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Which Way Wednesday – Hedging for Disaster?

They are messing with the bailout again.

Now the Republicans in Congress are crafting an "alternate" plan that includes a provision to eliminate capital gains for 2 years and provides massive business tax refunds.  Talk about an earmark!  Now I am outraged and demanding my representative vote this down.  Effectively, what this means is that, now that the value of our homes is at a 5-year low and loan virtual portfolios are being written down 50%, the people who come in and buy them at fire-sale prices can do so, double up in 2 years and pay no taxes.  Talk about a land grab for the rich!

At the same time, some House members have signaled they are against allowing changes in mark to market accounting rules that will allow the banks to carry distressed assets long-term, rather than being forced to liquidate them at fire-sale prices.  Does anyone see a pattern here?  No wonder David Fry asks in his S&P chart: "Where are the adults?"

This statement from Congressman David Davis, who co-sponsored the alternate bill, gives you a pretty good idea of how far apart these new provisions are from what was originally proposed.  Davis says of the oirginal bill: "Make no mistake about it, this legislation provides a taxpayer financed bailout of those who have acted irresponsibly. It federalizes and socializes another sector of our economy, fundamentally changing yet again the federal government’s role in the private economy. And, most importantly, this bill does nothing to address the problems that led to this financial crisis in the first place."  Interestingly, while he decries bailing out those who act irresponsibly, a cornerstone of his bill is to "Allow companies to carry-back losses arising in tax years ending in 2007, 2008, or 2009 back 5 years, generating a tax refund and immediate capital."  So WALL STREET firms can ask for hundreds of Billions of dollars in taxes back against the write-downs they are taking now in their virtual portfolios!  Madness!!!

The House and Senate also added earmarks for alternative energy credits to the bailout package but there is some logic to that as the impasse of this week has threatened the extension of existing energy credits that are set to expire in three months.  This has been tanking the solar sector and boosting oil in recent trading and is actually an important piece of legislation that the House needed to get done.  "With hundreds of thousands of American jobs and billions of dollars in clean energy investment at risk, we urge congressional leaders not to leave for the election recess" until reaching an agreement, the CEOs of national hydropower, geothermal, solar and wind energy associations said in a statement.

The Senate "rescue plan," which is being voted on tonight, would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power. The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax, and provide tax relief to victims of recent floods, tornadoes and severe storms.  Sounds good but who’s going to pay for it (more deficit?) and all these major changes make me very nervous that the whole thing may blow up and not get passed.

We know about using the SKFs to cover for a financial meltdown, with that ETF back down at $100, it’s a good opportunity to use Jan $100s at $19 for cover as they should retain about 1/2 of their value even if things go great for the financials but, if we drop back to just where we were on Monday, they are 100% in the money and will have very expensive October calls to sell against. 

Another crisis ETF is DXD, an ultra-short on the Dow.  Despite the Dow "only" gaining 485 points yesterday, the DXD plunged back to Monday’s open at $61.53, after closing at just under 67 on Monday.  If the economy breaks, Warren Buffett has said we will be looking at the 9,000s on the Dow, close to $80 on the DXD so Apr $55s at $14.20 are not a bad protector, especially as you can already sell Oct $69s for $2.90.  These are, of course, cover plays that you would hope to lose as they are playing for a disaster in the markets but, if you want to take a chance on being uncovered on longs in hopes of a bailout, it does make sense to take out some insurance against a worst-case scenario.  If we rally, the Dow has a declining 50 dma at 11,339 that should offer resistance and that would be a good time to get out (unless we feel the rally is irrational) of the protective plays but that line has held VERY firm since we broke below it in June.

SDS is the ultra-short ETF on the S&P and that one was at $77+ twice this month but retraced to $70.30 at yesterday’s close.  The March $77s are back to $9.95 and they were selling for $13 yesterday morning.  Even better, the current $77s can be sold for $4.05 which is a $3 spread against a market melt-down so perhaps a 4:3 spread is a pretty cheap way to add some protection. 

As far as hedging goes, if you are 50% invested and 50% in cash and you are worried about losing 20% on the stock side in a major sell-off, then the logic of these hedges is to take 40% of your cash (20% of your total) and put it on something that may double while the other positions lose.  If things go down, your gains on the hedge offset some of the losses on your longer positions.  If things go up, you can stop out with a 25% loss, which will "only" be a 5% hit on your total virtual portfolio but it means we are breaking through resistance and your upside bets are safe and doing well.  That is not a bad trade-off for insurance in this crazy market.  Also, be aware that these are thinly traded contracts with wide bid/ask spreads and you need to use caution establishing and exiting positions – note the way GOOG was wildly traded into yesterday’s close, flushing out stops on both sides of the trade (the Nasdaq canceled many of the trades, calling them "erroneous")..

We’ll be looking to hold test levels today that were breakout levels yesterday: 10,650 on the Dow, 7,400 on the NYSE and 1,135 on the S&P.  IF we do hang on and head back up, the Russell was a laggard yesterday but still the clear leader in last night’s Big Chart review and we need them to retake 700, with 720 being the rally point we need over the 50 dma, which was looking so promising just a week ago.   Coming down from the 750s to 679 (was below 660 on Monday) in just 6 trading sessions makes the Oct %730s, now at $6.20 a pretty nice gamble on the bailout actually doing some good for the markets, as those contracts were trading at $40 on the 19th and over $10 all of last week.

[Tankan]Asian markets were mainly closed for the holidays with China closed through Monday so there is little to be gleaned from thin action over there.  The Nikkei was open and added 108 points but pulled off that trick while trading down all day after getting a big pop at the open, so let’s not do a victory dance over that number.  The BOJ’s Business Confidence Survey hit a 5-year low, negative for the first time since June, 2003.  Companies grew more pessimistic about nearly all aspects of their business. They are feeling the pinch from soaring prices of energy and raw materials, while being forced to lower the outlook for consumer demand in Japan and abroad.  This survey was completed by many companies BEFORE the US crisis hit the fan and already "Many companies also report funding conditions are severe, in part reflecting credit tightening by banks. The main tankan confidence index for small- and medium-sized companies showed a negative reading of 21, compared with minus 16 in June."

Global funding costs are spiraling out of control and are only held in check at the moment on the promise of the bailout being passed this week.  Although Asian and European governments are flooding the market with liquidity at unprecedented levels, funding costs are continuing to rise as interbank lending rates skyrocket (because banks don’t trust each others books enough to hand out loans to each other).  "A lot of companies are saying, ‘should I even consider continuing with my current projects?‘" said Dr. Subramanian, head of investment banking at Enam Securities in Mumbai. He said power companies in India used to pay 8% for debt that now costs 14% to 15%, while raising money through equity is even more costly.  India’s central bank reassured depositors Tuesday about the health of IBN (who we made a well-timed play on Tuesday morning) following rumors of some financial distress and reports of cash withdrawals.

[Battered Banks]Europe is mixed an hour ahead of the US open, with the FTSE up 1.5%, the CAC flat and the Dax down 0.7% as overnight LIBOR rates shot up to 6.88% (they were in "crisis" on Monday when they touched 4%) and now the 3-month dollar LIBOR has hit 4.05%.  The dollar continued to climb against the Euro, keeping a lid on gold and oil despite upward inflation pressure on a global scale as Central Banks literally flood their countries with currency.  In France, President Nicolas Sarkozy met Tuesday with heads of the country’s financial institutions to assess their ability to borrow money, and promised measures by the end of the week to ensure they can carry out what the president’s office called their "primary task of financing the economy."

We talked about Ireland’s extreme measures in yesterday’s morning post and the ECB dropped another $50Bn into overnight funds and received bids for $70Bn right away so another case of possibly too little, too late.  The BOE filled all $13.4Bn worth of overnight bids for $30Bn worth of capital set to mature on October 7th.  The Swiss National bank said it also maintained its overnight offering of dollars "in a generous and flexible manner," without providing further details.  "Central banks can address the problem of liquidity, but they cannot address the problem of solvency and trust among banks," said UBS economist Stephane Deo.

One or more financial institutions parked a staggering €102.81 billion ($144.72 billion) overnight in the ECB’s deposit facility, which pays a low rate of 3.25%, data from the central bank showed Wednesday. The significance is that European banks would rather park funds at the central bank at a lower rate than lend to other banks at a higher rate.

Credit is so tight in the US that LVS CEO, Shelly Adelson, had to lend $475M to his own company in order for LVS to avoid breaking the terms of a $5Bn credit facility.  Investors and analysts had speculated for weeks over how the gambling company — best known for the Venice-themed Venetian resort in Las Vegas — would navigate a cash-flow shortage that would have put it out of compliance with its loan terms, and in the difficult position of renegotiating with lenders as Wall Street continues to be consumed by turmoil.  Meanwhile, GGP (another company big on property development) is down 73% on concerns that that company may not be able to service their $27Bn in debt.

These are the consequences being faced after just 2 days’ "delay" of signing the bailout package.  Congress  many think Paulson and Bernanke and Warren Buffett are kidding when they say we are about to go over an economic cliff but I think there is certainly enough evidence to merit serious concern.  In part, we have a crisis of confidence and – even if it were true that we could "muddle through" without a bailout, if just 1/3 of the investors believe that we can’t and pull out of the markets, what good will it do the remaining optimists?

Needless to say, be very careful out there!

 


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  1. scobe

    GM all.   All the comments I’ve heard from House members are about a vote Friday best case.  Seems that many are in their home districts & not returning until Thurs.

  2. Phil

    DIA June $108 puts are $9.38 and calls are $9.68 and a 1,000 point move in either direction should be close to a double on one side, leaving the other side a free play for the recovery or pullback.  Of course,  when things calm down, front month calls can be sold against each side.  It currently costs about $4 to roll to these positions from 1,000 Dow points away (the June $98 puts at $5.65 and the June $118 calls at $5.10). 

    Scobe – that is not good news.  What is their incentive to head back to Washington on a Friday and possibly be trapped there over the weekend with election day just 30 days away?

  3. Phil

    Nice, slow open, gives us time to lay down covers at least… 

    Ags moving up nicely.  Solars moving up on news of the add-on bill. 

    We are nowhere near testing downside levels and there is loads of reason to be worried  or course.  Gold is ticking up but today oil is down. 

    BA holding up.  MCD of course, AXP not so bad, WFR holding up.  CMI finding buyers but CAT seling down hard.

    Not looking good overall!

  4. lindsay

    phil, what are your thoughts on the oil inventory?

  5. Singapore Steve

    Phil
    I got out of the AAPL 150 problem.  Rolled down to Jan120 and rolled my callers to Nov120 for a .8 credit.  Now I just need aapl to stay below the 120-125 line for the next 51 days.   I used the iron condor screen to enter that spread so that I could save it ahead of time.

  6. RMM

    Phil:
    ISRG oct280
    TM oct 90
    they are very green and premium is getting lower,

    I probably should roll closer to ATM ???

  7. RMM

    Phil:
    why is GE down, is this good to buy more ?

  8. RMM

    Singapore Steve:
    I have aapl apr 135 and am not happy, what can you recommend for me ?

  9. ephmen85

    Covers   If you are unsure of whether to cover or not you can always split the difference and cover one strike higher than you would normally.  Since Volatility will likely drop if the bailout passes, even if stocks rally up sharply the cost of rolling to the next month will drop, so high premium sold today might still be profitable.

  10. jomama

    RMM, watch out with ISRG and earnings.  If they miss by a penny or even hint at negative guidance (which is very possible in this envt) this stock will tank like RIMM DESPITE the excellent long term fundamentals.  I am actually out of all of my ISRG plays and looking to get in after earnings.  If the stock tanks, i will be adding a lot of common stock to my retirement account.

  11. Phil

    Oil inventory – I think we are past the hurricane so deliveries should have picked up but refineries were still off-line and demand was down, also due to the hurricane closing Houston airport and the general storm cutting traffic in more than just Texas so I think we should certainly get a build in oil and maybe even a build in gasoline despite the refinery shut-downs and that would be way negative for $95 oil but they are already dropping fast so it’s a tricky bet.

    AAPL/Steve – Good, that’s a good spot, hopefully earnings aren’t too amazing (probably end of October).

    ISRG/RMM – I would sure take out the $280 caller at $7, looks like we may have a bottom.  If not, then you can sell something else as the $250s are $17 so you won’t risk much having a sell-stop at $15 to cover.  TM is also retesting yesterday’s low so why not take out the caller and wait a bit to see what you can get?

  12. kustomz

    MET is one unpredictable stock

  13. Singapore Steve

    RMM
    At least you have more time than me.  But you could either roll back to the Jan 125  or 120 and sell the oct covers.  Or roll them down to the apr120 for 5.5 and sell the oct 120 for a debit of about $1.    I like credits but if you can get out of a bad position for only a buck then sometimes just best to put it on the sidelines.  But exp is 16 days away so after that you can sell Nov. and recoup your $1.

  14. Phil

    GOOG is doing fantastically for the guy who bought them for under $1 yesterday!

    GE got a downgrade and Immelt said action is needed "urgently" on bailout which is making people think he is screwed if it isn’t done.  For some reason Buffett gets to say the same thing but his company doesn’t get trashed over it (and Berkshire also has a lot of financial holding).  If they are going to retest $23 and hold it, the stock is once again a great buy with that 5% dividend.  2010 $20s are also a good deal at $6.20, about 1/2 in the money and were $7.75 last Thursday.

    Covers – good point Eph!

    ISRG earnings 10/16 – I’m not saying STAY naked, just that I expected a run better than $240 between now and earnings as there have to be people thinking this is a great speculative play if they beat.

  15. Phil

    Big banks are holding up, all hope is not lost yet.  C up 4% in fact….

  16. DB

    UK down over 1% since US opened.

  17. kustomz

    CAT getting creamed today

  18. Phil

    Construction spending unchanged but ISMdown to 43.5, that is terrible!!!  TERRIBLE!!!  50 is the contraction line and last month was 49.9.    Now we’re going to test those levels so be careful….

  19. ephmen85

    ISRG earnings 10/16    Why do these companies with volatile stocks announce earnings the after hours the day before options expiration?   Do they like that people trade their shares like casino chips?   Didn’t Google do the exact same thing last quarter when they had their massive pop?

  20. Phil

    CAT is poison on that report, BA too, this is a global slowdown number.  USO puts will be looking very good now as a build in inventory is going to really freak out the barrel holders.   Oct $82 puts at $5.40 with a stop at $4 are not a bad way to play the inventory.

    C and BAC still holding up, seems like they are pretty sure bailout is coming.  JPM good too, GS and MS flat, WM flat, NCC seems a little concerned, WFC pulling back but still green.

  21. RMM

    Phil:
    I want to review my appl apr 135, its extraordinarily annoying, I assume that most AAPL products are bought with credit, so less will be bought,
    would you roll?
    would you roll and cover /
    would you sell and run ?

  22. kustomz

    Action in IBM might take us much lower today, not to mention CAT people trading on fear of recession

  23. Phil

    OIH wiped out yesterday’s gains, led down by RIG at new 52-week low.  A lot of yesterday’s gains turned out to be bullish comments on outlook by SLB CEO, possibly he’s just delusional…  Ouch, BHI just hit new lows too.  SLB probably a good mo play down from $75, the $90 puts have very little premium at $15.50 and can be stopped at $15 looking for a retest of $72.

  24. Phil

    AAPL/RMM – What happened to the roll and cover from yesterday?   Nov $120s are $10 and it costs you $9 to roll down to the Apr $110s.  Since your current position is worth $11.38 and you will be rolling into a $10 advantage spread for -$1, I’d say that’s the way to go.

    CAT & IBM/Acton – An ISM number of 43.5 is not a fear of a recession, it’s an actual recession…  It’s hard to tell how much of that has been caused by contracting credit and will be reversed if we free up capital.  Apparently people buying C think it will help a lot.

    Nice hard level test there and we actually may be holding it, don’t get too attached to your puts if this is all the down they can muster…

  25. Phil

    Those RUT $730s are down to $4.75, now would be the time to take a chance.

  26. ephmen85

    NKE   Sure holding up well; my callers are actually ITM.

  27. Phil

    GE saying capital position is strong and has not drawn on any bank lines…  Bad that they had to make a statement like that but it looks like today was a hyena attack timed with the downgrade.

  28. RMM

    Phil and Singapore Steve:
    how do you rationalize to add more and more cash by rolling AAPL down ?

  29. PharmBoy

    Didn’t someone ask the question here about the global slowdown after the Olympics…esp since China was building fast and furious to make the Olympics a success?  CAT, X and others were bound to slow down.

  30. Singapore Steve

    For me it is how long I can sit at the table.   My roll gave me a credit but it will park me on the sidelines for the next 51 days.  At that time I can roll out to the aprils and sell Dec to pay for it which could then give me 3 extra months to sell against.  If things are going flat then aapl is a good one to sell covers on.

  31. ephmen85

    Any TOS people using Portfolio Margin….did you just get an ridiculous BP Adjustment figure?

  32. Singapore Steve

    C is holding up really well today. I am 1/2 covered with oct20 and trying to look for a dip to take out 1/2 of them before the weekend.  Would rather be naked in them right now.

  33. ephmen85

    Mine should have come down with the fall in the VIX and it more than doubled

  34. Phil

    Airlines moving up a oil falls, day two of that. 

    Steel still way down, X near $70 again.

    PNC, C, KEY et al still heading up.  FRE heading back to $2.

    BA with a massive reversal off a great open, back at yesterday’s low, from which the $55s went from $3.20 to $4.10 so buying them at $3 seems like a good gamble but maybe even lower if we get a big sell-off.

    AAPL/RMM – I’m not saying add more cash, I’m saying sell the caller that pays for your roll.  The only time you want to add more cash is perhaps when it’s heading up and you buy a few more longs or stop out some of your callers.  Obviously, you have to have a bullish outlook on AAPL and believe it’s worth more than $120 or what’s the point anyway.  Step 2 is believing the government will do something productive, which is a stretch at this point so step 3 is you’d better damn well have some hedges in place in case the whole thing collapses.

    We keep getting right to that 7,400 level on NYSE and 10,650 on the Dow and 1,445 on the S&P.  If the S&P breaks, I think we have a problem although our target yesterday was 1,435 but now that they are holding 1,445 along with our other levels, we need to raise our expectations. 

    Post-Olympic slowdown – Yes but this is a little more severe than just China stopping construction projects.

    Oops, there goes the S&P!

  35. Phil

    SU making new lows, that does not bode well for oil. 

    No oil report yet?

  36. RMM

    PhiL; look at SKF, its flat, must be expectation tha a rescueplan is going to be passed,
    in your comments this am, you even suggested adding jan 100 calls. I have jan 120.
    I also have nov 107 DIA PUTS which are GREEN with 65 % gain.
    Any changes ?

  37. ephmen85

    VLO   Wow!

  38. Phil

    BTU down huge, that’s a good retirement stock to have at $39.    $40 cals are $3.50, that’s a nice premium for 3 weeks!

  39. DB

    UK now negative. Down nearly 2% since US opened. No mind of its own :-(

  40. Singapore Steve

    Phil
    Am holding GS 18 Jan 160 with 15 oct 160 covers.  My thinking is wait until Monday to roll my longs to Jan135 and sell nov 135 to pay for them. Rational is I still have $1500 in rent due to me and by Monday those covers will be dropping rather fast to cheaper to buy back plus the downside delta holding the jan160 is more protection if congress screws up. And GS has not done anything yet it seems to in becoming a bank.  Maybe something big is brewing.  So if there is a big pot in GS, then I can always rethink on Monday.

  41. Phil

    SKF/RMM – yes the big banks are all doing well, big part of SKF.  If you go by the banks, they are telling you to ditch the DIA puts down here, maybe if we crack back over 1,445 and 7,400 on the NYSE and XLF gets over $20 but, even if the senate passes the bill tonight, it means nothing until the House votes – the Senate vote was never in doubt.  Just keep in mind they are generally 2 bets on the same thing (no bailout) so taking profits on one side which already paid off isn’t a bad idea. 

    C/Steve – With this high Vol and big run up you can roll to 2x the $22.50s almost even, that’s not terrible but the way the maket is going at the moment, I’d be more inclined to DD the callers and look to take 1/2 back out on a retrace.

    GS/Steve – Your 15 $160 covers can be replaced by 2 $130s and all you have to do is roll down a few of your calls to cover and you can leave the rest naked.

  42. Quarryman

    Phil,

    Yeh, I’d like to own BTU shares long.  It’s American, it heats our homes, it makes our electricity… King Coal.
    Bastardi at Accuweather says this winter will look like 1985 which was cold early in December.  With such a supposition:
    I sold the Oct 40s and bought the Jan 40s.   Lock and load.

    Cheers,
    Q.

  43. RMM

    Phil:
    what do you think about SingaSteve’s roll down in strike to Jan120 on AAPL rather than stay with apr ??
    the roll cost less and the cover with nov 120 is still possible.
    Cover: Full or 1/2 ?

  44. jb

    Phil,
    Do you think HOV is @ a buy level?
    Thanks

  45. RMM

    Phil:

    this GE is now dropping close to 23.
    I have shares at 24.2$,
    bought back this am oct 25 shorts, can now sell oct 24 for 1.45 $,
    what do you think  about this ?/

  46. RMM

    Phil:
    how do you judge what to do with the C Butterfly: it is overall green.

  47. Phil

    No wonder CNBC skipped the oil report!  4.278M build in crude AND 901K build in gasoline.  They expected net even.  As I expected, imports were back up 1.8Mbd to 9Mbd and that made the big difference..    Distllates fell 2.359M and 1.5M draw was expected (lack of refining at the start of winter).  Utilization was 72.3%, still very low.  Gasoline consumption down 4.5% at 8.9Mbd – that’s 22 consecutive declines in gas consumption.

    Senate bill will allow FDIC to borrow unlimited funds from Treasury.  Not sure if that’s good because it’s insanely drastic…

    BTU/Q – nice play, gotta love them long-term.  One day we will run out of everything else…

    AAPL/RMM – It’s what I suggested to Steve yesterday so I think it’s brilliant!  8-)

    HOV/JB – $7.50 is always the buy level.  $8.10 is the sell level though, you just want to make a little or cover but it’s not so bad to play this for a breakout on the mortgage bill this week.

  48. Phil

    C Butterfly/RMM – At this point, as I said yesterday, it’s a good profit and there’s no reason to risk it as the bailout can shoot it way out of range one way or the other.  C looks determined to go much higher.  You can roll the callers to much more premium in the $22.50s but it will cost you .50 to do it and that’s your profit at the moment.

    We held our levels, same bottom fishing plays as yesterday are still worth looking at (Bold comments especially).

    GE/RMM – I think today was a hyena attack and it’s total BS, I totally love this stock at $23 and would not cover until they get back to $25.

  49. DB

    UK just closed up 0.8% but there was a big sell of in Oil/Gas, Industrial metals and Steel at the close.

  50. kustomz

    Dillion asking the Fox what they can do to help keep the chickens safe. Realtors were part of the housing bubble, trying to squeeze every last penny out of the purchaser and driving prices to unsustainable levels. Now that the wall of greed came crashing down on them we need action from our leaders on the hill because they aren’t making 6% commission on a home that’s 50% over the price it would have sold for last year.

    This is what bother me the most about any type of bailout plan, the people crying the most are the people that deserve to suffer the repercussions of their greed.

  51. jomama

    Any news on MCD, nice jump on a shitty tape.

  52. RMM

    Singapore Steve:

    did you fully cover your AAPL with nov 120 ???

    If so, is this not very risky ??

  53. Phil

    Speaking of long-term holds.  EBAY is down at $21.40 and the $20s can be sold for $2.15 so buying the stock and selling them for no less than $1.50 if it heads down only protects you to $20.  Earnings are on the 15th so it won’t take much to spike them up, earnings are projected to be in-line with last year at .41, just below last Q, which was a 5% beat at .43.  Nothing has happened all Q to lower their current year guidance and they started the Q at $27.

    Realtors/Kustomz – That’s why I still like my original plan.  Have the government take out $100K worth of mortgage from anyone who wants it in exchange for $125K of equity in the home.  That will cut the average mortgage in half and put $600 a month back in the homeowners pocket so it’s much more likely they can make their payment.  With Big G as a co-owner, the remaining balance can be refied below 6%, cutting payments further and people who can’t pay from that point forward can be foreclosed in an orderly fashion.  Even if the government ended up with a $125,000 interest in 10M homes (10%), that would be "just" $1Tn but it would rescue 100% of the troubled mortgages and pump 10M x $7,200 a year in saved payments = $72Bn a year back into the economy – that’s a pretty good return on $1Tn right away. 

    Just like the current plan, the government takes their "profits" when the home is sold, just like any equity partner and they can build in some interest to be paid at the end as well.  That turns all the crap mortgages into AAA paper overnight and that $1Tn, which was considered "lost" money on written down homes, would end up back in the banks in cash as that portion of the mortgage was cancelled.  At the current 50% write-off level, that $1Tn would be like the banks cashing out $2Tn in real estate at fire sale prices but it WOULDN’T put the homes on the market and depress the value of other homes and it would keep 10M families in their homes which will keep occupancy and housing demand MUCH higher, speeding up the normalization of prices without artificial pressure since people are simply staying in homes they already bought.

    MCD – Just a really good safety stock and a recession play.  A little overdone at $64 though.

  54. hp

    Phil,
    What do you think of vlo now??
    thanks

  55. Singapore Steve

    RMM
    Yes 100%. When you are 40 bucks out not much chance any other way.  The 120 are still 11 bucks away.  And AAPL has been downgraded.  Too much consumer spending in it if we are heading for a recession.  Plus the RIMM guidance and the GOOG phone.   Many analyst are staying that if we have hit bottom, they expect sideways choppy action in the market.  Even if aapl goes to 125 by exp, 51 days, I can still roll and sell dec covers to pay for it and stuill beable to roll my longs out to apr.

  56. Phil

    VLO – Still like them down at $29.  You can sell Nov $30s for $3.05 so you’re in for $26.20 and 14.5% profit on Nov 21 if you are called away.  If you still have the stock, then sell the Jan $25s and take your basis down to $23.  Kind of hard to imagine VLO is going out of business as they used to make good money when gas was $1 and oil was $40.  Another good VLO play is the Nov $25s at $5.85 and selling the Nov $29s at $3.50 for net $2.35 on a $4 spread.  Of course try to ride it up a bit as a mo play before selling.

  57. kustomz

    Love your plan Phil exept this one part "it WOULDN’T put the homes on the market and depress the value of other homes" i need prices to fall. Who in their right mind would pay 10 to 16x rent for a property in this type of environment?

    Allstate selling franchise’s for 100k a pop, not a bad deal

  58. kustomz

    WHOA Ford is in deep(er) sh*t than last month, say it aint so

  59. Phil

    Oil bravely back to $98, dollar pulling back a bit as bailout earmarks start sounding a little expensive.

    Homes/Kustomz – they would still fall but not plummet as they will if 5M homes get foreclosed on and go on the market.  Our whole housing market is based on people moving from one home to the next but we are turning millions of buyers into renters (at best) and we just can’t afford a total collapse of that system.  Homes will still be sold off at 50% discounts but not with the urgency that can drive them down to 20%, which is great for buyers but would put us into a 2x worse crisis than the one we are in at the moment as banks have to mark down 80% of their assets.  I’m amazed at how cheaply homes are renting now, I would have thought demand was up but not much pricing pressure it seems.

    ALL – That is a good idea.

    Ford Sept sales down 33.8%!!!  Holy cow!  If the markets can shake that off then they can shake off anything.  They say it’s as bad as the early 80s.  X goes further down on that news of course…

  60. BonVivant

    Phil:  Why is oil at $98?  If we are going into a recession, shouldn’t oil be falling?

  61. Phil

    Oil should be falling but it’s all manipulated BS that has nothing to do with fundaments like, for example, supply and demand…   From Bloomberg: ``With economic growth faltering in a number of countries, we have to assume that energy demand will be adversely impacted,” said Edward Meir, analyst at MF Global Ltd. in Connecticut. “Oil prices should be below last year’s levels of $80 a barrel as the current picture looks far worse than it did at this time last year.

    JOSB back over $35, all is well…

    This market is just funny at this point, the VIX may as well stay at 45 with 200-point swings every couple of hours!

  62. jomama

    Captain Kirk is going to own Ford at this rate.

  63. kustomz

    Phil this bailout package is going to grease some very undeserving palms and i cant stand the idea of someone benefiting from something that’s supposed to help people that are in despair.

    Homes need to fall, if it takes 1, 2 or 3 years they will fall, i would just like them to fall faster. I don’t want to see families out on their ass’s, but i have been in the market for 5 years and every year the prices kept going up and i refused to get into bidding wars and wouldn’t pay more than 9x rent but people came in and bought the property at 17x rent i just couldn’t understand the logic behind it. I knew the people that over payed couldnt meet their obligations and here i am still sitting on my hands as prices have not come back to a level i feel comfortable with.

  64. DB

    GOOG all over the place.

  65. Phil

    C testing 10% up.  Short selling ban ends tomorrow – that’s scary!  XLF up just 2%.   Oops, MS breaking up now, GS too, looks like someone got good banking news…

    Homes/Kustomz – I feel for you, it’s hard to be the only rational guy in the room but you saved yourself a ton of heartache by waiting but there are a lot of people out there who will take a lot less than the asking price, especially as mortgages are so tough to get now so maybe make a few offers at a price you do like and see what happens.

  66. RMM

    Phil:
    now Protection:

    have cashed in my DIA nov 107PUTS, only protection left is SKF jan 120 with 1/3 cover (oct 120),
    this does not seem to be enough,
    CHOICES are : SKF, SDS, DXD, DIA PUTS, TWM, SMN,

    which one fits best ?
    Risk is general market drop, but particularly the higher priced techs,

    what is best conclusion ?

  67. RMM

    Phil:
    my C LEAP jan 2010, 15 position has a return of 23 %, the call itself  is up 88%, I have 1/2 cover with oct 20.
    my XLF LEAP jan 2010, 18 position has a return of -3.8 %, the call itself is up 22 %, I have no cover,
    so, the difference in return and call yield is the result of shorting and rolling.
    what is there to be done ?

  68. Phil

    HOV hit $8.04 already!

    Now energy stocks are coming on strong with oil back over $99.  Gold is up a bit too.

    XOM is trading insanely, up and down 5% today with a $400Bn market cap.

    Protection/RMM – I’d wait to see how high we go an short whatever went up the most but I always prefer the Dow.  Be careful as the Senate will pass a bill tonight and there may be a big push tomorrow morning but that would be the time to sell as there’s a 50/50 chance Congress screws it up and another 50/50 chance that they pass a bill and people read it and say "that sucks".

    C/RMM – You really need to work on Stops on those things!  You can still roll the 1/2 $20s to the $22.50s for better than even now so why not do that.  You only have to give your caller his money back at $24.50 and your leaps should make that well worth it by then.  On the XLFs, isn’t that the uncovered bullish play against which you took the SKFs?  If so, you don’t want to cover, that’s your play on the bailout going through.  Just make sure you feel balanced enough on the short side (assuming we drop back at least past Monday’s lows if it fails).

  69. RMM

    Phil:
    I believe the prudent assumption is:
    even if package is passed, almost all companies will suffer from REDUCED business and REDUCED earnings.
    So, the trick is to identify those which are really at a bottom. Many can still fall as they are still at pretty good prices.

    Agree ?

  70. jomama

    RMM, I think that C has earnings on options expiration, Friday.  So there is plenty of time left.

  71. kustomz

    Phil you would be surprised i make an offer and get laughed off the property then get a call back a few days later asking if i could raise the offer, i stand pat and dont get a call back. Trust me I’m out there looking for good deals, not hand outs and since the bank cut my interest in half i have no choice but to look at other means of income.

    Failed Deals Replace Boom in New York Real Estate
    http://www.nytimes.com/2008/10/01/nyregion/01develop.html?_r=1&hp&oref=slogin

    Markets moving now

  72. Phil

    No vote in the House until Friday.  VP debate on Thursday will be fun…

    Reduced earnings – Of course there will be reduced earnings but will they be 25% reduced from last year’s forecasts?  That’s where we’re trading.  In financials, of course, but will AAPL justify a 20% haricut?  Is GOOG really worth $300 less than they were last Fall? 

    Wow, France to the rescue with a proposal for a $400Bn bailout of European banks!

  73. Malai

    phil/optrader
    I subscribed yesterday to swing portfolio thinking I’d have access to optrader tab.  I have been trying to access the tab and am not able to access it.  If you think I should contact the admin, could I have the email so I can contact them.  Sorry folks to post non trade related issue at this time.
    thanks.

  74. RMM

    Phil:
    on C, what stops would be adequate ?
    trailing stop on the LEAP calls at ???
    or stops on the shorts ?

    I DO have trouble with this .

  75. ramana

    Franch Rescue – Germans oppose it.  That is $560B very close to $700B

  76. ramana

    I meant France :-)

  77. ramana

    Eurogroup Chairman Jean-Claude Juncker said European Union countries will not let any big bank fail

    Do the europeans anticipate bank failures? Well, looks like the crisis has gone global…

  78. Phil

    So it’s very hard to fight the CBs isn’t it, when they can suddenly propose dropping another $400Bn on the markets.

    Kustomz – Where are you trying to buy?

    Malai – I’ll get Greg right on it.

    C stops – On covers in general you can set stops at 25% on 1/4, 25% on the next quarter, then roll up to 2x coverage at a higher strike (if it keeps going of course) and then back to 25% on each 1/4.  If you half cover because you are bullish on a position, the same logic applies but with smaller numbers.  If you do this, it is also important that you re-cover on the way down.   Of course it’s not robotic, you have to think the move that is hitting your stop is real and sustainable but as a rule of thumb, it will keep you out of big trouble. 

    Germans oppose the French?  You don’t say?  They probably oppose because their econonoy if 4 times bigger than France so it’s really Germany and England’s money France is proposing to spend (assuming UK is included and not doing a seperate BOE thing).

    Crisis is totally global – It pretty much started with Northern Rock actually.

  79. DB

    ETFs – How do ETFS that invest in an underlying foreign market work when they trade during US hours yet the underlying market is closed ? For example the ETF (EWU – FTSE based fund)) is up 1.12% and still trading yet the FTSE was only modestly up at close which was 90 minutes ago. So how does this work ? Are the prices purely bid/ask driven until the next trading day ?

  80. mSquare

    GE – In spite of the downgrade & financial trouble stories today it should get a boost as Senate is taking up the India Nuclear deal. GE stands to gain $10s of billions. House has already passed it, Bush very much in favor of it and GE’s Imelt went to Congress begging that it be passed.

  81. kustomz

    Phil I’m looking in the NY metro area, Manhasset Nassua county as my primary residence.

    A friend is trying to sell me on buying trailer parks in North Carolina, he’s on his 3rd and clears 1k a month on a 120k investment. I need to take a closer look but i really want quality tenants would like to stick with NY…. i think he’s asking for trouble but the investment is minimal.

  82. RMM

    Phil:
    C caller stops: the point is, have the caller not run away, stop him /?? yes, put in a buyback order GTC ?
    on upward move when callers become more expensive, have a stop paying 25 % on 1/4 of the callers ??  yes ?
    if it keeps going up, 25 % on next 1/4,
    if it keeps going up, roll 2x coverage to higher strike,
    iif it reverses and the stock goes down, re-cover.

    Do I have it now ??

  83. PharmBoy

    All – GE Capital has holes all over it, and they are scrambling to fill those gaps.  In talking with several people in the banking/trading industry, including my uncle (of whom I have mentioned here before) – they all expect GE to fall to 20 or so.  Possibly high teens even with the passage of a bill.  FYI and something to watch if the puts gain steam.

  84. Bronek

    Phil Ref C . I am monitoring your exchange with RMM concerning C’s ($22.9) Oct20 Callers (3.8). I am in the worst situation b/c I am fully cvrd. I am thinking of sitting tight and do nothing. I see that C advanced from $19 to ~23 in two days, there is ~$1.3 premium still in the caller, and IV is much above normal. So, there is a good chance that premium will go down with time, then I will roll either to Oct 22.5 or to Nov 22.5. This trade is in my LTP p-folio, so I don’t DT on it. I am familiar with your 25% buy back rule and generally I follow it –if IV is steady. Please straighten up my thinking. Thanks.

  85. Phil

    ETFs/DB – I think it is just speculation.  Look how amazingly wrong the FXP (ultra short China) was on Monday.  They were assuming (as was the FXI) that the Asian markets would open 15% down, which we knew was silly because of the holiday and the fact that China trades 10% limit down.  So I’m pretty sure they were trading at levels that were not even possible to hit in a single day of real trading.  On those FXPs, by the way, I like the Nov $70s for $30.75, selling the Oct $90s, which are now $14.40 on a good run.  That makes a nice spread and the $90s can be rolled to the Nov $110s if it starts running up, which is a $16.30 entry on a $40 spread  to the upside and otherwise break even in Nov is $86.30 with the FXP currently at $93.

    Trailer parks/Kustoms – Clearing $1K a month sounds like a thin margin, that would be my concern.  Start getting job losses and you have to tow people’s homes off your lot and hope someone with a job and a trailer shows up…

    If we don’t go green on this drive, pretty much if we fail 10,850 and fall below 10,800 here, then those DXD (ultra-short Dow) calls start to look attractive again.  Here we’re watching 7,500 on the NYSE, 300 SOX, 1,160 on the S&P and 2,075 on the Nas to confirm an uptrend.  Only the SOX and the Dow are over the line so if they fall back, its a rejection at this level.   DXD $61s are down to $4.80, that’s pretty good insurance on a pullback as a day trade.

  86. DB

    1.30 sellers in with a vengence there.

  87. kustomz

    Phil i agree, and this particular friend lost 4 Cold Stone icecream stores all in NY metro area( rents killed him), not someone i would take investment advice from. Just looking and i don’t mind buying real estate on the cheap with the possibility of collecting rent on a property that may increase in value.

  88. RMM

    Phil:

    RMM
    October 1st, 2008 at 12:25 pm | Permalink
    Phil:
    now Protection:
    have cashed in my DIA nov 107PUTS, only protection left is SKF jan 120 with 1/3 cover (oct 120),
    this does not seem to be enough,
    CHOICES are : SKF, SDS, DXD, DIA PUTS, TWM, SMN,
    which one fits best ?
    Risk is general market drop, but particularly the higher priced techs,
    what is best conclusion ?

  89. Fabregas

    FXI – is there an ultra long ETF for China?

  90. RMM

    PharmBoy;
    how would I protect my GE stock, base is 24.2$,
    cover or get puts ?

  91. RMM

    Phil: what do you think about PharmBoy’s GE comment ?

  92. jomama

    Phil, what are your thoughts on MDT and the judgement against them?

  93. rockaintdeadyet

    GE Halted, news pending.

  94. DB

    GOOG just went nuts

  95. rockaintdeadyet

    GE announces $12B common stock offering, Warren Buffett announces investment in GE.

  96. Marek

    Phil: After several no-new-monies-in rolls I am stuck with 10xJan’10 $17.5, 10x Dec $20, -20x Oct $20. I bought 2x Jan’10 $25 this morning too boost up my delta but this thing just kept climbing up and shoudl be repositioned. Could you help, please?

  97. dalef13

    Phil – As Europe starts to bail out their banks, should we not expect a rally in the USD, placing downward pressure on gold?  My connecting the dots has not seemed to work over the last few weeks…..

  98. ephmen85

    GE  Do they halt the options when they halt the stock?

  99. RMM

    still no trading on GE.

  100. Fabregas

    Similar to his GS deal:

    GE announced that it has reached agreement to sell $3 billion of perpetual preferred stock in a private offering to Berkshire Hathaway, Inc. The perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.

  101. Marek

    Oh, my message was about C position…

  102. rockaintdeadyet

    GE’s open again, trading 24.50 right now, about a point up from where they halted it. Aaaannnd…..heading upwards.

  103. Phil

    Covers/RMM – yes, that’s about it.  Actually I laid out that logic underneath our portfolio tab so check there for the math.

    GE/Pharm – that would be very sad if it happens, indicating how deeply screwed corporate America really is.  I don’t think things are that bad at GE.  They were very on top of the real estate crisis and orders came from the top well over a year ago to get out of risky real estate, I can’t imagine they got that badly burned but anything is possible as everyone’s models were off by a mile on these.

    Now they are saying that there is no French bailout plan and the markets are selling off to lower than they were when they never even heard the rumor of a plan – this is just nuts! 

    C/Bro – Well if you are fully covered then better to let the premium die as long as you have a clear roll to the Nov $22.50s, which currently costs you $1 but should get a little cheaper over time as the $1 premium on the $20s goes down.  If that $1 starts getting away from you, better off taking the roll and, on the other side, you need to be realistic that .50 is about the best you are likely to get so if that opportunity comes, you might want to take it (assuming no drop of course).  At the moment, you made a lot of money on C and you are well protected by $20 callers that can almost certainly be rolled to Dec $22.50s even anyway.  If we get the bailout, you can also add Jan $25s, which are now $2.17 and roll the callers to 2x the Nov $25s, also near even (except for the cost of the Jans) and that puts your caller back to all premium again.

    FXI positive ETF/Fab – I don’t know of one.   It’s funny if they only have short but possible.

    MDT/Jo – This case has been going on for a decade and will be appealed of course.  On MDTs side it’s $521M while BSX has $703M so great for JNJ but look at them trade on this news – very strange.   I’d like them if they fall further, like the mid $40s but kind of risky to judge the impact here at $49, even for a company that makes $2.5Bn a year.

    Oh good, Buffett just gave GE $3Bn and they are going to the moon so ha ha non-believers!

  104. ephmen85

    GE   Bad quote on TOS, says all the short options are $10000, for a minute my account was losing $70,000,000….I guess I can’t complain that much.    :-)

  105. kustomz

    GE needs money, and this is good news

  106. Kwan

    Phil, is there a discount rate applied at the time of renewal for people that have been here since the beginning and have referred others?  I just renewed and was wondering…

  107. DB

    My GOOG trailing stop kicked in on that spike , happened really fast.

  108. Bronek

    Phil – Ref  C. Thx.

  109. DB

    Buffet will own America in a few years time !!!!!!!!!!

  110. ephmen85

    If Buffett owns all of corporate America, at least the executive comp issue will go away.

  111. RMM

    Phil:
    now that I have rolled AAPL calls apr 135 to jan 110,
    now:
    sell oct shorts or nov shorts, 120s ??
    Full cover or 1/2 ??
    Once I have the cover, the cover  buyback stops as discussed would apply  ??

  112. PharmBoy

    RMM – I do not play GE….or any of the financials for that matter.  I am just passing on the information FWIW.  I know Phil and others here love them, and I do own them in my retirement account, but I am not a believer at the moment. I am playing the DIA puts/calls, MRK and VZ.  I am 40% cash at the moment.

  113. Phil

    GE – 10% premium is way better than GS deal, which was 10% discount.  That Buffett is amazing, he’s making over $1Bn this month on 2 deals yet Berkkshire’s stock is flat at $4,400 on the B shares.  They are also doing a $12Bn secondary offering.  "This action does two things for GE investors," said Jeff Immelt, GE chief executive, in a statement. "First, it enhances our flexibility and allows us to execute on our liquidity plan even faster. Second, it gives us the opportunity to play offense in this market should conditions allow. In addition, we remain committed to the Triple A rating and in the recent market volatility, we continue to successfully meet our commercial paper needs." The offering is expected to be priced before U.S. markets open on Thursday

    Referral discounts/Kwan – We are putting together a formalized referral discount program for next month but contact Greg (admin@philstockworld.com) and let him know who you referred and he’ll take care of you.  I planned on doing it a while ago but the tracking system has been a nightmare to set up.

    GOOG/DB – they are just getting too obnoxious to trade, the movement is like a joke at this point.

    AAPL/RMM – You really don’t want to pay for more than 1/2 of your roll out of pocket or the risk is too great so 1/2 cover at least I think.  Earnings are after expiration so the Nov calls should hold their value which means getting $4 for the Oct $120s is a good idea.

    Buffett just said "This is an economic Pearl Harbor"  Nice…

    GE/Pharm – Hopefully they are too big to fail and they are not a pure financial so I think it’s a bit much that they have been cut down like a pure financial and then there’s the 5% dividend.  That’s why I like them.

  114. kustomz

    Is WB calling a bottom in the markets? I find that hard to believe. Hes getting great deals and is guaranteed 10% interest from both GE and GS, i think hes a fair value investor that has a long term investor strategy.

  115. PharmBoy

    Phil- I like the GE’s dividend as well, but I am waiting for a better deal on them!!  ; )

  116. kustomz

    Back in the 90′s GE capital payed for my machinery, try and get those loans today. Not that you’d need it, who in their right mind would manufacture anything in this country?

  117. Phil

    RIMM with another amazing turn today. 

    Advance/Decline is still nasty today.  Most of the greens are Banks and consumer goods.  Tech is a sea of red, Materials including oil is wreck, all the Conglomerates are red.  Consumer Goods are mixed but Services look awful.  Utilities are mixed, kind of flat overall.  Healthcare is also mixed.  On the whole, it sure does not look like a sustainable rally but we’re all waiting for the government to drop money on us and that’s what it’s all about.

    GE deal/Pharm – You can still buy the stock for $24.89 and sell the $20s for $5.35, even if you are bearish that’s in at $19.54 and 2.5% for the month if called away, better than the dividend… 

    LOL Kustomz!

  118. tesorohaters

    phil, still like Cameco (CCJ) for a long-term play?

  119. Marek

    Phil – can you have a look at my message at 1:45pm re: C position, pls? I figure the answer is gonna be similar to Bronek’s. Maybe I add 2 more Jan’10 25 on the pullback. Thanks!

  120. kustomz

    VIX looks tired, couldn’t get past 41 and if 40 becomes resistance then we may get a decent rally into the close.

  121. MrMocha

    kustomz – if you believe in candlesticks, VIX just went shooting star which supposedly indicates a peak.

  122. DanW

    Well, dunno if its a good thing or not, but am just about fully covered on all my positions with all this mess happening, and whether we go up 480 points, down 180, and back up 180, my account hasnt moved more than 2% (~$400) either way.

    But I guess that’s the point of the rental business, no? That the disparity on the long calls vs. the short calls will get larger as time progresses…

    Unless I’m doing something wrong and are too covered..LOL

  123. Phil

    Mission accomplished on the S&P priced in Euro chart if we can hold 1,165 for the day.  That puts us above yesterday and in striking distance of changing our weekly candle to positive, which is essential if we are going to attract foreign capital. 

    CCJ/Tesoro – Absolutely.  We are certainly building more reactors and they pay a nice premium.  You can own them at $21.20 and sell the Nov $20s for $3.10, that’s a nice cheap entry with a reasonable call away and, of course, you can 1/2 cover and it’s still pretty good.

    C/Bro – sorry, I missed that in all the Buffett mania…  Why not roll yourself out to 40 Jan $22.50s and sell 40 Nov $22.50s or maybe a 3/4 sell so you don’t get burned again as you get a lot more cash from this sale.  You lower the downside delta of your longs, move the December calls back a month and take some cash off the table staying well covered.  If you want to be fancy you could do the same in the Oct $22.50s but I’m a little concerned about the bill passing and the stock going much higher.  If you don’t want to add to the position then just rolling callers to Nov $22.50s costs $1, which is great if it goes up but not so good if C heads back down.

    If I were the VIX., I’d be tired too.  This is a long time for it to be so high.

    NCC having a good day.

  124. Phil

    Dan – If you can sleep well at night, you are doing something right in this market.

  125. RMM

    Phil:
    TM oct shorts are very green, is it good to roll oct 90 to 95 to double premium ??

  126. sumit

    So what is the status of shorts ban? Is it getting extendend or expiring tomorrow.
    If it is expiring is it a good idea to buy some puts before market close?

  127. DanW

    Phil – Nah, I was losing money hand over fist until I reached this balance late last week. I gotta take analyze exactly why this is the case and wrap my head around what I did (i.e. was it the position amounts that were balanced, the # of longs vs. shorts, or position delta’s, etc.) And then figure out at opex if it was the right call.

  128. PharmBoy

    Phil – the comments here, that I why I joined this site.  Thx.  Looks like money is moving into the Pharma sector for safety.  MRK, PFE and others that are paying the dividend are holding nicely in this volitile market.

  129. PharmBoy

    ARNA is now at new lows…if you like to gamble, this one is worth it.  Data are out in March ’09.

  130. Bronek

    Marek – I am guessing that Phil used (2:41) my name in answering your question. I am pretty sure that you are much better looking, but he cannot see it.

  131. DanW

    C – Here’s my current situation with this. I made some cash on C the last few weeks, and decided to re-enter today, with the following spread:

    3 Long March 2009 17.5′s at $6.03
    -3 Short Oct 20′s at $2.68

    Currently its losing money. I saw the comments to Bro’s positions, but are they applicable to my spread as well? I was looking to get that $1 off the Oct 20′s, OR the full $2.68 (now $3.55) if the bailout bill is BS and everything goes to the crapper. The longs can stay where they are, as they are pretty much a long-term hold now.

    The spread didnt fill at the amounts I was hoping, but didnt want to leg in.

    What do you think?

  132. BonVivant

    Phil – If the Senate passes the Stabilization bill, are we expecting the DJIA to go up tomorrow?

  133. RMM

    FSLR up big.

  134. RMM

    Phil:

    SKF down to 97,
    if bill fails, will go up, if we have bill, will go down, so, cover some ???? oct 100 ??

  135. Marek

    Phil/Bronek – thanks.

  136. dalef13

    Phil – please see 1:46 post.  Would appreciate your thoughts

  137. Bronek

    C- If they raise capital, aka dilute, I am expecting that price may dip and Oct 20C may be worth less. That may be good for my callers. FWIW

  138. Singapore Steve

    DanW
    If C goes up another 2 on Monday then what are your options? Crash and burn.

  139. Phil

    TM/RMM – They were off 32% as well.  GM was "only" off 16% with insane incentive programs but if that isn’t making TM go further down, they are probably going to come back but a 1/2 cover at $85 on those awful sales at least as Asia still hasn’t seen the results to sell off.

    Now they are saying they may put back the uptick rule, that’s another big market booster.  I’m telling you if this bailout doesn’t work they’ll start passing rules that you can only sell a stock for more than you paid for it if they have to!

    Thanks Pharm!  Pharma does look good now.   Lots of good opportunities once things calm down a little. 

    Almost time to start buying GOOG $300 puts and see if they go from $1.43 (crazy price) to $300 near the close again! 

    C/Dan – Yep, same deal, going down hurts you more than it hurts them at the moment so you want to change that.  I just like the 2x roll to the $22.50s because you are selling more premium (which is your job) and effectively cashing in a winning position after a really good run.

    Senate bill/BonV – I expect them to get a good pop but that will be shortable as it’s all about the House on Friday and that can blow totally to hell so it’s going to be "Always sell into the initial excitement" tomorrow unless something profound changes. 

    SKF/RMM – if it’s insurance then let it insure.  XLF at 2.5% rule, C just over 10%, BAC at 7.5% – looks like resistance is kicking in. 

    Be real guys, we got that little rally after they said they are bringing back the uptick rule and that didn’t last.  Two weeks ago that news would have been good for 300 points.  This is not a strong market and it’s costing global banks about $200Bn a day to support it for the past week.

    Dollar rally/Dalef (another one I missed on GE news!)  – Well the dollar is already plowing ahead.  It depends how the final package reads but it does all go back to US still being the least sucky place to park capital (but not by much).   I’m not sure about gold though as we are only 25% of the global economy and many people may panic into gold and drive it up faster than the dollar can bring it down.   The dollar going up over 10% is the only reason gold isn’t testing $1,000 now – notice Gold adjusted to Euros is actually flying right up this week.   On the adjusted basis, gold was just rejected off the March highs, which were $1,000 US so a pullback is expected before it gets going again.

  140. kustomz

    If reality settles in, the market could lose another 10%, but thank the powers reality is what they want you to see. 
    IBM CAT and some others should give you a sign as to where the whole market should be going.

    Will passing of the bailout plan be good enough and is it a sell on the news event. AHH the 700 billion dollar question.

    Why is Bush is on TV? To declare Victory.

  141. kustomz

    LMAO Phil
    "I’m telling you if this bailout doesn’t work they’ll start passing rules that you can only sell a stock for more than you paid for it if they have to!"

    That’s my personal rule.

  142. Phil

    C dillute/Bro – Don’t expect too much dillution because they are getting cash, which is a good thing to have in this market.  It depends if they have to give an incentive and then there’s the EPS pressure of course but I’d say look at the dillution off a $26 target, not off where they are now. 

    IBM is scaring me!

    Bush having to cheerlead like that is scary too, I really think they still don’t have the votes.

  143. DanW

    C/Phil – OK, so if I’m fully covered on those 17.5′s  (3 long, 3 short), do I buy 3 more long Jan’s 25′s and roll the 3 short Oct 20′s to the 22.5′s?

  144. Phil

    Speakingt of crashing and burning, check out LVS!  It’s not good when the boss has to empty his piggy bank to fund the company…

    NOC at new lows for some reason and RYAAY, who I thought were a good discount airline, are at new lows.   Gotta love those cover plays!

    C/Dan – Not unless you want to carry $2.50 in margin against the $25s (plus selling lower puts is very dangerous).  I’m just saying you have 3 Jan $17.50s at $6.72 and those can be rolled up to 6 Jan $22.50s at $3.42, close to even.  The 3 Oct $20 callers at $3.80 can then be rolled to 6 Oct $22.50s at $2.15 for a small credit or 4 Nov $22.50s at $2.80 for an even trade that leaves you with a little more upside (but you have the $25s so you don’t need it).  Since the purpose of the play was to sell premium, you are now selling more premium this month and are on track to sell much more premium in Nov and Dec since you now have 6 longs vs. 3 yet it’s all on the same initial investment.

  145. DanW

    C/above post – should read "roll the 3 short Oct 20′s to 6 Nov 22.5′s?"

  146. acton88

    Hi, Phil:
    What do you do with IBM?  Wacth it? Sell it?

  147. DanW

    C/Phil – I think I get it, though I do not have the 25′s. The 3/-3 is my only C position at the moment and was started on my own outside of whatever play may have been spoken about here.

  148. Bronek

    Phil – Ref C capital rise. Thanks. They will rise only few $B that is miniscule comparing to their market cap, but sill typically they will pay (including fees) ~$1.2/$1. But, I just have a hard time to trust mgmt with cash.

  149. jomama

    where’s xian, he should be luving C and MCD today….

  150. Phil

    The only thing I know about RYAAY is that they are unhedged and had been betting oil would fall below $100 but I guess they may be getting bitten by the fact that,priced in Euros, Oil is up substantially off it’s lows and looks like it’s breaking up.

    IBM/Acton – what do you have?  They are down on the credit fears as they sell a lot of stuff on credit.  The finanicals seem to think a bill is passing and they are thrilled but pretty much everything else is selling off like it’s doomsday.  Perhaps it’s the fact that you can short IBM and tyhey are dogpiling on Dow components that can be shorted to keep the Dow from breaking up but that’s a lot of supposing…

    C/Dan – then the 2x roll is my favorite adjust and you may want to bite the bullet and keep a 25% stop on 2 callers. 

    Now SLM is crashing to new lows, they also live on borrowing.  There’s a lot of betting that there will be no bill…  Perhaps someone is jamming the Dow down to go long on the Dow ahead of the bailout against some sort of short financial play to cover like SKF.  The non-finanicals in the Dow are almost all down other than CVX (barely), KFT, KO, MCD, MRK, PFE, T and XOM

    JPM getting to $50!  MS flying too.  GS $15 over Buffets call price for a cool $500M in profit.

  151. Marek

    Phil: I have IBM 4x jan 115 and 3x Apr120 covered with 3x Oct 115 and 4x Oct120. I am thinking about rolling 4xoct 120 to 2x Oct110. Eats some margin tho. What do you think?

  152. Phil

    NDAQ way up from my call yesterday, selling 1/2 the $30s would be the way to go there.

  153. ephmen85

    Dow even…another boring day in the markets, yawn!   Hardly worth getting up in the morning for

  154. sumit

    Instead of buying SKF I sold (naked) Oct $95 put for $9.5. So I either pocket $950 by expiration if market tanks or I own SKF at 85 if market rallies.
    Phil did I do the right thing?

  155. acton88

    Hi, Phil:
    I have 4X IBM 120 call covered with 2X Oct 120 call.  When I check the caller still have $1.2 value.  Insane.  SO that is the reason I thought might be just waiting.  But the long side is bleeding.
    I have 6X JPM call and was covered with 3X 45 caller.  I bought back my caller and sold  3X Oct $50 call again(made .45 each).  DO you think it is better full covered?
    Thanks a lot!

  156. jomama

    JNJ  looking good..Trying to get 65′s 2010  for 7.5.

  157. Phil

    IBM/Marek – You have enought time to play for the bounce and I see no solid reason for them to be down other than general fear of a freeze up.  I think for sure you want to take out the $120 as they can do you little good at $1.50.  You can get that $6 back by selling a single Nov $110 if you need the cash and then roll just one of your longs down to match to kill the margin requirement. 

    IMCL heading higher on LLY offer at $70, good for that whole sector.   ELN was on a tear the past 2 days as well.

    CME up 15% in 2 days, cracking $400.

    SKF/Summit – If you can afford to own it and then sell the $85 calls for maybe $10, then why not?  The SKFs haven’t been below $70 since last summer so we’d be talking about a hell of a rally.

    IBM/Acton – Same thing, better to take them out and give it a chance to bounce.  JPM – for them, yes, they could really fly if the bailout is favorable to all the debt they took on for .10 on the dollar but keep ready to cover.

  158. ephmen85

    ACAS  I’m long stock and naked..  Stock is 26, but record date of it’s 1.05 dividend is tomorrow.  If I sell the Oct 25 for $1.50, I’m basically selling $1.50 in premium, not .50, right?   Good idea to for protection?  When in doubt, sell 1/2 I guess.

  159. sumit

    Phil/SKF cool I wish I had sold more!

  160. RMM

    Phil;

    the 25 % loss stop on callers (and putters): is that not very high ?

    have put a trailing stop loss on some C shorts,
    just missed doing same on some AAPL shorts, market closed.

  161. mSquare

    IBN – Good risk/reward. Buy stock for $23.70 (just bought more in AH) and sell Oct $25 Calls tomorrow. 
    Stock quite near a 2-year low – Compare with HDB a another Indian private bank which is at least 25% higher than the 52-week low in India. Can get additional appreciation as $/INR (near a 5 year high) goes lower too.

    Oct $25 Calls traded between $1.80-$2.20 and at the cost of increasing risk sell for more than that later…

  162. Phil

    ACAS/Eph – on the assumption they drop, sure it does seem like you are selling much more than it looks like.  I suppose it is priced in as the puts have far more premium than the calls. 

    25%/RMM – Well 20% on a $3 call you sell is just .60, not much of a stop.  I’m not into setting hard stops but it’s just the point at which you need to make a decision.  The idea is that if the caller goes from $3 to $3.75 and you take him out, you still have 3 X $3.75 in protection, that is just .75 less protection than you had when you started and it only cost you .75 to take him out.  Even if it drops back to $3 and you change your mind and re-cover, it’s a very minimal change to the overall coverage.  Once the first 1/4 is off the table, the next out would be $4.50, at which point you should be up nicely on your longs.  That $4.50 x 2 remaining can then be rolled (assuming you are still bullish and, if you weren’t, then why were you buying out the callers?) to 4 x $2.25 and you are still $10 covered but at a whole strike higher than the $12 you were covered at before and hopefully your long calls gained more than .50 each to make you at least even.

    What you don’t want to do is to be stopped out on spikes so you need to know the stock you are dealing with.  C and AAPL are both very volatile and if you set a stop it WILL get triggered.  The idea is more to trigger yourself to look closely at the play at that 25% mark and decide if the move is real enough to warrant taking out some callers.  In C today, it was up and strong all day so it made sense to take them out.  In AAPL they go up and down like a yo-yo so we’d want to see a real breakout before we start buying back callers, especially ones with such high premiums. 

    Interesting action around the NYMEX close today, they did the usual pump and someone dumbed into it, giving them a pretty bad close. 

    IBN/M2 – Where were you the other day when we picked them under $22?  I would just sell the $22.50s for $3.10 to make a net $20.60 with a nice 10% gain in 3 weeks – why mess around?

  163. mSquare

    IBN – I did purchase some more IBN in the $22s too – perhaps I now have too much! The reason it went that low in the first place is as besides the 777 point selloff here, it was rumored that IBN was hiding more exposure to Lehman junk than already announced. Yesterday RBI/Govt. of India issued a PR giving them a clean bill of health, thus reducing the risk substantially.
    I expect IBN to jump up tomorrow/Friday by 5-10% more and then I will sell calls. I currently have half covers with Oct $25 sold for avg. of $4.05. I plan to cover it fully before house starts to vote though.

  164. Phil

    Yeah watch out for that House vote.

    MS is so paranoid that the $17.50 calls are $8.40 on a $24.42 stock so it pays even better than IBN as you’re in for 16.02 and make 8.5% called away above $17.50, which is a 28% drop from here.  On that play, you can actually also buy the $17.50 puts for $1.32, which cuts your profit to .16 but you can’t lose so that’s kind of fun (if you have very low fees).

  165. mSquare

    Obama televised speech (on Bloomberg) is causing XLF & UYG to go up? Or, is there some other news?

  166. RMM

    Phil:
    Txs again,

    so, on callers and putters, you do want to watch it but NOT put in an order for  a buyback with a trailing stop loss as the variations are typically triggering the trade prematurely (I have experienced that),
    so when you say, set a hard stop, it is in your mind, not entered in your trading platform ???????

  167. kustomz

    http://www.reuters.com/article/marketsNews/idINBNG32609220081001?rpc=44
    Oct 1 (Reuters) – Barnes Group Inc (B.N: Quote, Profile, Research, Stock Buzz), an aerospace and industrial components maker, withdrew its earnings outlook for the full year, as it expects disruptions related to the continuing strike by machinists at its customer, Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz).

    Barnes, which supplies engine nozzles to Boeing’s 787 Dreamliner aircraft through General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), said business disruptions related to the strike will affect unit Barnes Aerospace’s original equipment manufacturing business, which represents about 20 percent of the company’s total sales.

  168. Phil

    Obama – that is the kind of magic powers we can expect when he becomes President!  8-)

    I think there’s just a general sense that something will get done.  The Senators are pontificating on CSPAN and they are generally behind it so the sense is there is unity but the Senate and the House are two different worlds.

    RMM – I hope I never say hard stops.  I really don’t like them for that reason but, of course, when you are looking at a wild day and are nervous of certain levels, they can be useful.

  169. Cap

    Gotta give props to Buffet; not many can dictate their terms on Goldman and GE.

    Phil your earlier comment about GE saying their capital position was strong is hilarious; given that it came before the sale to Buffett and 12 million share stock offering announcement.

    C up I think b/c of rumored offering or financing; it may go up some more, but I think there are some big problems still at C; wouldn’t be surprised to see it back at 15 sometime during Oct.

  170. Fabregas

    Ultra ETFs – don’t think China has an ultra long version.  What’s the ultra long ETF for IWM?

  171. newparadigmz

    ultraSHORT IWM is SJH

  172. 3wayhard7

    hello phil,
    I have C Mar 17.50s at 7.5 (1.65 cost, +320%)
    fully covered by C Oct 20s at 3.95 (1.90 cost, -108%)

    Obviously, I didn’t follow the 1/4 stop out rule on the covers like I should have…

    Any suggestions for adjustments?  The Oct 20s still have .90 premium left, should I consider some kind of x2 roll of both positions or just stick with it and buy back some covers if we get a pullback and roll to Nov if we don’t

    thank for your help as always!

  173. Gabby H

    PHIL….it seems to me that you spend a VERY disproportionate amount of time answering questions from ONE member who asks you every day to adjust almost every position he has.  If we all wanted individual advice on all our positions you wouldn’t have time.  Would appreciate your comments and those of other members.  GABBY

  174. mSquare

    Short Selling ban extended to Oct 17th.
    http://www.sec.gov/news/press/2008/2008-235.htm

  175. ephmen85

    Just bring back the uptick rule and be done with it.

  176. Fabregas

    SRS – may be my focus play in the coming days and weeks.

  177. DB

    Good Morning everyone.

    The UK is up 1.5% after 2 and a half hours trading and after a ropey start. It was up more than this yesterday before the US opened so I’m hoping we have a mind of our own today. Commodities still getting a pasting especially oil services and copper mining. Still have no idea how the markets are going to respond to the bailout getting passed the Senate or what happens next.

  178. ramana

    Good Morning DB and All

  179. ramana

    Asia Markets :    Thursday, October 02, 2008
    (The following is from WSJ; please cross check with other sources to confirm.)   

    Nikkei Average*                  11154.76    -213.50    -1.88%
    Hang Seng*                         18211.11    194.90      1.08%
    China: DJ Shanghai**            238.94         1.00      0.42%
    Seoul Composite*                1419.65      -20.02    -1.39%
    Bombay Sensex**               13065.91    205.48      1.60%
    Baltic Dry Index                      3025.00    -192.00    -6.78%

    *at Close
    ** Closed for national holiday

  180. ramana

    Asian Markets Fall Despite Senate Bailout Approval

    (China and India closed for national holidays. India will reopen Friday and China on Monday)

    Asian markets closed mostly lower Thursday and safe haven assets such as government debt gained after the U.S. Senate’s approval of a massive bank bailout plan failed to dispel the deepening worries about the global economy. Japan closed 1.9 percent lower while South Korea shed 1.4 percent.

    Japanese and South Korean stocks accelerated their losses after the approval, helping the MSCI index of Asia-Pacific stocks outside Japan slide, reversing a modest gain immediately before the U.S. Senate vote.

    Japan’s Nikkei finished down 1.9 percent to hit a three-year low, despite passage of the U.S. financial bailout bill by the U.S. Senate, with worries about its fate in the House of Representatives and concern about the global economy overpowering relief. Growing worries over the U.S. economy sent Toyota Motor and other carmakers lower, dragging the Nikkei down.  High tech firms also slipped.

    South Korea’s KOSPI shed 1.4 percent as mounting economic worries outweighed relief over the approval of a U.S. financial rescue plan, sending key exporters and industrial issues down.  Banks also fell after Moody’s Investor Service changed the outlook on the financial strength of South Korea’s big four banks to negative from stable on Wednesday.

    Australian shares finished 0.7 percent lower, with investors now looking ahead to a vote in the House of Representatives on the matter.

    Hong Kong shares gained 1.1 percent in skittish trade as sliding local property stocks and Hang Seng Bank’s 8.9 percent plunge nearly overshadowed the U.S. Senate’s green light for a financial sector bailout package. But Chinese property stocks bucked the trend, soaring after state media reported that regional governments were propping up the ailing sector with measures including subsidies for home buyers.

    Singapore’s Straits Times Index closed 0.2 percent higher, reversing gains of as much as 1.5 percent, with blue chips slipping across the board.

  181. Phil

    GE/Cap – I was just reporting what Immelt said, not certifying it but I think it’s much like GS, they just needed to reassure the markets, it wasn’t like they were going to shut down if Buffett hadn’t come in.  As to C, it all depends on the house bill, which is why I don’t like 3way being in the March $17.50s.

    C/3Way – At the moment, the $20s at $3.95 can be rolled to the $22.50s at $2.25 with C at $23, that costs you $1.70 while the March $17.50s at $7 can be rolled up to the $22.50s at $3.90, taking $3.10 off the table.  Since you entered the trade net .25 and you are putting net $1.40 in your pocket on that roll, it’s a nice win with a free ride on the remainder.  You can, of course do the 2x roll but with all the uncertaintly around the bailout, think of it more like if C does fly up, you can just buy some more March $25 calls to cover and then roll the $22.50s to 2x Nov $25s and if C flops back down, you will be really glad you took $1.40 off the table.

    There is a Russell ultra-short called TWM but I like the Russell longs ahead of the bailout, not the shorts.

    Time spent/Gabby – I’ve had that issue in the past but, when I have time I try to answer all.  Yes, it’s not good when one person abuses it but a little difficult to enforce in an open forum.

    Short Ban – that’s no surprise.

    SRS is a good one if the bailout fails (even if it passes it could still be a failure).

  182. Phil

    Good morning!

  183. ramana

    Euro Shares Gain on Hopes for Banks Recovery

    European share prices gained early on Thursday with the passing of a $700 billion banking industry bailout package by the U.S. Senate rekindling hopes that banks could advance on a recovery path.

    The FTSEurofirst 300 index of top European shares was up 1.1 percent at 1,084.03 points.

    The benchmark closed 0.9 percent higher in the previous session, but is down about 28 percent so far this year.

    Swiss bank UBS rose 9.5 percent after it said it would make a small profit in the third quarter after a year of losses, signaling it had started to turn the corner even as the credit crisis still engulfs many U.S. and European peers.anking stocks were the top weighted gainers on the index, with HBOS rising 13.3 percent, Lloyds TSB rising 4.1 percent, Fortis gaining 15.5 percent and Dexia climbing more than 8 percent. Shares in French bank Natixis rose nearly 13 percent on market talk that the company’s owners could buy out the public shareholding and delist its shares.

    British house prices fell 1.7 percent in the month of September from August to post their biggest annual drop since comparable records began in 1991, the Nationwide building society said.

    Investors awaited the European Central Bank’s rate decision at 12:45 pm London time. The bank is expected to keep rates on hold at 4.25 percent but its views on the global financial crisis will be scrutinized by the market.

    Across Europe the FTSE 100 index was up 0.9 percent, Germany’s DAX rose 0.6 percent and France’s CAC 40 added 0.9 percent.

    Miners broadly gained, tracking a rise in key base metals prices and on positive market sentiment.
    Energy stocks were also up despite a decline in crude oil prices.

  184. ramana

    Good Morning Phil

  185. ramana

    Oil Gives Up Gains, Falls Below $98

    Oil fell towards $97 a barrel on Thursday, after the U.S. Senate’s approval of a $700 billion bailout of the financial industry failed to allay concerns over weakening fuel demand in the world’s top energy consumer.

    U.S. light crude [  97.68    -0.85  (-0.86%)] for November delivery fell, off an earlier low of $96.02 and erasing earlier gains above $100.

    It settled down $2.11 at $98.53 on Wednesday, when U.S. government data showed supplies rising and on a firmer dollar.

    London Brent [  94.08    -1.25  (-1.31%)] was down.

    U.S. government data on Wednesday showed crude oil inventories up 4.3 million barrels last week as output from the Gulf of Mexico continued to recover from disruptions caused by Hurricane Ike.

    Gasoline inventories also showed a surprise 900,000-barrel rise as more refinery capacity came back online following the storm, which caused the worst disruption to the U.S. energy sector since the 2005 hurricane season.

    Oil prices have also come under pressure from investors shifting money out of commodities into safe haven investments such as cash and government bonds because of the financial sector crisis.

    Dollar Rides Higher on Senate Vote, ECB in Focus

    The dollar neared a one-year high versus a basket of major currencies on Thursday after the U.S. Senate passed a $700 billion bank bailout plan, while the euro slid ahead of the European Central Bank’s verdict on rates.

    For the euro, investors are keen to see if the ECB will shift from its hawkish stance following signs of easing inflation and mounting risks to economic growth from the financial market turmoil.

    The ECB is widely expected to keep rates unchanged at 4.25 percent.

    Banks scrambling to buy the greenback on the open market because they have been shut out from borrowing funds in frozen interbank money markets have provided further support for the dollar.

    The dollar index, a gauge of its performance against six major currencies, was up 0.4 percent at 80.050 — near a one-year peak of 80.375 struck last month.

    The confluence of factors has pushed the euro and sterling both down about 4 percent against the dollar so far this week.

    The euro [ 1.3913    -0.0094  (-0.67%)   ] fell on the day against the dollar, having hit a session low of $1.3856 — a level last seen in September 2007.

    Against the yen, the dollar [ 105.35    -0.34  (-0.32%)   ] slid.

    Sterling [ 1.7641    -0.0058  (-0.33%)   ] slipped on the day versus the dollar.

    Platinum slips 3 pct on demand woes; gold steady

    Platinum tumbled to a 33-month low as fears over demand from the car industry weighed on prices and the dollar rose to a one-year high versus the euro, but gold was steady as investors bought bullion as a haven from risk.

    Platinum as quoted at $979/999 an ounce at 0920 GMT, against $1,002 an ounce in late New York trade on Wednesday. Earlier it touched a session low of $976, its weakest level since January 2006.

    Gold was quoted at $867.10/869.10, against $868.75 in late New York trade on Wednesday.

    Among other precious metals, silver  slipped to $12.31/12.39 an ounce from $12.52, while palladium was unchanged at $201.50 an ounce.

  186. Fabregas

    Russell – UWM is ultra long and TWM is ultra short.

  187. Fabregas

    SRS (and perhaps SKF) – I’m looking to short the strength even if the bill passes.  Perhaps not right away, but something I will look to do at some point.  Also eyeing TBT (the ultra short version of TLT).  Options are too expensive to play, I’m switching to ultra ETFs for now.

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