Doug's log

[Sergei Barna]

Another clarification on the Dividend Irrelevance: It doesn't matter much if you miss the dividend by selling before the ex-dividend date, say, you sold the stock the day before, but even though you haven't received a check in the mail, you've captured most of the dividend for the period you held the stock. Dividends accrue throughout the whole time period between their payments (especially if they are stable and predictable) not just the day before they are paid. You can really see this when you look at stuff like AGNC and IVR, whose underlying value doesn't change much unless there are changes in expectations about interest rates. The big drops you see in their charts are the days when they go ex-dividend and after that there is a steady uptrend more or less. That up-trend is the next dividend being accrued daily up to the next ex-dividend day. With other stocks this is harder to see because their price is affected by a lot more factors, both systematic and unsystematic (asset-specific). So the daily variation in price dwarfs the small dividend accruals, and the ex-dividend day price may not be lower by the full amount of the dividend due to a larger positive daily return explainable by other factors.

[Sergei Barna]

CME just increased margin requirements for crude by 25% ($1250 per contract). SCO might be a good play tomorrow. Oil has been kind of shaky lately, and this could send it further down, reversing today's gains and then some.

[Doug Coulter]

Errm, I've seen stocks both drop and not drop on ex dividend day, depends on if they're being traded actively by big guys for whom that little money adds up in big trades, or just held by a lot of little guys who just don't pay much attention and are long term holders, maybe check their statement quarterly if that. The markets aren't actually efficient (or free), that book learnin's going to lead you astray...This is poker, not a computer algorithm simulation, or a casino like many say. The other players affect the outcomes vastly more than standard theory tends to indicate.

That's one reason I tend to trade stocks that are "off the radar" of the big boys -- with the less well known issues I can get a better feel for the other players and beat them better. The only way I play the majors is if I see the big boys manipulating them -- then I'll catch the middle of the move they create out of thin air, and be out again as quick as I can.

We get for example, all sorts of large moves where the fundamentals didn't really change one bit -- just mood, attitude, fear, greed. And momentum. In fact, those are how I make most of the money I make. I do have rules like "never short a good company" and also "don't go long a bad one" but also "the ticker is the truth, the rest is noise". I tend to play it like -- everything has to be green for me to go long, everything has to be red for me to go short. If I'm long, I'll get out on a mood shift (by the other players) usually as I don't know how far they're going to take it -- and tomorrow is another day, I can always get long again on the next dip-recovery. Yes I miss some profits that way -- but I also miss a lot of losses too. BTE is a good example of one that makes me feel dumb -- I was trading it from $12/shr. I only doubled my money since then -- it's a 5 bagger over that same time! But "who knew" and some of those dips were scary enough to trip me out.
Luckily, I can trade large enough blocks that a couple percent is worth the trade -- commissions are nil by comparison, and a few hundred or a few thousand per trade make me quite happy.
In other words, I can make OK money off moves most would consider market noise. I do that pretty well, actually, but if anything, it messes up my head for more normal "investing" as I tend to focus too short term.

100% of the dividend paying stocks I've traded so far have only counted what you held on the ex dividend day, period, no exceptions. The ones you're discussing might be different, I can't know without more homework, but I guarantee you no other stock magically looks at your day by day holdings to award dividends, like a bank does on "average held balance" (and heck, they cheat on that using long floats on deposits and instant withdrawals). If I hold 1000 shares of BTE (not uncommon), then buy another 500 during the month, then sell all but 300 by the ex dividend day -- say the day before, I get divvies on that 300, and that's all. No one pays on time, I see them in my account statements a week or more later -- not real bad, but not "on the day". Some other guy gets the dividend on the other 1200 shares I sold before the ex day. In fact, selling on the ex divvie day is risky -- you may lose it all, and it's happened to me. Theory is one thing -- actuality is what controls what you make.

Sounds like those REITs have some very significant risk factors, which is probably why they have to pay out so much (else they are just stupid, and I doubt it). Interest rates -- they're dead. Fannie or Freddie restructuring (which is under discussion), they're dead. Some major change in the lawsuits to force bad loan buybacks, they're dead. More downturns in the housing prices so that so many people walk away strategically that the backers back out (could happen), they're dead. So it's a fine balance on a knife edge there. Back when things were failing quick, and the government was being even more interventionist than now, they were doing things like this over weekends so that the markets could "digest" the news of a major bank shutdown, or whatever.

What that resulted in was huge gaps down on Monday for lots of things, some of them only mildly related to the news -- I know, I got hammered on a couple of those -- and there is absolutely nothing you can do about it. If you had stops, they tripped. If you didn't, you could at least wait for the dead cat bounce after all those other guys stops tripped and the bargain hunters came in. But you still lost a lot. Having to hold a whole quarter on something that basically never goes up, but can go down instantly isn't real attractive to me personally -- someone else might find that fine. That's a very skewed risk distribution and it's not in your favor unless everything really goes right. Hence the need to pay out so much -- no one would bother with their equity otherwise. When things get that extreme, it's a sign to me to not fool with it, personally. I know I'm not smart enough to really understand the risk profile -- so I have to be smart enough to avoid it.

I don't worry the tax implications, as I have a non taxable account for my bigger trades -- an IRA, which provides most of my income -- I pay tax only on distributions I take, and I don't take much. I also have a cash account that I do cowboy stuff in, but am careful not to make too much easy to tax money in it (and as a business owner, can spend profits from there on tax deductible stuff) -- I rarely hold dividend stocks in it long enough to collect any of those. I've actually experienced having taken a loss, but having to pay taxes because of dividends. I'm not going to let that ever happen again! This was in a mutual fund, which I held before I learned better.

I think the risks of a continuing downturn in housing prices, and the stuff that's going to hit the rotary air moving device soon around whatever happens with the end of QE says, if you're going to fool with these, wait for a more-stable time to do it. June isn't that far off after all....we can see what eventuates then.

We can discuss what's really going on with the low interest rates and the stealth continuing bank bailout where one hand washes the other. Banks can borrow at near zero, then buy bonds, forcing up their prices -- one hand washes the other (and the bonds are good collateral for their margin accounts, sweet deal, eh?). So they borrow at 1/4 and get paid at 4 - not bad, risk free for them, and the government suddenly has a buyer for all its debt. Slick, if kind of dishonest. Remember mark to market -- all the big banks are one FASB rule away from being actually insolvent -- they are now allowed to "mark to fantasy" on all that bad debt -- many of those houses are abandoned and worthless, yet they still carry the loans on the books as good debt.
Yeah, right.

It's kind of funny that way -- they are actually insolvent now, but as long as we're not told that in so many words, and they have this pal over in treasury, we can keep the fantasy going.
Makes you wonder sometimes....And you know, if they hadn't been so paranoid about setting a precedent in taking a haircut on underwater mortgages, we'd be in a lot better shape now, and so would they...They are playing the same game mentioned above -- we'll take an actual haircut by being paid in ever more worthless dollars, fine, but not one that looks like a haircut in nominal bucks. Stupid-human trick by paper and number worshipers.

According to ToddH, there are literally several multiples of world GDP out there in bad paper of various sorts -- CDS's and other insurance type derivatives that we all know are bad -- the issuing entities could never pay if their markers were called in. Me, I say, let them fail, we don't need them despite their protests to the contrary, and look what they've done for us, or would that be "to us" anyway. No one protects me from MY bad bets, I have to take my medicine. And now I'm having, as a taxpayer, to take medicine for someone else's bad bets too. I don't like that very much. But they are better than taxpayers -- they make campaign contributions and better, provide all the thinking and sound bites for our lawmakers -- so they get pretty much what they want. I've worked in politics up to house of representative levels, I saw how it works in reality.

I think that the knowledge of this is perhaps why the big financials are in the crapper and didn't recover when everything else did. Lots of cheerleaders are saying that means buy them -- surely they'll catch up and gain 100% in the next year. I kinda doubt that's a good move at this point, because it's obvious that people in the real know aren't doing it -- these same guys are the ones who easily drive prices around, and they can't manage it on their own industry? Pretty big "tell" if we keep the poker metaphor.

At any rate, I'm going for risk-adjusted rewards, or at least trying to learn to do that. I already have the high risk/high reward thing going on in these physics projects -- what's fusion worth if we make it work? What are the chances we do? That's pretty defining. For the rest, I am just trying to fund the physics (because as John's, or for that matter Jon's, recently posted movies point out - it's fun), and can't withstand any big drawdowns, as I'm past the point of reinvesting my winnings - I'm living on them, so my philosophy has to be different than someone with a longer time horizon. I could probably just quit trading and live off my stake for as long as I'll live -- but that word probably doesn't get it for me -- hyperinflation might hit, you never know, so I try to keep the stake intact at least, which requires fairly high, but not ridiculous, returns on it.

I'm past the point of going out and getting another job -- I'm too overqualified, I know, I've tried it. No one wants a wildman CEO right now that I know of (and having had that job a couple times, I don't really want it again anyway). Lesser jobs -- no one will hire me for, they think (probably correctly) that I'll leave if something nicer turns up. So I have a different set of circumstances than most do, I suspect, I've got to make this stake do it for the rest of my life, or start another successful business, and since I know how tough that is, I'm not going to do it on whim -- and you have to have done it already by the time you need the income, most of them don't make profit on the first day, you know.

The thing about risk-adjusting rewards reminds me of some lines by CS Lewis about a blind man climbing a cliff -- maybe an apt analogy. He says you'd see this guy taking insane risks sometimes, and sometimes going very slow where there was clear climbing -- because he can't see. That is kind of how we are now -- we can't see the future too well. We can see big clouds on the horizon moving in, and can guess there will be a storm soon -- but we don't know when, how bad it will be, or if it will dissipate before getting here. As a guy who used to do sailboats, I've sure seen all those outcomes. I think the cure for this ignorance is learning -- and broad based at that. Not just which companies should do well, or where the economy is going, but also investor psychology, who's bribing who for the best laws money can buy, who's hurting in the polls and what they'll do about it -- everything. Specialization is for insects, as Heinlein said.

[Doug Coulter]

I'd short a long oil etf rather than go long a short one -- the odds favor you better that way. Because both lose value as they roll over daily, and all pay themselves fees, so it's better to short them and get that too.

What it means to me is that I might be able to get long BTE again if they get hammered enough. I think they're way overvalued right now (glad, as I got out higher than I thought they could go).
I'm not sure what their true valuation should be (not that it matters in a panicky emotional market much) but they are a dinky outfit that can only pump so much oil. They win by being risk free in the sense that they can ship all their product to us, overland, none of that middle east risk stuff, yet they get the price premium from that!

For awhile, oil was real predictable, and I made a lot of money on it. See chart:

Long term crude chart

I didn't sit long during that parabolic rise -- my bad. But what I did do is recognize this pattern -- oil would shoot up, crepitate round for awhile, then go back nearer the MA. Over and over and over (superimposed on that parabolic rise, which wasn't as obvious for the first part of it). I didn't catch each wiggle perfectly, but see where when it shot up, it stayed up for a couple weeks, then reverted? Well, there was a decent lag time (days) between it shooting up and the oil stocks following. So you could watch oil itself, but play the stocks. Quite the edge!

I've been out of oil awhile, as if it keeps going up -- it's the end of the world as we know it. Bad justification, I might as well be rich if the world ends, right? I got out of BTE in the $60's, I'd personally like to see it more like 50 (and just missed a close to that trade), but that's a guesstimate, out of my gut. They're well run and a decent outfit, good Canadian dudes, but...now that the world has found them, their stock price is controlled by things other than fundamentals, so I'm learning the new patterns before I get into them again. I used to also do real well with PBR and HES but....with the Brazillian government interference, those aren't my faves anymore. You know of course that they are partners in what is the biggest oil find, on and offshore near Brazil, since the Saudis, right? It's just taking awhile (and a lot of borrowed money from the Chinese) to get it online. Meanwhile, the local government is deciding to take most of the money from this -- before there even is any. Another wait and see for me.

[Sergei Barna]

It seems you misunderstood what I was trying to say about the daily accrual of dividends. You're right in that the company paying the dividend only looks at who are the stockholders on the dividend record day (which is two business days after the ex-div day), but the dividend is accrued by the market through price appreciation all throughout the quarter (especially when the dividend is predictable). That's why I was pointing out AGNC and IVR as an example--they trade in a sea-saw pattern--drop on the ex-dividend date and then slow price appreciation to the same level as the dividend accrues.

This is not just book stuff. The reduction of the stock price on ex-dividend day is rather automatic. In my understanding, the market makers automatically reduce the prices of all the outstanding orders by the div amount on the ex-div date. Whether the price goes up from there or further down depends on what the buying vs selling action is on that day.

AGNC and IVR pay out over 90% of their earnings, not because they are dumb, but because that's a legal requirement of being a REIT. They definitely are risky, but I think most of the risk is interest rate risk and some political risk regarding the future of Fannie, Freddie and Ginnie. I think it's easier to keep an eye on that, than to predict asset-specific risk plus macro risk for many individual stocks, even safe ones. Also it seems like you don't mind taking on interest rate risk since you trade JNK.

[Sergei Barna]

Shorting a leveraged ETF over bying a short leveraged ETF makes sense if you are expecting to hold it through a somewhat long period of ups and downs. If you are expecting prices to trend in one direction (which what I would expect with oil as a result of higher margin requiremets), it's better to hold the short leveraged ETF. A case in point, if you were to short AGQ at its closing price on 4/29 and hold it through the close on 5/5, you would've made a 50% return. Buying ZSL would've yielded 78% over the same time period.

I think buying SCO should be a low risk play tomorrow. While a rally in oil is very unlikely, there is a possibility of a cascading margin-call-induced sell-off similar to what happened to silver, although probably not to the same extent since the margin increase is smaller and there was already a 10% drop in price. I'm thinking of buying and holding it until the first increase in oil price greater than 1%.

[Doug Coulter]

Right, with the big dividend, you can see AGNC pop down on the day. The rise between is anything but linear though, more like noise. BTE sometimes does, sometimes doesn't do that, but then their divvie is smaller -- you get most of the gain from them just going up. I fooled with JNK as a standin while waiting for a re-entry point in BTE, true -- but I can't say I especially like it (and did sell nearly all of it). At least there, the interest rate risk is 1::1 more or less, no leveraged -- and it's not going to zero no matter what -- GE etc are not going out of business.

Click on this to expand it.

Looks like the move was to buy SCO yesterday at the close, sell at the open today -- it was up 3+ percent in that trade (had we made it) and is now not doing as well. Remember guys who are trading on margin are aware of margin increases -- very aware, and we'd probably be a day late -- and in this case, probably were. I notice on my watchlist on the right, however, that the cruise lines who are oil sensitive are doing great in this screenshot.

In fact, things like that are one of my premier trading tricks I want to share. Find something that is a leading indicator for something else -- then trade the something else. Nice edge. I look at futures over on ino.com, then trade outfits that are affected by them -- you often get at least a few hours heads up -- plenty for us.

Sergei -- lets move this discussion of trading vehicles to the new thread I created for it, so this stays my actual trade log.
viewtopic.php?f=51&t=355

[Sergei Barna]

yep, it doesn't look like there's much selling of crude going on at the moment. SCO would've been a good overnight play, but I think the margin increase was announced after the close. It kind of looks like that oil traders were anticipating the increase after what happened with silver, and that was partly the reason for the sell-off last week, so perhaps at this point it's priced in.

[Doug Coulter]

I did just put on a very small (100 shr) position in AGNC, we'll watch it better that way. Yeah, it's not enough to make much money, but it's also not enough to lose much either.

Edit, also picked up some GLD (100). Should never have sold the core position, so I'll admit the mistake and average back in.
And, near the end of the day, added some PALL (100) and a lot of BTE (700). Which of course fell right after I bought, sigh. I'm suspecting oil is going to bounce around the current level for awhile, not zoom back up or go in the crapper, and in that case, the BTE will go up a bit, and pay that divvie at the end of the month too. I'll be happy with +/- a few percent on that, it's a good long term hold rather than a trade, really. I *think* the selling after the big bounce is people getting out who got in higher, and taking this chance to lose a little less.

[Doug Coulter]

Well, that next day tankage of BTE sure took me by surprise, and I missed just getting out, and got stuck with a rather sickening loss, which I did not book. Instead, once it got really down, I bought more, not quite doubling down, reducing my entry price. Since, it has come back a bit, and I expect it will hover in the 55-56 range for awhile, as I expect oil to muddle around 100 also.
Nice to have plenty on the sidelines to be able to do things like that, though this usually isn't a smart move. We'll just have to play the cards we've got.

Managed to catch a little FCX under 50, which should do well, as copper is down and has one main direction it's going to do from here unless we have a real hard landing in some large economy.
It looks like there might be some issues in Peru that will create the uncertainty in supply to drive it a little. We'll see. So far this is just about the first time in a few years where the "sell in may" saying might be good -- my original sell call still stands. But I don't see any real good shorts yet - I need real conviction to put those on, and I just don't have it right now.

GS might be a candidate, but again, late to the party there. Looks like there might be some fallout from the old congressional testimony (you had to see it, some was quite funny) and the Raj insider trading case.

PALL might be a good buy at around these levels (near 70) as it's been swinging between there and the high 70's a few times lately. Depends a lot on perceptions of how the auto business is going.

But in general the markets right now look like "meh" -- no big directional drivers, ho hum news on every front, just computers chattering at one another. I would remind that the next batch of earnings probably won't be so rosy....and right now, I'm more looking for good shorts than longs in preparation for that probability.