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Thanksgiving Thoughts

SPY DAILY What an ugly finish November is having!  

We’ve been trying to get bullish with little success and, if we are not reversing tomorrow, I will be regretting the wasted time poking at bullish plays when we could have been going "wheeeee" on the slide.  

I thought that blue line on Dave Fry’s chart was going to hold, it’s about 2.5% down from our Must Hold level for the S&P on the Big Chart (1,235) and that would have been a reasonable (and slight) overshoot of the 10% drop we were expecting so we played for the bounce but now we’ve blown our -5% line at 1,173 and our next support level is -10% at 1,112 – a very sad level to revisit if we do.  

Technically, of course, we’re breaking down.  Fundamentally, I’m not so sure.  The fear is palpable as Europe looks terrible and clearly all these austerity measures are taking a toll on the Global economy but it’s simply NOT showing up in the data yet.  PMI’s are dropping across the Globe but the Purchasing Manager’s index is a SENTIMENT indicator that reflects the OPINION of the buyers about business prospects.

As I have been pointing out (yes, there was a point) in my recent series of articles about market and media manipulation – there is a protracted campaign underway to push sentiment down – to chase retail buyers out of the markets.  

Who is doing this?  Perhaps it is the IBanks, who want to bottom out the market ahead of QE3, when we’ll be off to the races again.  Perhaps it is the Fed and Treasury, who want to chase people into the $140Bn worth of bonds they have to sell each month.  Perhaps it is the Republicans, who want to campaign against the worst possible economy next year to prove that Obama has blown his handling of the economy almost as bad as Bush did – so we may as well try one of their idiots again since it seems to make no difference.  Don’t laugh – I have a button for Romney that says that

Whatever and whoever is behind the negativity (and let’s not forget Germany, who are angling to take control of the EU and will be able to do so if things deteriorate further) – our job as investors is not to particularly care – but to figure out how far negative SENTIMENT can push the markets down before DATA pushes it back up.  

As I pointed out on Tuesday with WHR, we’re now at the point (with the high VIX and low prices) where we can create spreads on stocks that give us built-in discounts of 25-30%.  This is an improvement of our usual Buy/Write Strategy (see "How to Buy Stocks for a 15-20% Discount") that comes along with the happy (for Fundamental Investors) combination of an oversold market and overactive volatility.

While we are ready, willing, able and anxious to execute on Warren Buffett’s advice to "Be greedy when others are fearful" – we also must take the advice of William Wallace and "hold, Hold, HOLD" until we are confident (as opposed to hopeful) that we have found a proper bottom to invest in.  

It’s fine to do a little bottom fishing if you are sitting on a lot of cash but PLEASE let us not forget the lessons of 2008 – that there is no bottom in a Global liquidity panic.  So it’s here that we want to exercise a little game theory – what are our various possible outcomes going forward?  

Since we have gone to cash in our short-term portfolios and hedged our our long-term portfolios as best we can (also half cash anyway) – the BEST thing that can happen right now is a devastating crash.  As you can see from the chart on the left, there’s a very good chance of that happening since it is both political party’s self interests to hold out – just as it is the interests of individual countries and various Central Banks to do the same – even though their action invites the possibility of a total catastrophe.  That’s essentially what we’re playing for from a cash position, which is why we speculate to the upside while we wait – we KNOW we will do well in a collapse, it would just be a shame to miss an unexpected rally so upside bets are now our hedge against our cash position.  

Cash is betting the Dollar is more valuable than stocks or bonds or commodities.  Since we went to cash two weeks ago, that has certainly been the case for stocks and commodities but not so much for TBills – which have gone flying up in PRICE (not VALUE) as people panic into the Dollar.  Of course, we also need to keep in mind the huge advantage of cash that’s a bit harder to quantify – it gives us the ability to very quickly move into new positions once their PRICE is sufficiently below their VALUE to the point where we are once again WILLING (because we are already READY and ABLE) to invest our cash,  

In game theory, our choices are hold cash or invest.  The market (ignoring a flatline) will go up or down.  If the market goes up and we hold cash – bad outcome.  if the market goes down and we hold cash – good outcome.  So we guard against the market going up with some small bets that are, hopefully, offset by that 4% increase in the value of our Dollars, as well as the deeper and deeper discounts offered on the bullish positions we will ultimately buy.  

Guns rice third world economy market forcesOh  yes, perhaps this is a good time to make the point that this is NOT an investing strategy for people who think the World Economy will completely collapse and we will all go back to living in caves while Ron Paul divvies up the gold and ammo.  For that, I am told an FN FS2000 Bullpup ($2,000) or an M1A ($1,500) are both excellent weapons for the post apocalyptic shopper.  

Hopefully, we’re reading stock market newsletters because we believe there is a future for the Global Economy (and, if you don’t believe me, try reading "The Worst-Case Scenario: Getting Real With Global GDP") so we will focus here on looking for and preparing to take advantage of opportunities to bet ON the future – not against it.  

Arnold Rothstein was a famous gambler in the 1900s (he was supposedly involved in fixing the World Series of 1919) and here’s a scene from Boardwalk Empire where he gives a little advice on betting and PATIENCE:

"Some days I make 20 bets, some day’s I make none.  There are weeks, sometimes months, in fact when I don’t make a bet at all because there simply is no play.  So I wait, plan, marshal my resources.  And, when I finally see an opportunity, and there is a bet to make – I bet it all."  

Now keep in mind that Rothstein is a fixer, he’s not talking about a 50/50 bet – he’s talking about when he’s already set things up so he KNOWS he’s going to win.  For those of us not working at Goldman Sachs or JP Morgan – we may not have already set the markets up so we can be 100% sure of the outcome so it is prudent of us not to "bet it all" but it is certainly great advice to remember that sometimes, as the great and powerful WOPR reminds us – "the only winning move is not to play."  

What we can do is marshal those resources (have cash ready and able to deploy) and wait PATIENTLY for the right opportunity to deploy it.  As I said, we made a mistake (several, actually) in 2008 of trying to guess the bottom but there was not bottom.  Sure we can look back now and say of course BA is worth more than $27, of course IBM was worth more than $70, of course AAPL was worth more than $78 and we were not wrong when we bought BA at $40 and IBM at $85 and AAPL at $90 but IT WAS STILL TOO EARLY and we suffered that last drop and some people stopped out right at the bottom – only to see, just a month later, those "too high" entry prices retaken and passed by. 

Obviously, no timing system is going to be perfect but the key is to have cash available and not to over-commit.  In September of 2009, I reviewed the collapse of 2008-9 with a series of 3 articles.  In the 3rd post, we discussed the day, on March 6th of 2009, when I was on TV while the market was in absolute free-fall, telling people to BUYBUYBUY.  During a 3-hour live broadcast, I came up with 13 trade ideas that made an average of 469% in 6 months but opportunities like that don’t do you any good if you blew all your reserves trying to guess a bottom on the way down.  

There is great money to be made if we are patient.  If we end up being wrong and the markets turn back up faster than we thought, then all we have lost is a little time but we still know dozens of ways to make really good money in a flat or up market BUT, on the off chance things do collapse, the smartest play we can make is to wait out that collapse and THEN, when the panic gets to ridiculous levels – as it was in March of 2009 – THEN we can buy our Blue Chip stocks at irrationally low prices and Mr. Buffett will be very, very proud of us.  

Game theory suggests it is currently wiser for us to have cash and POSSIBLY miss a sudden move up in the markets than to tie up our cash and miss another huge opportunity to buy stocks cheap, like we did in 2009.  The upside to catching a knife here for a move back up to the October highs is what?  5%, 10%?  The upside to being in cash and buying those same stocks another 30% down from here is 35%, 40% – patience pays better than gambling!  

Of course, if we though it was only 25% or less likely that the economy would suffer another shock, then we’d be less inclined to wait but, manipulated or not, we have some SERIOUS issues yet to resolve before we can get comfortably bullish again.  Until then, we will continue to take a few upside pokes but will remain "Cashy and Cautious" for the duration.  

Speaking of caution, our EDZ plays (our primary hedges) are getting deep in the money so it’s time to look at another layer of protection.  In this series, we began with my 11/3 morning Alert to Members, where I said:  

 

EDZ is still the best hedge against a Global meltdown and you can play the Dec $19/25 bull call spread at $1.30 and that can be offset with the sale of CHL Jan $45 puts at $1 for net .30 on the $6 spread or the now silly-low RIMM Nov $18 puts that can be sold for $1 or the Dec $17.50 puts that can be sold for $1.75 to make a credit spread with a net entry on RIMM at $17.15.

ISM numbers were not good and I still like my USO puts (Nov $35 puts are .90) as well as DIA Nov $116 puts at $2. Let’s do 10 of the DIA puts in the WCP with a stop at $1.75

Notice in this trade we were NOT sure we were going down so we hedged EDZ with CHL to neutralize the cost, in case the markets did not drop.  For an offset, you want to pick a stock you REALLY want to own, even while the markets are selling off – because that’s the bet you are making.   As it stands at the moment, EDZ is at $25.36 and the Dec $19/25 bull call spread is now $3.50 and CHL is at $47.22 and the Jan $45 put is still $1 for net $2.50 – up 733% so far.  The RIMM Nov $18 puts expired worthless so an even better play there but I was wrong about the longer Dec $17.50 puts, now $2.25 for net $1.25 off the original .45 credit but still up a nice 377% so far.  Our next EDZ hedge was from my early morning Alert to Members on 11/9 with my comment:  

EDZ remains the best hedge if you feel you’ve been caught not short enough. Any time they are below $18 we like them and you can sell Dec $16 puts for $1.50 to fund the purchase of the $16/22 bull call spread for about net even. Even if it’s a blown trade, you can roll the short puts and end up owning EDZ as a permanent hedge at $12 or less and then it’s just going to be great to sell calls against long-term.

This was a MUCH more aggressive hedge as we’re selling the EDZ puts to offset the cost of the bull call spread so doubly bearish less than a week after we first became cautious.  I’m glad we did this because it’s a great example of the difference between a cautious offset and an aggressive one.  The Dec $16/22 bull call spread is now $4.50 and deep in the money but those $16 short puts are now .05 so this trade, is already up $4.45, that’s 4,450%, even if the net of the trade was a dime!

Another week later, on the 17th, we went back to the well again and I think you can already see why EDZ is my favorite aggressive hedge for a global meltdown.  My increasingly bearish comments to Members in that morning’s Alert were:  

 

Somebody’d better do something or this whole thing is going to blow at this point. I have been expecting some form of Government intervention (but not Yentervention, which would be BAD) for a month now and they are missing their window of opportunity as Black Friday approaches fast (cue Steely Dan).

Obviously anything less than 1,235 on the S&P is BIG TROUBLE for the market so it’s an easy day to stay bearish as we have a clear indicator to cover. As I said early this morning (and please look over the news of the day from 3:33am Chat) this is just getting depressing and it’s certainly not something we want to be buying the dips on until we see definitive measures taken to forestall this growing crisis in the EU.

EDZ is still miles below where it could be in a panic at $20 and so it’s still my favorite hedge. The Dec $19/24 bull call spread is $1.40 and you can offset that with the sale of the $17 puts for $1.10 for net .20 on the $5 spread that’s $1 in the money to start. Owning EDZ at $17 is not a terrible hedge long-term either (and rollable, of course).

Another offset to the above is CHL, who I consider to be like buying AT&T in the 60s, short March $42.50 puts for $1.40 for a free spread and a crack at buying CHL for 17% off. The June $40 puts can be sold for $1.20 if you want a 20% discount on that entry.  

I know, it’s boring.  I make the same picks over and over again, don’t I?  THAT’S BECAUSE THEY WORK!!!  The Dec $19/24 spread is now $3.10 and the short $17 puts are .20 for net $2.90 (up 1,450%) and the CHL March $42.50 puts are down to $1.10 so looking good there despite the China melt-down (so great pick with CHL!) and the June $40 puts are higher, at $1.45 but that’s still net $1.65, which is still up over 800% – not too shabby for a week’s protection!  

The next week, on this Monday, we were already way ahead on our EDZ hedges and, since we had gone to cash and were now generally very bearish – it was time to layer these hedges and begin just a little bit of bottom fishing.  My comment from Monday morning’s Alert to Members was:  

 

So, if we get another breakdown here (and, with the news-flow, we likely will), then it’s just going to be another buying opportunity once we find a bottom. For now though, let’s not assume anything. Mostly let’s watch the Dow, as long as they hold the Must Hold line (11,590), there is hope. As we noted last week – we liked the DXD shorts because the Dow had a lot of catching up to do and it’s right about a 1.5% drop for the day so hopefully we hold there, down right at about 5% for the week and hopefully stopping there.

If it doesn’t hold – the next hope for the Dow is the 50 dma at 11,535 but, failing that and we’re very bearish until it’s re-taken. EDZ is flying now ($24) and we can add the Jan $22/26 bull call spread for $1 in preparation of stopping out all or part of the Dec spread. If we pull the Dec calls we bought (the $18s are now $6) and leave the $24s (now $3) naked, covered by the new Jan hedge, we have all the way up to $29 before it becomes a problem and, as we’ve seen – they don’t move that fast. Keep in mind though it’s a STOP out on the Dec calls, not a roll now so we are, at the moment – adding more protection and not cancelling our original position until we clearly have a reversal of fortune.

Oil is still stubbornly high and, in a real meltdown, it should fall back to the $80s. SCO Dec $40/46 bull call spread is $2 and you can offset that with the sale of XOM Jan $70 puts at $1.60 or RIG (who have more spill issues) 2013 $35 puts at $5. RIG is a bit risky but, long-term, they should come back and currently $45 means there’s a long drop before the $35 puts worry you. You can sell 5 of those for $2,500 and buy 10 of the SCO spreads for $2,000 with a stop at $1,000 for a net $500 credit that could bring back $6,500 if all goes well.

At the moment, I’m hoping the Dollar stops at 78.80 (now 78.64) and pulls back to give the markets a chance to recover but this is no place to be catching falling knives – we are really getting to the point where there is the possibility of a 2008-style meltdown if confidence erodes any further

What we are doing here is walking a fine line between fear and greed.  We are layering our EDZ play but doing so in PREPARATION for getting stopped out of our earlier, successful trades.  This allows us, hopefully, to maximize our gains off the calls we bought without having to ride them back down on a reversal.  If there is no reversal (and there hasn’t been one so far this week), then we simply have a new layer of hedges as the markets decline further.  Notice we also added SCO to our primary hedges because our indexes fell 6-8% while oil stayed stubbornly high so either oil is indicating that our indexes are oversold (hence our preparation to take EDZ profits and run) or the indexes are right and oil is going to collapse along with them on the next leg down.  

Fitch downgraded Portugal to junk this morning while that country is shut down by a Nationwide strike as citizens reject the harsh austerity measures forced on them by the EU.  Meanwhile, EU leaders are talking about amending their Constitution to enable them to further crack down on the PIIGS while, at the same time, backing away from committing to playing a greater role in back-stopping the slide.  

We don’t know when this merry-go-round is going to stop so we will just have to play it by ear.  Having a well-hedged, well-balanced portfolio with plenty of cash on the side is, by far, the best way to enjoy the ride!

May you and all your family have a very Happy Thanksgiving, 

- Phil

 


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  1. jmm1951

     Good post. As far as I am concerned, if there is to be a crash, then bring it on so that my hedges don’t go to waste and I can buy some nice cheap stocks in the January sales. It does not look to me like Santa Claus is coming to town this year. Probably the high cost of reindeer fuel and disputes over landing rights wil force him to curtail his rallying activities. 

  2. NF**X

    Good stuff. I love AR in BE and 8 Men Out. Happy Thanksgiving PD and all. PD – I may add you to our email list just for weekend so you can see our little effort to do something other than talk as we enter December – some inspired by being back here.

  3. jabobeast

     Awesome Phil! Happy Thanksgiving everyone other than Fitch!
     
    FU Fitch!!!

  4. dplatt

    Phil,

    Happy Thanksgiving everyone! I was just curious currently what positions in the virtual portfolios you have that are open. I know you are mostly in cash but you are saying you have small bets and hedges. Edz and sco are hedges, your bets from what i have read are GNW, whirlpool, qqq, and tna? Since the dow fell below 11500, (11257 currently) does that mean we are very bearish now? I’m new and just trying to learn why you do what you do. I know you have proven your investments make money and i’m excited to profit and learn from this great community of savvy investors!

    My current plays were just bull call spreads deep in the money to collect time value on SPY and AAPL. I dont have a very large portfolio so selling naked requires too much capital for my account.

    David,
    Finance Major @UCF 2012 grad

  5. zeroxzero

     I second that, Good Post!  I believe it was Rothschild who said he always made money by buying to late and selling too soon.  And I suppose it was some farmer who said "Bottom pickers become cotton pickers."  Easy to say, hard to do.
     
    As to our global quandary, I’ll throw in a JK Galbraith’s comment, which I think captures the essence of Obama’s problem: the sense that America is unravelling while his leadership is MIA:   " All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership."

  6. dplatt

    It says there is 5 comments on this article but i can only see mine. Are the other comments premium members and i just can’t see them?

  7. zeroxzero

     You can’t see ‘em. There are seven, including yours, and this one.

  8. zeroxzero

      FT: Barroso presented proposals towards fiscal integration and eurobonds – Merkel described proposals as inappropriate and troubling.
     
     FT: (i) José Manuel Barroso, the European Commission president, presented proposals to curb the fiscal excesses of national governments and introduce a joint “eurobond” to replace national debt issuance – but was met with a frosty reception from Berlin. (ii) His proposals will give the European Commission new powers to assess and object to national budgets before they are published – a step towards fiscal integration that is seen as a prerequisite to joint “stability bonds”. (iii) But, at least in public, Angela Merkel, the German chancellor, remained resolutely unimpressed, describing the Commission’s decision to propose eurobonds as “extraordinarily inappropriate” and “troubling” in the midst of a crisis.
     
    Uh, oh.  It’s a fair guess that Germany’s not going to belly up to the Eurobond bar as the price of "dominating Europe", a much-bandied but fairly speculative idea, given Germany’s past experience with Depression.  Laying Germany’s credit on the line to pay the past [and future] indebtedness of the Peripherals seems to me a total misreading of German intentions, more driven by a misreading of it’s 20th century history than an accurate estimation of it’s future path.
     
     My own guess is that it’s future lies more to the east — German industrial knowhow and capital, east European labor, Scandinavian and Russian resources, as a counterbalance to China — than in exploiting the nice weather and tourism potential of the peripherals.  If this is correct, there ain’t gonna be no United Eurobond nor unlimited German bailouts.  The mathematics don’t support it — Germany can’t afford it — assuming a Euro anywhere near current levels.
     
    And that means a breakup, in some form, e.g. A/ selected Peripherals returning to a national currency [yes, I know that means default on their Eurodebt, but that's coming anyway, B/ split the Euro into a Euro-A and a Euro-B, to give the Peripherals a "devaluable" currency [which is a real Hail Mary pass, it must be said], or C/ the markets vote with their feet, and the Euro drops 20% from current levels, following by many months of violent wrangling which outcome I won’t even attempt to guess.
     
    Bottom line, Germany doesn’t fall on its sword for its southerly neighbors.
     

  9. dplatt

    Zero

    Thanks for the confirmation, much appreciated.

  10. Canuck

    Phil,
    great post – thanks.  Two questions:
    1)  EDZ Jan 2025 bcs, looks like a net $2.00 or better entry, currently fully in the money.  Even with no offset, if we continue down and stay down for two months, then you get a 2.5x + return on your net on the EDZ spread.  However, if we find a bottom here and reverse and EDZ heads back to $18 for example, then we just sell a $16 or $18 put to pay for the spread and see if we need the insurance again over the next two months.  Or we could sell slightly OTM Jan puts now on names like BTU, CHK, MT,…
    2)  Arnold Rothstein – if TLT hits $125 and we do a TLT weekly bear put spread at 125/123, is the a Rothstein-ish trade?

  11. NF**X

    NFLX – Can one of you aces run a probability calc for me plz?  Was just messing around with plays around NFLX volatility around next earnings.  Not really interested in doing anything with NFLX anymore – just motivated to run some numbers based on a UK piece I was reading today.  Using OpEx trade calc, I mistakenly punched in numbers for a Mar 12 67.50 short straddle – clearly not a vol strategy, but the trade shows as green at all relevant price levels.  What up with that? 

  12. zeroxzero

     Out on a Limb:  A Euro currency thesis.  Please feel very free to skip over this unread, since PSW doesn’t generally concern itself with forex.  I do because I have forex-denominated investments.
     
    I have become convinced that the Euro is being seriously mis-priced at it’s current 1.33-something level.
     

    This is no longer about economic analysis; it seems clear that the Peripheral countries, in which I would include France, are collectively bankrupt. Hence the the outcome has moved entirely to the political sphere. 
     
     
    The political outcome that I foresee is based on my perception that the market is mis-pricing Germany’s intentions.  More specifically, the market believes that Germany is seeking effective control over the European financial and economic sphere, and I do not. 
     

    Germany, in my view, sees its longer term future to hinge more on what goes on beyond its eastern border than its western border.  Germany sees itself, correctly, as facing a long-term economic rivalry with China, in which it counters China’s price advantage with technological sophistication.  It looks to Eastern Europe to provide an ample supply of cheap labor for production, and to Russia for natural resources, along with certain arrangements with Finland and other states bordering the Baltic.  Much of this view is based on an energy seminar I took at a northeastern university last November.
     

    I believe that the current price of the Euro reflects a belief that Germany will do more than it intends to do to support the Euro, because it reflects the view that Western Europe is more important to the long-term economic future of Germany than is truly the case. 
     

    To put it somewhat facetiously, Germany is likely of the view that wine and tourism will not have the future cash-flow generating potential that they might have had in the past, as we enter a Brave New World whose 7 Billion people are bumping up against the limitations of the world’s natural resources.  I believe that Germany understands that, based on the profile of its capital investments as I understand them.
     
     
     Yes, I’m exaggerating for effect, but in the end it comes down to whether Germany believes that the large western Eurozone countries — France, Italy, and Spain — are worth bailing out on a cost/benefit basis.  I firmly believe that they do not think this  to be true, and that their public and private investment profile is hard evidence of this.
     

    Had there not been a U.S. real estate meltdown and subsequent global recession, Germany would have been happy to balance between the two.  But given a hard choice, I very much doubt that Germany will sacrifice its long-term future, in geopolitical terms, to rescue its three large Western neighbors.  The fantasy that Germany will assume the debts of France, Spain and Italy through the mechanism of a collective European debt mechanism will be dissipated very rapidly if international investors continue to withdraw their support from the Euro. 
     

     Since the Euro is a strait jacket that prevents the upward and downward movement of national currencies that would otherwise act as a market adjustment mechanism controlling the price of labor, export and imports [and hence consumption], even if the outstanding Peripheral sovereign debts were all reset to zero, the inevitable future trade deficits created by currency rigidity would condemn Germany to cover all future trade imbalances that the Peripherals will run into the distant future.
     

    Germany will never put itself in a position to do this, and the price of the Euro at present would be at least 20% below its current level if Germany were to say that clearly.  Which is exactly what I am convinced they will say, now that the German bond auction failed [at the price offered] and Germany’s political class can now see clearly that the illusory prospect of a general "German bailout" for which the market is feverishly watching and waiting is an absolute impossibility.  Respectfully submitted, Z

  13. Phil

    Good morning! 

    Italy 2-years hitting 8% this morning, 10-year at 7.35% so I shouldn’t even have to tell you what the markets are doing. 

    Yields sky-rocket to an average of 6.5% as Italy sells €8B ($10.7B) worth of 6-month bills, up from 3.35% in October, with the bid-to-cover ratio dropping to 1.47 from 1.57. In an auction of €2B worth of 2-year zero-coupon bonds, the yield soared to 7.814% from 4.628%.

    A survey of the ugliness that is 10-year eurozone government bonds shows that Italy +12 bps to 7.23%, Spain +6 bps to 6.69%, Belgium +4 bps to 5.78%, Austria +2 bps to 3.79%. At least France -3 bps to 3.692 and Germany flat at 2.197% 

    The deterioration in market conditions over the past month means that the eurozone may not be able to meet its goal of leveraging up its €440B ($583.9B) EFSF rescue fund to over €1T, the FT reports. Even a lower target might be difficult to reach, with the fund’s eventual capacity expected to fall "well short of its billing." 

    10 days in a row the DAX and FTSE are down – 11% for the DAX so far with a point being added today.  This is very nasty stuff!  The Dollar is way up at 79.70 so I guess we’re going to test 80 now BUT, that’s gotta give us some sort of pullback as it’s up 5% from our consolidation at 76.50 in the first half of this month and the last half of October (other than a spike down at the end of October that gave us the very fake rally we decided was BS for exactly that reason).  

    Last Christmas/New Years we topped out at 81.44 on the Dollar and that should knock us down to those -10% lines if it happens but I think we’re more stretched this year as the run-up on the Dollar is almost entirely over EU panic and certainly not because we’ve demonstrated our own abilities to balance our budget and fix the economy.  

    So, unfortunately, I still can’t get on the bear side this morning – I’m just not buying the negative story, it just seems like panic to me and nothing more.  

    Friday’s economic calendar:
    4:30 PM Money Supply
    4:30 PM Fed Balance Sheet

    6:00 AM Overseas: Japan -0.1%. Hong Kong -1.4%. China -0.7%. India -1.0%. London -0.6%. Paris -0.7%. Frankfurt -0.7%.

    Paul Krugman takes time from Thanksgiving prep to post his thoughts on the run on German debt. He reads this as the market "pricing in a real possibility of eurozone collapse." How about the other side? Maybe the market is pricing in tighter integration, with Germany set to weaken its own credit by standing behind the debts of southern Europe. Or maybe German yields had just fallen too far too fast, and buyers simply stood aside.

    The euro hits a new seven-week low of $1.3298 following yesterday’s disappointing meeting between Merkel, Sarkozy and Monti. The euro has lost around 1.5% this week, and with international asset managers pulling out the eurozone, the market is braced for further weakness. Euro now -0.3% at $1.3307.

    Sarkozy and Merkel, emerging from a meeting between themselves and Italian PM Monti, promise proposed changes to EU treaties before the Dec. 9 summit. Merkel says the changes will be about enforcement of budget rules, rather than eurobonds or the ECB. Markets register disappointment, the Stoxx 50 giving up about 1% of its gains, now +0.8%.

    U.K. Q3 GDP (second estimate) 0.5% M/M and Y/Y, in line with expectations. (PR

    U.K. 10-year borrowing costs are now cheaper than those of Germany for the first time since 2009, with gilts yielding 2.19% and bunds 2.21%. "Going, going..With German bunds yielding more than gilts, the euro crisis has moved into its final phase. Germany must act or it’s game over," says Jeremy Warner. 

    German bunds stabilize as December futures rise 9 ticks to 135.14, while 10-year yields fall 2.5 bps to 2.169%. "Bunds are really just too cheap at the moment," says a trader. "The market is trading like it expects armageddon and equities are trading like they expect some sort of muddle through, but bunds are usually right." 

    Fitch sends Portugal into junk status, cutting its sovereign rating to BB plus from BBB minus with a negative outlook. The agency cites the country’s large fiscal imbalances, high indebtedness, and poor economic outlook. Recession will make reducing the deficit more difficult and hurt the quality of bank assets, Fitch says.

    Hungary gets cut to junk status by Moody’s, with a negative outlook. Drivers of the downgrade include uncertainty about the country’s ability to hit its fiscal targets, as well as Hungary’s recent requests for assistance from the IMF and EU.

    S&P’s Takahira Ogawa says the agency is getting closer to downgrading Japan’s AA- rating, due to its finances "getting worse and worse every day, every second." Ogawa’s remarks follow an IMF warning that Japan is at risk of a "sudden spike" in bond yields that could make its debt unsustainable. - Gee, I wonder why the Dollar is spiking?  

    Japan October core CPI -0.1% M/M (in line) vs. +0.2% in September. It’s the first fall in four months and confirms that Japan is still grappling with deflation, which will probably ensure that the BOJ will maintain its ultra-easy monetary policy for a while to come. (PR)  

    Portuguese and Greek citizens make their feelings known about the crippling austerity they are suffering, with Portuguese workers launching a paralyzing general strike and employees at Greek power producer PPC clashing with police during a protest against a new property tax. 

    This is not what the media is telling us:  Amid the angst over yesterday’s German debt auction and PMI, the country’s Ifo business sentiment index for Nov unexpectedly rises to 106.6 from 106.4 in Oct, the first increase since June. Expectations were for a drop to 105.1. The euro rises in reaction and is now +0.3% on the day to $1.339. (PR

    Only 12-13% growth?!?  Quick Ethyl, sell everything!  Chinese factory output growth will probably slow slightly to 12-13% next year because of softening global demand, the industry ministry says. That would still ensure GDP growth of 8-9%, the level that China needs to create enough jobs to stem social unrest and avoid a "hard landing." 

    This sounds kind of bottomy:  Lloyds (LYG) sells A$1.7B ($1.75B) of distressed property loans in Australia and New Zealand to Morgan Stanley (MS) and Goldman Sachs (GS). Those who lost out in the bidding process include Blackstone (BX) and a consortium involving Deutsche Bank (DB). Lloyds shares +3.7% in London.

    France is pushing for a European embargo of Iranian oil, a move the U.K. "broadly" supports but which will face strong resistance from Italy and Spain, both heavily dependent on Iran’s oil. Analysts say the embargo could keep crude prices above $100/barrel despite slowing economic growth. 

    China takes another small step in loosening its currency controls and opening its market, giving JP Morgan (JPM) permission to create a $1B renminbi fund, the WSJ reports. Such funds are able to bypass forex controls, cut through red tape, and gain greater access to restricted industries.

    Enticed by huge discounts, shoppers flocked to early Black Friday openings at major stores such as Macy’s (M) Herald Square outlet, where an estimated 9,000 people waited outside for its midnight start. Meanwhile, Best Buy’s (BBY) reductions included a $500 Sharp TV for $200 and a $400 Lenovo laptop for $179.

    More on Black Friday: The National Retail Federation expects the number of consumers to go shopping this weekend to rise 10% from last year to 152M, but that November-December sales growth will slow to +2.8% from +5.2%.

  14. Phil

    Someone asked about why TASR is my stock of the Decade:  

    TASR is my "Stock of the Decade" on the premise of A) Crowd control and B) That there will be a lawsuit in which a police department is found liable for NOT using a Taser. That will be the turning point.  Once the risk of not using one or using one balances out – then you’ll see them start to replace guns on a greater scale.

    An example I like to use is that you can imagine an episode of Star Trek, where they are all stunning people with phasers (Kirk and his band of Galactic jack-booters just love stunning anyone who looks at them funny) and then one guy whips out an old 44 magnum and blows a guy’s head off. What would the reaction be? Once you have this kind of technology, it WILL replace the old way of doing things over time – just like now it is unlikely that a modern swat guy will plant a crossbow bolt in someone’s eye or that the police will whip out old-style maces to bash a few skulls in. TASR just needs time but it will become the standard for global police.  

    That’s the future – you can’t expect game-changing technology not to creep in over time. In the history of weapons, when has that ever happened? Arrows were much cheaper than guns yet, not surprisingly, eventually every king springs for the steel, didn’t they?

    We’ve been buying TASR at $3-4 for years now so $5.66 seems like a lot but the market cap of the whole company is just $315M with about $100M in sales and no real profit yet.  Gun sales, on the other hand, are a $5Bn industry – I don’t see any reason TASR can’t take 10% of that market over time.  

    At $5.66, you can buy the stock and sell the June $5 puts and calls for $1.60 and drop the net to $4.06/4.53, which is about where we do like to accumulate them and a nice, quick 20% even if you get called away.  

  15. Phil

    Crash/JMM – Just don’t let waiting for the end of the World blind you to a change in sentiment.  I think the end of the World is already priced in – the EU will have to take action, Italy and Spain simply CAN’T borrow money at 7%, no one can.  

    Email/NF – What’s with this guaranteed jobs thing?  Also, did Greg ever get you our programmers’ info? 

    Open positions/DPlatt – I will do an update over the weekend.  Keep in mind the WCP is all short-term trades, you don’t need to follow old ones – we’ll have more tomorrow.  As I said above, technically, we have to be bearish but, Fundamentally, I think we’re oversold.  Deep bull call spreads are fine until the stock drops below your caller, then you lose money very fast.  Just make sure you are realistic about your targets or, at least, hedged for a major dip.  

    Thanks ZZ.  Yes, I often say we’re not going to miss much by waiting to confirm a move up, rather than repeatedly trying to call a bottom (or a top).  We do need better leadership, Obama’s a huge disappointment as he could have taken office and held a fireside chat and rolled out a New Deal Part II and I really think he could have pulled it off, given the mood of the country at the time – one of the great missed opportunities of history.  John Stewart interviewed Nancy Pelosi (there are 3 parts) and it was pretty interesting (for those who are able to listen to what she has to say without going "ewwww Pelosi" before she gets a word out).  I love the fact that she leads off with asking "who are these 9% who actually approve of Congress?"  

    Comments/DPlatt – Yes, on weekends the site has a mode that lets Basic Members see Premium chat but it doesn’t work on holidays so, with few people commenting, it can look pretty empty.  

    EDZ/Canuck – Yes, that’s a good way to play, especially if you have bets that do well to offset if EDZ comes back down.  With a trade like that, you’re right, no hurry to sell puts to offset.  On TLT, yes, I think $125 is unsustainable and, as long as you are willing to roll out if we go to $130 and $135 (also unsustainable) and wait to be right, it’s one of my favorite bets.  

    400 Richest/Diamond – That’s what I said in my last BNN Interview when they cut me off!  If the bottom 150,000,000 begin to realize that they can chop off the heads of just 400 people and double their lifestyle – it’s really only a matter of time before it happens.  Especially since about 15,0000 of their children are living in poverty with 8M kids now living in families that have lost their home.  

    NFLX/NF – I don’t trust that OpEx calculator, very often gives strange results but certainly the premiums are so massive on NLFX now in both directions that you may be able to pick up some nice combos if you time it right.  

    Germany/ZZ – Without the EU and the free trade, etc.  Germany would not be Germany.  They know that.  You could make the same argument for breaking up America or China, for that matter, where the wealthy cities support 5 times their population trying modernize the rural areas.  It was Germany who WANTED the Euro in the first place BECAUSE they couldn’t effectively compete with Dollars, Yen and, eventually, Yuan and the Mark was eventually going to be marginalized along with both Francs.  I think all this panic is simply Germany, who does hold all the cards, pushing to get as many concessions as possible before doing what they have to do.  It’s practical for Merkel, who needs to show that she’s a tough negotiator fighting for Germany and it’s good for France, who would like to see the smallest bailout possible so they are both happy to force a decade of austerity on their neighbors/competitors before opening their wallets.  

    Either way, we’ll see soon, this "crisis" is coming to a head as Italy and Spain hit 7% – I doubt they are going to risk waiting for France to start paying 7% on their debt before putting a stop to this nonsense.  

  16. brooklyn

     Phil/Hedging Morning After Problem – previous hedges that I have rolled have left me with a number of short calls comfortably out of the money (at least at the moment) but showing a loss as conditions deteriorate. I was thinking of layering in an out of the money hedge to protect these (like TZA April 35/50). And/ or should I trim the calls that are a slight loss before things get worse as the game of chicken plays out in the Eurozone? 

  17. exec

    Phil

    It could be time to sell some puts. Do you have any companies that you are particularly fond of?

  18. Phil

    Hedging/Brook – Well I would certainly make sure you’re covered into the weekend as we could fall off a cliff.  If you leave naked calls, you do need to re-cover them (generally with further out in time calls) if the stock price crosses their strike or you can get in big trouble. 

    Puts/Exec – I don’t want to jump the gun and, also, in this kind of market, I’d want to think long and hard about what companies I don’t mind riding back down to 2009 lows – just in case. 

    Speaking of hunger – this picture is sick but funny – too sick for the morning post but makes a great point on so many levels:

    A Woman's Patience

  19. brooklyn

    Phil/Naked Calls – so what would you do with 20 EDZ Jan $50 calls originally sold for $1.05?

  20. NF**X

    Jobs – It’s been on our back burner for a year – you knocked me off the fence, man. Not yet re Greg.

  21. NF**X

    QQQ – Did we stop out of the Dec w 55 C’s? Or are we DD’ing today?

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