Friday Already – Now We Get The Buffett Boost!
by Phil - July 24th, 2009 8:23 am
Warren speaks at 8:30 on CNBC.
What are the odds he says SELLSELLSELL? It would be a perfect bookend to a rally that started two weeks ago when CNBC’s guest was Meredith Whitney, who’s upgrade of the financials sparked off the biggest market rally in almost 20 years. After bailing out even on our $1.20 QID $29 calls yesterday morning (thank goodness!), we had the nerve to go for the QID $28 calls into the close for $1.15. We thought we hit that one out of the park with both AMZN and MSFT disappointing investors. After all, doesn’t MSFT alone make up 7.9% of the Nasdaq? Little did we know they had Buffet on deck and we all know he can knock it out of the park anytime.
We were otherwise wishy-washy into the close. We broke out of our watch level on the NYSE and it was what we like to call a "Free Money Day" as the market headed up and up and up all the way into the close so it was hard to go bearish, even though we are now at the top of our expected range, with the Dow testing (and failing) our 9,100 5% rule. I’ll be drawing up a new Big Chart Review this weekend but my statement to Members in our 3:42 alert was: "Japan is very likely to break 10,000 tomorrow and the HSI should move up too. Europe ran out of time or they would have gone higher so it’s not likely we go down first thing tomorrow."
Even with the disappointing results from our tech leaders, both the Nikkei and the Hang Seng made good efforts with Japan finishing the week at 9,944 (up 151 points, 1.5%) and the Hang Seng just failing to hold 20,000 and up another 0.8% to finish the week with a neat 1,000-point gain (5%). As I said in yesterday’s morning post: "the market’s WANT to retrun to the 33% off (the highs) level." We did make it "through the roof" yesterday and today’s question is going to be – can we hold it?
As you can see from Trader Mike’s S&P chart, we have a rapidly rising trendline that is very exciting if we hold it but also means we have very little tolerance for failure. This is what I sometimes refer to as an "air…
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Just Another Manic Monday – The Goldman Goose!
by Phil - July 20th, 2009 8:22 am
Here we go again!
Just when you thought the market couldn’t get more pumped up – this morning CIT has been "rescued" and GS is raising their price target on the S&P to 1,060 (up 13%) by the year end. Kudos to our government for not bailing out CIT – it turns out they DID have alternatives to having their bones picked clean by GS and JPM although perhaps this only puts off the inevitable, we’ll have to see. I see CIT trading at $1.50 pre- market and they make a tempting short here as not actually filing for bankruptcy doesn’t means your have "saved" your company and what’s good for the bondholders is often not what’s good for common stockholders….
Does this mean the stimulus is kind of working? Bondholders have $3Bn to give CIT and structure a deal that does not require government intervention. The free market triumphs – maybe. There is certainly no shortage of companies in loan trouble as U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.’s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed. Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier. In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt. "Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future."
Yes, I know – as I said in the weekend wrap-up, we have committed the great sin of being skeptical based on fundamentals and we may have cashed out too early by taking things off the table on Friday and, judging by the pre-market (8am), it looks like we were also…
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Wild Weekly Wrap-Up
by Phil - May 31st, 2009 8:29 am
What a wild week that was!
We got such a good sell-off last Friday that we went 1/2 covered into the weekend on our DIA puts (a little bearish) but we had already cleaned up on quick short plays on the Dow and USO and we were very much in cash but still making bullish plays at the time. I did a 3-part series on dividend-paying stocks over the weekend, elaborating on the 21 dividend payers we picked that Tuesday along with our $104,340 Portfolio (used to be $100,000) so we had no shortage of bullish ideas but it didn’t take us long this week to turn pretty bearish.
Last Friday morning (22nd), ahead of the holiday weekend, with the Dow at 8,323, I sent out an early alert to members saying: "I’d go long on the Dow here but frankly I’m just not in the mood today. Still full covered on long DIA puts and still in the DDMs but just hanging out and watching today since you can’t take the action seriously anyway." Our plays that day ran the gamut: We sold BAC July $10 puts for $1 (now .66), took a TBT spread that has been a wild ride but right back where we started and an ICE bull call spread ($90/$100, selling $90 puts $2.33, now .57) that is right on track. All that came before 11:33 on Friday, where I rightly called a top at 8,342. We made nice profits on DIA puts and took an EXM and T hedges that are doing well. One of our best plays on Friday was the USO $32 puts at .80 we took into the weekend, those cashed out Monday morning at $1.05 (up 44%) – those USO trades were followed through in detail in our Members Only post: "Stupid Options Tricks - The Salvage Play."
As I mentioned, we have been mainly in cash for over 2 weeks now so mainly we’re just taking small opportunities and having fun while we wait for the market to break one way or the other. One article I wrote over the holiday weekend was a timely update to "How To Vacation-Proof Your Portfolio," something anyone not in cash needs to take under strong advisement and DO NOT miss the very generous free video lesson from Sage’s Market Tamers that is on that post. Our of 21 dividend plays…
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Hedging Your Way To Healthy Dividends – Part 2
by Phil - May 24th, 2009 7:46 am
Time to get a little more conservative…
In Part 1 of this post, we talked about the potential long-term value of taking a chance on companies that used to pay dividends but don’t at the moment. In addition to the 7 selections we had last Tuesday, I would urge members to keep on the lookout for additional prospects we can discuss as the long-term benefits of catching these stocks at the lows can be amazing! This was the same logic that led me to pound the table back in March on C, BAC, WFC, JPM and even the hated GS – stocks that have tripled or better in just 3 months.
We had a very easy time selecting those stocks as we were able to hedge our entries and our long-term logic was that, at those low prices, we could be fairly sure of producing a good option income even if they never restored the dividends but the kicker was the possiblility of owning, for example, C at $1.50 down the road when they go back to paying $1 per year dividends. Imagine having a year’s salary put away on stocks that pay you almost a year’s salary every year in dividends alone!
Don’t worry, you didn’t miss a once-in-a-lifetime opportunity, we just have to work a little harder at the moment. As I noted with our LYG example, there are still beaten-down financials that are worth a look and today we’ll look at 2 more of our 21 Tuesday selections (one now, one later) and go over the trading plans for those positions. Note that the LYG trade ties up just $1,035 in cash to make (hopefully) $1,465 in year 1 with a commitment of $3,535 if you end up owning all 1,000 shares on Jan 15th.
By making sure you are on top of these figures, a person making $30,000 a year who has $5,000 in an investment account count take a modest 6-month gamble like this. If this trade pays off, $5,000 becomes $6,465 and 500 LYG shares are secure (about $2,500 worth) or, at worst, you have 22% more cash for the next trade. The next trade secures another potential dividend payer and if every 6 months you can secure just another $2,500 worth of dividend paying stocks for under $2,000 then in just 10 years, investing just 10% of a $30,000 annual salary, you could, very conservatively, have $50,000 worth of…
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Hedging Your Way To Healthy Dividends – Part 1
by Phil - May 23rd, 2009 8:14 am
We had selected 21 top dividend payers for trade ideas in Member chat last Tuesday.
Today Vitaliy Katsenelson of Active Value Investing sent me an excellent power-point he will be presenting at the CFA Society of Miami next Tuesday on Value Investing In Range-Bound Markets. I don’t want to spoil it for you but let’s just say that he agrees with our premise that dividend-paying stocks are, by far, the best choice to ride out a choppy market like the one we have – one that may persist for quite some time.
Using options to hedge our dividend positions can make them even more rewarding as we protect ourselves against the occasional downturn (not to mention the little dips stocks may take as they go ex-dividend). Another benefit of using our Buy/Write Strategy to purchase didvidend paying stocks is that, by decreasing our net entry price on the position, we are effectively raising our dividend yield – that is what they call a real win-win! Of course, hedging a position doesn’t mitigate all possible damage but it’s sure better than not hedging. The main problem with any dividend paying stock is that, if they announce they are suspending the dividend, they tend to drop like a rock so it’s important to stay on top of the company and pay close attention to news that may adversely affect the dividends down the road.
Of course, this disadvantage has a flip side and 1/3 of the dividend selections we discussed on Tuesday were companies that no longer pay a dividend, have taken a big hit but may go back to paying it again down the road.
LYG was one of the seven. From 2002 through Aug 2008, Lloyd’s paid a nice $2+ annual dividend but the bank suspended their March dividend this year and may not make the August payment either. Suspension of the dividend was the last straw for the already struggling bank and Lloyds fell from it’s 2007 highs of $45 to $20 in October of 2009 all the way down to $2.22 in March. Most of Lloyd’s troubles came from good, old-fashioned lending impairments relating to the housing crisis rather than exotic trading gambles that went bad and, of course, the UK government has stepped in under the Government Asset Protection Scheme (I love that they call them "schemes" in England – that word would not go…
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Friday Morning – Google, GE and Citi Oh My!
by Phil - April 17th, 2009 8:02 am
Never before have such important earnings moved the market so little!
Last night we heard from GOOG who once again pulled a rabbit out of the hat with an 10% increase in revenues as there was a huge surge in searches relating to unemployment, bankruptcy, foreclosures, loans, alcohol and gambling proving that there is always someone who can fiddle while Rome burns. We are thrilled, of course, as we played GOOG to flatline and it looks like we’ll get our wish as my trade idea on Google in yesterday’s Member Chat was: "May $400 calls for $17.25, selling Apr $400s for $9 and May $370 puts for $15.55, selling Apr $370 puts for $7.15." We’ll see how it actually performs but anything between $370 and $400 should be a very nice win on this trade!
As David Fry’s chart indicates, GOOG was already driven hard to fill it’s October gap and faced significant resistance at $390. Also facing significant resistance at Google is their market share, which was 79.9% in October of 2008 and is 81.39% as of March. Another negative that came out of the CC was that the company is getting lower click conversion rates, possibly indicating that this form of advertising is being ignored more often by the users. In fact, AdSense revenue was down (3%) for the first time ever. As GOOG is still very much a one-trick pony, the analysts on the line pressed management hard about how they could monetize other products and what new revenue streams they would be developing. To Google’s credit, people have been worried about this for 2 years yet, despite the recession, the company did post their best quarterly profit ever and they did it the way well-managed companies do – by watching the bottom line.
GE handily beat low expectations of .21 per share earning .26 despite revenues being down 9% from last year. "Only" a 36% drop in quarterly profit is good enough for the bulls and GE is up 5% pre-market. Don’t get me wrong, I love GE and we’ve been playing them positive for quite some time but this is the BEST company in the market. GE barely scraping by is no reason to stage a broad market rally! Another best of breed is CitiGroup and they also were "less worse" than expected with losses of…
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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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