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TGIF - Stop the Week, We Want to get Off!
TGIF - Stop the Week, We Want to get Off!
By What a disaster!
Of course, that's why we have Disaster Hedges, right? August 11th was the last time we did a "Hedging for Disaster" post which included a LONG trade idea on gold that's done now (we're short) after gaining over 300%. We're a little mixed in our results on the other hedges but that means we can SWITCH HORSES - from the trades that have already worked to the ones that haven't yet. That's how we cash out our winners on a regular basis - it's the pony express of investing. Our other Disaster Hedges from that post were:
- DXD Oct $23 calls at $2, selling Oct $27 calls for $1.15 and the Oct $19 puts for .70 for net .10. That spread is currently -.05 so down 150% so far and a nice horse to switch to, offering a .05 credit on the $4 spread.
- FAZ Oct $65 calls at $22, selling Oct $72 calls for $20 and selling JPM 2013 $20 puts for $2.05 was a net .05 credit as a backstop to our long financial plays. FAZ is now at $71.34 and the October FAZ spread is now $3.70 but the JPM puts are now $3 so net .70 is only up 1,500% so far. Should the financials stay low, we get the full $7 from the spread and we're obligated to buy JPM for $20 (now $29.27) in 2013.
- SDS Sept $26 calls at $3.20, selling Sept $32 calls for $1.65 and selling VLO Jan $15 puts for $1.20 for net .35. SDS is only at $25.73 so far (not a disaster yet) and the spread is now net $1.25 and the short VLO puts are .17 so net $1.08 on this one is up 208% and we're not even at goal - that's pretty good! Note the spread is LOWER than when we started so this can also be used as a fresh horse with a different offset, like X Jan $15 puts for $1.20 for a net .05 trade.
- TBT was stopped out with a small loss at $24 (fortunately). My comment at the time, with TBT at $24.88 was: "Keep in mind though, that the Fed has said rates will stay low through 2013 so it would be wise to uses stops on the puts, at least, if TBT fails to hold $24!"
- EDZ is always our favorite disaster hedge as we've long suspected emerging markets would implode at some point, whether the Western markets improved or not. Our EDZ play was selling one set of the ridiculously overpriced January $75 calls for $3 and buying 2 Jan $25/40 bull call spreads for $2.60 each, which was net $2.20 on the spread. Unfortunately, the Jan $75 calls are still a crazy $4 but, fortunately, the 2 spreads are already $6 each so we're up to net $8 (up 263%). There's a stop on the calls at $5, by the way and, if that is triggered, then we set stops to maintain profits on the spreads, of course.
I would urge you to read the post as well as our other Disaster Hedging posts we've written over the years as there is noting more important than having INSURANCE. Having portfolio insurance lets us ride out the market waves and stick with our sensibly hedged (hopefully) long positions through the gyrating market cycle. At the moment we HOPE (not a valid investing strategy) that we are at Capitulation on this chart and we've done a bit of bottom-fishing, just in case we're there.
Our long ideas in yesterday's Member Chat were XLF at $11.50, shorting TLT at $123, shorting VXX at $49.50, TNA at $34.50, BRK.B at $65, AA at $10.20, VLO at $19, IMAX at $15.75, BA at $58.32, AGQ at $170, CHK at $27.50, DIS at $30.14 and ABX at $47.50. Of course we also had plenty of short plays to balance it out (15/15 is our current goal) and, when I say we like, for example, ABX at $47.50, that is to say we liked it enough to sell the 2013 $35 put for $3, which is a net $32 entry, $15.50 below the current price (33%). THAT's how we get bullish when we're not sure if we at Capitulation of Fear - we buy things while giving ourselves a nice buffer (see "How to Buy Stocks for a 15-20% Discount") AND we hedge with short plays that will give us more buying power on the way down.
We HOPE (not a valid investing strategy) 20% off from here is the worst-case scenario but the markets have gone much lower than that in 2008-9 and, while we don't feel this situation is the same as it was back then - one thing we learned 3 years ago in September was that you should never underestimate the ability of your fellow investors to FREAK OUT. Our job is, very simply, to have as much cash as possible when the market bottoms and that's what hedges are great for. If we do get assigned ABX at net $32 and we have a hedge against it like EDZ that pays us $20, then we're getting ABX for net $12 (75% off). If you don't want ABX for net $12, then why on earth would you buy it when it's at $47.50?
There's a huge difference between the PRICE of stocks and the VALUE of stocks but there are very few of us Value Investors left in the World. TradeBots are not value investors - they look at price and that's all. If gold, for example, breaks $2,000 - a TradeBot is perfectly happy to buy it because of momentum and if gold breaks below $1,000 - the same TradeBot is happy to short it on momentum. Gold has no value whatsoever to the machines that are doing 85% of all the trading and neither do stocks - not AAPL or IBM or JPM or VLO or BA or CAT - NOTHING!
It's not just the Bots though - most of the traders out there are technical traders as well and that's a valid strategy because it's a technically driven market but, at a certain point, stocks get too cheap or too expensive relative to their FUNDAMENTALS - and that includes the whole Global Macro environment (see "The Worst-Case Scenario: Getting Real With Global GDP")
Note this cartoon from that post is from 2005 and, other than adjusting the debt figure upwards by $8Tn and putting the housing bubble into the past tense, not much has changed - has it? As we learned from the great Roseanne Roseannadanna back in the 80's - It's always something or, as Tommy Lee Jones points out in "Men in Black":
There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they Do… Not… Know about it!
We (savvy traders) are the Men in Black - we are keenly aware of all of the threats to Global Economic Stability while the vast majority of the rest of the World gets up and brushes their teeth and eats their Egg McMuffin on the way to work until they get fired. As more and more people get fired (428,000 last week), more and more people become aware of the HORRORS of the Global economy and OF COURSE THEY PANIC - it's HORRIFYING!
Now we need to step back and objectively, CALMLY, away from the madness of the crowd and simply factor the panic into our fundamental equation. On Monday and Tuesday this week I did my best to put Greece in perspective because we EXPECTED this panic drop but that's only half of the game - now it's my job to tell you why YOU need to leave the herd and NOT panic.
In Tuesday's post I mentioned our Fed hedge was a GLD Nov $180/174 bear put spread at $3.30, selling the $193 calls for $3 for net .30. That one is already $2.67 (up 790% in 2 days) and we're done with that, of course. In Member Chat at 11:50, we added short-term aggressive hedges on SDS, LVS and GLD again - all huge winners, of course and at 12:24 we added a November SQQQ spread to hedge against a longer downturn. As I discussed in yesterday's post, we tried to get more bullish but abandoned that when the Fed statement came out and now we are simply doing a little bottom fishing - HOPING (not a valid strategy) that the markets do find some support at our -10% lines - again. If not - we change horses, layering in our Disaster Hedges and enjoy the ride down!
Have a great weekend,
- Phil
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Just hope nobody forgets about this gem:
http://www.zerohedge.com/contributed/turnaround-tuesday-greece-fixed-again
I didnt:
Check this out Bitchez:
At 10:08 we got aggressive with a TNA Oct $41/45 bull call spread at $2, selling the $29 puts for $1.70 for a net .30 spread with 1,233% upside potential if TNA finishes over $45 in 30 days. DIA 9/30 $115.75 calls were bought at $1.05 in the $25KP and those shot up to $1.35 (up 28% in a day) but we decided to be greedy and hold them overnight. HOV got attractive again for a long-term play at $1.23, USO was the subject of a complex and very aggressive spread as they hit $33, AAPL caught our attention on the sell-off and we played them long-term bullish to $500 in 2013 and then we went for TNA again as it was still sexy at 12:14 pm.
We haven't been this bullish since way back to last Monday
Funny how they never tell you about the mistakes those "oops" or even "ohhhhh shit" just the winners.
Dude got lucky hahaha ... its ok bro luck is nice.
After that paragraph Im not buying what your selling though not after this week lol.
The internet is a bitch aint it.
Downside, bitchez! Publish that, too, Dickweed!
Is it Far from the Maddenning, Madding, or Made-off-withings Crowd?
Roadkill hit the nail on the head; a lot of commentary at ZH is less than useless.
On the other hand............
Yes, I know it's an old joke.
The Smartest Man In The World
http://georgesblogforum.wordpress.com/2011/09/23/the-smartest-man-in-the-world/
One of the more balanced posts I've read on ZH. Great website for keeping on top of the Risks in the market, but sometimes the comments make it seem like no one here is looking for opportunities... other then buying and stock piling gold no matter what price it's at - like it could NEVER get into a bubble (or like their is 0 chance Benny will sterilize the Fed BS when the velocity of money picks back up rather then let monetary base expansion generate monetary supply inflation).
I'd love to hear more from the other members that are at least looking at stocks to find bargains - if not here, then at 1,000; 900 or some other reasonable levels. Let's not forget in March 2009 SPX hit 666 (and some mega cap stocks like Dow hit $7) only to rally to 1,350 (Dow hit $40 and is still at $25). Money is money regardless of if you make it on the long side or short side.
Personally I've been trading the range. Taking up exposure in the low 1,100s (intraday using limits) and taking it down in the low 1,200s. But personally I see opportunity when something like FAS hits 10 - so I picked up some (1,000 bps of my net long) for a bounce. I see 1,000 as inevitable, and 900 as very possible - so I've got a max of 25% net long until things resolve or we get cheaper. My negative case is a double dip, EPS falls from $100 to $75, and that gets 12x. That's when I get aggressive. I know the SHTF crowd will mock that, but they staid short at 666.
3 reasons I'm being cautious right now (28% net long):
We were at 1,000 last July pre-QE3 when Greece/PIIGS/Euro was arguably better.
If we go into traditional recession (which would be REALLY ugly given we still haven't recovered from the last one) then SP 500 EPS falls from $100 to $75. Put a 12x multiple on it and you get 900 on S&P.
Not sure if we will have a credit crisis from a Greek default, as French and German banks don't have enough capital.
Positives are:
Oil decline gives consumers a lot of help.
Corporate balance sheets are the best they've been in 50 years.
Trailing earnings and historical multiples get you to 1,400 on SPX.
I will start looking as soon as we break lower from this rangebound cycle we are in and some of the looming disasters play out. Too many reasons to be short right now, which probably means we should all be long, eh?
Money is money till you dont have it. Going long over night on stocks just seems like a hangover waiting to happen in this environment. Now I would entertain a hedged bet. This is one move I like very much is to pick 4 strong stocks that outperform up and down markets and buy them out right then short the whole market. Thats about the only way you get me in. I did that and made some money and will probably do it again. I like coke as one of my top 4. Other then that I like buying puts on the market and gold and silver ... yeah even now ... hell even more now.
The thing Im worried about the most right now is which movie Im going to see tomorrow or the tacos Im going to buy tonight. Not concerned about my portfolio in the slightest its all good. Im not on margin lol.
@scrappykoala you like coke. Well so do i. Who is your suppplier lol
The "SHTF crowd" didn't know the US government was going to suspend the rules of accounting and let banks lie about asset values. That's what they've been doing for three years. They are sitting on hundreds of billions in bad loans in the US and trillions around the world.
However, the market finally appears to understand that Bank of America and the rest of insolvent several times over. Hence the reason BofA is trading at a third of book value.If anyone actually believed BofA's balance sheet they could be buying the company at an extreme discount. Clearly nobody does.
In fact, the rest of your arguments are bogus as well. The consumer has no job and their house is underwater. Lower gas prices are pissing into a hurricane. Corporate balance sheets are terrible when you realize they have debt, not cash.
Only problem is that I have trouble seeing any of TPTB recognizing an opportunity.
I like the title too.
Crisis = opportunity - Even better!
Thanks for the reminder.
So Phil is treading water. Winning!
"...in 2008-9 and...we don't feel this situation is the same as it was back then"
Errm, no, it's worse. Banks hiding true accounting in 'mark-to-model', bank leverage as high as, in some cases higher, than 2008, Government debt a magnitude higher than in 2008, unemployment higher than 2008, the Fed now sitting on the WORLD'S highest amount of Treasury debt. I could go on.
DavidC
Agreed. Over here in "reality" the banks are actually in worse shape than they were three years ago. They are sitting on hundreds of billions of hidden losses and nobody knows where the losses are.
The US government is borrowing and spending 12% of GDP in a poorly conceived effort to prevent the market from clearly itself.
Corporations aren't sitting on cash, they have debt.
F**king right it's worse than 2008 ...whoever thought Govts spending more debt could 'solve' a debt problem is a moron (pretty much every institution in the Western World then)
Let's hear it for all those morons that supported Govt stimulus in the Banking, Business, Educational sectors and amongst the public that voted for it ..and then there's Paul Krugman and the Financial Times Chief Economist, Martin Wolf, who like Krugman is a socialist (idealogical pinhead) not an economist
deleted
Did I miss something?
There's a huge difference between the PRICE of stocks and the VALUE of stocks but there are very few of us Value Investors left in the World. TradeBots are not value investors - they look at price and that's all. If gold, for example, breaks $2,000 - a TradeBot is perfectly happy to buy it because of momentum and if gold breaks below $1,000 - the same TradeBot is happy to short it on momentum. Gold has no value whatsoever to the machines that are doing 85% of all the trading and neither do stocks - not AAPL or IBM or JPM or VLO or BA or CAT - NOTHING!
Great paragraph that hits the nail on the head and why you can't fall in love with anything...fundamental/value investing might come back some day but you are much better served trying to get in on the multi-month momentum plays on those equities that ride them hardest.
"Stop the Week, We Want to Get Off!"...wonderful title.