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No, the important economic event of the week was not the snail like progress towards solution of the European debt debacle. It was the weekly jobless claims announced on Thursday that plunged 23,000 to 381,000, a six month low. That puts it well below the 400,000 level where the economy is generally thought to be expanding.
Yes, you can argue that there are all kinds of temporary, one off hires in these numbers, as retailers step on the gas going into the Christmas season with temp hiring. But there seems to be a lot more than that going on here.
More confirming data came out the next day showing that December consumer sentiment leapt to a surprising 67.7, from 64.1. I think that one big factor in consumers? more positive feelings derive from the fact that the stock market that is no longer crashing, and double dip fears for the economy are now but distant and fading summer memories.
And you can?t view the reports in isolation. They are only the latest in a long stream of modestly improving economic reports which occasionally blow out to the upside.
The news may be enough the enable the S&P 500 (SPX) to tack on another 25 to 50 points by year end. All Europe has to do is to shut up for a few weeks and the US markets will rise. Given that this is the last real working week of the year, that is a distinct possibility.
I am going to use this strength to unload my remaining ?RISK ON? positions in silver (SLV) and the (TBT) so I can go into the New Year fresh, with a flat book. Keep in mind, also, that this is a lousy place to buy. As my friend and former mentor, Barton Biggs, always used to tell me, always leave the last 10% of a move to the next guy.
Having the flu during the holidays is the pits. This weekend, I blew my nose at the Cirque du Soliel so loudly that is perilously distracted some of the high wire acrobats. I coughed and hacked my way through the San Francisco Ballet?s Nutcracker Suite. Even the eggnog is utterly tasteless, no matter how much Myers Rum I pour in it. I am writing this piece with a fever and chills through a haze induced by Robitussin, Dayquil, and Tylenol PM.
Nevertheless, I did manage to get a dozen calls through to an assortment of European bankers, hedge fund managers, central bank officials, and finance ministry staffers this weekend to get a read on the true meaning of the Friday ministers summit agreement.
Don?t kid yourself. The deal that they cobbled together with spit, duct tape, and bailing wire was no panacea. It was just enough to keep the Euro (FXE) from collapsing, but lacked the oomph to send it off to the races. And there was some serious kicking of the can forward, with a March deadline set for the most important elements.
However, it had the juice to send US stocks soaring and European sovereign bond interest rates plunging. After a marathon, ten hour negotiating session that ended at 5:00 am local time, a deal was hammered out that includes:
*Automatic sanctions for violators of the 3% of GDP debt ceiling.
* Brussels (read Berlin) has the power to veto national budgets.
*?200 billion was chipped into the IMF to help troubled countries like Greece.
*Added with other bailout measures, the value of the safety net rises to ?700 billion, or nearly $1 trillion.
While a good start, this is by no means a grand solution. No mention was made of the $100 billion needed to recapitalize European banks, or where it is going to come from. Deleveraging will be decade long process in Europe and be a drag on asset prices worldwide.
Sovereign rating downgrades are a certainty and will trigger a bad day for the markets when they are announced. However, the bond markets won?t crash as yields are already at levels that attract serious buyers. Witness the George Soros move to buy MF Global?s distressed $2 billion portfolio of European paper and the continued purchases by a dollar diversifying Chinese government.
Mario Draghi?s European Central Bank has, in fact, done more on its own to rescue the economy that the political leaders. It cut Euro interest rates by an additional 25 basis points, the second in sext weeks. It eased collateral requirements, extended reserve ratio cuts, and permitted longer term repo agreements
Despite all of this, there was not much of a recovery in the Euro, which ticked as high as $134.20. Maybe it is heavy, or just plain tired. In any case, if we somehow get a rally as high as $1.36, take it as a gift, and sell it short one more time. Parity is still on the long term horizon.
?I don?t know where the next 1,000 points is coming from, but I know where the next 10,000 points is coming from,? said Sir John Templeton, when he was playing chess with me at his home at Lyford Cay in the Bahamas many years ago.
Given the failure of the ?RISK OFF? trade to develop any serious downside momentum this week, I am using the dip this morning to take a small profit on my S&P 500 ETF (SPY) puts.
We had every reason to go down, given the Standard and Poor?s threatened European debt downgrade on Monday night. If this despised and deeply flawed ratings agency had made this announcement in September or October it would have been worth at least ten (SPY) points to the downside.
But they didn?t announce it then, they announced it now, and in the post Armageddon world this gets you only a modest two point dip. It?s an old trader?s adage that if you throw bad news on a market and it doesn?t go down, then you buy it. The risks have just risen that the Santa Claus rally continues for a few more weeks. Plus, if I can duck a major headline risk this weekend and still keep some change in my pocket, like the European ministers meeting, I am going to take it.
As it is way too late to buy, this means cover your shorts. This is doubly true for options holders who have a heavy price to pay in time decay and falling volatility over the holidays.
On top of this, we are looking at retail holiday sales that are coming in better than expected and a seasonal liquidity push to year end. Although consumers are depressed about the outlook for the economy in 2012, they are apparently dealing with their sorrows through buying a big screen TV, an Apple iPad, an Xbox 360, or a Snuggie.
There is another factor at work here. Any hedge fund manager who has had a great 2011 tends to step out of the market now and go flat. This locks in their gains until their 20% performance bonuses are paid out in January. Any profits in hand now get paid out in cash in 30 days. With a 42% year to date return, I certainly fall into that category.
My profit on this trade came to (9 contracts X 100 X $.32) = $288. For the model $100,000 virtual portfolio this adds 29 basis points to the total return. It?s better than a poke in the eye than a sharp stock, and will afford me some silver eagles to toss in the Salvation Army pot next time I go to the mall.
For those who wish to participate in my Trade Alert Service, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails.
I am pulling the plug on my short position in the Euro here, selling my Euro ETF (FXE) January, 2012 $134 puts at cost.
It?s not that I have suddenly fallen in love with the beer drinkers and the garlic eaters. This is an option driven decision. With market volatility falling across all asset classes, the short dated options are eroding away faster than the underlying is moving in my favor.
Time decay is also taking its toll, accelerating into the January 19, 2012 expiration. This continues even while the markets are closed over the holidays. In fact, Christmas and New Years are the best time of the year to run a volatility short. So while I managed to catch a two cent move down in the (FXE) since I added this position on November 18, the options are trading at my cost. There is nothing worse than being right and not getting rewarded for it. All work and no pay makes the Mad Hedge Fund Trader an irritable boy.
On my last four trade alerts the options quickly rose substantially, only to give back all the profits within days. That happened with Jeffries (JEF), the Euro (FXE), silver (SLV), and the S&P 500 (SPY). The time frame that markets allow traders to make money has suddenly shortened. The lesson here is to take the money and run.
By going neutral on the Euro here, I now have dry powder to sell it again on the next short lived ?feel good? rally to $1.3550 or higher. The headline risk going into this weekend is also large. I can roll into the next strike in February to partially sidestep the holiday time decay. With the (FXE) bang in the middle of its recent $1.3180-$1.3550 range, this is no time to let positions grow hair on them.
Live on the fight another day.
?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
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Take a look at the charts below, and you will see what prompted me to knock out some shorts on the S&P 500 (SPY) on Friday. The longer the current trading range in the index works, the more traders pile into it, confining it to an ever narrowing range.
I am even hearing that fundamental managers who normally shun charts and technical analysis as a pagan religion are starting to track such alien indicators as Bollinger bands, relative strength indicators, and stochastics. The 200 day average presents such formidable upside resistance that it will take spectacularly good news to close substantially above it on big volume. A little bit of ?kiss and make up? in Europe just isn?t going to cut it, especially when they continue to bad mouth each other among their close friends in private.
Since I am such an inveterate seeker of cross market correlations, I always like to refer to the Volatility Index before taking decisive action on a trade. And guess what? Just as stocks are bumping up against resistance, the (VIX) is bouncing along support at its 200 day moving average. This further reinforces my belief that the indexes are ripe to give back a chunk of their recent gains.
Watch your news service headlines. This contest will ultimately be determined by what does, or does not happen in Europe. And once again, thank you Standard and Poor?s for another belated downgrade of European debt!
Yes! Technical Analysis Can Work!
I heard the magic words today from German chancellor Angela Merkel and French president Nicolas Sarkozy: ?treaty changes?. That will be the gist of their joint proposal at the European summit this coming Friday to deal with the sovereign debt crisis.
To me, this means that the two besieged leaders are finally biting the bullet and laying the groundwork for the sweeping changes needed to solve their formidable financial challenges.
The plan will implement greater budget discipline with automatic sanctions for budget busters like Greece, who exceed the 3% of GDP deficit guidelines. Expect the European Financial Stability Council (EFSF) to move into action next year to help keep Greece in the monetary union.
You can also expect the European Central Bank to launch some fireworks this week. Among them will be:
1) ECB president Mario Draghi will cut interest rates by 25-50 basis points.
2) The ECB will relax collateral rules for borrowing banks.
3) It could also increase sovereign debt purchases of paper from the weaker countries, like Italy and Spain, from last week?s feeble $3.5 billion to as much as $20 billion a week.
The bottom line here is to expect a lot of ?feel good? news flashes in coming days, which could cause the Euro to edge back up to the top of its current trading range at $1.3550.
But don?t hold your breath for any panaceas. The European treaty includes 27 members, with 17 employing the Euro as a common currency, and all have to agree to any changes. Substantial modifications will require national referendums. On top of that, Sarkozy is still blocking pan Eurobonds advocated by Merkel, which is the only supra national fund raising mechanism that can possibly work.
The reality here is that Germany is imposing austerity and fiscal discipline on the rest of Europe, and non-Germans may not necessarily like it. So the next wave of optimism is likely to once again bear the bitter fruit of disappointment, taking the beleaguered European currency down to $1.29 in Q1, 2012.
For those of you who have followed my advice to sell short the euro, there is an 800 pound gorilla in the room to deal with. The trading community is now short over 100,000 contracts in the futures market, an all-time high, matching the peak seen in the spring of last year, when the Euro just fell short of $1.60. The risk of a snap back rally going into the coming European love fest is high.
I have noticed that in recent weeks, the market is allowing the nimble ever smaller profits from their quick in and out trades. This may be a function of the declining volatility going into the holidays and the year end. So those with itchy trigger fingers may want to take profits sooner than they usually might and celebrate Christmas early. The value of dry powder is rising.
A One Night Stand or a Long Term Relationship?