Five Reasons I am Thankful To Be Short In This Market

Kermit The Frog said it best when he said, "it's not easy being green." Christmas came early today for the bulls, as we saw government intervention all across the world. It must be everyone's holiday cheer. Even with some of the worst economic data we have received all year, we were still able to close at 8726. We expected this rally, however, I personally felt that it would come more aggressively in a smaller time frame, than spread out into more days. This was the exact reason why I held on to most of my long options, and good thing. The November and December months have a history of ignoring outside data and bulling forward. The big question is, will it last? My thoughts, even after today, are NOT A CHANCE!



By now, many of you may think I am just a pessimist, and I'm not, I swear. I have made just as much money on the long side than I have short. There are just too many reasons that exist to make me feel comfortable with going long again. Sure, we had some great rallies this week, and you know what, I think it will continue for a bit. But there is too much hype derived by speculative announcements and mythical figures to be anything solid.

China made a HUGE rate cut, which of course is going to send them flying a day or two. Europe also joined in the cheer by adding more money to the bailout pile. These two announcements of course killed FXP and EEV for today. Which with those two, I just have to sit back and wait. It could be December; it could be January. But I'm still backing them 100%. Cheers to the people that are just starting to buy these at their low rates!

Many agree this rally may continue for another 1000 points or so, so those of you skeptical about shorting, you may want to wait another week. However, if you miss the boat, don't blame it on me. However, most also agree that we have not hit bottom and that the rally will end with an even worse sell off. So I will just utilize this time to make even more money on my long options until we see it come down again. In the midst of all this green, I'd like to give my five reasons I am thankful I'm short on this Thanksgiving week.

1) This Is A Global Recession
These days we're in aren't like the recessions of the 70's-90's, where we are feeling an isolated recession, and we can look to other flourishing countries to help bail us out. It's everyone for themselves right now. With our economy now being a global economy, this does not give us many to people to go to for temporary relief. All nations are feeling pain right now. Although, most people may seem optimistic of China, China is struggling. Several Chinese toy companies, which is a prominent trade for China, have either shut down or have laid off several employees. Yesterday, there was a huge riot of employees claiming they had been wronged. Get use to seeing that.

2) The Warren Buffett Farm Analogy
A couple months ago, the all wise Warren Buffett gave a great analogy to what is going on with our nation's economic position. He said, "We're like a very rich family; we own a farm the size of Texas but want to consume more" than the farm generates, he said. "Every day, we sell off or mortgage a piece of the farm."

If the policy continues, over time, the rest of the world "will own more of our farm" and future generations will resent that they spend part of their workweek paying off those costs of consumption, he said. We have been mortgaging off our "farm" for years now and our national debt proves it. There is no way the government can conjure up all the money needed to free Americans from our debt dilemma. Pretty soon, us as Americans are going to be feeling this first hand.

3) Housing Market Leads The Way
Today's housing announcement should have shown everyone just how bad of a position we are still in and should be in for quite some time. The point is, even if it turned into a buyers market tomorrow, it would take us 6 years just to buy all the inventory that is currently on the market, without bringing in new inventory. Housing prices have a direct correlation with consumer sentiment. No one likes to know the value of their house (usually people's main source of equity) has been cut in half. Everyone now feels they are invincible to foreclosure and bills, thanks to Uncle Sam. This is not the case. A majority of people will not be bailed out of their mortgages and credit card bills. Once this sets in and creditors come knocking, this sediment will charge downward. The housing market led us into this crisis and I believe it will lead us out.

4) Many Hedge Funds Not In The Market
There is a lot of money still sitting on the sidelines. In fact, most hedge funds still are sitting on the sidelines. Despite the rally today, the volume was very low. This is not the sign of a turnaround. A lot of the market is being dictated by uneducated yahoos, feeding off emotion. It is no wonder there is no correlation in the market right now. So why are hedge funds sitting on the sidelines or staying very conservative? I think because they know we've still got a ways to go.

5) No Banks and No Money
Last, but probably most important, No money! Nobody can get money right now. Most American business buy their inventory on margin (or on loan). With the big drop in sales, many retailers cannot make their margins to buy new inventory. This is what exactly happened to Mervyn's. This is also the problem with small business owners, real estate owners, joint venture funds, commercial REITS, Insurance and pension funds and others. When the financial markets went away, these all went away. If you talk to any banks, especially in their underwriting department, you will find that they don't plan on giving out many loans for a while now. This lack of liquidity will continue to hammer down on our economy.

These are the main reason I cannot jump on the green band wagon. Even though I am hurting in my shorts, I will just wait. I am making great money in my long positions and will look to liquidate those, probably next week. I was able to begin my SRS purchasing today. I will continue to buy SRS if it continues to go down. Q1 2009 should be a horrible quarter for retail sales and real estate owners. If you want to be long, for comfort, I like VMW, VZ, DIG, and GDX (these are most that I am in). We will continue to get more "Obama promises", but as conditions continue to get worse in the US, and these problems begin to hit people's homes, we as a county will become a lot more skeptical. I hope everyone has a good Thanksgiving and has something to be thankful for. Have a good rest of the week and Happy Trading.

8 comments:

  1. Smart Says:

    A stupid question:

    How do you check the volume of the market?

  2. Finance Fanatic Says:

    Type in DJI into google finance, it tells you the AVG volume as well as the daily volume. Yahoo finance will tell you difference volumes throughout the day.

  3. andy Says:

    @Smart if you have Ameritrade, just jump on the ControlCenter 2.0 and you can also check the volume on a per Ticker basis including the DJI.

    @Finance Fanatic - Excellent article today. I feel a little more confident in my SRS choice over SKF... Point #3 is the mindset i took when walking into SRS...

    HAve a great Thanksgiving... Looking forward to your post-Turkey write-up! :-)

  4. Anonymous Says:

    I was wondering why you are bullish on VMWare. I've noticed since the downgrade by UBS it has been very weak in a strong market. I own it at $20 but it's a little frustrating with the lack of participation, especially if we see the market pullback. It was intraday at $17.25 last Friday which is a breakdown on the chart as well. Thanks for your input.

  5. Anonymous Says:

    I have a question regarding options trading. I understand we need to hedge risks by purchasing long call. What option level is for long call? Level 1 or 2? I tried to apply for options trading on many online broker sites (such as tradeking and zecco), but they only gave me level 1 (covered calls). My questions is, is covered call what I need for buying long calls? If not, what level do I need and how do I get a higher level of options trading?
    Thanks!

  6. Finance Fanatic Says:

    Anon1,
    I'm bullish on VMWare, mostly because of their market share and the product they sell. When your IPO shoots up to $120, it isn't a fluke. I think they've been hammered, bc of their high PE, but they should be a $90 stock and a $50 stock in this market. They may get hurt more here in the short term, but I like them long term.

    Anon2,
    Most brokerages are like that, especially right now. But you should be able to BUY any amount of contracts. They just don't let you write covered calls (or sell them), unless your have them covered by actual shares. A lot of brokerages have cut down on margin option trading, especially for level users. You should be approved for the "buy to open" option though, which is what I use mostly.

  7. Smart Says:

    Let me tell you my weekly prediction sentiment:

    I think we will have a downturn for a 2-3 days, and then the GM bailout news will come next week, which will be followed by a rally. Then, the downturn would continue as quarterly reports kick in. Just my opinion. Any thoughts?

  8. Finance Fanatic Says:

    I could very well see that happening, Smart. GM will definitely create noise, whether they are approved or not for bailout funds. Either way, I've got to think there is nothing stopping Q1 of 2009, even with Obama, from having some serious hardships.