Of course I was not happy with yesterday's "rally."
We were led higher by the Energy sector, which jumped 6.8% on the day and the Financials averaged a 5% gain (20% for many) but it wasn't enough for most to take back Tuesday's open so nothing to get too excited about but it does beat the alternative of making new market lows. Our bullish flip on Tuesday was justified but we are only HOPING to avoid the flop today. Geithner should be confirmed at 10 and if that doesn't fuel a rally (or if it doesn't happen today) it will very likely be time to cover up again.
As David Fry notes in his morning post: "We had become oversold and in such conditions a stampede is easy for some trading desks and hedgies to start in the opposite direction." David compares the action in the markets to a casino and I've been saying that for a while (it's the first chapter in the book Sage and I are writing) but, as our members well know – we don't care if the game is rigged, as long as we know which way it's rigged. Thus we went long on the oil scam at $35 last week and we sell the SKF $200 calls for $39 to the seemingly infinite amount of suckers who think something that went up 30% today will surely go up 30% tomorrow.
As David says, it's a huge turn-off to the average investor and it is a no-win game for people who are buying the options we are selling. We love buying options, but not when the VIX is at 50 – it's sort of like playing roulette with the same 38 numbers on the wheel when they change the payout from 35 to 1 to 10 to 1. On the other hand (and this is the point of the book chapter which is titled "Be the House") if you can take the other side of that bet, if you can get someone to make a 38 to 1 bet that you will pay them 10 to 1 if they get it right – then it's really only a matter of time before your balance sheet starts to improve dramatically.
Our buy/write entries are a fun way for us to sell puts and calls as we scale into positions in these uncertain markets. While it's certainly not foolproof with stocks like C dropping 50% in a week, it does give you a nice cushion to the downside while making for a nice monthly payout. We've been heavy into this strategy since the October crash and I summarized the strategy in the November post "How to Buy Stocks for a 15-20% Discount." We will certainly keep making these plays as long as the market keeps serving them up but it is still vital that you pick the right stocks – ones worth holding through thick and thin, ones with good balance sheets, low debt, steady earnings in tought times, good dividend payers… That's why we have our reference list of 38 "Stocks to Buy" along with our daily opportunity ideas that come along (like BK and FXI on Tuesday and VZ yesterday morning).
Keep in mind I am BOTTOMISH, not "bullish." We have an earnings strategy we're playing in member chat that I won't share here but another way to sell premium is to play for what Sage and I call the "volatility crush" where you once get to BE THE HOUSE and sell front-month contracts for outrageous premiums ahead of earnings and take a longer-term neutral position. Yesterday we played AAPL that way by taking the April $80 puts and calls for $19.05 and selling the Feb $80 puts and calls for $11.90. AAPL actually did better than we thought (our target was $85 but we were well covered to $75) and is up to $90 pre-market and we'll analyze the adjustment to this trade in tomorrow's post. This trade was made at 11:21 and we did think AAPL earnings would be good but we also thought they would be held back by the market (and whatever new rumor they get attacked with today).
One house you do not want to be is the House of Commons (England's Congress) as the pound continues to fall off the white cliffs of Dover. The Pound is down 33% in one year, redefining the term "taking a pounding" and far worse than last year's 16% decline in the dollar, which was painful enough for the US economy. The Euro is down 20% since last April so not too much better off but at least the Euro has shown occasional signs of life – we have seen none yet from the Pound.
Despite repeated denials by the British government, the UK Financial sector is still on the ropes with the fear of full nationalization hanging over their heads. The government already owns 70% of RBS and 43% of Lloyds, meaning it has significant control over both. The further step to nationalization — in which the government would take over 100% of their shares — wouldn't only be an embarrassment for Mr. Brown. It would saddle taxpayers with about £3 trillion (or about $4 trillion) in new liabilities, an amount far exceeding the country's annual economic output. Furthermore, it would put the government in the position of deciding which companies should receive loans and kicking delinquent mortgage borrowers out of their homes. A government-owned bank also could hurt competition because customers might be more willing to do business with a sovereign institution. "Nationalization is a last resort, almost as unpleasant for the government as it is for the shareholders," said Bruno Paulson, bank analyst at Sanford Bernstein in London.
Does the British banking situation foreshadow the financial future of the US? The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy. The only difference, so far, is the dollar. "The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be." So let's keep an eye on our bond yeilds – if they go up, we could be headed down FAST!
EU markets (even England) were up about a point this morning with bank shares making a comeback on the heels of the US bounce and Asia also finished up about a point this morning despite China's GDP grinding down to 6.8% and SNE warning of their first full-year loss in 14 years. I specify this morning as our pre-market looked fine this morning UNTIL we got our Housing numbers, which were beyond awful with a 15.5% dip in Housing Starts FROM LAST MONTH to an annual rate of just 550,000. There are 100M homes in this country folks – at that rate we will replace one every 200 years! In 2007 there were 1.35M housing starts by comparison. Expert economists who track this market for a living had expected 600,000 housing starts. Building permits were no better with a 549,000 annual rate and economists had wisely forecast 610,000 so another disappointment created by unrealistic expectations.
Since no one is building or planning to build a home, it should be no surprise that Jobless Claims jumped 12% to 589,000 – the highest level since November, 1982 – the month we kicked Carter out of office and hired an actor to cheer everybody up. Total unemployment claims are now 4.6M, also the highest level since November of 1982. This has put a major damper on our open, as has a big disappointment from MSFT, who announced they would be contributing 5,000 more people to the unemployment lines, including 1,400 TODAY and they will be "trimming" salaries for those that remain. One can only hope that Steve Ballmer is one of today's 1,400 but it doesn't look that way: "While we are not immune to the effects of the economy, I am confident in the strength of our product virtual portfolio and soundness of our approach,” said Steve. "We will emerge an even stronger industry leader than we are today." Obviously Ballmer didn't have a chance to read Apple's report before he laid claim to the leader board…
As I said to members last Tuesday, we are in what I call a Bugs Bunny market – after the episode where he flips the "intermission" switch at the theater and stampedes the crowd in and out of the lobby. That's how the sheeple are being herded around in the markets and we can sell them puts when it's low and calls when it's high. With stocks swinging back and forth 20% per day – do we really need to buy options?
