Wild Weekly Wrap-Up – Down Goes Cramer!
by Phil - August 4th, 2007 11:59 am
"every position I had was green today. Even LEND calls. I have never seen that since I started investing in 2000. And in no small way some thanks is in order to PSW… 
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Thanks BDC! What a great way to end a great week in the markets!
We finally got the beginnings of the correction we’ve been planning for and all those investment in the "wrong" direction have finally paid off. We stand now at the tip of a major inflection point in the markets and, as I’m taking a vacation, I’ve left the 25% of non-cash positions very well hedged (I hope) with a remaining downside bias.
Paranoia really paid off this week as we very simply nailed the market movements on the head. If I weren’t going away (and already in trouble for not packing yet!) I could write the most amazing essay about how we (Happy, Zman, Sage and I) arrived at these conclusions but I will just say it was a great team effort and I couldn’t be prouder of both our writers and our great contributing members who make up the smartest community of market watchers I’ve ever been a part of!
As many of you know, Happy Trading and ZMan are "going pro" this month and this is going to be a great thing. The ability to devote more of our time to the markets and more time to this newsletter has truly turned this from a hobby (and if you doubt that feel free to go back to my 2005 blogspot files!) into a real profession and I can already see the level of analysis ratcheting up as we each get comfortable knowing that, day-in, day-out THIS is what we do for a living!
Anyway, so the PSW team was in full swing this past week. Actually, why be modest? This whole month has been incredible but the quick highlights of the week were:
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Thurs, 7/26: "That’s right, we have trades for every market direction,
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DiggVacation Notes
by Phil - August 4th, 2007 8:11 am
Notes on positions for members:
I’m sorry i didn’t get to finish the LTP review. The market got crazy and that thing with the mortgages came up Wednesday which caused me to pull an all-nighter trying to figure out what was going on which led me to conclude that the markets were about to collapse. This is what I do to protect my own virtual portfolio – study, study, study and sometimes I have to prioritize. As fast as I read it still does take a lot of effort so I’m sorry AND not sorry at the same time as I think arriving at the correct market call trumps specific roll recommendations.
Please take a good look at the LTP and feel free to question the logic of any rolls or covers you see. I pretty much covered everything that made sense to cover, mostly with Septembers (on new covers) as I’ll be away and it’s less hassle but, ordinarily, I hate to give my callers more than 30 days to cash in. The structure of my current virtual portfolio is not aimed at making money in either direction, my goal is to be about neutral when I get back on the 20th but I will take action as appropriate.
Most of my callers/putters have 50% hard stops on them, which I hate but not as much as I hate giving someone a double! My other positions seem well balanced enough – I figure if they survived this week, what the heck else can the market do to them?
It’s one thing to call for 12,500 as a "necessary correction" and quite another to see it happen. I take no pleasure in being right about a crash but it sure beats being wrong! My original correction call was for 11,500 but that was way back in November and we did correct to 12,000 so I feel satisfied with that but this run became unhealthy when the PPT wouldn’t let the market correct below 13,500 in June and the run to 14,000 was pretty much a joke given the economic environment. The more you put off a correction, the worse it can get and if 13,000 doesn’t hold I think 12,500 is a certainty. Understand (for all you 1-min chart watchers) that not holding 13,000 means breaking below 12,900 for more than a day, not skimming to 12,995 in intra-day trading!…
Friday Virtual Portfolio Moves
by Phil - August 3rd, 2007 6:24 pm
Downside – I’m still following mattress play rules of course although I wish I hadn’t cut off my August puts yesterday as they would have been great this morning but I’m around 80% cash and carrying the September AND August puts was overkill and dangerous going into my vacation.
FAF is driving LFG and FNF further south!
EOG Sept $75s at $2.50 are cheaper than yesterday, not a bad play to make. XXX
CYCL – this is another good one to own and sell calls (7% return on sept here) as they are a solid long-range outlook but who the hell knows what mid term. Mar ‘08 is the furthest out you can go and $1.50 for the $10s (15%) is a bit much but, on the other hand, you can buy the stock for $9.81, sell the March calls for a net 8.31 basis and, if you get called away at $10 that’s 20% for 7 months – you could do a lot worse in this market. When you enter thinly traded issues like this it is best to just buy maybe 500 shares at a time and see how long it takes to sell leaps before committing to that strategy. XXX
Hurricane outlook reduced! Oil falling fast, very good time to think about our hurricane plays.
Options trading in July was up 72%, a new record, I think we may have contributed a point or two on the mattress plays alone! OXPS Mar $27.50s are $2.17 and you can sell the Aug $27.50s for .30 (but I’d wait for a bounce) XXX
PCLN – I decided to risk my Oct $75s into earnings but my basis is just $1.45 on 10 so not exactly betting the farm. SINA/BAY – that’s an interesting trading pair! Big Pharma is getting hammered and BAY looks attractive here but so did PFE last month! SINA falls under my don’t bet on China ADR rules, which I often break and would consider doing for this one as I think they are in just the…
TGIF!
by Phil - August 3rd, 2007 8:59 am
Woo hoo – vacation time!
Usually when I take off I am filled with regrets as I hate to miss the fun in the markets but I’ve never been happier to lighten up on positions and take a break.
I’ve been talking about fundamentals all week, possibly looking a little like Chicken Little as I’m telling people the sky is falling while the market rallies but I’m not here to win a popularity contest so I’m really pushing the "better safe than sorry" school of investing this month as my best case scenario for the next couple of weeks is that we consolidate around 13,600 and my worst-case scenario is downright depressing!
Not as depressing as working for AHM of course, that company announced they would cease "most" operations and will be letting go of 6,250 of their 7,000 employees. If you ever need to be reminded how clueless the market can be, take a look at yesterday’s chart on American Home Mortgage as it went from $1.50 to $4.50 and back to $1.50 in yesterday’s trading. This is real money people, not play money – what the hell are you thinking?!?
![[Endangered Loans]](http://online.wsj.com/public/resources/images/NA-AN596A_MORTG_20070802214121.gif)
According to today’s WSJ, lenders are clamping down on all risky mortgages, that includes "Alt-A" mortgages like no-doc loans that speculators often use (when you have lots of money and no time). Since $1T worth of Alt-A and Sub-prime loans were written last year and the year before, we can assume at least (and boy, am I being kind) half of those deals will die this year, knocking out $500Bn of home transactions. At a national average of $250K per home and assuming the 1/2 of those loans are refinances (also generous), that’s 1M homes that won’t move, close to 1/4 of a year’s total transactions.
- That’s 1/4 less commissions for realtors
- That’s 1/4 less business for the mortgage industry
- That’s 1/4 less business for movers, decorators, painters….
Overall July employment was up 92,000 in this morning’s report, quite a bit less than the 135,000 expected and LESS THAN HALF of last July’s 220,000 jobs. The "growth" came in health care, hospitality and, surprisingly, financial services but AHM will certainly fix that! This is pretty bearish for a "Goldilocks" number with unemployment creeping up to 4.6%.
You MUST read this WSJ article entitled "Loan Woes Hit European Bond Fund" detailing AXA…
Thursday Wrap-Up – Are the Brokers Broken?
by Phil - August 2nd, 2007 11:15 pm
Yipee, another strong finish in the markets.
Now we made some technical levels and I’m happy and Happy Trading is happy:
Just because we are happy does not mean we are jumping right back into the markets but we have been nibbling at a few leaps as this has been a very good time to establish a few longer plays in case we really are on the road to recovery. I’ve been cashing out with no regrets as this is my second to last day before vacation and the market just doesn’t seem like the best place to keep my assets while I’m away!
Will we have follow through to this very positive movement tomorrow? Well, if we don’t, I’ll be much doom and gloomier about the future as we have every technical reason to march the S&P to at least a retest of 1,510 and consolidating over that line would be a very good thing (Dow about 13,600). The chart for the Nasdaq also looks promising:
While this all does make for a pretty chart, I have often said charts can be forced and 2 consecutive days where 100% of our gains came after 3pm in one giant spike may move a chart but do not move me to move my money back into the markets.
There are still some very ugly fundamentals to deal with. As I noted in the morning post, the credit market issues are spreading RAPIDLY and it is beyond naive to think that this is just a bump in the road and it’s the denial that makes me nervous. Just a week ago today I said (in large typeface) "When the M&As start to unwind it is time to be all cash or short the market – this is that time!!!" Today the WSJ counts 46 M&A deals worth more than $60Bn have been pulled since June 22nd (see I needed a large typeface again!).
So not only has nothing fundamentally changed since I started becoming concerned about the markets but things are deteriorating rapidly. How many deals were pulled last year? None! A lot of work goes into setting up an M&A deal and things have to be pretty catastrophic to take all that work, pay all those fees and trash it - but that’s happened AT LEAST ONCE A DAY FOR THE PAST MONTH!…
Thursday Morning
by Phil - August 2nd, 2007 8:37 am
The markets seem once again determined to open positive so who am I to argue?
In my wrap-up yesterday we discussed a possibly disastrous situation developing in the bond markets and this morning I see that MS is being fined for overcharging retail investors as much as 18% on bonds they recommended as "safe" investments. MarketWatch’s has an article about 20 tipping points that can wreck this rally and the WSJ has had to start a chart to track How Credit-Market Tremors Have Affected Junk Bonds, LBOs and Hedge Funds.
Just this week alone they’ve added the following:
| 07/30/2007 | IKB Deutsche Industriebank AG | Profit problems | CEO left; profit warning issued | Company says it can’t maintain its earnings forecast of EUR280 million for the 2007-08 financial year; IKB says it has "felt the impact" of the U.S. subprime crisis; Commerzbank said the difficulties will shave its profits by 80 million euros |
| 07/30/2007 | American Home Mortgage Investment | Margin Calls | Banks demanded more cash after the lender wrote down the value of its loan and security virtual portfolios | Shares of the real-estate investment trust were halted for more than a day; lender delayed paying dividends on common stock, may delay payments on preferred shares because of margin calls; may have to sell assets, find new financing, or restructure debt to meet banks’ demands |
| 07/30/2007 | Stoneridge | Offering delayed | $200 million senior secured term loan postponed indefinitely due to "unfavorable market conditions | The electronic component maker was forced to cancel its tender offer to purchase its $200 million in outstanding senior notes |
| 07/30/2007 | Insight Communications | Offering delayed | Bids for the New York cable operator were due yesterday, now delayed more than a week by the firm’s bankers | Bankers at Morgan Stanley delayed to give private-equity bidders more time to line up financing |
| 07/30/2007 | Commerzbank | Hedge fund losses | German bank said its total exposure to the US subprime market is 1.2 billion euros | Set aside 80 billion euros to cover exposure to US subprime market |
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Wild Wednesday Wrap-Up
by Phil - August 1st, 2007 11:48 pm
"Whether you are a bull or a bear, please be careful out there" – Me, 9:30 this morning!
Wow – a little something for everyone today!
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09:30: 13,211 -
09:36: 13,280 (+69)
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09:49: 13,159 (-121)
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10:20: 13,286 (+147)
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11:00: 13.135 (-151)
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12:35: 13,307 (+172)
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01:24: 13,173 (-134)
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02:05: 13,246 (+73)
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03:26: 13,146 (-100)
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03:56: 13,391 (+245)
That’s 1,212 worth of Dow movement in just one day! Needless to say it was very exciting for us and we had a ball getting in and out of oil puts, and calls as well as index puts and calls on a day that was lots of fun but also reminded us why we are mainly in cash!
We had successful tests of both the S&P at our target of 1,440 and the Nasdaq at 2,525 but I thought the end of day movement looked a little forced so I remain in full-blown skeptical mode:
Oil came down just a bit today ($1.68), despite a large draw in crude inventories - hopefully it was something we said! Let’s keep forwarding Tuesday’s wrap-up to every politician you can get your hands on until we start hearing questions about crooked oil trading being thrown at the candidates!
I’m not going to say anything else about the markets just now other than the fact that I got a very disturbing call from someone in the mortgage industry and he told me that there is a liquidity crunch in the credit industry and margin calls are being made. I will warn you that this is, so far (10pm) unsubstantiated and it is unlikely I’ll know until morning but what that means is this:
Higher credit risk is driving DOWN the price of bonds (you pay face or "par" value for a bond but the value of the bond fluctuates depending on whether the rate of interest you get is better or worse than the prevailing rates and the creditworthiness of the bonds themselves), causing those bondholders who bought on margin (Yen carry traders!) to get margin calls as the value of the bonds they are holding have declined significantly and no longer cover what the brokerage/bank/whoever was willing to lend against.
So, let’s say a…
Wednesday Virtual Portfolio Moves
by Phil - August 1st, 2007 11:24 pm
XOM making a break for it, the Dow needs them above $93 to make real progress. AAPL failing in its comeback (very bad sign as it just got an upgrade). BIG WARNING – despite the “rally” my index puts are UP and my DIA calls are down – that indicates tremendous negative sentiment!!!
Shorting – I was looking to short the DIA but then I ran into that very strange option behavior. CME may make a fun mo play with the $550 puts at $9.50 XXX
AAPL – answer – a lot! This is a roll down play as an upside hedge against a bearish virtual portfolio. If we are going to recover Apple should be a leader. I already moved to the $140s and now the $135s are getting interesting at $10.05. It’s costing about $2 per roll to gain $5 in position but I can still get $6 for the Aug $130s if I decide it’s hopeless.
Go Google! Go Apple! Go markets!
NAK – I would hope for a pullback as a new entry, they’ve had a great run and it’s still a long time until they get production out of Alaska. That’s not in a current virtual portfolio, just my retirement account along with GE, OLED (not for long), EBAY, T, INTC and TASR. Those are essentially the stocks I expect to be up consistently for the next 25 years. I sell calls against the slow ones but usually 5% out of the money for roughly an 8% annual bonus to the movement of the stocks.
ISM was fine – exports were strong per my restaurant example this morning. And yes, Chris, there is a small shakedown operation going on but once we are under new management I think a lot of that will repair itself, assuming we can stay in business that long!
GRMN/MA/EVERYTHING – Rule #1 – I’m not even going to say it again!
WFR around $60 is a buy from me too! XXX
Inventory play – XOM can give back that $1.20 gain…
Always an Option 1:3 – August 2007
by Greg - August 1st, 2007 7:38 pm
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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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