Weekly Wrap-Up
by phil - August 26th, 2007 5:04 pm
Last weekend I said "It's hard to see a bottom except in retrospect" at the same time as I put up the Thought for the Day, which was basically that you can be TOO safe and perhaps it was time to do a little bottom fishing. Last weekend we were bullish by accident as Thursday's drop and recovery took us out of our short positions but this week we put capital back to work, albeit well-hedged as we still continue to see some scary fundamentals.
Above all else, lets remember that this market rally was based on the Fed Funds Futures starting the week pricing in a 100% probability of a half-point rate cut on September 18th, something I consider very unlikely to actually happen. Nonetheless, we have the chance to remain irrationally exuberant until September 6th, when it is very likely that the ECB (the bank of the World's #1 economy) gives us a cold slap in the face with a rate hike of their own. This is, of course, just my prediction but I was just there checking things out and that's my call…
Option Sage, who took his turn to vacation this week, made the call last Sunday that "The result of a weak dollar is likely going to mean a continued stock market rally. It appears to me that we could rise up another couple of hundred points on the Dow before encountering a down-trending resistance line that began with the 14,000 peak and continued with the 13,600 rejection." The Dollar did indeed pull back from resistance at 81.50 all the way back to 80.68 (1%) while the Dow climbed 250 points (1.9%) a gain that appears slightly muted when priced in Euros or Yen.
Happy Trading was also looking on the bright side last Sunday stating:…
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Friday Virtual Portfolio Moves
by phil - August 24th, 2007 6:35 pm
DIA – as I don’t have a lot of faith in the upside I’m going with Sept calls, maybe 300 against my 400 Sept puts, which I am starting to roll to October.\
CFC – I think it holds $20, no sense in being greedy.
Dow strangle – risky if you aren’t playing it out of an existing hedge but effectively I try to pick up the two strikes closest on each side which, at the moment, are the DIA $132 puts (already have) and the $133 calls, both $2.50. To make this work you need to stop out of the losing side and let the winning side run and we are hoping for a BIG day, like we had last week.
Of course it’s best to work our way into these by buying low and selling high so, if I were going in fresh I’d start out light and just hope to get a chance to buy cheaper if the Dow channels for a day or so. Don’t forget there is no economic data on Monday and we do have the possibility of some M&A news (as well as a sub-prime disaster). If it’s a normal Monday, we’ll open higher – possibly a good time to buy puts.
Meanwhile new home sales are suddenly up 2.8% so it’s a good thing I did cover that upside! Watch those puts people, kill CFC for sure! XXX
Not a very impressive move on that housing report. I think people are fed up.
Gold over $670, not good.
Market rally – sadly it’s oil that stands the most to gain.
GOOG calls – I’m thinking of selling some – how much are you offering? I am going to cover into the weekend, I picked up some quick bucks yesterday but stopped out, hoping for another crack at $515 so I can sell the $520s for about $13, I feel safe(ish) with that one as…
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TGIF!
by phil - August 24th, 2007 8:58 am
Let's go markets, let's go!
Well we've tried everything else, we may as well pull out the cheers. Of course all the cheering in the world doesn't help if your team sucks so let's hope for the best…
I've gotten my depressing article out of the way so let's accentuate the positive this morning and look for some positive signs to develop. Japan pulled back just a bit and the Hang Seng gave up a little ground while the Shanghai continued to post new records.
Europe was drifting lower but US durable good were up a surprising 5.9% in July, which is a nice ray of sunshine and those markets are ticking up in their afternoon. Both the US and Europe shook off a lot of good news yesterday and went nowhere and I will remind folks that last Friday we had a good start and a bad finish too so let's not go crazy. My intention is to strangle the Dow by the end of the day so a 300-point move either way next week will add to our cash reserves.
Although durable goods are nice, that was July and they will be followed by July New Home Sales at 10 am and no prize for guessing how that will come out. Next week we lead off with Existing Home Sales on Tuesday followed by Consumer Confidence and the Fed Minutes on Wednesday (and of course Oil Inventories). Thursday will be a biggie with the Preliminary GDP report and the Preliminary Chain Deflator, Jobless Claims, Personal Income and Spending. We finish off the week with the Core PCE Inflation, Chicago PMI, Factory Orders and the Michigan Sentiment. Yep, you've gotta love the 300-point strangle…
We are just skating along at critical levels in this no-data week when CBs have been dumping Billions on the markets every day to support them – that data had better be darned good next week or the panic will become palpable!
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I Will Gladly Pay You Tuesday
by phil - August 24th, 2007 8:09 am
Are hedge funds turning into wimps or, in this case, Wimpys?
Our depression-era hero was famous for saying "I will gladly pay you Tuesday for a hamburger today" and that seems to be the game plan of hedge funds who are telling all the rich folks to please, please, please not panic as they clamor for withdrawals.
The problem is (aside from the fact that these funds' performance have pretty much gone down the tubes) that there is not enough ACUTAL money in the world to pay these rich people what they thing they're worth. That's what a liquidity crisis is, not enough actual cash to back up our phony-baloney asset prices.
I wrote about this problem back in March, but no one listens to me. At the time I warned: "We have taken a couple of Trillion dollars of discretionary income out of the hands of average Americans and put it into the hands of wealthy people who put it into the hands of brokers who put it into the hands of oil companies who buy back their own stock and employ no additional workers and produce nothing new other than better balance sheets! This is not a platform for long-term economic growth!"
In short – nobody EARNED those dollars your virtual portfolio is stuffed with. No goods and services were created, we simply decided that a $200,000 home was "worth" $500,000 and that a $45 barrel of oil was "worth" $70 while simultaneously telling employees that their contributions were worth less. That was OK(ish) as long as employees had the illusion of wealth because their primary asset, their homes, was increasing in value and low rates let them borrow against them (in $Trillion$) but now it turns out those fully leveraged homes may NOT be worth $500,000 which puts both the consumer AND the lender in a bit of a bind.
When the banks phony-baloney balance sheets are full of assets that are backed by securities that may be overvalued by 15-20% and some joker says "show me the money" – well, funny story actually… There isn't any!
Or at least there's a lot less than you thought there was. As George Bailey tries to explain to the worried townsfolk: "You're thinking of this place all…
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Thursday Wrap-Up
by phil - August 23rd, 2007 10:52 pm
Another day that went pretty much as we expected.
There was no head-fake today, our indices headed pretty much straight down from a strong open but, very disappointingly, the levels we wanted to hold; Dow 13,250, Nasdaq 2,550 and S&P 1,470 quickly turned into firm upside resistance.
Both Happy Trading and I were forced back to more cash and I don't like the sound of that as we are rarely both nervous at the same time! Happy did manage to close out NOV Sept $120s with a 32% profit and we both got out of our current Apple calls (sadly but profitably) and it only took until 10:03 for me to comment: "DD on my DIA $132 puts and adding back $130 puts at $1.75 as pre-roll. Just a little nervous looking at the internals."
MRN made a great early call to re-up the puts on CFC as we thought little of the BAC emergency loan and he promised at 9:48 to "pull CFC down to fill the gap by sheer will power!" Let's hear it for the power of (I guess) negative thinking! Between my Monday's printing of the day's chart before the open and MRN's psychic abilities, we are becoming quite the market force…
We tried to maintain a positive attitude but by 11:10 we gave up on our DIA calls, turning the virtual portfolio net neutral and went back to pulling profits off short-term contracts. By 11:17 we were covering our Long-Term Virtual Portfolio plays as CFC's CEO decided to give MRN a hand by saying he couldn't see the housing crisis NOT leading us into a recession!
It's very nice to be a part of a well-hedged group, we spent the afternoon talking about martial arts, kayacking and nice vacation spots while tossing around a few trades but nothing that happened this week has caught us off guard. My macro view of things for the afternoon was: "Holding 13,200 is not too bad. Let’s keep perspective with the Nas over 2,525 and the S&P over 1,450 we would have been thrilled to be here last week! Europe had a crap finish, giving up a full point of gains from open to close – as I said in…
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Thursday Virtual Portfolio Moves
by phil - August 23rd, 2007 6:17 pm
CVX and SU $85 puts are XXX up here.
DD on my DIA $132 puts and adding back $130 puts at $1.75 as pre-roll. Just a little nervous looking at the internals..
This is an energy sector rally – not a good way to recover. Whenever GM leads the Dow higher I tend to want to go the other way…
CCJ/UTX – both are plays I think are at bottoms so I am not anxious to cover down here. Of the two, UTX makes me more nervous but $72.50 has been rock solid support and I can always sell the $70s on the way down and pick up more than the $1.15 currently being offered for the $75s so that’s my current attitude. At about $2 I would get interested in selling the $75s.
MCO getting crushed, kind of unfairly but there is a huge overhang as people (congresspeople that is) question their role in allowing this sub-prime mess to escalate by handing triple-A ratings to what turned out to be junk bonds. Still the Jan ‘09 $60s are just $9.20 and you can sell 1/2 the Sept $45s for $4.10 ($2.20 premium) and 1/2 the $50s ($1.50 and $3 out of the money) for a nice first month return as I really doubt they will recover soon. XXX
Bye bye oil patch – gas inventories weren’t very exciting and these guys have nothing to hang their hats on. If the NYMEX turns red, this could get nice and ugly. I’ve been waiting for an excuse to press my XOM ‘09 $75 puts, now $2.15 back up and this is it! XXX
Stopped out of DIA calls, will reset them if we turn back up but not likely I think. Will take profits off the table on uncovered short-term calls…
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Thirteen Thousand Three Hundred Thursday?
by phil - August 23rd, 2007 9:26 am
A nice open seems virtually guaranteed this morning and we should blow past my 13,250 target.
As long as we hold it I will be very happy and the Big Chart lists 13,300 as our "Comfort Zone" for the Dow, who had been our leader on this leg of the recovery but was leapfrogged by the Nasdaq, who shot right over 2,550 with a mighty 31-point jump, led by 3 of Cramer's 4 Horsemen; AAPL (+3.9%), AMZN (+1.3%), GOOG (+1.2%) with RIMM holding steady at a ridiculous post-split $81.81.
As Option Sage mentioned in his excellent post on the Horsemen last month: "The bargain of the group based on P/E multiples and projected EPS growth would seem to be Google. Google trades at a multiple of 45 and a forward multiple of just 27 despite EPS growth projections of 30%." That was July 24th and Sage predicted further pullback but we've been picking up Google calls as our 2nd favorite tech play (no points for guessing our favorite – too easy!).
There can be no real rally with Google below $525. I won't get into all the reasons here, it's a whole article in itself, but 2008 gives us a Presidential election, the World Cup, Winter and Summer Olympics – it's the Superbowl of advertising, which is where Google derives the majority of their revenues and they have been firing on all cylinders lately so we can expect a string of record numbers going forward. Also, I was fascinated last night by the World Clock (thanks to Windywheel), which shows an absolutely astounding minute by minute increase in Internet Access Points as they are added 15 times faster than people are being born! In a single minute over 2.000 new web connections are formed and that bodes (or should I say "nodes") very well for the on-line marketplace.
![[Toshihiko Fukui]](http://online.wsj.com/public/resources/images/HC-GC296_Fukui_20051012124651.gif)
I've been talking about how the CB's have stepped up to bail out the rich folks before they suffer the anguish of a market pullback and the BOJ stepped up to the plate today and reversed their decision to hike rates at this meeting. Japan's Governor (who's name you will never hear on TV or Radio) had previously stated that the bank was determined gradually to close…
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Wild Wednesday Wrap-Up
by phil - August 22nd, 2007 11:46 pm
Well that went pretty much as expected!
As BillBigD noted in yesterday's chat, it's "Amazing what 700 points does."
We stopped just short of my 13,250 target with a strong 50-point move into the close but we got everything we wanted this morning with better than 1% gains across the board giving us new green boxes on the big chart in the NYSE, Transports, 2 on the Nasdaq, and the SOX while stopping us just short of our green levels in the S&P (6 points to go) and the Russell (1.5 to go).
Europe had a good showing as well but the CAC and the FTSE had a long way to go so we MUST have follow-through leadership over there if we are going to continue to rally over here. As I said this morning, we also need Japan to show us something special as they are dragging Asia down and mSquare reports from India that the market there is taking a cautious tone and expecting further corrections. The Bombay Sensex was looking strong at 14,248 and we really don't want to lose our levels there. They are in our comfort zone at 14,100 but they must hold 13,500 or it is likely that they will become the downside leader for Asia so we will watch them with great interest!
I said in the morning that this rally was the result of a massive global effort on the part of the central bankers to bail out angry rich folks like Senator Kent Conrad (and his string pullers), who wants to fire Fed officials who let the market drop.
On the whole We're getting close to a 50% retracement on the Dow Jones World Index from our peak around 313 to the drop at 278 and we are going to be retesting our February high (remember 2/27?) tomorrow. Once we clear 290 we can expect a full 50% move to 295 (which is the same center point you would get if you threw out the spikes..). How we act there will really tell the tale of the markets.
Meanwhile, our FXI calls from the 16th look to be in good standing but they should be rolled at this point the $125s are up over 400% and it doesn't make sense to risk it so the…
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Wednesday Virtual Portfolio Moves
by phil - August 22nd, 2007 6:21 pm
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Wild Wednesday Morning
by phil - August 22nd, 2007 8:07 am
Yee-haw, here we go!
Another day, another 600-point gain for the Hang Seng, now back at 22,346 and up a healthy 3,000 points from Friday's low. Are they crazy or are we simply missing the party?
David Fry notes that we are not getting the index action we would expect of such a bold move in the China market but I'm not surprised, I went to cash this month and, as we can see from the treasury action, so did pretty much everyone else. The problem we've been discussing on the member site this week, as we sit around counting our cash, is that there simply aren't any "good" alternatives for our money!
- Cash – dollar is unstable
- Mutual Funds – underperforming the markets
- Money Markets – low returns
- International Funds – too scary
- Commodities – looking toppy
- Hedge Funds – aren't they being investigated?
- Real Estate – LOL
- Bonds – low returns and looking riskier
- Mortgage Backed Securities – ROFL!
US equities anyone? We may actually be the least sucky place to put your money in the second half of '07. For foreigners, the dollar doesn't seem like it can go much lower and for local investors, it's hard to find a place to park a significant amount of capital. Sure we have this overhang of sub-prime mortgages and we're fighting a war of attrition for goals we're uncertain of at an absolutely staggering cost while plunging the economy onward to $10T in debt but – so what? We've been doing that since 2003 and the market is up over 50% since then and last year I dubbed it the Meatball Market because bad news Just Doesn't Matter!
We touched 12,500 (a 10% correction) and are likely to see it again but, if we can consolidate around 13,000 for the quarter, there are enough pockets of strength among our 9,000 public companies that we may get a chance to rally around a new leadership. That will let us markets take us to new highs that can be sustained on fundamentals – an that's a good thing!
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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 site