When do we go to cash?
This week I received a question about buying December, 2012 SPY Put Options. So let’s examine the global events that are falling into place.
1. A while ago I suggested that a there were technical developments that simply lined up with historic patterns, and the overall reading was that we are in the later stages of a bull-run since March, 2009. The problem is that we are witness to something that has NEVER occurred – our Central Bank (Ben Bernanke) told us flat out, he's supporting the market to create the "wealth effect" – a psychology (if you will) that when people see their 401K's and their stock values rise - they feel "better" and go out and spend more money.
2. But the question remains – if the Central Bank is buying up all the toxic assets around the globe – what if the Central Bank does NOT get the return that they require – could they actually go bust – or would they just create more money with nothing backing it? Well until now the charter of the FED stated that they would go broke and could not create money without something backing it. THEN just LAST WEEK they changed the law – http://www.cnbc.com/id/41198789. Law week the Central Bank adopted a little noticed accounting change that was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when announced on Jan 6. “Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer. Wow – they just changed the rules to make sure that no matter how absurd their policies are - they win.
3. But the question still remains - as the market forces continue to build up pressures that need to be resolved to the downside, can Bernanke's insane policies offset all of that enough to keep the market going up, or (at minimum) moving sideways? My personal view is that the decision will be removed from Ben Bernanke – as the other governments will decide when this party comes to an end, starting of course with China, Russia, Brazil, India etc.
4. Back in December, China and Russia signed a pact to trade in their own currencies. What this signaled to me was the death of the dollar, and I’m on record as saying we will lose our global reserve status. You see while China holds $2 Trillion in reserves with about $1 Trillion of that being U.S. dollar denominated "stuff", China made all that money selling “stuff” to the U.S. and Europe. With Europe falling apart daily, and the U.S. on life support they haven't had the inflows of cash that they were used over the past 5 years. Now that's a real issue with China, because it was the enormous expansion of their manufacturing base to supply the world, which employed all of their people. And currently – due to their massive work program - China has about 15 cities that they have constructed where no one is living. And what comes with that – is lack of manufacturing. You see the Chinese that left the rice fields to come to towns and work in the factories are being laid off, just like here. So, this is why they are so very upset about our economic policies. If China isn’t making big profits selling goods to the world (because the world is basically in recession), it’s important to them that the reserves they have keep their value. But (as you know), with Bernanke devaluing the dollar, China is getting the proverbial double whammy. Unemployment is roaring, inflation is soaring, and their holdings are losing value.
5. Now how long will China allow that to remain before they cut all ties to the dollar – not long I'd say? Some speculate that the real fireworks will start in May – the largest Communist holiday of the year – and close to when Ben Bernanke said that QE2 would stop. Now combine this with the technical signals that signal a pullback of 10 to 15%, the "rising bear wedge" we've been seeing, and the divergences between the DOW, S&P, NASDAQ, and Russell means that behind the scenes we are now OVERDUE for a correction.
So I 'think" we're looking at sometime soon getting our first real correction. How soon? Well judging by the options roll outs they bought on Friday, it would seem they can keep this going for about another two weeks. Figure sometime around the 2nd or 3rd week of February – but honestly the near term indicators suggest that it might happen as soon as this week. Thus far we’ve been leaning long and selling fast – but we expect to see this trend reverse and then we will begin to snap up shorts. But I don't think this first wave down will be the "Big One". I think we will get our 10% correction and then people will rush into buy it back up. And then sometime from May on we will begin the danger zone for China to pull our plug and the real nasty pull down takes place.
Now what about buying those December 2012 SPY Put Options? I actually like just slightly out of the money puts – because buying at the money puts today, could see them underwater over the next few months, so I wouldn’t make any moves just yet. I want to go short soon, and catch that first significant dip, then when people buy it back up – THAT is when I will start loading my long term put account.
This week we took profits – bailed out of anything we had in the short-term account – and that was fine. Let us assume that Bernanke simply wanted the DOW to shine bright for the weekend and he got his wish. The market is signaling it wants a rest, with Bernanke trying to offset that rest. In the grand scheme of things, China will dictate when we crash, but I do think we're within 2 weeks or so of our first really big dip – so play cautiously. I tend to think that when the dip hits, it's going to be wicked – dipping from 10 to 12 percent or more – and then we will ‘snap back’ very quickly.
We still have some of our gold and silver stocks – with our long term holds looking like: SLV at 25.81, NG at 6.825, AAU at 3.02, DNN at 2.71, AVARF at 4.00 and USSIF at 0.61
We sold our BIDU for about a $7 profit – and are still nursing the N – which is still slightly positive for us.
In terms of what’s looking attractive, we will be diving back into silver soon (and in fact are still buying the physical metal) – and will put out a short on the metal itself over the next couple of days.
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Until next week – be safe.