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Wednesday, June 7, 2023



Flashback Friday – EU and the Ghost of Lehman’s Past

It was September 15th, 2008 when Lehman announced they would file Chapter 11.

Lehman had already lost half their value in one day on September 9th as the government failed to step in and assist them.  Whether they were solvent or not became a non-issue as investors lost confidence and put a run on Lehman, making the short attacks on them a self-fulfilling prophecy.  Jean Claude Trichet yesterday, was speaking up for the EU in the same way that Dick Fuld attempted to speak up for Lehman as the end was near.  Fuld could not believe that people were questioning the solvency of LEH and Trichet can’t believe that people are now questioning even the continued existence of the Euro.

"Trichet did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”  As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece, or the euro from tumbling to a nine-month low against the dollar. 

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.  “Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”  He said that according to the International Monetary Fund, in 2010 the average deficit for the entire euro region should be around 6 percent of GDP.  “Can I mention what it is for other major industrialized countries,” Trichet said. “The U.S., a little bit more than 10 percent, Japan, a little more than 10 percent, and you can find out other industrialized countries that are even higher than 10 percent.”

We were discussing these comparisons in the morning post and in Member Chat yesterday and I pointed out that the STUPID countries are, for the most part, better off than the USA, as evidenced by this scatter chart of fiscal irresponsiblility:

So Trichet is not wrong when he says "sure we’re a disaster but look at America and Japan" but, much like Lehman saying they weren’t Bear Stearns – better than nothing can still be nothing to panicking investors.  And panicked they are as benchmark gauges of corporate credit risk in North America and Europe jumped to the highest in about nine weeks on growing concerns that governments will fail to close budget gaps sparked a global drop in stocks and bonds.  REALLY?  Is this actually news to someone?  Is it possible that THAT many people have not been reading our PSW Report?  Have I mentioned I like TBT lately? 

Countries (like the banks were) are overextended.  Last year’s crisis forced them to borrow much more than they wanted to but, if they are given time, they will return to normality.  Just like had we given the banks time, they would have collected 30 years worth of mortgage payments and even a 10% default rate would have washed out over time as banks generally collect 250% of a home’s value over 30 years (yes, mortgages are for suckers, but that’s a different article).  CDS’s jumped 12% in Western Europe yesterday and now the dominos are striking the IBanks again as Credit swaps on Goldman Sachs Group Inc. climbed 15 basis points to 131 basis points, according to CMA.  Contracts on Morgan Stanley jumped 18 basis points to 147, Citigroup swaps rose 23 basis points to 220 and Bank of America Corp increased 23 to 130.  Swaps on JPMorgan gained 17 basis points to 84.  Maybe NOW Government Sachs will start caring?

Asia is freaking out (down 3% this morning), Europe is freaking out (down 2% this morning) and we added some more disaster hedges yesterday but today WE ARE BUYING!  That’s right suckers, sell us your stocks – we are catching those knives.  I finished the 3rd section of our Buy List yesterday and our 45 trade ideas have held up exceptionally well since we began this last round on Jan 9th, when the Dow was at 10,618.  How is that possible?  Selecting stocks with good fundamentals and hedging your entries allows you to ride out these little market dips and we see this little correction as an opportunity to go long with our disaster hedges covering us – just in case we get another leg down.

Back on Jan 9th, I predicted we would be setting up for a down leg, saying: "It’s all about holding that 10,000 line on the Dow now, there is no more room for error to the downside of the markets or we may be seeing 8,650, not 9,650 again."  So here we are, at Dow 10,000 and it is time for us to intiate some long positions.  As I often say to members: "If we don’t buy low, how are we going to sell high?"  THIS is low.  It may not be THE low, but it certainly is A low and if we buy solid stocks that we believe in long-term, then this is an opportunity that cannot be passed up

China is a questionable investment, Japan is a questionable investment, Europe is a mess, the dollar is rising and commodities are falling.  US equities are not looking so bad are they?  I’ve been looking for consolidation around 10,200 and rotation out of the commodity pushers since November and now that we are getting it this is no time to sit on the sidelines moaning about the markets is it?   We’ve been buying on the dips since last week but this (Dow 10,058) was our 5% rule line in the sand since October so how about we give it a fighting chance?  I published our watch levels for Members last night and we’re not going crazy today but hopefully next week we firm up here and we can begin to BUYBUYBUY again.  To be clear, our oder of entry is:  Disaster Hedges first, THEN well-hedged upside stock plays.

Much like the financial crisis, this STUPID crisis is based on something that we knew was going to happen long in advance and, like all crises – this too shall pass.  Speaking of passing – we are passing the most feared event of the week as Non-Farm payrolls showed a 1.2M revision to the prior year (worse, of course) as the birth/death adjustment kicks in.  That means we’ve now lost 8.4M jobs (officially) since the end of 2007.  The BLS shows us 14.8M people are actually unemployed and that is now "only" 9.7% of the labor force thanks to 1.1M "discouraged" workers, who no longer count as unemployed.  If we can only get those other 14.8M people to stop looking for work, we’d be back to full employment!  See, we don’t have an unemployment problem, we have a problem with people who don’t know when to quit!  

Average hourly earnings were up a nickel in January, to $18.89 and I’m sure that went a long way towards covering the 8% increase in gas prices.  Of course, that’s nothing compared to the 6.4% increase in health care costs as our "World class" health-care scam is costing US citizens $282 Million PER HOUR.  That’s right, every hour of every day just take $1 out of your pocket for each family member and THAT’s how much this country is now spending on health care.  $2.47 TRILLION dollars in 2009, 17.3% of our entire GDP and that’s including $2.47Tn of health care.  Our non-health care GDP is only $11Tn so – AFTER we are done doing everything else we do in this country, we have to put in another 22% effort just to pay for health care.

That, my friends is DOUBLE the amount of any other nation on Earth and, considering we have the largest GDP on Earth you would think we would get some kind of discount but, quite the opposite, we get shafted and play the role of this planet’s biggest suckers as "THEY" scam a good portion of our population into voting NOT to change things.  How long can we sustain 6.5% increases in health care.  In just 8 years that will make health care 1/3 of our GDP – maybe when it’s half it will be considered to be a problem?

Oh well, that’s politics (actually it’s not, it’s destroying the economy and robbing the proletariate and setting up an elitist system where the rich get to live while the poor die alone but they shift it to a political arguement so people can wrap it in a flag and call you a communist if you object to being ripped off) and we hate to talk about politics, don’t we.

Meanwhile, it’s time to go shopping, mostly window shopping this morning as we test the waters but those falling knives are looking very interesting this morning! 

Have a great weekend,

– Phil



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Phil, look forward to your write-up over the weekend, after you’ve read European news.
Have a great weekend everyone!

dflam: good point. I have mortgages and lines of credit to the maximum, paying an average 3.8% per annum, and earning an average of 18% for the past seven years. That is the purpose of credit. Not to spend, but to make a profit.

cwan/short strangles,
I was out with just my iPhone and the big stick on the 5 minute chart on /ES or SPY is very impressive.  I was planning on adding short strangles on that dip and only 10 contracts was executed while I was out.  Well, there are always more chances. 
As for your 3:11PM comments, selling more calls than puts may work in a downswing market, but the risks is higher on the upswing:
– Looking at the option chains, the call value decreases faster than put values away from the money.  This means that on the occasion that we get blown out on the upside, it would be costly (despite the help from a lower VIX).  So a 6% cushion seems risky for 4-8 weeks to expiration.  6% for 2 weeks to expiration looks better.
– Short calls usually need more margin than short puts as the strikes are higher.  It appears that the profit percentage is better if we have the same number of callers and putters.  I haven’t done a study on this yet, just a observation.
In shorts, my observation (not scientific) that a 6% cushion on the upside doesn’t seem to be enough for 4-8 weeks to expiration.  More calls than puts may decrease the profit percentage for the same budget. 

BTW: I wasn’t  implying that you were depressed, only that you have a rigid cognitive bias that, while it may be accurate, is impairing your performance. So, I was just drawing the parallel from the depression research.

aclend, actually, I wasn’t diagnosed as being depressed.. but I wouldn’t be suprised if I have been struggling with it from time to time over the last 5 years.  Losing both parents and being within a c. hair of divorce will do it to ya!  But just for your futher edification, at 2:43 today I sold my FAZ position (short) and bought FAS (long).  Unfortunately for me, at 2:50 I sold the FAS and started another position in FAZ.  After averaging down the rest of the afternoon I’m nicely in the hole.  I even had a stop limit order to sell the FAZ at 21.14 but the drop was so violent it blew right past my limit.  So, I recognized the start of the stick, I just guessed wrong on it’s staying power.  I even put in an order to fold if I was wrong.  But  THEN, my stubborness got in the way of me capitulating the short position below the limit I set.  And I had two opportunities to do so back at the limit I’d set.  So yes, I’m stubborn!  Not sure about the pyschoanalysis..  have a great one.

Peter D, what SS positions are you looking at?  I appreciate the guidance.

 Phil, thanks for the CSCO trade. Actually it seems to me that now is a good time to get started. A couple weeks like this one and we’ll be able to pick up some good companies at fire sale prices!

Your comments relating to your study of clinical psychology adapts well to our individual approach to investing. I, personally fall into the category of those that observe the world through "rose colored glasses" . As a businessman that was very successful at raising money for my entrepreneurial ventures, I was once told by a banker " Gel, you are an eternal optomist". I always achieved my objective, but my bias always forced me to take irresponsible risks. I love risk, and look upon it as a challenge, and consider myself invinceable. We all learn from experience, as for example the first week of January I pulled off all my covers, anticipating a typical good market the 1st week of the year, and logged in profits of 200K for the week. The balance of the month was terrible, and I lost my gains plus 100K. So much for optomism. With Phil’s help I am becoming a better trader and keeping in mind my bias to irrational behavior. I am keeping your post as a constant reminder of my weakness.

Just an afterthought, I continually do an assessment of my tendency for over-optomism in order to limit risk, As one who has studied behavior and psychology at a graduate level, have you ever self-diagnosed your bias or propensity for risk, and how do you factor this into your trading attitude?

gel1 – earlier today
"I, personally fall into the category of those that observe the world through "rose colored glasses"." (my emphasis)
gel1 – Tuesday
"Obama is one very troubled dude… he has gone into full campaign mode, trashing the republicans and once again blaming Bush for everything he inherited. This rhetoric is not about solving problems and engendering cooperation, but trying to justify his failed actions of the past year, in an attempt to energize politically the proletariat, for the coming November elections."
If you consider your Tuesday comments about our current President as perceptions seen through "rose-colored" glasses, I’d hate to see the world through your eyes if you really disliked someone.
My point (and my angry response Tuesday) actually is that you are being played, just as are the vast majority of Americans.  How do I mean played? 
As Matt Taibbi discussed in a recent article, this country is deeply entrenched in a class war, and the ruling class has a decided interest in keeping the masses from seeing our current national problems as being a class war.  Through their whores in the MSM, Americans are continually bombarded with the myth that the underlying problems in America today are due to a liberal vs convervative, or a Republican vs Democrat political worldview.  And your comments on Tuesday played right into this, you were played (as I have often been).
My anger was not personal…you’re just a gel1 entry on a trading blog to me, but at the underlying myth that is destroying the fabric of this once great country.
As long as we as a people continue to believe this central lie, we will not heal as a nation….become again a United States.
On a brighter note, I too am keeping aclend’s excellent post as a reminder of my weaknesses….so we have something in common in that regard.

Nice job Phil…..

Hey all; wild day; I was tied up manning the battlestations today to participate here … sorry.
You can always catch up w/ some of my trades on Twitter ….
Mocha … HK again !  Holy moly.
Lots of babies thrown out w/ the bathwater.
Phil baby; how’s that referendum thing going ? … 1110 to 1043 in a couple of days …. O _ _ _ A

Craigzooka … nice call !
Mocha:   MA … I played that bounce early today for about 3 points.   Then I chose not to get in again when it dropped to 217 (close 221).  darn.   I think we’ll see at least one run to 230 or so over the next 2 weeks.  Still have a small long position.
Today I was going long all kinds of energy names; mostly in nat gas space; as they have been pounded all week and were really cheap.  Had a couple of early good swings; then got back in again only to endure a huge downdraft and late day rebound that put me back in the green.  It was wild.

Phil / SPG  (Simon)
Bad news for SPG and all retail reits:  Tenant sales at SPG regional malls dwon 8% year over year !!
How they can spin their results as good and the thing is up $3 is nuts.
Good news for SPG shareholders:  SPG will resume paying dividend in cash.  Had been paying 80% in stock.

BIDU; only up b/c earnings are on the 9th.   Then it gets destroyed.

Great post aclend …  I see my reflection in there somewhere….

My sympathies for the loss of your parents. I recently lost my grandmother who was the closest thing I ever had to a mother and also went through a tough divorce a couple years ago so I understand a bit. I think you proved my point though by acknowledging that you are "stubborn." The "rigid cognitive bias" I spoke of was referring to your belief/position of what the market "should" be doing instead of observing what it actually is doing (and has been doing for 10 months) and working from THAT information. It was not referring to the theoretical point about the depression research; that was just an example of a well-known cognitive bias that affects an individuals’ viewpoint.
Indeed, I have spent a lot of time analyzing my own tendencies and biases. I very much have a "sensation-seeking" bent to my personality (desire for novel experiences, extreme sports, etc.). In trading, this lends itself to impulsivity where I might take a trade on a hunch without thinking through the risk/reward or ignoring or minimizing a possible negative outcome in hopes that I will get a big payoff, just like a gambling addict. More specifically, if we think about the typical "fear and greed" ("hope", I think, is interchangeable with greed in this context) that is so often discussed, then I can get emotional about a certain trade if I am focused on "how much money I could make" if it works out, and dismissing (sometimes intentionally and sometimes unconsciously) important information that could prevent loss. I just did it with GOOG by buying a Jan’11 580c when GOOG was at $576 (pre earnings and an already substantial pullback) and I thought to myself, "I should cover with the sale of a Feb 640 call", which was about $4 at the time if I remember correctly. Then I thought, "Nah, because if it takes off upward, it will be a big win"…"and I don’t want to have to deal with the hassle of rolling on to the next month, etc"…so my other predominant issue, which is lack of discipline (i.e., laziness) also was a factor. Well, we all know what GOOG did and now I will just have to wait for it to recover. Thanks to Phil, I have gotten MUCH better at thinking through the technical aspects of the trades and limiting these mistakes or passing up trades if I miss the good entry but I still deal with it sometimes. Since I also used to not have a good trade plan, I would fall prey to fear and close positions prematurely because, even though I am a risk-taker, loss still hurts. That is one of the reasons I love it here is that, even though Phil doesn’t discuss trading psychology explicitly very often, it seems he understands it and applies it in the trades implicitly. I’m not sure if he is just naturally psychologically equipped to think this way (like a naturally talented chess player who just "has the constitution for it")  or if he intentionally studied it and internalized it so that now it is automatically part of the trades without having to think about it. Either way, I recognized it right away and knew that I had to learn from this guy.
A few of my favorite quotes from The Disciplined Trader by Mark Douglas:
1) The few individuals who have achieved astronomical success in trading, at some point, learned to stop trying to conquer the markets or make them conform to their expectations or mental limitations.
2) There is a direct correlation between your ability to let the market tell you what it is likely to do next and the degree to which you have released yourself from the negative effects of any beliefs about losing, being wrong, or revenge on the markets. (This one was about our tendency to let losers run ("hope it comes back") because we are taught from a young age that being "wrong" or making "mistakes" is a negative reflection of who we are as an individual. So, we avoid closing out losing trades because that is an acknowledgment that we were wrong, which we try to avoid at all costs because it is falsely linked to our identity and self-appraisal/self-worth. It’s a deep chapter.  …and what else is so often tied in with our self-worth and views of success in a capitalistic, materialistic society? MONEY…double whammy of not wanting to "feel" (appear to ourselves!) like a loser. No wonder the phenomenon of traders losing money this way is so ubiquitous. No wonder "having discipline" in your trading is so crucial to success!) I’m telling you this is a bad-ass book!  🙂
3) If you can’t define your own behavior and that of the markets, you can’t learn how to repeat your wins and prevent your losses.
4) When you put on the trade, you had to have some belief about the future. What you need to do is to learn how to release yourself from the demand that your expectations be fulfilled exactly the way you expect them to be. This will allow you to shift your perspective to perceive whatever opportunities exist in the market now, as if you didn’t have a trade on at all.
5) Here is what objectivity feels like:  You feel no pressure to do anything. You have no feeling of fear. You feel no sense of disappointment/frustration/rejection. There is no right or wrong. This is what the market is telling me, this is what I do.  You are not focused on the money but the technical aspects of the trade.

Your all nuts!!! Except for you Cap 🙂

I think matt is just burnt out, he has every right to be angry or feel as though he’s been let down by the very system he’s counted on his whole life (i know, i giggled too). (Cue Washington Post) Taking from the strong and bailing out the weak is not the capitalist way. We are venturing down a road that leads to division. Choices were made that do not adhere to the American way of life and both sides point fingers while they bury us for generations.

Hang in there matt

gel, your more than an entry on a blog to me…you are my comrade and we all go down together.. thats the way Karl Marx would want it

aclend, depression theres an app for that


Cap, how can I access you twitter page? Thanks.

Ha, thanks kustomz.
The philosopher asks the depressive, "Which is worse, ignorance or apathy?"
The depressive responds, "I don’t know and I don’t care."
OK, last is my all-time fav.
A guy walks into a psychologist’s office wrapped in cellophane. The psychologist looks at him and says, "Clearly, I can see you’re nuts."

Is Greece Our Future?   [Victor Davis Hanson]
I lived in Greece for more than two years, and one of my best memories is of a small hotelier at a seaside resort. He checked you in; he cooked; he did the landscaping at night; he did all the maintenance during the day. I asked him why he didn’t hire more help, since his hotel wasn’t all that small and he seemed to be going 24/7. What followed was a harangue about the cost of hiring a permanent worker in Greece, the difficulty of ever firing him if he proved worthless, and why he preferred to do everything himself rather than fill out all sorts of forms and hire unmotivated but tenured employees. Besides, he said, almost everyone was on some sort of pension, disability, or government benefit, and was unwilling to work, so his choices were either illegal immigrants or broke foreign students. Then he launched into a blast against socialism, and explained how he was forced to become an expert tax dodger, how he would barter for all the transactions he could, and why he hated the government. He finished by sighing that in Greece, the people spend their time either devising ways to get government money or scheming to avoid the tax collectors — or, preferably, both.

I think the medicine for Greece’s current crisis will prove more unpalatable than the wasting disease.

magret:  @capcube

aclend- enjoyed your very thought provoking late night entries. Will have the Mark Douglas book in a couple of days. Thanks.

Welcome to the Psychiatric Hotline.
If you are obsessive-compulsive, please press 1 repeatedly.
If you are co-dependent, please ask someone to press 2.
If you have multiple personalities, please press 3, 4, 5, and 6.
If you are paranoid-delusional, we know who you are and what you want. Just stay on the line so we can trace the call.
If you are schizophrenic, listen carefully and a little voice will tell you which number to press.
If you are depressed, it doesn’t matter which number you press. No one will answer.
If you are delusional and occasionally hallucinate, please be aware that the thing you are holding on the side of your head is alive and about to bite off your ear.

robert/5:51PM question,
You are asking what are the strikes, right?  I added SPX Mar 925/1170 and 900/1180 short strangles yesterday, and added the 900/1150 today as I think I’ve given up on any bounce back to the 1150 level.

You have often refered to "household name" companies (eg KO, MCD, NKE XOM ec) as being the ones which will be the fastest to recover in the aftermath of a market meltdown. When you have time, are there any other particular stocks which you reccommend and at what price.  Also what do you think of selling calls on "shortable " companies as disaster hedges rather than buy/wries n EDZ, DXD etc The latter rapidly deteriorate if the market continues to rise for months at a time.  On the other hand you can always roll naked calls. Favourite short term candidate often mentioned are POT, FSLR, FCX and X. Also last week CAP mentioned SPG, SLG and KRE. SPG have gained ground these last days. At what prices would you reccommend shorting these or other companies? Thanks.

Phil, forgot to mention BIDU as a short candidate at €450.

Peter D.  Thanks for the direction.  I will study those this weekend.

Those bullet points from that trading book are great advice.  This sentence especially seems true:
"What you need to do is to learn how to release yourself from the demand that your expectations be fulfilled exactly the way you expect them to be."
I played golf with a psychiatrist for 8 years (not my Dr. BTW, met in an investment club) and he would always say that the essence of mental health is an ability to continually adjust one’s expectations to reality.  He was actually very good at this, where I was an abject failure. 
There’s no better venue than playing golf to see one’s inability to adjust one’s expectations to reality (the pull-hook out-of-bounds, the missed 2.5 footer, etc, etc).  If my score after 4-6 holes was such that I couldn’t imagine shooting a great score, then I’d get despondent and couldn’t enjoy myself.
I actually had to stop playing golf precisely because I couldn’t stop having expectations.  I knew I was becoming a lousy playing partner and its too expensive and time-consuming a sport not to enjoy it.  So I quit, I haven’t played in 5 years although I live on a golf course.
Your observation that Phil manifestly lives by these high-performance standards is right on. Its what I too find most helpful about reading his observations and decisions each trading day.  And I’m happy to say some of it appears to be rubbing off on me as I’ve made some good progress the past 3 months I’ve been a member.  So much so I’m considering trying to play some golf this spring.

Great points. I’m also the average hack golfer and have learned to just enjoy myself, which usually leads to relaxation and hitting better shots anyway! There is an easy-to-read relatively short book by a local but internationally known sports psychologist named Gio Valiante (Rollins College here in Greater Orlando) that did for my golf game what the other book did for my trading. It is called Fearless Golf and is all about the psychological aspects of expectancy and performance. The gist is focusing on continual improvement and mastery of the process (Japanese idea of kaizen). I highly recommend it if you want to enjoy golfing again. Not surprisingly, there is considerable overlap in the material for both books. I’m starting to think there might be something to all this psychology hocus-pocus!  🙂

Boy, this weekends reading is like a trip through "Psycho Central". I have to confess, I contributed to it. One thing is for sure, we all come from different backgrounds, and have had diverse experiences, which makes for a great synergy of ideas and opinions. I have to agree with you, that the level of rancor in the media and the political arena is not helping the divisions in this country, and we are all suffering from the results of political gridlock. I have, however, a much different view of class warfare than most. I believe in the concept of "live and let live" and am not an envious member of society, nor do I pay a lot of attention to how others choose to live. I however do believe the best way to define "class warfare" is the destinction between those who pay taxes and those who do not, and the conflict that exists because of the disparity. Having lived most of my life in California, I have witnessed the destruction of what was one of the best places to live in the US, to unfortunately a state that is in serious deterioration.The state is 540 Billion in debt and has been put in this condition because 60% of the state’s population pays no state income tax, and this majority controls completely the political direction, which has in the past, been to spend money recklessly on non sensical welfare expendituresand to capitulate to the public service unions. There is no way to correct the mess, as the benefits go to the class that pay no taxes. The class that pays all of the tax (40%) are fed up, frustrated over this imbalance and are moving out of the state in droves. This migration makes the imbalance worse in percentages and exacerbates the income shortage further. Now this is real class warfare that has profound results that are becoming catastrophic.. The solution is to have EVERYBODY at least pay SOMETHING, so that they might be more responsible who they vote for. Now, back to my trading strategy for tomorrow!

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