This page has been archived and commenting is disabled.
Twisting in the Wind
Excerpt from Stock World Weekly, September 25, 2011, The Week Ahead section. ~ Ilene
Twisting in the Wind
On Saturday, the International Monetary and Financial Committee (IMFC) of the International Monetary Fund (IMF) released a communique stating, “The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role.”
The Telegraph UK reported “German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiraling out of control. Their aim is to build a “firebreak” around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered ‘too big to bail.’
“According to sources, progress has been made at the G20 meeting in Washington, where global leaders piled pressure on the eurozone to fix its problems before plunging the world back into recession. In a G20 communique issued on Friday, the world’s leading economies set themselves a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4. Sources said the plan would have to be released as a whole, as the elements would not work in isolation.” (Multi-trillion plan to save the eurozone being prepared)
Phil’s overarching premise is that the eurozone will not collapse, and the financial crisis will not result in the breakup of the EU. Others are less optimistic. Mish Shedlock is skeptical: “The number of arrogant, unbelievable lies from the EU and ECB are flying so fast I do not have time to report on them all... There is no method, and there is no strategy. There is only talk of producing a strategy by November. Good luck with that given all the EU infighting. At this juncture, I doubt the market will wait until November even if the EU could come up with a viable alternative to default (which it can’t).” (EU Synopsis: No Method, No Strategy, No Calendar; Blatant Lies by French Finance Minister) Zero Hedge reported on Saturday night “G20 is now preparing itself for Greek default after October - all efforts behind the scenes (by G20 members) are now going into recapitalising banks, preparing economies for default. (Lehman Weekend Redux)
Phil wrote in Friday’s article “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 back then, one thing we learned 3 years ago 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...
“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!”
In the meantime, the stock market is largely being driven by rumors and negative sentiment, with daunting words like “default” and “bankrupt” regularly adorning the headlines. An investor’s task is to keep his head while everyone else is losing theirs, do his homework to determine the VALUE of a company (versus its price).
We reviewed Lee Adler’s Wall Street Examiner Professional Edition to see Lee’s technical analysis for next week. According to Lee, “Cycle screening measures have reached a level consistent with a short term low. A 6-7 week cycle low is due, and the market low on Thursday is within 5 points of the projection. At the same time, the 13 week cycle sideways up phase appears to be in a top phase. Any bounce here should be short lived...
Many sector charts have already broken down, creating setups where rallies back to resistance should be shorting opportunities. A short term rally should be in that context, with lower lows to follow within the next few weeks.” (The Yeah But Market)
Phil wrote on Friday: “Still all rumors and madness driving the markets, and I still favor neutrality, but if you are neutral and you have 3x plays going both ways, then you can only lose 100% on one side while hopefully you make 300% on the other side! That’s what we did with the Qs ahead of the Fed on Wednesday and that went very well (p. 7)… Cash remains king into the weekend. I’d love to say BUYBUYBUY but it’s a crap shoot, and we have 10% up to run if we’re going to stage a comeback. We won’t miss much by remaining cashy and cautious, but it’s fine to deploy a little cash to trade ideas like BCS*.”
[BCS - We went long on BCS at $10 (hedged) and it is at $8.70 now. There is no bottom limit to panic but I looked over the books (as best I could) and decided $10 was a good PRICE while my VALUE is around $15. If the PRICE goes to $5, my VALUE will still be $15, and at $2, my VALUE will still be $15.]
We have a trade idea this week, courtesy of Pharmboy: “GlaxoSmithKline (GSK, $40.67) has a good revenue stream, pipeline, and pays a hefty 5% dividend. I like GSK to hold its lows of the year ($36.28). If we can pick it up cheaper by year’s end, then we will take a good company. I would sell 2 January 2012 $35 Puts for $1.10 or better.”
Better opportunities may arise as the markets sort out the facts and fictions of the day. In the meantime, once again, we remain cashy and cautious.
»
- ilene's blog
- 5090 reads
- Printer-friendly version
- Send to friend
- advertisements -
I hope they will make sensitive progresess in this case and the situation will be better soon. Asigurari de locuinta
Cash IS king because you can use the printed paper to obtain PRECIOUS metals now, at a better price than last week. And cash works at the gas station, too.
It's a Dip - buy it.
The 3x is a "Triple ETF".
word is eurozone will securitize the new round of greece bailout funds to print more fiat crap. value of fiat going down the drain.
this talk about cash being king is nonsense. i must highlight the shameful acts by government entities, cahooting with banksters, using fiat to enslave the populace. cash has now lost its 'store of value' function, it's only to provide liquidity. central bank have bastardized cash debase it so much, it's only to provide liquidity for the market.
as far as 'store of value' goes, believe in the gold/silver hype. it's the ultimate speculative weapon, there's no time value of precious metals.
The question is will the Arab oligarchs make Israel an offer it cannot refuse to ensure that East Jerusalem becomes the future capital of the ephemeral and virtual state of Palestine? Its all a question of the number of barrels of Oil you put in the balance to ensure that the state of Israel does not go belly up in the upcoming recession. The Arab spring has a potentially acrid smell of rotten almonds in store for the sons of Jehovah, if the Abbas initiative meets a hidden unsuspected ground swell by TPTB, like the Libyan sandstone Aquifer.
falak pema.
The question is will the Arab oligarchs make Israel an offer it cannot refuse to ensure that East Jerusalem becomes the future capital of the ephemeral and virtual state of Palestine?
NO WAY IN HELL THIS EVER HAPPENS
If there is ONE thing Israel will never negotiate is losing 100% control of Jerusalem.
Most of the indices on the Tel Aviv Stock Exchange posted moderate gains on Sunday. The TA composite index rose 1.63 percent to 934.07 on low volume, ahead of Monday's activity involving international investors. Leading the gainers were the oil and gas stocks, which closed at 862.63, up 2.55 percent, followed by the bank stocks, which climbed 2.15 percent to 994.88 as the financial institutions finished the first day of the trading week at 903.61, up 1.38 percent. The Maof 25 most-widely-invested issues rose 2.06 percent to 1,060.29, while the TA 100 closed at 949.54, up 1.73 percent.
The media and communications index rose 1.65 percent to 783.50 and The real-estate index closed at 255.54, up 1.55 percent the Blue Tech technology index rose 1.2 percent to 247.34, including a rise of .86 percent by the biomed stocks to 646.71.
" if you are neutral and you have 3x plays going both ways, then you can only lose 100% on one side while hopefully you make 300% on the other side!"
Huh? Not being a wise owl here but how does that work? How come 3x both ways results in 100% one way but 300% the other? And what if you pick the wrong one? Enquiring owls want to know.
I am pretty sure Phil was referring to this trade taken on Wed., which he referenced again on Thurs.,
"In fact, in yesterday’s morning Alert to Members, our trade idea for the morning was to buy the QQQ weekly $57 calls for $0.45 AND the $56 puts for $0.40 on the expectation we’d get a $1+ move one way or the other. The $56 puts hit $1.05 yesterday for a nice 35% gain on the first day but they should be much better this morning and we can take them off the table. Whatever the $57 calls make on a bounce (if any) is just a bonus.”
Later in the day, Phil followed up by writing, “Holy smokes, those QQQ $56 puts are $2.40! Now that’s a nice return considering we had no idea which way things would go yesterday morning! Congrats to all the wishy-washy players who took that one…”
So one part of the trade, in this case the calls, goes down to 0 - a 100% loss on the calls (for example). If the other side gains more than 100% - e.g. the puts in this case - then that offsets the loss on the calls and can go even higher.
Thanks for taking the time to explain it. Since it involves options, which I also don't claim to understand, I'll take your word for it :-)
this is a peculiar question, but i believe you are absolutely right. 3x letf played both ways and lose 100% on one position, CANNOT get 300% return on the other.
you could get close to 300%, like 297% but never 300%.
and i think this is because letf's are under a constant leverage trap, you are in a way, being charged a 'time value of volatility', as these letf's magnifies market volatility, a function particularly useful to speculators.
in addition it's not possible to hedge away all risks of long letf position using shorts, you would have to rebalance continously in a loop.
Owl, only way that doesn't work is if things stay static. Classic Straddle.
like taking Ohio State and the points.
Night Owl
You read it right.
Phil is a master of New Math.
It's not clear from the post but Phil's an options guy so he may be refering to options on the 3x ETFs. He often posts option postions on FAZ and FAS for instance. It's worth reading his views because he makes a realistically bullish counterpoint to the ZH spin. Bullish means he may say he thinks we are in a downward trend but the next few weeks will likely rally, that sort of thing. He's right more often than I am but I'm pretty much a permabear by nature.
Dead Fred
There are two large positions now supporting BOTH a rise and a decline. Picking which one comes frist....