Wild Weekly Wrap Up: Super Secret Plays for a Mindless Market

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 |  Includes: AMZN, ARNA, BAC, BBRY, BXP, CROX, DBA, DIA, EDZ, ERY, FCX, FXP, GLL, GS, INTC, JPM, LIMAF, MS, OIH, QQQ, RSX, SPWR, SPY, SRS, TNA, USO, VNO, VZ
by: Philip Davis

Click to enlargeWhat a crazy week!

The markets were bucking like a bronco. But were they trying to throw off the shorts prior to a move back down or trying to flush out the weak-handed longs prior to a big breakout to new levels? After gapping open to 10,900 on Monday morning we went up to 10,950, down to 10,830 and back to 10,950 - all to finish the week at 10,927. This is up 39 points since March 23rd, so don’t tell me we’re wasting our time as that’s 5 points a day baby (if we round up).

We had the day off on Friday but we did get the critical Non-Farm Payroll data for March. But, as noted in my report (and in the Member Chat), despite the very excited reaction from the futures, there is no clear indication there that either the Bulls or Bears have a lasting point. So perhaps the wild market action is nothing more than good old-fashioned indecision. Futures flew up, but then Goldman said they saw "Little Underlying Improvement" in the data and that "Productivity Gains Have Diminished Sharply" - clearly mixed signals that may take some time to resolve.

Last weekend, I complained that it was a "6-Point Weekly Wrap-Up" as that’s all we got from the S&P, which finished at 1,166. This week I am happy to report that we gained 12 points - all the way to 1,178. We are closing in on that 1,080 mark, which we did touch briefly at Thursday’s open (which gave us the great shorting opportunity we had looked for in Thursday morning’s post!). It’s not that I don’t respect the rally - technically, you have to respect the rally but that’s why we’re in cash: We can take advantage of these huge intra-day moves down (and sometimes up) - getting our 6-second bull rides and scoring as many points as we can before the rodeo clowns turn on the buy programs and stop the ride.

Overall, it’s a pretty mindless market. You can go long at about about 2pm and flip short about 10 am the next morning - in the futures that can add up to shocking amounts of money and it sure isn’t bad when you are using options for leverage either. We’re sure the game will collapse one day and hopefully we’ll be able to pull the rip cord without making too much damage but, as you can see from our plays - once we make more than 5 plays that make 20% or more - we literally have nothing to lose!

Click to enlarge

Wow - what a ride, right? When you consider that Dow Futures pay $5 per point, per contract and that we can reliably pick up 20% gains on the DIA option contracts on moves of 50 points or more it’s no wonder the rich get richer in this country. Just imagine what Goldman Sachs (NYSE:GS), which is making 50% of these trades and whose traders can time their entries and exits to perfection, must be making on this crazy action. We’ll find out on April 20th but estimates are already pushing over $4 per share - up 15% from last year’s record pace and roughly $2Bn for the quarter. Oh and keep in mind that that is NET to the bottom line - roughly 1/2 of GS’s trading profits go out as salaries and bonuses to the traders.

In fact, GS made so much money last year ($45Bn in gross profit) while doing virtually NO M&A work (which is how Goldman usually makes money) that the CTFC is finally looking into this nonsense because, as the Washington Post says:

No company has benefited more than Goldman Sachs, market analysts say. During the financial crisis, when most of the firm’s other business activities were suffering, commodities trading produced "particularly strong results," according to its annual report. Goldman does not disclose how much it earned from these trades. But along with its bonds and currency divisions, commodities activities generated about half of its net revenue of $45 billion in 2009, Goldman reported. Financial analysts estimated that these activities in typical years account for about a tenth of the firm’s revenue.

Anyway, this is the Wrap-Up so we aren’t here to complain about GS manipulating the markets and making obscene profits. Our job is simply to identify HOW Goldman makes its obscene profits and play along at home. Our Super-Secret 'Buy at 2pm and Sell at 10am' Strategy is one way to follow Goldman’s trade-bots until they shift the pattern again. Of course, we won’t make as much as Goldman because we can’t borrow tens of Billions of Dollars at 0.25% to play the markets with as Goldman can; even though (and it’s a funny thing) WE are the ones subsidizing the lending rate to THEM!

So it’s only fitting that we play along with our friends at GS, JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) etc. - as I often say to members:

We don’t care IF the game is rigged - as long as we understand how it’s rigged so we can make the right bets.

Sure it’s cynical, but it works! So far, cashing out at S&P 1,166 on March 19th has worked for us. We made plenty of good plays last week with just 4 misses out of 35 trade ideas. Of our misses from last week: Amazon (NASDAQ:AMZN) April $135 calls were sold for $3.60 last Thursday and hit $3.80 at Friday’s close (down 5.5%) but are now down to $1.65 (up 54%) so we’ll change that status to winner. TNA $56 calls were closed down 3%, so no saving those and a good thing too as they are lower now. Sunpower (SPWRA) May $18 puts were sold for $1.35 and finished last week at $1.45 for a .10 loss but are now down to $1.05 for a nice 22% gain and our other loss was a closed one on the oil futures, but we play those almost daily so we got right back on that horse. This week, as I said, was fairly dull:

Monday Madness - 11,000 or Bust!

The Nikkei ran up to 10,986 in the morning and we spent the week trying to catch up. Bulls will be very pleased if we keep following the Nikkei next week as it hit 11,300 in Friday’s trading and finished at 10,286 for a neat 300-point rise in 4 days. Of course it makes sense the Japanese markets would fly as the exporters were thrilled that the dollar hit 94.5 Yen for the first time since last Summer, when the Nikkei topped out at 10,767. You could also tell our bulls had blinders on Monday as terrorist attacks in Russia had no effect - not even on the RSX - which jumped 10% for the week.

I also warned gold was getting out of control again but this wasn’t the week to short it (although we did go short on Thursday at $1,130). And there were grave concerns about commercial real estate in the U.S. and Europe. But we know better than to bet against CRE, although Vornado (NYSE:VNO) and Boston Properties (NYSE:BXP) did trend down for the week and even poor SRS made a little bit of progress. My closing comments in Monday’s morning post were:

We had a fabulous week of trading last week (as detailed in the Wrap-Up) so we’re not looking to spoil it by deploying our cash ahead of the holiday weekend but that won’t stop us from taking a few opportunities when they present themselves. Still, overall we’re having fun watching the shenanigans and we’ll see if it’s enough to get to that magical 11,000 mark. With the low volume we expect this week it will be very sad for the bulls if they can’t pull it off.

  • Oil futures short at $82.50, out at $82.10 - up $10 per penny per contract

  • Oil futures short at $82.50, out at $82.10 - up $10 per penny per contract

  • Arena Pharmaceuticals (NASDAQ:ARNA) complex spread - on target

Testy Tuesday - Real Estate Edition

We looked at the CPI and the hidden inflation that is being held down by the Owners Equivalent Rent calculation as well as the usual nonsense from the ratings agencies. We had Liz Warren’s dire warning that by the end of 2010 (this year - for those of you keeping track), about HALF of all Commercial Real Estate mortgages will be underwater. Lennar (LNR) property was my prime example of how fast things are falling apart and NYC commerical properties are suffering. Even the Case-Shiller Report wasn’t very encouraging.

So, despite the pre-market run-up and the additional 50 points we flew up by 10am - I sent out a very skeptical Alert to Members at 10:11 saying:

The best play of the week [will be] to PATIENTLY wait to retest the highs and then finding some good things to short right up there… We expected a massive pump job this week and Monday is D-Day for End of Quarter so let’s see what they’ve got…

  • Freeport McMoRan (NYSE:FCX) May $85 calls sold at $4.40, now $5.20 - down 18%

  • Verizon (NYSE:VZ) complex spread - on target

  • DBA complex spread - on target

Not much trading at all! We did have some great chat sessions though and I shared my favorite videos from the TED conference. More importantly, I shared a list that detailed what conditions were like last time the S&P was at 1,200 compared to where we are now - just food for thought:

  • The dividend yield was 2.4%, not 2.0%;

  • The unemployment rate was 6.2%, not 9.7%;

  • Industry operating rates were 73%, not 69%;

  • Housing starts were 822k annual rate, not 575k;

  • New home sales were running at a 436k annual rate, not 308k;

  • The Case-Shiller home price index was 162, not 146;

  • The level of retails sales was $366 billion, not $356 billion;

  • Auto sales were running at a 12.5 million annual rate, not 10.3 million;

  • The level of employment was 136.3 million, not 129.5 million;

  • Real personal income excluding government transfers was $9.5 trillion, not $9 trillion

  • The level of manufacturing shipments was $429 million, not $384 million

  • Consumer confidence levels were at 61, not 46

  • Credit card delinquency rates were 4.6%, not 5.8%

  • Bank-wide residential loan default rates were 5.3%, not 10.1%

  • Commercial bank credit was $7.3 trillion, not $6.6 trillion

  • The fiscal deficit was $500bln, not $1.5 trillion.

Wednesday’s Worry - World Wide Cash Crunch

I don’t wake up every morning looking for bearish news - I read everything and try to talk about the things I think are most relevant to the markets that day. Wednesday I saw debt bubbling up to the top of the news flow. I won’t even get back into it here as it’s just sooooo depressing. Even Richard Fisher seemed depressed and was moved to warn us that

Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see.

So I called it right that morning and we held bearish under the crush of bad news despite our general belief that there would be an attempt to run us back to 11,000 on the Dow.

  • Oil futures short at $83.50, out at $82.50 - up $10 per penny per contract

  • USO April $40 calls sold for $1.10, out at .85 - up 22%

  • USO May $39 puts at $1.10, now .85 - down 22%

  • DIA 3/31 $109 calls at avg .14, out at .17 - up 21%

  • OIH April $120 calls sold for $4, out at $4.20 - up 5%

  • Oil futures short at $83.50, out at $83.20 - up $10 per penny per contract

  • Research in Motion (RIMM) April $75 puts sold for $3.85, now $6.75 - down 75%

  • RIMM June $70 puts at $3.30, now $4.85 - up 46% (pair trade)

  • Crocs (NASDAQ:CROX) complex spread - on target

  • DIA 3/31 $108 calls at .55, out at .50 - down 9%.

That was NOT a great day… We should have gone longer on the DIA calls, having to close them out for a loss that day made us miss a 100-point rally. But they were, as I had mentioned in Member Chat, high-risk, high-reward plays and were what we call "craps rolls". That is to say we only play the amount of money we’re willing to lose on a single roll on the craps table. It’s OK to gamble sometimes - as long as you know you are gambling.

Thrilling Thursday Morning - Pre-Market Push

Thursday’s action did nothing to dispel our cynicism as the Dow gapped up over 100 points and, right at our 10 am shorting time, headed into a 90-point decline. This is a brilliant strategy for manipulating the markets as less than 10% of the day’s volume is used to take the market up while few people have a chance to trade. Then 60% of the day’s volume is then sold off to all the retail traders during the day. Don’t worry though, between the jack-up in the last 90 minutes of trading (our 2pm buy-in) and the goose we got in the futures - we’ll be right back to 11,000 on Monday morning (so we can sell again at 10). It’s all part of the great circle of the markets!

I pointed out the nonsense in the morning post and, as it was such a blatant move, we finally took some of our sideline cash and did a little shorting, beginning with my 9:44 Alert to Members. At 10:03 in Member Chat, we triggered our USO short plays as we got our Construction Spending and ISM Data and I said:

That’s all the positive news we’re expecting so if this can’t get us to 11K, nothing will.

That was good for a 90-point ride down and then, at 2:19, we flipped positive in Member Chat as I said:

I like the QQQQ $47 calls at $1.31 here with a stop if they can’t hold $48 (now $48.03), looking for some stick action.

How’s that for hitting the turns?

  • USO May $41 calls sold for $1.67, now $1.75 - down 5%

  • DIA April $109 puts at .90, out at $1.20 - up 33%

  • DIA April $110 puts at $1.35, out at $1.70 - up 26%

  • Intel (NASDAQ:INTC) complex spread - on target

  • EDZ complex spread - on target

  • Oil futures short at $85, out at $84.70 - up $10 per penny per contract

  • GLL April $9 calls at .60, still .60 - even

  • Bank of America (NYSE:BAC) complex spread - on target

  • QQQQ April $47 calls at $1.31, out at $1.27 - down 3%

  • QQQQ April $47 calls at $1.25, out at $1.41 - up 13%

  • FXP April $7 calls at .60, still .60 - even

  • ERY complex spread - on target

Click to enlargeWe stayed bearish into the close for the most part but still mainly in cash and letting our Disaster Hedges do most of the heavy lifting on the short side. We’re ready to go bullish if we have to (but we’re not going to like it). We still haven’t had a good reason to kill our last 15 bullish plays on the Buy List. As you can see above, we’re still going for the occasional long plays but mainly long-term, complex spreads that will be able to weather a storm to the downside but still give us great upside potential.

The BAC play, for example, is a January $17.50/20 bull call spread at $1.10 paired with the short sale of the $12.50 puts at .54 - which nets .56 and is already .54 in the money. The potential upside return on that play is net $1.94 at $20 or a 346% in 12 months. Think about what that means: Rather than buying BAC for $18.04 with a 10% stop that risks $1.80, you are spending a net of just .56 (and using $1.25 in margin) and you have THE SAME upside potential to $20. But you can only lose .56 and your worst-case is that BAC will be put to you in January at net $12.56, which is 30% LOWER than today’s price. If you bought all your stocks this way do you think you’d do better or worse?

Underemployment in U.S. Workforce, December 2009-March 2010 Monthly TrendThank Jobs It’s Friday!

The chart on the right really bothers me but it doesn’t seem to worry the MSM. Of course, the funny thing about the MSM is - they all have jobs! So do the people they interview. Those people spend a good portion of their lives flying around the country, sitting in business class seats next to people who have jobs and staying in hotel rooms with people who are generally there for their jobs. So, when you ask them what they think of the economy, it’s not too surprising that they tell you have great everything looks to them, is it?

My take on the Jobs report is in the Friday post and another major "green shoot" you’ll be hearing about this weekend is the rise in state tax receipts, which are up 3.5% this year. This would be wonderful news, but they are still down 10% from 2008. And, of course, 90% of that 3.9% recover is coming from capital gains etc. from the top 10% and corporations. State budget gaps are still over $200Bn in 2010 and projected at $180Bn in 2011 and $120Bn in 2012 - providing things stay as "wonderful" as they are. Revenues are projected to possibly return to 2008 levels in 2013 so, as long as they keep costs down, everything should be just peachy.

Of course the markets didn’t want to wait and they are back to 2008 levels already, 3 years ahead of the actual economy - Man, that’s what I call a FORWARD-LOOKING mechanism! If all this seems a little crazy to you - then perhaps you understand our concerns…