Stopped out and Sold

Yesterday some activity left us in cash

Sold WFR at $83

Stopped out
VIP - $31
NOV - $58

Website almost ready - Your requests please

I have hired someone to put a website up. I find the blog format a little clunky.

I am setting up separate pages by topic and could really use input. Right now, I am looking at the following:
Stock reviews
Weekly Update
Commentary
Strategy
Portfolio
Forum

What do you think I should do?

Buying Update

I just noticed that in my previous buying post that I did not correctly copy/paste the SRS purchase.

I notde SRS but didn't say price and volume.
100 shares SRS $113.77

And down again

Well, that didn't last long - the Dow just dropped to 11,800. It will rise up, but holding above 12,000 is not a sure thing.
I have the feeling that the DOW could rise to 12,400 as the next surge. Could be because the rates are cut or some other positive news. But it won't last beyond April.

Retail Sales - down. Which is no surprise. I wonder if Pier 1 will go bankrupt
Finance - Carlyle group is defaulting. Considering all the free handouts lately, for a major fund to go under is a sign of the reality today.

The puts are doing well.

Profit taking or more

Compare the 2001 recession with today.
http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chdet=1205380233000&chddm=491878&q=INDEXDJX:.DJI




From 1994 to early 1998 the market more than doubled from 3,900 to 9,167. Suddenly, in late 1997 problems erupted in East Asia. The cause was a credit crisis: $40B was given to Thailand, South Korea, and Indonesia. Japan started to collapse and the US bought a few Billion dollars of yen.


The world's financial markets 10 years ago were a lot smaller and so were these economies. This money meant a lot more back then.



Then the Russians got hit. Another $23B was required from the IMF. Then US funds got hit - Longterm Capital management ended up losing $4B.

In just 6 months, the Dow crashed 18%.



Then - surprise - Greenspan entered. Liquidity was injected into the market and it surged 40% to 11,000 in just 8 months. Then it collapsed again - falling 10% in a month. It rose again as Y2K approached and companies stocked up 'just in case' - creating a false image of growth.



There were several peaks and troughs, but each peak was lower and each trough deeper. In its last major cycle, the market collapsed 20% over a 3 month span, rose 20% over 6 months and then crashed 25%.



Behind this play by play, we see
* 35% market drop
* took 30 months
* typified by 4 major peaks and 4 major troughs
* in each mini-cycle, Run-ups were usually 6%, run-dwons were usually 10%
Each peak was lower than the one before it, and each valley lower than the one before it.



Now look at today:

We see the same things happening:

* Each trough is lower than the one before it (T2 vs T1), and each peak is lower than the one before it (P2 vs P1)
* The recent drop has fallen below the first gasp. When this happened in 2001, the market then ran up 10% over 2 months. But it then crashed even harder, falling 18% over 4 months.

If we expect this to resemble the last recession, what lessons should we draw:

1. Market drop of 30% - that puts us at 9,800. In the 1990-91 recession, the market dropped 20%. In the 1987-88 recession, it dropped 33%. So a drop of 30% is high, but not unreasonable.

2. Duration - the last stock market collapse required 2.5 years. The 1990 collapse lasted 6 months. The 1987 collapse took 4 months - 33% of stock values wiped out in 4 months. Why did the recent one take so long? The Y2K effect dragged things out and distorted true demand. It sent confusing signals. Additionally, Greenspan's heightened liquidity pushed the market up

3. Economic Lethargy Overcomes Liquidity - Eventually the economic cycle returns.

I would argue that the internet is speeding things up. We just dropped 15% in 4 months. It will be the last collapse sped up.

I would also argue that increased globalisation will slow the fall, but not the depth.

Lastly, I would argue that we will hit 10,000 this year. Folks could argue the Fibonacci technicals. I just assume a bottom of 30% based off of the extremely bubbly conditions. Add a big dash of consumer belt tightening, over extended financing, another 1990s style global credit squeeze and real estate speculation driven mania, and we are facing severity in the markets.

I also note that in the last recession, once it was clear that the market was heading down, each trough was 10% lower than the last one, as if market sentiment drove it that way. We just hit 11,700, so the next stop will be (based on that logic) 10,500.

New Bull Run or Not?

Yesterday the Dow and NASDAQ surged ~4% after the Fed agreed to loan $200B to banks.

What the Fed did was to temporarily buy the crap loans that banks are holding. Instead of owning loans with a street value ~40% of paper value, the Fed lets the banks have pristine US Treasury bills at face value.

This allows the banks to overstate the value of their assets and to continue doing business as usual - at least for 28 days. In reality, the Fed will probably push the replay button in 28 days.

Simply put, the Fed has bought the crap loans that are weighing on the banks, freeing them from the normal obligations. The fact that this is happening right before a major tax payment is due and right before the end of the quarter is very deliberate. It actually lets banks limp along for at least another quarter or 90 days.

To give it a 1-2 punch, the Fed will also lower rates in a few weeks.

The Market loves this. The Fed is signalling that they will continue to keep consumers spending instead of going in default. This mainly delays the day of reckoning, but it will in fact help many consumers. The wave of foreclosures and defaults will still happen, but it will be a bit less severe and be further out in time. Moreover, if the exports can surge, maybe the situation won't be as bleak.

So that's the question: will this limit the recession's severity. Answer: somewhat, but the damage is already done.

The liquidity being injected is really just shuffling money around. Consumers won't buy new things, they will either pay off debts or re-finance them. Folks don't need more things. The belt tightening has already taken hold.

But it helps, at least for another quarter.

Ultimately, the stock market will rise and fall based on the US economic performance. Exports are growing, and imports are slowing (although the rising cost of gasoline hides that fact). But exports are growing in value: corn and wheat prices are surging, so the value of what we sell is more. That doesn't lead to massive hiring and buying more cars.

A few weeks ago I reviewed the trade data and found a spike in agriculture and chemicals. Other than that, things are only fair. I nfact, a lot of companies are lowering guidance.

So if the idea is to give folks a loan while we wait for the cheap dollar to export our GDP higher, well, that isn't going to work and the reality will be clear in 3 months.

I think euphoria for 30 days (late April) and then earnings reports will signal problems. That's why I'm sticking with our long term puts. The timing was horrible, but that's why I bought 9 months out - because these kinds of moments happen. Just as crashes will inevitably happen as well.

One thing is clear - the stocks I chose to go long on have resurged, and that's a good thing for the stock picking model.

Making sense of things

There is no doubt in my mind that we sold at a less than opportune time. I had wante dto sell as we got closer to earnings season and solid earnings reports calmed things down.
There is no doubt in my mind that there were better times to buy these PUTs. I've been pointing them out for 5 months now, I should have included them in the portfolio.

The Fed will likely juice the market a bit with more generosity and rate cuts, but even those are limited. The low rates are spurring on a weak dollar to new levels of weakness. That in turn is pushing gas to new highs (+10% in 2 weeks). Something has to give, and the US economy will slide.

The portfolio and model are changing dramatically in 2 ways:
1. After resisting it, I have added a lot of puts
2. Trading activity will increase

In a very disciplined manner, we will set SELL prices to try and yield 5% per month. That will pull us out of the hole by SUmmer's end and set us up for a great year finish.

All PUTs need limits to sell at a 10% gain. We can always jump back in, but lets play the volatility.

Boeing Dreamliner delays hurt TIE, PCP, ZOLT

For the longest time I have been watching PCP drop and I couldn't figure out why. It made no sense but I suspected a company specific event because they dropped on good market days and bad days. Same with TIE - ATI reported great news, indicating titanium strength. But TIE still dropped.

Then I thought I understood it: Boeing lost the contract to build the next generation of the US -re-fueling plane fleet. For PCP, that means less growth. For TIE, that is a wash because the plane will use GE engines (TIE supplies them) and the wings will be made in Europe using TIE titanium (most likely).

Then the Dreamliner was delayed. Again. And that is a real problem.

And it's an opportunity. Whatever short term impact there will be will be short lived as well. PCP is not a bad company or suffering a long term problem, so don't walk away entirely. Watch and be prepared to get back in.

Buying

QID 100 shares $57.08
SZK 100 shares $75
Scc 100 shares 103.63
Sij 100 shares 70.91
Srs

PUTS (20 contracts each)
AN $10 jan 09 $0.90
VMC $50 Jan 09 $3.58
NKE $50 Jan 09 $3.60
HOG $30 Jan 09 $3.20
ZLC $15 Jan 09 $1.85

Buying

QID 100 shares $57.08
SZK 100 shares $75
Scc 100 shares 103.63
Sij 100 shares 70.91
Srs

PUTS (20 contracts each)
AN $10 jan 09 $0.90
VMC $50 Jan 09 $3.58
NKE $50 Jan 09 $3.60
HOG $30 Jan 09 $3.20
ZLC $15 Jan 09 $1.85

STOPPED OUT

AG – sold $59, 100 shares
CF – 200 shares @$110
FWLT – 200 shares @ $60
IO – 150 shares $13
MVl – 300 shares 23.9