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2012 Tea Leaves Come in Black, Red and Green

I love tea! 

Sadly, I don't get any tea leaves as I have excellent filters so I don't spend a lot of time staring into the bottom of a cup for answers.  Instead, I prefer to filter the mind-numbing amount of information available to us these days and try to separate the wheat from the chaff – which is another thing people simply don't have to do anymore.  Without tea leaves or entrails or bones to cast – how else will modern man forecast the futures?  Help us Magic 8 Ball! 

Anyway, so we're wondering whether the markets will finish 2012 in the red or in the green or somewhere in between and those just happen to be the colors of tea leaves, which are as reliable as anything when predicting future events.  My favorite iced tea maker is the very simple Takeya 11100 (for $17, they don't name them!) but for hot tea I love my cast-iron Japanese tea pot with the high-tech filter (hidden inside) and the cool golden dragons etched into the metal.  

Now, I can predict, with a great deal of certainty, that next January, I will still be using my cast-iron tea pot.  For one thing, the design is thousands of years old and hasn't been improved upon.  Also, it was freakin' expensive, so I'd need a damned good reason to change it.  We've been through a lot together so I have an emotional attachment to it and my oldest daughter loves dragons and drinks tea with me out of the matching iron cups – all things that are not likely to be replaced over the next 12 months.  

My Takeya, on the other hand, is relatively new and replaced my more expensive Mr. Coffee Iced Tea machine that I had been using for over a decade.  Not the same one but, when the last one crapped out I didn't like the design of the new one so I began experimenting with alternatives and ended up loving the Takeya, which is cheaper, easier to clean and makes much better iced tea.  Could I have predicted last year that Takeya would be the winner?  Not at all – I'd never heard of them.  That means, although I LOVE it, I don't feel as sure that it will remain my favorite next year.  In fact, like a quantum event, the act of my writing this article may cause someone to point me towards a tea maker I like better and thus alter the outcome of my prediction.  

Could I have predicted that the Davis Family's value of Mr. Coffee would plunge in 2011?  Nope, never would have guessed – my first impulse was to run out and buy a new model but they made changes I found unappealing, which forced me to re-evaluate my decision to own them.  This is why it's not only difficult to predict the future but dangerous as well – the act of making predictions tends to paint analysts into a corner, where they spend a great deal of time and effort trying to justify their predictions – even as they unravel around them.  

As I said on Friday, I don't like to make predictions unless/until I have a good reason to and the arbitrary turning of a calendar page is not a reason for me to force guesses on what will happen when another 366 days pass (leap year this year).  

I went skiing this weekend and even people who normally don't bother me wanted to know what I thought the markets would do next year and, when I got home, I have well over 100 EMails from various media people wanting to know the same.  The sad truth is, unfortunately, that there are so many strong cross-currents in play at the moment that attempting to chart a course now that will get you to a goal at the end of a year's journey is a fool's errand – yet everyone lines up to hand the charlatans a few sous in exchange for their "knowledge" of the future.  

"Always in motion is the future" – Yoda said that and, of course, Einstein agrees – it's elementary physics but that doesn't stop people from paying a fortune to have people tell them the unknowable.  The stock markets make a great scam for Futurists who want to separate the masses from their money because it's essentially a binary outcome – stocks go up or they go down so any random guesses made by "experts" are going to be half right.

Combine that with the fact that very few pundits actually commit their predictions to writing and it creates a culture of "expert" prognosticators who feel very comfortable making predictions with very limited information because, on Television – it's more important to look like you know what you're talking about than to actually be right.  

We don't do predictions, per se, at PSW – we teach our Members to "be the house" and make money off of the endless supply of suckers who THINK they know what's going to happen.  The equally endless supply of media prognosticators who are willing to sling their bull at the beautiful sheeple insures that there are always plenty of them lined up to pay us a premium because they "know" where a stock will be down the road.  Our job, as option salesmen – is simply to bet that they don't.  


Do you think Shelly Adelson ($22Bn) or Steve Wynn ($2.5Bn) sit up in their suites worrying about whether the next spin of the wheel will be red of black or do they just count the green provided by the people who think they do know and come to play?  They even sell "system" books right in the casino gift shops – the more people who think they can beat the house – the more money the house makes.  Like the markets – casinos are a rigged game – not so much that they openly cheat, but that the odds are stacked against the individual player in favor of the people who "make the book."  

Very much UNlike the casinos, we investors are able to make book by selling options to other gamblers.  They don't let you deal poker and take the rake and they don't let you toss the roulette ball and say "sorry folks" as you scrape all the chips off the table but they do let you sell AAPL 2013 $300 puts for $18.50 to someone who believes that AAPL will be lower than $281.50 in 12 months.  Similarly, there is another guy who is equally certain that AAPL will be higher than $535 in 12 months and that guy will pay you $20 for the $515 calls.  

As the bookmaker in this situation, you are collecting $38.50, which is almost 10% of AAPL's total price and, because you CAN'T lose on both ends, you are essentially betting that AAPL will not fall below $261.50 (down 35%) or rise above $553.50 (up 37%) over 12 months.  Can you lose?  Of course you can lose.  You can also hedge against those losses but that's not what this post is about.  The point is that, like Steve Wynn or Shelly Adelson, you may lose 35 to 1 on any individual spin of the wheel but, over many years and many, many spins – the odds are very much in your favor! 

Now, you can play a strategy like that and just play the odds but we at PSW like to combine the tremendous ability to be the house whenever we choose with our FUNDAMENTAL outlook on stocks so, rather than sell AAPL calls, we may only sell the puts as we're very confident with AAPL's VALUE over $300 and we are knowledgeable enough of the mechanics of options that we know how and when to adjust our bets if they begin to move against us.  

Selling AAPL $300 puts for $18.50 is NOT one of our favorite bets at the moment because AAPL has run up and we don't have the same degree of certainty we had last year, when we sold January 2012 $250 puts for the same price (they expired worthless, of course, for a 100% gain).  That's OK, though – because there are 9,000 other stocks we can do this with and every day we learn a little more and see a little more and every day our "degree of certainty" moves up past 75% as we find another trade we are comfortable making.  While we occasionally stray to the dark side of the table and make a few bets ourselves – we never lose site of our JOBS – and our jobs are to SELL premium.  

Being the house is, without a doubt, the best and most consistent way to make money in the stock market.

THAT's my prediction for 2012 because – whether the markets are in the black or the red – we can collect the green all year long by simply taking the wagers, especially the ones where we can sell into the excitement of the masses – who are egged on by the pundits who claim to have all the answers – God bless them all!  

Have a happy and healthy New Year, 

- Phil

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  1. I drink a gallon of iced tea daily. (Rarely drink anything else.) The best ice-tea maker is a $1 plastic 1-gallon pitcher with a lid. Fill the pitcher with cold water, add tea bags, cutting off labels as necessary. Place pitcher in fridge, wait 45 minutes, drink. You can extract the tea bags with a large slotted spoon if you want, but personally I don’t bother.
    If you want the tea very cold, put it in the freezer section for 45 minutes and then in the regular part of the fridge. You can add one or two teabags of Earl Grey tea or peppermint tea if you want a little variation in flavor.
    I am thinking of selling my tea makers on Amazon for free as I can probably make a profit off the shipping and handling  without paying any sales commissions. I could probably include a few tea bags for a gallon of free tea as a limited time offer.

  2. jmm1951
    So funny.  Down here in Nicaragua anything from the states is 50-100% more expensive than in Walmart.  I had a awesome icetea maker in SF, and had to get rid of it.  Now I take a pot of boiling water, put it in a ceramic pitcher I bought for $1, and throw tea bags in.  Wa-la!  Some of the best tea I ever made.  It’s amazing how you can learn to live without all the gadgets and appliances made for only 1 purpose.  

  3. Phil,
    Happy New Year,
    Does anyone know about the company Green Mountain Coffee Roasters? 
    My wife asked me for a Keurig Single cup coffee maker for Christmas.  I thought it looked kind of cheesy and a waste of money but figured what the heck, might as well get her what she wants.  Turns out, this thing is awesome.  I hear they were flying off the shelves for Christmas and I honestly would recommend one to anyone who is a coffee drinker.
    Anyway, I thought Green Mountain who apparently manufactures and distributes the Keurig may be a decent investment, however, the stock looks like it’s been tanking.  Does anyone know why?

  4. Green Mountain,
    Forget it…..Schwab has them rated at an "F".

  5. Thanks so much for the exposure in your SWW Newsletter………that was a real surprise! I actually read right over it on the first pass, and leaned right into the page on the second look.
    Best wishes for the coming year and beyond.

  6.  No predictions from me, either, but I continue to meditate on my Hemispheric Hypothesis — in sum, that investment funds will pile up in the west at the expense of the east due to a variety of favorable factors, the East/West 87/13% population split being the principal difference, from which many other disparities emerge.
    The position of the U.S. as a massive net energy importer,  given the centrality of energy in the operation of the global economy, has always given me pause as to the timing of this shift, which might easily take centuries to show itself.  So I read the following with interest today, from FT:

    A decisive shift in the equation of global energy supply

    Technology is profoundly changing the world’s energy equation, and all its geopolitical implications. Energy efficiency in the advanced countries has risen sharply, implying that their demand has peaked, and vast, commercially exploitable discoveries of oil and gas – especially gas – have been made in politically stable areas, including in the US.

    Since the embargo of 1973, there has been a global preoccupation with the centrality of oil, its supply, its cost and the international politics of it. As economies grew and global demand for energy increased, oil and gas exploration and production increasingly moved to distant and politically unstable countries, such as Russia, Iraq, Libya, Iran and Venezuela. At the same time, Opec rose to power; the US military assumed protection of the Persian Gulf; and concerns grew that the world might run out of oil.
    This difficult era is now approaching an end, and technology is the main reason. New techniques of exploring and drilling in very deep water and tar sands have been developed. New approaches to hydraulic fracturing and horizontal drilling have made it possible to extract deposits of oil and especially gas profitably from shale. The implications are huge. Vast reserves of natural gas are now accessible, and the role of gas in world energy supply is growing fast. Within 25 years, gas should outstrip coal to become the second biggest source of global supply, behind oil. This is positive because gas is much cleaner than coal. 
    America is experiencing both higher efficiency and an energy boom, in both offshore and onshore production. This means that it will reclaim its role as the world’s biggest energy producer and, incredibly, become a net energy exporter. Brazil, Canada and Australia, all stable countries, are experiencing similar energy booms.
    Roger Altman, founder/chairman Evercore Partners, former U.S. Dep. Treas. Sec

  7. Ice tea/JMM – I drink gourmet green teas loose so tossing them into a pitcher doesn’t work for me.  What’s good about my pot is you can put in a little of one tea, a little of another and add the sugar (rock sugar, of course) up to the line and presto – a pot of tea.  Also, I like my tea with ice so I prefer it strong in the pitcher and dilute it later.  As Burr says, simple is better though as this system beats the pants off the automated Mr. Coffee machine, which wasted both tea and sugar in it’s "efficiency."  

    GMCR/Exec – That stock was one fabulous short!  Here’s a few historical comments on them:


    GMCR/Aclend – Hmm, we were buying them in the $30s since the fall and they may be a bit ahead of themselves at $55 but we’ll find out tonight I suppose.   Generally I don’t like to go short on companies I like unless I think they are really out of control and I don’t see any reason GMCR won’t hit another 20% growth qtr that will put them up almost 50% over last year in earnings when they were trading int the $40s so, no, I wouldn’t short them here but I wouldn’t go long either ahead of earnings.  You could sell $55 puts and calls for a crazy $7.20 and expect that they won’t move 10% on earnings – that’s a fun play.



    GMCR FINALLY looks toppy at $77.50 (now $76.35).   I love selling the $80 calls naked for $3.30 as that price is just silly.  Dec $85/80 bear put spread is $3, that’s nice too.


    Submitted on 2010/06/04 at 1:58 pm

    GMCR/David – Great company.  I had lost interest when the stock went crazy but I love that idea on this pullback.

    Submitted on 2010/08/19 at 10:54 am

    Fundies/Rev – CCJ is a great long-term play and "right-priced" at $25.  GMCR and BIDU are not really the kind of stocks I’d put in an IRA as I prefer to own stocks where I would have great difficulty paining a scenario in which they can drop 50% and GMCR was 50% lower in June and BIDU at the beginning of the year so the "attractiveness" of the call premium is offset by the sheer terror of counting on those stocks to fund my retirement.  Of course I shouldn’t lump GMCR in with BIDU, as GMCR has sound fundamentals overall but are simply a bit pricey, IMHO.  If you want a covered call bargain, INTC is $18.85 and you can sell the 2012 $17.50s for $3.45 for net $15.40 with a 13.6% upside plus the 3.2% dividend


     GMCR/Rev – You never know with these SEC things but 20% is a lot to sell off on this news so best is to take advantage of the heightened volatility and sell puts into the initial excitement.  I like selling the Jan $26.67 puts for $1.90.  If you don’t REALLY want to own GMCR at net $24.77 then you shouldn’t even consider any play on them, right?  TOS says you collect $190 and have a net margin of $162 so a very nice return of 117%  for 3 months if you have that margin level and the worst case is you own it for another 20% below today’s price ($30.77).  


    Submitted on 2010/12/09 at 2:05 pm

    Hey Scott!  I don’t know where they are with the 10-K, if they do put it out, it will be a relief.   If it looks like a stonewalling, they sure aren’t priced for it.  P/e is through the roof and they can’t afford to slip so I guess you want to take advantage of the very silly expectations baked into the Jan $36.67 calls by selling them for $3.40 and those can be covered with the March $40s at $3.10.  It’s just a net .30 credit but, assuming they don’t totally crash, you will maintain 3 months of time value relative to the caller and you have 3 months to roll them if wrong.  If you want to get more aggressive, you can sell a 4:5 or 3:5 or 3:4 ratio for a bigger credit and, if GMCR pops up, you just buy enough calls to cover to allow for a 1.5x roll of the callers but we can always deal with that later.  

    Submitted on 2011/03/21 at 10:12 am

    Disaster hedge/Wass – Everything is coming up roses today, I would not be spending much money on the downside until we are back below Breakout 2 levels.  I still like shorting GMCR but they are really the new NFLX, which is good as the old NFLX is down today.  GMCR June $60/55 bear put spread is $2.10 and you can pay for that by selling Jan $35 puts for $1.90 for .20 on the $5 spread.  I don’t think they go BK – just come down to earth.  

    Submitted on 2011/04/12 at 10:38 am

    GMCR/Morx – Selling puts in them?  I’m not bullish on them at all and Sam (Antar) is pretty sure there’s something fishy going on with their books (he’s been looking into it).  


     GMCR – WOW!  Terrible for our put play, the back-spread should be workable but this is a good test of one blowing up on us.  

    We should have guessed this one.  GMCR is benefiting from providing an addictive substance to top 10% consumers (who can afford those $100, one-cup coffee makers) and they’ve pushed through a 10% increase in the price of each cup as of Feb (easy to do as it’s .64 up from .58 per cup but still way cheaper than going to SBUX).  Like any good commodity pusher, having not gotten much negative feedback from the sheeple consumers, they have announced that they will be raising prices another 10% – even though they are already making 25% more money than they expected to!  Keurig brewers and K-Cups were 82% of their total sales and up 94% from last year!  They are guiding for $1.45 now, so a p/e of 51 is not too bad with that growth.  

    I see the wisdom of the SBUX move now – they don’t make money on the coffee and they push out their own brand BUT they are moving a ton of machines because they offer the coffee so a lot of their revenue and profit growth is front-loaded but that won’t save the bears in the near future.  They are floating 7.1-8.6M shares, for a 5% dilution (and they just diluted 7% last Q too!) but I never mind it when a company raises cash for shares – that’s no reason to sell them.  This could be a nasty short-squeeze in the morning! 


    Submitted on 2011/05/10 at 1:44 pm


    GMCR/Scott – I doubt SBUX would care about their bad accounting as long as what they do is clean (although, to some extent, it’s nice to trust your business partner).  What I saw about GMCR this weekend was the new machines they sell are more money ($149 and $179) and one of the "features" is that they have a filter cup and you can put in your own coffee, tea or cocoa without buying the K-cups.  This seems kind of insane but it indicates they are getting pushback, as I expected, on the K-cup pricing and they are trying to cover their tracks by front-loading machine sales revenues to keep the books looking good.  No way would I ever go long on them and I still think, long-term, the shorts will pay off but when is the big question.  They are like FSLR – there’s no real future in them but they are a great tool for the market manipulators to herd the sheeple in and out of constantly generating fees and spread revenues over and over again – who wants to give up on that?  

    Good point Lol – SBUX must have known about the issues.  All they are doing is branding their coffee in K-Cups and selling the machines – not like they are in partnership with GMCR.  



    Interesting Herb Greenberg on CNBC making sure to mention that Sam Antar is a convicted felon to knock down his credibility in attacking GMCR but doesn’t mention that GMCR is being sued by it’s shareholders for accounting fraud so it’s not exactly one or two crazy guys with an agenda…



    Drugs/ZZ – Actually, the average New York City resident is in the top 10% at least (you kind of have to be with 1Br apartments at $2,000+ per month).  The top 10% have money, the top 20% are surviving and have less than  6% unemployment (and those are $60K+ jobs) – it’s the bottom 80% that are screwed, especially the bottom half.  So plenty of money for 60M people to enjoy SBUX or buy GMCR machines.  My issue with GMCR is (aside from accounting issues) that their model is not sustainable and, with a p/e of 50, your model needs to be sustainable.  Those machines are one-time sales – like a big up-front cost for the customers but, after that, they don’t need to buy coffee from GMCR.  In fact, the reason the new machines are so popular is because they now have a filter cup that allows people to put in their own ground coffee (it was the #1 complaint in the old model).  As I said earlier, this model is all razors with no blade sales but is being priced for massive blade sales.  



    Submitted on 2011/07/27 at 4:38 pm
    (GMCR) reported earnings of 37 cents per share including special charges, and non-GAAP earnings of 49 cents per share, versus consensus expectations for 35 cents per share after the close. Before the close, shares fell about 4% to 88.16. The company said GAAP operating income rose 215%. Revenue was $717 million in the third quarter of 2010, and analysts expected $607 million in revenue.
    The Keurig single-cup coffee maker, which sells for between $80 and $250, has been driving revenue growth. A Keurig cup is launching in Boston Dunkin’ Donuts this week. (Shares of its parent, Dunkin’ Brands Group’s (DNKN), ended up a whopping 50% in their first day of trading.)


    Submitted on 2011/07/28 at 12:42 pm

    GMCR/Savi – I’d buy the Jan $95 puts for $9.20 and sell the Aug $97.50 puts for $1.50 with a stop on 1/2 at $3.  

    GMCR/Savi – Selling calls very dangerous because they may get upgrades.  Wait until tomorrow to see what the Cramericans do as I’m sure he’ll be in day two of pushing them (unless he’s moved on to SODA, which is the same essential business model).  

    Submitted on 2011/08/12 at 3:23 pm

    GMCR Jan $115/95 bear put spread at $10.50, selling Sept $110 calls for $4.60 is net $5.90 on the $20 spread. 

    Submitted on 2011/08/30 at 11:00 am

    GMCR/David – Well there was a quick trade but they’re up 4% already.  It’s old news of course and not particularly great for GMCR because it pushes profits out of their own coffee and into SBUX.  There are only X amount of machines and this represents lost sales to GMCR once the bonus machines themselves are sold to SBUX fans.  I’d be more inclined to short them again on a run-up near $110.   See SODA for another view of what happens to their business model once the fad buyers wears out.  

    After all that nonsense in the Futures we’re opening flat but not GMCR, which is flying up to new highs on news that COST sold out of their machines so lining up for a good short entry around $115.  The Oct $120/110 bear puts spread is $5 and that’s a fun way to play and that can be offset by the sale of the Sept $115 calls, now $2.25 for about $3.  

    Phil, I find it incredible that you are still coming up with these clever ways to bet against GMCR, which has been one of the very few strong performers despite a bad market and near-perfect correlation between stocks. I can tell you that I began about a year ago shorting the 55 calls, and now, I have to admit that despite rolling three times and doubling down, this trade has simply got away from me and is doing serious damage. I would advise anyone considering a bet against GMCR to slap themselves silly before pressing the "trade" button.


    It may someday work out the way most of us think is "correct", but I have begun to fear one more positive earnings report (fake or not) from these guys. Betting against GMCR on fundamental grounds has been the worst series of trades, bar none, I have ever been involved with.

    GMCR/Barf – Just because a stock keeps going up doesn’t mean you can’t make money betting against it – it’s just a question of time-frames and notice this one was nice and short and that spread is already up 50% on the short calls and up 10% on the spread for net $4.25 off the $2.50 spread (up 70% on the day).  The trick with shorting the MoMos is sticking with them as you generally get them eventually but you have to take small victories and run because the next day they can burn you again.  Are you still in them?  The premiums are so insane at the moment they do make for fun betting. 

    GMCR/Lincoln – Sounds good to me.  Keep in mind that our main goal, ALWAYS, is to SELL PREMIUM.  With every position you have you should say – how can I sell more premium?  What does Steve Wynn do?  He sells premium to thousands of people over and over and over again and sometimes he loses the bet and sometimes he wins the bet but he ALWAYS sells the premium to someone else and you NEVER lose that bet (as long as you don’t buy it back early).   That’s it.  Sell premium over and over again and you will have a huge advantage over the people who buy premium.  After that, statistics become your friend…  

    Meanwhile GMCR dropping like NFLX.  

    Algo/Matt – The key is to be aware of many factors and write the best one you can.  As you know, I used to consult on systems and I’ve never seen one I would rather have trading for me vs. doing it myself but it depends on how you trade.  I can make a pitching machine that’s 10 times better than me because I’m not that good of a pitcher so it’s all relative and depends what you want to accomplish.  Like GMCR, the other day.  We know they are not worth $112 so when the "good" COST news shot them up there, we went short for a huge win.  You can’t teach that to a machine – at least not until Watson develops the appropriate level of cynicism to read the breaking news with a critical eye…  

    Submitted on 2011/09/17 at 8:27 am

    NFLX/BDC – I got bored with them myself, just like got bored with SODA and GMCR, if you are a looking for the next major failure.  We began shorting NFLX heavily around $250 to $300 and they dropped back to the low $200s so nowhere near as interesting at that point.  As I keep saying about these Momo stocks – they do collapse, the trick is riding them out until they do – which is why that Jan bear put spread on NFLX was a good way to play as the bet was simply that they don’t go to $400 by next Jan and any drop is a bonus.  The trick is to make these trades WHILE people are still excited about the stock.  

    To that end, GMCR is still way up there with a p/e of 104 on extrapolation that these machine sales will go on forever followed by ever more cup sales.  This nonsense can go on for quite a while, the good thing about NFLX is they were pushing mathematical limits as to how long people could believe they could grow at that clip.  GMCR may be able to pull a new market out of a hat or link up with Dunkin’ Donuts or something (as they too need to sustain a silly valuation) so it’s not at all a sure thing but figure the March $105/80 bear put spread at $10, selling the $130 calls for $10.70 is a .70 credit on a $25 spread and you’re betting GMCR doesn’t go up more than $23 (21%) by March but the March $130s can be rolled to the 2013 $165s (now $12) so that’s the real bet, that GMCR doesn’t gain 60% in 15 months.  

    There’s no sense in playing woulda, coulda, shoulda with Momos because you can never pin exactly when sentiment turns on them but this trade has a potential for a 1,800% return if GMCR drops 30% by March – you don’t need magical timing if you simply make sensible trades like this on a regular basis.  

    Submitted on 2011/09/22 at 7:47 am

    GMCR would be my favorite bear play and we already did a short play on them this week but let’s say you sell 5 Oct $115 calls for $5.40 ($2,200) and buy 3 Jan $130s at $8.75 ($2,625).  If GMCR fails to go up $5 in 30 days, you keep the $2,200 plus whatever value remains on the longer calls.  If GMCR goes up, the $115 calls are an even roll to the Nov $125 calls ($5.95) and those are an even roll to the Dec $135s ($5.40) so all you have to do is make sure those rolls don’t get away from you and the next roll would be to the Jan $140s ($6) and then you would be in a spread of 3 $130s and 5 $140s for net $425 ($1.42 per long).  That means, along the way, you can spend even $15 (2x) for 2 more of the $130s and your net on 5 $10 spreads would be $6.28 and, of course, you wouldn’t end up in those spreads unless they were deep in the money and GMCR had been going up on a tear for 3 straight months.  Flexibility and control – those are the things you give up the second you enter a vertical – especially one where you are the sucker paying the premiums.  

    Submitted on 2011/09/20 at 3:02 pm

    High flyers/Ksone – We had an in-depth discussion of that re. NFLX at the end of Friday’s comment section.  Of that group you mentioned, only GMCR is one I am excited about shorting and let me know if I’m wrong but I think we had a play on them in the same group of comments.  CMG is on my radar but I’m waiting to get a handle on how their new Chinese thing is doing.  If it’s the disaster I think it is – CMG will be a great short.  


    GMCR/Dennis – That’s one that you never know when they will bit the dust but you can slel the Nov $125 calls for $6 and that overpay for the $130/115 bear put spread at $5.70 for net .30 credit on the $15 spread that’s 100% in the money.  If you aren’t willing to take that short, with a break even at $125.30 (up 14%) then you don’t really want to short this stock!  


    Mircrowave theory/Lincoln – You are right about that.  I also think GMCR will go the way of SODA but slower as they do move product – it’s just the upside to the company that’s unrealistic.  Keep in mind you don’t have a short – you have a "not long" that is already wrong and you’re just hoping to get it back.  On the same logic – why open yourself up to possible damage – you can just do the 1x roll to the $5 caller and eat the $3.50 for now and, AFTER you win that one, then you can go for winning the rest.  When you are behind you need to play to get even – any baseball manager knows this…  


    If anyone has GMCR, you should look at Einhorn’s powerpoint presentation.  The guy is known for exposing shady practices in companies (even though Phil called this one first), and his case is very solid against GMCR.



    Submitted on 2011/10/19 at 4:00 pm

    LNKD/Lincoln – Another BS stock but we shorted them at $100 and got a ride to $75 and I haven’t been very interested since.  I’d love to see them pop back up and use that $100 line but you have to be careful with first-year earnings on these silly stocks as they can make the numbers look very nice (see GMCR) to pull more suckers in. 

    Submitted on 2011/10/20 at 2:00 pm

    GMCR/Amatta – They make $200M, which is about $1.80 a share, not $5.50 and the whole point is that they may really be making $100M if they do their accounting properly.  The patent on their system is gone in about a year so we have to assume margin pressure and they’ve whored out their licensing which means they’ve screwed up the model which is to take a loss on the razor (the machine) and make money on the blade sales (the K-cups).  Now they are competing against better brand names like SBux and Dunkin’ Donuts to sell cups and then the generics will come on-line in a year and further trash margins so I don’t buy into the growth model and no way would I pay more than a 20 multiple, even if I believed their numbers and their growth so $4Bn would be the MOST I could consider for them and their cap is still $10.7Bn.  



    So that’s a great real-life example of what I’m talking about in the post.  We had a stock, we liked it – but then it got too expensive, had some accounting issues, developed a strategy we didn’t agree with and we turned bear on it.  What should the "prediction" be?  When we were bullish, it seemed obvious to be bullish and when we were bearish (a little early at first) it seemed obvious to be bearish – but it had nothing to do with arbitrary markings on the calendar – our decisions were driven by FUNDAMENTALS as we gathered data over time.

    When those Fundamentals shifted, our play on the stock shifted because, at all times, what we care about is the VALUE of the stocks relative to its current price and THAT is how you determine the future movement of a stock, an ETF, and Index or an entire economy over time.  

  9. SWW/Roro – Thank the editors (Ilene and Elliott), they are fantastic at pulling together the relevant data for each week. 

    Energy/ZZ – Interesting how they discount solar.  The big problem with solar this year is how quickly it became cheap – if that pace continues and if battery technology has a decent breakthrough, by 2035 neither oil, coal or gas will be important sources of energy.  I’m actually betting on flywheels to come into play a lot sooner than that as we develop solar cells that begin to produce enough surplus energy during the day to be worth storing:  

    Compared with other ways of storing electricity, FES systems have long lifetimes (lasting decades with little or no maintenance;[2] full-cycle lifetimes quoted for flywheels range from in excess of 105, up to 107, cycles of use),[4] high energy densities (100-130 W·h/kg, or 360-500 kJ/kg),[4][5] and large maximum power outputs. The energy efficiency (ratio of energy out per energy in) of flywheels can be as high as 90%. Typical capacities range from 3 kWh to 133 kWh.[2] Rapid charging of a system occurs in less than 15 minutes.[6] The high energy densities often cited with flywheels can be a little misleading as commercial systems built have much lower energy density, for example 11 W·h/Kg, or 40 kJ/kg.[7]

  10. Josh has some stocks picks in the fixer-upper category thinking that with all these houses in foreclosures, these will do well in 2012:


  11. Did that Phil……sent Ilene and Elliot a thank you email.
    The information here is terrific, and synthesized in a way that allows very quick cross referencing and also zeros in on the lowest risk trades with the most potential for positive return.
    I especially like the hit and run approach and since signing on to PSW have been applying it much more effectively when trading the equity indexes, currencies and Oil.

  12.  Phil/Flywheels:  I’m going to build a house next year.  I’ll use lots of solar thermal — all the hot water, basically, which works very well since it installs in discrete packages, so if your 7 year old takes a 30 min. shower, their water gets cold, but yours doesn’t.  Photovoltaic runs into primitive battery technology — buying an expensive but super-efficient set of lighting fixtures works much better, and they have excellent color.  But when I asked about flywheels, I was blanked --"super heavy, super expensive, nothing even close to cost effective for a house — even a house with year-round sun."  True?  I don’t start construction until April, and electrical installation will be months beyond that.  Any cites appreciated.

  13. Phil/tea
    No, the $1 pitcher doesn’t work for loose teas. But this does raise an interesting issue. The US is often berated from a moral standpoint for overconsumption, but maybe it is really Americans who are sacrificing their lives in the service of corporations so they can buy expensive stuff so that the rest of the world can get by on cheap stuff and subsist.
    Here in the Dominican Republic I have about 30 restaurants or fast food places within ten minutes walk of where I stay, and three supermarkets too. If I need help bringing home the groceries I can get a motor cycle taxi for 75 cents. In the US the stores and businesses are purposely built miles from where people live so that they have to use cars to get there, which needs gasoline, oil, rubber, batteries, steel, copper cables, special glass, microchips, and so on. But probably the citizens of the oil producing countries would be starving  if Americans were not making this "sacrifice" of living in such an inconvenient way? Or if not starving, perhaps they would not have funds to get things like lifesaving drugs, televisions, or manufactured goods like toothbrushes or cooking stoves. Certainly if Americans suddenly decided to give up individual cars and use shared taxis for 50% of their travel, that would cause a worldwide depression in manufacturing and commodities like the world has never seen.
    50 years ago my mother was a Tea Party prototype. She believed that the government should be run like a business, show a profit, and keep some reserves for a rainy day. None of this printing money nonsense for her. Intuitively her point of view makes sense if seen from the point of view of a taxpayer not wanting to pay more taxes, but from a macroeconomic point of view, austerity is nonsense and Keynes was right. One of my favorites lines from Keynes:
    If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town (garbage), and leave it private enterprise on well tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

  14. Good list StJ.  

    Flywheels/ZZ – Not really practical for home use so far but industrial uses are pretty far along (see Beacon Power).  Beacon went BK this year after 2 units failed and they lost orders, but still in business I think.  We’re years away from affordable home systems.  As safe manufacturing and pure materials are a must – I’d wait until GE or someone else major begins manufacturing them – at the moment, the big boys are letting the start-ups make all the mistakes.  I think they are all off-track as they try to design the flywheels too well.  Simple ones can be powered up and spin for 12 hours and, if you consider that most homes use less energy at night – that’s all you need.  A bearing system would handle that but all these companies go for composites and magnetic floatation/vacuum systems – all nice but, in reality, a home can always be on the grid for backup when it needs it an a sensible, reliable system could be designed that would work 95% of the time and if 5% of the time you need to pay for electricity – it’s still a big improvement.  It’s the all or nothing attitude that is ruining many of these alt energy systems.  

    Sacrifice/JMM – Sure, we are/were the top 10% of the Global Economy and we are "taxed" by commodity producers – that’s fair enough but has not led to a balanced Global Economy and now it’s all tipping over.  Keynes seeks to provide ballast for when the ship of state is listing while the austerity crowd believes in balancing the ship by tossing 3rd-class passengers overboard – which may work once but next time you have to go after the 2nd class and then you are left with the 1st class passengers in a death match – that will be the next stage of the Global economy once the middle class is wiped out.  

  15.  Phil …  such appreciation of tea!  Sounds like the ideal basis for a PSW meeting in London.  I vote afternoon tea at the Ritz.
    Obviously only after we "fix" things in Europe

  16. Just posted the "Money" portfolio recaps in a new article in the income section:

    Since this was the first article recap, I added some information about the portfolio setup.

  17. PHil – for flywheels check out ACPW (Active Power) – down right now but could be a good entry point.  An authority on the subject is John Petersen with a lot of articles at SA. 

  18. Phil – at the end of Friday’s post I tacked on a question regarding the AAPL play that you suggested for Maya – buying the $410/460 July BCS. The question was why you didn’t play it more aggressively by selling the 2014 $290 puts and buying the 2013 $400/500 BCS.  My question was based on that you suggested such a play on BTU – to sell the 2014 $30 puts and buy the $30/45 2013 BCS – so I was wondering why not to do something similar with AAPL if the goal is to play it aggressively…
    I suppose that you answered in this post above – AAPL has run up and therefore you do not recommend selling the 2013 $290 puts at this point.  I suppose that is the difference between AAPL and BTU.  BTU is very cheap at this point…still am I missing something else in the analysis?  Would there be other reasons not to play AAPL so aggressively at this point?

  19.  Thank, Phil, Jc:  Your point about grid backup is well-taken, I will be on the grid, just looking for ways to minimize buying electricity, which doubles average U.S. prices. High-zoot, high efficiency bulbs with timers are key.
    One architect suggested "mass" as the most efficient energy-saving measure, and he’s right — I was once in Castile during ferociously hot mid-summer, and had lunch in old but very well kept house.  It was large, massively built, and the living room floor was half a meter below ground level.  I’m pretty sure southwestern Indian quonsets used this last feature.  Not a whit of air conditioning, and the temperature was close to 70F.  I was amazed, having been in the energy business and having lived in many hot climates.  Or course it was very dry there; humidity creates a different problem by handicapping the human evaporative system — we are sort of walking "swamp coolers."  In any event, we will have double the normal wall thickness on sun  exposed surfaces, with exterior plant shading.
    Speaking of which, there’s lots of sun and wind around the house site, anyone know if a giant swamp cooler would work at 80% average humidity levels?  

  20.  FYI:

  21.  Forgot I couldn’t post a graphic of Thomson Reuters "Asset returns in 2011]; better luck next time.   U.S, Treasuries topped the list up 16.7%, copper at the bottom, down -23.1 since Dec. 31, 2010

  22. From Friday’s close at $99 OIL is back over $100 on a gap up open for Monday 6PM, Phil……….any thoughts?

  23.  And my candidate for PSW Man of the Year 2012!!!  A little early to judge, perhaps, but I think this guy will win hands down.
     With a vast sense of irony — he undoubtedly reads Phil’s columns — he decided to go public with his view of Quantitative Easing, in a stunt so over the top that I think PSW should immediately institute an award for "the person who has contributed the most in each year to the U.S. public’s awareness of U.S. economic policy" and take up a collection for his bail money!

  24. Zero
    I have to admit, while I tend to get a bit annoyed at political discussions, you bring a ton of interesting perspectives and insights that I, and I’m sure many other, most appreciate.  Thanks for continuing to contribute on topics ranging from energy to trading to politics, etc.  The members of this "community" are at least 50% of the reason for continuing to renew my subscription.  

  25. zxz – and from the comments, "whose mug was on the bill?" Lots of possibilities there.

  26. Flywheel storage is probably never going to be all that great for what is called ‘behind the meter’ energy storage in that one of the main benefits is ‘rapid charging’.  This is of little benefit to a home owner whose solar panels would typically provide for limited excess capacity over ‘normal day use’ over other, cheaper, forms for storage like batteries.  Flywheels are much better suited for grid ballancing, where there is a need for short term need to quickly sink and source power as generation fluctuates (think variably cloudy day over a solar farm).

  27. Good morning!  

    China was very happy, with the Hang Seng up 2.4% this morning and india up 2.1%.  Maybe happy because the Shanghai was closed.  Nikkei closed too so inconclusive and Europe had a nice open, over 1%, but is falling fast into lunch. 

    2:19 AM Asian stocks rise, as reports from AustraliaGermany andChina hint at some positive movement for manufacturing. Hong Kong+2.1% to 18821. India +1.9% to 15817. Japan closed. China closed.

    China’s official December PMI rises to 50.3, beating estimates of 49.1 and last month’s 49.0. The "festival effects" of the western New Year and upcoming Chinese celebrations helped boost the gauge, says the statistics bureau in a statement. HSBC’s PMI also rose in December, but remained in contractionary territory at 48.7.

    Australian manufacturing expanded in December for the first time in six months, with the PMI at 50.2 vs. 47.8 in November. Basic metals, transport and publishing led the gains. ASX closes +1.1%.

    On the other hand:  Singapore’s GDP fell an annualized 4.9% in Q4 from the previous quarter, marking the second contraction in three quarters. The data suggests that the depth of the eurozone crisis is chipping away at the resiliency Asia has shown until now

    Asia Shows Divergence on Output

    Manufacturing activity continued to contract in South Korea and Taiwan in December but grew in India, as the euro-zone sovereign debt crisis and the sluggish U.S. recovery hit Asia’s export economies harder.

    Foreign-currency bond sales by South Korean companies are expected to climb to a record in 2012, and could rise to $31B from $27.5B last year, as struggling European banks pare back their lending and firms are forced to look for funding sources elsewhere.

    The CAC is dropping hardest, falling from + to – in their first hour.  Futures aren’t open yet on US indexes, which is very frustrating – I guess 4am or 6am.  Oil is up on Iran rumors – AGAIN!  

    German unemployment fell to 6.8% in December. Economists had expected the rate to remain unchanged at 6.9%.

    Helping the positive tone in Europe is Germany’s December manufacturing PMI, rising to 48.4 ahead of an earlier estimate of 48.1 and last month’s 47.9. The rise halts an unbroken string of declines going back to April, though Markit’s Tim Moore notes manufacturers as saying the falloff in European demand since the summer has spread to emerging markets.

    The Dax (+3%) led a surge in European markets Monday, with the broader Stoxx 600 gaining 1.1% on weak volume. German manufacturing data came in stronger than expected. 

    Swiss PMI comes in at 50.7 for December, better than the 45.4 expected and back in expansionary territory. (see also: positive PMI data rolls in elsewhere) 

    Eurozone December manufacturing PMI is confimed at 46.9, up slightly from the previous month’s 46.4. "Worryingly, new orders are falling at a far faster rate than manufacturers have been cutting output, meaning firms have been reliant on orders placed earlier in the year to sustain current production levels," says Markit’s Chris Williamson.

    Iran plans to launch missiles and torpedoes as part of its ongoing naval exercise in the Persian Gulf, as the country’s oil minister says crude prices will break $200 if sanctions are imposed on Iran’s oil exports. (previously)

  28. London/Malsg – Now that’s a tea party I can get behind!  

    ACPW/Jerconn – I forgot about them, thanks.  They might throw a good entry as they are likely to be de-listed from the Nasdaq for being under $1.  I know BA has a flywheel project and SATC dabbles as well but, sadly, we’re a while away from mainstream on this stuff.  

    Wow, Seeking Alpha figured out a way to make their site even more annoying to read!  

    AAPL/Jerconn – Yes, with me it’s about a Fundamental bottom call, not just picking a random strike.  I pick the price at which I REALLY want to own AAPL (or BTU) at and then DD if it drops another 30% below that.  BTU is the kind of trade I like to make – AAPL is because you asked but I’m not chasing AAPL over $400, even though I firmly believe it’s worth $500 – there’s just more than a 50/50 chance of a 20% downside risk and if we can’t cover something comfortably, why play at all?  

    Don’t forget, my issue with AAPL is that they are essentially priced for massive growth already and, since they have 100% of the tablet market and whatever massive percent of the phone market – there’s not much of an upside surprise left to them in market share.  The tablet space itself should grow nicely but, with AAPL, you are really counting on that old "halo effect," which has held up quite well over the past 5 years though. 

    Mass/ZZ – That’s an interesting concept, I’ll be very interested to know how it works out.  With the evaporative cooler, don’t forget to take into account your cost of water.  I’m not sure how much they are impacted by humidity but you don’t see many of them outside of arid climates so I imagine there must be diminishing returns as the humidity rises.  Don’t forget, if you are designing the home from scratch, that warm, moist air is less dense than dry, cool air and you can vent your home to take advantage of that.  Assuming you have a large home and a good supply of solar hot water, you might want to look into an absorption cooler, which runs off heat.  

    Asset returns/ZZ – Here you go! 

    Oil/Roro – More Iran BS – setting us up for another nice short but patience is a virtue here.  

    Flywheel/Lotter – I am under the impression that flywheels CAN quickly transfer energy but that certainly doesn’t mean they have to.  In theory, a large mass flywheel with no friction should return 100% of the energy that is put into it on demand over whatever period of time it’s required.  I think for home uses, as I mentioned earlier, they should stop going for the gold and grab the bronze ring with simple steel and ball bearing systems that are cheap and effective.  Simply allowing homeowners to store energy off-peak and use it during peak hours is a nice plus.  Home systems don’t need to be small, they can go outside like air conditioners or be built into the basement or stuck in the corner of the garage so cheaper, higher-mass/lower rotation solutions can be used rather than the cutting edge stuff.  Don’t forget the goal is simply to store the day’s solar energy for that night’s use and the next day, there will be either sun of you hit the grid – it doesn’t have to be perfect to make a difference.  

  29. FTSE and DAX up 1%, CAC down 0.6%.

    Dollar 80.56, oil $101, gold $1,592, silver $28.63, copper $3.486, nat gas $2.996, gasoline $2.7165.  

    Index futures still not moving.  

  30. Excellent advice Phil and , I took another lesson on patience getting short the AUD/USD at 1.0200 on low Friday volume instead of remaining all cash………closed it for a loss and gave back some profits.
    Patience, patience, patience.
    The UK had a nice Mfg PMI print at 49.6, but the Pound didn’t really pop and break the 1.5600 number decisively. Not so far at least. It has been kind of hanging between 1.5575 and 1.56


  32.  >



  33.  Currency Intervention Anyone?

    click for larger graph


  34. Great article by Barry on Forecaster Follies.  He feels the same way I do – markets are unpredictable at the moment and people who are making predictions are generally idiots.  

    Futures finally opened with massive gap up of 200 on Dow (1.6%).  Dollar dove to 80.045 – total joke and my knee-jerk reaction is to short the Dow (/YM) futures below the 12,350 line (12,352 now) and the RUT (/TF) if they cross back below 750 (now 754).  Iran oil may have some legs so we may have to wait for inventories (Thursday) to short but we’ll see.  

  35. Complete European Sovereign Issuance Calendar
    (From Zero Hedge) Earlier in the week, we discussed at length the funding gaps that various European sovereign nations face as the gap between supply and coupon/redemptions can’t be assumed to be rolled away (and Europe faces EUR43.5bn of net cash-flow surplus from sovereigns into the ‘market’). In order to better comprehend the timeline, Morgan Stanley has published both the complete issuance calendar for European bonds and bills over the next five weeks as well as a breakdown of the flows that are dominated by next week and the first week of February

  36. Did a quick hit and run short Dow close to the gap high, and am back to cash……..