Weekend Wrap-Up, Still Trying to Get Bullish
by Phil - March 14th, 2010 5:20 am
I’m having writer’s block this weekend.
Usually when I can’t think of what to write it helps me to go over our portfolios so I started this morning reviewing the Buy List but I didn’t get far because it was silly. Of 43 plays on the buy list, 39 are doing well - too well in fact to the point where it’s hard for me, in good conscience, not to say let’s kill the whole thing and get back to cash as we’re up about 20% in 2 months and that’s just ridiculous - most people would call that a good year and go on vacation.
The Buy List was 100% bullish and we did catch a good bottom on our early February entries. I was gung ho bullish then because I felt comfortable that the 10,000 line on the Dow would prevail and that we were good for a run back to the top (10,700), following, more or less, the pattern we had in 2004 (see original post for charts). Well that’s pretty much what’s happened since then but that’s not making me happy because I see no reason we won’t complete that pattern and begin falling off a cliff shortly.
As you all know, I’m not a big fan of TA, or patterns for that matter but the reason I started looking for patterns was to try to get a handle on how long market could really keep going up before falling victim to exhaustion. To me it seemed we weren’t at that point on Feb 6th but now that we’ve put in that big push back up - if we can’t punch up to new highs on all our indexes then I do think it’s time for the markets to take a break.
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Clearly I’ve been too bearish for the past couple of weeks and we are now 224 points over 10,400 on the Dow which is where I turned bearish as the January data made me lose faith in our ability to get back to 10,700. I should have stuck to the TA because we’re a lot closer to 10,700 than we are to 10,400. With the Russell and Nasdaq exploding to their own new highs. You can see though, from the above chart, why I do want to wait to see the NYSE, Dow and S&P confirm this move up - it’s not far now!
We’re finally getting the hang of the Wonderland Market though it’s actually quite simple…
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Which Way Wednesday - World of Worries Weighs on Wall Street
by Phil - March 10th, 2010 7:33 am
7 W’s in the title - that has to be some kind of alliterative record!
What could we possibly be worried about with the market making new highs? Well, I’m a little concerned that Shanghai housing prices fell 10% in a week. That’s the kind of behavior that may make you think they may have a bit of a bubble that’s popping. Of course they held up well compared to Shenzhen, where prices dropped 14% in the first week of March. That was matched by a 14% decline in iron ore shipments from Australia as China’s demand fell from 11M tons in January to 8.7M tons in February. So, if you were wondering how much China’s $600Bn stimulus spending was affecting their economy - 14% is the effect of them simply slowing it down a little.
Japanese Machinery Orders fell 3.7% in January and Producer Prices fell a deflationary 1.5% in the World’s second-largest economy (for now). “The gap between supply and demand in the domestic economy has yet to shrink,” said Morita at Barclays Capital. “It’ll be very difficult for companies to pass on those costs. That’s not good for their profits.” The Baltic Dry Index is topping out just over our 3,200 target, signaling a possible end to the great commodity run of 2010. Devan Kaloo, head of Aberdeen’s Global Emerging Markets is predicting that emerging markets (we are long EDZ, now $47) may fall as much as 15% this year. “The markets will see a correction this year,” Kaloo, whose Aberdeen Emerging Markets Institutional Fund has beaten 93 percent of competitors in 2010, said in an interview in New York. “People get over-optimistic and expect too much out of earnings and global growth.”
Sure, I know I’ve been saying this for a while but it sounds so much more official when a guy in charge of $22Bn says it! China’s 4 trillion yuan ($586 billion) stimulus package, coupled with record bank lending in 2009, helped the benchmark Shanghai Composite Index rally 80 percent last year. The gauge has dropped 6.4 percent in 2010. “From a stock-picking perspective, we can find better opportunities” than China, Kaloo said. “The government pumped money into the financial system, but soon they’ll run out of money,” which will hurt the earnings of Chinese companies.
Amazingly, much of the tech growth we’re seeing in Asia is resulting from a mad rush to produce 3-D TVs in time for the holidays - something I believe may be one of the biggest marketing catastrophes of our time. At the moment,…
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What is Apple up to in China?
by ilene - March 6th, 2010 9:46 am
Ultimi Barbarorum takes a favorable look at Apple’s store openings in China. Read on to learn why. - Ilene
What is Apple up to in China?
Courtesy of Ultimi Barbarorum
Baruch, in this post: A new piece of information, augmented by local insight, that amounts to yet another upside case for Apple. And yes, it involves the iPad.
The new information: This past Thursday, Apple revealed plans to open 25 retail stores in China. Currently, there is one swish Apple Store in an upmarket outdoor Beijing mall, with one more planned in Beijing and two in Shanghai this year. Opening Apple stores in Chinese cities that most foreigners have never heard of (The likes of Shenzhen, Hangzhou, Chongqing, Chengdu, Kunming —there are 25 such cities in China bigger than Chicago) betrays a whole new level of ambition in the Chinese market, beyond just servicing creative elites in their international watering holes.
But what could Apple possibly sell in those stores that the Chinese can afford en masse? Let’s put that question aside for a moment and look at these recent observations:
- My Chinese teacher, upon visiting my apartment, ogles my 17-inch MacBook Pro and 24-inch Apple screen. She goes so far as to run her fingers over the logo. “Made in China!” she beams. There is pride in the fact that Apple devices are made here, even if the IP comes from elsewhere. They are obviously built very well, which is more than you can currently say about Chinese-assembled cars or buildings. Apple computers may well be the most famous high-quality product coming out of China right now, and the Chinese know it.
- Take a subway in China during rush hour and you will see few Chinese reading books or newspapers — the subway is far too crowded to claim that much personal space. Instead, more than half are pressed against their multimedia devices — hacked Sony PSPs, shanzhai touch-screen gadgets, or large-screen mobile phones — often scrolling attentively through long texts or watching soaps.
- Luxury good brands usually tackle China by setting up shop in the most prestigious mall available and then running an ad campaign. These high-end malls are always empty when I inspect them, because very few Chinese right now can afford what’s on offer — but that’s OK: The idea is to stake one’s claim early as an aspirational destination, to be that symbol of success craved by the Chinese, so that when they do all eventually achieve success in droves, they will be preprogrammed to want…
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Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
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This whole week did not feel right to me.
We were too bearish as I had expected a bogus commodity rally in last weekend’s wrap-up but I didn’t expect it to persist for a week, even as the dollar held it’s ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850. Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%). Let’s say gold is a true indicator of dollar weakness - that means that only 33% of oil and copper’s move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we’ll give it to them). Can the rest be attributed to demand?
Certainly not with copper. Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays’ very aggressive targets for China growth only bring global demand up 2.5% this year - whch would just about bring us back to 2007 levels of consumption. That, of course, also assumes a rebound in housing construction - something we are not seeing at the moment. Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper. As you can see from the chart - that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.
Oil is just as silly. According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 - and that is with some very rosey estimates of a global econonomic recovery - exactly the type of thing that can be derailed by high oil prices! Mighty China’s consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase. Last week, the US had a build in inventories of 4Mb - we just send those over to China and everyone is happy! I’ve already had my say on oil demand this this weekend, so let’s just move on…
Let’s just say I’m a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery. Prices are not going up based on demand but on expectations of demand in the future and that’s a very dangerous game to play…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Apple Stock Split Rumor Adds Over $100 Billion In Capitalization To The Market In Matter Of Minutes
by ilene - February 25th, 2010 2:46 pm
Apple Stock Split Rumor Adds Over $100 Billion In Capitalization To The Market In Matter Of Minutes
Courtesy of Tyler at ZH
To all who trade this manipulated lunacy, you have our sympathies. A 1% market move equates to well over $100 billion in market capitalization. And this value just materialized because Apple stock will (allegedly) be $50/share instead of $200, so the quadrillions in cash on the sidelines can buy buy 4 shares where before they could buy one. Just brilliant. Goldman/JPM/33 Liberty just raped everybody for lunch. And to complete the lunacy, this just made top Bloomberg news. The absurdity is just surreal. In other news, the Greek revolution will be televized in 1 minute YouTube 360×240 mp4 clips via iPhone.
Feb. 25 (Bloomberg) — U.S. stocks pared losses, rebounding from the biggest drop in three weeks, as the Dollar Index reversed its advance and Apple Inc. shares jumped.
The Standard & Poor’s 500 Index retreated 0.6 percent to 1,098.49 at 2:03 p.m. in New York after slumping as much as 1.7 percent. Apple pared its drop to 0.2 percent.
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Prior Weekly Wrap-Up - February Expiration Day Special!
by Phil - February 19th, 2010 7:17 am
I didn’t get to do a wrap-up last week so we have a lot of trades to go over and, with expiration looming and the Fed tightening, I thought it would be good to just get the list out on Friday so we can adjust our rolls to March where neccessary (in bold under appropriate positions).
In our Feb 7th Wrap-Up, I was gung-ho bullish saying "It’s Only a 55-Point Drop You Wimps!" and we had been BUYBUYBUYing at the bottom all week, especially Wed-Fri as the market spiked through our projected support at Dow 10,000 but not enough to change our minds as we bottom-fished on AAPL (2 trades), ABX, ACOR, AKAM, AMED, BRK/B (2), C, CCJ (3), CSCO, DELL, FXI, GE, GOOG, IBM, LLY, LOW, NLY, TBT (5 times!), TM (3), TNA, USO (yep, we wen long oil) and UYG. To say we were weigting bullish by that Monday was an understatement as we has finished the weekend in a bullish stance and were relying on our disaster hedges to protect us.
Those disaster hedges are an interesting set to look at, especially now that we’ve recovered 400 points:
- DXD July $27/33 bull call spread at $2.50, now $2 - down 20%
- We can roll the $27 calls to the $25 calls for $5 to widen the spread and drop our b/e from $29.50 to $28.50
- EDZ July $3/8 bull call spread at $2.10, now $1.60 - down 23%
- EDZ Apr $10 calls sold for .70, now .15 - up 78% (pair trade)
- SDS 2011 $36/40 bull call spread at $1.30, now $1 - down 18%
- We can roll the $36 calls to the $33 calls for $1.10
- TBT Jan $35/45 bull call spread at $6.30, now $7.40 - up 17%
- TBT March $50s sold for .65, now $1.22 - down 87% (pair trade)
This is what is great about disaster hedges. The potential upside on these spreads, if the market headed south was up about 100% on the 4 trades so a commitment of 5% of your portfolio to each one (20%) would give you back 40% of your portfolio in cash if the markets tanked. Already, after 2 weeks, we have the markets heading in the opposite direction and what is the cost? Not even 20% of the 20% you may have allocated, a 4% insurance premium while the 80% of the portfolio that is bullish caught a huge rally up and this insurance is still good through July!
Monday (2/8) Market Movement
I pointed out how much chart people love…
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Love Letters (Weekend Reading on Valentine’s Day)
by Phil - February 14th, 2010 8:25 am
Happy Valentine’s Day!
Last Valentine’s Day was as Saturday, following a frightening Friday the 13th, where we had fallen through the 8,000 line on the Dow. I wrote a very interesting post that morning discussing how I came about my political views, which is good for new Members to check out. We also flipped short that day on SKF, too early at $130 but that ended well as we kept after them and it was our biggest bet by March 6th, which eventually returned over 1,000%. We also stopped shorting GOOG at $350 (it did keep going to $300 but the upside was nice too). I closed the morning post with:
For us, it’s all about the levels as we try to remain unbiased as investors, no matter how voraciously we defend our political views. Dow 7,800, S&P 820, Nas 1,460, NYSE 5,100, Russell 437 and SOX 203 all better continue to hold today but, even if they do, we’re nowhere near where we want to be and we’re going to take some bearish covers into the weekend - just in case. So whether you are a witch celebrating the horrors of the 13th or waiting for a rose from your true love the next day, remember to be careful out there - we are certainly still deep, deep in the woods!
That Tuesday (Monday was President’s day) we fell 300 points and another 300 points by the end of the week! That was a fitting way to mark the 80th anniversary of the St. Valentine’s Day Massacre when Al Capone’s "South Side" gang, dressed as cops, rousted a garage run by Bugs Moran’s "North Side" gang and had them stand against the wall and then executed all 7 men. They shot them 70 times with machine guns and made their escape by using the Capone men dressed as cops to "arrest" the other Capone men and drive them away from the scene in broad daylight. Now that’s what I call a good plan!
Here’s a great chart that summarizes our year to date. Someone else found this, I wish I knew how to use StockCharts this well, they have tons of good things in there:
It’s a bit worrying that XLU is doing so poorly - so much for diversification keeping you safe… It’s going to be worth rummaging through the utility companies looking for good dividend payers who are on sale. SO is one we like to play with a 5.6% dividend and, as long as they…
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Wintery Wednesday - Are We Now Corrected?
by Phil - February 10th, 2010 8:21 am
Was that it?
A 10% correction (David Fry chart on right) and we’re done? If so, this is still a fairly bullish market, and it should be, as our sell-off last year was, beyond a doubt, way overdone. Often people forget the fundamentals of investing and the biggest fundamental of them all is: "Where else are you going to put your money?" There many fine companies out there with P/E ratios that are below 15. That means if you give them a dollar, they will return 6.6% in earnings. IBM has a PE of 12, which is an 8.3% return on my money and, according to projections, that will improve to 11 next year, generating 9 cents for each dollar I give them.
Call me an optimist but I think IBM is a fairly safe place to keep my money. Perhaps as safe as 4% TBills, or 7% Greek bonds or 3% Yen Notes or, Heaven forbid, a bank! In fact, not many banks are paying 1.8% on your deposits but IBM does through dividends. IBM was my example trade in the Weeekend Wrap-Up so I won’t get into strategies here but that is what our whole Buy List is about - picking up great long-term values and hedging them to even more effective entries.
Not every stock is as rock solid as IBM but (going back to the Wrap-Up) who did we buy when the chips were down last week? C, CCJ, TBT, GOOG, XLF, AAPL, AMED, CSCO, TM, LOW, AKAM, LLY, NLY, GE, TNA, USO, ABX, DELL, FXI, UYG, BRK/B. Not exactly a radical collection of picks is it? Yesterday, with the market up 2.5% from our shopping spree - we bought NOTHING. Part of the "buy low - sell high" philosophy is waiting for the market to be either high or low. Two weeks ago, on Jan 29th, I charted 10,058 on the Dow as a critical support line and, from our Buy List Update this weekend, I put up the following chart for Members:
And where did we finish yesterday on the Dow? 10,058. See, this charting thing is easy - that’s why I don’t usually bother, it’s dullsville! Let’s now turn our attention to our other major levels of 10,165 and 10,300 which, keep in mind, is nothing more than our predicted "weak bounce" off the drop from 10,700. As I said in the above chart, we can expect to be "tight and bouncy," which is what we’re seeing this week as…
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Weekly Wrap-Up, it’s Only a 55-Point Drop You Wimps!
by Phil - February 7th, 2010 12:19 pm
That’s right, I said WIMPS!
I have never heard so much whining and crying and complaining about a market drop as I have the past few weeks. Last week, I pointed out that we had only fallen 105 points from the prior week (10,172 to 10,067) and this week we fell ALL THE WAY to 10,012 to finish the week and you would think the world was ending (again) from the way the MSM has been acting.
By Friday the panic was palpable as we gave up Monday and Tuesday’s bogus gains to test new lows for the year - testing, in fact, the lowest levels the market has hit since last November and I pointed out in Friday’s post that it reminded me of when BSC and LEH went under and everyone panicked and sold Financials off to the point where Warren Buffet was willing to give GS $5Bn AFTER they bounced 50% - THAT’s how undervalued the financials were in November of 2008.
What do we do while people are panicking? We BUY! We don’t BUYBUYBUY like Cramer’s Pavlovian Peons but we sure do BUY and take some nice entry positions with sensible hedges. I was finally motivated to finish updating our Buy List on Friday and 18 of our 38 positions were highlighted (immediately actionable) on Friday. Sure they may go lower, but we’re buying them with 20% buffers built into the positions and then we can double down if they drop 40% (back to Nov 2008 lows) and then we’ll have our entries down 10% from the lowest levels of the past decade or so that we can hold until the next decade - what’s there to panic over?
If I wanted to buy IBM in January but thought it was a little pricey at $134, why would I not be HAPPY to have the opportunity to make an enty at $122, back at where they were pre FABULOUS October earnings? I can buy IBM for $122 and take advantage of the panic-induced VIX at 26 to sell July $125 calls for $6.60 and the July $120 puts for $6.65 for a net entry of $108.75 with a call away at $125 for a $16.25 profit (15%) in 5 months. If IBM should fall below $120, we will have a second round of the stock put to us as $120 for an average entry of $114.38, another 6.2% lower than it is now. If we were more worried, we…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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