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Saturday, February 24, 2024

Terrible Tuesday – Duck this Fip!

Now THIS is a panic!

Ordinarily, I would be very enthusiastic about buying but we were in an overbought market so we need to be very selective about what we buy.  Once again we had a lot of discussion of the Global situation in Member chat and a special 12:21am Alert went out to Members and there was a follow-up at 6:52 this morning and, frankly, we don’t really have better information at 7am than we did at midnight, which seems kind of crazy with all these 24-hour news channels and the web and all.  Instead of getting the facts instantly, it seems what we get is information overload where it’s almost impossible to separate facts from rumors.

I want to thank both Zeroxzero and Pentaxon for their excellent analysis of the nuclear situation in Japan yesterday – without their now-obviously accurate observations, we would have probably gone more bullish.  We did do some dip buying but generally with well-hedged positions except for the $25KP, where we did take a risk on FAS that will bite us in the ass.  

Once again, I apologize that it’s my job to get analytical when talking about a massive human tragedy but we need to step back and assess the situation.  I have been suggesting that people, in the very least, text REDCROSS to 90999 on your cell phones to donate $10 to help with the relief efforts in Japan – 250,000 people read me each morning and that’s $2.5M and if you pass this along to 10 friends and so on and so on we can really have some impact so please, Please, PLEASE – when you are about to buy something today – think of something you can do without and instead send $10 so a child in Japan can get fresh water to drink and a blanket to sleep on.  Thanks!  

What an interesting day for a Fed statement (2:15)!  We also have the normal Tuesday Retail Sales Reports, the Empire State Manufacturing Survey, Import/Export Prices, TIC Flows and the NAHB Housing Market Index – all important stuff but all overshadowed by events in Japan.  So, what is REAL over there?  In the morning alerts we discussed the status of the disaster and we have Members who are clearly better than I am at discerning the facts so we’ll deal with that during market hours.  

My expertise is in assessing the macro and I figure, as we discussed in yesterday’s post, that the markets are a forward-looking mechanism and the Tokyo traders, who have knocked their market down 16% in 2 days, have likely determined that this disaster WILL knock 10% off Japan’s GDP this year – so that accounts for that much of the drop.  They are also thinking that it MIGHT get worse and mirror the 25% drop that occurred after the 1995 Kobe Earthquake (see chart yesterday) so a percentage of that is being priced in as well.  

EWJ WEEKLYThe Nikkei closed at 8,605 which is the lowest it’s been since March of 2009.  As I said last week – Happy Crashiversary!  As you can see from David Fry’s chart (this morning not updated) Japan blew right through support and fell another 10%.  Think about that, though – support was based on the situation as it was prior to the earthquake and 10% is how much of a set-back we currently believe the earthquake will cause to Japan’s economy so that makes 8,600 "just right" for the pullback – assuming things do not get worse at Fukushima.  

If we assume that 8,600 is "right" in Japan (down from 11,400 last April, off 25%) then how far can the Dow fall off our 12,400 high of February?  25% would seem to be a bit much as the disaster did not happen here.  As we noted in yesterday’s post, Japan is a major trading partner of ours but exports 50% more than they import so there’s one way to fix our imbalance as Japan shuts down at the end of Q1.  

25% off the Dow is 9,300 and that is just 7% over the old 8,650 line that we had long-ago determined was the very least the Dow was worth – even when we were in the midst of the original crisis.  Nothing will stop a panic from going where it will but we need to determine where we will be willing to put our foot down and take some of our cash off the sidelines (our general mix has been 65% cash with a 20/15 bull/bear deployment of the cash in use).

If we were to assume we suffer 50% of Japan’s effect, then 10,850 on the Dow should be our local worst-case.  This is, of course, a very broad-brushed way to look at things but it’s important to acknowledge that it is possible for us to follow the Nikkei down another 1,000 points from this morning’s probable 11,700 open but that is a level at which we want to be BUYING, not panicking.  In between there and here is the nuanced middle.  As with yesterday, of course we want to take advantage to pick up stocks we REALLY want to own long-term.  As we discussed in our $25,000 Virtual Portfolio Review on the Weekend, Warren Buffet says "Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."  

BruceE asked in Member chat last night whether today was the day to cash in last week’s disaster hedges.  After all, this IS a disaster.  Unfortunately, we didn’t really expect it to come so quick and we’re not going to do as well on our hedges as we would have if they had unfolded more slowly.  Wednesday’s disaster hedges were:  

  • DXD Apr $18 calls at .85, now $2 (up 135%) – Those are great unless your offset was the DIA $118.75 puts, which are looking like $1.50 this morning, wiping out the gains.  Not really a big deal as we can roll them to the Apr $115 puts and that keeps us good to the 11,500 mark but I wouldn’t change the short puts today – that would be buying into the excitement, wouldn’t it?   As to selling the DXD’s with a 135% profit?   OF COURSE WE DO!  We can always add another hedge if our "Must Hold/Breakout 2" levels fail but, on the whole – all this is is a test of the levels we expected to be tested for one reason or another anyway.  
    • I had, in fact, said about the DIA short at the time: "..unless the Dow falls more than 400 points by next Friday…" – OOPS! 

I’ll discuss adding hedges later, of course because, as I said, we could fall another 1,000 points if the bears get control of the message.  As I said to Members last night – if this were not an overpriced market in the first place – I’d be an enthusiastic buyer here but, as I said last Wednesday: "You can’t blame us for hoping we have another nice correction – especially with values currently so stretched. We don’t want to be bearish but, when there’s nothing to buy you either stay in cash or get a little short and, as much as we liked AMZN at $62.50, we have to question their true value at $167."

  • SQQQ Apr $26/30 bull call spread at $1.20, now $2.40 (up 100%) – With SQQQ opening at $29.50, we’re right on target on those.  If you have the ability to go naked on the calls, then setting a .50 trailing stop on the $26 calls is prudent as they should open at about $4.50, which is above your max profit and then you can roll the $30 caller and establish a new spread if the Nas fails to hold 2,650.  The rising VIX is our friend here as we get a favorable roll to a longer (in time) strike.
  • TZA Apr $36/41 bull call spread at $2, now $3 (up 50%) – With TZA at $45.50, it would be silly to accept $3 for the $5 spread that’s 10% in the money but we will try to figure out some way to cash the $36 calls for $10 and then establish a long diagonal spread we can roll into.  We also shorted the March $36 puts at .71 and that, of course, is a 100% winner.  The alternative sale of the BA May $65 puts at $1.32 will be a test of how much we REALLY love BA this morning as those should run up to about $2.25 (down 70%) but still out of the money with BA opening at $68.50 (and still a long I like).  
  • EDZ Jan $17/25 bull call spread at $2.80, now $3.50 (up 25%) and the short sale of the Jan $16 puts at $3, now $2.40 (up 20%) – This is very annoying when you get a quick sell-off but a great lesson as to why we don’t use very long-term disaster hedges when we are short-term nervous.  This trade was actually initiated on 2/15 and reiterated on 3/9 (as the price was the same) as our major general coverage for the year as we tried to get more bullish along with long-term TZA hedges and their function is to cover our LONG plays, not our short ones.  There’s nothing fancy to do with these, they are merely "on target" but consider you can STILL buy this spread for net $1.10 and it’s $6.50 in the money!   Ultra spreads are very strange things but that’s what makes it so easy for us to hedge long-term bargain hunting with trades like this, which can STILL pay us $6.90 on $1.10 (627%) simply if the market DOES NOT go up.   

So that covers last week’s disaster hedges.  Remember – "When in doubt, sell half" – that’s the least we should be doing on a disaster day like today and, as I said, if we fail breakout 2 levels – there are plenty of new ones we can pick up for the next 1,000 points down!  

Fortunately we added bearish plays on CCL and ADBE in the $25KP and we will be cashing out our EDZ hedges into the initial excitement in that Virtual Portfolio but our DIA covers will be hurting us and we just need to ignore FAS as we have 5 weeks left and we’re not going to freak out over a bad day.  I still like the financials long-term and long-term may be 2:16 this afternoon as the Fed has every reason in the World to maintain their very, very popular FREE MONEY program for the top 1% – even as the bottom 99% take a huge hit to their virtual portfolios – AGAIN.  

What can the Fed say to "calm" the markets, though – when they’ve already pulled out all the stops?  Can they have the audacity to announce an emergency injection of liquidity on top of the still $300Bn of QE2 left to distribute?  Sure, why not – it’s only money (and it happens to be your money anyway).  

The Dollar is showing signs of life above the 77 line and we’ll be watching that one closely today and TBT is a buy again down at $36.75 pre-market – the normal naked put selling will be a good way to get started.  Our big selling yesterday came between 10 and 11:30 so we’ll be watching that timeframe but it’s all about whether or not we are going to hold our Breakout 2 levels in the first real test we’ve had since popping over in January to start the year off with such a bang.  

Let’s be very careful out there but let’s remember that whole Chinese Crisis/Opportunity dichotomy – the Fed has pulled so many rabbits out of the hat these past two years – it would be foolish to bet against them this afternoon so we’ll buy that F’ing dip one more time and let the Banksters work their magic if they can (barring Japan getting worse, of course).  



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