NEWSLETTERS & RECOMMENDATIONS - September 17, 2010

Dear Friends and Fellow Traders,

The Ugly:
The Current Population Survey (primarily by the Bureau of Census) just released shows that in 2009 the poverty rate climbed to 14.3% from 13.2% in 2008. The figure is 43.6 million Americans live below the poverty line and I'm sure the number will be much higher at least for the next 2-3 years. This number is the highest since 1994. This is truly ugly. It will get worst because Obama's economic policy can be summed up in two words - income equality. Obama feels he can spread the wealth more equally through government programs.

Obama's pre-occupation with income inequality causes the government to pursue economic policies and business regulations that restrict or inhibit growth. In doing so the Democrats punish business and the rich so much so that the growth isn't there and thereby punishing the middle class and poor. In fact, the more the government hurts business the greater the rise in the poverty level will be down the road. There is only way the cycle can stop - Obama has to be sent a message this November and he still may not get it but a number of Democratic senators and representatives may. Even if the Dems manage to control both houses it will never be the same for Team Obama, Reid or Pelosi again. Yea!

To date between the Fed's $2 billion increase in the size of its balance sheet and a nearly $3 trillion increase in the national debt we have only created 750,000 private sector jobs. See what I mean. You and I could have done a better job crisscrossing the country passing out the money to those individuals and businesses in need. We certainly could not have done any worst.

The Bad:
Barrons calls this the Trillion - Dollar Challenge in this week’s issue and says "Fear of taxation prevents U.S. companies from bringing in some of the $1 trillion-plus held overseas that could help fuel an economic rebound." Bush instituted a 5% tax and I believe $300-400 million came back. The U.S. has the second highest corporate tax rate in the world. Barrons further writes in their comments Chambers Cisco's CEO made a thinly veiled threat: if Washington doesn't change the rules, Cisco will have to invest the cash elsewhere. Earlier in the year the CEO of Intel told investors that it costs $1 billion more to build and staff a semi-conductor plant in the U.S. today versus building one overseas. Think of what $500 billion or more could do invested or spent here instead of overseas?

Just three weeks ago nearly everyone was in a panic as the market was going sharply lower. In fact, according to the American Association of Individual Investors (AAII) only 20.7% were bullish and almost 50% were bearish. Where have all the bears gone? In a surprise reversal this week we find almost 51% are bullish and 24.3% bearish. Remember back in April I used similar extreme bullish numbers to recommend a put trade that made a 900% return in only 3 weeks. Time to start taking some money off the table would be the prudent thing to do. I thought selling some naked calls might provide a return but the premiums are non-existent as the risk/reward is much too great now. I’m waiting to see if market fails or breaks out. Either way there's a good trade ahead.

The Good:
Unlike August's weak economic reports, there has been more consistently above consensus data during September. Before we get too excited, more good news will have to be forth coming. The election picture seems to becoming a bit clearer. The Tea Party kicked a few GOP butts that may cost 1-2 seats in the Senate but now it's time for this political tsunami to really kick some "Donkey Butt" and send Obama a message loud and clear. This could be just the wake-up call this administration needs to become more pro business and investor friendly.

More importantly most of the large funds and Hedgies have hidden out in cash, very safe equities or have moved to the side lines these last few months. If September breaks out up the monies are going to be forced into riskier assets, especially stocks in order to perform or lose the money and/or their jobs.

Lastly, the Leveraged Buyout Firms (LBOs) raised enormous funds about 5 years ago that has to be put to work by the end of next year or returned. I'm betting that won't be returned. In addition a number of the buyout firms have rather large new issue offerings filed giving them even more deal-making funds. I'm guessing the raised $s could be as high as $65 billion or the ability to buy over $450 billion worth of public or private companies. For the sellers that’s one hell of a chunk of money to put back in to the markets or spend.

Under ideal circumstances, I can see a strong September followed by a brief mutual fund tax selloff in October with a higher close into yearend all with a chastened new Obama. I can dream can't I?

Trade or the Week in Review:
Most of the week's rally occurred on Monday. The remainder of the week markets traded in a narrow range, sold off early and closed at the highs nearly every day except Friday when we needed it most. After trading as high as 1132.75 in the Thursday overnight session the market opened Friday 1125, rallied to 1126.50, rolled over and basically went to a big 2-day 60% buy coupled with a 30 minute 5-day 40% buy. No big up was expected. I even wrote on the "A" chart that the option trade wouldn't be there.

The 1126.50 high matched the June 21 high for a triple top and a Tenet #3 sell with 30-minute triple "D" (divergence). The 510 puts got as low as $.90 and were $2.60 less than an hour later where profits could be had. There were lots of hedged longs to be traded as well.

After 3:00 I sent an Alert Email to consider buying the 510 calls between $0.20-.25 for a throwaway trade. The calls trade as low as $0.15. I had a $2,700 long 150 call position after commissions. The market rallied about 3.5 S&P points but the calls never exceeded $0.25. I alerted the Chat Room I was shorting 50 E-minis as a hedge. By 3:50 it was apparent nothing was going to happen so I covered the shorts at breakeven and sold the calls for $0.10.

Had I waited about 15 minutes longer the E-minis dropped 2 points for a potential $5,000 profit versus $2,500 option loss and I would have made money versus losing nearly $1,200. Lesson learned. I've said this before only to forget it in the heat of battle -"They" work to pin the strike by pinning most large cap stocks to a strike price during monthly expirations. Both 510 puts and calls got pinned and lost significant premium. Therefore, in narrow ranges the Weekly’s work better. There is no pinning stock to strike price and "They" can do whatever they want. See Friday’s C Chart, NET Weekly Money Chart 2010-09-17.

Keep those cards and letters coming.

Good trading,

Stan Moore
702.267.0396

P.S. I hope you all have a sense of humor so here goes. I met a fairy today who offered to grant me one wish "I want to live forever," I said. "Sorry" said the fairy. "I'm not allowed to grant wishes like that!" "Fine," I said. "Then I don’t want to die until after the Democrats get their heads out of their asses!" "You sneaky bastard," said the fairy. Go Tea Party!