Temper Your Optimism

 | Dec 01, 2011 | 7:48 AM EST
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Temper, temper, temper, temper. That's right. Temper your optimism on China because the Chinese statistics last night show China could be slipping faster than we thought, maybe faster than they can cut rates and at the same time that oil, a chief cause of inflation, stubbornly stays up or could go higher.

Temper your enthusiasm about U.S. retail sales and ADP hiring, because we know that we have seen blips of hiring before in this country but they haven't lasted.

Temper your positive feelings about the coordinated action yesterday because it is a sign that things are far worse than you thought, with big dominos about to fall if the sovereign debt crises aren't resolved and if Germany sticks by its fight-inflation guns.

Temper your feelings about the stock market's rally yesterday, because we rallied to resistance and were unable to take out key levels, while at the same time the FXE, which leads the market, didn't ruin its bearish pattern.

Let me give you a way to position yourself for this next leg. I would be long select retailers, high yielders, like Sanofi (SNY) or Bristol (BMY) or General Mills (GIS), as well as industrial yielders like Dupont (DD) or IP (IP). If you had a favorite tech, maybe you buy deep-in-the-money calls. Oils, oils oils. Brent's not coming down.

I would own gold, preferably the ETFs because we know about all of the problems that afflict individual gold miners.

And I would have a raft, a huge amount of in, at and out of the monies on any of the financial ETFs as well as individual U.S. banks where we don't' know what's really happening because they have chosen not to tell us.

I would set this portfolio up so that if the market drops 10% on a series of major bank failures, you will feel it somewhat on the long side. But you will clean up on the short side. I would be willing to risk, in the leveraged put way, up to 10% of capital, which we know can be a gigantic swing, if Europe blows it. If you have to err, then err on the side of too much.

Accept that if Credit Agricole or Paribas or Deutsche Bank or SocGen can't open its doors then you would have vast nationalization. Accept the fact that we could see 9% Italian bond yields and budget accordingly.

Prepare for DEFCON 1, which is what happens if they don't act and act now to fix the Eastern front (sovereign debt) now that we have thrown a lifeline to the banks. Understand that the ECB will next expand the collateral it will allow for further lifelines, but that there will be haircuts and those haircuts will put tremendous pressure on all the debt, subordinated and senior of the European banks.

All of these things can happen. It's 50/50 on that.

This way, if everything goes wrong over there your ten 10% could make you 30%. But you will lose 10% on the U.S. portion, which might come back quickly, with the exception of the higher-yielding cyclicals which will be hurt more than that.

Then you will be ready for anything this market throws at you.

Random musings: This cold snap is going to make Deckers have a real good holiday season. Deep-in-the-money calls three months out. The way to go.

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