That was a painful way to start the week!
When I said RBS, Soros and Spain were going to trash the market yesterday, I posted a link to the scene in the Wizard of Oz where the cowardly lion jumps out and scares Dorothy and company and the part of the Cowardly Lion was played yesterday by Nouriel Roubini who, with his usual vulture-like timing, decided yesterday morning would be a great time to say: "U.S. Banking System Insolvent, Another $2.5T of Losses Coming." That was all it took to send an already frightened financial sector spinning out of control.
We didn't know at 9:45 what Roubini had said but we did see the XLF looking weak and my plays at the time in member chat were naked calls on ultra-shorts: SDS $85s at $6.35 (now $10.15), DXD $61s at $5.05 (now $11.40) and QID $61s at $4.85 (now $7.65). My logic on these at the time was to shift our balanced virtual portfolios 10% more to the bearish side saying: "I am not predicting we will collapse but if you are dropping too fast on the downside and worried that a drop to 7,500 will cost you 30%, then putting 10% into one of these with a stop at 5% (as things would have to be improving nicely by then) will offset perhaps 2/3 of your potential losses on the way down so it’s spending 5% to protect 20% kind of insurance." Now that we have a quick double on the DXD (which I did say in that call was "the bargain of the bunch") the question is can we throw off those covers and take the quick profits or do we still need the aggressive protection?
The dollar leaped 2.7% yesterday, flying as it broke over the 50 dma – a move we predicted and discussed last week. This did not stop gold from climbing 1.8% to it's own 200 dma at $854, another move we discussed and predicted last week as now the US currency is gaining ground even against the mighty Yen as Japan is once again downgrading their outlook saying, in a government report that is like our Beige Book: "the economy is worsening rapidly." Of course, even rapidly is relative as Japan is seeing slowdowns of about 1%, much like the US. Singapore, however, is defining rapidly for all of us with a 16.9% decline in Q4 GDP and their government forecasts a "sharper downturn" for 2009! Singapore, of course, plans to spend their way out of this problem – that is the joy of a fiat currency system – you can make more anytime. With gold at $860 this morning I don't think I need to remind you how much I like gold but the song that keeps playing in my head this week is "Your cash ain't nothing but trash" and you would do well to listen to it until it's stuck in your head too!
Gold and the Wizard of Oz – it's all coming together as I had predicted last March when I used the Wizard of Oz analagy to point out that rising oil prices and poor monetary policies would lead to "An Economic Tornado." We are simply reaping what we have sown. As the Blue Oyster Cult so aply said: "All our times have come. Here, but now they're gone. Seasons don't fear the reaper. Nor do the wind, the sun or the rain. We can be like they are. Come on baby (don't fear the reaper), baby take my hand (don't fear the reaper), we'll be able to fly…" When we can participate in the downturn, even as we "sow" positions for later profits, we can be good virtual portfolio farmers. While Cramer rails against the ultra-short ETFs on Mad Money, we have been using them as fantastic virtual portfolio hedges to cope with disastrous days like yesterday and, Peter D was even been making some FAS (3x Ultra Financials) picks into the close which I said "makes me feel conservative playing my 2x ultra UYGs."
We did sow a little more UYG yesterday but hedged the entry down to $2.35 by selling the March $3 puts naked for .65, which is a 76% profit on the .85 net margin requirement if called away in March – not a terrible way to ride out the waves… Of course we went for more oil on the dip but we also established hedged positions in QLD (ultra-long Nasdaq) and UWM (ultra-long Russell) as the market continued to fall – hedging ourselves for another 20% down on those entries – just in case. FXI also hit our buy point back at $24.50 and we were able to hedge that down to $21.58 so a very nice 15% payoff if they can hold $23 through Feb 20th. BK was our bottom fishing bank of the day and we jumped on them at 10:03 and those are already a solid-looking trade, up 20% since then!
The trick to playing FXI is that you have to realize that the pricing during the day already anticipates the drop that China WILL have based on what the US is doing so the fall from $26 on Friday to $24.50 at our buy point was looking for a 10% total drop which, by our rules alone, gives us enough confidence to play an entry for a bounce. The Hang Seng did fall 3% this morning, making 5% since Friday's close (Nikkei fell 2%) but the Shanghai held flat as textile manufacturers and property companies rallied on an anticipated bail-out. The official Shanghai Securities News reported that China’s National Development and Reform Commission, the top planning agency, would soon submit to the State Council, or cabinet, a proposal to aid the country’s textile industry, after China announced plans to bolster its steel and auto sectors.
Banks continue to wreck havoc in Europe as the Pound continues to fall, now making 7-year lows against the dollar and setting a new record low against the Yen on expectations the ECB will start pumping money into the system in the next two weeks. So far, the UK bailout has far exceeded ours in proportion to their economy. "Although such action will sow the seeds of recovery for the economy and the pound, the near-term impact is likely to be further pound weakness," said Daragh Maher, deputy head of global foreign exchange strategy at Calyon Credit Agricole. A report published Tuesday by the Chartered Institute of Personnel and Development and KPMG showed that 44% of U.K. firms are laying off staff and half are also freezing recruitment. Earlier this week an Ipsos MORI poll of 1,005 people found that 49% of full-time workers fear they will lose their jobs.
While we may have nothing to fear but fear itself, the irrational fear of 49% of the people thinking they will lose their jobs (at the height of the Great Depression, unemployment was 25%) is something else to be feared in a consumer society as people who are uncertain of their futures tend not to spend and that leads to a contracting economic cycle that comes much closer to fulfilling those fears as the situation worsens. That is what President Obama must fight in this country – the polls we discussed over the weekend in which 92% of the people in the United States thought the economy was "fairly bad" or "very bad" with 54% of the people thinking it was getting worse than that!
When we found out Roubini had sparked the sell-off in the morning, I felt better about our bullish turn in the afternoon, we hoped 8,000 would hold (it didn't) but we are buying based on fundamentals and one thing I was thinking about is there was a time when someone like the President or Ben Bernanke would have the public's attention and Roubini wouldn't. One of the reasons we have such a crisis of confidence is because Roubine, Whitney et al get more time on camera stating their case than our President or the Secretary of Treasury or the Fed Chairman. Bad news sells and, with consumer confidence, it becomes a self-fulfilling prophecy.
While I am disappointed that we have not yet gotten our "Obama rally" I will defer to our new President, who laid out our long-term bullish premise yesterday: "Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.
"These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land – a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights. Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America – they will be met."
