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Welcome to the Grand Illusion

Come on in and see what’s happening

Pay the price; get your ticket for the show

The Stage is set, the band starts playing

Suddenly your heart is pounding

Wishing secretly you were a star

But don’t be fooled by the radio,

The TV or the magazines

They show you photographs of how your life should be

But they’re just someone else’s fantasy

So if you think your life is complete confusion

Because you never win the game

Just remember that it’s Grand Illusion

And deep inside we’re all the same

We’re all the same

America spells competition; join us in our blind ambition

Get yourself a brand new motor car

Someday soon we’ll stop to wonder what on earth this spell we’re under

We made the grade and still we wonder who the hell we are - STYX

I recall being in high school and listening to this song without any real idea what it meant or how it might play out in reality. But I liked the sound enough, and so I went to my first concert and saw this “Grand Illusion.”
“America spells competition.” Well, if that is still true, Merriam-Webster or Wikipedia must have changed either the spelling or the meaning. It appears to be spelled correctly so “just remember that it’s a Grand Illusion.”
In most competitions a scorecard is kept, and I have been reviewing America’s. It is true that many could argue that we aren’t in the 9th inning, fourth quarter, 15th round, or whatever is analogous to a game nearly being over, but we are fairly clearly behind in the game.
It is fair to say that some or many of the numbers fed to us on the scorecard are just a part of the Grand Illusion. Nevertheless, here is the card America has signed:
  • Second quarter GDP grew at 1.3% rather than the expected 1.9%.
  • First quarter GDP grew at 0.4% rather than the previously reported 1.7%, “but that was just someone else’s fantasy.”
  • Last week’s durable goods report was -2.1% for June, down from the +1.9% in May.
  • The ISM Manufacturing Index came it at 50.9 to give 0.9 of confidence in “join(ing) the blind ambition” that our economy is in expansion rather than a double-dip recession.
  • Oh, and one other grade on America’s scorecard caught my attention yesterday (actually, last night after the market closed): S&P downgraded U.S. debt for the first time in U.S. history, from AAA to AA+.
There are rarely surprises in the markets for many reasons. Phrases like “buy on the rumor, sell on the news” - or in this case “sell on the rumor, buy on the news and sell again very quickly” - lead to us “think(ing) our life is complete confusion.” The market had one of its worst days since 2008 on Thursday, with the S&P 500 dropping 60 points, and at times on Friday added another 30 points before the announcement of the downgrade, which came after the markets closed on Friday.
There are plenty of excuses out there for the sell-off (just a small sample of domestic excuses are listed above, but plenty more are coming out of Europe), so perhaps the downgrade is the next shoe to fall. If, on the other hand, it was sell on the rumor (of which we had plenty of advance warning/threats) and buy on the news related to the downgrade, then perhaps the Grand Illusion will settle here.
As we wrote back on September 1, 2010, “Any Way the Wind Blows, Doesn’t Really Matter” in a long/short hedge. we may have a good opportunity to “make the grade and still wonder who the hell we are.” So here are three short hedges in place, previously recommended by Dark Horse Traders’ Hedge, whose tickets are ready to punch and take some profit.
Freightcar America (NASDAQ:RAIL) was recommended as a short/hedge on November 8, 2010 at $25.73. Monday’s close of $16.77 gives us a +26.39% profit and a more properly valued RAIL. I recommend punching the “buy to cover” ticket at the open Tuesday.
USG Corporation (NYSE:USG) was recommended as a short/hedge on July 1, 2010 at $12.08. Monday’s close of $8.17 provides us with a +46.56% profit and more correctly prices the value of USG. Therefore, I am recommending punching the “buy to cover” ticket at the open Tuesday for USG.
ComScore (NASDAQ:SCOR) was recommended as a short/hedge on August 23, 2010 at $17.94. Monday’s close of $13.90 allows us to close with a +23.48% profit. I would argue that the $13 price SCOR traded at on Friday is closer to fair value, but as stated in a previous article, we “Live to Win.”
We haven't recommended any options to deal with in August so no action is necessary on the buy/write and covered call positions in August.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: 3 Short Hedges to Consider in This Market