Fast and Furious Four-Day Wrap-Up
by Phil - June 5th, 2010 7:12 am
Wheeeee, what a ride!
Like any good car race, the lead changes often in the markets. Yesterday the bears took the lead as the combination of Hungarian debt issues and a disappointing jobs number were like a tire blow-out for the bulls, who were forced to pull in for a pit stop. Fortunately, we had our seat belts on and had assumed the crash position as I had warned Members on THURSDAY Morning at 10:04:
Watch that 666 line on the RUT – we don’t want to lose that or even show weakness there… ISM a bit disappointing, now we’ll see what holds but I’m out of short-term, unhedged, upside plays here.
I felt strongly enough about it that we also posted it on Seeking Alpha, to warn as many people as possible, under the heading: "Phil Calls Short-Term Top." I don’t post live trade ideas on Seeking Alpha but in Premium Member Chat (and you can subscribe here) I followed right up at 10:17 Thursday morning with the following trade idea:
BGZ (large-cap bear) is at $15.27 and I like them as a hedge here with the (June) $14/16 bull call spread at .75, selling the July $14 puts for .95 and that’s a net .20 credit on the $2 spread with about $2.70 in margin so you can do a 10 contract spread for a $200 credit and $2,700 in margin (according to TOS standard) with a $2K upside if the market even twitches lower. Worst case is you own BGZ as a hedge to a dip below Dow 10,600 (your put-to area) at net $13.80 (9% lower than current price).
That’s what hedged trade ideas look like in our Member Chat. At PSW, you need to put some time in LEARNING how to trade and, more importantly, how to hedge. This is a fairly complicated options play but we take it BECAUSE IT WORKS! There are many, many simpler ways to play that don’t work (or carry far more risk) but we prefer to teach our Members how to do the things that do work. As it stands, just 48 hours later, BGZ is up 10% on Friday to $16.89 (so the spread is now 100% in the money) and June $14/16 bull call spread is now $1.50 while the July $14 puts are Down to .60 so net .90 already on the spread that already paid…
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Wild Weekly Wrap-Up – The Madness of the Markets (Part 1)
by Phil - May 21st, 2010 11:22 pm
Where do I even begin to go over this week?
I think, to set the proper tone, let’s look at my Thursday morning Alert to Members where I said: "Get out, Get Out, GET OUT of the short-term short-side plays if we get back over the 200 dmas. Take the money and RUN. CASH OUT THE SHORT SIDE. Is that clear? We may not hold these lines but that’s why we have October Disaster Hedges, the shorter-term downside plays are huge winners and should be cashed here – we’ll find something else to short if we fall off this support level. 200 dmas need to be held and those are: Dow 10,250 (8,650 is next major support), S&P 1,100 (900), Nasdaq 2,225 (not there yet! 1,800), NYSE 7,100 (5,500) and Russell 630 (still above! 500)."
We never did hold those levels but, as I mentioned in Friday morning’s post, I thought the end of day sell-off on Thursday was a bit forced, and, in my first Alert of Friday morning I said: "TAKE THOSE SHORT PROFITS OFF THE TABLE!" Now, I am not prone to making statements in all caps in Member Chat - almost never is about how often so this was a pretty important statement. Before that Alert, right at 9:42, I had already called for the SPY $105 calls at $2.45 as our first trade of the day. Those calls finished at $4.11, up 67% for the day so a good start to our expiration day!
A good start and our other day trades did very nicely as well:
- FXI June $39 calls at .98, now $1.28 - up 30%
- DIA May $102 calls at .13, out at .45 – up 246%
- DIA May $101 calls at .95, out at .80 - down 16%
- DIA May $101 calls at .10, out at .80 – up 700%
Of course we followed our strategies and took 1/2 the DIA’s off the table at a double so the other half was a free ride (we like to gamble but we’re not crazy!) but the FXI was the only "keeper" for the day, we’ll see if that was a good idea on Monday. We also took (as I said we would in the morning post) a number of well-hedged, bullish plays on BA (from the post), TNA, TBT (have I mentioned how much I like them lately?), INTC, AAPL, VLO, FCX (I guess we’re done relentlessly shorting them!), XOM and…
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Tumultuous Tuesday – Funds Tend to Short Ten-Year Treasuries
by Phil - May 4th, 2010 7:55 am
Societe Generale is out with the latest edition of their hedge fund watch and in it we see that they’ve found hedge funds to have the "shortest position EVER on bonds."
Well, ever is since 2005 but still, hedge funds now have more than 270,000 short contracts on the 10-year Treasury Bond and that’s not even counting PSW Members and their TBT positions (ultra-short the 20-year) so we are either twice as smart as hedge funds or twice as dumb – either way, it looks like it’s coming to a head!
SocGen also reports large short positions in 30-year TBills too with a net short there of about 100,000 contracts and the Bank concludes that funds are also "strong net sellers of the Yen (50K net short) and buyers of US Dollars." Short positions in the Euro are being reduced now that we’re near my $1.30 target but this is a critical line for the Euro and we could still break 10% lower if it doesn’t hold, I mentioned our Euro play in the Weekend Wrap-Up so I won’t get into it here but what a day we had yesterday already!
According to Market Folly, hedge funds are also now net sellers of equities with long/short equity funds are now around 25% net long, which is definitely below their historical average of 35-40% net long. Folly also sees that, according to CFTC data, many hedgies have been adding to shorts in S&P futures. Whether they are simply selling longs to lock in some profit or making a market timing call, one thing is clear: hedge funds are definitely cautious in this market. Following the funds has been profitable this year as they are up 13% year-to-date after the Hedge Fund Generals Index was up 69% last year.
PSW members did their best to avoid temptation yesterday despite the "rally" (that failed to make it back to Thursday’s highs on low volume) and despite the "fabulous" auto numbers that CNBC et al could not stop fawning over. Indeed the statistics were so good they were – RIDICULOUS – Chrysler up 25%, DIA up 18.8%, F up 24.7%, GM up 6.4%, HMC up 12.5%, Hyundai up 30%, Kia up 17.3% and TM up 24.4%. This caused me to comment to Members:
OK, now I may be an old fuddy-duddy but I’m counting less than 1M cars sold in a month in this group and it seems to
…
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Wheeeeeeekly Wrap-Up
by Phil - April 17th, 2010 8:22 am
Wheeee! That was fun – let’s do it again!
There is nothing more fun than a nice, big dip in the roller coaster that you are prepared for and nothing more terrifying than a sudden, unexpected drop you were not prepared for (think air pockets on planes). I know my incessant harping on fundamentals gets annoying and makes me somewhat of a party pooper at market tops but think of my commentary as that "clack, clack, clack" sound you hear when a roller coaster is climbing to the top of the tracks – the sound lets you know there’s a big drop coming and the more clacks you hear – the bigger the dip is likely to be.
In fact, much like a roller-coaster, most of our well-prepared members were disappointed that we didn’t get a BIGGER dip on Friday but we’ve learned not to be greedy on the bear side and to quickly take those profits on our short-term plays while we let our long-term disaster hedges run wild, waiting patiently for the big score. By the way, it’s not that we’re perma-bears – far from it, when Cramer, Adami, Finerman, John AND Peter Najarian were telling you to crawl into a bunker and hide your head in the sand a year ago – I was the one yelling BUYBUYBUY while our hugely successful Buy List, which is the bulk of our portfolios, has been all bullish since Feb 8th. Just because we think a rally is BS, doesn’t mean we don’t participate in it!
As a fundamentalist, I believe there is a market "truth" a real value that can be placed on stocks and indexes based on reality, not hype and, when the MSM hype stampedes the herd and takes the market (or an individual stock) too far one way or the other – we simply step in and take advantage of it. It’s not complicated but it takes a little bit more work than the average "Lightning Round" participant is used to so PSW is not for everybody – this is our JOB, not our hobby, but boy is it fun when we get it right!
Despite the sell-off this week, we still finished up over 11,000 on the Dow but poor 1,200 on the S&P couldn’t hold and Nas 2,500 was merely a brief flirtation. The NYSE fell all the way to 7,550, down 200 from Thursday’s high…
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Short (but Wild) Weekly Wrap-Up
by Phil - April 3rd, 2010 7:55 am
What a crazy week!
The markets were bucking like a bronco but were they trying to throw off the shorts prior to a move back down or trying to flush out the weak-handed longs prior to a big breakout to new levels? After gapping open to 10,900 on Monday morning we went up to 10,950, down to 10,830 and back to 10,950 – all to finish the week at 10,927, which is up 39 points since March 23rd so don’t tell me we’re wasting out time as that’s 5 points a day baby (if we round up).
We had the day off on Friday but we did get the critical Non-Farm Payroll data for March but, as noted in my report (and in the Member Chat), despite the very excited reaction from the futures, there is no clear indication there that either the Bulls or Bears have a lasting point. So perhaps the wild market action is nothing more than good old-fashioned indecision – the futures flew up but then Goldman said they saw "Little Underlying Improvement" in the data and that "Productivity Gains Have Diminished Sharply" - clearly mixed signals that may take some time to resolve.
Last weekend, I complained that it was a "6-Point Weekly Wrap-Up" as that’s all we got from the S&P, which finished at 1,166. This week I am happy to report that we gained 12 points – all the way to 1,178 and we are closing in on that 1,080 mark, which we did touch briefly at Thursday’s open (which gave us the great shorting opportunity we had looked for in Thursday morning’s post!). It’s not that I don’t respect the rally – technically, you have to respect the rally but that’s why we’re in cash: We can take advantage of these huge intra-day moves down (and sometimes up) - getting our 6-second bull rides and scoring as many points as we can before the rodeo clowns turn on the buy programs and stop the ride.
Overall, it’s a pretty mindless market. You can go long at about about 2pm and flip short about 10 am the next morning – in the futures that can add up to shocking amounts of money and it sure isn’t bad when you are using options for leverage either. We’re sure the game will collapse one day and hopefully we’ll be able to pull the rip cord without…
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6-Point Weekly Wrap-Up
by Phil - March 27th, 2010 2:27 pm
Wheeee – the S&P is up 6 points this week!
I know, I can hardly contain my own excitement either. It almost makes my cash-out decision of the 19th (where we did open at 1,166) seem silly what with us missing a 6-point (0.5%) rally this week and all.. Of course, you have to look at the bigger picture like the year-to-date, which has us up a whopping 34 points since January 4th although, to be fair, 18 of those 34 points were gained by Jan 19th, then we had that sell-off thing and THEN we had a nice rally, all the way back to 16 points over the Jan 19th high. See, I’m not early with my top call – I’m 2 months late! We could have taken a vacation from Jan 19th to today and missed very little upside action.
We don’t cash out just because we’re at a top. Hell, we love playing tops, bottoms, middles – whatever… We cash out when it’s no fun to play and, as many, many members commented this week – it’s much less fun to play when the market turns toppy and churny like it is now. My cash out call was for a Market Mental Health Break ahead of earnings season and we did have a very nice, relaxing week just hanging out in Member Chat and, yes, making the occasional play but it’s more like when you go to the track and toss a couple of bucks on a race to keep it interesting – and that makes it fun!
Monday Medical Miracle – Health Care Finally Passes
We passed the Health Care Bill on Sunday and, instead of ending the Universe as promised by Republicans and Tea Party enthusiasts alike, it actually sparked a huge dollar rally that gave us a full 2.5% run for the week, closing at a year high of 81.60. We were thrilled as we had taken gold shorts and SCO (ultra-short oil) longs the week before, when oil was testing $83 a barrel – now back at $80 on the nose to close out this week.
Seven banks were shut down by the FDIC last weekend (and 4 more bit the dust last night), Greece was still up in the air, TIF missed earnings and the Four Seasons in Maui missed a mortgage payment but the thing that made me gladdest we were on the sidelines was…
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Monday Morning – Moody’s Makes More Negative Noises
by Phil - March 15th, 2010 8:27 am
Top ratings agency, Moody’s says the US & UK are "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose.
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report. “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said. Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending.
The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band. “Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”
So happy Monday to you! The Pound is certainly not taking this news well and has plunged to $1.505 from $1.52 in early morning trading and the Euro has flopped back to $1.37 but we are still maintaining 90.7 to the Yen so it’s actually a strong dollar day so far. Copper, which is one of our key indicators, has fallen back to $3.32 – which is great for our short plays on FCX and gold is hovering under the $1,110 line (the bullish line for gold) while silver, our tie-breaker, is just over the line at $17. Oil has been skating along at $80.67 for the weekend and gasoline is still strong at $2.25 (go VLO!) with nat gas down at $4.34
Perhaps the US should be more like China, who were going to have a…
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Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
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This whole week did not feel right to me.
We were too bearish as I had expected a bogus commodity rally in last weekend’s wrap-up but I didn’t expect it to persist for a week, even as the dollar held it’s ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850. Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%). Let’s say gold is a true indicator of dollar weakness – that means that only 33% of oil and copper’s move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we’ll give it to them). Can the rest be attributed to demand?
Certainly not with copper. Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays’ very aggressive targets for China growth only bring global demand up 2.5% this year – whch would just about bring us back to 2007 levels of consumption. That, of course, also assumes a rebound in housing construction – something we are not seeing at the moment. Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper. As you can see from the chart – that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.
Oil is just as silly. According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 – and that is with some very rosey estimates of a global econonomic recovery – exactly the type of thing that can be derailed by high oil prices! Mighty China’s consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase. Last week, the US had a build in inventories of 4Mb – we just send those over to China and everyone is happy! I’ve already had my say on oil demand this this weekend, so let’s just move on…
Let’s just say I’m a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery. Prices are not going up based on demand but…
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Jobless Friday – US, Japan and Europe Add More Stimulus
by Phil - March 5th, 2010 7:43 am
Wheee – more free money!
The money train left the station just ahead of the US market close yesterday when the House passed a $15Bn Jobs Bill although it remains to be seen if Jim Bunning will pass it. China doesn’t need Bunning’s permission to hand out free money and they will be "allocating 63.2 Billion Yuan" to fight high housing prices by SUBSIDIZING low-cost housing. Come to think of it – I object to that! Someone in China needs a lesson in some basic economics…
The big boost this morning came from Japan, where bonds hit the highest level of the year after the Nikkei newspaper said the central bank at its March 16 meeting may discuss additional monetary easing steps. It doesn’t matter whether this report is true or not as it already did it’s job and shot the Nikkei up 223 points for the day, erasing two week’s worth of losses in a single session. It’s hard for the BOJ to get easier than our own Fed but Chicago Fed President Charles Evans said yesterday he needs evidence of “highly sustainable” growth before supporting tighter monetary policy, while James Bullard of the St. Louis Fed said the central bank should remain “accommodative” – these are, of course, the Fed’s code words for MORE FREE MONEY!
Of course, our Futures are up 1% from yesterday’s low and the commodity markets LOVE IT and oil is back at $80.65 with copper back at $3.40 despite "weak" demand in China, where stockpiles of copper are now at 7-year highs and even Goldman Sachs has withdrawn their buy recommendation on coppper because of concern that economic recovery in developed markets isn’t on “solid footing.” “About 60 percent of China’s copper is used in the power industry, and our sales to wire-and-cable users reflected that demand is rather weak,” Chairman Wei Jianghong said, while attending the National People’s Congress.
“The demand is not very strong in the first place,” Jiangxi Copper Chairman Li said in Beijing while at the congress. “But a lot of people have long positions in the market, so I think in the first half of this year, copper prices will be good.” Copper stockpiles in China jumped to 149,478 tons for the week ended Feb. 26, 28 percent more than the week ended Feb. 12, according to the Shanghai Futures Exchange. Demand from China for global supplies may weaken because prices on the Shanghai Futures…
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Weekly Wrap-Up – Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno – who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know – if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March – a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people – NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be…
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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
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