Tuesday Top Off
by Phil - September 30th, 2008 8:49 pm
Wow, what a week and it’s only Tuesday!
From record drops to record pops in one day is no way to run a market and it’s still a day trader’s paradise as what works one day is poison the next and vice versa. This morning we started out looking for better than 20% bounces off yesterday’s drop and it didn’t take too long for us to get on track. We started out cautious but it only took until 10:04 to decide we were on an uptrend as we noticed the big banks leading the charge and I called for covers on the SKFs. We got a nice Consumer Confidence number an a better than expected Chicago PMI at 10 and by 10:13 our indexes were testing the 2.5% rule.
The momentum picked up at 10:18 when I saw on CNBC: "Now Kudlow is talking about what the Fed, FDIC and Treasury can do without Congress that I talked about above, this is going around and may give us some traction to the upside so watch out for those financial puts!" That led to a very large amount of bullish trade ideas which obviously worked out on an up 485 day and we ALMOST started looking at full covers at 3:17 but, just 6 minutes later, we got the word the SEC would be changing the mark to market accounting rules which allowed us to be a little braver about tomorrow.
We’re still worried about hedge fund redemptions causing an unwinding of positions but that will be part of the very large wall of worry we will be dealing with all week, even after they pass (hopefully) the bailout package. The Dow finished above my 10,800 target by 50 points, also a good sign but we’re not going to get too excited until we take back all of Monday’s losses, something that will really perk up our weekly chart of the S&P measured in Euros as the dollar made great gains today as well.
Looking at our Big Chart, things could certainly have been worse:
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Lucy, Congress and the New Plan Trick
by ilene - September 30th, 2008 7:54 pm
Feeling a bit like a yo-yo wishing someone would just cut the string so you could roll one way or another? Well, you’re not alone.
Lucy, Congress, and the New Plan Trick
By Paul Kedrosky, at Infectious Greed
Excerpt: "So here’s where we are at:
- Almost two weeks ago the market soared when late on a Thursday word broke that Congress would soon see a U.S. plan to help solidify the financial system. It continue to climb the next day.
- The market then fell on the first three days of the following week as it became obvious that doing such a plan was far from a lock, and as Congress squabbled and fought over it.
- The market then climbed for two days on signs that Congress was behind the bill, that it was taking it seriously, and that it would get completed over the weekend.
- The market tanked yesterday, as the House voted down the current plan, saying a host of things, many of which were petty, silly and personal.
- The market is soaring again today on news that plan isn’t dead yet, and that some in Congress are saying a "bill get done".
- We’re back to hearing that something may come together by the weekend.
Congress needs to put or shut up (and heaven help us if it’s the latter), and Treasury’s Paulson needs to become less of a liability. First, these oscillations are doing even more damage to equity markets, with investors withdrawing more capital in the face of record volatility. Similarly, it keeps credit markets locked,…
…If it feels to people a little like Lucy, Charlie Brown, and the football, that’s because it should. Too bad we’re all the football."
More here.
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House Republicans help send fear soaring
by Andrew Wilkinson - September 30th, 2008 4:09 pm
Today’s tickers: VIX, CTX, POT, XLF, NCC, SOV, GD, AAPL, RIMM, C & BGG
VIX- CBOE Volatility Index – The failure of the house to pass the $700 billion bailout bill has sent stocks into freefall this afternoon. As a result shudders have been sent up the backbone of the financial system. Treasury yields have slumped to 3.66% from 3.80% last week, but the ugly impact has been delivered to the fear gauge, which at a reading of 46.16 is up some 33% on the session. The options market is reasonably busy, but it’s the character of today’s trading that is more important. The Oct 30 strike calls are most voluminous as the fear gauge easily takes out the recent 42.50 peak and so on to another 52-week high. Most of the 30,000 lot volume traded early in the session to either the mid or the bid price of around 3.10. The current bid on the same calls is 5.00. The same month 35, 37.5 and 40 strikes all appear to have been bought as investors look for higher strike prices as the VIX increases and maintains its vigor. At the January strike an investor has sold a previously unpopulated 55 strike call for a premium of 20cents.
CTX- Centex Corp. – Homebuilder Centex has dropped 10.3% today to $15.52 while put options at the money have been popular. At the October contract an investor appears to have ditched 10,125 lots at 80 cents while in the January contract an investor bought around 25,000 lots at 3.0. The trades could be related with prior open interest at least matching the size of the sold puts, while the January position appears to be fresh. The investor here is looking for Centex to decline below $12.00 by expiration (delta argues a one-in-three chance) or could be a hedge against a long position in the underlying. With share prices at more and more banks tending towards single digits, one wonders whether an investor isn’t predicting the same for the overlooked core problem.
POT- Potash Inc. With the financial bailout package unfolding before our eyes, the reality is once again a realization that the degree to which financial toxins have become entwined in the global body is greater than anybody guessed. The simultaneous failure of European financial institutions serves to remind us that other central banks and treasury officials elsewhere have some of their…
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How to lower your break-even point without increasing your risk
by Optrader - September 30th, 2008 3:06 pm
We all know that averaging down is a losing proposition: you throw good money after bad and increase your risk. Also, cutting your losses short is one of the most important rules of trading.
However, there is a strategy, using options and vertical spreads, that allows you to lower your break even point on a position that went against you. And to do it without increasing your risk.
If you own a call option and have an unrealized loss in this position, you can improve your chances of breaking even by "rolling down" into a vertical spread. You do it by selling 2 of the calls that you are currently long (the one that you own plus another one), and buying one call at the next lower strike, ideally for even money.
Let’s see how it works through the use of an example:
AAPL is at $114 and you buy Oct $115 call for $3
Stock drops to $112, you now need a $6 move before expiration to breakeven. You need the stock at $118.
Now, let’s say that at that time the Oct $115’s are trading at $1.50 and the $110’s at $3. You then sell 2 of the 115’s (the one you own plus another one) and buy one of the $110’s for even money.
You now own a 110/115 vertical (Long the $110′s and short the $115′s). And your risk is the same as the original risk ($3)
Let’s say the stock goes to $113 at expiration. The $110’s will then be worth $3 and the $115’s will be worthless, leaving you with a net $3.
You just lowered your breakeven point from $118 to $113 increasing significantly your chances of turning a profit on this trade.
But more importantly, you did not increase your risk.
Of course, some potential reward had to be sacrificed. Your potential profit is now limited to the stock going to $115. But if it goes to $115 by expiration the 110 call will be worth $5 and the 115 will be worthless, and your profit will be 66%. Not bad for a position that was first going against you! Also, if you are very bullish and the stock starts going up fast, you can always roll the $115′s to $120′s.
This strategy is a great strategy to include in our swing…
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How to lower your break-even point without increasing your risk
by Optrader - September 30th, 2008 3:02 pm
We all know that averaging down is a losing proposition: you throw good money after bad and increase your risk. Also, cutting your losses short is one of the most important rules of trading.
However, there is a strategy, using options and vertical spreads, that allows you to lower your break even point on a position that went against you. And to do it without increasing your risk.
If you own a call option and have an unrealized loss in this position, you can improve your chances of breaking even by "rolling down" into a vertical spread. You do it by selling 2 of the calls that you are currently long (the one that you own plus another one), and buying one call at the next lower strike, ideally for even money.
Let’s see how it works through the use of an example:
AAPL is at $114 and you buy Oct $115 call for $3
Stock drops to $112, you now need a $6 move before expiration to breakeven. You need the stock at $118.
Now, let’s say that at that time the Oct $115’s are trading at $1.50 and the $110’s at $3. You then sell 2 of the 115’s (the one you own plus another one) and buy one of the $110’s for even money.
You now own a 110/115 vertical (Long the $110′s and short the $115′s). And your risk is the same as the original risk ($3)
Let’s say the stock goes to $113 at expiration. The $110’s will then be worth $3 and the $115’s will be worthless, leaving you with a net $3.
You just lowered your breakeven point from $118 to $113 increasing significantly your chances of turning a profit on this trade.
But more importantly, you did not increase your risk.
Of course, some potential reward had to be sacrificed. Your potential profit is now limited to the stock going to $115. But if it goes to $115 by expiration the 110 call will be worth $5 and the 115 will be worthless, and your profit will be 66%. Not bad for a position that was first going against you! Also, if you are very bullish and the stock starts going up fast, you can always roll the $115′s to $120′s.
This strategy is a great strategy to include in our swing…
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Review of House No Vote
by ilene - September 30th, 2008 9:40 am
Collection of thoughts on the House’s "no" vote on the bailout, our so-called leaders and their political game playing, and the potential consequences of the failure to take action in this ongoing financial crisis. Courtesy of Mark Thoma, at Economist’s View.
House Votes against Bailout Package
The House voted against the bailout package. Brad DeLong says:
Bring Congress Back into Session After the Election…: …and go for the Swedish plan: nationalize the insolvent large financial institutions: dare Bush to veto that after the election.
Vote Count:
Democrats: 141 Yea, 94 Nay
Republican: 66 Yea, 132 Nay.This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt…
Swamped today – quickly – and holding back the shrill reaction, this is irresponsible and needlessly puts our economy at risk. I’ll update with more reactions as I find them.
Update: Initial market reaction:
The Dow Jones Industrial Average, which had posted a loss of less than 300 points heading into the House vote, posted a decline of nearly 700 points as the "nay" votes reached a majority.
The market has recovered slightly. We’ll see how it goes. They can revote, so there’s still hope, but don’t know if that is planned, or if that would do any good. But it’s not the stock market I care about, it’s employment and growth. Even if this is not a catastrophe, you don’t take this kind of risk with the economy. Even without a major crash, it’s likely a lot of people just lost their jobs, though they don’t know it yet. If the problems aren’t addressed, it is likely to constrain credit, that in turn causes firms to cut back on new investment projects, and as they do, employment and growth taper off. You don’t see the effects as a big drop off in employment all at once since investment projects can take years to complete and momentum from the past keeps the ball rolling. But as those projects end, if they are not replaced with new ones, employment and growth will suffer. And it’s not just investment, people who sell cars, refrigerators, tractors, TVs, stereos, and so on, rely upon credit markets. If the credit isn’t there, they aren’t needed.
I’m worried, maybe for nothing, but why take this kind of a…
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Why Have Things Gone So Wrong?
by ilene - September 30th, 2008 9:25 am
Here’s Roger Ehrenberg’s assessment of what went wrong and how Paulson in particular should change his perspective to begin addressing the crisis in a way that people will support. Courtesy of Roger, at Information Arbitrage. 
Why Have Things Gone So Wrong?
Lack of transparency. Intellectual dis-honesty. Failure to read the pulse of the nation. In my adult life I have never seen a backlash so powerful or so well-timed as this. The voting public called bull#$%& on Hank Paulson, the President, Congress, Ben Bernanke, and anyone else associated with the current proposal, right in the midst of an election year. It could have been so easy. See problem. Identify key elements of problem. Quantify magnitude of problem. Develop plan to address problem in conjunction with needs of key constituencies. Clearly and thoughtfully articulate the plan to solve the problem. Put plan on floor of Congress. Pass plan. Implement. Repeat if necessary. But this is not how it came to pass.
I have been a Paulson supporter since his appointment. But he has bungled the handling of the bailout worse than an intellectual midget. This is one circumstance where IQ points, hubris and ego served as a barrier to success. He was so convinced of his righteousness and correctness that he didn’t listen. During an election year. In the midst of one of the most severe financial crises this country has ever faced. He simply missed the boat. He didn’t have a read on the pulse of the country. And it cost his bill passing Congress. And perhaps his job as well.
I said it at the beginning of the crisis and I’ll say it again: the voters, the people paying for the plan, need to trust its makers and need transparency for that trust to be cemented in their minds. Seems obvious. Seems fair. But this is not the way Secretary Paulson or his pals read the situation. They wanted supreme powers. They wanted to avoid judicial review. They wanted to steer clear of compensation caps. They couldn’t have been more wrong, either on the issues in a vacuum or in light of the needs and desires of their constituents. Market Value. Repeat after me – M A R K E T V A L U E. This is what can and should be paid for liquifying toxic balance sheets. Not a penny more.…
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Tempting Tuesday Morning
by Phil - September 30th, 2008 7:21 am
We’ve had improvements in the pre-market but do not be easily led into temptation.
It is very normal to get a 20% bounce off a harsh drop, while that would give us 150 Dow points and 40 Nasdaq points and 20 on the S&P, that is nothing to get excited about. Anything less than a 40% recovery is pretty much a continuing downtrend. The last play we looked at yesterday, at 3:43 was a speculative bounce play on the QQQQ $38s at $1.69 but, as I said to members at 11:20 yesterday (with the Dow was still up over 10,800) when we were still looking for bearish plays: "Technicals on all the indexes say we are doomed and TA has been very good at predicting lately. If this bailout doesn’t give us traction soon, we probably are doomed so don’t go too crazy on the long side, I’d have to say that calls are still the speculative plays as the preponderance of evidence is against them."
We had our clue to worry from watching the VIX early in the morning and at 10:48 I had noted: "Looks like the market is not done going down and the VIX is up high enough for us to get back to 10,600 or it may mean we are 200 points too far down already – tough call with all this negativity!" The VIX is an excellent indicator of trouble brewing in the markets. At the time I made that comment to members it was just touching 40, by the end of the day the VIX spiked all the way to 48, possibly an all-time high, which we then noted would make for some good puts on the index of course.
Our worry was that Congress would pass the bailout package but it would be perceived as not enough (the morning post was titled "Too Little, Too Late?" but it did not occur to us until the voting started that they would actually vote it down and, rather than "too little, too late" we got NOTHING AT ALL. What did doing nothing cost us yesterday? Well the markets lost $1.2Tn in market cap, something that has a pretty broad-reaching effect on America but nowhere near what it would be if we had gambled our Social Security Trust Fund on the markets. Of course, now…
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Dave’s Daily
by David Fry - September 30th, 2008 2:39 am
MARKET COMMENT
September 29, 2008, Courtesy of Dave Fry, ETF Digest
The markets gave a Bronx Cheer to the bailout proposal “before” there was even a congressional vote today. After the vote failure the ongoing sell-off intensified. My understanding, based on news reports, is that Speaker Pelosi made a tactless Bush-bashing speech before the vote took place needlessly offending wavering republicans. Now she will have to “make nice” and resistant republicans will no doubt I understand vote for the bill. Maybe John McCain will helicopter in.
It’s all pretty silly and petty if that’s the case. But, the initial wave of selling before the vote really trumps the Botox Queen’s mistake anyway. Nevertheless the media is focusing on the vote which would be a mistake.
Are we crashing? Not yet. From market action only, this is more like 1998 than 1987. Remember, during the latter event markets were down 23% in one day or roughly 2,500 points on today’s DJIA.
As I wrote subscribers over the weekend one reason we haven’t crashed is the large amount of “captive money” in brokerage and money management accounts. Since 1987 the levels of assets tied-up in IRAs, mutual funds, wrap fee retirement accounts and so forth have grown to spectacular levels. Redeeming and selling assets is difficult and costly meaning less not more panic selling. If clients start busting these accounts then we could see a full-blown panic.
More worrisome today were comments from conservative stalwarts like Northern Trust that they’ll have to add corporate funds to prevent their internal money market accounts from breaking par. Legg-Mason was also made similar comments.
If you’re against the bailout then you should read this from proponents of the Austrian School of Economics. You’ve read or listened to the proponents for week’s now.
Volume was heavy and breadth both [surprise!] sucked and blowed.
Much is being made of the climbing TED spread which is LIBOR [the rate at which banks will lend to one another] versus Treasury Bills. This rate has rocketed demonstrating the severity of the credit crunch.
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The Limits of Power
by ilene - September 30th, 2008 2:15 am
These videos of Bill Moyers interviewing US Army Colonel Andrew J. Bacevich are well-worth watching. The original source at pbs is here. Thank you to Barry Ritholtz, for finding these for us. Excerpt from Barry’s post:
Bacevich: The Limits of Power
"Is an imperial presidency destroying what America stands for?
Bill Moyers sits down with history and international relations expert and former US Army Colonel Andrew J. Bacevich who identifies three major problems facing our democracy: the crises of economy, government and militarism, and calls for a redefinition of the American way of life.
Part I
click for video
>
Part II
click for video
September 26, 2008
BILL MOYERS: Welcome to the JOURNAL.
Here in New York a new season is opening on and off Broadway. But nothing, not even a comic opera, can compete with the spectacle, drama and farce of what’s happening in Washington and on Wall Street.
If it is possible for a political system, like individuals, to become deranged, so unhinged from reality there is no longer any regard for the consequences, we saw the process this week. It’s nothing but bizarre, and for a supposedly mature democracy, deeply troubling.
For technical reasons we had to tape this broadcast before John McCain finally made up his mind about whether to show up for the debate tonight. So we decided not to try and second guess events.
Instead, we are going to hear some truth-telling from a man who says our country’s in deep trouble and needs a renewed commitment to critical thinking, honest words, and hard choices.
In this slim volume on THE LIMITS OF POWER, Andrew J. Bacevich goes to the root causes of our discontent and to our broken and foundering politics. That many people agree with this unsentimental diagnosis was apparent when we first aired this interview a few weeks ago, your emails poured in to pbs.org. In a matter of hours his book had become a best-seller.
Now, with chaos in Washington and the markets, it seems a good time to give this soldier, scholar, and patriot another hearing. He has found an audience across the political spectrum, whether writing for THE NATION or THE AMERICAN CONSERVATIVE magazines, lecturing to college classes or testifying before Congress."
More here.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(