AN EYE-POPPING THREE-HUNDRED-FORTY-SEVEN PERCENT!

The unraveling of the markets has done our portfolios a world of good...

OUR PROSHARES ULTRA SHORT QQQ (QID) CALLS ARE UP A WHOPPING ONE-HUNDRED-FORTY-FOUR PERCENT!

OUR LINEAR TECHNOLOGY (LLTC) PUTS ARE UP A BREATH-TAKING THREE-HUNDRED-TWENTY-FIVE PERCENT!

AND OUR CENTURY ALUMINUM (CENX) PUTS HAVE ZOOMED HIGHER BY AN EYE-POPPING THREE-HUNDRED-FORTY-SEVEN PERCENT!

And that's just for starters--we also have open profits of 94% on our SKF calls, 80% on our EUO calls, 37% on our TZA calls and 27% on our brand new HOG puts. In fact the only play that is close to break-even is our SHLD puts and those look like a fantastic buying opportunity.

The bottom line is it's never been a better time to be a bear--and chances are good this week that the markets will be pummeled lower adding even more profits to the right bearish plays.

To get a better idea of what is happening right now let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

As you can see the major indices are pointing due south--regardless of Friday's late short covering.

The current fear driving the markets lower is a sovereign default by Greece and several other weak Euro-nations including Spain, Italy, Ireland, Portugal and others. Because this is the current investor focus--and will be until it is resolved--we're going to take a good look at how the European situation is affecting our markets.

Late Friday there was a rumor the IMF might announce an aid package for Greece over the weekend and the reaction in the markets was instantaneous. Even if the rumor is unlikely to come true traders with heavy short positions could not afford to hold over the weekend and bought with both hands.

As of this writing it doesn't look like any 'miracles' are going to be announced and the markets will likely resume their dominant direction this week--lower.

The problem is widespread fears of national default in several countries--defaults that would wipe out billions in capital and shake the faith in several nations ability to stay solvent. For example on Wednesday Portugal tried to sell 500 million in bonds but received bids on only 300 million--in other words their bond auction failed--a situation that is usually unthinkable for a sovereign debt auction.

If Greece, Italy, Spain, Ireland or even Great Britain tried to sell a large amount of debt now the odds are good the auction would fail or be at an interest rate they could not pay. Dubai, Greece, Poland and Spain have already been forced to pay much higher interest on debt they sold recently.

The advent of the Euro and strict economic policies required in order to join the Eurozone gave lesser countries access to relatively cheap debt because the Euro was thought to be a sound currency. Unfortunately the Euro concept allowed those without sound financial policies to hide behind the Eurozone fueling their deficits with cheap debt denominated in Euros.

The problems in Greece are now starting to be seen in other Eurozone countries with hundreds of billions in Euro debt at risk. Unfortunately there is no mechanism in place for any Eurozone country to bail out another country. Membership in the zone meant you had to adhere to the strict financial rules that supposedly kept everyone out of trouble.

If anybody in the Eurozone is going to bail out Greece it would have to be Germany and that's not going to happen. Germany's economic minister reminded reporters on Friday that the same rules that required less than 3% debt to GDP also banned bailouts of one EU member country by another. Besides--Germany has their own economic problems.

The other option is a bailout by the International Monetary Fund. The IMF is in business to bailout countries from unsound financial practices but may not be inclined to spend the tens of billions necessary to rescue Greece--and then the rest of the struggling EU countries shortly thereafter.

Greece promised this week to slash its debt to GDP from 12.9% to 3% by 2012. Unfortunately nobody believes them as it is politically and economically impossible. Many analysts believe their debt is actually 15%--it was recently discovered that Greece falsified their economic statistics in 2009 and hid 40 billion in debt to make their deficit look smaller. With that kind of credibility record it will make borrowing new money extremely difficult.

Austerity proposals to reduce these crippling deficits have generated massive resistance. One of the major Greek unions with membership of more than 300,000 has called a public strike for Monday. The government deployed 10,000 riot police in Athens in December for a far smaller strike. Another union with 500,000 workers has also called for a strike in February but has not yet announced a date. These strikes will likely turn hostile. Unfortunately entitlements are fun to hand out but virtually lethal to try and take away--a situation we may have the chance to discover right here in our own country some day.

Greece owes 290 billion Euros and most of it is to European banks that are already struggling to stay afloat after the financial crisis. Greece will need to borrow another 54 billion Euros to cover its budget gap in 2010 but who is going to lend it to them? Investors are worried that any serious budget cuts by Greece would plunge them back into recession and eventually cause a devaluation of the Euro by default.

It is not going to be earnings driving our markets this week--it will be the faith in the European Union. The entire world appears to be rushing to short the Euro and buy dollars and that is killing dollar denominated stocks and commodities.

The Euro broke support at 138 to the dollar on Thursday as the crisis intensified and some analysts are now claiming it could return to 125---the level seen at the bottom of the financial crisis. The dollar has broken out to new six-month highs as it again becomes the safe haven currency for the world.

Investors holding debt on a dozen different countries are scrambling to dump it, insure it or find some way to protect themselves. This is going to keep pressure on the Euro to the downside, the dollar to the upside and pummel foreign banks holding Euros.

In late news Saturday evening the G7 agreed to tax banks for the government bailouts of the global financial system. Any kind of massive global tax on banks to repay bailout funds is not going to be met with cheers by the market--another sign that Friday's short bounce won't hold.

Secondly the G7 was assured by ECB president Jean-Claude Trichet that Greece would meet tough new targets to reduce its deficit by 2012. Unfortunately Trichet is incompetent and can't be trusted--this is the man who held interest rates high as the Eurozone crumbled into recession in 2008 and 2009.

The EU is comprised of 29 countries, each with its own political and economic system. This makes it difficult to make decisions and to act in unity. Spain, Portugal, Greece, Ireland, Italy, Bulgaria, Latvia and Lithuania could all default. There are too many holes in the dam and the ECB is running out of fingers. Once one or two countries fail, we could see a cascading effect. Lenders rightfully wonder who is safe and banks will stop trading with each other out of self-preservation. Once credit freezes up we are right back where were a year ago.

According to the G7 members, there won't be a bailout so get ready for another leg to the downside--the question is...

HOW DO WE MAKE MONEY ON IT?

First of all take a look at our existing positions because after Friday's reversal they all have new potential--if you are not in yet pick a good one and climb on board with at least a March expiration to give you some time. As far as new trades go we've got two plays lined up this week--one bearish and the other bullish.

Our bearish play is on a company that just announced earnings Friday and the market hated them. The numbers were 'massaged' to show big gains but most all the profits came from a tax rule instead of actual new business. The stock sold off breaking critical support on its first big step lower. We'll jump on board this play Monday with some well-placed puts for what looks to be outstanding gains!

Our next play is on one of the places investors rush to put their money when things get scary--like they are in Europe right now. This index bounced hard Friday and it looks like this is one case where the momentum will continue making some serious profits on the right calls!

We've got a volatile market with some great ammunition to play it--so let's get started...
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Four Eye-Popping Winners...

As the markets gyrate south our options plays have been racking up some serious gains...

IN JUST TWO WEEKS OUR ULTRA-SHORT FINANCIALS (SKF) CALLS HAVE JUMPED AN IMPRESSIVE SIXTY-NINE PERCENT!

PLUS OUR PRO-SHARES ULTRA-SHORT QQQ (QID) CALLS ARE UP AN OUTSTANDING ONE-HUNDRED-SIXTY-EIGHT PERCENT!

AND IN JUST TWO WEEKS OUR CENTURY ALUMINUM (CENX) PUTS HAVE JUMPED A WHOPPING THREE-HUNDRED-TWENTY-FOUR PERCENT!

MEANWHILE LINEAR TECHNOLOGY (LLTC) HAS DRIVEN OFF A CLIFF CATAPULTING OUR FEB 30 PUTS TO AN EYE-POPPING FOUR-HUNDRED-THIRTEEN PERCENT OPEN PROFIT!

And that's just our biggest gains--we also have double digit open profits on our two brand news plays on the EUO and TZA and currently we have no losses of any kind and haven't for weeks!

Bear markets have been VERY good to us in the past and this one is no different except now we've got these wonderful inverse ETFs to buy calls on--and it's working beautifully--so far.

Some subscribers have been moving in and out of our plays as they bounce back and forth-- which is a great strategy for the nimble--but since the overall pattern on all the indices is lower it's been great to just hang in there and watch the open profits get bigger and bigger.

It's been a profitable few weeks--but will it continue? To find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

Four levels of converging support have all collapsed on the SP-500 so it looks like the big caps are heading lower. Financials, techs, chips, materials and energy have all led to the downside. It is not one sector but a broad market decline--there is no support of any significance until the 1034 level.

The Nasdaq is only 59 points away from a 10% correction to 2088. At the speed the big cap techs are dropping the index will likely continue substantially lower.

Given the lowered guidance from several chip companies it is not surprising that the Semiconductor Index is down 13% for the month of January. Compared to the other major indexes with losses in the -4% range the chips have been beaten senseless by disappointed investors. The chip sector is supposed to lead tech stocks higher whenever the economy is recovering from a recession, so a sell-off in this sector is a very bearish sign.

Qualcomm (QCOM) implied everything was great at the January CES expo in Vegas and then gave wary guidance when they released earnings last week. Qualcomm said they were seeing only a "subdued economic recovery" and that is not what investors wanted to hear--the stock lost -$8 since reporting on Wednesday night.

SanDisk (SNDK) was knocked for a 12% loss on Friday after reporting better than expected earnings of $1.18 compared to analyst estimates of 69-cents. Even though earnings were good guidance was less than the street expected and the stock got pummeled.

Steve Jobs took to the stage to announce the rumored and much anticipated tablet PC and the audience cheered at every point. That was until he told them it still ran on the AT&T network. AT&T has some serious problems and just getting a voice call through their network challenging. They claim it is the massive bandwidth consumption by iPhone users that has clogged the system but regardless of the reason service is horrible.

Their new tablet did little to impress investors and AAPL dropped over twenty dollars since Wednesday.

Then Microsoft 'blew out earnings' but on closer examination the company included deferred revenue from pre-sales of Windows 7 to PC makers and its free upgrade program. Excluding that to get the regular operating income number and the bottom line drops to 60-cents while analysts were expecting 59-cents. They beat by a penny--and the stock dropped almost four dollars from Friday's high.

You should be getting the picture--investors are disappointed and are hitting the sell button. Although earnings have been good quarter over quarter guidance is down--and the markets are always looking forward.

After five months of flat trading the financial sector finally rolled over as well--and this is a biggie because the financials underpin the entire market and certainly the SP-500. Credit problems are growing again and although the banks are fully capitalized thanks to endless debt and stock offerings the guidance from them is also questionable. The commercial real estate loan problem continues deteriorate behind the scenes as banks extend and ignore those problem loans in hopes they will go away when the recovery finally kicks in. As long as the banks keep extending their commercial loans they don't have to recognize them as in default--but they're not going away.

Goldman and JP Morgan are in full decline below recent support and are dragging the rest of the financial sector down with them.

The markets started off with a bang Friday morning after the Q4 of +5.73% growth in GDP was released. This was the largest headline gain since 2003-Q3 and much stronger than the expectations for a +4.5% increase. However the adjustment to inventories accounted for 3.4 points of the 5.73 reading. Real final sales of domestic product, which is the real GDP minus the change in inventories and a true measure of demand for U.S. goods and services, grew +2.9% in Q4 compared to +2.0% in Q3--not quite so dramatic.

The +3.4% GDP gain from the increase in inventories was the largest contribution to growth in over 25 years. Inventories had been forced to dwindle to very low levels due to the credit crisis and the inability by many companies to finance new inventory. When business conditions began to improve the additions to inventories were large on a percentage basis because the starting levels were so low.

As good as it was there were some negatives in the GDP report. Personal consumption expenditures, how much consumers actually spent, rose +2% but that was down from the +2.8% increase in Q3. Spending in the holiday quarter was actually lower than Q3. Auto and auto parts sales subtracted -0.6% from GDP because of the hangover from the end of cash for clunkers.

This will be the largest GDP reading for a long time. Overall GDP is expected to be positive but significantly weaker for this year. It's estimated that growth in the first half of 2010 will be below that needed to keep pace with an expanding labor force, and the unemployment rate will move higher, peaking at close to 11% in the fall.

According to the average estimates of fifty-nine economists surveyed by Bloomberg, unemployment will average 10% or higher for all of 2010. That is the highest rate since 1948. The average for 2009 was 9.3%, the highest level in 26 years.

However growth should pick up toward end of this year because of a stabilizing labor market, an expanding global economy, additional federal stimulus, improved credit flows, and stronger homebuilding. Growth could then be very strong in 2011 and 2012 as pent-up consumer demand kicks in, finally bringing down the unemployment rate.

Another problem that is going to push sentiment lower before we see a major recovery is the flood of foreclosures expected in 2010. Some analysts believe there are as many as 4.5 million homes facing foreclosure in 2010 and believe that while many will escape through a sale or modification there will still be more than three million that actually get foreclosed. This compares to the 2.8 million foreclosed in 2009.

The National Association of Realtors and the Mortgage Bankers Association believe home sales will rise by 448,000 in 2010 from the 5.45 million pace in 2009. An additional three million foreclosures will continue to push home prices down because most potential buyers have already taken advantage of the low prices, decades low interest rates and homebuyer tax credits in 2009. Existing home sales dropped -17% in December---the largest drop on record--not a good sign.

When the markets are declining it's smart to look at the internals to see if we are falling on lower volume--which could signal an end to the selling. That is not currently the case--Monday was the lowest volume day for the week at 8.2 billion shares and each day thereafter rose steadily to 11 billion on Friday. The selling pressure is escalating every day and four of the top six volume days of the year have been Thursday--Friday of the last two weeks.

The bottom line is the path of least resistance is still down. The highlights for the week are the Cisco earnings on Wednesday and the non-farm payrolls on Friday.

The question now is...

HOW DO WE MAKE MONEY ON IT?

We've got two positions lined up this week and they are both bearish. The first is a retail chain that is dropping from very high levels and the selling is accelerating. Puts on this diver should yield some very generous results very quickly.

Our second play is also bearish and it's on a luxury item manufacturer whose sales have all but dried up--and investors are finally starting to recognize the fact. The stock has broken key support and now looks ready to plunge--a ride we'll be jumping on first thing Monday morning.

The markets are trending south with gusto and we've got two great plays lined up to take advantage of it--so let's get going...

For more information on everything you receive with your Pearly Gates subscription click on www.cashflowheaven.com/pg