Are We In the Eye of the Storm?

Well it's about time for our correction, we need a break in the market. The market has gone too far too fast, and we are due for a correction. There are really only two ways for this to happen. Either we will see a few weeks of up and down movements without much shift from where we are now (down to 9,400 for the DOW and then back up again near 9,900), or the other option is to have a quick drop in the next several weeks that will bring the market down into the low 9,000 range.

We are currently in the midst of recovery, but there is little progress on the future of the economic state. We have no answer on unemployment, we have no answer on the budget deficit, and we have no answer as to where growth will come from. Services account for approximately 70% of GDP (that's a lot!!) which means we produce very little domestically. A weak dollar does help secure some domestic production, as this means our goods are less expensive to foreginers, however, there are not immediate answers at this point on where such needed growth could come from.

For these reasons, it would not be reasonable to assume we will have a strong recovery. Until we solve these long term problems we are looking at a very long recovery, and I think what we were facing was a potential depression (yes I said it, we were very close to a depression) and I am still not quite sure the word should be swept off the table. While there is not a concrete definition of what classifies a depression vs. a recession. After facing the longest recession in history, and continuing to endure high unemployment rates for some time, I am calling this a depression.

With a storm still on the horizon I am saying it is still not safe to venture into the market, and if you do, use options as protection because this is only the eye of the storm!

The Obama Effect

I just got done watching President Obama deliver his speech about healthcare reform. All I could think during his speech was how this was going to affect health insurers. The message seems to be that these insurers have plenty of spare fat to be trimmed, and with this means that profit margins will narrow if the insurers are not able to cut costs. If this plan is put into motion, and it is still far off, it will put quite a bit of pressure on them to meet these expectations. Stock prices these days are based on earnings, and in this day and age there is a lot to be said about expected earnings. With the pressure of reducing costs to maintain earnings, it is fairly likely the prices that can be justified today for a share of these companies will not be justified by future earnings. Based on the implications of this new plan, I would imagine that the prices of health insurers stocks should decline, likely now, and likely in the future, at least until the insurers bring down their overhead costs.

Double Dip on its Way

The economy has had quite a run, but while the third quarter results are likely to show our economy grew during the quarter, too much of this growth is due to short lived stimulus programs. Everyone who had the opportunity to trade their clunker in for a newer car, and all those first time home buyers, have gotten their share of the pie, and this causes problems down the road.

With the unemployment rate still high, and a lack of job creation (did I mention a growing budget deficit), those who fall into the long list of people looking for a job and even those who are fortunate not to have made the list are likely cutting back on purchases.

Without another round of quick pop stimulus programs such as "Cash for Clunkers" the fundamentals are sure to come into plainsight once again, and drag us easily back into negative growth. All those end-of-year purchases (homes, cars, durable goods) have likely already been consumed in the third quarter and boosted us out of recession - really a great way to ignite spending - so without additional programs we are likely looking at another disappointing 4Th quarter.

Time for a correction

Well, it seems like people are starting to wise up and take profits. The market has slipped over 3% in the last two days and even with some good news today in the job market, it seems that it is questioning further and even long-term growth. The large budget deficit that's expected to accumluate, along with the lack of direction as to where job growth is going to come from, has officially stalled this rally.

I sold my Citi (C) position on Thursday and took a nice 120% profit - I haven't used options very much but this shows you how nice the reward can be when you get it right! Citi was the last of my sizing down that I did on my portfolio, I expected the market to pullback soon and I too wanted my profits. I am sitting on the sidelines waiting for some more oppotunities, and if the market keeps dropping they should be plentiful. The last opportunity I saw was AIG on Friday, as it approached a price that screamed rediculous I called my dad - unfortunately I was at a golf tournament and couldn't make my own moves - and I told him he should short the stock. Well if he did (he's a bit stubborn sometimes as all parents are so I doubt he did), he would have made about 30% on that quick play.

My strategy for now is to stay out of the market until I can get an idea of where the mass population is going with this selloff and until some more opportunities present themselves. I'll let you know when I find another opportunity, until then hold steady!!