Finally the market gets it

Last time I made a quick speculative Dow Jones Industrial option play, I used my regular brokerage account. This time When the market reached 11613 just before the Fed meeting annoucement, I decided to place a put option. To save on taxes, I tried to use my retirement account for the trade. I put a trade for November put for 117 on Dow at the then rate of 2.10 and then walked away. I planned to close/half the position on Friday after making a quick profit of 20-50%.

It seems my retirement account doesn't allow speculative bid - I have yet to call them and find out the reason. They rejected my order. By the time I got to know about it. Dow was around 11580 and I gave up.

Now the reason why.. If you have read my last two post you know that I am bearish on the US market in short term (6-8 months). Here are the links to the blog posts.

Now what prompted me to take action. I believe that most people in the market believe that there will be a slowing in the economy. The difference is opinion is whether it will be a soft landing or a steep thud. Even though spat of good news has helped push the market very near the two peaks to keep in mind (11670.19 on May 2006 and around 11750 during the 2000 boom). With the coming downturn at the back of their mind, most investors will rush to take profits if we do cross those peaks.

Unlike the last time, when I had strong belief of a quick turn around (up in that case), I was not sure when that market will go down. This was the reason I placed order for November puts that gave me some breathing room and have some time on my side. I missed the opportunity with market around 11500+ now. I have yet to call my broker and ask the reason why my order was rejected.

I am still medium term bearish and will place some puts if market goes up again. I don't believe that to be a case in next 7-10 days so till then I will lay low and keep watch.

Macroeconomics of a slowing economy (Part II)

Today was the last date for the 3rd estimated tax payment date (September 15th). As I paid my estimated taxes today, I couldn't help but think about another aspect of economic demand government consumption.

With the kind of fiscal indiscipline we have seen in the last six years (Both necessary and otherwise), I think we will see a controlled government expenditure during the next two years of Bush presidency. In a way last six years GDP has already borrowed some growth in the government expenditure from the next few years.

People might argue that what will stop Bush adminitration to keep spending through the next two years. I have two arguments in it's favor. First recent hires by Bush shows that next two years the monetary policy will be based on fiscal discipline. Also, Bush is not as strong in the Capitol as he was after September 11. So we will be seeing more democrats as well as republicans speaking out and at odd with Bush.

I will delay the post on investment strategies in a slowing economy. I think there is another important issue that needs to be addresses regarding the recent uptrend in the stock market.

Macroeconomics of a slowing economy

We have had a great rally in the last 3-4 years, now all signals point to a slowing economy. Actually, I should correct myself: We are in a period of mixed signals, but I view this as nothing but a transition from growing economy to slowing economy. If we wait for clear signals, we may have lost the boat.

Housing is slowing with home stock going down. With housing down consumer spending will decrease as consumers can not finance any more debt and will be thinking about saving (Who American, No Way!!!). Additionally, recent reports have shown that more CEOs are withholding capital investment than are thinking of increasing it. So, with consumer spending - one that contributes 65% to the total economic spending - slowing and business not ready to picking up the slack, overall demand growth will be difficult to sustain.

The above logic may fail as we have an unpresedent low unemployment rate. So, consumer income can provide a growth avenue to sustain consumer spending growth. But, I think unemployment rate has nowhere to go but up as we are at or below the natural unemployment. Additional income growth can only come from increased labor rates which finally hits the reason why we invest - corporate profits.

Another argument is that recent reduction in comodity prices and especially oil prices will give consumers more money to invest. I disagree with this argument as first we will not see any effect of these oil prices on our neighbourhood gas pump anytime soon. Also, recent events have proved , at least to me, that US consumer spending is not very sensitive to the oil prices in the range $55-$75.

So, if you agree with me that the economy is going to slow down. how should we change out investing strategy? This issue will be tackled in another post later this week.