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Thursday, March 30, 2023


Monday Medical Miracle – Health Care Finally Passes

Paul Krugman summed it up nicely:

There is, as always, a tunnel at the end of the tunnel: We’ll spend years if not decades fixing this thing.

Love it or hate it, the US has just taken a big step towards nationalized health care so maybe now we can finally stop talking about it and move on with the investing!  I think medical devices (IHI) should do well with 32M new patients – that's a play we made quite a while ago though and, like pretty much everything else in this market – they look a little toppy. 

As I noted in the Weekend Wrap-Up, we came to the decision to get back to cash on Friday, removing all uncovered bullish bets and adding our disaster plays, no longer hedges (as there's not much to hedge) but as bets that the Global markets are due for a little correction at this point.  I'm already feeling good about the decision as the futures look awful this morning (8am) as the Hang Seng dropped 2% (437 points) and couldn't get back over 21,000 during the session and has now given up all of March's gains.  The Dow is still up about 400 points in March as well – hopefully our fall won't be as violent as what the Hang Seng saw this morning.  India held up well, only losing 1% after Friday's surprise rate increase. 

The Dollar was very strong after the Health Care vote and we're sitting below $1.50 to the Pound and we've bounced off $1.35 to the Euro twice this morning – a break below there could get very interesting!  The Yen is staying down at 90.5 to the Dollar, which is a relief for Japanese exporters but I'm not sure they'll hold 90 this week.  Copper broke below $3.40 on Friday – confirming our bearish turn and is at $3.32 this morning.  Gold once again is testing $1,100 and silver failed $17 at $16.82 with $16.50 being a bearish signal for metals.  Oil dropped all the way to $79.31 this morning and we'll see if they can get back over $80 but we are going to be thrilled with our short plays (see wrap-up) in that sector

Risk aversion has come up after developments in India and Greece,” said Henrik Gullberg, a fixed-income strategist at Deutsche Bank AG in London. “Any exiting of the current accommodative policy stance is bad for risk appetite and good for the dollar.”  Greek bonds tumbled for a third day, with the yield on the two-year note jumping as much as 18 basis points to 5.55 percent. National Bank of Greece SA, the nation’s biggest lender, led stock declines in Athens, sinking as much as 5.3 percent. The cost of insuring against a default on Greek government bonds rose, with credit-default swaps climbing 26 basis points to 356 – something we'll have to keep a close eye on this week. 

Chancellor Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan, which helped send Greek bonds to their lowest in more than three weeks.  Europe is down 1% across the board ahead of the US open as the dollar pushes that $1.35 mark.  There is a lot of concern over in Europe that the ECB and BOE will follow India's Central Bank in raising rates but that concern will not be mirrored by US investors, most of whom are not aware that India has a Central Bank and many of whom, sadly, can't identify India on a map

Something we should all have plenty of practice identifying this year is failing banks.  On Friday, the FDIC shut down 7 banks, bringing our 2010 total to 37, on pace to shatter last year's record of 140!  As I pointed out in yesterday's "Hedging for Disaster – 5 Plays that Make 500% if the Market Falls," the FDIC seems to step in when banks are already critically short of assets.  The pattern we noted on Friday was that the FDIC had to make up 40% of the implied assets to shut down the banks.  In the case of Utah's $1.6Bn Advanta bank, the FDIC could not find anyone willing to take over the operations and the fund took a hit of $636M on that bank alone

The US may not have officially lost it's AAA rating yet but bond investors have voted with their feet as it costs the US government 3.5 basis points more to borrow money for two years than it does for Buffett's BRK/A as well as PG, JNJ and LOW – who have all recently gotten better terms than Uncle Sam on their loans.  The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating.

The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.  “It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”  

While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.  I may have mentioned liking TBT at some point…

What I'm not liking is cracks showing up in the armor of even those companies that serve our top 10% club.  TIF missed estimates despite positive sales growth as gross margins decline due to, you guessed it – rising commodity prices (diamonds and gold) as TIF is yet another corporation that is having trouble passing along costs.  Just as scary as TIF if news that the Four Seasons in Maui has gone delinquent on its $425 million of mortgages.  MSD Capital LP, the private investment firm of Dell Inc. founder Michael Dell and his family, skipped the February payment on the debt as it seeks to restructure the loan

The Four Seasons Maui has struggled in the past year along with most luxury hotels in Hawaii. Its occupancy fell to 60% in last year's third quarter from 79% a year earlier, according to Realpoint. Its net cash flow declined from $32.9 million in 2007 to $10.9 million in the first three quarters of 2009.  MSD Capital bought the Four Seasons Maui for $280 million in 2004. It then refinanced the property in 2006 with the two mortgages totaling $425 million.

What is the world coming to when the Four Seasons can't make their mortgage payments?  Like I said – I'm not regretting our decision to get to cash one bit – sounds like Michael Dell can use some…



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David… I’m in your CAAS play – I like that one. I wish they had options as it would be great for leverage.

SS, I’m not playing the Stick at these levels, not after the run this morning.  But waiting for a sell-off is getting old.  I may pack it in early and go play with my kids.  You waiting for anything?

Jo – anything at highs scares me, but….that being said, I would enter cautiously and build on the position.  The candle from Friday is large and bearish, so maybe a 1/4 entry and selling the $62.5 Apr10 P for $1, being prepared to roll down as $60 May10s are $1.40.  I would not buy any longs at this point unless there is a pullback.

judah – I agree.

From the trenches: 
While much of the analysis around the passage of the bill centered on insurers, which gain an estimated 20 million customers at a cost of being required to take all comers, analysts were also quick to gauge some big advantages for the biopharma industry. Biotech’s big gain here is approval of a provision that provides 12 years of data exclusivity for new biologics. Biotech lobbyists had pressed hard for this, marshalling enough support from lawmakers to overcome the objections of leading Democrats, including Henry Waxman as well as President Obama, who both wanted a much smaller window of market protection.
BIO CEO Jim Greenwood, who got exactly what he was looking for in the legislation, called it a clear win for the biotech industry. "This provision includes the incentives necessary to attract the massive investment required to speed the discovery and development of the next generation of breakthrough therapies and potential cures for the world’s most debilitating diseases," he said in a prepared statement.
Ira Loss, an analyst for Washington Analysis, tells the
Wall Street Journal
that drug makers probably came out of the legislative wrangle better than any other industry involved in healthcare. There is a new tax on drug sales beginning next year and the pharma industry will have to shell out a few billion more for reform than originally intended. But a whole slate of issues, from reimportation to delaying generic sales, came down in the industry’s favor, much to the disdain of consumer advocates.

In case anyone cares – BIDU appears to be in motion …

check out BIDU

Pharm- re your last post, i dont know much about the space but have been reading in past week.
Who stands to benefit in bio-pharma? Who do you like best?
Also, any thoughts on heathcare IT like EM and MDAS?
Last, your thoughts on ESRX? I really like them…they are generating huge increases in cash flow as a result of their acquisition of WLP’s PBM business…they are forcing patients to opt-in to retail pick-up (rather than opt-out of mail delivery). Mail-order has much higher margins and this will drive increased profits.

I have a very large position in GOOG with a small amount of covered calls. A lot of pundits are strong on the Tech sector, and I would appreciate your sentiment reflecting the next few months for this stock

They like it!  They really like it!! 
If Wall St is all knowing then one would have to deduce that ramming through health care is just fine and dandy for investors.  On the other hand, it could just be that stocks have very little if anything to do with fundamentals/ news  and everything to do with liquidity in the market.  And we’ve all heard that ain’t goin anywhere.. so to the moon, Alice!

From Yahoo news: "Up until today the S&P 500 hasn’t had a correction of more than 0.25% for 17 consecutive days. Last Friday, the Nasdaq closed up for the 13th straight session, something that hasn’t happened in nearly 20 years." I guess I chose the worst time during the last 20 years to be bearish on the market …

 Re BIDU- What does it mean that Google.cn is redirecting traffic to the Hong Kong server. Couldnt the Chinese already do that anyways 

Biotechs/SNS – BIIB  and BioMarin are two I am liking for many reasons.  My writeup has a few others.  Don’t know as much about IT, but GE, GOOG and CERN are the leaders.  EM is cheap and should benefit (I wrote about them last year).  ESRX is doing quite well, and this area will grow. I will have to look at the underlying, as I think they are all takeover candidates from generics…..JMHO.  Medco is my favorite followed by CHSI (I mentioned them here at $23).

GOOG –  hi Phil How should I adjust this put spread Sept 570 long put and short 550call, should I roll up the put and call together and what strike should I pick , thx

 This market up today…..IF it has anything to do with the health care bill, the effects of this won’t really be felt for YEARS.   Isn’t this a good time to get real short Phil?

Good strategy… thanks !

 I also like your GOOG assessment Phil.   I’ve pulled my longs today and will wait for the sucking sound tomorrow, thinking we might get back in nearer $500

I ran to the store and not sure if I missed the chance to get out of TNA 55c w/ a profit. Is that a "conviction" short that I should look to ride and roll? The chart seems to look so. Thanks.

Pharm- Txs…where can I find the write-up you mentioned?

fcx was up 3.00 today; what are your charts confirming? thanks:)

dear phil.
I have TBT Jun 47-54 vertical call spread at $2.5. What do you recommend?

 I’ve purchased some more DIA puts.  More short than long now.

Phil, It seems the Dow is having difficulty holding 10,800…..

Write-up is out here….

Phil – buy Buy BUY!  😉

Actually, I’d like to short what Doug Kass is buying – Dougie has been wrong since Mar.09……

I agree. Isn’t the capitulation of the last holdout bears, one of the indicators?! I’m surprised Phil didn’t mention it.

Check out Obama,  57 states?

Hi Phil I thought I wait till after the market to asked you on the AAPL question, so the intrinsic number that  you get is fromthe TOS platform aprill 210 caller right now I am looking at AAPL 210 caller, it said intrinsic 14.75 and extrinsic is 1.675, so the premium left is the extrinsic value right at 1.675 right now, and this is about 11% of the extrinsic value of 14.75.  If i get your calculation right this time, then I know what to look for from now on, I have been using wrong calculation, no wonder my option has not been working at all, and my roller is all wrong, I will need your guidance to correct my roll up and out on some of my caller, please understand that I am just learning for the last two mos — I know if this is annoying you I will understand …. thx

Howdy short stranglers,
What a day!  Our short strangles with negative Delta was sitting pretty this morning.  Until the tide rose again!  In between meetings and portfolio adjustments, I didn’t have a chance to get on PSW until now. 
What I did was just running away from the rising market like crazy.  With the March puts expired, it freed up a lot of margin.  So I roll 2x some callers up, then flip some short calls to short puts.  Since the puts can be further out of the money (with the same dollar amount as the calls), they can go down in value quickly, even with 2-3 months to expiration.  As the market goes up, we can get more aggressive with higher puts, knowing that SPX 1,000 level probably holds up for a while (don’t quote me on it though, hihihi).

When the market goes down, we need to sell more calls to cover, or flipping putters back to callers.  As long as we get close to even on the flip, we don’t loose if they expired out of the money.  While these adjustments happen, the clock is still running, and the OTM options keep decaying, and we should buy them back later to reduce risks.  For example, the RUT April 600 puts were $1.8 on Friday, they are now $0.95!  In 3-4 days, they could be down to $0.5 if the market is flat.  As we’ll have a boatload of these short puts, we need to buy them back, just in case the market drops 5% on us.  We can always sell a higher put if the bullish trend continues, or sell the same strikes for more if the market turns south.  With all these adjustments, my portfolio managed to be up 1% for the day.  This was because the short puts gave back all their gain when VIX surged last Friday.

All these actions are a stop gap measure only, not our normal strategy.  We went from 1X to 2X to 4X, so now we need to manage the 4X for another 2 weeks, to give a chance for our account balances to regain their highs, then we’ll cut down on the number of contracts.

 It’s after hours, and the GOOG thing in China is all about censorship.   I find it an interesting subject.  Most people don’t realize how common it is in the U.S., much less China.    The internet here is highly censored; so are other forms of communication.  And so is the government.    It serves many purposes, some seemingly benign, others not.  In most cases it’s a form of control over others, I believe.  I find it generally objectionable, but ubiquitous.  Others don’t even realize it’s occurring.  Good subject for an evening’s discussion over a few beers, uncensored.  

iflan… Yes, good idea, but make that beer a Samuel Adams if you don’t mind !

Hi, Peter,
Can you give us some examples of your flips?  Which strike & month to flip to which strike months?
What kind of delta do you try to maintain for your SPX/RUT strangles?  I guess this delta should be relative to the total size of the strangles?  A -500 delta on a total $500K of strangles is not the same as -500 delta on $5M?  So perhaps the target delta should be a % of the portfolio size?
Perhaps you can suggest some actions for those positions in my portfolio that are being threatened: RUT April 690 calls and SPX April 1180 calls and SPX MAY 1160 calls (a BIG Ouch!), all of which are results of several rolls.

Hi Phil sorry I was so busy at work today- I run a medical clinic and what a day today — About GOOG it is a bearish position that you recommended back in february when GOOG was around 520 ish but you have mention that Sept is too early to adjust so I didnot do any thing, the position does not look good right now unless GOOG having a sell off tomorrow.this is the original position opened in feb 25
sold sept GOOG 510put at $34.75
bot sept 570 put at $68.65
sold sept 550 call at $27.65 , net debit $6.25 for the trade, I did not know what I was doing when GOOG run up to $583 I bought back the sept 510 putter on march 11 for $18.90, I should have keep the spread alone and asked you how to adjust the whole thing instead of buy back the puttter and possible sell the sept 510put again for a higher premium when goog go down,  I know now it may not work out the way I was thinking, so now you know the original position, I think you were bearish at GOOG b/c of what happen in Europe that you have menttion before that is why I open the position back then , but market is so crazy —  if GOOG longterm still bullish, could you help me with what I have now or abandon the position and take the loss which I prefer not,  should I sell the sept 530 put  and rolled the both 570 long put and 550 short call up at the same time to sept 600 long put and sell sept 570 call, all for a net cost $2.25 to trade, hopefully I can sell some from month put to get back $ 2.25 next 5 mos.  what do yo think master Phil

when you flip and sell more puts do you buy same amount of put spreads?

Hi Cwan,
It’s a good idea to work through an example.  Say we have 10 RUT Apr 690 callers, and 10 Apr 480 putters (right?), we can roll the callers 2X to 700 or 3X to 710 (preferred).  The 710 calls gained $0.975, while the 700 calls gained $1.7 (about 2X), and the 690 calls gained $2.7 (about 3X).  So we don’t lose anything rolling 2X or 3X at the end of today. What a nice tactic! if we have the margin for it.  We’d roll 2 contracts of the 690 callers to 6 710 callers first and see how that goes.  Now on the put side, we think 620 is a nice support.  One 690 caller at $9.2 can be flipped to 6 RUT Apr 620 putters at $1.72 each, for even.  We have now spent the margin for rolling, but don’t actually put any cash in.  Our positions are now further out of the money on the call side, i.e. more chance of the shorts getting expired worthless, and the Delta is less negative now, reducing loss on the upside.
If the market keeps going up tomorrow, you can still do 3X to the 710 callers, and perhaps sell the 630 putters as we are more bullish.  If the margin on the downside becomes problematic because we have more putters, you can buy back those 10 RUT Apr 480 putters at $0.025.  If the market drops, those remaining 7 RUT Apr 690 callers would give you huge returns.
For SPX, the April 1180 can go to 1200 or 1205.  SPX Apr 1060 or 1070 puts can be sold.   See how SPX is more mellow and there are plenty of strikes to choose from.  The SPX May 1160 callers (yes, ouch) can go to 3X at 1210, and the putters can be 950, 975 or 1000.  The callers may need to be rolled up further, but you have time to wait for a pullback and hopefully margin to roll.

Any knowledge/opinion of SMTS?

Brutal, nutty market …. managed to take a few shekels out of it today; playing very small.
Checkout my post mortem compilation on that terrible piece of legislation and abuse of power that occurred last night:  

now I confused:  in your example, when you said to roll 2x is it mean that you roll all your calls and double amount off calls in higher strike? or you mean that you roll only TWO calls and keep other EIGHT at the previous strike?

I see.  Let’s clarify that rolling 2X means we can roll the entire set of calls or puts, or roll a partial set.  Even if we want to roll 2X the entire set, let’s do it in smaller chunks, in case we don’t need to roll the remaining shorts.  In the example above, I managed to mix the two tactics, a) rolling 2X and b) flipping from callers to putters, in the same message.  We can do each action, the roll and the flip, independently.

tcha, I’m only adding the put spread in May and June, not April’s as we are kinda bullish short term.

SMTS/Acl – sorry, didn’t even know of them until you posted.  There is sooo much out there to learn!  I will look into them and if anything strikes my fancy, I will let you know.

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