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Wild Weekly Wrap Up – Only Halfway Through January!

Wheee, what a ride!

The week can be neatly summed up by my 1:35 comment to Members in yesterday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours."  Of course it’s easy to laugh when you play the market correctly – as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Virtual Portfolio, for example, up 12% in one day – enough to send us back to cash rather than risk a weekend reversal

We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance target of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638.  As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they are fell right off our 2,000 target, giving us the early warning that things were not right):

As you can see, the 5% Rule rules!  I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets.  I don’t mind that the markets are manipulated, that’s been going on since markets were invented – it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!). 

In this case, very precious investor capital is being steered into commodities, which is a very poor use of recessionary capital as is inflating the money supply to prop up home prices that should be pulling back to realistic levels that would be affordable under REAL interest rates.   What people buying $200,000 homes now do not understand is there is no bargain to be had as their $180,000 mortgage at 5% is just $966.28/month – fairly affordable. 

BUT, if those "home investors" try to sell that home in 5 years, even for the same $200,000 with a $180,000 mortgage – if rates are up to just 8% the payment the new buyer is asked to make will be $1,320.78/month – that’s 36.6% more!  Unless wages rise 36.6% in 5 years or unless mortgage rates stay at 5% for 5 years (and we become Japan), then home investments are likely to return little or nothing in the near future.

It’s been a long time since we had rising interest rates.  Last time rates went up hosing prices fell so fast it was like a bubble popping or something…  In the last cycle, rates topped out at just over 7% (with the Fed at 5.25%) as the "crack spread" the banks charge between the Fed Funds and the 30-year Mortgage Rate hit the lowest point (2%) since 2000.  This is what happens when the Fed rasies rates but consumers can’t afford bigger mortgage payments - it’s one of the few things they can’t fake.  Now the banks have a mortgage crack spread of 4.75%, the most since 1994, when mortgage rates hovered between 7.5 and 9% and Fed Funds were at 3%. 

That was a good time to be a bankster but the big difference was that, back in the mid 90s, the mortgage default rate was under 1% and was quickly driven up to over 2.5% as the Fed raised rates and the stock market collapsed.  Fed rates peaked out in late 2000 at 6.75% but that was "only" up 1% from 5.75%, where it was roughly from 1995-1999.  After the last major recession, the S&L crisis of 1990 (when we also bailed banks out of stupid investments due to poor regulatory oversight) the Fed Funds Rate was as low as 3% so the great collapse of 2000 and the huge (and note the delay) rise in defaults came on a 2.75% rise in Fed Funds over 6 years.  

Will our Fed be able to keep rates under 3% for 6 years or are we screwed?  Will the banksters be willing to give up their crack (spread) or will they stick it to the taxpaying homeowners (and don’t even get me started on rising property taxes that are also pushing people out of homes) – effectively cutting off their noses to spite their faces?  Ah, that’s what’s so much fun about the future – anything can happen and usually does….  At least it’s a lot easier to look back a week and try to figure out what happened:

Monday Market Momentum – Can We Keep It Up?

Dow futures were up 100 points heading into the open.  We had closed Jan 8th at 10,608 on the Dow and we finsihed this week at 10,609 so the short story is – nothing happened.  We had the Rent-A-Rebel attack we had predicted the prior week shoving oil up to $84 a barrel – where we shorted the hell out of it.  I pointed out the farce of the oil companies with 100,000 barrel/day pipelines ($8.4M/day at $84/barrel) pretending they can’t fight off four guys with an outboard motor boat attacking their facility.

Despite the nonsense, we went with an XOM 2012 $60/Feb $70 spread for net $11.75, which is holding up just fine so far as we need some upside oil plays for balance and XOM is probably the best.  Former AIG CEO, Hank Greenberg accused Goldman Sachs of being evil (duh!) and Fitch warned that Chinese banks may implode in a cloud of debt defaults while BCS began foreclosing on Dubai but we focused on the green shoot of the day which was that the census would be hiring 1.2M peope in the first 6 months of the year and that means we can look forward to pretending the economy is improving!  Our other trades were:

  • DIA Jan $105 puts at .33, out at .42 – up 27%
  • THC artificial buy/write, too complicated to list here – on target
  • LWSN Aug $7.50 puts sold for $1.50, now $1.40 – up 6.6%
  • DIA Jan $105 puts at .35, out at .35 – even
  • QQQQ Jan $46 calls at .57, out at .65 – up 14%
  • VZ artificial buy/write, too complicated to list here – on target
  • EDZ Apr $4 puts sold for .50, now .45 – up 10%
  • AMZN ratio backspread at net $55 credit, now $175 credit – up 218%
  • QQQQ Jan $45s at $1.32, out at $1.45 – up 10%
  • AIG Feb $34s for $1.04, now .45 – down 57%
  • DIA Jan $106 puts at .48, out at .75 – up 56%
  • AA Feb $18s/Jan $17.50 spread at net .22, now .46 – up 110%

Notice we did a lot of day trading, which is typical during an options expiration week as we can make a quick 10-20% over and over again when things are going our way.  Obviously we expected AA to miss, which is why we yanked our short-term bullish plays off the table.

Testy Tuesday – AA Disappoints Ahead of Beige Book

I was very concerned about the Beige Book on Wednesday and we were already having a rare pre-market sell-off on the AA earnings.   We noted that the last Beige Book got a reaction a day later so we weren’t expecting a big drop until Thursday, even if the news was bad

China ordered banks to raise their reserve requirements and I mentioned the short FXI/long FXP trade in the morning post and FXI fell from $43.40 to $41.45 (down 4.4%) and FXP went up from $7.91 to $8.66 (up 9.5%) so don’t tell me I never make straight stock picks! 

In my 9:39 alert to Members I noted we should watch our levels for a bounce (they all held) saying: 

Keep in mind that we’re trying to cultivate a more bullish attitude where we look for buying opportunities on these little dips but I’m not too keen on making major bets until we get past tomorrows Beige Book.  We’re getting mixed signals in a low-volume reversal back up at the moment (probably won’t last).

  • USO Jan $41 puts at $1.01, out at $1.40 - up 39%
  • USO Feb $39 puts at $1.01, out at $1.67 - up 65%
  • QQQQ $45 calls at $1.03, out at $1.40 – up 36%
  • ERTS March $17 puts sold for $1.27, now 1.05 – up 17%
  • TBT March $48 puts sold for $1.27, now $1.58 – down 24%
  • TBT Jan $49 calls at $1.05, out at $1 – down 5%
  • TBT 2011 $46/53 bull call spread net $3.40, now $2.90 – down 15%
  • RMBS Feb $22.50 calls sold at $3.40, now $1.52 – up 55%
  • DIA Jan $106 puts at .56, out at .80 – up 43%
  • MGM at $12 calls sold for $1.05, now $1 – up 5%
  • MGM at $12, now $12.09 – up 1% (cover)
  • WFR Feb $14 puts sold for .75, now .80 – down 6.6%
  • ABX Feb $40s at $2.23, now $1.68 – down 29%
  • PCS buy/write at $3.17/5.33 – on target
  • AET Feb $30 puts, sold for $1.50, now $1.10 – up 26%
  • DIA Jan $105 puts at .35, out at .30 – down 14%
  • DIA Jan $107 puts sold for $1.35, out at $1.25 – up 7.5%

We got a super crazy stick save into the close (which we’re finally learning to play for) but we didn’t want to keep much open into the oil inventories and beige book as we expected both would disappoint but, as I said when we too the AET play at 2:02: "Oh wow, I’m actually buying on the dips (checking for horns)."  TRYING to be bullish was the theme of the week but, as you can tell from my posts, the more I tried the more frustrating it became trying to pretend that nothing bad was actually happening.

Day Trading StrategiesFor those of you who want a closer look at the day trading action on Tuesday, I wrote up a special post called "Day Trading Expiration Week" and it’s good to review our entries and exits with the charts as this is a monthly activity at PSW – something we like to do every expiration week - the rest of the time we try to trade a little more conservatively!  If you are not a member and are interested in learning more about joining us CLICK HERE.

Which Way Wednesday – Beige Book Boogie

We love Beige Book days, they are always exciting and, despite the anecdotal nature of the report, we do get some good insight into what’s really happening in the economy.  I began the day by reminding readers that we are back in what I like to call a "Meatball Economy" where bad news JUST DOESN’T MATTER, pointing out that our last Meatball Market (2006-7) ran for 2,000 Dow points so there was no easy way to predict when this bubble was going to burst. 

I pointed out what a manipulated joke of a close we had on Tuesday and had an image of the futures market and the silly pump that was going on there and my observation that morning was:

If one didn’t know any better, one might assume some computer program was executing these moves in order to paint a pretty picture for the human guinea pigs so they will keep pushing the BUY lever every time the little line on the chart turns green at which point the bots begin their relentless "sell to the bagholders" program.  Our job as bulls is easy, buying into the afternoon dips but we’re not brave enough to ride out the overnights yet as we sadly, still have some nagging doubts

Our biggest nagging doubt is "Why can’t Super Market break our levles?"  It seems a simple enough goal, just finish the day above the targets we’ve been listing for over a month:  Dow 10,549, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638.   They’ve all been individually broken but we are still waiting for the day when all 5 of our indexes finish above their marks on the same day.  Until then, we proceed with caution.

Google was threatening to leave China, Germany’s GDP fell 5%, 40% worse than expected but the idiots who call themselves economists when answering the phone for surveys and gang of 12 member Societe General warned on profits.  I predicted we’d have an oil inventory build that would not sustain $80 (it was huge and we finised the week at $78) and we decided XLF $15 would be the key break up and break down point to watch and they punched over $15 on Wednesday at 11 and fell back under Friday at 10 so it isn’t that hard to gauge market direction – as long as you follow the right leading indicators:

  • UYG Feb buy/write at net $5.37, UYG at $5.99 – on target
  • DIA Jan $106 puts at .36, out at .48 – up 33%
  • DIA Feb $108 calls at $1.18, out at $1.28 – up 7.6%
  • GE 2012 $15/20 bull call spread at net $2, now $1.95 - down 2.5%
  • GE March $17.50s sold for .42, now .32, up 23% (pair trade)
  • FXI Jan $41 calls at $1.32, out at $1.55 – up 17%
  • DIA Jan $106 puts at .30 (average), out at .45 – up 50%
  • TXN Feb $24 puts sold at .68, now .84 – down 26%
  • AMAT Feb $14 puts sold at .60, now .75 – down 25%
  • OIH Jan $130 calls sold for $1.32, expired worthless – up 100%
  • VNO Feb $65 puts at $1.25, now .98 – down 22%

The Beige Book came out at 2pm and my quick comment to members at 2:03 as the market ran up was "I’ll have a review shortly but assume up is a head fake at the moment."  You can read my whole review of the BBook HERE but the short story is the word "sucks" came up more than once and the only trade we made into what I was sure was a wrong-way rally was the ill-fated (so far) VNO puts.  My closing commentary on that 2:49 Alert to Members summed up how to play the market for the rest of the week:

One again a pretty poor report and I’m not impressed (see 10/21 report notes here).  Is this the report we should be seeing at the end of a 10% run in the markets and commodities over 10 weeks?  Apparently the market thinks so, as we have been going up since and making day’s highs, but the volume is still light and I’ll be looking for a sell-off into the close or possibly tomorrow morning

This is simply not an all-clear signal for the economy but we thought the market would stay strong while our banking friends testified and it is options expiration week so anything can happen but now I’m not willing to capitulate until we cross 2,314 on the Nasdaq – the last holdout of our index breakouts.

Thursday Thrust – DB says "Ignore the Unemployed Men Behind the Curtain"

 

We did get our sell-off into the close on Wednesday and a little more Thursday morning but the pump monkeys were out in force with G12 member DB telling us (and I wish this were a joke but they really said this) "the US economy may grow as much as 6% this year" while fellow gang member MS made the equally outrageous statement that  "Metals may gain 32% in 2010."  As any Los Angeleno knows, when gang member start flashing signs like that it’s time for bears to hibernate before they start firing buy orders and leaving blood on Wall Street.  This is drive-by BS at it’s finest!

THIS was the point at which I became completely fed up this week with the manipulation and you can see my change of tone as I went from laying out my case for why the GDP is not likely to grow 6% and why the oil numbers were far, far worse than the evil criminal bastards finest journalists GE could hire at CNBC would have you believe and then that set me off to getting back to complaining that the poor (that being 90% of the US population) were once again being screwed saying:

That is how we are "fixing" the economy.  It turns out you may not be able to get blood from a stone but we sure can bleed US and global consumers dry through commodity speculation that completely ignores the fundamentals of supply and demand in order to dig into consumers’ pockets and pull out that last dollar.  This is a mainstay of the "Dooh Nibor Economy" and is, of course, great for us top 10% club members as we already know the bottom 90% are tapped out.

By getting that extra $20 for gas each week from 165M drivers, WE make sure that $3.3Bn goes to people who will actually spend it on stuff – further boosting the GDP.  Add another $5Bn in mandatory grocery spending (becaues EVERYONE needs to eat – muhaha) and we’re getting $431Bn from those poor cheapskates, who would only save it or pay off some debt if left to their own devices (and we don’t need them to pay off their loans – that’s the government’s job!).

I sadly concluded that maybe DB was onto something and maybe WE (the top 10%) could continue an entire additional year simply raping the global consumer base and throwing them an extra $2Tn, heck maybe $8Tn if MS gets their way, into debt in order to fund another year of Wall Street bonuses.  I predicted that morning that we would party on that news like it’s 1999 – or 1929 and move the markets higher but my 9:44 Alert to Members cautioned: "Be very careful today, I still feel like this whole thing can snap on one bad news story."

  • INTC complex earnings spread at net .04, out at .18 – up 300%
  • JPM complex earnings spread at net $1.13 – on target
  • EWJ Jan $10 calls sold at .45, out at .40 – up 11%
  • C 2012 $2.50/5 bull call spread at .95, still .95 – even
  • BAC 2012 $12.50/20 bull call spread at $3.55, now $3.44 – down 2.8%
  • BAC May $18s sold for .30, still .30 – even (pair trade)
  • JPM March $41 puts sold for $1, still $1 – even
  • JPM 2011 $45/50 bull call spread at $2, now $2.10 – up 5%
  • JPM Feb $46 calls sold for $1.05, now .88 – up 16% (all 3 are a spread)
  • FAS 2011 $65/85 bull call spread at $10, now 8.95 – down 10%
  • FAS Feb $98 calls sold for $2, now $1.12 – up 44% (pair trade)
  • TBT Feb $48 puts sold for $1.10, now $1 – up 10%
  • MA $250 puts at .10, out at .05 – down 50%
  • FXI Jan $42 puts sold for .27, out at .27 – even
  • SMH Jan $27.50 puts sold for .20, out at .20 – even
  • DELL artificial buy/write, too complicated to list here – on target
  • BWLD ratio backspread at net .50, now .63 – up 26%
  • RTH Feb $90 puts at .80, now .90 – up 12%
  • IYR March $46 puts at $2.20, now $2.30 – up 4%
  • IYR 2011 $43/45 bull call spread at .90, now .95 – up 6% (pair trade)
  • LMT artificial buy/write, too complicated to list here – on target

Notice how we bought some calls early on but then flipped very bearish in our later trades.  We were very aggressive in buying back the DIA Feb $105 puts we sold as cover against our June DIA puts as we were very confident in a sell-off by the time we got to the close – if not on Friday then certainly next week.  Turns out, we didn’t have to wait long at all!

Freaky Friday – Options Expirations Promise a Wild Ride

As the note on the chart says, until the major trend-line breaks, we are still taking the money and running very quickly on our bearish trade ideas.  I often remind members what John Maynard Keynes said almost 100 years ago: "The markets can remain irrational far longer than you or I can remain solvent."  As fundamental investors, these are words to live by because we can be totally right about the value of oil or AMZN or VLO or WFR or FSLR but we have to recognize that being right on value is only half the battle – we also have to pick our spots because you can be a better boxer, even a dominant one, and you are still going to lose a few rounds along the way.  Failing to recognize that simple fact is the undoing of many investors

We have been mainly in cash since Christmas and we were out of our unhedged bull plays on Thursday’s silly run, preferring to watch from the sidelines over the weekend with our bearish (but still mainly cash) sentiment.  Right in the morning post I laid out our very successful plans for getting out of INTC and JPM with nice profits.  INTC went as planned and we’re out but JPM we’ll have to ride out.  That’s the thing about earnings plays – you play for the quick profits but you’d better have a longer-term plan just in case you get stuck in the trade! 

Boy I was angry when I wrote that post – very fed up with the manipulation and frustrated buy the way the general public just bends over and take this despicable abuse.  It’s not just that I’m a bleeding-heart liberal (I am) but, FUNDAMENTALLY, I believe that the fleecing of the American sheeple is creating a bifurcated society that, ultimately, will NOT be good for our future.  This does not bother the ultra-rich, who inhabit a country that Robert Frank has dubbed as Richistan and those people, the top 10% of the top 10%, could not give a rat’s ass what ultimately happens to this country but I do – I’m sorry for that but it does matter to me so I do get pissed off when I see this country being destroyed by greed and stupidity….

I was extra furious as Karl Denninger did a great job of exposing the blatant market manipulation that went on on Wednesday.  Notice that we had a lot of successful trades on Wednesday so this is not about sour grapes and it’s not about me being surprised that people are manipulating the market as I’ve been saying it for many, many years – this is about me being angry at how not angry Congress, the MSM or even the American Sheeple are about this activity – it’s sickening!  Still, there’s money to be made on all this stupidity and that’s our job:

  • DIA $106 puts at .10, out at .40 – up 300%
  • TBT Feb $48 puts sold at $1.12, now $1 – up 12%
  • DIA $106 calls at .30, out at .25 – down 17%
  • DIA Feb $105 puts sold at $1.75, now $1.50 – up 14%
  • DIA $105 calls at .66, out at .80 – up 18%
  • INTC Feb $21 puts sold at .72, now .80 – down 11%
  • DIA $106 calls at .10, out at .15 – up 50%

Notice we did a great job flipping mid-day and made good money in both directions.  Other than INTC (which we couldn’t resist at that price) and TBT (ditto), it was an all DIA day as we just day-traded the index as it’s nice and liquid to get in and out of.  After some jerky action along the bottom, I called it a day for the bears at 2:11, saying to members: "You have to be satisfied that we got this sell-off.  We cashed out the longs (naked ones) yesterday as we were stupid high and today we were able to cash out of the shorts and now we are cashy and flexible into the weekend, which is sooooooooooo nice!  No sense in risking anything now that we already had a sharp 150-point drop."

All in all, it was a very satisfying week over at PSW – we had 68 total trade ideas with just 16 losers, not bad for a crazy-assed week where we went up and down like a yo-yo!  Now we’re going back into the weekend with plenty of cash and a loaded Buy List, looking for earnings week bargains as well as some fun spread plays but we’re happy and neutral into the holiday weekend so I hope everyone is out having fun.  Me, I’m finally seeing Avatar with the kids and relaxing – see you Tuesday!

 


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  1. aclend

    Anybody,
    Did you guys do really well selling premium when the VIX was super high or did the unpredictable drops and necessary damage control offset that advantage? I’m just curious how this style portfolio would perform in an that environment. Does margin double or triple on you or is it just fractional but significant? I need to know what to expect if we drop 20-30% so I don’t hit the panic button. :-)  
    Thanks, Aaron

  2. EricL

    aclend,
     
    On average, no; sellers of high-VIX premium did not tend to do well because the market moves were very often greater than those priced into the options – there were some stats showing this for index ETF options (which I  currently can’t find; I think they were on Optionmonster). So for example, people who bought 8.00+ (!) front-month ATM straddles on the SPY in late ’08 – early ’09 still tended to make money because the index moves were greater. And crazy though the leveraged ETF option prices seemed then, they were almost always better as a net buy, not a sell.
     
    I’ve read of professional option traders who prefer to buy when volatility is high (late ’08, e.g.) and sell when it is low (now); and over the last two years that strategy has likely worked on average.

  3. EricL

    "Unless wages rise 36.6% in 5 years or unless mortgage rates stay at 5% for 5 years (and we become Japan), then home investments are likely to return little or nothing in the near future."
     
    Good point Phil, and if we do become Japan (sustained deflation), you don’t want to have a lot of debt anyway.
     
    The main U.S. indexes now have a potential double-top formation that we should keep an eye on.

  4. Pharmboy

    Eric -  I noted yesterday that the FXI seems to have a head and shoulders formation.  SPX is still showing negative divergence but the interesting thing is that all the moves back to the major trend line over the past 3 mo. are one day events. 

  5. pstas

    Eric/VIX  I don.t pretend to know much on the subject but it seem counter intuitive that high vix would mean higher option values, relative to low volatility/low VIX?
    Perhaps you could elaborate?

  6. EricL

    pstas,
     
    The VIX is just a statistic that measures the implied volatility of S&P index options over a 30 day period. It reflects the expected annualized change in price of the underlying (S&P stocks) over that 30 day period, as calculated from the option price. So a high VIX always means higher (S&P) option prices since its computed from the price of the options (specifically the implied volatility reflected in the option prices).
     
    What may seem counter intuitive is the claim that some traders prefer to buy options when volatility is high and sell them when it is low, but remember that the VIX isn’t a security like a stock — it’s a statistic. Simplifying somewhat, if an ATM SPX 30-day straddle costs $80.00, then the SPX needs to be moving less than 80 points on average during that period to for the seller of the straddle to win. If the SPX is pretty consistently moving, say, 100+ points in that period, the straddle seller loses and the buyer wins.
     
    Before 2008, Phil used to trade lots of diagonals; buying LEAPS and selling front-month options against them. Notice he doesn’t do nearly as much of that now. Almost all long-theta/short gamma trades were tough positions to manage during the high volatility — diagonals, calendars, short straddles, short strangles, short condors, etc. They were often either blown apart or they flipped over on you. All these types of trades involve a bet that option IV over-prices the actual volatility, and during the meltdown they were generally wrong.
     
    Lately, as actually volatility has fallen, they’ve been generally right, which is why Peter D has been having a great time selling strangles.

  7. EricL

    Pharm,
     
    Yeah, thanks. Frustratingly, we’ve had several (at least 5) major SPX trend-line breaks over the last 9 months, and each was completely reversed (they don’t appear now as trend-line breaks, of course, since the trend-line now has been drawn to include them). So all the nice looking bear set-ups turned into traps, without exception.

  8. pstas

    Eric,
    Now it makes a bit more sense. As long as one’s play works in the anticipated direction then the higher VIX/higher premium should mean greater profit all else being equal. I have several stock positions on which I just gave up on selling covered calls because of the frustration of managing the postions. It seemed I was always getting run over and/or whipsawed.

  9. gel1

    Pstas
    Over the past year I have encountered similar frustration, as I did a lot of covered call writing on stocks I held. My market movement direction guestimates were correct most of the time, however I thought I could still add additional income by selling OTM calls. As the stocks and ETFs moved up, my covered calls took hits, and I continually had to double down and move my position up in order  to avoid being called away My salvation was that I took advantage of closing them out on those days we had substantial pullbacks in order to get out from under these sometimes oversized positions relative to my underlying stock positions. An example was my position in KMP. I have 3500 shares, and on the last pullback I unloaded all of my covered calls on this stock. After all the rolling and doubling down, I was up to 80 contracts short, which is scary as the proportion in size to the underlying was out of whack. Overall, I came out well and still made money on my insurance policies. The puts I sold, in order to get more balance paid off as well, because they in all cases expired worthless. In order to get out from under these type of situations, you really have to take advantage of a day the bears take charge in big way.

  10. chaps

    Phil/TBT:
     
    We’re generally using TBT to play rising US gov interest rates. Since that’s a directional bet and many of our bets are involving 2011 or 2012 LEAPs (verticals or otherwise), how are we dealing with the known ultra ETF time decay? Just betting that the rate increases will offset the decay?

  11. chaps

    Phil/TBT redux:
     
    To try and answer my own question, I’m going to guess it’s because the underlying index (TLT) has relatively low volatility  (beta of about -.06), so the effects of decay due to leverage are not that significant.

  12. gel1

    Pharm
    Here is another analysis (adding to your great piece) on LLY. Imclone could be their ace in the hole, or possibly another strategic acquisition. http://www.streetauthority.com/a/dont/-miss-best-pharma-value-market-1127

  13. gel1

    Pharm
    More on one of our favorites. – GILD. The compassion for help in Haiti and Africa is huge and growing. HIV is one of their largest concerns. This might be the next blockbuster. http://www.streetauthority.com/node/1079

  14. samz3700

    gel1
    KMP is also one of my largest holding as well as epd – scooped up a bunch of kmp when there was forced selling in 08.
    You have an other mlps you like right now?
    What has been your strategy for selling options?
    I sold some puts late in 08 early 09 but I got a little worried that selling covered calls would impact the mlp tax status by trigering short term gains if I was selling covered calls less than a month out – obviously you can handle this by selling longer dated calls but this was less appealing.
    KMP seems pricey to me right now but I am earning 10% tax free on invested capital so am loathe to sell
    Do you have any KMR in iras? was thinking of trying to getting some kmr for iras bc seemed undervalued at least compared to kmp

  15. samz3700

    Chaps – tbt – not to answer your question about being short vol.
    but your other options are selling calls on tlt or buying puts on tlt – I guess you could sell a vertical call spread
    You never want to sell calls on tlt – if we have some international crisis, tlt can explode to the upside – and you can just get toasted so you don’t have that many choices especially if you don’t want to buy near term premium  - also shorting tlt can be hard – you might not be able to get the shares, you have to pay the div. and same with calls – you can get blown out.

  16. samz3700

    If you think Greece is an isolated case – read this about the baltic countries -
    GDP down 20% since 2007 – may not default but will need to devalue currencies -
    from pimco
    http://www.pimco.com/LeftNav/Global+Markets/European+Perspectives/2009/PIMCO+Euro+Persp+10.09+Bosomworth+ERM+Blues+US.htm

  17. Phil

    Good morning!

    Finally saw Avatar yesterday and it was very good in IMAX and the place was PACKED and the previews for upcoming IMAX films looked really good so I like IMAX as a long-term investment again.  It used to be that IMAX was double a regular film but now it’s still $15 and it’s $10 for our regular movies anyway and there is no comparison in the experience. 

    As to the film itself, I’m a big science fiction fan and have a cousin who’s a Hollywood writer and I have been a producer of a movie so I know enough to be dangerous and I thought the story line was so-so but that didn’t matter because the experience was simply amazing.  The question is, how long will they get away with that before people start expecting more from 3-D movies? 

    Cameron is REALLY smart and he wrote the story specifically to work in 3D and you’ll notice that almost all the scenes involving humans (non-CGI) were shot in small boxes (small rooms, ships, at controls of robots) while the alien world (all CGI) was the real 3D experience. 

    Cameron hasn’t solved 3D for future filmmakers, he designed a film and a story that worked within the limits of the technology (ie, 3D is still virtual, not good for real life) and all these people telling you that a new world of 3D filmmaking is just around the corner are nuts.  Of course the solution is probably to work harder on making better CGI people rather than try to make 3D reality suitable for filming (think of the mikes, the cameramen, the paper-thin walls, the fake doors, the control of the background, lighting, the flaws that can’t be hidden…) and, especially in this economy, I don’t think there is any way the increased production costs will fly enough to support 3D TV in the near future. 

    By the way, for my kids (girls 7 &9) – it was one of the most intense experiences they’ve ever had and they loved it (didn’t move for 2 1/2 hours), probably the way I loved Star Wars, which was, when I was 14, the coolest, best special effects ever so it’s worth taking kids for that fact alone.  My little one cried a bit at the sad parts but still said she loved the film overall. 

    VIX/Ac – When the market dove and the VIX went rocketing it was very damaging to leaps and naked puts.  Your margin does rocket up as you go in the money and you need to pull the plug sooner than later.  We don’t drop 20% in a day but we do drop 5% in a day and that can drop your portfolio 20% if you are too bullish - it’s the hanging on that kills you in a prolonged downturn, not the first days or weeks.  Always have cash and always have positions that let you put on the breaks (like long-term DIA puts that you can increase) so you can switch your portfolio to neutral and ride out a move down. 

    Indexes/Eric – See Market Tamer’s chart review on main page, scary stuff!

    Meanwhile, we got that dollar bounce I predicted on Friday.  Really this currency stuff doesn’t seem so hard, maybe we should try it…  Hang Seng and Nikkei dropped a point but Shanghai picked up half a point along with India.  Europe is up half a point across the board and our futures are up a tiny bit. 

    Oil is at $78.50, Nat gas at $5.65, copper is 2% at $3.43, silver $18.65 and gold $1,131. 
    Good point on stategy shifts, Eric!

    TBT/Chaps – WHEN the VIX is higher (or TBT is high in it’s channel) THEN we will sell calls (1/2 covers though as it can move violently up if we have a crisis) against it to offset potential long-term decay but you are very right in your own answer, we have less fear of TBT decaying on us than say FAZ or FAS because, NORMALLY, TLT is not prone to the kind of moves that damage an ultra that tracks it. 

    Kick ass article by the way Pharm!  Thanks…

    TBT – and what Samz said!

    Baltic/Samz – I’ve been saying that for ages, glad to see someone finally backing me up.  It’s been amazing to me how little coverage something I considered obvious back in 2008 has gotten. 

  18. pstas

    Special effects- how can you beat Flash Gordan?
    http://video.google.com/videoplay?docid=-3463556139541807842#

  19. Pharmboy

    gel – thanks on the article.  Must have read PSW first!!  LLY on making more acquisitions – I think the whole industry will be ripe this year and next.  As I and many others have said, 2011-2014 are gonna be big years for patent expirations.  Biologics are coming of age, and the real drug hunters are few, and far between (small molecule).  everyone thought that the human genome info was going to be  the cure all for many, and it has done very little actually.   The easy targets are finished (angiotensin inhibitors & beta blockers for blood pressure, diabetes drugs, ect.).  I equate those to the superhighways  that we can shut down a few lanes because the body compensates.  Now we are trying to manage the side streets, and there are many ways to get around town.  As I noted on Ilene’s post on stem cells, that technology is just redoing the entire town, and we ain’t there yet.
     
    So to make a long story short, I and you all should be watching for opportunities in this market this year, as biotech’s valuations will be a bit lower than normal due to the Big Pharma on the prowl, and set backs should be opportunities for us to get into these companies as long as the science is sound.

  20. gel1

    Samz
    I entered KMP about the same time as you. It has been nice as an income investment, and is appreciating very nicely as well, in value. It is one of my long term positions that I very carefully sell calls against. The volitility is somewhat predictable and therefore a safe call play, but like you say, do not take the chance of being called away, because the tax implications are costly. I also have a large position in EPD which is a good one. I have as well MMP and NS.. My strategy for options is primarily income. I very seldom buy options, unless it is short term puts for portfolio protection, or leap calls which I sell closer term calls against. At this point, I do not have KMR, but given my positive assessment of the fundamentals, I would feel comfortable with the position. Over the next 12 months I believe there will be some very attractive trading opportunities that will evolve. I plan to capitalize on these opportunities, primarily through option trading as opposed to investing. I am feeling the markets are approaching maturity in their current valuations. The correction is not too far off in the distance and it will be very swift once it gets started. My reasoning for this opinion is fueled primarily by the lack of volume in the markets. Additionally, buyers are becoming more scarce, as the retail investor is still in shock from the destruction of their IRA’s and retirement portfolios. Mpost of them are still de-leveraging and have placed their resources in "safe" depositories such as bonds and CD’s. The Fed can not continue with its current policy of monitizing debt as outside buyers of treasuries are becoming fewer and fewer. In order to attract outside investors to stay in the game, interest rates will have to be sweetened and this will really hurt the equity markets as rotation into the bond market will hurt the equity valuations. The upward move in the USD is confirmation of this theory. I believe we will see a fantastic buying opportunity in equities after the next correction and I have accordingly increased my cash position to 50% of my portfolio value, which will be in reserve until I feel the correction has bottomed out. Until that time arrives, I will not be acquiring any new investment positions, but will concentrate my activities in short term trading – both options and currencies. FX cross-trading is shaping up to be a very interesting space to be in, as the various countries make moves to sort out their de-leveraging activities. There is a very clear demarkation between the strong and the weak, and the evolutionary changes that are taking place between them.

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