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Wheee, what a ride!

The week can be neatly summed up by my 1:35 comment to Members in Friday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours." Of course it’s easy to laugh when you play the market correctly - as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Portfolio, for example, up 12% in one day - enough to send us back to cash rather than risk a weekend reversal.

We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance targets of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they fell right off our 2,000 target, giving us the early warning that things were not right):

As you can see, the 5% Rule rules! I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets. I don’t mind that the markets are manipulated, that’s been going on since markets were invented - it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!).

In this case, very precious investor capital is being steered into commodities, which is a very poor use of recessionary capital as is inflating the money supply to prop up home prices that should be pulling back to realistic levels that would be affordable under REAL interest rates. What people buying $200,000 homes now do not understand is there is no bargain to be had as their $180,000 mortgage at 5% is just $966.28/month - fairly affordable.

BUT, if those "home investors" try to sell that home in 5 years, even for the same $200,000 with a $180,000 mortgage - if rates are up to just 8% the payment the new buyer is asked to make will be $1,320.78/month - that’s 36.6% more! Unless wages rise 36.6% in 5 years or unless mortgage rates stay at 5% for 5 years (and we become Japan), then home investments are likely to return little or nothing in the near future.

It’s been a long time since we had rising interest rates. Last time rates went up housing prices fell so fast it was like a bubble popping or something… In the last cycle, rates topped out at just over 7% (with the Fed at 5.25%) as the "crack spread" the banks charge between the Fed Funds and the 30-year Mortgage Rate hit the lowest point (2%) since 2000. This is what happens when the Fed raises rates but consumers can’t afford bigger mortgage payments - it’s one of the few things they can’t fake. Now the banks have a mortgage crack spread of 4.75%, the most since 1994, when mortgage rates hovered between 7.5 and 9% and Fed Funds were at 3%.

That was a good time to be a bankster but the big difference was that, back in the mid 90s, the mortgage default rate was under 1% and was quickly driven up to over 2.5% as the Fed raised rates and the stock market collapsed. Fed rates peaked out in late 2000 at 6.75% but that was "only" up 1% from 5.75%, where it was roughly from 1995-1999. After the last major recession, the S&L crisis of 1990 (when we also bailed banks out of stupid investments due to poor regulatory oversight) the Fed Funds Rate was as low as 3% so the great collapse of 2000 and the huge (and note the delay) rise in defaults came on a 2.75% rise in Fed Funds over 6 years.

Will our Fed be able to keep rates under 3% for 6 years or are we screwed? Will the banksters be willing to give up their crack (spread) or will they stick it to the taxpaying homeowners (and don’t even get me started on rising property taxes that are also pushing people out of homes) - effectively cutting off their noses to spite their faces? Ah, that’s what’s so much fun about the future - anything can happen and usually does…. At least it’s a lot easier to look back a week and try to figure out what happened:

Monday Market Momentum - Can We Keep It Up?

Dow futures were up 100 points heading into the open. We had closed Jan 8th at 10,608 on the Dow and we finished this week at 10,609 so the short story is - nothing happened. We had the Rent-A-Rebel attack we had predicted the prior week shoving oil up to $84 a barrel - where we shorted the hell out of it. I pointed out the farce of the oil companies with 100,000 barrel/day pipelines ($8.4M/day at $84/barrel) pretending they can’t fight off four guys with an outboard motor boat attacking their facility.

Despite the nonsense, we went with an XOM 2012 $60/Feb $70 spread for net $11.75, which is holding up just fine so far as we need some upside oil plays for balance and XOM is probably the best. Former AIG CEO, Hank Greenberg accused Goldman Sachs (GS) of being evil (duh!) and Fitch warned that Chinese banks may implode in a cloud of debt defaults while BCS began foreclosing on Dubai but we focused on the green shoot of the day which was that the census would be hiring 1.2M peope in the first 6 months of the year and that means we can look forward to pretending the economy is improving! Our other trades were:

  • DIA Jan $105 puts at .33, out at .42 - up 27%
  • THC artificial buy/write, too complicated to list here - on target
  • LWSN Aug $7.50 puts sold for $1.50, now $1.40 - up 6.6%
  • DIA Jan $105 puts at .35, out at .35 - even
  • QQQQJan $46 calls at .57, out at .65 - up 14%
  • VZ artificial buy/write, too complicated to list here - on target
  • EDZ Apr $4 puts sold for .50, now .45 - up 10%
  • AMZN ratio backspread at net $55 credit, now $175 credit - up 218%
  • QQQQ Jan $45s at $1.32, out at $1.45 - up 10%
  • AIG Feb $34s for $1.04, now .45 - down 57%
  • DIA Jan $106 puts at .48, out at .75 - up 56%
  • AA Feb $18s/Jan $17.50 spread at net .22, now .46 - up 110%

Notice we did a lot of day trading, which is typical during an options expiration week as we can make a quick 10-20% over and over again when things are going our way. Obviously we expected AA to miss, which is why we yanked our short-term bullish plays off the table.

Testy Tuesday - AA Disappoints Ahead of Beige Book

I was very concerned about the Beige Book on Wednesday and we were already having a rare pre-market sell-off on the AA earnings. We noted that the last Beige Book got a reaction a day later so we weren’t expecting a big drop until Thursday, even if the news was bad.

China ordered banks to raise their reserve requirements and I mentioned the short FXI/long FXP trade in the morning post and FXI fell from $43.40 to $41.45 (down 4.4%) and FXP went up from $7.91 to $8.66 (up 9.5%) so don’t tell me I never make straight stock picks!

In my 9:39 alert to Members I noted we should watch our levels for a bounce (they all held) saying:

Keep in mind that we’re trying to cultivate a more bullish attitude where we look for buying opportunities on these little dips but I’m not too keen on making major bets until we get past tomorrow's Beige Book. We’re getting mixed signals in a low-volume reversal back up at the moment (probably won’t last).

  • USO Jan $41 puts at $1.01, out at $1.40 - up 39%
  • USO Feb $39 puts at $1.01, out at $1.67 - up 65%
  • QQQQ $45 calls at $1.03, out at $1.40 - up 36%
  • ERTS March $17 puts sold for $1.27, now 1.05 - up 17%
  • TBT March $48 puts sold for $1.27, now $1.58 - down 24%
  • TBT Jan $49 calls at $1.05, out at $1 - down 5%
  • TBT 2011 $46/53 bull call spread net $3.40, now $2.90 - down 15%
  • RMBS Feb $22.50 calls sold at $3.40, now $1.52 - up 55%
  • DIA Jan $106 puts at .56, out at .80 - up 43%
  • MGM at $12 calls sold for $1.05, now $1 - up 5%
  • MGM at $12, now $12.09 - up 1% (cover)
  • WFR Feb $14 puts sold for .75, now .80 - down 6.6%
  • ABX Feb $40s at $2.23, now $1.68 - down 29%
  • PCS buy/write at $3.17/5.33 - on target
  • AET Feb $30 puts, sold for $1.50, now $1.10 - up 26%
  • DIA Jan $105 puts at .35, out at .30 - down 14%
  • DIA Jan $107 puts sold for $1.35, out at $1.25 - up 7.5%

We got a super crazy stick save into the close (which we’re finally learning to play for) but we didn’t want to keep much open into the oil inventories and beige book as we expected both would disappoint but, as I said when we too the AET play at 2:02: "Oh wow, I’m actually buying on the dips (checking for horns)." TRYING to be bullish was the theme of the week but, as you can tell from my posts, the more I tried the more frustrating it became trying to pretend that nothing bad was actually happening.

Day Trading StrategiesFor those of you who want a closer look at the day trading action on Tuesday, I wrote up a special post called "Day Trading Expiration Week" and it’s good to review our entries and exits with the charts as this is a monthly activity at PSW - something we like to do every expiration week - the rest of the time we try to trade a little more conservatively!

Which Way Wednesday - Beige Book Boogie

We love Beige Book days, they are always exciting and, despite the anecdotal nature of the report, we do get some good insight into what’s really happening in the economy. I began the day by reminding readers that we are back in what I like to call a "Meatball Economy" where bad news JUST DOESN’T MATTER, pointing out that our last Meatball Market (2006-7) ran for 2,000 Dow points so there was no easy way to predict when this bubble was going to burst.

I pointed out what a manipulated joke of a close we had on Tuesday and had an image of the futures market and the silly pump that was going on there and my observation that morning was:

If one didn’t know any better, one might assume some computer program was executing these moves in order to paint a pretty picture for the human guinea pigs so they will keep pushing the BUY lever every time the little line on the chart turns green at which point the bots begin their relentless "sell to the bagholders" program. Our job as bulls is easy, buying into the afternoon dips but we’re not brave enough to ride out the overnights yet as we sadly, still have some nagging doubts.

Our biggest nagging doubt is "Why can’t Super Market break our levels?" It seems a simple enough goal, just finish the day above the targets we’ve been listing for over a month: Dow 10,549, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. They’ve all been individually broken but we are still waiting for the day when all 5 of our indexes finish above their marks on the same day. Until then, we proceed with caution.

Google (GOOG) was threatening to leave China, Germany’s GDP fell 5%, 40% worse than expected but the idiots who call themselves economists when answering the phone for surveys and gang of 12 member Societe General warned on profits. I predicted we’d have an oil inventory build that would not sustain $80 (it was huge and we finised the week at $78) and we decided XLF $15 would be the key break up and break down point to watch and they punched over $15 on Wednesday at 11 and fell back under Friday at 10 so it isn’t that hard to gauge market direction - as long as you follow the right leading indicators:

  • UYG Feb buy/write at net $5.37, UYG at $5.99 - on target
  • DIA Jan $106 puts at .36, out at .48 - up 33%
  • DIA Feb $108 calls at $1.18, out at $1.28 - up 7.6%
  • GE 2012 $15/20 bull call spread at net $2, now $1.95 - down 2.5%
  • GE March $17.50s sold for .42, now .32, up 23% (pair trade)
  • FXI Jan $41 calls at $1.32, out at $1.55 - up 17%
  • DIA Jan $106 puts at .30 (average), out at .45 - up 50%
  • TXN Feb $24 puts sold at .68, now .84 - down 26%
  • AMAT Feb $14 puts sold at .60, now .75 - down 25%
  • OIH Jan $130 calls sold for $1.32, expired worthless - up 100%
  • VNO Feb $65 puts at $1.25, now .98 - down 22%

The Beige Book came out at 2pm and my quick comment to members at 2:03 as the market ran up was "I’ll have a review shortly but assume up is a head fake at the moment." You can read my whole review of the BBook HERE but the short story is the word "sucks" came up more than once and the only trade we made into what I was sure was a wrong-way rally was the ill-fated (so far) VNO puts. My closing commentary on that 2:49 Alert to Members summed up how to play the market for the rest of the week:

Once again a pretty poor report and I’m not impressed (see 10/21 report notes here). Is this the report we should be seeing at the end of a 10% run in the markets and commodities over 10 weeks? Apparently the market thinks so, as we have been going up since and making day’s highs, but the volume is still light and I’ll be looking for a sell-off into the close or possibly tomorrow morning.

This is simply not an all-clear signal for the economy but we thought the market would stay strong while our banking friends testified and it is options expiration week so anything can happen but now I’m not willing to capitulate until we cross 2,314 on the Nasdaq - the last holdout of our index breakouts.

Thursday Thrust - DB says "Ignore the Unemployed Men Behind the Curtain"

We did get our sell-off into the close on Wednesday and a little more Thursday morning but the pump monkeys were out in force with G12 member DB telling us (and I wish this were a joke but they really said this) "the US economy may grow as much as 6% this year" while fellow gang member MS made the equally outrageous statement that "Metals may gain 32% in 2010." As any Los Angeleno knows, when gang members start flashing signs like that it’s time for bears to hibernate before they start firing buy orders and leaving blood on Wall Street. This is drive-by BS at it’s finest!

THIS was the point at which I became completely fed up this week with the manipulation and you can see my change of tone as I went from laying out my case for why the GDP is not likely to grow 6% and why the oil numbers were far, far worse than the evil criminal bastards finest journalists GE could hire at CNBC would have you believe and then that set me off to getting back to complaining that the poor (that being 90% of the US population) were once again being screwed saying:

That is how we are "fixing" the economy. It turns out you may not be able to get blood from a stone but we sure can bleed US and global consumers dry through commodity speculation that completely ignores the fundamentals of supply and demand in order to dig into consumers’ pockets and pull out that last dollar. This is a mainstay of the "Dooh Nibor Economy" and is, of course, great for us top 10% club members as we already know the bottom 90% are tapped out.

By getting that extra $20 for gas each week from 165M drivers, WE make sure that $3.3Bn goes to people who will actually spend it on stuff - further boosting the GDP. Add another $5Bn in mandatory grocery spending (because EVERYONE needs to eat - muhaha) and we’re getting $431Bn from those poor cheapskates, who would only save it or pay off some debt if left to their own devices (and we don’t need them to pay off their loans - that’s the government’s job!).

I sadly concluded that maybe DB was onto something and maybe WE (the top 10%) could continue an entire additional year simply raping the global consumer base and throwing them an extra $2Tn, heck maybe $8Tn if MS gets their way, into debt in order to fund another year of Wall Street bonuses. I predicted that morning that we would party on that news like it’s 1999 - or 1929 and move the markets higher but my 9:44 Alert to Members cautioned: "Be very careful today, I still feel like this whole thing can snap on one bad news story."

  • INTC complex earnings spread at net .04, out at .18 - up 300%
  • JPM complex earnings spread at net $1.13 - on target
  • EWJ Jan $10 calls sold at .45, out at .40 - up 11%
  • C 2012 $2.50/5 bull call spread at .95, still .95 - even
  • BAC 2012 $12.50/20 bull call spread at $3.55, now $3.44 - down 2.8%
  • BAC May $18s sold for .30, still .30 - even (pair trade)
  • JPM March $41 puts sold for $1, still $1 - even
  • JPM 2011 $45/50 bull call spread at $2, now $2.10 - up 5%
  • JPM Feb $46 calls sold for $1.05, now .88 - up 16% (all 3 are a spread)
  • FAS 2011 $65/85 bull call spread at $10, now 8.95 - down 10%
  • FAS Feb $98 calls sold for $2, now $1.12 - up 44% (pair trade)
  • TBT Feb $48 puts sold for $1.10, now $1 - up 10%
  • MA $250 puts at .10, out at .05 - down 50%
  • FXI Jan $42 puts sold for .27, out at .27 - even
  • SMH Jan $27.50 puts sold for .20, out at .20 - even
  • DELL artificial buy/write, too complicated to list here - on target
  • BWLD ratio backspread at net .50, now .63 - up 26%
  • RTH Feb $90 puts at .80, now .90 - up 12%
  • IYR March $46 puts at $2.20, now $2.30 - up 4%
  • IYR 2011 $43/45 bull call spread at .90, now .95 - up 6% (pair trade)
  • LMT artificial buy/write, too complicated to list here - on target

Notice how we bought some calls early on but then flipped very bearish in our later trades. We were very aggressive in buying back the DIA Feb $105 puts we sold as cover against our June DIA puts as we were very confident in a sell-off by the time we got to the close - if not on Friday then certainly next week. Turns out, we didn’t have to wait long at all!

Freaky Friday - Options Expirations Promise a Wild Ride

As the note on the chart says, until the major trend-line breaks, we are still taking the money and running very quickly on our bearish trade ideas. I often remind members what John Maynard Keynes said almost 100 years ago: "The markets can remain irrational far longer than you or I can remain solvent." As fundamental investors, these are words to live by because we can be totally right about the value of oil or AMZN or VLO or WFR or FSLR but we have to recognize that being right on value is only half the battle - we also have to pick our spots because you can be a better boxer, even a dominant one, and you are still going to lose a few rounds along the way. Failing to recognize that simple fact is the undoing of many investors.

We have been mainly in cash since Christmas and we were out of our unhedged bull plays on Thursday’s silly run, preferring to watch from the sidelines over the weekend with our bearish (but still mainly cash) sentiment. Right in the morning post I laid out our very successful plans for getting out of INTC and JPM with nice profits. INTC went as planned and we’re out but JPM we’ll have to ride out. That’s the thing about earnings plays - you play for the quick profits but you’d better have a longer-term plan just in case you get stuck in the trade!

Boy I was angry when I wrote that post - very fed up with the manipulation and frustrated buy the way the general public just bends over and take this despicable abuse. It’s not just that I’m a bleeding-heart liberal (I am) but, FUNDAMENTALLY, I believe that the fleecing of the American sheeple is creating a bifurcated society that, ultimately, will NOT be good for our future. This does not bother the ultra-rich, who inhabit a country that Robert Frank has dubbed as Richistan and those people, the top 10% of the top 10%, could not give a rat’s ass what ultimately happens to this country but I do - I’m sorry for that but it does matter to me so I do get pissed off when I see this country being destroyed by greed and stupidity….

I was extra furious as Karl Denninger did a great job of exposing the blatant market manipulation that went on on Wednesday. Notice that we had a lot of successful trades on Wednesday so this is not about sour grapes and it’s not about me being surprised that people are manipulating the market as I’ve been saying it for many, many years - this is about me being angry at how not angry Congress, the MSM or even the American Sheeple are about this activity - it’s sickening! Still, there’s money to be made on all this stupidity and that’s our job:

  • DIA $106 puts at .10, out at .40 - up 300%
  • TBT Feb $48 puts sold at $1.12, now $1 - up 12%
  • DIA $106 calls at .30, out at .25 - down 17%
  • DIA Feb $105 puts sold at $1.75, now $1.50 - up 14%
  • DIA $105 calls at .66, out at .80 - up 18%
  • INTC Feb $21 puts sold at .72, now .80 - down 11%
  • DIA $106 calls at .10, out at .15 - up 50%

Notice we did a great job flipping mid-day and made good money in both directions. Other than INTC (which we couldn’t resist at that price) and TBT (ditto), it was an all DIA day as we just day-traded the index as it’s nice and liquid to get in and out of. After some jerky action along the bottom, I called it a day for the bears at 2:11, saying to members:

You have to be satisfied that we got this sell-off. We cashed out the longs (naked ones) yesterday as we were stupid high and today we were able to cash out of the shorts and now we are cashy and flexible into the weekend, which is sooooooooooo nice! No sense in risking anything now that we already had a sharp 150-point drop.

All in all, it was a very satisfying week over at PSW - we had 68 total trade ideas with just 16 losers, not bad for a crazy-assed week where we went up and down like a yo-yo! Now we’re going back into the weekend with plenty of cash and a loaded Buy List, looking for earnings week bargains as well as some fun spread plays but we’re happy and neutral into the holiday weekend so I hope everyone is out having fun. Me, I’m finally seeing Avatar with the kids and relaxing - see you Tuesday!

Source: Wild Weekly Wrap-Up: Only Halfway Through January!