So Now We Are A Bull Market?
One of the nice things about bouncing around global time zones is you can be ready for breakfast lunch or dinner when ever anyone convinces you its time to eat. This morning I was a little lagged, but once I spotted my Barron's in the driveway, I know it was breakfast time. Douglas had conditioned me to enjoy a poach egg on toast and a little slab of brie with a cup of tea. It was marvelous, but I kept peaking at the cover of Barron's and I had flashbacks to 2005-2006 pre-bubble. Every headline reflected bargains and a bull market sentiment?
So how bad did it get before it got good? For the best review you have to read Kopi Tan's great column "A Record-Setting, Stomach-Churning Week." After reading it I was glad to be out or the country, though the FTSE 1000 did not behave much better. According to Tan, at one point the market was down to a 17% low for the last 11 weeks. As far as daily swings, down almost 7% on Monday up almost 5% on Tuesday, down 4.5% on Wednesday and up 4.5% on Thursday and a half a point up on Friday. Imagine if I had called that week.
Gold broke 1,800 last week for the first time and as we suggested here two weeks ago the Chicago Mercantile Exchange increased the margin call for the shiny stuff and we saw a bit of a correction or we could have easily seen $1,850 or dare I say it, $1,900. We held our position and would have added to it on the dip had we more cash. We talk here a lot about call options on the VIX.
A quick remedial visit for those that need it, The Chicago Board of Option Exchange uses an average of 30 day "at the money" ratio of put options versus call options. A put option implies the market will go down and call options implies the market will go down. It is also know as the fear meter for the market. As the VIX goes up more people are afraid and will be selling their stock. (This is measured by the increase in the number of put options on the market.) If the VIX goes down, the market is having a Magaritaville moment and every one is content.
We have been suggesting (and by example) that you can play the volatility in the market using call options on the VIX via an option from iShares which measure the volatility of the option ratios on the S&P 500 called VXX. In March we bought a bunch (An investment term meaning more than we should have.) of January 2012 call options at a target price of 40. We have seen a 90% loss most of the year. In the last two weeks, we have seen that loss dwindle to 36%. If my guess is correct, volatility and market instability will carry forth for the next week or so. When the VXX breaks 42, we will be in very very good shape. If the VXX returns to the levels of March of 2009, about 70 ish, you will see a significant improvement in our portfolio. Of course, all the issues in Europe could be fixed, the US debt ceiling could be fixed, S&P credit rating could say just kidding you are back to AAA+, oil could come down to 50 a share, unemployment could drop back down to 5-6%, our GDP could pop up to 4-5%, and everyone in London will return all the things that they looted during the riots.
I will take a crack at the week ahead and more stupid things I could do with my time tomorrow. But let me leave you with this. Some times its hard to understand the size and the actual reality of the US dent situation. My buddy Ben, (He spent about 4 hours with me today inventorying wine-Thanks) sent me this on Friday. Since I am feeling a bit wankered (British Term for-let's just say tired.) I thought I would get lazy and close with this clear explanation of the US Debt situation.
"Let's put the 2011 federal budget into perspective:
U.S. income(From Taxes and Duties and the like: $2,170,000,000,000 (Trillions)
Federal budget: $3,820,000,000,000
New debt: $ 1,650,000,000,000 (Trillions)
National debt: $14,271,000,000,000 (Trillions)
Recent budget cut: $ 38,500,000,000(Billionsand I think the author might want to check as actual budget cuts we 25 Billion, not 38.5)
(about 1 percent of the budget)
It helps to think about these numbers in terms that we can ALL relate to. Let's remove eight zeros from these numbers and pretend this is the household budget for the fictitious Jones family.
Total annual income for the Jones family: $21,700
Amount of money the Jones family spent: $38,200
Amount of new debt added to the credit card: $16,500
Outstanding balance on the credit card: $142,710
Amount cut from the budget: $385.00"
Let's give those guys and gals in Washington a round of applause.
Salve Lucrum
