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Sunday, November 27, 2022


TGIF – Closing a 12% Down Quarter

SPY DAILY1,320 – That was the S&P close on June 30th.

1,160 – That was the S&P close after yesterday’s wild action.  A neat 160-point drop (12%) in 3 months for the World’s largest market kind of sucks, don’t you think?  My commentary in June 30th’s "It’s the End of the Quarter as We Know It" post was:

We feel fine because we cashed out on the long side (shorter-term, unhedged positions) and we really don’t care what the market does today or tomorrow but we are betting this rally reverses and we will be taking some (more) short hedges today – hopefully selling into the last legs of this fairly fake-looking rally.  

My top downside picks to play the sell-off were EDZ ($17.90 at the time, now $28, which is up 36% even without using options to make a spread) and TZA ($35.50 at the time, now $51.10 – up 44%).  As I said in that morning post: "I didn’t think they could take the Dollar below 75 but they hit 74.54 last night and it remains to be seen if they can hold it down in real trading, especially with the Pound weakness (see this morning’s Alert) and the Yen’s unwanted strength.  Something’s gotta give and we’re betting it’s this fake, Fake, FAKE rally…."

We were shorting oil futures (/CL) at $95 (now $80, up $15,000 per contract) as we thought the holiday weekend was the end of the run but we did keep heading up to $100 (down $5,000 per contract) before finally getting a drop to $75 (up $25,000 per contract) in early August.  

One funny play from that June 30th Member Chat was the VIX Aug $15/17 bull call spread at $1.20, selling the $16 puts for .50 for net .70 on the $2 spread.  That just seems so cute (and obvious) with the VIX at 38.84 now (it was 30 at the end of Aug for a full 185% gain on that hedge).  

Other hedges we liked in that post were the TZA Oct $31/42 bull call spread at $3, selling RUT Aug $710 puts for $2.90.  The RUT puts expired worthless so net .10 on the spread that is currently $20 in the money for pretty much the full 10,900% gain.  EDZ was another October spread we took that day, with the Oct $16/23 bull call spread at $2, selling the Oct $15 puts for $1.20 for net .80.  EDZ is at $28.76 and the bull call spread is currently net $5.50 while the puts are down to .25 for net $5.25, up 656%.   

In member chat this morning, we looked at our worst performing upside play from our September’s Dozen list and that was X and we took a $1 loss off the $27.50 entry so far thanks to our hedges.  Meanwhile, $1.25 (5% insurance) put to work on the EDZ spread would have returned $8.20 and $1.25 put to work on TZA would have returned $136.25 – enough money to buy 6 shares of X with just the insurance pay-off on a single share!  This is why IBanks love CDO swaps so much – they can insure one home against default and, using similar leverage, make enough money to pay for 6 homes on the insurance – that’s why banks have done nothing at all to help consumers – they WANT your mortgages to fail – it makes them more money than if you pay them off!  

We don’t WANT our markets to fail but we sure would have been surprised if the markets went up from those ridiculous June highs so we take INSURANCE – just in case – and, of course, as value investors, we do love a good sale!  In fact, stocks did go up a bit in early July and people were calling me a perma-bear and saying I didn’t understand the new market dynamics and this time it was different, etc.   Now we are down to where I though we should be and I’m being called a perma-bull because I don’t understand the new market dynamics and this time it will be different.  

Well, maybe so but, as I said at the end of last quarter – I think I’d like to wait for actual earnings results before I change my mind – which is actually neither a perma-bull nor a perma-bear but just a guy who sees a trading range and thinks we tend to move towards the middle from each end.  I know – CRAZY!  As I said the other day – is it crazy to buy stocks here when we’re hedged for 20-30% drops on our first round entries or is it crazy NOT to?  

Is the news today really so different than the news of June 30th?  Looking at my archives for that week I see:

The chart on the left if from the Monday article (6/27) about the Greek vote.  We expected a Greek default then and, 90 days later, we STILL expect a Greek default.  So, in 90 days, Greece did not miraculously undefault itself and the markets are down 12% BECAUSE PEOPLE ARE IDIOTS. 

Sure the markets were too high at the time but they weren’t 12% too high so now they are too low.  Just don’t let FEAR drive your investing decisions – much the same way you should not let GREED drive them.  Companies, like homes, have REAL, MEASURABLE VALUES and we should buy them when they are low and sell them when they are high – regardless of which way the sheeple are being herded.  

UUP WEEKLYAs I have often pointed out this month, the Dollar is up 10% and the market is down 10% but your stocks are priced in Dollars so OF COURSE they are down 10% when the Dollar is stronger.  This is one of the funamentals we try to hammer home at PSW because American investors are simply not used to thinking of their currency as something that fluctuates day to day enough to make a difference to their investments.   That has not been the case for many years now, as Dollar moves have become one of the main drivers of the market (see David Fry’s chart and, of course, the last year of Stock World Weekly). 

Corporate earnings, especially for large-caps, who report early, will be impacted by the strong Dollar.  How they are impacted will depend on how they report earnings.  If for example, they convert all their Euros into Dollars as they are earned – then their Euro earnings will go down about 5% as it averages out.  If, on the other hand, they keep their money in off-shore subsidiaries to avoid taxes and report on their earnings based on today’s conversion rate – then they will be doing so at a rate that is 10% off the top.   

So GM sells 1M cars for 20,000 Euros in May and books $29.8Bn in revenues against $27Bn of US production costs and books a 10% profit for Q2.  In Q3, GM sells 1M cars for 20,000 Euros and books just $26.8Bn in revenues against the same $27Bn cost and shows a 1% LOSS on the same sales.  CATASTROPHE, PANIC – SELL GM!?!???  We used to accept the fact that economies and businesses were cyclical and it was, as recently as the 80s, almost laughable to sell a company over just one bad quarter.  Yesterday, there was a RUMOR that RIMM halted production of the Playbook at 11:19, which RIMM categorically denied at 12:31 – but not before their stock was well on the way to down 10% on the day.  Too late, the technical damage has been done and, most amazingly – no arrests will be made.

The September New York ISM Business Index is 50.6, up 6% from August’s 47.8 reading, which was impacted by Hurricane Irene.  At the same time, OUTLOOK has fallen to 55.9 from 63.2 in July (11.5%).  Had we gone by the July Outlook, we would have been bullish at the top of a 12% drop.  So, do we get bearish now or do we realize that the "Outlook" is a lagging sentiment indicator more than an accurate predictor of future conditions?


August Personal Income and Outlays showed Income falling 0.1% (fun for the "job creators") while Personal Spending rose 0.2%.  PCE core prices were up 0.1% and that all led to a 0.3% DECREASE in Real Disposable Income for the US Consumers.  Wages and Salary Disbursements were slashed across the board but they were offset quite nicely with Proprietor’s Income increasing at a 109% faster rate than July (the rich get much, MUCH richer) and Rental Incomes were up $8.3Bn.  So if you own property or employ people – it was a good month.  If not – then not so much…

In fact, Personal Savings dropped $31.2Bn in July in order to fund that increased spending against falling wages.  In Member Chat this morning, JCaesar asked how Consumers can be "deleveraging" when income is falling and the answer is – DEFAULTS!  Every time a consumer defaults on a $300,000 home loan, consumer debt goes down $300K, when an American citizen goes bankrupt (close to 2M at this year’s pace), they owe an average of $36,000 – that’s $72Bn of deleveraging right there!  

Why do people go bankrupt over "just" $36,000 – because the average family income of a person who goes bankrupt is $24,000.  Just as it is with Sovereign Nations – when your debt gets to 150% of your GDP – you’re NOT going to end up paying it off!  

Hopefully they manage a stick into today’s close that keeps our losses for the quarter under 10% but the fear is running hot this morning and anything can happen so let’s be careful out there. 

Have a great weekend, 

– Phil



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Thank God for hedging.
"The lamps are going out all over Europe. We shall not see them lit again in our time"
[Attributed to British statesman Sir Edward Grey on the eve of World War I]

Phil-  I don’t really care about sticking with AA, meaning I have no personal attachment to them.  I simply want to start making back the $40K I’m down from TLT (lost $8K), X (lost $9K on calls I sold for a loss and have 90 Nov $25 puts that are being traded for $2/put more than I sold them for..meaning I’m temporarily down $18K)  and AA options (down $7K) in the last two months.  In case you’re wondering, yes, I’m down $40K overall in the past two months DESPITE the AGQ and other small profits. 
Whatever ETF or stock or strategy will help me get those losses back will instantly become my favorite.  So the question becomes…..what is the best way to make that money back and/or which trades have the "highest probability" of helping me make up the losses?  The answer might not be to stick with AA & X right?
For example, isn’t there a higher chance of me making money by selling call spreads for credit on CRM (they have a ridiculous 600 P/E ratio among other issues) than sticking with basic materials stocks (AA & X) going into the fall/winter when there isn’t much construction?  I need to be realistic and if necessary, close out my AA and X trades for huge losses.  Just for reference, here’s my current portfolio (it doesn’t show the X and TLT positions I closed out for a $17K loss):

X Nov 19 ’11
$25 Put

 X Nov 19 ’11 $25 Put 


AA Nov 19 ’11
$12 Call

 AA Nov 19 ’11 $12 Call 


FAS Oct 22 ’11
$12 Call

 FAS Oct 22 ’11 $12 Call 

I have a number of things I would like to discuss with Phil, or any interested party for that matter. First, I am designing a hedging system and I encourage comments.
I decided to sell naked calls against TQQQ (the 3x bull Qs), but even though this has made money as we fell, it is not a true hedge. Its value is limited to the premium I collected, and as the market sinks, my expected profit stalls at that value. Today, I sold the Nov TQQQ 72 calls, and bought the TQQQ 50 puts, for the same dollar amount, but I sold 2x of the calls to generate cash. In the event of a real crash before Nov expiry, the puts will pay off for every dollar below 50 – a true hedge, and the  calls expire, so I get a 1x gain there. The risk is that we rally hard, and the puts become worthless, and the calls start to cost money – but the calls can be rolled.
I have never had good luck with spreads, because when they blow up, I can’t figure out how to adjust them (and yes, I know you can, but no, I just dont think like that :)….
Anyway, I can’t bring myself to go straight up long on a bear issue, and I’m only comfortable with simple option plays. Do you folks think what I did today will work as a hedge?

 Stj:  No, you’ll be pleased to know that I wasn’t referring to the tired old saw about 1/2 of Americans not paying taxes.  I think it’s rather worse than that:
"Slightly over half of all Americans – 52.6 percent – now receive significant income from government programs, according to an analysis by Gary Shilling, an economist in Springfield, N.J. That’s up from 49.4 percent in 2000 and far above the 28.3 percent of Americans in 1950. If the trend continues, the percentage could rise within ten years to pass 55 percent, where it stood in 1980 on the eve of President’s Reagan’s move to scale back the size of government.

That two-decade shrink-the-government trend now appears over, if for no other reason than demographics. The aging baby-boomer generation is poised to receive big payments from Social Security and government healthcare programs."   (:

zero, you are presenting good points bravely in this hostile environment. 🙂 I am working on a parallel track right now.

Phil- The call spread I mentioned on CRM would be a bear spread, expecting them to not go any higher.

Also, I don’t have portfolio margin so I can’t sell calls against a spread. If I went into an April $10/$11 bull call spread on AA, any Oct calls I sell would be considered naked.

Our current deficit and its contribution to our now-staggering debt burden is primarily the result of a weak economy and the twin penalties imposed on our government – weak revenues, increasing safety net expense. It is a sham to suggest that "tax cuts for the rich" gave us this problem. We had tax cuts for EVERYBODY, and to some extent our revenues were constrained by that. And lefties, dont bother giving me the math: If the incomes that were earned were taxed in the old way, revenues would have been X. What makes anybody think the incomes that were reported would have been the same with higher rates?
Anyway, we have a problem and our government needs all of us to help solve it, since, quite frankly, our government seems ill-suited for the job.
I want to sign on as an Obama advisor. I believe I can help him help the country and win re-election. And I’m a libertarian-republican. You see, I don’t care who is our President. I just want good stuff to happen, for everybody. I have adult children who struggle with below-median incomes and health care issues, and even though they lack impressive educations, I continue to push them toward a career and lifestyle that works. Yes, it is still possible. Not easy. Not automatic, but quite possible.
Our county provides stunning rewards for the prepared: those who have learned productive values, who apply themselves, and are smart. Education is a great bonus for the smart. IT DOES VERY LITTLE FOR THE ORDINARY. If our country would recognize that, great progress would be possible. Why do we insist on bashing the successful? What, exactly is their crime? Didn’t they do what was given to them to do? Our country rewards the prepared, but fails to reward the ordinary. Is this the cause that animates the left wing? Is this a travesty?
So, Mr. President, I suggest to you to STFU about the "millionaires and billionaires" and the growing gap between rich and poor". I know what you would like is for people to buy into that rhetoric, and decide that we can close that gap with Robin Hood politics. We can not. Handouts do not change lives. They do not cause progress. So rob the rich and create bullshit programs that nominally help the ordinary? Never worked before. Won’t work now.
Mr. President, quit saying the "rich" (and I know you intend that to apply to the well-off not rich) should pay "their fair share". I mean that’s a spin designed to impress poor people in the inner city. It massively PISSES OFF the folks that do that math, and realize they ALREADY PAY MORE THAN MOST PEOPLE CONSIDER FAIR. Now here’s the kicker. I would suggest this: " I know people with high incomes pay a progressively higher tax already, but I am asking prosperous Americans to support their country in our time of need by paying a bit more".
"I commit my administration to ferreting out waste, cutting counter-productive regulation (which I may not have written myself, but is on the books already) and preparing a plan to sensibly and fairly trim entitlement spending."
I do not expect to hear this any time soon. But I long for it.

Income / ZZ – I would be curious to see how he gets to these numbers and what he considers significant. Clearly, 52% of our population is not on Social Security. Does he include food stamps, Medicaid? A rise in these programs is inevitable when faced with a crisis like the one we have and rising unemployment. Clearly there are some bad factors at play right now – demographics and the ongoing crisis. Obviously we can’t do much about demographics! Reforming entitlement (why is that such a bad word BTW!) would be a start, but good luck with that from any side of the aisle! 

Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience." CS LEWIS

I am a relative newbie to trading options, but it does not seem to me that selling naked calls on anything, let alone triple leveraged funds makes a lot of sense, because it is too risky. Supposing there is an announcement over the weekend that the problems of Greece have been resolved once and for all? Then what? If you are determined to sell calls to hedge, then you need to hold the underlying and sell in the money calls.
Also the whole point about spreads is that they enable you to have lots of pieces of the pie cheaply, instead of large indigestible pieces. What is better, to buy the $113/$112 SPY put spread 50 times and cash in if SPY drops to $112, or to buy one put and wait for SPY to drop 500 points?
On your question: "Why do we insist on bashing the successful? What, exactly is their crime?"
You could take for example the bankers who lobbied for relaxation of laws governing banking, and then used their new freedoms to enrich themselves and bankrupt the country by behaving completely irresponsibly. You might call them successful, but they could be charged with terrorism offenses of subverting democracy by bribing politicians. They could easily be charged with RICO law offenses, legislation under which all their ill-gotten gains can be immediately confiscated.
However the real point is not that high earners have committed a crime, but just that they need to pay a bit more tax. George Harrison, in his famous song "Taxman" complained bitterly about  the high rates of "Supertax" on very high earners in the UK in the 1960’s, tax rates that were later repealed.
Let me tell you how it will be
There’s one for you, nineteen for me.

But no-one is asking for 95% tax rates now. However the US could perhaps move to a maximum tax rate of 50% as in the UK, and remove loopholes by which people like hedge fund managers avoid paying their fair share. Of course some people would probably leave the US and go into tax exile in Bermuda, which has no income tax, but probably not as many as you would think.

Regarding the Grecian debt crisis – with the continual back and forth between "Greece is fixed" and "Greece is defaulting" I find myself reminded of Schrodinger’s Cat and the Copenhagen interpretation of quantum mechanics, which says that after a while, the cat in the box is simultaneously alive and dead.

As of now, I’m thinking maybe the best way for investors to think about the Greek debt crisis is to simply consider Greece to be like Schrodinger’s cat, simultaneously solvent and defaulted.

In other words, ladies and gentlemen, welcome to the wacky world of quantum finance…

Jmm: I just put the Taxman on my system.   Wow, how that rocks!
I take it you wouldn’t sign on my to my speech?

elliot: wonderful reference. Greece is in the process of defaulting. And then, Greece will be fixed.

I am not saying the prosperous should be exempt. I am saying you could do it without bashing the life model I grew up believing in.

I might agree with some parts of your speech, but not necessarily in the way you would expect. For example I think there could be savings in entitlements like Medicare. I have worked in medical care systems in different countries, including 18 years in the US, and although there is much to admire in the US medical system, it is incredibly inefficient from the point of view of providing cost effective health care. A large part of this is because medical practice in the US is dictated by the legal system, regardless of cost. We would do better to adopt Cuba as a role model for health care.
A vast amount of the medical spending in the US is for lifestyle related diseases related to overeating and lack of exercise. We need to make fundamental changes in the way in which the population is fed and how it is transported. It is good for the health of people to walk to the bus stop to go to work and to stop on the way home to shop for food on foot instead of going to drive in fast food places for food.
However, I don’t really expect any change, because most of these issues are deeply embedded in US culture and society and the legal system sees health care in terms of the rights of individuals rather than in terms of what society as a whole can afford to give everyone.

 jmm- I have been of this opinion for years. There’s just too much money to be made keeping American’s obese, unhealthy, and glued to the TV. It always seems to come back to the balance between corporate exploitation of the populace and the will of the people not to be exploited. So far the corporations are way ahead!
Michael Pollan once argued never to buy any food that is advertised. Imagine how much healthier we’d all be people followed this advice? Instead we live and die by slogans such as "America Runs on Dunkin’". Yeah, no shit. Embarrassingly so. 

 And the very next thing I read is this by Steve Ells, CEO of CMG regarding their new Asian venture "ShopHouse":
"We have more potential than anyone else to change the food culture in a positive way," says Ells, speaking for both ShopHouse and Chipotle, while noshing on a ShopHouse bowl of grilled steak, brown rice and veggies. "The act of eating shouldn’t be based on any form of exploitation," says the rail-thin CEO. Both Chipotle and ShopHouse, he says, are about treating customers, employees, farmers and even animals with respect. "I’d like to change the way Americans think about and eat fast food."
Maybe we SHOULD be rooting for CMG after all!

Yes, I mean should a government health plan like Medicare be providing expensive hip and knee replacements for people who have worn out their joints because they are overweight as a result of overeating? On the one hand you can say that we cannot discriminate and since we have the technology everyone should be able to benefit. On the other hand you could say that we just can’t afford it.  Or the government could contract with providers overseas to get the job done for less than half the price. Cuba, for example, earns foreign currency by running hospitals that are just for foreigners. But nobody really wants to debate or discuss these issues.

You bring up the issue of moral hazard. Why should we reward the obese with hip/knee replacements when it’s their own fault their joints are destroyed? I believe a more enlightened approach would be if CMS took a look at what we could be doing to prevent people from becoming obese in the first place. Is it really ALL their fault? Or are people like sheep who go in the direction we push them (yes yes!!)? Maybe we could outlaw TV advertising for food, just as we have for cigarettes. They would likely find that this would pretty much only affect food that is bad for us anyway, since no one selling broccoli they grew in their garden or farm has the $$ to advertise on TV. Maybe we could stop subsidizing corn, and favor food that is good for us, perhaps emphasizing local, organic growers. Maybe we could subsidize farmers markets where people not only buy their food, but also congregate and socialize- something that never happens in a grocery store (yes, there’s research on this). Over time a cultural shift away from junk food would occur, and we’d need fewer joint replacements. It’s sad that we "know" this can’t happen because it doesn’t involve exploiting people for money. Pathetic.

 Dr. Craig/jmm/Moral Hazard/Food Issues: It does seem an awful lot as though we in this country are treating our citizens, especially those who have less education and access to better nutrition, as though they are the beef going to the stockyards to be fattened up on subsidized corn – which we, like the beef, call ill afford to eat. A culture eating like this can look forward to a life of Diabetes and waiting in line (for hours or even days if you are going to Cook County Hospital here in Chicago) for treatment we can ill afford to provide. Like many other issues discussed on this board the answers seem so obvious yet remain out of reach. I certainly agree that companies like CMG are worth cheering for, at least as the outliers in the fast food space

Yes, I pick my niece up from high school every day and I am shocked to  how many of the children are obese, sometimes grossly so. In my own schooldays in the 1960’s such a thing was almost unknown or there would be maybe 2 or 3 fat children out of 500. The solution would be to weigh all the children a couple of times a year in schools and haul the families in for counseling if they were overweight and prosecute the families for child abuse if situation continues.  Of course to most Americans this smacks way too much of Cuba and totalitarianism, and it would never fly in a country where half the people don’t even want to cooperate with vaccinations for contagious diseases.
Anyway, I can absolutely guarantee you that the health care of these obese children is going to cost the country a lot of money down the road.

You folks are all worried about fat people and their potential cost to society. Fatness is just another example of a series of poor choices, like blowing off school, or doing drugs, or promiscuity. Some self-inflicted wounds we feel compassion about, others seem to generate outrage.
I have poor relatives, and I can honestly say their situation is nearly entirely self-inflicted. Their needs are grounds for raising my taxes? Nobody says fat people should be recipients of tax dollars. I just guess it matters how popular is the affliction du jour.

"Nobody says fat people should be recipients of tax dollars."
I think they do.
Further up the page you are calling for the President to cut back on entitlement spending. Are not expensive treatments for diabetes and knee and hip replacements for Medicaid and Medicare recipients exactly the kind of things that might be cut back on?

Jmm: Are fat people to be denied treatment because their difficulties are self-inflicted at the same time we continue to provide economic aid to people who are poor because of their willful acts?
Do you believe that announcing that fat people can’t have a hip replacement would cause them to lose weight?
It just seems to me that we are picking on one troubled segment of the population. That’s the only point I am making.

As we head to the future, we have reached a fork in the road, and are in desperate need of a serious discussion about what we provide for people, and how should we pay for it. For the first time in my adult life there is no overwhelming support for "more stuff" for "more money".
I believe our delivery of health care is inefficient and costs more than it should. For that, I blame a number of bad habits in the industry and our regulation of it. If people lived perfectly healthy lives, they would live longer and the costs would still be out of hand. We overtreat and overtest to a staggering level in part because we have new expensive tools that cry out to be employed, and in part because docs don’t want lawsuits.
There is much that can be done to reduce health care costs before we talk about withholding care.

Yodi – What up with your ‘safe areas’ in Mexico!? http://news.yahoo.com/police-7-bodies-dumped-pacific-resort-170626037.html  . This happened in  Zihuatanejo too! Hopefully Andy Duphrane and Red are safe….

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