Click to enlarge
Last Thursday, I said in the Morning Post:
We’ll certainly be angling to hedge back near neutral into the weekend. Next week is going to be a real thrill-ride as Greece boils over in the EU this weekend and Bernanke steps up to the plate on Wednesday.
In member chat on Friday we cashed out our FXI Oct $36 longs at $2 (up 117% in 2 days) in our $25,000 virtual portfolio (now over $80,000) - selling into the morning excitement and grabbed the QID Oct $44/47 bull call spread at $1.45, selling Research In Motion (RIMM) Oct $22 puts for $1.10 into the panic as a bullish offset. At net .35, it will be very easy to get a quick 100% or even 200% gain ahead of the Fed on the morning sell-off and we'll be looking to cash out and switch horses if we can hold the same levels we held on Thursday, the same ones we were looking to break over on Wednesday (we did) - notably S&P 1,200 and Russell 700.
We are simply waiting on the Fed this week and little attention should be paid to any action in the markets as long as it stays within our range. What matters is the reaction to Wednesday's FOMC statement at 2:15 and, between now and then, it's all about Housing in the U.S., with the NAHB Housing Market Index this morning at 10 followed by Housing Starts and Building Permits tomorrow at 8:30 and then the MBA Mortgage Index Wednesday at 7 a.m. and, finally, Existing Home Sales at 10. After that the Fed has the floor and nothing really matters after that.
If housing is bad, we are ready with IYR hedges in our income portfolio so we'll be able to sell DIA puts to cover into the morning sell-off that we anticipated on Friday. We can also take advantage of the morning panic to short TLT again, as they should be flying over $113 again. Our last TLT spread was last Wednesday, where we sold the weekly $113 calls for .90 and bought the $114/112 bear put spread for $1.12 for net .22 and that one finished Friday at net $1.75, up 795% in two days - so you can why I'm excited to get another pop at it this morning!
Doug Short wrote an excellent article titled "Weighing the Week Ahead: Expecting Magic from the Fed?" which saves me a lot of writing if you read that. John Nyardi has a more alarming article which asks: "Can Central Banks and Governments Stop the Tidal Wave?" where he makes a good case for the fact that we're in a bear market rally and that we wouldn't be seeing this level of Central Bank intervention if things were not already far worse than they seem.
Of course things are bad but - are they THAT bad? Notice in Doug's chart of the University of Michigan Sentiment Index vs. the GDP (above) how HORRIBLE Consumer Sentiment is. Clearly it looks like this could be the worst thing EVER. Unfortunately, I Have to take the other side of this argument and point out that consumers are clearly WRONG this time as their sentiment doesn't match the improving GDP.
Consumer Sentiment doesn't cause GDP - it's a result of it and the modern consumer is besieged by a 24/7 negative news cycle unlike any that existed before. Not only is the negativity of the mainstream media coming from nothing but Big Business-owned broadcasters but those same broadcasters have taken over the Financial Press as well - there is no alternate viewpoint, save that of a few radical bloggers such as myself.
The last time consumers were this wrong in their sentiment was in 2002, just after 9/11 and just after the big crash of 2000-2001 (the last time we made the horrible mistake of trading in a perfectly good Democrat for a Republican) and the Dow Jones Industrial average flew from 7,500 in October of 2002 to 10,500 in in December of 2003, up 40% in just over a year. Why? STIMULUS! Do not discount the power of stimulus!!! Sure Bush's chicken in every pot BS sent this nation spiraling into the worst debt since World War II and unemployment to the worst level since the Great Depression but hey - look at the stock market!
Well, don't look at the part where the whole house of cards collapsed in 2008 but look at all the fun there was until then. We don't want to miss that, do we? To be clear, I am NOT saying everything is fine or the economy is strong but what I am saying is that the same Central Bankers who sent the markets up 100% - TWICE - are not the guys you want to bet can't send them up another 20% of more (back to 14,000) - EVEN IF THEY ARE SOMEWHAT INEFFECTIVE.
The only question on the table at the moment is - will they even be trying? We are currently assuming the Fed will do SOMETHING on Wednesday but, if they do not, then all hope may be lost, Globally, on Thursday morning. To that end, EDZ is always a favorite Disaster Hedge of ours - but they will be jumping this morning on poor performance in China overnight.
Another trade idea from Friday's post that will be cheaper this morning is shorting gold with the GLD Nov $180/174 bear put spread at $3.30, selling $193 calls for $3 for net .30 on the $6 spread. The logic there is that no Fed easing will send gold lower and an equity rally will also send money out of gold and into more exciting assets.
This morning, Greece is the Boogie Man again (along with Obama and his tax hikes on the rich) but we discussed how overblown the panic is over this VERY SMALL nation whose debt is only large when measured against their own meager GDP. Last Tuesday I discussed this in great detail in Member Chat as we looked at the Greek budget (in euros):
Click to enlarge
These are not typos - the entire 11M person population of Greece generates a GDP of $330Bn, which is a healthy $30,000 per person GDP (U.S. is $50,000) but they are now $460Bn in debt. That's $42,000 per citizen, which may sound like a lot but not compared to the U.S., as our $15Tn National Debt is but a small portion of the $54Tn worth of liabilities our government has taken on (on our behalf) - encumbering every man woman and child with $174,996 worth of debt. In fact, if you go by Republican statements that only 65M people in this country actually pay taxes - that becomes a very ugly $830,769 per taxpayer that our government has saddled us with.
The ENTIRE budget of the Greek Government is $96Bn, or $263M per day, about what the Republicans claimed Obama spent on his trip to India last year! If you don't believe the 11M people in Greece (20% of whom are unemployed) can pay off a $460Bn debt, then how on earth can you expect 300M American people (27 times more people) will be able to pay off a $54,000Bn debt (117 times more debt)?
If Greece "MUST" default then the U.S. is merely being delusional if they don't do the same. Even if you ignore all of our other liabilities and JUST stick to the $15,000Bn National Debt - that's still 33 times more debt than the Greeks have per person or 122% U.S. to Greek debt per citizen. The only crisis Greece has that we don't is the Greeks can't go into a back room and crank up the printing presses - that's the only reason America is "better" than those "lazy, unrealistic, welfare-state... (fill in your own Conservative derogatory terms)" Greeks.
As it says in the Bible: "Let he who is without tax loopholes for the rich print the first dollar" - or something like that. Obama will be speaking this morning about closing $150Bn a year worth of the most outrageous tax loopholes enjoyed by Americans making over $1M per year and you would think it's a full moon the way the Reps are howling on the hill from the same dogs who point their finger at Greek tax cheats and call for government austerity "over there" - as if our 600 Congresspeople would even bother getting out of bed for just $263M a day!
Of course the collapse of Greece can lead, like dominoes, to the collapse of Portugal, Italy, Spain, France and Germany and if that seems silly because surely someone will do SOMETHING before they let things spread that far - then you understand our bullish premise.
We're not saying it will work, but "extend and pretend" has been a very powerful and reliable economic tool for our Central Bankers and, as long as none are "without sin" then we can expect more of the same before any nation is stoned to death.
As bullish premises go - this one pretty much sucks, but we work with what we've got, right?
Disclosure: I am short USO, TLT, QQQ.
Additional disclosure: Positions as indicated but subject to change