Money for Nothing: Just Buy S&P 500 Puts

The title says it all.

Dynamics of too many shorts works well to create these nice trending rallies. With all the negativity on the street, it makes sense that the most people possible in the short term lose the most possible money. But in the end, fundamentals still anchor price. And without a black swan of sorts, we shouldn't go too far from this value area we've created for ourselves. Forward PE of 18 for S&P 2008 ($1,370 divided by $74 earnings target, 15% fall from '07) doesn't leave much upside. Even if we maintained earnings at $87 (impossible at this point, considering bank losses), that still leaves us with a 15.74 PE at $1,370 for 2008. Not exactly a screaming buy in the face of uncertainty.

Back to reality for the week:

1) Earnings start. We get to see a glimpse of the truth. Tonight, RIMM should give the GOOG and AAPL stocks a sense of direction this next few weeks.

2) Fed Chairman Bernanke testifies before Congressional Joint Economic Committee - since when recently have the markets ever interpreted a moral drilling of Fed policy in a positive light? I'm sure the JP Morgan and Bear Stearns issue will be resolved in entirety tommorow.

3) Friday: March Non-Farm Payrolls. Again, the title says it all.

Until we see elevated corporate defaults at least matching last recession, or a fantastical halving of the income tax rate, this is still a bear market. Oh, and did I forget... we need two quarters of negative GDP. That would mean we have at minimum another 3 months of negative GDP growth from here.

That said, its looking like a good setup for a 'risk free' buy of S&P puts. Not only that, but they're on sale! Vix is down 12% today.

PS: Keep your eye on Long Taiwan (EWT) and the Short Yen (actually the dollar) as all interesting value plays here. The recent pro-growth election result has been appropriately sold into the market, and we all know how I feel about the dollar.

Disclosure: Short SPY

Comments

[maher:]

Yeah sure, Short SPY, just Don't Quit Your Day Job Baby!

2008 Apr 03 02:53 AM

[Worldtravel...:]

Be careful..

2008 Apr 03 09:34 AM

[Nick Gogerty:]

Historical Equity earnings yield + 10 year notes yield= dow 8,800

nickgogerty.typepad.co...

If my math is wrong please comment and I will fix the post.

2008 Apr 03 12:50 PM

[Michael B. ...:]

yes. the near term visibility is too low. Take a look at this.

scriabinop23.blogspot....

Corporate defaults are still way too low. This is going to take a while to bottom.

2008 Apr 03 09:56 PM