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Thursday, March 28, 2024

What Now Wednesday – Another $670Bn Not Enough?

Woops! 

I titled yesterday's post "More Stimulus Please" and, as expected, we did indeed get another $670Bn (500Bn Euros) rumored around noon yesterday as the word is the EFSF is going to either double or eliminate it's lending cap.  This action was backed up by our own little Timmy Geithner, who backed the play, saying: "We're encouraged by the progress [Europeans] are making, not just to put in place economic reforms across Europe to create the conditions for stronger growth in the future, but to try to build a stronger architecture for a fiscal union … and try to make sure there's a sufficiently strong firewall in place to support those efforts."

It took 12 hours after the close but it seems to have finally occurred to market participants that the only reason we NEED a "sufficiently strong firewall" is BECAUSE EUROPE IS ON FIRE!  Not only is the prospect of doubling down on the EFSF less than a month after it's passed kind of worrying but the real concern in the markets this morning is that – another $670Bn is not enough!

EURATINGS

If we assume both Ireland and Portugal are essentially junk and that Italy, Malta and Slovakia are next – assuming the S&P goes from "negative watch" to actual downgrades – how big does the EFSF really have to be?  Well, it's all about Italy (GDP $2Tn), who are about $2.5Tn in debt – about the same as Germany, who have a 60% bigger economy (GDP $3.3Tn).  

Spain (GDP $1.5Tn) is a relatively mild $800Bn by comparison and only 55% in debt so if they lose their AA rating – on what basis do the big boys get to keep their AAAs?  

We were discussing the Global Debt situation in Member Chat this morning and Jthoma asked how long this can go on and I said you have to think of this a a Global game of musical chairs – only there are 7 Nations (the G7) dancing around just one, very rickety-looking chair.  Since no one thinks they are likely to find a safe seat when the music stops – not even China – no one is going to stop the music and call an end to the came and they will all keep dancing and dancing until they collapse.  THAT's the Global Economy at the moment! 

That's why we flipped more bearish at Monday's opening run and remained so as we tested the same top yesterday.  In our White Christmas Portfolio we held short on oil, of course (another nice chance to short at $102 this morning!) and cashed our long FAS trade and pressed our TZA hedge, rolling down to the Dec $33 calls for net $1 and they were down to .65 yesterday but that wasn't enough to shake us out.  We also added an EDZ spread as an overall hedge at 1:49 and the last thing I said to Members before heading off for my interview (same comment) was:  

Well,. it’s turning into another strong day.  RUT over goal, NYSE close, Dow a bit shy.  I have to go be on TV (3:10 they say) but, if we have a good finish, we’ll need to do some aggressive upside plays tomorrow but I super doubt this move is sustainable given the total lack of fundamental support.  

Unfortunately, other than bottom-fishing on AXP (well-hedged), HOV (ridiculously well-hedged) and GNW (well-hedged), we haven't found much cause to make bullish bets just yet as we continue to gyrate madly up and down – both intra-day and in the futures markets (8:40 view of Russell (/TF) above).  

As I have said before, this is great fun for both our rangey day-trading strategies, where we simply buy at the bottom of the channel and sell at the top – over and over and over again – as well as our long-term Income Strategy, where we ignore the gyrations and sell options to idiots who think they can guess the highs and the lows!  Our goal, quite simply, is not to be the same idiots. 

So far, we're simply following the same rally into consolidation pattern we had in early October.  There we consolidated about 5% lower than we are now and that had a happy conclusion for the Bulls as we rallied another 5% into the end of the month where, fortunately, we made our non-greedy exits – just like we did last week – and managed to enjoy the ride down in November.  

We were doing the same thing then – "Cashy and Cautious", watching and waiting for the right opportunity to re-deploy our cash.  Looking at the Russell chart above – it's certainly not like we miss an opportunity to buy at the top or sell at the bottom because, if you wait about two hours, the market flips the other way again.  That's what consolidation looks like – although usually you don't see indexes pulling 1.5% intra-day swings over and over again (see yesterday's remarks on volatility).  

As day traders, we simply enjoy it while we can and, as long-term investors, we just ignore the nonsense and wait for the markets to pick a real direction.

Speaking of long-term investing – we haven't had much reason to worry about HOLI since we jumped on them in Member Chat on July 25th (as noted in the post the next day).  Our first play on them was a simply sale of the Jan $7.50 puts for $2.40 – following Rule #1 and selling into the initial excitement as they dropped 21% when China blamed their switches on their train crash.  

We made several other upside plays on HOLI as they went even lower (down to $4.54) in PRICE (but not VALUE) in August, including a nice, aggressive spread in our Income Portfolio and this morning we get even better news than the stock holding $9 as Citigroup ups us to Buy and says we have another 50% upside.  That's how we play these crazy markets – wait for opportunities to buy good stocks that are too cheap – it's not that complicated, all you have to do is be patient.  

We're still PATIENTLY waiting to get a real direction signal from our indexes but the fact that we're not finding VALUES at this level is a great indication that, in my gut, I still don't trust these markets so we remain cashy and cautious – looking for the next good opportunity.  

 

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