Friday's Outlook

by: Philip Davis

I didn’t do a wrap-up as we reviewed the $25K Portfolio and, as I said to members, I didn’t think too much of yesterday’s sell-off while it was in progress. Sad though Bhutto’s assassination was, it was a fait accompli from the moment she entered the country - something we’ve been discussing since the first attempt on 10/19, which was that week’s excuse to drop the markets 300 points. We recovered most of the loss the following week and we can expect the same here providing, of course, nothing else happens.

The markets were looking for an excuse to vent a little and at 12:37 on Wednesday as we were rallying into the close I had already warned: "My Jan puts stopped out - all Jans should be leaning towards cash if they are yours." I don’t like the Jan positions anyway as there is just not enough time to adjust them in a big market move and Wednesday’s action seemed very toppy to me. That coupled with my predisposition towards cash going into the holiday weekend kept us out of trouble yesterday.

As we can already see from pre-market action, it was a little early to hit the panic button but I sure am glad I’m mainly in spectator mode as we whittle down our portfolios, getting ready for a brand new year. While it’s somewhat arbitrary to close out positions based on the calendar, it’s as good a reason as any to take profits off the table and refine our strategies for investing over the next 4 quarters.

Our Long-Term Portfolio is immune to the annual rollover but the Short-Term Portfolio is looking comparatively sparse, with just 38 remaining positions and 90% cash. I’ll be taking some of the larger plays off the table ((NASDAQ:FSLR)spreads, (NYSEARCA:FXI) puts, Jan DIA and SPY puts, (RTP) puts) in order to make the new plays more accessible next month when we reset the portfolio at $1M.

My secret plan for next year is to run the new $25KP up to $50K, then make a $50KP that we run up to $100K and then make a $100KP that we run to $250K. OK, so I’m not good at keeping secrets but that’s what I hope to do with members next year as our new portfolio posting system is working quite well and the alert system should be ready to roll by then. I’m really excited about this as it’s going to be very challenging, especially in what looks to be a much choppier market than we had this year.

I was wrong about Japan yesterday, today was a half day for them but they should have taken my advice and taken the day off as the Nikkei gapped down over 200 points at the open, dropped another 100 and then bounced back a bit at the close but finished down 256 points for the day. This makes the Nikkei the worst performing market of 2007, whatever the opposite of ichi ban is!

The Hang Seng was no picnic either, dropping another 472 points to 27,370, now giving up about 1/2 of the previous week’s gains. There was nothing fundamentally wrong over in Asia, if anything the assassination of Bhutto means it’s going to be business as usual with our nuclear powered allies and Wall Street likes it when things don’t change, no matter how creepy our alliances are. If you need more evidence that we overreacted yesterday, look at India, whose market was dead flat yesterday. The Pakistan markets were wisely closed so Tuesday should be an interesting day over there.

It’s very smart to kill the opposition leader ahead of a holiday weekend to avoid economic disruption that would displease the General’s financial backers. Assassinating Bhutto after the markets closed and then closing the markets for the day ahead of a planned 3 day weekend gives the government lots of time to restore order and, again, I hope this doesn’t give the GOP any ideas…

China is running out of ideas about how to keep their bubble going and they are turning to foreign investment banks, opening the doors for them to take a 33% stake - and, eventually, a 49% stake in underwriting joint ventures while at the same time allowing foreign investors to put money into Chinese brokerages. These new rules do not grant as much access as (NYSE:GS) already has (along with (NYSE:UBS)) - they got in on the ground floor before regulators shut out other applicants in 2005 (as suggested by — Goldman Sachs!). Isn’t the free market a wonderful thing? I wish we had one so we could find out…

Japan’s CPI is up, which wouldn’t be a bad thing but it’s entirely energy (up 5.4%) but indstrial production declined again (down 1.6%) which puts their Central Bank in a quandary and should keep the Yen flowing freely to maintain the carry trade for another quarter, good for the markets as a rapid unwinding would be a worst-case for us. Household spending in Japan also fell 0.6%.

Europe is trading flat ahead of our open and not much of note there other than England’s morgage lending dropping to a 28-month low. This mirrors our own issues and indicates that we may indeed be facing a truly global crisis if Europe’s $500Bn fix last week wasn’t enough.

We’re just watching the markets today, it’s good to look over who held up yesterday and who bounces well today. Warren Buffett is starting a bond insurer, that’s a good thing but we’ve tracked that $20Bn the Fed gave out last week right back to Wall Street, which means the gains you’re seeing are totally artificial and that’s bad!