Sell the News – Be Patient and Wait For A Put Writing Opportunity!

February 10, 2009
Author: Peter Stolcers, Founder of OneOption

If you've been following my daily comments, I told you to stay the heck away from the recent rally. The promise of a silver bullet bailout plan for ailing financial institutions kept hope alive and the market treaded water. The original $700 billion TARP program is now a $1.5 trillion "Financial Stability Plan". $500 billion will go to buy ill liquid assets from banks and $1 trillion would be used to shore up bank balance sheets. Treasury Secretary Geithner's comments did little to ease fear. "I want to be candid: this comprehensive strategy will cost money, involve risk, and take time. We will have to adapt it as conditions change. We will have to try things we've never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted." I still come back to one fundamental question. "Who is going to finance all of this debt?" We keep adding on to this tab as if the demand for US debt is unlimited. The unprecedented supply of US treasuries will force interest rates higher. If the demand dries up, the Fed stated they will buy treasuries to artificially depress interest rates. This practice is known as printing money. This is exactly what South America did and it is not the solution. If we choose this course, we can kiss our AAA credit rating goodbye for the rest of our generation. Standard & Poor's already warned that the US is in peril of losing its debt rating. Higher interest rates will also have a devastating impact on our national debt interest payments. In the next decade, all of our nation's tax revenues won’t cover the interest expense on our national debt and Social Security. That’s not to mention defense, education, transportation… This financial mess will take many years to work through and the government does not expect repayment anytime soon. Supposedly, taxpayers will have a chance to make money on these "investments" in the distant future. If you print money and devalue the dollar, the assets will go up in price but not value (relative to global currencies). You might get all of your money back, but your loaf of bread will cost $20. My fear is that we won't be able to attract buyers for our debt and the cost of capital will escalate dramatically. That will force the Fed to print money and the dollar will devalue like never before. I believe today's decline is a reaction to Friday's Unemployment Report and to the new financial bailout plan. The employment number was as bad as I've seen, yet the market rallied. Short selling ahead of the Unemployment Report is getting a little too predictable and the shorts needed to be squeezed. Credit card defaults on private-label credit cards (cards that can be used at one retailer) jumped to 10.5% in January. General credit card losses stand at 7.5% and that is a 40% increase year-over-year. In December of 2007, General Electric tried to sell its portfolio of private label cards and it failed to find a buyer. Earnings will continue to dribble in, but most of the major firms have announced. Overall, nine out of ten sectors have missed earnings estimates. Thursday, the initial jobless claims and retail sales figures could weigh on the market. The $1 trillion stimulus package is still being debated in Congress. The longer it takes them to hammer out the plan, the better. The market still has something tangible to hang onto and I doubt we will retest SPY 80 before that plan is approved. A solid support level has been established and I believe it will hold for the time being. The kitchen sink has been thrown at the problem and the next big issue will be the demand for US treasuries. For today, the early momentum has been established. The chance for a big reversal is minimal and I believe we will drift lower into the bell. I'm not looking for a dramatic decline, just a gradual move lower. As I mentioned, the promise of a stimulus plan should keep a bid to the market through option expiration. I am cautiously looking to allocate the remaining 25% of my desired but writing risk exposure in the next day or two. image

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