Sunday, May 10, 2009

No Spendee, No Ponzi

Lost in all of the stress test buildup last week was the largest decrease in consumer credit ever recorded, $11 billion in March. This means people are actually attempting to pay off credit cards and not taking on new debt. Interesting, yet we're told that banks need to get a lendin' again to free this credit up, stoke our GDP, and allow the overbuild of inventories to add multiple points to the bottom line of our Ponzi economy, built on 70% consumer spending.

Well, it won't be so easy. Inventories will not ramp up to the unprecedented levels seen before the collapse. Oil will hit $60 again, possibly this week. Banks are hesitant to lend to the deadbeat consumer. Gone are the days of walking into Best Buy or Rooms to Go and using your 500 credit score to secure 18 months of interest-free payments. No ticky, no laundry as my father-in-law likes to say.

But as we've seen over the last 2 months, even with unemployment hitting almost 9%, the market doesn't always deal with reality, and certainly can't "predict" a thing, let alone six-months into the future. I'm not convinced the optimism over bank profits will dissipate tomorrow, and certainly may ride through the false allure on the no-shorting/uptick rules waiting to take shape. With this in mind, I'm ready to roll our profits from last week into a new hedge.

You may recognize the major player, Citi. Citi treated us well by shooting up Thursday, putting our calls into 200% return territory. But at $4, I'm not sure Citi is done with its CDS plunging in price (optimism over no nationalization) and the sale of large assets such as Smith Barney pending. We all expect the crash, and it may be even harder now than we thought, but it may not be tomorrow. Phase 1, 9/09 $5 calls at roughly .40.

The other half of the hedge is no stranger either. FAZ is the triple inverse financial ETF and has been getting hammered (aside from us buying it and selling it for profit on Thursday). Now at $4.49, it seems that even a 10% pullback in financials (a roughly 30% gain for FAZ) could be leveraged with calls out to 1/10 where the $5 calls are trading at roughly $2. If Citi explodes, we win, if it crashes and burn, we win, if it explodes and BAC crashes, we win twice. And, these scenarios are not mutually exclusive, as Citi may run through June and then crash. These longer-dated options give us some time for more extreme events. Obviously it would be wise to not purchase these things on the same day, as a rise in one probably means a fall in the other.

And thank you all for your continued support, we received our all-time high viewership last week.

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