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Stocks rallied yesterday on the prospect of a budget deal, but
don’t expect them to get very far. With yesterday’s moderate
surge in the broad averages, investors appear to have upped their bet that
Obama and his heartfelt enemies in Congress will do what we have confidently
expected them to do all along – i.e., agree to kick the can down the
road. No one will be surprised, since kicking the can down the road is what
politicians do when they are not in recess, campaigning or buggering their
clerks. Unfortunately for us all, the can will still be lying there when 2013
begins, and concerns about what this implies for the U.S. economy are apt to
grow between now and the last trading day of the year, December 31.
The good news, such as it is, is that Obama’s “filthy
rich” – mainly small-time entrepreneurs who toil 70 hours a week
to net a princely $130,000 after taxes – will get a reprieve from 39%
marginal rates. The dollar will be spared too, at least for a while, since
Obama will not be given the ruinous power to raise the debt ceiling without
consulting Congress. And the military pork-barrel that feeds so many cities
and towns will remain alive and well, albeit temporarily, since a $500
billion sequestration of defense funds will not automatically take effect.
What will remain once the can has been kicked is an economy that is
probably in recession already, a housing market nearing the end of its
dead-cat bounce, and a consumer hangover from the recent binge in, among
other things, automobile purchases. (This just in: A hitherto unnoticed
provision in Obamacare will charge each and every
insured person an extra $63 each to cushion the cost of covering people with
pre-existing conditions. This works out to tens of millions of dollars for
large companies, but the number for 190 million insured is a much bigger
number: $11.97 billion.) And let’s not forget the looming deflationary
juggernaut of state and local budget cutbacks, presumably to be accompanied
by a wave of municipal bankruptcies that, it is easy to predict, will hit
philosophically blue states such as California, Michigan and Ohio hardest.
We Bet on DIA Puts
For the record, Rick’s Picks told subscribers
to buy January 128 puts on the Diamonds (a DJIA proxy) yesterday for 1.00.
Although our original DJIA target at 13259 was exceeded intraday by 47
points, the actual high at 13306 was close enough to an alternative target at
13303 that we have little trepidation about holding onto the position.
Subscribers have been advised to exit the puts only if they trade down to
0.70. However, if the Indoos work their way lower
as expected, our goal is to spread off risk by shorting puts of a lower
strike against those we own. With any luck, we’ll take in more for them
than we spent acquiring the January 128 puts, giving us vertical bear spreads
that cannot lose. We recently did this in Facebook, incidentally, where
subscribers hold two-dozen March 30-33 calls spreads for a net credit of
$300. That means the worst they can do is make $300 even if the stock falls
to zero. On the other hand, the position will produce an actual gain of $7500
if Facebook is trading above $33 come March 16. If you are skeptical about
this claim or want to determine whether our instructions were clear and
simple enough for you or anyone else to have followed,
click here for free access to the Rick’s Picks
archive. “Simple” was our intention, although some of our
recommendations are geared toward more experienced traders.
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