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Friday, December 9, 2022


Which Way Wednesday – Hurts So Good!

Finally – news so bad it's GOOD!

Commercial Real Estate is down 14% in China so far this year with Residential right behind, down 13.5% – all on 11.8% fewer sales than last year.  Foreign investment in Chinese properties has dropped 42.9% year to date.  China's main banks are not lending any money – due to lack of demand, not supply and 45% of Chinese companies predict a slowdown this year and next.  Brazil is right behind China with their own real estate market collapsing and the IMF is racing over to Australia to assess the damage done to their banks by the bursting property bubble and EU property values are also off 20% from their 2007 peaks – even in London and Frankfurt – which were supposed to be "immune" from this nonsense.  

Good – let's get it all out in the open finally!  

PhotobucketItalian Banks are in turmoil and their Government is considering using troops to protect the Banksters after one was shot last week.  There is a run on the Greek Banks with almost $900M withdrawn this month and virtually no liquidity should people want more.  Meanwhile, The Institute of International Finance has estimated that the global cost of a Greek exit could hit $1,300,000,000,000. When Argentina defaulted in 2001, foreign debtors lost around 70% of their investments.  Is $1.3Tn finally a number that matters?  

That's right folks, the Global situation is a complete and utter disaster – which is why we went long on the Russell Futures (/TF) at 775 and Oil Futures (/CL) at $92.50 in Member Chat this morning.  Where the Hell else are you going to put your money if not in US Equities?  That was my conclusion at 11:54 in yesterday's Chat, when I said to Members:  

Nice pop off the EU close – still seems like people are abandoning the sinking ship of state over there and money has nowhere to go but US equities (but TBills and Dollars are getting some love too).  With gold, silver, oil and copper all looking weak – where the hell are people supposed to put money?

SPY DAILYWe noted that there were 16 stocks that were hitting their 2009 panic lows which we were very comfortable moving into in what we're calling our "Twice in a Lifetime List" – named that since I pointed out that we never thought we would get an opportunity for entries like that again in our lifetimes.  Once example of a stock on that list is CHK, now priced at just $9Bn with $60Bn in proven reserves (15% of reserves) while XOM is priced at $400Bn against $2Tn in proven reserves (25%).  That's putting CHK into the realm of a no-brainer buy for a big oil company looking to shore up their reserves, right?

Of course we don't just BUY CHK at $14.50 – not when someone is willing to PAY US $5.50 to buy CHK for $15 in Jan 2014.  Even if we do end up buying the stock for $15, our net entry on CHK is $9.50 for selling the naked put – that's 35% off the already drastically discounted price – that's not bad for an initial entry is it?

We already have some aggressive spread trades on CHK but, for the purposes of our Twice in a Lifetime List, we're looking to take advantage of the panic pricing in long puts at the same time as we take the money and run on our Long Put List – where we took advantage of the complacency pricing in puts when the market was toppy and the VIX was low.  See how easy that is to play?  

XLF WEEKLYWe filled the gap on Dave Fry's S&P chart in the Futures this morning, touching 1,320.75 at 3:30 and we're already back at 1,336.  As I said on Monday morning: "It's a very long way down to our next support level on the S&P which never filled the gap up over 1,320 from early February, which just so happens to be our 2.5% line for that index as well – so we'd expect to see some strong support around there."  So we're certainly not going to complain when the market follows our script essentially to the penny

Our other targets were that 775 line on the Russell, where we went long (now 780), $92.50 oil (now $93 and the Egg McMuffins are paid for!) and 12,500 on the the Dow and those Futures (/YM) tagged 12,545 before bouncing with the S&P and that's close enough on the Dow, which is the stupidest of all our indexes anyway.  

XLF $14.50 is another target and we've been playing that one long with FAS and JPM is another stock we went long on (see Monday's post) but a bit more cautiously as we're not sure where the bottom is there.

We still have our hedges, of course – who knows what craziness this market will rain down on our heads.  Cash is still King but a few pokes at some longs here protected by some disaster hedges not only keeps things interesting, but lets us take profits on both sides during these wild gyrations.  The simple DXD May $12 calls, for example, that I pointed out in Monday's post at $1.45, closed at $1.85 yesterday so even if you missed our original entry at $1.20 – they still made a quick 27% in 48 hours!  

The CAT May $95 puts that we were hedging with (also from Monday Morning's post) shot up from $1.45 to $2.80 yesterday, almost a double in 2 days there and up closer to 200% from our original .95 entry (from our Long Put List) while even the SQQQ June $10/14 bull call spread popped another .40 from $1.70 – a 23% gain in 2 days but our net entry was just .45 and net $2.10 currently makes for a 366% gain on that hedge.  

That's how we can buy with confidence – using leveraged protection we can commit just a little cash to our hedges while we begin to deploy some bullish money at what we HOPE (not a valid investing strategy) is the bottom.  If we're wrong – then the money we make off the hedges goes towards some dollar cost averaging on our longs.  If we're right, relatively small losses on the hedges are certainly forgotten as we have our long-term bullish positions at rock-bottom prices.  

Every trader knows the trick is to buy low and sell high but what's the point of knowing that if you don't have an investing strategy that let's you pull the trigger?  

We were discussing scaling strategies in Member Chat this morning and I think the real key in taking advantage of these situations is to always have a healthy degree of paranoia.  If you ALWAYS assume that whatever you buy will drop 20% – then you are more likely to be pleasantly surprised than shockingly disappointed (see "How to Buy a Stock for a 15-20% Discount With Our Buy/Write Strategies").  To use our friends at JPM as an example, the stock is $36.24 so let's say you have a $100K portfolio and you want to put 10% to work buying JPM.  You can:  

  • Sell the 4 2014 $32 puts for $5.20.  That puts $2,080 in your pocket against about $1,310 in net ordinary margin so you are keeping ALL of your cash but stand to make $2,080 (20% of $10,000) if JPM simply holds $32 through Jan 2014.  Worst case is you are assigned 400 shares of JPM at net $26.80 and you own $10,720 of JPM stock at 26% off the already discounted price.  
  • You can also scale in by using our buy/write strategy to buy 100 shares at $36.24 and sell the 2014 $30 calls for $9 and the $32 puts for $5.20 for net $22.04 ($2,204) on 100 and if JPM is below $32 in Jan 2014, you will be assigned another 100 at $32 for an average of $27.02 on 200 shares ($5,404).  Even if JPM is down at $15 in 2012, you still have $4,596 on the side and you could buy 300 more shares at $15 ($4,500 assuming you still liked them) and then you'd have 500 shares at an average of $19.80 – a 45% discount off the current price.  

These discounts are so good that we are, in fact, often DISAPPOINTED if JPM goes up and we "only" make $796 when we are called away at $30 off our initial $2,204 investment (36%).  Of course once JPM does move up significantly and it becomes unlikely that we'll be scaling into a larger position, the rest of our $10,000 allocation ($7,796) to buy JPM is freed up to initiate a position on the next bargain we identify.  It's not a complicated strategy – it just takes a lot of patience and THAT is the most difficult thing we try to teach our Members.

As I've been saying all week – we're still not very bullish until we punch through our Must Hold levels and we stand ready to add more bearish bets (and maybe even pull the bullish ones) if we once again are rejected at our weak bounce levels (see yesterday's morning Alert to Members).  It's still 1,360 or bust for the S&P this week and it's all up to Facebook to boost the markets on Friday as the Fed seems to be sidelined through the elections – unless, of course things get REALLY bad – but we're not there —- yet….


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Phil / CHK – Based on my post the other day, CHK is now below my entry price (JAN 17.50 PUTS for an entry at 14.30).  I am considering a DD, JAN 12.50 for an entry of 9.15 for an average entry of 11.73.  Would you recommend a different strike? Something else?  Hold Steady?

Phil / CHK – You can also just say 'Read the post concerning CHK Jan 14 Put for 5.50'.  Thanks!

I guess it's all good then… Mitt Romney on the JPM loss:

“A trading loss of this nature is something from which JPMorgan should learn, and I think as well regulators should look at it just to understand what happened and why it happened. But…this was not a loss to the taxpayers of America. This was a loss to shareholders and owners of JPMorgan and that’s the way America works Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $2 billion JPMorgan lost someone else gained.

Good business analysis there…

And from a blog reader out there…

You know, it’s interesting, as an attorney, I spend a lot of time reading the libertarians over at the Volokh Conspiracy.  To a man, they purport to believe in the sanctity of contract rights.  During the auto bailout, they raged and gnashed their teeth when various bondholders were forced to take losses by the big unions and their lackeys in the administration.  Remarkably, they never have anything to say when a worker gets screwed out of earned pension benefits or health care coverage.  It’s as if the contract rights of labor are somehow illegitimate or second-class compared to the inviolate rights of the One Percent.

I said the same thing when we had all these guys on CNBC in 2009 saying that the execs at AIG and the banks should get their bonuses because, by Gosh, a contract is a contract. But when they tore down the union contracts and renegotiated deals it was for the greater good. Shared sacrifices, GOP style!

Disregard the above 2 posts.  As i read today's board (CHK…Etc..) it just reinforces why I am a member.

I am a new member.  i am going thru the process but would like to review the disaster hedges asap. Would someone be good enough to post the link or the hedges. tks

StJean / Levels
Ok I never really looked hard at the Level's numbers, but now that I do, it looks like the Dow is a multiple of the S&P, and NYSE is a multiple of the RUT.  Just wondering why this is.  I got confused when you and Phil re-did the levels after Eliot left.

ban2 / JPM
That's a VERY GOOD point that I hadn't given all that much thought to.
From the news reports, it sounds like Dimon and the others truly did not know the magnitude until mid to late May. Also, from reports, it sounds like mid May was when things really started to move very hard against them, and then did pretty much every day for about two weeks.
btw, as I was reading over the weekend, and on Monday, I saw something in the Journal to the effect that Ina Drew had tried to "minimize" the importance of the position. The tone of the article (it didn't make it real clear) was that she was trying to MINIMIZE IT TO JPM MANAGEMENT (meaning Dimon). If that's true, I imagine he wasn't terribly happy about it  🙂
Is this a "Zero Sum" situation? Does it necessarily hold that every dollar JPM lost was a gain to some other party? Or is there a "vaporization" somewhere, that does not have to be a profit by a counter party? If so, shouldn't that be pointed out in more news articles? Yeah, a big loss for JPM, but if a whole bunch of smaller hedgies "got one over" on JP, that seems not so bad. They're certainly not complaining.
When I make a small profit on my TNA / TZA, I just "mentally pretend" that I made the profit off Goldman!

Levels / Burrben – I think that it's mostly a coincidence. Phil calculates the numbers by looking at long term charts and levels of support and resistance. Eliot and I just plot the numbers given by Phil.

Disaster Hedges/Millcreek – I don't think there are any current disaster hedges in place for these levels.  As Phil noted above, the likely candidate may be the Qs.  Stay tuned early morning as I'm sure Phil will post something should futures, etc. warrant them.

Phil / CHK – Thanks for the advice… I will study.  I have 5 Puts (Yes… I scaled in incorrectly).  If I have learned anything over the last few months is to have PATIENCE.  If I am reading the board correctly, the advice is to wait and see where the floor is made, decide if CHK is still a long term investment based on knowledge to date which you have laid out in today's postings (thanks) then if it is still a good investments (microwave theory) DD and sell Puts into the move up as a way to further scale in.  Ultimately, the motivation is to build a long term portfolio!  CHK, if all goes well, should be a stellar holding.

 An interesting take on jobs….. 

Phil / FAS / Hedges
So I had a nice wake-up email from my broker that the short 91 FAS puts was a mis-trade and I didn't get out at $7.  I'm therefore still holding the 2 short 91's priced now at most likely at $9+ with FAS at 82.  I sold these for $2.69  I did short 6 of the 85's for $2.70 for a net credit of $8.10, but these are down some as well.  
With the open looking crappy, I'm thinking of shorting some futures here pre-open.  I was obviously underhedged for this move down as my account has lost about 10% of it's value since last friday even with the SQQQ hedge we did last week. I'd like to stop the pain as the news from our bastards in the EU keeps getting worse.

Burrben, With the high VIX it distorts the value of your short puts, as Phil often says: are you on track or not. I sold the 2013 CHK 7.50 puts and am down alot but not worried – except if you have margin problems the you must take the hit. When VIX goes back down your putters will move in your direction alot also.

These are the FAS puts from the FAS money portfolio, which expire tomorrow.  Vol isn't playing a big piece here since FAS is at 82, and these 91's have $9 of intrinsic value already.  This is more about a delta move than a vega increase…although I also feel pain on the long term sold puts.  

Burrben, If they expire tomorrow then yes, its different.

WMT bribing officials in foreign countries – shocking! Here in SE Asia, you can not get any govt. business done unless you bribe someone. Mexico and others I'm sure the same. In the US though you bribe a Senator or Congressman. Only trouble is the bigger the company the bigger bribe you can make so it freezes out the smaller ones.

FU FAS!  StJ, you should re-update FAS Money…it's a bloodbath.  FU FAS!

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