It’s Time to Make These Two Adjustments
Now what?
Markets could continue drinking the good times Kool-Aid they’re drunk on? Or April could be the last hurrah before a May hangover has us reaching for the Alka-Seltzer again.
What do I see and what will I be doing and advising my subscribers to do?
I’ll tell you.
I’ve been a cautious bull since October and participating in the run-up, as I recommended you all do, too. But, as I’ve said, I’ve been too cautious and haven’t beaten the lofty middle ground of the three major averages, which was 12% for this year’s first quarter.
That’s mostly because the Nasdaq Composite, now at 3091.57, rose a whopping (as in crazy hot) 18.7% in the quarter. How much of that rise reflects the shine of a single Apple Inc. (NasdaqGS:AAPL)? If you’ve read my articles on the Apple effect, you know how much. It’s a lot.
The Dow finished the week and the quarter at 13,212.04. That’s an 8.1% quarterly run. The Industrials are only 952 points, or some 7%, from their all-time high posted on October 9, 2007.
As for the more widely watched S&P 500, it rose 12% in the first quarter.
If the average of the averages, which is 12%, was to continue at this pace, we’d have a 50% gain in equities this year.
Is that likely?
Yeah, about as likely as you winning that mega lottery.
I’m a momentum player. That means I don’t fight the tape (the tape, as in ticker-tape, was the old way of reading stock prices), but go with the flow. And I’ll continue to maintain my long positions.
However, I’ll take cautious over greedy any day, so based on some “stickiness” I see on the path ahead, I’m making adjustments starting this week.
Here’s why.
European Woes Have Not Gone Away
They may be on the verge of blowing up, again.
It’s complicated, but it “bottom lines” down to this: There’s a lot of money to be made (on the short side) by hammering away at European stocks and bonds. And hedge funds and other big-time institutional players want to crack them to make massive amounts of money in short order.
Because the ISDA (the private derivatives authority) declared Greece in default, finally, credit default swap holders got paid. What happened earlier was that the ISDA said Greece’s bond swap, because it was “voluntary,” would not constitute a default event.
CDS holders began selling their positions in anticipation of not collecting on them.
In the final analysis, after the paring down of positions and the final netting of outstanding swaps, there was only about $5-$6 billion (principal coverage) left in outstanding claims, and they got paid off.
It was a game of chicken. European governments and the ISDA knew that all hell would break loose if Greece’s bond swap would be a default event. It was rigged so it wasn’t, until it was, which of course it was (a default) all along. That won’t happen again.
Players are going to go after new prey and try and hammer down prices to trigger a panic sell-off. And my guess is, it will happen.
For one thing, Greece holds elections (supposedly) in May. My guess is that Greece will elect new leaders, and they will opt to default on their outstanding debts, exit the Euro-zone currency mechanism, and return to the drachma, but stay in the European Union.
If that happens, all hell WILL break loose.
Why do I think that will happen? It’s the only way for Greece to survive and get back on its feet. It can’t grow its way out of the harsh austerity being imposed on it by the EU and IMF.
By reverting to the drachma (which will be dirt cheap and impose its own kind of austerity), Greece’s exports will be cheap on world markets, and tourism, which is Greece’s biggest money-maker, will explode. They will work themselves back to reasonable growth in less than three years, as opposed to maybe 10 years to a generation under the current boots-on-their-neck scenario.
Spain’s bond yields are creeping up (here come the players). Spain is not Greece. It is Europe’s fourth-largest economy. The new government there wants to fix its fiscal problems and mounting debt by taking one giant axe swing at the economy.
Unemployment there is already more than 20%. And they’re going to cut government spending by 17%, in a hurry? Good luck with that. It’s going to be a hot (as in fire from riots) summer in Spain.
And don’t take your eyes off Italy. They’re in better shape than Spain, but not out of the woods by any means.
France holds elections on April 22. It’s going to be Sarkozy vs. the Socialists. The French being the French, it’s going to be a fashionable fight with lots of mustard being hurled.
Like the rest of the European Union countries voting on the fiscal compact their leaders agreed to, France is going to have to listen to its voters. So far, we’ve heard what European leaders say. We haven’t heard from the citizenry, and they’re starting to speak.
Next Up on My Worrywart Chart: China
The Shanghai Composite is down 8% since March 2. In the past, the markets have been a good barometer of the economy.
Is this leading indicator pointing to a hard landing? Or will China bounce back from here?
There’s some real deep political stuff happening over there. Chances are, what’s out of the bag will be put back in and covered up quickly. That will likely mean that whatever discontent may be fostering under the veneer of what the Communist Party wants the world to see, the way to mollify its people is to give them more growth and more money to play with.
So, I expect the Chinese will ease up monetarily and they will push growth again, even though they just came out a few weeks ago and said they wanted quality growth over quantity.
We’ll see. If there are deeper problems in China that can’t be glossed over, look out.
Here at Home…
Sure, things are looking a lot better in the U.S. It’s just a matter of keeping the momentum going.
Last year at around this time, we were fearful of the end of the Fed’s QE2 program. Markets sold off in May, and we had a volatile (to say the least) summer. This year, Operation Twist is scheduled to end in June. Will markets react the same way to a less-than-likely addition of liquidity via a QE3?
The markets have been on a tear. But I believe it’s time to raise all your stops and time to start selling calls against all your long positions.
Why not? By selling calls you not only add some minor protection (it will be minor if there’s a big sell-off); you also collect some income you get to keep if the markets stagnate here but don’t drop back. And if your stocks go higher and you get called away, are you going to complain that you took profits?
If you get called away and you want to get back in, you can buy more stock. Or better yet, sell some puts to collect more premiums. And if the stocks go down and you get assigned on your puts (meaning you have to buy the stock at the strike price of the puts you sold), you get back in lower than where you sold to take your profits.
We have a busy week ahead, and things have been on a good and smooth trajectory. But I’m starting to get this little thing in my stomach that makes me squirm enough to blink.
And you know what blink means… don’t you? No? Then check out Malcolm Gladwell.
As I’ve commented before, you write a good read, but there are certain concerns aroused by your colleagues. What ABOUT the July 1 financial “doomsday” stuff? Readers are admonished to hoard bullion coins, hide it in the mattress if need be because our not-so-bright national leaders intend to take over banks and confiscate private property. You write a refreshingly optimistic scenario. Is there any basis for all the concern being generated by other sources?…and you surely know which ones because they pepper the internet with fiscal apocalypse.
Why is every expert dancing around the real problem? The USA has a trained terrorist for a president. He has contrived birth certificates to cover the fact that he is not qualified to be president.
Obama has repeatedly abused his use of executive orders so why not suspend his executive privilege until after the election. Enough is enough. Its time for action.
Now the state of the economy. The USA has discovered enough oil for the next century within its borders. Get secure, environment acceptable pipelines in place to transport the oil to refineries – immediately.
Obama wants to run the value of the dollar down (by printing dollars) so stop him and the Fed. Let the banksters fend for themselves.
Buy back the USA debt with oil at highly inflated prices. This is not a bad idea, but you need someone besides Obama – possibly Paul to do it.
Have fun – but act.
The USA has discovered enough oil for the next century within its borders. Get secure, environment acceptable pipelines in place to transport the oil to refineries so the oil companies / refineries can export all our gasoline overseas at huge profits, like they are already doing (refined oil is now our leading $ EXPORT).
Many, many Quarters from now, we will all be trying to prepare ourselves for the financial disaster when the politicians talk, or leak out tiny bits of information at the arrival of QE-5 or 6 or 7? And the printed money will come from our great great grandchildren? would be my best guess. I try to prepare for the worst, and don’t know what to expect.
Brian Riordan
there is probably too much printed money paper above our heads in Europe, in America, and in China, and less and less money in our pockets, due to deflating economies, because the big money was not in the real economy, but probably in the “casino banks and financial firms”. People all around the worlld need absolutely to secure their life savings, and take of from banks, insurances, states : and silver, gold coins are the royal savings of the present and of the next future, despite the prohibitive regulations. see next JUNE 2012, when Chinese citizens will be able and allowed to buy and keep physical gold and silver ! what is going to produce : sure, the precious metals rises.
refugee in a land farm with forest, not in next troubled cities : the prove : the Greeks who left ATHENES, and came back to their parent’s country houses have lower prices. for food, lodging, despite the lack of jobs, but as they disappear too from the cities, what worth staying in the cities ?
Christophe
Your strategy for handling the present situation is very credible. HT
I agree with what Mr. Gilani says; the wait and see along with selling calls or puts can’t be a bad angle. Especially if you intend to hold; then there is no reason to not sell covered calls.
I have been screening for call option sales steadily for the last month, but have been repeatedly disappointed at the prices paid for those calls. Implied volatility values have been crashing for my holdings, making me VERY hesitant to sell those calls. If IV picks up, the value of those calls will increase and my short call positions would go against me. Not a bad outcome if the underlying stocks rise in value, but might cut into my profits on those short calls if the prices of underlying declines rapidly.
Based on what happened last year, I do not trust these low IV readings I am seeing.
Mr. Gilani, could you give us your view of the prospects for volatility in a future weekly letter?
Rigging for a take down. Markets have hesitated and the uber-participants are always ready to take profits and buy back at lower prices.
The BRICS have just unleashed their mutual cooperation intentions, that are reputed to include and alternative Intl. Settlement mechanism to the current S.W.I.F.T. system. This is on the heels of SWIFT excluding the Iranian banks.- feathers will fly soon.
If Shah is hedging, so are others, and the strength of the speculative moves may pressure the uber-p’s to pull the rug now, and use the May dated Euro stuff to attract fund flows and set the stage for the election parade.
I agree that Greece and Portugal will have to default at some time. I don’t think Germany will keep propping up the rest of the euro countries. The elections in Europe and China are going to cause problems for markets over their summers. The few Chinese manufacturers I know are still relying on the US recovery, and are hoping for a stronger US economy and dollar. They export and don’t see any local market growth without changing their business models significantly. China definitely seems to be moving to trade more in the Yuan, as well as US dollars in the future. Costs are definitely going up there as well, for example, try getting hotel accommodation in Hong Kong or Guangzhou during trade fairs, as prices have gone up by at least another 20-30%. The Chinese themselves also tell you how prices keep going up. However, I’m also aware that money managers in the banks and other financial institutions want to keep making money, so where will their money go next? I thought it was impossible to short equities in Europe, so how will the institutional traders hammer the European markets other than by a gradual sell-off? I’m sure there are ways and means, but I’m ignorant of them. Also, those who got into US equities early may have been reluctant to sell-off because they’re waiting for more money to join them, as daily volumes of money in the markets have been low. But on Friday, the volume jumped up. To me, this suggests another last push up of the indices with a few head feints, and then many money managers cashing up for summer; ready for another run-up in autumn before the US election. Of course, the smart money has surely been selling-off gradually already. Let’s face it, the US employment and housing markets are not going to improve dramatically in the next six months; so some Fed help is likely in a few months time. Naturally, when Greece goes, the sell-off will be sooner, or even if Spain’s perilous situation gets more media coverage, which it is in Britain.
If I had money in the US market, I’d definitely be making the same moves as Shah.
There is a clear difference between the Euro/North American and the China/Asian market supply chain. The EU/NA suppliers work on a ‘warranty feedback’ system. ie; The product moves through a clear set of suppliers and when there is poor or good quality the system responds directly back from the customer to the design/manufacturer. It is cumbersome and affects margins but it generally gives us best product for price. The China/Asian supply system has no feedback and huge margins. Problems with quality are simply solved with replacement of more of the same ‘crap’. Problems are never cured. Worse, there is now over supply and containers are now being bid down instead of being bid up. We are being overwhelmed with a mountain of crap and our own manufacturers are gone. Look out below…
As Kenny Rogers once sang, “you have to know when to hold ‘em and know when to fold ‘em” and now is the time to fold ‘em. Time to sell from this central bank induced rally. Bernanke can do all the interest rate wishing he likes but when the rubber hits the road the question is will foreign lenders be prepared to co-operate with his ill-conceived experiment of attempting to compensate for irresponsible fiscal policy with loose monetary policy. So it is not only time to play with safeguard options, it is time to sell!!
Telefonica SA looks cheap to some analysts, but it’s better to wait until
there is some closure on Spain, as they could have another cut in their
dividend. They own some Italian telephony, which is also dirt cheap,
and of course, nearly one half (soon to be more?) in the hottest Latin American
telephone properties in the Americas. Telefonica may well be worth waiting for,
if you are a value investor, who also likes long term growth.
Does selling covered calls prevent you from having sell stops on those stocks like I have read? If so, you are exposing yourself to a lot of risk if the mkt. does drop.
What the market is telling me is that the know they only have a few weeks before that magic 6 month out view sees the devastating effects of the end of the Bush tax cuts and 4 or 5 other bad news events scheduled for Jan2.
This is a gigantic Mexican hat dance and when the music stops is this the
data that will be trotted out?
Personally there are too many black swans above to dawdle in US dollars under the circumstances. Yes, engineering a drop in the Euro could cause a false dawn, with the dollar and Treasuries. alla ’08 They have been trying for awhile, and we got to ~82. Anything is possible especially in the next few weeks. Shah’s advice is appropriate for low risk gains.