An Insult to Every American
June 28, 2010
Good morning. Down week for the market last week, with the S&P losing 3.5% to close at 107.87. The VIX shot up 16% to close at the fairly high number of 28.53. It seems, for the moment at least, that we are still stuck in this trading range of roughly 1040 to 1120 on the S&P, with the market wanting to flutter somewhat violently back and forth from the 1080 number. Of special note last week was the even greater decrease in the Dow Transportation Average of 4.3%, which some Dow theorists would say would not be what you would expect in a recovery at all. I think it is fair to say that the recovery is stalling a little, with the obvious debate being will the stall intensify to the actual negative growth that would signify a double dip recession. Unfortunately as well, all eyes remain trained on the public sector, on decisions being made in both the regulatory and spending areas, as those decisions seem to be a bigger and bigger piece of the investment decisions going forward.
Why is it so hard to get a grip on what is happening? Maybe because it is hard to get a base read on the current situation and put it in historical context. I believe that the bifurcation between how well the average American is doing (not real well) and the large Corporations (way better than you would expect for various reasons) is not something that can last forever. However, I have never known a world where in some cases half of the income of the large multi-nationals comes from outside the US. A couple of talking heads on TV this morning, before our show, were addressing this very issue. Their opinion is that my concerns are old school, and that it does not take a strong economy here for these companies to do well (forget ever further my arcane opinions about monopolies and anti-trust). Are they right? Is it possible for CAT, INTC, IBM, and the rest to go merrily on even if the US and European economies sputter? Can the former third world carry them? I honestly don’t know, maybe I am myopic in that I do not trust the growing bubble in China, and view it as the solution rather than a potential problem. I also think that the tremendous run the large Corporations have had in dominating governments in regards to taxation will begin to end out of a necessity that even the sleaziest lobbyists won’t be able to fight successfully.
It sure seems without doubt that the move to more of a modern society in China, India, and elsewhere will be a massive economic growth engine for a long time. It will not be even however, as evidenced by our own history. The US, coming out of the Civil War, had probably the greatest capacity for growth ever imagined, with huge reserves of raw material, new inventions changing the world by the day, abundant land for the taking, you name it. Yet the growth was anything but smooth, littered with Banking Panics, wars, corruption in some cases, over –leverage in spots, etc. Will the growth in China, India et al be any different, especially in light of their political systems? I think for the moment I will continue to focus on the lack of growth for the average American and European as a real problem, not just a momentary bother.
So what about the political landscape, after two years of pressure has the political system responded to the problems in any meaningful way? I would say the answer is no, with maybe a capital N. They are about to pass a Financial Reform Bill so weak and useless it is an insult to every American. I am all for having no regulation if we want to go that way, but paying huge sums of money for elected officials and bureaucrats to have regulation and not get it is, in my opinion, the worst of all worlds. You would think that these hacks would be somewhat nervous about the electorate’s reaction to absurd things in bills these days, but you would be wrong. Banks will still be able do their trading in Credit Default Swaps in a wholly owned subsidiary (that the Fed would have to power to bail out if needed). So we, the Federal Government, will still be providing deposit insurance to people that are willing to insure say, a foreign governments debt, in a transaction we cannot price, quantify or control. Of course, it I hard to legislate with one lobbyist sitting on you lap as two more have their hands in your back pockets sliding in checks (that must be uncomfortable, at least for the person on your lap). One good example of the idiocy, the Automobile Dealers Association (18,000 strong) was able to insert the caveat that the new Consumer Protection Agency would have no ability to police the auto dealers. So let me get this straight (and I am no real fan of yet another new agency), in general the average American’s second biggest purchase is not under the auspices of an agency charged with guarding against consumer fraud? How that looks, and the elected officials inability to see how it looks, really says it all about how contemptible and stupid the average politician views the average American. Somewhere in the 21st century there will be a revolution in this country, and I am hoping it is something bloodless like a third party, but am not so sure. It is one thing to have outright fraud buried in a world of no light of day, but it is there for all to see and there is no shame.
What about the G-20, other than the usual rioting as some protest various alleged wrongdoings. This time we had (in one corner) a European group trying to tone down expenditures and put their fiscal houses in order, and (in the other corner) a group of Keynesians on steroids from the US urging them to increase stimulus spending. Mind you, the same people from the US would reserve the right to criticize their European counterparts if they come anywhere near a fiscal default. What kind of Kool-Aid are our guys drinking? They, or our President who seems willing to say just about anything if it sounds good, promised to work to cut deficits in half by 2013, but in anyone’s memory there has never been a useless or wasteful program the President did not support as being “simulative” at least to someone. How can both happen, stimulus and budget cutting, without some sort of wild estimate on growth that recent numbers do not seem to support? The deficit in fiscal year 2009 was over $1.4 Trillion, and through eight months of this year is $935 Billion, so it averaged $117 B a month last year and is averaging $117 B a month this year. I will say that the last four months of this year have not been as bad as the same months last year (504B vs. 581B), but we are nowhere near making any progress towards half. Even if we do get to half gradually by 2013, that will mean the total debt would be over 18T by then compared with a GDP of in the $15T range, way worse then the worst European so-called pig. Is that progress, Mr. President say whatever, or only progress in the eyes of the political dancing animal?
So how do you trade a wild but range bound market? It is hard from the option side, as the moves are violent but lack follow through. If you go long premium at these levels, you get some movement but not enough (so far) to find a winner. For example, right now on Monday morning the July 107 straddle (call and put) is roughly $3. That would mean break even is roughly 104 on the downside and 111 on the upside, so the market would essentially have to breakout of the recent range for you to make anything if long. That is a pretty good move in three weeks, but surely not one that can’t happen. Form the short side, it sure seems like the market is stuck in just the range the spread is pricing. All it would take, however, is one dash towards either end of the range and anyone would be tempted to cover, as the market would sure look to be gaining steam in that direction. It has been a good few months for those who are good trading a range bound market, those that essentially are 1050 bid and 1110 offered. It is tough trading to buy when it looks awful and sell as it looks good, but that sort of short term trading has worked recently. Obviously we would like to refine the risk a little by not being totally exposed when we enter. The Protected Index Program continues to perform well in this choppy market environment, and actually would benefit by the market sliding a little lower. We still are looking to enter the market with some new money if the volatility would relent a little.
PTI Securities & Futures will be hosting a FREE In-Office Protected Index Program Seminar at our downtown Chicago offices on Saturday, July 17th, 2010 from 9AM-12PM. My brother Dan and I will be going over the strategies of our managed money program. Did you know that in May the market as measured by the S&P 500 experienced an 8+% loss. Our return out-performed the market by 10+% during May. Even modestly funded accounts benefit from the Protected Index Program. We will be readily available to answer your questions. Seating space is limited. You MUST register to attend. Once registered, you will be directed to a confirmation page which includes parking, hotel and transportation information. A continental breakfast, coffee bar, and classroom materials are provided to registered attendees. REGISTER HERE!