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Friday, March 29, 2024

Tumblin’ Tuesday – Italy’s Looming Default Spooks the Markets

Wheeeeee!

We knew the markets were going down – we just weren't sure which of the many, MANY possible reasons would rise up and finally cause people to re-price risk.  Today it's Italy, which essentially has been unable to form a Government for the past 3 months as President Mattarella has refused to work woth a Euro-skeptic Finance Minister put forth by newly-elected Populist party leaders Salvini and Di Maio.  

At issue is Italy's potential to default on $250Bn worth of bonds and a possible exit from the Euro-Zone, following the UK's Brexit lead and possibly unraveling the whole Union at this point.  If this is a surprise to you – then you don't read our PSW Reports every day as my first bullet-point on July 6th of 2016 was "Italy is spinning out of control and taking the EU down with it." – so we saw this coming from a couple of miles away – aside from our many recent posts on the topic

Image result for defusing nuclear bomb animated gifAt this point, it's very possible that the 5-Star Coalition that controls the biggest voting block in Government will seek to impeach Mattarella and, if that happens, we go from unstable right to the point where the hero is usually sweating over the nuclear bomb with a pair of pliers debating which wire to cut.  

Italy really isn't the important thing, anything could have sent investors flying out of equities and back into bonds (up 1% this morning) and CASH!!! rather than paying 100x earnings for the next "hot" stock.  The market is overpriced and it needs to cool off – any catalyst is a good excuse to do so.  

 On Thursday we called for a short of the Nasdaq (/NQ) Futures at 6,950 and we hit 6,900 this morning for a gain of $1,000 per contract and the S&P (/ES) Futures at 2,728 blew through our 2,712 target to test the 2,700 line for a $1,400 per contract gain so "wheeeeeee!" indeed and a great way to start our week.  Also, Wednesday's webinar play to short oil using the SCO June $14/17 bull call spread at $1.45 is on track for the full $3 as Oil (/CL) falls to $67 now that the holiday pump job is over.  

Remember:  I can only tell you what is likely to happen and how to profit from it – the rest is up to you!  

I don't know how many people took my advice to "sell in May" and take the summer off but it sure will be a lot more relaxing than scrambling to cover now.  I think this morning's sell-off will bounce back – that's why we trade the Futures, we were already able to cash out and now we'll see where we next want to short and, if no shorts present themselves, we'll be using our additional CASH!!! to hunt for equity bargains that other people are panicking out of.

We talked about Limited Brands (LB) on Thursday morning and that bounced back so fast we couldn't fill our new, long position but we're sure glad about our old positions as the stock jammed back to $35.50.  GE was also featured on Thursday as a "screaming buy" at $14 and it's still only $14.50 so, since the LB trade didn't work, how about we try a similar spread on GE:

  • Sell 10 GE 2020 $15 puts for $2.20 ($2,200) 
  • Buy 20 GE 2020 $13 calls for $3.25 ($6,500) 
  • Sell 20 GE 2020 $15 calls for $2.25 ($4,500)

That spread puts you in a $4,000 spread for a net $200 credit so you lay out no cash but you are obligated to buy 1,000 shares of GE at $15 (less the $200 credit) – that's your worst case.  The trade requires $1,534 in ordinary margin, so it's an efficient way to make $4,000 and GE barely has to budge to pay you in full.  

We are being far more aggressive than that in our Options Opportunity Portfolio, selling 10 2020 $20 puts (now $5.90) with 30 long 2020 $13 calls ($3.25) with no short covers as we feel GE should be well over $18 by then – hopefully $20+ so the above trade is what we consider very conservative but a very cheap entry on a great value stock.  

Meanwhile, the disaster in Venezeula continues and that should put somewhat of a floor on oil for the moment.  This is another "unforeseen" event that can rock the markets in the near future and it's supportive of oil, despite Russia and Saudi Arabia this weekend indicating they may raise output to stop US exporters from gaining more market share with their former customers.  

Keep in mind that the Saudis originally cut oil production because more oil was being produced than was being consumed and it was piling up everywhere but cutting production increased the price and allowed new production to come on line that would not have been viable at lower prices.  Most of the new production happened in the US and all the Saudis really accomplished was having their oil supply replaced by new US supply.  Now, in order to get their customers back – they have to supply cheaper oil – at least for a while. 

It looks like the US/North Korea Summit will be "on again" as Trump scrambles for a win of any kind – especially as he was just ranked as "The Worst President in US History" in an annual poll of Presidential Scholars.  It's tough competion for the bottom spot as Buchanan is credited for causing the Civil War, which divided the country and cost millions of American lives.  Trump is the first President ever to fall below Buchanan – even for a moment – managing to more than double Buchanan's negative score.  

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On the bright side, Buchanan was a one-term President who was followed by our best President (Lincoln) and hopefully we also have a savior waiting in the wings (Bernie?) who will unite the nation – hopefully without the armed conflict in-between.  

Will someone finally come along and free the wage-slaves?  Don't hold your breath…

 

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