Liverocket Portfolio - Updates

Uggh. Sorry about the eyechart. Please click on it to see the details.

My intent is to review the portfolio and performance monthly. We had a lot of trades this week, so this is intended to capture and update the portfolio.

Sold DSX and MGM Puts. Took a small loss on the DSX (got bottom-ticked) but the MGM wsa a sweet return. The proceeds are not yet added to the cash position.

Bought a slew of Calls. From a trading perspective, I am wondering whether to exit next week if there is a short squeeze spike or whether to wait a few months. I may leave BIG if I don't see them grabbing market share a la Walmart.

Planning on exiting AGN Puts ASAP and possibly adding to ETFC. The AGNs expire next Friday and I just don't see them crashing. I will set an order to sell at $5 and watch every day. If it doesn't bite by Tuesday, I will make a different decision.

ETFC is crashing with the banking sector and I see myself averaging costs down. If I look out 1 year from now, I see the sector bouncing back a bit. Even a return to $5 would be meaningful. This is a speculative move all the way, but it assumes that ETFC is fine from a liquidity standpoint.

In general, I am pleased. To be in positive territory in a major Bear market is a good thing. I do not feel comfortable with STOP orders as we head into earnings season, but they will return in mid-August.

The long equity positions are mediocre right now. The calls, however, are doing well. (The TRID calls are old and a major speculative play that is not paying out...yet.) This week's purchases were a short term play in response to short term volatility. I felt that this was a pullback driven hard by technical issues (hedge funds selling to get cash and triggering automatic sale orders). With volatility of this nature, options are the best way to maximize gains. If I am correct and these stocks return to their highs and go even higher, we should see some nice returns. Otherwise I would much prefer to own the stock.

In looking at the call value, note that I use the Bid price (what we would get if we sold) and not the Ask price (what we paid).

Also the Call positions are less than the Puts ($27K invested in Puts vs $22K invested in Calls). Several reasons:

1. Options exposure is high: 33% of total portfolio value. That's about 3X what I normally want, but understandable given the opportunities

2. Calls feel riskier. Chinese response to Western slowdowns is the wild card for commodity demand. However, dollar weakness may counter Chindia weakness. Friday's IndyMac, Fannie Mae & Freddie Mac implosions simply raise US Government obligations and stress the value of the dollar.

The short positions are also doing much, much better. The Ultrashorts are essentially breakeven (yeah, we got in too soon). The Puts are doing very well, even excluding the MGM returns. As I mentioned about 2 weeks ago - the leverage here is so significant for the portfolio that a swing up or down makes a big difference. At the moment, the stocks are swinging in the way we want, and another few dollars down for each stock will generate handsome returns.

Some of the results still puzzle me: HOG and ZLC should be down so much more. At the same time, I feel lucky with NKE. The loss could be much, much higher.

Closed MGM Put position for $25

MGM is still dropping, but we are out at $25.

That's a profit of $21+ per share on 500 shares (5 contracts).

Options Update

I am mostly concerned about AGN - with just 7 trading days to go, the sudden turn is eroding most of our gains here.

Looks like we did not get orders for
ME
TS
GIFI

My strategy was straightforward. I decided that this wasn't a Bull trap and just a pullback. So I bought calls that were 15%~20% above where we were today but close to or at prices that had been hit recently. I also bought months in advance.


What we bought today:
Up a bit: MEE, FRO
Barely moved: UNT, SM, GTLS, OSG, CPX, BIG
Eased More: WLL, SD, PXD, SE
Eased a lot: MMR

I had expected a strong rally but it did not happen. Does that mean I was wrong about a Bull Trap? We'll see what earnings bring. I have been tracking all of these stocks and I see some big wins this quarter and next because they get the benefit of current pricing.

Will coal/oil/Natural gas prices drop? I hope not.....

Buying Update

I am waiting for some of the orders to go through. If they haven't, I'll revise the prices.
So far, open orders are:
gifi
se
ts
osg
me
pxd
sm

Last time I did this I got cheap on the calls and missed out on WTI & MVL.



Meanwhile, I have been waiting for a pullback to the 50dma on many stocks. I saw that yesterday.

Buying these calls

I put in orders to buy 2 contracts each of the following calls.

unt 4 dec 90s
sm 5 nov 60s
wll 10.5 jan 110
sd 7.5 Jan-65
pxd 5 jan 80s
mmr 2.7 Jan-35
gtls 5 dec 55s
gifi 1.6 jan 50s
se 1.25 jan 30s
ts 3.2 dec 80s
osg 5 jan 90s
me 2 Feb-40
mee 11.5 jan 90s
cpx 1.7 Jan-45
clf 16 jan 120
big 2.4 jan 40s
fro 3 feb 75s

False rally - but short squeeze could pressure our puts

I bought DUG and remained on the sidelines because I saw too much hyperbolic behavior in commodities.
The last few days pullback was exactly the thing I wanted to see. It was exaggerated by program selling - technical moves and not fundamentals.

So I will be buying some calls this morning.

In the meantime, my take on the rally yesterday is this:
1. The Fed announced that it will keep the money pumps flowing
This cuts in several ways. In March they announced that the loans to banks and investment companies would be short term - ending in September. Now they see the loans continuing through 2009. That reinforces the banks significantly and, in the short term, removes some pressure to repay loans.
But the important point to me is that the Fed clearly sees that the situation is much, much worse than they imagined. And that they see it persisting another 18 months.

2. Banks and Lenders are too big to fail
The Fed is waiving laws that require Fannie Mae and Freddie Mac to be solvent. In other words, these lenders are insolvent - they lent more money than they have. The law requires that these companies must immediately raise capital - and they need ~$100B combined. Obviously they can't, which would force them into bankruptcy.
So the Fed has given them a hall pass.
That removes immediate pressure, but it doesn't solve the downstream mortgage mess. FNM and Freddie are the largest lenders in the US. This state of affairs will affect their ability to lend as well as the expectations in the markets that buy US mortgages.
Given the obvious risk associated with mortgages, I expect rates to rise even more to reflect a bigger risk premium. I predict that, by the end of the year, if the Fed raises rates, the Jumbo loan rates will be 8%+.

Get ready to buy today

Oil, Coal and Natural gas

While an oil crisis is good for spurring innovation, it takes years to affect the existing energy market. Meanwhile, world energy consumption is growing, especially in Asia.

Oil consumption is affected by manufacturing and cars. US and EU demand has leveled off the last few years for the exact reasons that it has grown in China: vehicle growth and manufacturing have flattened. China has become the world’s manufacturing plant while car sales are surging.

The Chinese car market is growing ~2M units per year. India is expected to add 1.5M units. Add in Russia and other countries and it is safe to say that 5M more cars will be on the road in 2008 than in 2007. And many of these countries subsidize oil, so there is no incentive to consume less in the face of rising oil prices.

Will reduced US and EU consumption balance out this new soaring demand? Already the US is reducing consumption, but it isn’t enough. There is less than a 1M bpd surplus in the world today. US oil consumption has fallen ~4% or ~0.8M bpd. A lot fewer planes and cars are running these days.
(http://www.eia.doe.gov/oiaf/forecasting.html)

But that 0.8M bpd is quickly eroded by new demand. A barrel of oil yields 20 gallons of gas. 5M cars on the road will consume 1 gallon a day (terrible traffic consumes a lot of oil) or roughly 0.25M bpd. Add in growth in emerging markets from manufacturing, airplane travel, and so forth, and global increases in demand reduce US surplus gains to almost zero. One refinery goes down, and any surplus disappears. One major storm in the Gulf or the North Sea, and that’s it.

Meanwhile, China imports ~150M tons of oil per year. There are only 2619 ships to go around and China is already using half of them. http://www.osg.com/oi_tankermarket.htm
Factor in the scarcity of refineries and you see a transportation process that moves crude oil to a refinery and then to local markets. The remainder service Japan and the US. Which leaves very few ships around to contract – hence my love of shipping and interest in DSX and FRO.

Getting back to oil – supply is very tight today and for the next 12 months. While dollar weakness and speculation has played a part, the reality is that underinvestment and sudden demand are the real culprits.

The real issue is electricity. Factories run on electricity. Air conditioning, hospitals, the internet, infrastructure – it all needs electricity. And coal and natural gas generate the bulk of electricity in the world.

Half of the US electricity is generated by coal. China consumes more coal than the US, Europe and Japan combined. India is better off because it produces 80% of its coal needs, but it still imports almost as much coal as the US exports. China became a coal importer as of January 2007.

Meanwhile Vietnam is slowing exports, hurting Japan. The net result is that Asian countries need coal and are having to go further afield to obtain it. Hence my love of US coal.

This is not going to stop for some time. And there are bottlenecks which create mini-shortages - like limited transportation routes and ships, like weather around East Coast or West Coast ports, and so on. DSX is a contract drybulk shipper - they pass fuel costs on to customers, so oil i snot an issue. And they are the ones who benefit from this demand.

Natural gas is in a similar shortage.
NG is used for heating, electricity generation and for fertilizer. The US consumes the most (the Gulf of Mexico provides a lot), and China comes second. China demand grew 20% last year.
http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7045418

So all roads seem to lead to China. Will a recession change things? Probably not. Even a low growth forecast will not see major surpluses in the next 12 months.

I think earnings will blow away all expectations and I like the recent pullback for an opportunity to buy oil extractors and services, NG extractors and services, coal, and shipping.

Liverocket doing great!

Although I have shifted to a monthly performance review, I couldn't help but peek at the weekly results. We are down 4% against the background of a broader market that is down 15%.

A lot of this could be due to July 4th weekend and a short week. It would be nice to see the markets erode further and boost our short positions.

THE LONGS
With the major coal pullback, I ready to jump in. Got my picks ready.

DSX - I decided to take the loss. My analysis said that $30 was the resistance point and when it blew past it and down more, I preferred to take the hit and maybe get back in. Sure enough, it fell another $1 Friday. I like this company, so will look for a cheaper buy-in point.

DUG - Even with gas going up, DUG rises on strong volume. The broader market is starting to doubt oil's continued rise.

ETFC - Climbing back as I expected. It was up on large volume too.

MUR - Oil and coal had a crazy week. MUR raced up to $101 and fell back to $94.

TRID - Nice article in Barron's (http://ceoblogger.wordpress.com/2008/07/03/barrons-analyst-says-the-timing-is-right-for-trident-microsystems-trid/)
Nothing new said there: the article points out that the stock was trading for cash.
However, the timing was interesting - a bullish article before earnings. Someone must need their stock to move.

THE SHORTS
Honestly speaking, things are crashing faster than I expected. That means faster gains
AGN - Time is running out: 2 weeks to go. It keeps bouncing around $52, so I am going to not be greedy and close out the position this week. Closing in on 75% return.

AN - Fell below $9 on heavy volume. Even the Fool noted the bad performance. http://www.fool.com/investing/value/2008/06/30/buffett-and-lampert-miss-the-boat.aspx
We paid $0.90 per option and are $1.02 in the money with 6 months to go. Closing in on 100% return.

HOG - This stock has a lot of resilience. I expected that they would crash like Ford and GM, but not at all. They have been bouncing between $35 and $40 for some time. But the trend line is currently pointing down for now. A bad quarter will drop them hard and put us in the money.

MGM - Wow. I am surprised by the drop. A huge drop on Friday on major volume (3X the normal). In any case, we are below the $30 threshold that I expected to see. MGM is struggling in a classic case of doubling down at the wrong time. But they can always sell off a casino if needed. I am putting a sell order to close the puts if they hit $25
This has been a solid grand slam homerun: 600%+ profit

NKE - A lot of puzzled people are wondering why NKE is drifting below $60. Personally, I think the Olympics will be a bust for them. In the meantime, I see gross margin weakness from inventory buildup. In any case, I'd like to breakeven here.

VMC - From the 80s to the 50s in 1 month. This is testimony to keeping the faith and sticking to our investment thesis. We are breakeven and I could see a better return with 1 or 2 bad quarters.

ZLC - Nice week: from $21 to $18. The story here is that Zales is telling fund managers that they can maintain sales and profits by pushing silver and other cheaper jewelry. After all, $200 doesn't buy much gold.
The problem with this thesis is that it assumes that consumer disposable spending won't drop. It will. This is a put we will likely have to hold until January.