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Weak Weekly Wrap-Up – Is Cramer Still Wrong?

Zombie BanksBad news kids!

I just did a huge, long-promised write-up of the 5% rule for Members and we cast our bones over the indexes and the signs do not look that good.   I do not want to be bearish, I want to turn off my brain and celebrate this amazing economic recovery – maybe we can rent out one of those empty shopping malls for a party and hire a lot of former manufacturing employees for minimum wage to serve drinks (if WMT doesn’t get them first!).  Oh yes, we love a good party but you know what can happen when you rent a mall at an inopportune time…  That’s right – ZOMBIES! 

"Zombie" banks and other corporations that were propped up by the government were blamed for Japan’s "lost decade" (now in year 18), in which, according to Wikipedia, there was: "A massive wave of speculation by Japanese companies, banks and securities companies. A combination of exceptionally high land values and exceptionally low interest rates briefly led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.  Recognizing that this bubble was unsustainable, the Finance Ministry sharply raised interest rates in late 1989. This abruptly terminated the bubble, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government."

NikkeiGosh that sounds familiar!  Well thank goodness we have wise leaders who study global history and learn the lessons of the past so that we do not make the same mistakes that other countries have (end sarcasm font).  Michael Schuman of Time Magazine noted that banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser’s paradise."  This led to the phenomenon known as the "lost decade", when economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life was muted, however, as the Japanese people tended to be savers, not borrowers. Unemployment ran reasonably high, but not at crisis levels and Japan just drifted along, well under 50% of their former highs, all the way down to 7,000 – which was, 80% off the 1989 high of 38,000. 

While you may want to think that this was unusual or exceptional, the sad fact is that it happens pretty often.  The cycle we are now in WOULD BE exceptional if it DID NOT follow the pattern of the Nikkei bubble of 1989, the Nasdaq bubble of 1999 and the Dow bubble of 1929.  Why will 2009 be different?  Certainly not because the government is intervening – the government always intervenes:

Market Crash

Oh yes, very much in line with our 5% rule discussion, we’re right at that very critical 40% off the top level and we’re being led by the Nasdaq, which seems like a good thing but the Nasdaq is just completing their own 10-year crash cycle and should damn well be leading something as they are still 65% off the highs, actually underperforming both the Nikkei and the 1929 Dow 9.5 years after their crashes.  As to this run up – the Nikkei made a splashy recovery from -50% to -30% (up 40%) but then entered a new cycle of misery that continues to this day.  The S&P has gone from -55% to -40% (up 27%) and can go up another 21% from here (complex math) before really breaking the pattern.

Bullish and bearish outlooksWe don’t intend to be bearish for the next 20% though, we are sitting in cash and will be thrilled to take a ride up if the S&P can break our long-standing 946 mark and the NYSE can take out 6,232, both 40% off the tops.  Once we establish those lines, it will be a no-brainer (literally) to use those as stops for some very aggressive upside plays.  In this particular case, the low VIX will allow us to turn leverage very much to our advantage, picking up leaps in solid companies for the run up.

BUT, FIRST, we have to get there!  So far it’s been a frustrating June as we’ve sat on our hands in cash waiting for a break – one way or the other, we don’t care which – we’re happy to play either side.  At the moment, as we are under what CNBC and now the whole MSM calls "an invisible ceiling"  (which looks pretty darned visible to us) but it is easier for us to bet that the kid on the trampoline will break his neck slamming into the ceiling, than it is for us to assume he will just fly up to the next level.  In what rational world do we watch markets fly up 35-50% in 3 months and then have the "experts" in the media act like they are baffled that we’ve hit resistance?

Certainly the markets were oversold, I was the one saying that in March.  On March 6th, in fact, when Jim Cramer told everyone to sell and said the Dow would go to 5,320I was calling him an idiot, just like I’m calling him an idiot now when he tells you we’re going straight to 10,000.  He was wrong then, he is wrong now.  In fact, the Friday before Cramer was telling people to SELLSELLSELL at the bottom I was on TV telling people to BUYBUYBUY financials and SELLSELLSELL the SKF, which was topping out at about $270 (now $39).  I did my show LIVE, while the market was crashing, WHILE people were panicking and I called it right.  Cramer did his show at the end of the same day and came to a VERY different, very wrong conclusion. 

Jim CramerI don’t bring this up to pick on Jim but he’s downright dangerous here and someone needs to say so.  As I said, we’re all for being bullish IF the markets can prove themselves but (and I said this a lot on the way down in the Fall) IT IS NOT OUR JOB TO SAVE THE MARKETS!  While Jim seems happy to use his sheeple as cannon fodder, I prefer to wait for more of a trend to develop before punching all the buttons.  Meanwhile we are mostly in cash and picking up the occasional fun trades and yes, it’s dull but boredom is no reason to make random bets is it?  

Even if you’ve watched the March 6th video before, I would suggest watching the beginning of it (1st 30 mins) as the same reason we were long (and in pain) at the bottom is why we keep sniping at short positions at what we think is a top!  There is great opportunity to being a contrarian IF you time it right.  That’s been our pattern of trading this entire month, we keep jumping on little swells in the market as they turn up, hoping to eventually catch a big wave when it comes.  This strategy remains valid unless we break over our top levels, just as  our current strategy works unless we break over our tops.  We will be very happy to change – when there is evidence to merit a change.   

SheepleI’m bringing this up today because, in reviewing the week’s comments, I see the same fatigue on the part of the bears as the bulls had in that first week of March, when it looked like we’d never stop going down.  Convictions or cash are your best alternatives (even though cash is losing value fast!), not the latest tonic sold to you by some television huckster.  You can review what I wrote in the pre-bottom week HERE and the post-bottom week HERE and it’s interesting to compare as our man Jim has been calling me a "perma-bear" when, if anything, the only thing I have consistantly been is perma-opposite Cramer.  We like to buy low and sell high, Jim likes his sheeple to buy high and sell low and thank goodness for them because someone had to sell us BAC for $2 and buy SKF from us for $270 but – if you are one of my people – try to stop being one of his!

Better yet, don’t be anyone’s follower.  Philstockworld.com is a community site, with many intelligent and diverse options.  Read our opinions and then give us your own – it’s easy to be a sheep and hard to be a wolf but sheep get sheered over and over again – keep that in mind!   We’ve updated our Strategy Section and we have our Virtual Portfolio Section which has our Buy List of stocks we generally like, our Dividend Plays and sample $100,000 Hedged Virtual Portfolio – all things well worth going over, especially IF we do break higher.

Oil PricesLast weekend I made a point of saying that high oil prices were likely to derail our recovery.  I noted we had just come out of a manic/depressive week and it was not likely that behavior was going to change and I pointed out that that we had entered the "Triple Top Testing Zone," which left us pretty much left on the sidelines in cash, along with 11 Trillion other dollars it seems.  Are we in the smart-money crowd or are we missing the train?  It’s still to early to tell unfortunately….

Monday started with a big sell-off, which was good as we had gone short into the weekend but we held the 8,650 line on the Dow and 925 on the S&P so there was nothing to be too bearish about.  We made some quick DIA short money, took and XTO spread and sold COF July puts.  We went in and out of USO over and over as the channel drifted higher each day, hoping to catch the big one when/if it finally breaks down.  The Dow had a 150-point mother of a stick-save into the close but we added to DIA puts, turning a losing play into a winner the next day. 

Won't get fooled againTuesday we had a huge pre-market based on comments Paul Krugman had made in Hong Kong the day before and I put my foot down calling the move BS and asking, incredulously if we could get fooled, yet again, by the same BS.  Apparently we could as we sold off into Wednesday afternoon but another huge stick save and two day’s of drift left us back as Tuesday’s pumped-up open for the week. 

I said to Members in the Morning Level Alert "The only levels we need to watch today are S&P 946 and NYSE 6232 – the rest are over already by a good margin so it’s just a failure we’ll be looking for.  Oil $70 is critical to get the OIH and XLE higher, gold is already over $960 and needs to hold that to stay bullish."  That pretty much guided us for the week (and the S&P finished at 946 on the nose while the NYSE touched 6,232 on the nose on Thursday before being harshly rejected.).

From a trading perspective we spent Tuesday practicing our day-trading on oil and the Dow.  Timing was good on oil too as I warned Members at 1:31: "OK, 1:30 was sell time for oil yesterday.  Time to kill puts plays on crude if we don’t get something soon…."  DB, one of our perma-bears, threw in the towel at 2:37 and I wasn’t joking when I said that the capitulation of the real bears was often the best signal that it was time to get bearish.  Nonetheless, we watched and waited out the stick.

Train Wreck economyWednesday was a Beige Book day and we expected a little of everything and we got it in spades!  Our man Cramer had told his sheeple to BUYBUYBUY the night before, saying that we in the blogosphere were FOOLS for paying attention to "facts" and "news" and "fundamentals" when clearly the markets were going to go higher because they were going to go higher.  I said we would be happy to join Cramer’s crazy train if he would only be so good as to at least show us the technicals before we start tossing our good money after his audiences Mad Money.   I had already sent out a Morning Alert to Members listing our "Brain Shut-Off" targets, saying:  "Aside from the not yet held 40% lines of 946 on the S&P and 6,232 on the NYSE, we really need to take out Friday’s tops of:  Dow 8.750, S&P 950, Nas 1,865 (beat in yesterday’s high of 1,870), NYSE 6,160, Russell 536, SOX 285 (June 1st, Friday was 275), Transports 1,880 (also June 1, Fri 1,850)."   

Not very surprisingly to us, rather than go UPUPUP, the markets went DOWNDOWNDOWN 200 points, right back to our 8,650 line on the Dow, yet again.  We had shorted the Dow into the open and continued to mess around with oil puts but it was much like making small bets on horse races to keep things interesting while waiting for the big race to start.  We put our foot down on FXP and sold the $12.50 puts for .93, thinking China seemed overdone.  We also did a nice spread looking for a 100 point move in either direction on the Dow and, amazingly, got it both ways!   UNG was added (naked July $13 puts for .70 and a bullish spread) and we exited our QID puts with a very nice win as we called almost the dead bottom by setting stops at 1:13.  In fact, at 1:57, I said to Members: "Keep in mind we could fly 150 points so fast your head will spin in 5 mins so be careful!  Take some off the table if you have profits.."  That is pretty much exactly how many points we went up into the close.  We shorted POT into the stick save but that was it for the day.

HyperinflationThursday morning I wrote an article warning about hyperinflation, which is the only way to sustain a commodity rally but we continued to bet against it and upped our oil shorts once again into the morning pump.  I pointed out in the morning post how suspicious it was that we kept closing at 8,750ish.  We didn’t like the Beige Book, we didn’t like the Retail Sales report or the Unemployment numbers so we took another attempt at a breakout with a huge grain of salt. 

Our trade ideas for the day included DIA $87 puts at .69, another round of shorting the oil futures as they hit $72.50 (in and out many times), SPY $93 puts at .75 (avg), more oil shorts and a spread on OREX.  Still mainly sidelined in cash on what was yet another crazy day.

Friday morning I wondered if it was finally the day we all fall down.  It wasn’t and we pretty much flatlined into the close – not very impressive on the whole and still not hitting our levels.  We continued to play with the oil futures on the short side, looked at some C longs, VLO naked puts (sold), and more oil shorts but we stayed light into the close as the Iran election news was hard to decipher and we were worried about a big run over the weekend.

All in all, the week went as we expected – almost exactly the same as the two before it.  We are still naked on our long September DIA puts so still bearish overall but still in cash overall and looking for clearer signals than the ones we’ve been getting.  We are willing to go bullish if we get the right signals but not willing to force the issue.  Patience is a hard thing to master, especially when the media is telling us that we are missing out if we don’t BUYBUYBUY but, if this is going to be the rally of the century, then I think waiting for the NYSE to confirm a breakout 74 points away is not going to cause us to miss much.

Until then, the downside is the easier path to walk as we have such a clear stop line if things break higher.

 


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    Phil,
    I was reviewing Friday’s posts and have a question on this exchange:
     
     
    Phil, not very nibble at playing the oil volatility and sitting on 20 USO Jun $38’s puts.  Should this position be closed or rolled by end of day (to avoid decay in expiration week)???  Is July $38 put the best roll-out for this position?
     
    USO/Mirachael – Why not sell 1/2 the $39 puts at .85?  That collects 85% of your value and you still have 50% downsiide delta advantage over the weekend….  See if you can get $1, then you have it all off the table!
     
    I am trying to understand this move.
    Is this supposed to be an “exit/salvage” move ? Does this presume that the June 38’s would be closed and then hold the short June 39’s  for expiration and keep the money?  It appears this would work as long as USO closed above 39 at expiration but it seems to me that it is just as likely USO could go below 39 by Friday.
    Could you get into a bit more detail on the thought process on this.
    Thanks,


  2. http://www.msnbc.msn.com/id/31238321/ns/world_news-mideastn_africa
     
    "Official" Iran results – Ahmedinijad "landslide"
     
    So much for the BS CNBC lies that gave the excuse to pump the DOW into "positive" territory for the year….


  3. Phil, not sure if this is he right place to post it, but I’m sitting on a CAL June buy-write combo with a $9 put to deal with and a UAUA June buy-write combo with a $4 put to deal with.  With the airlines battered in the span of a week, it seems a roll up to July is the way to go.  Your thoughts?


  4. Ammm looks like we just might get that revolution after all. it looks real bad.
    i guess i was wrong yesturday.
     
     shooresh1917.blogspot.com/2009/06/blog-post_13.html


  5. pstas,
       you hold the 38′s and sell 1/2 the 39′s as phil was saying, you get 85% of 38′s worth back and have a downside advantage if oil/USO falls.


  6. BA/Phil: Hi, Phil, on Friday, someone asked you about BA.  You suggested:
      BA/Maxt – A little late to chase them now.  $15 for the 2011 $40s is cheap
      though, selling 1/2 July $50s, now $3.45, if they fall to $3 and then full
      cover at $2 with a stop on 1/2 at $2.50.
    I understand that you suggested buying 2011 $40 calls.  Were you suggesting selling 1/2 July $50 calls @ 3.45 or wait until it’s at 3.00?  I am lost on the selling calls part.  Can you elaborate?
    Generally, what’s your strategy on selling calls on such a play?  I mean at what price do we sell calls?  How do we manage the callers (when do we take profit/stop loss)?  I’d appreciate it if you can use BA, or better yet, a recent trading example, to illustrate.
    Thanks!


  7. cwan120,
        Wait until it falls to $3.00, the reasoning is that we hope BA goes up and can sell the calls higher or exit the trade etc…. But if it falls down then we sell the calls so as not to lose money on the 2011.
       Cant speak for phil, but i buy back everything that I sold for 1/2 price.


  8. Last June — no window dressing in sight —  every year is different, but worth keeping in mind ….
     
    last year June was down & closed at the lows for the month…..
     
    DIA ….. 4th column is closing price
     

    30-Jun-08
    113.48
    114.27
    112.75
    113.42
    21,139,100
    111.16

    27-Jun-08
    114.57
    114.74
    112.86
    113.46
    25,276,000
    111.20

    26-Jun-08
    117.01
    117.06
    114.44
    114.67
    28,987,900
    112.38

    25-Jun-08
    118.20
    119.13
    117.78
    117.91
    18,907,600
    115.56

    24-Jun-08
    118.04
    118.95
    117.16
    117.94
    19,038,300
    115.59

    23-Jun-08
    118.62
    118.76
    118.04
    118.33
    13,844,000
    115.97

    20-Jun-08
    119.61
    119.71
    118.09
    118.24
    21,836,600
    115.88

    20-Jun-08
    $ 0.269 Dividend

    19-Jun-08
    120.55
    121.32
    119.94
    120.63
    20,644,400
    117.96

    18-Jun-08
    121.30
    121.55
    120.08
    120.33
    18,091,600
    117.67

    17-Jun-08
    123.38
    123.43
    121.61
    121.93
    15,301,000
    119.23

    16-Jun-08
    122.53
    123.37
    122.25
    122.66
    11,578,600
    119.95

    13-Jun-08
    121.99
    123.32
    121.77
    123.10
    15,354,800
    120.38

    12-Jun-08
    121.56
    122.85
    120.93
    121.63
    17,194,500
    118.94

    11-Jun-08
    122.68
    122.72
    120.98
    121.05
    19,598,200
    118.37

    10-Jun-08
    122.25
    123.81
    122.21
    122.96
    14,819,800
    120.24

    9-Jun-08
    122.39
    123.44
    122.08
    122.96
    16,553,700
    120.24

    6-Jun-08
    125.18
    125.22
    121.96
    122.12
    24,015,200
    119.42

    5-Jun-08
    124.35
    126.25
    124.12
    126.11
    13,030,200
    123.32

    4-Jun-08
    123.82
    125.04
    123.48
    123.99
    14,257,600
    121.25

    3-Jun-08
    125.39
    125.53
    123.41
    123.96
    18,030,600
    121.22

    2-Jun-08
    125.98
    126.00
    124.24
    125.16
    13,444,200
    122.39

    30-May-08
    126.70
    126.85
    125.90
    126.13
    8,060,400
    123.34


  9. i don’t know why this didn’t paste properly !


  10. Hi, foss,
    Thanks for your inputs.
    At what price level do you stop loss on a caller?  Or, do you roll over to a higher strike & further out month?
    I chose to rollover on one of my covered callers.  Kept rolling & the stock kept going up…


  11. Charts just do not work in this thing, which is a shame…

    USO/Pstas – RK has it right, this play was about getting delta neutral (more or less) over the weekend rather than giving up on the position, especially during an unfavorable day.  If USO flies up, then the money is collected on the short calls and maybe even use the cash to roll or DD if it’s a BS-looking spike…

    Got to run, will catch up tonight!


  12. Phil,
     
    Just read you post on the 5% rule.  Great read. But I do have a question to see if I am following along correctly.  At the end of the post, you state:
    "980 is the 40% up mark for the S&P and you want your upside marks to hold, not your downside marks, which is what 946 is.  Now, to be fancy though, we have a 280-point move off 700 at 980 and that means we expect a 40-point retrace, which makes 940-946 a VERY significant zone for the S&P and look where they are this month"
     
    I guess I must be doing something wrong.  If we moved 280 points to get from 700 to 980, wouldn’t 20% of 280 be a 56 point retrace which would lead us to an S&P level of 924?
     
    many thanks


  13.  The evidence is mounting in Iran that the election was stolen by Ahmadinjed. Interior Ministry intitial counts were showing Mousavi was winning a landslide. Supreme Leader Khamenei was informed and order the IM to cook the numbers to ensure Mr. A had a landslide victory that ensured no run-off next Friday.
     
    http://www.juancole.com/2009/06/stealing-iranian-election.html
     
    Election data too linear to be real…   http://tehranbureau.com/2009/06/13/faulty-election-data/
     
    People in the streets by the thousands
    http://www.youtube.com/watch?v=_vZLMJxDras
    http://www.youtube.com/watch?v=Xhyvg4C7dcQ
     
    Police running away from the massive marches
    http://www.youtube.com/watch?v=6SaGRnSia7Y
     
    Mousavi placed under house arrest
      http://mynewsjunkie.com/2009/06/13/daily-kos-mousavi-arrested-rafsanjani-resigns-iranian-police-fleeing-from-demonstrators/


  14. cwan120,
       I have not been good about this… but my understanding is that you stop out 25% of callers when they gain 20%. Another 25% stopped out at 40% gain. Assuming it keeps going up, you are ready to roll to next month at a higher strike profitably. It if starts going down you sell the calls again.


  15. Retail Sales Tick Higher; Economic Headwinds Remain

    §                   Retail sales rose 0.5 percent in May, following declines in both March and April. Results were mixed across industries, in stark contrast to the past few months, when falling sales were recorded in nearly every segment of the retail market. Year over year, current sales are down 9.5 percent, a slight improvement from a few months ago, but conditions remain weak. The annual declines in retail sales are significantly greater than at any point since the recession of 1991.
    §                   The uptick in retail sales in May was driven by an increase at gas stations of 3.6 percent, due largely to higher fuel costs, not a significant rise in demand or consumption.
    §                   Core retail sales, excluding auto and gas, advanced just 0.1 percent in May. Drugstores and building supply centers posted the strongest gains, while sporting goods stores, hobby stores and department stores recorded the steepest declines.
    §                   The new figures suggest that the deep spending cuts that were recorded late last year have likely run their course, but a significant rebound in household demand is unlikely in the near term. Consumers are increasingly focused on saving rather than spending; the savings rate has risen by more than 5.7 percent in the past year, and households are paying down debt. As a result, retailers anticipate relatively flat spending in the coming months.
    §                   Spending trends and changing consumer preferences have caused many retailers to shift from expansionary strategies to survival mode. Tenant demand for space will ease further, resulting in a 290 basis point vacancy spike to 12.3 percent by the end of 2009 and rent declines in excess of 4.5 percent. The drop-off in space demand, however, is unlikely to be identical across industries. Retailers that provide consumer staples, such as drugstores and grocery stores, along with discounters and dollar stores, are expected to fare best in the downturn and in the early stages of the recovery.
    §                   The soft retail climate is spilling into the industrial market. Business inventories are declining, which is limiting warehouse space demand. In the first quarter alone, negative net absorption totaled 25 million square feet, fueling a 50 basis point rise in vacancy to 11.3 percent. As vacancy rates creep higher, industrial rents are expected to contract by as much as 7 percent in 2009, heightening investor caution and increasing the pool of distressed properties in the market.

     


  16. Iran update.  Looks like business as usual over there – a little rioting, arresting the opposition…  I’m wondering if Mousavi really had 60% or if that was his count in the cities and no one ever bothered to consider a landslide for the far right from the more religious sandbasket areas (like America’s breadbasket but without the food)?

    CAL/Sam – Unless it’s a special post, the most recent post is always the best place to ask a question.  Airlines have cut earnings forecasts and, if oil prices drive back to $100, they will cut forecasts yet again so I think letting these get called away if possible is the way to go.  If you are going to roll to July, my issue is the low VIX gives you less protection than we had but getting $2.10 for the $8s on CAL drops $9 to $6.90 with a $1.10 profit if called – still not terrible but the risk is you tread water as it drifts lower if the economy doesn’t turn.  UAUA is a togher case at $3.83.  You can pick up $1 for selling the July $4s, which is really fantastic money if we had faith and $3.45 was the March bottom so, if you are willing to ride it out long-term – why not?  Otherwise, we can just see if our indexes get over the top next week first.

    BA/Cwan – Foss has it right, it’s an IF.  We have a cover play ready IF they head lower.  Don’t forget these plays are not in a vacuum, Maxt had asked about going bullish on BA and that’s the sensible, bullish way to play.  You should ALWAYS have a plan for what you are going to do if your position goes down.  Not having a trading plan is like getting into a car to drive without having a plan for what to do at red lights, stop signs, intersections or turns.  Your plan to drive "straight" over to somewhere may work for a little while, but it’s not likely to work out perfectly for the whole trip is it?

    BA logic walk-through:

    Take BA for example.  At $51 it’s a little worrying, having just been rejected at $53 and showing no particular support on the downturn in a market that is also showing some weakness/possible toppiness.  Going with the 2011 $40s immediately lowers our downside risk as the $45s are $12.15 vs the $40s at $15.10 so the downside risk (delta) is $3/5 or .60 per $1.  That means you will lose 40% less using the leap than you will owning the stock straight up on the downside.

    On the upside, the $35s are $18.50 so that’s a delta of $3.50/5 or .70 so you immediately have a .10 per $1 risk/reward advantage by choosing this contract.  Isn’t that both clever and easy?  The entire premium is $3.70 so, over the course of 18 months, you are giving up (in your premium) $3.70 of the move on the $51.44 stock (7%).  Since BA was $100+ in ’07 and $70 this time last year, I’m thinking it’s realistic to beat $54.70 in 18 months IN A BULLISH PREMISE. 

    Now we’re up from $29 to $51 so call it $22 and let’s say a drop of $11 better not surprise us.  So we KNOW for AN ABSOLUTE FACT that we will lose $3.70 in premium over 18 months and we need to be prepared for what we are going to do if we drop $11 more.  With a downside delta of .60 (which decreases as we move further out of the money but ALWAYS estimate conservatively) we expect to lose $6/60 of that $11 drop.  $6.60 + $3.70 is $10.30 so, if we do not see a way clear to bring that risk under control this is not a great play. 

    Luckily, we have 18 months to collect premiums and, at $40, we stay in the money on our entire ANTICIPATED worst-case drop.  So, the question is – can I expect to collect $10.30/18 = .57 per long contract to offset my potential losses, giving me an even base to build off?  Now this goes back to experience a bit but we play BA often and we know you can always get $1 for an out of the money caller AND we assume that if BA goes down 20% then the VIX will be higher – also giving us a better income from selling calls. 

    Since the July $50s are $3.30 and offer $1.85 in premium, we are well ahead of our monthly collection track if we sell just a 1/2 cover.  At $3, we would be collecting $1.50 in premium, still .75 per long contract on the half sale, so we set a "sell-stop" there to lock in our .75.  That still leaves us flexible and if BA fails at $50, it would be time to get a little more paraniod, maybe selling 1/2 the $45s, now $4.60 if they go to $3.50. 

    Notice there is a plan, an alternate plan and then plans for what to do AFTER the other plans are triggered.  If you play chess, you know that anyone who doesn’t think 3 moves ahead will lose the game to someone who does.  You are playing chess with your callers (which is why I tend to personify them, it’s easier to think of them as an opponent you need to beat).  You make a move, there is a counter move (the stock’s move) which causes a chang in (value of) their position and then you may or may not want to counter that with your next move, which will then lead to additional potential changes in the value of the contract you sell which will lead to your next action

    If you think of your sales as one-time win or lose events, you are a gambler and will probably do as well as gamblers do.  If you think of your sales as a strategy you play out over the course of your underlying contract, you are an investor who may have some ups and downs along the way but will probably make it to your goal (providing it’s a realistic one).

    What is our goal with BA?  My goal is simply to offset the potential losses and try to keep a reasonable upside open.  If I set it up so I’m very unlikely to lose money then I don’t have to be that lucky to win.  In this example, if both of my sell-stops trigger I collect $3.25 per long, which is enough to roll me down to the 2011 $35s at $18.50 so I am covered for a 10% drop in BA through July 17th.  If I am scaling in, I should be fine about buying another round down there (assuming I still believe int he position) OR LOWER so if BA falls 20% and the callers get wiped out and I’m in for net $11.85 on the 2011 $40s. 

    I can assume the $40 go down to $9.60, which is the cost of the $50s now (as it’s just a month out of 18, we don’t worry about theta) and we can assume the $30s, now $22.40, come down to the $15.10 price of the $40s.  So there we are with out net $11.85 $40s with BA at $40 and I can either cover with the Aug $40s for $3 and lower my basis to $8.85 or, if I think it’s an opportunity to scale in, I can spend $3.50 to roll down to the $30s at $15.10 (net $11.85 + 3.50= $15.35) and then buy round 2 at the same or just wait since we’re not even behind after a 20% fall.

    After 3 moves ahead the possibilities increase exponentially and you are making too many assumption about volatility that may affect your pricing so it’s not worth going further but if you go into a position without a plan for it going 20% down that you can live with – you are often asking for trouble.

    Window dressing/Cap - If they want to drag money off the sidelines (and think how motivated our 4 remaining brokers are to do that!) then they damn well better get us over the top in the next two weeks.

    Stop-loss/Cwan – It depends but action should always be taken or, in the very least, strongly considered at 20% and 40%.

    5% rule/Ongba – You are right, I have to see what I was looking at but but I’ll change it later.  I think I was looking at, but failed to explain that there was consolidation and a small retrace at 780, which means this leg of the run-up is 200 points, not 280 alhought 280 would still remain a significan number as well and would be the secondary level to look for if we do fail the 940 mark on a retrace.  924 already held up and that’s another bullish indicator as we moved away from that potential retrace into the upper band.  That makes sense too if you subscribe to the view, as I do, that the entire drop from mid February to last March was a spike down that will ultimately be thrown out and our true consolidation point is the top of that V.   That would go for all indexes.

    Retail/Cap – Is that a good report or bad?  Headline sounds good but then it kind of falls apart…


  17. It isn’t funny but its hard not to be amused by the different opinions of people at the helm of different business

    "All we need is a plague of locusts to complete the scenario," said Qantas Airways chief executive Alan Joyce.

    http://news.bbc.co.uk/2/hi/business/8097635.stm


  18. Retail / Phil -  despite the headline, it is clearly a negative report.


  19. Iran – The election results were not a surprise. The only people who were surprised were the western media. TheDaily Telegraph reporter wrote after attending a Ahmadinejad rally,  “combined the fervour of a religious gathering, the jostling crowds of a rock gig moshpit, and the carefully choreographed build-up of a World Wrestling Federation grudge match”. An interesting perspective from a Indian journalist.


  20. Good Morning Phil & all


  21. Asia Markets :    Monday, June 15, 2009
    (The following is from Yahoo; please cross check with other sources to confirm.)   

    Australia All Ordinaries*                       4030.40     -31.10    -0.77%   
    Nikkei Average*                                   10039.67     -96.15    -0.95%   
    Shanghai Composite*                         2789.55       45.79      1.67%   
    Hang Seng*                                         18498.96   -390.72     -2.07%   
    Seoul Composite*                                1412.42     -16.17     -1.13%   
    Singapore Straits Times*                    2316.56     -60.51     -2.55%   
    Bombay Sensex*                                14875.52   -362.42    -2.38%   
    Baltic Dry Index                                      3583.00    100.00      2.72%   

    *at Close


  22. Asian Markets Fall from 8-Month Peak

    Asian markets edged lower Monday and pulled back from eight-month highs hit earlier this month, as investors fretted over whether the global economy had improved enough to justify a further rally. Investors bought back into the U.S. dollar as a drop in oil prices from last week’s eight-month highs prompted profit-taking in commodities-linked currencies such as the Australian dollar.

    Japan’s Nikkei fell 1 percent, dragged lower by chipmakers after disappointing guidance from a U.S. peer, as investors booked profits after the Nikkei rose to an eight-month high last week. But falls were checked by gains in property developers after Daiwa Institute of Research hiked its rating on the real estate sector to "neutral" from "underweight", citing ongoing improvement in credit markets and global confidence.

    South Korea’s KOSPI closed down 1 percent, led by banking issues with renewed concerns about growing tensions with North Korea adding to pressure on shares.

    Australian shares fell 0.8 percent, held down by resource companies amid lower commodity prices and as major capital raisings drained cash from the market.

    Hong Kong shares snapped a three-day winning streak, sliding 2.1 percent, amid a lack of fresh evidence of a global economic recovery and lower energy prices, while China stocks edged down as the market braced itself for an imminent resumption of IPOs.

    Singapore’s Straits Times Index dropped further, down 2.5 percent, taking cues from weak regional markets as oil prices dropped weighing on offshore & marine, commodity plays. Singapore’s April retail sales fell a seasonally adjusted 3.1 percent from March due to lower sales of motor vehicles, government data showed on Monday.

    China’s Shanghai Composite Index moved back into the black, rising 1.7 percent, with losses in nonferrous metal and coal producers being offset by gains in banks.

    Bombay Stock Exchange’s Sensex fell 2.4%. Key indices came under intense pressure on Monday following a sharp fall the index heavy weight because of a adverse court ruling.


  23. Euro Shares Led Lower by Miners, Oils

    European shares fell on Monday morning, tracking losses in Asia, with mining and energy shares hit by lower commodities prices as the U.S. dollar strengthened.The FTSEurofirst 300 index of top European shares was down 1.5 percent at 872.0 points. But the European benchmark index is up more than 35 percent from the record low it hit on March 9, as investors have become more confident on the prospects for economic recovery.

    The dollar rose across the board on Monday after Russia said the U.S. currency’s role as the world’s main reserve currency was unlikely to change in the near future, hitting energy and commodity prices and related shares.

    With the price of copper and other metals sliding, Anglo American, Antofagasta, BHP Billiton, Lonmin, Rio Tinto and Vedanta Resources fell between 1.6 and 4.5 percent.

    Among oil stocks, Total, ENI, BP and Royal Dutch Shell fell between 1 and 1.6 percent, as crude prices slipped below $71 a barrel, before a slight recovery.

    Among banks, Banco Santander, Credit Suisse, Deutsche Bank, HSBC, Societe Generale and UBS fell between 1.2 and 2.5 percent.

    Switzerland’s Holcim fell 1.8 percent after the world’s second-largest cement maker said it would buy the Australian operations of Mexico’s Cemex for $1.64 billion and that it was planning a capital increase to raise the funds

    Chemicals companies BASF and Akzo Nobel, were down 1.7 and 2 percent, respectively.

    World number two truck maker Volvo fell 3.5 percent after saying its truck deliveries in May fell 57 percent from a year earlier as the global downturn weighed on demand for commercial vehicles across its main markets.

    In economic news, Switzerland’s largest business association, economiesuisse, said GDP would shrink 2.9 percent this year and unemployment rise to 4 percent as recession bites deeper.

    Around Europe:
    FTSE     4,368.31    – 73.64    – 1.66%
    DAX        4,961.73    – 107.51    – 2.12%
    CAC          3,272.18    – 53.96    – 1.62%
    SMI        5,477.54    – 44.30    – 0.80%
     


  24. Oil Falls Toward $71 on Firmer Dollar

    Oil fell to around $71 a barrel on Monday, extending its retreat from a near eight-month high as the dollar firmed and analysts said the market had rallied too quickly.

    U.S. crude [ 71.26    -0.78  (-1.08%)] fell.
    London Brent crude [ 71.1    -0.70  (-0.97%)] for July, which expires later in the day, dipped.

    Post-election political turmoil in Iran, a major oil exporter, did not halt the price correction that many analysts say is justified given falling global demand and high inventories. "Energy markets will likely gloss over this event unimpressed," Meir said. "Certainly the events in Iran could postpone a correction if they take a turn for the worse," he added.

    French Economy Minister Christine Lagarde said G8 ministers wanted measures to curb volatility in oil markets, which put at risk growing signs that their economies were heading towards recovery.

    In Nigeria, the main militant group said on Monday it had sabotaged an oil pumping station in the Niger Delta operated by Chevron  the fifth attack claimed against the U.S. company in less than a month.

    Dollar up sharply, helped by Kudrin comments

    The dollar rose broadly on Monday, boosted by comments from Russia’s finance minister on the U.S. currency and as investors continued to take profits on other currencies which climbed sharply early last week. Speaking on the sidelines of a Group of Eight finance ministers in Italy, Russia’s Alexei Kudrin said the dollar’s role as the world’s main reserve currency is unlikely to change in the near future

    The comments alleviated concern that central banks around the world are diversifying their foreign exchange reserves away from the dollar, though investors are awaiting a summit of leaders of Brazil, Russia, India and China (BRIC) on Tuesday for any further comments on the issue.

    Other major currencies meanwhile continued to succumb to profit-taking after rising sharply early last week on optimism that the global economy is beginning to recover from a deep recession.

    The dollar jumped 0.9 percent against a basket of currencies to 80.820

    The euro fell 1 percent against the U.S. currency to $1.3876.
    Euro also lost 1.1 percent against the Japanese yen to 136.31 yen
    The Australian dollar fell 1.4 percent to $0.8011. U.S. dollar gained 1 percent against the Canadian dollar to C$1.1296.

    Focus will now centre on the first summit of BRIC leaders on Tuesday in the Russian city of Yekaterinburg, where discussions may include foreign reserve diversification. But a top Kremlin aide said leaders of the BRIC countries do not plan to discuss prospects for new global reserve currencies at their meeting


  25. Gold falls towards $930 as dollar gains

    Gold fell toward $930 an ounce on Monday, pressured by a broadly firmer dollar, while easing oil prices dampened demand for bullion as a hedge against potential oil-induced inflation. Commodities priced in dollars have lost value as the U.S. currency firmed, as they become more expensive for holders of other currencies.

    Gold fell to $933.25 per ounce by 1003 GMT, against $937.90 an ounce late in New York on Friday.

    Demand for physical gold remained weak. Holdings of the SPDR Gold Trust, the world’s largest bullion exchange-traded fund, were steady at 1,132.15 tonnes as of June 12 — unchanged for a fifth session.

    Among other precious metals, silver tracked gold lower, falling to $14.40 an ounce against $14.79. Platinum was at $1,227.50 an ounce compared with $1,249.00, while palladium was at $245.50 from $250.50.

    ETF buying of platinum eased, with ETF Securities reporting its holdings remained unchanged on June 12.