By: Matthew Whiz Buckley
And no, I don’t mean Andy Reid.
Top Gun Options cautioned our traders last week to be wary of rallies during holiday shortened weeks and low volume. Why? Institutional traders with any shred of experience were either 1) in the Hamptons ordering coffee behind the Piano Man 2) on an island where they consider themselves a local and also know the extradition rules with the U.S. inside and out, or 3) at Vail or Aspen.
As the Managing Director of Strategy for one of the largest volatility arbitrage options trading firms in the country headquartered in the Chicago Board of Trade, I saw this scene take place many times over –
Think Office Space
Senior trader or partner – [addressing junior trader] Ummm…yeah. I’m gonna be out next week and I’m gonna need you to watch my book and positions… Great…
Junior trader – Well, I was going to fly back to my parent’s house in Iowa, I haven’t seen them since graduation last year…
Senior trader or partner – Ummm…yeah… So I’ll be gone. Don’t [insert Gordon Gekko expletive] anything up. Ok? Great… Oh, and if you do, don’t be here when I get back. Super…
So there really was no conviction to the rally last week on the part of hedge funds, prop shops, or large financial institutions. Junior was manning, or staffing to make my HR folks happy, the trading desk.
We also warned our traders about listening to financial media and ‘experts’ who searched for a reason or reasons behind last week’s rally. After searching for various memes that could fit in a sound bite or headline, the ‘experts’ agreed – fiscal cliff resolution it is! Whew. Almost broke a sweat on that one.
We personally believe the bump last week was a relief rally – Obama was in the Far East and congress folks were home in their districts thanking their constituents for not firing them. So little damage could be done since the kids were gone.
Fast forward to yesterday when the markets seemed to take good news on housing and durable goods, along with great news on consumer confidence (4 year highs) with a yawn. The yawn lasted until The Honorable Gentlemen from Nevada (I know… I know…) opened his mouth and announced to an apparently stunned market that “little progress” had been made on fiscal cliff talks.
Cue the risk off music on high volume.
Apparently the fiscal cliff, impending $500B in mandatory cuts and tax increases set to hit on 1 January, is news to Mr. Ried, Mr. Obama, and Mr. Boehner. How do I know this? Simple. If our ‘leaders’ had known Taxmageddon was set to hit on this exact date with a near instantaneous 2-3% blow to GDP and certain recession (hint – we’re already in one), they would have most certainly sat down last year, or at the very least 6 months ago to do something.
So now the market is going to be at the mercy of dueling press conferences, reports of a deal, reports of no deal, etc etc.
We believe, stay with us here, that the consequences are so dire that there will absolutely be a deal. There’s no way our leaders would let something as bad as this happen.
No, seriously. And by a deal of course we mean that noblest of Washington traditions – winding up the leg and delivering a crushing hit that kicks the well-worn can down the road. We shall empower a commission to study all of this! Ahem…Simpson/Bowles… A true resolution will not be achieved in the less than 20 work days these folks have to get something done. And you can scratch this week…nothing scheduled. Although the president is scheduled to meet today with giant squid CEO Lloyd Blankfein (GS), Home Depot (HD) skipper Frank Blake, and other business heavies.
Oh, and Joe Biden will be there!
At Top Gun Options we remain poised for an increase in volatility (VIX) and a pullback in the market as the deadline looms. We also expect to see above average equity tax selling if capital gains and dividends are to be smoked in our new Amerika. We will however, ready our horses and men for a mid or end of December rally.
For the past 3 years the market (SPX) has lurched out of the gate in January and February as a new day has dawned and hope springs eternal. Until Q2 reality sets in. And then we move sideways. And give some of it back.
In the meantime, more news on housing today (new home sales), along with Beige Book Clift notes this afternoon will simply be background noise to the kabuki theatre in DC. Today we’re going to have one of our Marty Feldman eyes on the next guy to drop a fiscal cliff bomb and the other on retailers reporting earnings today – Ann Taylor (ANN)…I should own that company by now, Aeropostale (ARO), American Eagle (AEQ), and Guess (GES).
With the surprising strength of the consumer we’re also looking to personal income and personal spending reports on Friday to see if we should get long on fiscal cliff dips and rig the model portfolio sails for smoother sailing.
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