The financial media would have you believe that everything is okay, that a second-half recovery is upon us.
We’re nowhere near a sustainable recovery, regardless of what the media says. Fortunately, there’s a simple way to profit from it, which we explain below.
Look, we’re not here to rant about politics. We’re simply pointing out how the financial media is missing the real story with their religious-like faith in Obama. Newsweek editor Evan Thomas, for example, once said: "Obama’s standing above the country, above — above the world. He’s sort of God.”
Such hero worship could lead Obama to believe his own press. Heck, I’d be inclined to believe it too if I were praised as much.
But what the press won’t tell you is we’re headed for a minefield of financial catastrophe that could end in a double dip recession.
The current Administration is re-inflating the old Bush bubble by pumping up asset prices, re-inflating the popped credit bubble, and hoping for some sort of economic recovery that’s still a ways off.
They’re basically kicking the can down the road, hoping for the best.
Greenlight Capital fund manager David Einhorn agrees, noting that the Administration is "trying to stretch things out in hope that time will solve the problems." They’ve "adopted an attitude that "what’s good for the banks is good for the economy."
But Einhorn questions that view of "what’s good for the banks is good for the economy," "because the best interest of the banks is to buy time so that future earnings can outrun embedded losses, while the best hope for a rapid economic recovery rests on insolvent borrowers. . . A corporation, homeowner or consumer that has more than manageable amount of debt is not going to hire people, invest or spend."
And, unfortunately, no amount of new capital will force banks to provide credit to consumers and businesses that carry far too much debt.
It’s also why smart traders are short the market…
…And betting on the possibility of a double dip recession, as unemployment skyrockets, bank bailout funds begin to dry up, and interest rates rise.
You see, there’s increasing concern that when the flow of money dries up (beginning in 2010 when much of the stimulus package is spent), the economy won’t be as strong as we think it is. And at the core of the double dip scenario are the consumers, who have barely left a dent in their debt.
Consumers have witnessed an unprecedented destruction of wealth over the last two years. They won’t be prepared to face any more challenges like rising mortgage rates, an end to stimulus spending, and high rates of unemployment.
By the end of 2008, households were on the hook for more than $13.8 trillion in debt. And households owed about 130% of disposable income at the close of 2008, proving a willingness to spend well beyond means.
Add this to crippling credit card defaults, high unemployment, and mortgage reset problems over the next three years, and you’ll see we’re nowhere near the end of the economic woes.
(As economically pessimistic as this may sound, there are bright spots to be found in this market, too. There’s always a bull market opportunity somewhere.)
So how do investors like yourselves profit in a debiliating situation?
One way is to buy LEAPS on the major indices (as we’re about to in Options Trading Pit), credit card companies like American Express (AXP) and Capital One (COF), or even consumer discretionary stocks. It’s only a matter of time before each of these come tumbling down.
And as we said above, there’s a very easy way to profit from the possible "double dip", using LEAPS.
And for those of you new to LEAPS, here’s a bit of background from Options Trading Pit. . .
How to Buy LEAP Options. . . and Maximize Your Gains. . .
There are two ways to fully maximize your potential gains. One is to buy the underlying stock in each, diversifying your portfolio. Another is to buy long-term options LEAPS.
Say you’re anticipating an advance in the price of a stock option over the next two years, but don’t want exposure to time decay issues.
LEAPS cost only a fraction of owning a stock. And they’ve been known to rocket higher as the underlying price moves. Say you own a $50 stock, and it goes up $5. Your gain is 10%. But say you own the January 50 calls, for example, at $1 and the stock went up $5. You could now be sitting on 400% gains.
That’s how you maximize your potential gains. Not by worrying about time decay, or making scant gains from holding overpriced stocks.
Your risk is known.
You can buy LEAPS calls if you think a stock is rising. You can buy LEAPS puts if you think a stock is heading lower. There’s a lack of time decay.
You can play "big picture" trends, using commodities such as gold. Say the dollar gets weaker. Investors run to gold as a safe haven, and you own the XAU LEAPS that’ll leverage your gains when gold moves in "your" direction.
Ian L. Cooper
P.S. My Options Trading Pit readers are gearing up to bank monstrous gains playing the coming "double dip" crisis. We already banked 57% on the short side of Treasuries this month. And we believe credit cards, prime loans, commercial real estate and broad market weakness are right around the corner. Click here to make sure you get in on the next winning play... and the 48 others I’m guaranteeing after that.