Sunsets on Wall Street The Rude Awakening
Laguna Beach, California
Thursday, November 30, 2006 - How does taking December off with a 14% year sound?
- A Call option in Eurodollars to start the new year,
- Contrarian investment inspiration and absolutely no chateau buying or gypsy babble.
Eric Fry, in the midst of staring at sunsets and computer screens, reports… We did not do anything extraordinary yesterday. We did not buy a chateau. We did not board a flight to Buenos Aires. We did not engage in witty banter with a politician or a prostitute. We did not receive any accidental wisdom from the mouths of babes or plumbers or gypsies. Instead, we sat in an office chair and stared at a computer screen. The screen flashed the green and red hues of collective capitalism…and the astonishing digits of denial. Stocks soared, even though crude oil jumped to a new two-month high, and even though the dollar barely budged from its 20-month low, and even though third-quarter GDP registered tepid, inventory-inflated growth of 2.2%, and even though new home sales plunged 25% in October. We use the word "astonishing" to describe yesterday's market action. But we don't really mean it. The trading action on Wall Street has been so astonishing for so long that it has become utterly commonplace. The rallying stock market is only astonishing in relation to facts, not in relation to feelings. Like each day's sunrise, the rallying stock market is a recurring marvel that has become so routine, it elicits no sense of awe whatsoever. But here at the Rude Awakening, we watch many sunrises and many sunsets. We actually sit and watch them because we delight in these commonplace miracles. We also like to sit and watch Wall Street's daily trading action unfold on our Bloomberg screen, just to see what miracles and marvels might appear there. It does not matter to us that the stock market seems to rally every single day, we still find it awe-inspiring. How could it be, we wonder, that every morsel of news is "good" for the stock market? How could it be that richly valued stocks deserve to become even more richly valued after Ben Bernanke explains that the economy is slowing? How could it be that housing stocks, in particular, deserve to rally when the Commerce Department reports that housing starts tumbled to their lowest level in six years? How could it be that foreigners are clamoring to buy American stocks and bonds, even while the dollar is plunging? We are sure that we do not know the answers to these questions. But we are awed that everyone else seems to. The minor daily miracles that push share prices higher never seem to perplex the CNBC commentators who confidently explain them. Wearing earnest, knowing expressions, they continuously explain the inexplicable. They offer their silly theories and assertions with supreme self-assurance, much like their flat-earth believing, virgin-sacrificing forbears. Stocks are rallying, they explain, because the economy is too weak to cause the Federal Reserve to raise interest rates. Stocks are also rallying, they explain, because the economy is too strong for investors to worry about recessions or falling corporate profits. In other words, it is perfectly weak-strong. We don't believe these explanations. We think stocks are rising because they are rising. And we think they are likely to begin falling because they are likely to begin falling. We enjoy the theatre that CNBC provides, but we never confuse it with reality. We also enjoy a good James Bond flick. But that doesn't mean we expect to see Pussy Galore traipsing through our bedroom. ------ Options Special -----
Our readers could have turned $5000 into $1 million in just over 5 years "Each week, I tell my readers to make just 1 investment buy. And last year, not one pick lost value! Just 2 in 2004, 4 in 2003! It's no wonder our readers could have turned $5,000 into $1 million in just over 5 years! Read on to find out how!" ---------------------------- Sunsets on Wall Street
By Eric J. Fry Stocks have been going up for many months. That's probably the very best reason why they might soon go down. If the Dow clings to its positive performance for November, the venerable index would have registered six straight winning months. Maybe it's time for a losing month. Forget PEs ratios; forget "dividend-discount models;" forget productivity gains; forget "Goldilocks" economies. The stock market doesn't care about these things. The stock market goes up when it feels like it. And it falls when it feels like it. Over long-term timeframes, of course, things like earnings and interest rates exercise a great deal of influence over stock market valuations. But over the short-term, PEOPLE influence valuations…not DATA. The collective attitude of investors determines share price levels. To anticipate short-term market action, therefore, it sometimes pays to monitor the collective attitudes of investors. When they are feeling extremely pessimistic, stock market rallies often begin. And when they are feeling supremely confident and complacent, share prices tend to fall. At least, that's the bedrock assumption that inspires "contrarian investing." At the moment, investors are feeling extremely confident…maybe too confident. In fact, Jay Shartsis, a seasoned professional options trader and astute stock market observer, suspects investor sentiment has become too bullish for the market's good. "When the United States declared war on Japan after the Pearl Harbor attack," Jay remarked last week, "the vote in Congress was unanimous, except for one member, who thought that in a democracy, it would not be proper for all to vote in favor of war. I don't recall the name of the representative but I bet she (I think it was a she) would be bearish on the market now. Bullish sentiment is absolutely unanimous." "But the bears on the stock market hold more evidence in their favor than the dissenting Congresswoman of 1941," Jay asserted. "For example, on November 17, with the Dow at 12,342 there were 163 new highs on the NYSE. By comparison, on October 26th with the Dow at 12,163 there were 431 new highs. That's a quite sharp contraction of new highs with the Dow nearly 200 points higher. A good piece of bearish evidence."
Interestingly, the extreme low readings of the VIX Index corroborate this "bearish evidence." The VIX Index, as regular readers may recall, measures the implied volatilities of various options on the S&P 500 Index. Because the VIX is based on real-time option prices, it reflects investors' consensus view of future expected stock market volatility. "During periods of financial stress, which are often accompanied by steep market declines," the CBOE Website explains, "option prices - and VIX - tend to rise. The greater the fear, the higher the VIX level. As investor fear subsides, option prices tend to decline, which in turn causes VIX to decline." The fact that the VIX is languishing on 13-year lows, therefore, suggests that investors have become overly confident and complacent. 
Put/call ratios tell a similar tale. "The 21-day volume-based put/call ratio for the broad market has dropped to just about where it was at the market top of early last May," Jay observed recently. "It is now at 66 puts traded for every 100 calls and then it was at 65. Imagine, it took a 15 % straight up move to bring this about. Now the bears (if there are any left) are armed with something a lot more potent then the pea shooters they have been using."
Lastly, Jay notes that the Dow has soared 1000 points above its 200-day moving average. "That is an all-time record," he says. "Joe Granville, who pointed this out, calls it a 'major warning and a sell signal unto itself.' This is hard to ignore." The Dow is up 14% for the year. Fourteen percent is not too shabby. So why not call it a year and take December off? [Joel's Note: There are those who like to chip away with their trading…eking out a nickel here, a dime there. This may be a perfectly sound, conservative method of investing, but it is not for everyone. Trading options is not for everyone either. They can be volatile and, without the right coach, confusing. But for those who do use them effectively, the rewards can be very handsome indeed. To find out if trading options with Steve Sarnoff is right for your investing style, click here. Options Coaching With Steve Sarnoff ------------------------------------- Did You Notice? - Trouble Ahead
by Steve Belmont The inverted yield curve, the imploding housing market and collapsing durable goods all seem to be pointing to a slowdown in 2007. Whether or not this slowdown materializes remains to be seen, but there are a growing number of key indicators that seem to suggest something is in the offing. Our concern goes beyond an economic slowdown. What we fear is a financial accident caused by the incredible leveraging of the global economy. And while we don't pretend to be able to forecast when or if such an accident will occur, history tells us to beware. The chart below tells the tale. Eurodollar futures closely track the Fed Funds rate, the short-term interest rate that the Federal Reserve controls. For the past 25 years, the Fed has acted in a relatively predictable fashion, rapidly dropping rates in response to financial accidents. It then raises them to clean up the mess caused by those lower rates (think NASDAQ and housing "bubbles") until the new higher rates cause another financial accident, leading the Fed to lower rates again. 
December 2007 Eurodollar have already priced in a 50 basis point cut next year. If a financial accident does develop next year, a 4% Fed Funds rate is certainly not out of the question. A collapse of a major bank could mean even more aggressive cuts. To guard against this possibility, I'd suggest buying call options on Eurodollars. If the Fed cuts rates sooner than expected, for any reason, this trade should be a winner. Mr. Belmont is a senior partner and chief market strategist for commodity broker Rutsen Meier Belmont Group (RMB Group) in Chicago. [Eric's Note: A serious financial crisis will not automatically follow the recent run-up in eurodollar yields, but a very serious hydrological crisis has already begun. All around the globe, clean water is becoming dangerously scarce. Even here in the U.S., vast underground aquifers are running low, while much of our groundwater is becoming contaminated with fertilizers and other toxins. Throughout China and the rest of the developing world, the water crisis is even more serious. It will cost money to combat this massive crisis…lots of money. That means opportunities for forward-looking investors. A handful of public companies are already beginning to address the global water crisis…and these companies are already prospering from what will certainly be an open-ended campaign to provide the world's population with clean world. To learn more about the global water crisis and how individual investors can do well by doing good, check out our free report… Investing in Water - A Special Situations Report --- Special --- Deep-Sea Treasure Hunter Unlocks $502,526 Wall Street Secret… This small-town Californian turned $2,000 into $502,526 in less than three years. His success stunned Wall Street…yet today many moguls now refer to Charles Deveroux's unique method as "Deveroux's Secret." Look here for the key to his secret. | 
