Tuesday, March 15, 2011

15 March 2011 Greed and Fear and Lessons Learned


15 March 2011 Greed and Fear and Lessons Learned

Now that most of our sell trades cleared our portfolio all we see are the bonds, the options and a couple of defensive positions JJG, DBA, GLD, SLV, and CANGX. We did take some tidy profits this morning on some PUT options on AAPL and AMZN. We checked out of WCRX after hitting our 8% down rule, but it remains on the watch list. We ante’d up for more EBIX after feeling comfortable that the down swing yesterday after a great earnings call was just a weird anomaly. (Perhaps a reverse short squeeze. NOW I swear I made that term up as I could not explain what happened to EBIX yesterday, but low and behold in March 2000 one of Cramer’s good buddies Herb Greenberg actually used the word to describe what happened to a stock called MSTR MicroStrategies.

I have to “steal” this for you as it is in the subscription side of The Street.com:"No natural cushion: A week or so ago, when many of the MicroStrategys (MSTR) of the world were racing skyward in one of those "mothers of short squeezes," I mentioned that the trouble with short squeezes is that when the shorts are squeezed out, there are no natural buyers to cushion the fall.

A few readers weren't clear on the concept, so I tried to explain how shorting works: that short-sellers borrow shares and sell them and, if all goes their way, the stock falls and they buy the shares at a lower price and return the stock to the owner. That buying by the shorts provides the cushion when the stock heads south.

A squeeze, on the other hand, pulls the shorts out before the fall, as the owners of the stock demand that the borrowed shares be returned, forcing the shorts to buy stock and get out of their positions.

Still don't get it? Take a look at MicroStrategy yesterday, where the short-sellers had been squeezed out by the time yesterday's bombshell was announced: That the company had been booking too much revenue upfront. (You know the shorts were gone -- or mostly gone -- because short interest in early February, just before the stock made its final push upward, had fallen to 1.29 million shares from 3 million a month earlier. Short interest presumably dropped even more as the stock more than doubled since then.)

With no shorts left to buy, or to cushion that fall, the only surprise was that the stock tumbled only 62%, as sellers tripped over one another trying to be first out a very narrow door. (Add the heavily margined nature of many of these "yeehaw-squeeeeeeezzzzzeeeee-them-shorts!!!!!!!!!!!" message-board posters, as Cramer has been pointing out so well, and you get an all-out implosion. "The stocks are down 50% before you can get the first trade off," chortles one short-seller.)

Anecdotal evidence suggests shorts had abandoned such companies as Rambus (RMBS_), which dropped 19% yesterday after an item here raised some red flags; Lernout & Hauspie (LHSP), the voice-recognition software company known for its "momentum" press releases, which dropped 12%; and Terayon (TERN), a cable-modem maker, which was off 9%.” Please consider a subscription to the Street.com as there is tremendous value in their alerts and it is a great resource for investment education. Really!"

So we are sitting at 35.5% bonds with an average yield of 7.2%. (One is a tax exempt muni so the yield is a teeny tiny north of there when you consider tax adjustments.) Then we are 24.5% defensive ETFs and ETNs as mentioned. There is 4.5% in 31 call and put option positions. (Most of these are WAY down. Learn more in lessons learned.) Then we have 3.2% in equities. That leaves about 29.6% in cash.

Fear and Greed

There are only two things that drive a market in any direction. Any guesses? Earnings, earnings growth, low debt, cash, dividends, share buy backs, positive news? Nope. The ONLY thing that drives the market in any direction is Fear and Greed. “How cynical”, you might say. You can make money in the market without being greedy. You can just be well read and opportunistic and do quite well. You can be cautious and protect your capital.

Opportunity is just greed dressed up in a Tom Ford Tuxedo and caution is just fear clothed in an Elise Saab Mermaid Gown.

 (Whoa! Flash back to way too much time watching the red carpet arrivals at the Oscars.) But let’s face it, fear and greed is what make the market move.

If inflation were permanently pegged at 2% and all the nations of the world came out with the God, Allah, Buddha, FILL IN THE BLANK deity Bond fund guaranteeing 5% return forever, with in minutes someone would be looking for a way to hedge or leverage that fund with credit default swaps or ETFs in order to get 5.0001%. It is human nature.

Today we saw the face of fear. It may be justified it may not we do not know. It does not matter. It would be a heck of a lot scarier if the Nikkei index dropped 17% and there was no earthquake, Tsunami, or radiation scare. No one knows what tomorrow will bring and that means there is fear.

Lessons Learned

So many, where do I start. We mentioned that carnage in our option holdings. In the last year we have spent a decent sum of money learning the options market. We still have a long way to go. My goal is to retire some day and be able to manage and protect my capital and provide enough income to eat the gourmet dog food and not the generic dog food. I have often found that analogy annoying for if you investigate it, Dinty Moore stew is cheaper than most dog foods, but I digress.

Here is a piece of my long and expensive learning curve. When you buy call options (The right but not the obligation to buy that stock at a pre-determined price on a pre-determined date.), don’t buy them out too far. We bought a bunch of VXX options in November-February for a January 2012 options expiration and it has gone down and stayed there. The reason is because no one cares and it is so far out (Still 9 months) that there is NO pin action on the option so every day we sign on and see this great big ugly RED number staring me in the face showing a minus 89% return. We assumed that when the third largest economy in the world got whacked by an earthquake, Tsunami, and nuclear accident, that the needle would have moved a bit for the VXX options. Well, the March 19 options are going crazy up and the April options have quite a bit of pin action, but the January 2012 options have gone from a minus 89% to a minus 77%. Lesson Learned.

Salve Lucrum


Post a Comment

<< Home