There is little doubt that business leaders in general would prefer that presidential candidate Mitt Romney wins the election in a few weeks. One of the basic differences between the Republicans and Democrats as it relates to their respective views of the economy is that Republicans perceive the economy is viable when businesses profits are growing. Whereas, Democrats tend to believe a prosperous economy is one where job growth generates higher worker wages and benefits. Republicans are generally recognized for what are considered pro business policies, plus Mitt Romney's solid business background deeply endears him to the Chamber of Commerce crowd. It may be assumed that business owners longing for a Romney presidential victory should correlate into a stronger investment market as his candidacy has gained momentum. However, this has not been the case and there is a strong argument that a Romney win could be a short term negative for the market.
The New York Times has reported that Fed Chairman Ben Bernanke may not stick around for a third term at the central bank. Mr. Bernanke's term as Chairmen ends in January 2014 and Republican nominee Mitt Romney has already said that he will not re-nominate Bernanke if he wins the presidency. And the article also stated that Treasury Secretary Timothy Geithner has already made it clear he wants to leave his post by the end of the year. Most market pundits agree that investments have been catapulted higher due to excessive liquidity provided by central banks from around the world. Market fundamentals have been less that desirable for a long time with the ongoing European debt crisis, escalating worldwide geopolitical tensions, and fiscal problems in the U.S. But the market has continued climbing higher with an occasional pause as every time it appears that investors are getting nervous and start showing withdrawal symptoms the central banks step in to provide a fix. Many Republicans have not been shy about expressing their disdain for the Feds unconventional efforts to spur economic growth as some economists argue that they risk future inflation and abet profligate spending in Washington. The Fed has committed to providing excess liquidity for the near future, but a big Republican win could conceivably reign in the central bank easy money policy.
Businesses cash flow is absolutely not an issue as companies are sitting on piles of money having long figured out how to extract profits from business operations in a tight economy. Whoever wins the presidential election, there is very little they could do to in the near term to resolve all the economic uncertainty including the impending 'fiscal cliff' and questions about how the regulations for the new Healthcare law will be written and implemented. However, from an investment perspective if president Obama is re-elected there is probably a higher level of assurance that the central bank will continue with its current policy and backstop the market with liquidity infusions to prop up asset values. All the market seems to care about at this point is stimulus and if investors perceive that a Mitt Romney win might snatch away the punch bowl they may be inclined to start cashing in chips while they are ahead?
As indicated in the S&P 500 index P&F chart below the stock market is in a near term downtrend. The major equity indexes have dropped below the lower level of their relatively narrow trading ranges that had been place for a few months. Relatively tepid third-quarter earnings and profit data have given stock prices a reason to pull back. Basically stocks have given back most of the rally from the Feds QE3 announcement in the middle of September. Prices may be stabilizing as traders have stepped in over the past week to buy the dips and prevent a correction. Over the next week or so we should know whether the current pause is merely giving the market an opportunity to absorb oversold conditions before continuing downward or if prices have established a new support level for a trading range.
The Treasury Bond Fund P&F chart below suggests that the current investor mode is 'risk off' trading as bond funds are in an uptrend while equities are trending down. If stocks hold up and don't fully correct over the next few weeks then it is reasonable to expect another upside move toward the end of November. After third-quarter earning season winds down, market prices will react to analysts' speculation about what the Fed will announce at the next FMOC meeting on December 11 â€“ 12. The Fed is expected to take action because 'Operation Twist' is scheduled to expire at the end of the year. Under Operation Twist, the Fed has been selling short-term notes and using the proceeds to buy longer-term treasury bonds. When Operation Twist expires, the central bank will run out of short-term investments to sell. Market pundits surmise the Fed will announce that it will replace Twist with another program to keep buying longer term bonds to keep interest rates low.
SPY Position Update -------------------------------------------------------------
SPY closed at $141.35 on Friday â€“ the November position is approx. $800 in the black
The October 17th Couch Potato published a November expiration SPY call spread
On October 23rd we suggested closing out the call spread for an approx. $900 gain (see tables below)
The October 11th Couch Potato published a November expiration SPY put spread
The put spread is approx. $200 in the red (see tables below)
$138 strike price short put delta is -.2816 (72% probability this position will be profitable)
SPY Risk Analysis
As mentioned above we closed out the SPY call spread, therefore the only risk is the S&P 500 index continuing downward and threatening our $138 strike price SPY short put.
TLT Position Update -------------------------------------------------------------
TLT closed at $122.64 on Friday â€“ the November position is approx. $1,200 in the black
The October 11th Couch Potato published a November expiration TLT call spread
The call spread is approx. $600 in the black (see tables below)
$128 strike price short call delta is .1347 (87% probability this position will be profitable)
The October 22nd Couch Potato published a November expiration TLT put spread
The put spread is approx. $600 in the black (see tables below)
$117 strike price short put delta is -.1422 (86% probability this position will be profitable)
TLT Risk Analysis
Treasury bond prices have trended upward over past week, but the path or least resistance is downward which would threaten our $117 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $165.96 on Friday â€“ the November position is approx. $1,200 in the red
The October 11th Couch Potato published a November expiration GLD put spread (see table below)
The put spread is approx. $1,200 in the red (see tables below)
$165 strike price short put delta is -.4221 (68% probability this position will be profitable)
GLD Risk Analysis
Gold is in a strong downtrend and has already encroached on our $165 strike price short put. There is a lot of time left before November option expiration and if the trend doesn't reverse course we will evaluate potential trade adjustments.
Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a week or so prior to the expiration date, we may be able to hold out for a .05 (or less) bid.
If one of our short strikes is penetrated (closing price above a short call or below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.
Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.