Up and up the markets go, where they stop – only Ben knows!
We actually initiated the October 8 picks on Thurs, Sept 30th, when we had that crazy Dow spike to 10,950. As it was the last day of the month we got an instant winner on the NFLX play and some other good ones as we plunged to 10,700 that Monday. In between, when I wrote the post on Sunday, Oct 3rd, I said "I hate to go short."
We were still very bullish in our virtual portfolios (see September's Dozen, Turning $10K to $50K, Defending with Dividends, 9 Fabulous Dow Plays and the June 26th Buy List) since the June bottom (and we were early on that call too) but we felt is was time to start covering with some bearish plays as we completed our projected 12.5% run back 11,000. These 8 trade ideas were to get the ball rolling in October. Since then we have flown up to 11,062 on the Dow, slightly over our projected top, much the way 9,650 was slightly below our projected bottom in July. The rally still has not retraced enough to cause us to give up on our long-term longs so this is a BALANCING move on an expected pullback, not an overall long-term bearish posture – always be clear about that! We've been bullish since the beginning of July as this point it pays to diversify.
Like July, we can take advantage of the the spike out of our range to scale into positions and to roll and adjust the trades and, like July, we looked at some bullish covers along the way – just in case we are even earlier than we thought. I'm not going to get into the whole macro thing here – I did that all week but everything old is new again, as you can see from this chart:
I don't know how well you can see this but I copied the current rally and lined up the bottom with the Feb rally. It's hard to see because the movement is VIRTUALLY IDENTICAL. That's right, Lloyd is either too lazy or too cheap to even bother to change the Bots he uses to gooses the markets. As you can see in the area with the extra lines – day after day, tick after tick, there is virtually no variation to the market's moves up. Last year, we joked about the Omega 3 pattern that we watched repeat itself for months. We'll call this one the Beta 5 but this may be bad news for the bears as, like the groundhog's warning, we may have 6 more weeks of this nonsense before we get a proper pullback.
Special Update: Thanks to the Elliot and the News Team at Stock World Weekly (our new Newsletter in Beta) we have a more professional version of the chart where Elliot used red to illustrate the copied section (this chart kind of reminds me of the song, "The Bear Climbed Over the Mountain."
So bears BEWARE! We do not short stocks just because they are high, we short them because they are not worth what people are paying AND because we believe that earnings (or some other event) will make that obvious at some point. That is our premise – Yet a rising tide does lift all ships (for a while) and, if we are wrong, then we need to admit it and that looks like about 11,500 if we keep following this pattern. 6 weeks from now is Thanksgiving – it would really suck to come back from the holidays right into another flash crash, wouldn't it. But, let's assume the flash crash was an accident. Then we'd be looking for a steady, downward grind with no Santa Rally and a bottom, once again, in early February.
I hope we don't get such an exact match-up or who needs guys like me to predict the markets? Well, as Field Marshal Moltke said: "No battle plan survives first contact with the enemy" and, as I said in the "October 8" post: "My major bear premise is that the dollar makes a comeback and knocks down oil, copper and gold and that sends the energy and mining sectors down which drags down the broader market and gives us a good, healthy pullback where hopefully we can go long again." So far, so wrong, I guess as we simply can't fight the Fed but, like we saw at the end of 2009 – they do get to the point of diminishing returns…
Despite the relentless rise in the market, we have still been able to take advantage of the spikes up to take quick shorts. We discussed the value of having a good stop discipline in yesterday's Member Chat and our first three trade ideas from the 9:40 morning Alert were a great example of that as I suggested craps roll plays (the amount of money you would be willing to lose on a roll of the dice in a casino) on DIA ($111 puts at .22), QQQQ ($51 puts at .16) and GOOG ($590 puts at $1.65).
Of course you have to allocate at least $165 for the GOOG trade, so it's not for everybody. Those topped out at $2.45 right about 10:19 which was the same time I called for tight stops on the DIA $111 puts as they topped out at .90 (up 300%) the QQQQ $51 puts only made it to a double at .38 before they too fell off and this is why we say, over and over again: DON'T BE GREEDY! Even if you are "only" playing $100 on each, that's $300 and $100 in profits – in an HOUR! You have to keep perspective on what you can expect to gain on short-term positions and that goes for the bigger ones too….
Our first trade idea for the October Overbought Eight was NFLX, who we had been watching for some time as going too far. Our first NFLX play was selling Oct 8th WEEKLY $170 calls for $3.50 and those were .25 (up 92%) at the end of that day. NFLX had the nerve to spike back up and we then looked at the Oct $170 calls for $8 and those, of course expired worthless (up 100%) as NFLX finished the period at $155.72 – still too high but not as much fun to short.
#2 on the O8 list was BIDU and the Nov $95 puts were the pick at $5.30. After reaching $7.30 (up 37%) on Monday, the 4th as well as Friday the 8th, they are back to $5.05 – yet another great example of why stops are important (see Strategy Section) – with stops, you could have made $2 twice. With greed, you are right back where you started with 2 weeks less to play! Of course I had discussed taking the money and running on BIDU in the Oct 3rd post as we had already hit our 20% goals (20% is ALWAYS our goal) that Friday (1st). I was also very specific about stops in our 3rd BIDU short:
Anyway, our new trade on Thursday was the fairly aggressive Oct $95 puts at $1.35. Those popped nicely to $2.15 (up 60%). If we continue to follow Mr. Buffet’s advice, it is best to "Be fearful when others are greedy" and note that taking 1/2 off the table with a 60% gain leaves us in 1/2x at net .55 so a stop at $1.10, still leaves us with a 25% overall profit on the trade, which means we can certainly ride out the gyrations for a day or two to see if BIDU makes a proper drop or not.
Remember, the shorter your time-frame, the more conservative your stops need to be! We simply don’t have time to be wrong on October spreads, which expire in just two weeks, especially when we are committing the cardinal sin of buying premium, rather than selling it. It doesn’t matter that the BIDU Oct $95 puts jumped to $2.15 – you must keep in mind that they are STILL $3.80 out of the money with 10 days left to trade – that’s the kind of nonsense we usually sell to other suckers – not hold onto ourselves!
I could say this stuff 100 times and still people don't listen so I'll say it for the 101st and apologize to those who are bored hearing it – Set Stops, Don't Be GREEDY! As you can see from the chart, we caught a huge break that Monday as BIDU did fall further and the $95 puts jumped to $3.25, almost a 50% gain from my Sunday comment and up just shy of 200% from our entry. Now, where do we stop out with a 200% gain? At 160% ($2.85) – ALWAYS have a 20% of the profits trailing stop!!!
Notice that having $2.85 cashed out on Monday, the 4th, gives you an excellent opportunity to get back in on Tuesday at .90 and take it back to, guess where – $2.25! It is not coincidental that option prices retrace back to our original goals like that – we pick those numbers for solid reasons and that's why we get the hell out when we hit them. Just because things are going your way, does not mean they are going the right way.
#3 with a bullet to our brains was the dreaded TLT. We picked them for a short at $105 when they first popped it on Sept 23rd and what a long, strange trip it's been to Friday's close at $100.27. As I keep saying, with straight stock picks, our goal is just to make more than the 2.5% per month that our cash is devaluing at. Our option idea was selling the Nov $105 calls for $2.20 (now .45 – up 80%) and buying the Dec $102 puts for $2.45 (now $4.10 – up 67%) which proves, as usuals, that it is better to sell premium than to buy it but doing both doesn't suck either as a net .25 entry can now be cashed for $3.65, which is a 1,460% gain on cash committed in 10 market days. If that sort of thing doesn't satisfy you – I really can't help you!
PCLN was our #4 selection and we found selling the Jan $380 calls for $23.25 (now $18.80 – up 19%) to be a comfortable way to set ups a short on the stock at net $403.25. However, those calls dropped to $11.99 on the 7th and that's 50%(ish) in a week. Back to $18.80 now is yet another example of how GREED KILLS. As I had commented in the original O8 post on this trade: "Those have already dropped to $17.50 (up 25%), which isn’t bad for 2-day’s work!" Take profits, Take Profits, TAKE PROFITS and, have I mentioned, TAKE PROFITS! The other half of that pair was the Apr $190 puts at $5, which hit our $7.50 exit target (up 50%) on the 7th as well but are now down to $4 (down 20%). Imagine if every Friday they handed you a paycheck and you said "Nah, I'm going to let it ride" – would you be richer or poorer???
#5, MOS is our first Oct short play that's still in play and it's a total disaster! The Nov $52.50 puts were $1.10 and plunged to .55 the next day. We thought it would be clever to spend another $1 to roll to the Nov $57.50 puts and $1.75 more to roll to the Jan $57.50s, which are now $2.15, so down 44% from the $3.85 worth of net adjustments for those who rode it out. Gosh I hate to say it but, if you are still in them, you probably want to DD at $2.15, which would be net $3 and down .85 on the Jan puts that have a delta of .23 so you need a $4 drop to get even. I do like the Jan $57.50 puts as a new entry and this is another great example of the benefits of stopping out. Even if you killed the original MOS trade at .55 (down 50%) then it would cost just $1.60 more to reposition at the Jan $57.50 puts now and just a $2 drop would bring you back to even. Net entry on the Jan $57.50 puts (now $2.15) at $3.85 (before the DD) vs $2.70 – that's the difference between stopping out and repositioning and rolling!
Rolling is fine as long as it's combined with scaling in (Once again, see Strategy Section) as the Double Down to 2x nets $3 vs $2.70 if you would have stopped out. That's the power of scaling in, even on a position that goes horribly against you like MOS did on us, by keeping conservative entries you have plenty of spare firepower to "fix" it – if you should decide to keep at it and, of course, losing 40% on 1x is far less damaging than losing 20% on a full 4x or 5x allocation, isn't it?
AMZN was our 6th short trade idea and, as I said at the time, it's a very scary stock to short. I should have made a more directional play but we liked the short buy/write of the Jan $190/165 bear put spread at $18, now $16 (down 11%) paired with the sale of the Jan $170 calls at $9 (now $10.75 – down 19%). Similar to our normal buy/write trades, these longer plays are not ones we tend to adjust unless we have to. While AMZN is making an impressive show of strength at $165, we still have a hard time believing they will justify $160 on Thursday's earnings report. That coupled with our general feeling that the market will correct by January means we still like this one.
FSLR came in at #6 but it's always in the top 10 of my short list. This particular round of idiocy was based on them hitting $151 on the Thursday we picked our 8 and the play on them was a ratio backspread on the put side, buying 3 Jan $130 puts for $7 ($2,100) and selling 2 Nov $130 puts for $4 ($800) as we didn't think they would fall that fast. I was wrong as they dropped like a rock to $136 on the 12th but they've recovered back to $145 and our net $1,300 spread is now net $1,375 so boring but progressing. Yes the straight put would have been more exciting and a huge winner but that's what we thought with MOS – sometimes they work, sometimes they do not!
Our last of the October Overbought Eight was CMG as we were looking for a longer-term short position. Part of the reason for this is the first 4 picks were made into that Thursday morning pop so the short-term, directional plays made more sense. By the afternoon, the market had already fallen back so we moved to more hedged positions, in case we popped again – which we did. The backspread on CMG was selling 5 Nov $175 calls for $8.75 ($4,375, now $12.75 for $6,375) and buying 4 March $190 calls for $10.75 ($4,300, now $14 for $5,600) so a net $700 loss so far. This is a long play and the Nov $175 calls can be rolled even to the Jan $185 calls and still carry $6 of premium and our premise hasn't changed so nothing to do here but wait.
Yes, spreads are boring but boring can be nice in a choppy market. Again, we are generally bullish and using plays like these to hedge what had been very, very bullish picks that we've been making for months. As we hit new highs and get closer to our 11,500 line, we get a little more bearish each day but now we are hedging our bearish picks with some high-reward upside plays. We already cleared last Thursday's SSO spread off the table at 800% (which turned out to be way too early) and decided to ride out the XLFs, which are looking a bit shaky. I have called for getting to more cash as I think the dollar is too far down and the market is too high so, when you cash out and the dollar bounces, your cash dollars are able to (hopefully) gain in value, giving you cheaper opportunities to pick up stocks and commodities later.
This week we added Disaster hedges on QID and FAZ (to offset the XLFs) on Monday and the QID entries are now cheaper but the FAZ is already doing great. WYNN was a new short trade idea on Monday and what a bad one it's been so far. RICK and AAPL, on the other hand, are doing just fine as upside plays. Tuesday I said (how many times?) "DON'T BE GREEDY" on the short side in our Morning Alert to Members and the Dow kissed our 10,900 target and that was it for that.
Tuesday we looked at long plays on INT, C, SVU, VZ, rolled MOS to Jan and then the Fed had us puzzled going into the close. In the Wednesday morning Member Alert, we decided there was too much free money floating around and after adding a new TZA Disaster Hedge, we added 3 bullish trade ideas for UNG, XLF and DDM as laggards that could really take off if this rally gets legs. Obviously, DDM is up huge already but the other two are still playable if you need more bull for this BS rally…
USD was also added to the bull side before the bell on Wednesday and the PCLN $350 calls were a sell at $1.80 into the afternoon excitement and dropped to .50 the next morning but severely punished the greedy with a $4 finish on Friday! That's why Rule #1 is: ALWAYS sell into the initial excitement.
DRYS came up as our last trade idea of the day on Wednesday, that is a 2012 buy/write that's still a good way to play a rally. C was Thursday's pre-market selection and I joked in the morning Alert that things were getting very 1999ish again and maybe it was time to buy YHOO but that was a joke, based on the merger rumor, not a pick! I did call a buy on the Nat Gas futures (/NG at $3.60 and those jammed up over $4 at the day's end but now back to $3.52 in overnight trading so maybe we get another whack at them next week!
XLF seemed like it was giving us a good entry at 11:04 and we looked at a 2012 artificial buy/write. They have fallen .30 since then so not really a panic (and that's what the FAZ's are for) but it will be for the markets if they fail to hold $13.50 next on a downturn. UUP may have seemed crazy at 12:13 on Thursday but I still liked them at $22.20 and maybe, just maybe, we found a bottom. DBC was my idea for an inflation hedge in the afternoon but, unfortunately, PCLN tempted me to make another short pick and I liked those October $350s short at $2.40 again, which did not work this time (down 67% at close -same chart) as well as the short Nov $380 calls at $8.90, which are now $10.70 and down 20%. While ugly, net $388.90 on PCLN still does not seem very likely.
ENTG is working out great so far as a bullish play and the .10 QID Oct $14 calls were a total loss by Friday's close. Finally we got bearish again for real with an EDZ April atificial buy/write and our tricky GOOG spread idea was a loser as GOOG popped out of our range (we were going for something more neutral) but, of course, I prefaced that one by saying "If I had an inkling of a clue as to what they will do, I’d play them but I have no idea at all!" Still, my bad for putting it in a featured trade idea box…
Yesterday we hit the jackpot on our two index shorts and the GOOG trade took some of that back. We added QQQQ puts for next week (too tempting not to with the Nas 2,470 as well as the SQQQs and QIDs on the same premise so we'll be watching tech earnings with great interest next week. We also looked at an upside trade idea on AAPL to offset (hedged of course with earnings) and I also liked HOV (as usual) as they dipped back to $3.75 while HMY was our selection for playing continuing metal madness.
Surprising isn't it? I'm surprised as I thought I had been much more bearish but I guess, after reviewing the week's comments, I just FELT bearish while making mainly (2:1) bullish picks – holding, as I have said, our noses while we try to go with the flow. We'll see what happens next week but balance and cash are the way to go in this crazy market. As I keep repeating, it is all about the dollar – if the Dollar goes up, the market falls and if the Dollar goes down – God help us all but it will, at least, be "good" for the APPARENT value of stocks.
And remember my darlings, it is better to look good than to feel good!
Growth/Pstas – On WDFC’s Consolidated statement, $931,000 of the $6,888,000 in net income (15%) was from unrealized foreign currency exchange gains! . They also made an "Equity adjustment from foreign currency translation, net of income taxes" of $3.7M this Q, which accounted for about 1/3 of their total earnings. That got translated by Reuters into "WD40 profit beats street, sees strong FY11" with no mention of the exchange contribution that led to a 3-cent (10%) beat. What’s really shocking is how no one mentions this stuff – as if a 12.5% drop in the dollar is just business as usual and doesn’t impact the earnings numbers we’re seeing.
Gloom/Jthom – I haven’t gotten much drinking done yet but I will say that you should read some books about the Great Depression. We had totally screwed up the country then and there was lots of political incompetence at the time and you can say it was the war but we did not only turn the country around but we thrived for the next 30 years. Economies have cycles and the same forces that drive us down and China up will one day drive China down and us up – it’s waiting out the in-between parts that sucks!
On the banks – obviously $80Bn is just a drop in the bucket for them. C lost $27Bn in 2008, let’s say this costs them $4Bn for their share of the mortgage market – who’s going to notice over a couple of years? In reality, FRE and FNM are on the hook for the most unless they sue to force things back but they really can’t do that without calling MERS, which they built, some kind of fraudulent transfer enterprise and that’s not going to happen so, very likely, NOTHING will really change. You can be outraged and disgusted and whatever but what’s it going to change?
Stops/Iflan – To be clear, I do not like hard stops. Especially with options, that can easily go up and down 50% and flush stops, it’s really dangerous to have hard stops. What’s even worse about hard stops is that most people set bottom stops but not top ones, which is ridiculous as an option could, on a coin flip, go up or down 20% every day so if you stop out only with 20% losses, your are locking in every downturn and then letting all winners ride without locking in any gains – there’s almost no way you can win that unless your percentages are phenomenal.
Banks/Goldman – Time for another "Resolution Trust" where the government takes over foreclosure activity (paying the banksters cash, of course) and deals with this mess over the next decade. Then the banks can fly higher while we foot the bill for the mess they made. A government trust can insure title by simply guaranteeing payment – how it happens is of no concern as long as the guarantee can be counted on and then the title companies can simply underwrite the possibility of the government reneging – probably through AIG who we own too and we’ll get stuck with that. See how this game is played?
China/Gel – Oh absolutely. They will be the world’s reserve currency as soon as they circulate 6,500% more Yuan. No problem I’m sure. Unless, of course, we pull 50% of our currency out of circulation. No, wait, that won’t work because then our currency will go up and they’d still need to press 3,750% more of their own at the same time… Hey, how about if… no, that would never work… Maybe if…. no, that won’t work either… Get the point? It’s like saying that Dallas, which is growing at a rate of 2.5% per year in population, now 6.5M is well on the way to passing New York’s 19.5M because they only grew at 1% a year this decade. Can it maybe, possibly happen if trends and policies continue for decades – MAYBE. Is it something we should bet on. Not at all.
The Dollar became the World’s reserve currency by agreement at Brenton Woods after WWII BECAUSE the rest of the World was in shambles and they were able to get countries to agree to it so the US could lend them all money and help them rebuild. Also, the US consumer base was undamaged leading to us becoming the worlds greatest importer of goods for the next 60 years. I’m sure you know, we NEVER had enough gold to back the buck – that was always a joke. The reason Fort Knox was kept secure wasn’t to protect the gold but to protect the fact that there wasn’t enough of it from becoming known.
We weren’t the only ones who were pretending when global GDP went from $7Tn to $25Tn but gold flatlined. All the jump in gold was in the 70s was a realization of the reality that Brenton Woods was never followed and money wasn’t worth what people thought.
Now we are in part two of that crazy spike with everyone losing faith in paper currency again and this bump of 600% is still shy of the 700% move we had in the 70s (and the spike was close to 900%) before 60% pullback.
So $2,700 and bust is the cry for gold with maybe $1,050 remaining my "fair" value for it because you are NOT going to take slivers of gold with you to the store to buy things. You are not going to pay an ounce for 4 shares of AAPL – it just won’t happen, our society is not set up that way any more than it was in our last currency crisis in the 70s when the Nixon/Ford brain trust led us to the brink and Ford came up with his "brilliant" WHIP INFLATION NOW strategy. That didn’t work of course and the inflation was passed onto, and then blamed on, Carter. Hey, wasn’t Ford’s VP a Billionaire? Funny how those things work out.
Even then, though, Republicans were comparatively rational. Some of Ford’s points were:
So, where was I? Oh yes, China as a reserve currency. Can’t happen. You don’t snap your fingers and become a reserve currency. You have to run a $500Bn average trade deficit for 30 years so you ship $15Tn out of the country and some of those dollars end up being "reserved" as assets. The only way to get past (for example) $62Tn out of $100Tn in global assets being in dollars is for China (not even $1Tn priced in Yuan) to run a $1Tn trade deficit for 60 years AND for their trading partners to value Yuan enough to hold them as reserves AND for the Japanese, British and EU not to attempt to do the same thing as they all have significant reserve advantages over the Yuan already.
The only reason the Euro made any headway as a reserve currency is because of the forced replacement of Marks, Lira, Francs and whatever that was already on reserve. Banks that had 1Bn electronic German Marks on a Friday changed the symbol to the Euro on Monday and that was that. The actual paper currencies were exchanged over a couple of years and bond notes were liberally allowed to be redeemed for Euro equivalents. Don’t forget the Euro dropped about 40% in value in its first decade, the path to becoming a reserve currency is torturous at best…
Cashin/Jthom – Boy, he did a great job of summarizing what I was saying all week! I like that guy…
Banks/Gel – Well there were laws as to how to perfect a mortgage and, in order to cut costs and corners, they ignored those laws. I guess we can give them a pass – after all, regulations were never intended to harm a bank anyway, they were there to stop consumers from passing off their mortgages to someone who may not have had the ability to pay back the bank. When the bank is the one passing off mortgages to people who have no ability to pay – then of course you want to rescind those laws as quickly as possible.
There’s going to be some major damage to other people who cut corners, investors who bought foreclosed homes and saved money by not buying title insurance. Many of them are going to be totally screwed if the people who were foreclosed on assert their rights -they probably can’t even afford to fight the lawsuits that will be coming down the pike. Likely what will happen is the banks will have to guarantee the title insurance companies on any foreclosure issues, otherwise the home will not be marketable and then the banks will have to count on buying enough Congresspeople and judges to get things taken care of.
Hyperinflation/Hoss – As Cashin says and as I wrote extensively about, the Fed cannot control hyperinflation by snapping their fingers because they have pretty much doubled the money supply (in bank reserves) while the velocity of money fell 50%. Inflation, by it’s nature, causes the velocity of money to pick up as leaving it standing still causes it to lose value so velocity rises and demand for dollars rises and lending increases (if lending doesn’t increase, the banks get paid back on old loans in worthless dollars and make no profits on new loans to offset) and the velocity skyrockets. So $4Tn in cash at 4x velocity is a $16Tn GDP and now we have $8Tn in cash moving at 2x for a $16Tn GDP but, the problem is, if the velocity goes back to 3x – that’s 50% inflation (50% more money chasing the same goods) and the Fed can only really pull back what they’ve created, which was "just" $2Tn and that would leave us with a $22Tn GDP despite the Fed pulling the reigns all the way back.
Obviously, 30%+ annual inflation, whether it’s in stocks or real estate or commodities, leads to a greater demand for money. Companies that borrowed $1Bn last year need $1.3Bn just to stay even and the money paid to all those asset holders begins to seek Alpha in the system and that can prevent the Fed from raising interest rates high enough to hold off more inflation as people dump money into high-yield (relatively) TBills on the expectation the Fed is moving to revalue the dollar. In this week’s newletter, Elliot points out how bunches of countries have trashed their currency this way in the past century. To think the Fed has some grand way to control this is no better than thinking China is some all-powerful global presence. Everyone has their own pressures and problems and, in the end, it’s just some guys who are not much smarter than any of us and who have the same fights with their wives and ailing parents and out of control children as any of us may have at one time or another just trying to do what they think is best either to please their boss or keep their jobs or look good to their peers – why anyone thinks things are different is beyond me…
Hola Prof! Good plan staying out of bonds and commodities. We are either at the end of the ride or at the beginning of a much longer one so no harm in seeing which way the train pulls out of the station first. The interest rate shock will come (may have begun last week) when foreign buyers simply stop buying our silly notes at auction. Even our Fed isn’t slippery enough to mask buying almost 100% of the TBills sold at auction (officially about 40% now). That’s what’s going on now, it’s like your wife is selling your baseball card collection and you are in the room bidding $100 per card and the other 20 people all know you two are married and the bidding is a total farce. So they just sit there and watch you two make fools of yourselves selling things to each other and, at the end, you don’t have the money you needed and the other buyers will never do business with you again.
Charts/Exec – Yeah, sometimes I catch those and go – hey……
China/Stjean – Their proportional stimulus was close to triple ours and they spent it building empty buildings (entire empty cities actually) as well as airports with no planes and rails with no cars and storing up almost a year’s worth of the World’s commodity supplies. They spent $220Bn on infrastructure IN ONE YEAR! That’s 55M $4,000 jobs! Even Beijing has a 22.4% vacancy rate vs New York at 11.3% and $1.4Tn of construction loans were made LAST YEAR! That’s like building a bubble on top of a bubble…. So let’s be kind and say that $550Bn was the real number and pretend the money was well spent. That means it cost $275Bn to grow China 8% but that means that, to continue 8% growth, if $275Bn was 5% of GDP ($5.5Tn) and GDP grows 8% each year, then if they need more stimulus next year for the following 2, the base will be + 24% (not even compounding) or $7Tn and now they need $700Bn to keep up the 8%. Unless they are adding to reserves at a truly astounding rate, this will suck up their cash quickly so China will have to choose between continuing to grow at 8% or becoming a debtor nation. We had this choice at one point and chose to go into debt….
Esignal/Dr.C – I just use them for the intra-day charts. I run a simple 10min chart with volume, bollinger (20), RSI (14), Stoch (14,3,3) and MACD (12,26,9). That’s the only thing I do with them.
Phil / Title Insurance
I am not sure the the notes that collateralize the mortgages will be able to to be challenged, for the reason I have cited… electronic records can prevail in the end as supported by UCC regulations, and steri decisus in the law.. In the absence of this backdrop, then the banks will become the issuers of title insurance ( as you predict ), and will have some actuarial experts determine the risk, and then this cost will be an add on to their sale price. – or alternatively, as you say, buy a few politicos, and change the law, althought they are very expensive lately.
Phil / Reserve Currency
Gotta disagree with you on your position on China…. Their currency is in a state of assent, and this trend is at the infancy stage. They can thank the irresponsible overindulgence of the mature economies in the United Sates and Euripe for this unexpected gift – through mismanagement of debt, and the econimic policies that have failure in their DNA. I will not get into a miriad of statistical examples, but the bottom line is …. these economies are in decline, and overleveraged with unsustainable debt, that is creating uncertainty in the minds of others that rely on stability in a reserve currency. Lets face it, Phil…. we are facing hyperinflation, and it is not too far down the road. The Eurozone is another disaster, when you consider the debt load and the tepid economic strength that is supposidly going to provide a resolution…. not there!
Just an update… The Hong Kong Dollar is soon to have a wake, and then a dignified burial…. the reason? – Yes the Chinese Yuan will soon replace the HKD, and eventually transend to the new world’s Reserve Currency. – A few months ago you could buy Yuan outside of China, but you were allowed to convert it back to the original currency if you only were inside the country. This has changed, as you now can open bank accounts in HK in order to hold Yuan currency directly.and also trade it back a forth with any currency. The residents of HK are buying large amounts of Yuan daily, trying to load up on what they consider an appreciating currency. They also believe it is just a matter of time before the HK Dollar is replaced with the Yuan. The Yuan is DEEPLY discounted to the value of the US Dollar, and the HK dollar is pegged to the US Dollar, so thay are selling dollars, and their own currency and buying the Yuan. The Chinese are some of the world’s smartest people – don’t ya think!
Many experts are predicting the Yuan will replace the USD by 2015 as the Reserve Currency. The seeds have been planted, and China wants the Yuan to become the world’s Reserve Currency. Beyond HK, China is encouraging direct trading with other currencies. China is developing its FX, bond and equity markets in order to meet investor demands, and the more folks that invest in Yuan denominated assets, then the more likely the scenario becomes reality. The Yuan is becoming very popular in Asia, and this weakens the USD domination. I am one who believes this trend is for real, and the bottom line is…. get the hell out of as much Dollar denominated assets, and get diversified into assets that are hedged to the dollar, or are denominated in stronger, more stable currencies ( Canadian, Australian Swiss, Singapore etc. )
Phil, I agree with your point exactly. We have a huge pool of money that’s not moving, in fact that’s what scares me about QE2 is it doesn’t solve the underlying problem. Our problem is not a lack of money, rather it’s a lack of velocity in the money we have. People are holding it, waiting for lower prices later…which becomes it’s own positive feedback loop.
My question would be, how long would the hyper-inflationary period last and what would be the best solution for riding out the interest rate shock when it hit.
It sure feels to me like we are at the turning point you point out in your post to Prof. We could be on the precipice of runaway inflation and commodities may stand to gain. Or we may be at the floor in the dollar, and anything that sends the dollar back up would tank the markets. So again we are at be careful and stayed hedged.
Thanks for your input, love the insight.
ah, baseball cards, a blast from the past
Play on AAPL
*) Nov 320/340 call spread for 6.20
*) 1/2 X of 280 put for insurance (3.15)
*) Outlay: $1,555 (for 2 call spreads and 1 put)
*) Profit levels: 264 > X > 328 (AAPL down 16% or up 4% by 11/19, from its 315 close this past Friday)
*) Max gain up @ 340 = $2,450 (+58%)
SPY – Thanks so much for your post!