Wednesday, December 11, 2019
League of Power

The League of power


"Freedom by Friday"

Drill Baby, Drill


There may not be too many lines as famous as that one uttered by RNC Chairman Michael Steele and made even more famous by Sarah Palin during her debates with Joe Biden, US Vice President.

That line will become even more famous should Palin throw her name in the ring for the 2012 Presidential campaign. It may be early yet, but as I mentioned last week, you have to begin to pay close attention to what is happening in the political arena. Not since the days of Jimmy Carter have Americans been exposed to the possibility of massive tax increases across the board whether of the open nature or of the stealthy nature.

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Listen, I am not here to convince you to vote Republican, Democrat, Libertarian, Communist or Independent. As far as I can tell, none of the parties have done much or suggested much to make life more prosperous, and THAT is our goal.

This past week gold performed mightily in the face of what looked to be a crumbling market. On a day where the Fed Chairman Ben Bernanke was sounding positive on the economic rebound, the markets tanked by 3%. The next day they made back their losses. This is NOT an investors market; rather it is a traders market. So, in this type of environment what are you to do?

Cash is King? But a Poor One

Problem is that there is little to no return from cash. Sure we all hear that “return of capital” is more important than “return on capital”?but for how long. Here’s a prediction for you: your bank account will not pay you much over 1.5% (in the best case) per annum for at least another year. The European crisis has seen to that. Whenever there is a major shock to the system, the last thing the US Fed will do is raise interest rates.

One would think that such a low rate environment would foster growth and employment. It’s not. And that my friend is the key issue and the major problem. The stock market is higher, sure. Those who have jobs are slowly loosening their purse strings, sure. But, if you don’t have a job, you’re not having a good time. A friend recently put out an advertisement for an administrative assistant, paying $8.50 per hour for 20 hours per week. She received more than 100 responses in a day from people who were former executives, Masters degreed individuals and those who were qualified to do the job. That’s pretty scary.

The housing situation is not getting better. Official numbers would have you believe that the housing stock is decreasing. At last count they showed that inventory was down under a year’s supply. Yeah, right! When you add in the foreclosed properties still sitting in the bank’s off-balance sheet books that number swells to more than 24-months supply. Imagine that ? over two years worth of housing stock.

And, then there’s economic growth. It’s non-existent except for government spending. And even that is doing little except to stem the tide. Europe just dented whatever hopes there were for global recovery. And, that story is still playing out. When the Euro hits parity, which should happen in the next six months, Europe will finally be able to dig itself out with export growth. However, for the Euro to hit that level, it means that there is more bad news to come. Sovereign debt default from the PIIGS (Portugal, Italy, Ireland, Greece, Spain) is not really the issue. The issue is default from countries that border the Eurozone. This past week the Hungarians revealed a crisis situation and went begging to the EU for help. Who’s next? The Bulgarians enjoyed a massive property boom that is about to bust?the list is endless.

A further meltdown in Europe and downward pressure on the Euro is OUR problem. It will make the dollar stronger and exports more expensive, putting more pressure on a frail recovery. That means lower interest rates for some time to come (not good for cash) but also a weaker stock market as many companies that had positioned themselves to benefit from a weaker dollar by selling more goods overseas, now will feel the opposite effect.

The Easy Answer

There isn’t one. If you’re a day trader, this is likely as good of an environment as you are going to see. If you are an investor, you’re running scared. If the market were to continue this correction in earnest, then we are looking for another 15% move to the downside to retrace last year’s gains. That is a lot of pain my friends and you need to have a plan in place.

The best way to play the move is to make sure you are investing in put options (bets that the market or individual stocks are going down). Put options allow you to manage your risk since you are only liable for the amount you paid for the option. If the market crashes, you’ll be happy, but if it just meanders down or levels off, consider it insurance.

Right now the most liquid and fairly priced put options are on the S&P 500 ETF (SPY-NYSE). I know that many of you are looking at the double down and triple down ETF. A caveat ? nothing is that easy. You might make money trading them on a daily basis, but that is it. They reset every day and if you hold for an extended period, you may lose more on up days than you made on down days.

Of course, you could just hold cash.


Best Regards,

Kevin Raymond


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