Doug's log

It appears some of us are interested in the business of trading, hopefully for both fun and profit.
Here's a place to talk about that. I suggest two main categories. How to trade (timeless), and what are you trading now, and why, and how it turned out. Those tend to be missing from the pro boards, so pundits can have selective memory....but that's not all that is important. Being wrong is part of the game, and how to handle it and make money anyway is crucial, for just one example.
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The usual. Be nice, be informative, tell it like it is.

Re: Doug's log - sell

Postby Doug Coulter » Wed Apr 27, 2011 2:29 pm

Hectic day, and the sedatives aren't doing much good it seems. Forget the markets as a whole, look at GLD, SLV, MCP, CCJ, TMV, FCX...some wild action, and that's what I owned this AM (along with some JNK).

Sell. The good news is that after a couple of excruciating days holding silver and even buying more with big red numbers showing, I pulled it off and got out with a small profit. Further, on those and other trades, I made my monthly "dole" with a little extra.

The bad news is:
Stocks almost always go down the day after the Fed, and today is a doozy there in some odd ways. The markets are in such complete random panic that what's going to happen next is completely unpredictable even to the hair on the back up my neck (standing on end) and my gut (sinking feeling). Much less the crazy ticker action. Lots of people on both sides of every trade (good, someone's doing stuff and paying attention) but very little agreement on which side of the table to be on. I think this presages a move that could be quick and brutal. Question is, which way? If I was pretty sure of some near term down, I'd be getting short the markets overall. But I'm not, at least as of 3:30.

I prefer to keep a lotta dry powder when I feel like this. I "lucked into pulling one off" in SLV but I really shouldn't suggest doing that to anyone who (needs to) listens to suggestions.
Both I and Todd were right on this one, at least for now -- when I got out last, it was a good move after all, I think. That "get just one more" thing was cowboy-stupid and that was luck, not skill so much (except to hold a little longer and catch a bounce).

Same on MCP. I'll keep a "watch this" amount in my long term account...but my cash account -- gone, about 2 bucks a share -- a trip to the grocery store ++.

Still waiting for BTE to hit a buyable price again. That was the buy and hold stock of the entire recovery -- a five bagger. I did maybe half that trading it...but "who knew".

Sure there are philosophies that say, well, next year, holding this or that long would have been good. Thing is, they usually emit such statements after the fact, and ignore the ones they made that didn't pan out. And most who really know, rather than say later "who knew" if they're honest, either don't know or are saying get the heck out of commodities. What's funny is they may be wrong, but suddenly there are enough of them saying that to make it come true -- temporarily -- due to their followers. Funny old world. Long term of course, commodities are going to track inverse dollars and increasing demand, and the usual unexpected events (which of course you should expect some -- because assuming normal is bad never happens is optimistic, but not very accurate, there are always bumps in the road). Which is why I won't short them now, but I will simply get out for a bit.

Today we're seeing some crazy divergences -- OBV (on balance volume, and I plan a long post about that one as an indicator and how the errors various platforms make in computing it affect things) going up, while price dropping in the percent/minute speed -- or vice versa. Other indications that things are happening faster than even the quickest react to in a balance.

Since I'm where I'm at -- goals reached this month, all but the long term stuff (GLD, JNK (but going to kill that soon), CCJ == out with you. Yes, I'm keeping some 10 shares of this and that, it helps me watch and gives me records, but believe me, they wouldn't take us to the grocery store -- no money, no risk. There will be better times to be long or short, for now, it's time to watch a little fireworks, grinning with a lot of dry powder to jump on anything cool, but not too quick -- look before you leap for the moment, or maybe a goodly number of moments.

Time to put this to bed for awhile, and go do some more science, which is more fun lately, if not yet remunerative.
I'm in over 2/3 cash right this instant, and it might be a bit more by the end of the day.

Yes, I know I'm not getting to this timely enough for people to get the same trades. Sorry about that, you'd need a webcam to track this quick enough. Now, if I only had more guts....If I'd made all the exact trades I've made this year, there are people out there I wouldn't have beaten, but not many. And I'd be able to hang it up for the year and still not touch principle. Something I'm trying to learn the balance on myself.

Good luck out there, and stay nimble.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log

Postby Doug Coulter » Thu Apr 28, 2011 12:27 pm

Mostly out of things, just watching to stay ready.
Found a couple of interesting pix today:
pp4285.jpg
No, it's no different this time.


And, yeah, someone with honest price policy:
pp4281.jpg


Might have been a little ahead of time with that 200 mpg go-kart/hot rod. But only a little. It's a lot more beat looking today - it gets hard use, but it's still useful indeed, as in today when I went out to survey the storm damage we had. We were lucky, a few trees snapped off, a couple direct lightning hits on the lab, which only shortened my lightning rods a little, but the next door neighbors more or less lost half their house when a massive tree uprooted and landed on it. So we'll be up there helping them for a bit.
That's how it works out here - if you wait for government "help" you might wait awhile. If you need real help, well we just handle that amongst ourselves and leave the inefficiency and wasted time out of it.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log

Postby Doug Coulter » Wed May 04, 2011 9:53 am

Well, I followed my own advice and got nearly all the way out of everything yesterday, even sold half the gold, and all the palladium, most of the JNK. Looks like I called the silver right all along(!) -- some skill, some luck. Here's a good post mortem on that one.

See, this is really all about psychology, and the observations in the linked article are spot on. When everybody is all in, the first one who is smart and wants to sell - no one's around to buy, they're all in already...and we see what happens in that case.

I'm keeping a watch it amount of MCP which has sure been thrills and spills. I remarked to my wife at breakfast that I should either sell what I have or buy more - it was up wild in pre market.
She said sell. Didn't do either. Oh well -- maybe she's got more on the ball than most suspect. Back to watching the roller coaster, quite dramatic if you have a strong stomach.
Screenshot-15.png
Fun morning, kind of


Markets "feel" twitchy now. I suspect a lot of fallout from the sudden drop in SLV -- a lot of hedge funds got truly hammered, and held thousands of tons on margin -- much more than you can move quick without taking the market with you. I suspect their margin calls got the better of them, causing other selling. Metals, precious and industrials, are all getting hammered. So is oil, a good thing for most (and I've been out of it for awhile, waiting - key to this game is waiting for the right setup). I can't see why gold is getting hammered, the dollar is still dropping. I'd guess it's forced selling, and might be a buying shot here in the next few at a nicer entry price -- again. That's how I play these guys, not super long term (usually there's better stuff for that) but the fear-on, fear-off trades. My survival, financial and otherwise, doesn't depend on anything so flakey as the markets, or believing that this or that can't go down, ever....deliberately.

One way to measure "twitchy" is to have a big watchlist of all sectors (along with the per sector specialized ones). I have such a list, and every morning sort it in order of gains. If it's more than half green, it's a good day for things in general, and the obverse. If it stays sorted -- and usually with one sector's stocks at one end or the other, it's smooth sailing no matter how much green or red there is (you just go with the flow -- if it's all red, short!). If I have to re-sort it every few to keep the red and green from mixing -- "something is up". Doing this every day, one also notices which things tend to be at the top or bottom (highest beta) and that things that are at one end today, often as not are at the other end tomorrow. Good trading tip in general.

I suspect the crummy jobs report didn't help much, along with worries that Ben might actually keep his word and end QE (I suspect he will -- for just long enough to let the market tank so he can save it again).

Went short the nasdaq for a little bit (less than one "unit") as that seems a good bet to make a cartload of groceries today, but looking at things, should have done the dow instead today. I want like crazy to be short Sony -- hate their guts over their corporate behavior and a serious tanking couldn't happen to a more deserving outfit (already did to MSFT, but their PR/spin machine and fanboys seem almost invincible, they can't seem to go up, but they seem to manage not going down most of the time). But trading the news can be tricky -- they might pull out a PR victory by firing someone sacrificial and I'd be stuck in a bad trade for a long time. Watching AAPL too in that regard. Nothing much against them -- but their longer term prospects don't seem that fantastic anymore. Despite hating their "walled garden" approach to things -- you know, it was the only way to get people like the media on board with them for music and other things -- important for now, till things shake out further there. They are working with the lowest common denominator -- people who only consume, rather than produce content, for most of their sales after all. I think their 30% tax on everything going through them is going to fail longer term, maybe even legally with their anticompetitive structure (they won't sell your stuff unless they are guaranteed the best retail price of anyone -- in other words, if you sell through them, you have to give them 30% off, and charge any other channels more than Apple's retail prices), and that will be a huge blow.

They already have it all -- where are they gonna grow? At some point even the most rabid of their fanboys is going to realize this, and dump the stock that's been pretty flat compared to the epic growth story and move on to the next momentum play. Of course, if you bought it back in the 100's -- still seems pretty nice, but at some point people have got to notice it's not zooming anymore, and there's little reason it should. What are they going to do -- dominate smartphones? Oops, that's done for now and android is catching up -- and the entire cell phone world is in court with one another over silly patents that should never have been granted in the first place, like a bunch of hungry cannibals. Dominate tablets? Same story. iOS has a lot of copies -- but most are on iPods, a product being subsumed by other things. And, it doesn't look like they'll have Jobs a whole lot longer to "innovate" the next slick packaging of not so new tech and ideas (we can argue this as long as you want, but most of what they've made all that money on was actually stuff that everyone thought of a long while before they marketed it so well -- that's their real innovation -- getting people to "Think different" in herds, oxymoronically). So, I'm watching that one, as it's been rounding over since mid March or so. But that's longer term thinking, a macro observation. Hardly a get rich quick deal. But make a few bucks here, and some over there, and after awhile it's real money.
Screenshot-16.png
AAPL trend reversal


Assuming I've drawn the trend lines right (this is tricky) and that history goes as usual, looks like apple will touch 319 sometime fairly soon, and it's at the top of it's current trading range now. Might be late to this party -- note current top isn't rolling over like the previous two did, yet, but see that huge down-spike -- one huge trade this AM where someone really needed to get out, no matter what....hmmm. A margin call, or something else?

//////

Ok, end of day. Bought QID early, sold around lunch -- grocery cart. Bought MCP in the dip, sold at various times thereafter -- what a boomerang. Looked at various other shorts, no dice.
3 carts of groceries today, and that's with me more or less out of things -- most of the money is in the bank at this point. I did 100 or 200 share chunks of things, and picked up a couple day trade flags...worth it I think. Haven't had the guts to short any PM's yet, but hindsight shows that would have been nice to do on SLV a little while back.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log

Postby Doug Coulter » Thu May 05, 2011 10:42 am

After a harrowing day yesterday, in which I actually had to earn the money I made (negative if you count my longer term gold holdings, but I booked some profits on the stuff I was actually trading, and the long term core will come back at some point), it's a good day to be "out". Unless this is us tipping into the dreaded double dip, it's good news, actually. With oil and most other commodities going into the crapper, things are getting to good prices to buy into again -- not yet, but well along that path. I don't think demand is going to get crushed for all those things -- yet. It's just the "hot money" getting out and looking for something else for awhile, which is bullish once it's complete -- all that money will find a place to go and whereever that is, will do well again.

Unless you count Todd Harrison, who sure called silver right (a little early, as he admits) on that short, but who now has gone long the stuff. Seeing the crazy negative numbers in on balance volume there, I'd say it's quite possible it will overshoot going down and then bounce in a short squeeze -- he might be right this time too, but early as usual.

I'm just going to wait some. This AM is the first day I've been able to get out of the chair without excruciating pain in about a week -- did something to my lower back during storm damage repair, so I'm going to do things that require being ambulatory for awhile again -- they build up around here at this time of year.

Someone mentioned (a random poster on a finance board using a funny handle) that in fact the bernanke might have a clever scheme here. The equity markets have been pumped not so much due to any recovery (other than realizing the crash was overdone) but due to flooding the speculators with liquidity from the Fed. Ok, so he stops for awhile - QE2 is over soon. Markets tank (they are) - all that money has to go someplace, and if they tank dramatically (they are) then a lot of money might start demanding "safety at any cost" - and we have all these nice bonds we want to sell, instead of buying them with our printed money....I wish I could credit who said that, as it made some lights come on for me, and totally changed my thinking on a couple of things.
Be slick if it worked -- for the government and certain other parties who hold a lot of bonds already, not so much us peons. Bill Gross might have missed this one...which would be the exception, he's pretty good at that game to say the least (runs the largest bond fund on earth, great track record too).

This makes some sense. I don't have to go to bonds (yuck at these rates) and can just go short the markets when I want to, most often. The real big money can't so much, as they can't borrow the amount of shares if a lot of money wants to do that (and they don't cheat by naked shorting).

I was looking (and am still watching) for things short-treasuries to zoom at some point around now, due to the end of government demand for its own debt, but that may have been a dead wrong call. As Toddo says, be humble or the markets will do it for you.

Some fun charts, mostly for hindsight.
Screenshot-17.png
Interesting charts

You can see on the SLV chart where someone like Todd would be looking to go long. I'd wait to see SLV get closer to my bottom trend line myself, or even undershoot it -- you could then hope for a mean reversion (often happens). As Todd says, no one really knows if technical analysis works because it works, or because traders think it does and make it self-fulfilling. I do know that historically, business profits are a very mean-reverting series because there are understandable reasons for it - when profits get high, new competition tends to enter the markets, though of late, the best laws money can buy tend to damp that effect and give the big boys unfair huge competitive advantages on top of what they have already by being big. The super duper earnings and the rally they've generated should still be suspect because of this -- though the playing field isn't level, it's not quite vertical yet.

The other chart is Sony, who I'd like to be really short on, but I may have missed the party here on their debacle -- boy are they good at angering the world these days, but you can't count on them not doing well despite that.

So both of these are "who knew" kinds of things. A lot of people were figuring out SLV in the last couple of weeks (this is a classic case that will be examples in a lot of future books), but of course we don't get to see the right hand side of the charts until they happen....All the people calling the fall were ridiculed by the PM-religion-bugs - but they are the ones laughing now.
And, the bugs will probably be more or less right in the longer term -- PM's are historically good stores of wealth. But also, historically, they don't create much, just store it, and trading around other things with (usually) more beta is potentially better to a rational observer.

Lookie here -- as I and many others have said, nothing parabolic ever lasts. This is the first big piercing of the 50 day while that was itself rising. That's one big drip in the last couple days.
Not that it will show up at the pumps as quick as the rises do....
Screenshot-18.png
Oil


I might actually be able to afford to get long BTE again soon....
But for now -- it's hurry up and wait while paying close attention. let things set up nicely again before risking money.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log

Postby Doug Coulter » Thu May 05, 2011 12:45 pm

One more for instruction....
Screenshot-19.png
SLV level II


Here's the level II data on the SLV ETF. A more thinly traded one might be more instructive, and I might find one and add it, but this shows some fairly good info as is. The thing is, you really need a movie, not a still to get some of the points across.

The bright colors in the middle of the block chart are bids and asks near the current price -- people who just want a trade to happen more or less right away, or market orders a brokerage house is trying to fill, maybe a little to their advantage -- somewhat south of the law, but this is normal. Now, well higher, there are some blue ask (sell) orders just in case someone desparately wants to pay well over the momentary current price. Ditto, some low green lines -- if you'll sell me something at a steep discount, I'll take it. Note these adjust based on where the current price is, as these days trades too far off the map get cancelled. They are also small -- test orders. If one gets hit (and it happens) that entity, probably a co-located HFT trading machine, might put on more, or change the price and put on more. Either of these outliers can be hit in various circumstances, it happens all the time when there's a momentary shortage of buyers or sellers, and some market buy or sells on the other side -- you ask for now, you get now, but it might cost you.

The HFT guys if they get hit on one of these outliers, can simply wait a few seconds and close the trade back at the norm...it's an almost no-risk game for them that takes advantage of the "noise" in who is trading how much of what right now. We little guys can do this too - to a point, a little slower, just FYI, and I sometimes do. The little line/dot chart is the chart of closest bids and asks to the current market, and the dots are where the deal went down in actuality. Sometimes when things are flakey, you'll see dots outside the bid/ask lines -- see above. When you see that, it's often a good clue for a day trader that in not long, the mainstream trades will be going in that direction soon. If you've got enough money to make it worth it -- you can make decent money on these small but very predictable moves. It's really computer turf to do it much, though.

The bar chart with bids and asks listed under it is also a real time movie -- it's who has what as open orders based on the exchange they are coming from. It's not uncommon to have the same exchange post a real low bid and a real high ask at the same time -- again, they can do that trade and close it at the actual current market price quick at low risk, and after hours, you'll often see an ask of a million and a big of a penny from the same guy. And some of these exchanges are tiny, private affairs -- anyone can do it if they want and do all the paperwork.

This level of info used not to be available to anyone not spending some 10's of thousands a year for it; It's free to me on my accounts at TD Ameritrade because I've got the "apex" feature, which is basicaly some extra perks you get for having a lot of money with them, or making lots of trades that make them a lot of commissions. This is leveling the playing field somewhat. The game, yeah, it's rigged, and I'm showing some of the ways. You can still win at poker when the dealer cheats -- you just have to know how he's doing it before you place your bets.

Now I need to find a programming expert in mixed push-pull realtime data systems in XML -- TD makes their API available for those who want to write their own trading software, hmmmm...
With what I know of signal processing (especially in noise) -- should do well. These quants, they're not really that smart, I'd bet not one could program glitchless low latency audio over internet, which my team did almost in its sleep back in the day...I see a lot of mistakes in what the HFT guys do, instabilities because they don't know underlying signal processing/information theory/signal prediction theory well enough to model what happens when they interact with one another. The kind of guys who build amplifiers that oscillate instead of amplify -- now give them that same task, but interconnect it with a few other incompetent amplifier builders and have it not oscillate. Fat chance -- I smell opportunity. But I'm only one guy and my part would be writing the top level stuff (and of course, it's my money at risk), not the on the metal XML parsing and data delivery stuff -- I'd die of boredom having to go back that far in the chain of things again.

Edit:
I meant to mention -- watch out for scale factors here. I think I already did a rant about autoscaling charts not showing you the true picture unless you do that.

Added another chart, this one for MCP, a very high-beta issue for the only US mine about to reach production of rare earths. This trades a little thinner, so you can see more detail in the shot.
Screenshot-20.png
MCP level II

Here you can see more information about who else is around the poker table. The pros are good at keeping their hands hidden -- usually. I like stocks like this vs say a big one everybody trades in, as you can sort of learn the other players better when there are fewer of them. You can tell a lot about sentiment by whether more trades are going down on the bid vs ask, along with the direction of motion. Note, autoscaling. During the time period shown, the stock made a 40 cent swing -- 40 bucks on 100 shares. With the low commissions an online broker charges (generally under 20 bucks round trip) you can trade say 200 shares like this and make out well -- and they love those $20 shots for taking no risk of their own and treat you real nice too, because you're a good customer and everyone makes money if you do it right.

Whereas the plunge in silver and the rise before were enough to get into the news bigtime, this stock makes that kind of move every day, almost. It's not for the weak hearted. In the past few days we've seen 8% swings...in other words, what a lot of mutual funds do in a year. Catch a couple, and hey -- you can absolutely cream those guys.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log - one more level II

Postby Doug Coulter » Thu May 05, 2011 1:35 pm

This one for C (Citibank) which is being heavily HFT'd and for huge volumes. As I said above -- the pros keep their cards hidden. The real information here is the information that isn't here, if you get me. Look at all the trades going down between bids and asks -- that's phone call trading to some degree, or bids/asks we don't see (I only get second by second updates). Also look at the sheer amounts involved -- millions of shares. A penny makes a good quick trade on a million! That's 10 grand. And it happens so fast that in fact you don't actually have to have the money to do it -- no one can check that fast, and you're out with your profit or loss before the bookeeping gets done if you don't hold overnight. I also have a rant on this somewhere, but the upshot is -- avoid this kind of thing if you're a small trader -- you can't make money in this crowd outside of exceptional luck or at a lousy risk/reward ratio. If these guys want to be all incestuous over their own stocks -- let them do it in private and stay out of family affairs!
Attachments
Screenshot-21.png
Citibank and the robots -- a good rock band name, but a lousy trading opportunity.
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Re: Doug's log

Postby Doug Coulter » Mon May 09, 2011 1:12 pm

Well, here I sit, almost completely in cash, and pondering. A number of my favorite plays are at lower than usual prices and trending up slightly. Those might include such items as BTE, and FCX for example. The thing is, they're also a lot higher than they were the last time the prices of the raw commodities they drill or dig were where they are now -- and they do correlate well over time most often. So, do we wait and see if the commodity rout is over, and growth (not in USA, but world) resumes on-track, or dive in now? Silver's trying to bounce, but my guess is that this is currently a bull trap. That's a guess, understand. The leverage fueled zoom it took won't be repeated with the new higher margin requirements, so yeah, all the little guys are buying back in but not the biggest players. When the bugs run out of money and are all in -- zam, down it goes again, or so I think. Copper, the main driver for FCX is down below $4, at which level they still make money (boy do they ever -- their costs are more like $1.25) but -- perceptions rule stock prices...and it seems that the extra 40 cents or so on the basic copper price have a big effect on psychology in the market. Oil, who knows? Demand destruction is a reality at current pump prices, at least here in this country.

But not so much in China it seems, or definitely in the eurozone, where they're already paying so much they've adapted. I see this kind of like the situation with grains in the USA. If the price of the few cents worth of wheat in a $2 loaf of bread doubles -- no big difference in the price if passed through. But in say, the middle east where raw wheat is bought to grind as a subsistence food, yeah, it makes a big difference (see: violence in the streets). Could it be that a similar situation obtains with oil here vs places it's subsidized or taxed so high that the input price doesn't matter so much?

One of the things I do when opening a trade is figure out where I want out in both directions. There's no point in opening a trade for expectations of 1%, even with my unit size -- there's still plenty of risk, but not much expected payoff, and once open, a trade has to be watched when perhaps I might have other things I'd rather be doing than that -- I've got a long list of projects related to the physics to do, which are fun, the usual maintenance of the campus, and a get together here next week that is going to need at least a little prep to make sure it goes well.
So I'm in no big rush to be in, on either side of this market just now.

If one follows William O'Neills rules, one sets a trailing stop on a trade at 8%. And then sells anytime you've doubled or tripled that, say 16% or 24%. With exceptions like silver awhile back, those big numbers haven't been getting it for me for quite awhile now. A possible 8% loss scares me too much, and I'm generally not patient enough to wait for a 16% gain unless it's not going to take very long (SLV, MCP, BTE, FCX have done well in that area at times). But it's crucial as a trader to keep that ratio intact -- if you allow for up to an 8% loss, you'd better be getting double or better that gain at closing time or you simply have to call too high a percentage of trades perfectly, something no one can do (or, has done reliably).

The thing is, if you try to set stops tighter, so you can still use those ratios -- market "noise" will trip you out all too often, and always at a loss of course. I can somewhat overcome this by manually just watching and doing the stops in my head, rather than posting stop orders, of course, but it's a lotta work.

I feel the markets are now at a cusp. We have three choices -- we can go up, down, or sit in a range, miasmically. I can go with any of the three as a trader -- makes not much difference. A good solid trading range is as good as a very well established trend for me. But at this point, I'm honestly not sure what we've got ahead -- there are some interesting things we know are going to happen, but the reactions to them are ???. And there is one big known unknown -- when is China's bubble going to pop? And make no mistake, it will, but that old line comes to mind about the markets being able to stay irrational longer than one can remain solvent if one expects rationality from them.

So for me, it seems time to resume serious homework. I'm watching my usual favorites and a few new ones, trying to figure out what a good entry would be on them all, and the conditions under which I'll pull the trigger (or should). And for once, some of what I'm looking at isn't the high-beta stuff. I'm also looking at large and midcap things that have a lot of exposure to markets that aren't USA or China for example, as a place to park some of this cash for a long, slow, but reasonably safe, gain. The names that come to mind just now are IBM, MMM, PG, and some midcap etfs, as well as the market indices's -- but again, I don't have a call for say, the next three months or more that I trust enough to even do the "safe" things right this instant.

Here's one thing -- QE2 is about to end. The government has been borrowing around 40% of its spending, and buying 70% of that in QE. Who's going to step up and buy all that debt when we stop monetizing it? Haven't a clue. Many of the smarter bond traders are getting out for now. If yields go up (how could they not when manipulation stops?) then maybe they become attractive, and if they become really attractive, then money will flow out of stocks and into bonds. This could be the Fed's exit strategy if they can do it without tanking the markets too badly, but on the other hand, if the bond or stock markets make panic moves, I sort of expect the Fed will step back in -- and yeah, don't fight the Fed.

China is worrying. All those empty malls and cities they've built, high speed rail they can't make money on...mis-allocation of funds to the extreme, and there's nothing magic about their government that will handle the results that much better than any other when the fit hits the shan. An interesting thing I read the other day -- turns out that Chinese tightening was actually what drove copper up so high. Worked like this -- they tell the banks to tighten, they do it (mostly, except for off-book stuff -- same issues we had here before our crash). But, there's various incentive programs still running, ones to help them attempt to control the markets in commodities they know they'll be needing. Like copper. So as it turns out, it was hard to get bank money for other things, and companies used the incentive programs to buy copper as a way to get a loan, then were turning around and selling it on the spot market to get the actual cash -- even at a loss it merely added a little to the loan interest. That just stopped -- copper falls, makes sense. China is important to keep an eye on, as they are the "demand at the margin" as well as the source of most of the increased baseline demand for a lot of things, and a setback there -- which is likely as you analyze where they are -- will cause a very swift and deep correction in the world at least, if not another major recession (but how can I speak of another, when this one ended only on paper to a few analysts?). Can't call a double dip till the first one is done.

In the eurozone, well, we have Greece with almost as much debt as the US (when honestly reported, the US is WORSE off -- unfunded mandates, and off budget entitlements figure big if you're honest). And there's talk of restructuring, though not yet of haircuts (since the guys in charge happen to be the same guys who'd catch those haircuts). Ireland is now saying that if the Greeks get a break, they should to -- they were really stuck with a rotten deal. And so it goes. Can they all hold it together over there, and will it really matter? Most of the bad debt they owe to one another, a recent chart of who owns who's bonds is a maze, and very interesting as well as incestuous. For example, German banks own a lot of that substandard paper, and will take a loss if it fails -- so the Germans are bailing out their own banks when they bail Greece -- it's funny, if stupid. I guess they realize that they were playing on the high yields because of their weak neighbors and just didn't believe they were as weak as they evidently are. It would be outstanding honesty (and rare) if they really did and took it on the chin for trying to take advantage before things got bad -- but like I said, rare, and/or unlikely.

Austerity measures cut growth, all too much of which has not been in the private sector -- the worlds governments are in a trap of their own creation. By increasing their size and scope to take over all too much of the power and scope, their inefficient ways have reduced total value of work. When they cut back, as they must, for the short term that creates a loss of growth, as all those guys hit the streets in search of jobs and paychecks, but without the knowledge of how to be productive, start companies and so on. Long term, smaller government is probably better, but short term, zowie -- we got issues. And they can't just keep spending like nothing happened, though that is obviously their plan.

The trick is, the inflation that creates means that their debt service is now in devalued nominal currency, so they have a shot of actually paying their debt -- on paper and if you squint enough.
Call it a stealth haircut to all who loaned them money. The thing is, it's a not so stealth haircut on everyone else, as wages stay the same but prices go up. I believe in helping those who need it, but this is more a case of those who were and are responsible helping those who were not. That's neither fair nor really right, as it sends the wrong signals, and increases the ability to be irresponsible while cutting the disincentives to be that way.

I kind of doubt we'll ever reach a level of honesty where we just say -- take the haircut in nominal bucks, rather than getting one anyway due to the bucks being paid back not being worth squat. Humans! (As marvin would say, "Life, don't talk to me about life!")

Those are mostly macro things -- looking out farther than my usual trading window, but relevant. I can't see miles away when walking through the woods full of enemies (from sniper training). But with each step I take, the "wall of green" recedes by one step. So, if I assume others are looking 3-6 months out, at the end of my 3 months, things that people are looking at 6 months from there will affect my trade at the time I close it (or planned to).

So, while this could change at any time -- that pearl of great price may show itself -- I'm planning on waiting about two weeks and watching before doing more than dipping my toe into anything. yeah, if I see a huge overshoot of some sort, I'll dive in for a day or two and catch the mean reversion, but I'm not looking to put on major positions either way for a little while.
It's just easier to see when the dust has settled a bit.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Doug Coulter
 
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Re: Doug's log

Postby Sergei Barna » Mon May 09, 2011 1:23 pm

Doug, have you looked into mortgage REITS such as AGNC and IVR? They buy agency (Fannie and Freddie-guaranteed) pass-through mortgage securities and CMO's. They leverage stockholder's equity with short-term borrowings to buy these securities and payout most of the earnings as dividends, which amounts to annual 18-19%. It seems they are relatively safe to park the money you are not actively trading with, as long as the status quo with the interest rates continues. And I think it's not just the spread between short term and long term rates that you have to worry about, but also the level of LT rates, since if those go up that might reduce the value of the securities they are holding and affect the book value of the stock. Anyways, there's quite a bit of interest rate risk in these, but if you watch it closely and are nimble, they might be good tools in your trading.
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Re: Doug's log

Postby Doug Coulter » Mon May 09, 2011 1:56 pm

Not till just now. Maybe you could help me understand some things about these? I note the super dividends, and at least AGNC isn't too volatile - and even trending up just now. I like quarterly divvies, but I like monthly ones more if I'll be trading in and out of things -- too often you miss the ex dividend date in trading if for some reason you wanted to sell (say because of news causing a drop in the basic share price). In that case you can really lose money -- both the divvie and the loss on the stop loss. Learned that one the hard way on BTE (which has a fairly nice divvie too).


I'm just having some trouble understanding the balance sheet - most of the numbers look really good, but there's these odd red numbers that make some things zero or negative, and EBITD etc look nasty (but those aren't the numbers I really look at, I look at return on equity mostly and top line growth).

There of course is some talk about doing "funny things" with Fannie and Freddie -- do you suppose that will hurt these types of outfits if they go private?

Certainly looks worth looking into, but this is out of my normal expertise in company analysis -- I mostly understand the more straightforward (to me) outfits that dig stuff up and sell it, or make some product and sell that, those I understand. Those divvies look "too good to be true" indeed -- but my unfortunate experience is that when that bell rings, it's usually "too good to be true" and I'm too late to the party.

Please enlighten!
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.
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Re: Doug's log

Postby Sergei Barna » Mon May 09, 2011 4:31 pm

Doug, you probably know this, but it might be worth pointing out anyway for the benefit of others. The dividend capture strategy (when you buy before the ex-dividend day and sell on the ex-dividend day) isn't supposed to work in theory (Dividend Irrelevance Theorem by MIller and Modigliani) because on the ex-dividend day the price falls by the amount of the dividend. Different tax rates (capital gains vs dividends) could matter, but shouldn't because there are plenty of non-taxable institutional investors. If the ex-dividend price was consistently higher than P(cum div) - Div, there would be an arbitrage opportunity. I looked at your favorite BTE and it does look like even on the ex-div date the price is higher than the day before, but the price increase is probably due to other factors and would have been higher if it wasn't ex-div day. (One way to test this would be to compare market adjusted returns for the ex-div dates to other returns).
Most of the volatility you see in IVR and AGNC is due to the drops in price on ex-div days (and usually it drops pretty much by the amount of dividend), but also there are some other announcements around those days (like SEOs). Both IVR and AGNC are mortgage REITS, and what they basically do is leverage shareholders money by entering repurchase agreements (basically a 30 to 90-day loan that they have to constantly roll over) and buy federally guaranteed mortgage securities. As REITs, they have to pay out at least 90% of their earnings (and they do), and they usually trade close to their book-value (similar to NAV for mutual funds). So the huge dividend yield looks to good to be true, but it makes sense considering that they have leverage of 4 to 1 (or maybe higher) where they pay 0.25-0.5% on their REPOs and purchase long-term assets that pay 3.5-4.5%. Theoretically any investor could replicate these returns, if they had access to short-term borrowing at these rates and the markets that sell the agency securities, but we can't easily do that, so REITs do that. So I think this is different when you see a stock or a bond with a high yield, which usually indicates that the market perceives low probability of the payment in full--in this case it's because of the high leverage.
So the main factors affecting the risk and attractiveness of these REITS are:

1) They exploit the normal shape of the term-structure curve of the interest rates (i.e. when the curve is flat this is not going to work).
2) They trade close to their book value since unlike stocks there is not a whole potential for revenue growth unless they raise more equity and debt and buy more securities (with the exception that they can get extra earnings through favorable outcomes of interest rate hedges and increases in fair value of the securities that they hold)
3) The Fed will be selling a hundreds of billions worth of MBS, which might lower their book value; also increase in long-term rates would decrease their book values.
4) As a REIT they don't pay corporate taxes and pass through their pre-tax earnings, but individual investors have to pay higher individual income tax rates (not dividend tax rates).
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