Distractions.
That's all we have lately. Greece's silly $171Bn loan is meant to distract us from Europe's $17Tn debt hole and the US continues to borrow $171Bn PER MONTH to cover it's deficit and we don't even talk about Japan as the debt climbs over 220% of their rapidly declining GDP and who knows what's going on in China but, generally, when you have double-digit declines in home prices on a monthly basis – there's going to be a problem down the road.
This may be my last bearish post before drinking the technical Kool-Aid this weekend and we've already selected 5 trades for our Members that will make 200-500% if the market keeps moving forward and there are still plenty of stocks we can make a lovely Buy List out of if this rally has legs – especially the way we like to bet, since our hedges allow us to make very nice returns, as long as we simply hold our current levels.
There's the rub though – are the current levels sustainable? The nice thing about consolidations like the one we've been having this year is that they firm up a floor and give us a very obvious exit point on the way down so we can move some of that sideline cash into play – as long as we hold 12,500 on the Dow and 1,300 on the S&P and 2,800 on the Nasdaq – pretty simple strategy, right?
Notice the 2nd row has our major indices priced in Euros and our third priced in Yen. My main issue has been that we've been much weaker than it seemed as the Dollar's relentless decline masked a downturn in the inflation-adjusted price of our stocks (and the weak Dollar also serves to inflate revenues reported by multinational companies) but, at the moment, we're at our breakout levels by any measure so we may as well go with the flow until we see a proper reversal.
First we need to get past our NFP report at 8:30 of course. I'm expecting a miss but will the market even care or will that just mean Uncle Ben has an excuse to pump up the QE according to their new "formula"?
Keep in mind that what Bernanke said last week regarding the Fed's system for determining policy boils down to – As long as US corporations don't hire American workers, he will continue to give them money at historically low rates. I don't know about you but if I'm GE and I'm thinking about hiring 10,000 workers but I'm also looking to borrow $100Bn – I think I'd put off the hiring until after I get my loans lined up in the very least.
8:30 Update – Well, I'm wrong (or so it seems from the headline number) – 243,000 jobs were added, almost double the 125,000 officially expected and unemployment dropped to 8.3%. Hours worked up is up as well so this is a strong report. Private-sector employment grew by 257,000, with the largest employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment down slightly for the month. Manufacturing added 50,000 jobs, mainly in the Durable Goods space – another positive. Even Construction added 21,000 jobs.
On top of all this good news, they bumped November up from 100,000 to 157,000. While it's horrible to think that the figure we have today could swing 57% one way or the other, the trend does look good with the initial adjustment to December going from 200,000 to 203,000. I guess the Conservatives will have to start calling Obama the Great Job Creator now…
NOW we get to see how much gas the market has left in its tank as there is no possible excuse not to bust out to new highs on this one. The big drag I see is that more people working means more demand for Dollars to pay them and less QE per the Fed's formula (especially if prices also kick up) and that is, of course, Dollar bullish which is oil bearish (not that oil should need any help with Shell saying oil may fall to $70) and other commodity bearish and makes for a tough dollar-adjusted gain in our indexes the same way that a week Dollar gave us an artificial boost before.
So let's keep an eye on that Dollar as it can really hold back the rally and this would also be a great time for the BOJ to run a Yentervention as they've been waiting for a chance to goose the Dollar into clear market strength and we're not likely to get a stronger number than this and we have TBills to sell next week so this should be the spot to run the Yen back to 77 at least.
As I mentioned, we had our 5 bullish trades in yesterday's post and it looks like we can look at 5 more already. Our plan was to add one a day, beginning yesterday, to layer up for an extended rally. Of course we've been doing this every week with FAS, BAC, TNA, etc. as we're never all bear or all bull (70/30 is EXTREME in our balance).
Since we are going to be popping into the open, let's concentrate on some longer-term trade ideas that will be less affected by the morning move. Keep in mind, as long as the net of the trade is the same, it doesn't matter what each leg trades for:
- BA ($75.22) is still very cheap at $75. If the World economy isn't going to collapse, then BA has over 3,000 planes to deliver against a current capacity of under 500 planes a year so a 6-year backlog and last year they grossed $65Bn with a $3Bn profit delivering older and less profitable planes as just ONE 787 was delivered in 2011. Although they pay a 2.5% dividend, I think it's unnecessary to own the stock as the 2014 $60/80 bull call spread is just $11 and you can sell the $65 puts for $8, which TOS says has an ordinary net margin of $6.50 so net $3 of cash to make $20 (566%) if BA gains $5 into Jan 2014 is better than holding and covering the stock for the $1.76 dividend. Don't forget, when you have those calls, you CAN exercise them and become an owner – if they raise dividends, for example (doubtful with their current cash-flow profile as they ramp up).
- F ($12.26) is still down in the dumps and their volatility makes them a fun stock to sell calls against. As I said, the way we hedge, we don't need the markets to go up, they can just stay flat and with F, you can pick up the 2014 $8/12 bull call spread for $2.40 and sell the $10 puts for $1.50 for net .90 on the $4 spread that's 100% in the money to start. TOS only wants $96.50 per contract of ordinary margin on this trade that makes $310 if F flatlines or better for 2 years. Meanwhile, SINCE you have a 300% upside, you can buy 10 of the long spreads (net $900 cash, $3,100 potential) and sell 2 March $12 calls for .65 ($130). If you get away with a $130 sale every couple of months, you have a free trade by the end of the year and you're giving yourself a very nice 15% bi-monthly dividend while you wait for your 300% pay-off!
- GS ($115.45) may be the devil but don't you think they know how to profit from a market that NEVER goes down? Let them worry about day-trading while you pick up the 2014 $80/110 bull call spread for $20 and offset that with the $90 puts at $12.50 for net $7.50 on the $30 spread that's $35.45 in the money to start. Your worst case is you end up owning GS long-term for net $97.50, which is 15% below the current price. TOS says net ordinary margin for shorting the $90 puts is just $9 – not bad..
Oops, out of time, I'll have a few more in Member Chat, of course – looks like we'll be closing this week off with a bang!
Have a great weekend,
– Phil
