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Thanksgiving Thoughts
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Thanksgiving Thoughts

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Thanksgiving Thoughts

Thanksgiving Thoughts

Courtesy of Phil of Phil's Stock World

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What an ugly finish November is having!

We've been trying to get bullish with little success and, if we are not reversing tomorrow, I will be regretting the wasted time poking at bullish plays when we could have been going "wheeeee" on the slide.

I thought that blue line on Dave Fry's chart was going to hold, it's about 2.5% down from our Must Hold level for the S&P on the Big Chart (1,235) and that would have been a reasonable (and slight) overshoot of the 10% drop we were expecting so we played for the bounce but now we've blown our -5% line at 1,173 and our next support level is -10% at 1,112 - a very sad level to revisit if we do.

Technically, of course, we're breaking down. Fundamentally, I'm not so sure. The fear is palpable as Europe looks terrible and clearly all these austerity measures are taking a toll on the Global economy but it's simply NOT showing up in the data yet. PMI's are dropping across the Globe but the Purchasing Manager's index is a SENTIMENT indicator that reflects the OPINION of the buyers about business prospects.

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As I have been pointing out (yes, there was a point) in my recent series of articles about market and media manipulation - there is a protracted campaign underway to push sentiment down - to chase retail buyers out of the markets.

Who is doing this? Perhaps it is the IBanks, who want to bottom out the market ahead of QE3, when we'll be off to the races again. Perhaps it is the Fed and Treasury, who want to chase people into the $140Bn worth of bonds they have to sell each month. Perhaps it is the Republicans, who want to campaign against the worst possible economy next year to prove that Obama has blown his handling of the economy almost as bad as Bush did - so we may as well try one of their idiots again since it seems to make no difference. Don't laugh - I have a button for Romney that says that...

Whatever and whoever is behind the negativity (and let's not forget Germany, who are angling to take control of the EU and will be able to do so if things deteriorate further) - our job as investors is not to particularly care - but to figure out how far negative SENTIMENT can push the markets down before DATA pushes it back up.

As I pointed out on Tuesday with WHR, we're now at the point (with the high VIX and low prices) where we can create spreads on stocks that give us built-in discounts of 25-30%. This is an improvement of our usual Buy/Write Strategy (see "How to Buy Stocks for a 15-20% Discount") that comes along with the happy (for Fundamental Investors) combination of an oversold market and overactive volatility.

While we are ready, willing, able and anxious to execute on Warren Buffett's advice to "Be greedy when others are fearful" - we also must take the advice of William Wallace and "hold, Hold, HOLD" until we are confident (as opposed to hopeful) that we have found a proper bottom to invest in.

It's fine to do a little bottom fishing if you are sitting on a lot of cash but PLEASE let us not forget the lessons of 2008 - that there is no bottom in a Global liquidity panic. So it's here that we want to exercise a little game theory - what are our various possible outcomes going forward?

Since we have gone to cash in our short-term portfolios and hedged our our long-term portfolios as best we can (also half cash) - the BEST thing that can happen right now is a devastating crash. There's a very good chance of that happening since it is in both political partys' self interest to hold out - just as it is the interests of individual countries and various Central Banks to do the same - even though their action invites the possibility of a total catastrophe. That's essentially what we're playing for from a cash position, which is why we speculate to the upside while we wait - we KNOW we will do well in a collapse. It would be a shame to miss an unexpected rally, so upside bets are now our hedge against our cash position.

Cash is betting the Dollar is more valuable than stocks or bonds or commodities. Since we went to cash two weeks ago, that has certainly been the case for stocks and commodities but not so much for TBills - which have gone flying up in PRICE (not VALUE) as people panic into the Dollar. Of course, we also need to keep in mind the huge advantage of cash that's a bit harder to quantify - it gives us the ability to very quickly move into new positions once their PRICE is sufficiently below their VALUE to the point where we are once again WILLING to invest our cash,

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In game theory, our choices are hold cash or invest. The market will go up or down or flatline. If the market goes up and we hold cash - bad outcome. If the market goes down and we hold cash - good outcome. So we guard against the market going up with some small bets that are, hopefully, offset by that 4% increase in the value of our Dollars, as well as the deeper and deeper discounts offered on the bullish positions we will ultimately buy.

Perhaps this is a good time to make the point that this is NOT an investing strategy for people who think the World Economy will completely collapse and we will all go back to living in caves while Ron Paul divvies up the gold and ammo. For that, I am told an FN FS2000 Bullpup ($2,000) or an M1A ($1,500) are both excellent weapons for the post apocalyptic shopper.

Hopefully, we're reading stock market newsletters because we believe there is a future for the Global Economy (and, if you don't believe me, try reading "The Worst-Case Scenario: Getting Real With Global GDP"). We will prepare to take advantage of opportunities to bet ON the future - not against it.

Arnold Rothstein was a famous gambler in the 1900s (he was supposedly involved in fixing the World Series of 1919) and here's a scene from Boardwalk Empire where he gives a little advice on betting and PATIENCE:

"Some days I make 20 bets, some day's I make none. There are weeks, sometimes months, in fact when I don't make a bet at all because there simply is no play. So I wait, plan, marshal my resources. And, when I finally see an opportunity, and there is a bet to make - I bet it all."

Now keep in mind that Rothstein is a fixer, he's not talking about a 50/50 bet - he's talking about when he's already set things up so he KNOWS he's going to win. For those of us not working at Goldman Sachs or JP Morgan - we may not have already set the markets up so we can be 100% sure of the outcome so it is prudent of us not to "bet it all" but it is certainly great advice to remember that sometimes, as the great and powerful WOPR reminds us - "the only winning move is not to play."

What we can do is marshal those resources (have cash ready and able to deploy) and wait PATIENTLY for the right opportunity to deploy it. As I said, we made a mistake (several, actually) in 2008 of trying to guess the bottom but there was not bottom. We can look back now and say of course BA is worth more than $27, of course IBM was worth more than $70, of course AAPL was worth more than $78 and we were not wrong when we bought BA at $40 and IBM at $85 and AAPL at $90 but IT WAS STILL TOO EARLY and we suffered that last drop and some people stopped out right at the bottom - only to see, just a month later, those "too high" entry prices retaken and passed by.

No timing system is going to be perfect but the key is to have cash available and not to over-commit. In September of 2009, I reviewed the collapse of 2008-9 with a series of 3 articles. In the 3rd post, we discussed the day, on March 6th of 2009, when I was on TV while the market was in absolute free-fall, telling people to BUY. During a 3-hour live broadcast, I came up with 13 trade ideas that made an average of 469% in 6 months, but opportunities like that don't do you any good if you blew all your reserves trying to guess a bottom on the way down.

There is great money to be made if we are patient. If we end up being wrong and the markets turn back up faster than we thought, then all we have lost is a little time but we still know dozens of ways to make really good money in a flat or up market. On the off chance things collapse, the smartest play we can make is to wait out that collapse and THEN, when the panic gets to ridiculous levels, we can buy our Blue Chip stocks at irrationally low prices and Mr. Buffett will be very, very proud of us.

Game theory suggests it is currently wiser for us to have cash and POSSIBLY miss a sudden move up in the markets than to tie up our cash and miss another huge opportunity to buy stocks cheap, like we did in 2009. The upside to catching a knife here for a move back up to the October highs is what? 5%, 10%? The upside to being in cash and buying those same stocks another 30% down from here is 35%, 40% - patience pays better than gambling!

Of course, if we though it was only 25% or less likely that the economy would suffer another shock, then we'd be less inclined to wait but, manipulated or not, we have some SERIOUS issues yet to resolve before we can get comfortably bullish again. Until then, we will continue to take a few upside pokes but will remain "Cashy and Cautious" for the duration.

Fitch downgraded Portugal to junk this morning while that country is shut down by a Nationwide strike as citizens reject the harsh austerity measures forced on them by the EU. Meanwhile, EU leaders are talking about amending their Constitution to enable them to further crack down on the PIIGS while, at the same time, backing away from committing to playing a greater role in back-stopping the slide.

We don't know when this merry-go-round is going to stop so we will just have to play it by ear. Having a well-hedged, well-balanced portfolio with plenty of cash on the side is, by far, the best way to enjoy the ride!

May you and all your family have a very Happy Thanksgiving,

- Phil

For non-stock market T-Day thoughts see Louie Schwartzberg: Nature. Beauty. Gratitude.

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