I am so happy we loaded up on TSO and XOM puts!
We're not out of the woods yet but I'm very glad that we pressed, rather than panicked out of our positions on Friday's ridiculous run-up based on the Kirkoren news. On Friday morning, as I was advocating shorting the hell out of TSO at $65 I said: "I’ll tell you what bothers me about TSO – why would he announce he wants to buy 28M shares at $64 with the stock at $55. That is irrational behavior, he’s not buying the whole company, just 16% of it (and now he’s paying for 17.3% worth). The scam is that Tracinda already owns 5.5M shares and now all he has to do is say they couldn’t come to an agreement, dump his 5.5M shares ahead of earnings and he gets away clean while everyone else eats the stock. That’s my theory and I’m sticking to it! Earnings are on the 1st."
This was a follow-up to the $10KP and $25KP virtual portfolio review from the 19th, where my comment on TSO was: "TSO (11/1) – I will drink the gasoline if these guys have a good quarter!" TSO is a west coast refiner and crack spreads on the west coast are down 60% from last year – I don't think this makes for a complicated thesis… That's the difference between being a fundamentals trader and a momentum trader, fundamentals traders can make huge returns, if they can stick to their guns when the momentum swings against them!
Things could not have gone better yesterday as we were able to get the YHOO Apr $32.50s we wanted for just $4 (we hedged then with a 1/2 sale on the Nov $30s at $2.60) and our new Focus Put candidates, XOM and WYNN, both gave us fantastic entry positions for our puts. This is a good pair trade as oil is at the point where it will break the economy so either oil pulls back or frivolous spending (like travel and leisure stock WYNN) will suffer.
Asia suffered a very mild pullback this morning with the Hang Seng gaining just 51 points (anything less than a 200-point gain is considered a bad day for them) and the Nikkei went down all day long, finishing at the low of the day but down just 47 points overall. PTR got Yahoo-like sell on the news action after raising $8.9Bn in their China IPO. Like Yahoo's Alibaba, the real fun will come when the shares start trading in Shanghai on November 5th.
Over in Europe, UBS lost $700M, compared with a profit of $2Bn last year after writing down $3.5Bn in sub-prime loans (is anyone keeping score as we move to my $200Bn goal?). They also had a $3.5Bn trading loss as they tried to do what GS did so well by hedging their losses but without Goldman's good timing. All these losses came on "just" $37Bn worth of sub-prime exposure and UBS warns that there are more write-offs to come in Q4. As we discussed last week, with over $1.5 Trillion of US sub-prime exposure (and we are pretending the rest of the housing market ($6T) is a bowl of cherries), that ratio of losses will blow my $200Bn loss target out the window in no time!
Europe is trading off overall with several earnings misses and a pullback in commodities. Also an issue in Europe is increasing pressure to reign in hedge fund activity and the U.K.'s Financial Services Authority said yesterday that it is starting a formal assessment of the safeguards hedge funds have in place, after an initial review showed some don't have adequate controls. The financial markets watchdog — which supervises the activities of U.K.-based hedge-fund managers, though not the offshore funds they typically manage — said it had been disappointed by some of what it had found on recent visits with managers to see how they prevent market abuse.
MER, who lost over $7Bn this quarter in the sub-prime market, is replacing their CEO so I expect a VERY large Q4 loss over there as the new guy takes the opportunity to heap all the company's trash on the previous administration. That makes MER a SELLSELLSELL no matter what kind of relief rally they get off this news. Let's grab the Apr $70 puts at $6.40 and sell the current $67.50 puts IF the stock goes over $67 but buying them back if it falls again if they get back to $3 and flipping to selling the $65 puts if we have to but I think someone will realize MER is rearranging deck chairs on the Titanic and the stock will see $60 soon.
Home prices fell yet again, the biggest drop since 1991 and yadda, yadda, yadda – who cares, it's Fed day tomorrow so let's go with the flow today and have some fun!
