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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