by Option Review - October 18th, 2013 4:46 pm
by Phil Davis - October 19th, 2012 8:30 am
25 years ago today, the market fell 22%.
You never know what's going to panic the markets – since then we've had many other sudden corrections like Black Friday just 2 years later and Black Wednesday in September 1992, we've had the dot.com collapse and 9/11 and whatever you call 2008 and recently we had Dubai and Greece leading to sudden crashes and the ubiquitous flash crash and whatever happened last August (Europe again).
So stock markets are dangerous places to keep your money, on the whole. That's why TZA (ultra-short Russell) is our primary hedge in the Income Portfolio and, as I mentioned in last Wednesday's post, should the S&P fail to hold 1,440, then the Dow has little support all the way down to 13,295 as well. Just this Tuesday, I reiterated a TZA spread Members could use for general portfolio coverage:
Ultra hedges/Bdon – You just can't beat TZA at $15. The Jan $12/15 bull call spread is $1.50 so 100% upside if TZA simply doesn't go any lower. If they do go lower, you can sell the April $11 puts, now .50 for $1 (the Apr $12 puts are .92) before your $1.50 is even out of the money and then you'd be in the Jan $12s at net .50 and worst case is you get assigned at net $11.50 in April but, of course, you can roll or simply accept the assignment and cover and then you have more long-term protection.
We like to buy our protection when the market is going up – it's cheaper that way! TZA was at $14.75 at yesterday's close and the Jan spread was still about the same $1.50 but it's $2.75 in the money – all we need is for TZA to not go down (Russsell not to go up) and we make a tidy profit. That's a good way to hedge because the only way that hedge loses money is if the market breaks higher.
We're not turning bearish yet but, as we're seeing some pretty serious misses (GOOG and CMG yesterday, for example) and some pretty strong reactions to those misses – it is a good time to make sure people do remember the value of hedging. If nothing else, it's a piece of mind that lets us ride out these dips without worry. Also, of course, it's good to…
by Phil Davis - October 18th, 2012 8:03 am
EU leaders are meeting in Brussels today and tomorrow.
For anyone who's been paying attention for the last two years – that's usually not a good thing and, as we noted yesterday, it was a strong Euro and a weak Dollar that was driving our little rally. The Dollar bottomed out at 79 and the Euro topped out at $1.314 and the Euro's strength sent the Yen back up to 79.30 to the Dollar (weaker) and that led to a 2% Nikkei rally last night. As you can see from the chart on the right, the S&P for the week is 1% behind UK and Germany and 2.5% behind France and Italy (+4%) and Spain (+7%) – so we have a lot of catching up to do if this rally is real and sustainable.
Still, I sent out an Alert to Members early this morning noting that the Global Markets were holding up well as of 6am and that was encouraging. Yesterday we discussed taking advantage of the run-up in the Russell to make a TZA hedge to lock in some of our gains (see main post) but we still haven't covered XLF (target $16.50 – see Dave Fry's chart) and we're still bullish on AAPL as well. We cashed that ISRG play, as planned for $9 on the spreads (200x = $1,800), spending .30 x 200 ($60) to buy back the callers so that, with the $200 we were paid to take the position is just short of our $2,000 goal at net $1,960 – not bad for a day's "work".
In Member Chat this morning, we discussed GOOG's outlook for earnings this evening and decided they were more likely topping than popping so we have that risk to the Nasdaq for tomorrow. IBM was an 80-point drag on the Dow yesterday but it did manage to finish flat and advancers led decliners on the NYSE by 2:1 so the conditions are still there for a rally and hopefully what we have here a a pause that refreshes and not a triple top from the mid-September highs.
The Nasdaq and the Russell are, in fact, in downtrending channels and, for the Nasdaq, their fate rests on GOOG tonight and AAPL next Thursday – but it's still a long way back to the highs at 3,200.
by Phil Davis - October 11th, 2012 8:19 am
"We don't see the focus on poverty as about charity, but rather about investment in future growth."
World Bank President Jim Yong Kim outlined his vision of what the multilateral lender should do, focusing sharply on cases of significant poverty. Dr. Kim said economic-growth expectations were being scaled back everywhere but that he was determined to prevent the substantial gains made by emerging economies over the past decade from being wiped out. "Every country has to look at its public spending and see what works," he said.
The World Bank had their annual meeting in conjunction with the IMF in Tokyo this week and Dr. Young's message is no longer the opposite of Christine LaGaurd's, who has essentially come around to thinking that austerity is no longer the answer – pushing for debt write-downs for Greece, Portugal and Spain as well as backing Greece's request for two more years to meet its fiscal targets. “We will spare no time, no effort to actually do as much as we can in order to help Greece,” Lagarde said. The fund’s purpose is “to make sure that Greece is back on its feet, that it can one day return to markets, that it doesn’t have the need for constant support.”
Meanwhile, Spain was downgraded to one notch over junk (BBB-) with a negative credit watch by S&P last night but it was more of a "buy on the news" event this morning as it's certainly not a shocker that Spain's paper is worthless without the ESM backing. Yields on 10-year Spanish bonds shot up 9bps to 5.89% but stopping short of 6% was considered a positive. Spain is the poster child for the idiocy of using austerity to combat debt (ie. the Romney plan) as squeezing the economy by cutting Government spending has actually worsened the country's fiscal position, which has led to calls for greater austerity but these calls come from bankers and bondholders – who just want to get paid, no matter the long-term damage done to the borrowers.
“There is no chance that Spain will hit its targets,” said Megan Greene, director of European economics at Roubini Global Economics LLC, “The deficit targets are economic suicide.’ “Even as you cut, the gap between spending and revenue collection keeps getting larger,” said Jonathan Tepper, a partner at research firm Variant Perception. “We’re…
by Phil Davis - June 29th, 2012 7:47 am
I love it when a plan comes together!
As you know, we took an aggressive, protective short on Wednesday afternoon so it was "wheeeeeee!" on the dip with our prediction of XLF hitting $14 coming in to the penny while our JPM bottom target of $34.75 missing by .10, as we bottomed out at $34.85 before popping back $1 (3%) but, in all fairness, I did say "around $34.75" in the morning – so we knew it wasn't an exact target.
While we bottom-fished all day, I officially called the turn at 2:48, saying to our Members in Chat:
If you want a thrill ride, you can now buy the QQQ next week $61/62 bull call spread for .55 and that should be able to stop out with a .20-25 loss if things go badly tomorrow but make a nice double if the Qs head back up (now $61.58). Note we got wiped out on our this week $63s so not at all a sure thing.
Also, UCO just seems silly at $23.50 with July 4th coming up – I like the July $23/24 bull call spread at .50.
TNA next weekly $47 calls at $2.15 are also fun but those can cost you if things go the wrong way but TNA was $50 2 days ago and $52.50 2 weeks ago so they could make a nice payoff quickly.
Damn, I guess I still think the EU comes through tomorrow….
We didn't have to wait until tomorrow, of course. Someone (who will never be investigated) jumped the gun with a $3.3Bn block purchase of 50,000 S&P E-Mini Futures and that reversed almost all of the day's drop into the close. Then we got word of the expected $120Bn whatever they are calling it from the EU after hours and we got even better news at night as they took various steps to do stuff that I really don't care about because it isn't enough cash and it's going to fail again unless they pump it up by about 3x today.
by Phil Davis - May 18th, 2012 8:24 am
The World is still going to Hell but LOOK – FACEBOOK!
Ah, Facebook will save us. They have magical powers and will turn around the $60,000,000,000,000 Global equities markets with their $16,000,000,000 IPO, right? I mean, who are we to question the power of Social Media – probably the single biggest drainer of productivity in the history of all mankind?
How many Billions of hours of lost productivity have Facebook's 900M users put in over the past few years? How much is it worth to turn millions of people into couch potatoes and can those ever-fattening eyeballs be converted into advertising Dollars? That's the real question as Facebook currently does a pretty crappy job of converting – roughly 1/6th as good at it as Google is.
That won't matter to the people buying Facebook in a Frenzy this morning as they release about 400M shares at $38 a share and I predicted we'd end the day at $45 but maybe $50 or even $55 on a spike up during the day. We at PSW don't have much interest in playing these silly stocks until there are puts to buy (5/29) and then, if they are still in this nosebleed range – we will be very excited to short the hell out of this stock, which is really worth $25 tops.
So we are rooting for Facebook, as it will be two weeks before we can short them with options and we would love to see them at any idiotic valuation at that point. Even with 900M users, a $100Bn valuation says Facebook's users are worth over $100 each. Yelps users are worth just $20, Instagram's $30 and Twitter's $70 – but Twitter isn't public either so that valuation is nonsense.
In fact, no public company values users like Facebook is and 900M means not all these users are Americans or even Europeans, where the average per-capital GDP is about $40,000. No, we're into Asia and the 3rd World here were it's more like $5,000 per person on average. Are we really supposed to believe that Facebook will convert just as much revenue from a man who makes 100 rupees a day as they do from the average US consumers on steroids?
by Phil Davis - May 17th, 2012 8:04 am
What a week to do an IPO!
Will Facebook save the markets tomorrow with a successful roll-out of the largest IPO of all time or will it be the straw that breaks the camel's back, with a disappointing open that sends the Nasdaq off a cliff along with their entire over-priced sector? Either way – this is going to be fun.
We can argue the merits of Facebook's value (or lack thereof) all day long but, scam or not, it's very likely FB will set off a buying frenzy in the space and we finish the week off with a bang. If that doesn't happen – I will be very, very bearish but from what I'm hearing and the way they are extending the offer and raising the price – it's way oversubscribed. Also, we have to consider that people are cashing out 1-5% of their holdings to raise cash for FB on Friday – sure it's moronic, but that's what people do so you have to put yourself in a position of someone who wants to put 5% of your portfolio in to Facebook (the way you wish you had put 5% into Google at $80 when they IPO'd) tomorrow – what would you be doing with the rest of your portfolio today?
Meanwhile, the rest of the World is falling apart with Europe turning sharply lower as Spain sells bonds at record high yields (5.106% for 4-year notes) this morning after announcing that their Q1 GDP was -0.4% at the same time as Moody's indicates they will be cutting the credit ratings of 21 Spanish Banks this evening AND, to top it all off – there is a run on Bankia, which Spain nationalized last week – with $1.3Bn pulled from accounts this past week! This sent Spain's markets down 1.6% and Italy (who is next) fell 2%, sending the Euro down 1% to $1.2668 and the Pound followed it down to $1.5832 (while EUR/CHF holds steady at 1.2009 in the most blatant currency manipulation ever witnessed).
Wow – that's a lot of bad stuff! Maybe too many bad things – as in a bit suspicious that all this bad stuff happens at once – as if maybe someone WANTS to force a panic bottom? If so, I applaud them – we certainly needed to shake things up a little…
by Phil Davis - February 20th, 2012 6:37 am
Why do we scream at each other
This is what it sounds like
When doves cry – Prince
It's no coincidence that this week we will be hearing from Fed Governors Kocherllakota (1pm Tues), Hoenig (12:30 Weds), Plosser (1:30 Weds), and Bullard (9:15 Thurs) ahead of our 2-Year Note Auction (1pm Tues), 5-Year Note Auction (1pm Weds) and 7-Year Note Auction (1pm Thursday) as the Fed needs to bring out 4 of it's 5 most hawkish members to talk up the Dollar (by talking down QE3) to keep those rates paid as low as possible for Treasury.
Once the Hawks drive the rates down and the notes are sold, the Doves will once again be released to talk them back up by extolling the glories of QE3 – completely reversing whatever was said before just as the Hawks will once again be called upon to reverse what the Doves say at a later date – when they need rates to come back down. The joke of it all is that traders will react to each statement, every time, as if it's a "game changer" and adjust their positions to reflect the new reality of the moment. It reminds me of a quote from Orwell's 1984:
As soon as all the corrections which happened to be necessary in any particular number of The Times had been assembled and collated, that number would be reprinted, the original copy destroyed, and the corrected copy placed on the files in its stead. This process of continuous alteration was applied not only to newspapers, but to books, periodicals, pamphlets, posters, leaflets, films, sound-tracks, cartoons, photographs – to every kind of literature or documentation which might conceivably hold any political or ideological significance.
Day by day and almost minute by minute the past was brought up to date. In this way every prediction made by the Party could be shown by documentary evidence to have been correct, nor was any item of news, or any expression of opinion, which conflicted with the needs of the moment, ever allowed to remain on record. All history was a palimpsest, scraped clean and reinscribed exactly as often as was necessary. In no case would it have been possible, once the deed was done, to prove that any falsification had taken place.
by Phil Davis - February 8th, 2012 5:16 am
78.50 on the Dollar!
The Yen finally got back to 77 and EUR/CHF back to 1.21 so my theory that the BOJ has given up on the Dollar and moved to boosting the Euro is playing out nicely.
This does not make me more bullish (expecting falling Dollar to boost the markets) because, in the grand scheme of things, this is kind of like now there are two kids building a sand wall on the beach instead of one – sure it will last longer than the wall just one kid was building but, eventually, the tide will get it anyway or, as Jimi Hendrix said more poetically: "Castles made of sand, fall in the sea, eventually."
Once you start messing around with Forex markets, you are messing with major macro forces that are hard to control. Japanese banks have $7.5Tn of Japanese bonds at 1% – what happens to the value of those bonds if the BOJ does push the Yen down 10%? Who takes that $750Bn hit? What if rates go up to 2% – what's the value of the bonds then? Who will bail out the Japanese Banks when they have a multi-Trillion Dollar (several hundred Trillion Yen) hole in their balance sheets? Do Japanese spreadsheets even have room for Quadrillions? They are going to need it!
Then there's this Bloomberg article on the Central Banks, who have doubled their balance sheets since 2006 to $13.2Tn but, magically, have caused no inflation (according to Ben Bernanke – not according to people who actually buy food and stuff). China is now sitting on $4.5Tn of other people's TBills (mostly ours) and that's up $1.5Tn in a year. The ECB is right behind them with $3.6Tn and another $1Tn supposedly coming in the next EFSF round and the Fed has $2.9Tn plus whatever nonsense they are running off book.
So, how is it that WE are the bad currency here? If the Dollar is a problem, then China, who's GDP is only about $8Tn (optimistically, possibly $5.5Tn depending on who's measuring) is almost as insane as Japanese bankers and maybe more so as they are betting on our country's ability to pay and maintain the value of the Dollar (already a fail, right?). I suppose no one can ever recognize losses and just carry more and more junk…
by Phil Davis - December 12th, 2011 8:27 am
That was easy!
Who’d have thought Europe’s problems could be over just like that? Certainly not us, as I was quite skeptical Friday Morning (see yesterday’s Stock World Weekly for the Executive Summary of the Week’s Events). As I noted in Friday morning’s post, we had ended the day on Thursday very bullish – too bullish I decided on Friday morning and I called for cashing out into the weekend at the end of the morning post. In the morning Alert to Members, I repeated:
When in doubt, sell half and, in this case, I want to get back to more cash by the day’s end in the White Christmas Portfolio as the WCP is too bullish and I’m just not in the mood to risk it so we’re not going to be too brave if the "rally" stops or even slows down.
The markets were very kind to us, heading higher all day long and giving us great exits. Heading into the close, we got a bit more bearish and, aside from existing hedges like our EDZ spread (mentioned as our key hedge in last week’s Stock World Weekly), we added DXD (ultra-short Dow) Jan $15 calls at $1.25 but we offset those with short FCX Feb $33 puts at $1.25 in our virtual White Christmas Portfolio, with 10 of those contracts on each side netting a free spread with unlimited upside (with the downside being owning FCX cheaply). As I pointed out to Members, DXD was $18.50 just 3 weeks ago.
At 3:26, just before the close, we added the SQQQ (ultra-short Nasdaq) Jan $16/19 bull call spread for $1.50, which I pointed out had a nice 100% potential upside all by itself but you could also, for example, offset it with things you REALLY want to own if they get cheap – like shorting a GOOG Jan $500 put ($1.20) or an AAPL Jan $320 put ($1.25) or a MSFT 2013 $20 put ($1.10) – the idea is to just thing of what stock you REALLY want to be jumping in and buying if the market throws a 20% off sale. If there’s nothing, then you should be thrilled with the 100% potential gain on the raw spread.