It's hard to believe that just one year ago today investors thought the world was ending!
Well, not all investors – we were BUYBUYBUYing at the time, as I recapped back in September whan we did our "Market Crash – Year One Review." Click on Cramer's picture for the Daily Show's March 4th, 2009 review of the magical moments that led us down to the bottom and here's another great video from the evening broadcast on March 9th and, of course, there is my own legendary appearance on LiveStock from March 6th, but that's summarized in the crash link, so save yourself 3 hours, although the first 10 minutes are worth it for people who want to learn about our buy/write strategy as I explained the logic of it as I recommended FAS at $2.41 using those hedges.
And what a wild year it has been as we've made an epic recovery. The only question is – have we come too far too fast? Should we be up 75% from our March 9th lows? We are still down 25% from our highs but let's keep in mind that we made those highs thinking AIG was MAKING money, that FNM and FRE were great stocks for your retirement virtual portfolio, that Kirk Kirkorean was going to rescue GM, that BZH wasn't some kind of scam, that BSC, LEH et al were "the smartest guys in the room." I urge you to click on Cramer and listen to the idiocy of the analysts who would tell you everything is all right even as it was all falling apart around them – why does everyone suddenly trust them again?
How could we not love this market? Markets do this sort of thing all the time don't they? It's all part of the "efficient pricing model" that always lets you know what a stock is truly worth like when GE was "worth" $30 in 2008 and "worth" $6 in 2009 and is now "worth" $16. This is not some biotech folks – this is GE, they've been around for 100 years and they have $170Bn in global sales. Did they really drop 80% in value in 2009? No. That's why it was easy to pick a bottom – the valuations got ridiculous and, as fundamentalists, we siezed on the opportunity to BUYBUYBUY despite the negative sentiment.
Now, we are in a very different situation. Now we have the MSM telling us to BUYBUYBUY despite the 75% run-up, as if a return to Dow 14,000 and S&P 1,500 is inevitable. My problem with this is that those levels were based on profits that never actually happened so how can we return to them? Clearly the solution our government has chosen is to continue to allow companies to report profits that never actually happened so we can slip back into our fantasy world where 30M unemployed, discouraged and under-employed Americans are somebody else's problem as are the 4M families facing foreclosure this year and the 20M families that are behind on their mortgage payments, who may be joining them.
I have not been a fan of the recent move up as we were led by commodity stocks, real estate and financials. People, these are the SAME guys who led us to our doom last time! Is it really that hard to remember?? I'm sorry but if I get into one more conversation where someone tells me "this time it's different" I will FREAK OUT! I'm getting interviewed and my views are considered "radical" because I'm still a bit concerned about the soundness of the banks who have Trillions of dollars on loan to unemployed people and businesses who serve unemployed people and on houses and CRE that is not selling and even to countries that themselves have debts they can't possibly pay. My views are radical because I'm CONCERNED?
I would be a lot less worried if other people were worried but what really worries me is how NOT worried the MSM is (or at least how they edit and present the views of the people who they decide to allow access to). And, if the average person didn't believe what they see on TV – I would not be worried but, sadly, they do! It is possible for a group of people – for a whole society, in fact, to believe something that is totally untrue. The people of Pompeii were proud that Vulcan had chosen to make his home in their mountain, for example…
So the people of America have chosen to believe that spending $80 for a barrel of oil and importing 11 Million Barrels a day and sending $321Bn a year OUT of the country to some of the very same people we are spending another $600Bn a year fighting a war against is the sign of a healthy economy. Keep in mind that $321Bn is only about 1/2 of our oil spending in total. In addition to the stimulus last year we also had oil that averaged $50 a barrel for the first half of 2009. With 19Mbd consumed in the US, that was putting $17Bn PER MONTH right back into consumer's pockets vs $80 oil or, to put it another way – we now have $17Bn less money per month to spend than we did in June. Of course, refining mark-ups and other rising commodities make it more like $50Bn a month but, since that extra $50Bn is counted into our GDP – it's a GOOD thing, right?
That's my premise for being cautious, the same one I had back in 2007 and 2008 as oil went over $80 and I kept saying it was going to destroy the economy. I was wrong for a very long time – keep that in mind – but then, I was very tragically right as we finally hit a wall and the economy fell off a cliff. But the wall wasn't caused by the sudden spike to $140 – the wall was caused by people running out of credit cards and second mortgages they were using to pay for all the oil. If we're shipping $321Bn out of the country at $80 – how much did we have to borrow to subsidize $140? And that money is NEVER coming back!
Since we originally had to borrow money to pay for $80 oil and now we, the people, are all tapped out – how can we be expected to do it again? It's an unsustainable model BUT – it may take a while before we hit the wall so we will party on – but you can be damn sure we will ALWAYS have our eyes on the nearest exit! That being said, let's take a look as the S&P chart and the key resistance points we'll be watching this week:
The critical channel for the week is going to be between 1,130 and 1,150 and the most important takeaway from the chart is that we are now 10% over the 200 dma – that doesn't happen too often. I did the multi-chart in yesterday's post so we know where we generally stand. I have been bearish since last week – I am still bearish until we break 1,150 and then I will be VERY reluctantly bullish because I'm fairly certain it will all end in tears but knowing that in 1999 didn't stop us from having a fabulous year – even more so for those who cashed out at Christmas!
Can we party in 2010 like it's 2009, where a monkey with a dartboard could have picked a stock that was going to double? Well CSCO has an "It"-type announcement at 1pm and hopefully Cisco's "it" isn't Segway's "it," which didn't actually change anything except the way really rich people play polo.
Asia was flat as a board this morning and not much happened other than the Yen getting strong again as Japanese companies brought profits home before the fiscal year ends. This is happening at the same time as the Pound is getting weaker on poor housing data so currency traders may want to reverse this bet now that things are calming down. Moody's has also made some negative noises about British Banks (and their bonds) so not a good day for the UK, on the whole. Also of note in Asia, China's head of Foreign Exchange said "gold is unlikely to be China's investment of choice" as they diversify their reserve holdings BECAUSE IT'S TOO RISKY! Gee, imagine that…
Copper failed $3.40 but is still a far cry from rational (below $3.20) so we'll be watching them closely and gold fell all the way to $1,110 in pre market – which will be fantastic for our GLL play if it sticks. Oil fell all the way to $80.16 overnight but is, of course, recovering now that the NYMEX crooks have punched in for the day. $81.50 is the mark to make over there and once again we'll be looking to short oil at $82 the day before inventories if they are foolish enough to take it that high.
Not much else today. Greece and Dubai are still unresolved while Spain, Italy and Ukraine are getting harder to ignore. As with yesterday, we'll be watching our levels to see what sticks but, so far, it's looking like a slippery slope.
Cwan/JPY
I have started to track the Yen as a currency to trade. At the moment, I do not have the same sentiments as you regarding the prospects of weakness against the Dollar. Down the road, after we see how the economy is doing, I will become more confident. It is definitely an interesting study.I have closed out all of my short Euro positions except the EUR/AUD, and I have doubled down my position, as it just keeps chugging along in my favor. Bord has some very good insight to the strengths in Asia, not only relating to currencies, but also the impact on equities.
jburgess
Now that is some terrific reading… most interestingly is the revelation of how quickly these empires failed. Ferguson stated that " most imperial falls are associated with fiscal crises, caused by the imbalance between revenues and expenditures" .History is truly the window to the future. In almost all cases, the demise of a government is caused by ineptitude or personality disorders of individual leaders, and not external forces. California has suffered from very poor government for decades, brought on by selfish non qualified elected officials that are perpetually re-elected through handouts to potential voters. This totally flawed system now has destroyed a great state, that had so much promise for so many. Until the government has a complete make-over, the future looks grim. This problem, is replicated at the federal level, and the solution will have to be the same.
California, Illinois, New Jersey- 3 major states all in the news lately are the canaries. All afflicted with the same problems of profligate spending with 80% of the problem emanating from public employee pay and benefits. Taxes will go up. The lunch tab must be paid. Look to Greece. That is our future.
Good morning!
Bank sales/Matt – They can try to manage them but, on the whole, they will keep home prices depressed and hamper the recovery of the building market. I was an advocate of removing mark to market for PERFORMING loans but they went nuts and removed it for everything. It’s all going to hit the fan one day, probably in some major bank failure where a lawsuit uncovers all the crap on their books that gave a false impression of the bank’s health but, meanwhile, the free money papers over everything. What do you care if you are carrying $100Bn worth of dead assets if you can borrow $100Bn at 0.25% so you are risking 1.25% ($1.5Bn) to hope the market bounces back in 5 years?
Of course, the downturn was inevitable anyway and I don’t understand why Obama or someone can’t just get on TV and say to America "Hey, we overbuilt for 5 years – that means we will have to underbuild for 5 years to get back in balance. Meanwhile, those 3M construction jobs WON’T be coming back so let’s stop fooling ourselves and do something to utilize the skillsets of those unemployed people like, instead of giving them welfare and unemployment – how about we pay them to repair bridges and highways and build high-speed rail lines that will have a lasting benefit for our country?" Maybe we can even get some massive hyrdroelectric or wind projects going…
It always seemed to me that we have this Grand Canyon thing that’s very tall with a river running down the middle so why can’t we put a couple of walls in that allow the water to build up in one section until it gets very high and then drop it into some turbines? That’s how we power the most of the Northeast United States….
Adjustments/Phlit – Once a caller gets to less than 25% premium, it’s time to consider a roll as you are probably going to do as well or better by rolling him to a longer call.
Bull calls/Dflam – That was a function of the very high VIX making naked Leaps and other long-term calls unattractive. The bull call always has it’s uses but the key is always the long-term target. You have the math and the concept totally right but keep in mind that you are selling the May $18 put so, as long as you REALLY want to own GLW at $17.61 – it’s a great play but just keep your bearings on how you will feel if GLW misses in April and falls back to $14 – where they were most of last year. Do you still want them – are you willing to DD and have a $15.80 net basis on 2x? What’s the plan going forward? Those are the considerations you need to make when establishing what is, on the whole a fairly inflexible position. Perhaps that would lead you to conclude that you’d rather go for the May $17/18 spread at .65 and sell the $17 puts for .50 for .15 on the $1 spread with a put-to price of $17.15 but your break-even is actually $17.08 because you’d still have something from the calls!
So, on the whole, I like to use the bear-call spreads to either give me tremendous leverage on a hedge (like our disaster hedges) or to take a position that is already in the money that I have a great deal of comfort in. With GLW, I think it can go back to $14 simply because it did go back to $14 and sat there for a very long time so it’s not much of a stretch for me to imagine investors panicking back to that level. So my long-term plan for them has to include what I will do if the stock is between $12 and $14 for a year or two. Obviously, your put side can be rolled so all is not lost if they drop (as long as it’s not sudden) but I would prefer to go for the GLW Aug $16/18 bull call spread at $1.30 and sell the $16 puts for .70 for net .60 and a put-to price of $16.60 but with the Jan $12.50s at .43, that’s my roll target for the put side.
I’d be more comfortable doing 20 of those unless you REALLY, REALLY want to own 2,000 shares of GLW at $17.61 AFTER something bad must have happened. My plan makes the same $1.40 yours does but my commitment is effectively to buy 2,000 shares of GLW in January for about net $13.25 – a price I REALLY would want to own them at – a price I’d be EXCITED to own them at!
We’re still in the kind of market where you may wake up one day and find your stocks are cut down 20% and they could be 1/2 in a jiffy. It is not a good idea to make big commitments on stocks you don’t mind puttting under your pillow for a year or so while another wave of crisis sorts itself out.
Japanes/Cwan – Vitaliy had a great PowerPoint on Japan’s aging population and the economic impact on the main site about 2 weeks ago. Not a pretty picture…
Bahama’s/Pstas – If you are an Amex Platinum or Centurion member you can call them and they can set you up with a local phone or maybe a sim card that will work while you are there, might be cheaper. I can’t stand that hotels charge for WiFi – it’s infuriating, especially in nice hotels where they are supposedly catering to business people. Of course, there’s always Starbucks and I’m pretty sure when I was in Atlantis the Wi-Fi was free as I remember using it all around the resort.
Upgrade/Ac – I believe he took care of it.
Banks/JRW – That is total nonsense isn’t it? It’s all part of the stealth bailout that’s still going on that is keeping the banks "healthy" by showering money on them as fast as we can print it.
ITMN – Congrats to all who played that one! It’s funny that our original buy/write just a month ago gave us a $3.40/6.70 with a $10 call away… That’s the nice thing about hedging biotechs that way – when they pop, you get to close out early with 95% of your full profits anyway.
Wow Bord, that’s some schedule! I miss those consulting days – hanging out in different cities, staying at nice hotels all the time…
Cali/Alsos – Yeah, it’s funny how people worry about Greece and Dubai when California could swallow them both for breakfast.
TBT/Hanna – Keep in mind it’s a very violent ETF and could very easily bury a $49 call. Why not just sell the Apr $49s for $1 and leave the March calls with a .15 stop? It’s always very tempting but just because expiration day is close and the premiums are low, doesn’t mean the risk to you of TBT moving $2 against you in a single day is diminished – you are simply getting paid far less to take the same risk.
Here’s an interesting thing you can do. The Apr $50/48 bear put spread is $1.20 with TBT at $48.50 so you are effectively capping your gain (until $50) at $48.80 but you get an additional .80 protection if TBT slips to $48 or lower. Since the caller already caps your gain – you really have nothing to lose.
California/Gel – I don’t know if Whitman can save it but if she thinks she can I say let her take a whack at it. Perhaps someone can convince Arnold to terminate the legislature, who seem to be a major impediment to progress.
Speaking of California:
In California’s Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values and a consumer shift to cheaper brands.
I always wanted to buy a vineyard when I retire, maybe now’s the time. Except I was going to buy one in France around Burgundy. I sprent a month in Lyon once and I really got to love that region and the bullet train makes it a very easy trip to anywhere you want to be while still living a real country life-style. Nappa is very nice too but. over the long haul – I think France has a better chance of surviving….
Phil, current position in DIA March calls
bot 70 105 calls @ 1.04
sld 70 106 calls @ .50
bot 30 107 calls @ .42
sld 30 108 calls @ .12
Hoping for DIA close @ 106.5 (or higher) at the end of March, what adjs would you make now. Thanks, and thanks for VLO clarity.