NEWSLETTERS & RECOMMENDATIONS - October 3, 2010

Dear Friends and Fellow Traders,

Last week I briefly noted that the Tea Party really took the GOP to task but the fun was just beginning for the Dems. I believe tensions between Obama and fellow Dems blew out last week. The Dems left town so fast they didn't bother to pack their bags or pass a budget resolution of any kind.

I can sense a war is brewing in the Democratic Party with the President losing control of his base. From early Congressional polling races in swing districts the Dems that didn't support Obama are leading big time while those who supported him are trailing badly.

I can see real problems for the U.S and stock markets big time down the road that neither party will or can fix. Looking ahead, who needs Greece when we have Ireland? Ireland is already in a depression and its new four year budget will only shrink the economy even more. Most are surprised. Ireland, unlike Greece or Spain, is taking this sitting down without a whimper. However, I believe Ireland and not Greece will be the first to see massive social unrest and default. These problems will play out over the next few years providing us with a glimpse of what's in store for the U.S. down the road.

Part of the real problem for Team Obama stemmed from the fact that his programs never worked for the economy and Biden et al keep telling us from day one that if they didn't act the economy would have fallen off a cliff and things would have gotten much worst. Obama focused on how many jobs were saved. Americans didn't buy into the story.

A WSJ article which compares total 2007 employment levels with those of the second quarter of 2010 in the United States, the United Kingdom, the 16 Euro zone countries, the G-7 countries and all OECD (Organization for Economic Cooperation and Development) countries.

There are 4.6% fewer people employed in the U.S. today than at the start of the recession. Euro zone countries have lost 1.7% of their jobs. Total employment in the U.K. is down 0.6%, G-7 average employment is down 2.4% and OECD employment has fallen 1.9%.

This simple comparison suggests two things. First, that American economic policy has been less effective in increasing employment than the policies of other developed nations. Second, that if there was a cliff out there, no country fell off. Those that suffered the most were the most shameless spenders, such as Greece, and their problems can't be blamed on the financial crisis. While the most recent quarterly growth figures are just a snapshot in time, it is hardly encouraging that economic growth in the U.S. (1.7%) is lower than in the Euro Zone (4%), U.K. (4.8%), G-7 (2.8%) and OECD (2%).

Americans didn't buy into the lie and now feels betrayed. Obama grew the government and favored his friends (unions et al).The voters are taking action this November. I've always argued take your medicine now, like Bush did in 1989-90 with the Junk Bond induced real estate crisis. If Obama acted in a manner that was best for jobs, he should have taken his medicine as recessions are meant to correct excesses and focused all his energies there we'd be well on our way out by 2012.  Then he'd be a two-term President. Instead Obama appears to become a lame duck some time in 2011.

Market Reviews and Thoughts:
The markets enjoyed their best September since 1939. Why? First the Fed tells us the" Helicopters are “Hovering." Most investors are jumping in front of the Feds possible purchases of government bonds come the election. Risk was back. With an expected flood of new liquidity, mergers are encouraged, commodities rally (ala gold, copper and oil). Stocks follow as earnings estimates rose a bit. I saw July/August numbers near $79.50. During September I saw the numbers rise to nearly $80.00. Today the new forecast is nearer $80.35. Companies start reporting Thursday with Aloca. We may see some projections downplayed for the fourth quarter so companies can beat the new lower expectations. The only real disappoints may come from tech.

The 2011 earnings estimates will be refined as their visibility increases. Today most analysts remain near $92.50 up slightly from near $92 in September. Over a month ago GS cut their forecast below $90. It is my belief most estimates will come down closer to $90 during the fourth quarter. Therefore, I only see a modest rally that could reach 1200 with a little luck but no big downside yet.

Today's Barron's tells us that 27% of funds are trailing their benchmark index by 5%. This is the highest number since 1998 and only 3% of the large-capitalization stock funds are beating their mark by 5%. In 1998 Barron’s noted that the S&P 500 rose 21% from Sept. 30 through year end, proving it's a good year for equities as managers played catch. Wouldn't that be nice.

However, if the Fed doesn't deliver in November as expected and the economy remains weak look for a lower market.

Looking Ahead This Week:
All eyes will be on Friday's Jobs numbers. The consensus forecast calls for an unchanged number after layoffs of 75,000 census workers. I can further see the jobless number will tick-up if more workers enter the work force. Either way I see continued weak job growth with possible revisions down for past months. If this is the case, the nail is in the coffin for the Dems. This will be the last number before the election. The markets will trade and NET traders will be there to take advantage.

BioTime:
I'm still trying to figure this stock out. On Thursday the stock drops $0.35 with no news then on Friday BTIM rallies $0.35. All I know is that technically BTIM has broken the 20 and 50 DMAs to the upside as well as the multi-month down trend line. Overhead is the $5.60-5.70 200 DMA. I continue to sell puts and use the proceeds to buy Dec/Mar 5 calls and sell a few shares in strength thus taking $s off the table without cutting position much overall.

I haven't seen any news yet but there seems to be 1-2 stem cells conferences every month somewhere in the world with Dr West speaking at every one of them. This coupled with multiple new product offerings should translate into higher stock price for BTIM in 2011.

I continue to see BTIM with two very important businesses. If I can use a California gold rush analogy, Levi Strauss become rich selling miner’s clothing supplies and miners became rich finding gold. BTIM sells supplies and has every prospect with over 200 product patents for striking gold. I never owned a company that offered it all now with a very small market cap and limited dilution before like BTIM.

Trade of the Week in Review:
Thursday before the opening I sent an Alert Email looking to buy puts in an expected false breakout through 1150. I couldn't follow-up fast enough because the rally lasted all of 15 minutes and we don't chase options up or down. NET traders are almost always buying options into extremes and scaling in or out at extremes as well. In this case, I was wrong because the OTM 515Ws went from $0.80 to $4.00 in a matter of hours.

Early Friday after the opening, I identified a narrow trading range day in an Alert Email where we could trade options. Before 10:40 I sent another Alert Email to buy the 515 calls under $1.50 and to scale-in lower if needed. Shortly thereafter the calls traded down to $1.10. The S&P E-mini hedging profits more than paid for the calls. After 12:30 I sent an Alert Email when the call his $2.35 and to scale out into strength. The calls hit $2.90 and closed at $2.25.

My personal favorite trade in the Chat Room and in an Alert Email was to buy the 515 puts under $0.50 and go long E-minis as big as possible. The puts hit $0.20 giving us say an average long position near $0.30. You mostly lost all your put money but made anywhere from $300-400 per contract on the long S&Ps. Just hedging 50% returned almost 5Xs and higher hedge ratios returned 6-7Xs. See Friday's 5" C chart, NET Weekly Money Chart 2010-010-01. It was a great day for trading OEX options hedged with S&P futures – NET style!

This continues to be nice work if you can get it and I'm the only place (or New Era Trader) you can get it.

Keep those cards and letters coming. I see we are picking-up few new students in the Chat Room. Welcome aboard.

Good Trading,
Stan Moore
702.267.0396

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