Wednesday Ramblings: Things That Make You Go Hmm

by: Philip Davis

We had an interesting Chat session this morning so I think I'll share.

As it's sort of the anniversary of the big crash, we were discussing my historic bottom call when I was on TV doing LiveStock with Tim Sykes that afternoon and we ended up making 13 bullish calls that were up 469% AVERAGE just 6 months later. Not that it took a genius to pick the stocks (GE, DIS, XLF, AMZN...), that was like fishing in a barrel using a nuke - everything was going to go up - the real trick is pulling the trigger - that's the hard part.

It doesn't happen very often but this is why we like to stay around half cash in our main portfolios - you never know when a huge opportunity will present itself. It's also why it's so valuable to have those downside hedges.

Like currently, we have just 50 DIA puts as a hedge in our Income Portfolio but that's because it's new and it's well-hedged and we are mostly in cash and we don't have a lot of profits to protect at the moment and, if the market begins to crash - we'd be happy to take small losses and get back to cash or DD into better positions (as we initiate 1/4 positions in general anyway). But, back in Jan of 2008, we were at the top of a massive run and back then, in that Long-Term Portfolio, we had 250 DIA puts protecting our positions. We had started with 50 DIA puts but the market kept going up so we rolled them and doubled them and rolled them and doubled them and THEN there was a big crash and the puts saved our assets.

That post evolved into "How to Solve the Housing Crisis Tomorrow" on April 16th of 2008 so yes, we at Philstockworld considered it a crisis long before the MSM did. In fact, I sold my real estate data business at the end of 2004 - that's how early I called it! Anyway, a year later, still nothing was done and I wrote "For Timmy G: How to Solve the Housing Crisis TOMORROW" and props to Mr. G for inviting me and a few other bloggers to meet in Washington where, as noted by Steve Walman:

Phil Davis, who made clear that his remarks were from the perspective of bank investors, thought Treasury was doing far too little to defuse the housing problem. He pointed out that even if the financial reform bill is beautifully crafted, its full implementation will take up to three years, during which the banking system will remain in peril, largely because of tenuous mortgages.

Sadly, this all came up because, 4 years later now, we are STILL discussing tenuous mortgages as an underlying economic problem. In fact, we have now added tenuous student loans ($1Tn an counting) to the mix because the college costs that used to be paid for by refinancing a home are now burdens placed on the students at much higher rates. As usual, the banks win and we all lose. In answering a Member's comment as to what can be done to help homeowners (other than low rates), I said:

Think about what's happening, they are telling people who have $400,000 6% loans that they don't qualify for $400,000 3.5% loans - even if they are making their current payments. If the Government simply fixed that - this economy would take off like a rocket. The banks are able to quickly refinance at low rates but not their customers. Also, of course, there are all sorts of nonsense charges involved when refinancing. You need title insurance again, which is ridiculous and they usually do appraisals, also ridiculous and then they charge you application/origination fees, etc. All BS charged to the consumer and enough money that it prevents the most needy from going through the process that they desperately need to save them money.

One stroke of a pen and the Government can force banks who want to borrow for 0.25% to ADJUST EXISTING LOANS to 3.5%, with no fees and no searches - there is no reason other than corporate greed for banks not to pass along those savings to consumers - savings that those same consumers are going into National Debt for to provide subsidized rates to those very same bankers.

Madness, right? Anyway, we had a great time yesterday shorting oil at $93 and $93.50 (and I mentioned right in the morning post, so don't complain that we only give good trade ideas to our Members)and again this morning, we caught another ride down from $93 to $92.50 in Member Chat. At $500 per .50 move per contract - we can afford coffee with our Egg McMuffins this morning!

We also went long on Silver (/SI) at $29.05 and caught a very nice pop to $29.19 and, while that doesn't sound like much, silver contracts pay a whopping $50 per penny (margins are a bitch at $10,450 per contract) so a nice $700 pop there with an obvious stop at $500 and a reload on the next cross over $29.15 would be the way to play it.

We could also flip long on oil (/CL) at $92.50 until it breaks and it's almost certain to climb ahead of inventories at 10:30, where we expect to go short again (and see yesterday's post for USO and SCO ideas for you non-futures players). As you can see from the chart on the left (thanks StJ), we're very confident in our long-term bearish view on oil and, while it may drag the energy sector (and the market) down in the short run - in the long run, $70 oil would be fantastic for a recovery. As I noted to our Members:

Note how they refuse to project further drops, which makes no sense as CAFE standards alone raise the fleet to 35mpg (from current 22) by 2020 and 54.5 (no, I am not kidding) by 2025. So tell me, how does that chart stay flat if the same cars that were getting 22mpg in 2012 are getting 54.5 in 2025. Also, what about other possible improvements in the use of solar or Bill Gates' fusion project or something? That's why I love the long-term short on XOM - they are a lot deader than AAPL in the long run.

I cannot stress enough what a great trade bearish on oil is likely to be today. As I said yesterday and as I said at $103 last year: If the NYMEX crooks are stupid enough to pretend to want oil delivered to them at $93 per barrel in April, we are more than happy to take their money and promise to deliver it to them. Oil is up $2 from last week, when we had a build in inventories and traders are looking for a draw this week as imports have once again been cut back to create artificial shortages and refiners have been working overtime to blend non-ethanol gasoline before the regs kick in to use less oil in making gas (more expensive for them)so the conditions are primed for a drawdown in crude this morning but, after that, then what?

So don't be fooled by a headline draw in crude today if it is offset by a build in gasoline stockpiles as that will simply indicate that more oil was converted to gas this week than last - it has nothing to do with demand which, contrary to populist opinion - still does matter when pricing commodities. What also matters in pricing commodities is the Dollar that they are priced in and the Dollar seems to be topping out at 83 and we're calling below 82.75 bullish and that means we would not want to be shorting commodities (or anything else) if the Dollar is dropping. Meanwhile, oil did just touch $93 again (8:15) and that's still a shorting line (and a nice $500 gain since we went long at $92.50) - who needs to get paid to write posts when the futures market acts like a free ATM?

That's why I want to retire to Europe, I'd be writing this at lunch-time and making my Futures trades to pay for my lunch (and the rent) each morning and then the rest of the day I'd take off. As we noted last week, statistics show that, for the average trader, trying to time the market is a complete waste of time anyway so better to just take the hit and run trades and be in cash at the end of each session while leaving long-term money in simple SPX funds. In fact, for example, you can just sell the SPX Jan 1,200 puts for $15.50 and the margin on each $1,550 collected per contract is $11,975 (according to TOS in ordinary account) and that's a 12.9% in 10 months as long as the S&P holds 1,200 (now 1,550) so you have a 20% cushion to make your 12.9%.

How is that riskier than putting your money into individual stocks? If you combine that with a few clever hedges along the way, maybe you only make 9-10% but that still beats the returns of 9 out of 10 traders and look how relaxing it is! If you combine that with a very basic money-management strategy and scale in (see our Strategy Section) and roll on the dips, you can probably stay out of trouble all the way to S&P 900 - can you say the same for the stocks you pick?

Warren Buffett ImageAnd one last point on rolling. People say, what good is it if the market drops to 1,000 and I have to roll and I only break even? This is a major problem many investors have in visualizing a strategy but, as March 2009 taught us, the trick in a market crash is simply TO HAVE MONEY TO INVEST - it doesn't matter if you are "only" even or (and I know this is confusing) even "only" lose 20% when the market drops 50% - the point is you have 80%+ of your money and you can buy stocks for 1/2 the price or less - so you can buy a lot more shares than you could have before in the exact same companies (who have already proved they can survive the crash, which was our heavy XLF logic in '09). Of course, using options like we did, you can turn 80% into 400% on the recovery - so how do you feel about those S&P short puts now? No wonder Warren Buffett sold $5Bn worth of them!

AAPL Revenue TTM ChartNow, since I'm rambling this morning (and Retail Sales are up huge), let's just mention AAPL and the very good article by John Tobey at Seeking Alpha reviewing all sorts of TA and FA on my favorite company. One thing that struck me is a chart he used to "demonstrate" AAPL's "stagnation" as they hit the "notorious S curve" in tech (left). As noted by John (and I'm not criticizing, the article is great):

By examining the following graphs, we see a maturing company, with declining growth rates in both sales and earnings. While the profit margins are still within the historic range, they are in a period of decline. Why? There have been a number of developments such as keeping the iPhone 4 and 4S products in the lineup at reduced prices or the widespread discounting of iTunes gift cards during the holiday season. This chipping away at prices adversely affects Apple's two key measures: Sales growth and Earnings growth.

BUT (and this is a really BIG BUT), you could have said the exact same thing in 2009, when the same chart looked even worse:

As with most things - it's all a matter of perspective. Same words in a different situation can convey a very different impression (like my favorite version of Baby Got Back). AAPL sure had back at $85 in 2009 and I'm not going to get into the fact that I feel the same now about it as I did when I was pounding the table at $85 at the time for most of the same reasons. Same song, different tune.

At this particular moment, AAPL is mainly down on fears that the new Samsung phone will be the nail in the "coffin" of the IPhone. I think they said the same thing about the iMac for the last 15 years although, ironically, AAPL may have finally killed the growth of the iMac (and the rest of the PC/laptop sector) with the IPad and NO ONE is seriously challenging AAPL's iPad(s) so far. As to phones - as AAPL will demonstrate in the near future - phones are so 2012...

Disclosure: I am long AAPL, GDX, TZA, CIM, GLD, BA, ALU, DBA, GLW, SQQQ, SCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly even mix of long and short positions - see previous posts for other trade ideas). Commodity positions are very short-term and not tradeable by the time you read this.