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Sunday, October 2, 2022


Yentervention Wednesday – Kan Baffles Bulls


As we discussed yesterday, it was meet the new boss, same as the old boss in Japan as Naoto Kan’s re-election sent the Yen to new highs as he was considered the least likely candidate to back intervention.  Well surprise, surprise this morning as Japan officially intervened in the FOREX markets and sent the Yen down a full 2.5% as they used their Yen to purchase an undisclosed basket of currencies.   

Since the Dollar is up today against both the Pound ($1.55) and the Euro ($1.29), we can assume the dollar is one of those currencies and demand for Dollars means upward pressure on rates so that should be the end of the TLT bounce for the moment.  Stock boys want bonds to die so the money can come this way and bond boys want you to fear the stock market so you will let them hold your money (and charge you fees) at ridiculously low rates of interest.  That’s they Yin and Yang of the markets. 

Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency.  The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.

We’ll see if the stronger Dollar today puts pressure on commodities but we’re in pretty good shape as this rally, for a change, has not been led by commodities as the market is now flat to the August despite an 8% drop in oil prices (see USO on chart):

I often complain about rallies that are led by Financials and Commodities as those are things that suck money OUT of the economy and are not long-term drivers of growth.  The entire 2006-7 rally was this kind of rally and I bitched about it all the way up.  We also had housing back then, another type of commodity, but that’s so dead now it’s hardly worth mentioning, is it?  Actually housing is where we used a lot of commodities like lumber and copper etc.  33 months after the onset of the Great Recession, new home sales are still down 70% and non-residential construction is down 36% – that market is dead, dead, dead

We get housing starts next week but who really cares?  Is it going to be 525,000 or 575,000?  I can tell you one thing, it’s not going to be 2.1M, which is where we peaked out in 2006 and it’s not going to be 1.4M, which was around "normal" in the 90s.  While many bears will latch onto this number and tell you how it spells DOOM for the economy – I’ll give you a couple of reasons why it’s a GOOD thing.

A) Commodities – they get expensive when housing sucks them all up and that makes the cost of goods more expensive for consumers as well as for manufacturers.

B) Savings – With an average price of $250,000 and an average deposit of 10%, each new home sucked $25,000 out of savings accounts – 1.5M less homes sold means $37.5Bn more money in savings accounts.  Ad in mortgage fees, moving costs etc. and you can double that amount.  Also, it pays to consider the vast number of people who have simply stopped saving for a new home as it is no longer considered a goal for many people – that money can be used for other purchases or to pay down debts.  If the average family saved 3 years to buy a new home than that’s a very large amount of money that has been re-directed. 

C) Loans – If they are putting down a $25,000 deposit, they are borrowing $225,000 from the bank.  That’s a demand for $337.5Bn per year of bank capital.  Less demand for money for homes means more money available (in theory) for businesses to expand (and hopefully hire).  

D) Cash flow – Hard to quantify but generally, people who stay in homes can afford their mortgages, the stress comes when they upgrade to bigger homes and have to make bigger payments.  

To some extent, the same thing applies to the 6M cars per year that are not being bought as well.  Of course, cars only last so long before they begin falling apart but so, to some extent, do homes.  At 500,000 homes a year we are only replacing the average US home every 205 years.  Is your home likely to last 205 years?  If not, then at some point, people will HAVE to start buying new homes again.  If we assume 1.5M homes a year is a proper replacement rate (once every 73 years for 110M homes), then we can use the above chart and estimate that about 1.5M homes too many were built between 2003 and 2006 while about the same 1.5M too few homes have been built in the past two years.  This is called "working off excess inventory" and it’s very, very normal and explains whey the Case-Shiller Index has found a bottom of sorts recently:

Interest rates are the real wild-card here as people don’t buy homes, they buy mortgages, so low home loan rates (remember that low demand for money) makes homes seem more affordable and it remains to be seen if buyers really have the stomach to pay 70% of peak home pricing if rates head back to 6%.  At 4.5%, a $200,000 mortgage is $1,266.71 per month, at 6%, that $200,000 jumps to $1,498.88 per month – a 15% increase.  So, we can look at the above chart and knock 15% off if rates had not dropped so significantly during the housing bust and that puts the chart at 136.  7.5% mortgages can drive us down to about 115 so it is not out of the realm of possibility that an event (like the Yen being devalued to the dollar, for one thing) can still drive rates up and drive housing prices another 15-30% lower. 

This is what we consider to be one of the biggest overhangs in the economy because we are not creating enough jobs to create demand for homes and every day we risk an event that raises rates and the banks are still on the hook for 3 years worth of home loans they made at higher prices than those homes are likely to fetch today and that deficit in their loan to value ratios can get MUCH worse very quickly if we do have a rate event and that line drops from 160 to 130 to 115, which would put a whole decades worth of home loans deeply in the red on the banks’ books (if they ever actually mark them that way, of course). 

Don’t be fooled by the recent bounce in financial stocks, Louis Navellier warned yesterday. "High foreclosure rates and low lending rates are acting against the big banks," he says, urging investors to sell these 11 famous financials: STD, BAC, BCS, LFC, C, HBC, GS, JPM, LYG, RBS, WFC.  This morning we got the MBA Mortgage Application Report and that was down 8.9% for the week, despite the fact that the 30-year fixed rates fell from 4.5% to 4.47%.  When I met with the Treasury last month, we discussed rates and (we are not allowed to be specific) I got the impression that they were not all together against the idea of seeing rates drop to 1% if they thought it would actually boost housing but, in fact, they don’t.  That foreclosure rate and lack of new buyers is going to keep housing down for quite a while but, as long as it doesn’t get worse, as I said, not such a bad thing

This overall uncertainty is why we held onto our hedges yesterday as we were only testing the top of our range, so we expected some pullback anyway.  We took advantage of the morning pop to add SQQQ and TZA hedges and we’ll be out following our 3 of 5 rule if we can get over our lines but seeing the Russell struggle to hold the 2.5% line at 650 made us a little dubious as to whether they would be joining us at the 5% mark.  Oil failed to hold $77.50 and copper failed to break $3.50 and gold went higher – all things to make us nervous but not so nervous that we didn’t like ARNA on the dip as a fun, risky trade idea that will make or break on Thursday, when the FDA makes their decision. 

We set up a hedged play on ARNA that pays 1,566% at $5, which is a fun way to gamble on silly biotech stocks.  The idea of a play like that, of course, is not to put 1% of your virtual portfolio in and hope to make 15 times your virtual portfolio on one trade but to put 0.01% of your porfolio and make 15% if it works out.  That way, you can afford to have 10 misses trying to make 15% before you are out even one tenth of one percent of your virtual portfolio – we see trades like these at least once a week so it’s not like they are a rarity. 

Asia was mixed this morning with the Shanghai getting hit for 1.3% but the Hang Seng held flat at 21,752 and that 22,000 line would be bullish for them.  The BSE hit 19,502 with a 0.8% gain and the Nikkei was thrilled with the intervention and jumped 2.3%.  Europe is down about half a point ahead of the US open as protests against austerity budgets broke out in Romania and the EU proposed a ban on short selling that made the markets nervous.  

Also making everyone nervous is our miss on Industrial Production (0.2% vs 0.3% expected) as well as Capacity Utilization (74.7% vs 75% expected) and the Empire Manufacturing Index for September also fell short of the mark at 4.1 vs 6.4 expected and 7.1 prior.  If that kind of data keeps up, then the August "recovery" is going to start looking like a bump on the way down.  However, new orders were the bright spot of the report, up 4.33 vs down 2.71 last month while employment ticked up slightly and prices turned higher.    August Import Prices were up a surprising 0.6%, doubling expectations.

We expected to test our 4% lines today and we’ll see if they hold up at: S&P 1,112, Nas 2,288 and NYSE 7,072.  The Dow has yet to give us 10,608 nor has the Russell seen fit to test 660 but these are the expected pullbacks off our 5% lines and the other 3 have tested the tops and how they behave on a pullback is going to be critical as we decide on our stance into the weekend.  It’s very had to make any conclusions on a day where there has been such a massive currency intervention and I would take all early moves with a huge grain of salt. 



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Some great reading for an otherwise choppy trading day, on the NYSE-Listed Chinese stock UTA (down 30% today based on this simple research):
FRAUD ON THE NYSE? Chinese Travel Company Universal Travel Group (UTA) Appears To Be Mostly A Fiction
Reads like a good detective story, and emphasizes the basic importance of fundamental equity analysis in the age of ETF and Futures-centric markets.   Brings back memories of the late 90’s where people bought anything that had the suffix "dot-com" attached to it — regardless if they had viable businesses at all.  This stock is listed on the NYSE and they rang the opening bell.  One has to wonder just what percentage of Chinese companies are legit.  How long before .cn goes the way of .com?

The same thing happened many times over the last coupe of years in Singapore. Several Chinese companies listed in Singapore (S Chips) have been defaulting on their bonds or went bankrupt. They were just smoke and mirrors. Singaporean auditors never went to mainland China to inspect their assets..
Scary thought….

Today s action looks so much like yesterday’s.
Don t they have a different program for Wednesdays?

Ok, let’s see if I’m right – DIA goes up till noon, then drops till 2, then we try for a reclaim of the high.

UNG – any thoughts on how far this run can get?

lionel:  I have read many stories about scams and underhanded business dealings in China.  Including a very sad situation with a desperate sick family member who was scammed and ended up passing away in China. 
Not that this type of behavior is unique to China, but it has an environment and system that not only turns a blind eye to it, but probably even fosters and encourages it, so its not out of the question to scams and dishonesty on a wide-scale.  I bet once the whole thing falls apart, the scale of it will surprise even skeptics like me.

ARNA – Not sure if you are familiar with Gekkowire.com  but there is a pretty good analysis on the Briefing Document at http://www.gekkowire.com/?p=4843  I was long ARNA but closed out my remaining long position this am after reviewing this analysis… should have taken more of the profits and run per Phil’s rules.  ARNA management don’t seem to have won the confidence of the FDA through this process which is my biggest concern from a Panel approval perspective.   
The site also suggests that the same panel is reviewing Meridia and then Lorcaserin which might put them in an ugly mood for the Lorcaserin review. 
On a more positive note, of the panel crossover from VVUS’ Qnexa, they get 4 postives and 4 negatives.  Of the 8 panel members who were on Qnexa and are not crossing over, only 2 were positive and 6 were negative. 
My other learning here is that you should consider making pharma trade decisions before ta Briefing Document is released as well as prior to the panel review decision. 

I am not saying anything about doing business in China.
This examplifies poor market regulation overseas.
Foreign stock exchanges were so happy to benefit from Chinese IPOs that they have forgone their duty of due diligence in order to secure juicy Chinese deals.
Foreign banks who did the underwriting are also to blame and a few trials are ongoing at the moment.
It is all about greed – not about culture 🙂

Becaful of those Chinese ADRs: yesterday was DYP, today is UTA.

MBIA at 52 week high (MBI) what is up w/ that !!!!

Phil, do you see any easy money leading into Options Expiration? Low-risk put/call sales, high-reward long put/call gambles, etc.

lionel:  Oh, of course.  I don’t blame the Chinese culture than I blame the Internet for the dot.com bubble.  But anytime you have these "wild frontier" markets open up suddenly, you’re going to have greedy folks throwing money into it in order to catch the next motherlode.

Out of MAIL with a decent profit and placed proceeds into a GLW buy/write – selling a January short straddle  @17.5. 17% discount on the stock purchase. This is a good day for this trade as the stock is down 3% today.. With the economic recovery in Asian countries, this stock has a nice future, IMO

Phil, have heard you say so many, many times "Be the house". Can’t tell you how much I appreciate your pounding that concept into our heads. It always comes down to the basic principles doesn’t it?

Phil… Do you have any near term thoughts on GOOG. I have a lot of it, and am thinking there might be better plays.

Max pain for Friday’s IWM is 63.00; 66.00 for end of month. so I’ll be shorting here into the close.


In TZA at $29.59

Out of UNG Jan 6 calls for 15%

JRW, been in and out of TZA a few times for small gains today,
I think you are right (and you usually are), but its been quite a battle so far to scalp small $.

 13 pages of ARNA blog analysis.
Short version, looks like a miss. Front month volatility is the play

Phil- If you have a moment would you help me? i understand range bound markets, POMOs, and technicals. the question I have- I fully expect the POMOs to take us over 1130 at some point. Where does the REAL buying power or demand come from for any possible move to 1200? The POMOs have a complished their job, the mutual funds have no cash, the public ,other than a few johnie come latelys who are destined to buy at the top, have no confidence or desire to be in this market, and the black boxes do not care. thanks in advance- JT

not to quibble but in your morning post the example around the effect of mortgage interest rates raising the monthly cost from 1266 to 1498 is for a 250k mortgage (not 200k) and the increase is 18.3%.

VIX has been stubbornly high today (+0.93, 4.3%).  Either someone is nervous about further Japan currency intervention, or VIX is artificially set by the big boys.

Prognistications – JRW, you don’t have anything to worry about from my competing with you….

Cap / TZA

I’m out if we break north of IWM 65.45; they’ve got TBT flying !!

 Phil:  Thanks for your answer yesterday evening regarding my TBT roll.  For me, it was an instructive, out-of-the-box way of looking at the problem.  However, what you suggest is impossible in my current account.  Ameritrade has a maintenance requirement 6X that of TOS for a naked ultra put.  I don’t have that kind of buying power in my account.  Consequently, I have decided to transfer to TOS, but my account won’t be there until early next week, at best.  I am considering closing out the TBT Sept short put positions now, saying a prayer, and completing the roll per your suggestion next week.  Or do you have a better idea that puts me at less risk in the interim.
My original question:  " I have short puts in vertical credit spreads and have been rolling them downward since spring. I currently need to roll the following positions:  short Sept 43s/long Sept 35s, net credit is $1.83; short September 42s/long September 35s, net credit is $2.06; short Sept 41s/long Sept 35s, net credit is $2.50; short Sept 41s/long Sept 34s, net credit is $1.85; short Sept 40s/long Sept 36s; net credit is $1.60."
Your answer:  TBT/John – Well, generally you are short TBT at $41 with a $2 credit on average.  You are tying up a lot of margin and the current price is about $6 so you are down about $4 on each.  If you can, I think I’d sell some amount of naked 2012 $27 puts for $2.90, which TOS tells me has a net margin of $1.20 for each $2.90 collected.  This is using far less margin than your current spreads and you can always buy the $20 puts (now $1) to cover as a momentum play if TBT breaks below, say $32.50 and then get back out when they turn back up.  If you do that and pick up a dime here and a dime there, after a while you can be talking real money.  Let me know if that doesn’t help and we can look at alternatives but this is simple and frees up margin, not to mention dropping your putters $14 in strikes – so I like it. 

In TZA now at 29.41; this is the entry I THINK I have been waiting for ….

You guys may be ahead of the curve on TZA but I would like to see financials weaken before tagging along, a few tech companies cut …SCHW news sucked, crappy data this morning and here we are green..I just cant shake the image of Benny and the ink jets dumping trillion dollar bills from a helicopter..money coming out of bonds

I’m in  with you both!

REITs rally;ing for no reason again (other than opex);  shortable IMO   SPG at R2 same for SLG, for example.  Surely others as well.

Care to explain your max pain theory?

JRW … that 10k at 29.48 you ?

No volume, Sig rune, TBT flying, 3 min above 8EMA, I could be on the wrong side of this; I think I’ll call LLoyd.

exec / Max Pain

The price at which the most options expire worthless; a place the market usually gravitates to. ( Pardon the dangling participle)

phil- tell me what 10 days and I will take the rest of– LOL- thanks for the reply-JT

Cap / $29.48


Contra warning on REITs, a broker who picks loosers called and recomended one!

Trading AAPL:   A short term trade for any of you who can’t keep away from the temptation to make more money on this stock.  
Buy Oct 270  calls
Sell Sept 270 calls        6.10 debit for the spread. 
If AAPL stays close to 270 thru Friday (which I think it will) you stand to make $1800 on $6100 invested for every 10 contracts, within 3 days.  If it drops, you hold the Octobers (and may want to buy more).  If it rises you are protected by the spread.

Phil – I hope you are not taking any drugs, b’c many (statins, Byetta derivatives (look at Novo’s new GLP inhibitor), SSRIs, and on and on) cause cancer in rats/mice.  Gene tox was clean (not that it means anything to anyone except FDA and pharma).  Yes, there are some that don’t, but in a 1 yr monkey tox study, there was no cancer (breast or otherwise).  FYI

Phil–on the artificial on STT  which 25 p are we selling I do not get 3.30 on the Jan 12s 25 s?

I am still too nervous to trade the Yen in the FX market. I just sold some Feb puts ( 18’s ) on the Ultra Short ETF Japenese Yen. – YCS. My reasoning the Yen will drift lower ( the BOJ will make sure of this ) and the short puts will expire worthless.

 Dear CME, please go to 400 (or 450??) by March 2011.

Thanks Phil for guidance on GOOG. With the stock so expensive, and the moves so questionable, I think there are so many better plays that offer less risk. On the next pop up, I’ll bail and get into some stocks that have a more compelling direction

Ohhh this is how it works!
In that case,
Dear ARNA, please stay above $5 until the end of the year.
Signed Lionel
PS: I have been very good lately. Ask Phil 🙂

lionel / ARNA
LOL… One must revisit a comment Pharm made some time ago – "more money has been made shorting the biotechs, than in taking long positions"

gel if theres even a whisper of no QE2 look out USD shorts and bye bye gold

Just out of curiosity, where do you find that type of information…..IE: what price at expiration will inflict max amount of pain.

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