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TGIF – Stop the Week, We Want to get Off!


What a disaster!  

Of course, that's why we have Disaster Hedges, right?  August 11th was the last time we did a "Hedging for Disaster" post which included a LONG trade idea on gold that's done now (we're short) after gaining over 300%.  We're a little mixed in our results on the other hedges but that means we can SWITCH HORSES – from the trades that have already worked to the ones that haven't yet.  That's how we cash out our winners on a regular basis – it's the pony express of investing.   Our other Disaster Hedges from that post were:  

  • DXD Oct $23 calls at $2, selling Oct $27 calls for $1.15 and the Oct $19 puts for .70 for net .10.  That spread is currently -.05 so down 150% so far and a nice horse to switch to, offering a .05 credit on the $4 spread.  
  • FAZ Oct $65 calls at $22, selling Oct $72 calls for $20 and selling JPM 2013 $20 puts for $2.05 was a net .05 credit as a backstop to our long financial plays.  FAZ is now at $71.34 and the October FAZ spread is now $3.70 but the JPM puts are now $3 so net .70 is only up 1,500% so far.  Should the financials stay low, we get the full $7 from the spread and we're obligated to buy JPM for $20 (now $29.27) in 2013.  
  • SDS Sept $26 calls at $3.20, selling Sept $32 calls for $1.65 and selling VLO Jan $15 puts for $1.20 for net .35.  SDS is only at $25.73 so far (not a disaster yet) and the spread is now net $1.25 and the short VLO puts are .17 so net $1.08 on this one is up 208% and we're not even at goal – that's pretty good!  Note the spread is LOWER than when we started so this can also be used as a fresh horse with a different offset, like X Jan $15 puts for $1.20 for a net .05 trade.  
  • TBT was stopped out with a small loss at $24 (fortunately).  My comment at the time, with TBT at $24.88  was:  "Keep in mind though, that the Fed has said rates will stay low through 2013 so it would be wise to uses stops on the puts, at least, if TBT fails to hold $24!"  
  • EDZ is always our favorite disaster hedge as we've long suspected emerging markets would implode at some point, whether the Western markets improved or not.  Our EDZ play was selling one set of the ridiculously overpriced January $75 calls for $3 and buying 2 Jan $25/40 bull call spreads for $2.60 each, which was net $2.20 on the spread.  Unfortunately, the Jan $75 calls are still a crazy $4 but, fortunately, the 2 spreads are already $6 each so we're up to net $8 (up 263%).  There's a stop on the calls at $5, by the way and, if that is triggered, then we set stops to maintain profits on the spreads, of course.  


I would urge you to read the post as well as our other Disaster Hedging posts we've written over the years as there is noting more important than having INSURANCE.  Having portfolio insurance lets us ride out the market waves and stick with our sensibly hedged (hopefully) long positions through the gyrating market cycle.  At the moment we HOPE (not a valid investing strategy) that we are at Capitulation on this chart and we've done a bit of bottom-fishing, just in case we're there.  

Our long ideas in yesterday's Member Chat were XLF at $11.50, shorting TLT at $123, shorting VXX at $49.50, TNA at $34.50, BRK.B at $65, AA at $10.20, VLO at $19, IMAX at $15.75, BA at $58.32, AGQ at $170, CHK at $27.50, DIS at $30.14 and ABX at $47.50.  Of course we also had plenty of short plays to balance it out (15/15 is our current goal) and, when I say we like, for example, ABX at $47.50, that is to say we liked it enough to sell the 2013 $35 put for $3, which is a net $32 entry, $15.50 below the current price (33%).  THAT's how we get bullish when we're not sure if we at Capitulation of Fear – we buy things while giving ourselves a nice buffer (see "How to Buy Stocks for a 15-20% Discount") AND we hedge with short plays that will give us more buying power on the way down.  

We HOPE (not a valid investing strategy) 20% off from here is the worst-case scenario but the markets have gone much lower than that in 2008-9 and, while we don't feel this situation is the same as it was back then – one thing we learned 3 years ago in September was that you should never underestimate the ability of your fellow investors to FREAK OUT.  Our job is, very simply, to have as much cash as possible when the market bottoms and that's what hedges are great for.  If we do get assigned ABX at net $32 and we have a hedge against it like EDZ that pays us $20, then we're getting ABX for net $12 (75% off).  If you don't want ABX for net $12, then why on earth would you buy it when it's at $47.50?  

There's a huge difference between the PRICE of stocks and the VALUE of stocks but there are very few of us Value Investors left in the World.  TradeBots are not value investors – they look at price and that's all.  If gold, for example, breaks $2,000 – a TradeBot is perfectly happy to buy it because of momentum and if gold breaks below $1,000 – the same TradeBot is happy to short it on momentum.  Gold has no value whatsoever to the machines that are doing 85% of all the trading and neither do stocks – not AAPL or IBM or JPM or VLO or BA or CAT – NOTHING!  

It's not just the Bots though – most of the traders out there are technical traders as well and that's a valid strategy because it's a technically driven market but, at a certain point, stocks get too cheap or too expensive relative to their FUNDAMENTALS – and that includes the whole Global Macro environment (see "The Worst-Case Scenario:  Getting Real With Global GDP") 


Note this cartoon from that post is from 2005 and, other than adjusting the debt figure upwards by $8Tn and putting the housing bubble into the past tense, not much has changed – has it?  As we learned from the great Roseanne Roseannadanna back in the 80's – It's always something or, as Tommy Lee Jones points out in "Men in Black":

There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they Do… Not… Know about it!

We (savvy traders) are the Men in Black – we are keenly aware of all of the threats to Global Economic Stability while the vast majority of the rest of the World gets up and brushes their teeth and eats their Egg McMuffin on the way to work until they get fired.  As more and more people get fired (428,000 last week), more and more people become aware of the HORRORS of the Global economy and OF COURSE THEY PANIC – it's HORRIFYING!   

Now we (the heroes of this little drama) need to step back and objectively, CALMLY, away from the madness of the crowd and simply factor the panic into our fundamental equation.  On Monday and Tuesday this week I did my best to put Greece in perspective because we EXPECTED this panic drop but that's only half of the game – now it's my job to tell you why YOU need to leave the herd and NOT panic.  

In Tuesday's post I mentioned our Fed hedge was a GLD Nov $180/174 bear put spread at $3.30, selling the $193 calls for $3 for net .30.  That one is already $2.67 (up 790% in 2 days) and we're done with that, of course.  In Member Chat at 11:50, we added short-term aggressive hedges on SDS, LVS and GLD again – all huge winners, of course and at 12:24 we added a November SQQQ spread to hedge against a longer downturn.  As I discussed in yesterday's post, we tried to get more bullish but abandoned that when the Fed statement came out and now we are simply doing a little bottom fishing – HOPING (not a valid strategy) that the markets do find some support at our -10% lines – again.   If not – we change horses, layering in our Disaster Hedges and enjoy the ride down!

Have a great weekend, 

– Phil


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Savi – email me at pharmboy123 at gmail.  We need to start putting together the plans.


What I have so far is dinner on Saturday 7ish at ______ for how many?

Poker after dinner, but I am going to need a headcount as I am trying to arrange with lv’s friend.

Sunday morning/afternoon is open, regather for dinner and trading at lv’s?

Monday morning is trading at lv’s until market closes and then disperse? 


If you are planning on attending, please email me as well, i will put together the list of participants and that way we are all connected by email.  We need to start ASAP.  I will make reservations on Monday, so let me know if you are in for dinner. 

Sorry I won’t be able to hit Vegas with you guys, and after a week of the aging-boomer party lifestyle at Lake of the Ozarks, I really need to spend a few days discussing things with folks like you. Can’t make it because of doctor stuff…. (another aging boomer blessing) .Lake of the Ozarks is a fabulous party town IN SEASON (this was not) mostly for folks under 30, like my kids….. What a wonderfully overdeveloped water resource. $1M homes with property taxes under $1k!!!
In particular, I would love to debate Phil in person, in an environment where the mike is shared, not like here.
I nominate John Stossel for President…Often shares my point of view. Always sounds reasonable.
If I were named King for a day,  a flat income tax with absolutely no deductions or exemptions besides yourself and your adult partner. I am completely confident this would solve many problems. This might be blended with a VAT (which I don’t completely understand). After all, I actually heard Tom Friedman say he believes "it is all about incentives". Can this guy really vote for democrats?????
I second the vote for Dick Lugar, one of the most impressive national figures of my lifetime. What ever Lugar and Moynihan agreed to would have been good enough for me.

Any tips on Memphis, New Orleans, Biloxi, Mobile? Driving that way to our FL residence on Sanibel Island. Doing the western route this time.
Oh, and TLT can not fall much below where it is given the Fed bias. The upper end is unlimited. But then, I’m the guy who lost a sleeve of his last shirt playing this crap.

Phil, do you care to share with us the number of premium and basic members? I know there are more than the 100 or so I see posts from.

Sorry, I got carried away and forgot to ask what is up with CHK, down 3% Friday. I have been a long time believer here, and that surprised me.

In case the market turns up, is there an AAPL bull call spread in the OCT 440 range with an OCT  SPY put offset that would be a possible "what if"  things turn upward home run bet?

i don’t believe they directly effrot to debase our currency i think they have a strategic (and flawed) vision of how to increase revenue from our treasury and force us into a more malleable relationship through higher interest rates ..if you listen to them proselytize about our fiscal probity it makes me wish i were a cartoonist…i would have a scolding yu look up at a scoreboard that shows the cds for the us and china…i certainly believe s&p was somewhat tendenciously motivated by their pandering realtionship with china in the timing of our downgrade..the constant jawboning of chinese officials about a new reserve currency or more generally their deisre to unlock themselves from the dollar’s clutches is a perfect example of how ham fisted their efforts are..they measure with a micrometer and cut with a meat axe…the municipal off balance sheet debt owed to the central chinese treasury is in the trillions and ..the amplified fist shaking and whinging over us fiscal poilicy is a cloak under which they idiotically believe they insulate themselves from the objective bias of a far more civilized and sophisticated set of players in world markets who know they are buying (MUST BUY) our debt and continue leading the world to falesly believe they have massive reserves..they hide the offset on those reserves as effectively as they manipulate their sham infested propagandized growth engine ..once their labor costs rise another 15 or 20% the usefulness they offer to our corporations looking for cheap goods is severely mitigated…the dilatory effect this will have on goldman citi and the plethora of hagiographers posing as financiers who have attempted themselves to aid and abet china in its false ascension as the central cog in the world’s growth machine ..will be nuclear in its after effects..if the president has anyone around him with a precise vision of how completely vulnerable ( compared to the us) the rest of the world and particularly europe and china ( two of the us’s  prime collaborating protagonists) will become the hone upon which we (finally and completely) sharpen our wits..i could go on about this in far greater detail…i have had a vast bet of europes unravelling of bubbles popping and the us becoming quickly ascendant again..china will NEVER replicate the last 15 years of again unless its as a result of a vibrant chinese consumer……because the chinese people won’t allow it..serfdom disguised as a collective is still a slave colony……once we began tracking AND publicizing the hacklike hacking they have tried with our military… corporations etc., AND when the us government began a far more intense signalling that we knew what was up..i thought wow…they’ve known forever..why now..well i think its the first indication that we don’t believe them worthy of a full and trusting economic arrangement…SHOCK..i did finally sell th ebalance of my bonds wednesday and thrusday and got into a  relatively small short in the 30 year..i suspect the aussie and euro go much lower but i had to cover more than half my position their but remain short euro in gold terms…i think we could break the august lows but i am starting to see th epotential for a massive move higher in stocks into the year end…all of course FWIW

Vegas Details (this is my current understanding, anyway) — 
Dinner on Saturday at 7PM — Phil said where, but I forgot!  Anyone have it?
Poker Tournament after that — count me IN!
Sunday 11AM Cafe Moda — then futures trading starts at 3PM Pacific
Monday — back at Cafe Moda for the trading day…6:30AM?

angel i love your posts it’s like when i was 12 and finished a novel in the naugahide recliner in the den and didn’t want to go to bed yet even though it was after midnight. i turned on the tv to the opening scene of dr strangelove and soon enthralled said to myself "yes there is intelligent life out there somewhere."

 Phil–any real help from the G7 today or is just more lip service?

sparky the guy/gal who came up with the name naugahide..that was a smartypants!…

Hi Everyone—I am in Bannf Alberta–but will  put a list together tomorrow so that we can all coordinate Vegas

I created a google site for the psw las Vegas meetup. I will post all the information I can find and give you the address Sunday afternoon. That way we can keep track of everything.

 Here is the address and most updated information.  I will continue to update it with any additional info.

Vegas update—I have 18 confirmed attendees
let me know if I missed your name

I have a more important question:
what is your “best guess” in the scenario that Europe tanks over next few weeks, dragging us down another 10%
what does THAT do to AAPL?
Have a great weekend.

 Savi –
I am going to be at the Monday trading session.  Can you send me an email regarding deposit or anything else I need to do to confirm?  E-mail – jennifersurovy@yahoo.com

 Angel:  My compliments, very incisive.  I’ve thought about China for quite awhile — who hasn’t — without feeling I’ve sorted it out.  So that was very helpful.
On the longer timeframe, the Western hemisphere, with 950M people comprising 13% of the global population, and at least 25% of the resources on two contiguous, ocean-surrounded, continents with three countries occupying the bulk of it — or two, if you count the U.S. and Canada as one — will see substantial inward capital flows eventually.   The Eastern’s hemisphere’s near-6 billion people always have a couple of wars or insurrections going on, and every few generations they really kick out the jams with casualties in the millions. So betting on the U.S. longer-term is an easy call.
You suggest that China beguiled us into believing that it is a wealthy and powerful country, while it is actually an overleveraged dictatorship with half the per capita income of Mexico.  That China’s vaunted "reserves" were leveraged up and spent many times over on a massive jobs program after export volumes plummeted in 2008.  And that while Chinese Stimulus may have prevented revolution, it has also rocketed Chinese national income well above that of the competition elsewhere in Asia and Eastern Europe.
In sum, you appear to mean that all of the profits accumulated by the Chinese within a generation have been frittered away on a jobs  program to maintain an autocratic regime.  That suggests that the accumulated national income that was transferred on a large scale from developed countries to Emerging Markets over the last 30 years, principally Asia, leaving an overindebted Europe and U.S. to struggle in its wake, became the "equity" in a giant Chinese-elite-get-rich scheme that would leave Countrywide looking like the Swiss national bank by comparison.  It certainly appears so.
But dictatorships can extend and pretend even more effectively than supine democracies, so it’s hard to see who’s going to call a default on Chinese property loans.  And it’s a useful policy tool to be able to lower wages 20% across the board and shoot any given 20,000 people who turn out with Molotov cocktails in the village square.
In sum, while I agree entirely in respect of a Great Unraveling in Europe, as well as the Great Deleveraging of Asia, all of which will eventually inure to the benefit of the United States and its Western nation compatriots [Brazil/Canada], it may be a longwave event with a complicated evolution [governments react] that is more hazardous than profitable to bet on.
 Europe not so much; the painless solution to Europe’s fiscal crisis was for the Germans to step in and support a Eurobond.  But as the magnitude of the Peripheral’s aggregate indebtedness is projected forward into what has become a very unhelpful global economy, it becomes more obvious that Germany is shifting the locus of its economic future eastward and will not be writing any blank checks until the Euro falls a lot closer to par with the dollar – and even then, perhaps not.  I’m Euro short / Gold long,  too.

 Correction:  A Eurobond would have been relatively painless for Peripheral Europe, not painless for Germany!!


Bank Lobby Rejects Reopening of Greek Rescue Deal


Great post about China Angel! I have also been saying for a long time that the easy part of the road is now behind them! The challenges that they will face in the next 20 years are quite daunting and diverse – ecological with a poisoned environment that is a victim of their growth, economical with mountains of hidden debt (see a post I had from Jim Chanos this week), political (no explanation needed there) and demographic as their population will age rapidly with the increased pressure that it will put on society. In addition, their resource need might have some grave consequences on their relationship with the rest of the world. As Phil likes to say, this is tomorrow’s crisis – today’s is Europe. And that is probably right, but something we need to prepare for as well!   

Maya1. I don’t believe Europe brings us down 10% during the next 30 days. Even should they, I don’t expect AAPL to follow. But of course we don’t know for sure, so keep your hedges in place, and you should be fine.

I have played my hedges with options rather than the underlying, and after some examination, I believe because of decay issues, you are better off hedging by selling calls against the 3x bull rather than puts against the 3x bear. Even so, I have played EDZ (3x bear emerging markets) for nearly two years, during which time it has dropped by more than 50%, and yet, I have a small gain on it. I believe you can maintain downside hedges by selling calls against the 3x bull even more effectively than that. I will do so on TQQQ if we rally on Monday.

Hugh Hendry of Eclectica Asset Management (http://www.eclectica-am.com/) was interviewed recently (24/9/11). He spoke about the economy, markets and speculation. Thanks to Hugh for continuing to share his thoughts and being ever-so-patient with these interviewers and interviewees!

Hi Savi-turns out I can attend Vegas also.  I know you posted before, but to save me time from scrolling for your email, can you send deposit and any other info to celeste.turbeville.com?  Thank you!

 Hello Vegas PSW friends,
Please let me know if you need help setting up (LVModa) or making plans.  I arrive at 130PM on Saturday and I am happy to provide any help if needed (I practice integrative medicine and acupuncture so let me know if you need that also!).
I am in for dinner on Saturday and social Poker (if someone teaches me and the cost in contained.)
Please count me in for all activity on Sunday including social events.
Monday I will show up as early as Phil lets me.  I have never been to Vegas, but for me this trip is entirely to meet all of my PSW friends and learn all I can from Phil.  
Kurt and I are staying at the Orleans and sharing car or cabs.  If anyone else is interested, it is relatively inexpensive and they have plenty of rooms.
Take care,

What do you think of the Oct AAPL 420/450 bull call spread at $7.20?

I see that TQQQ is about $65 now and you can sell the October $60 calls for $10. Is this what you are talking about? Stock goes up and you are called away for a profit–good. Stock goes down, and … ? You keep rolling down with it until it reverses?

China – good stuff all. The wild card for China, of course, is North Korea. China’s working on reestablishing their historic suzerainity, South Korea is playing with being anti-American (with considerable reason I might add) but realizing this may mean opening the area up more to Chinese influence and do they want that. And both China and South Korea hope like hell that North Korea doesn’t fall suddenly, although given the resemblance to Romania under Ceau?escu, that’s a strong possibility. The first indication we’ll likely see of that will be masses of Chinese troops on the border to keep refugees inside North Korea – since over half the population lives in the northern third or so of the country.

great new phillipics above bravo…now barry left out bathos which is the admixture of air leverage and shit we ve been fed th elast 7 years..truly sad for this great country to have someone so bad handoff to soemone no more good in his own way…please let there be someone out there capable of helping this world made bad by arrogant mediocrites

 "When we misuse the specific meaning of words to to argue for or against something, we are engaging in the form of rhetoric Aristotle termed “Pathos” — appeals to base emotion."
I always thought that misusing words to argue for, or against, something as an appeal to base emotion was called "Politics."  It is encouraging to know that my blanket condemnation of our political process as "Pathetic" finds support within a 2,500 year old intellectual tradition.

Per JPM,
AAPL cutting IPad supply chain orders 25%. Why?
Non issue, or does it reflect a world wide slow down?
Is the news already baked in? Or are we seeing just the tip of the iceberg?

It has begun!!

Phil – RE: "It’s been 30 years …"
Set it to music and you might have a hit! 🙂
We Didn’t Start The Fire
 — Billy Joel

 Euro falling off a cliff.  Now we’ll see to what extent going long solid U.S. large caps while fulling hedging the dollar exposure can be made to work.

Wow Europe really is a mess.

We look good by comparison….however I can see the day when more fiscally responsible states rebel against the states that are taking advantage of the union.

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