John Stewart rightly declared it "The Death of Hope."
We were bearish going into yesterday but not THAT bearish! The market dove right back to our "Freak Out Friday" lows on 1/23, when I had said: "So good morning World Leaders – clearly the investors have no confidence in you whatsoever and the rats are leaving the ship in droves – certainly not without good reason as it is getting very wet in here!" Substitute "Obama Administration" for "World Leaders" and then you can just re-read that post and we're all up to date…
I said yesterday "Can we handle the truth?" It certainly seems investors can't since the truth is that the Administration is not promising a quick fix and they do see massive problems ahead and they're not sure they are doing the right thing but they want us to bear with them as they try to get a handle on the situation. Clearly that was NOT what the markets wanted to hear after 8 years of hearing how great everything was – even when it wasn't. Yesterday I said Obama was acting like a cardiologist giving you bad news and while Geithner was speaking yesterday I said, rather than playing the hoped-for role of "good cop," he came across more like the rehab nurse who tells you she's really not sure when you will be able to resume a normal life.
To be fair to Geithner, the NYTimes had an article yesterday morning (updated now) showing how hard he fought to STOP the left wing from getting their agenda on this package. Possibly yesterday's vagueness was the result of Geithner’s last minute victory over hotter heads in the party: "In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials. Mr. Geithner, who will announce the broad outlines of the plan on Tuesday morning, successfully fought against more severe limits on executive pay for companies receiving government aid. He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid."
It is also very possible that, strategically, the administration does not want to roll out a $2Tn bank bailout bill before having a bill signed that helps the American people, who are already pretty ticked off about the banking industry. Meanwhile, Cramer is once again playing fast an loose with the facts on SKF. After talking his sheeple out of protection that went up 15% yesterday while the financials collapsed, in yesterday's show Jim justified his massive disservice to viewers by pointing out that the SKF, SRS, FXP and DUG "would have actually had a 30% loss" in 2008. While that is true, it ignores the fact that they were up 150% in early December, where a 30% hedge in the ultra-shorts would have offset a 64% drop in the remainder of the virtual portfolio. When a hedge pays off, as I would imagine Jim knows, you cash it out – only a truly MAD money manager would press an insurance bet that goes (in the case of the SKF) from $100 to $300 during the year.
Never trust a man who shows you charts when it suits him but then tells you something else and says "you can look it up" because that man is counting on you to be too stupid or lazy to actually do it! The reason we short the ultras when they spike up (as we did yesterday) is because we understand how they work because we do not invest based on what someone on TV tells us to do. Once the XLF drops below $10, then a $1 recovery sends the SKF DOWN 20%. Understanding this relationship helps you play these ETFs very effectively. In fact, right at the end of last Thursday's post I had said "we expect Monday’s lows to hold but look out if they don’t and have some downside bets ready – maybe those SKFs!" What would having SKF plays ready have done for you yesterday? Jim does not want ordinary people to be able to do what any hedge fund can do through leverage that is not available to the average investor. While Cramer says many, many, stupid and misleading things – his campaign against the very useful ultra ETFs is really pissing me off. In fact, I mentioned in the morning post we expected China to reverse and our usual play on that one is the ultra-short FXPs and you can judge from this chart whether or not a 10% day gain could be useful to you (our play yesterday was selling the $31 puts for $1 – pays off $1 for $15.50 in margin in 7 days if they hold $31).
We're going to have a tough time getting going today as the banks are back before Congress, who are sure to ask them if they flew there in a private jet and other useless things as we avoid substance at all costs while our "leaders" continue to use the spotlight to jockey for position in the next election. We still need to test our 2/2 lows of Dow 7,800, S&P 815, Nas 1,460, NYSE 5,100, Russell 437, SOX 203. We are roughly 2% above those levels except for the Dow, just 1% over, so a long way to go if the market is determined to hit them. Below there are our November lows but I think we test just the 2/2 levels before someone hits the buy button.
We'll be keeping an eye on that red line at the bottom of David Fry's chart of the S&P at 825, which is the rising support line off the November lows. If we can stay in that channel, there is hope but anything below that is likely to have us going very short, dare I say ULTRA-short, on the markets until we complete this leg down. Remember I said at the beginning of the week that I expected we would get irrational buying that was likely to be slapped down by the reality of some very ugly data and earnings by Thursday. Well we got some very irrational selling and we're still going to get slapped. AMAT and NVDA were the previews of that last night!
I want to be very clear that we were BUYING into the dip yesterday and are still playing 8,000 as a bottom (in fact, things got so cheap we bought oil again) but… Just in case:
Our favorite play to prevent immediate further loss is hedging with the DIA Apr $80 puts for $5.55 which we cover with the Feb $79 puts at $2.15 so you are in for net $3.40. Should the Dow drop 300 more point to 7,600, the DIAs should be $76 and the putter will be worth $3. Currently, the March $76 puts are $2.75 so we have a reasonable assumption that the Feb $79 puts can be rolled to the March $73 puts. That puts the Apr $80 puts $7 in the money (ahead of the puts you sold as a hedge) on a $3.40 investment, a double if the Dow continues to fall. If you invest 20% of your virtual portfolio in a hedge like this, you can stave off a 25% loss of the other 80%. Should the Dow head higher, you are in for $3.40 net, which is the price of the Apr $75 puts so, roughly, it would take a 500 point move up in the Dow (short-term) for you to go red. If the long plays you have won't do well enough with the Dow up 500 points to balance out any losses on the hedge, then you are over-hedged. This is a major simplification of a complex strategy but something very worth experimenting with in SMALL amounts until you get the hang of protecting your virtual portfolio. Our Education section has many, many articles on the subject and we're doing a Webinar on trading strategies this Sunday.
Neither Asia or Europe seemed that upset by our huge losses yesterday. Other than the Hang Seng, which fell right to the 2.5% rule, the rest of Asia was flat, with the Shanghai still being held up by promises of government stimulus. The government may cut consumption taxes on alcohol, cosmetics, jewelry and watches, raise import tariffs on luxury consumer goods, and lift export tax refunds on products such as home appliances and furniture, the newspapers said. The threshold at which individuals start paying income tax might also be raised. China's exports fell 17.5% in January and, even worse for the region, imports fell 43.1%. Net net for China, that keeps their trade surplus at record levels but the data needs to be taken lightly as the Lunar New Year, which shuts China for a week, was in February last year. The General Administration of Customs said that adjusted for the impact of the Lunar New Year holidays, exports rose 6.8% from the same month last year, while imports fell 26.4%.
"Despite potential tax cuts and stimulus measures in key overseas markets, the outlook for global consumption remains bleak," J.P. Morgan China Equities Chairman Jing Ulrich wrote in a research note. "Exports are likely to remain lackluster until global consumers regain their appetite for consumption." As China produces less its appetite for components and materials also drops. Asian economies, including South Korea, Taiwan and the Philippines, also reported sharp declines in exports last month, partly reflecting weakening intra-region activity. China, for example, is buying fewer components from Taiwan and South Korea to make end products, such as mobile phones and televisions, that it sells abroad. Analysts said China's imports fell because the prices of commodities have been falling and domestic demand is waning. That is the BIG picture!
Europe is also holding flat this morning despite BOE Governor King saying the UK is in "deep recession." Well duh, I guess… EU ministers are making great progress on handling their bad bank assets while the heads of the UK banks said "sorry" for the cameras this morning. As we expected, MT had terrible earnings but not so terrible as to justify yesterday's sell-off (selling X March $30 puts naked is a good play here) and CS also found confession was good for their soul as a $2.7Bn write-down turns out to be cathartic for them as they pop off their 50 dma at $26.
Obama is still pressing for funds that were cut to be put back in the stimulus and the nice thing about all this delay is it may actually dawn on people that the lack of a new stimulus is not ending the world as we know it. Here's a great WSJ chart of how the two plans compare and companies such as BA, GE, NOC, OSIS, LLL and RTN are among the companies that stand to directly benefit from the passage of this bill. Those are all worth a look if we tumble further as are many companies on our Buy List, especially with the VIX shooting back up near 50, which gives us great spotting for our hedged entries. Also, keep in mind this is the Wednesday before expiration week and only momentum traders and suckers hold front-month contracts after today – make sure you know which you are!
RIMM is going to hold down the Nasdaq on a poor outlook (again, Duh) along with the AMAT and NVDA while SIRI is down on bankruptcy rumors. The energy sector should get a boost today as we should have a much lower build, as we usually do at this point in the contract cycle (a week before the rollover to next month) and that can give us a little boost around 10:30 and then if we can shut the Finance Committee hearings at lunch without lynching the bankers – we may be able to get back to yesterday's -3.5% levels, which would be Dow 8,000, S&P 840, Nas 1,550, NYSE 5,300 and Russell 450. Failing to take those levels back today is BAD.
Be careful out there!