U.S. bank stocks may be staging another suckers’ rally.
-- Reuters, July 31, 2008
From time immemorial the four most dangerous words in the investment language have been “This time is different”. Today, however, a new phrase seems destined to join the dreaded phrase group – “No end in sight”.
If an investor assumes that the IMF is correct, then the bank loss write-downs could reach $945 billion. If hedge fund investor extraordinaire John Paulson is correct, the number increases to $1.3 trillion. If Bridgewater Associates is correct, the number rises further to $1.6 trillion. And the top end of Nouriel Roubini’s disaster scenario range is a cool $2 trillion.
At under $500 billion in losses taken thus far, “no end in sight” is an apt phrase.
But, to quote the Joker, “Why so serious?”
Investment Strategy Implications
While the relief certain investors may feel due to Merrill’s (MER) actions may be premature, investment strategy considerations drive the current portfolio decision-making process. For, if an investor has been fortunate enough to have produced alpha thus far this year – for example, portfolio and investment strategy decisions made in the Model Growth Portfolio [MGP] have yielded over 300 basis points of alpha [i.e., the excess return over the market] thus far this year – then the real risk may not be the next plunge in equities (that’s coming) but the danger in not exploiting the near-term momentum game courtesy hedge fund momentum players and thereby losing valuable alpha in any short-term bear market rally.
Therefore, the appropriate current investment strategy appears to be largely a market neutral one. With an undervalued market and no sustainable and exploitable trends or themes at work, being fully invested – yet with no particular tilt from a sector perspective* – seems most appropriate. It’s only from a style and size perspective that a modest tilt toward the Smids [Small and Mid Caps] and growth (as opposed to value) remains advisable**.
So, when Warren Buffett declares that the financial crisis due to “financial weapons of mass destruction” is “far from over”, investors should heed the warning. For those who are paid to exploit near term market moves, however, an undervalued market dominated by hedge fund momentum…
First we’re under-covered, then over-covered, and now under-covered again as there just was not enough time to cover into that drop after I called it at 11:01. We’ll have to see what tomorrow brings but, on the whole, I’m not buying Greenspan’s doom and gloom scenario but it doesn’t do me any good if I’m the only one so we have to go with the flow tomorrow, even if it flows downhill.
This is another one with too many positons over time so I have to use the annoying format. I can’t even imagine having to re-enter all these into a new virtual portfolio (and I’d lose all my notes):
It’s worse now as they just got more bad news on Tysabri as two more patients got PML in a study and that was the fear that originally killed the drug and knocked the stock all the way down to $3 and change a couple of years ago. So total disaster on those now and we’ll probably make a killing plaing it in the DTP but not in this portflolio, where we’re just screwed. Coming down from $35, I’m not sure a full butterfly would have fared much better and I’ll give some thought to taking long puts in the morrning to begin a leg where we can sell puts but if we can get out with $3K ($1.50 per share), I think we should just walk away from this one.
AAPL is fine and BIDU is high but either they are wrong or GOOG is wrong so we’ll see. FSLR flwe down into the close, back at $284 and on track after all that. We’re still up 75% on the puts and they are still a rip-off to buy out. MA we did buy out the caller of and now we’ll wait, hard to say they didn’t bounce when the whole market tanked:
At least it’s easy to review – We have 100 BA Nov $60s that are down almost 50% and we discussed in comments today about rolling them into a Sept vertical but I’m not too keen on that as it’s just money laying there so I’m thinking it over. We have 50 FIG Sept $10s that are up 83% and looking good and then we have the 40 GOOG $470s, that finished poorly but then popped back up in after hours so we’ll see tomorrow. That’s it. The DTP is up 196% since 5/19 and has $169K in cash as I’ve gotten back to more pure day trading and less long holds (BA being the one old one we’re stuck with).
Stocks are up very nicely for a 10 day-old portflio at 7%. Lots of sold puts and just our naked SIRIs and the HOVs with those puts sold as well. The only put I’m worried about owning is C and I’m not worried about that because I don’t mind owning C for $17.40 if it does get put to us:
I have to use this ugly format because there are way too many positions to run the history.
I think when I have some time (perhaps 2016) I’ll purge this virtual portfolio and start fresh as it’s a real pain for me to reformat this just to get it to be this ugly! As with the $10KX, the GOOGs are getting worrysome but everything else is fine. Great example of why we do not move butteflies around just because the market goes up or down 200 points – you just have to wait a few days and, often as not, you are back on target:
I felt very much like Rocky as Greenspan was talking, watching our portolios take a serious beating but thinking all the while "Come on Greenspan, is that all you’ve got?" It’s going to be a tough call into the weekend and I’m going away ahead of the market close tomorrow so if things don’t turn up, I may want to move to cash or covers, we’ll have to see how the morning treats us.
We were up over 20% for a while this morning but now up just 14% but still not too bad considering how awful the market is looking. Those GOOG $510s are killing us of course but now that we ditched the AAPLs we have cash ($6,937) so we can make an adjustment if we have to. At this point, I do not believe we’ll get a very big gain from GOOG in time to take the risk to hold it as premium erosion hits us too hard starting next week so we’ll have to be careful there.
IBB,- News of Bristol-Myers Squibb’s bid to acquire ImClone excited traders about the many and varied possible M&A configurations in the sector (and helped the sector shake off yesterday’s killjoy Alzheimer’s drug data from Elan and Wyeth). Shares in the iShares Nasdaq Biotech Index – which numbers biotech heavies Amgen, Gilead, Teva Pharmaceuticals, and Celgene among its components – rose 2.7% to set a new 52-week high at $89.49 as options traders appear to be jockeying for a break of $100 and beyond by year’s end. With more than 12,000 options trading, we saw fresh and heavy buying pressure in December 100 strike calls, which traded at more than double the open interest at $1.35 per contract – this reflecting about a 1-in-5 chance that the index can break $100 by December 19. Fresh longs at speculative call strikes extended into the January contract at the 105 strike, which traded nearly 3,000 times at 65 cents – the options market currently prices in about a 13% chance of that occurring. The fact that traders are buying into these odds suggests many feel liberated to wager on higher highs for the sector as a whole into 2009.
DNDN,- Elsewhere, option traders seem to be favoring long collar strategies designed to protect gains on an underlying stock position. This was the case in Dendreon, the developer of antigen-identifying drugs for cancer treatment, whose shares rose 2% to $5.80 along with the broader sector. Implied volatility on all Dendreon options ticks in at 79.7% – some 26 percentage points above the historic level of volatility that’ Dendreon stock has already charted – and this elevation can be explained in some measure by the fact that Dendreon is due to report earnings next week. Today’s volume shows traders largely bypassing the front month and turning to the November contract, where a 20,000-lot long collar was put on at the 2.50 put line and the 12.50 call line. When entered in connection with an underlying stock position, the long put position protects the stock against an undue decline (…in this case, as it involves the $2.50 put strike, a catastrophic one), while the short, out-of-the-money call represents the price at which the trader would be willing to unhand the stock at a significant premium to current levels. While the short…
Here’s an article by Eric J. Fox, Stock Market Prognosticator, discussing the dot.com bubble, and its subsequent deflation, from a psychoanalytical perspective. – Ilene
I recently came across a paper by David Tuckett and Richard Taffler entitled "A Psychoanalytic Interpretation of Dot.com Stock Valuations." I believe it can shed some light on the current situation in commodities.
The two authors examined the academic literature on the dot.com boom of the late 1990′s from a psychoanalytical perspective and came up with five stages: Emerging to View, Rush to Possess, Psychic Defense, Panic Phase, and then finally Revulsion. These stages can be applied to Commodity Investing in general, and oil in particular.
Emerging to View
It is during this stage that an investment first comes to the attention of investors, usually due to the efforts of financial analysts and the Media. As interest builds in these investments, they become "alluring phantastic objects." For the Internet Bubble, the authors identify the Netscape IPO in 1995 as the starting event that kicked it off. Other seminal events that come to find were the $1000 Amazon (AMZN) price target prediction, the Globe.com IPO, and many others that have been lost to history.
For oil, it is hard to come up with a starting event. Doug Terreson’s piece on the "Golden Age of Refining" comes to mind, or perhaps the publication of Matt Simmons tome on peak oil, or T. Boone Picken’s almost psychic predictions on the price of oil, but it doesn’t seem like there was one dominating event to kick it off. It was more of a gradual process.
Rush to Possess
The second stage is called the "rush to possess." During this stage a stampede of sorts begins as investors engage in compulsive behavior. The key to this stage, according to the authors, is the introduction of the idea that some sort of "new world" is starting. For the Internet boom, it was the emergence of a "new economy" where old ways of doing business were no longer valid. Remember when no one was going to shop in malls, or read newspapers or bank in person. Get ready we are told, don’t be left behind.
We are toward the end of this stage for oil as we have been
Derivatives consultant Janet Tavakoli landed an RPG on Merrill Lynch’s we-sort-of-got-the-garbage-off-the-books party yesterday, in a client letter strongly suggesting that more biohazards may be…ahem…lying in the weeds.
So, how did the CDOs that Merrill Lynch brought to market in 2007 perform? As expected, they are dreadful…As of June 10, 2008, of 30 CDOs totaling more than $32 billion in notional amount, 19 have declared an event of default, are in acceleration, or have been liquidated. Ten others are “toast,” as evidenced by downgrades of their “triple A” tranches to junk status, yet I could find no record of a declared event of default (EOD). The remaining CDO has “triple-A” tranches downgraded to junk, but the two topmost tranches are still rated investment grade (the topmost is Aa1 neg/ AAA neg and the formerly “triple-A” tranche below that is Baa2 neg/ BBB+ neg). The EOD may be undeclared due to documents that avoid that declaration so that investors cannot trigger acceleration or liquidation (or the declaration may be pending).
While the main point of Tavakoli’s missive was to point out that the securitization market will remain becalmed until investors regain some trust in the investment banks and CDO managers that gorged at the trough, the assay of Mother Merrill’s 2007 bowel movements is eye-watering. Two things:
Merrill Lynch said that the stuff it loosely characterized as having “sold” to Lone Star was “US super senior ABS CDO, the majority of which comprises older vintage collateral – 2005 and earlier.” Interesting, as those older vintages were solid gold (although 2005 was probably only 9 ct) compared with the bags of wet newspapers issued in 2007.
It’s impossible to tell from Merrill Lynch’s entirely legal but deliberately and utterly Delphic disclosures how much of that vintage 2007 vintage is still on the books, and where it’s marked. Good luck, Temasek,** especially now you’ve given up the death spiral part of the earlier deal!
Dead Calm: No One Trusts You
(Don’t miss the table on Page 3)
by Janet Tavakoli
Tavakoli Structured Finance Jul. 30 2008
Ouch – the GDP came in lower than expected at 1.9%.
1.9% would be good but not when the government gave away $168Bn to get it there. Q1 GDP was revised down to 0.9%, down 0.1% from what was previously reported. The personal consumption price index was up 4.2%, increasing from 3.6% last quarter but the PCE, excluding food and energy (which no one who matters needs) fell to just 2.1% from 2.3% last quarter so mission accomplished boys!
Of course, with this government, it’s always worse than you think and the Commerce Department is NOW ready to admit that Q4 GDP was ACTUALLY MINUS 0.2%, not the plus 0.6% previously reported. Revisions like that damage the credibility of our government and cause foreign investors to lose faith in our economy and our currency. You cannot play games with facts for political ends! Forecasts for this quarter were for a 2.3% GDP, that would be 2.1% higher than Q4 and would have been a big relief but, because the government lied about the fourth quarter (or were they just off by 400%?), the 2.5% jump in GDP from -0.2% (which is more than the 1.5% jump forecast from 0.6%) is being seen as a failure.
You can fool all of the people some of the time (2000 elections) and you can fool some of the people all of the time (hard-core Republican voters) but you can’t fool all of the people all of the time (record low approval ratings). Economic data is certainly no place to fool around, especially by an administration that likes to play doctor with the economy when the data we’re working with is statistically worse than what you would expect from a random number generator.
Speaking of random numbers, 448,000 jobless claims is the real damage this morning, up 10% from last week and clearly in recessionary territory. Now this number is OVER stated as the government moved to enroll workers in a new extended Federal benefits program and found a percentage of those people qualified for regular benefits and added them to the rolls. The 4-week moving average of claims rose 11,000 to 393,000, just a touch under the 400,000 panic level. State unemployment, a better indicator, rose 0.6% to 3.28M and the 4-week average of continuing claims rose 42,750 to 3.17M.
Just because we think it’s an over-reaction doesn’t mean we shouldn’t react. We uncovered…
The small Mediterranean country of Greece has been more than a thorn in Europe’s (NYSEARCA:VGK) back for the past eighteen months; it has been the focal point of foreign press on Europe, and in this case all press is not necessarily good press. To truly understand the scope of the Greek debt crisis, one must analyze the Greek economy and its overall importance to the Euro. As ever more countries bid to enter the Euro, now Greece appears to bid for an exit, the first ever in the Euro’s history. A Greek exit from the Euro has been likened to a w...
Top 5 RisersStockRatingAnalysisWDCSTRONGBUYWestern Digital is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.KROSTRONGBUYKronos Worldwide is gaining higher expectations and its recent history of its earnings increases is significant.URIBUYProjected value continues to rise for United Rentals while long term increases in earnings growth are also becoming more widely expected.SWHCBUYAn increasingly attractive expected long term growth rate and a significantly higher projected valu...
The full set of DTCC data is in (that is the repository for reporting CDS data) and reading between the lines provides us with some significant color on what was occurring at JPM's CIO office. For the Cliff Notes' version - see the summary at the bottom...
First things first, the position does not appear to have any HY9 tranche involvement at all, but a modest short HY credit index position was unwound in mid-Feb (we suspect related to the IG9 tranche unwind - since the d...
The following are the M&A deals, rumors and chatter circulating on Wall Street for Tuesday May 22, 2012:
SAP to Expand Cloud Presence with Acquisition of Ariba
The Deal: SAP AG (NYSE: SAP) and Ariba (NASDAQ: ARBA) announced that SAP's subsidiary, SAP America, has entered into an agreement to acquire Ariba, the leading cloud-based business commerce network, for $45.00 per share, representing an enterprise value of approximately $4.3 billion. The acquisition will combine Ariba's successful buyer-seller collaboration network with SAP's broad customer base and deep business process expertise to create new models for business-to-business collaboration in the cloud.
The carryover from yesterday's rally in the S&P 500 dove for cover in the final hour of trading on news that Greece's former prime minister mentioned contingency planning for a Greek exit from the Euro. The index had reached an intraday high, up 0.95% during the late morning, faded through the afternoon, and sold off during the final hour when the Greek news began circulating. A rally during the last 10 minutes of trading lifted the index out of the red to a 0.05% gain at the close.
The index is now up 4.69% for 2012, which is 7.22% off the interim closing high on April 2nd.
From an intermediate perspective, the S&P 500 is 94.6% above the March 2009 closing low and 15.9% below the nominal all-time high of October 2007...
EXPR - Express, Inc. – Shares in apparel retailer, Express, Inc., dropped nearly 30.0% today to a new 52-week low of $16.38 after the company projected full-year earnings below those expected by analysts. Options on EXPR are far more active than usual today, with overall volume on the stock currently at 4,460 lots, up nearly 2,000% over the stock&rsq...
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
It is still very early in the conversation but the fact some European leaders are seriously considering a region wide bond is definitely a sea change. This news came out yesterday and while Germany will resist, it will be interesting to see if over the next 6-12 months the idea of a "eurobond" gains momentum. The bond would obviously help protect the weaker countries in the region (letting them borrow at rates they otherwise would not) and be a penalty for the stronger countries (namely Germany). So Germany has to consider if its worth the cost and/or if this is a cheaper way to maintain a flawed system in a current form R...
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In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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...
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But, to quote the Joker, “Why so serious?”
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It is during this stage that an investment first comes to the attention of investors, usually due to the efforts of financial analysts and the Media. As interest builds in these investments, they become "alluring phantastic objects." For the Internet Bubble, the authors identify the Netscape IPO in 1995 as the starting event that kicked it off. Other seminal events that come to find were the $1000 Amazon (AMZN) price target prediction, the Globe.com IPO, and many others that have been lost to history.
Ouch – the GDP came in lower than expected at 1.9%.
Speaking of random numbers, 
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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
(