Second Quarter Report (At Least I Got One Prediction Correct)

by JDH on June 30, 2012

It’s end of June, the end of the quarter, so three topics to discuss today:

  1. My prediction for a massive rally
  2. Obamacare
  3. June 30 report: who won the Buy High Sell Higher prediction contest.

Let’s get to it.

Stock Market Rally

Last week I asked the question: Is a massive stock market rally starting? I postulated that with the negative tone of the markets, and with the presumed defeat of Obamacare by the Supreme Court, we could have an unexpected rally.

So, as a gamble, on Wednesday, the day before the Supreme Court ruling, I bought, 10 contracts of the SPX July 1370 calls. I paid $6.50.

As luck would have it, I was wrong, and the Supreme Court upheld Obamacare, which resulted in a small drop on Thursday. But then, on Friday, it was back to the races, with a big rally on the markets (for no apparent reason). So, not wanting to tempt fate, I sold my options on Friday for $9.50.

I got lucky. I was wrong on the Supreme Court decision, but I got lucky and made $3 (which on 10 contracts is a gain of around $3,000 on a $6,500 gamble).

I could have held on for more, but since options are a wasting asset, I was happy for the cash, and that was that.

Supreme Court and Obamacare

I am a Canadian, so I am indifferent to whatever decisions are pronounced from the U.S. Supreme Court. That being said, I found the reporting on this quite interesting.

Conservatives are calling Chief Justice John Roberts a traitor for upholding this legislation. Obama supporters are presumably quite happy.

Here’s my take:

I think the Chief Justice’s decision to side with the “liberals” was brilliant.

As a conservative, he probably wanted to kill the law. However, as the Chief Justice, he also has to uphold the integrity of the court. Americans are not big fans of un-elected judges over-turning laws enacted by elected representatives. So what’s a judge to do. In this case, I believe Chief Justice Roberts made the perfect decision: He upheld the law, so now no-one can say that “the decision was split along party lines” or “an un-elected court over-turned the will of the people.”

But, at the same time, he made at clear that he was only supporting the law because Congress quite obviously has the power to tax, and this is a new tax. Whether you agree with that reasoning or not, it allowed him to have his cake and eat it too.

If I was Mitt Romney, I would be thrilled with this decision. He can now go to the electorate with two talking points:

  1. Obama lied about no new taxes on the middle class; even the liberals on the Supreme Court agreed that this is a new tax.
  2. The court made it clear that only elected representatives can change the law, so in November vote for me so I can change the law. If Obama gets re-elected, the law won’t change.

Enough about politics, let’s get to the markets.  (Although if you are interested in irrelevant news I could express my shock that Tom Cruise and Katie Holmes are getting a divorce……………..).

Buy High Sell Higher Reader Predictions

Each year I ask readers to submit their predictions for where the Dow and the price of gold will close at the end of each quarter.  You can read them all on our 2012 predictions page.

The group predicted, on average, that the Dow would close on June 30 at 11,902.  We were somewhat pessimistic (not fully grasping the extent of money printing to support the market) as the Dow actually closed at 12,880.  Congratulations to Uboat with his prediction of 13,000, a virtual bullseye, only 120 points from the actual close.  Well done.  Honorable mention goes to ChrisC at 13,220, meaning that we only had two participants that predicted a number higher than the Dow actually closed.

In case you are wondering, both Uboat and ChrisC are predicting that the Dow will remain unchanged between now and the end of September, so govern yourselves accordingly.

As for gold, the group predicted a closing price of $1,655, and the actual closing price was $1,597, so again we expected the world to be in worse shape than it appears to me.  As for the winners, two of you nailed it with a prediction of $1,600, a perfect hit.  Congratulations to Uboat (again) and Peter518; well done.  Both Uboat and Peter518 are predicting increases over the next three months, to $1,750 and $1,700 respectively.

How did I do? Not even close.  I expected 10,500 on the Dow and $1,900 on gold.  My pessimism was not rewarded this quarter.  The drop in gold and silver has not helped my portfolio, as I’m only up 4.2% on the year.  However, I still have cash, and I believe I’m well positioned with quality precious metals stocks, and I’m not on margin, so I can afford to sit back and wait for the inevitable upswing.

That’s my plan, and I will think no more about it as I enjoy the Canada Day weekend here in Canada, and pass on my best wishes for the Fourth of July in the USA.  Thanks for reading; see you next week.