SURVIVING THE GAME

OCTOBER 9, 2008
2008 - 3

I am sorry. That is what I feel today. I am sorry for delaying the start of this newsletter until now. I have been toying with this idea for years but just never got around to it. For that I am sorry. The money that most of you could have saved this last year is astounding. Who would have thought things could unfold as they have? Today was another brutal day for most investors. I heard today was the 3rd worst day for the Dow ever. Worst day was the crash of 1987, 2nd was a day the week after and today was the 3rd. Unfortunately, Toronto isn’t far behind. My only hope is that I can possibly help guide you through this mess.

If you are light on equities, stay out. This is probably not the bottom yet. I said I thought we could drop another 20 %, I didn’t mean in 2 days !! If you are fully invested or just can’t resist getting in, please don’t just buy stock or sit there and watch your money melt away. Try to use some of the options I outlined in the last newsletter or call if you would like to discuss other options not yet explained. Typically the bottom will be marked not by some huge volume blowout day to the downside, but by a huge volume blow-out day up. Look for 10:1 up vs. down volume on HUGE overall volume. This is usually followed by a pull back and then off to the races we go. We may see a 1000+ point up day when this is over. So, keep your cash safe and wait for the sign. I will try to send out a letter during this time. It could be next week or not for some time. I felt a noticeable change in attitude today amongst the talking heads on the TV and radio. They started to say things like “ maybe this problem can’t be solved “ and “ this market could drop another 50% “ as opposed to their usual “ don’t worry, stay invested and ride this out “. This market is different than most because we have the added twist of the seized credit markets. Usually when things are bad the Fed just opens the tap and pours dollars into the system, lubricating the recovery. This time, no amount of dollars are able to unlock the fear that those with money have. I heard today that there are 7 trillion dollars in private equity waiting on the sidelines.

Keep your eye on the LIBOR rate. That is the London Inter Bank Offered Rate. They have started showing it on CNBC on the top line. It is currently at 5.09 % As little as last month it was at about 1.5%. This is what banks charge each other to lend money back and forth overnight. THIS IS THE ROOT OF THE PROBLEM. This is a benchmark used for many lending rates but most importantly it is a gauge of confidence. Of all the things one could watch, I believe this is one of the most important. If banks won’t lend to each other, they sure won’t lend to me or you ( or a company like GM !!! ). The system is frozen due to a lack of trust and that will take time to ease. The lack of positive reaction from the bailout bill and the coordinated rate cut shows that this will be a tough ship to turn around

Also, watch the VIX. Look at a long-term chart of VIX and VIN. These are volatility indexes put out by the CBOE. A better name for them would be fear-o-meters. We are reaching levels not seen since the meltdown in 2000 and the crash of 1987. A huge spike like this in the VIX is another good sign that the bottom is near. When fear reaches unbearable levels, it is over. The volatility is what drives up the price of options. This is what makes some of the option strategies I discussed last time look so appealing. We are looking at an opportunity that comes around maybe once every 10 years or so. Those able to stomach the risk will be able to sell options soon and make an absolute killing. The best example I can give is in 2000 near the top ( all this stuff works in reverse as well ) one of the internet stocks was trading at about $300. A person could sell an options straddle for almost $300. That meant that if the stock dropped to $0 you broke even and you didn’t lose unless the stock rallied above $600. I can’t remember which stock it was but I know it sold off to less than $100 and you were able to buy back the options you sold for $300 for about $230, pocketing the $70 profit. And this was on a stock that was crushed! The same sort of thing is setting up now only in reverse. Stay tuned, I will send out specific recommendations when it is time.

To close I just want to say that I believe we are getting pretty close to the end of this nightmare. So hang in there and start to think outside the box to be able to benefit from the coming market conditions – whether that is a rally, sideway action or a continued decline. You can profit in any market.



Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca