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Weekend Wipe-Out, the Second Wave!

Another week another 100 points lower

Yep, that's all it was, we lost all of 100 points more than last week, when we fell from 10,725 to 10,172 (553 points) and this week we dropped from Friday's Dow close of 10,172 all the way down to 10,067 yet you would think the world had come to an end to hear the media and the traders freaking out.  I'm not going to try to explain it, I can't.  Maybe it's because going into last week we were very bearish but, starting on the 22nd, we let ourselves finally get a little more bullish AND THE MARKET BETRAYED US!

How could the market not zoom right back up?  It always zooms right back up, doesn't it?  As I said a week ago Friday: "Boy, when sentiment shifts – it REALLY shifts!"  My closing comment on Friday the 22nd was "Back to cash but leaving disaster hedges, which are looking great now as this is shaping up to be some disaster" and our weekend "Global Chart Review" showed us to be at some very key inflection points, letting us go well prepared into this week: 

Manic Monday Market Movement

My Jets lost on Sunday so I was not in the best of moods on Monday.  My outlook that morning was: "We still have our disaster hedges in case things get worse but, on the whole, we’re expecting a 1% bounce in the very least off our 5% lines (anything less will be a bad sign)."  We were pretty much at the 5% rule on Friday's close so we focused on the bounce we wanted to achieve in order to get more bullish. 

I noted that the levels we were looking for were not exactly 1% retraces (see post for reasons) and our target retraces were:  Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625.  What were the highs for the week on those indexes?  Dow 10,310 (+10), S&P 1,103 (-2), Nasdaq 2,227 (+2), NYSE 7,098 (-2) and Russell 621 (-4).  So that's a net of +4 points out of  21,355 points worth of predictions on the retrace, accuracy to within .019% - not a bad showing for our patented 5% rule.     

Please, under NO circumstances subscribe to our daily newsletter, where you would have this kind of information every morning and DO NOT get an Alert Membership where we send out our amazingly accurate watch levels to you every day.  Having this sort of advanced information on the markets would be unfair to other traders, who thank you for your restraint…

See how I cleverly used reverse psychology there?  I'm studying marketing techniques, we'll see if this one gets a good response…  Anyway, back to Monday – I warned that things could get ugly and we could see a correction all the way down to 10% but we weren't really expecting anything further than that (Dow 9,650 is our downside target) and that meant it was a good time to consider some bottom fishing using our patented techniques described in "How to Buy Stocks for a 15-20% Discount."  My comment was:

The simple logic for our bargain hunting is this – if you regretted not buying stocks when the Dow was at 8,200 in July and we can scale into positions that break even on a 20% drop that protects us down to 8,200 – then why not take a chance on what may be the 2nd opportunity of a lifetime in 12 months?  We also have over 300 earnings reports so non-stop fun but, for today, we will be seeing what happens and hoping we didn’t get too far ahead of ourselves in our early bottom fishing expedition last week

I reminded Members that we expected an "amazing" GDP report on Friday and that led me to think we had a stick save coming by the week's end in the very least.  In fact, I actually said at the time that we had a ton of economic data "all leading up to a highly inflated Q4 GDP Report (at least 5% now expected) as bullish inventory builds and rising commodity prices gave our economy quite the apparent boost.  If it comes in well and the market flies – we’ll probably sell into it and flip bearish but let’s not get ahead of ourselves." – not a bad call 5 days in advance…  Monday's trade ideas went as follows (adjustments, if any, in brackets):  

  • XOM March $65 puts sold for $1.65, now $2.75 – down 57% (all premium, no change)
  • XOM 2012 $60 calls at $11.30, now $10 – down 12% 
  • AAPL 2011 $190/240 bull call spread at $20, now $17.60 – down 12%
  • AAPL 2011 $150 puts sold for $10, now $11.50 – down 12% (pair trade)
  • LVS 2012 $12.50/22.50 bull call spread at $3.50, still $3.50 – even
  • LVS 2012 $12.50 puts sold for $3.50, still $3.50 – even (pair trade)'
  • LVS March $19 puts sold for .63, now .37 – up 41% (pair trade)
  • AAPL Apr $155 puts/Feb $180 puts for net .20 credit, out at $1 – up 500%
  • AAPL July $185/March $200 net $17.50, now $17 – down 3% (can offer to roll July calls to $175 calls for $5)

It is very important to note that we are entering initial positions here and PLANNING to buy a second round when they are down 20% or more.  It's very difficult to time the market perfectly so we scale into positions when we think we MIGHT be hitting a bottom but we generally stick with stocks we REALLY like A LOT and don't mind owning for YEARS in case we get a major downturn.  As I said last week (and will keep saying) scaling into positions is ESSENTIAL in this kind of market (see "Stupid Option Tricks – The Salvage Play").  I set targets for Members on Monday evening, saying:

All I see here is a normal market correction (long overdue) as people finally catch up and realize the same stuff I’ve been talking about since November when we clearly moved into over-priced area (to the fundamentals).  I’m not going to abandon them now and the fundies tell me that 9,650 is a fair bottom for the markets and we ran up from about 7,500 (I don’t count the spike down) to 10,700 (42%) and the 5% rule says a 10% correction or 12% since we overshot the top.  88% of 10,700 is 9,416 so that’s my bottom call even if we break down here and if we find any support higher than that, then I would consider it more bullish.

So we are buying here, using our classic "How to Buy Stocks for a 15-20% Discount Strategy" knowing full well they may fall another 10% or so.  Why do we do this?  Well, if we do recover quickly from here, we won't be missing a good buying opportunity and if we do drop, then taking a 20% (read the articles!) position on AAPL at net $185 and doubling to 40% if they drop 20% further to $150 for an average of $168 and then doubling down again if they drop another 20% to $135 puts us in an 80% full position of AAPL at an average of $152.  If you don't REALLY want to own a full position of AAPL at $152 then DON'T buy it at $185.  If you do REALLY want to own AAPL at $152 – the only way you're going to get your price is if it goes down.  The trick is learning to enjoy the ride…

Tightening Tuesday – Global Edition

Finally China began taking some real steps to reign in the madness.  As you can now see, it WAS fake Chinese demand driving commodities and look how fast that bubble has burst (but don't worry, I heard the speculators got right on the phone to Rent-A-Rebel and we can expect attacks in Nigeria this weekend to keep oil over $72.50).  Europe was looking to cut back and even Obama gave us a preview of his SOTU proposal saying:

We are going to have to be serious about the deficit in ways that we haven’t been before,” Obama said yesterday in an interview with ABC News. “We need a smarter government, not a bigger government, not a smaller government, we need a smarter government. And we don’t have one right now.”

Not even my most Republican friends can disagree with that one – no sir, we do not have a smart government right now and the last thing we need is a bigger, dumber government!  Speaking of dumb governments, the S&P threatened to cut Japan's credit rating – and their population actually SAVES money!  The Nikkei dropped 300 points from Tuesday's open for the week.  I think I gave a clear enough warning in Tuesday's post when I said: "Fool me once, shame on you.  Fool me twice and I’m a commodities speculator" but I also backed it up with a boatload of statistics and got flamed all over the web by the usual oil apologists who make it their mission to immediately stomp out any unfriendly mention of the giant scam that is the oil trade.  Commodities led the rally lower this week and THAT's my favorite kind of market sell-off!

  • VZ March $30 puts sold for $1.10, now $1.25 – down 14%
  • VZ 2012 $30 puts sold for $5.40, now $5.80 – down 7.5%
  • VZ at $30, now $29.42 – down 2% (waiting to cover with 2012 $30 calls at $5 but will cover with Apr $28 calls if they fall to $1.50)
  • GOOG March $520/540 bull call spread at $12, now $11 – down 8% (roll to $510 calls for $6)
  • GOOG March $510 puts sold for $12, still $12 – even (pair trade)
  • BRK.B Sept $62/$70 bull call spread at $3.80, now $5.70 – up 50%
  • GS Feb $150 puts sold for $4.10, now $5.85 – down 43% (no change yet)
  • CME June $270/290 bull call spread at $12, now $11 – down 8%
  • CME June $250 puts sold for $12., now $11.20 – up 7% (pair trade)
  • AMAT July buy/write at net $10.85/11.43 – on track
  • FTR Aug buy/write at net $6.22/6.86 – on track
  • INTC artificial buy/write, (too complicated to to summarize) – down but fine
  • MBI March buy/write at net $3.90/4.45 – on track
  • TASR 2011 $2.50/5 bull call spread at $1.70, still $1.70 – even
  • TASR 2011 $5 puts sold for .85, now .90 – down 6% (pair trade)
  • XOM 2011 $55 calls at $12.85, now $11.40 – down 11% (we'd like to roll down to $50s for $3)
  • XOM March $65 calls sold for $2.60, now $1.67 – up 35% (pair trade)
  • FDX Apr $75 puts sold for $2.40, now $3.30 – down 38% (not a problem if you REALLY want them for net $72.60)
  • T 2011 $30s at .53, now .56 – up 6%
  • EDZ March $6 puts sold for $1.05, out at .85 – up 19%
  • SDS March $32/36 bull call spread at $1.90, out at $2.60 – up 36%

At 1:36 in Member Chat, I also made the very timely call to get out of AAPL positions, scaling out using trailing stops.  Just because we love AAPL (or any stock), doesn't mean we mindlessly ride out the moves down!  Check out AAPL's chart and make sure you don't subscribe to our service because it is so much more exciting not knowing what's going on (see, that reverse psychology thing works great!).

Fear and Greed are market driversThat was a busy day!  As we had been talking about how Keynesian stimulus policies had created false commodity bubbles that were driving an unhealthy misallocation of resources and I had been channeling my inner Hayek in the morning post, I thought it appropriate to further that discussion that evening in "Hayek vs. Keynes – An Economic Smackdown."  The video is really good if you haven't had a chance to view it yet (at least to an economics geek like me!).  As the markets dragged us lower during the week, I was looking at it as a sensible rotational move out of bubble stocks as the Global governments eased off on the stimulus pedal (but be careful not to mention politics when discussing the markets, as it makes people upset - better to ignore it so we don't ruffle and feathers, right?).  

Wednesday – Weakness or Consolidation?

See, there's an odd sort of flow to these thoughts from one post to the next, isn't there?  As we expected to be testing the 5% line that day, we had to wonder what was next but the nature of the sell-off, driven by the commodity sectors (and SMH was one of our big hedges, of course) was just what we wanted to see in order to have a proper rally driven by companies that might actually HELP the economy instead of bleeding the consumers dry by overcharging them for gooey black liquids and shiny bits of metal.  I made my case for loving a little consolidation for the week but the bulls were having none of it by Friday as they were getting very impatient for the rally that "always" comes.  In fact I said at the open of Wednesday's post: "People have gotten so used to immediate rescues off any drop that holding a floor for two days brings out the doomsayers." 

I pointed out that very rapid rise in ETFs has contributed to the bubbles we're seeing and that those same ETFs can easily be triggered into a frenzy of mindless, panic-selling – which is why I am thrilled with simply not going down as that, in itself, is a victory because things could be much, much worse.  You can read my diatribe on ETFs that morning, where I also warned about the uptick in CDS's, which rose 14.2% on 54 governments since Ocober 9th.  14.2% more wagers on government defaults in 3 months - that IS something to be concerned about!  Adding fuel to the bearish fire was our pal Nouriel Roubini and, daring to mention politics, I said that I thought Obama's spending freeze was a good sign, especially after looking at this:


But they couldn't get the freeze past the Senate, nor could they get the 60 votes needed to empower a balanced budget commission because, as I said on Wednesday: "Like Lot in Sodom and Gomorrah, we can’t find 60 righteous senators who want to get an honest assessment of this situation – perhaps because we all know what the answer is (cut spending, raise taxes) and now one has the guts to actually say it out loud."  We were short from Tuesday's close but expected a big move at 2:15 – kind of like the one pictured HERE

  • GS March $145 puts sold for $5.85, now $6.35, down 10%
  • RSX March $33/31 bear put spread at $1 out at $1.30 – up 30%
  • RSX March $29 puts at $1.10, out at $1.10 - even
  • GOOG artificial buy/write, too complicated to to summarize – down but fine
  • AAPL $210 puts sold for $11.60, out at $7 – up 40%
  • BRK.B March $66 puts sold for $1.50, now .85 – up 43%
  • SYMC March buy/write at $16.37/17.18 – off target (waiting to see next week)
  • PBT Sept buy/write at $10.25/12.63 – on target
  • SLX March $59/56 bear put spread at $1.50, now $2 – up 33%
  • T March $26 calls at .75, out at .95 – up 26%
  • AAPL at $202 – now $192 -  down 2.5%
  • DIA Sept $97/104 bull call spread at $4, now $4.70 – down 10%

The IPad came out at 1:30 and the Fed came out at 2:15 and for no particular good reason the markets flew up into the close.  We had a nice, strong-volume day where we didn't go down for a change and I liked that but, sadly, it didn't last.  Pharmboy posted a great write-up that evening called "Orphan Drugs Are Good!  BioMarin & Illumina" highlighting those picks. 

Thrilling Thursday – Obama plus Jobs (Steve, not employment) Boost the Market

Our momentum off of Obama's SOTU Address lasted all of 5 minutes into Thursday's open before we went right off a cliff, quickly breaking our 5% levels.  PIMCO was in charge of killing the market rally with Bill Gross releasing his very negative outlook that morning, which put the US, UK, Japan, Italy, Greece, France, Spain and Ireland in a "Ring of Fire" were unsustainable debt to GDP ratios will spell DOOM as we attempt to unwind.  As we recovered on Friday morning, Gross' co-PIMP, Mohamed El-Erian said it might be a little soon to talk about "post-crisis" times, expecting instead a slow reset this year: "Too many markets, too many institutions have assumed this would happen quickly." Financial firms need to realize public policy risks and stay ready for a shaky regulatory environment, he told an FDIC conference.  See how brilliant they are - Gross sets it up on Thursday and El-Erian drives it home on Friday and PIMCO's bonds gain Billions over the weekend – all in all, a good 2 day's work by Da Boyz

We had a nice chart outlining the  effect that the removal of stimulus might have on the global economy, George Soros joined me in calling gold a bubble and we were getting all kinds of mixed signals from Davos.  I warned that if gold and the GDP both fell below 1,088 that is was a bearish signal that should not be ignored along with copper $3.20 and ALL of them failed on Thursday.  By 9:38, I had already soured on the market, sending out an Alert to members saying: "Stopped out of DIA $103 calls already at $1.49 (10,200 was the stop line), maybe reload later but expect a sell-off from EU investors as well as quick bull profit taking (which we should be doing too!)."

  • MOT July $7 puts sold for $1.10, now $1.32 – down 20%
  • MOT 2012 $5 calls at $2.25, still $2.25 – even
  • QQQQ $44s at $1.02, out at .90 – down 12%
  • T 2012 $30s at $1.02, still $1.02 – even 
  • T March $26 calls sold for .68, now .58 – up 17% (pair trade)
  • QQQQ $45 calls at avg .31, now .18 – down 42%
  • DIA $104 calls at avg .60, out at .80 - up 33%
  • AAPL March $185 puts sold for $4.75, now $7.25 – down 52% (waiting)
  • AAPL 2011 $180 puts sold for $19, now $22.60 – down 19%
  • QLD March $50 puts sold for $2.50, now $2.80 – down 12%
  • AMZN Apr $110/Feb $120 put spread for .55 credit, now .95 – up 172%
  • ABX March $34 puts sold for $1.80, now $1.90 – down 6%
  • YRCW $1 puts sold for .50, still .50 – even (must get out ahead of meeting!)
  • AMZN ratio backspread, too complicated to summarize – huge winner
  • LVS June $13 puts sold for $1.25, now $1.30 – down 4%
  • LVS 2011 $17.50s at $3.35, now $3.10 – down 6%
  • LVS March $17.50s sold for .85, now .70 – up 18% (pair trade)

At 12:52 I went "VERY LONG," killing the disaster hedges and other unhedged bearish positions.  As I said at the time: "May be a mistake but you have to gamble once in a while."  As I said at 1:09 to Members: "Just the indexes QQQQs and DIA as directional bids (unhedged).  I’m pretty determined to see it through to the GDP in the morning but if we don’t get a move up from Bernanke’s confirmation I’m going to probably give up as that would be one leg of my premise shot right there…"  What a ride it has been since then already!  As I warned at 2:59 into the close

Yes, I like the Qs ($45s at .38 are good at the moment), this is the same "coiled spring" action we had last time they forced down the big Nas names and of course, MSFT and AMZN earnings tonight.  It is still very risky – I’m playing a scenario that has nothing to do with fundies and everything to do with manipulation and sentiment so there’s nothing to fall back on if it fails – keep that in mind!

The problem with Friday's move up is the VIX dropped like a rock and we did not get good prices on our long index plays.  With 3 weeks to go to expiration I elected to hang onto my longs and that still may be a mistake – we'll find out next week!  It would have been far less stressful to follow through with the plan we had all week, which I reiterated in my comment to Members into Thursday's close at 3:53, saying: "Still a little bit bullish for some fun ahead of GDP (but probably selling into that excitement, if any)."

Thank GDP it's Friday!

I definitely got too excited in the morning as things were going our way.  Had I stuck to the original plan and gone short into the run-up on the over-hyped GDP numbers, we could have done much better.  We had gained a nice 150 points from where we flipped bullish on Thursday and I was GREEDY for 10,300 which, of course, never came.  I was expecting a much bigger move up than we got but there was a huge volume of selling that came in wave after wave all day, which was very disappointing as we were driven back to cash without really getting a benefit of that very nice run off the bottom.  

As I had said in the morning post: "We’re not going to be too cynical but we will be getting back to cash (no unhedged positions) over the weekend because who knows what the pundit patrol will have to say over the weekend."  As a junior member of that pundit patrol – I still haven't decided what I want to say and I'll be reading everyone else and attempting to form an opinion in time for it to be useful on Monday.  Sadly on Friday, by 11:15 I had to warn Members: "Things are not looking too strong.  Time to get out of the short-term plays unless you are willing to ride them out (I’m going to).  Certainly if S&P blows 1,088 we need to give up until they get back over."  Having stop levels set and taking them seriously does A LOT to keep you out of trouble. 

  • DIA $104 calls at .67, out at .82 – up 22%
  • GOOG June $490/500 bull call spread at $7, now $6.50 – down 7%
  • GOOG 2011 $470/570 bull call spread at $52, now $53.60 – up 3%
  • GOOG March $590 calls sold for $5, now $3.65 – up 27% (pair trade)
  • AAPL March $180 puts sold for $4.50, now $5.60 – down 24%
  • AAPL 2012 $160s at $62, now $60 – down 3% (we want to roll down $10 for $5 any time)
  • AAPL 2011 $200/230 bull call spread at $11, now $10.50 – down 4.5%
  • AAPL March $165 puts sold for $1.80, now $2.33 – down 29%
  • TBT March $46 puts sold for $1.10, still $1.10 – even

I must have said "cash" about a dozen times during Friday's Member Chat, to the point where it's now the joke we used to use for gold where I just say "Have I mentioned I like cash lately?"  We hate to be in cash, we LIKE to trade but if we don't know what's going to happen next (or at least think we know) then cash keeps us flexible until we gain some clarity.

Meanwhile, what are we doing?  Take a look back over the week's trading and you'll see we're selling puts at lower strikes into a higher VIX and hedging spreads that give us 10-20% downside cushions, not on speculative stocks, but on top-shelf listings like XOM, AAPL, GOOG, T, BRK.B, GS, CME, INTC, ABX…  When the market is throwing a sale we don't go to the junk shelf, do we?  If the market is crashing, then buy the stocks you expect to survive a nuclear war – that's a simple trading premise.  Trading for the long haul doesn't mean a month or even a year, when you can get in cheap on a stock like XOM, it doesn't matter if it drops from $65 to $55 because we will own it for many years and make about $1.50 a month selling premium for a 15% annual return on our $65 no matter what the face value of the stock is.  While we go for much higher returns with our quick trades and spreads, where our long-term retirement virtual portfolios are concerned - 15% a year is good money! 

Also, when you are new to options trading it's very difficult to get over the sticker shock you get selling short puts and calls as they move against you.  As you can see we sold a lot of AAPL puts but that's because we are THRILLED to own AAPL at $180 or less after seeing earnings and calculating what we feel the growth will be.  We sold, for example, March $185 puts for $4.75 because we WANT to buy AAPL for a net price of $180.25.  That was when AAPL was at $202 and AAPL is now at $192 and the March $185 puts are now $7.30 and those puts are down 54%.  That sounds awful but the $7.30 is not only 100% premium but it's still $7 out of the money so AAPL has to drop almost 10% more just to get the guy who we sold the puts to even. 

Meanwhile, we have "sticker shock" in our virtual portfolio with a 54% loss on that position but we didn't sell the puts because we were sure AAPL was going up (we would have bought calls!).  Selling the puts gave us a healthy buffer and an entry to AAPL that was 11% cheaper than $202.  If we are buying a first round at $180.25 and then we plan to double down 20% lower at $145 (probably by selling June $150 puts for $5 or more as AAPL falls) then we'd be scaled into round 2 of our AAPL purchases at an average of $162.50 with AAPL at $145 (down 10%) not really that bad considering we decided to buy AAPL at $202 is it? 

Had we bought the stock at $202 we'd be down $10 while the short puts are only down $2.55 so we're 75% better off already using the options for an entry so don't focus on the 54% paper loss on the puts – concentrate on the plan.  Plan the trade, trade the plan and don't let fear and greed drive your trading.  It happens to the best of us from time to time and, hopefully, we learn from our mistakes and do a little bit better the next time.

Also, keep in mind that, for a balanced virtual portfolio, we needed to pick up long positions as we cashed out our disaster hedges.  We are now bullish without the downside protection, risking the wrath of the market over the weekend but there was pleny of cash to be put to work from our Disaster Plays, last updated with reiterated buys in the weekend post of Jan 10th (see, these things can be worth reading!) and we'll have a new batch ready for Members on Monday Morning, just in case.   The old ones finished the week as follows (and we are out):

  • SMN Apr $9 calls at .73 average, now $1.55 – up 112%
  • DXD Apr $26/33 bull call spread at $2.20, now $3.95 – up 79%
  • FAZ July $20/35 bull call spread at $1.60, now $3.30 – up 106%
  • FAZ July $15 puts sold for $2.45, now $1.70 – up 31%
  • SDS March $34/44 bull call spread at $1.40, now $3.35 – up 140%

So this is the week we took off that round of disaster hedges on the possiblity we find support and this is the week we take that money (over 20% cash to work with, if you hedged just 10% of the portflio originally) and add some long positions.  Since we cashed out at the top, they weren't protecting much anyway and now we put that money back to work and we will certainly be adding bear plays next week if things head south but, hopefully, we got some good entries into some market consolidation and the economy isn't going to fall off a cliff.  That would be nice – I'll let you know if I still believe it after I get some reading done


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  1. Has no one noticed the rise in  BRK A&B shares ?
    Up 17 1/2 % since I bought in.  Nowhere in my reading have I found any mention of it, or any forecast of how high it should go once it’s nestled into the S&P500 index.
    Any thoughts on that ?

  2. BRK – ekor- I certainly have noticed since I have large holdings of both A&B shares. My view is that BRK has been undervalued in this "recovery". In the past, it has been valued at somewhere between 1.4 and 1.6 times book value. That translates into $80-90 per share which is , IMO, as good a target as any. Surely some of the recent run is due to the split and the S&P action. I don’t know how the funds make the purchases, i.e., how much they have to buy and when. I recall reading something to the effect this may be in the area 30% of shares.  In any event, I expect a pull back sometime when this excitement subsides. I think Phil was looking for $65. That train may have left the station already. Similar to Jobs/AAPL; if Warren gets a head cold, look out. My plan is to watch if it runs over $90. I will trim there and look to re-enter later. Certainly there will some exciting option plays which were previously unavailable to us mortals. Great timing on your purchase.

  3. DT- Phil, your thoughts on this? The recent pull back translates to an 8% yield. They are the weak sister here with T-Mobile and are suffering some of the same landline losses as VZ and T. However, there is the mobile and broadband aspects in Europe coupled with the forecasted relative strength of the German economy ("ring of fire’). I note that the dividend is an annual payment which means the stock would be particularly susceptible to a call away on a buy write. Not sure how to defend against this.  

  4. Phil & Stranglers:
    Here is an article I found that is interesting. I suspect Phil will like it as it supports his continuous reminders about selling premium.
    I think it adds strength to the argument in favor of selling strangles as there is a positive bias to selling vs. buying with the caveat on risk/position sizing which Peter has emphasized in great detail. From a personal standpoint, the more involved in these plays the more I find they appeal to me. Essentially , it is establishing  levels and ranges which can be done with a rather high degree of accuracy within a narrow time frame. My business (contracting) requires dealing with estimates and quotes so I am very comfortable with the concept. I don’t have to right on the money, just right on the over/under and build that in the cushion. Occasionally I will get blown out but I am confident those are offset as often in my favor. Also, just as my business has adjustment options for unforeseen circumstances, the strangle plays offer plenty of adjustment angles.
    So, as conditions warrant I intend on allocating more of my portfolio to this strategy.

  5.  pstas / VZ, etc : i like T, VZ, and DT as well. The dividend yields are very healthy, and seem (to the best of my analysis) stable. This means if coupled with very conservative buy-and-write positions, you can get 10%-ish out of these companies (even if called away). What i think is interesting, is that there has not been more rotation into these and other high-yielding stocks (i.e. utilities, in particular).
    Meanwhile, Phil, i’d be interested on your thoughts on AYE at this point i did a buy-write last week, which is working out OK. the call is basically worthless at this point…(up 80%), and the stock is down about 5% since purchase.

  6. Pstas/DT
    I have wondered the same as the drop is somewhat precipitous. I have seen no news that supports the negative sentiment in the stock. It could be sector weakness possibly.

  7. Hello all!

    Jubak/Jordan – Well that’s nothing I haven’t been saying but I’m not so dire in my long-term outlook.  Don’t count the Asian middle class out just yet.  Over the long-term birds gotta fly, fish gotta swim and 2Bn people want IPhones and that’s the kind of crap we should be investing in, the kind of stuff a teenager or an upwardly mobile person "must" have.  Japanese consumers have proven they don’t need homes (not big ones) but they damn well need houses and game consoles and they go to movies and take vacations (because they’re not crushed by housing debt like this nation of working rats in mazes).

    Hey, that reminds me, I have a new theory that’s going to be very unpopular with conservative and I’m not trying to start another buhaha but it occurs to me that what is wrong with the world is OVERemployment, not unemployment.  I can’t find it now but when I was looking up data yesterday I passed by a chart that said in 1920 compaines generated about $10,000 per worker and they paid them about $5,000, now companies generate $70,000 per worker and pay them around $28,000.  That’s messed up!  The real problem is not just that the corporations are obviously not sharing the wealth but the FALLACY that the workers are more productive.  We are not really that much more productive than we were in the 1920s, the difference is that the average worker works more hours now with pre and post work Emails and take-home assignments and long days and long commutes and even when you are sick you work from home.

    It’s all very efficient for the company but what’s happening is that, by having 140M people working 8 hours a day vs. 6.5 in the old days, we’ve eliminated the need for 27M jobs.  And eliminating the need is a funny word because if we who work, all went back to putting in a more reasonable (to human beings) work day, then there would be a NEED for those 27M people.  So maybe we would get paid a little less, perhaps $25,000 instead of $28,000 by cutting our hours back to something in-line with the rest of the world but then 27M people would get $25,000 (675Bn) and corporate profits would drop 10% but maybe they’d sell more stuff.  Just a thought…

    BRK.B/Ekor – The S&P addition had a much bigger effect than it should have but I suppose that a lot of it has to do with Berkshire now being available to "the little guy" and a lot of people are piling in with no regard to actual valuation.  It’s not possible that the company gained $30Bn in market cap just because they joined the S&P is it?  Now they will have a very hard time pleasing people with earnings but I wouldn’t bet against them as maybe they’ll just carry a rock-star p/e for a while.

    $65/Pstas – Yeah, unless Warren is caught napping on camera or something I don’t think we’ll be seeing $65 in the near future. 

    DT/Pstas – I like them in general and we grabbed them last spring around $11 – perhaps they are headed there again.  We have to be careful with Europe until the resolve Greece.  If they fix Greece, then Spain and Portugal won’t look so scary but if Spain or Portugal get hotter while Greece is still on the fire – watch out!  You could certainly do DT at $12.87, sellingt the July $12.50 calls for .95 and the $10 puts for .35, which is $11.57/10.79, which is about 20% down if put to you so not bad for an entry considering the dividend (and, if they drop below $12.50, you can always get another $1.75 rolling the putter to the $10s, which drops your net to $9.82/9.91 – you can’t start out there becuase you’d be called away on ex-dividend day for sure). 

    Strangles/Pstas – I was just sitting down with a fund manager the other day discussing something similar.  It’s very, very hard to contrive a long-term situation in which the consistent bi-directional sale of out of the money premium doesn’t win out over time.  The only issue is managing for those "black swans," which tend to come along more often than people think and that’s the key.  As an individual investor, a black swan event can knock you to zero and then you lose the ability to reset and sell until the next big move.  As a contractor, you are not likely to get wiped out by a problem with a home, even if it turns out you have to dig through 200 feet of granite to get a pipe to the street but the market can move 10% against you while you sleep and the critical thing is to have a plan that lets you dust off from something like that and get back on the horse. 

    AYE/Hanna – I like the utility plays as long-term income producers and AYE is back near the March lows despite improvements in profits, mostly because they do have a massive $5Bn debt to service and a 2% uptick in interest rates would wipe out about a quarter’s worth of profits (or the dividend!).  Let’s suppose we quesiton their value at $20 but we would be willing to go in at $17.50.  You can buy the July $17.50 calls at $3.75 and sell the $20 calls for $1.90 for net $1.85 on the $2.50 entry with an upside of 35% if they hold $20.  You can drop the basis (if you REALLY want to own them at $17.50) by selling the $17.50 puts for .60.  They are now .45 but I say .60 because unless AYE drops below $20.50 you have no need to cover anyway as that’s a locked in 35% in 6 months and I KNOW you KNOW not to be greedy.  Anyway, if we are forced by circumstances to sell the puts for .60, it drops the basis to $1.30 with a 92% upside at $20 and a b/e way down at $18.80.  Compare that to buying the stock for $20.95 where you need to get to $22.15 to make the same $1.20.  Of course, as AYE goes up, you can add a couple more calls and get more upside too but watch the 50 dma at $24.50.

  8. Dollar at $1.386 to Euro and $1.5985 to Pound and 90.26 Yen for a buck.  That’s bad for TBT short-term and, of course, commodities won’t like that one bit if it holds up on Monday.  Looks like I many have picked the wrong week to cash out of SMN!

    Toyota (TM -0.9%) – now facing a Congressional investigation over its handling of a record recall related to sudden-acceleration problems – is liable to face a grim start to next week as Tuesday’s sales numbers give a look at the debacle’s damage.

    Green shoot: China is resisting pressure to let the yuan gain or to initiate a formal tightening policy. The government’s main goal is to cap inflation, says PBOC’s Zhu Min, and the "current accommodative fiscal and monetary policy" will continue. (ETFs: PGJ, FXI)

    A Big Three price war in beef bowls (Japan’s analog to America’s hamburger giants) has the chains trying to shave off already razor-thin margins – perhaps the most visible indicator that Japan’s deflationary expectations may be hard, if not impossible, to shake.

    Greece makes you think, writes Randall Forsyth – in this case, about the prospect that sound monetary policy and sound fiscal policy may not go hand in hand, but that sound money could help feed credit excess.

    Friday eyes turn to financial failures. A big bank hasn’t tanked since AmTrust went down nearly two months ago – and while large-cap fears have eased, smaller institutions are showing weak results and are still likely to go down like dominoes.

    First Regional Bank of Los Angeles leads five bank failures, bringing the annual total to 14, and 154 since the beginning of 2009. The L.A. bank had $1.87B in deposits and a purchase agreement will cost the FDIC’s Deposit Insurance Fund an estimated $825.5M; banks in Florida and Minnesota and two banks in Georgia (I, II) add nearly another $1B to the DIF’s costs.  And the FDIC has how much left now?

    And American Marine Bank of Bainbridge Island, Wash., makes it a full 15 bank failures for 2010, at an estimated cost of $58.9M.

    Tesla Motors files for a $100M IPO. The shine definitely seems to be back on the IPO market; thirty-two companies went public in the fourth quarter, and not only are there 75 firms in the pipeline looking for $13.6B, there may be a big logjam behind them waiting to get in. One contributor: financial services spinoffs.  I like these guys!

    Gotta love the IPad bashing:

    This is a great article in the Times but it cracks me up how "obvious" the signs were AFTER the crisis happens.  The world is just chock-full of armchair experts: The original wave of securitizations took place in the 1920s, when the United States went on the greatest building boom ever. Many investors saw how rapidly real estate prices were rising and wanted in on the action. The builders and brokers were only too happy to oblige.  There was even something similar to the exotic C.D.O.’s, or collateralized debt obligations, that failed so spectacularly. Those securities were not directly backed by real estate, but were instead supported by other securities that had such backing. One 1920s bond was called a “collateral trust” security, with a claim on a building’s profits but not on the building itself.

    Good article – 4 Potential ETF Bubbles and How to Cope:  Gold, oil, stocks and government bonds have experienced large run-ups that have put prices above their historic averages and some feel that these levels aren’t being justified by fundamentals, comments Shawn Tully for Fortune. [How to spot and avoid bubbles.]

    Not so long ago, financiers ruled the roost at the glitzy annual gathering of the global economic elite here in the Swiss Alps. At this year’s gathering of the World Economic Forum, the unofficial theme seems to be, "First, kill all the bankers."  The ire directed at bankers from all sides is palpable, acknowledged Donald Moore, chairman of Morgan Stanley in Europe, as he stood alone reading some charts amidst the hubbub at the forum’s Global Village cafe. Asked which other groups of people have been similarly unpopular in Davos in the past, he said: "terrorists."

    Speaking of wages:  Wage and benefit costs, both before and after adjusting for inflation, grew more slowly in 2009 than in any year since the U.S. government began tracking data in 1982, as double-digit unemployment weakened workers’ ability to command higher pay.  In the past 12 months, the cost of wages and benefits received by workers other than those employed by the federal government rose 1.5%, according to the Labor Department’s employment cost index. In the same period, consumer prices rose 2.7%.  If workers of the World don’t unite, in 50 years they’ll be wishing they were slaves – at least slaves got fed! 

  9. For those that have taken positions in TBT, I strongly recommend reading the John Mauldin missive published this week (This Time is Different) and specifically his comments regarding " Crisis of Confidence". The Treasury has about reached the maximum anticipated level of confidence one can expect from outsiders buying TBills, paying the very low yields. The cracks in confidence are evident, as when one looks at the diminishing % of foreign buyers and the increasing % of Fed buying (household definition). When confidence starts to collapse, it is is quick (BANG) and the crisis is for real. The result is very quickly rising yields in order to attract more fools who are looking at fat yields but oblivious to the risk. As the "level of confidence"continues to fall, which is precipitated by the news of growing deficits and weak GDP, then we soon will see the TBills auctioned at higher yields, as the Fed cannot keep buying the debt and keeping the yields artificially low.. I have positions in TBT and am expecting a big payoff before year end.

  10. Obama talking to the House Republicans – Interesting.  Not too productive but interesting. 

  11. Jubak
     "Consumer demand isn’t coming back. Not anytime soon. Not for a decade or more" That was a strong statement and i think relies on on this fact "treating their houses as ATMs" We have to consider that the Gov has spent its way out of what might have been the next great depression, but i believe all they did was to prolong the recession that may lead us into the next not so great depression. Where does the ability to sustain growth come from, this is the question that must be answered. 

    Another matter that in my opinion has been severely overlooked…Gov debt is your debt and cant be dismissed. What really scares me is that we haven’t had real sustainable growth without very low interest rates. Simply put without the low rates and easy credit we fall into depression. Why can no one see this? The problem we see with Greece is just the tip of the iceberg. How many countries will have to be bailed out in the coming years if things (will) continue to worsen? Every currency around the world is at risk of becoming monopoly money. Lets not mention what can happen when and if QE ends.

    New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary
    Neat global debt clock thats interactive

    You can take this Time magazine article from Nov 2 1992 and use it today, just change the billions to trillions and it would work to describe exactly whats happening at this very time.,9171,976934-2,00.html


  12. Kustomz
    Your analysis of the prospects of consumer demand is daunting but most likely accurate, as you say their house is no longer a source for never ending refinance and take out opportunities. The greatest fear now is the US has to de-leverage as the ratio of debt to GDP is out of whack and interest payments on the debt is sucking out the resources for growth.I believe there is only one way out, as the government debt continues to grow with the wars and never ending entitlements (socialist security payments to now retiring baby boomers), and that is to grow the economy. The Government hiring more people is counterproductive to the solution, therefore the whole economy relies on small business and innovation to jump start this activity.We, however have a major problem – our current administration does not understand this dynamic and will not spend the stimulus in this direction.There is only one solution to this problem, and that is to change the government or educate the incumbents.Do the majority of those who are unfortunately suffering without jobs and in fear of losing everything they have recognize the facts as they exist – Nancy Pelosi designed the stimulus package on her own and the results are in. Oh Boy!

  13. gel

    We can no longer look at our own economy and come to any conclusion or understanding of the level of problems that wait for us in the not too distant future. The world is much more interconnected financially speaking due to globalization of investments. If you look at emerging markets they depend mostly on rising commodity prices for investment or ability to sell debt that is needed for future growth. Hence the quick turn around in commodity prices and explosion in global debt issuance by emerging markets after the bubble burst. I quake at the mere thought of higher interest rates and the impending problems that they usher in.

    We need to look at a whole host of factors to get a better understanding of whats happening and what will happen. It seems the top 20% were hit harder by the bubble than that of the lower 80%.
    “High-income households are highly exposed to aggregate booms and busts,” report Northwestern University economists Jonathan A. Parker and Annette Vissing-Jorgensen in a recent National Bureau of Economic Research working paper. They estimate that our current bust is hitting the income and consumption of households in the top 20 percent of income earners significantly harder than the households in the 80 percent below. And the higher up the distribution you go, the harder the hit is likely to be.

    I think its obvious who needed the bailout and why markets are gunning for the moon, fortunes must be restored. The lower 80% will only continue to struggle and depend on easy credit for any hope as Phil puts it on buying the next IPhone. Phil is absolutely right and i hope I’m not taking his statements out of context when he says we are partying like its 1999. Are we setting the markets up for another tech boom or has it happened without us seeing it for what it is, another bubble. Look at AMZN GOOG AAPL ISRG tell me they aren’t in bubble territory when they are clearly at levels not seen since the market tops back in 2008. Every media outlet and Wall St are pushing tech like its the next coming of you know who. I seen it happen back in the 90′s, deja vu?


  14. Kustomz
    I love your posts and always benefit from them. My feeling is we as a nation have always struggled with change and have experienced a lot of discord both politically and economically as a result of the pulling and tugging in one direction or another as a result of bias and the resistance to accept change. Over the past 80 years we have evolved from an agricultural economy (75% of our GDP was farming related) then on to a industrial economy and eventually evolving into a technology driven economy that leads the rest of the world in this regard. Our superior educational system has permitted this to evolve, and I believe this should be the area where our precious government financial resources should be focused to be spent as stimulus, ie innovative entrepreneurial ground floor start-up ventures. Our government has concentrated the bulk of the stimulus on resurecting failed ventures, (unionized has-been ventures) and targeting temporary projects that have marginal benefit and no long term employment prospects. The almost 1 trillion of stimulus was wasted, for the most part, but the residual drag on our economic future is huge, as we have to de-leverage over a long period of time, in order to liquidate the debt, with the danger of creating another recession as we proceed.with the remedy. As far as bubbles are concerned, I do not regard IRG or APL as components of a bubble, as the P/E ratio is fair for their fundamentals, ie market domination and potential revenue going forward relative to product innovation.

  15. Thanks gel…def mutual

    Speaking of China Phil, now you have to take into account that the poverty line is 1.25 a day but here’s a good tidbit for you.

    China accounts for nearly all the world’s reduction in poverty
    Excluding China, poverty fell only by around 10% globally
    China’s poverty rate fell from 85% to 15.9%, or by over 600 million people. Now can all those people afford a new IPhone probably not but it shows the fact that as they grow richer we here in the US grow poorer so hooray for the Chinese.

    To gels point of education……Not China bashing but it surely brings to light that if we don’t have a highly educated population to take up the slack in steep losses in manufacturing jobs that created most of the millionaires of this country in past decades we will continue down a slippery slope of income inequality which is detrimental to the level of social connectedness across society (not too liberal of a statement was it) which leads to more social programs. We can see this all taking shape in the simple fact of how many of the younger generation need medication just to interact.
    If it weren’t for the Internet, gaming consoles and shows like American Idol i think society would look much different and we’d need to hire more riot police. ;-) Bottom line our Gov needs to figure out a way to reverse the lack of educational attainment which i would assume is due to rapid increase in tuition.



  16. There’s an old saying:  Think Globally, act locally – that everyone seems to have forgotten. 

    To assume we can solve these problems on our own is not too logical.  The world is changing at a far faster pace than it did when the US went from a farm economy to an industrial economy and let’s not forget that the workers leaving the farms caused bubbles in commodity prices and misallocated farm resources in a farm labor shortage (everyone went for higher paying jobs in the cities) which left us vulnerable to the drought that led to shortages during the great depression so it was far from a painless transition going from 75% farming to industrial and now we are going from industrial to what? 

    We have spent the last 40 years tearing down industry and, for the most part, we replaced those jobs with service jobs and construction.  102M out of 140M people now work in services and 14M are still farmers.  There’s only 17M people left in manufacturing – there’s nothing left to save.  6M people work in construction  and we know how that’s going.  We ARE post-industrial and that is our weakness. 

    Out of the measly 102,000 Service Jobs in our country, 20M are government jobs, 20M wholesale and retail, 15M lawyers and accountants, 15M Health Care, 12M hotel workers and 7M bankers (by the way, I have searched and searched and you cannot find any stats on how many US jobs are outsourced – isn’t that strange? CATO says not to worry so I won’t).  OK, now – what do you do to grow jobs?

    It’s housing that really gets the ball rolling as you have Construction, Realtors, Mortgage Guys, Bankers, Legal and then, on new homes, even retail and manufacturing get a boost.  Without getting housing rolling we’re really just spinning our wheels.  The problem with getting housing going is we have no population growth and no money and we already played the game of jamming everyone with a pulse into a mortgage to pump up the economy last decade so everyone here is tapped out. 

    In the 80s, the Japanese saved us by coming in and buying up the country.  We sowed the seeds of our own destruction when we slammed the Dubai port deal and freaked out about foreigners buying our banks (in retrospect, it would have been much cheaper for us to have sold them all off!).   We also destroyed our own housing market by kicking out all the evil illegal immigrants (they had to live somewhere) and fencing off our boarders and tightening up all forms of immigration.  How are you going to employ what was, at the peak, 8.5M construction workers with a stagnant population?  Did the powers that be know this was going to happen when they passed all these rules – of course they did – it’s just math.  The fact that they let it happen, the fact that they made it happen is what should make you wonder about what could be next. 

    Jefferson said:  The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.

    This isn’t a new scam – it’s the same scam that was being pulled in Europe long enough for a bunch of pilgrims to get so disgusted they crammed into a tiny little ship and sailed 3,000 miles to get away from it.  It was bad enough in Europe that leaving everything in their lives behind and going to America to live off the land and fight savages seemed like a good idea and Jefferson was sickened to see the same bankers getting their hooks into our brand new country but, of course, he was just one honest guy and most of the rest of Congress was bought and paid for and here we are today – same old, same old…

    We (America) are in no position to solve this problem by ourselves and neither is China or Europe.  We have a vast planet full of resources but we need to adopt some form of strategic long-term planning to figure out how to grow without depleting things.  We have 185M cars in the US and use 19M barrels of oil a day China has 45M cars and uses 7Mbd of oil and India has 15M cars and uses 3Mbd so about 2Mbd must be for other energy use as a base.  We have 300M people and China + India have 2.5Bn people.  What if China and India do grow their economy and need 300M cars (still just 20% of our own per capita car ownership).  That’s about 35Mb more oil  – not going to happen.  Do we even have the steel available to make that many cars?  Where is this stuff going to come from?  When do we start wars over who gets to have what?

    That’s just with the existing population, we’re not even looking at adding another Billion people every 10 years.  So rah, rah America and all that – I get it, we are the greatest country, we can solve anything with our can do attitude and if the government would just leave us alone Dick Cheney, Lloyd Blankfien and whoever the next Enron is will put together a "thing" that will fix everyting because, deep down inside, they only have our best interests at heart or, as Lloyd says "they are doing God’s work." 

    I think that’s great, let’s not stand in the way of business and innovation but let’s also maybe have a backup plan in case all they give us is more Mortgage-Backed Securities, Credit Default Swaps, Carbon Swaps and jobless commodity bubbles and call it a recovery while they outsource another 5M jobs and raise hours, reduce wages and cut benefits for those lucky enough to still be working.  

    In a New York Times op-ed, Paul Volcker fleshes out the case for stripping commercial banks of their prop desks: "Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest" that even the highest Chinese wall can’t block. And allowing charter banks to play with the hedge funds "only tilts a level playing field without clear value added."

    With $300B of delinquent loans, Fannie (FNM) and Freddie (FRE) are checking files for underwriting flaws and forcing banks to repurchase those loans. The biggest losers are likely to be BofA (BAC), JPMorgan (JPM) and the mortgage giants themselves, who will still be stuck with billions of dollars in properly-documented delinquent mortgages.

    As banker-bashing at Davos sinks to new levels, bankers and regulators say they’ve found some common ground, though details are scarce as to just what the two sides agreed upon and regulators have said changes are coming without industry support.

    U.S. Toyota (TM) dealers could lose up to $2.5B in monthly revenue because of halted sales. Meanwhile, rivals including Hyundai, Ford (F) and GM continue to poach Toyota customers.  Supposedly TM has a fix already so don’t get too excited by these reports.

  17. Thanks Phil, I agree with you on AAPL and will be looking for some positions there, long term calls covered by other calls.  Same with GOOG.
    Will be interested to see what you come up with after your weekend’s reading.  I am entering next week expecting some bearish moves.

  18. I must have missed that episode of the Jeffersons. 

    "To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses, and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account, but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers." --Thomas Jefferson to Samuel Kercheval, 1816.


  19. Jeffersons/Kustomz, I think the song was: 

    We’re mounting our debts, to the Tillions

    We’ll probably de-falult by July

    Mounting out debts

    To the Trillions

    Interest is taking half our budget’s Pie…

    Of course Adams said:  Liberty is not built on the doctrine that a few nobles have the right to inherit the earth.  Ha – what a fool! 

    Here’s Jefferson questioning Hamilton (who was shot by Burr after using smear tactics to stop Burr’s Independent Party run for Governor of NY) about the real motives of his banker buddies. 

    And here we are 200 years and $14Tn in debt later (not, of course, counting $40Tn in entitlement oblgations) with our modern Jefferson (Ron Paul) on Dylan’s show.

  20. Good afternoon
     Phil anyway way we can get a poll going for members so we can take a survey on market sentiment?

     Jeff ? Hamilton i have to watch the whole series!!

  21. Phil — would you roll Feb 48 tbt short puts?  If so, to what?