You made me promises promises
You knew you'd never keep
Why do I believe
All of your promises
You knew you'd never keep - Naked Eyes
Wow - what a party!
The former vice chairman of Goldman Sachs (Draghi) says everything is fixed and the global markets go flying - what's not to trust? Would anyone form GS ever lie to us? Would GS be involved in manipulating the global markets - of course not!
Now that I've fulfilled my obligation to get my mother back unharmed - let's get real. Draghi said the violent spike in bond yields in recent days was hampering "the functioning of the monetary policy transmission channels" - the EXACT expression used to justify each of the ECB's previous market interventions.
Yields on Spanish two-year debt plunged 72 basis points to 5.47% in barely an hour, with comparable moves on Italian debt - easing the pressure before a string of debt auctions in Rome over coming days. The MIB index of stocks in Milan surged by 5.6%. Madrid's IBEX rose 6%, the biggest jump in two years, led by an explosive rise in bank shares. Mr Draghi's comments came as Spain claimed backing from France and Germany for activation of the eurozone's rescue fund (EFSF) to buy Spanish bonds, though this would require calling the Bundestag's finance committee back from holiday for a vote. Action by the EFSF would provide "political cover" for the ECB to join the fray in a two-pronged attack. "We're firing on all cylinders: that is what has ignited the markets," said Hans Redeker, currency chief at Morgan Stanley.
Joint statements from Madrid, Paris and Berlin said market turbulence "does not reflect the fundamentals of the Spanish economy, or the sustainability of its public debt." According to Ambrose Pritchard, "the wording seems scripted to clear the way for intervention." Of course, now it's time to put up or shut up as the Fed meets next week and the ECB has its pre-holiday meeting next week as well so it's going to be action by next Friday or none until September. Marc Ostwald from Monument Securities said Mr Draghi's words were "cheerleading bluster," while Gary Jenkins from Swordfish called them "a bluff to get through the summer."
As far as bluffs go, it's a good one. And why not, if this were a poker table, Draghi has the second biggest stack of chips at the table, next to Bernanke and then there's the BOJ, the BOE and the PBOC - and you - and Draghi just put the bears all in on the ante - he doesn't even need to bet yet.
Needless to say, the bears quickly folded yesterday and the global markets took off, bringing us right back to the highs we had when we had that ridiculous rally at the end of June - that was also based on promises of more QE from our Central Banksters. The fact that we then fell right back to the lows of July in the first 10 days of the month doesn't seem to worry traders (not "investors" at all!), who went into such a buying frenzy that EVEN JIM CRAMER thought it was overdone.
"Mario Draghi may have given us the perfect opportunity to cash in on some gains," said Cramer. "Every asset that investors had just given up on was suddenly roaring. But move fast, Cramer warns, because this kind of optimism never lasts. Germany's "iron chancellor," Angela Merkel, will always be there to pull the rug from underneath." While I find it very disturbing to have to agree with Cramer - he's making perfect sense here.
To that end, we added a bullish spread on the Russell to take advantage of possible ACTUAL stimulus over the weekend or next week. We're using a very aggressive bull call spread on TNA and tempering it with the sale of short puts in stocks we would like to buy anyway - my trade idea from member chat was:
With the S&P over 1,360, it's time to go bullish on the RUT (playing it to catch up). I think the Futures can be played over the 775 line (now 773.30 on /TF) but the fun play on stimulus is the TNA Aug $49/54 bull call spread at $2.20, selling something you want to own in a downturn like Chesapeake (CHK) Sept $17 puts for $1.28 for net .92 on the $5 spread.
- Starbucks (SBUX) might make some good put sales today - we'll have to see.
- Diamond Foods (DMND) is back down where we like to sell puts, the Sept $15 puts can be sold for $1.35.
- McDonald's (MCD) came down nicely, Jan $85 puts can be sold for $3.05 or 2014 $80 puts can be sold for $6. Also odd on MCD, which was around $100 until March - is the March 2013 $92.50 calls at $2.75 - that's not a bad risk for a call position, especially if you pair it with the long put sale.
Setting ourselves up for a potential 400% winner if the markets do move higher (and we simply stop out of the spread if the S&P fails it's Must Hold line at 1,360), which then provides an upside hedge for the bearish bets we intend to make and press into any rally that isn't backed by at least $500Bn in actual cash from the Central Banksters.
8:30 Update: GDP came in at 1.5% vs. 1.2% expected and down from 2% last Q. We expected more of a slowdown but prices up 2% gave us a nice APPARENT boost (same goods and services produced but at 2% higher prices is a $320Bn pop to GDP, which is the entire GDP of all but the top 30 Nations on Earth!). Q4 2011 has been revised UP to 4.1% from 3% so we are slowing drastically but it doesn't seem as bad because, instead of being down 2.6% from 3% to 0.4% - the magic of the revision has us starting from a 1.1% higher base so we "soft land" at 1.5% - isn't math fun?
Of course, with an established 1.1% margin of error between revisions, it's very possible that our actual GDP is 0.4%. Residential fixed investments (durables) were weak and federal, state and local government spending were once again negatives as even our government begins to run out of money. As we expected, inventories increased substantially and added 0.32% to the GDP as the calculation is based on the assumption that everything in a warehouse eventually gets sold at the full price. This is the kind of thinking that leads to nasty downward revisions in GDP later on.
Today, however, the futures are loving it, as well as more positive noises about potential stimulus from the G20 so hopefully another nice rally this morning to add some shorts into but, as I said to our members yesterday - you have to have a good mix of upside plays as well since this market can move 5% in either direction very quickly.
So be careful out there and have a great weekend.
Additional disclosure: Positions as indicated but subject to change.