?Green pictures of dead presidents suddenly have a lot of appeal,? said Art Cashin of UBS Securities.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
The next step has been taken in the coming Japan crisis. American ratings agency, Fitch, has downgraded Japanese government debt to A+, with a negative outlook. The move cut the knees out from under the country?s dubious currency, sending it down sharply.
Fitch expects the country?s debt to reach a nosebleeding 240% of GDP by year end, far and away the largest of any major country. That makes our own 100% debt to GDP look paltry by comparison. The Mandarins in Tokyo have been able to finance this enormous debt through a whole raft of financial regulations that limit local institutions to investing a large portion of their assets in Government bonds.
Regular readers of this letter are well aware that the asset base of these institutions is about to shrink dramatically due to the death through old age of the country?s primary savings generation. The problem is that there is not another generation of savers to follow them. An average growth rate of 1% for the last 22 years, and a ten year government bond yield that has hovered around 1% since 1995 mean that no one has accumulated new savings for a very long time. It is just a matter of time before the country runs out of money. In the meantime, government borrowing for perennial stimulus packages continues to skyrocket.
How long it will take this house of cards to collapse is anyone?s guess. My old friend, retired Japanese Vice Minister of Finance, Eisuke Sakakibara, otherwise known as ?Mr. Yen?, thinks that is still five years away. Hedge fund legend, Kyle Bass, says that it should have started in April. The timing of the onset of this looming financial crisis is now a subject of endless analysis by the hedge fund industry, and will be one of the big investment calls of the coming decade.
This is why I am running a major short position in the yen through the (FXY), and frequently am involved in the double short yen ETF (YCS). When the sushi hits the fan, you can count on this beleaguered currency to fall to ?90, then ?100, then ?120, and finally ?150. This gets you 200% potential gain on the (YCS). Us the recent ?RISK OFF? run to establish shorts in the yen at great prices.
Time to Sell the Yen?
This trade was an unmitigated disaster, and hopefully it will be the worst of the year. I?m glad we had one of these because it provides a wonderful opportunity to illustrate everything that can go on with a trade. Every loss is a learning opportunity, and a loss not learned from is an opportunity wasted, and dooms one to repetition. Let me count the ways:
1) I was too aggressive on the strike. I should have matched my long August $70 strike with a short May $70 strike instead of reaching for the extra income by selling the $72.50?s. I got away with this on the (PHM) trade. Not so on (BA).
2) I shouldn?t have leveraged up with a 1:2 ratio. Those who did straight 1:1 spreads did much better and slept well at night. They saw only a slight opportunity cost as some losses were offset by profits in the August $70 puts as intended.
3) I was not aware that individual investors were so harshly treated by margin clerks. Hedge funds only get charged margin on the delta plus some small maintenance, which they then continuously rehedge. Most retail investors were prevented from doing this trade by broker policies banning naked put selling.
4) The Morgan Stanley guy who decided to price the Facebook (FB) issue on an options expiration day has to have a hole in his head. That only succeeded in increasing market volatility. I?m sure that when they made the call, they thought this would make (FB) go up faster. Instead, the reverse happened. On Friday, everyone?s portfolio effectively turned into a long Facebook position, tracking (FB) tick for tick. This did not end well.
5) This was a really unlucky trade. Although the global macro situation is pretty much unfolding as I expected, I didn?t think the rot would spread so fast once it set in. Even a one-day short covering rally on Friday would have turned this trade profitable. Thank Greece for that. Facebook too. It took one of the longest continuous market moves down, 12 out of 13 days, for this trade to lose money.
6) The only consolation is that those who had puts exercised against them and saw stock delivered into their accounts Monday morning at a cost of $72.50 were granted a huge short covering rally to sell into, with (BA) rising $2.85 back up to $72. This enabled shareholders to recover 85% of their losses on the position.
Taking in the entire May short option expiration play, and it is clear that this didn?t work. Add up all the P&L?s and this is what the damage came to:
(FXE) $127 puts? +$950
(FXE) $132 calls? +$950
(FXY) $121 puts? +$1,500
(PHM) $8 puts? +$980
(IWM) $77 Puts? -$5,544
(BA) $72.50 puts -$8,708
Total?? -$9,872, or ?9.87% for the notional $100,000 model portfolio.
Of course, this loss was more than offset by the enormous profits that we took in on our long put positions in the recent market meltdown. Since I initiated the short put strategy on May 3, the long put positions added a welcome 30% to the value of the portfolio.
We did get the protection against a sideways market that had been killing my performance in April. So it did perform its insurance function as intended. As I often remind readers, when you buy fire insurance, you don?t complain to the company when your house doesn?t burn down.
The way this strategy usually works is that you make money like clockwork all year, then one bad month wipes out two thirds of your total profits. That means repeating this play will probably work for the rest of 2012.
This also illustrates how the neophytes who attempt this strategy with tenfold leverage regularly get wiped out. What looks like easy money on the outside quickly becomes toxic waste on your position sheet. The rich uncle morphs into a serial killer overnight. When I look at those miracle 100% a year track record regularly touted on the Internet, this is usually what I find.
These calculations assume that you sold your (BA) at the close on Friday, which was a new low for the year. The net loss on the short (BA) May $72.50 puts comes to ($72.50 - $69.15 + $0.24 = $3.11). This subtracts (100 X 28 X -$3.11) = -$8,708, or -8.70% for the notional $100,000 model portfolio.
Oops
?Transparency is a good idea. Like my shower door, it lets in the light, but keeps out the flies,? said former Federal Reserve governor, Bob McTeer.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.
I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.
Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.
By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.
There was enough mud on lead underwriter, Morgan Stanley?s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm.? I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don?t worry, they?ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.
I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn?t flashed a huge ?BUY? signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big ?RISK OFF? stance to a moderate ?RISK ON?. So far, it?s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.
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Holy Cow! Somehow I missed the May 4 trade alert about selling the (GLD) June $160 puts at $3.40 -- guess I didn't scroll up far enough on the ol' iPhone and only saw the alerts about (FXY) and (FXE) that day. And how happy am I that this happened, keeping me in the (GLD) puts until this morning, when I sold them at $11.15? VERY VERY HAPPY! While I was enjoying seeing the profit on that trade grow, thanks a million for sending a second alert on those puts and getting me out with big profit intact. I?m most grateful. See you at the Beverly Hills seminar next month.
A Happy Celia
In 1933, a supporter told Franklin Delano Roosevelt that if the New Deal succeeded, he would be remembered as the greatest president in history. He replied, ?If I fail, I will be remembered as the last US president.?
