Festival Friday: Carnival Of Madness

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 |  Includes: DIA, DXD, FAS, FCX, GLL, TZA, USO, UUP, XLF
by: Philip Davis

Click to enlargeIt's party time!

A lot of investors have been saying "Phuket" lately and they can only be referring to the annual Patong Carnival in Thailand, where the tourist bureau wants you to know the tuberculosis outbreak is "under control." Actually, it's an amazingly beautiful place with great people - must be why so many people keep mentioning it when looking at the markets this week.

As I mentioned yesterday, we had to flip bullish because our bearish bets were no fun and we felt that A) the bottom was a little forced in order for Timmy to peddle his T-Bills and B) that Santa Clause is coming to town. Actually, we had plenty of bearish bets from when the market was high so we needed the bullish bets to get BALANCE!

Balance was the theme of our virtual White Christmas Portfolio and we added another $3,615 in gains over the past two weeks to bring us very close to a triple at $42,925, off our $15,000 start back on November 21st. This is a very aggressive virtual portfolio where we are practicing the art of hit and run trading. The positions we closed in the last nine sessions were bullish bets with FAS, XLF, DIA, GLD and XLF and bearish bets with GLL, TZA, FAS (spread), USO, DIA and DXD. See - BALANCE!

We thought the market would go up and down (I know, such a stretch) and the markets did in fact go up AND down with an AVERAGE swing of 1.5% PER DAY. But, in the end, we're still consolidating around our Must Hold lines and right back where we were at the last options expiration day of November 18th - causing almost all puts and calls sold to sucker a month ago to expire worthless. Isn't it a funny coincidence how all that seems to work out for the Banksters?

As I reminded our members, our cynical motto at PSW is "We don’t care IF the game is fixed, as long as we can figure out HOW the game is fixed and place our bets accordingly."

I don't know how many times I need to tell you oil is a scam before you'll believe me but it was way back on June 1, when I laid out our plan to break the speculators at the NYMEX, saying:

"If some idiot is stupid enough to pretend to want to buy oil at $103 for July delivery – we are happy to sell it to them." This comes from our fundamental concept that oil is in no way, shape or form, WORTH $103 per barrel and that, even if it were, consumers can’t AFFORD $103 a barrel and, even if consumers were mindlessly throwing themselves another $2Bn a day in debt ($10Bn globally) without cutting back on fuel consumption – that the dollar, which oil is PRICED in, is also undervalued and will correct up and kill the PRICE of oil at some point.

UUP WEEKLYThe Dollar was way down at 74 when I made that call (see David Fry's chart), up 10% now and oil gave us a ride down to $89.61 in June and then back to $100.62 in late July and then to $75.71 in early August (wheeeee!), back to $90.52 in early September, then to $76.25 at the end of the month and then a huge run back to $103.37 in mid November - when I begged the president to give me the keys to the Strategic Petroleum Reserve so I could short oil and release it into the market while shorting the 600,000 open front-month NYMEX contracts.

While I didn't get the keys to the SPR, our short position, if taken against those 600,000 contracts at $103.37, would have made a nice contribution toward paying off the deficit as oil closed yesterday at $93.45. At $10 per penny per contract on 600,000 contracts, that's a cool $6Bn profit in a month.

That was nothing compared to the original June trade, when I called for a short of 726,000 contracts at $103 and we caught the run to $75 in August for about $22Bn in potential profits. Of course, you don't have to be such a big shot trader - each single short contract yielded a very nice $28,000 in profit off a $7,560 margin requirement.

As value investors, we don't change our mind on oil based on the charts. When oil gets to $100, we begin to take up short positions, when oil goes over $100 - we take more aggressive short positions and, when oil still goes higher - we "back up the truck" and short some more. As noted above, we don't go 100% bearish - we went long on gasoline futures at $2.50 just yesterday (also a standard bet into the weekend) and we even went long on oil off the $94 line yesterday afternoon. If it goes below it again - we'll get out but $94 is approaching oversold territory in the short-term.

USO WEEKLYSCO (ultra-short oil) was one of our big winners in the White Christmas Portfolio as that was a trade we were confident enough to make with conviction. Notice in the WCP list above we stick to a relatively small subset of things we can get in and out of quickly and that we follow closely like the indexes, commodities and the financals - if you want to be a day-trader, you should stick to a few things you know AND UNDERSTAND very well rather than chasing after whatever stock some idiot on TV tells you to BUY BUY BUY or SELL SELL SELL.

I wasn't sure whether we should buy or sell into the weekend as I reviewed our White Christmas this morning as the weekends are so dangerous with Europe still in flux. We've been playing "Cashy and Cautious" for most of the month and our net cash in play in the WCP is just $2,585 (using margin, of course) with 94% of our cash on the sidelines in our short-term virtual portfolio.

My gut feeling was even 6% was too much but we get bored when we're in all cash so I guess we'll trade something - but I'm not enthusiastic about it, that's for sure. Hopefully we get on firmer footing over the weekend and Santa can really go to town but we still have $99Bn worth of TBills to peddle next week and those are not going to move very well if the markets are racing high so - No Virginia, there may not be a Santa Claus this year.

Have a great weekend.

Disclosure: I am long USO, XLF, FAS.

Additional disclosure: Positions as indicated but subject to change.