So I’ve been telling people lately they should be buying puts on the SPY and the past few days are why. The broad market is well overbought and were seeing a turning point as all the bears and bulls are now starting to turn. It could get awfully bumpy. The global market is still fragile and it has been living on QE candy. (I’m on a strict diet so I can’t help but compare the market to a malnourished body).

So, here’s what to do. Obviously the thing to do would have been to load up on SPY puts, but I have not been diligent about posting or you may have known! The other part is whether or not you would have taken action. Most likely not. Most people won’t take action until its too late. Whether you’re protecting or investing here are the puts you want:

SPY: 145 puts for march expiration. These are gonna be crazy but that’s what you want. I had my eye on the 140s before but these will do. They are higher volume and OI so you shouldnt get trapped in em. I might wait until we get a bounce before jumping into these. I don’t expect to hold these until expiration nor for them to get into the money. They will be a good lever for the coming volatility. You should see some nice gains if you stay agile and get out before the decay gets ya.

TTFN!

I am fed up with the amateur tax specialists out there telling people they can deduct everything. Yes, it is theoretically possible that you could deduct it. There is much more to the process than most people want to admit. Many people like to claim that just about anything is deductible and a lot of things may be. If someone owns their home this opens them up to a world of possible deductions as long as their mortgage interest, property taxes, and potential deductions combined are more than their standard deduction and they can justify itemizing. This is easy to accomplish if someone is single. If someone is married and lives in a modest home it can be more difficult especially considering the low cost of mortgages right now.

The biggest amateur culprit is the “work expenses” deduction. Unless you are an independent contractor or run your own business you are very unlikely to be able to deduct these considering you have to first have enough deductions to justify itemizing and then additionally there is a minimum of 2% of your Adjusted Gross Income (AGI). For someone making $50k this would be $1000. For a couple making $100k this would be $2k.  Most people don’t spend this much for legitimate unreimbursed expenses. Additionally this area makes you a bulls-eye  to be audited. Good luck with that!

Then there’s the medical expenses line which is 7.5% of your AGI and good luck getting to this ($7500 for a couple making $100k)! There is a class of people that would typically make this and this would be those who have had a really bad year with medical expenses and have put out a boatload out of pocket or individuals who have to spend a ton per month for insurance or have regular expenses that are very high. If this is the case the best thing to do would be to try and participate in some form of HSA of FSA program.

Some fun summer reading: The instructions for Schedule A published by the IRS. Happy reading

I am short the dow through DXD because like our friend Paul Krugman at the New York Times said the other day about falling wages, I just don’t believe that the fundamental promlem underlying our economy has changed. I noticed the falling wages problem but Paul Krugman summarized it nicely.

I also called the new housing bubble, stating that through low interest rates and the new homebuyer tax credit, there will be a short term bubble in housing. And look at what came out this week: Housing is starting to stabilize. Don’t worry it will pop like the last one did.

The next chart is the  market crash of 2008 and the recovery up until now.

And here is a chart through 1932, showing that the recover of early 1930 was just a head fake for a coming disaster much worse than the initial decline of the 1929 crash.

Why would this be the case when we’ve had so many ‘recessions’ since the great depression that weren’t like this? One reason iss the massive deflation we have experienced, with the shrinking of available credit and the 30:1 leveraging of the bank balance sheets which flooded capital markets with money. Securitization of mortgages helpes with this too. During the 2000′s there has been no real income growth, just debt expansion.

This is the reason we will not see a recovery for years in the United States. The savings rate is skyrocketing which will further drive home the depression of 2009. There will, however, be bubbles in certain sectors due to government interaction. There will be another smaller housing bubble driven by the astronomically low interest rates and the $8000 tax credit as I have said before. There will also be bubbles in renewable energy and government subsidized programs. The recent uptick in consumer spending is likely linked to consumer receipts of tax refunds which is very short term. The unemployment rate is still increasing and is maintaining a very high rate.

Although there has been attemps by the FED and the goverment to artificially stimulate the economy all this is doing is creating another bubble like the one that just exploded. Take a look at the effect of the 2008 stimulus that Bush enacted. This had a sugar high effect which was very short lived. There is just no fundamental reason to be buying into US equities. Any recent upticks in economic data are likely head fakes which will later decline more like we saw in the early 1930′s. Additionally, the recent market is very overbought (meaning it has run up too much too fast).

Yeah thats you. Through managed retirement accounts and 401k’s the money in your retirement account flows through mutual funds to fund equity interest in your favorite companies and institutions like AIG, Citigroup, General Motors, Bear Stearns, Bank of America, Morgan Stanley, Goldman Sachs, JP Morgan, and Exxon Mobile. This is just a few. So the next time you want to get angry at these companies take a look at where your money is invested. These companies are you.

The moral of the story is that the banks had capital to lend before this change, the government gave it to them. Ken Lewis said this morning that the lack of lending is directly related to the quality of lenders and not the capital, due to the fact that there is now a ‘smaller pie’ of quality lenders now, due to the current depression. So when will banks start lending? When the lenders are worth borrowing to. Will will that happen? When the depression is over. So….maybe we’ve been taking the wrong approach by giving the banks money and maybe other actions should have been taken instead?

It seems like giving the banks money expecting them to lend was not only irresponsable from the standpoint that the government expected them to lend at the rate that they were lending at before, which drove us into the current depression, but it was like the goverment reassuring the banks that they were not in the wrong and actually had the power to cure this debt funded shadow economy. We’re still throwing band aids on the gaping wound instead of treating the real problems of the economic disease. These are all short term fixes just like the economic stimulus payments of 2008.

I really dont know why China is crying to the IMF about it when they could single handedly shut down the US currency as the reserve currency by stopping buying treasuries or by selling them. China has such a massive investment that they are in a paradox with their investment, the same as a creditor that has sunk a large investment into a dying business. The creditor knows the business is dying but doesn’t want to be the one to kill it. The US is like a dying business that has creditors but also has a counterfeit money printer and prints out money when it doesnt have enough money to pay its debts. But if it prints too much it will become obvious to the creditor that the money isnt real.

I wonder when the public will stop focussing on the smaller infractions like the AIG bonuses and take a closer look at Chinas ongoing rhetoric about our currency. The accepted lie about the US currency is that a devalued dollar is a good thing. Lets take a look at what happened when we had $150 oil, that was amazing for our economy. It helped to drive our economy right down to where it is now. It was also coupled with a pop of the debt and housing bubbles that were the drivers of our shadow economy.

Everything that seems so obvious now was obvious then too but no one wanted to listen because of the other static like the war in iraq. It was clear and the canaries in the cave were the indicators like average household salaries did not go up but yet their mortgage obligations and spending did. This is just like  a cash flow statement, where did the money come from then? Debt – of course. Here’s how to capitalize on these future events.

This is another one of those cases where the comedy media has actually been the one to break the story. See the Daily Show interview of Jim Cramer videos here. There is some very enlightening material in the video aside from the incrimination of Jim as a former hedge fund manager. A light has been shined on short term market manipulation, as if we all didn’t suspect this and know it happens based on so many cases of it when the actors are caught.

There is no such thing as risk free. There is “low”, “moderate”and “high” risk. These are just based on our experience of what we have seen to be the case thus far. In this sense, if we continue to maintain the same risk scenarios they become outdated. This is the case RIGHT NOW such as the case of Indy Mac. Also, what seemed to be such a guarantee is now up to question with Fannie Mae and Freddie Mac. Risk aversion is a different ball game now. Risk can never totally be averted, just hypothesized at aversion. We can get close to guessing at risk free but we will never achieve that. There are no guarantees. The sun has risen and set for as long as we know and will know, but it won’t in a few billion years.

Also a drastic change, which no one seems to think is so drastic: The North Pole is completely melting this summer. What the hell is going on in the world? The north pole will probably be water this summer, the payoffs that used to be guaranteed no longer are, and yet by striving to maintain the same definitions of risk averse we inevitably set ourselves up for high risk situations.

Putting money in a fixed interest savings account or a certificate of deposit or a treasury bond would seem to be the lowest risk investments one could make. These have intrinsic risks though. If they don’t succeed the rate of inflation, you actually lose money by letting them sit in these accounts, and lose the opportunity that could have been made by the use of them. These accounts may be insured by the FDIC or by the government, but these aren’t infallible either. What will happen when the government, who is already trillions in debt, tries to bail out Fannie Mae and Freddie Mac? This is going to get really interesting really fast.

Mutual funds were the “risk averse” method as of the last decade, and with the market having gone to hell, this option as being non risk averse has become very clear also. I’m not just saying this because of the recent decline in the market. I have been saying this for the last few years, that the financial advisers who say that on a “30 year average” the Dow Jones Index always wins have become complacent to the fact that the data they speak of really only goes back 40 years and this isn’t much to go off of when speaking in “30 year averages”. I never trust these guys, because saving a million dollars 30 years from now might not even buy me groceries. (Obviously if the money was invested correctly, it would go up with the market, but either way it still doesn’t make sense in the way that they make it out to).

I’m not saying there isn’t money to be had in the market. But it isn’t just in buying something and holding it forever anymore. It is more about riding the waves and taking advantage of all of the options. Short selling and day trading will become much more advantageous now that the market has become so volatile, and headed downward. I’m not even sure trading houses will be so liberal with short sales as they have been.

The new definition of risk averse has more to do with action, rather than inaction. Inaction is putting money in a fund or set of stocks and letting it sit. Action is taking advantage of the above mentioned traditionally higher risk options, which become lower risk in a market such as we have now. Also, with the interest rates as low as they are and the market acting the way it is, it only makes sense that right now is not the time to invest in the traditional “low risk” avenues, but with venture capital investments which capitalize on the concept that it is more financially advantageous to spend in a market such as our current market than it is to save. Whether this be by buying a business, or by investing in the equity of a business.

Also, one should consider “diversification”, not in the traditional sense of the word, by just buying multiple stocks, but in the sense of the capital you are investing. Lets take $100 million of capital for example. If you invested this four ways, $25 million each into venture capital, equities, foreign currencies, and commodities (gold is the standard). With the venture capital and equities one might even want to consider having these split amongst different countries. Obviously in the case of a global collapse all of these tactics are still subject to lose, but then again, who wouldn’t? Either way there is no “risk free”.

Isn’t it enough that the government already gives a tax benefit to homeowners by giving deductions for home interest and property taxes, and essentially opening the deductions door to this group? (I am part of this group for this exact reason).

Homeownership levels skyrocketed to astronomic levels at 65% homownership rates back in 2007, and with recent foreclosures has likely dropped some. The new legislation – giving a $7,500 loan for first time home buyer purchases in most of 2008, and now a $8,000 credit for those purchased in most of 2009, is going to give even more HUGE incentive for people to buy homes who haven’t owned in the last 3 years.

This will create a short term bubble, and will probably last through early 2010. This will recede however, unless the economy has ‘recovered’ by then. The whole concept of the economy ‘recovering’ is flawed because the economy was a shadow economy, only based on consumer debt and speculation in the housing market creating wealth that was not real. This influx of trillions in value from the increase in home value felt like real GDP growh, but was really like an adrenaline high that leaves you weak and drained afterwards.

So, how will you capitalize on this?

If you are a seller: Wait until you feel that this bubbling has occured, and that the home prices have increased significantly in a short period of time. Sell your house and rent.

If you are a buyer: buy now and hold for 2 years to get the tax exclusion, and sell it then.

If you are a trader: Buy the IYR now and hold it for ~2 years.

In ~ 2 years short the hell out of the IYR it with the SRS.

I know both of these alternatives are a hassle but I am giving the best case scenario here and showing how to take advantage of what is going to be another shadow economy. Welcome to Paradise!

Here’s why I am long oil (USO) and am getting longer on dips:

-Oil has come down about almost 80% from its high. (I understand that there was overbuying because JP Morgan was highly leveraged and was technically manipulating the market, but it worked for a reason)

-Oil is a commodity just like Gold and Silver, making it an international currency.

-The Federal Reserve Bank is leveraged 75:1.

-The U.S. government is 53 Trillion in debt, according to our former comptroller.

-The US GDP ranks 177 out of 181 countries ranked by gdp.

-The US government Currently spends all of the $4 Trillion it makes annually and more, making the $53 Trillion unlikely to get paid anytime soon.

-The US used to be the reserve currency of the world. Right now there isn’t one. People are confused as to where they can put there money, and the US is currently being used because the next best thing hasn’t been figured out yet. It won’t be the euro or the pound thats for sure. They are both in similar positions.

-Oil is an international currency which will hedge against the dollar in the case of the dollar devaluation that the US government is currently setting up.

-Oil is consumed, whereas every ounce of gold ever mined is still on earth (unless it was forcibly changed into something else, which is unlikely).

-Even if the demand for oil doesn’t come back it is not feasable to extract it usng more expensive methods at these prices which means that the production will be decreasing more and more the cheaper it gets and the more methods are ruled out based on this.

-The general consensus is that its too cheap right now. How do we know this? Instead of selling oil to the general market, the new trend is to rent tankers and store it. It is relatively cheap to rent a tanker compared to how much can be made by holding it until it is at more reasonable levels.

-The only real threat to oil is a renewable energy source that will replace it or a cleaner burning method. This is highly possible, but the widespread application of it will not happen anytime soon. Even in the case that there is a replacement found for cars it is used in many more things than just gasolene. It is used for plastics and other similar consumer products. It is hard to find something now that doesn’t have some plastic in it.

Overall, oil could definitely go lower, to a certain point. But even if the market dies and the dow hits 0, this will negatively effect the dollar, which will then spike oil. But I am in it for the long haul, and am willing to wait it out. I was right about gold (GLD) and silver (SLV), and see oil as the next logical move because gold and silver are starting to get pricey. If I was going to invest in gold or silver it wouuld be physically. I can’t exactly store oil otherwise I would.

There are those that would criticize this play on the basis that any commodity is eligible for this argument. Copper is an example. You might be right. So get any commodity you like. I like oil, for the reasons above.

I’m going to use the Hollywood version, because I was not actually on the Titanic, nor have I done any further research on it, but I have seen the Titanic movie a lot of times.

So Imagine that the US, or even Global economy is the Titanic in this example.

The Titanic took hours to sink. All evening, in the movie. It was very slow. Those at the Captains level weren’t seeing water until right before it sank. Those at the bottom knew something was wrong right away. Those in the bottom levels of the ship and those in the engine room were seeing water right away. They were screaming, running, and panicking but those at the top could not hear them. The passengers at the top of the ship may have had some idea that something might be wrong, but there was no visible proof that anything was wrong but rumors and maybe a view of some people leaping out from below. It took hours for the top level passengers to eventually see water and the chaos of the ship sinking and all evening before the ship finally sank. Before it sank all the wealthy people at the top got into the life-boats and most were fine, but the lower classes either drowned or froze because of the temperature of the water.

The current situation of the Titanic sinking in the US economy has been happening since September 11, 2001 when the economy took a massive hit from the terrorist attacks and the effect it had on the country. The lowered interest rates, down to 1%, were a band aid for a shotgun wound. The shadow economy sprouted and it looked like there was growth. Really, there was little actual growth but very much shadow growth based on borrowing and false equity created by the low interest rate, cheap borrowing housing boom. All the while, the ship was leaking, and already sinking. The top levels were partying, and the bottom levels were doing OK still. Slowly, level by level, those passengers began to feel the effects of the leaking, there were foreclosures and those jumping out of the lower levels, while those at the top were relatively uninterrupted. This continued and we are now looking at the point where those at the top have finally started to see the water, and have started to get into the life-boats.

So now the economy is sinking and is nearing the breaking point, where the ship splits and breaks in half. It is nearing that point, even though it may have seemed to already happened, just because there is flooding in the ship and people are fleeing, the ship is still there and semi-afloat. When it splits it will cause a massive rift in the markets and the economy, there will be increased losses of jobs, a realization of the massive amount of consumer debt that has been bulding and will not be resolved overnight. There will be those that will hang on to the ship on the rails, while the ship goes into the water, and some will jump before it sinks but some will go down with it. Either way, it is definitely sinking and the next things to look for:

-Continued drops in the levels of the market.

-Continued reports of corporate losses and economic data which shows that the economy is contracting.

-Continued tighening of credit standards.

-High Inflation from the recent actions that have been taken  by the FED.

Gold and silver are great but its oils time to ‘shine’. It might take some time before it catches fire again, but it definitely will once the impact of the doubling of the FRB (Federal Reserve Bank) Balance sheet recently. Because the FRB uses a fractional reserve system which allows it to Lend $75 for every dollar it ‘has’ this means that the  fed has the ability to monetarily create $150 trillion from the 2 trillion on its balance sheet currently. When this is lent out, commercial banks then turn around and lend at least 10x so this could turn into $1,500 trillion. Wait…what is that? A quadrillion. Yeah, within a few years that could be the next term to become familiar with (we’re only recently coming to terms with a trillion). This is starting to sound suspiciously like Russia, when they used their currency as toilet paper and barrelled it to the store. We’re going to see a return of the $1,000 and $10,000 and $100,000 bill. 

There are two ways to capitalize on this. One is to have fixed rate debt like a 30 yr fixed mortgage. If inflation doubles dollars then your $1000 mortgage has just effectively become a $500 mortgage. Inflation is not good though, because salaries typically do not keep scale with inflation. 

The other is to put money into commodities, which are the universal currency and were the original currency, like the old school fur traders. Or you can short the price of the treasury bond through TBT. This essentially says that the demand for dollars will go down and thus the price of bonds, and the yields will go up. I explain this in another post, search TBT.