Phil's 2007 Review

 |  Includes: DIA, QQQ, SPY
by: Philip Davis

It wasn’t a very good Santa Clause rally to end the year - we’re right back where we started from, just over the top of my 13,300 level but Wednesday’s move gave us the perfect chance to exit our positions as planned and we’re ready to face the new year with a leaner and meaner set of portfolios.

The Short-Term and Long-Term Portfolios have both been reset to $1M, the Stocks Portfolio is down to just (MRB) at $250,000 to start the new year and, Complex Spreads have been dropped to $500K (pretty much all Google) and the Happy 100 has $100,440 in cash plus just 40 (NASDAQ:AMGN) $52.50s so at least we’re going to get our money back! On the 18th I’ll be using that slot to start a new Free Picks Portfolio for our new newsletter subscribers - the last Free Picks Portfolio we ran was one of our best performers of the year.

Our $10K portfolio held flat for the week at $12,838 (up $200) but we raised a little cash and that was our main goal. The $25,000 Portfolio rocked on with a $5,400 gain to $158,582. More importantly, we raised our cash level to $87,822 (55%) which is a level I can live with over the holiday weekend.

We’ve had a fantastic year, making really great gains but there was luck AND timing that made our gains truly epic:

January was uneventful and we had just broken over 12,500 in February but, in my 2/25 Weekly Wrap-Up, I noted: "We started the week with Super Market and ended the week with Clark Kent." That Tuesday the WSJ had said "the mood is downright bullish" to which I replied "I hate to hear that kind of talk, it’s often the sign of a top when everyone starts telling you how great the markets are" and I warned that "this sub-prime mortgage problem is NOT going to go away." That certainly won the award for understatement of the year!

The following Monday, after reading my column, Alan Greenspan agreed with me and said the R(ecession) word for the first time. While the reaction that day was muted and the market held 12,632, the next day the Asian markets collapsed and we followed them down, dropping 400 points on 2/27. This was all fine with us as we had accumulated a whopping 40 naked puts leading up to that drop.

Down at 12,200 I was already in a bargain hunting mood and the 2-week consolidation around that level led us to build many long positions even as we cashed in all of our very successful puts. I laid out a game plan on Wednesday the 28th that is a good idea for new members to review as it discusses some fundamental strategies for finding bottoms.

We did indeed turn into happy bulls for the remainder of the spring, as the Dow took off and zoomed all the way to 13,500, I thought the last leg up to 14,000 was a little premature and we took it off the table in early July as we closed our membership for the summer. There were a ton of overriding issues I thought we were ignoring and I said on 7/15, with the Dow at 13,907: "On the whole, a failure to consolidate between 13,500 and 13,600 only increases the chances for a painful correction (13,500?) ahead." 11 days later, we were back at 13,500, on the way to 12,800.

I had called for a cash out the week before the crash and we picked up another large batch of puts, even as we broke through 14,000 for the first time. Aside from the fact that I was going on vacation, I simply did not like the way we were getting there. Google (NASDAQ:GOOG) had "disappointing" earnings and I may have been a little premature but we did a BUYBUYBUY on the dip, leading to one of our best plays of the year as we scooped it up around $500.

Option Sage and Happy Trading filled in for me when I was on vacation in mid-August and Sage hit the bottom on the nose on the Aug 15th stating: "Well today the Fed abstained from injecting liquidity and we saw the result. Personally, I hope for some panic selling so we can shake out the last of the nervous investors clinging by fingertips to existing positions." At 3:50 am on the 16th, my comment from France was: "If we do turn here I’ll start building Oct $131-3 calls as a hedge but I will use the opportunity mainly to stop out of my puts and move to more cash as I’d rather maximize my flexibility for next week."

Sage wrapped up the day, when the Dow spiked down to 12,500 by telling us it was "Better than Pig Wrestling" and my morning comment from Monte Carlo, with the Dow at 12,845 was: "Sticking to my plan from yesterday so puts (and sold calls) stopped out, leaving me 90% cash and very bullish on remaining positions, now way up due to yesterdays WTF. I followed through with my strategy and dumped the puts except for what is now my (NYSEARCA:DIA) Sept $130 puts which I will crank up into the close to cover my very bullish remaining positions. I AM NOT VERY BULLISH - my stops just made me that way!"

I was not bullish enough as we ran back to 14,000 but, come October, I got downright bearish again. We had that totally amazing play on (NASDAQ:BIDU) early in the month, the kind that makes a whole portfolio some years and we followed that right up with a fantastic trade on (BEAS). Flush with all those early gains, it’s no wonder I was eager to take the money and run in October. I didn’t like the "Paulson Plan" from day one on 10/15 as we were sitting right at 14,000 and neither did the rest of the market as we dove 500 points that week.

We had gone into the weekend of Oct. 13th with the Dow at an all-time high and 700 naked DIA puts and 200 (QQQQ) puts and, with the overall bearish posture we had taken, the Short-Term Portfolio gained 28% on Monday’s 200-point drop - you can imagine what happened by the end of the week as we completed the 500-point dip!

We had a nice bounce into the end of October and kudos to Andrew Wilkinson, who wrote on 10/22 (ahead of Apple’s (NASDAQ:AAPL) earnings): "A look at the delta on these calls indicates that while the odds are 50/50 of Apple shares trading above $180 in the first month of 2008, there’s less than a one-in-three chance that Apple will see the ball drop on $200 by that time." Now that is good targeting - we briefly touched $200 but couldn’t quite break on through to the other side!

Despite Apple’s great numbers, I was very suspicious of the larger market bounce, saying: "Notice there is nothing in these notes regarding fundamentals, as they haven’t changed. At this point, we are in the mode of "What doesn’t kill us makes us stronger" as any bad news the market shakes off serves to feed the myth of invincibility required to sustain the rally. The problem with this game is that we are running with that market story while at the same time whining and crying for the Fed to come save us. It’s hard to be the damsel in distress AND the knight in shining armor - who do you kiss?"

I was looking very wrong as we headed into the last week of October with the Dow back at 13,800 on the 26th and my put positions were starting to hurt but this picture says it all as I kept hammering on my theme that I did not like the little bounce we were taking off of 13,500 as it came too quickly and easily for it to have been a proper correction.

Despite my bearish posture during the month of October, we had decided that the Dow was the way to go and set up a special Dow Portfolio that gained 30% in 30 days but enough was enough on the 26th and I shut it down as the market was just too crazy for me to keep going with the ridiculous flow. That turned out to be good timing as we made it through Halloween by yadda-yaddaing all the bad news but November 1st was VERY scary as the market dove 400 points in one day, even though the Fed gave them their rate cut.

(NYSE:XOM) sealed the deal with a miss (another play we had bet heavily on) and the Dow marched all the way back to 12,700 by Thanksgiving. Once again I switched sides as the last 300 points of the drop seemed overdone, with GS leading the attack on C and other financials, and we decided to play the upside for a trading range of 13,000 to 13,300 through December expirations. After a really wild ride we finished December 21st a bit higher than planned at 13,450, mainly because the Dow gained 230 points that day but a miss is a miss…

That led us up to this very dull week where the year ended up once again looking more like Clark Kent than Superman. Sure the Dow gained 1,000 points (8%) but that’s a distant 3rd to Germany and China with only pathetic Japan, who have been in a 20-year recession, underperforming us as one of the world’s economic leaders.

Of course the Dow and the S&P underperformed the Nasdaq but we expected that as my comment from Jan 2nd for this year was: "As a recommender of corporate purchases, I see a very big tech year ahead as there is a lot of pent-up demand for new computers that has been on hold for 2 years as we wait, and wait, and wait for Vista. We will continue to wait for service pack 2 to make real purchases but the IT guys will have at it as soon as we can get them in and we should get the green light to start buying by the end of this quarter."

We also came much closer to the final GDP with our 3% prediction than 50 "leading economists" who said 2.5% last January. We anxiously await this year’s prognostications so we can make fun of them too! I did call for Dow 15,000 by July 2008 and I’ll give that a lot of thought this week as I gear up for Predictions 2008.