Buy SPY,FXE puts

Everywhere talk of recovery and at the same time talk of stalling market rally happening. Folks like Jim Cramer are questioning the sharp rally happening in risk markets. Market is shrugging of bad reports and inching forward on small good reports. Turmoil in Europe, Housing doldrums in US and unimagined impact in emerging markets are forming the main events of the current act. Back drop is still peppered by deep sovereign deficits in developed economies and surplus in developing economies.


Today housing starts report printed 593,000 units. This is a 10% drop from month of April 2010. Starts of single family homes fell 17.2%. This number vindicates the fact that government’s tax rebate of 8000 dollars effect started fading. Construction industry folks are saying housing industry is still in dire straits. Lack of financing new projects is main bottleneck. Banks are not interested in getting into this high risky business in current environment due to expected losses. Housing starts normally acts as leading indicator of economic growth. Since this indicator is flashing red, economic recovery looks not a feasible outcome. My recommendation would be to buy SPY OTM puts.

Spaniards are occupied with world cup foot ball games although the country is sinking due to crisis in public finances similar to Greece. So what is really going on here? Euro zone governments came together and pooled together 950 billion dollars as a stability fund to bailout nations that are having difficulty in accessing capital markets. In May, Greece managed to get the funding issues resolved temporarily. Although, Greece is not out of woods yet. Now Spain came along with its problem of debt problems. In fact Spain took austere measure to bring the deficit down. These measures will not only bring the debt burden but also bring down the prospective tax revenue. In this situation only thing can help not in short term is to improve the competitiveness in the market. Spain is not alone in the world. If Spain goes down then along with it many other economies have to go down. First order effect will be on Euro. Euro has to depreciate further against dollar. Along with Europe its primary trading partners in emerging markets (India and china) will face a slow down. This means a contagion effect will kick start and economies around the world will again face show down. This time central banks that have already flooded market with liquidity need to employ financial engineering to bootstrap the economies from the brink of disaster. Can they? I think they might get lucky again. In the mean time I will recommend FXE puts to monetize the euro dollar parity.