Boy am I mad!
It was brought to my attention last night that Jim Cramer has stolen my plan, which I called "The 3% Mortgage Solution" in my Feb 9th column, and simply added a point to it and claimed it as his own on national TV. I’m not sure how to feel about that – I’ll be glad if the plan is used of course, but seeing Cramer take credit for my work is a little irritating. In fact, "Cramer’s plan," as laid out, also lifts elements from my 2/16 article – the latest version of my year old plan for immediately ending the mortgage crisis by making the government an equity partner in the homes. So congratulations to Cramer for sinking to yet another new low in broadcasting – I suppose only writers from TSCM, where Jim has overseen the loss of 87.5% of shareholder equity in the past 5 quarters, are worthy of being given credit by the great Cramer while the ideas of us independent bloggers are just his for the poaching…
Other than being shocked last night by Cramer’s flagrant foul, yesterday was a pretty good day. We executed our plan of buying out our short DIA puts into the morning run-up as we rolled up our long puts and we grabbed some XLF puts as our first trade of the day, which worked out well as a day trade. We did a little bottom fishing with UNH and ISRG and caught the IBM rally for a quick momentum play all before lunch. In fact, at 11:20, we were done being bullish as I said to members: "I do expect a big temper tantrum this week. I know I threw one at Bush’s last budget (in fact it was BECAUSE it hid so many costs) and the GDP is going to back up the Doom and Gloom squad tomorrow so still balanced bearish off this level as we haven’t hit one of our goals yet: Dow 7,400, S&P 780, Nasdaq 1,450, NYSE 4,850, Russell 415. Keep that in mind."
We had added long QID puts as general virtual portfolio protection and those are working out so well we are becoming concerned with our April $64 covers – which seemed safely out of range at the time. We had a bit of a false bottom after lunch but I said to members at 1:33: "Not good on XLF – see they tested $8.40 to upside and failed. That puts them on path to test $8.20, which is light resistance on the way to a real test at $8 and below that we are back to $7.60 so be careful if this starts breaking down." We ended the day picking up some FAS calls, just in case our bearish stance was wrong but it looks like there was no need as the pre-market (7:30) is already looking awful.
We are getting hit from all sides this morning with the government announcing a much larger stake in C along with the FDIC doubling fees charged to lenders and, of course, the upcoming 5% drop in GDP. For Citigroup, the government is expected to match $25Bn in privately held preferred stock conversions, so $50Bn of preferred comes off the books and the conversion price is $3.25, a massive premium to yesterday’s close, which will immediately dilute C by 1/3, pulling down all the indexes they are a part of. Running an onerous deal like this may be good for the government but it’s bad for confidence in the financials and we can expect our pals at SKF to fly back to $180 or better today – only this time I’m not so certain I want to be shorting them. Contrary to Cramer’s advice, we had been using the SKF $230 calls at $7.30 as disaster protection and yesterday I suggested selling the SKF Apr $95 puts for $5 into the close – those should do very well at the open!
The XLF is miles above the low of $7 from last Friday and I warned members how easy it would be to have that 15% drop back that could send SKF up 30% ($240), this is the danger we fact when we have an ultra-ETF like SKF that is indexed to a broken ETF like XLF. Of course that’s also our opportunity on the downside as a .35 bounce off $7 (5%) can send SKF tumbling $20 or more (10%) – that was the essence of our 1,300% gainer last Friday and here comes the set-up again so stay tuned in intra-day chat – hopefully we’ll get another swing at this one.
Meanwhile FNM (if you are a taxpayer, you own it) lost $25Bn this quarter and says they need another $15Bn to get through the next one. FNM lost $59Bn in 2008, making GM look efficient and we’re not even discussing bigger brother FRE (we own them too!), who may need $35Bn of their own to move forward. The two mortgage companies hold about 200,000 foreclosed properties ($200K each = $40Bn), double last year’s rates but, once again, I will point out that delinquent loans account for just 2.4% of their total virtual portfolio’s of $5Tn – cash flow and mark to market is killing these companies, not bad loans.
We’ll be watching XLF $7 to hold, also oil at $40 and copper at $150 as signs of the overall economy. The Baltic Dry Index fell below 2,000, which was our watch level from last week and now we need to see them hold 1,900 or we may be looking at another big, global sell-off. China is not buying our bonds, they are SELLING theirs as local governments are running out of cash. India’s Rupee sank to record lows against the dollar as their economy slowed to 5.3% growth (from 8.9%) in Q4. The rising dollar was good for the Nikkei, and that market gained 1.5% but they were alone in the region as the Shanghai went 1.8% the other way and the Hang Seng fell 0.7%. "Asian economies have proved to be more vulnerable than most had been anticipating to the collapse in global export demand," said David Cohen, director for Asian forecasting at Action Economics in Singapore. "They have dropped at a pace not seen before. Exports just went over a cliff in the fourth quarter."
It’s 8:30 now and Europe is off their own cliff now that our -6.2% GDP Report came out. That is way worse than the preliminary reading of -3.8% and way worse than the -5% analysts were expecting. EU markets are down about 3.5% across the board, an indication of broad-based program selling that is hammering the US pre-markets as well. We will certainly be testing our last week/November lows at the open and it’s going to be very hard to make bullish plays into the weekend but now is certainly the time to buy if we can hold our levels again (hedged of course!).
One of the best ways to open a position in a falling market is by selling out of the money naked puts. In addition to our usual "Buy List," I had 4 nice-looking candidates in yesterday’s chat:
- AMGN took a nice dive today. $50 puts are $1.75 but let’s make sure they are done going down.
- RAH fell back to the 50 dma crossing the 200 dma, nice spot for a rally. Apr $55 puts are $1.58.
- APOL got whacked for no reason I saw: $65 puts are $1.62, wish I’d seen this $4 ago this morning!
- GMCR in an interesting squeeze on the charts: $35 puts are $1.43.
We should get even better pricing on the morning dip and these are all stocks that I like for the longer term. Remember, scaling in is the key to survival in this market!
The November lows were: Dow 7,449, S&P 741, Nas 1,295, NYSE 4,607 and Russell 371. Those are our "lines in the sand" for today but, more importantly, we are closing the second month of the year today and let’s keep an eye on our 20% off levels from our Jan 2nd open. Those are Dow 6,995, S&P 724, Nas 1,260, NYSE 4,600 and Russell 400 and we should get some good resistance there with expected bounces of 4% above those marks before March expiration (20th) or we are going to have a very, very long way to the bottom!