The Long And Short of It
(I've been travelling for over a week, so apologies for no updates)
Nobody should be surprised by the past 2 weeks. This is what I have been saying for months
1. Expect a lot of bad news every day
* Much worse reports from the banks (Citigroup doubled its losses from $9B to $18B, for example)
* Earnings slowdowns and misses especially among the corporate IT, retailer and consumer stocks
2. The market will be in free-fall mode. Expect lots of market negativity and lots of volatility. Expect the market to fall even faster than the previous recession thanks to the Internet
3. Stay invested in oil and agriculture related
4. Buy puts around June period that are just at or below current prices.
The rate of drop has actually surprised me - the markets are down ~12% in just over 2 months. I expected more up and downs, fits and starts. There haven't been anyway
Where I have been critically wrong is to stay long at all. My assumptions were
1. Agriculture, international infrastructure & Oil equipment/services stocks will continue to show strong earnings growth
2. Swings will be up and down. I am travelling and can not confidently jump in and out, so continue to hold steady
Until this week, many of the stocks were actually up or just not down that much. Now they too are affected deeper than I even expected AND there hasn't been any uptick.
Where I have been right is in the puts I suggested. My reccomendation was to buy puts expiring around June and either at or just out of the money. With only one exception (HD), every put has gained.
Even better, I said that the average put price of 16% current price and expected 20% price drop meant strong likelihood of making money. Well, 10 of the 27 companies have already had price drops of ~15%. Huge gains.
Which means the remaining companies stand a chance of still crashing.
What to do.
What began as a technical problem (sudden unavailability of cash) is now a crisis of confidence. Not a lack of confidence in the housing or financial sector only, but the loss of confidence in earnings growth if there is a US recession. The panic is now self-feeding with each new low causing more people to leave.
Wholesale selling is not over. I want to remain in my target companies because I think that they will continue to show earnings upside. But the amount of hedging must continue to grow. I am now going to assume more panic days this year: a further 20% price drop on target shorts by January 2009. I would select companies that haven't dropped much yet, because they are waiting to drop more.
So I will be looking at puts that are 30% outside of the money. That is to maximize my leverage. I would also be looking out at January 09 for expiration dates because I'm risk averse.
Nobody should be surprised by the past 2 weeks. This is what I have been saying for months
1. Expect a lot of bad news every day
* Much worse reports from the banks (Citigroup doubled its losses from $9B to $18B, for example)
* Earnings slowdowns and misses especially among the corporate IT, retailer and consumer stocks
2. The market will be in free-fall mode. Expect lots of market negativity and lots of volatility. Expect the market to fall even faster than the previous recession thanks to the Internet
3. Stay invested in oil and agriculture related
4. Buy puts around June period that are just at or below current prices.
The rate of drop has actually surprised me - the markets are down ~12% in just over 2 months. I expected more up and downs, fits and starts. There haven't been anyway
Where I have been critically wrong is to stay long at all. My assumptions were
1. Agriculture, international infrastructure & Oil equipment/services stocks will continue to show strong earnings growth
2. Swings will be up and down. I am travelling and can not confidently jump in and out, so continue to hold steady
Until this week, many of the stocks were actually up or just not down that much. Now they too are affected deeper than I even expected AND there hasn't been any uptick.
Where I have been right is in the puts I suggested. My reccomendation was to buy puts expiring around June and either at or just out of the money. With only one exception (HD), every put has gained.
Even better, I said that the average put price of 16% current price and expected 20% price drop meant strong likelihood of making money. Well, 10 of the 27 companies have already had price drops of ~15%. Huge gains.
Which means the remaining companies stand a chance of still crashing.
What to do.
What began as a technical problem (sudden unavailability of cash) is now a crisis of confidence. Not a lack of confidence in the housing or financial sector only, but the loss of confidence in earnings growth if there is a US recession. The panic is now self-feeding with each new low causing more people to leave.
Wholesale selling is not over. I want to remain in my target companies because I think that they will continue to show earnings upside. But the amount of hedging must continue to grow. I am now going to assume more panic days this year: a further 20% price drop on target shorts by January 2009. I would select companies that haven't dropped much yet, because they are waiting to drop more.
So I will be looking at puts that are 30% outside of the money. That is to maximize my leverage. I would also be looking out at January 09 for expiration dates because I'm risk averse.
posted by Andrew at
1:04 PM
1 Comments
