[lewman]

Powayseller, I suggest you take this as a lesson to make yourself a better investor.

There will be stocks that you believe very strongly that it’s the next Microsoft giving you a 10x or even 100x return over the next decade. But the only way to get that 10x return is you put it away and sit tight through all the volatilities. Then there are those that you “trade” and you remember to set stop losses and employ tactics like those Chris described and if they get stopped out you walk away.

Re: Ivernia. You said you don’t mind the volatility but yet you’re concerned it dropped so much. Well unfortunately short term volatility is part of long term investment. What you have to ask yourself now is whether Ivernia is a long term investment.

Re: COP. It went from $63 to $58 and you consider that “way down”. Sounds like your risk tolerance level, even at the individual stock level is pretty low. As such, should you invest in stocks at all ?

In my case, I didn’t invest in Ivernia for reasons that some other people have said on this thread but did follow Zeal’s advice and launched an oil and natural gas stock campaign between apr & jul. Collectively these stocks are down and some of them have been stopped out. If they rebound from here, great; if not, the stops will do what they’re supposed to do and I walk away and try to make money elsewhere.

Good luck to both of us here.

[lewman]

Chris, you said “After you do this you then move up your stop underneath support points as prices move up. $67.02 became the most obvious support point so that is where most pros would have been out of this”.

I followed you up to this point. How did you arrive at $67.02 ? thanks.

[lewman]

Zeal launched their service pretty much at the start of the current commodity bull. Before I subscribed, I went back to look at a lot of their weekly essays and as far as I could tell, so far they’ve launched 4 campaigns 1) precious metals 2) oil 3) base metals 4) general stock market.

The general stock market campaign was launched in mid-2002 as the stock market bottomed. Too bad it was a “short” campaign and they screwed up big time.

The other 3 (or you can say one as they’re all commodities) have been generally profitable and they continue to recycle capital between profit taking and stop losses.

I would agree with the claim that so far they’ve only proven themselves to be capable of riding the commodity run and nothing else. It’s interesting to see how well they’d fare when the commodity bull ends / takes a breather.

With newsletters in general, I prefer writers that write in a way that I understand and can learn from, instead of just getting their picks. With Zeal in particular, I learned how to use what Zeal calls relativity (basically an asset’s price vs its own moving average) to help determine whether an asset’s price is resonable. I also enjoyed Zeal’s discussion of long valuation wave (basically stock market oscillates between extremes in terms of valuation like a sine wave) and I look forward to a period in the future when the S&P500 trades at 9x PEs and the headline “Sell All Your Stocks Now” appears on the likes of Businessweek. And that’s when I’ll sell my last underwear to plunge into the market.

I don’t think there’s anything wrong with not following 100% of the advice even you choose to pay for it. Newsletter advice is meant to be one size fits all. Obviously we’re all different. However, if all you care about is performance to judge a newsletter writer’s capabilities, it’s better to look at the performance of the whole portfolio, and over a longer period of time, rather than focusing on a few picks over just a few months. Warren Buffet unwound his FX shorts last year probably at the worst possible time. I haven’t heard anybody say he’s a lousy investor because of that.

[lewman]

“I’m a bit frustrated that I only make about 50% on Jan 08 puts if the NASDAQ falls 10%. I’m comparing that against simply shorting the index, which would net me 10% under the same condition, only with much less risk.”

I also thought about using shorts but am at least ruling that out for myself. Firstly, I don’t think shorting is better/worse compared to puts. I just see it as different ways to skin a cat. Putting the supposed risk of unlimited loss aside since getting squeezed on QQQQ is highly unlikely, I think put options offer what I call execute-then-take-a-vacation benefit because you know the maximum downside. Besides, what I hate the most is I’m right about the ending but was wrong about the process.

The markets are surprisingly strong at this point meaning collectively we assign a low probability to recession in 2007. Besides, the market’s track record for mid-election year bounces is just too good to ignore. So it seems that the insurance premium paid via the put option is not that bad.

“I think what I’ll do is spend HALF of what I plan to spend on options this week and hold the rest in my back pocket”

I think that’s a good strategy.

And how do you choose amongst the different strikes ? I usually stay away from out-of-the-money options and focus on options that are in-the-money a little bit, and just look at the BEP% to see if it’s reasonable (by gut feel). I wonder if there’s a more scientific way to do it.

[lewman]

vrudny, I think it’s a sound strategy. I think it’s sound because I’ve been thinking about doing the same myself 🙂

Judging purely from PEs, nasdaq is also the most expensive compared to SP500 & DJI so naturally I expect it to fall the hardest … that is assuming an upcoming recession and the market is going down blah blah blah.

My current plan is to first determine the maximum loss I’m willing to take then spread the amount across PUT options for all three indices. I haven’t looked very closely but I prefer in-the-money options so in case I’m wrong I may be able to salvage something at the end.

I’m also looking to supplement this strategy with a number of stocks, particularly those related to consumption and finance/banking. Personally I think I might have missed the boat on property and builders.

Having said the above, timing-wise I’m still undecided. You might have been following threads in this blog about the market bounce in a mid-election year which we’re in now. I suspect it might even have started and we’re in the middle of it. I think I may just wait until after the fall before I execute this.

[lewman]

1. 70% recession upcoming. Cause: housing slowdown -> elimination of equity as a form of ATM and direct and indirect elimination of jobs -> slowdown in consumption and as consumption is two-thirds (some say 70%) of US economy, impact would be big. What’s with the 30% reservation ? Again consumption. Despite recording the first full year of negative savings rate since the Great Depression, America continues to borrow and spend (I heard back-to-school sale is stronger than expected) and perhaps the trend could continue until it utterly collapses.

2. Start shorting the market except certain sectors but not yet because:
a) Stock market oscillates between extreme pessimism to extreme optimism as reflected both in stock price and valuation. History: latest bull run started in early 1980s but before that interest in stocks was destroyed (trough at 598 in Dec-74). To get there valuation has to go very low (PEs in single digits and yields double to triple today’s level). We’re not there yet and in my opinion we will eventually and the market may use the recession, if it happens, to push prices to that level. Plus mega trend stuff like the imminent retirement of boomers who would liquidate their stock portfolios to fund their requirements.
b) Why not yet ? There’s been much discussion about a bounce from the fall of mid-election year (2006 is one). In my previous post, I looked at SP500 charts going all the way back to the 1960s and found that to be true 100% of the time and that kind of accuracy just cannot be ignored.

3) a collection of hedge funds, gold-related investments, china, foreign currencies

4) reading investment newsletters is better than listening to famous bank analysts / economists

5) china … people here are just starting to get a taste of what money can do for them and are not afraid to work hard and sacrifice things that those of us in developed worlds cannot part with (like quality time with the family on weekends) … it’s a fundamental drive which I believe will translate to continued growth … short term I do believe that if the US slows down it will affect china but to what degree I have no idea … so advice is think long term and use techniques such as dollar cost averaging to reduce timing needs

[lewman]

I appreciate the post and I don’t think the important point here is to time the exact bottom. Rather, there are perhaps signs that one could use to see if we’re getting close to the bottom, or the worst decline is over, or are starting to emerge from the bottom, and therefore hopefully get a better price. Rich has a chart that plots income vs price, and I also think that would be a good set of numbers to look at. And volume, as suggested here, seems to be a good one too.

Looking forward to seeing the chart.

[lewman]

Thanks powayseller. I understand that there is unpaid interest payments for negative amortization loans, but do you mean banks are actually permitted to book these unpaid interest payments as revenue even though they haven’t been received ?

I was under the impression that banks just book the portion received and the principal amount increases and if the key is handed back to them they have to write off a bigger loan than the original loan balance.

[lewman]

I believe the market in aggreate (collection of all stock prices) does a fair job of anticipating the future. And just like everything else in life, there are exceptions at the micro / individual stock level as in the case of HR block, and people who do their homework (or insiders) can be a contrarian and benefit from it.

And EPS can certainly rise despite falling sales. You cut cost. How fast the effect can be seen depends partly on the industry. In my industry (fund management) the effect can be quick swift because the biggest contribution to cost is often people-releated … as opposed to capital intensive industries.

[lewman]

Powayseller, you said:

If WaMu keeps recording $200 mil/quarter of unearned option ARM income, by the end of 2006 they would have close to $1 bil of neg-am income, and I wonder if that entire amount has a chance to disappear.

Why would there be unearned income from option ARMs ? Could you elaborate ?

Thanks. Lewis

[lewman]

ybc’s right; I’ve been living in beijing for a year now and have been paying some attention to the local property market scene; the rules change every other month and recently new rules were published to make it harder for a foreigner to buy a flat, and that is on top of a number of recently added taxes to be levied only when you sell the property. Recently a friend (born and raised in china so speak fluent mandarin but he spent the last decade or so in the US and has gotten used to the US way of things) bought a flat; half way into escrow the property agent called my friend and said the seller wants to cancel the deal; my friend said “sure pay me double the deposit as it says on the contract and the deal is off”. To make a long story short, the so-called seller turned out not to be the title holder of the flat (he now claims he’s the brother of the flat owner), and the property agent and the seller teamed up to convince my friend to just take back the deposit and walk away. Consolation is it seems they’re at least willing to give my friend back the deposit.

Now imagine you don’t speak the language and you’re normally thousands of miles away …. hmmmmmmm

[lewman]

Rseiser,

You wrote:

The only problem I found is that when shorting I don’t get credited the dollar amount versus my stocks on margin. So I still have to pay margin interest for some of my longs, and don’t get any interest for my shorts.

I thought that when shorting a stock, I borrow stock and sell it. But the “borrowing” incurs expenses and the expenses are covered from the interest generated by the cash from the sale of the stock. Am I wrong ? Do correct me if I’m wrong.

You also said:

This makes me tend to use in the money puts, that have another advantage for the small investor that premiums are automatically deducted from your profits, so your tax is reduced without itemizing.

Could you elaborate on this ? Thanks.

[lewman]

The mid-term rally is one of the most consistent stock market patterns I’ve seen. Amazingly if you look at the S&P500 since the 1950s, your chance of making money was 100% if you follow this strategy. See my previous post where I verified this claim: http://piggington.com/stock_market_rallies_in_mid_term_election_years_2

Quite rightly so, powayseller pointed out that the data set’s not complete because we’ve never had a mid-term year imeediately followed by a recession. I also happen to think there’s a good chance we’ll have a housing-led recession, but what I think will happen is not relevant, at the end of the day I’m hesitatant to go against such a powerful and consistent trend.

For me the ideal scenario is we get a dip into the fall, then the market rally for 6~9 months then get flushed down the toilet in 2007.

Kudos to you for not going along with the herd.

[lewman]

Gold, like all other assets, do not go up / down in a straight line. Even if you beleive that it’s heading towards $2000 an ounce, it will go up, stop, come back down, consolidate in a range, then rise again.

As frustrating as it may be, gold reached its latest peak in May and it’s only been 3 months. Three months is not unusually long for gold to consolidate before it resumes its uptrend (if it does). This essay looks at the 6 up,down,consolidate cycles in the past 5 years: http://www.zealllc.com/2006/gamehui.htm

[lewman]

I agree with FSD that relative yield could be one of the reasons why investors continue to put money into REITs today. I also agree with Powayseller that if the search for higher yield is the sole reason it may not be wise as REIT investors may one day realize that while they continue to get a good income stream, the value of the underlying is eroding and the extra yield doesn’t cover the loss in capital.

Having said that, the above statement is based on the assumption that the assets held in REITs, i.e. commercial properties, apartments, retail properties will go down in value. And secondly, the corresponding REITs will not trade at a premium to their underlying assets (note that REITs are basically a special type of closed end funds and I have witnessed closed end funds rising in price despite a downward revaluation of its underlying assets).

I think most of us here agree that SFR and Condo prices will go down. Are these other property types in the same camp ?

Other than logical assumptions which we often base our opinion on, has anybody looked at the facts and statistics or have first hand experience (not the anecdotal type) perhaps because you’re in the property industry ? For example, whether these types of properties go down in value when the residential properties declined in previous cycles ?

Thanks and as usual more questions than answers.

[Author]

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