Back in the Saddle

Your June 1st Update

Dear Bottarelli Research Member,

After a wonderful week in Hawaii, I’m back at the command center – ready to continue our assault of this market. (I’ll share some pictures with you below, just in case you’re interested in my adventures.) For today, it’s quite clear that the bulls want to push this market higher and higher with no sense of restraint or caution. When I issued the alert titled “Strap on the Horse Blinders” on Monday, May 11^th 2009, I basically conceded to the fact that the market sentiment was bullish, and that we’d plug our nose and play alongside the upside trend in the most logical manner possible. At the same time, we also wanted to be aware of the potential market pullback in the works.

Looking at our current positions, I’d like to maintain our AGU June 50 Puts (AGU RJ) and our DRYS June 7.50 Calls (OOC FU). It finally appears like DRYS is breaking free of the shackles that have been holding it down lately, and this could lead to more gains on our calls. At the same time, AGU was unable to mount any sort of sizable upside move over the last week of market gains, so this tells me that the upside potential is currently tapped out. Holding both positions will give us both upside and downside exposure going forward, which is the smartest way to play this fickle market right now.

In terms of our two ultra-short positions, it’s time to take our lumps and give them each a moment of silence. As you know, the market has failed to move down in the manner that I expected, which has resulted in losses on our SRS June 25 Calls (SAK FE) and our FAZ June 8 Calls (FAY FH). I have no doubt that there will be a time when both plays jump aggressively higher, but unfortunately that time is not happening right now. As I mentioned above, the bulls are punch-drunk but in complete control of the market, so we have no choice but to close out these ultra-short positions now. Sell.

On that same point, I had some time to catch up on some reading over the last week, and here are some interesting highlights:

• In 2006, there was not a single trading day when the Dow rose or fell by 2% (or more). In the first quarter of 2009, we’ve already seen 21 such days. Volatility is here for good, my friends.
• In two years, Washington’s global bailout efforts will lead to an unimaginable Federal budget deficit of $3.8 trillion. To service this debt, the U.S. government would need to issue an average of $36 billion per week. I can’t even fathom the size of these numbers anymore. But in my view, this makes a very strong case for gold and silver, both of which cannot be created out of thin air in Washington. Therefore, I’ll continue to buy into the dips of gold stocks.
• This one’s as simple as it gets: History has proven that employment is the key to any sustainable economic recovery, and it’s quite clear that we’re nowhere close to job creation in this country. For example, the market cheers when we only lose 450,000 jobs in a given month — not the 600,000 that we’ve grown accustomed to. This is not a signal of recovery, my friends. This is a continuation of a very concerning trend. After all, the U.S. consumer accounts for 70% of the economic expansion in our country, and right now, that consumer is jobless, cash poor, and without any reserves. Plus, their home is no longer an ATM machine, but rather it’s now turned into a sinkhole that is costing homeowners more than it’s currently worth.

For these reasons, I still remain very, very skeptical about the recent market rally. Remember, bear market rallies are always very powerful and very convincing. As I mentioned above, I’ll play along to the upside when appropriate, but I’ll also remain very cautious.

As always, I’ll continue to update you throughout the trading session. But for now, here are some Hawaii pictures, if you’re interested. Enjoy!

Your editor getting pummeled by a wave on Big Beach:

Surfing on Maui:

Okay, now this one’s crazy. On a 2-mile waterfall hike, I peered over the edge of Whailia Falls, pictured here:

Later that week, on a helicopter tour, I got a full sense of the waterfall I was peering over. Here’s a shot from the chopper, with an arrow pointing to where I was standing above. Wow!

And finally, we’ll end with your friendly neighborhood sea turtle:

All told, a truly wonderful trip. But as always, I’m glad to be back — so that I can once again say…

Lock and load!

Sincerely,