changed from stock price valuation to politics. All eyes are on Tuesday’s midterm
elections with investors optimistic that the Tea Party movement can
force gridlock in Washington. The Tea Party movement is an
interesting phenomenon. If the Tea Party had been in control during
the financial crisis then General Motors would be dissolved, the
banking system would have been left on its own to collapse, and U.S.
currency would probably have already returned to the gold standard.
There is no question that this political movement is extreme if left
to itself, however, a dose of Tea Party mixed into a Republican
majority with President Obama at the head could produce a wonderful
tonic for the stock market. If Obama shifts his policy towards the
right as Bill Clinton did in 1994 and is successful at stimulating the
economy through a conservative agenda, the stock market should
outperform the historical 21% average return for a 3rd year 1st term
Democrat. The current market is trading on this optimistic scenario.
But what if all doesn’t go according to plan over the next few days?
What if undecided voters rebel against the extremism of the Tea Party
and Democrats overcome the odds to win both the House and the Senate?
Although this scenario is unlikely, some within the Republican Party
are a little nervous by what is happening in California with gubernatorial candidate Meg Whitman getting buried in the polls by Jerry Brown and Carly Fiorina not able to budge Barbara Boxer. This negative momentum could
possibly spread to the rest of the country as a vote signaling ‘we’re
not happy with Washington but we don’t like the new alternative
either’. I’ll admit I would be much more comfortable with the
projected outcomes of Republican victory if this Tea Party movement
was a little more moderate. I am not yet convinced this is a sure
thing. As an investor looking to protect some large gains, I find it
prudent to watch the election play out before committing new capital.
With the market at the upper end of its trading range and with Apple
action looking worn out I think we could be in for a ‘sell on the
news’ reaction even if the Republicans do win the majority. And if
Democrats maintain a majority it won’t be a ‘sell on the news’
reaction, it will be a ‘sell the surprise’ overreaction!
Let me clarify, I fully anticipate the Republicans will win a
majority. In fact, I think this Tea Party movement has as much
political enthusiasm as the campaign of change that got Obama elected
to the White House. I think the Tea Party movement will open the door
for a Republican candidate like Mitt Romney, Jeb Bush, or even the new
superstar from Florida Marco Rubio to give Obama a run for his money
in 2012 but as an investor I like to live in a world of certainties.
I need to see that the Tea Party movement is legit before I risk my
hard earned investment capital. As soon as victory is assured, I will
look to reinvest my cash in the first half of November. As for today
I am content to sell down positions and watch how this plays out.
Since identifying the Apple August low our E Weather option LEAPS
trades have generated gains worth holding on to. It is a very special thing to be in tune with the action of a leadership stock like Apple. Our 12 trades since
August 25th have yielded 11 winners and 1 loser:
14% allocation of AAPL January 2012 $280 calls 29.00-64.40 (122%, holding)
6% allocation of AAPL January 2012 $300 calls 23.35-52.70 (126%, holding)
5% allocation of AAPL April 2011 $230 calls 35.80-65.50 (83%, sold on 9/23)
5% allocation of AAPL January 2011 $270 calls 23.50-31.00 (32%, sold on 9/23)
2% allocation of NFLX March 2011 $120 calls 33.50-47.00 (40%, sold on 9/23)
2% allocation of AAPL April 2011 $260 calls 26.60-43.00 (62%, sold on 9/23)
5% allocation of AAPL April 2011 $290 calls 26.00-39.00 (50%, holding)
5% allocation of NFLX March 2011 $150 calls 30.60-26.40 (-14%, sold on 10/1)
5% allocation of AAPL November 2010 $270 calls 22.00-42.00 (91%, sold on 10/19)
5% allocation of AAPL November 2010 $290 calls 15.00-25.00 (67%, sold on 10/19)
5% allocation of AAPL January 2011 $290 calls 22.00-29.00 (32%, holding)
5% allocation of BIDU January 2011 $100 calls 10.00-15.40 (54%, holding)
Overall, the Economic Timing portfolio mix of ETF’s, stocks, options and
cash is up 71.4% since August 25th. We are in the process of
finishing up the October newsletter and wanted to give a quick heads
up as to current conditions. Washington will determine the next move.
Disclosure: long AAPL, BIDU, NFLX