The Citi puts we hold will give us some positive exposure if stocks take a dive between now and December. Anything below $40 a share would be worth $1,800 a point to us, so we’ve got pretty decent leverage. And it doesn’t hurt that earlier profit-taking has reduced our cost basis on these puts to just 27 cents apiece. 

When we bought them a while back, the assumption was that Citi would be a high-beta performer in any serious downturn. Now I’m not so sure. Assuming energy costs are going to sap the economy in the coming months, it’s possible Citi will come to be viewed by retail firms' pathologically sunny analysts as a defensive stock. With the onset of winter, one of the biggest negatives for the corporate bottom line and the economy as a whole will be the already higher-than-ever price of energy. And if temperatures should turn frigid in the Northeast, that will worsen the situation, since homeowners will find themselves bidding against manufactuers for a critically limited supply of fuel.

Cost of Money

If so, expect Citi’s operations to be little affected by it. It is the cost of money that is the banking behemoth’s main concern, not the cost of fuel, and for now at least, the banks would seem to have few worries in that department. Indeed, despite persistent tightening by the Fed, there is as yet little evidence that the money center banks are having trouble expanding their lending. 

(Click on chart to enlarge)

Concerning my outlook for crude oil, we’ll known more soon, since a key hidden-pivot support that I’ve flagged in December crude is likely to be tested this week. If it fails, great. That would be a sign that still-lower prices impend. But evn if so, the odds of a robust bounce from my number are high. In any event, there will be no way initially to tell whether it is a corrective rally or perhaps the beginning of a move to new all-time highs. Regardless, we’ll be bottom-fishing with the usual micro-tight stop-loss, looking for the kind of gains that could help offset this winter’s steep surcharge for fuel.

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We’re Put Buyers

We had a clue early on that stocks would be down yesterday when the futures failed by two ticks to reach a modest hidden-pivot target that I’d flagged in the weekend update. I’d written as follows: The futures appeared bound for a hidden-pivot resistance at 1205.00 when the music stopped on Friday. If they can get past that number this morning in the first hour, it would imply further progress to the next, 1214.50. In the event, the mini-S&P went no higher than 1204.50, at 7:40 a.m. local time,  about half-an-hour before the day session began. Stocks looked pretty punk all day, especially near the close.

Too bad the November 100 DIA puts that I suggested buying in an intraday bulletin stayed just out of reach. We were a couple of minutes behind them, and when someone took out the $1.00 offer, they never looked back. You can usually assume you’re on the right track when something you’re bidding for plays hard-to-get. In this case, the puts picked up juice as the session wore on, and by the final bell they were trading about 10% higher than they had been with DIA at the same price lower in the day. We’ll try again this morning, since it is not for no good reason that the market makers were unwilling to part with the puts at fair value.