Three Blind Mice

Well I promised to go for a swim and today I made it. It took a while to round everything up again, but cranked out a few laps and some resistance reps. Felt really good today as a result. It was nice to feel nice and stretched and limber while seeing the carnage in the market.

After breakfast I made two poached eggs and had some juice. My body is a temple you know. Well, perhaps more like a convention center. Ok, an aircraft hanger.

Just as I was headed out the door, Mrs. Cronin, who was moving a little gingerly this morning said I needed to come to the single car garage. I did and she explained there was a mouse. Ok a mouse. I would have let the little guy enjoy himself, but mice are one of those "Men Are From Mars Women Are From Venus" things.

So instead of happily driving off to work, I battled the hairy beast. It was the quickest mouse I have ever seen. Seriously, I would have it cornered under a milk crate and then it would be teleported under a skate board 6 feet away. Then when I got to the skate board it would miraculously appear under some racking on the opposite wall.  One one run across the floor, the little guy cam close to Devin's foot and this gingerly moving women sprinted out the garage like a gazelle.  All the while, I am now working up a sweat and kneeling on the cement floor. The good news was I was not watching the plummeting index figures in the market.

It was not till about 15 minutes later I realized there were three mice, not one. They were using hand signals to tell their buddies when to stick their whiskered faces out to get my attention and make me crawl to the other side of the garage. Yes I saw the hand signals, I am sure of it. I got one to run out the front of the garage which you think would be a good thing, however it headed towards the front door of the house. (This will be our little secrect as I did nto tell Devin.) Then I got the second one to run to the neighbors (Yeah, you Rob sorry.) The third one was still in the garage when I left. It was under the shelves looking at me and smiling. I gave him a hand gesture as I drove away.

The rest of the day was relatively uneventful. We had some members on a tour and I got to give a brief PADI History lesson, cleaned up more e-mails, and by 2:00 I could not take the negativity on Bloomberg and spent the rest of the day listening to light classical music.

I got to catch the end of Man Child's football practice and then had a fabulous meal at Hanna's with my Buddy Ben. I was deciding what wine to bring to dinner tonight and after the whacking everyone took in the market, I was reaching for some marked down Two Buck Chuck when I said to my self, it would be a nice day to have a great wine. I chose the 2003 Joseph Phelps Backus, a phenomenal cabernet.

Brooke decanted the bottle for us and the first slap across the nose was loaded with berries and crushed fruit aromas. Maybe a touch of currant and other spices like vanilla or a banana smell. In the might it was rich and chewy but oh so smooth. It was surprisingly smooth considering we did not allow it to breath too long. Maybe some cinnamon and cocoa and a slight earthly taste to it. Ben and I got to share a bit with Dave Hanna who first groaned meaning it was good.

I ordered a small filet and a side of The Lobster Ravioli. I have a picture but I am too lazy to publish it. As usual, the service was great and the teams new uniforms are very flattering. Good job again guys and gals, love ya.

When I got home I had to get Cramer's read on this day, and he too sounded the be calm this is not 2007-2008 all over again message. By the way he was signaling that HON Honeywell is back to a very bargainish level. (That was for you Hutch)

Let's PUT Some Perspective On This

It seems appropriate to remind you of what was posted in the blog last night.

"We had a lot of folk on the sidelines today and that probably won't change much tomorrow. We will probably see some negative reaction to the inflation numbers today and what will probably be higher inflation numbers for the consumer side of the coin tomorrow. (Watch Gold Climb again). As we said earlier in the week, a jobless number at or below 400,000 is baked into the numbers. If we see a larger than expected number (North of 405,000) we could see a 2-3% drop in the market. Look for the VIX to creep back up!. I need a 40 on the VIX.

Have a great day tomorrow and be nimble and watch your stops."

It appears as though we got that one right, unfortunately. So how are we dealing with this? As I said, I drank a lot tonight with my buddy Ben at a nice meal at Hanna's. But seriously, I didn't do what I should have done. After all we have been calling for this "correction" since Mid May when the market hit 12,800 and said it was to hot too fast and it cooled only to return to those levels in July. If you look at some of the May posts, we were talking about a 10-15% correction. That would put us in a trading range of 10,880-11,500. We closed today at 10,990. In those posts we suggested the correction would come several weeks after the end of QE II. QE II ended in June.

We would have to say the correction is here. Do we expect more? YES. How much? Perhaps anther 3-5% over the next couple of weeks. The market has a lot to digest. This Philly Fed report today scared the willies (That is an investment term meaning common sense.) out of a lot of smart folk. The housing number as expected, were terrible. That along with the sudden realization that the European Economic Union is possibly falling apart. (The underlying fear is that the Greece debt issue was not solved but delayed until mid September. You have a lot of influential global banking execs saying it is ridiculous to keep bailing Greece out. If one of the union members agrees, it triggers a default fault line that will be felt globally and could destruct the EU and its currency the Euro. That will be more catastrophic that the banking fiasco of 07-08 here.) The market will probably take a cooling off day with little direction and little volume tomorrow (look for a slight increase as bottom feeders start licking the carcasses on the trading floor.) as the suits in the big offices try and figure out what Bernanke is going to say next week in Jackson Hole. It would be nice to be on the right side of that coin. Oh crystal ball don't let me down now.

On the 26^th, we are guessing that there will be a Quantataive Easing III, probably in the form of more treasury purchases. A year ago Bernanke was talking about a 2 trillion dollar treasury purchase deal and he settle on 600 billion. He could go to that well again. Now the idea behind Treasury buy backs is to get the yields so low (although the 10 year fell below 2% today I don't know how low you could go?) that investors look elsewhere for returns. Think real estate, stocks, bonds, etc. He could also pull the .25% capital reserve interest from the Fed for bank members. That might make them be more flexible in their lending.

So if you prescribe to this notion, what should you do. All of the above supports upward pressure on Gold. Today it broke $1,826. I think it was only last week we were talking right here in the blog about 1900-2000. It could come as early as next week. So what's a blind folded casino monkey to do?

GLD, is what you should consider. At $177 a share (not technically a share, not a unit. I know you will do your homework.) that would mean tying up $17,700 for every 100 units. That is a lot of money, though there are not to many places to put the money if you have it. If you think gold is going to 1900 or 2000, you could by some January 2012 GLD 180.00 call options for about 30 cents a contract. That means for $30.00 (100X.30) you would be controlling $18,000 (100X180) dollars of GLD. Options are not for everyone so BE CAREFUL and talk to a financial advisor about options. Or you could do what I did, buy lots of books, spend two years loosing gobs of money and still not get it right every time. It all depends on your risk and conviction.

So now if you had been reading the blog and when we were saying gold is at 1,200 and it could go to 1,800, what would that call option look like. It took some digging, but about one year ago this week gold was at 1,224 or so and GLD was selling for $119 a unit. The January2011 130 dollar GLD call option was selling for about .15 a contract. Now pay attention BAGAKOAA. You would be controlling $13,000 dollars of GLD for $15.00. On January 3, 2011 GLD was selling for 138.00 and your call would have been worth about $8.15 each. For one contract you would have made $800.00 or 53 times your money. OPTIONS ARE NOT FOR EVERYONE.

Ok options are scary so what do we do about this 3-5% drop that might happen. Well I did not serve myself and others well as I did not ask my self that question as I was saying there would be this huge correction. Today (even though it may be a bit late) I took some risk management action. In looking at my core conviction stocks like AMZN, WY, AAPL, XOM, and the like, they are down. CMG is still up just barely. I decided to look at some January PUT options on my core holdings as cheap insurance.

Lets say you have 200 shares of XOM and let's say you are down about 20% meaning you bought it for $85.00. Today it closed at 71. Now if you don't want to sell and take the loss and you are worried that it may fall farther because of this extremely well written blog, you can buy a January PUT option that will increase in value as the stock goes down. For instance there are some $60.00 January Put Options selling for 2.38 cents today. For $238 you can buy an option that increases in value as the stock trades down from 71 to 60. Remember a PUT is the right to sell a stock at a future time at an agreed upon price. In this case you have the right to sell XOM at 60.00 a share in January 2011. You pay $2.38 per share to have that right. If you do the math, your breakeven on that trade would be 57.62 (60.00-2.38). Now keep in mind as the value of XOM drops, your option get more valuable.

I know I a killing you softly with this stuff, but we are getting some questions as to what to do. Those are a couple of things you can do to ease the pain. Be patient and calm, but very defensive.

Salve Lucrum