Throw the Bums Out Thursday
by Phil - September 16th, 2010 8:11 am
There’s only one thing voters hate worse than Democrats:
That is, of course, Republicans. The latest NY Times/CBS News poll found that, while while voters rate the performance of Democrats negatively, they view Republicans as even worse with 63 percent disapproving of Democrats and 73 percent disapproving of Republicans. Still, the prevailing "they all suck" attitude is not good news for the Democrats as they have the most seats up for re-election and over 63% of the voters are pretty much determined to vote for "the other guy."
I would propose instead that we begin a national campaign to elect "None of the Above" as a write-in candidate. I don’t expect it to change much but it would force a lot of run-off elections and would send a real message to Washington that we are sick of the nonsense, that we are "as mad as Hell – and we’re not going to take it anymore." If you watch this video clip from 1976 (click picture) you’re realize how little progress we’ve made in 35 years of American politics. If only we’d taken Howard Beale’s Oscar-winning advice at the time and gotten off our sofas and actually said: "I’m a human being, goddammit! My life has value!" – maybe we could have done something about the Corporate Kleptocracy this nation has morphed into. Now, instead, we are once again asked to flip the switch for Republicans or Democrats and, if the candidates weren’t labeled, it would be very hard to tell most of them apart.
In many election cycles, voters readily acknowledge that they are dissatisfied with government or Congress in general, but they tend to have a stronger connection toward their own representative. That is not the case this year, with 55 percent of voters saying it is time for new leadership and only 34 percent saying their lawmaker deserves re-election. It is a historic high for a question asked in each midterm election year since 1990. Of course, the MSM plays a huge roll in this as 8 out of 10 Americans rate "the economy" negatively but, when asked about their own family’s financial situation, 6 of 10 say it is the same or improving. So 40% of the people feel their own situation is negative but 80% think it’s negative for everyone else. Gee, I wonder where they get that impression?
Voters do not perceive Republicans as having better ideas and…
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Monday Morning – Basel Boosts Bourses
by Phil - September 13th, 2010 8:03 am
Nice pop in the futures this morning!
The big news, which we already discussed in the "Weekend Reading" post, is the historic remake of the World’s banking regulations, which was finalized in Basel, Switzerland by the G20 Finance Ministers over the weekend. You can click over there for the details, as well as discussions on gold, college costs and the jobs market – so I won’t get into all that here. Suffice to say, the rules are good and, like FinReg, they will take a long time to go into effect and the markets are relieved that the uncertainty is over (well, that particular uncertainty, at least).
Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery." Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."
All seems right with the World this morning as Oil touches our $77.50 goal in pre market trading and Gold stays below the $1,250 mark (no panics). Copper is in the upper end of our expected $3.40-$3.50 range and is likely to break over -even our poor Natural Gas is catching bids at the $3.80 mark, now $3.85 and TLT continues to fall (TBT continues to climb – see Dave’s chart) . This is all despite a strong dollar That held the 50 dma all last week – another week over the line and we begin to bend it up to match the rising 200 dma and then the fun can begin. Fortunately, we have had less of a run in the commodity sectors this time so, hopefully, the rising dollar won’t be the market-killer it usually is but we will be watching out for that.
Another chart we’ll be watching is the VIX, the volatility index, which is known as a "fear" indicator for the markets, hasn’t been below 20 since April and,…
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Which Way Wednesday – Beige Book Edition
by Phil - September 8th, 2010 8:06 am
On June 9th we liked the Beige Book, which confirmed our bottom call.
On July 28th, we did not like the Beige Book and I said to Members in my review of the report: "Housing drives the market and housing and commercial construction are dead. How can commercial construction come back if we have less employees? How can housing come back if fewer people qualify for loans and the population doesn’t grow? How does anyone think that we can address these problems through capitalism (ie. without stimulus)?"
We got the GDP report that Friday (July 30th) and the low expectations there gave us the gap up we were expecting and Alan Greenspan went on Meet the Press that weekend and admitted I was right – both stealing my "Tale of Two Economies" economic outlook and blasting the Republicans, saying the party had "lost their way."
We couldn’t do anything about the Republican’ts but I was able to call a "Toppy Tuesday" on August 3rd and we drifted along that top until the next week, where we caught the action just right as we took our bullish money and ran on Monday and began grabbing downside hedges including the QID play I put up right in that Tuesday’s (8/10) morning post, where I said:
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
That hedge did, of course, return the full 669% as QID finished the expiration period at $17.80 and there was no doubt on the trade as we had a mild drop Tuesday morning, followed by a major drop the next day, where my opening comment was: "Wheeee - I told you this was going to be fun!" It is FUN when you are prepared to ride…
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Tuesday – Uncle Rupert Throws A Tantrum
by Phil - September 7th, 2010 7:28 am
Happy Tuesday to you!
Nice market take-down by the Journal this morning, who led off with an article questioning the EU stress tests saying: "From this point of view, it is not surprising that the doubts raised about the validity of the stress tests are weighing on the Euro and also on other risk-correlated currencies." Then, to make sure no one misses the article, they run another headline for the US markets that says "Concerns Over EU Banks Hit Euro" in which they quote themselves:
New concerns about the ability of European banks to weather the financial crisis came after the WSJ story highlighted once again the weaknesses of the stress tests. The report helped to widen the bond spreads on peripheral debtors and knocked European stock markets lower as another wave of euro zone jitters hit the market.
If this seems like BS manipulation to you, you will be doubly insulted to know that the US isn’t even the target of the manipulation. Mr. Murdoch, an Aussie and long-time foe of the Euro, is simply expressing his displeasure in a Labor Party victory in the Australian elections this weekend (real Democracy’s hold elections on weekends to encourage voting) and is knocking down their dollar by simultaneously boosting both the dollar and the Yen (also in the article is news that the BOJ will not intervene in the Yen, which is total BS) to push down his native currency and make a post-election statement. Just a media giant throwing a temper tantrum this morning.
![[EUSTRESS]](http://sg.wsj.net/public/resources/images/P1-AX101A_EUSTR_NS_20100906180015.gif)
Think about the "nature" of this story. There is nothing NEW in this NEWs, is there? It’s the kind of article that could be written any time someone wants to push the markets. Even the data they are using is from back on 3/31 – they didn’t even bother to update their facts for Q2! Notice that the article is pure worst-case speculation by the WSJ, followed by comments like:
- An FSA spokeswoman declined to comment.
- CEBS didn’t disclose that the banks were calculating the figures in that way.
Wow, pretty damning evidence that they couldn’t get a comment contrary to their BS on a holiday weekend, right? This news is also conveniently drowning out Obama’s proposed 6-year Public Works Program to combat unemployment by committing $50Bn for needed reparis on roads, rails and airport runways – putting some of our nation’s unemployed construction workers back to…
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Troubling Tuesday – Bears and Bears and Bears, Oh My!
by Phil - August 31st, 2010 7:32 am
Fear is the mind killer,
Fear is the little death
That brings total Oblivion
I will permit my fear to pass
Over me and through me
And where it has gone
I will turn the inner eye
Nothing will be there
Only I will remain."
That is the Bene Gesserit incantation for bravery from Frank Herbert’s "Dune," one of my favorite books. When the markets turn nasty on us it is time to get analytical, not emotional and we need to let our fear pass over us as we step back and evaluate the situation with fresh eyes, and a calm mind.
Above is a chart of our major indexes and their year-to-date performance. As we tested our -5% lines last week, we added a fresh round of Disaster Hedges, a series of trade ideas that can make 500% or more if the market falls further and in an afternoon Alert to Members yesterday, we added another SDS hedge with a 400% upside. Having some high-reward hedges in your portfolio allows you to set aside just 2% to protect your entire portfolio against a 10% drop in the markets. 10% is A LOT for the markets to fall and, of course, now that they have brakes on the market, we can always add more hedges along the way down. Should the market fall "just" 5%, we STILL make 10% on our hedges and that nets our portfolio (in this example) UP 5% on a 5% drop in the market. If our bullish plays were also hedged with covers – then so much the better!
Most importantly, having a balanced portfolio with hedges allows you to play the market WITHOUT FEAR. Warren Buffett famously advises investors to "Be greedy when others are fearful" and our own PSW Rule #1 is "Always sell into the initial excitement," which doesn’t mean always buy but we look for opportunities to sell fear (naked puts) on a dip, the same way we sell our own positions into spikes up that we consider overdone.
In last week’s "Disaster" article, I wondered if we were in the panic/capitulation part of the above chart and, if we are, then…
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Technically Troubling Tuesday
by Phil - August 24th, 2010 8:27 am
We finally blew our levels!
Sadly, it’s time to flip bearish until we can retake our watch levels at Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635. If we can’t retake at least 2 of them today, we may be seeing 2.5% drops back to Dow 9,945, S&P 1,043, Nas 2,145, NYSE 6,630 and Russell 619. Since the Russell already blew 619 we have to consider the possiblitlity of even a test of our 5% lines at Dow 9,690, S&P 1,016, Nas 2,090, NYSE 6,460, and Russell 603.
Fundamentals are great but once panic sets in the market is all about technicals and we just need to strap in and go along for the ride. We have been playing for a bounce off our 10,200, 1,070 lines but, now that we lost it – it’s time to flip bearish – I was wrong and that’s that, time to move on and make some downside money. Of course it will take more than a single day to give us a trend but the same way we don’t get very bearish until we loser 3 of 5 of our center levels, we don’t get bullish again until we break back over. Yesterday I sent out an Alert to Members as we broke down, saying: "We could very easily drop 250 from here on the Dow (2.5%)."
We added a fresh DXD hedge but we already had a proper hedge from Friday when the morning trade idea was:
A better way to hedge at the moment is the DXD Sept $27s for $1.70. They have a delta of .62 but can be transferred into a vertical if the Dow goes up by selling the $25 puts (now .20) for .50 and covering with the $29s (now $1) for at least .70, leaving you in a $2 spread for .50. That would be the ESCAPE, at the moment I like the plain DXD $27s at $1.70 until we get a real move back up.
That was an addition to the Morning Alert Trade, which was the DIA Sept $99 puts at $1.50. Neither the DXD or the DIA plays have been paying off so far but they did provide cover for our speculative bullish plays as we tried to play the line. Of course we take our major disaster hedges when the market is high (it’s cheaper then),…
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Goldilocks and the 300,000,000 Bears
by Phil - August 14th, 2010 3:43 am
Talk about feeling outnumbered!
As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!" Of course, as I often tell people I am neither bullish nor bearish – I’m rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions. Despite the fact that this is the range we predicted last October and is the range we’ve been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.
I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die. That does make me kind of bullish by comparison doesn’t it? We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades. As PT Barnum once said:
"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
Balance is the key to long-term success and we’ve had many conversations about that in Member Chat. Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us. As Ravalos said Friday in Member Chat:
"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the
…
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Tumultuous Tuesday – Waiting for the Fed
by Phil - August 10th, 2010 8:27 am
Wheeeee – this is going to be exciting!
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
We put on our Stock Market Parachutes and went bearish on our Mattress Plays as well. Not so much because we are long-term bearish but because the run-up ahead of the Fed decision seemed very overdone as pretty much EVERYONE is now predicting QE2 so what kind of market mover can it now be – even if the Fed does drop another Trillion or so on us this afternoon? Later in the day we added an SDS spread, similar to the logic of the QID but longer-term (January). As I said in my closing comment to Members: "We haven’t got 666 on the RUT yet so the risk/reward favors rolling up to the Dec $110 puts and staying naked through tomorrow. If we are over on 3 of our levels tomorrow, then we can cover."
When we are near the top of our ranges (see Charts from the Future: 5% Rule Update) we can assume there will be upside resistance so we have less risk shorting the indexes we think are over-extended compared to the potential reward of what happens if the news that had been pumping up the market on rumors turns out to be a big disappointment and causes us to retrace.
This is not contrarian investing nor is it trend following as we make our bets very much against the trend (ALWAYS sell into the initial excitement) – it’s simply our attempt to apply logic and statistics to a volatile situation. Also, keep in mind we are still long-term bullish and that’s where the bulk of our open trade ideas are aiming so we lean towards shorter-term bearish covers to keep us safe through…
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Toppy Tuesday – What Would it Take to Get Over the Top?
by Phil - August 3rd, 2010 8:28 am
Wheeee, what fun!
Check out yesterday’s action on the Russell, up 1% from the gap up open (rejected at 665), down 1% and then up 1% to finish up 1.7% for the day, pretty much right where they started the mornining. Our other indexes had more conviction than the small caps, who have been our leader all year so perhaps, just maybe, they are consolidating at the 5% line (666) waiting for the other indexes to catch up? We had a similar situation in late February, where the Russell paused to wait (like a dog running ahead of it’s master) and again in later March while in April the Russell was slow to follow the other indexes as they trended lower.
Yeah, remember April when the Russell was at 740? Ah, good times… It was easy to call a top then and we hedged for disaster on April 28th so it’s not like we can’t see these things coming. It was easy to BUYBUYBUY as we tested our lows in June and July as that was the bottom of the same range (this is not rocket science, folks!) but now it is HARD to say which way we will go because we are in the middle of our range. I see too many of our Members looking for trades every day but not every day is a good day to trade. Some days are good for watching and waiting. Some weeks are good for watching and waiting…
I reiterated our 1,000% SDS spread from the weekend post in the morning in our morning Alert to Members as it’s nice to be able to commit $500 to a $5,000 pay-off that protects $50,000 worth of bullish positions from a 10% drop. That’s what insurance is supposed to do – it’s a "just in case thing." Since the market is now on a 10% "limit down" system, we don’t need to go too crazy with our insurance as even another 9/11-type event should not, in theory, give us more than a 10% drop before the markets are halted, giving us a chance to reposition on the fly. That’s why those Fed reports are such good practice for us – we get major market-moving information in the middle of the day and we react to it within moments and we’re good enough at it that we actually look forward to those violent Fed day…
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Another Manic Monday – Greenspan Finally Agrees With Me
by Phil - August 2nd, 2010 8:14 am
Wow, Alan Greenspan and David Stockman both came to my side of the debate in the same weekend and the market rockets – very interesting.
First, we had Alan Greenspan on Meet the Press, regurgitating my "Tale of Two Economies," which was our theme for 2010 investing and, of course, is something I have been carping about for many years as income disparity has become critical in this country. Somehow though, it sounds more official when a crotchety octogenarian says it – so we’ll give the Chairman his due:
Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the--and everyone’s pointing out, are in excellent shape.
The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.
Another conservative darling who turned on his masters this weekend is Reagan’s OMB Director, David Stockman, who eviscerated current Republican fiscal policies in a NY Times Op-Ed this weekend, summing it up neatly with the title: "How the GOP Destroyed the US Economy," which is a must read but here’s a few juicy tidbits:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase…
…This approach has not simply made a mockery of traditional party ideals. It
…
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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
(