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Our day is done, how's yours?
That's right, we already did our 3 a.m. trade where we caught the dead top of oil (and the dead bottom of the dollar), where my 2:59 am comment to members in chat was:
Dollar at session low of 80.40 at 3 a.m. and oil back at yesterday’s high at $103.70 so oil (/CL) makes a nice short below $103.75 here but DANGEROUS pre-market trading as Iran could spout off at any moment and the trading is VERY THIN.
So that brings us back to the good old Dow (/YM) futures at 12,350 and they are just over that line at 12,351 but that’s the short of the moment as long as the dollar is over 80.40.
For the next hour, I did a blow by blow on the oil trade in member chat on the way down to $102.70 - a nice $1,000 per contract worm gotten by the early birds, where we took the money and ran ahead of likely morning manipulation back up to $103.50, where we can short it again on inventories (11 a.m.). The Dow slipped to 12,300 and paid a solid $250 per contract as well, paying for over 100 Egg McMuffins this morning by itself. If you want to see how we make decisions along the way down - it's well worth going over this morning's comments - there was also some good discussion of other topics this morning, including my pick for the best wide-screen TV.
We're still just messing around with hit and run plays, waiting to see how the week pans out and next week we'll be waiting to see how earnings pan out as well as what we expect it will be a pretty major market pullback leading into the 10-year auctions next Wednesday at 1 p.m. Clearly the Fed freaked out and jumped in yesterday when TLT hit $118 so we are fairly comfortable with our prediction of a slide into the 1 p.m. 3-year note auction on Tuesday that culminates in panicking people into 10-year notes the next day. AFTER that, we can start looking at earnings to drive the market.
Driving the gloom this morning is a story we picked up yesterday but it seems to be surprising people today that Unicredit's failure to raise capital yesterday is causing the stock to drop today. Italy's second largest bank is now trading well below its 2009 crisis lows and is back at levels not seen since the early 90s and the whole Italian market is down 3.3% this morning - led down by financials. Italian 2-year notes are already back up to 4.72% while Spain is creeping up to 3.63%.
The euro is down to $1.283 and the pound is testing that $1.55 line that would spell catastrophic failure if they don't hold it. The good news for Japan is that the yen is almost back to 77 (76.82) - so they have that to hang their hat on.
So Europe is still a mess - not a surprise really. We're patiently waiting for next week's earnings data so we can get a feel for what's real in the market and what is not. Some early reports are mixed with Helen Of Troy (HELE), Monsanto (MON) (got 'em) and MSC Industries (MSM) beating this morning but RPM International (RPM), Worthington (WOR) and Constellation Brands (STZ) missed and Children's Place (PLCE) slashed guidance by 30% with "margins hit by discounts and record high apparel costs."
THAT doesn't sound good, does it? And STZ is a pretty diversified company with revenues down 27% year over year and they STILL missed those lousy expectations. Even Eli Lilly (LLY) cut guidance this morning as Zyprexa goes off-patent. What is this World coming to if we can't make insane profits on anti-psychotic drugs?
Barnes & Noble (BKS) is down about 30% pre-market after announcing plans to spin off its digital business - which is the only part people like. Still, I don't think investors understand what spin-off means so I'm going to be liking a play on them under $10 this morning, perhaps selling puts into the initial drop.
We "only" lost 372,000 jobs last week and the ADP report came in hugely strong at +325,000 vs expectations of 150,000. This is the largest monthly increase for ADP since the same December report last year and the market rallied all the way up to 1,344 on the S&P by the end of the month before dropping back to 1,250 so anything less than a big pop off this news and we know there is other stuff that's much worse than it was last year without even checking.
As you can see from David Fry's XRT chart, we're pretty high in the range on high expectations that are simply not likely to be met. I was hoping for a test of $55 to go short again (we hit them last summer for a good ride down) but this morning's data doesn't make that likely and woe unto the markets if they can't hold 50 through earnings.
Of course, what really matters is, as usual, the financials. Dave has a nice chart from Morgan Stanley (MS) showing that the top six financials: Bank of America (BAC), Goldman Sachs (GS), GE (GE), Wells Fargo (WFC), Allstate (ALL) and JPMorgan (JPM) are EXPECTED to contribute 26.3% of the S&P 500's TOTAL earnings growth for 2012 - that's a heck of a lot of responsibility heaped on what have recently been very narrow shoulders. We're in BAC, JPM, GE and ALL and are generally bullish on the financials but I'll bet many people are going to be surprised that it's BAC that is expected to lead the S&P's earnings thrust in 2012 with a 12.25Bn turn around in profits.
That's right, when you see all the clever analysts on TV telling you that they are targeting 1,350 on the S&P - keep in mind that, if you don't believe in BAC - then that whole premise is right out the window. So, I guess we should put BAC in our one stock portfolio - the portfolio for lazy people who can't be bothered to play the market every day (or maybe just have a life) and just want to pick just one stock that they can put everything in on a make or break trade.
BAC is still $5.75 and you can buy the stock and sell the Jan 2013 $5 puts and calls for $2.55 for a net entry of $3.20/4.10. So putting $32,000 into 10,000 shares of BAC and selling 100 puts and calls can make a profit of $18,000 (56%) in 12 months if BAC holds $5 (13% down from here) through next January's expiration. It's very likely that this trade would outperform the S&P if successful and it can be hedged with five FAS Jan 2013 $40/60 bull call spreads at $3.10, selling the $20 puts for $3 for net .10 on the $20 spread so five contracts pay $10,000 if FAZ shoots up, which is what we expect to happen if BAC fails to hold $5. On the downside, BAC should be well in the money long before you are forced to buy 500 shares of FAZ for $20.10 net ($10,050) and even if FAZ is zero, if you make $18,000 on the BAC spread - you still net $8,000 (25%) for the year.
So that's it then - have a lovely 2012 - I'll check back with you next January and we'll see how this goes.
Additional disclosure: Positions as indicated but subject to change.