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Weekend Reading

Where do we go from here?

Dylan Ratigan is going somewhere, off CNBC because THEY didn't like the direction he's been taking lately – going after the mechanism of Wall Street that led to this crisis and may well lead to the next one.  Dylan wants to do more investigative reporting and thinks CNBC should take on a watchdog role – as he says in this clip re. Wall Street bonuses "it's not capitalism, it's stealing."   CNBC, on the other hand, wants Dylan to look pretty and lob softball questions at CEOs while parent GE et al feed at the government trough while Dylan wants to tell people "capitalism is broken" and needs to be fixed and regulated.  I don't know where he's going to find a job pushing that agenda but he can certainly find a forum here!

The official G20 kicks off in earnest on Wednesday (the underlings have been going at it for 2 weeks already) and our President is going to make a real World Tour out of it:  Stopping by to see th Queen for tea ahead of the G20, at the meeting all day Thursday, having a Town Hall meeting in Strasboug on Thursday ahead of Friday's Nato Summit.  Saturday it's off to Prague for a speech at the EU-US summit, Sunday he negotiates with Turkey on troops and trade and Monday he'll be in Istanbul before heading home.  So what will you be accomplishing next week?  "President Obama has been talking for many months, if not a year or more, about the need to restore U.S. leadership around the globe," said Reginald Dale, a senior fellow at the Center for Strategic and International Studies' Europe program. "This trip is the first chance, actually, to start doing something about that."

While Obama's away, the bears may play next week and we have tons of data coming:  Tuesday we have Consumer Confidence, which has been below 30 since the Fall, The Case-Shiller Home Price Index, down about 18% since last year and the Chicago PMI, which should give us a small upside surprise from 36 expected.  Wednesday we have the dreaded ADP report, which showed just under 700,000 Jobs lost in February and better be under 650K for March.  We also have Construction Spending and the ISM and Pending Home Sales – all at 10am, so a crazy day ahead there (Crude Inventories at 10:30 of course) with Auto Sales in the afternoon.  Thursday we get a lot of big earnings (see yesterday's post) as well as Jobless Claims and Factory Orders.  Friday is a big day next week with Non-Farm Payrolls for March and the ISM Service report so a very big test for the end of the week (assuming we even hold up through Wednesday).

Next Wednesday the House discusses the Budget Proposal but, as Mark Whittaker said:  "Look, this is Kabuki theatre at this point, because in the House side, Nancy Pelosi doesn't need the Republicans to get the budget through. And in the Senate, I think there's more and more a sense in Washington, that they're headed toward a legislative tactic called budget reconciliation that would allow them to pass the bill in the Senate…without a filibuster."  So we can expect plenty of sound and fury about the budget over the next week that will, in the end, signify nothing.

A couple of weeks ago I had a video that explained the credit crisis but this week's South Park may have surpassed it with this fantastic recreation of what happened to people's money at the banks, I love the assessment of the economy from the economic reporter (3:00).  Also funny was the FOMC's system for "consulting the charts."  Also funny but great advice at the time is this clip of John Stewart giving financail advice to the nation on the eve of Bush's 2000 election.  Gold was $250 at the time and I'll be updating last week's gold play in the comments of that post this weekend.

It's my birthday this weekend so no wrap-up, you'll just have to re-read the articles yourself…  There are several new trade ideas in comments below but we're kind of in wait and see mode for next week.  There's an excellent wrap-up of the week by Tyler Durden of Zero Hedge, which very neatly summarizes why we went bearish on Thursday and remained so over the weekend.  Don't forget I was looking for something like a 5% pullback and "all" we got was 2.5% so far.


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  1. Copied from Friday comments,
    Phil, In your coverage technique, you explain why you use PUT on the DIA, very logical but could you educate me as to why not use Calls on a reverse index instead, in the same vein and since we are buying leveraged insurance, why not buy calls on double negative indexes? My reasoning is since insurance is mostly lost money, I want the best coverage (multiple) at the lowest cost, my double negative calls gives me a payback ratio of 10 to 1 if the market falls 200 points. Of course I loose the money if the market goes flat or up.  That (lost) insurance money is easily recovered with the money made using your very successful Put writing/rolling technique.  By the way, a great thank you for your very insightful daily morning market updates, it is very refreshing to read your macro view of the world and its effects our markets. pc

  2. Phil, I made an error in the previous question, to get a ratio of 10 to 1, the market DOW would have to drop 1000 points. But my point is that with an insurance cost of 1% of the portfolio, I would get almost 100% coverage with the calls on the double reverse.

  3. What’s the point of that S&P chart, exactly? Not sure what the time marks go to, but it doesn’t seem to show the latest upside movement to 830, which is outside the channel.

  4. Based on the bottom and assuming its a daily chart, its ~2 weeks out of date.

  5. Phil, what are your thoughts on MGM?  I bought the Jan 2.5 09′ Calls for 1.65 on Friday but havn’t covered them yet or set up the diagonal.  What are the odds they go bankrupt?

  6. It’s 2pm Time to invest in the Stock Market!!!! $$

  7. Chuck, have you looked into this deeper? I just checked the charts for the previous 10 trading days and they were up after 2pm half of the time and down after 2 half of the time so no better odds than flipping a coin the last two weeks, I would be interested in a longer term analysis…

  8. S&P/Miller – Good catch, it was old and I didn’t realize it.  For some reason I picked it up as a current chart and my bad for not checking the channel!

    I’ll catch up with more later.

  9. Mr Mocha
    I’ve done no real analysis.  Just shared a link.
    However as a simple observation it seems like lately the real time to buy is more like 2:45pm and sell @ 3:55p.  When I first read the article I was kinda surprised they used 2pm as the opening of the window. JMO nothing analyitical.

  10. Just returned from  VA hospital (again) and  want to know best way to get current info re 30 BEST BUYS.  tKS. gabby

  11. DIA/Warp – There are many fine uses for 2x and 3x ultras as cover and we do use them once in a while but the DIA’s are covers that can be on all the time with little effort needed to shift with the markets.  It does not take much luck to turn them into free protection as we sell puts against them along the way while the risk of covering ultras you use for protection is huge as a move IN THE DIRECTION OF YOUR LONG PUT will bury you with a cover.  We just sold FAZ naked puts for example, last week and 3 times in a row they made 20% or more off $5 – THAT’S good insurance!  Another issue it the ultra shorts (or longs) don’t perform properly over time.  On the whole, I like insurance but I like it better when it’s free.

    MGM -  I think they will ultimately get the financing, find another partner or whatever.  The project is too far along to abandon and Vegas is still an attractive investment at these levels.  I like selling the naked May $2.50 puts for .80 or the buy/write of the Jan $2.50 puts and calls for $2.95 for a net of -.10/1.20.  If you have 50% margin requirement this trade costs you 0 and pays $2.50 in Jan if MGM finishes over $2.50.  You can even offset the downside by buying the June $2.50 puts for $1 (brings your net up to .90/1.70 but a BK pays back $1.50 of your loss).   That last is too messy for me but maybe something you can slap on if you get nervous…

    HIG is another good one for a buy/write at $9.41.  The May $7.50 puts and calls can be sold for $4.25 for net $5.16/6.33 so put to you for a 30% discount or called away with a 50% profit!

    ING at $6.18 is also paying some good premium, with the May $5 puts and calls fetching $2.22 for net $3.96/4.48.

    Another interesting play is the Euro (FXE), I’ve been thinking about these options as they don’t really move that much over time.  It’s doubtful the dollar goes higher than $1.20 to the Euro (FXE $120) or lower than $1.50 (FXE $150) but you can buy the Jan $135s for $7.45 and sell the May $135s for $2.83.  It’s a cheap spread and very easy to roll.

    Also strangely cheap to leap is BLK, where you can sell the Apr $130s for $8.10 and buy the Oct $135s for $20, should be easy enough to roll

    2PM – Well it’s time for something  violent most days but it seems to me it could go either way.  Much, much more reliable is buying NYMEX futures at 1:30 and selling at 2:30 every day.

    30 Best/Gabby – Welcome back!  The Buy List was updated last week (under the Portflio Tab) but don’t go crazy until we see if we can hold our levels next week first. 

  12. Hello Phil,
    I went into this weekend very bullish for Monday. I have some large positions in BGU(24.60)  FAS(6.44) and URE(2.48). I do not know what I was thinking. But if Monday is bad I will be toast! Everybody is talking about mutual funds closing their balance sheets  and it will be a bull ride till tuesday. What now worries me is that if everybody is thinking that it might just break the otherway. What would be your call for Monday especially since futures are down.

  13. Sagupta--I also went bullsih financials into the weekend—although the mark to market issue seems priced in somewhat, next week mark to market will be lingering – and i expect some big news later in the week that will spur a feeding fenzy for a short while—positions may be taken early in the week--just a thought

  14. Phil:
    On DIA covers: You’ve mentioned stops on at least some of your highest-delta longs to protect you on an upswing. What do you generally do with stops on your short puts? Put stops in on at least some of those as well to protect you on a downswing? I’d imagine you’d not want to get too cute with these, thereby resulting in your short puts stopping out too soon, just to see the market then move up on you.

  15. Phil:
    trying to understand what you meant in response to Warp’s idea above of a long call on a double negative. Specifically,
    while the risk of covering ultras you use for protection is huge as a move IN THE DIRECTION OF YOUR LONG PUT will bury you with a cover.

  16.  Gabby, welcome back.  I spent a lot of time at the Kentucky VA as a resident.  The best/most appreciative patients.  They have been light years ahead with computerized records.

  17. Bullish/Sagupta – Well, certainly nothing bad happened over the weekend so far.  In fact, I have read very few things worth mentioning at all in the above post.  You are pretty agressive with the BGUs though, especially after such a big run and FAS is always dangerous and URE is just crazy talk!  Other than that, your positions sound fine…  8-)

    Futures just opened back up at 6pm (which is why I went back to the PC ahead of dinner) and they’re fine so far, just drifting along following the sell-off we had Friday but not breaking the pattern so far.  Oil is still under $52 and that’s hurting the energy sector but they should push that along by the time Asia gets going.  The dollar is actually even higher against the Pound and Euro but being supported against the Yen and you can tell it’s BS because the Aussie dollar is off 1% and there is no reason they should disconnect from the Yen like that.  Gold’s up a bit at $927 but still way off Friday’s open. 

    I’m almost tempted to buy Russell futures at 427.50 as they are off 3.3% from Friday’s open while the S&P, Dow and Nas are off about 1.7% but too thinly traded to mess around with right now.  I think the pump monkeys have at least another good day in them and woe unto us if they don’t!

    Don’t foget you can always slap on some FAZ or SKF if the financials start falling, both are good for doubles if there’s real trouble.

    Stops/Chaps – Whenever you are fully covered with short puts you need to recognize you have given up downside insurance so it’s important to stop some out if they break your targets and just be quick to resell them (re-cover the longer puts) if things bounce back.  As with any call or put you sell, it’s good to stop out 1/4 when they gain 25% on you and another 1/4 when they gain 1/2 as a rule of thumb.  There are a hundred good reasons to override that but, when in doubt, it’s better to have some sort of guideline to follow.

    The logic to the uncover move is this.  I sell 20 DIA $77 puts for $2.  When they go to $2.50 I buy back 5 at $2.50.  All this does is lower the net basis of the remaining 15 puts to $1.84 with the puts at $2.50 but now I have 5 naked June puts I don’t have to worry about.  If I set a stop to re-cover at $2.25 then I’ve put the net basis on all 20 back to about $1.94 and I’ve lost a whopping 6 cents from my original cover.  If the DIAs, however, kept going down and down then I uncover another 1/2 at $3, which lowers the basis on the 10 remaining puts to about $1.50 each and I can simply roll them to (guessing) 20 DIA $75 puts at $2, collecting back almost all the money it cost to stop out the 1/2 putters and now I’m covered 200 points lower than I was originally and my spread is $2 wider than it was – all for about .20 out of pocket.

    Again, the way the Dow bounces up and down 200 points every few hours you can’t just mindlessly keep buying and selling but, when we break our levels – it’s time to act!

    Risk/Chaps – If you hold a BGU (3x bull) Oct $21 call for $8.30 because you want huge leverage on a rally (and they’re up from $14 to $26 since the 9th) that’s fine but if something like that is your "cover" against a bearish portfolio and then you do something silly like sell the Apr $26 calls against it for $2 what you’ll find is that a $10 run in BGU will, of course, put a $26 caller $8.50 in the money while your long position will only gain about $6.   It is very easy to get burned doing spreads on Ultras as the delta you sell changes very quickly as the brackets change.  This is why I rarely talk about deltas – it’s one of the most misused of all option indicators because people don’t understand the delta delta (the rate at which the delta changes as the price changes over time).

  18. Rick W resigns from GM??? 
    GM CEO Wagoner to step down at White House request on Yahoo Finance.

  19. Tiger!

  20. I see a good possibility for a new Bear Raid on the market.
    1.   The bank comments out of Friday’s WH meeting were far from positive.  Heed the message, March not so good … I take that as a warning across the bow.
    2.   C out of global Dow
    3.  GM – Waggoner out … moves GM one step closer to BK IMO.
    4.  Articles over the weekend talking about Bears setting sight on financials again and 6400-6500 on the Dow.
    5.  Banks have not signed on publicly at all to this PPIP stuff.  Plus, exactly who is going to provide the financing for this ?   FDIC to guarantee it, but where is the financing coming from ?  Nowhere or the taxpayers.
    6.  Geithner and his plans still getting mixed to negative reviews.  George Will calling it a power grab by the Executive Branch and "unconstitutional".  I would not be surprised to see legal challenges to all this stuff as we move forward.
    7.  G-20 …. look for riots and TV coverage of same.
    8.  NY — Patterson / Albany looking to raise state income taxes (instead of cut wasteful spending) to try to narrow budget deficits.  NOT GOOD.  They call it a "millionaires tax" but it will hit everyone making over $250 K (pre-tax), so if you make $125 K after tax before housing, food, etc.  that makes you a —-- MILLIONAIRE !   And this is before Obama and Dems come after your pocketbook.
    To sum up, I see the news flow starting to turn negative / realistic again as people start to look at the rally and say WTF was that ?
    Side note, I had to laugh at news articles from WH bank meeting where Obama told bank execs to curb bonuses and make the hard sacrifices.  Sort of like Obama’s budget, which is chock full of those same "hard sacrifices" right ?
    My strategy:   Sell covered calls on all my long positions (check); lighten up my long positions and raise cash (check), opportunistically add to short positions at high levels (check), have SKF SRS and FAZ protection for downside run (check), try to work in some index / mattress plays (phil strategy — still working on it).

  21. And AMZN got pumped by Barron’s with a long, but superficial article.  I might look to go long early for a trade and/or short at the next peak.

  22. Sagupta, I wouldn’t read anything into futures prices yet. E-mini S&P’s have so far traded about 200 of the 80,000 lots they will trade "today" (ie zero volume) and are down 4, which is really nothing. These things can move a mile between 8.30am and 9.30am EST anyways.

  23. Y’all should read this story….

    I never heard of this Bob Basso guy until just now; but it is quite amazing and disturbing that Obama would want to "summon" him to the White House to discuss "the disturbing nature of his videos"    … (What apparently is disturbing is that Basso is railing against Obama and Congress for what they are doing to our economy & country and poor Obama just can’t handle the criticism).  
    This bears watching.

  24. cap--have to agree with you--the news is turning negative everywhere--agree with the G20 stuff--will dominate this week--i’m out tomorrow on financials when i see a spot—(should’ve friday--check) anyone see a play on the mark to market accounting trick being played out this week?

  25. Damn, GM BK is one of our three things that can take down the Dow!  So much fo hanging on to gains… 

    Overall though – GM, G20, negative news flow…  Whatever it takes to bring us back to our levels for a test is fine as long as we hold it but GM is not isolated (as that by itself resets my mid-point to 7,000), we also now have bank failures back on the table and that can bring us down to 6,000.

    Commodities, including stocks, are getting slammed as people run for bucks, which are up more than half a point already, even against they Yen.  

    Video/Cap – It’s the same old thing, Da Bears are trying to push the banks to mark things to the current, depressed market.  Yes, if you force banks to liquidate now you break the system – end of game, America is bankrupt.  But if you look at the actual PERFORMANCE of the loans, there is no reason for the banks to accept the current market value as they can run through the lifecycle without taking the losses they’d have to take at current market. 

    This is no surprise – I wrote above yesterday "while Obama’s away, the bears may play" and I guess they were ready to go out of the gate with a blitzkreig on the futures as soon as Asia opened – suddenly ALL the news has flipped back to doom and gloom.

    The WSJ finally figured out my inflation game plan – congrats to them on catching on after 3 years!
    No matter what happens, it doesn’t pay to be emotional about it, we went into the weekend 55% bearish with 1/2 covers on DIA Apr $77 puts so, as we discussed above, a simple adjustment to roll down to 2x the Apr $75 or $74 puts if we have to but not until we see our levels (7,604) fall. 

    Japan may do another stimulus boost, that’s hurting the Yen and their industrial output is down 9.4%.

  26. Here’s a good chart from the WSJ this morning:


    So be careful what you wish for bears – you ain’t seen nothin’ yet if this thing really starts to fall!

  27. Here’s one to chew on on a down market morning: "Our Engineered Meltdown:  End of the Beginning"

  28. [...] last weekend’s post I warned: “Don’t forget I was looking for something like a 5% pullback and “all” we got [...]

  29. [...] last weekend’s post I warned: “Don’t forget I was looking for something like a 5% pullback and “all” we got [...]