We had a totally exciting week last week!
I was busy this weekend so no Wrap-Up but I did write about 5 pages of commentary under Sage's $1,000,000 Virtual Portfolio article regarding virtual portfolio allocations and scaling strategies – all Members should read that! We were discussing our Disaster Hedges as well which are all well in the money but hardly a double in the bunch so far, which is actually fantastic news if you haven't entered them yet as you can enter these plays now and still do great if EITHER the market continues lower OR the VIX calms down since it's the high VIX that is keeping us from making big money. These are October hedges so no one expects them to pay off this early but the fact that you can still get in them even after this dip is a nice break if you intend to start getting bullish and want hedges.
We took shorter-term hedges for more aggressive traders during the last week of April and those, of course, are up very nicely like:
- EDZ June $38/44 bull call spread at $2.80, now $3.50 – up 25%
- EDZ June $35 puts sold for at $1.25, now .70 – up 44% (pair trade)
- FAZ July $12/16 bull call spread at $1.10, now $1.35 – up 18%
- FAZ July $10 puts sold for .70, now .50 – up 28%
- IYR May $52 puts at $1.30 (fell to .79), now $2 – up 54%
- OIH May $131 calls sold for $3.45, now .05 – up 98%
- OIH May $131 calls sold for $3.90, now 05 – up 99%
- QID May $16 calls at .32 (fell to .27), now $1.27 – up 296%
- QID May $15 puts sold for .32 (rose to .37), now .02 – up 94% (pair trade)
- QID June $14/16 bull call spread at $1.15, now $1.50 – up 30%
- TBT Sept $43 puts sold for $1.50, now $3.90 – down 160%
- TBT Sept $43/48 bull call spread at $2.60, now $1.55 – down 36%
- TZA June $6 puts sold for .70 (rose to .94), now .74 – down 5%
- UGL Oct $49/54 bull call spread at $2, now $2.50 – up 25%
- GLD March $90 puts sold for $1.20, now $1.40 – down 17% (pair trade)
- VNO May $80 calls sold at $2.30 (rose to $3.90), now $1.85 – up 19%
As I often say, sometimes the best way to enter a trade is AFTER they are down and most of these hedges were down as of May 2nd, when I published the Wrap-Up for that week. We don't always get optimal entries – that's why we scale into positions and the trades we stick with AFTER they've gone against us (like the QID and OIH plays we made twice) are often the best plays to get started with if you have a more limited virtual portfolio and can't afford to press positions. That means now, serious attention should be paid to our TBT spread!
We've been picking up some bullish positions since the big dip but still haven't been moved to turn our Watch List into a Buy List as we wait for another test of S&P 1,100 OR a clear sign that we're recovering as we take back our levels. We had a rotten finish to the week on Friday but we were up for the week after the prior week's panic. In last week's Wrap-Up we pegged our critical S&P line at 1,155 and that was a hotly contested area this week until we failed it on Friday Morning. Keep in mind that the 5% rule predicted 1,155 when we were down at 1,110 (that Friday's close) – how's that for a useful rule?
Let's keep in mind that this week's top is the prior week's bottom as I used the 5% rule to predict our breakdown range back on Wednesday the 5th at 5:40 in the morning, when I said: "So what lies ahead? Most likely a retrace back to 1,100 (25% of our run) but if that holds and we consolidate a bit, I will be downright bullish. I will also be impressed if we hold 1,145, which was our last breakout line but, for now, we have a 3.75% drop from 1,218 but a poor bounce yesterday indicates we are likely to get down to a 5% pullback from 1,218 to 1,157 and not holding that is going to be nasty." Nasty is exactly what we got less than 30 hours later but no consolidation at 1,100 so I'm not yet bullish. IF we get there, our above 1,070 lines are the same ones they were on May 5th (the 5% Rule doesn't move lines around every day like most TA):
I know it may seem amazing that a line of resistance we predicted on May 5th would still be used the week of May 10th but these are actually the SAME lines we used when the S&P was at 800 too! Very simply, 1,140 is the 5% drop off 1,200 which was our top-level EXPECTED bounce from the fall that took us below our EXPECTED 800 line. That same 5% pullback (60 points) is a 20% retrace of the rise fom 900 and will be a bullish sign if we can hold it but finishing under it, like we did on Friday, is not very encouraging although one day does not a pattern make.
So, with uncertain technicals we need to examine the fundamentals to get an idea of what direction things might head next week. As I said, we took a stab at some bullish plays and we did finish up for the week but we are well-hedged and mainly in cash so we really don't care what happens next week – we're just looking for clarity. Also, May options expire on Friday so we're not going to take anything that happens next week seriously anyway!
It's not a very exciting data week as we have only a little data next week with Empire Manufacturing Monday Morning along with TIC Flows and the Housing Market Index. Tuesday is Building Permits and PPI; Wednesday we get Housing Starts, CPI and Minutes from our Fabulous Fed; Thursday is the usual 450,000 Job Losses, Leading Economic Indicators, the Philly Fed and the announcements for the next round of Note Auctions and Friday, of course, is options expiration day for May contracts and suddenly we're in the last month of Q2 – time sure flies when you're having fun, doesn't it?
4 more banks were siezed by the FDIC on Friday, bringing 2010s total all the way up 72 already, more than half of last year's total on May 14th:
Speaking of bad loans and foreclosures, here's a great commercial by a guy who sells repossessed mobile homes. Unlike regular homes, which people can live in for ages without paying for – if you don't pay for your mobile home, they just come and take it away!
On the opposite end of the housing spectrum: They say living well is the best revenge and it looks like Lloyd Blankfein's name must be Vengeance as he pays CASH for his new $26M NYC duplex on Central Park West BEFORE selling his old 5 BR Park Avenue apartment (he's asking $13.5 for the old place). You would think SOME ONE might have said "Gee, Lloyd, do you really think this is the smartest time to be throwing it in people's faces?" Maybe his new place has a "spider hole" in case the SEC comes knocking…
Barry has a good summary on the NY Times article, "The Rise and Fall of the GDP," which is something we discussed last year when Stiglitz issued his report to the EU but, finally, the US MSM is catching up and it's still worth a read. The NY Times also asked a very good question "Is College too Expensive to be a realistic goal for most people?"
One of the funniest things I read this weekend was this excerpt from the WSJ: "Sen. Coburn added that he has his own account at TDAmeritrade, valued at about $70,000. He said he trades actively based on tips he gleans from Jim Cramer's "Mad Money" show on CNBC. In 2008, Sen. Coburn traded Transocean four times in less than a month on Mr. Cramer's advice. "I lost my shirt," the senator said."
Bloomberg had a good article on "$60 Billion in Corporate Tax Dodges" so outrageous event he Tea Partier think it's wrong. The article focuses on one of many corporate tax tricks called transfer pricing where companies (and Forest Lab is a highlighted example) set up subs that sell their own product to themselves to shift profits to more tax-friendly jurisdictions. It's a neat trick than any company can do as long as they are big enough to open fake offices in foreign countries and have lawyers draw up BS contracts and use completely immoral accountants to paper it all over. U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year, according to data compiled by Bloomberg. That cumulative total, based on filings by 135 companies, increased 70 percent over three years, from $590 billion in 2006.
The above video is a scary viewpoint on inflation and, while you are watching that, you can play with this great collection of bubble charts.
FINALLY something I have been asking for for years. A "White List" based EMail system that only delivers mail to you from people or domains you pre-approve. I haven't tried it yet but hopefully we can get some feedback this week on what looks like a free system from Stanford U, who should be getting a Nobel Prize if this things works!
Not on my white list is the John Locke Foundation of Raleigh. This neo-conservative "think" tank put out a letter saying "Dems Target Private Retirement Accounts: Democratic leaders in the U.S. House discuss confiscating 401(k)s, IRAs." Despite this being totally untrue and quickly refuted, Rush Limbaugh has been running with it for quite some time and now it's making the rounds again. Ordinarily I wouldn't care but this is making rounds again at a time when the notes are coming up for auction and the currency market is going crazy anyway – just another nice way to churn a story and push for a market collapse…
According to the National Journal: "If the economy produces jobs over the next eight months at the same pace as it did over the past four months, the nation will have created more jobs in 2010 alone than it did over the entire eight years of George W. Bush’s presidency." And that's not even counting the jobs that were "saved"! 😎
The European Central Bank president, Jean-Claude Trichet, warned this weekend that Europe faces its worst crisis since the second world war as he called for a "quantum leap" from eurozone countries in getting a grip on their finances. With political leaders across the eurozone lining up to blame the financial markets for their economic plight, Trichet said it was Europe's governments that were responsible for the euro's slump, rather than currency traders and speculators. German chancellor Angela Merkel concurred with Trichet's analysis in an interview with Süddeutsche Zeitung. "The real problem is the big budget deficits in eurozone countries," she said. Merkel called on countries to become more competitive and urged that economic policies in Europe be more closely aligned.
Contagion can raise its ugly head quickly, very quickly, even in "half a day," warns the ECB's Trichet. Europe needs to experience a "quantum leap" in how it manages its fiscal economy, lending credence to long-standing claims that the eurozone needs centralized fiscal oversight. The shock and awe of Europe's $1T intervention is fading even faster than officials had feared, writes Mohamed El-Erian in a Financial Times guest post, and it's important to be aware that "the serial contamination of balance sheets is hitting the reality of scarcity."
Also, quick list of highlights from Seeking Alpha's Market Currents:
The Dow's chart isn't looking as spectacular when adjusted for inflation: After quite a rally, it's still 30% off its 1999 peak, and only just over double its 1929 peak.
In the most serious sign yet that the government is moving to exit the auto industry, the Treasury is shopping around for a Wall Street bank to advise on a General Motors IPO.
Confirming earlier rumors, federal prosecutors say they're investigating Massey Energy (MEE) for possible "willful criminal activity" over the April 5 coal mine explosion.
Greece may take legal actions against U.S. investment banks that might have contributed to the country's crisis, says PM Papandreou. In the U.S. financial sector, "I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.” At first glance, it may seem a little silly for Greece to consider investigating U.S. banks for their role in the Greek debt crisis. Then again, the Bankers Trust case from the 1990s is the perfect example of how it's possible to shift public opinion, even when the facts don't seem to be in your favor.
And the ash cloud is back. Airspace may be partially closed in the U.K., Ireland and Germany "due to continuing volcanic activity in Iceland and prevailing weather conditions." Last month's airspace closures cost the industry $1.7B in lost sales.
There has been surprisingly little news this weekend and that's not good for the market as we needed some reason to move over our technical levels. Asia was getting into real technical trouble and, as I mentioned on Friday, the computers have taken over those markets so we'll look for support on 2.5% dips Monday morning, which will bring the Nikkei back to a magic test of that 10,200 mark that is so critical in Japan. The BSE needs to hold 17,000 and the Hang Seng is pathetic below 20,000 while the Shanghai lost our respect a while ago. FXI does make a fun upside speculative play if they get back to $36.50 though, especially if we can hold on and get green tomorrow.
