At the end of the Monthly Market Analysis I mentioned how we had adjusted our attitudes thanks to the great and powerful "Paulson Plan" to bail out the sub-prime mess.
I also said I wanted to see the details fleshed out before we went all nuts and started buying too much but it seems like most market participants are not such discerning shoppers and used the government's red-tag rate extension as a sign to buy the markets up another 300 points, rather than considering it might be a going out of business sale.
This is a plan meant to buy time for the lenders and accidentally bails out a few homeowners who were going to default anyway but it's not solving much. In fact, the needs test proposed effectively targets the real middle class, already a dying breed in this country and charges them the full rate adjustment if there is any way the bank can find a way to squeeze it out of them.
Early last week we found that new home sales slumped 23.5% WHILE prices slipped 13% and that the US Conference of Mayors is looking at a further 10% decline in property values next year that will knock $6Bn worth of collections off the local tax rolls ($1.2Tn of devaluation) over the next 12 months and THAT is assuming this plan works and 2M additional homes are not foreclosed on! Also, it seems that the "plan" the President rolled out by giving out the wrong number on national TV isn't quite as good as the half-assed job we thought it was as we got this report from Nonsequitor:
"I just got off the phone with 1-888-995-HOPE–full disclosure I run a mortgage region for a large money center bank in Nor Cal (and no we dont do Neg Am or sub prime) -You really need to take some time and call these guys to truly get a visceral feeling of what a SCAM Pualson and Bush are pulling on the market.
"The lady who I spoke with was literally laughing for the first ten minutes as she told me what a joke the past two days have been—they have NO information on any program and she said the only thing that they are able to do is to REFER the person back to their lender—she could not even tell me the years that the “program” was going to cover—
I started to ask her about the the trend of calls she is seeing with regard to people going into foreclosure— Quote “it does not feel like a recession it feels like a depression” each month things just get progressively worse— I’m telling you its worth a call—- I think the way GS and C are trading today says it all."
To some extent we can imagine that GS, C et al were NOT happy about the fact that the government was not going to be giving them a handout as the money they wanted to spend bailing out the lenders had to be promised away to cancel out the AMT without raising taxes on Bush's family and friends. Continuing the $80Bn wealthfare program for the top 1% and trying to pass a $196Bn war funding bill past a reluctant Congress at the same time is a tricky business. Perhaps the financials were also just a bit concerned about the GDP report, which was so good (the "strongest" growth Quater in 4 years) that you just know it's a lie.
Spin the O provided us with this excellent link to shadwostats.com, who have compiled what they call "Shadow Government Statistics" to give us a true picture of the GDP by removing the "gimmicked methodological changes" to give us a pretty clear view of what we already feel
The GDP numbers, according to SGS, is "utter nonsense" and I wish I could post more from them but they are a private site. What is deeply disturbing here is the accelerating deviation leading to a clear break in the two lines beginning this year. This indicates additional tinkering was required to hit the government's numbers this year and there are lots of cool charts here including one showing that the M3 money supply that the government refuses to report has jumped 16% this year, an insane level, while the true CPI is actually over 10%, not the 2% reported by the administration
Yes, I know… It's clearly a liberal conspiracy so whatever you do don't check the data series and methodologies that are clearly outlined on the SGS website, unlike the numbers thrown at us by the MSM that are treated like the gospel when it benefits the market and derided as inaccurate when they tell the wrong story. Try to remember that sometimes Rupert Murdoch wants a strong economy and sometimes he wants a weak one depending on what he's buying or selling that week. Uncle Rupert takes over at the paper of record next week – I'm sure it will be fine!
Despite the 10% rise in the real CPI (and how can this surprise any rational person who looks at oil prices that are still up over 40% from last year's average, wheat and corn prices that are double and copper at a persistent ATH that is near last year's crazy highs and more than double '05s average) the Fed seems determined to cut next week on the heals of the "strongest growth quarter in in 4 years" as well as an upbeat jobs report and despite the fact that any rational person would tell you it will still be two or three months before the effects of the first rate cut can be measured. MADNESS!
Interestingly, Stock Traders' Daily points out that the joke is on the markets because there is a strong correlation between rate cuts and a DECLINING market and rate hikes and a RISING market but never confuse the MSM with facts as Clueless Narrators Backing Cuts never seem to have room for a dissenting opinion from a guest on which way the Fed should go.
So are we back in business, as last week's market action suggests, or going out of business, as recent Goldman Sachs downgrade of 13 SECTORS suggests. 33% of subprime ARM loans are overude NOW while the Dow was gaining and average of 100 points a day for the past two weeks – please point me to the part of "The Plan" that's going to help clean up these people's (8M of them SO FAR) credit ratings. How does MA hit an all-time high when so many of their clients can't even pay their mortgages? I must have slept through the chapter in economics entitled "People who can't afford to keep their mortgage current or put gas in their cars are probably busy buying durable goods for the homes they have a foreclosure notice on."
Foreclosure filings were up 94% from last year and bank repossessions are up 35% with 224,451 notices going out in the month of October. Merced, CA was the poster child for the nation's future with 1 of 82 homes in foreclosure while Nevada was the state leader with 1 of 154 homes in foreclosure statewide. Nationally, on of every 196 homes are in foreclosure and another year like this one and next fall the entire country will catch up with Merced and, according to RealtyTrac: "Given the number of loans due to reset through the middle of 2008, and the continuing weakness in home sales, we would expect foreclosure activity to remain high and even increase over the next year in many markets."
Of course the banks don't want all these homes so this whole "bail-out" is entirely self-serving as Centex CEO, Timothy Eller said: ""This looks like it's going to be the deepest correction of any housing correction since World War II." I've been saying to members for the past two days that something is bothering me and this is what it is:
Gosh that looks bad doesn't it? It kind of makes you think that a brief uptick in the data in any given month shouldn't really be a reason to jump back into the housing market right? We have the worst drop in housing prices (13%) since 1970 and sales are still plunging with a record 191,000 COMPLETED new homes unsold on the market. This is DESPITE the MASSIVE incentive programs offered by builders over the summer. "We've gone beyond the stage where some of those incentives can work," said Mike Larson, a real estate analyst with Weiss Research, an independent research firm. "We're into the stage that home builders have to cut prices to move inventory."
According the the National Association of Realtors, also know to air-brush their data, we have the weakest sales of existing homes on record AND the largest drop in prices EVER. Toll Brothers is reporting "a sharp drop in the number of homes sold and an even steeper decline in prices" while Hovnanian reported a sharp rise in cancellations (homes that were previously reported as sold that are now not) AND THOSE ARE THE GOOD BUILDERS! Moody's has already downgraded CTX, PHM and LEN to junk bond status yet people were buying them like nuts on Thursday and Friday along with everything else that had a ticker symbol.
What the hell people?
As Barry Ritholtz so accurately put it: "Unless you can show me another ~5% GDP quarter where S&P 500 profits were down 8.5%, I think the answer to this conundrum is obvious: There has been no "decoupling." What I strongly suspect occurred is that the 4.9% GDP is a fantasy, a statistical sleight of hand that is half inventory build, and half wildly understated inflation."
Also on Barry's site was this little bit of insanity showing the top 12 lenders who have $76Bn worth of loans in default (60+ days delinquent) out of the $381Bn that they wrote IN 2006 ALONE. I said IN 2006 ALONE. That was JUST of the loans that they wrote in 2006. Now, I can ask you again, who are we trying to bail out here?
Motley Fool has a great article that points out that the key provision in "The Plan" that "You do not qualify if the bank holds your loan" along with these (and I kid you not) restrictions on the borrower:
- If you have good credit, you do not qualify.
- If your rate has already reset, you do not qualify.
-
If you are behind in payments, you do not qualify
make it a bank-only benefit that will have a devestating effect on the innocent bondholders of mortgage backed securities like WFC, who had to set aside $1.4Bn for defaults in PRIME mortgages. WFC's loan virtual portfolio has an average credit score of 750, the top 40 percentile while subprime is usually considered 680 or lower.
So it's not I'm totally against the rally – something is clearly better than nothing but I think the market has swung right back from acceptance to denial of the problems and the continuing exuberance of the past few days is irrational indeed. Needless to say I could have done better if I had ignored the nagging feeling I was getting and just run with the herd but I just couldn't bear (oops, don't say bear) to do much more than switch to neutral and our performance was less than stellar this week because of it.
Monday Morning my wait and see attitude was the right one as the Dow floundered. I made a free pick of TTWO Mar $17.50s for $1.50 that finished the week at $2.10, down from $2.30 (up 53%) as well as THQI Jan '09 $30s, which finished the week where they started at $3. Tuesday was no better and many members were already getting into vacation mode as we've had a wonderful year and may as well get some shopping and family time in while we can. With the Dow down at 13,250 on Tuesday night I called on a buy of FNM Jan $35s for $3.65 which were good enough to come down all the way to $3 on Wednesday morning before jumping up to $6 on Thursday, finishing the week at $4.50, still a nice gain for those of you who don't know how to take a profit off the table.
To my great shame I called the rebound on Wednesday morning right on the nose, but I just wasn't feeling like it would last so I was way too cautious with my buying. Note to self: When productivity (or whatever economic) numbers are strong and all three branches of government are trying to boost the markets, buy first and think later because that's what most people do and being "special" may make you money in Hollywood but not on Wall Street. I may still be right but we missed some cool runs, something the skier in me knows is a bad play as you take 'em when the conditions are right as you don't always see them again.
It was Wednesday morning that I pointed out that China was tightening rates but the gap up put me off doing much that day. I also said 13,400 would be a good breakout point and we finished at 13,440 and I put our 36-hour rule into effect on Wednesday night as we began to short oil and the FXI into the run-up the next day. I read the pre-market wrong on Thursday morning as the ECB did not lower rates and we were not prepared for another 200-point move as I got caught with my pants down and said as much in that day's wrap-up.
I was so thrown off my game that I let myself get flushed out of my front-month BSC calls when they went down after Bush's 1:30 statement only to fly up 6% as Paulson smoothed things over – a pattern I had just discussed the day before! I don't even want to look at where the Jan $100s finished for the week…
By Friday morning I was in a downright nasty mood as all of the above issues were just driving me nuts and the market continued to make me look foolish and I said as much in the morning post. On the whole, there was nothing in Friday's action that put me off my so-far wrong game plan to short oil into the weekend, roll up my index puts and wait my 36 hours for the rest of the World to catch up to our bets but I did wimp out and go much more neutral than I had originally set out to do into a 400-point rally that blew out my 13,300 target. Still there are 300 Jan DIA puts and 400 Dec SPY puts open going into the weekend, not to mention 400 XOM puts so don't move me into the bull corner just yet – cash will be king if I'm still wrong about the markets next week as I simply can't buy into this rally and I'd rather take a mulligan here and take a clean(ish) look at the market after New Year's.
The Short-Term Virtual Portfolio lost $12,200 for the week (down 3%), our first loss in a long time as we shifted gears and literally ate our shorts as the run came too fast and too hard to give us good adjustments. As I wasn't buying the rally I didn't offset like I should and I very arrogantly did not adequately cover the upside of the indices as I really thought my trading range would hold, even as it was breaking on me. That's all it takes to be wrong in the market, even a very hedged virtual portfolio will take a hit if you are unwilling to go with the flow. There are 20 naked calls so we are more bullish than we were but hedged into about neutral by our index puts.
Thank goodness for the Long-Term Virtual Portfolio, which had a fabulous week as the VIX took a 10% dive and crushed our close callers despite the overall gains in many positions. The LTP posted an 8% gain on the week without a single position being touched, perhaps a little less bullish than we thought we were but very nice as it left us free to concentrate on salvaging our errant shorter plays.
Our $10,000 Virtual Portfolio stands at $11,658, up just $485 for the week (4.8%) but I'm glad we were cautious as I dread what would have happened had I gone with my instincts, which were a bit off. As we learned by watching War Games: "Sometimes the only winning move is not to play" especially when you have to chase the market in a low dollar virtual portfolio. As I pointed out to member this week though, we have $10,563 in cash yet we have $9,665 in covered calls so it won't take too much luck to do well over the next two weeks and it would take horrific luck for us to dip below $11,500, which is not terrible for a first month's performance.
Our $25,000 Virtual Portfolio hit $123,372 last week, up $5,715 (23%) from our basis for the week. Clearly this is our more aggressive of the small virtual portfolios and we are just 44% cash right now, taking pretty good advantage of the rally so far.
The Happy 100 Virtual Portfolio suffered a death by AMGN and clearly shows the difference between a covered position, like we had in the $10KP and an uncovered on like we had in this virtual portfolio as the unexpected drop knocked almost 1/2 off the postion. We are still down 10% for the quarter as even IBM's semi-recovery didn't offset the AMGN damage and we will be winding this virtual portfolio down as we can.
Boring old Stocks Virtual Portfolio gained another 3% for the week, now up 84% for the year with all 6 positions untouched for the week. Only MRB is giving us trouble but I'll be buying more on Monday if gold can hold $800. Since it's been very popular with members I've decided to initiate a $1M "Super Safe" virtual portfolio next year showcasing our various hedging strategies to pull in as near riskless a 15% return as we can.
The star of our show this week was, of course, Complex Spreads, which had a nice 20% gain on the week thanks almost entirely to our decision not to cover GOOG last week. With a broken MA butterfly and condor, this virtual portfolio is truly messy now and I'll try to impose some order on it next week but, like the market in general, I thought the run in MA was very overdone so we took out the short legs of those positions hoping for a correction.
While stunned at the gains and sitting on the wrong side of many trades, our main reaction with 2 weeks until expiration was no reaction and we closed just 55 positions, mainly winners coming off the table with an average gain of 107% and a gain on cash of 25%. This will lead to a very painful adjustment over the next two weeks if nothing changes but really, when has that happened this year?
Description
Type
Basis
Open
Sale Price
Sold
Gain/Loss
%
25 DEC 07 760.00 $RUT CALL (RUTLL) SO $ 56,260 12/5 $ 46,240 12/6 $ (10,020) -18% 10 DEC 07 195.00 AAPL CALL (APVLS) LO $ 3,010 12/7 $ 5,490 12/7 $ 2,480 82% 20 DEC 07 190.00 AAPL CALL (APVLR) LO $ 6,310 11/29 $ 11,390 12/6 $ 5,080 81% 5 DEC 07 185.00 AAPL CALL (APVLQ) LO $ 2,960 11/29 $ 4,290 12/6 $ 1,330 45% 5 DEC 07 155.00 AAPL PUT (APVXK) LO $ 1,760 11/20 $ 515 12/4 $ (1,245) -71% 5 DEC 07 145.00 AAPL PUT (APVXI) SO $ 210 11/20 $ 6,115 12/4 $ 5,905 2812% 10 DEC 07 55.00 AMGN CALL (YAALK) SO $ 510 12/3 $ 1,390 12/7 $ 880 173% 10 APR 08 57.50 AMGN CALL (YAADY) LO $ 3,560 11/30 $ 2,990 12/3 $ (570) -16% 5 JAN 08 55.00 AMGN CALL (YAAAK) SO $ 1,110 11/30 $ 1,365 12/3 $ 255 23% 5 JAN 08 55.00 AMGN CALL (YAAAK) SO $ 1,110 11/30 $ 1,365 12/3 $ 255 23% 10 APR 08 57.50 AMGN CALL (YAADY) LO $ 3,560 11/30 $ 2,990 12/3 $ (570) -16% 70 DEC 07 12.50 AUY CALL (AUYLV) SO $ 5,260 11/30 $ 7,000 12/6 $ 1,740 33% 20 DEC 07 420.00 BIDU PUT (BPJXD) LO $ 48,010 11/5 $ 87,990 12/4 $ 39,980 83% 40 DEC 07 95.00 BSC CALL (BVDLS) SO $ 12,810 11/20 $ 15,470 12/5 $ 2,660 21% 25 DEC 07 100.00 BSC CALL (BVDLT) SO $ 3,510 11/28 $ 3,490 12/5 $ (20) -1% 50 DEC 07 10.00 CFC PUT (CFCXB) LO $ 3,510 11/30 $ 5,990 12/3 $ 2,480 71% 20 DEC 07 40.00 CROX CALL (CQJLH) SO $ 7,410 11/12 $ 8,990 12/6 $ 1,580 21% 20 JAN 08 40.00 CROX CALL (CQJAH) LO $ 15,810 9/24 $ 13,990 12/6 $ (1,820) -12% 20 DEC 07 40.00 CROX CALL (CQJLH) SO $ 6,010 11/30 $ 4,190 12/4 $ (1,820) -30% 40 DEC 07 90.00 CVX PUT (CVXXR) LO $ 8,610 12/5 $ 7,990 12/6 $ (620) -7% 160 DEC 07 85.00 CVX PUT (CVXXQ) LO $ 14,410 11/29 $ 7,190 12/6 $ (7,220) -50% 100 JAN 08 133.00 DIA PUT (DAWMC) LO $ 43,500 11/19 $ 33,000 12/5 $ (10,500) -24% 10 DEC 07 127.00 DIA PUT (DAWXW) SO $ 340 11/27 $ 2,990 12/5 $ 2,650 779% 200 DEC 07 5.00 ETFC CALL (EUSLA) SO $ 4,010 11/19 $ 4,990 12/3 $ 980 24% 10 DEC 07 220.00 FSLR PUT (HJQXD) LO $ 15,140 11/29 $ 18,990 12/7 $ 3,850 25% 30 DEC 07 240.00 FSLR CALL (HJQLW) SO $ 45,010 11/30 $ 71,990 12/3 $ 26,980 60% 10 DEC 07 250.00 FSLR CALL (HJQLX) SO $ 11,010 11/30 $ 10,990 12/3 $ (20) 0% 10 JAN 08 210.00 FXI PUT (FNQMB) LO $ 5,210 10/17 $ 22,590 12/6 $ 17,380 334% 10 DEC 07 180.00 FXI PUT (FVUXX) SO $ 3,310 11/20 $ 14,990 12/5 $ 11,680 353% 20 DEC 07 680.00 GOOG CALL (GOQLP) LO $ 62,010 12/6 $ 83,990 12/6 $ 21,980 35% 5 DEC 07 650.00 GOOG CALL (GOOLJ) SO $ 25,510 11/20 $ 15,840 12/5 $ (9,670) -38% 5 JAN 08 660.00 GOOG CALL (GOOAL) LO $ 21,260 11/13 $ 28,490 12/5 $ 7,230 34% 6 DEC 07 710.00 GOOG PUT (GOQXB) SO $ 20,710 11/5 $ 26,114 12/4 $ 5,404 26% 6 DEC 07 690.00 GOOG PUT (GOQXR) LO $ 14,410 11/5 $ 15,590 12/4 $ 1,180 8% 40 DEC 07 40.00 IMCL CALL (QCILH) SO $ 6,810 11/20 $ 9,390 12/5 $ 2,580 38% 20 DEC 07 200.00 MA PUT (MALXT) SO $ 6,610 12/4 $ 19,850 12/7 $ 13,240 200% 10 DEC 07 200.00 MA PUT (MALXT) SO $ 3,310 12/5 $ 8,490 12/7 $ 5,180 157% 16 DEC 07 85.00 NYX CALL (NYXLQ) SO $ 4,810 11/30 $ 6,400 12/6 $ 1,590 33% 50 DEC 07 170.00 OIH CALL (OIHLZ) LO $ 65,020 11/19 $ 93,330 12/5 $ 28,310 44% 50 DEC 07 180.00 OIH CALL (ODLLP) SO $ 50,270 11/19 $ 37,480 12/5 $ (12,790) -25% 20 MAR 08 22.50 PFE CALL (PFECX) LO $ 3,110 11/19 $ 4,590 12/6 $ 1,480 48% 20 DEC 07 190.00 PTR PUT (PTRXU) SO $ 8,710 11/16 $ 13,790 12/5 $ 5,080 58% 40 DEC 07 116.63 RIMM CALL (RULLF) SO $ 11,010 11/20 $ 17,990 12/6 $ 6,980 63% 40 DEC 07 110.00 SHLD CALL (KTQLB) SO $ 16,410 12/3 $ 20,190 12/6 $ 3,780 23% 4 DEC 07 110.00 SHLD CALL (KTQLB) SO $ 1,650 12/4 $ 1,790 12/6 $ 140 9% 4 DEC 07 110.00 SHLD CALL (KTQLB) SO $ 950 11/27 $ 3,190 12/3 $ 2,240 236% 400 DEC 07 148.00 SPY PUT (SFBXR) SO $ 62,010 12/5 $ 71,990 12/6 $ 9,980 16% 40 DEC 07 100.00 SU PUT (SUXT) SO $ 10,730 11/16 $ 16,200 12/5 $ 5,470 51% 5 APR 08 37.50 T CALL (TDU) LO $ 1,260 11/27 $ 1,540 12/6 $ 280 22% 50 DEC 07 15.00 TASR CALL (QURLC) SO $ 3,510 11/20 $ 2,240 12/6 $ (1,270) -36% 5 DEC 07 55.00 TSO PUT (TSOXK) SO $ 4,260 11/16 $ 2,040 12/7 $ (2,220) -52% 5 JAN 08 57.50 TSO PUT (TSOMZ) LO $ 2,510 10/19 $ 5,415 12/7 $ 2,905 116% 400 DEC 07 90.00 XOM PUT (XOMXR) SO $ 60,040 12/5 $ 89,960 12/6 $ 29,920 50% 25 DEC 07 90.00 XOM CALL (XOMLR) SO $ 5,010 12/5 $ 5,115 12/6 $ 105 2% 400 DEC 07 85.00 XOM PUT (XOMXQ) LO $ 29,210 11/29 $ 15,990 12/6 $ (13,220) -45%
