Congrats! NET trader books $220,000 profit on our '09 stock of the yr.

Fellow Friends and Traders,

Market Overview

This week, the Fed released its April meeting minutes and the news was not good. All estimates for U.S. economic growth were revised to reflect a worsening economy over the next two years. Overseas markets sold off hard.  There has been no signs of economic improvement, just slower rates of worsening. Less worst won't cut it going forward. The market needs to see growth.

Our technical analysis work is now confirming preliminary bearish economic signals we got last week. See our NET daily chart which shows massive leading "D" for the first time. This rally certainly has had nine lives but may be coming to an end. It's our job to look for confirmation of a leg down.

Stocks are no longer cheap going forward. The market absorbs bad news and $10s of billions of equity or secondary offerings. The market staggers from the blow and now for the "Where do we go from here?" question.

I see a battle royal (a violent struggle) between the forces of the Great Unwind and Massive Government Intervention well into the future. We've never been here before and there is no road map. Government is rewriting the rules as we speak.

We had the grand daddy of all economic and financial meltdowns and it makes sense to experience the mother of all market rallies. We know there is a "new normal" so the key is determining which normal share prices are discounting after the rally.

I believe that the U.S. consumer durable sector - areas such as housing, auto, appliance, and retail - is secularly challenged. Stay away!  The financials depend on household debt servicing which seems marginal at best. Note the 18% non-performing loan status of this week’s big Florida bank failure. However, I love one large major bank stock here – see below. The major banks are a buy on weakness while regionals are a short given their rather large exposure to commercial real estate.  I see a potential paired trade here?

Clearly, the Fed and Government are taking every step possible to move the country forward, borrowing and creating trillions. High inflation at some point down the road is almost a certainty. Hence, our love for the reflation trade. I've covered this in "Spades" already. We will own large positions in Energy and Materials. Meanwhile, US Government Bonds are getting killed and our USD is making a 4-month low.

Meanwhile, we have made our choices and will have to live with the consequences of our decisions, huge debt and government control of our auto, energy, banking and health care industries for years. These decisions will remain much longer than any de-leveraging would take in our capitalist system.

We have to invest accordingly but we have to have an "Alternate Plan" to deal with the inevitable move to much higher tax rates from all sources, high inflation and a move to the more socialist state I see coming.

Updates

First let me say I've paired back my equity positions rather substantially. I can always reverse this on a dime. You’ve heard me say this before - I'd rather miss a trade than lose $$$. I’m not bearish but rather cautious. A 38% rally is quite breath-taking; I need to catch mine. I'm hoping to add substantial new naked put positions on any 8-10% retracements to our Favorites. At the present, the S&P 820 area is my target buy area.

HUN continues its march higher up $0.80 @ $6.70 and a weekly high of $7.33 heading into its June 8th date with destiny.  I've rolled a lot of my long June 7.50 strike options over into a long bull spread.  I'm now long Aug 7.50 calls and short Aug 10s for a $0.50 debit.  If I'm correct and HUN closes above $10.00 I will make a $200 return on a $0.50 bet. I like this here but I will add 50% more naked 10.00 calls on rallies near $8.00.  If I'm wrong I will lose over $15 but have almost no cost on the 7.50 calls for a free ride.

LINE caught a few upgrades now that investors believe the dividend is safe and closed over $18.25.  Analyst targets are anywhere between $21 and $29. Go LINE!!! I sold stock as I mentioned 2 weeks ago and added more naked puts. The company raised capital but I was not happy will a $200M bond offering with a 7 year 11.25% yield.

I finally closed out all naked puts in CAT, FCX and CHK. I'm back to overwriting OTM calls on these on almost all other long positions.  Remember roll your calls up and over if you do not want to be called away.

Finally I'm getting sucked back into the BAC. I initiated a new long position on the recent BAC secondary but did not stay long.  I chickened out; I'm happy to say I sold the stock is much higher than Friday's close.

Currently, MS and GS are buy recommendations. MS raised their target to $32 from $25 last week. It's Doug Kass's new favorite long. I met a hedge fund type at my Nirvana Seminar Monday and it's his favorite long financial with a $3.50 EPS number for 2011. We can start discounting this number a year from now.  Paulson, one of the best HF managers in today's market environment, loves BAC and holds a rather sizeable position, I might add.

I started to write BAC Jan 2010 10.00 naked puts over $2.25 and intend to sell more higher. I will look to use these put premium to buy Jan 2011 10-15.00 strike calls with the stock under $10.00. On rallies I will look to sell closer in OTM calls. Another bank analyst Dick Bove thinks BAC could earn $4.50 or more out to 2012-13. The company just raised $20B in new capital and plans to sell more non-essential assets to repay TARP. Yea!!  Don't hold your breath on this happening anytime soon but they can dream can't they?

This pretty much sums it up for the week. As always keep those cards and letters coming I read every one. Almost forgot.

Now he's looking for weakness to get back in. Way to go!!! Congrats!!  I'd love to put an email with your kind words into my web site.

As always thank you for all your support. You have made me a much greater trader than I could have ever hoped to be. It truly drives me. To think I was doing all this work for free. Now maybe someday I may actually earn some money from my teaching.