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Monday, February 6, 2023

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TGI Fed(s) – Promises, Promises

 

You made me promises promises


You knew you'd never keep


Promises promises


Why do I believe


All of your promises


You knew you'd never keep – Naked Eyes

Wow – what a party!  

The former Vice-Chairman of Goldman Sachs (Draghi) says everything is fixed and the global markets go flying – what's not to trust?  Would anyone form GS ever lie to us?  Would GS be involved in manipulating the Global Markets – of course not!  

Now that I've fulfilled my obligation to get my mother back unharmed – let's get real.  Draghi said the violent spike in bond yields in recent days was hampering "the functioning of the monetary policy transmission channels" – the EXACT expression used to justify each of the ECB's previous market interventions.  

Yields on Spanish two-year debt plunged 72 basis points to 5.47% in barely an hour, with comparable moves on Italian debt – easing the pressure before a string of debt auctions in Rome over coming days. The MIB index of stocks in Milan surged by 5.6%. Madrid's IBEX rose 6%, the biggest jump in two years, led by an explosive rise in bank shares.  Mr Draghi's comments came as Spain claimed backing from France and Germany for activation of the eurozone's rescue fund (EFSF) to buy Spanish bonds, though this would require calling the Bundestag's finance committee back from holiday for a vote. Action by the EFSF would provide "political cover" for the ECB to join the fray in a two-pronged attack.  "We're firing on all cylinders: that is what has ignited the markets," said Hans Redeker, currency chief at Morgan Stanley.

Joint statements from Madrid, Paris and Berlin said market turbulence "does not reflect the fundamentals of the Spanish economy, or the sustainability of its public debt".  According to Ambrose Pritchard, "the wording seems scripted to clear the way for intervention."  Of course, now it's time to put up or shut up as the Fed meets next week and the ECB has their pre-holiday meeting next week as well so it's going to be action by next Friday or none until September.  Marc Ostwald from Monument Securities said Mr Draghi's words were "cheerleading bluster", while Gary Jenkins from Swordfish called them "a bluff to get through the summer".  

As far as bluffs go, it's a good one.  And why not, if this were a poker table, Draghi has the second biggest stack of chips at the table, next to Bernanke and then there's the BOJ, the BOE and the PBOC – and you – and Draghi just put the bears all in on the ante – he doesn't even need to bet yet!  

Needless to say, the bears quickly folded yesterday and the Global Markets took off, bringing us right back to the highs we had when we had that ridiculous rally at the end of June – that was also based on promises of more QE from our Central Banksters.  The fact that we then fell right back to the lows of July in the first 10 days of the month doesn't seem to worry traders (not "investors" at all!), who went into such a buying frenzy that EVEN JIM CRAMER thought it was overdone.  

"Mario Draghi may have given us the perfect opportunity to cash in on some gains," said Cramer.   "Every asset that investors had just given up on was suddenly roaring. But move fast, Cramer warns, because this kind of optimism never lasts. Germany’s “iron chancellor,” Angela Merkel, will always be there to “pull the rug from underneath.”"  While I find it very disturbing to have to agree with Cramer – he's making perfect sense here.  

To that end, we added a bullish spread on the Russell to take advantage of possible ACTUAL stimulus over the weekend or next week.  We're using a very aggressive bull call spread on TNA and tempering it with the sale of short puts in stocks we would like to buy anyway – my trade idea from Member Chat was:  

With the S&P over 1,360, it's time to go bullish on the RUT (playing it to catch up).  I think the Futures can be played over the 775 line (now 773.30 on /TF) but the fun play on stimulus is the TNA Aug $49/54 bull call spread at $2.20, selling something you want to own in a downturn like CHK Sept $17 puts for $1.28 for net .92 on the $5 spread.  

  • SBUX might make some good put sales today – we'll have to see.  
  • DMND is back down where we like to sell puts, the Sept $15 puts can be sold for $1.35.  
  • MCD came down nicely, Jan $85 puts can be sold for $3.05 or 2014 $80 puts can be sold for $6.  Also odd on MCD, who were around $100 until March – is the March 2013 $92.50 calls at $2.75 – that's not a bad risk for a call position, especially if you pair it with the long put sale.  

Setting ourselves up for a potential 400% winner if the markets do move higher (and we simply stop out of the spread if the S&P fails it's Must Hold line at 1,360), which then provides an upside hedge for the bearish bets we intend to make and press into any rally that isn't backed by at least $500Bn in actual cash from the Central Banksters.    

8:30 Update: GDP came in at 1.5% vs. 1.2% expected and down from 2% last Q.  We expected more of a slowdown but prices up 2% gave us a nice APPARENT boost (same goods and services produced but at 2% higher prices is a $320Bn pop to GDP, which is the entire GDP of all but the top 30 Nations on Earth!).  Q4 2011 has been revised UP to 4.1% from 3% so we are slowing drastically but it doesn't seem as bad because, instead of being down 2.6% from 3% to 0.4% – the magic of the revision has us starting from a 1.1% higher base so we "soft land" at 1.5% – isn't math fun?

Of course, with an established 1.1% margin of error between revisions, it's very possible that our actual GDP is 0.4%.  Residential fixed investments (durables) were weak and Federal, State and Local Government spending were once again negatives as even our Government begins to run out of money.  As we expected, inventories increased substantially and added 0.32% to the GDP as the calculation is based on the assumption that everything in a warehouse eventually gets sold at the full price.  This is the kind of thinking that leads to nasty downward revisions in GDP later on! 

Today, however, the futures are loving it, as well as more positive noises about potential stimulus from the G20 so hopefully another nice rally this morning to add some shorts into but, as I said to our Members yesterday – you have to have a good mix of upside plays as well since this market can move 5% in either direction very quickly. 

So be careful out there and have a great weekend. 

– Phil

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Barfinger – strangling TLT.  I may have seen the light.  I was looking at strangling TLT after reading your post.  It looks like an interesting trade.  How much premium do you try to generate each month?

revtodd: I take whatever I can get at the stike I feel comfortable with. It is not about optimizing profit for the period, it is about being paid and avoiding trouble. Currently I am short Aug 133 calls, and 126 puts. Whatever it produces (and I got an average of $.90 a side) it doesn't matter. Get a position that you can roll if it goes wrong, take what they give you.

Hi Joel,
I do like the suggestion and BE for the new position is 8 for Jan 2014.  To make 4k, I would need to tie up 4k on BCS (20 contracts 5/8) and 8k on 20 contracts 8/3 put credit spread (assuming no margin IRA). So, net $cash is 12k, which drops to 6k with margin (roughly). This compares reasonably to my current cash outlay of about 5k on current positions.  I would prefer to do this in an account where I do not have margin for naked puts but I can play around with that with multiple accounts.  
I would probably do something like that but wondering.. why not try 7.5/9 BCS to Jan 2013 first, and if it does not work, roll it forward to 2014?  (I already have some Jan 9P sold that are showing even and may add some 2014 8P on a market drop).
I am not very good at "rolls" but like the idea of rolling forward, selling premium.  I have tried to read PSW to learn this better – anyone have a good link or reference for this?  Anyways, I would probably skip this part of the position for now.
 Thanks for the suggestion.  

Thanks Barfinger, I think I will add this to my tactics.  Do you do the mostly do the monthlies?  Ever do the weeklies?

I love selling premium, but one thing that Nassim Taleb believes has always nagged at me. He says that you can sit there collecting small amounts for a very long time and then get blown up with a single Black Swan. Black Swans are, by definition, highly unusual, rare and unexpected events. But they can happen, especially in this day of HFT. I'm always worried that a 3,000 point drop in 10 seconds could undo months, maybe years, of collecting premium. 

drmtv10, nothing wrong with the 7.5/9 jan 13.  The difference is if you sell the 2014 5/8 you have more protection to the down side with the 1.71 in your pocket, paired with the short 8 put giving another 1.35 in your pocket.  You get a $3 credit and only need 8 to hold  and the whole thing is covered.  At this point,  you won't have to worry about rolling for awhile and you have a good defined spot at $5 resell 2015 or 16 puts.   If it runs away to the up side you just slap on a 9/12 BCS.

Apple is no basically a cell phone company:

http://www.engadget.com/2012/07/29/visualized-the-idevice-influence-on-apples-bottom-line/

Visualized the iDevice influence over Apple's bottom line

Well, an iPad as well…. Computers are now less than 15% of their business. Some transformation!

Black Swans/Phil – Thank you for the thoughtful input. Puts much of the nagging feeling to rest. One key seems to be sizing and make sure you always have enough margin available. As you say,there's no free lunch in the markets. At least not anymore – way back you could work little inefficiencies, such as warrant hedging ("Beat the Dealer" author Thorpe picked up on those. I once built a small hedge fund around it – but I digress.)

Perma bear.. Come on. I am a realist.  Bonds do not tell a lie, and last time SPY was up here TLT was 116.  Please tell me who is not telling the truth.  We are Japan…and that country still has not hit an all time high after how much stimulus?

AAPL / Phil – It's actually really scary because 10 years ago, Nokia were really hip, then Motorola came up with the Razr and everybody had to have one. Then Blackberry were the latest fad and now it's the iPhone. But 5 years from now, who knows…. And when 50% of their business is that iPhone, they better come up with a good one each time!

St. Jean:  Apple better be working on the iRise Reincarnation Platform [DNA-based], because they're going to need Steve back to keep that amazing string going.

Does anybody know a good website to rent a car for a couple weeks? I am coming in from overseas in Sept.

Phil / CLNE – Were $24, now $14,  Jan 14 $12 Short Puts at 3.10 (8.90 entry).  Do you like the NAT Gas fleet provider long term?

jomptien
I've had good sucess with Car Rental 8

jomptien – carrentals.com  🙂

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