I've seen the needle
and the damage done
A little part of it in everyone
But every junkie's
like a settin' sun. – Neil Young
Come on Bennie, give us another hit!
We're hurting man, we need the good stuff. The markets love to get high and, just when we thought the trip was never going to end – we crash hard! Big Ben and his Central Banking buddies fed our commodity addiction with a flow of easy money and the speculators got so hooked that they have now overdosed and the price of commodities is now killing the host (the Global Economy).
Gee, who could have ever seen that coming?
Oh yeah, right, it was me. Well, very good then… I guess. There's nothing like a good correction to make some fast money. In yesterday's post (and Tuesday's) I mentioned our TZA and EDZ hedges and thank goodness we dumped XLE as they flew back to $78 on the oil madness (more on that later). In yesterday morning's Alert to Members we added IWM $83 puts at $3 and they finished the day at $3.93 (up 31%) but we were done with them earlier as we flipped bullish when they pulled back to $3.75 and grabbed the IWM weekly $80 calls at 1:03 at .66 and we flipped out of those at .93 (up 40%) for a nice, quick gain.
We also lost .20 on an SSO trade, trying to catch one more bear wave that didn't come but, on the whole – Wheeeeeeeeeeeeeee! This is the best ride EVER!!! We love a volatile market, especially when it gooses the VIX (something we were also long on) as that gives us better and better prices for the options we sell to suckers who think they are smarter than the market. Yes, we buy them too – but look how fast we dump them. Options are great for momentum trading and for controlled leverage but the REAL MONEY is made BEING THE HOUSE – not the gambler and what we really love to do is SELL options, not buy them.
When the VIX is low, selling options is much less fun but, when the VIX goes up, so does the amount of money people will pay us for all sorts of things. For example, we can get paid $1.55 to promise to by CSCO for $17.50 in January. CSCO is $18.40 now so buying it for $17.50 less the $1.55 we are being paid now to promise to buy it (we sell a Jan $17.50 put) nets out to $15.95 to buy CSCO. That's 13.3% less than it costs now. Even better, the net margin on this transaction (according to ThinkorSwim) is $2.75. Even if you allocate 50% margin to the possibility of owning CSCO at $15.95, that's still $1.55 paid on $8, which is 19.37% in 10 months and you get paid in full as long as CSCO doesn't GO DOWN 90 cents.
Getting paid 20% if a stock doesn't go down 5% – BRILLIANT!
I was invited to speak to an investing group last month and it was amazing to me how few people utilize even the simplest of hedging strategies like this to enhance their virtual portfolio performance. If you REALLY want to be a long-term owner of CSCO – what is the downside? If you were going to buy it now and buy more if it got cheaper (dollar cost averaging), why not skip a step and just buy it cheaper now? That, in a very brief nutshell, is all we try to teach people to do at PSW – you don't have to be the sucker buying premium and watching time eat away your positions – you can be the guy selling premium and taking worry-free vacations. You don't have to join my site to learn this – there are books on option strategies like our own Option Sages "Secrets to Tame Volatile Markets," which is the updated version of the EBook our Members get. I don't get paid for this but Gareth is a friend who happened to write a very good book – so take my recommendation for what it's worth.
Now, let's see if we can figure out what the market is worth… How quickly the worm has turned, right? Actually, wrong – you are all a bunch of whining, sniveling babies who forgot how a real market acts thanks to B-B-B-Bennie and the Fed's 3-month morphine drip of POMO that's had investors in a stupor, ignoring bad news that was piling up like trash in a crack den. We finally had a little wake-up call from our friends in the Middle East but, don't worry, Uncle Ben's coming back today with $6Bn of the "good stuff" this morning and promises to score us another $8Bn tomorrow and that should hold us over through the weekend, as we expect another $26.5Bn next week – Ahhhhhhh…..
So far, we've had minor pullbacks at best: The Dow fell from 12,370 (rounding) to 12,070 at yesterday's low – that's just our 2.5% rule – what did you expect to happen after a virtually unbroken run from 11,800 at the end of January (5%) and from 11,000 at the end of November (12.5%)? We expected a retrace of 20% of the run up (1,370 points) so that's about 270 points, back to 12,100, which is a proper correction, even in a hyper-stimulated bull market like this one.
Don't forget (also discussed yesterday) these are our 100% lines on 3 of our indexes, off the March '09 lows. How silly would it be NOT to have a pullback off a 100% run? Anyway, so the S&P topped out at 1,340 coming off 1,175 in November (14%) – so that's a 165-point run, and we'll take a 33-point drop back to 1,300 and, wouldn't you know it – that's just what happened yesterday! This is what I call TA for people who hate charts! The Nasdaq had a 340-point run off the 2,500 line in November (13.6%) and did they drop 70 points from 2,840 to 2,770? Yes they did – and more, hitting the 50 dma at 2,720 and that means the Nas is flashing us a warning signal that the pullback may be more severe. They need to take back 2,770 before we can relax now. The NYSE had (again rounding) a 1,000-point run from 7,500 to 8,500 (13.3%) and 200 points down from there is 8,300 and they finished the day at 8,292 and that brings us to the Russell, which zoomed from 725 to 835, up 15% and a 33-point drop is 800 (we defer to psychological lines) and they closed at 799.65 – close enough, right?
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So that's what we'll be looking for today, those blue lines need to hold and that would be BULLISH – but look at that Dollar dive – that's scary! We need to hold that 77 line, which was tested this morning at 5:15 on a spike down, otherwise there will be no holding back these runaway commodity prices. It's a cycle that feeds itself – commodity prices rise, the Fed prints money, the Banksters use the money to buy more commodities, the Fed prints more money, the World loses faith in the validity of the fake money (foreigners not as stupid as you thought) and commodity prices rise relative to the Dollar, making the IBanks rich while the Fed prints more money to "help" and gives it to the IBanks who (surprise) buy more commodities. Why just yesterday CNBC found someone to say oil would hit $220 a barrel. Really? You know we're at a top when those guys come out of the woodwork.
See my 2008 retort to Goldman Sach's famously idiotic prediction: "$200 Oil – Who's Going to Pay for It?" – the same logic applies now, only more so as the Middle Class has since been mugged, raped, beaten, stabbed, shot, bankrupted and foreclosed on by those very same Banksters who, as Matt Tiabbi points out – are not in jail because they also control the regulatory and judicial branches of our government as well. Just ask Jeff Immelt, who sits at Obama's table as the Chairperson of the Council on Jobs and Competitiveness, maybe to help come up with more creative ways to lay people off, like they are doing in Schenectady.
Sickening, isn't it? Ah, but there is our bullish premise! The markets are nothing more than a shell game, a massive con engineered by the IBanks to take your money. It's a casino and, as I said before, we prefer to be the house! We don't particularly care if the market goes up or the market goes down, as long as suckers keep coming through the doors thinking they can beat the market with their "system" and then we will be happy to sell those people puts, calls – whatever they want – as long as they pay us the premiums!
Once we have booked all the bets, we don't have to "fix" the markets ourselves – we are but small-time bookies playing Lloyd Blankfein's games on the house's side, trusting that a little bit of their 97.5% winning percentage will work in our favor as well. As Matt said when he first began investigating the nonsense that goes on in the Investment Banking Industry: "If America is circling the drain, Goldman Sachs has found a way to be that drain."
The danger we see is the old "black swan" event – the kind that even cause GS to lose money (but they get a bailout – we don't) and that's keeping us cautious at the moment with the Middle East in turmoil and oil at the $100 level. We have been buying the dips, but it's been tentative, hedged buying. Even our gold and silver trade ideas yesterday were very conservative, bullish but anticipating the possibility of 20% pullbacks. Still we got the kind of triple digit upsides we love to play with now that THE VIX IS BACK!
As I said to Members yesterday afternoon when I put up the gold and silver trades: "VIX 23! Oh boy is this great!" Or, as the great and powerful Warren Buffett puts it: "Be greedy when others are fearful and fearful when others are greedy."
It's an exciting market at the moment as we have a little bit of each but that is so much more fun for us to play then when it is all one way or another as there are opportunities on both sides of the table. We have a ton of things going on today including the vote in Wisconsin, some kind of speech by Qadaffi, the FHFA Home Price Index, New Home Sales, Oil and Gas Inventories and a $29Bn 7-Year Note Auction (yesterday's 5-year was terrible).
We've already gotten a mixed batch of earnings this morning and there will be a great opportunity to pick up some RBS, who are plunging for all the wrong reasons in EU trading. Unemployment was "just' 391,000 this morning with continuing claims at 3.79M, which is not too hot to cause wage pressure and cold enough to keep the Fed funds flowing so another one of those numbers that are good for the markets but bad for humans.
Durable Goods were a strong 2.7% after December's TERRIBLE – 2.3% but don't get excited by the headline number as that includes volatile transports – core Durable Goods fell an EVEN MORE TERRIBLE 3.6% in January! Another potential mood-killer is the Chicago Fed's National Activity Index, which fell to -0.16 vs. +0.18 in December. Consumption and housing were once again the big drags on that index and that is confirmed by a report that Retail Sales in the UK is clearly showing that inflationary pressures are causing steep drops in consumer demand, giving the UK the slowest rate of retail growth in the past 8 months at less than one quarter of the expected monthly number.
Fortunately – IT JUST DOESN'T MATTER – as Bennie and the Fed resume their money printing this morning so we will just enjoy the "clack, clack, clack" sound as they take our stock market roller coaster back up the rails, where we can test our levels and reset the short plays we cashed out (XLE is good again!) and laugh our way all the way to the iBank, which is to say the bank Steve Jobs will have to build us to house our AAPL profits as that silliness (hopefully) draws to a close (again).
Best news of the day is that the Administration is finally moving toward forcing the banks to implement my principal reduction strategy for mortgages. It would have been nice if they had done so when I first suggested it back in April of 2008, which could have averted the whole crash (that was obviously coming) or it would have been nice if Timmy would have gone with my updated version when I met with him last year (maybe he didn't like the picture?) but I'm just glad to see SOMETHING being done before the next wave of foreclosures sends home prices tumbling another 20%. .
It's going to be a bit of a watch and wait day as we already did our bottom fishing but we still have most of our bear hedges in place and now we have to see if we pulled up live fish or dead ones on the bull side. Let's watch those blue lines but, as I said, just holding 3 of 5 of the majors means our retrace lines are holding strong and this is, so far, nothing more than a bump in the road. We bought the F'ing dip, we must be learning!
