Mid-Year Report: Is a Summer Turn-around Still Possible?

by: Philip Davis


USA Stock Train CrashI did an Index Round-Up way back on December 31st, last year where I said the following:

"Although the Dow, Nasdaq and the NYSE are well up since (my August review), we’ve lost ground on the Transports, S&P and SOX so our mission for January is clear - will the top three come down or will the bottom three come up (the Russell is our tiebreaker)."  Obviously, our leaders have turned down to meet the bad boys, all off about 15% EXCEPT the transports, who surprisingly are up slightly for the year.

I also noted: "It will only take the smallest bit of bad news to push us to retest the 2007 lows around 12,500 whch is how I agree, yet disagree with Stuart Freeman (BusinessWeek’s market forecast winner of ‘07) as he sees the Dow bottoming in the summer in the low 12,000’s but I see it going lower now and topping in the summer, perhaps close to 15,000 but we both see the year ending around 14,500."  Well, so far I’m right about it going lower than 12,000 in the first half - but can I still be right about us turning it around in the summer?

MSFT did not spur a tech rally with Vista and the SOX are not leading us out of trouble and our OPEC friends have not helped us get the price of oil down (I’ve given up even thinking that the administration will do anything) and, of course, there has been no turnaround in the financials (quite the opposite) due to a similar lack of action to address the foreclosure crisis, which marches on and on and on and on…

It doesn’t sound at all good does it and, if I were a foreign investor, I wouldn’t touch this banana republic with a 10-foot pole - and they didn’t!  Foreigners have been panicking out of US equities since last fall and have driven the Dow back to it’s post 9/11 lows at 7,200.  No, I’m not on another investing planet, on the left is a chart from Seeking Alpha of the Dow adjusted for Euros since 2001 - not a pretty picture is it?

What it is though, is a good place for a bottom hopefully as we have a solid 30% sell-off in the past 9 months and even the Hang Seng bounced off the 30% line, as it slipped from 32,000 to 22,000 early this year.  After testing 26,000 (a 33% retracement) the Chinese index is back at the lows again BUT, still up 50% in 2 years.  The Nikkei, the BSE and the Shanghai Composite are all in similar straits.

In Euros, the S&P is sitting at 8.05 on a relative scale to the May ‘07 (not October!) highs of 11.53, that’s 30% on the button, right where we were in the March sell-off before recovering back to 9.2 (a 50% retrace).  That is going to have to be our breakout goal for earnings season, back over 1,400 or bust!   Of course this will all be relative to the dollar but, if we haven’t found a bottom here at 72, then it’s time to buy gold again anyway…

Even London’s FTSE, when priced in Euros, is also retesting that March low here.  What we have is a global correction when measured against a real currency and NOTHING MORE THAN THAT.  The whole world is suffering from the same disease - oil which, even when measured in Euros, is up just under 100% in 12 months

What’s really shocking is the chart I mentioned last week, the S&P in terms of a barrel of crude.  Down from 26.88 barrels in Jan of ‘07 to 8.59 on Thursday - that’s 68% in 18 months.  How low can we go?  The Hang Seng is down 60% relative to oi, the Nikkei is off 72%, the BSE is off 65%, the DAX is down 65%, the CAC is down 72%.  Only the FTSE is "holding up" because the UK exports oil, but even they are off 32% over this 18-month period.

This is just a review so I will refrain from mentioning that the speculators have effectively sold the industrialized nations down the river in exchange for their 30 pieces of silver and that they have enabled Iran (for example) to use their 2Mb a day of exports to buy twice as many shares of nuclear engineering SGR as they could last year (they could own the entire company with 16 day’s output) or Iran could take their $280M a day and buy CCJ in 50 days.  Every 4 days we send the poster boys for the axis of evil ONE BILLION DOLLARS, and that’s just a very small portion of the 12 Billion US dollars that are exchanged for barrels of oil, which are burned, every single day - that’s $4.380Tn a year up in smoke, with 25% of those dollars being sucked right out of this country!

Even gold has dropped 50% these past 18 months when measured against a barrel of oil.  Even the CRB is off 40% to oil (and oil is a part of the CRB!).  It is sheer madness to say that this isn’t a speculative frenzy as gold is subject to all of the same geopolitical and currency concerns that oil is and that IS relevent to this review as it ALL hinges on what happens with oil over the next few months

If we continue to let the energy speculators run the global markets - we are doomed.  The economic engines of this planet are being held hostage and forced to pay an outrageous premium for the oil we can’t function without.  Still, other than the Transports and selected other industries, I do expect earnings to NOT be reflective of a 68% sell-off in the past 18 months.  I would rather have a share of IBM or AAPL for the next 20 years than a barrel of oil, I would rather buy an IPod than a tank of gas, I would rather eat than drive and we can expect those choices to be made planet-wide for the remainder of the year.

click to enlarge




As I wrote back on March 11th in "$200 Oil - Who’s Going to Pay For It?": "We are talking about the destruction of the very fabric of our society here, not a "rally."  The rise of oil is a crisis and needs to be treated as such as it will do more to destroy your way of life than a hundred terrorist attacks could possibly hope to do and it won’t change unless you demand that it change.  Our "leaders" set their agendas based on the polls, maybe it’s time we start setting the agenda…"  At the time oil was at $105 and the Dow was at 12,000.  We stand now about halfway to Goldman’s hoped for $200 mark and I think the evidence is bearing out my premise - there simply isn’t enough money in the world for oil to go up another 35%.

The G8 meets this weekend and I simply can’t believe that the leaders of Canada, France, Germany, Italy, Japan, the UK and Russia are all willing to turn over the keys to OPEC and the speculators.  Of course Russia, Canada and the UK are all oil producing nations as well.  Russia’s 12% inflation rate is running in tandem with their 14% growth rate but Fitch recently raised concerns that their economy was overheating.  We’ve already discussed the FTSE’s drop to a barrell of oil and the TSE (Toronto 300) is also surprisingly off 60% to a barrel of crude.

In short, the price of oil is helping no one but a very, very select few in the World and it’s a sad, sad state of affairs if we are powerless to oppose them now that the pain is being felt on a global scale.  That has been my position for the past three weeks and we’ve poured considerably more cash into postions as it was my call that $140 oil would not hold.  While it has certainly not been fun, it sure will be if I turn out to be right!

If I am wrong, and we break through $150 oil and we are not saved by earnings next week.  Then it will be time to make some very serious changes in our portfolios.  It’s been a very good year and we are poised to take advantage of a market rally or even a bounce that retraces as little as 20% of our losses (back to 11,600).  It’s crunch time next week and we’ve been more than patient.

We have closed very few positions, despite the pain and have rolled down a lot of the Long-Term Portfolio plays, moving more cash off the sidelines than at any point in the year so far.  This is the difficult part of following this strategy - you must buy or roll when the market is down so you’d better love your positions, as you may be stuck with them for a while! 

We took a 14% hit in our Long-Term Portfolio and our Stock Club Portfolio is also down 20% now on this 2,000-point market dive.  Our $25,000 Portfolio, dropped 29% in this short week and the $10,000 Portfolio held flat but is still down 7.4% overall.  Of course our more flexible Short-Term (up 8%) and  Day Trading  (up 49%) Portfolios did well - we don’t care which way the market goes for swing trading, as long as it goes somewhere!  Stocks and Complex Spreads were flat for the week and, for the year, our overall performance is as follows:

  • Short-Term Portfolio (Initiated Jan 1st) - Up 416%
  • Long-Term Portfolio (Jan 1st) - Up 114%
  • Stocks Portfolio (May 19th) - Up 9.7%
  • $10,000 Portfolio (June 23rd) - Down 7.4%
  • $25,000 Portfolio (Feb 19th) - Up 10%
  • Day Trading Portfolio (May 19th) - Up 79%
  • Complex Spreads (Jan 1st) - Up 350%
  • Stock Club Portfolio (April 7th) - Down 20%

    To say this has been a rough quarter would be a tremendous understatement.  I will remind members that our first $10KP of the year was down as much as 40% and ended up more than doubled and our first $25KP of the year more than doubled in January so I’m not ready to crawl into a hole and wave a white flag just yet - if oil does get to $150 a barrel, we can make plenty of money going short on… everything!


As I wrote back on the 22nd, we can always be dull and safe and make 20% a year - I certainly intend to allocate a good portion of my hedge fund to a nice, conservative strategy like that - these portfolios are risk capital and we are either sitting at the entry of a great market opportunity or in the middle of possibly the worst stock market correction since the great depression.  Our dot-com collapse from 2000 to 2003 knocked 4,000 points off the Dow (35%).  At least that took 3 years!  This market is off 3,000 points in just 9 months - 2 years and 3 months more of this nonsense and we’d better learn Farsi!

To predict the markets you sometimes have to step back and look at the big picture and, as I often say, we don’t have an economic crisis in this country so much as a crisis of leadership.  We already see new leaders rising to the challenge, people in Congress, people in Finance, State Governors, other World Leaders… are not going to sit idly by while the whole world falls apart and polls suggest the American people aren’t going to stand for it either. 

Japanese Admiral Yakamoto is reported to have said, after the bombing of Peal Harbor: "I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve" and I know many of our members and many people I speak to in business and in politics are waking up and are resolving to make changes happen.  We have been lulled into a very false sense of security after 30 years of low oil prices and this country hasn’t had something to get behind in quite some time.  I think we’re going to see a lot of changes over the next few years, whether oil comes down in price or not and I’m very excited about that.

As investors though, it’s going to be a long, hard road to turn things around if we have to fight our way out of triple-digit crude prices.  There’s a $4Tn oil industry that is ripe for being taken over by solar, nuclear, biofuels, wind, wave, goethermal and chemical industries and who knows what other industries that don’t even exist yet - that should provide a reasonable incentive to reignite the entrepeneurial spirit.  After all, we really can become as rich as kings (or at least Sheikhs) if we shift those profits from OPEC to the Nasdaq!  We’re not going to get ahead of ourselves, but it’s a very exciting time to be a long-range investor

In this very short week we mainly stood around like people watching a car crash - it’s horrible but there’s not much you can do to help until everything stops moving.  We closed just 28 positions for a 42% average gain - mainly short positions we had sold against longer contracts.  We went into the weekend a little more cautious than we had wanted to be but, after getting beaten up 3 weeks in a row, we’re more interesting in surviving than thriving for the moment.  It’s going to be a very exciting week - cash is still king but we’re 2/3 invested in the LTP and, since we are up 100% for the year, we have close to 3 times as much money invested now as when we began in January, with the Dow at 13,100.  If things go well, we could put up some really stunning numbers!






 Sale Price




$RUT 10 Jul 2008 670.00 $RUT CALL [RUYGN] LC  $  22,010 7/2  $  24,990 7/1  $     2,980 14%
AAPL 5 Jul 2008 170.00 AAPL CALL [APVGN] SC  $    3,760 7/1  $    3,740 7/2  $        (20) -1%
AAPL 20 Jul 2008 175.00 AAPL CALL [APVGO] LC  $    8,530 6/24  $    9,380 7/1  $        850 10%
AMZN 20 Jul 2008 75.00 AMZN CALL [ZQNGO] SC  $    2,710 7/5  $    5,990 7/1  $     3,280 121%
ANF 8 Aug 2008 67.50 ANF CALL [ANFHU] LC  $    5,360 5/23  $    1,726 6/30  $    (3,634) -68%
BA 100 Jul 2008 70.00 BA CALL [BAGN] SC  $    4,710 6/25  $    4,790 7/1  $         80 2%
BAC 80 Jul 2008 25.00 BAC CALL [BACGE] SC  $    2,810 6/27  $    4,790 7/3  $     1,980 71%
BHP 20 Jul 2008 80.00 BHP PUT [BHPSP] SP  $    2,610 6/28  $    5,290 6/30  $     2,680 103%
BIDU 10 Jul 2008 320.00 BIDU PUT [BDUSC] LP  $  11,010 7/3  $  12,990 7/3  $     1,980 18%
BIDU 10 Jul 2008 320.00 BIDU CALL [BDUGC] LC  $  11,010 7/2  $  13,990 7/1  $     2,980 27%
CCJ 20 Jul 2008 40.00 CCJ CALL [CCJGH] SC  $    2,810 6/28  $    3,890 7/3  $     1,080 38%
CHL 10 Jul 2008 70.00 CHL CALL [CHLGN] SC  $      410 6/20  $       690 7/2  $        280 68%
CROX 20 Sep 2008 8.00 CROX CALL [CZLIK] LC  $    4,750 6/3  $    2,390 6/30  $    (2,360) -50%
DIA 300 Jul 2008 112.00 DIA PUT [DIASH] SP  $  39,010 7/1  $  68,990 7/2  $   29,980 77%
DIA 300 Jul 2008 113.00 DIA PUT [DIASI] SP  $  48,610 6/28  $  70,480 7/2  $   21,870 45%
FSLR 20 Jul 2008 270.00 FSLR PUT [HJQSZ] LP  $  32,010 6/16  $  69,990 7/3  $   37,980 119%
FSLR 20 Jul 2008 290.00 FSLR PUT [HJQSV] LP  $  53,010 6/16  $  73,490 7/3  $   20,480 39%
GOOG 10 Jul 2008 520.00 GOOG CALL [GOPGV] LC  $  31,610 6/26  $  28,390 7/1  $    (3,220) -10%
IBM 10 Jul 2008 120.00 IBM CALL [IBMGD] SC  $    2,260 6/20  $    5,490 7/1  $     3,230 143%
MRVL 30 Jan 2009 10.00 MRVL CALL [ULJAB] LC  $    8,560 2/22  $  23,990 6/30  $   15,430 180%
POT 20 Jul 2008 220.00 POT CALL [PJNGD] SC  $    9,010 6/27  $    9,990 7/3  $        980 11%
SIGM 160 Jul 2008 15.00 SIGM CALL [MQNGC] SC  $    5,620 6/27  $    7,180 7/1  $     1,560 28%
THQI 30 Jul 2008 20.00 THQI CALL [QHIGD] SC  $    2,380 6/25  $    2,990 6/30  $        610 26%
UNH 10 Jul 2008 25.00 UNH PUT [UHBSE] SP  $      310 6/24  $       670 7/2  $        360 116%
VLO 10 Jul 2008 42.50 VLO CALL [VLOGV] LC  $    2,470 6/20  $    1,090 6/30  $    (1,380) -56%
WFMI 25 Jul 2008 25.00 WFMI CALL [FMQGE] SC  $      635 6/28  $    2,355 6/30  $     1,720 271%
XLF 100 Jul 2008 21.00 XLF CALL [XLFGU] SC  $    4,010 6/25  $    5,990 7/1  $     1,980 49%
XOM 60 Jan 2009 95.00 XOM PUT [XOMMT] LP  $  64,750 4/14  $  82,790 7/2  $   18,040 28%