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Which Way Wednesday – Fed Up Edition

I don’t know what Fed minutes the market red yesterday but the ones I read scared me!

As usual, I went through the minutes in Member Chat (and there’s a highlighted version in Seeking Alpha minus my color-coding) and the red (negative) statements are far outnumbering the green (shoots) in the minutes including little blow-offs like "the Federal Reserve’s total assets had risen to about $2.3 trillion" and "the Desk had been reinvesting all maturing Treasury securities by exchanging those holdings for newly issued Treasury securities" which, if you put them together in non-BS language, pretty much says: "Of the $1.3Tn in Treasuries sold in 2009, it’s hard to see how the Fed bought less than half of them, maybe closer to all of them since we rolled our short-term paper over each time, therefore buying much more than it seems."

Once again, the finger is pointed sqarely at Commercial Real Estate as, according to the minutes: "Conditions in the nonresidential construction sector generally remained poor. Real outlays on structures outside of the drilling and mining sector fell again in the fourth quarter, and nominal expenditures dropped further in January. The weakness was widespread across categories and likely reflected rising vacancy rates, falling property prices, and difficult financing conditions for new projects."  In a real economy, that statement alone would send investors running for the exits but we also got these three – all in a row:

The dollar value of commercial real estate sales remained very low in February, and the share of properties sold at a nominal loss inched higher. The delinquency rate on commercial mortgages in securitized pools increased in January, and the delinquency rate on commercial mortgages at commercial banks rose in the fourth quarter. The percentage of delinquent construction loans at banks also ticked higher in the fourth quarter. 

Delinquency rates on credit card loans in securitized pools and on auto loans at captive finance companies remained elevated in January but were down a bit from their recent peaks.

Total bank credit contracted substantially in January and February. Banks’ securities holdings declined at a modest pace after several months of steady growth, and total loans on banks’ books continued to drop.

The Fed blows off this bad news by noting that CDS rates were ignoring the weakness in CRE (so we should too?) and, even worse is the way the Fed keeps pretending inflation is something that only happens in science fiction stories by saying: "Although increased oil prices had boosted overall inflation over recent months, the staff anticipated that consumer prices for energy would increase more slowly going forward, consistent with quotes on oil futures contracts. Consequently, total PCE price inflation was projected to run a little above core inflation."  My note to members on this was:

This is important, they were TOTALLY wrong about energy prices so the summary of the whole thing so far is:  The Fed has been pursuing a disastrous free money policy and ignoring the plight of the consumer based on completely misguided expectations that energy prices would not derail the economy.  As energy prices are already up 10% since this meeting and up almost 25% since early February, when these idiots were gathering data – we can pretty safely assume that the policy they came up with was totally wrong!

I had much, much more on the subject but, suffice to say, we went short on the rally, grabbing very aggressive DIA Apr $111 puts for $1.62 and TZA Apr $6 calls for .50, neither one of which made big moves by the end of day so we’ll see if reality hits us this morning or if we have to scramble back to cash – where we feel warm and safe as this insanity storms around us

Are we missing out on something?  Perhaps but, so far, we’re only just testing the top of the range we discussed on March 12th, where we were looking for moves to the 61.8% Fibonacci levels from our indexes at Dow 11,138, S&P 1,226, Nasdaq 2,206 (well above that one), NYSE 7,972 and Russell 677.  As it was a month ago, the S&P remains our lagging index at 1,189 and we are not waiting for the Fib levels to put our cash to work on the bull side, we have our own set of crosses that we’re still patiently (hah!) waiting to confirm

So if you were BUYBUYBUYing yesterday, it was us who were selling to you because, according to the MSM, the Member population of PSW must be pretty much all the people on this planet who are bearish on the market as the rest of the planet has their rally caps on with the average IBank analyst targeting 1,350 on the S&P at the year’s end.  We’re not even that bearish – we’re in cash but we are made to feel like bears for not participating in the rally and for having the nerve to take a few short plays.  This is so much like 1999 I don’t think I can explain it to you if you didn’t live through it.  We have participated in most of the major rallies off the bottom – right now we’re just catching our breath and taking a little time to count our money - which is the kind of strategy that ultimately kept people from being wiped out on the other side of January 2000. 

Yesterday, for example, we made bearish plays with EDZ, GLL, FXP, Oil, DIA and TZA and a few of bull plays on MEE, GILD and RIMM so it’s a little mixed and, as I said, we stop out our bear plays and get back to cash at 11,000, which is where we were doing our shorting.  As you can see from the Weekend Wrap-Up, last week we also had a fair mix in our 28 plays, with just 6 that didn’t work out and 8 long-term bullish plays so it’s not like we’re sitting the rally out in protest – it’s just that we have no faith in it whatsoever – something we like to call healthy skepticism…

Housingwire has a great article by Paul Jackson that explains the total disconnect between our defective economy and the rise in consumer spending.  Jackson asks: "What if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending?"  Jackson points to 7.4M non-current loans with most Americans who are behind on their mortgage now OVER A YEAR behind on their payments.  We already know that Americans stop paying their mortgage long before they stop paying their credit card bills, auto loans etc. because the foreclosure process is relatively slow and, of course, many consumers are waiting for the modification fairy to come and fix everything.

Jackson cites an example of a person who isn’t paying their mortgage living rent-free in the home yet spending more than the $1,880 monthly mortgage on things like tanning, nails, liquor, pay-per-view and "Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker."  Jackson reasonable extrapolates this behavior to show how we could easily be looking at $3.7Bn a month in consumer spending (10%) that is simply a quirk of this in-between stage of people who have given up trying to pay for their homes but haven’t suffered the consequences – YET. 

We has a great discussion in Member Chat last night on the ethics of walking away from your home – as you should any other bad investment.  Are we "sticking it to the bank" or is the bank simply our partner in this home-buying venture that didn’t work out and should be sharing the pain in our mutual bad investment?  However you want to slice it, the fact is that the banks are not moving to foreclose because they’d rather write off a year of missed payments than take back the home and have to write it down when it’s sold as well as having to pay taxes (also past due) and maintenance on their vacant homes as they sit unsold in a bad market.  Frankly, if those 7.4M homes were actually empty, the bank would have to pay someone to mow the lawn, and keep the bugs out and prevent the property from being looted, etc. 

This is how this strange situation is persisting in 2010 but don’t mistake and economic coincidence for real economic strength – it’s just another house of cards that will look nice right up until something makes it all collapse.  Of course it is possible that the market does turn around and the consumers go back to paying their mortgages and the banks don’t ultimately have to write off another Trillion in bad assets but I’m just a little uncomfortable counting on that and, with the markets back at 2007 levels – that’s exactly what investors are doing.

Asia was flat today other than the Hang Seng, which gapped up 300 points at the open and finished the day up 391 (1.8%) at 21,928 – right back to our 22,000 mark after giving us a strong sell signal when they failed it way back on Jan 13th.  The Hang Seng had gone as low at 19,500 so 22,000 is a 12.5% move off the bottom and we’ll be looking for them to complete the move to 15% at 22,500 – anything less than that will be a sign of weakness in the Chinese markets.

Europe is trading down across the board by about half a point as the Euro tests nwe lows against the dollar.  The EU economy "unexpectedly" (to the bulls) stagnated in the fourth quarter as companies cut spending more than previously estimated.  Yes, I know this is the opposite of what you’ve been hearing in the MSM and that is because this is the truth and there’s no place for that in our corporate media outlets.  Data “point to a continued recovery of the world economy, albeit at variable speeds across countries and regions,” the Organization for Economic Cooperation and Development said in a report today. “A number of factors are expected to bear down on activity in the very near term.”  Europe will see “a slow and bumpy recovery,” said Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. in London. “The euro area is set to rely disproportionally on trade this year and next.”     

This is, of course BOOSTING our futures as it means the ECB is likely to remain on hold which means our own Fed can keep handing out free money and we can keep pretending everything is fine for another quarter so YAY, I guess.  Greek 10-year bonds hit a record 407 basis-point spread to the German bund as that crisis gets worse again but US investors are bored with it so we’ll pretend it doesn’t matter now.  Copper briefly failed $3.60 and gold pulled back to $1,125 and that sent miners lower but the free money story is pumping the commodity pushers back up ahead of the US open

Today we have Greenspan testifying to Congress in day one of two days of testimony on the financial crisis starring the usual suspects.  Mortgage Applications were up 0.2% last week as the 30-year climbed from 5.04% to 5.31% during the week.  At 1pm we have the 10-year note auction and that can be a market-mover if it goes poorly.  Midwest manufacturing tapered off in February, largely due to a decline in auto production according to the Chicago Fed. The Midwest Manufacturing Index fell 0.8% to 82.6, paring back a 2% gain in January. Compared to a year ago, the index was -0.5% but the S&P is up 78% so this must be a good thing somehow, right?

Another "good thing" with the IYR up 160% in 12 months imust be that the vacancy rates at U.S. shopping centers and malls rose to 10-year highs in Q1 according to research firm Reis, who predicted no improvement in the near future: "Until we see stabilization and recovery take root in both consumer spending and business spending and employment, we do not foresee a recovery in the retail property sector until late 2012 at the earliest."  Have I mentioned how much I love cash lately?

It’s still pretty crazy out there – be careful!


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  1. gold is 1136.80, copper 3.605, do you feel fcx good to short? if commodities crash, yes--what is your take? thank you,

  2. Very nice Phil! Seems to me reality is now striking the market, hopfully the irratinality won’t be seen today

  3. its nice when msn comes out with "markets to drop on open", helps guide the public--

  4. USO  I’ve a double-diagonal on oil for quite a while, and was quite surprised to wake up today to find that I had been assigned on Apr 40 Callers and was now short 300 shares of USO.   Since I can’t watch the market and don’t want to commit the margin, I want to close out the position today.   Any suggestions as to a price I should look for to cover?

  5. Good morning Phil,
    B/W ACI at 23.25 and July call for 2.50 at 3/2, miss the run to 26+ at 3/17(50%+ profit).  ACI is going up again, should I take profit if I can get 50%+ profit?
    Thanks a lot.

  6. Phil, I know you didnt like MON before, but after missing earnings and guidance on the low end they are near their 52 week lows do you think we are nearing a good entry point?

  7. JRW,  If you’re around, I’d love some lines at these nosebleed heights for IWM.

  8. Good morning!

    Same as yesterday on the whole:

    Dollar getting attacked right at the bell and that’s keeping commodities up and keeping the markets from failing but not a very exciting move so far except for gold, which plowed up to $1,143.

    Transports are still lagging with oil back at $86.67 – perhaps we’ve finally found the breaking point?

    Let’s keep our eye on the ball as we must break ALL of our recent highs (getting old now) of: Dow 10,955, S&P 1,180, Nas 2,432, NYSE 7,497 and Russell 693 – See, I’m being optimistic now and making 3 of 5 green instead of 2 of 5 red but really – if they aren’t all green there is nothing to get excited about and failing all 5 means we are likely failing in general.

    To the upside, we expect resistance at the next set of even numbers:  Dow 11,000, S&P 1,200, Nas 2,500, NYSE 7,500 and Russell 700 - 3 of 5 over here is actually bullish and the Dow, of course is most likely to be next if things go well. 

    AAPL finally broke $240 and that can free up the Nasdaq to go higher but I’m still going for CASH into the weekend and through Tuesday next week – THEN, if we are still over our levels, I will have lots of fun bullish plays to make as we can hedge for a drop well below 11,000 and make great money if we hold up through May expirations using natural and artificial buy/writes and other spreads.  Plus we’ll have the fun of earnings season, which will give us a little better premiums than we deserve in such a well-behaved market. 

    Our short plays aren’t working so it’s back to cash if our indexes start turning green.  I still think it’s all BS but it’s the kind of BS that can make you broke if you try to fight it so nice, comfy CASH is the way to go.

    Monsanto (MON): FQ2 EPS of $1.70 misses by $0.03. Revenue of $3.9B (-3.6%) in-line. Shares -0.3% premarket. (PR)

    10:00 SEC Meets on Asset-Backed Securities
    10:30 EIA Petroleum Inventories
    12:05 BoJ Rate Decision
    12:15 PM Fed’s Dudley: Economic Outlook
    1:30 PM Fed’s Bernanke: Economic Challenges
    2:00 PM Fed’s Hoenig: ‘What About Zero?’
    3:00 PM Consumer Credit

  9. Judah,   JWR is in Fiji.   Per yesterdays post           lines are 69.34,  69.82, 70.44

  10. Stockbern, Ah, missed that. Much obliged.

  11. Mr. Market, Phil starts his vacation tomorrow, so is it too much to ask for 11k today? Thank You.  ;)

  12. I own a BIDU JUN 570 put and am short an APR 590 put. I’m in the trade for $24 or so, so behind a little. Should I roll up the JUN 570 to JUN 590 and the APR 590 to APR 610 for $2 or so?

  13. Morning All – Phil, what do you think of MEE (not me) this morning? $45′s are $3.50!

  14. Phil, do you recommend DD on MEE if I sold May $45 puts short at $2 yesterday?

  15. USO/Eph – Right now we’re in the usual pre-inventory pump-up so not a good time to buy back shares.  Expectations are for a 1.3Mb build in oil, a 1Mb draw in gasoline and a 1.3Mb draw in distillates so a net 1Mb draw is expected but I don’t know where they see this distillate draw with all the warm weather – I suppose they are counting on Easter travel.  USO bottomed out pre-market at $41.50 so around there you should consider yourself lucky to get back.  Meanwhile, you can sell the $42s for .72 and maybe .75 into the inventories if you are feeling brave to re-cover.

    ACI/Bobhu – I’d take 50% now as this was a good run and will very likely reverse a bit – especially as we’re expecting oil not to hold this level. 

    MON/Jrom – Well they sure bounced back fast!  I’m still for staying away – there’s a lot of false assumptions in commodity pricing that may not last the next month. 

    Vacation/1020 – Yes, good reminder.  I will be leaving today at 1pm and semi-around Thurs and Friday.  Back to normal next week but totally off on the weekend!

  16. BIDU/Roast – I’d wait until next week. 

    MEE/Morx – Good for a DD as long as you are moving to 2x (out of 4x) as we could get downgrades that push us further but, meanwhile, averaging in the May $45 puts at $2.75 is very nice!

    I love The DonaldTrump: "China thinks we are dumb SOBs"(3:49)1:25pm  Donald Trump says America should tax China to recoup the money the United States loses through outsourced jobs and manufacturing

  17. Um, what do you mean "moving to 2x (out of 4x)? Was it NPR that used to play, "What did the Fed Chief say…?"

  18. The iPad ($499) version costs about $260 to build. Nice margins apple…

  19. DIA Mattress:  I know we are long the June 110s but should we cover with April 109 or 110?  1/2 cover?

  20.  JROM – MON had a huge reversal – by the time i read your comments they bounced back – i wanted to add to my puts.

  21. AAPL – Hi Phil could you help me reajust these short call, I have 22 AAPL 230 may  short call and 5 Jan 12 240 short call, I made a mistake on this on mean to sell Jan11.
    BIDU short strangle 3 contract June 550 short put and 590 short call, also have 7 contract  Sept 590 short call also, how would you recommend to adjust these position, thx

  22. MEE/Morx – If you are scaling into a position, you make a 1x entry, then DD for 2x on your next entry and then hold the remaining 2x in reserve for rolling or possibly another double down.   On this particular play, we are thrilled to move to our 2x position at a much higher sale price, after which we are unlikely to DD and more likely to just roll them out in time for no additional commitment. 

    AAPL/Kwan – They don’t do anything they can’t make 34% on.

    DIA/Daveo – Our last move was to get naked near 11K and, if the Dow goes over 11K, we sell the $110 puts as a momentum play.  Still a good plan.  Nothing wrong with a 1/2 cover of $109 puts to be conservative.

    LOL – Oil up 2Mb, Gas down 2.5Mb, Distillate UP 1.1Mb – who are these forecasters???

  23. A Greek default may be "unavoidable" without “extraordinary&r… financial assistance from the EU and IMF, according to Stephen Jen of BlueGold Capital Management. "It needs to prove to the market that it can borrow in the next two months. That’s a minimum.”

    The housing market won’t fully heal until two classes of renters – those who have delayed forming new households during the recession and those who lost their homes to foreclosure and need to repair their credit scores and rebuild their savings – make the transition to homeownership. And that may take a while, as many factors are at work.

    AAPL/Gucci – I wouldn’t do anything with May $230s right now.  Earnings are on the 20th so you can give it until next week to see what holds up.  The move will be something like selling the May $220 puts (now $3.25) and using that money to roll the callers up to the May $240s ($11.10) so you spend about $3 out of pocket to move the caller to $9 more in premium but, obviously, this would be so much better of AAPL pulls back to $230 first so I’d give it the weekend.   On BIDU, also, I’d wait for clarity as all you are going to do is roll them along anway and right now I see the June $590 calls can be rolled to the Sept $660s for $12 and, obviously, if you are rolling the $590s then the $550 puts expired worthless and you will be free to sell the Sept $550 puts (now $34) so really, what is there to worry about at $626?

    Keep in mind my advice is clouded by the fact that I think everything is pretty much over-valued up here.  If we get through 11K and hold it then we will have to re-evaluate a lot of these positions because it becomes a lot more likely everything manages to go up another 10% but, since I think that’s completely insane, I therefore think getting through 11,000 makes no sense

    EIA Petroleum Inventories: Crude +1.976M vs. consensus of +1.3M. Gasoline -2.498M vs. consensus of -1M. Distillates +1.074M vs. consensus of -1.3M

    A Business Roundtable survey says 29% of executives expect to increase corporate payrolls over the next six months, while 21% predict their work forces will shrink and half see no change. It’s the first time since Q1 2008 that more CEOs have expected to increase jobs rather than shrink them.   Woo-hoo, so only 71%of coroporations ARE NOT hiring and, of those, only 1/3 are actively firing people.  Wow, what a great economy – let’s buy stuff!

  24. Playing the Turkish Lira today – Selling EUR/TRY…. Enter at market and set stop loss at 2.05…. get out at 1.890 ish.

  25. Phil, The trade bots have been programmed with your vacation schedule.  They just want to mess with you.  Wheee!

  26. Phil
    Your comments from yesterday’s discussion regarding  performance obligations in mortgage contracts does prove one thing for sure… you are a man of compassion, which is comendable. Also… your debating skills are superior to some of the best!, however I approach my position from a totally different oblique, and have a contrarian opinion.

  27. Phil
    Any thoughts on TAM, GOL, the Brazilian airlines?

  28. Obligations/Gel – I love hearing your opinions on this stuff.  There is nothing I like better than informed opposition.  I really do wish I had paid more attention in Business Ethics but the whole thing seemed like such a joke as it’s one of those things that sound good in theory but are rarely practiced.  I’ll be giving the topic more thought while I’m away and I look forward to contnuing when we get back – I think it will work into a very good post on the subject as it’s certainly not an issue that will be going away this year. 

    Whee/Judah – We’ll take what we can get…  Actually, this reminds me of a huge dip we took in ’07 right when I went on a cruise.  The situation was similar and I had a very hard time deciding to remain bearish while mainly out of touch but we were so overbought, as we are now, that I couldn’t see any other way that I could live with myslef.   By the time I got to Spain, the market was down about 300 and everyone on the site was saying wheee!

    Copper failed $3.60 again.  FCX dropping hard.  Gold spiked up to $1,149.20 but back to $1,145 now.  Seems to be some noise about China doing something with their currency. 

    Volume a little better on this morning’s dip – Dow at 57M at 11, which is better than "normal" 50M. 

    TAM/QC – No thoughts at all frankly.  It’s hard enough playing the US airlines.   What are you seeing there?

  29. Hi Phil looking at a play on GS Jan 11 strangle sell 210c and 155p for 15.27 break even 139.73/225.27 your opinion  thks

  30. Phil,
    Question on short term strategy… I like you think 11K is silly and we should not be here, but my opinion on market sentiment is that we could be here for a while and even move higher. For those of us who know the risk, but still want to have a few chips in the game, would running some double diagonal make sense? The theory being that if we are flat or upward trending, one might capture some small profits, and if/when there is a decent correction, the double diagonal could set you up nicely for a longer term bullish spread (eg- taking the profits on the short side and letting the long side run). Thoughts? Thank you.  
    Also, a thank you to Gel, I closed two long spreads simply using  AUS and CAN dollar ETFs for 25% gain on each. Thanks for your currency recommendations.

  31. Peter – You still working on your taxes? Have you seen this site?

  32. Phil
    This is article I was reading.
    Flying High With Latin America’s Top Plays

  33. Maybe instead of putting off the discussion we could all join you at Disney World. What do you think guys? I’m sure Phil’s family wouldn’t mind.

  34. Phil, before you leave on vacation (which i hope you enjoy!!), need some advice. Lemme know what you think about these positiona and action i should take:
    1. TBT. Hold stock. Up 5% now. Sell covered calls, or sell and switch to options? (also hold 50 2012 40s (bought at 10)). I still have a very large position in TBT, so i could just take some off i guess….
    2. AAPL: Have stock 3k shares, sold 30 250 2011 covered calls for about $10, now 25. Roll?
    3. AAPL: Did risk reversal: sold 2011 200 puts (for $25, now 12ish). Bought 2011 200 calls (for $25, sold at $50). Hold the puts? Roll? Close?
    4. GLW : Hold stock. Up 15%. Close? Sell covered calls? Do nothing?

  35. Phil
    If you have time go to the Cafe Tu Tu Tango,

    Cafe Tu Tu Tango
    8625 International Drive 
    Orlando, FL 32819-9334

    (44407) 248-2222
    It’s ok for kids-they will enjoy the dances and artwork. The artists paint on site. The food is also great.
    Try the Sopa de Leon

  36. Dick Bo ve says,
    “Inflation is already back,” he added. “If you were to take out housing in the CPI number, it’s up 4.5 percent—so inflation is back and interest rates are going to go up meaningfully. And that’s going to be very beneficial to the banks, because inflation will help raise real estate prices and higher interest rates will improve their lending curve."
    I thought low interest rates helped the banks’ yield curve?  Or is a yield curve different from a ‘lending’ curve?  While inflation will ultimately cause home prices to rise.. it won’t be before they fall further!  Rising rates hurt home affordability.  When rates go up prices go down.  It’s not until inflation finally gets to wages employers are forced to pay will home prices go up.  And that’s one of the last things to happen.  So, to me, inflation is bad for banks.  Can this guy really be so wrong?

  37. Phil – before you go on vacation can you tank the market big time?

  38. morxlntway – That is a good site for reference. You can also check: ..
    But, none of these sites cover a big gray area, options on ETFs which track indexes like DIA, SPY, FAS, and specially more complex cases like options on VIX, options on USO (which is based on commodity futures), & options on GLD. Still struggling with those.

  39. GS/Yodi – It’s a fair range with risk to the downside if we do have a crisis 2.0 this year.  As long as you don’t mind holding GS long-term though, they’ll probably recover from anything. 

    Diagaonals/Bord – Sure, they work fine in a dull market but, as I said to Yodi above, if we do crash – it is likely to be a "black swan" and you will be looking at assignments.   As long as you stick to stocks you don’t mind shepherding through a correction – then it’s no problem. 

    Gel – We’re going to have to give you a green box for all these currency plays!

    TAM/QC – I like the premise that they are now under the One-pass alliance but that’s tempered by my total distrust of emerging markets and the fact that oil over $85 eventually kills airlines.  I think it’s a good story if they go on sale but I’m not sure if $17.50 qualifies as a sale with what looks to me as a much higher cost-basis on fuel than last year, when they averaged about $11. 

    Disney/Morx – I’m up for that!  Kids are in bed around 9 and we can do a poolside chat session.  Bring the wives and Tina will take them clubbing…


    TBT – I’m out the door but see how the 1pm auction goes.  If TBT heads up, the 30 year will probably give it another boost tomorrow and THEN it’s time to cover, maybe around $52.50.  If they fail $50 – also a good time to cover with perhaps 1/2 May $50s to start.

    AAPL - I don’t see the point in tying up $720,000 in AAPL stock.  You have no reason to sell the long puts and consider that the price at which you will own AAPL again if they drop 20% and you can swap your $241 stock for 45 2012 $230s at $52.75 ($237,375) so you take $500K off the table and you have 1,500 shares worth of uncovered upside that is well protected by the Jan $250 calls and, if AAPL heads higher, you can roll those calls to 1.5X the Jan $270s and that puts you in a $40 spread on 45 calls ($180,000) and you’ve canceled your current $75,000 obligation and you still have a full year to roll and $500K cash on the side to make additional adjustments. 

    GLW – Why not sell the May $19s for $1.60?  That takes you through earnings and gives you 8% protection (1/2 your gains) and worst-case to the upside is you’ve effectively sold your stock for $20.60 so you won’t feel so silly for not covering 50 cents ago. 

    Time/QC – Thanks but no time as I’m mainly seeing my folks and running to Orlando for 2 days and 3 nights so my plan is swimming and walking to Epcot for dinner and maybe Saturday at Universal – not a major vacation. 

    Interest/Matt – Banks like inflation if it’s tame.  They get to keep raising borrowing rates ahead of the curve and there has never been a Fed that’s been friendlier to the banks than this one.  The mortgage crack spread has never been this wide (4.75%+) and don’t forget the banks have been hoarding cash so they don’t need to borrow much more so it’s all a question of what they can lend their money 10x for.  Also, if we re-flate their assets then their reserve requirement goes down and they can leverage even more cash at usurious rates.  Ah capitalism….

    Tank/Dilbert – Sorry, you guys are on your own.  I don’t have enough positions to sell and make a dent but maybe if Hanna and Gel lighten up….  8-)

  40. NVS is getting hammered for some reason. Started on 4/1 with a freeze on selling generic Skelaxin (muscle relaxant).  Why punish NVS for something that is not even in their patent space.  I am going to pick up a few long calls 50 Jan11 for 4.9 for a bounce.

  41. Sudden market boost thanks to:  JPMorgan’s Global Total Output Index jumped to 56.6 in March, the highest since July 2007 and an eight straight month of expansion. Though manufacturing leads the upturn, "the service sector is showing renewed strength." Its employment index moved over 50 for the first time in 23 months.

  42. Not making it to 11k would be a great tragedy, how many days have we traded above 10900 …11 days


  43. Phil you go and rest your brain a bit for the coming season have a nice vacation enjoy !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  44. Thanks Phil and have a great vacation!

  45. Phil… Your confidence in my currency trading skills is enlightening, however, I am still a novice, and would feel uncomfortable with a colored box. When I get to the level of Pharm, Peter, JRW and Matt, I will have the profit to prove my expertise. In the meantime, I’m just truckin along and learning as much as possible, and will post my convictions. Thanks, anyway.

  46. morx, that’s a good clarification.  Thanks!  I’m done with my taxes, and this clarification doesn’t affect me much as I’m mostly in the cash settled indices. 

  47. Currency/Gel – Well you are more of an expert on that than I am.  My brain is way too full to start learning those pairs! 

    Meanwhile, rally not looking so hot again.  Copper did not follow gold up so maybe it’s a blow-off top.  I never filled my GLLs yesterday and if I wasn’t out the door I’d be looking at them today.  I had wanted the May $9s for .50.

  48. How are the short stranglers doing?  This is the 4th expiration on the row that I have boatloads of short puts on RUT and SPX.  Even though I don’t like the run up, I have been able to keep up with all the rolling 2X or more, plus the flipping from short calls to short puts.   I’m seeing that the April putters have lost most of their values, so I’ve closing them out, starting yesterday.  If the market drops, preferrably on Friday, then we’d sell more short puts into the excitement and hopefully get them to expire worthless next week.  I’m going to be in meetings until after the market close, so no comments until then.

  49. gel, thanks for throwing me in with the others but I’ve got a terrible trading record.  I’m just a guy who can see things for what they are and then when I don’t agree with them.. like to rant and make bad investment decisions!  When I’m not being logical I’m being emotional.. and both are terrible traits for a day trader.  But if honesty is what you want.. then I’m your man!

  50. Phil/ 3D television.  I know you are skeptical, as I have been, but my 8-year old brought this to my attention and I thought, "Of course, 3D sporting events."  It has completely changed my long-term view of the possibilities.
    "The [Masters] telecast, originating from Augusta National Golf Club, will constitute the first, live national, “next-gen” 3D broadcast and simulcast of a major sporting event on TV and online, as well as the industry’s first live, multi-camera 3D production."

  51. Hey all,

    I have a long term investing write up available now about Big Lots. I am testing for the first time a long term analysis of a company. I would love to get your feedback. I have given a five year fair value estimate of the company, and I have discounted cash flows available. I know most of you love your short term trading, but I think having both in your back pocket is a nice thing to have.

    Here is the link.

    Good Investing!

  52. Peter or other fellow ss, how do you flip short call to short put, is this done in the same mos.  I have 4 short call spx 1180 in april, very closed I am trying hold till next week and adjust or should I adjust now thx

  53. Gucci,  Unless there is a sell-off by next week, the closer we get to the opex date, the fewer choices you will have.  Many of us roll the short calls and puts as the month goes along, keeping a cushion between the price and the short positions.  At this point, I think you can do two things — first, roll the calls up 2x to April 1190, 1195 or 1200, which you can do for a credit, even, or a small debit, depending on the strike price you choose and how many additional puts you sell as well.  Then, if the SPX keeps marching toward 1200, you can roll out to May.  My advice would be to roll 2x this week and, if that isn’t sufficient, roll to May next week. 
    Hopefully, Peter, Pstas and others will weigh in with advice as well.

  54. OK guys, I’m out of here.

    83M on the Dow at 1pm means we slowed down a lot since 11 and under 140M at 3 is "stickable". 

    10-year note went out at 3.9% with a big bid to cover of 3.72 so that’s good for a relief move.  Bad for TBT of course so we’ll see where it settles down.  30-year tomorrow.

    New York Fed President William Dudley: There’s little doubt that asset bubbles exist and occur frequently – but assessing them and their size will be a challenge. Credit bubbles are likely to cost more when they burst, compared with equities. Rate hikes aren’t as good a tool for deflating bubbles, compared with the Fed’s bully pulpit and regulation.

    Fall guys:  The SEC charges Morgan Keegan (RF) and two employees with fraudulently overstating the value of securities tied to subprime mortgages.

    We may not be going back to 2006 anytime soon, but putting data points together from gasoline to luxuries to cargo suggests consumers are starting to climb out of their bunkers.

    Delta Air Lines (DAL -3.7%) says March passenger traffic jumped 3% on capacity that was lower by 1.6%. Load factor (percentage of seats filled) rose to 84.2% from a year-ago 80.5%.

    Three lunchtime reads:
    1) Why we aren’t headed for ’70s-style "stagflation"
    2) Throwing in the towel on policy makers
    3) Labor, losing influence?

  55. Gucci- Strangles- I agree with juda’s advice. First roll up 2X then out a month. I watch for a spike up to do the rolls for the best chance of additional credits. This has been very annoying as I have already rolled some 2X and 4X (I was playing very close to the edge) and now perhaps looking to have to roll out some May’s out to June to get some margin relief.

  56. I doubt they can keep this up but very impressive
    JP Morgan led all equity capital markets underwriters for the second consecutive year with US$14.8bn in proceeds from 82 issues.

  57. GLD and TBT.  Should they not move in some sort of concert?  Here is the chart comparison.  TBT is down today, gold up.  TBT appears to be a leading indicator on the down turns.  I am going to take a small short position.

  58. MEE diving again

  59. Pharm the 10 year was a success, i think its temporary. I agree with taking a small pos. Seems gold traders arent buying into the hype either.

  60. MEE
    Standard & Poor’s Ratings Services on Wednesday put Massey Energy on its CreditWatch list with negative implications following the explosion at a Massey mine in West Virginia that killed 25 miners. Four miners remain missing.
    S&P could lower or affirm Massey’s "BB-" non-investment grade corporate credit rating after it completes a review

  61. DCTH is forming a nice little island top.  ITMN did this before they exploded.  Mind you, DCTH could go the other way, I am betting not.  I am going to sell a few of the 5s, and buy a few more of the 10s.  We need to move to May though, as theta is gonna kill us if things don’t come out until after OPEX.

  62. Got the GLL May 9s at .50 (Unfortunately, I mistakenly also bought the May 6 Puts and had to quickly sell them for a .05 loss)

  63. Yeah, like the GLLs better.  Not going to move to GLD until it rolls.  Mine are filling slowly as well.

  64. Big short squeeze on AIG today…. up 4.25%…. sold some Apr 41 calls.

  65. Wow, the Fed’s Hoenig is starting to voice what everyone else outside of the Fed is thinking.  What gives?  He’s far too lucid and candid to be a governor.  Must be his mid western roots.  You can’t hide ‘em!

  66. Matt – Kansas was one of the states on yesterdays charts that had the least debt issues when it came to CC and mortgages.  State itself has issues, though..

  67. As usual Steve LIESman is clueless. He should tune into PSW to get some real insight ;-)

    Hoening is truly the only voice of reason, he must be crazy.

    Very anti bullish news here, REITS anyone
    U.S. Regional Mall Vacancies Climb to Decade High, Reis Says

  68. Wheee.

  69. Interesting how the financial sector has behaved just like the talking heads have been predicting.  Financials have been on a tare for over a month now.  Everyone was buy, buy, buy.  But just today, several analysts, and Bob Pisani have voiced concern over earnings this quarter.  Finally, they’re going down some and in my opinion will continue to do so through earnings.  Is it possible they’ve lightened their positions already?  And if so, can the masses still be whipped into action with the pathetic volume we’ve been experiencing such that they can unload while the banks are still rising?  I mean, they went up for a month!  It just doesn’t seem possible they can pull all that off and they still go up.  If so, it must be one hell of an algo.

  70. thx pstas – i am in the same boat the problem is my buying power is now all used up, I am unable to do 2x or 4x, so I have to keep roll to another month and waiting game again, this is very annoying, and next week is earning season, that is a possible continue to go up and up, hopefully price is already bake in and it will sell on good earnign as last earning.  Thx again good day, I may get a break on April short 1180 caller….I will wait till next week and if not expired worthless then here we go roll to another month again

  71.  Nothing new here… Hoening has always been an interest rate hawk… he was one of the most outspoken governors against rate cuts when everything was falling apart in 07 and 08….. he’s not prescient, he’s just always disliked low interest rates.

  72. Gucci,
    I agree with Judah & pstas, roll out & up.  If you have to take some debit in order to roll up to a higher strike, sell some April puts to finance the roll.
    I’ve been selling lots of April puts with really low strikes, like 1050, which is about -12% away from market.
    I am learning the lesson the hard way, as well.  I waited too long before rolling.  For example, I just rolled some RUT Apr 700 calls this morning.  I’m sweating over my margin.  Right now, I’m just trying to survive.

  73. Whomever bought the TNK offering at 12.25 is screaming mad if they did not cover their position.  Transports were the leading indicator.

  74. Hi, Gucci,
    I just saw your comment.  What do you mean when you said you used up your buying power?  Is your BP close to zero?  Do you get a margin call?  Does TOS force you to close positions?
    As you can understand, I am in a similar position, and am quite worried about my margin.

  75. Holy cow!  One minute after Phil stepped out, Dow is down 100 points!  He should take mini vacation at 1pm every day!

  76. cwan-  I was negative 20K this am, has not got an email for margin call yet, but was save this afternoon from 100 plus point drop, now my buying power go up to 15k, still not enough to roll 2x on april 1180 short call, but it drop below 1180, save another day.  Will see what happen tomorrow before roll to may up and way out OTM this time and hopefully I can see some may put to finance it without tap into my buying power $$$. :)

  77. That consumer credit report is really awful.  If you look at NSA numbers, total credit dropped $35.5B (1.4%) from January to February, and that despite a 4.2B increase in federal government nonrevolving credit.  Market SHOULD be down a heck of a lot more than it is, but what else is new.

  78. 1176-8 on the SPX is support as noted above (1180 by Phil).  Bounced right off it.  Needs to hold here.  Earnings are gonna be a big driver this Q.

  79. VZ – not a great chart at all.  Going to have to watch closely to sell some Ps.

  80. Pharm – I think they could go back to 29.5 range (around 50dma). Then we need to see if they hold that or not.

  81. Pharm, Tradansh,  I was thinking the same — selling Ps between 29 and 29.5.  Worked like a charm for me last month. 

  82. Pharm,
    Do you have a play on VIVO? Thx

  83. Ace – VIVO is holding their line here.  I would sell some P to establish and entry for now, as if the market breaks lower, they could follow.  Selling 1.2 20 May straddle here would be OK for an entry, and if they pop up, you can buy 2X the stock for the cover on the calls and roll them up and out.   Support is about 19.30 here. If that is too risky, just sell 1/2 the Ps.

  84. fcx going down, yahoo—

  85. The push to get us back to 10900 was sold into heavily

  86. TBT, anyone.
    Can anyone explain why Hoenig from the Fed talks about the need to raise rates to 1.0%, the market has a nasty (or good day, depending), and TBT FALLS $1.28…. not making sense to me. Thanks.

  87. jburgess, if rates go up more people will be more willing to lend to the US.

  88. TBT, got it. Strong 10 year auction.

  89. FRX – COPD drug rejected.   Those P are gonna be nice!  Wish I could have been around during the spike up….then down, as both could have been played for some nice $$.

  90. jburgess- TBT / interest rates- also note that rising interest rates tends to depress stock prices over time as this decreases the present value of future cash flow streams – all else being equal. So, a spike in rates will likely shock the market down. Just another reason to be cautious about this rally. The drop in TBT today is , I think a knee jerk response to "news". Logic says it should be the opposite.

  91. jburg action speaks louder than words, look at the nose dive in the 30 year today.

    Holy cow Parm didn’t CNBC report they received approval today. Great trade!! Congrats..

  92. Gucci,
    If I were you, I would’ve gotten a heart attack!  Be careful (with your account and your heart)!

  93. Woa!
    "The Federal Reserve said Wednesday that borrowing declined by $11.5 billion in February, surprisingly weaker than the small $500 million gain that economists had expected."
    As Phil would say, who are these people making these predictions?  This has got to be one of the worst ones ever!  And just how are retail sales going up when borrowing is dropping this much?  Are people really switching to cash at a rate high enough to cut borrowing by $11.5B in a month?!  Something doesn’t seem to add up here..

  94. thx cwan I am sweating everyday :) but somehow always end up positive end of day

  95. gel interesting video from Dylan Ratigan pertains to our conversation about folks walking away from their obligations from yesterday..i found it interesting and know you’ll will as well

  96. I agreed with Judah and Pstas on rolling 2X within the same month first, then roll to the next month if necessary.  You guys got this down pat already.
    Let’s talk about the margin issues with Short Strangles:
    1- Check how much short positions that you have:  For TOS users, Go to Monitor, Account Statement, and look at the short Value.  They are in brackets.  If the short values are over 10% of your balance, you are quite greedy with the shorts.  If all the positions are May and April and they are out of the money, you’d make 10+% in a month if the market stays flat for the month.  That’s a lot or profit for short strangles (beating a standard mutual fund by 10x), and hence you’re over-leveraged, and need to get off at any favorable opportunity.
    2- Check the margin on the callers and putters (for portfolio margin account):  For each symbol (SPX, RUT, etc.), click on the BP Effect number to reveal the margin for each PM equidistant test point.  With SPX, the highest test point is 1,253 at the close today, the lowest is at 1,087.  If your BP Effect is much higher at the callers side than the putters side, you are having too many effective short calls versus short puts.  The counts may be the same, but the callers may be a lot closer to the money than the putters.  It’s a good opportunity to flip them, and you’d see a huge margin relief with no additional cash put in.  The reverse is true where you have more putters than callers, just flip them the other way. 
    Rolling 2X would make the margin worse, so we do it when we have plenty of margin left.  Rolling to next month further away from the money reduces the margin requirement.  Sometimes rolling 2X to next month does not increase the margin, depending on what are the strikes.  This is why we do the flipping with less time to expiration.
    If the BP Effect is the same for both sides and you are out of Buying Power, the only way to win is to pray for the market to stay perfectly flat so that we gain on Theta.  As we know how effective the praying in this market, we should cut down on the number of contracts or roll to next month to free up margin.
    In rare cases, the margin drastically increases as some obscure algorithms would deem that you have too many positions concentrated in a symbol.  Then you can just buy them back and sell a different group of security, i.e. change from RUT to SPX or NDX.
    Remember Penson puts on a 1.3X margin multiplier for PM accounts?  Just call TOS to take it off and you’d have plenty of margin for a day or two.  Make sure that you lighten up, rather than adding more.
    3- Check on the Delta of course:  See if your Delta is too negative or too positive, meaning a small move in the wrong way can bring the balance down fast.  This is essentially the same as the margin in item #2, just a different view.
    4- Be wary of VIX:  Even if the Delta is negative (benefiting from a down swing), we can still lose on the downside as VIX goes up, inflating the options value and increasing the margin requirement.  So if you a nearly out of the Buying Power, be also fearful of the VIX surge.  It’s worse if you have a positive Delta and no Buying Power, any overnight drop will result in a margin call.
    Good luck with the adjustments!

  97. Hi, Peter,
    Thanks for such a great summary on margin requirement.  A quick question: how much delta do you recommend?  Is it relative to the size of the portfolio?  A -500 delta for a $500k portfolio can’t be the same as for a $5M portfolio.  So, I think the delta should be a percentage of the portfolio size.  Do you have a rule of thumb on this?

  98. Peter,
    On flipping from callers to putters, what put strike would you choose?  Does the usual rule of buffer zones apply here also?  By buffer zone, I mean the buffer zone when we start a new strangle, say, +10%/-15% 2 months away, +3%/-5% 1-2 weeks away.  So, if I want to flip a May 710 caller, I’d choose maybe May 620 putter, which is about -12% away as we are 6 weeks from May OpEx.

  99. dear peter   can i ask a  basic questions. Under what specific circumstances do you 2x in the same month?

  100.  Peter D   Have you written anything in a condensed form on your short strangle methodology.  I’ve learned a lot just reading your posts but just wondering whether you’ve summarized it all somewhere.  Thanks.  
    I’m using TOS paper trading section to practice your techniques.  

  101. Cwan/Delta (or Position Delta, yes it’s dependent on the size of the portfolio.  How much Delta that we can be comfortable with is a great question as there are no wrong answer in my opinion.  Position Delta of 100 on SPX means we’d lose $100 per SPX point when it moves against the position, i.e. losing roughly $1,100 every 1% move in the index.  Since most people has a mental 10% stop, losing $11k on a $100,000 portfolio when the market moves 10% against your position is bearable.  So Position Delta of 100 for each $100k position is conservative.  Of course, Delta do change as the underlying moves, meaning we are likely to lose more than $10k with a 10% move in the underlying.
    Flipping – You’re right on with the flipping example, which is a low risk move.  Perfect!

  102. Drum/rolling 2X – We roll 2X when we are in trouble.  Our tolerance is very different and thus we would have varying trigger points.  Some of us would roll when we are within 5% of the money, some roll ATM.  The level does vary depending on how long to expiration.  All depending upon your risk tolerance.  You can actually construct scenarios for your own tolerance and just act on it once the market condition triggers it.  You can see that with a capability of rolling up to 8X, it’s very hard to lose with short strangles on the 1X indices.  The ultras though, are much tougher to manage.

  103. lflan/condense version – No, I haven’t summarized it in one place.  I wrote the general scheme to make sure that the long term expectancy of the short strangles is profitable, but no compilation on the tactics yet.  Like many of us, I save my own posts for reference, so one day, I’ll sit down to compile it.

  104. Kustomz
    The Ratigan clip was accurate and factual. It really "wraps" the whole scenario as it was played out,  and one can see how an inexperienced and unformed buyer of a piece of residential property could be " over confident " in their decision to obligate themselves to a financial committment that was over their head. The confidence given to the buyer of property was unfounded, because I always thought Greenspan was "winging it" and hoping for the best.  We now know that was the case. The Senate and House banking committees were the other catalysts that encouraged this over-exposure to risk. There should have been strict oversight to this activity, but no, these same people encouraged the loose regulations and obsene credit risk, as they were the principal cheerleaders that encouraged this activity. Our problem is concentrated in the lack of qualified people who serve our government.  Notwithstanding the shared liability that exists in the resolution of this major problem, I still feel all effort should be made by those that were in a position to benefit from this easy credit, to do everything possible to accept the responsibility to make good on their committment. Had the real estate market strengthened instead of crashing, then they are the ones that would have benefited the most from the upswing.. Fifteen years ago I invested in farm ground ( fully leveraged ) in a huge way, as I had studied the historical valuation of farm ground over the past 70 years, and saw a trend, and I assumed the investment was without risk….. I was wrong as the commodity markets dropped precipitously,  and the value of this land  investment dropped like a rock. I guess I could have walked away, but I would have violated my contractual fully leveraged obligations. I sucked it up and took the losses and made up for the losses later on. I however maintained my good credit rating in order to go to battle elswhere with credit that allowed investment opportunities in the future.

  105. Interesting discussion last night in the wee hours!  I heard  you all mention it today but didn’t take the time to read back until now.  Both sides were well articulated so I don’t want to beat a dead horse.  I’m just glad people are discussing it now because a while back no one seemed to care.  Still not enough do but hopefully the tide is turning.  Ratigan is certainly trying to do his part.
    My two cents:  Many were complicit.  That implies the homeowner was in on the con, too.  Hairdressers were flipping 2 -3 homes a year for a quick buck.  But as Kustomz stated, the home owner would be the last person I would blame.  WTF good is a regulator if they can’t keep the institutions safe?  It’s the reason for their very existence!  If corporations are really people like our supreme court wants us to believe then they HAVE to be protected from themselves because they are some damned fools!   But seriously, the Fed is completely culpable to the extent that they provide the hot money in the market for the MBS that were being bought.  That’s what always amazes me.  There just seems to be a never ending supply of hot money.  If we knew exactly how much money is borrowed from the Fed to buy the $hit then we would know how responsible they were for the bubble.  But I know many pension funds that got CLOBBERED and they don’t get their money from the Fed.  So, can you blame the Fed for that?  I don’t think so.  For that, the blame should be squarely pointed at the ratings agencies.  People trusted the ratings.  The instruments were way too complicated for pension funds to understand.  They just went with the rating bestowed upon them.  But then, upstream from the ratings agencies, you’ll find all the banks and Ibanks that were packaging the MBSs and CDO.  They were slicing and dicing $hit $ix ways to $unday just to confuse the bought and paid for dumb ass posers at the ratings agencies.  So then, it would seem that once again.. it is the BANKS and IBANKS that were at the root of the problem, the most culpable and were the ones perpetrating fraud at the greatest scale as opposed to the occasional hairdresser flipping houses.
    On the other hand, can a government, made up of people, take responsibility for itself without first people taking responsibility for themselves? 
    Dunno.  It’s quite the quonundrum.  Where are the friggin plaintafs’ attornies when you need them?  They’re usually pretty good about finding someone to blame..

  106. Phil; have a nice vacation !

  107. Peter; how do you save your own posts ?

  108. Surprised nobody here was talking about PALM today … takeover rumors … RIMM…. this was so predictable we should have seen it coming !

  109.  Cap, I seriously doubt that Rim will try and take over Palm. I used to work in Waterloo, ON, Rim’s hometown, and everyone encouraged me to buy Rim. But I always said that with Palm in the picture, they didn’t have a chance. Me = idiot.
    Matt, I seriously doubt that the majority of US homeowners were complicit. They just aren’t smart enough. They are just part of the herd who thought real estate just couldn’t go wrong. Did it myself a couple of decades ago (and did I ever pay the price when I got divorced).