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October’s Overbought Eight – Expiration Check-Up (Members Only)

Up and up the markets go, where they stop – only  Ben knows!

We actually initiated the October 8 picks on Thurs, Sept 30th, when we had that crazy Dow spike to 10,950.  As it was the last day of the month we got an instant winner on the NFLX play and some other good ones as we plunged to 10,700 that Monday.  In between, when I wrote the post on Sunday, Oct 3rd, I said "I hate to go short."

We were still very bullish in our virtual portfolios (see September's Dozen, Turning $10K to $50K, Defending with Dividends, 9 Fabulous Dow Plays and the June 26th Buy List) since the June bottom (and we were early on that call too) but we felt is was time to start covering with some bearish plays as we completed our projected 12.5% run back 11,000.  These 8 trade ideas were to get the ball rolling in October.  Since then we have flown up to 11,062 on the Dow, slightly over our projected top, much the way 9,650 was slightly below our projected bottom in July.  The rally still has not retraced enough to cause us to give up on our long-term longs so this is a BALANCING move on an expected pullback, not an overall long-term bearish posture – always be clear about that!  We've been bullish since the beginning of July as this point it pays to diversify.

Like July, we can take advantage of the the spike out of our range to scale into positions and to roll and adjust the trades and, like July, we looked at some bullish covers along the way – just in case we are even earlier than we thought.  I'm not going to get into the whole macro thing here – I did that all week but everything old is new again, as you can see from this chart:

 

I don't know how well you can see this but I copied the current rally and lined up the bottom with the Feb rally.  It's hard to see because the movement is VIRTUALLY IDENTICAL.  That's right, Lloyd is either too lazy or too cheap to even bother to change the Bots he uses to gooses the markets.  As you can see in the area with the extra lines – day after day, tick after tick, there is virtually no variation to the market's moves up.  Last year, we joked about the Omega 3 pattern that we watched repeat itself for months.  We'll call this one the Beta 5 but this may be bad news for the bears as, like the groundhog's warning, we may have 6 more weeks of this nonsense before we get a proper pullback.

Special Update:  Thanks to the Elliot and the News Team at Stock World Weekly (our new Newsletter in Beta) we have a more professional version of the chart where Elliot used red to illustrate the copied section (this chart kind of reminds me of the song, "The Bear Climbed Over the Mountain.

So bears BEWARE!  We do not short stocks just because they are high, we short them because they are not worth what people are paying AND because we believe that earnings (or some other event) will make that obvious at some point.  That is our premise – Yet a rising tide does lift all ships (for a while) and, if we are wrong, then we need to admit it and that looks like about 11,500 if we keep following this pattern.  6 weeks from now is Thanksgiving – it would really suck to come back from the holidays right into another flash crash, wouldn't it.  But, let's assume the flash crash was an accident.  Then we'd be looking for a steady, downward grind with no Santa Rally and a bottom, once again, in early February.  

I hope we don't get such an exact match-up or who needs guys like me to predict the markets?  Well, as Field Marshal Moltke said: "No battle plan survives first contact with the enemy" and, as I said in the "October 8" post: "My major bear premise is that the dollar makes a comeback and knocks down oil, copper and gold and that sends the energy and mining sectors down which drags down the broader market and gives us a good, healthy pullback where hopefully we can go long again."  So far, so wrong, I guess as we simply can't fight the Fed but, like we saw at the end of 2009 – they do get to the point of diminishing returns

Despite the relentless rise in the market, we have still been able to take advantage of the spikes up to take quick shorts.  We discussed the value of having a good stop discipline in yesterday's Member Chat and our first three trade ideas from the 9:40 morning Alert were a great example of that as I suggested craps roll plays (the amount of money you would be willing to lose on a roll of the dice in a casino) on DIA ($111 puts at .22), QQQQ ($51 puts at .16) and GOOG ($590 puts at $1.65).  

Of course you have to allocate at least $165 for the GOOG trade, so it's not for everybody.  Those topped out at $2.45 right about 10:19 which was the same time I called for tight stops on the DIA $111 puts as they topped out at .90 (up 300%) the QQQQ $51 puts only made it to a double at .38 before they too fell off and this is why we say, over and over again: DON'T BE GREEDY!  Even if you are "only" playing $100 on each, that's $300 and $100 in profits – in an HOUR!  You have to keep perspective on what you can expect to gain on short-term positions and that goes for the bigger ones too….

Our first trade idea for the October Overbought Eight was NFLX, who we had been watching for some time as going too far.  Our first NFLX play was selling Oct 8th WEEKLY $170 calls for $3.50 and those were .25 (up 92%) at the end of that day.   NFLX had the nerve to spike back up and we then looked at the Oct $170 calls for $8 and those, of course expired worthless (up 100%) as NFLX finished the period at $155.72 – still too high but not as much fun to short.  

#2 on the O8 list was BIDU and the Nov $95 puts were the pick at $5.30.  After reaching $7.30 (up 37%) on Monday, the 4th as well as Friday the 8th, they are back to $5.05 – yet another great example of why stops are important (see Strategy Section) – with stops, you could have made $2 twice.  With greed, you are right back where you started with 2 weeks less to play!  Of course I had discussed taking the money and running on BIDU in the Oct 3rd post as we had already hit our 20% goals (20% is ALWAYS our goal) that Friday (1st).  I was also very specific about stops in our 3rd BIDU short:

Anyway, our new trade on Thursday was the fairly aggressive Oct $95 puts at $1.35. Those popped nicely to $2.15 (up 60%). If we continue to follow Mr. Buffet’s advice, it is best to "Be fearful when others are greedy" and note that taking 1/2 off the table with a 60% gain leaves us in 1/2x at net .55 so a stop at $1.10, still leaves us with a 25% overall profit on the trade, which means we can certainly ride out the gyrations for a day or two to see if BIDU makes a proper drop or not.

Remember, the shorter your time-frame, the more conservative your stops need to be! We simply don’t have time to be wrong on October spreads, which expire in just two weeks, especially when we are committing the cardinal sin of buying premium, rather than selling it. It doesn’t matter that the BIDU Oct $95 puts jumped to $2.15 – you must keep in mind that they are STILL $3.80 out of the money with 10 days left to trade – that’s the kind of nonsense we usually sell to other suckers – not hold onto ourselves!

I could say this stuff 100 times and still people don't listen so I'll say it for the 101st and apologize to those who are bored hearing it – Set Stops, Don't Be GREEDY!  As you can see from the chart, we caught a huge break that Monday as BIDU did fall further and the $95 puts jumped to $3.25, almost a 50% gain from my Sunday comment and up just shy of 200% from our entry.  Now, where do we stop out with a 200% gain?  At 160% ($2.85) – ALWAYS have a 20% of the profits trailing stop!!!  

 

Notice that having $2.85 cashed out on Monday, the 4th, gives you an excellent opportunity to get back in on Tuesday at .90 and take it back to, guess where – $2.25!  It is not coincidental that option prices retrace back to our original goals like that – we pick those numbers for solid reasons and that's why we get the hell out when we hit them.  Just because things are going your way, does not mean they are going the right way.  

#3 with a bullet to our brains was the dreaded TLT.  We picked them for a short at $105 when they first popped it on Sept 23rd and what a long, strange trip it's been to Friday's close at $100.27.  As I keep saying, with straight stock picks, our goal is just to make more than the 2.5% per month that our cash is devaluing at.  Our option idea was selling the Nov $105 calls for $2.20 (now .45 – up 80%) and buying the Dec $102 puts for $2.45 (now $4.10 – up 67%) which proves, as usuals, that it is better to sell premium than to buy it but doing both doesn't suck either as a net .25 entry can now be cashed for $3.65, which is a 1,460% gain on cash committed in 10 market days.  If that sort of thing doesn't satisfy you – I really can't help you!  

PCLN was our #4 selection and we found selling the Jan $380 calls for $23.25 (now $18.80 – up 19%) to be a comfortable way to set ups a short on the stock at net $403.25.  However, those calls dropped to $11.99 on the 7th and that's 50%(ish) in a week.  Back to $18.80 now is yet another example of how GREED KILLS.  As I had commented in the original O8 post on this trade: "Those have already dropped to $17.50 (up 25%), which isn’t bad for 2-day’s work!"  Take profits, Take Profits, TAKE PROFITS and, have I mentioned, TAKE PROFITS!  The other half of that pair was the Apr $190 puts at $5, which hit our $7.50 exit target (up 50%) on the 7th as well but are now down to $4 (down 20%).  Imagine if every Friday they handed you a paycheck and you said "Nah, I'm going to let it ride" – would you be richer or poorer???

#5, MOS is our first Oct short play that's still in play and it's a total disaster!  The Nov $52.50 puts were $1.10 and plunged to .55 the next day.  We thought it would be clever to spend another $1 to roll to the Nov $57.50 puts and $1.75 more to roll to the Jan $57.50s, which are now $2.15, so down 44% from the $3.85 worth of net adjustments for those who rode it out.  Gosh I hate to say it but, if you are still in them, you probably want to DD at $2.15, which would be net $3 and down .85 on the Jan puts that have a delta of .23 so you need a $4 drop to get even.   I do like the Jan $57.50 puts as a new entry and this is another great example of the benefits of stopping out.  Even if you killed the original MOS trade at .55 (down 50%) then it would cost just $1.60 more to reposition at the Jan $57.50 puts now and just a $2 drop would bring you back to even.  Net entry on the Jan $57.50 puts (now $2.15) at $3.85 (before the DD) vs $2.70 – that's the difference between stopping out and repositioning and rolling!  

Rolling is fine as long as it's combined with scaling in (Once again, see Strategy Section) as the Double Down to 2x nets $3 vs $2.70 if you would have stopped out.  That's the power of scaling in, even on a position that goes horribly against you like MOS did on us, by keeping conservative entries you have plenty of spare firepower to "fix" it – if you should decide to keep at it and, of course, losing 40% on 1x is far less damaging than losing 20% on a full 4x or 5x allocation, isn't it?  

AMZN was our 6th short trade idea and, as I said at the time, it's a very scary stock to short.  I should have made a more directional play but we liked the short buy/write of the Jan $190/165 bear put spread at $18, now $16 (down 11%) paired with the sale of the Jan $170 calls at $9 (now $10.75 – down 19%).  Similar to our normal buy/write trades, these longer plays are not ones we tend to adjust unless we have to.  While AMZN is making an impressive show of strength at $165, we still have a hard time believing they will justify $160 on Thursday's earnings report.  That coupled with our general feeling that the market will correct by January means we still like this one.  

FSLR came in at #6 but it's always in the top 10 of my short list.  This particular round of idiocy was based on them hitting $151 on the Thursday we picked our 8 and the play on them was a ratio backspread on the put side, buying 3 Jan $130 puts for $7 ($2,100) and selling 2 Nov $130 puts for $4 ($800) as we didn't think they would fall that fast.  I was wrong as they dropped like a rock to $136 on the 12th but they've recovered back to $145 and our net $1,300 spread is now net $1,375 so boring but progressing.  Yes the straight put would have been more exciting and a huge winner but that's what we thought with MOS – sometimes they work, sometimes they do not!  

Our last of the October Overbought Eight was CMG as we were looking for a longer-term short position.  Part of the reason for this is the first 4 picks were made into that Thursday morning pop so the short-term, directional plays made more sense.  By the afternoon, the market had already fallen back so we moved to more hedged positions, in case we popped again – which we did.  The backspread on CMG was selling 5 Nov $175 calls for $8.75 ($4,375, now $12.75 for $6,375) and buying 4 March $190 calls for $10.75 ($4,300, now $14 for $5,600) so a net $700 loss so far.  This is a long play and the Nov $175 calls can be rolled even to the Jan $185 calls and still carry $6 of premium and our premise hasn't changed so nothing to do here but wait.

Yes, spreads are boring but boring can be nice in a choppy market.  Again, we are generally bullish and using plays like these to hedge what had been very, very bullish picks that we've been making for months.  As we hit new highs and get closer to our 11,500 line, we get a little more bearish each day but now we are hedging our bearish picks with some high-reward upside plays.  We already cleared last Thursday's SSO spread off the table at 800% (which turned out to be way too early) and decided to ride out the XLFs, which are looking a bit shaky.  I have called for getting to more cash as I think the dollar is too far down and the market is too high so, when you cash out and the dollar bounces, your cash dollars are able to (hopefully) gain in value, giving you cheaper opportunities to pick up stocks and commodities later.  

This week we added Disaster hedges on QID and FAZ (to offset the XLFs) on Monday and the QID entries are now cheaper but the FAZ is already doing great.  WYNN was a new short trade idea on Monday and what a bad one it's been so far.  RICK and AAPL, on the other hand, are doing just fine as upside plays.  Tuesday I said (how many times?) "DON'T BE GREEDY" on the short side in our Morning Alert to Members and the Dow kissed our 10,900 target and that was it for that.

Tuesday we looked at long plays on INT, C, SVU, VZ, rolled MOS to Jan and then the Fed had us puzzled going into the close.  In the Wednesday morning Member Alert, we decided there was too much free money floating around and after adding a new TZA Disaster Hedge, we added 3 bullish trade ideas for UNG, XLF and DDM as laggards that could really take off if this rally gets legs.  Obviously, DDM is up huge already but the other two are still playable if you need more bull for this BS rally…

USD was also added to the bull side before the bell on Wednesday and the PCLN $350 calls were a sell at $1.80 into the afternoon excitement and dropped to .50 the next morning but severely punished the greedy with a $4 finish on Friday!  That's why Rule #1 is:  ALWAYS sell into the initial excitement.  

 

DRYS came up as our last trade idea of the day on Wednesday, that is a 2012 buy/write that's still a good way to play a rally.  C was Thursday's pre-market selection and I joked in the morning Alert that things were getting very 1999ish again and maybe it was time to buy YHOO but that was a joke, based on the merger rumor, not a pick!   I did call a buy on the Nat Gas futures (/NG at $3.60 and those jammed up over $4 at the day's end but now back to $3.52 in overnight trading so maybe we get another whack at them next week! 

XLF seemed like it was giving us a good entry at 11:04 and we looked at a 2012 artificial buy/write.  They have fallen .30 since then so not really a panic (and that's what the FAZ's are for) but it will be for the markets if they fail to hold $13.50 next on a downturn.  UUP may have seemed crazy at 12:13 on Thursday but I still liked them at $22.20 and maybe, just maybe, we found a bottom.  DBC was my idea for an inflation hedge in the afternoon but, unfortunately, PCLN tempted me to make another short pick and I liked those October $350s short at $2.40 again, which did not work this time (down 67% at close -same chart) as well as the short Nov $380 calls at $8.90, which are now $10.70 and down 20%.  While ugly, net $388.90 on PCLN still does not seem very likely.  

ENTG is working out great so far as a bullish play and the .10 QID Oct $14 calls were a total loss by Friday's close.  Finally we got bearish again for real with an EDZ April atificial buy/write and our tricky GOOG spread idea was a loser as GOOG popped out of our range (we were going for something more neutral) but, of course, I prefaced that one by saying "If I had an inkling of a clue as to what they will do, I’d play them but I have no idea at all!"  Still, my bad for putting it in a featured trade idea box…

Yesterday we hit the jackpot on our two index shorts and the GOOG trade took some of that back.  We added QQQQ puts for next week (too tempting not to with the Nas 2,470 as well as the SQQQs and QIDs on the same premise so we'll be watching tech earnings with great interest next week.  We also looked at an upside trade idea on AAPL to offset (hedged of course with earnings) and I also liked HOV (as usual) as they dipped back to $3.75 while HMY was our selection for playing continuing metal madness.  

Surprising isn't it?  I'm surprised as I thought I had been much more bearish but I guess, after reviewing the week's comments, I just FELT bearish while making mainly (2:1) bullish picks – holding, as I have said, our noses while we try to go with the flow.  We'll see what happens next week but balance and cash are the way to go in this crazy market.  As I keep repeating, it is all about the dollar – if the Dollar goes up, the market falls and if the Dollar goes down – God help us all but it will, at least, be "good" for the APPARENT value of stocks.  

And remember my darlings, it is better to look good than to feel good!

 


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    Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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  1.  I accidently held Oct. GOOG calls into yesterday’s earnings.  Ka-ching!!!!
     
    Even if you participate in a rally by accident, you still get to participate!


  2.  who is "Lloyd"?


  3. Phil- Can the banks stay solvent?


  4. Phil—von Molke was pretty much paraphrasing Robert Burns:  "The best laid plans of mice and men go often askew." Even more prescient is the last verse of Burn’s poem:  "But och! I backward cast my eye / On prospects drear! / An’ forward tho’ I canna see, / I guess an’ fear! "  But if there’s something von Molke can contribute to our current climate, it’s that in his planning for wargames, he painted the enemy as red and the good guys as blue. 


  5. Roses are red.
    Violets are blue.
    Come November.
    We’ll see who’s who!!


  6. Phil or other generous members:
    I want to work on lowering my commissions paid. Could you suggests some places where I should investigate rates. Currently I am at Fidelity and pay  $8.00 per stock trade,$16 per 10 contracts on options, over 200 trades a year (ouch!).
    Thank you.
    dclark41


  7. Phil,
    When you get a chance could you provide some details on the SPY conservative strategy?  I’m talking about the one where one buys SPY and selling Calls and Puts against it at a lower strike.  I just need some guidelines for making adjustments.
    With that I think that I will be able to save a few souls (my single again friends) who are in cash out of total FEAR and not wanting to trust anyone again. 
    I realize that I can’t get them to be traders but perhaps something that would be better than doing nothing which is a real crime considering the devaluation of the dollar.
    Thanks Phil,
    Donna


  8. dclark, IB you pay 1 for stock trade and 0,7-1 for one option.


  9.  Lloyd = CEO of Goldman Sachs


  10. dclark – TOS – Scott Sheridan – scott at thinkorswim dot com.  Tell him that Pharmboy and Phil sent you at PSW.  He should be able to get you a better rate. Tell him what you pay.


  11. Lloyd Blankfein is the CEO and Chairman of Goldman Sachs.


  12. InteractiveBrokers have lower rates generally, but they also have order cancellation/modification fees, so if you are the type of trader that modifies an order a dozen times before it executes, then stay with someone with a fixed charge.  However, if you are the type f trader that places orders and waits the market to come to you, then InteractiveBrokers is cheaper.  You get charged 0.714 per options order, adding/subtracting any exchange liquidity fees.  For stocks, it is half a cent per share, with a $1 minimum.


  13. Phil- setting stops is something that I never do and have suffered becuase of that. Should I set stops for a loss or a profit (say 20% either way)? Should i set hard stops or trailing stops?


  14. http://blogs.wsj.com/economics/2010/10/16/number-of-the-week-slow-growth-adds-to-deficit/
    Here is the situation in a nutshell. Growing debt burden and slow growth. The upcoming earnings reports will show well but guidance will be key. Hard to see how the future can look too rosy in the face of macro headwinds.


  15. As I sit here on a Saturday morning I thought I would share some of my thoughts. I have nicknamed myself Dr. Gloom , unfortunately, because when I look at the facts I can draw no other conclusion. I believe we have seen the best years of America- I certainly hope I am completely wrong. We have lived over our heads for 25 years, we have sold this country to the Chinese as they now indirectly own us through the purchase of our debt obligations, and I fear it is time to pay the piper. We are currently in a currency war and the Chinese will not let this stand. They now control Ben Bernanke. Yesterday he spoke and said he would come with FURTHER fiscal stimulus if needed and when he finished they trashed the bond market. Nothing he says now can be taken as positive unless we truly see a good, not less bad, economic number. We have issues on all sides, which we cannot fix in a short time period, and we have sold our children’s future.
       The dollar is being crushed because we are printing money as fast as the presses will run- we do not have this money. We are going to see Jimmy Carter inflation once again unless the economy collapses and we see deflation because there will be no money to buy what we need. Commodities increased about 10% in certain areas over the past 30 days- corn, cotton, coffee, sugar etc. we all have to buy these things and yet if we put out money in CD’s or bonds we earn about 1% or worse yet in money market less than ½ of 1%. These same factors tell me the stock market is at great risk. When GOOG goes up $60.00 in a day, and AAPL goes up $12.00 in a day and yet the bank stocks get taken to the woodshed I have to ask myself- what is wrong with this picture? It is somewhat reminiscent of 1999 and the tech bubble and we all , unfortunately know what followed that.
        Why did the bank stocks get clobbered? News is coming out that all mortgage applications and related documents were robosigned. This means only that a clerk at BAC and all other banks- signed all these documents without really reading them. This is technical fraud and now- every lawyer in all 50 states has the right to sue the banks for anyone who has a mortgage they cannot pay and everyone who bought one of the packaged products which Wall Street so graciously sold them, has the right now to sue them. This is a state matter as it affected the residents of the individual states. The only way Congress or President Obama could do something to mitigate the situation would be to have a constitutional amendment. Even Obama cannot do this on his own unless he chooses to ignore the constitution. Dick Bove ( the second most noted bank analyst in the country) came out yesterday and said this will cost the banks 80 billion in legal fees. The banks do not have an extra 80 billion dollars and unless he is wrong, and I happen to think he is right, we will have to bail them out with your and my money once again or we have to let them fail endangering our entire financial system as we know it. If any of you have any suggestions I would say please pass them along to Obama, Bernanke, and Geithner although I fear non are smart enough to listen. I fear the bank stocks return to the levels of 2008.
        I am doing my very best possible to navigate these waters. I missed the rally of last month as you know. I fortunately saw the bank debacle coming and I fear many of the facts will now manifest themselves. While I am never able to predict the timing of something ( as we have a wonderful ability as humans to stick our heads in the sand and ignore reality) sooner or later we are forced to face the facts. I am much more concerned with the return of your money than the return on your money at present. We are all too old to make it back again should we lose it. Some of you are not clients and I would only suggest BE CAREFUL- it is very dangerous out there. If you have bond funds ( which the public has bought as fast as they could for the past year chasing yield) remember they have no real maturity unless they are short term bond funds. In the 1980’s when we had Jimmy Carter inflation they all went to >60 on the dollar if you wished to get back what was left of your money. Please consider coming out of them. I also have some concerns about the future price of bank preferreds as they have the risk of deterioration in credit quality as well as the rate risk. Most are above what people paid for them and it might be time to harvest your gains.
       I realize this is a lengthy email as I sometimes get much too verbose for my own well being but I care about each of you and your economic future. In closing, please let me stress, this in no way reflects the opinions of anyone other than Jim Thomason. I hope for my sake, my children’s sake, and your sake that I could not be more wrong as America has provided a beautiful place for us all to live and prosper- it has truly been a great country and I can only hope we are resilient enough and creative enough to solve our problems rather than have been handed the greatest country in the world and have turned it into something much less. God bless us all!- jim
    Phil- Did not know if anyone might enjoy my weekly commentary to my clients?


  16. Pharmboy:
     Thank you for the info.. Is that his email address? (scott@thinkorswim.com)
    While I have your attention, could I get your opinion on DCTH. I own 1500 shares at ~$7 . I also sold Jan’11 $7.50 puts. Do you think there is any merit to rumors of a buyout? And do you think the contract they signed with Mylan for Melphalan significant. I would appreciate your thoughts and any advice on my current position. Thank you.
    dclark41


  17. Phahurik:
    Sorry, but who is IB? Thank you.
    dclark41


  18.  nicha…..setting stops….replying because the subject is so interesting to me.  I have seen Phil write here that he doesn’t like stops all that much, but I believe they are extremely important, especially for less experienced traders or those who cannot be at the computer all day.   I’m low on time right now (going to my son’s birthday party), but I’ll come back on this fascinating subject this evening and give you my (unsolicited) viewpoint.   


  19. lflan- any advice is appreciated :)


  20. Pharma Co. Watchlist.  Still updating with important dates.


  21. dclark- I am also with Fidelity--I called my private access guy and negotiated a better deal--their platform is not bad( but no verticals allowed in retirement accts is a problem)--try negotiating and do not be shy about asking for free trades if you bring more money in or they screw up(i.e. weeklies)


  22. jthoma/banks "clobbered" – Simply put there is not clear chain of title…thus title companies are refusing to play anymore…therefore the courts will be full of homeowners saying "prove you owned my bankrupt house!" as once missing signature in the chain of title equates into a free home)…thus the foreclose fiasco could last another decade instead of a few more years and drag the entire banking industry further into the black hole in which they already exist.  The thing I noticed is that BAC, ALLY (GMAC), and JPMorgan are the three banks who originally were in bed with the current admin over the proposed "court ordered mortgage cram-down"…so I thought it odd that these were the same three banks who jumped onto the foreclosure moratorium first.  My theory is this entire process will end with either a)banks will be forced to refinance all underwater and foreclosure bound mortgages for the 25% of Americans who lived/are living beyond their means …or b) the TBTF banks start collapsing within a few years due to foreclosure-gate.  Either way…the taxpayers will ultimately lose, so this drop in bank stock values will probably reverse once Ben makes it perfectly clear to Wall Street that zero mega banks will ever fail…again.  I look forward to the news as I made a nice chunk buying BAC calls when the banks turned off mark-to-market accounting to hide the original mess…rinse and repeat…cha ching!!!


  23. Pharmboy,
    Do you have any comments on Pharmathene discussed in this ‘Seeking Alpha’ article?  I didn’t see it on your watchlist.
    http://seekingalpha.com/article/230259-why-pharmathene-could-go-from-2-to-20?source=hp_mostpopular


  24. jthoma
     
    You sure do sound "gloomy"  Your facts are accurate about our debt, and the sentiments of the Chinese relative to helping with our debt issues, however I do not totally agree with your position on the mortgage debt problem.
     
    The Chinese are well on their waty to become the new reserve currency… make no mistake about that. They, when it comes to currency matters, are far ahead of the US, and they will not take prisoners in these matters, so we should not look for compassion.. We, governmentally,  are in need of far more expertise than what we have on the bench, and until that takes place, look for and anticipate some very profound change, as well as opportunity as an investor.


  25. lflantheman,
    Would like your opinion on upcoming aapl earnings. Are you planning to play it and if so, how?  I am leaning towards a weekly AAPL 320-330 Bull call spread (currently at $3.15).  Do you see aapl going to 330 this week?
    many thanks.


  26. DCTH/dclark – I am a huge fan of them, and if you want them long term (until FDA decision), then I would sell covered calls on them.  The $9s are good now, otherwise, why not take some of your profits and turn it into a vertical with a few Ps sold along the way to reduce the costs.  I am going to be moving to the 5/15 Jan12 C vertical for 2.90, selling the front month Ps on pullbacks.  With your gains, you can use the gains and buy 5 of those or so, and have an extra $6K to play with other things.


  27. goldman- We both have our fun- I made more in the last 2 days than in the last 2 years being short BAC and WFC- we both had fun


  28. dclark- You can thank FINRA and the SEC as can all for the cost of trading. Brokerage firms used to be able to charge you say 1% for unlinited trading and were happy to do so if you needed no time from your broker. FINRA- in their infinite wisdom- decided all fee based accounts were advisory in nature and thus clients could not have internet access to place orders because they were not " being advised"- a very bad deal for traders and brokerage firms because FINRA was " protecting you the public" from the villans of wall street


  29. gel1- I wish I could feel otherwise but the facts do not support it- as they used to say on Dragnet- " just the facts lady" !


  30. gel1 – I think we do not think that differently at the end of the day. The wonderful thing for us all here on PSW is it creates trmendous trading opportunities- to quote goldman- " cha ching" !!!!!!!!!


  31. lotter – I don’t know anything about them, and it seems to me it is more of a legal bet than a scientific one.  For a $1 stock that has now run to $3 on the article you posted is too rich for my blood.  22M shares traded Friday, only 550K is normal.  Seems to me a big short is coming.  IF they get back to $2, then might be worth a flier.


  32. Mortgages /jthoma – the robosigning is not the worst of it. My son spent the last few years working, basically for a temp agency, for several large, big-name banks, selling and handling mortgage applications. The banks use temps for these jobs, sweeping them out and bringing them back in periodically. The worst he heard of was mostly at a couple of now-bankrupt mortgage companies, but he’s sure it happens elsewhere. The temps essentially act as the mortgage underwriters, using the name and underwriter number of someone who is no longer even an employee of that firm. The temps for the most part had no idea of the significance of what they were doing – just doing as they were told. That said, I very much doubt that any bank will get in legal trouble for these games. They simply have too much weight and pull and can easily evade this sort of thing.  They might throw a "black sheep" or "bad apple" or two to the wolves if too much gets out.


  33. jthoma
     
    You are doing it right…. as an investor you are reading the tea leaves and trading the emotion surrounding this " manufactured debacle" that some of the State’s attorney generals have created  ( might I say this is a political endeavor for political reasons )  Tom Miller from Iowa is a guy that has been running for Governor his whole life, and getting into the limelight is his primary objective ) The banks are the target "du jour ", because everybody hates the banks because of the pain that has been suffered from our real estate problems. Yes, they are not "lilly white clean", but I believe the "dead beats" who are looking for every reason on earth to shove their mortgage obligations back to the bank, are the ones who are the most guilty, as they are the ones through deceptive means filled in the loan papers to purchase the properties when in many cases, did not have the means to meet the mortgage payments..
     
    So where are we now….. The politically inspired attorney generals are trying to negate the validity of the security documents ( deeds, notes and related transfer docs ) because they were not signed sequentially according to the requirement by individual state laws, and suggesting the dead-beats can keep their homes, without further obligation to keep the payments current…… Not so IMO….. Sure, the local State law prevails in questions of this nature….. but not so fast – this law is trumped by Federal law …. Yes, the Uniform Commercial Code ( UCC )  Article 9 , states that "electronic report mechanisms that document the chain of title, is sufficient to establish title superiority". The robo signing claim is without relevancy when the " conflict of laws" are resolved. The "wet ink" note is antiquated and is not necessary to prove ownership…. Ie, the chain of title is not broken. And a warning to the dead-beats who think they will get something for nothing…. the law states that possession does not constitute ownership.  – So… pay your mortgage or get your ass out, and do not trash the property on the way out the door.
     
    During this whole fiasco, and the period of time that it takes to settle this mess, the banks will suffer a hit on the value of their shares. The banks will prevail in the end.  This moratorium is a hold on future forclosures, but remember, banks do not have to write dowm their loss until the foreclosure goes through.  When the courts settle this issue properly, then the banks will recover their credibility as an investment, and the stock will resume its recovery in share price.  I believe this whole real estate mortgage problem will take about three years to correct itself  ( coming inflation will help to revalue the  property upward  in order to create equity for the owners ) and the folks that have the resources to pay the mortgages, but have chosen not to because they are upside down in the equity attached to the property, will finally make thr choice to step up to the plate and do what others do….. pay their bills, so your neighbors do not have to pay them for you through taxation.


  34.  ongba – I suspect the optimal trade would be a bunch of long October week 4, or November calls on Monday at the open. Wait to see how they respond to earnings (a gain of 7.5% would be typical), then either sell out your position Tuesday at the market open, or sell the Oct week 4 calls $10 away from the money. We’ve come so far so fast, I doubt it’s going to run away after earnings. Typically the post earnings day is flat to down slightly. Provided the world doesn’t end later in the week, it shouldn’t pull back too far. 
    If we hit 330 prior to earnings, I may just sell out before the announcement, since the earnings pop is probably already fully priced in. Wouldn’t that throw us all for a curve!
    I’m very curious what lflan will have to say. 


  35. Holy crap I wish the world would quit thinking the Chinese are the greatest thing since sliced bread.  That is such total, and complete bullshit.  If they were all people said, with their ability to own the world, and be the low cost producer to the world, and have the ability to make the US do their bidding at the simple selling of a few hundred billion in treasuries…WHY HAVEN’T THEY DONE IT?!?!?!?!?
    It’s the million dollar question…and the answer is…THEY CAN’T.  If they kill the US economy, they lose nearly 40% of their downstream market.  Think about that.  It would be like the US losing 40% of its GDP instantly….don’t you think a few people would be pissed off?  Don’t you think, even with a state controlled media, that there would be more than a few people asking questions they don’t want answered?  (And they are ruled by a MUCH smaller minority than we are) 
    Remember, THIS IS A COMMUNIST COUNTRY WITH A NATIONALIZED GOVERNMENT.  They control almost everything in and out of their country.  The reason the world is having a near orgasmic love affair with China is because their nationalistic system provides more directed control of their economy.  During times of strife, a directed economy can be a bit safer because it can be specifically directed.  And they have enormous currency reserves in various denominations…but that doesn’t make them omnipotent.
    Their very structure creates its own conundrum, in times of plenty, there’s little or no room for innovation.  What drives growth?  They are like a parasite, without a host, IT DIES.  A few people at the top of the political system are going to make the correct decisions for EVERYONE in the MOST POPULOUS COUNTRY IN THE WORLD!?!?!?  Are your F*****in kidding me?
    Yes, we are in debt up to our eyeballs and we are probably on our way to hyperinflation.  Ben Bernanke is playing chicken with a Ford Thunderbird that has an engine the size of a continent….but that’s the hand we’re dealt with, and we have to play it.
    So in my wine drinking tonight, I’ve come to the realization that we’re WAYYY too short sighted.  So let’s play a game…


  36. The game:  We are screwed.  So what happens next.  Let’s say the Chinese tell us to go F*** ourselves and start dumping US dollars.  What’s the trade?  I have no idea…but here’s my thinking…please put in your 2p as this may be closer than you think….
    Well, if I own hard assets and commodities, the trade is probably to hold fast and look to sell near the top, because the Fed cannot standby and let armageddon just happen, so they will have to buy the debt back as quickly as possible and then tighten money supply to reign in inflation as quickly as possible. Next question would be how long would hyperinflation actually exist?
    My guess is there would be a short period of time where the world looked totally out of control, and people would panic, but I believe things would quiet down much quicker than you think, because people are habituated.  They do what they’ve always done.(ie patriotism, return to the constitution, stuff like that) 
    Yes, the currency would be out of control, and people needing to spend right now would be in deep shit, but life would go on.  The question would be if you had cash, or were in cash, what would be the best course of action?
    I think it would depend on whether or not the Fed/Gov’t decided to abandon the dollar in favor of another type of money, or would act to restore the dollar.  If it abandoned the dollar, who knows what could happen.  However, if it acted to return to the dollar, there’s a decent chance they could restore order by soaking up the liquidity in short order.  Our standard of living would collapse, there would be social unrest, but there would also be the opportunity to re-ignite America.  Return to self-sufficiency in manufacturing and, hopefully in other areas like energy and education.  It would be painful, I’m not belittling that, but to think with would de-volve into Mad Max is ridiculous.


  37. I believe Gel’s right, the currency wars which we are only just beginning to comprehend are a three dimensional chess game, and who knows what the endgame is…but I learned a something while I was ill that has served me very well….INTENTIONS EQUAL RESULTS.  Or another way of looking at it is don’t listen to what someone says, watch what they do.
    America doesn’t intend to die.  We may be fat, lazy, stupid and out of touch, but that is not the same as intending to die.
    think about it…China is forecast to grow 8% per year for the next decade.  Following the rule of 72, they would slightly more than double in that time frame, which would make them the second largest economy in the world, but still only a fraction of the US economy.  But if the US economy slowed to 0% or returned to recession, China would be DEVASTATED internally.
    And, before I /rant off….don’t forget the US is the world’slargest exporter of corn.  Our grain belt is still second to no one, and China imports a massive amount of food for the basic substinance of their populous.  In short, they cannot bite the hand that feeds.
    There’s more to what’s going on with QE2 than we know….I happen to think its something along the lines of a new Plaza type accord and a return to fixed currency exchange, but that’s merely a guess.
    Sorry this took so long, I was on quite a tear tonight.  Peace,  T


  38. And Gel, I think you’ve missed it on the foreclosures.  The game is not the borrower getting a free home…what will sink the banks is the entire structure of the securitizations.  If those put backs can/are triggered, the banks are doomed.  The people who borrowed what they couldn’t afford need to pay up or forfeit the property, there won’t be much dispute about that.  What will be in dispute is on the other side, where the investors were sold a bill of goods that were "in fair and good order and abiding by all laws" when clearly they might not have been.  Ouch….HB3808 would have fixed that, but oh yea….
    whoops.


  39. Greetings Earthlings,
    The Prof is concerned about these artificially low interest rates.  Every day he wakes up and sees the 30-yr Treasury under 4% and is shocked in disbelief.  How can you spend $1.3TRILLION more per year, than you take in, and manage to borrow for 30 years at traditionally 1 year rates?  This shell game has to end and soon. 
    I don’t know what kind of contrary indicator the Prof showing up here right now can be interpreted to be.  I am scared to death for those nervous nellies and retired folks that are seeking the perceived "safety" of cash and CD’s.  Even the so-called inflation hedge of Gold and precious metals is a flawed strategy.
    Almost all of my money is in value and defensive stocks like telecom, health care, utilities and consumer staples.  Beer and cigarette companies look pretty good right now - for more than one reason!  haha   I am re-allocating my clients’ assets away from individual bonds and bond funds; taking the very nice gains Mr. Market is providing right now.
    The outlier risk here is an "interest rate shock" that sees rates increase so dramatically and quickly that there is no time to reposition your portfolio.  I’m not sure that commodities are the answer to a globally aloof economic environment where inept newbie free-market systems are the so-called growth engines of the world.
    Keep in mind that more than 40% of the demand for Gold comes from speculators.  Even rich people are buying Gold by the bar.  This HAS to be the next bubble to burst.
    Well, take all of this with a grain of salt as the Prof is typing this after a few cocktails this Saturday evening.
    My best to you traders.  You all have a passion and attention to detail that is – crazy?  opportunistic?  strategic?
    I hope Phil catches this post.  I have so much respect for him, and what he’s done with this online community.
    Back to real life now,
    Prof


  40. Phil/Chart Overlay:
     
    Amazing…..it’s hard to believe that they can manage the market the way they do.


  41. Speaking of China, long but good article….
    http://www.foreignpolicy.com/articles/2010/09/30/the_japan_syndrome?page=full
    Key sentence - The harsh reality is this: Japan got rich before it grew old, and China will grow old before it gets rich. [...] 


  42. Ka ching/BDC – Congrats on those.  GOOG pops at least once a year, the question is always when.   Lloyd is, of course, the fabulous Mr. Blankfein – you’d better know his name  

    Banks/Jthom – If I am willing to lend you an infinite amount of money at 0%, can you stay solvent?  That’s the answer for the banks.  The Japanese banks went bust 20 years ago when they bought US real estate at bubble prices right at the top and they are still running.  Brazil’s banks did similarly stupid things and they are now part of the mighty BRIC and we are becoming the 3rd World also-ran nation.   As long as the financials continue to pay $400M a year to Congress – they should be fine.  

    Actually, this is a fun chart if it prints – lobbying expenditures by sector:  

    Sector Total Agribusiness $133,485,956 Communic/Electronics $360,282,321 Construction $56,075,445 Defense $136,593,762 Energy/Nat Resource $419,693,719 Finance/Insur/RealEst $467,314,695 Health $544,827,341 Lawyers & Lobbyists $34,536,238 Transportation $243,713,298 Misc Business $568,030,236 Labor $43,945,735 Ideology/Single-Issue $156,284,420 Other

    $251,747,242

    Small wonder that Labor doesn’t fare very well and the Construction Industry is in the tank – THEY AREN’T PAYING!   Government is, sadly, nothing more than a protection racket for businesses who get licensed to rob the American people.  The Government carves out territories and eliminates their enemies and passes laws as needed to protect business interest in exchange for obscene amounts of money.  

    Think about this, in just one year, this chart shows about $3.5Bn spend lobbying 435 Congressmen, 100 Senators and 1 President along with his cabinet – and this is just the stuff we know about!  Let’s call it $3.5Bn/600 or about $6M PER elected official.  You know, if the Republicans spent $6M in one year trying to "convince me" that tax breaks for the wealthy were the way to go – I wonder if even I would be able to resist….

    Now let me make this very clear – we were brought up believing that all these lobbying groups represented many points of view and sort of balanced each other out.  That is total BS!  Virtually ALL of the lobbying groups represent some form of big business as well as the top 1%.  Notice it says "Agribusiness" not "Family Farmers" and you can pretend that Transportation is about "the people" but, if so, they sure do a piss-poor job of getting public transportation together.  Actually that group breaks down to Air ($83M), Auto ($60M), Rails ($46M), Sea ($24M), Misc ($18M) and Trucking ($10M) – is it any wonder that trucking is another industry getting crushed in the past couple of years?  No bribes – no bailouts – very simple!  

    So, pretty much it’s $44M spent by Labor to $3.1Bn spent by big business to screw them over…  Ah, ain’t that America?


  43.  Phil – I decided to try esignal for a 30 day free trial and my quote windows are coming up "no data". Any idea why this might happen? I can’t seem to find anything in the product support to explain this. I am running it on a Mac via Parallels with no firewalls set up, and had no problem connecting the software to OXP. (yes, I do plan to switch to TOS eventually, I definitely want a better platform to trade from). For now, hey- free trial. Do you find any of their proprietary indicators or studies helpful? 


  44.  ongba…I’m still working on my AAPL trade for tomorrow.  Later on that.
    nicha….STOPS!    A favorite subject of mine.   I could write pages on it, but I won’t.  The short version……
    I believe that failure to place appropriate stops is one of the major reasons for investment losses.  The usual case scenario is that the investor, after appropriate research and thought, buys stock ZOOM for, say, $100, or buys the related options.  Then ZOOM goes to $95.  "Oh, no problem.  That’s just a minimal pullback."   Then to $90.  "Hmmm.   Well, I’m not worried about 10% pullback", thinks the investor.   Then $80.  The investor now wonders what’s happening here. " I couldn’t have been wrong on this, could I have?"   Maybe I should double down! "  Then $75, or lower, and the investor has a revelation.  "This sucker ain’t going up.  It’s going down!"   And he’s lost 25% or more before getting out.   It’s human nature not to want to admit that we are wrong.  But when investing you will OFTEN be wrong.  
    I recall years ago, prior to my adoption of sensible trading rules, I went into my "other job" at 8 a.m. and came back to the computer at noon to discover that my investment on a single stock had lost $40,000 during the morning.  This was a 70k investment that dropped over 50% in 4 hours. Totally unexpected.  No, I had no stop on this trade, to my chagrin.  That has not and will not happen to me again, as I place stops on ALL trades.  
    You have seen recently how a completely unexpected event can drive the market down hundreds of points in just a few minutes.  You have to be prepared for unexpected events.   Here’s how I do it with options (I rarely trade stocks anymore):
    Rule    Make the stop a part of the initial trade.  Decide what’s the most you are willing to lose at the time of the trade, and place the stop.  For me it’s usually 20% on an option trade.  It may be less, but rarely more.  But if I lose 20% on an initial trade I will usually exit.  By making the stop a part of the initial trade you remove all of the often mistaken second-guessing and self-deception that will lose you money.
    Rule    Move the stop based on movement of the option.   If you’ve made 20% already on the trade you may want to move the stop to ‘break even’, or to 10% profit.  Keep moving the stop upward.
    Rule   Don’t use stops to take profits.  If you think it’s time to take profits, do so.  Then set a stop on the rest.  For example, I may have an option up 40%.  I’ll take profits on 1/2 (sell 1/2), then set a stop on the rest at 20% profit.  My exception to this is when I am day-trading a fast-moving stock and want to squeeze every penny out of the move.  Then I often set a TRAILING STOP on the set of options.  This stop is generally only 20 cents or so on a trade that is rapidly gaining in value.  You may have seen me work this on an AAPL day trade a couple of times. 
    Rule   Beware the STOP LIMIT order.  This can cost you big time.  Say you place a stop on an option to sell if it drops to 2.50, at 2.50 or better.  You may see this option tank to well below 2.50 and….YOUR OPTION MAY NOT BE SOLD because it is a limit order.  I generally use a STOP and SELL AT MARKET order.   Here the option WILL be sold as the option drops, and you’ll get very close to 2.50 IF you trade in heavily traded options, such as SPY or AAPL.   Remember, you are using stops to get you out before disaster sets in.  When this sucker tanks you don’t want to quibble over 2.50 vs 2.40 or 2.30.  You want OUT.  The market stop order will get you out.  The limit stop order may not.
    What is the downside to stops?  Not many.   With swings in Options prices(more so that stocks) a stop may kick you out of a trade before you’ve had a chance to make a profit as it moves back up.  But with experience you can figure out how to set the stops so that this happens less frequently.   More often than not a stop will save you from big  losses more than it will prevent you from making  profits.
     
    Place stops on ALL your trades.  :You will not regret it over the long haul.  


  45. "about $6M PER elected official"
    That’s not so bad. It’s only a bit more than the avg NBA salary and watching Congress is a whole lot more entertaining.


  46. Actually, you have to watch that last link, it’s a great splice of Donald Duck cartoons with a Glenn Beck soundtrack!

    Plans to get laid/Fortep – Actually, the full quote of the first bit is a better economic lesson as it’s:

    But little Mouse, you are not alone,
    In proving foresight may be vain:
    The best laid schemes of mice and men
    Go often askew,
    And leave us nothing but grief and pain,
    For promised joy!

    November/Pstas – The most pessimistic, REALISTIC view I’ve seen has the Dems with 47 definite seats and the Reps with 46 so that leaves 7 seats actually up for grabs and you need 5 of the 7 to get past Biden’s tie-breaker.  I kind of hope the Republican’s do take control because the precedent has been set that the economy is your fault in less than 18 months and we are very likely heading off a cliff at this point and that will be MUCH more likely if the Reps take control so let them be at the helm when we crash and burn – that’s the brilliant strategy that put Hoover in office on a platform to clean up Government inefficiency and waste, fight illegal immigration, pass pro-business legislation – that went so well it was 20 years before people dared pull the Republican lever again, and that was only for Ike, who was a war hero and barely a Republican – after that, another 16 years!  You might remember that time from 1933 through 1969 as what was known as the "Greatest Generation" of America – the golden age when this country flourished and grew and people were proud of our country.  Ah, good times…

    Commissions/Dclark – Check out Option House, Trade Monster, Interactive Brokers and ThinkorSwim and call them and ask them for their best rates.  Try to get it in writing and then you can use those quotes to first call Fidelity and say "I am leaving you for this deal unless you can match it."  A lot of times, they will match it – all the investment houses work this way and you have to constantly go back to your brokers and press them, otherwise they will just charge the the max suckers rate.  Even TOS won’t give us a proper group discount – each person has to negotiate individually because brokers know that most people are terrible negotiators and it pays for them to deal with people one on one so they have "polices" that don’t allow for group discounts.  

    SPY/DD – I want to be super clear that this does not guarantee any kind of outperformance and will NOT outperform in a large up or down move but, assuming the S&P does not move more than 10% per year, and assuming you REALLY WANT to be a long-term investor in the S&P then you can take, for example, $100,000 and buy 10 Dec 2012 $80/110 bull call spread for $21.50 ($21,500) and sell 10 $105 puts for $13.50 ($13,500)  for net $8,000 on the $30 spread that pays you back $30,000 (up 275%) if the S&P holds 1,050 through 2013.  The margin requirement is $19,000 on the put side so $22,000 gained is "only" up 81% on the cash + margin committed and, keep in mind, the obligation is to buy 1,000 shares of SPY at net $113 ($113,000), which is obviously more than $100K but, of course there is rolling and hedging and the $80 calls shove the break/even way down to $96.50 or 965 on the S&P so you are really riding out an 18% drop.    

    So that’s an easy example of how you can commit $23K of cash and margin to make $22K in 2 years (11%) and you have a slight discount on your entry (3.5%) so you obviously beat the S&P by 3.4% to the downside no matter where it ends up and you make 22% on $100K as long as it doesn’t go down.  You can, of course risk more to make more but then you have to worry about managing the downside risk of assignment.  The problem is passive plays like that don’t do much for you if you aren’t going to utilize the leverage but utilizing the leverage (you could do 30 and make 66% in 2 years) gives you more downside risk than you have cash and that’s not a smart thing, even when you do have a lot of experience.  

    If your friends have cash in the bank, perhaps point out that they are already betting that the US banking system will not collapse and, therefore, they may as well invest in XLF.  XLF is $14.35 and you can do a 2012 $7/12 bull call spread for $4 and sell the $11 puts for .90 which is net $3.10 on the $5 spread that’s $2.35 (16%) in the money.  Worst case is you own them at net $14.10 and the break-even on that one is $10.55, which is a 26% drop from here.  So let’s say you are willing to own $28,200 worth of XLF in Jan 2012.  All you have to do is do 20 of these spreads for net $3.10 cash plus about the same in margin so $6,000 and you make $7,000 in 15 months if XLF simply holds $12.  That’s 7% of $100,000 and all you are doing is committing to MAYBE owning $28,200 of XLF next year and, realistically, your break-even is at $21,100 (2,000 shares at $10.55).  

    We can go lower, we HAVE gone lower and the idea would be to commit more cash to the next two years if we get a bad dip on the theory that, if the markets go down, then your cash will be worth more.  Meanwhile, even looking at this as 7% of $100K is still a lot better than any bank and way better than the mattress you’d be stuffing the money into if XLF really falls another 26% or more.  

    Stops/Nicha – I am not a fan of hard stops because they can get blown out on spikes.  I am a huge fan of scaling and stops and PLEASE go through the Strategy Section and the commentary under the Scaling Article as well as it has a ton of explanations in it.   As a quick example.  If you have $5,000 to allocate to a position and you decide to buy a stock for $10, without scaling you spend all $5,000 for 500 shares (the same goes for options, of course).  Now, if the stock goes up or down $2, you have a 20% gain or loss of $1,000 and you’d better stop out with a 20% loss, right?  

    Now, if you are right half the time and wrong half the time, that’s fine because, occasionally, you will go up more than 20% before a pullback stops you out and you will NEVER go down more than 20% because you are disciplined.  Of course, you can possibly get caught off guard by a crazy announcement or a BK but that’s not likely to happen if you stick to blue chips and, of course investing in non blue chips or non straight ETFs ups your risk considerably (I hope that’s of course!).   

    If, on the other hand, you are scaling in.  Let’s say you allocate $1,000 to the first round and buy 100 shares for $10.  Now, the entire position could be wiped out and you "only" lose 20% and the entire position could double and you "only" make 20%.  If it makes 20% or more that’s 4% of a full allocation and if that happens quickly, so what?  Cash it out and move on.  If it goes down 20% early on, however, what has happened?  You have only lost 4% and you still have $4,000 of $5,000 on the side.  You are now IN CONTROL of the stock rather than the stock controlling you.  You can calmly and rationally decide if you should A)Quit and move on because your premise is blown, B) Give it some time to come back or C) Press your bet.  If

    I buy WFR, who I love, for $10 and they fall to $8, what do I want to do?  Buy more!  If, however, I bought an AAPL Nov $300 put for $10 and it fell to $8, maybe I’m not so hot to put another $800 into another contract.  BUT, I may decide to wait and say to myself "If they hit $6, THEN I’m willing to risk $600 more on round 2."  That would put me in 2 contracts at $1,600 or $8 per share with the contracts at $6.  Again, if it were WFR stock, it would be a no-brainer but let’s say the AAPL calls now fall to $4?  Well, I spent $1,600 for 2 contract and now they are worth $800 so I’m down $800 on my $5,000 allocation (16%), EVEN THOUGH the contract fell 60% and I STILL have $3,400 cash on the side.  

    Keep in mind that while all this is going on we are getting more and more information about the stock over time than we had when we made the first round bet.  When you plunk $5,000 on a stock (assuming that’s a full allocation) then you are making an all or nothing bet that it doesn’t hit your breaking/capitulation point.  When you scale in, you are testing the waters and will be able to make adjustments along the way or perhaps a much better opportunity comes along that you take advantage of instead. 

    The other great thing about scaling in is that you only end up building big positions in things you like over time that are very cheap (compared to where you first liked them).  So if WFR goes from $10 to $8, perhaps I DD and own 200 shares for $1,800 ($9 per share) but then, if it falls to $7, I’m not so sure what’s wrong so I wait.  If they go to $5, rather than having lost $2,500 if I had started with $5,000, I have only lose $800 – that’s not even 1/3 of what you lose by not scaling.  Also, at $5, I still have $3,200 on the sidelines and I can buy 300 more shares for $1,500 and that puts me in the 500 shares I wanted to buy at $10 each for a grand total of $3,300 – $6.60 a share.  

    Since I KNOW how my allocations will flow, I can allocate some of that $1,700 I won’t be needing to a hedge along the way.  Perhaps a short that makes $800 on the way down and than I’m in for net $2,500  ($5 a share) with WFR at $6.60 a share.  Keep in mind that 3 times I would have decided that the drop was an opportunity and by the 3rd round, we have certainly committed to being long-term holders but IF YOU NEVER ENTER A POSITION ON A STOCK YOU DON’T REALLY WANT TO OWN LONG-TERM – THIS IS NOT A PROBLEM!!!  

    So you only get "stuck" with stocks you really, REALLY want at 40% discounts to your original entry and, if the stock takes off before you get to round 2, you might make just 4% instead of 20% but I’d rather make 4% 5 times with a very small amount at risk than tie up a big amount of capital all at once.  Now the equation shifts from making 20% on 5 and losing 20% on 5 and HOPING that occasionally you make more than 20% to making 4% (of the full allocation) much more often and only committing to greater than 4% losses on ones that go hopelessly against you so this is just another way of buying stocks with a 20% discount (at least).  

    If you look back at your trading career and say that each time you make a decision to buy that you either made at least 4% or bought the stock you intended to buy for an average of 25% off – would that improve your overall performance?  

    And, of course, part two to this is don’t be an idiot and buy premium.  When you sell options – based on the same logic – you can roll them along and charge more and more premium until they expire worthless or you are forced to bite the bullet and take the loss but, when you buy options, you HAVE to be right by a certain time or you end up with NOTHING AT ALL to show for it.  No wonder it’s so much better to BE THE HOUSE! 


  47. November- precedent – No, the Prez will get the credit or the blame- allways has and allways will be so. Not necessarily fair but that’s politics.
    Greatest generation & good times- Yes, they were but certainly not because of any particular political party being "in charge". In that era, there was a general consensus regarding the role of government; cultural values, etc. The ’60′s marked the ascendance of the political left and all that has wrought. It has been downhill from thereon.
    The nation’s salvation lies in returning to a more conservative consensus. That process has begun and may well take many years to play out.  Ma & Pa Kettle and Joe Bagadonuts are ahead of the curve.


  48. lflantheman
    I like your decipline on stops.  My question instead of a hard stop why not set a trailing stop instead? thks


  49.  Growth/Pstas – On WDFC’s Consolidated statement, $931,000 of the $6,888,000 in net income (15%) was from unrealized foreign currency exchange gains!  . They also made an "Equity adjustment from foreign currency translation, net of income taxes" of $3.7M this Q, which accounted for about 1/3 of their total earnings.  That got translated by Reuters into "WD40 profit beats street, sees strong FY11" with no mention of the exchange contribution that led to a 3-cent (10%) beat.  What’s really shocking is how no one mentions this stuff – as if a 12.5% drop in the dollar is just business as usual and doesn’t impact the earnings numbers we’re seeing.  

    Gloom/Jthom – I haven’t gotten much drinking done yet but I will say that you should read some books about the Great Depression.  We had totally screwed up the country then and there was lots of political incompetence at the time and you can say it was the war but we did not only turn the country around but we thrived for the next 30 years.  Economies have cycles and the same forces that drive us down and China up will one day drive China down and us up – it’s waiting out the in-between parts that sucks!   

    On the banks – obviously $80Bn is just a drop in the bucket for them.  C lost $27Bn in 2008, let’s say this costs them $4Bn for their share of the mortgage market – who’s going to notice over a couple of years?  In reality, FRE and FNM are on the hook for the most unless they sue to force things back but they really can’t do that without calling MERS, which they built, some kind of fraudulent transfer enterprise and that’s not going to happen so, very likely, NOTHING will really change.  You can be outraged and disgusted and whatever but what’s it going to change?  

    Right now it is ALL about the dollar.  I don’t care how high or low the dollar goes, I do know that IBM is worth $100 2007 dollars a share and if those dollars drop to .50 then IBM is "worth" 200 American Dollars.  This is the thing I have been trying to impress upon everyone for the past two weeks – you need to think of US Dollars the way you think of erratic foreign currencies and do your translations each day to find out what things REALLY cost.  If I tell you a Coke is 30 Rubles in Moscow you will say "how much is that in real money?"  

    Well if I tell you AAPL went from $235 to $315 since 8/15, you NEED to say, well that’s up 34% less 8% from the Dollar dropping = 24%.  Still impressive but not so much the S&P, which is up 13.5% over the same period.  Also, you need to consider that the S&P is rallying because people who don’t take currency into account (most) think it is rallying so they are sticking their money in the market so you have fake signals leading to a false interpretation of the market leading to malinvestment based on poor information which forms a bubble that will break if people wise up or the dollar stops dropping.  Still, that has nothing to do with the health of the economy, which is the same sluggish but recovering that we had all year and will probably have for another few years.  

    Stops/Iflan – To be clear, I do not like hard stops.  Especially with options, that can easily go up and down 50% and flush stops, it’s really dangerous to have hard stops.  What’s even worse about hard stops is that most people set bottom stops but not top ones, which is ridiculous as an option could, on a coin flip, go up or down 20% every day so if you stop out only with 20% losses, your are locking in every downturn and then letting all winners ride without locking in any gains – there’s almost no way you can win that unless your percentages are phenomenal.  

    Banks/Goldman – Time for another "Resolution Trust" where the government takes over foreclosure activity (paying the banksters cash, of course) and deals with this mess over the next decade.  Then the banks can fly higher while we foot the bill for the mess they made.  A government trust can insure title by simply guaranteeing payment – how it happens is of no concern as long as the guarantee can be counted on and then the title companies can simply underwrite the possibility of the government reneging – probably through AIG who we own too and we’ll get stuck with that.  See how this game is played?

    China/Gel – Oh absolutely.  They will be the world’s reserve currency as soon as they circulate 6,500% more Yuan.  No problem I’m sure.  Unless, of course, we pull 50% of our currency out of circulation.  No, wait, that won’t work because then our currency will go up and they’d still need to press 3,750% more of their own at the same time…  Hey, how about if… no, that would never work…  Maybe if…. no, that won’t work either…  Get the point?   It’s like saying that Dallas, which is growing at a rate of 2.5% per year in population, now 6.5M is well on the way to passing New York’s 19.5M because they only grew at 1% a year this decade.  Can it maybe, possibly happen if trends and policies continue for decades – MAYBE.  Is it something we should bet on.  Not at all.  

    The Dollar became the World’s reserve currency by agreement at Brenton Woods after WWII BECAUSE the rest of the World was in shambles and they were able to get countries to agree to it so the US could lend them all money and help them rebuild.  Also, the US consumer base was undamaged leading to us becoming the worlds greatest importer of goods for the next 60 years.  I’m sure you know, we NEVER had enough gold to back the buck – that was always a joke.   The reason Fort Knox was kept secure wasn’t to protect the gold but to protect the fact that there wasn’t enough of it from becoming known.  

    We weren’t the only ones who were pretending when global GDP went from $7Tn to $25Tn but gold flatlined.  All the jump in gold was in the 70s was a realization of the reality that Brenton Woods was never followed and money wasn’t worth what people thought.  

    Now we are in part two of that crazy spike with everyone losing faith in paper currency again and this bump of 600% is still shy of the 700% move we had in the 70s (and the spike was close to 900%) before 60% pullback.  

    So $2,700 and bust is the cry for gold with maybe $1,050 remaining my "fair" value for it because you are NOT going to take slivers of gold with you to the store to buy things.  You are not going to pay an ounce for 4 shares of AAPL – it just won’t happen, our society is not set up that way any more than it was in our last currency crisis in the 70s when the Nixon/Ford brain trust led us to the brink and Ford came up with his "brilliant" WHIP INFLATION NOW strategy.  That didn’t work of course and the inflation was passed onto, and then blamed on,  Carter.   Hey, wasn’t Ford’s VP a Billionaire?  Funny how those things work out. 

    Even then, though, Republicans were comparatively rational.  Some of Ford’s points were:

    • I have reviewed the past and the present efforts of our Federal Government to help the economy. They are simply not good enough, nor sufficiently broad, nor do they pack the punch that will turn America’s economy on.
    • Food prices and petroleum prices in the United States are primary inflationary factors.
    • America’s future depends heavily on oil, gas, coal, electricity, and other resources called energy. Make no mistake, we do have a real energy problem. One-third of our oil—17 percent of America’s total energy—now comes from foreign sources that we cannot control, at high cartel prices costing you and me $16 billion—$16 billion more than just a year ago. (note, we now import 11Mbd (60%) at $26Bn PER MONTH! Nice job boys!)
    •  I will meet with top management of the automobile industry to assure, either by agreement or by law, a firm program aimed at achieving a 40 percent increase in gasoline mileage within a 4-year development deadline.
    • Now, if all of these steps fail to meet our current energy-saving goals, I will not hesitate to ask for tougher measures. For the long range, we must work harder on coal gasification. We must push with renewed vigor and talent research in the use of nonfossil fuels. The power of the atom, the heat of the sun and the steam stored deep in the Earth, the force of the winds and water must be main sources of energy for our grandchildren, and we can do it. (LOL, so funny to reflect on the BS 36 years later!)
    • Non-competitive professional fee schedules and real estate settlement fees must be eliminated. Such violations will be prosecuted by the Department of Justice to the full extent of the law. (ROFL!!!)
    • Three weeks ago, I released funds which, with earlier actions, provide public service employment for some 170,000 who need work. I now propose to the Congress a two-step program to augment this action.
    • Now, I know that low- and middle-income Americans have been hardest hit by inflation. Their budgets are most vulnerable because a larger part of their income goes for the highly inflated costs of food, fuel, and medical care. The tax reform bill now in the House Committee on Ways and Means, which I favor, already provides approximately $1.6 billion of tax relief to these groups. Compensating new revenues are provided in this prospective legislation by a windfall tax, profits tax on oil producers, and by closing other loopholes. If enacted, this will be a major contribution by the Congress in our common effort to make our tax system fairer to all.
    • Number six: stimulating housing. Without question, credit is the lifeblood of housing. The United States, unfortunately, is suffering the longest and the most severe housing recession since the end of World War II. Unemployment in the construction trades is twice the national average. One of my first acts as President was to sign the Housing and Community Development Act of 1974. I have since concluded that still more help is needed, help that can be delivered very quickly and with minimum inflationary impact. I urge the Congress to enact before recess additional legislation to make most home mortgages eligible for purchase by an agency of the Federal Government. As the law stands now, only FHA or VA home mortgages, one-fifth of the total, are covered. (the beginning of FRE and FNM)
    • To support programs, to increase production and share inflation-produced hardships, we need additional tax revenues.  I am—I am asking you to approve a l-year temporary tax surcharge of 5 percent on corporate and upper-level individual incomes.  The estimated $5 billion in extra revenue to be raised by this inflation-fighting tax should pay for the new programs I have recommended in this message.
    • I say to you with all sincerity that our inflation, our public enemy number one, will, unless whipped, destroy our country, our homes, our liberties, our property, and finally our national pride, as surely as any well-armed wartime enemy.  I concede there will be no sudden Pearl Harbor to shock us into unity and to sacrifice, but I think we have had enough early warnings. The time to intercept is right now. The time to intercept is almost gone.

    So, where was I?  Oh yes, China as a reserve currency.  Can’t happen.  You don’t snap your fingers and become a reserve currency.  You have to run a $500Bn average trade deficit for 30 years so you ship $15Tn out of the country and some of those dollars end up being "reserved" as assets.  The only way to get past (for example) $62Tn out of $100Tn in global assets being in dollars is for China (not even $1Tn priced in Yuan) to run a $1Tn trade deficit for 60 years AND for their trading partners to value Yuan enough to hold them as reserves AND for the Japanese, British and EU not to attempt to do the same thing as they all have significant reserve advantages over the Yuan already.  

    The only reason the Euro made any headway as a reserve currency is because of the forced replacement of Marks, Lira, Francs and whatever that was already on reserve.  Banks that had 1Bn electronic German Marks on a Friday changed the symbol to the Euro on Monday and that was that.  The actual paper currencies were exchanged over a couple of years and bond notes were liberally allowed to be redeemed for Euro equivalents.  Don’t forget the Euro dropped about 40% in value in its first decade, the path to becoming a reserve currency is torturous at best…


  50. Cashin/Jthom – Boy, he did a great job of summarizing what I was saying all week!  I like that guy…

    Banks/Gel – Well there were laws as to how to perfect a mortgage and, in order to cut costs and corners, they ignored those laws.  I guess we can give them a pass – after all, regulations were never intended to harm a bank anyway, they were there to stop consumers from passing off their mortgages to someone who may not have had the ability to pay back the bank.  When the bank is the one passing off mortgages to people who have no ability to pay – then of course you want to rescind those laws as quickly as possible.  

    There’s going to be some major damage to other people who cut corners, investors who bought foreclosed homes and saved money by not buying title insurance.  Many of them are going to be totally screwed if the people who were foreclosed on assert their rights -they probably can’t even afford to fight the lawsuits that will be coming down the pike.   Likely what will happen is the banks will have to guarantee the title insurance companies on any foreclosure issues, otherwise the home will not be marketable and then the banks will have to count on buying enough Congresspeople and judges to get things taken care of.  

    Hyperinflation/Hoss – As Cashin says and as I wrote extensively about, the Fed cannot control hyperinflation by snapping their fingers because they have pretty much doubled the money supply (in bank reserves) while the velocity of money fell 50%.  Inflation, by it’s nature, causes the velocity of money to pick up as leaving it standing still causes it to lose value so velocity rises and demand for dollars rises and lending increases (if lending doesn’t increase, the banks get paid back on old loans in worthless dollars and make no profits on new loans to offset) and the velocity skyrockets.  So $4Tn in cash at 4x velocity is a $16Tn GDP and now we have $8Tn in cash moving at 2x for a $16Tn GDP  but, the problem is, if the velocity goes back to 3x – that’s 50% inflation (50% more money chasing the same goods) and the Fed can only really pull back what they’ve created, which was "just" $2Tn and that would leave us with a $22Tn GDP despite the Fed pulling the reigns all the way back.  

    Obviously, 30%+ annual inflation, whether it’s in stocks or real estate or commodities, leads to a greater demand for money.  Companies that borrowed $1Bn last year need $1.3Bn just to stay even and the money paid to all those asset holders begins to seek Alpha in the system and that can prevent the Fed from raising interest rates high enough to hold off more inflation as people dump money into high-yield (relatively) TBills on the expectation the Fed is moving to revalue the dollar.  In this week’s newletter, Elliot points out how bunches of countries have trashed their currency this way in the past century.  To think the Fed has some grand way to control this is no better than thinking China is some all-powerful global presence.  Everyone has their own pressures and problems and, in the end, it’s just some guys who are not much smarter than any of us and who have the same fights with their wives and ailing parents and out of control children as any of us may have at one time or another just trying to do what they think is best either to please their boss or keep their jobs or look good to their peers – why anyone thinks things are different is beyond me…

    Hola Prof!  Good plan staying out of bonds and commodities.  We are either at the end of the ride or at the beginning of a much longer one so no harm in seeing which way the train pulls out of the station first.  The interest rate shock will come (may have begun last week) when foreign buyers simply stop buying our silly notes at auction.  Even our Fed isn’t slippery enough to mask buying almost 100% of the TBills sold at auction (officially about 40% now).  That’s what’s going on now, it’s like your wife is selling your baseball card collection and you are in the room bidding $100 per card and the other 20 people all know you two are married and the bidding is a total farce.  So they just sit there and watch you two make fools of yourselves selling things to each other and, at the end, you don’t have the money you needed and the other buyers will never do business with you again. 

    Charts/Exec – Yeah, sometimes I catch those and go – hey……

    China/Stjean – Their proportional stimulus was close to triple ours and they spent it building empty buildings (entire empty cities actually) as well as airports with no planes and rails with no cars and storing up almost a year’s worth of the World’s commodity supplies.   They spent $220Bn on infrastructure IN ONE YEAR!  That’s 55M $4,000 jobs!   Even Beijing has a 22.4% vacancy rate vs New York at 11.3% and $1.4Tn of construction loans were made LAST YEAR!  That’s like building a bubble on top of a bubble….  So let’s be kind and say that $550Bn was the real number and pretend the money was well spent.  That means it cost $275Bn to grow China 8% but that means that, to continue 8% growth, if $275Bn was 5% of GDP ($5.5Tn) and GDP grows 8% each year, then if they need more stimulus next year for the following 2, the base will be + 24% (not even compounding) or $7Tn and now they need $700Bn to keep up the 8%.  Unless they are adding to reserves at a truly astounding rate, this will suck up their cash quickly so China will have to choose between continuing to grow at 8% or becoming a debtor nation.    We had this choice at one point and chose to go into debt….

    Esignal/Dr.C – I just use them for the intra-day charts.  I run a simple 10min chart with volume, bollinger (20), RSI (14), Stoch (14,3,3) and MACD (12,26,9).  That’s the only thing I do with them.  


  51. Phil / Title Insurance
    I am not sure the the notes that collateralize the mortgages will be able to to be challenged, for the reason I have cited… electronic records can prevail in the end as supported by UCC regulations, and steri decisus in the law.. In the absence of this backdrop, then the banks will become the issuers of title insurance ( as you predict ), and will have some actuarial experts determine the risk, and then this cost will be an add on to their sale price. – or alternatively,  as you say, buy a few politicos, and change the law, althought they are very expensive lately.


  52. Phil / Reserve Currency
    Gotta disagree with you on your position on China…. Their currency is in a state of assent, and this trend is at the infancy stage. They can thank the irresponsible overindulgence of the mature economies in the United Sates and Euripe for this unexpected gift –  through mismanagement of debt, and the econimic policies that have failure in their DNA. I will not get into a miriad of statistical examples, but the bottom line is …. these economies are in decline, and overleveraged with unsustainable debt, that is creating uncertainty in the minds of others   that rely on stability in a reserve currency.  Lets face it,  Phil…. we are facing hyperinflation, and it is not too far down the road. The Eurozone is another disaster, when you consider the debt load and the tepid economic strength that is supposidly going to provide a resolution…. not there!
     
    Just an update… The Hong Kong Dollar is soon to have a wake, and then a dignified burial…. the reason? – Yes the Chinese Yuan will soon replace the HKD, and eventually transend to the new world’s Reserve Currency. – A few months ago you could buy Yuan outside of China, but you were allowed to convert it back to the original currency if you only were inside the country. This has changed, as you now can open bank accounts in HK in order to hold Yuan currency directly.and also trade it back a forth with any currency.  The residents of HK are buying large amounts of Yuan daily, trying to load up on what they consider an appreciating currency. They also believe it is just a matter of time before the HK Dollar is replaced with the Yuan. The Yuan is DEEPLY discounted to the value of the US Dollar, and the HK dollar is pegged to the US Dollar, so thay are selling dollars, and their own currency and buying the Yuan. The Chinese are some of the world’s smartest people – don’t ya think!
     
    Many experts are predicting the Yuan will replace the USD by 2015 as the Reserve Currency. The seeds have been planted, and China wants the Yuan to become the world’s Reserve Currency.  Beyond HK, China is encouraging direct trading with other currencies. China is developing its FX, bond and equity markets in order to meet investor demands, and the more folks that invest in Yuan denominated assets, then the more likely the scenario becomes reality. The Yuan is becoming very popular in Asia, and this weakens the USD domination. I am one who believes this trend is for real, and the bottom line is…. get the hell out of as much Dollar denominated assets, and get diversified into assets that are hedged to the dollar, or are denominated in stronger, more stable currencies ( Canadian, Australian Swiss, Singapore etc. ) 


  53. Phil, I agree with your point exactly.  We have a huge pool of money that’s not moving, in fact that’s what scares me about QE2 is it doesn’t solve the underlying problem.  Our problem is not a lack of money, rather it’s a lack of velocity in the money we have.  People are holding it, waiting for lower prices later…which becomes it’s own positive feedback loop.
    My question would be, how long would the hyper-inflationary period last and what would be the best solution for riding out the interest rate shock when it hit. 
    It sure feels to me like we are at the turning point you point out in your post to Prof.  We could be on the precipice of runaway inflation and commodities may stand to gain.  Or we may be at the floor in the dollar, and anything that sends the dollar back up would tank the markets.  So again we are at be careful and stayed hedged.
    Thanks for your input, love the insight. 


  54.  ah, baseball cards, a blast from the past


  55. Play on AAPL
    *) Nov 320/340 call spread for 6.20
    *) 1/2 X of 280 put for insurance (3.15)
    *) Outlay: $1,555 (for 2 call spreads and 1 put)
    *) Profit levels: 264 > X > 328 (AAPL down 16% or up 4% by 11/19, from its 315 close this past Friday)
    *) Max gain up @ 340 = $2,450 (+58%)


  56. Phil,
    SPY – Thanks so much for your post!
    DD