TGIF! – Thank God We’re in CASH!!!

How are the markets treating you?  

If you’re having a rough ride, there’s still time to head for the exits and join us in cash ahead of the Fed next Wednesday.  I’ve already said the Fed will not raise rates but will indicate they will raise rates at the next meeting (10/28) barring “unforeseen circumstances,” which will leave them room to put it off yet again without looking too indecisive.  

0.25% one way or the other is not going to make or break the markets.  CHINA might break the markets, JAPAN might break the markets,  BRAZIL might break the markets – 11 other Emerging Markets (the GS M-11 Fund) that have dropped 20%, into bear market territory, might break the markets – not the Fed hike.  

As investor pessimism spreads to the smaller developing economies, capital outflows are deepening. Exchange-traded funds that invest in emerging markets recorded withdrawals of $1.65Bn in the week ended Sept 4th, the 10th week of outflows.  Among the Next 11 Markets, funds focused on South Korea and Mexico had the biggest losses. The group also includes Indonesia, Nigeria, Bangladesh, Egypt, Pakistan and Vietnam. Iran is a member, but the Goldman Sachs fund doesn’t invest in the country because of international sanctions over its nuclear program.

“There’s just a lot of negative sentiment,” said Geoffrey Dennis, the head of global emerging-market strategy at UBS Group AG in Boston. “There are not many emerging markets that stand out against it, whether it’s Next-11 or BRIC. It sucks in every one.”

Per Bloomberg: The Next 11 countries’ shared vulnerabilities have been exposed by China’s slowdown and heightened anticipation of a Federal Reserve interest-rate increase as soon as this month. Weaker Chinese growth has hurt demand for Korean and Bangladeshi exports, along with the commodities produced by Mexico, Indonesia and Nigeria. Markets where foreign capital flows play an important role in driving investor sentiment — including Turkey and the Philippines — have slumped on concern international money managers will gravitate toward dollar assets as the Fed boosts rates.

Chaos + uncertainty = CASH!!!  That’s the simple formula we like to follow at PSW.  And that’s not to say we can’t find things to do with our cash.  We started our Option Opportunities Portfolio on August 8th and now, at the end of week 5, we’ve already closed 9 positions for a $10,310 gain – which is the EXACT plan we laid out when we began this portfolio a month ago:

This is why you should never fear cashing out your positions – THERE IS ALWAYS SOMETHING ELSE TO TRADE.  Cashing out positions doesn’t change anything.  What it does is help you to take a realistic assessment of where you are now and go after FRESH opportunities as they present themselves.  We had an Apple (AAPL) position in our Long-Term Portfolio that we cashed out last week, and AAPL is our Stock of the Year!

Cashing it out doesn’t mean we don’t like AAPL anymore and it doesn’t even mean we thought it would go lower – we simply decided the RISK in staying invested into all this uncertainty wasn’t worth the potential reward of staying invested during the turmoil we expected (this turmoil!).  We will get back in AAPL and the net entry on the trade I mentioned two weeks ago on Money Talk us still perfectly valid, now $21,000, up from $17,800 when we played it but down from $27,440 on Wednesday, so what are we missing by waiting other than heartache. 

Of course, we’re option players and that means we have way more OPTIONS to invest than stock traders.  You may look at AAPL at $110 and think you’ll never get it again at that price but I can still promise to buy AAPL for $90 by selling 10 2017 $90 puts for $8.10 (yesterday’s close) and collect $8,100 in exchange for my promise to buy 1,000 shares for $22.50 less than yesterday’s close (20% off).  

If I REALLY want to own AAPL for $90, then the $8,100 I collect is a bonus and THEN I can place a bet that AAPL will go higher using a Bull Call Spread, like buying 10 2017 $100 calls for $23.40 and selling 10 2017 $125 calls for $11.60, which is net $11.80 ($11,800) less the $8,100 we collected for promising to buy AAPL for a 20% discount means we’re in the long position on AAPL for just $3,700.  

Those 10 contracts at $3,700 ($370 per contract and $3.70 per unit) entitle me to ALL of the profits AAPL stock makes between $100 and $125 – up to $25,000 if AAPL is over $125 at the Jan 2017 expiration.  Those of you with masters degrees in mathematics may have noticed that AAPL is already at $112.50, which means those 10 contracts that you buy for net $3,700 are currently $12,500 in the money.  This is why we aren’t in a hurry – we can make our own discounts any time we want!  

We do have an offer to sell AAPL puts for high prices in the Long-Term Portfolio but they haven’t triggered yet.  We’re hoping for another spike down before we get back in and, as I may have mentioned – we’re a bit worried about the overall market and there are thousands of other bargains out there so, even if AAPL gets away from us, we have PLENTY of great things we can do with our CASH!!!  

Meanwhile, we sit on the sidelines and gather more information and watch the market action and get smarter and smarter about what we should be investing in.  If we’re bored, we can make short-term plays like the ones above or we can play our Futures (we’re short oil below the $45 line, for example and long gold).  

Just yesterday morning, in fact, I mentioned how we liked our Russell ultra-short ETF (TZA) hedge, which had gone from $1,400 to $1,610 and yesterday it closed at $1,650 but today it should do very well as the Russell drops back to 1,140 or lower.  Still, it’s a hedge, not a bet, it’s there to protect our long-term long positions and yes, we have been doing some bottom-fishing – even though we think it’s premature.  After all, we could always be wrong – that’s why we always like to be BALANCED.  

Maybe there will be massive stimulus announced over the weekend and we’ll suddenly gush higher with the Fed giving us another kick up on Wednesday with a doveish statement.  Maybe.  Or maybe there is no stimulus and the Fed tightens anyway and the markets collapse in disappointment.  I don’t know which way it will wind up but I do know that 82% of the NYSE is below the 200 dma, which means there are about 7,500 stocks on sale – so I’m a lot less worried about not being able to find a good lagging stock in a rally than I am about trying to unwind a full portfolio in a crash (remember 8/24?).  

So, PLEASE, be careful out there – and have a great weekend, 

– Phil

Provided courtesy of Phil’s Stock World.