Options Trader Friday Outlook: Deja Vu All Over Again?

by: Philip Davis

I’m getting some real deja vu here.

Remember last Thursday, when Japan went up 3.8% and our futures jumped almost 100 points? No, not yesterday, LAST Thursday. Yes, and that day ended up going down about 100 on the day, which was nice because we shorted into the pump (and we were already short for the week anyway. So yesterday felt a little like that with just about a 100-point gap up in the morning, followed by a downward slope all day. Today is now feeling like last Friday, where we got another 150-point run-up on the futures but finished the day up only 50 points. As I’ve been pointing out for quite some time, 200% of the last two week’s advances came in very thin, pre-market trading - the balance of the rest of the day is selling, punctuated by stick saves into the close.

Our man Cramer says you should take this as a sign to BUYBUYBUY (and Retail, of all the stupid things) but I say it’s time to RUNRUNRUN as the inmates clearly have control of the asylum and we have better things to do in the last two weeks of the year than play "guess what BS moves the market this morning." Last Friday it was the Jobs report, which we already knew would LOOK great as the seasonal adjustments made easy comps, but we also knew it was a fantastic shorting opportunity (see last weekend’s Wrap-Up).

So we woke up this morning to the same nonsense as last week and what do we do? We short the market, of course! While you were sleeping we Emailed a 3:54 am Alert to our Members indicating the Dow Futures were ripe for a short play at 10,400. We followed through with that play in chat and were stopped out at an average of 10,389, just 11 points but very satisfying at $5 per point per contract. We don’t play the futures very often - only when it’s obvious. Our next entry point is a cross below 10,390 with a stop at 10,395 (10-point trailing to be safe ahead of Retail Data). This morning we had an international pump-fest including:

Those are the big headlines driving the markets this morning. What you won’t see is that China’s Industrial Production rose because Chinese Banks (ie, the Government) boosted lending vs. an expected contraction, which is why they had a beat. You also won’t hear that fellow BRIC member, India, had a 14% miss (10.3% vs 12% expected) in their Industrial Production, which offset China’s 5.4% beat.

Like last week, this week’s data will be distorted by easy comps to last year. Retail sales will be up from a terrible, terrible November of last year and are expected to be up just 0.6%, which makes no sense since gasoline alone has doubled and makes up a considerable percentage of Retail Sales so pay close attention to those "Ex" numbers before getting all excited about consumer spending. We’ll get more of a feel for the holiday shopping mood from the Michigan Sentiment Poll at 10 am.

What got me in a very un-Christmas like mood this morning was a horrifying retail report from Spain, where Spanish holiday spending will drop 9.1 percent this season, according to Deloitte, more than the 6.3 percent decline forecast for western Europe. El Corte Ingles SA, the nation’s biggest department store operator, is advertising 70 percent discounts to lure shoppers. Foreign retailers like Carrefour SA (CRERY.PK) are also having trouble. In Spain, the Paris-based retailer’s second-biggest market, it cut prices as much as 25 percent on 10,000 products per store this year, a spokesman said. This week, it offered 20 percent off toys. Carrefour’s same-store sales in Spain dropped twice as much in the third quarter as they did globally.

Unemployment among people younger than 25, who account for 10 percent of the labor force, is more than 40 percent, posing a further risk to companies that focus on young fashion such as Hennes & Mauritz AB (OTCPK:HMRZF), or Inditex’s Bershka brand, said Francisco Ruiz, an analyst at Fortis Bank SA in Madrid. Debt built up during a decade-long real estate boom is also crimping households’ ability to spend. Mortgages, consumer credit and other loans account for 77 percent of Spanish GDP, compared with 51 percent in the euro region and 55 percent in Germany, according to European Central Bank data.

Hey, I know a country where mortgages, consumer credit and other loans account for 70% of the GDP - this one! I know a country with an ever higher teen unemployment rate that Spain - yep, US too - at 27.6%. Did the USA also have a massive debt build-up during a decade-long real estate boom that is now crimping households ability to spend? Sure we did! Why is it, then, that expert analysts like Jim Cramer not only believe we will have better retail numbers than Spain, but better than all of Europe as well? Probably because they count on the fact that their hype machine can drive Americans to consume in ways that a less pliable European population will not.

Why do I think they are wrong? Because Cramer and his merry band of media fools don’t live in the real world - they don’t pay for their food, they don’t worry about the price of gas or making their mortgage payments. They think if you JUST cheer people up they’ll go out and spend. You can’t get blood from a stone and the US consumer has hit rock bottom and has been bled dry by Wall Street, the IBanks, the commodity pushers, the destruction of their savings and assets (the fault of the same people) and loss of jobs. They can prance around on TV all day long and draw up fake reports BUT IT DOESN’T CHANGE REALITY!

Reality is (8:30 update) that Retail Sales were up just 0.6% ex-autos and ex gasoline and gasoline was 0.6%, so autos weren’t too hot either. I’ll even tell you a secret that is known only to PSW members and people who can read (in other words, not Jim Cramer’s target audience) - This Advance Monthly Retail Trade Survey has been "fixed" to "better reflect growing demand for consumer electronics." That’s right, our government is polling different stores than they polled last year and, according to MarketWatch, SHOULD have added "one or two percentage points" to last year’s numbers. What did we actually add? 0.6%.

Despite these facts, we can expect Cramer’s sheeple to be BUYBUYBUYing the RTH at the open and we’ll be shorting them (we already have Jan puts) by selling naked $95 calls to Cramericans, who will hopefully do as well for us as his AMZN buyers did last Wednesday night, when that became my short of the week in Thursday’s post, when I last had to warn people against following Cramer’s misguided advice.

We’ll see how it all plays out. We tried to find some bullish plays we liked but there were very, very few so we remain mainly in cash and very bearish, especially if all this "good" news can’t take out our upside watch levels.

Have a nice weekend,

- Phil