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Street Smells a ‘Kick-the-Can’ Deal

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Published : December 12th, 2012
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Category : Opinions and Analysis

 

 

 

 

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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Rick Ackerman is the editor of Rick’s Picks, a daily trading newsletter and intraday advisory packed with detailed strategies, fresh ideas and plain old horse sense.
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