E! True Hollywood Story: The Rise and Fall of SKF
by ilene - August 10th, 2009 10:16 am
E! True Hollywood Story: The Rise and Fall of SKF
Courtesy of Damien Hoffman at Wall St. Cheat Sheet
This is a guest post by Joshua Brown at The Reformed Broker.
The ProShares Ultra Short Financial ETF, otherwise called SKF, has had one of the most spectacular flame-outs in market history. One minute, SKF was a superstar, raking in millions of dollars on a daily basis and dominating the most actives list. Then suddenly, the party was over.This is the E! True Hollywood Story of SKF, Star of the Credit Crisis.February 2007Baby SKF is born on a wintry day at the ProShares HQ in Bethesda, MD. Just like his inverse twin, UYG, SKF was born at $70 per share on the American Stock Exchange.
SKF: I started shorting banks like, immediately. In fact, I was ultra shorting them, predominantly through the use of swaps contracts as opposed to outright short sales. Bank of America, Citi, Goldman…you name ‘em, I was short ‘em.
July 2007SKF was in the right place at the right time from day one. In the midst of an overheating stock market, Bear Stearns came out in the middle of July with the admission that two of it’s internal sub prime hedge funds were in trouble.
SKF: This was my first big break. Even though I wasn’t short a lot of Bear stock, I knew I was onto something big. Every morning, my agents would email me clippings of mortgage-backed securities stories from the media. The rest of the bank and broker stocks started getting jittery and I was getting hooked on the volatility, big time!
February 2008SKF celebrated it’s first birthday amidst a Dow Jones that had already lost 2000 points from it’s peak. SKF was flirting with $100 per share and the momentum traders had just started showing up at it’s party.
SKF: The scene was intense, man. The StockTwits guys started tweeting about me like crazy and I was all they could talk about on the Yahoo Finance message boards. People all over the market started to hear my name. I ain’t gonna lie, it felt good. Felt like I was important. So what that Bear Stearns was about to be shuttered and that the foreclosures were starting to get rolling. I was gonna be famous!
September 2008The drizzle of financial distress has now become a tsunami as Lehman…
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Weekend Wrap-Up, Ripping Through the Top or Topping and About to Tip?
by Phil - July 25th, 2009 12:34 pm
What a week this has been!
In last week’s 600-Point Weekly Wrap-UP, I said it would take some spectacular earnings results next week to keep the rally going and it seems like we got them this week as roughly 85% of the companies reporting this week beat expectations with 42 of this week’s reporting companies guiding up and only 18 guiding down. While people like Richard Bernstein may make very good arguments for why we shouldn’t focus too much on quarterly earnings surprises, I have to say I am somewhat swayed by the preponderance of evidence we’ve gotten this week that, by and large, the vast majority of our companies are weathering the storm far better than analysts have expected.
"It’s pretty amazing what passes for good news these days," remarks Barry Ritholtz on his blog, The Big Picture (www.ritholtz.com.) "Beating dramatically lowered earnings forecasts on cost-cutting and layoffs — rather than top-line growth — seems to be the order of the day. The irony is that the Wall Street analyst community overestimated earnings at the top of the cycle — pure extrapolation of trend to infinity. They seem to be doing the same thing now, only extrapolating falling earnings to zero. What that produces is not true upside surprises, but merely jumping over a dramatically lowered bar," he says.
It’s interesting Barry says this now because it sounded familiar and I went back to my May 2nd Weekly Wrap-Up, where the sentiment was very similar and I said at the time: "With 2/3 of the S&P 500 weighing in, earnings have been 70% positive. I had warned earlier in the week that we are only beating a very low bar but we are beating nonetheless. As you can see from the above chart, even if we do keep moving up, we are heading into some very serious overhead resistance that may not prove futile this time. With the added pressure of the old "sell in May, go away" adage – there will be a lot of obstacles to overcome this week and next so we will remain on guard but we have also trained ourselves not to think and simply go with the flow, letting our levels guide us and, so far, our levels keep saying yes – despite our common sense saying no."
More importantly, with…
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Friday – Workers of the World Unite!
by Phil - May 1st, 2009 8:29 am
Happy May Day!
I remember when Russia used to parade their nukes down Red Square and we used to do "duck and cover" drills in the schools during one of the greatest bull market runs in history. Now we have turned into such wimps that we panic out of our stock holding over fear of germs! Chrysler workers of the world united yesterday as the failed capitalist corporation filed for bankruptcy and agreed to give control (55%) to it’s workers. I am thrilled with this outcome as it’s going to be a fascinating socioeconomic experiment to see what decisions the workers make regarding Chrysler’s major long-term issues like retirement benefits and health care. I’m sure the administration is happy too to have a petri dish in which to watch the issues that plague this whole nation long-term play out in microcosm. If we’re lucky, we will even be able to blame the Italians (Fiat) for anything that goes wrong.
Many global markets are closed today for various celebrations and, ironically, many countries around the world still honor a US labor incident that this country has swept under the rug - the 1886 Haymarket Affair, which took place in our President’s hometown of Chicago when a workers strike for an 8-hour workday got out of hand and about 50 people died (4 police, the rest strikers). 8 Strike organizers were tried as anarchists and seven wer hung and if you thought the NYTimes was always a liberal paper, read 1886′s "Anarchy’s Red Hand: Rioting and Bloodshed in the Streets of Chicago" and compare that to the more balanced Wikipedia account of the incident. Anyway, that’s why we don’t celebrate May Day in America even though the American Haymarket Affair is the one that inspired this memorial holiday in the rest of the world.
Speaking of our government sweeping things under the rug, it’s incredible that people are buying this nonsense that Chrysler will have a quick and painless bankruptcy. If you think the trial of the union organizers as anarchists was a farce, imagine the joke of a court proceeding that we’ll have to have in order to steamroll billions of dollars of debtholders into submission. It was less than 2 years ago, August 2007, when Cerberus Capital took a majority stake in Chrysler and the company quickly turned around and borrowed $10Bn against questionable assets like auto patents and things like the Jeep brand name. They…
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Weekend Wrap-Up – Dynamic Portfolio Adjustments!
by Phil - March 14th, 2009 11:40 am
Was that a great week or what?
No really, I’m asking as I’m not sure yet… We had a great rally once we got Monday out of the way but, all in all, it was a hell of a lot of work to get back to where we were last options expiration day (Feb 20th). We nailed the market turn to a tee, beginning with my calls to go long on QLD, HOV and FAS while shorting the SKF at $250 (now $138) in last Friday’s appearance on LiveStock. In fact, my closing comment in Friday morning’s post was: "We EXPECT a 400-point BOUNCE along this downtrend so we’re not even impressed with anything less than 7,000 next week."
We did a little further investigation in member chat yesterday and decided that we need to break 7,450 on the Dow to actually be impressed next week. Our main concern is we get a quick spike up to that level and then a rejection that sends us racing down to the bottom so we will be positioning to guard against that next week. At the moment, we ended the day slightly bullish but would not be surprised by a drop back to the 7,000 line and we’re positioned for that, as we sold the 3/31 $72 puts against our longer puts. The $2.25 we collected from those pays for us to roll up our long protection 400 Dow points but, to the downside, put a break on our insurance at the 7,000 line (the point at which they go in the money).
By contrast, last Friday, my advice to members was to cover the long DIA puts with $70 puts at $4.32. Those are now .61 and the profits from that already paid for more than half the cost of our long June puts. This is very important to understand as we often talk about being 50/50 or 60/40 bearish but when you can offset 1/2 the cost of your 60% bearish side like this, it makes it very easy to go with the flow on a market rally. The only other stock I picked on Friday was AMZN as $62.50 for reasons I elaborated in the live show, they finished up near the highs at $68.63 but the FAS as $2.85 was a real winner, finishing up at $5.15 yesterday – not bad for a week’s work.
Of course nothing says…
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Weekly Whipping – How to Profit from Chaos!
by Phil - March 8th, 2009 9:35 am
8,285 on February 9th to 6,485 at 3pm on March 6th.
That’s 1,800 points down in 19 market sessions, a 22% drop with a "stick save" at the end that took us back to 6,626 – almost exactly, to the point, 20% below where we started! These are not coincidences, we just discussed the 5% rule in detail during member chat the other day and, sadly, finishing right at the 20% line on a 4-week dip is not really encouraging. As I mentioned during the video-cast on Friday, we went into the weekend 55% bearish – a decision I had to make before I left for the day at 10:30.
We did not buy into the "rally" in the morning, other than our usual stab at FAS and SKF puts, neither of which went well on the day but, as I said during the live show, we aren’t really too worried until Wednesday when we’ll have to roll the SKF puts to April or possibly a hedged July/April spread (we’ll decided next week). As I said to members at 9:45: "This is why we need to take those bullish chances on the bad days, things get away from you fast once they get moving." We do not buy into sudden market moves at PSW, we were buying on Thursday, when everyone thought the world was ending and, had I been around Friday afternoon, we would have been buying there too!
A good example of how we offset our exuberance is my 9:17 comment to members as the futures began running up ahead of the open: "Watch 1.25% and 2.5% levels to decide when/if to stop out at least 1/2 of the covers. I would certainly roll up long puts into this rally (.50 or less per $1 higher strike)." So, what are we doing when the market is flying up nearly 200 points in the first 15 minutes – WE ARE IMPROVING OUR DOWNSIDE COVERAGE! We already have longs, those we can let run but we have an opportunity to move our long index puts up to higher strikes, which: 1) Gives us better leverage on the way down, 2) Improves our net delta to any puts we have sold as a hedge and 3) Puts us in a position to sell hedged puts at higher strikes without compromising our position advantage.
So the "game plan" of watching the 2.5% levels (which I…
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Wednesday When Wen Chips In
by Phil - March 4th, 2009 8:34 am
China is leading the markets this morning.
Word is that Chinese Premier Wen Jiabao may announce new stimulus measures tomorrow, adding to a 4 Trillion yuan ($585 billion) spending plan as the government tries to revive growth in the world’s third-biggest economy. Wen will announce “a new stimulus package” in his annual address to the nation’s legislature, former statistics bureau head Li Deshui told reporters in Beijing today. That was enough to send the Shanghai soaring 6.1% with the Hang Seng jumping right to the 2.5% rule, finishing at the high of the day in a bullish move up.
Copper futures, which we have been watching closely, went limit up in Shanghai trading, oil jumped back to $42.50 and the Baltic Dry Index hit 2,034, a very far cry from the 700s we were seeing in the Fall. China will spend more on infrastructure and to boost manufacturing in addition to the stimulus package announced in November, Reuters reported today, citing an unidentified official at the country’s top economic planning agency. Wen’s speech to the legislative meeting, which starts at 9 a.m. tomorrow, will be the equivalent of a U.S. State of the Union address, setting priorities for the year. Keep in mind that China’s GDP is "just" $3.5Tn, a $600Bn stimulus from China’s leadership is like a $2.6Tn stimulus bill from us, not the $787Bn Washington is wringing it’s hands over.
The Nikkei "only" gained 0.85% on the day but that doesn’t really tell the tale as the index jumped 200 points off the bottom (2.8%) as Bank of Japan board member Miyako Suda said today the central bank should signal that it’s prepared to take “bold” measures to counter the recession. Japan’s lower-house of parliament approved a bill that will free up about 5 trillion yen ($50 billion) for economic stimulus. This kept the dollar from falling below 100 yen, which is a line Japan would really like to avoid crossing again.
This suits us just fine as the final play of the day, at 3:34 was: "Now is a good point to reload on those SKF plays. The $170 puts are back to $11 (from $14), the $120 puts are back to $1.45, the $270 calls can be sold for $9.70. Once again we have an air pocket under the gains, it’s a little tougher into the close like this as there is a risk of a spike up…
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Another Weak Weekly Wrap-Up
by Phil - March 1st, 2009 2:24 am
This is getting tedious!
We were bearish going into the week but not this bearish. It is unusual though that we have a weekly wrap-up with nothing but negative plays as we did last week but there was nothing very positive in the outlook after the action of the week of the 16th through the 20th, pictured here on this chart.
As I said in the last Weekly Wrap-Up: "Of course nothing beats sector specific covers against your own mix of positions but we like using the DIA puts as general portfolio coverage although, as I mentioned last week, both the DAX and the Qs may now have farther to fall." The Qs ended up dropping 8.5% for the week while the DAX tumbled 6%, underperforming other global indexes as we had expected it would. Our hedge play , the DIA June $77 puts, which we went with at $8.22 on Friday and half covered with March $75 puts at $3.85 ended up at $9.85 and $5.40, not much improvement but accomplishing it’s goal of converting a net $6.29 entry into puts that are now 100% in the money to our net entry. At this point, every point down on the Dow is a penny we realize in intrinsic value. Per our original plan, the $75 puts can still be rolled to 2x the Apr $66 puts, now $2.32, allowing for our long puts to be $11 in the money against the puts we sold. The reality is more complex than that as we day-traded the covers around and rolled up the longer puts but we went into this weekend with the same bearish half-cover, not wanting to take chances after Friday’s poor performance.
On Monday morning, I was not at all enthusiastic about our prospects for the week as we had the Bernanke testimony Tuesday and Wednesday and Trichet started us off with a thud by stating: ""In recent weeks we have seen the first signs of falling credit flows. An important part of this fall is demand-driven. However…there are indications that falling credit flows reflect also supply-side factors and tight financing conditions associated with a phenomenon of deleveraging. If such a behavior became widespread across the banking system, it would undermine the raison d’etre of the system as a whole." Perhaps he was channeling Nouriel Roubini, who on Saturday had told the Wall Street Journal: "J.P. Morgan took…
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GDP Friday – Cramer Rips Me Off!
by Phil - February 27th, 2009 7:15 am
Boy am I mad!
It was brought to my attention last night that Jim Cramer has stolen my plan, which I called "The 3% Mortgage Solution" in my Feb 9th column, and simply added a point to it and claimed it as his own on national TV. I’m not sure how to feel about that – I’ll be glad if the plan is used of course, but seeing Cramer take credit for my work is a little irritating. In fact, "Cramer’s plan," as laid out, also lifts elements from my 2/16 article – the latest version of my year old plan for immediately ending the mortgage crisis by making the government an equity partner in the homes. So congratulations to Cramer for sinking to yet another new low in broadcasting – I suppose only writers from TSCM, where Jim has overseen the loss of 87.5% of shareholder equity in the past 5 quarters, are worthy of being given credit by the great Cramer while the ideas of us independent bloggers are just his for the poaching…
Other than being shocked last night by Cramer’s flagrant foul, yesterday was a pretty good day. We executed our plan of buying out our short DIA puts into the morning run-up as we rolled up our long puts and we grabbed some XLF puts as our first trade of the day, which worked out well as a day trade. We did a little bottom fishing with UNH and ISRG and caught the IBM rally for a quick momentum play all before lunch. In fact, at 11:20, we were done being bullish as I said to members: "I do expect a big temper tantrum this week. I know I threw one at Bush’s last budget (in fact it was BECAUSE it hid so many costs) and the GDP is going to back up the Doom and Gloom squad tomorrow so still balanced bearish off this level as we haven’t hit one of our goals yet: Dow 7,400, S&P 780, Nasdaq 1,450, NYSE 4,850, Russell 415. Keep that in mind."
We had added long QID puts as general portfolio protection and those are working out so well we are becoming concerned with our April $64 covers – which seemed safely out of range at the time. We had a bit of a false bottom after lunch but I said to members at 1:33: "Not good on XLF – see…
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Which Way Wednesday
by Phil - February 25th, 2009 6:48 am
Well I’m uplifted!
We had a fantastic day in the markets yesterday as we went bottom fishing in earnest early in the morning, picking up entries on JPM, X, IP, VNO, HMY, M and IYR early in the day, ahead of my 12:48 observation to members: "BAC breaking up along with their preferred stock – that’s a good sign. SKF back at $192 test area, XLF at $7.45 so just a little push and maybe we can get somewhere!" Indeed watching our levels paid off and we went flying up after that. As I often say, you NEED to make these buy decisions at the bottom, it’s too late once the train starts moving. We did grab a momentum play on BAC as they crossed $4.40 but, other than adjusting our DIA cover play, we had no need to make adjustments during the run-up because it’s what we were playing for.
We went into the close fairly neutral (a very slight bearish bias on our DIA puts), having accomplished our mission and not being sure what kind of speech Obama would be giving. It turned out to be a great one and the Republican response by Gov. Bobby Jindal was so mind-blowingly awful that Rachel Maddow was stunned to the point where she was unable to speak and I will leave my own commentary at that! On this same clip, Cris Matthews had the comment of the week, saying that the Republicans were so mired in responsibility for this crisis that they had to outsource the response (Jindal is Indian). I found that very funny…
As we expected, there is no "quick fix" in Obama’s speech and we’ll see how well the markets hold yesterday’s gains. We would have been more bullish had we not had so much trouble with our two critical levels I said we should watch in yesterday’s morning post: Russell 411 and NYSE 4,790. As I said in the morning, these were just the levels we needed to break in order to consider the day’s action anything more than a weak bounce off the horrendous drop of the past two weeks. That’s why we do not jump on the bandwagon once the rally gets going – we do our bottom fishing at the bottom and we sell or cover into the rallies. If it’s a real rally, we have a long, long way to go and we…
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Testy Tuesday – A Very Dangerous Line in the Sand
by Phil - February 24th, 2009 7:17 am
Well we are up in the pre-markets (7am) – that’s something…
Interestingly the global markets took our dip rather well. The Shanghai fell 2.8%, the Hang Seng gave back yesterday’s 3.5% gain, India hit the 2.5% rule, and the Nikkei fell 2.2% – a bad day but not worse than ours, as is often the case in Asia. The DAX is, of course, leading Europe lower with a 2% loss into lunch but the CAC and FTSE are down just a point. I had a busy evening doing a Big Chart Review and indulging in my political rant of the week about the budget fiasco but maybe that will be a weekend article as my comments alone in the members section were over 2 pages.
We went mildly bullish into yesterday’s close, mainly by covering our long index puts, looking for at least a bounce off what is now a 1,100 point drop since February 9th, when we did our previous Big Chart Review. We are actually 14% below the 8,280 on the Dow that we held that morning so another 1% down to go before we hit our next bounce, just over the 7,000 mark. The gravity of the 5% rule dictates that we are more likely to go down than up now that we blew through 12.5% and finished at yesterday’s low and getting back to that 12.5% line (7,245) will be our challenge for the day. On the S&P we’ll be looking for 760 to be taken back but we are just a hair over 738, which is the 15% drop off that 2/9 open. The Nasdaq is about 2% over 1,352 and just under the 12.5% line at 1,392 so we’ll be looking for leadership there to the upside.
The NYSE is our most worrying index. They are aleady down more than 15% (4,675) at 4,633 and the Russell (see David Fry’s chart) is the NYSE’s partner in crime, failing the 15%, 400 mark by 5 points already. So it’s going to be an easy day to look for a turn as we need the NYSE to break over 4,675 and 4,790 is our next stop. The Nasdaq needs to hold 1,352 and get back over 1,392 and the Russell must break over 400 and return to 411 in order for us to see anything more than a weak bounce in today’s action. …
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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
(