In last night's Big Chart Review I said about our very inept government "we reap what they have sown."
That reminded me of one of the great philosophical lessons I learned early in life:
"All our times have come
Here but now they're gone
Seasons don't fear the reaper
Nor do the wind, the sun or the rain..we can be like they are
Come on baby…don't fear the reaper
Baby take my hand…don't fear the reaper
We'll be able to fly…don't fear the reaper
Baby I'm your man…"
Market swings are indeed like seasons and good investors should not fear downturns in the market but welcome them as buying opportunities. I made a premature call 2 weeks ago to start moving cash off the sidelines and, two weeks later, we STILL had 80% cash in the STP and 50% cash in our LTP at the beginning of the week while we went to all cash on our new $10KP and mainly cash in our Day Trading virtual portfolio.
We picked up a few financials on Wednesday, scaling into C, BAC and the XLF while yesterday we concentrated on rolling down our current positions, hoping for a bounce that doesn't look like it's coming today. Winter is a season and it's not going to end after the first day so our job now is to judge the severity of this market downturn and get ourselves ready for planting season.
I'm hearing all kinds of "end of the world" predictions in the media and this is exactly what we want to hear at a market bottom. Earnings do not start in earnest until after the July 4th weekend, so it may be a while before we have a catalyst for a turn (assuming the government does the same awful job of instilling confidence they've been doing so far).
Back in April I wrote an article about "How to Buy a Bank and Other Beaten Down Stocks" and even C, who have taken a tremendous beating, is only down 35% on the leap (which means doubling down here will leave us down 17.5% on the blended basis) while that $1.40 drop has already been paid for by calls we sold early on. At this point, we are holding our C's naked, hoping they hold the line at $17.50. If not, We simply sell the July $17.50s, now $1.25 and spend $1.10 to roll our Jan $17.50s down to the Jan $15s. If we have to continue to follow this strategy all the way to $5, so be it – I would be pretty happy to own C at $5!
So, when we start scaling into our new positions, there is no need to be brave. Let's dip our toes in the water with good coverage and add more on the way down – who know's what levels we'll end up owning our favorite stocks at – we still have 6 months until our January leaps expire and 18 months before the 2010s come due, we don't need a V bottom, just a bottom at some point in the next 3 months and we'll be fine! If not, I'm pretty confident that an intelligent leader will get us out of this mess next year.
Of course we still want to have plenty of cash on the side in a market like this, we still haven't had a big volume blow-off bottom and a lot of people think the VIX needs to hit at least 30 before we get a rally again. That would be tragic as that's probably Dow 11,000 or less so let's hope not! I think the sell-off is already overdone and, as I said to members yesterday, what is left for GS to downgrade?
Asia didn't need no stinkin' downgrades to fall 2% in this morning's trading. The Nikkei held 13,500 and the Hang Seng held 22,000, which is roughly where they bounced in January and March (the Nikkei fell all the way to 12,000 in March, then recovered to 14,600 just 3 weeks ago). The Shanghai Composite fell over 5%, erasing a week's worth of progress on the last day and back below the critical 300 level, over 50% off its highs.
When we talk about bubbles nobody thought would pop, we forget about China, which fell 50% in less than a year after having the same parabolic run to the top that oil is currently enjoying. What happened to all those can't miss BRIC investments? They are now can't miss energy investments which, oddly, rely on the same "fundamentals" of China growth that the China bubble relied on 50% ago…
Japanese consumer prices rose at their fastest pace in a decade due to soaring food and energy costs while demand is weakening across the board. That would be called "stagflation" in the world's second largest economy for all you history buffs. Vietnam is attempting to lower the value of the Dong against the Dollar to try to control their own inflation. Good luck to them on that, making your currency worse than the dollar is going to be a hell of a trick!
Europe is actually holding up quite well this morning, despite an after-hours pump of the NYMEX to $142 a barrel. Europe was at our 5% rule for the week though, so unless they gain more than 1% today, it's nothing more than a pathetic bounce at best. Business and consumer confidence fell "significantly" in the 15 nation Euro-zone but the ECB, who are take their inflation-fighting mandate seriously, are pressing ahead with their plan to raise rates.
The euro zone's annual rate of inflation was 3.7% in May, well above the level of just below 2% that the ECB targets over the medium-term. The ECB fears that a prolonged period of high inflation will lead consumers to expect that prices will rise at a similarly rapid pace over the medium-term. That expectation can become self-fulfilling, since consumers would be more willing to accept price rises, and more likely to seek higher wage settlements to compensate themselves for a loss of purchasing power.
If there's one thing "THEY" don't want more than anything else, it's wage inflation! As I mentioned in my Wednesday manifesto, we had wage inflation for the middle class under Clinton and "THEY" didn't like that one bit. You could barely get a good seat in the theater and the first class cabin was jammed with all sorts of riff-raff and we had to wait six months to get a decent Mercedes as all those nasty little people moved up the social ladder – thank goodness President Bush put a stop to that!
But our President must remain ever vigilant as personal income rose at a 1.9% annual rate, just 7% behind the real inflation rate this year. That was the largest gain since September 2005 and this time, personal spending was only up 0.8%, indicating consumers are cutting back their consumption significantly, especially since that figure includes the initial effect of the stimulus package. Adjusted for inflation by 50%, spending was up just 0.4% in May, still double April's increase.
Hopefully we can hold it together today. I doubt oil can hold $140 and, if it does, there could be more pain in store for the markets but, otherwise, we are very likely to flatline into the weekend and if we can make it to Tuesday without a "Black Monday" then we'll probably flatline into the holiday weekend as well. This means we DO want to cover into any rally today so let's keep on our toes as, either way, we'll be well covered into the weekend.
