Money in Options

To most people the word derivatives is just as bad as terrorism. However, when used efficiently derivatives can hedge risk and increase profits. But you can lose money on derivatives even if you assess the situation correctly. My strategy is to sell out of the money call options on stocks that have already made me a substantial gain. I want the option contracts to expire worthless but even if they are exercised I have locked in a profit and could buy the stock back at the same level if necessary. For options trading I highly recommend Option Express. Their platform is easy to use and they offer a vast library of strategies and coaching for new comers.

RIP Yahoo

First let me say that Yahoo Finance is one of the best resources for individual retail investors. Also, Jerry Yang should have taken the deal last year but founder bias played a major role. Okay with that out of the way Yahoo has sold there earning generator and might eventually be bought whole for pennies on the dollar. Yahoo has very little upside and plenty of downside in this deal. They were better off trying to partner with a web browser like Safari or Mozilla than selling the soul to Microsoft. But while it seems like shorting is common sense, I would wait. I have been repeatedly shocked on how Radio Shack is a going concern, so consenus may be wrong. They just might pull a Lazarus.

Citi's $100 Million Man

Not that I care, but CNBC subjected its viewers to three different segments in regards to Citi not paying one of its energy traders. Well, the argument seems to be because the government has a percentage stake in Citi and taxpayer money should not used to pay bonuses. Of course I disagree with this thinking. Shareholders large or small do not make compensation decisions. Even Warren Buffet cannot tell GE who should or should not receive bonuses. Also, this is a contractual obligation. Contract law must not be undermined by anyone other than the parties involved. Let the man get his millions, he earned it.

Disadvantaged Masses

Yesterday, I listened to one of my favorite television shows, Wealth Track. Yale's Endowmment Manager David Swenesen was interviewed and shared some words of wisdom. The individual investor is at a disadvantage. Many investors do not know what their IRA, 401k or ESA owns. The truth is most mutual fund managers underperform index funds. The other truth is that mutual funds want large amount of assets under management to increase the fee income they generate. The problem is that the financial service institutions who receive your weekly payments or lump sum deposits do not have your best interest at heart. The stock broker wants you to make money but he/she needs you to trade and make as many transaction as possible. The mutual fund manager needs to increase assets to make more money for themselves and the firm. Your bank wants to give your money and forget about so they can make loans without worrying about withdrawing deposits. Even thought your 401k gives you a large basket of funds to choose from, they all will underperform the index benchmark. Investors must read and educate themselves. The expert on television makes $1o million annually because you pay him to perform his job in a mediocre way. Investors must take their future into their own hands because most firms do not have their interests aligned with their non-high net worth clients. The masses are deluded if they believe that their financial institution gives them the same attention that a millionaire client recieves.

IRS Arbitrage

I have been asked this questions many times, Should I write 5 exemptions so I can keep all my money and pay the taxes back in April? While this is a great way to make a small return it is very difficult.

In theory:
1) You could take numerous exemptions
2) Multiply your weekly pay by your tax bracket
3) Put that amount in a ING Direct account or high yield savings account
4) In April pay your taxes with the balance in the savings account
5) You should have a small profit that could be compounded over the years

In practice:
1) Get more money in pay, spend more money

The problem is individuals are not discplined enough to put the money in the high yield savings account. Some feel that making $200 not enough compesnation for there effort, but $200 can get you closer to that new Coach purse or set of golf clubs.

Forget Equities, Buy Debt

Our Congressional representatives only seem to worry about reckless speculation when markets fall not when they rise. But I must stress that if investors are going to take time evaluate individual stocks and companies, they must evaluate fixed income securities. I try to read at least one book a week and in my trips to Barnes and Noble, the library and Amazon.com I rarely find books discussing bonds. But I see numerous books about stocks, which is the breeding ground for speculation. Going forward investors must purchase foreign debt and foreign government debt. I found a Moody's study which discusses sovereign debt default. In the last 30 years most defaults have been in Latin American countries, but that trend may shift to Eastern Europe countries. Diversification protects investors when they diversify among asset classes. Buying 20 different US stocks is not diversification because in crisis correlation goes to one and all stocks fall. Take time to read the study or talk to a financial advisor about international investing.



Moody Sovereign Debt Study -

30 Year Trade Recap

I am making headway in my attempt to buy individual sovereign bonds throughout the world. I am going through the process of buying bonds from the Reserve Bank of Australia. First, I will open a HSBC account in the United State then open an account in Australia. I will keep readers informed as the process continues.

Morgan Stanley 2nd Quarter

Morgan's losses were mostly attributed to paying back TARP and purchasing a majority stake in wealth management firm, Smith Barney. The latter will be a major revenue center going forward and adversely Citi will not have the extra revenue. Regional banks seem not to have the same glass half full outlook I think because they did not have the same opportunity to underwrite debt and equity like the major financial centers.

Capitalism is Back?

This weekend CIT negotiated with its bondholders to avoid bankruptcy. The negotiations were rushed due to the Treasury office and FDIC refusal to aid the small business lender. CIT may still fail because the money is enough to pay down interest and outstanding debt but the firm still needs capital to continue to earn money. This was a trade I had on but closed because the government was an uncertain wild card. Whether CIT was too little to save or not a threat of systematic risk the government must allow failure. While some argue for drastic situations call for drastic measures, this view is wrong. For capitalism to work there must be destruction and creation. The government allowing small firms to fail and rescuing large firms is the systematic problem. If capital is tied up in large failing firms, small efficient firms do not have access to capital to grow and expand. This is my stance but I still plan to buy BAC, as a trader buy the winners that will take taxpayer money and increase earnings.

Stop Wasting Money!

Great article I found on Yahoo.

Banks to Save the Day

Today the banks report better than expected earnings. I still do not believe the hype. However, I need time to evaluate my thinking. I am not sure whether I am being patient based on the facts or being stubborn based on my bias. I give the negative news a premium and discount positive stories. So, I will return on Monday with some insight. Enjoy the weekend and checkout Hustler Money Blog for some astute investments.

Everybody is an Expert but Nobody Knows Anything

I will be first to admit I have been wrong. The last three weeks my positions have lost more than they have made. In a market operation, the only way to know if you are right or wrong is to make money. Tables and charts mean nothing if your positions are bleeding. As I wait to see where CIT will open, I will probably closing some positions to satisfy my margin call and reevaluate the portfolio as a whole. Happy hunting!

The Media is Not Your Friend

While there is coverage on the soon to be Supreme court justice, I do not understand why is on Yahoo Finance. Will her one vote change the financial landscape, who knows. But the optimism in GMGMQ seems to be dying as the OTC stock fell 59.2 cents, or 51 percent, to 55.8 cents in morning trading Wednesday. My thought for the day is the news is entertainment. Many Americans watch the news thinking they are going to more informed than the guy down the street but they leave with very little. The news can help you learn about what roads not to take in the morning, major issues on the Capitol and what restaurants failed their inspection. But after 3 hours are you smarter or more informed. The news like every other non public show needs advertising revenue. If they were really there to help why do they wait until after the commercial to tell you the life threatening product lurking in your kitchen. You have to separate the useful information from the noise and this includes my favorite channel CNBC.

More Dominoes?

Impending doom , not sure but here is a list of companies that were or are on the brink. Many have declared and will declare bankruptcy. This is a starter some of this companies will bounce back and you do not want to be on the short side.

Moody's Bottom Rung List Q1 2009 -

Sorry, right click and hit full screen for better viewing.

My New Market Indicator

Unemployment, GDP, Consumer Confidence those are great because economist get paid to calculate those numbers. But pay attention to railroad transports, Baltic Dry Index and especially oil, oil refiners and oil drillers. When there is buying and spending these groups will have good news to report. When the recovery starts you will know is you pay attention. The easiest way to make money is to sell in a bear market and buy in a bull market. Why try to find the winners when the market is free falling, just short the whole list and wait for a turn.

The Insanity

When a company is in bankruptcy or retains bankruptcy counsel, that is not the time to go buy thousands of cheap shares. Stocks are never too cheap to short or too expensive to buy. I am more likely to short a stock getting kicked down than rising exponential. There was more profit in shorting old GM at $34 but when the stock was at $5 and there was talk of bankruptcy thats was a good time to short as much as you can carry. But investors lose billions of dollars seeing a large pull back in a bad stock and buying thinking, "This stock was trading at $50 a share 8 months ago, it is bound to go to at least $25 from $2". While I have seen marvelous rebounds, I have seen more cases of investors pushing a stock down because there is a problem. But there is always money to be made in the market.

Laughing to the Bank

Last month, I mentioned investors should look for short positions in public traded banks by looking at FDIC reports. On July 1, Habersham Bank received a “cease and desist” order. Unlike many cease and desist orders, this one came from Georgia Department of Banking and Finance instead of the FDIC. The order states that the bank must come up with a plan to maintain adequate capitalization. However, bank management claims they have more than sufficient liquidity. We shall see.

Disclosure: I am short HABC.

CIT

This is a great trade, this stock will make money, either long or short.

Bond Market Watch

After seeing billions of corporate bonds (mostly high yield) come to market and garner a large amount of subscription, the trend seems to be trending down. Borrowers issued at least $11.5 billion of debt this week, a 39 percent decline from the five-year average for the second week of July, and compares with $20.4 billion last week, according to data compiled by Bloomberg. Following the record pace of investment-grade bond sales during the first half of 2009, issuance may fall as borrowers cut back on capital expenditures. Yields over benchmark rates on speculative-grade debt widened 27 basis points this week to 1,079 basis points, or 10.79 percent, as of yesterday, according to Merrill Lynch’s U.S. High Yield Master II index. Yields rose 16 basis points to 13.14 percent.
Regal Entertainment Group’s Regal Cinemas Corp., the only junk-rated company to issue debt this week, sold $400 million of 10-year, 8.625 percent notes that paid a 560 basis-point spread, Bloomberg data show. The company is based in Knoxville, Tennessee. High-yield companies issued $4.26 billion the previous week. Rather than watching the Dow daily pay attention to the high yield market and whether new issue spreads are widening or tightening. In my opinion that is a better leading indicator. The link is available for the full Bloomberg article.

The 30 yr Trade

Over the last 30 years, if an investor had put their money in the S&P 500, they would have made 1.70% less than their bond (10yr treasury) counterpart. The table below shows how the 10 year has performed versus the S&P index. I do not believe this trend will continue. My solution is to invest in a basket a sovereign debt throughout the world. I would include the BRIC countries, Germany, Australia, South Africa, Thailand, one or two Middle Eastern countries and of course the United States. While I can think of many other nations that should have tremendous GDP growth, this is not a trade to call and brag about to your neighbor. The key is return OF capital. The other important issue I want readers to take away is, you could have paid no commission and slept soundly for 30 years and still beat most of the money managers on the Street. But there are no shows on CNBC about buy treasuries. Great article from WSJ discusses the misconception of long term investing.


Treasuries Outperform

zzzzzzzz10 yr TreasurieszzzzzzS&P 500zzzzzzzzAnnual Diff.

30 yrszzzzzzz9.40%zzzzzzzzzzzzz7.70%zzzzzzzzzzzzzz1.70%

10yrszzzzzzzzz6.80%zzzzzzzzzzz-3%zzzzzzzzzzzzzzzzz9.80%

5 yrszzzzzzzzzz6.20%zzzzzzzzzzz-4.80%zzzzzzzzzzzzz11%

1 yrzzzzzzzzzzzz9.70%zzzzzzzzzzz-38.30%zzzzzzzzzz 48%

Source The Leuthold Group

Blowing Bubbles

The government and regulators want to protect the consumer. As oil raised passed $140 politicians and regulators wanted to cap the price of oil because hedge funds and speculators were driving up prices. But as oil dropped off a cliff, no one stepped forward to stop the sharp drop. There is a bias to any active the impacts the masses negatively. By trying to cap oil from rising, a fictitious price will be held until the bubble breaks causing the true price to be revealed. I am opposed to cheating and unfair play, but allowing individuals to put their capital at risk is the basis of capitalism. But an outcry rises when employees lose 401k money or soccer moms pay $4 at the pump. Capping prices is a failed policy, America needs to tighten up!

One Day

JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44 percent from September 2007 to February 2009. Meriwether, credited with generating billions of dollars of revenue at the former Salomon Brothers in the 1980s through so-called relative value trades, returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index.

JWM Partners was created in 1999 by John Meriwether more famously known for his earlier hedge fund creation Long Term Capital Management. To learn more about LTCM read "When Genius Failed", LTCM lost $3billion dollars in 3 months.

No More Sitting on the Fence

I do not have a crystal ball, but the market as a whole is heading down. The green shoot argument is dead. In an Op-Ed section of The New York Times by staff writer Bob Herbert. “No Recovery in Sight” was the heading and his opening sentence asked, “How do you put together a consumer economy that works when the consumers are out of work?” While many argued that the labor market numbers were lagging indicators and a sharp rise is a sign of the ending of a recessionary cycle. But today the American Bankers Association released data showing a rise in home equity and credit card delinquencies. Delinquencies on home-equity loans climbed to 3.52 percent of all accounts from 3.03 percent in the fourth quarter, and late payments on home-equity lines of credit climbed to a record 1.89 percent, the group reported today. An index of eight types of loans rose for a fourth straight quarter, to 3.23 percent from 3.22 percent in October through December, the group said. Delinquent bank-card accounts jumped to a record 6.60 percent of outstanding card debt in the first quarter from 5.52 percent in the previous period, a signal unemployed borrowers are relying on cards as falling prices erode the equity in their homes. More borrowers are using cards to meet daily expenses after losing their jobs, the ABA said. Lets not forget that the "Stress Test" parameters might be breached by early August when GDP comes in lower than expected and unemployment rockets pass 10%. Already politicians and advisers are calling for more stimulus. Well, I will sleep more easily at night having short positions than waking up hoping the futures are higher. Hope never made anyone money!

What happened to the Toxic Assets?

From September to December of 2008, everybody was an expert on toxic asset clean up. Recently, everybody has been an expert on cultivating green shoots. This is the folly of the media, they are able to distract the masses while causing amnesia. I know the jobs number was worst than expected and the economy is not showing the signs of growth I am looking for. But I was told (correctly or incorrectly) that the problem was housing and toxic assets. Well, foreclosures are rising, home prices are falling and the market is ignoring the PPIP. But maybe I am ignorant of the real facts, if that is the case my 5 long positions will be short positions as soon as Timmy lets us know who is participating in the PPIP.

Change of Plan

I mentioned in a earlier post about changing your positions as facts and circumstances change. But let me differentiate between changing facts and changing your mind. As the economy picks ups or continues to decline traders should adjust. But when your positions starts to lose money do not change a trade into an investment. Also, if the movement (earnings, acquisition, dividend,etc) takes place or does not come to fruition move on to something else. Traders enter the market optimistically and when fortunes turn, they become Warren Buffet reading annual reports and dissecting financial statements to reaffirm their position. I believe in proper fundamental analysis and long term investing. However, the trader must know themselves and there trade or investment. Also, the trader should establish a limit sell or stop loss BEFORE you buy or short. Establishing a sell or stop after can be a costly error if the trader lacks discipline.

Short Sellers (Part of the Axis of Evil)

The Demons of the Street intent on destroying shareholder value, causing panic and starting unfounded rumors to drive down prices. They are portrayed as Un-American, but is it unwise to bet that the roller will shoot a 2, 3 or 12 or bet on the do not pass line. Why is it unwise to not profit when you see a faulty strategy or execution in a business plan? I am fully aware that short selling is in asymmetrical and loses can be infinite but it has and can be extremely profitable. I have 5 stocks, courtesy of Barron's Short Alerts:

JCOM
MIDD
CMP
LRN
PTV

I am not short and do not own any of the positions above. However, the only position I am considering is Pactiv. The company has $1.35B in debt and $152M in cash. In what I believe will continue to be a credit retraction, PTV will have problems rolling over debt and issuing new debt. However, there are many companies with similar balance sheets that have seen rising equity prices. My recommendation is a starting point not a definite trade. Also, if the market ramps up and begins to rise, I would cover whether I am right or wrong. Short selling is profitable and you should keep an eye out for failing companies.

End of Recession?

As California plans to send out I.O.Us and add to days employee furloughs, there seems to be more pain ahead for the entire nation. There are 48 out 50 states with budget gaps, ranging from $140 million to $13 billion. While the United States Treasury can hold Treasury auctions every week, states must balance their budgets. With dropping personal incomes, reduced sales tax and falling home prices the problems keep compounding. The question is to tax or cut spending? Either option will cause constituents to spend less or receive less state add. Why do economist see GDP growth when there is going to be retrenchment within individual states?

TABLE 3: SIZE OF TOTAL FY2009 BUDGET GAPS
	Gap before budget was adopted	Additional mid-year gap	Total	Total Gap as Percent of FY2009 General Fund
Alabama	$784 million	$1.1 billion	$1.8 billion	22.2%
Alaska		$360 million	$360 million	6.8%
Arizona1	$1.9 billion	$1.8 billion	$3.7 billion	36.8%
Arkansas	$107 million		$107 million	2.4%
California	$22.2 billion	$13.7 billion	$35.9 billion	35.5%
Colorado		$1.1 billion	$1.1 billion	14.2%
Connecticut	$150 million	$1.9 billion	$2.1 billion	12.2%
Delaware	$217 million	$226 million	$443 million	12.2%
District of Columbia	$96 million	$583 million	$679 million	10.8%
Florida	$3.4 billion	$2.3 billion	$5.7 billion	22.2%
Georgia1	$245 million	$2.2 billion	$2.4 billion	11.5%
Hawaii		$417 million	$417 million	7.3%
Idaho		$452 million	$452 million	15.3%
Illinois	$1.8 billion	$4.3 billion	$6.1 billion	21.4%
Indiana		$1.2 billion	$1.2 billion	9.1%
Iowa	$350 million	$134 million	$484 million	7.6%
Kansas		$186 million	$186 million	2.9%
Kentucky	$266 million	$456 million	$722 million	7.8%
Louisiana		$341 million	$341 million	3.7%
Maine	$124 million	$140 million	$265 million	8.6%
Maryland	$808 million	$691 million	$1.5 billion	10.0%
Massachusetts	$1.2 billion	$4.0 billion	$5.2 billion	18.5%
Michigan	$472 million	$1.5 billion	$2.0 billion	8.5%
Minnesota	$935 million	$654 million	$ 1.6 billion	9.2%
Mississippi1	$90 million	$363 million	$453 million	8.9%
Missouri		$542 million	$542 million	6.0%
Nevada	$898 million	$561 million	$1.6 billion	19.9%
New Hampshire	$200 million	$50 million	$250 million	8.0%
New Jersey1	$2.5 billion	$3.6 billion	$6.1 billion	18.8%
New Mexico		$454 million	$454 million	7.5%
New York	$4.9 billion	$2.5 billion	$7.4 billion	13.2%
North Carolina		$3.2 billion	$3.2 billion	14.9%
Ohio1	$733 million	$1.9 billion	$2.6 billion	9.4%
Oklahoma	$114 million		$114 million	1.7%
Oregon		$442 million	$442 million	6.6%
Pennsylvania		$3.2 billion	$3.2 billion	11.3%
Rhode Island	$430 million	$442 million	$872 million	26.6%
South Carolina	$250 million	$871 million	$1.1 billion	16.3%
South Dakota		$27 million	$27 million	2.2%
Tennessee1	$468 million	$1.0 billion	$1.5 billion	13.4%
Utah		$620 million	$620 million	10.4%
Vermont	$59 million	$82 million	$141 million	11.6%
Virginia	$1.2 billion	$1.1 billion	$2.3 billion	13.8%
Washington		$1.3 billion	$1.3 billion	8.5%
Wisconsin	$652 million	$1.0 billion	$1.7 billion	11.7%
Wyoming		$119 million	$119 million	6.8%
TOTAL	$47.6 billion	$63.2 billion	$110.8 billion	15.3%
1 Only the low end of the estimated FY09 gap for these states — ones that provided a range of estimates — is shown in this table. For more detail see 29 States Faced Total Budget Shortfall of At Least $48 billion in 2009 available at http://www.cbpp.org/1-15-08sfp.htm. Note: In some cases all or part of these shortfalls have already been addressed.

Express Yourself

Before I express my opinion let me say that I have absolutely no idea when the recession l will end and really I do not care. I will take long and short positions based on my analysis and experience. But calling the recession is pointless if one does not profit. So if Dennis Kneale believes his claim he should go buy the SPY, SPY calls and any instrument that will benefit when the recession ends. Rather than attack the data I will take a different approach because data can be subjective based on an individual's beliefs and bias. I believe that the market is biased towards optimism. As the markets crashed from late December 2007 until May 2009, guest came on CNBC and recommended buying stocks on a scale of 10 o 1. Rarely, you saw a guest continue to doubt a rebound and even less likely to recommend short positions. I do not know why the market is obsessed with owning stocks, my feeling is that a large portion of money in the game is on the long side. Other large players make money on transactions so they only care about volume and trading activity. Short sellers are despised and even threatened with jail when a poorly run institution fails. But while I do want people back in work, food on tables, care to the sick and other benefits of life, it would be foolish to allow my optimism or desire of a better life for others to influence my trading and blind me to objective facts. Bottom Line: Everyone should leave the belief of the American people and hope for a better future at 9:30 am and pick it back up at 4 pm (of course Monday through Friday).