GDPhursday – Brother Can You Spare $64Bn?

They used to tell me I was building a dream

With peace and glory ahead

Why should I be standing in line

Just waiting for bread?

Once I built a railroad, made it run

Made it race against time

Brother, can you spare a dime?

And the selling continues.  

We're down about 4% from our highs and we went on a little shopping spree yesterday with not one but two Alerts going out to our Members with some bottom-fishing picks.  All long-term trades, of course, with a short-term hedge to cover.  It was, by far, our busiest day of the year but that's the nature of value trading – we do a lot of waiting and then, when the time is right, we act.  

We don't KNOW that this is a bottom but we do KNOW that some of the stocks we're watching have values that we now consider fair.  That means we don't mind making long-term commitments to a few of them using our patented "How to Buy a Stock for a 15-20% Discount" strategy.  When we find stocks that have pulled back 10-20% already and we can add an additional 15-20% discount to our entry – it's a good time for us to bring a little cash off the sidelines.

We're still not even 40% committed in our virtual portfolios and that's margin, not cash.  Cash has barely been touched and, in most of our portfolios, we're carrying a cash credit – because we are BEING THE HOUSE – Not the Gambler.  Although we call our strategy "Getting Rich Slowly", as I noted yesterday – sometimes we ACCIDENTALLY make money very quickly.  

For example, back on Jan 9th (3 weeks ago) I said to our Members in the Chat Room:

UNG right on the 50 dma at $19.50 , down from $22 and Nat gas bouncing off the $4 line.  They really haven't gone below $14 and usually over $15 and you can sell the 2016 $17 puts for $2 and buy the Jan $15/20 bull call spread for $3 for net $1 on the $5 spread.  Not a bad way to play them.

As you can see, we pretty much nailed the turn and, although it was a long-term trade idea, the quick rise in natural gas to $5.40 yesterday ran the UNG Jan (2015) $15 calls we bought to $12.50 while the Jan $20 calls we sold to cover them to $7.50 for net $5 on the spread that we payed $3 for and the short 2016 $17 puts we sold for $2 are now $1.30, so net $3.70 means we can take this trade off the table, in just 3 weeks, for a 270% profit or a 370% return on each Dollar we invested.  

This was not an "aggressive" trade.  We were simply betting that $3.50 (about $17 on UNG) for Natural Gas would be a solid, long-term floor so we set up the trade to give us a discount on the entry and our plan was to PATIENTLY wait a year for a nice run in Nat Gas.  Well, Christmas came early on that one and 20 of those spreads for $2,000 are now worth $7,400 and, if left alone, can finish at $10,000 still (as long as UNG stays over $20).  

By giving ourselves 15-20% discounts on entries we already consider a good value, we vastly improve our chances of getting consistently good returns – it just takes a little longer —- usually.  While we wait, we make short-term trade like yesterday's 10:35 comment to our Members, after the Petroleum Status Report, which was:

WOW!!!  Huge build but draw in distillates may give us a pop but let's re-short at $97 with tight stops (/CL).   It's cold, of course we're using more distillates (heating oil). 

Nat gas already popped back over $5 on that news, they should have a nice draw next week and you can play them bullish over the $5 line (/NG) with tight stops. 

See, not complicated – we follow oil and gas trading all the time and we understand the dynamics of the scam well enough to know that a big draw in Distillates is likely to parrellel a big draw in Natural Gas and that meant the NYMEX pump crew could go nuts ahead of the Nat Gas report.  

So the trade seemed pretty obvious to us.  That .40 move we got later in the day was good for a profit of $4,000 for each long contract!  We're out of that trade now, of course, and we've moved back to a conviction short on Oil Futures (/CL) at $97.95 in this morning's Member Chat Room.

Now you see why we have a Futures Trading Workshop at all of our live events…  

Getting back to the current markets, we're just waiting for GDP this morning with 3% officially expected, down from 4.1% in Q3 but whisper expectations are for 3.6% and that's possible, but mostly because unsold inventories piled up in Q4 as holiday shopping disappointed but, nonetheless, that's  a big boost to GDP (as there is an underlying assumption that all goods produced are eventually sold).   We also have $64Bn worth of 5 and 7-year notes to sell at 1pm but, as long as the markets are still low – there should be plenty of buyers. 

We'll keep an eye on Retail Final Sales, which excludes inventory growth, as well as Real Personal Consumption, which needs to crack 2% – otherwise the trend gets ugly – 2008 kind of ugly.  We've adjusted our bounce lines to reflect the continual failure of the indexes to make even our weak bounce.  We also added target levels for the bottom of this dip (hopefully worst-case), below which (3 of 5) we would get more aggressively short at Dow 15,600, S&P 1,760, Nasdaq 3,975, NYSE 9,750 and Russell 1,100.  

The Dow is down 5.1% for the year so we expect to see a 1% bounce (weak) on any sort of good news this morning and, if we don't get it – we'll be looking ahead to a very possible 10% overall correction, which was the most we expected with our bearish stance – which is why we are comfortable buying stocks 15-20% below where we are now.  See how simple our logic is?  

While the WSJ runs healines like the one on the left (click for details), we're not really seeing any major panic on this dip so far.  That's why we figured we'd better do some buying – just in case yesterday's drop was as good as it gets for bargain-hunting.  

8:30 Update:  GDP came in at a SEEMINGLY disappointing 3.2% but, on closer examination, Government Spending (or lack thereof) knocked 0.9% off our score so the underlying GDP is actually very strong.  I just put a note up to Members to kill our short positions in the Futures and we'll see how much of a bounce we get (see new bounce lines).  The Dollar is flying back over 81 and gold and silver are collapsing so all is well at the moment.  

Excluding food and energy, the price index for the GDP climbed to 1.7% from 1.5% last Q – signs of accelerating inflation.  Real Personal Consumption jumped 3.3% and Non-Durable goods jumped 4.4% and Services went up 2.5%, so somebody was buying something last Quarter.  Very little Commercial Spending, unfortunately and exports were way up (11.4% vs 3.9%) and imports were way down (oil, petroleum drives this) at 0.9% vs 3.1% in Q3. 

Real Federal Government Consumption Expenditures and Gross Investment decreased 12.6% in the 4th quarter, compared with a decrease of 1.5% Q3. National Defense Spending decreased 14% vs -0.5% last Q.  Nondefense Spending decreased 10.3%, compared with a decrease of 3.1% in Q3 – that's what really dragged us down from having a fantastic report.  

Private inventories were up again, adding 0.42% to the GDP but not so much as the 1.67% they added to last quarter's total so it's actually progress.  Real Final Sales came in at 2.8% and that's a good number too.  

Personal Income was up 2% and Personal Spending was up 4% so I assume the credit card companies were the winners this Christmas.  Overall, our GDP cracked the $17Tn mark by $100Bn.   For the year, however, that's only actually up 1.9% in Real GDP, so don't get too excited.  

I'm also not excited by the 48.5 finish to the Architectural Billing Index for December, which indicates a serious lack of planned building activity for 2014 and is a fantastic forward-looking indicator.  So we're playing for a bounce but we remain skeptical and will certainly be re-upping some of our bearish bets as we move up to re-test our bounce levels (I don't even see retesting the highs as being likely).