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Testy Tuesday – Confidence is Key

This is spooky.

Yesterday, in my 9:53 am Alert to Members I said:  "I will be looking for this to reverse tomorrow unless they come up with something to back up this rally but today we can get back, like Europe, to Wednesday’s lows – which is Dow 9,800, S&P 1,060, Nas 2,130, NYSE 6,970 and RUT 615 – that’s where we’ll be looking for possible shorts."  So where did we finish for the day?  Dow 9,789, S&P 1,063, Nas 2,131, NYSE 6,940 and RUT 613 – I was off a grand total of 47 points on 20,536 points worth of indexes – that's 0.2% off, not bad for an opening forecast!

So the question for today is: Did they come up with something to back up this rally?  Well we have the FDIC proposing banks pre-pay them 3 years of assessments ($36Bn) to keep them from having a negative balance sheet.  No, that's not it – in fact, that makes me kind of nervous as they sound desperate.  The SEC is holding hearings to restrict short selling.  Nope, we tried that last year and that was also desperate.  Japan's CPI fell 2.4% in August.  No, I'm pretty sure that's a bad thing.  No, nothing concrete has been done to justify yesterday's excitement so I'm going to listen to the guy who was off by 0.2% yesterday and plan for a reversal a volume picks up.  

We did go into the close yesterday naked on our long DIA puts and we bought back our short Sept DIA puts that we sold to cover for a very nice 75% profit and we held our Oct $98 puts so we did follow the morning plan of shorting into the rally.  Now we have to see whether Retail Sales (8:15), Case Shiller (9:00), the CEO Survey (9:35), Fed Gov Fisher (10:00), Consumer Confidence (10:00) and the Investor Confidence Survey (10:00) will be enough to get us over those levels (at which point we kill our shorts) or don't do enough to keep us aloft.

Today is, of course, the 1-year anniversary of the Dow's 777-point drop.  I was just reviewing our Weekend Wrap-Up from the day before the crash as well as our Crash Day post, which I called "Too Little, Too Late" as I was very skeptical that the bailout package would solve anything anyway.  It isn't really as exciting a read as you may think because we were prepared for the fall and had bet accordingly but we were still shocked when the Republicans voted the bailout packaged down and put a nail in the coffin on the markets.  Still, that was the drama for the day and we watched it the way you watch a Nascar crash in slow motion – with sort of a detached sense of interest as it unfolds.   

There is no danger of repeating that performance today and the people who are bringing it up with that in mind are just silly.  We were in a massive crisis then and our leadership was in disarray and investors and consumers had zero confidence in the system so people were willing to dump stocks for 10 and 20% losses, just to get back to cash (or gold, which was flying) and into treasuries (which were diving).  That is how money flew out of the markets last fall – the question we now have to examine is what will it take to get it to come back?

Americans are currently sitting on $3.5Tn in cash (which is insured by $87.42 of FDIC funds remaining) and that is equal to 73% of the S&P 500s net assets at 1,030.  At the very peak of the bull market, that figure was 62%.  It's not apples to apples of course but it seems to me that this would indicate that the MOST the markets are likely to go up from here, if investors become 100% confident in the market and feel there is not a problem in sight, is 15%.  That would be S&P 1,184 and Dow 11,270 – just about 20% off the dead top.  OK, I'll buy that as a possibility as a goal for the next 12 months – but not this year!  That's kind of silly don't you think?

Last year we had a crisis of confidence, which wrecked our financial system (as it is based on confidence in a fiat-based monetary system) but it also destroyed REAL wealth in this nation.  When the S&P was at 1,500 that 62% of sideline cash was $4.4Tn so investors are still down 25% in available cash and it will take, we assume, 1/3 of the remaining cash to get the market back to it's old highs.  That would leave cash on the side at 50% of the S&Ps value and this is the EXACT SAME PROBLEM we had last year.  If everyone want to sell their "$6Tn worth of stock," they're going to have a very hard time doing so with just $2.5Tn of cash available – even if you want to assume all those cash holders are dying to take the stock off your hand at peak prices.  

That's right, we are rapidly getting back to the same completely insane market valuation model we had in 2007, only this time we've already destroyed about 25% of the Nation's wealth so the closer we get to "recovery" the more dangerous reality can become if it rears it's ugly head and causes people to want to sell stocks again.  Having the market rise too quickly, without allowing wages and capital gains to build up the supply of sideline money creates a very dangerous bubble with very little real support.  I have explained this to members in the past using the analogy of a car lot:

Let's say that the market is represented by 100 cars on a car lot and those cars have a "value" of $100,000, or $1,000 per car.  Now let's say that the people, your customer base, has $100,000 to spend.  You can, at first, sell all 100 cars for $1,000 and, in theory, everyone is happy.  That was roughly where the market was in March, when the value of the market dropped to about $3.5Tn, just about equal to the amount of cash there was to buy it.  Since that time, very little cash has moved off the side but the S&P has gone up 50% to about $4.7Tn.

If we look at that in our car model, let's say that 20 of the 100 cars were sold for $1,500.  That gives the remaining cars on the market a "value" of 80 x $1,500 since "that's what people are buying them for" but that logic is fatally flawed as the consuming public used $30,000 of their $100,000 to buy those 20 cars and now they have just $70,000 of cash left on the side.  While you may think the remaining 80 cars are "worth" $120,000 based on the fact that the last car you sold went for $1,500, the fact is there isn't enough money in the world left to buy your remaining cars at that price.  Should you wish to liquidate all 80 remaining cars now, not only would you not get $1,500 but, even if every single sideline buyer wanted to buy a car, there is only $875 per car left, representing a loss for all the "buy and hold" investors.

This is the great value fallacy of the market, especially one that rises quickly on low volume.  We are creating wealth only on paper and, while that may make us feel better, the fact is that if the people who think they have money in their virtual portfolios actually try to convert their paper shares into hard currency – they will find that it's not quite as liquid as they think.  The same nonsense is playing out in the commodity pits and we are building a real house of cards here as the markets have gotten way ahead of reality. 

It is possible that, over time, the money on the sidelines will grow to accommodate the skyrocketing market and commodity prices.  We will be looking for massive increases in Corporate Earnings and big increases in wages and savings that will show us that these levels may be sustainable as it is possible that investors are choosing to put new money straight to work in the markets and simply not bothering with cash – certainly that's the path the pundits are pushing this year.  We're happy to go along for the ride but expect us to also be the first ones to sell if things get a little shaky

As we expected yesterday (our first pick of the day was FXI), China had a nice bounce overnight with a 450-point gain, right back to 21,000 (2%).  The Nikkei gained a point, back to 10,100 but still 100 points below the danger zone even though they did get the Dollar back over 90 Yen, which sparked a huge relief rally in the export sector. 

Europe has been trading flat ahead of our open and nothing is going on there as we all wait for the US data to come in today.  Our futures got a quick boost from the Case-Shiller numbers, which shows just 2 of 20 metro areas still in decline (Las Vegas and Seattle).  As of July, the index is down 33% from it's 2006 peak so yay, I guess…

As I said, let's watch our levels to see if they hold.  We expect consumers, investors and CEOs to be confident at the top of a 50% market rally but the question is, as it was a year ago – Is it going to be too little, too late?


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  1. Present

  2. From GS-land:
    —Upgrading IPPs from Neutral to Attractive; RRI Energy to CL Buy
    With expected improvements in spot commodity prices, along with a continued uptick in power demand, we upgrade Independent Power Producers (IPPs) and reiterate our Attractive view on Diversified Utilities. Commodity levered utilities and IPPs lagged other energy/commodity sectors YTD, creating mean reversion potential going forward. While dividend yield spreads still remain attractive, we downgrade Regulated Utilities to Neutral, given limited average upside to larger cap targets. Within the regulated space, we tilt more towards smaller cap stocks. We upgrade RRI Energy (RRI) to Conviction Buy, as the most un-hedged name in our universe. We also reiterate our Conviction Buy rating on large-cap nuclear generator Entergy (ETR) and remove small-cap Great Plains Energy (GXP) from the Conviction List, although we maintain our Buy rating. We downgrade Portland General (POR) to Neutral from Buy due to recent share price performance and concerns about 2010 guidance. RRI 12-month price target: $9
    —We upgrade Polo to BUY (not CL) as we see the brand capitalizing on a two pronged story: (1) near-term US cyclical recovery driving sales and margin upside, and (2) longer-term multi-growth unfolding across margin-accretive geographies and categories. These opportunities plus share buybacks funded by a growing cash pile should propel over 20% yoy growth, driving our 2009/2010 EPS estimates to $4.15/$5.00 from $3.91/$4.22 – well above Street expectations. As in the past, we expect the market to reward stronger 15%-20% earnings growth with a premium 18X PE multiple, which gets us to our new $90 price target, or over 20% upside.
    Polo has a story beyond the typical US cyclical recovery that many of its peers’ sales and margins are poised to capitalize on. Unlike many of its domestic peers, Polo is at the start of a multi-year growth opportunity across geographies (Asia) and categories (accessories). After acquiring both its SE Asian and accessories licenses, Polo has the brand and expertise to capitalize on these margin-accretive markets. In fact, its five-year CAGR of 16% in Europe provides a compelling roadmap of a brand and team well-equipped to tap such opportunities. As it reaps these rewards, we believe Polo could reclaim and exceed prior 15% peak EBIT margins to power EPS beyond the $5 range. Few retailers can boast such revenue and growth opportunities beyond the US recovery story.

  3. hmm GS upgrades Ralph Lauren. I wonder if they still own it…..

  4. Other noteworthies:
    —Bullish energy: Buy XLE calls
    Our commodities team is forecasting $85 oil by year end, equity options have lagged credit and vol looks cheap in the sector. We recommend buying deep OTM December calls to position.
    —CBL remains one of our top Buy ideas, with 40% total return potential to our $13, 12-month price target. With substantial progress being made on the balance sheet as well as an improved outlook for the US economy, we believe the shares are attractive based on an implied cap rate of 10% or a current FFO multiple of 4.9X versus the REIT average of 13X-14X. Our price target embeds a multiple of 5X-6X on our 2009/2010 estimates, which is well below the long-term average multiple of 10X. We favor the stock for several reasons. (1) There has been substantial progress on the balance sheet and near-term liquidity. As a reminder, the company has a current debt-to-EBITDA ratio of 8.5X, in line with the REIT average. (2) Our estimates reflect a bear-case scenario. In fact, we forecast 87% year-end occupancy and expect continued pressure on SS sales in 2010. (3) Based on comments at the recently held GS Annual Retail conference, the retail climate is still challenging but retailers are more upbeat about store openings in 2010/2011 after cutting back on capex plans over the past year.
    Following a 10% sell off in CBL shares over the past three trading days, we view valuation as particularly attractive with the stock trading at just 4X-5X our 2009/2010 estimates. We expect movement toward our $13, 12-month price target as incremental deleveraging take place.

  5. I’ve been learning how to trade options with the help of this site for 9 months now and I notice that commissions in ToS (the best deal I’ve ever known) are running at $1225 roughly per month – which means that I have managed a 10% profit for these 9 months. Since my expectations were modest I will be happy simply to hang on to this edge but it occurs to me that on a monthly basis I must aim to make 1200 per month just to pay my commission costs alone and so perhaps if I traded less I could do better.

  6. Good morning!

    Let’s not undersell home prices stabilizing – that can give a lot of people hope although it won’t matter until we see real gains because stable home prices at 30% off what you bought them for doesn’t help people who are upside down or banks who have to liquidate in the long run.  That’s the destruction of wealth issue, 100M homes were were $268,000 each in 2006 ($26.8Tn) and now are worth $18Tn – we still haven’t fully accounted for that missing $9Tn in any meaningful way.  You can say it will come back over time and it probably will, that was my logic for buying banks at the bottom, but that time isn’t January or the next or the next but the markets are acting like it is, especially the building sector. 

    Also, don’t forget we still have that massive foreclosure overhang as the moratorium on foreclosures is totally skewing the Housing Data more positive all summer.  We do have $35Bn going to housing through some interest reduction plan but I’m not sure how much that will help really. 

    Levels are still Dow 9,800, S&P 1,060, Nas 2,130, NYSE 6,970 and RUT 615 and it was the RUT and NYSE who failed yesterday and dragged the rest down so let’s watch them carefully.

    XLF is over $15 again and that would be a danger sign on the way down.  Oil is tunning back to $67 and gold is trying to get back to $995.  The dollar is at $1.457 to the Euro and $1.60 to the Pound and back to 90 Yen after the BOJ said they would defend the dollar here. 

    ZION is racing back up and they are still a very good market indicator, as are BXP and VNO – who are likely to fade first if people are taking profits.  SRS is back to $9 and I do like selling the Nov $8 puts for .75 (now .70) if possible but, keep in mind, SRS is a widow-maker!

    RIMM coming back a bit this morning, that’s a horseman that can really give the Nas legs as a 10% gain there would have a huge effect.  We have multiple plays on them and I love them down here.

    Consumer and Investor Confidence at 10 should give us the boost for the day, that’s where I’ll be looking for a top and maybe a quickie on the DIA puts if it looks like a spike with no legs.   Since they expire tomorrow, it would be a pure momentum play on the 9/30 $99 puts, now $1.10 for $1 or less.   20% stop and looking for 30%+ to the upside.

  7. IPP/Aclend – I have no opinion on utility stocks.  Good for dividend plays but very dull otherwise.  RL was on our buy list (and so was GCI, who did great today) so I always like them but not on this gap up and nowhere near as much as I liked them in the low $30s in the spring.  

    Goldman’s XLE call is drug related (as in GS is on drugs) and just part of the usual oil pump.  JPM came out and said $60 oil would be vigorously defended by OPEC (duh) but that just means to me that we’re going to $60 and they’re trying to get a floor established. 

    Trade less/Red – Absolutely, overtrading can kill you with fees.  Also, contact, tell him you are a PSW member and tell him how much you are trading/spending and he should be able to lower your rate.  

    Flying up ahead of Consumer Confidence – I guess it’s in the bag.  If it’s over 60, the markets should really take off but otherwise I think generally disappointing

  8. this market is outrageous.  FAZ popped BEFORE the Dow plunged.

  9. Phil, the dichotomy of wanting to "park" cash in 2011 buy/write leaps and the reality of the facade pointed out in the ZH article is painfully palpable.  I too believe that a 20% correction is not off of the table, and therefore am afraid to committ to this strategy.  I am thinking of a blend of my park it strategy and gel1′s front month or quarterly premium selling strategy.  
    For example, PFE (as you like it better than MRK), buy the stock for 16.80, buy the 2011 17.50 put for 3.00 , and sell quarterly call and put premium.  The Jan 16 combo can be sold for 2.10 or X4 for 8.40.  This would be a net of 11.40 with full downside protection.  Does this hold water?

  10. Newspaper stocks catch a bid on the heels of Gannett’s (GCI) rosy outlook. While ad revenues remain under pressure, bottom line numbers were well ahead of expectations due to significantly lower newsprint expenses.

    In a common theme, BNP Paribas, France’s biggest bank, says it will raise €4.3B ($6.3B) in a share sale which it will use to repay the French government early. Leaving the government’s rescue scheme gives the bank more freedom in its pay structure, and would also allow it to buy cut-price assets from rivals under pressure.

    Sept. S&P/Case-Shiller Home Price Index (.pdf): -12.8% and -13.3% for the 10- and 20-city readings, a 1.7% improvement from a month ago. Figures continue to support the stabilization story, "but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures."

    U.K. revises Q2 GDP to -0.6% from -0.7%, citing better-than-expected performance in the construction industry. On the year, GDP fell an unrevised 5.5%, still the biggest drop since at least 1955. Economists were largely underwhelmed by the incremental boost, especially since Q1 GDP fell to -2.5% from an earlier -2.4%.

    Woops!  Confidence 53.1, that is WAY below expectations and lower than August’s 54.1 – looks like someone noticed the Emporer has no clothes (maybe one of the 18M jobless people or the 4M families with foreclosure notices finally picked up the phone and answered a survey). 

    Those puts are going to be rockin!

  11. SYNA getting pounded today…..can’t find a reason for it either.  They were also just raised to buy….I guess someone wanted a better entry.  Support at $24 otherwise back to $20.

  12. What about CBL (GS reco) for a buy/write, Phil….

  13. Sold a couple of lightly bearish SPY strangles on the premise that we hold up today, as funds need to report month-end holdings. Might as well skim the premiums.
    Meanwhile, Bloomberg has still not reported the bad CC number on their front-page. Bullish Case-Schiller results are up top. Maybe if you pay for their terminal you can get this information (or if you dig through their site). What a joke they’ve become.

  14. Someone over on SOH just compared this market to the liquid metal terminator.  You can shatter it but then it just melts back together gets up and rips your face off.

  15. The $ is showing decent strength and the euro is going down, ’tis a bit demoralizing to see equity markets up at the same time.  It’s exactly the reverse of the corelated trend for the past few months.

  16. Sept. Consumer Confidence: 53.1, down from 54.5 in August, and well short of 57.0 consensus. Present Situation index 22.7 from 25.4. "While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes. With the holiday season quickly approaching, this is not very encouraging news."

    FAZ/Matt – Yeah that move starfted about 2 mins early but they also immediately took profits as the volume is still low (35M at 10:15) so the pump monkeys can still try to pull this back up.  That’s a lot of real damage on that report and after the window dressing is done, I think we’ll start to see some firms getting back to cash ahead of earnings. 

    Cash/SS – The key is not to overcommit.  We’re talking about plays that are relatively safe and pay 20% a year so take 1/2 positions and have cash on the side for opportunites.  If you buy stocks that you REALLY, REALLY, REALLY would be happy to buy more of if they drop 50% then it won’t matter if the market tanks as you’ll just DD on AAPL at $85 and BA at $20 or whatever.  As I said, I’m not excited about buying here, I’m patiently waiting for the next drop. 

    CBL/Magret – Oh I ignored them.  A REIT being pumped by GS?  I could not run away from that fast enough. 

    Bloomberg/Eric – Yes this media sell-out is really spreading.  I used to think of Bloomberg as reliable but they have become much less so lately.  Thank goodness for the NYTimes but they are about the last paper I trust in this country.

    Oops, another bad report:

    Sept. Global Investor Confidence 118.1, down from 122.8 in August – a five-year high. "There is a recognition that a portion of the recent rise in global equity prices can be attributed to liquidity expansion rather than fundamental opportunities. Institutional investors are pausing to assess this balance," study says.

    LOL Where!

  17. VNO leading the breakdown here as expected, watch them for a sign of a bottom when buyers step in. 

  18.  Phil, If I was convinced that the market w/ drop hard sometime during the next few months what DIA month and strike should I buy?

  19. RIMM  I rolled down my 3 Jan 70s calls --> Jan 65 and am currently naked.  Should I be considering partial covers or wait to see if it bounces back a bit?

  20. Phil:
    AAPL/retirement ad naueum: Just want to make sure I understand something about this trade you outlined yesterday:
    AAPL/Iflan – Would you like AAPL to go to $220?  You can guarantee it buy buying the 2012 $220 puts for $62.  That puts you in AAPL for net $248 and you have 27 months to sell calls to bring your net down.  You can start by selling the Jan $200s for $9.20, which drops your net to $239 and if you do that once a quarter for 8 more quarters you’ll be in AAPL for net $167 with a guaranteed sale at no less than $220 in Jan 2012.
    Since you’re owning the stock and $220 put throughout the trade, you can think of the trade as owning/parking the stock and put, and selling naked calls every quarter for $9.20. Therefore your basis is decreased every quarter by $9.20 minus whatever you owe your quarterly caller. That would mean your final basis could be higher than $167 ( final basis of $167 plus whatever you paid out to all your quarterly callers), and you end up owning the stock and a guaranteed minimum value of $220.

  21. September Global Investor Confidence dropped to the widening perception that the equity market is over valued?  Where were they back in April???????  They are just now catching on?????????????????  So things were JUST RIGHT in August???????????????  Please!!!!!!!!!!!!!!!!!! 

  22. Phil
    Am holding 50 BA Nov 50 calls short that keep going in the wrong direction. Do you have a salvage possibility.?

  23. Hard drop/OldG – Depends how convinced you are.  We like the DIA Jan $99 puts right now as we can sell front-month calls against them for a quick .25-.50 here and there to offset the cost of waiting but if you REALLY want to play a drop, the DXDs (ultra-short Dow) are a great way to go as you can buy Apr $31s for $6 and sell the Apr $37s for $4 so $2 for a $5 spread with a 150% upside gain and already $3.50 in the money.

    RIMM/Eph – Unless they fail to hold $66, I’d be patient but don’t be greedy if they do get a 5-10% gain.  If they do break lower, you are better off covering your ass and selling the Nov $65s (now $5.60) and using that money to roll to the March $60s (now a $4.40 roll). 

    Endless Stimulus:  2011 will be the year of the exit strategy, Eurogroup chairman Jean-Claude Juncker says ahead of a meeting of EU finance ministers that is likely to clash on the issue. "They don’t want a date," a source said of France. "They are saying the same as everyone else, except for the date."

    Dallas Fed President Richard Fisher: Expresses cautious optimism overall. Housing is "a sector still on life support" with a limit to what the Fed or Congress can do. With the lag between action and impact, winding down Fed’s balance sheet needs to happen as soon as growth gets traction. Expects Fed moves to tighten money will be "equal in speed and intensity" to loosening policies.

    As expected, FDIC wants banks to prepay premiums through 2012, generating about $45B to replenish its drained deposit insurance fund. FDIC also raises its estimate for bank failure costs through 2013 to $100B from $70B.

  24. Oldgoat – Dec 99s are a good place to be.  Here is the rule for the DIAs….Newbies – Bookmark it….paper trade it to get a feeling for the movements – and I am speaking from experience.

  25. ssdirk
    Thanks for the plays

  26. For speculators only … a friend of mine has a Seeking Alpha piece that should be published manana on EMIS.  I am reluctant to comment any further only because the stock has done so damn poorly despite having at least 2 potentially blockbuster products in advanced Phase III trials run by Novartis.  The SA article is bullish; for background, you can search for others there. 

  27. LOOK at MCO go !   Shorts getting KILLED !

  28.  Market negative but wsm, wynn, anf , positive still. cant believe that all my puts are still down.

  29. Selling those SPG put calendars I bought yesterday. I’m starting to like this game.

  30. Most REITs getting smacked now.  SLG still about even; I think they are able to keep it pumped up b/c it is most difficult to short.   Definitely a sell IMO.

  31. TM – Seems sold too far too fast. Good reversal to mean trade. Sell Oct $80 Puts for around $2.60. There is solid support around $75, so if you don’t mind the extra risk, it can be a naked Put else buy buy the $75 Puts for a net $1.85.

  32. Phil, the Fed’s Fisher coming out saying interest rates will rise swiftly when they are confident that the economy is on solid footing seems like more rhetoric.  These guys see the real data.  They have to know the inside game and what the MSM is portraying is crap.  How do you view this and when do you see interest rates rising?  It seems the Fed has definately painted itself into a corner.

  33. Hi ssdirk still looking for Phils answer on your PFE question or did I missit

  34. Phil,  do you have targets on oil dropping much below current prices?   I’m considering to take a long position on an oil play based on the assumption that diplomacy won’t work with Iran and thus tensions around the straights of hormuz being shut down, Israel attacking, etc.  will re-stroke a fear premium in oil prices soon.   Also, with dollar weakness I don’t see oil dropping much further.
    Your thoughts on how to position for this possibility?   Perhaps buying ERX APR calls?

  35. yodi, check his 10:25 comment.  Not a direct answer to my PFE question, but a not ready to commit just yet.  If you do commit, however, do it in half measures.

  36. msquare, I like that TM trade. For most people the margin requirements for selling the 80/75 put vertical are sufficiently low ($500) relative to selling the naked put ($1600 at ToS), that IMO you’re better off selling three of the verticals than selling a single put. Max profit on the three put vertical shorts is greater too.

  37. Thanks ssdirk

  38. MCO and MHP both bucking the trend, maybe we got those right last week!

    Notice how VNO took a dive and the market is following (this is great for the SRS play too!). 

    AAPL/Chaps – Yes you may not get down to $167 but you are allowing for AAPL to gain 10% per quarter, not a pace they are likely to sustain.  If you are that bullish, sell puts as well as you’re covered.  If you are too nervous to sell puts to cover and too worried about the caller costing you money then I think the simple answer is this stock, and maybe this strategy, is not for you as it does depend on you riding out the ups and downs that do come with the market and some of your positions will work out perfectly and some will be a big problem.  In general, you want to avoid playing companies that will either go bankrupt or be bought out, both of which will be bad outcomes for you.  All the rest, we can usually work through. 

    April/Matt – The market was not overvalued in April.  Just because I think we’re overbought here does not mean I think we are heading anywhere near 7,000 again.  I’m even getting more comfortable thinking 8,650 is the bottom for the Dow (880 S&P) and 9,100 is the mid-point (S&P 1,000) – I would just like to see them tested again to confirm this. 

    BA/Gel – They won some Army contracts today so they got a boost as that really big fuel carrier deal is up for rebids – by the way, if that goes to BA you are massively screwed with shorts on them.   It’s hard to give advice on how to short my favorite company but I think you should sell the Nov $55 puts for $3.30 which, if BA goes higher, pays for the roll to the Jan $55s (now $4) and, if they go down, you still have an improvement unless BA drops lower than $46.  You can also spend $7 buying 2x the May $60s and rolling the callers to 1.5x the Jan $55s so they can’t really hurt you much more with 3 more months of rolling ahead of you and any drop in BA would get rid of the callers while you can still roll the callers to 2x whatever if they head north by adding 1x more of the longs.

    Apple (AAPL -0.8%) has begun warning direct sellers that orders for much of its iMac and Mac mini lines will go unhonored, giving credence to reports that Apple’s preparing to unveil the first makeover to its iMac and MacBook lineups since 2007 and 2006 respectively.

    Japan’s finance minister raises the specter of forex market intervention for the first time, hoping to limit the damage from a yen rally fueled by earlier comments of his. "I never said a word about leaving a strong yen as it is," said Hirohisa Fujii, on the job for just two weeks.

    TM/M2 – Very much a currency trade but the above from Japan (which I mentioned 2 days ago and is only now making news) is supportfive for them but $80 is not a huge bargain for them and I’d much rather wait for that support line at $75.  

    Fed/SS – He’s not really saying anything.  The Fed will tighten when it is time to tighten at about the same pace (in lunatic fits and starts I guess) as they did on the way down.   From reading the minutes I am not at all convinced that the Fed is smarter than the MSM.  They seem to rely on field reports from their interns who probably just sit in front of CNBC taking notes on how great the economy is.  As I said ahead of the last Fed meeting, no one in the history of economics has ever been more wrong than Ben Bernanke and Alan Greenspan without being executed by their government.  Even Burr shot Hamilton for poor fiscal policy….

    PFE/Yodi/SS – That play works fine but this may not be the best time to buy.

    Oil/LV – I think $60 at least should be tested.  All this Iran stuff is nonsense if gold isn’t climbing.  Gold traders are 1,000 times smarter than oil traders. The worst thing they could ever do is actually shut down the straight with the amount of oil in storage now because nothing would happen and that whole card could never be played again.  That fear stems from the 1973 oil crisis when the Saudis produced more than half the world’s oil.  It’s simply no longer the case and, while it would cause disruptions, we didn’t have an SPR in ’73 and there was no oil in Alaska or Canada or Russia or Africa or Mexico or Venezuala etc and now China has an SPR and Europe has storage AND demand isn’t that strong so all it would do is hand Iran a major ass-kicking, probably taking down their government and desensitizing people to oil fears for many years, which would tank the market.  Iran isn’t that stupid – only US oil bulls are that stupid. 

  39. redfern – TOS also has their own trading blog, called ‘monkey brains’, where they track a paper portfolio that they trade each month.  It’s mostly spreads of one type or another.  If I remember correctly when I looked at it a couple of weeks back, they had paid (to themselves), over the past 3 years of trading, something like $1,500.  Meanwhile, they had netted something like $300…..clearly, it’s better to be a broker instead of retail trader, from their blog.

  40. Phil…..Thanks and congrats for MCO…..Are you  of the opinion that we take the profit and run in view of a potential tanking of the market

  41. Oil/Phil -   Well, I’m with you on the fact that Iran is not stupid, and that the world has had 35 years to prepare for this possibility – with SPR’s and other supply streams, and that the world supply/demand fundamentals are bearish for the foreseeable future.  But, the point I’m focused on is that it seems unlikely that Israel will accept Iran’s nuclear capability and will act unilaterally for their domestic security independent of world political opinion.  Thus,  I’m pretty sure the US will accept Iran’s capability (since we don’t really seem to be doing much about Pakistan which seems much more dicey to me), even after getting Russia’s and possibly China’s acceptance of sanctions.  I just don’t see any light at the end of the diplomacy tunnel – and I DO believe that Israel with its current leadership may strike Iran in the next twelve months.   If the fear of the Israel striking takes hold after the talks this Thursday, then I see oil spiking in a fear premium along with the dollar strengthening (risk aversion again) and gold probably being offset by the dollar.
    There just seems to be a lot of complacency or distraction right now by economic and domestic items – while the last week has delivered a lot of sobering news in the geo-political chess match that is the Middle East.  Secret nuclear sites, missile tests, military exercises, G-20 and UN proclamations, none of which has really lowered the temperature any.
    Anyway,  it just strikes me that the MSM and the markets do not seem to be factoring in any of these developments.  $60 is the 3 month low set in July, so 10% down versus 30-40% up in the event of failing diplomacy….sounds like a LEAP buy/write selling the front month(s).   Would you recommend staying away from ERX and using a stock proxy?

  42. Is the restriction on short selling coming up again because they think the jig us up?

  43.  Hi Phil,
    I have T Jan11 20 calls with Oct 25  and Oct 26  covers split 60%/40%.  Extrinsic seems to be pretty much almost out with these, and ex-div is coming up next week.  Should I close up this position and move on or is there a roll that will help me continue burn premium.  I am up nicely overall with all the front month call writing I’ve done this year on T.  I know Crammer’s pumped up this stock recently and it is sort of a safety stock and people might be buying into the ex-div date also.  I know you’ve also been touting some double diagonals as a way to lock in a position with the puts to sell front month premium with minimal downside, might that be applicable here too?  Thanks in advance!  BTW I also still have those VZ Jan10 30 putters (@ 2.37) so any bit of T I do close out, I’ll be keeping aside for establishing a VZ position.

  44. MACY’s "M" Covered SHORT PUT play…..Phil, I just entered my first "Covered Short PUT" play & I just wanted to see what your thoughts would be on selling a covered put like this.  I’m not sure how long I can borrow shares, but here’s the trade details.
    Shorted the stock at 18.45
    Sold the OCT 18 PUT for 80 cents.
    Margin $900
    - XLF’d

  45. Phil what are your best ideas to short should there be another run up? My shopping list is prepared for a 2.5% dip.

  46. XLF’d
    You essentially wrote an naked call on M. Was there a big difference in the premium being offered?
    Selling the naked calls seems easier – no worries about borrowing

  47. Cap – EMIS – very interesting technology.  I have sent for a few of the papers to read.  RA is the real bang for the buck, and if it works…well, one can imagine a VIOXX type revenue, possibly greater.  I see their most difficult obstacle being the GI absorption of the protein in different people could be wide.  The GLP-1 data are also interesting, but  MRKs Januvia will run them all off the road.

  48. Calendar spreads?    
    Phil, when it comes time to roll the options in a calendar spread, what are the considerations to determine what to roll to? For example, I am long GLD Jan 105 call (bought at 4.10) and short Oct  99 call (sold at 2.70, now .95) . At this point, should I roll the short call to Nov or Dec, and should I roll closer to ATM or in the money? Should I take into consideration the deltas of the 2 legs? I see lots of possible alternative strategies but not sure the best way to evaluate each one.

  49. Regenerx Biopharmaceuticals (RGN) jumps 64% after researchers demonstrate for the first time that Tb4 treatment of EAE (an animal model for MS) significantly improves neurological functional recovery. Much of RGN’s product development is based on Tb4.

    Hedge fund manager John Paulson is floating a plan to save CIT Group (CIT +11.4%) by merging it with IndyMac Federal Bank, sources say. The two haven’t formally discussed any plan, and a key hurdle is CIT’s debt: a $3B, high-interest-rate lifeline.

    I’m liking FCX as a short as either copper or gold may fall and if both do they are heading to $60 fast.  The Nov $70 puts are $3.60 with a stop at $3, looking for $5.

    MCO/Magret – I like them as a long-term hold, this is just a knee-jerk response to being an oversold stock on a day when people are looking for bargains, I doubt they are done going up.  Our last MCO was a buy/write and that will be a nice 35% gain and last MHP was the 2011 $17.50 leaps with a partial cover on Jan $25s so looking very good overall.  On shorter plays, of course take some off the table!

    War/LV – Well it’s a tough investing premise.  I’d say war is unlikely to break out in one day and, if it does, just keep your eye on some long calls and buy those then but wishing for war or hurricanes or Nigerian Rebels is the ENTIRE reason oil isn’t $30 a barrel – there is nothing fundamental supporting this price with these demand numbers.  There is too much oil being produced for the current demand, in any rational market at any point in the history of this planet except during this scam, oil prices would be heading lower until it met demand equilibrium.  Yes there is $3.5Tn on the sidelines but, at $90 a barrel, that would remove 5% of it in a year, maybe 10% after refining mark-ups.  That would wreck any hopes of a market rally (as the best case is there’s 15% to play with) and that would crash the global economy, throw millions more out of work and run demand for oil down another 10%, war or no war. 

    Also, the war in Iraq consumes 1Mbd of oil.  If that ever winds down it’s like telling Nigeria they may as well just shut off their taps entirely.   If you are all gung-ho to play oil up, the USL Apr $31s are $6 and you can sell the $35s for $4 so all oil has to do is hold $35 through April and you make 100%, that’s a little safer than ERX, which is already up 200% from the March bottom.

    Short selling/SS – I think it’s because there are banks and REITs that are going to be failing and they don’t want hyenas to have that tool to accelerate their downfall, as they did last fall. 

    T/Chen – I’d roll the callers to the Jan $26s, now $1.90.  Whatever you don’t need can be used to make the cover partial.  You can then take about $6 of $7.50 off the table by rolling to the 2011 $30s at $1.55, which is a $4 margin but better than paying the callers $1.90 for nothing.   Come Jan, if T is rising, you can take $2 more and either roll down to the 2011 $25s and roll your callers along (hopefully up $1 every 3 months) or you can DD on the leaps and roll your callers up to 2x the Apr $30s, which are now .75 or, at worst, the Apr $29s.  So, lots of ways to win means no reason to cash out.

    M/XLF’d – It’s a good play as $19 is holding tough for them but, as Samz points out, why not just sell the calls?   I’d rather buy the Nov $21 puts for $3.35 and sell the Nov $19 puts for $2 and that’s $1.35 on the $2 spread that’s already in the money so $900 would net you about a $450 profit at $19 or less.  Meanwhile, I like M and wouldn’t bet against them in practice.

    Seven pieces of good news about the economy


    Treasury yields are at levels last seen in the spring, which could be a bad sign for the economy if buyers are locking in safe returns out of fear the recovery will be short-lived. Analysts say if the 30-year, currently at 4.03%, slides below 4%, it could signal a breakdown in faith.

    Shorting/B1 – I just like playing the indexes mainly and things like that FCX play.  We shorted BIDU and AMZN with no luck so far but I still like those too and, of course, our IYR shorts from last week are playable again. 

    Watch your shorts – certainly the volume is still very low (80M at 1pm) and VNO did get bought back up along with ZION so we’ll have to see what sticks here

  50. SAMZ3700 – Well, at the time the OCT 18 CALLER was going for 1.20. So it had 75 cents of prem left in it.  I’m really not sure if that would have been better or not…. but I’m certainly BEARISH on M regardless of which way to short it.
    - XLF’d

  51. Phil
    My BA adjustments worked well. Am now in a bullish spread and well covered. My previous spread did well with the short puts very profitable, but I did not keep an eye on the corresponding short calls that got out of the appropriate range with the nice move up in the stock price.

  52. Phil, check the FCX puts.  The Oct 70 is 3.45 and the Nov 70 is 5.75.  Which one?

  53. I think you meant FCX Oct 70 puts not Nov ….as per IB quots the latter are $5.80

  54. my MACY’s play
    OK maybe I should have sold the OCT $19 caller naked to PAY for the OCT 20/19 BEAR PUT Spread.  MAX profit $1
    - XLF’d

  55. Gotta short something here …. thinking AMZN on the downgrade….

  56. Pharm — I would be very interested in your thoughts on EMIS …

  57. Remember that guy who wrote Rich Dad, Poor Dad where the Poor Dad lived within his means and never ventured out much, while the Rich Dad levered up to buy more properties?  I wonder if those Dads have reversed roles?

  58. AMZN has the low volume pump thingy going again.  Up $2 since 11 am.
    They’ll window dress into any oppty !

  59. Javaben/TOS  – just back from work – thanks for the info on monkey brains – I’ll look into that. I was thinking and typing this morning before I went out and have no idea why I posted my musings but I’m glad I did.

  60. Credit card stocks tick lower after the Fed proposes amendments to Regulation Z (Truth in Lending) to protect consumers from several costly practices. Among the changes: prohibiting first-year rate hikes and cards to consumers under 21, and stopping creditors from allocating payments in ways that maximize interest.

    Now that is sad.  Not being able to screw people (as much as usual) causes the value of CC companies to fall….

    EMIS/Cap/Pharm – OK, I’m in but I’m warning Cap that if they cost me money, I may not vote Republican in the next election!  8-)

    Rolls/Allen – As a rule of thumb you should be reinvesting the money you collect from callers to improve your own position while pushing them out of the money.  Just always aim to get into a good vertical in your last month.  Each month, of course, depends on your outlook.  The Jan $105s are now $2.30 and you collected $2.70 so it’s a good time to use half of it to roll down to the Jan $100s ($3.65).  Meanwhile, you let the Octs expire worthless or, if GLD comes back, you can roll them up to the Nov $105 (now .95) as that’s suddenly a $5 diagonal you’re in for net $1.40.  Anyway, hopefully you get the idea – have a goal and the rest is obvious.

    BA/Gel – Yes, I feel better about it now too!

    FCX/SS – Oops, those were Oct $70 puts, now $3.50.

  61. Phil just for after hours discussion ……How would you play an ETF which is very volatile and about which you are long term bullish… GDX  Phil also a lot of commentators are bullish re Gold due to the money pumped in the economy by government… seem to be bearish. Is this your short term stance or do you think that Gold will noy be able to breach the $1000 in the  next year or two….

  62. GLD:
    Phil, okay, I’m confused. I thought a calendar is a neutral strategy, to keep bringing in the premium and the long leg is for insurance. You’re saying the end goal is to convert to a long vertical.  Does it also make sense to roll the short Oct 99 to the Nov or Dec 99s which would bring in a lot more credit (also, I have a 1.70 profit on the shot Oct so shouldn’t I be running? I know the overall position is not profitable yet….)

  63. I agree Phil that gold and copper look fragile right here. They and most commodities are barely holding on to recent support lines. If the dollar can break decisively above its recent downtrend line (one more bad bit of data this week might do it), then I think those support lines will break and we’ll get a larger correction in commodities.

  64.  Pharmboy and Phil,
    Thanks for the info. Could you explain why you choose 99 and not, for eg,  101 or 97? I’ve read several different theories but I’m wondering what yours is. I’m talking about loner dated ones, like Dec. or later. I’m still struggling to determine which is best.
    Pharmboy: Thanks for your reply.

  65. Phil at 75-76 cents, its better than Lotto !

  66. GDX/Magret – No better time than the present (when we’re having a dull day anyway).  I’m short-term bearish on gold because the dollar is too low and it will snap back and knock gold back down but THEN I’ll probably be liking gold again (I’m fickle that way).  With any speculative upside like that I look at the leaps first and the 2011 $40s are $11.50, which is a lot of premium with the stock at $44.60 so I don’t like it.  If I sell the Nov $46s for $2.60 that pays for a roll to the $36s if I need it so a good upside escape and not so bad to the downside either as GDX has a nice 50 dma support at $41.50.  So that’s actually not all that bad, despite the nasty premium.  The next thing I’ll look for is a vertical play, like the SELLING the March $44 calls for $6.  Always look at what you can sell first (max premium) and THEN figure out what call to buy.  Let’s say I’m willing to risk $3, then I find the March $38s are $9.30 so net $3.30 for the $6 spread.  Now I decide how comfortable I am with GDX holding $44 through March and, since I’m not all that sure, I’d rather play the leap spread.  See, simple enough…

    Confusion/Allen – Maybe the above clears it up.  The calendar is neutral here in that it’s more flexible AND I"m willing to spend more to improve my leap as I am clearly long-term bullish on gold and tolerant of a short-term sell-off.   The end goal is not neccessarily to convert to a long vertical but that’s what you have to look at as a goal to ascertain your eventual value.  It all depends on how bullish you are and what your long-term outlook is but I don’t go buying leaps in stocks I think will do nothing for 15 months, then I’m just thowing my long premium out the window.  So there is an assumption that you WANT to improve your long position over time while selling whatever premium you can.  With the Oct $99 caller, they still have $1 in premium and aren’t that far out of the money.  Unless you are now very bearish on gold, there’s no reason to move them now.  With gold, I treat each expiration as a huge victory because on any given day, you could wake up to find gold has jumped $50 on you so I’m never in a hurry to give my caller more time to be right. 

    From Deutsche Bank, a graphic reminder of just how overvalued the euro has become. Holidaying Europeans might not mind a stronger currency, but an overvalued euro effectively equates to tighter monetary policy – something the ECB may not yet want.

  67. I am looking into that one.  A ton of things work in this model…..and let me say, none are on the market.
    Regenerx Biopharmaceuticals (RGN) jumps 64% after researchers demonstrate for the first time that Tb4 treatment of EAE (an animal model for MS) significantly improves neurological functional recovery. Much of RGN’s product development is based on Tb4.

  68. Phil – This market is making me really nervous…When do you think we will have the pullback that everyone has been saying is coming since June? With jobless claims coming up this week and Oct nearly upon us, do you see the end of this week as the start of this pullback?

  69. Cramer
    Hey buddy, I know you are looking over our shoulder for guidance – give me a break, Jimbo, and press the BUY button on BA tonight. All the best.

  70. FWIW, I’ve been looking for a pullback since April !!!  I’m not kidding!

  71. DIA Strategy/OldG – The selection is based on our practice of rolling up.  Since we roll up $1 in strike for .50 whenever we can, then we enter at the first position that cannot be rolled up for .50 (which automatically puts us in and keeps us in a position with a .50 or better delta).  As to the length, that is generally something I want to keep at least 3 months out so I have room to roll my mistakes.  Our general goal at all times is to sell enough front-month premium to pay for our next roll up.  So the Jan $90s are $5.50 and the Jan $100s are $6 at the moment so either one of those is good for now but I always prefer to go a little higher if I can (and if you make an offer of $5.90 and get it, so much the better).  That let’s us sell Octobers with Nov and Dec to roll to so we can fix a HUGE mistake if we get burned.  Still, generally we like to be 1/2 covered unless we have turned bullish and the 1/2 cover is whatever will pay for 2 rolls up, so whatever is about $2, in this case the Oct 98 puts at $1.82. 

    If we have a 1/2 cover of the Oct $98 puts, we can see that we can roll them to 2x the Oct $95 puts, now .80 and those can be rolled to the Nov $89 puts, now .90 and that’s already a $11 spread on our net $5 entry so we have a clear path to a double and can sleep well at night. 

    If the market goes up 200 points then that wipes out the $98 puts (or at least lets us buy them back cheap) and that $1.80 should be enough for us to roll up to the Jan $102 puts, where we start the process all over agaiin.  Meanwhile, we try to time the momentum and take quick .25 and .50 profits when we can. 

    That’s the gist of it.  If you have a clear path to a double on the roll and you are 70% bullish you can cover with this play at 30% and, if the market drops 50%, this one pays 30% and your longs are down to 35% and that’s still 95% safe.  Of course, realistically, you only have to cover your imbalances as hopefully you have puts and calls in your portfolio but the bottom line is, if you are worried a 500-point drop will cost you $10,000, then you put $5,000-$10,000 into the Jan DIAs and do your best to roll and cover so your insurance holds up over time.  By the way, if the Dow climbing to wipe out our $10,000 cover doesn’t make you more than $10,000 then you are doing something wrong – it’s all about balance. 

  72. BA – I sold my BA longs today as I think JC pump is coming to an end. Plan to buy it back on a pull-back to $50 or just below. Currently looking for Puts in $45-$50 Puts to go long and then when BA pulls back, will sell $50 Puts against it…

  73. I’m in ny just upgraded my iPhone to the new s
    manager says it’s the best selling iPhone

  74. RDY – Indian generic drug maker. Lots of big options activity (typically nothing).
    Stock up 25%-ish in past 2 weeks on takeover / buy of 5% stake by GSK etc. If this is put to rest, I expect it go back to $17-$18 range in a hurry.
    Still trying to figure out what options play to best take advantage of this…Considering buying $17.5 Puts?

  75. Cramer just dry-humped RL to death on CNBC.  LOL!  

  76.  Phil, Thanks for that. Just to be clear, do you roll up in strike with both puts and calls?

  77. aclend, thanks for mentioning that. It’s interesting because look at that RL chart. I see a potentially huge double-top formation. If it can break higher it may have a pretty clear shot up to 90-ish, but jeez.  I’m definately going to start watching this one for a sign of weakness.

  78. I’m now "watching" RL with a single Jan/Nov 70 put calendar for 1.51 — helps me remember it, heh heh.

  79. Phil, while waiting on a pullback to initiate my modified 2011 Leap buy/writes I am thinking of selling NOV naked puts at strike prices that are 10-15% below today’s price.  If I get assigned then I will initiate my longer term plan.  If I don’t then I will just keep selling front month naked puts until the stock price looks attractive to initiate the longer term plan.  If things look dicey I can always roll before getting assigned.  What do ya think?

  80. Pullback/Jrom – I have no idea how long they will keep the nonsense up.  We’ll see how the EOQ goes tomorrow. 

    The market has been led this month by heavily shorted stocks, which have gained 13.2% since Sept. 2 vs. the S&P 500′s 6.9% gain – suggesting that investors are chasing the beaten-down shares. Could be a sign of froth; but then, those stocks have also led the way since March, up 116%.

    From IFSL’s annual report (.pdf): The global fund management industry’s assets under management fell 19% in 2008 to $61.6T. Of that, hedge fund assets declined 30% to $1.5T; mutual funds were down 28% to $18.9T; private-equity AUM dropped 40% to $189B; sovereign wealth funds grew 18% to $3.9T; and ETF assets fell 11% to $710B

    Pullback/Rich – LOL, I was happy enough with the July drop but I’ve been waiting for a retest of S&P 1,000 for the whole month of September and it is very annoying.

    BA/M2 – Has he smashed a model airplane and started telling you to buy all the parts makers (like poppa GE)?  THAT’s when we have a top in BA…

    RDY/M2 – Nasty premiums, I’d sell calls, the Nov $20s can be sold for $1.30 and that is likely to pay better than the $17.50 puts, plus you have more leeway.  Big downside if they do get bought though.

    RL – Naked sale of Oct $75s for $4, stop at $5, looking to buy back at $2.  Thanks Cramer!

    Roll up/OldG – No, just the long puts.  The short sale is always whatever works at the time and they go on or off, no rolls usually.

  81. Kustomz buddy!  Why didn’t you just ask?  You don’t have to go to NY to buy an iPhone 3GS.. you can get ‘em anywhere!

  82. Volume 107M at 3:20 – very stickable and sad if they don’t. 

    Only the S&P is holding it’s level so a very big deal if they can’t hold it, especially on this low volume.  If yesterday was because of the Jewish Holiday, what’s today’s excuse? 

    DIA – $97 calls for .87, stop at .80, playing for the stick

  83. phil, please remind me re: boeing buddy list. tie, beav?
    like a blast from the past

  84. NOV/SS – That’s absolutely the way to enter a position.  Low commitment and every time you don’t get the stock you just do it again.  NOV is at $43 and you can sell Nov $39 puts for $1.45 so net $37.55 for the entry.

    Oops, so much for the stick, dead already on the DIA calls as volume is taking us the wrong way!

  85. IPhones/Matt – Yeah but they are so much cooler in that big glass store…

    Boeing Buddies(tm)/Jo – AIR was buddy #3.

  86. 8-) matt i know this MAN!! What Phil said lol


  87. Phil, by NOV I meant November.  Sorry, about that, but I certainly get the point. 

  88. My cousin is working on the Allegria hotel and spa in NY, his boss had to take a mortgage on his home to pay his workers. The owner hasn’t paid the contractors for 6 months. Makes me wonder how many companies are in this position.

  89. EMIS/Cap – Hey I’m up 7% already!  In at .73, now .78.  Penny stocks are so cute! 

    VNO just blew $65!  BXP at $65.88 so watch for them to start accelerating if things go south.  BXP $60 puts at .90 are a fun way to play.

  90. Phil – DIA – should we half cover OCT 98 DIA puts for overnight, or go naked long put mattress?

  91. Phil, do you think they will  be able to run th emarket up tomorrow into the end of the quarter for window dressing or just flatline it here and then chalk up Septemb erto an up month, and then watch out below for October …?

  92. Phil: are any stocks or sectors coming into buying range ?
    My illness does not permit to be on station all day .

  93. Look at them trying to throw get the stick going.  Battle between sellers and the stick !

  94. Phil,
    In the spirit of your Microwave oven theory of behavior, I added some positions a few months ago and, now that I am an older, wiser trader (cough, cough), I am questioning those positions. Please tell me what you think of SU, CAM, and LRCX.

  95. Out of this morning’s SPY short strangles for a $21 gain each, which ain’t bad for doing nothing. IV looks like it’s about to go up…

  96. Nice entry Phil …. not enuf shares tho ….

  97. FU Stick !!

  98. Phil,  you mean selling BXP $60puts, not buying right?

  99. No Stickee, No Shirtee …

  100. RDY – Did manage to snag a few $17.5 Puts when they were cheaper. Now up 40% on those – just wish had more of them. Will re-evaluate tomorrow when reason for this frenzied PUT buying is known if I should hold them for more profits or selling PUTs against them.

  101. Phil
    Do we have any up/down catalyst tomorrow worth noting? I was surprised abt the lack lustre move sell off on bad consumer numbers. If we dont have any catalyst tomorrow, this market could be green again!!

  102. Chakra – this is from CNN.COM "
    Wednesday: The first two of the week’s four key employment readings are due in the morning. Payroll-services firm ADP is expected to report that employers in the private sector cut 200,000 jobs from their payrolls in August after cutting 298,000 in July.
    Also in the morning, outplacement services firm Challenger, Gray & Christmas will report on the number of announced job cuts in August.
    The final reading on second-quarter gross domestic product (GDP) growth is due before the start of trading. GDP is expected to have shrunk at a 1.2% annualized rate, versus the previously reported 1% rate.
    The Chicago PMI, a regional manufacturing index, is due out shortly after the start of trading. The index is expected to have risen to 52 in September from 50 in August.
    The weekly crude oil inventories report from the Energy Information Administration is slated for the mid-morning.
    In the afternoon, Federal Reserve Vice Chairman Donald Kohn is speaking in Washington at the Cato Institute. He is expected to discuss exit strategies the central bank is considering as it unwinds some of the trillions it injected into the economy to help soften the blow of the recession."

  103. How many/Kustomz - Most of them from the looks of the distressed property lists I’ve been looking at.  You know things are bad when realors will work without an exclusive AND cut commissions.  This is why I’m so worried about CRE – we have a house of cards built on investor confidence and consumer confidence that things will get better so the retailers and manufacturers are stretching themselves, hoping that all this confidence leads to sales in Q4.   Well, it’s Q4 on Thursday so I’d better see an empty chat room with everyone out at the mall loading up on crap or this nation is DOOMED!  

    DIA/Concreata – Nope, still no reason for us to think we’re heading up.

    Tomorrow/Dave – I don’t think they will tomorrow as the SEC is actually watching these days and I don’t think they’re going to let things slide like they did in the good old days.  Today was their big chance to pump it up and this move today is going to bum Asia out so I think they’d be lucky to hold steady tomorrow. 

    Buying/RMM – Patience, we’re barely down yet. 

    Positions/Aclend – Well nothing will look good if we’re breaking down but I like SU long-term.  CAM I would get out of and LRCX is fine if you hedge it. 

    Shares/Cap – Enough for fun.

    BXP/Jlui – No, buying them – selling them would be bullish, which I am not.

    Well, that was not a very sexy close.  Tomorrow should be interesting.  Volume today looks like 155M, 10% LESS than yesterday.

    Catalyst/Chakra – Tomorrow we have ADP Jobs and the final GDP numbers but that’s it for tomorrow.  EOQ makes everything wild but June 30th was a dead day and not even huge volume.  More to the point, what’s going to cancel downside momentum once it gets rolling?

    Later all, I have a meeting.

  104. TM – Biggest recall of 3.3 million vehicles in company history. Solid support around $75, so this may be a good opportunity to accumulate. I already own Oct/Nov $75/80 Put spread.

  105. TM – The fix for the "safety issue" is simply to remove the floor mat which may interfere with the accelerator. Any selling on this news is a buying opportunity.

  106. CaFords – I agree – but, the actually cost is lawsuits, and the dent in their "safe/quality" reputaion.  I took out the front matt out of my prius  and called it a day.

  107. Jo – But this is not a "recall". There is no defect in the product, only a faulty floor mat. Don’t get me wrong, at this point I would not touch an auto manufacturer, at least not until they decide to pull back substantially. But this is just rediculous that the headlines read "largest recall".

  108. I am wondering in your analogy how the US government works into it.   They are pumping loads of cash into the car lot,   but what net effect when they start pulling the support of the car lot away ? 
    This market makes me totally crazy.  I make money when I think I shouldn’t ,  when all the right things are in place I lose it.
    The completion backwards principle for sure

  109. ssdirk
    Re naked put selling for entry position – Phil nailed it. This has been my favorite method to buy a stock I like. Regardless of the stock movement, you either get the benefit of a discount on the stock, or you pocket a nice premium for your trouble. The premiums more than make up for the lost dividends.

  110. gel1, thanks for the advice.  With Phil and the gang’s help I am trying to navigate this schizo market for profits.  I have tried being a buyer of premium only to loose more than I have won.  I think my negative bias has definately caused me to buy more puts than calls.  Since then, I have slowed down and tried to formulate a game plan.  I want to have a conservative base (buy/writes selling premium and rolling when necessary), and trade with some discretionary cash using Phil and Optraders advice.  As Phil said, some calculated risk in a portfolio can go a long way.

  111. TM – "Today’s advisory was precipitated by continued reports of vehicles accelerating rapidly after release of the accelerator pedal. The incidents appear to be related to factors including the use of a variety of unsecured mats," the NHTSA said.   Be careful buying TM on the dip, it’s not "A mat" it’s MATS and that means it could be a hardware problem and a stuck accelerator can cause collisions which can cause mega-lawsuits. 

    The impending U.S. recall, at least 3.8M cars, the largest in Toyota‘s ( TMnews - people ) history, followed a horrific crash last month in San Diego in which a mat was suspected of snagging a gas pedal on a runaway Lexus, ending with a fiery crash that killed four family members.

    A minute before the crash, the driver called police to say the car had no brakes and the accelerator was stuck. The runaway car was doing more than 120 mph when it hit a sport-utility vehicle, launched off an embankment, rolled several times and burst into flames. The car, equipped with all-weather floor mats, was on loan from a dealership while the driver’s own vehicle was being repaired.

    "The tragic accident in San Diego was certainly an eye opener for all of us," said Senior Vice President Irving Miller, prompting the company to review previous allegations of unintended acceleration caused by floor mat interference.  Miller said the company could not quantify the number of complaints, nor could it estimate the cost of the safety campaign.

    This is not something you want to mess around with.  Let others catch this knife.  I see 3 years of Camrys, all Prius’, 4 years of Tacoma’s, Tundras and Lexus’ – bad stuff.  Even cost of giving out 3.8M mats is a lot, maybe $500M, then you have the advertising and absolutely lawsuits (everyone who had an accident in a Toyota for the last 5 years will be looking to see if they can blame the mats), could be $1Bn easy.  The company lost $2 a share last year and this seals their fate for this year to be red too, adding maybe .60 per share in losses vs. .34 expected.  

    Still a totally great buy once things settle down but no need to be the hero on this one. 

    Government/Ljer – Well it’s the loose government money that allows the market to inflate.  One way or another it gets people to overpay for stocks but anytime the value of the market exceeds the amount of cash on the sidelines by a wide margin, then it’s only a matter of time before a wave of selling finds no buyers, which leads to panic selling, which leads to another crash.  Of course, market psychology steps in at a certain point so if you sell cars in the above model long enough at $1,500, even if all you are doing is fake transactions every day where you and another dealer trade cars back and forth (as they IBanks are doing with C, BAC, AIG etc) then you create a perception that a car is "worth" $1,500 so, when it drops 20% to $1,200, buyer jump in looking for a "deal."  While that may be nice, the formula remains the same so $70,000 on the sides to buy 80 cars becomes $46,000 on the side to buy 60 cars once 20 get sold at $1,200.

    By the way, the model is more complicated than that because the people who buy a car immediately become sellers of cars too so it’s not really $46,000 of remaining sideline cash of 60 cars, it’s really $46,000 of sideline cash remaining to buy the entire lot of 100 cars when they decide to sell.  Next we have the additional problem of new issues.  Since cars are selling "so well", they start making more (just as many banks are now issuing more shares and China is going IPO crazy) but if you make 20 more cars but don’t hire any workers or raise any salaries or give the people enough time to save up more cash on the sidelines, all you do is create a situation where you have 120 cars and just $46,000 left on the sidelines or about $300 per car. 

    This is how manufacturers and retailers can be led down the road to doom by over-optimistic expectations and it is our governments RESPONSIBLITY to ACCURATELY forecast the economy to help our nation’s busineses make sound economic decisions.  Obviously that entire concept is shot to hell these days….

    Schizo/SS – Yep, all you can do is be patient and wait for things to get oversold and other things to get overbought and try to have a good balance of each.   As long as you take positions with scaled entries where you have the convicition to ride out a wrong move, then 1/2 your portfolio does well when the market goes down (and we take non-greedy profits) and then we wait for the other half to improve on a move up.   Getting out even is also key – too many people try to "win" every trade – you have to remember what you were doing, like the last DIA trade, which was a .07 stab at making .20 which didn’t work.  That was a quick in and out and we move on. 

    About 3 times in the past two weeks we’ve done better than .30 on DIA plays so a miss of .07 isn’t a big deal but had I forgotten my goal and rode it out to a .30 loss, I would have erased an entire win – that is silly….   With .07-.10 losses, I can miss 3 times for each win and be even and, if we get a big on like last Wednesday, which paid .90, that makes up for 9 or 10 losses.  The key is to consistently make controlled bets and make sure your overall risk/reward profile makes sense.  There are 289 players in the Baseball Hall of Fame and only 90 are considered "Home Run Hitters" (more than 300 home runs) – the rest find a nice niche they perform well in (pitching, fielding, hitting for average) and make a very nice carrer out of it…

  112. Hopefully this pastes correctly:
    The Truth – Courtesy of the FDIC

    Via ZeroHedge, comes a smoking gun release today from the FDIC. I mentioned last week that the FDIC, which is essentially broke (and by the FDIC, I mean, of course, the DIF – the Deposit Insurance Fund which insures customer deposits up to $250,000), was discussing a plan to re-fund itself by borrowing from its member banks. Today’s FDIC press release confirms just that. "But wait, Kid Dynamite," you might say, "the release says that the FDIC will have banks prepay 3 years worth of fees." Yes – that’s the same as borrowing from the banks.

    Sadly, the FDIC wants to go this route, instead of using a special assessment on the banks, because, in their own words:

    "Furthermore, any additional special assessment or immediate, large increase in assessment rates would impose a burden on an industry that is struggling to maintain positive earnings overall."

    In plain English, that’s like saying "everyone wants to pretend that the banks are solvent, but if we make them actually pay us extra money, it will make it harder to cover up the fact that the banks are insolvent." Thus, we wave a magic wand, and even though the FDIC is asking the banks for 3 years worth of money today, the banks will be able to recognize the cost over 3 years. Since when do we treat insurance as a depreciating asset? It’s not like when you buy an airplane and recognize the cost over 20 years! There is a simple, unarguable fact: if Citibank pays the FDIC $1B TODAY (I’m making this number up) in fees for the next 3 years, Citibank has $1B less in cash today. Not $333MM less in cash – $1B less in cash.

    The FDIC’s release today is a must read – it contains some serious and scary truths about our national financial situation, despite what the press and the administration have been telling us over the past six months.

    Take, for example, this gem:

    "Staff’s current projection of $100 billion in failure costs from 2009 through 2013 is higher than staff’s projection in May of $70 billion over the same period. Projected failures have increased due to further deterioration in the condition of insured institutions, as reflected in the increasing number of problem institutions. Asset quality problems among insured institutions are not expected to abate in the near-term."

    In plain speak: While you read headlines every day about the end of the recession, improvement among all metrics, green shoots, and how great it is to have 9.7% unemployment and over 500k in new jobless claims weekly, the fact of the matter is that in the last 4 months, the estimate for losses from bank failures over the next 4 years has increased by 43%! And guess what – asset quality problems are not expected to abate!

    The FDIC also reminds us of their previous time frame for restoring the Deposit Insurance Fund:

    "In October 2008, the Board adopted a Restoration Plan to return the Deposit Insurance Fund (DIF or the Fund) to its statutorily mandated minimum reserve ratio of 1.15 percent within five years. In February 2009, given the extraordinary circumstances facing the banking industry, the Board amended its Restoration Plan to allow the Fund seven years to return to 1.15 percent. In May 2009, Congress amended the statute governing establishment and implementation of the Restoration Plan to allow the FDIC up to eight years to return the DIF reserve ratio back to 1.15 percent, absent extraordinary circumstances."

    So, last year, the FDIC hoped to replenish the DIF within 5 years. As reality hit, they adjusted this estimate to a 7 year time frame in February. Then, in May, despite an epidemic spread of green shoots in the media, the FDIC again extended the estimate of time needed until the DIF was replenished to 8 years.

    There is another terrifying tidbit in the FDIC’s release that’s easy to gloss over:

    "At the beginning of this crisis, in June 2008, total assets held by the DIF were approximately $55 billion, and consisted almost entirely of cash and marketable securities (i.e., liquid assets). As the crisis has unfolded, the liquid assets of the DIF have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets in failed institutions. As of June 30, 2009, while total assets of the DIF had increased to almost $65 billion, cash and marketable securities had fallen to about $22 billion. The pace of resolutions continues to put downward pressure on cash balances. While the less liquid assets in the DIF have value that will eventually be converted to cash when sold, the FDIC’s immediate need is for more liquid assets to fund near-term failures."

    This is the doozy – the FDIC has been exchanging cash for trash – as banks fail, the FDIC takes assets (as they’ve admitted above: illiquid, presumably low quality paper – perhaps MBS that will turn out worthless?) and gives the failed banks cash to protect depositors. The last sentence of the quote above presumes that in the end, if they wait long enough, these illiquid assets will have value. The problem is, the FDIC needs cash now, and these assets simply cannot be sold for what we’re pretending they are worth right now. If you’ve been following the crisis, you should realize that this is no different from what the banks the FDIC has NOT yet seized have been hoping – that their trash assets will eventually recover. Everyone is sitting around extending and pretending, delaying and praying, refusing to mark to market, and keeping their fingers crossed that in the end, these assets will be worth what we pretend they are worth. What happens if they’re wrong?

    Obviously, I’m adamantly against continued attempts to hide the health of the banking industry. The FDIC doesn’t want to impose special fees on the banks because it’s a tough time for the banks, so they concoct a plan to cook the books -they admit this! They acknowledge that the "prepayment" plan doesn’t really change the balance of the fund!

    "Although the FDIC’s immediate liquidity needs would be resolved by the inflow of approximately $45 billion in cash from the prepaid assessments, it would not initially affect the DIF balance. The DIF would initially account for the amount collected as both an asset (cash) and an offsetting liability (deferred revenue)."

    When you pull forward revenue, you’re not improving the long term health of the insurance fund- you’re taking money now, and giving up money later.

    We need to have another round of special assessments on the banks to shore up the DIF, write trash assets down to realistic levels, seize the bad banks, take the pain, and then we’ll be able to move on unencumbered by a never ending pile of bad debt. As we stand now, failed banks have passed their problems on to the other banks, since the FDIC has inherited fantasy assets which are clogging up the balance sheet of its fund.


  113. Oops…reference left out.  Courtesy of
    I find Kid Dynamite to be a very shrewed and realistic viewpoint…despite the name.

  114. Good morning!

    Dollar took a dive last night which is, of course, the best way to pump the markets quickly.  $1.466 to the Euro, $1.61 to the Pound and 89.5 Yen.   That drove copper up to the 2.5% rule and oil hit $68 with gold back at $1,003.  We’ll see if it’s enough to support the market today, as they seem desperate to do.

    It’s another busy data day:
    7:00 MBA Mortgage Applications
    8:15 ADP Jobs Report
    8:30 Final Q2 GDP and Corporate Profits
    9:00 NAPM NY Report on Business
    9:30 SEC panel on short selling, Day 2
    9:45 NAPM Chicago Business Barometer
    10:30 EIA Petroleum Inventories
    10:30 Fed’s Lockhart speaks on U.S. economic outlook
    12:00 PM Chicago Fed’s Midwest Manufacturing Index
    12:35 PM Fed’s Kohn participates in panel on "Central Bank Exit Policies"
    2:30 PM Fed’s Tarullo testifies on "International Cooperation to Modernize Financial Regulation"

    Oil inventories are a big deal at 10:30 today and  USO is going to be a good short if we have a big build, which I expect.  Analysts are saying there will be a 600Kb rise in crude, 1.2M in distillates and 1Mb in gasoline so net 2.8Mb net build but we had 11.2Mb last week and I think we can beat it by at least 1Mb, let’s say 4Mb at least.  

    With that in mind, I’ll be wanting to buy the USO $37 puts for $2 (they were $3.15 yesterday) and hopefully ride them back to $2.50+, out if we don’t get a 4Mb build at 10:30.

    ADP at 8:30 is a big deal too.  If, for some reason, those numbers are good and the markets break more than 0.5% higher, then no oil puts but I just had a meeting with a bunch of real estate industry people yesterday and none of them are hiring until Spring "IF things get better."  Not statistically significant but NY/NJ is one of the superstar areas of Case-Shiller’s supposed "recovery."