Living Like Greeks
Research for Online Investors

by John Dalt

8/24/11

Yesterday we proposed the bottom may have been set at 1101 to 1120 on the S&P 500.  Please don’t take confidence from this.  After a bit of a false start this morning, the market is following through on yesterday’s rally and looks to close higher today.  We couldn’t script it better.  What we don’t know is what happens the closer we get to 1204 on the S&P index.

This was the high on August 15th and 16th, and will act as resistance for the market.  If we can pierce this level and close above it, we may be in the clear.  If not, we are probably doomed to revisit the lower 1100’s and see how strong our support is down there.

The bottom line, this is a time to be lightening up on some of your holdings if positions are too large or you can get them back into the profit zone.  You can also sell covered calls on your positions.  You get to pocket the premium.  This is a way to take some money out of the market and hold onto your stocks.  We have been busy adjusting positions that were too large and selling covered calls today.

The closer we get to 1200 the itchier our trigger finger becomes.  If you are like me, you have taken some losses in the last 30 days, and getting back to some dry firewood if the market drops sounds like a good idea.

If we sell a few stocks or cut back on some position sizes and the market goes through resistance at 1204, then and only then can we feel safe buying back in for the trip higher.  What do you have to lose?  A few points on a stock, for example you may sell a stock for $30 dollars a share (after it had been down to $25 a few days ago) and pay $31 to buy it back after the market confirms it is not headed back down to 1101 or worse.

If you sold covered calls, it works out even better.  A call option doesn’t increase in price penny for penny with the stock, so if the stock price goes up one dollar the call option may only increase in price seventy cents.  You can buy it back and let your stock run higher!

If the stock market plays hardball with us and falls back to test resistance you can let the covered call expire or buy it back for a few cents per share.  You get to keep the premium to reduce your losses.

Precious metals took it on the chin today as gold sold off hard.  Gosh, one would think everything was hunky dory in the world.  Maybe the gold market figured out that Bernanke wasn’t going to offer any new QE money on Friday, maybe the dollar showed some life after being in a downtrend since the first week of August.

Maybe it just got too crowded and the contrarians decided to sell and take some profits before the CME raised margin rates again.  But, don’t think everything is coming up roses.  Greek two-year bond yields hit 47% today.

All of the Economic Reports out of Europe this morning came in less than analysts expected.  The U.S. got a reprieve from the bad news as Durable Goods orders came in better than expected.

The eurozone is struggling to find a solution for Greece and other countries that cannot control their spending and need money to avoid bankruptcy.  Germany’s insistence that investors take a haircut on existing bonds has backfired.  Investors now realize that the bonds are not safe and they may be the next to have their head on the block.  Say all you want about the bond vigilantes and bankers, but you cannot fault them from wanting their money back when a “safe” sovereign bond matures.

Germany is in the toughest position.  If they don’t extend credit to the ‘bankrupt’ countries the eurozone will fall apart and everyone will have to go their own way with national currencies.  Germany has profited under the euro with currency advantages for their exports.  If they have to go back to German Marks the currency would appreciate in value and hurt their competitiveness.  To keep the eurozone together, Germany has to hold their collective noses and loan money to other countries that their banks may never see again.

One side of the coin means unemployment when their economy slows down, the other means higher taxes to send money out of the country.  Solomon would have difficulty with the choice.  German voters do not like giving money to other countries and have been turning out Angela Merkel’s party because of their support.  Future voters won’t like the unemployment that will result if Germany does not work in a concerted effort to save the eurozone monetary union.

This is the future the U.S. faces if we don’t make the hard decision to cut spending and balance the Federal budget.  It is only a matter of time.  A hard decision today becomes more painful with another hundred billion borrowed every month!  When the bond vigilantes start circling the U.S. bond market like vultures, how long will the U.S. dollar remain the world’s reserve currency?

When the Fed’s ability to print money is gone, there is no way out but to live within our means…like the Greeks.

Mailbag:
Human nature hasn't changed since man stood up and began to walk the earth. No reason to think it ever will. Same goes for Bankers.—Long Term subscriber R.R.

Great quote from Abraham Lincoln, I never knew that’s how he felt.----Long-Term and Buy, Sell, Hold subscriber G.C.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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