3SOF

Quote from: BigSully1 on March 15, 2008, 02:32:12 PM
I don't really know how David is tracking his portfolio performance now using margin and leverage, but frankly I am rather surprised that it "only" shows a 23% loss with so many 40-70% individual losses.

Hey BigSully, David wrote on 3/14/2008:
"(note: the Main Portfolio is actually rising a bit today, but its calculation has some bug. I've called Ramsburg to fix the problem)." Maybe this helps to explain.

For a short term view: The Fed's emergency assistance to Bear Stearns concerns me. Is this the only failure lurking in the bushes. BS assured everyone they were OK and BAM 2 days later Bear Stearns may be on its way out.  As someone posted earlier, who will be next?  Could this happen again? It looks as if we are still riding the elevator down, b/c I think the financials will drag us down. Thanks for sharing your thoughts, i hope you enjoyed mine. May we have a big fat rally with the Feds help and the new IPO VISA next week.

Obviously someone knew something was up days before Friday's Bear Stearn sell-off.

Here's an interesting take on the sell-off

http://aaronandmoses.blogspot.com/

Saturday, March 15, 2008
What sank Bear Stearns?

Bear Stearns was taken to the very brink of insolvency over the past 24 hours by a sudden collapse in confidence on the part of its hedge-fund clients.

There was a wholly modern hedge-fund run on the investment bank.
Here's how it happened.

One of Bear Stearns's most profitable businesses was its prime brokerage, which provides lending and admin services to hedge funds with a fixed-income bent.

These hedge funds deposit their assets at Bear Stearns, which the investment bank uses as a source of liquidity.

But – according to a banker close to Bear Stearns – in the last day or so a number of those hedge funds decided to terminate their respective relationships with Bear Stearns.

They were spooked by the rampant speculation about Bear Stearns' fragility and its supposedly excessive exposure to US mortgages.

The hedge funds stampeded to withdraw their assets, so the investment bank was deprived of a vital source of liquidity.

That's why it had to go cap in hand to the New York Fed for financial succour.

Perhaps the most shocking aspect of this episode is that help was in sight for Bear Stearns at the very moment the hedge funds pulled the plug.

As of March 27, Bear Stearns would have been able to exchange its illiquid holdings of mortgage-backed securities for high-quality, liquid US Treasuries, under a scheme announced last Tuesday by the US Federal Reserve.

That would have provided Bear Stearns with sufficient liquid funds to continue as a going concern.

But its hedge-fund clients weren't prepared to stick with it even for 13 days.
It's a very frightening manifestation of the nervousness of even sophisticated investors such as hedge funds.

In today's highly uncertain markets, they are not prepared to give an 80-year-old Wall Street firm the benefit of the doubt for even a fortnight.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/03/how_hedge_funds_sunk_bear_stea.html

Or maybe a bunch of hedge funds bought puts on Bear Stearns and then decided to jump ship. Anyone remember the 50,000 March 35 puts bought at .15 when the stock was at 60? For a cost of $750,000, these puts, that closed at $9 on Friday, were worth $45,000,000. Add in the exceedingly heavy purchases of the 50, 55 and 60 strike, and you are starting to talk real money.

Dr. J had this to say about BSC last week:
Bear Stearns (BSC) volatility in the front month March calls now tops 160 for the at the money 60 puts. Volatility in April at the money options is also sky-high, pricing at 125%. As a metric for comparison, the 100 day average volatility in Bear Stearns was 55%.

We've got very active put buying all the way down to the March 30 puts, but the institutional paper is trading in the March 60, 55 and 50 puts. In other words, the amateurs are buying up what they perceive to be "cheap" puts below the 50 strike, but most professional paper is more realistic.

The April 55 put (BVDPK) are up $3.90 to $6.00 on double the open interest. Volume tops 6,300 puts at this strike, against 3,200 open interest. Just how desperate are the put buyers?

Well, my DepthCharge shows buyers of the January 10 puts of 2009, where nearly 3,000 puts have trade up $.55 to $.85, a gain of 185 percent on the session. Like the action in Washington Mutual (WM) we cited Friday, this is bankruptcy fear rearing its ugly head in Bear Stearns, folks.

On the session over 95,000 puts have changed hands in BSC, or nearly five times the open interest in the first 2 ½ hours of trade.
http://www.optionmonster.com/#action=home

Only in this market, where nerves are so frayed, can a "run on the bank" start and end so quickly.

I'm going to sell DUG tommorrow. I'm not sure, but I think DUG is akin to shorting oil and gas companies and I don't want that, when I think they are  reasonably priced and should continue to do well. Instead, I want to be short crude oil futures and I intend to short USO.

QuoteI don't really know how David is tracking his portfolio performance now using margin and leverage, but frankly I am rather surprised that it "only" shows a 23% loss with so many 40-70% individual losses.

Hey, what's the matter with you, raising suspicions about the Main's performance?

The Main was down 23% before the hedge or margin was put in place and it is now down 22.49% in 2008.

The Main's value was $408,812 in January 31st, 2007. The following trades were closed in 2008:





And the open positions are as follows:



The current value of the Main is $339,260, down 22.49% in 2008.

The hedge (short 3,800 shares of IWM) is a huge position with a size of 74.1% of the Main, which isn't fully compensated by the long exposure which is 58.2% of the Main. Therefore the portfolio is actually net short.

Quote... so many 40-70% individual losses.

So many? And what about the 50.8% profit I made in GIGM, the 40% in SILC, the 85% in SDTH (just 1.8% position here), the 93% in PAL? These were all in 2008.

On SYX I lost 48% and I'm losing also 48% on IMMR. And then there are those two penny stocks where I'm losing 51% and 70%, but remember, those were initiated as 5% positions.

I'm not sure what's your problem?

The S&P futures are down 30 points as I write ...



... with the futures at 1263 the SPY would open between $126 and $126.5 ...



... so right at the crucial technical support!

I wonder if BSC will open around $2 a share (probably). That would be down 93.3% from Friday's close Well, Bear Stearns now has a weight of just 0.03% of the S&P 500 ... but I guess Bear's news will have an impact across the whole financial sector, which represents roughly 20% of the S&P 500:



Hmm, now I wonder, since I'm short the IWM (Russel 2000 tracker stock), not the SPY, if the IWM will go down as much as the SPY today ... what's the percentage of financials in the Russel 2000? I can't find that information.

Anyway, on the long side the Main also doesn't have anything related to the financial sector so I think I'll be allright in today's storm.

Suggestions for a good ultrashort guys?!

Quote from: Se7en on March 17, 2008, 04:32:42 AM
Suggestions for a good ultrashort guys?!

You can check them all here Se7en: ProShares

I was going to say that probably today isn't a good day to initiate your hedging strategy Se7en (because the general market will open sharply down), but it appears that the open won't be as bad as it seemed a few hours ago, as people continue to hope that the $126 support will hold the market. Maybe the open will still be a good selling opportunity, like it happened in Germany this morning.

By the way, the DAX didn't hold its support, this is a signal that the S&P500 will have a hard time holding on to its own:



I wonder what tricks, if any, the FED will pull out today or tomorrow to prevent the stock market from breaking down below this important support area. The problem is the FED made it clear that it was trying to support the stock market, so if it fails ... it will lose all its credibility. Investors will lose confidence in the authorities and will bail out in mass. It won't be a pretty sight.

This Bear Stearns news is really bad because it raises red flags for the entire market and the current valuations. Two sessions ago BSC was worth more than $60 a share, it closed at $30 on Friday and on Sunday the company was sold for $2 a share What does this tell us about the other investment banks and the general market valuation? Investors can be pricing stocks way out of whack with their true value.

We'll see what the next few days bring, I'm better hedged than fully exposed.

Oil's steep decline -- falling $4.17 to $106.04 a barrel on the New York Mercantile Exchange -- came hours after futures rose to a new trading high of $111.80 on the Federal Reserve's surprise Sunday move to lower a key interest rate by a quarter point. In the past several months, Fed rate cuts have fueled rallies in oil prices.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Interest rate cuts, and even the prospect of future cuts, tend to weaken the dollar further.

But the mass selling Monday -- despite the Fed's Sunday rate cut, the prospect of another cut at the Fed's regular Tuesday meeting, and the fact that the dollar dropped to new lows against the euro on Monday -- could be a sign that the oil market's momentum has turned negative, analysts say.

The FED has to defend $126 on the SPY at all costs and everybody knows that. The market went down to that support level yesterday and bounced strongly from it.

Today we have the futures up significantly ahead of the FOMC interest rate decision, to be released as usual at 2:15 pm ET. Market participants are expecting the FED to cut rates by 100 basis points, bringing the FED funds target rate from 3% to 2%.

The FED is taking really aggressive steps, using most of the weapons and munitions it has in a very short period of time. I personally dislike Bernanke's course of action. I used to trust him and his ability, but his recent moves changed my views ...

Now I recall what he said when people were taking 2nd mortgages on their homes and making those refinances to get cash for immediate consumption, he said something like this:

"People are just diversifying their assets, taking some equity out of their homes and using it for investing in other areas or consumption.". He thought it was actually a good thing. The same for derivatives:

"Derivatives spread the risk across more different players. They reduce the risk for each individual financial institutional."

Also, he doesn't seem to understand financial markets very well. He probably never traded futures or stocks. He's trying to support the stock market but these efforts are futile over the long term ... his rate cuts before the open and on a Sunday show lack of experience and understanding of the market dynamics.

I'll always remember that day when the markets were nosediving and while the market was open the FED comes in and cuts rates by a surprise 50 basis points. It was January 3, 2001. The Nasdaq went from negative to positive by 14% ... If Bernanke wants to gain time he should do things well at the right timing to really squeeze the shorts.

Anyway, the one who's being squeezed today is me with this huge short position in the IWM.

But I feel the market will feel disappointed even if the FED cuts the full percentage point. It will tank in the afternoon.

I'll remain hedged, as I'll keep holding the IWM short position. 

I think that cutting the rate of 100 basis points is as committing suicide, this will give the weapons again to people to manipulate the market and devastate it again with junk bond, sub-prime etc.

American people just look at the short picture and does not understand that cutting again will produce a long term disaster.

Keep my fingers crossed.

I agree about buying DUG. I'm no expert,but don't you short what's been going up? Shorting the market in Oct would have been a contrarian call,but the right one. What's the right one now? The best trades are the hardest to make.
                                 I still believe this. Why hedge at or near a bottom? When we're back over 14000 on the Dow and there are only blue skies,that's the time to do it. But what do I know?

Quote from: soxguy on March 18, 2008, 03:34:26 PM

I agree about buying DUG. I'm no expert,but don't you short what's been going up? Shorting the market in Oct would have been a contrarian call,but the right one. What's the right one now? The best trades are the hardest to make.
                                 I still believe this. Why hedge at or near a bottom? When we're back over 14000 on the Dow and there are only blue skies,that's the time to do it. But what do I know?

You probably know more than I do, I hope so

QuoteWhy hedge at or near a bottom?

It looks like the bottom, but the trend is bearish, as evidenced by the 50 days SMA on the chart below. Everything points to the bottom in sentiment terms.

But, when homebuilders and banks fell 30% from the top, everybody was bearish on them ... and everybody was right, because indeed, fundamentals deteriorated a lot further and stocks went down a lot more.

My take is the same thing is happening with the general market now. The conventional wisdom of "contrarians" is wrong, as it has been the case in several markets over the past few years ... I still don't know why this has been happening, but it's happening, in my view.

Is it that thing that "democracy is good, but too much democracy is bad"? adapted to "capitalism is good, but too much of it can be nasty"?

I don't know, these questions are too big for me.

I'll let the market guide my actions ... as it is now, the IWM is stuck between the descending 50 days SMA and the horizontal support just above $64.2. Unfortunately I think we'll eventually break $64.2 to the downside ... but I can be wrong, as I thought differently just a while ago and I've been a loser.

I'll keep this hedge for now.

Good luck

This hedge has been inflicting considerable pain on the Main Portfolio but I'm not throwing down the towel on this one.

I've been studying the bulls and the bears arguments and the bears seem right to me.

Basically the bulls arguments refer to sentiment and technical analysis. They're calling a bottom because the SPY held $126 and bounced strongly from that level. I attribute this market action to the FED's involvement.

The bears arguments are more of a fundamental nature. They point to the future for banks, credit, consumer spending and employment. I believe that the full extent of this crisis remains to be seen and unfortunately will take a lot longer than currently perceived.

Of course, the market can do whatever it wants without the slightest regard for my or anyone else's opinion, but given the current situation, what I would like to see to turn long term bullish again, would be:

1 - A sharp rise in interest rates, due to inflation or the need to protect the USD's value;
2 - A sharp reduction in consumer spending;
3 - A rise in the savings rate.

The investments of the future will have to come from savings, not credit. The FED is using all its weapons to maintain the status quo, but it will ultimately fail in my humble opinion.

The SPY closed right at the 50 days SMA. We'll see where it goes today.

It's possible that I'll have to "cave in" again, but for now I'll keep holding IWM short position.

David:  What time frame are you looking at in reference to the statement  "the full extent of crisis remains to be seen and will take a lot longer than currently perceived" ?  We have been in current downtrend since end of September.  You know what my 'opinion' is from my posts on the 'cave in' thread.

Poli

It seems to me that if a person really wanted to hedge a microcap portfolio such as David's by shorting an index ETF, then IWC - Russell Microcap Index, with holdings having an average market cap of $390M would be a much better fit than IWM - Russell 2000 with average market cap of 1.3B. I don't believe any of his holdings are even in the Russell 2000.

Even so, I wouldn't be short on any of them at this point. Buy low, sell high.