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Thursday, February 29, 2024

Wednesday – Waiting for the Other Shoes to Drop

EWP WEEKLY What next?

$125Bn for Spain AND they are going to be given 5 years before having to pay back their loans and rumor has it that it will be a 10-year payment period at 3%.  Sure, why not?   At least that way we can pretend they are going to pay everyone back, rather than watch them default just a few months after we lend them the money, like Greece.

As we expected, Italy is the next crisis on deck as their 10-year bond yeilds climb over 6% as Italy's $2.4Tn debt (120% of GDP) running at 6% interest ($144Bn a year = 7.5% of GDP) is going to require a lot more than $100Bn to stop the bleeding.  At the same time, Mr. Monti's tax-heavy austerity measures have choked economic growth, causing Italy's economy to contract 0.8% in the first four months of the year.  

Mr. Monti lashed back at an Austrian minister on Tuesday for questioning whether Italy might need financial assistance to ride out the crisis.  "I find it completely inappropriate that representatives of other governments in the European Union are talking about the situations of other countries," Mr. Monti said during a news conference, adding that his government was "continuing to work to guarantee the financial stability of the euro zone."

Clearly the honeymoon is over for Monti with a poll last week finding that only half of Italians supported political parties that form Mr. Monti's parliamentary majority, down from 63% two months ago. Confidence in Mr. Monti among those surveyed fell to 34%, compared with 71% when Mr. Monti took office.  The steady erosion of public support for Mr. Monti's government is also prompting some politicians to question whether Mr. Monti can still push through the tough changes demanded by EU leaders.

You can see from the chart on the left what a tremendous drag the global markets (down 12.5% in a year) are becoming on the S&P (down 2.5%).  If nothing is going to happen to snap the Global markets up – well, you do the math…

SPY 5 MINUTEThat math is keeping us Cashy and Cautious in this horribly choppy market and it's a good thing as we've been flip-flopping like fish out of water trying to stay on top of these crazy daily moves.  Fortunately, the market is doing exactly what we expect it to do but, since what we expect it to do is gyrate wildly up and down 1-2% a day – there's really only either day-trades or long-term investments to be made, not much in between.  

As we expected, the S&P held that 1,310 line in the morning (see David Fry's chart) and the excuse for the morning move was the Fed's super-dove, Charlie Evans saying something doveish.  Wow, what a shocker!  Who could have ever guessed that would happen?   Really, it's amazing how stupid these markets are sometimes…

In yesterday's morning Alert to Members we added long put plays on MA ($417) and V ($116) as bearish hedges because, if things are going to fall apart – those guys have a long way to fall.  Our prior disaster hedge, from 5/18, was the AMZN Jan $225/200 bear put spread at $11, selling the 2014 $120 puts for $8.50 to net $2.50 on the $25 spread.  That one is already up to $4 (up 60%) so we needed to get some fresh horses for our hedges before we made any new bullish plays.  Our bullish play of the morning did very well as it was AONE at $1.16.  My comment to Members at 9:55 was:  

AONE has come up with some very good, new battery tech.  You can sell 2014 $1 puts for .60 for a net .40 entry on the $1.16 stock and I like that a lot and you can sell 10 of those and buy 20 of the Jan $1.50/$2.50 bull call spreads for .10 and then you have a still good net .60 entry on the stock and the possibility of making $2 more if AONE takes off into the end of the year.

We were officially out of the stock trade at 11:32 at $1.65 for a very nice 42% gain while the spread is well on its way with a quick 75% gain so far as the bull spreads gained a nickel and the short puts dropped a dime but that's only "on track" for the potential $2.40 gain if AONE hits our $2.50 Jan target and holds up through 2014.  

We love news plays at PSW, they are both fun and exciting and you can clearly see from the chart why Rule #1 as PSW is: "ALWAYS sell into the initial excitement."  Had we missed that run we likely would have shorted them at the same spot we exited the day trade as the initial reaction is very often an overreaction but now we "like" AONE too much to short them and we'd rather wait to see if they pull back and look for another good entry AFTER we do a proper evaluation of their worth with this new technology added to the mix.  

This morning we're liking gasoline Futures (/RB) if they can cross back over the $2.65 line ahead of the 10:30 Oil Inventory Report where the expectations are for continued weak demand.  OPEC is having a 2-day meeting that started this morning and the oil market is very weak ($82.27) indicating that there is no consensus to cut production because, the cheaper oil gets, the more each OPEC nation is motivated to produce to keep the cash flowing and this can keep up until we are all drowning in oil.  A lack of action from OPEC by tomorrow may break the back of the oil Bulls and send us below $80 so we ONLY have interest in being long on gasoline if they first break back over $2.65 and then tight stops on that line.  

The Dollar is still up around 83 and that's a bit strong for a rally and the Euro is down near $1.25 and that's very weak and still in danger of collapsing if the "leaders" can't come up with something concrete for Italy very soon.  The G20 gets together in Mexico and we all hope they can keep their heads long enough to come up with some sort of plan but, if not – El Loco is waiting

The US has it's own 10-year notes to peddle today and then a 30-year auction tomorrow so the Fed doesn't want to be too doveish while we've got our hands out for more cash.   It's really all about next week's meeting in Mexico and, if that doesn't give us something solid to hang our hats on – we'll be moving right back to bearish and waiting for the S&P to catch up with a 10% drop as European youth take to the streets and starving Arabs begin to revolt…

Can our leaders really be that stupid?  


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