Stopped out of my Oil Short

I'd shorted some Feb '08 Light Crude futures a few days ago here, well I had put a stop on it 2 points higher, which just got triggered today ($93.31).

So am out for now, taking a $1200 hit.


3 day Oil Chart

Will keep an eye on it, may look to fade a strong rally to get involved again. Xmas markets probably too thin and can squeeze pretty far in either direction, so OK to be out for the moment and wait for a better entry.


Yours,
2and20

Back into the FTSE leveraged downside trade

Just did the following:
Sold FTSE Jan 6200 Call at 303.7 in £5/point, so £1518.50 premium.
Bought FTSE Jan 6200 Put at 52.7 in £30/point, so £1581 premium.

Net cost £62.50 which is about $124. For ref, the FTSE was at 6424.

Similar to my trades from earlier this month that I've already exited (see FTSE here and DOW here), I'm pretty bearish on equities but appreciate the squeeze factor that seems to be in them, so I think the strategy is to trade from the short side through fading any strength and buying the dips.


3 Month FTSE Chart

Going into options expiration today, global equity markets have moved up, so taking advantage of that to sell the FTSE. I'm doing this rather than the US markets as I think the US has been hit with a barrage of bad news lately, such as MBIA/monolines, Investment Banking writedowns and continuing disgusting housing data, and is impressive in how it hasn't cracked under that pressure. So I'm waiting for higher US prices before I fade that move.

Contrary to that, I think the UK still has bad news to come out. Housing is only just beginning to crack, and has a considerable way to go. I think we'll have increasing talk of a UK housing "crash" going forward, and the realisation has yet to sink in that UK equities were levitating in the first half of 2007 on potential private equity buyouts, and now that hope has gone.

Finally, for you technicians, I see that 1) the market has just moved up to both the 50 and 200-day moving average, which may provide resistance, and 2) the 50-day is just falling under the 200-day, the so called death cross!

So the ideal outcome here is that as soon as options expiry is over today, the market can get back to fundamentals and push back down to the 6100 level it was recently at. If it can do that in the next week or so, that would be around a £3500 profit ($7000) or so.

You like it?



Yours,
2and20

Selling Yen, Buying Swiss Franc

Why? Well, today Japan cut its growth forecast for the current fiscal year (April '07 - March '08) from 2.1% to 1.3%, and there seems to be talk of a recession happening also. Today's Lex column in the FT is pretty pessimistic.

Now I'm no expert on Japan, but over a decade and a half of failing to kickstart its economy, continued deflation, interest rates at 0.5% yet no stimulation happening, equity prices down over 60% from their peak in 1990, and land prices falling for 16 years in a row, does not inspire one to invest in that economy. I think this downgrade of is GDP forecast is a green light to get back into the carry trade.

Now, what to position it against though? Whilst I do think the US Dollar is due a rally, the economy is still a mess and looks set to worsen. The UK looks like it's set to follow, and the Euro is definitely over-valued after far too big a rally this year, and the Aussie/Kiwi I have no view on (although just glancing at it for this post, the entry levels look attractive and the carry is pretty huge...I'll come back to this later).

So given the options, I think the Swiss Franc is fundamentally the right currency to be long. We are in a period of great uncertainty, the Swiss Central Bank are apparently considering raising rates again from their current target level of (I think) 2.25 - 3.25%. With Euro rates at 4%, and fundamentally they should be higher as the ECB needs to slow down money supply, I think this could also drag Swiss rates up. So with rising rates, it should be used less as a carry currency going forward.

Also, Switzerland is the 4th largest holder of gold, which is good news for those who aren't fans of fiat currencies. (See here for a nice overview).


1y Chart of CHFJPY

In terms of carry, it's worth about 50 cents per 3 months.

Spot is trading ~98.00, I am buying a Jun '08 contract at 97.17, with an exposure of $600 per big figure.

And I am going to have a good think about putting the same trade on against AUDJPY and NZDJPY.

(Admin note: I'm going to put just the spot price in the spreadsheet, so will put the equivalent spot level of 98.07 in. Will correctly account for P+L/Carry etc when trade unwound)

Yours,
2and20

Buying back the Apple short

I'd sold about $20,000 worth of Apple one week ago, selling it at around the 52-week high. Buying it back today for a $1,006 profit, just over 5%.

Was only in this for a small amount, as felt Apple was over-valued even though it is definitely a company with great products and a great future. I'll try and keep an eye on the stock and may sell it again if it gets overbought in the future.


5 day Chart of Apple

Yours,
2and20

Ramping Up The Equity Portfolio

Just shorted about $12k each of Coca-Cola (KO) and Hormel Foods (HRL). I was reading an article the other day on Minyanville that pointed out how well Consumer Staples stocks had done lately. I was surprised to hear that these were at 52-week highs, as I would have thought food producers would be hit with the double whammy of higher input prices (due to commodity markets being basically at all time highs) and a slowing economy/consumer slowdown which would make it difficult to raise prices without hitting sales. I guess the equity market is not seeing it that way. My bet is that portfolio managers out there are just playing the "obvious" trade of owning consumer staples into a slowing economy, whilst disregarding some of the fundamentals of the trade.


3y Chart of Coca-Cola

3y Chart of Hormel Foods

Stumbled across this article from Forbes from a couple of weeks ago, basically Fitch are saying the food producers could face profitability pressure in 2008 for exactly the reasons I said above.

Sold Coca-Cola at $63.12 in ~$12,800
Sold Hormel at $39.83 in ~$12,000


Yours,
2and20

Closed the Dow option trade

Closed out my Dow option trades that I put on on Thursday, for a profit of $3,072.

I'd sold a Jan 13100 Call for 619 that I bought back for 451, in $10/point, so $1,680.

I'd used that premium for the call to buy a Jan 12800 Put for 129 that I sold back today for 158, in $48/point, so $1,392 profit.


5 Day Dow Chart

The Dow had sold off nicely in the 3 trading days since I put it on, and whilst I'm still very bearish on stocks over the medium-term, the newsflow has been very negative lately and whilst stocks deserve to be lower, it's at points like these where stocks can seemingly rally out of nowhere, I guess as many market participants are short the market and so it squeezes higher. Plus, the premium on the 12800 Put will suffer quite badly from time decay over the Xmas period, so any reduction in volatility over the coming week or so would have hurt the position.

I'll wait for another entry point to put a similar trade on.


Yours,
2and20

Selling a Straddle on Cable (GBPUSD)

The dollar has been on a bit of a rebound lately, and one of the currencies it has done OK against recently has been the British Pound.


3 month Chart of British Pound versus US Dollar

With some HORRIBLE numbers out of the UK lately, including November asking prices for UK property down 3.2% in November, and down 6.8% in London(!!), the pound has taken a bit of a beating. I think long-term we will see it move from ~2 to the dollar to down to ~1.50 to the dollar, as the UK credit bubble was even bigger than the US. However, I think the slowdown may take a little while to fully unfold in the UK, so I'd expect more negative newsflow from the US than the UK, so we may see FX volatility subside a little. Also, the interest-rate differential may remain positive, or get more positive, for the foreseeable future (BoE currently 5.50%, 1.25% above the Fed).

5y Chart of British Pound versus US Dollar

So I've sold a 2.00 Straddle on GBP, expiring Jan 4th, at 382.6, in £10/point, so pocketing a premium of £3826 = $7700. Spot is currently trading ~2.0180.

If the rate moves sharply in one direction or the other, I may look to actively trade around the separate put/call. We'll see.


Yours,
2and20

Closing my small S&P 500 Short

Just closing out my small short on the S&P 500 that I put on on the 4th of December. My timing for the entry was not great, as the market rose pretty quick from there, but at least that allowed my to put on some other shorts (see my FTSE and DOW Option trades). Market back down now, and I'm buying it back at 1460.25, for a profit of a HUGE $100 :)

Size was probably too small also, I probably want to make something like $5-10k on a 10% move in the market, so should have been about 2 or 3 times the size.

I'm still very bearish on the markets long-term, although we've had a nice sell-off during the last week, so may get a little stability. Considering taking my Dow options off, profit something like $2500 at the moment. I sold 13100 calls to buy 12800 puts, and just wonder if this may not work further from here if volatility dies down over Xmas. Will keep you posted!


5 day Dow Chart

Yours,
2and20

Selling some Crude futures, and Musing on Northern Rock

I just sold about $55,000 worth of Feb '08 Crude contracts.


6 month Chart of Feb '08 Light Crude Futures

The rationale is pretty basic behind shorting it. An economic slowdown WILL reduce demand, and a stronger dollar, combined with a change in market mentality regarding further weakening of the dollar. ie. consensus expectations seem to be that the dollar will continue to weaken, whereas my view is that other countries, particularly within Europe, are in equally dire straits, and the dollar is due a massive rally back as this enormous one sided trade on its further weakening gets unwound.

So a stronger dollar and slowing US growth, and slowing global growth, could easily take $20 off the oil price in short order. Plus, in a similar manner to the dollar, it seems like consensus is for oil prices to continue to rise, and I just love trying to identify when a sea change in opinion is about to take place, that's when the really big moves take place.

Sold about $55,000 worth of Feb '08 US Light Crude futures at 91.31.

On a side note, the portfolio has got off to a nice start, thanks to falling equity indices. One other trade I am looking at is buying some shares in Northern Rock, the UK lender who has been lent around £25bn by the UK government, as talk of nationalisation seems to be increasing, and on the back of that I read somewhere that under EU rules, the government would have to pay shareholders the average price over the last 3 years, which is something like £4+ per share...it's trading today around 87p a share. Huge upside potential, but I'm struggling to find anything more concrete on whether that rule is true or not. This to me is the ONLY reason to be buying Northern Rock, as it probably is worthless fundamentally.


Yours,
2and20

Covering my small Euro short

Just bought back the EURUSD I shorted earlier this month. Right from the start I knew I'd put this on in too small a size. Today, following a 1.5 point fall in the rate, I've been chewing over whether I just take my small profit, or increase the size of the trade and put a stop-loss at my average price.


5 day Chart of Euro versus Dollar

Well, I'm a wimp and just took the small profit. If it drifts back up I'll get in in better size next time.

So, just paid 1.4487 for Mar '08 EURUSD, netting a whopping profit of $368.

Hmmmm....


Yours,
2and20

Dow Option trade - Leveraged Bear Position

Similar to my FTSE trade over the last couple of days, I have just done the following on the Dow:

Sold $10/point Dow January 13100 Call @ 619
Bot $48/point Dow January 12800 Put @ 129

For zero premium (well, it cost me 2 bucks...)


6 month DOW Chart

US stocks are holding up far too well on bad news lately (other than the financials). My guess is that this is a bet on the weak dollar supporting earnings of exporters. An interesting post at Bespoke shows that half the Dow stocks are up 15% or more on the year, and glancing over them, the bulk certainly seem to have overseas exposure.

It seems to me that the dollar is oversold against the Euro/Yen/Sterling and is due a strong rally back, as it is one of the biggest one-way trades out there. Also I think that since that whilst the poor state of US fundamentals is obvious, the equally poor state of Euro/UK fundamentals is not. Well now that the UK housing market is starting to crack (houses have just dropped for 4 months in a row, and the last reading was the fastest pace in 12 years), the Irish downturn is firmly in place, Spain has also turned down, and I'm sure other markets will start to show the same signs soon, this may cause the "obvious" trade of selling the dollar to buy the Euro/Sterling to fade. And it seems to me that positioning is extreme out there (some days I feel like I'm the only dollar bull...).

So a dollar rally will take away the last supporting argument for owning DOW stocks, as far as I can see.

Selling the call deep in the money as I am happy to be short this market anyway, and using it to give me nearly 5:1 leverage on the Put.


Yours,
2and20

Closing out the FTSE Option Trade

Just covered the 2 FTSE Options I traded 2 days ago. P+L was $2,381.

I had sold £5/point of a Feb 6400 Call at 348 which I bought back at 256.9.
I had bought £20/point of a Feb 6100 Put at 87.1 which I sold back at 122.8.


FTSE had a big fall today, 2.5%, and I am happy to close this out and want to enter into a similar trade on the DOW. Plus, every time the FTSE seems to have a big fall, it just comes roaring back the next day. Until the market feels like it has firmly become bearish, I think a "buy the dips" strategy is the right one.


5y Day Chart of FTSE

Well?



Yours,
2and20

Buying Sotheby's - Auction market not dead yet

I just paid $37.62 for just over $11k of Sotheby's BID) shares.


1y Chart of Sotheby's Stock

Today they just sold a hand-written Harry Potter book for £1.95mm, that had an estimate of £50,000. I don't think the news has hit the stock yet. Just a month ago, the stock cratered about 30% following a failed auction of a Van Gogh, which always seemed a bit overdone to me given that it had a reserve of $25mm. This could bring back the focus on a highly lucrative industry where competition isn't particularly high. And whilst the auction houses do sometimes guarantee a certain amount for an auction item, it's not like they carry a huge inventory of dubious assets which could collapse in value, as per the banks.

Stock trading with a market cap of $2.5bn, and a P/E of 13.6. So not a crazy value by any means. The stock is down nearly 40% from it's 52 week high, and whilst I don't expect it to get all the way back up there, I think the fundamentals haven't changed dramatically yet. Whilst I am pretty bearish long-term on asset values, and could easily imagine art values etc dropping a long way from recently reached levels, it could take some time for the "rich" to feel the pain from a slowdown.

You like?



Yours,
2and20

Selling some Johnson & Johnson (JNJ)

On the back of reading a bullish post by Howard Lindzon on JNJ, I took a quick look at this company and decided it's worth a short.

JNJ, trading today at $67.75, just a shade off all-time highs, a market cap of $194bn and a P/E of 19.1 (forward P/E is 15.4). The company "operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics".


5y Chart of JNJ

In the face of a slowing economy, I don't imagine the Consumer side of the business can have huge near-term growth. Factor in high commodity prices generally and producing goods and selling them on seems like something that could hit tough times soon. I'd also imagine, that whilst healthcare is traditionally a defensive sector, that it still suffers from the usual supply and demand issues in good times and bad, even if it is less so than a "consumer discretionary" company. A P/E of 19+ just seems aggressive for a company that's already valued at $200bn, and faces a slowing economy in its main market. Plus I think the future of biotech is in some of the smaller genetic-focussed companies, and could imagine the giants having to take them over in an M&A wave lasting for years.

The only thing that bothers me slightly with this trade is that over the last 5 years, it is "only" 40% above the lows, in a period where we've had strong global growth and domestic inflation. So I'm not in this trade for much, maybe just 5% or so. Selling just over $10k worth at $67.75.

You like?



Yours,
2and20

Leveraged downside trade - Selling FTSE through options

Looking outside the US, it is clear that their are many places that have issues. One of the most obvious is the UK, where despite the property market only recently topping out, they have still had a bank run on one of the major mortgage lenders. Property values there are even more stretched than the US, affordability is now being questioned, the market has fallen for 3 months in a row, and the Bank of England has just cut interest rates DESPITE HIGH INFLATION on fears the credit crunch is about to really bite in the UK. The FTSE has been a pretty poor performer over the last year, up around 7% whilst the DAX, the German main index, is up 24%. However I think this is because of all the downside risk that has existed within the UK property market, and hence the consumer and the economy.


1y Chart of FTSE 100

1y Chart of FTSE versus DAX

So putting this together, I am pretty comfortable taking a short bet in the FTSE. I'd like to express that in the following way:
Selling £5/point of 6400 Feb call at 348
Buying £20/point of 6100 Feb put at 87.1

So for flat premium, I can leverage 4 to 1 through selling an In-The-Money (ITM) call and buying an Out-The-Money put. I am fairly comfortable selling an ITM call as I expec the index to drift downwards for the next couple of months anyway. And I want the leverage because I think there is a decent chance of a near-term fall down to 6000 as fears about the economy are heightened. Also, the FTSE had a good performance in the past on M&A, which must be substantially reduced now the ability to obtain leveraged credit has all but disappeared.

You like it?



Yours,
2and20

(Just an admin point, the option pricing in my spreadsheet is my model's estimate although should be close to market levels...I need to manually put in vol numbers, so just need to keep an eye on that over time)

Selling some Apple at the 52-week high

Today looks like a sweet entry point to get short some Apple. I sold just under $20,000 worth at 194.07.



Seems like the equity market is enthralled with Apple...from trading at 50 at one point last year, it's now a shade off 200...I mean what wasn't out there last year? Everyone had an iPod already. And the iPhone was always rumoured back then also. Anyway, from what I gather, the iPhone may be doing OK in the US, but it certainly hasn't hit it off in Europe, with disappointing sales and not much consumer enthusiasm for the poor terms of the contract you have to enter (longer than standard mobile phones, eg. 18 months in the UK as opposed to 1 year for normal phones), and not on a 3G network.

Trading on a P/E of ~50, a forward P/E of 30, so even if it hits ALL its numbers next year, it still won't look cheap. $170bn market cap, to justify that you have to sure this company has the potential to earn $10bn a year over the long-term MINIMUM. Now, we all know that technology can be a fickle sector...all it will take to destroy this stock will be an earnings miss, a bad prouct, and analyst euphoria disappearing. Selling some at the 52-week high seems low risk at this point.

How do you like that?



Yours,
2and20

Buying some IACI (Ask.com)

One stock I've been involved in in the past, and has an interesting story around it, is IAC/InterActiveCorp (IACI). IACI is a company with a portfolio of internet stocks, including Ask.com, Match.com and Ticketmaster. It said a month ago that it planned to split into 5 separate businesses to realize value, and also signed a 5-year deal with Google to show advertising on Ask.com.


2y Chart of IACI


With the whole business having a market cap of $8.1bn, even just growing Ask.com such that at some point in the future it can compete with Google could be huge, as Google has a $224bn market cap. Add in the fact it's trying to make a go of it in China, and it seems that this rag-bag of 60 brands could indeed be worth substantially more than the current market cap. With a forward P/E of just 15.7, and shares 30% off the highs of this year, this looks like a decent entry point, and we'll wait for some more newsflow regarding the break-up into separate businesses. Buying just under $12k worth at 28.67.

What say you?




Yours,
2and20

Buying Heely's - P/E just too low

One thing I want to get going with this blog is an active single-name equity portfolio. Whilst macro trades make good discussion points, trading will be limited as most of my views are more medium-term. So equities will allow more frequent positioning.

First up is a stock I've watched for a while, Heely's. It IPO'd about a year ago somewhere in the 30's, and is currently trading a little over $6. Yes $6. The P/E is a lowly 4.3, with a forward P/E of 6.8. Market cap is $166m.


1y Chart of Heely's Stock Price

The stock got crushed back in August when the company said inventory levels at retailers were quite high, but it always seemed overdone to me. Yes, it's a bit of a one-trick pony when it comes to this company, but even so, I still see kids all over the place wearing these things. And I'm guessing a fair few have got them on their Xmas shopping lists...

Also I have seen these throughout Europe also, so whilst I'm not sure what proportion of their sales are from overseas, every little helps with the weak dollar. With sales of $245m on a market cap of $166m, and other attractive metrics including healthy margins, this one looks like it is just trading at the wrong price. We'll see. Putting in $10k at $6.15 a share.

What say you?



Yours,
2and20

Selling some EUR-USD

Just sold $200 per big figure of Euro against the Dollar.

(Exact trade: sold Mar '08 EURUSD at 1.4671)

The Euro is off about 1 big figure today against the dollar, I suspect the thinking being that interest rates are less likely to go up in the Euro area. Sterling just got crushed for 3 points against the dollar today, as it now looks like interest rates will be cut there, as the UK has just come out with some horrible numbers today. House prices dropped 1.1% last month, and consumer confidence fell markedly, according to Nationwide. Although bizarrely one of the reasons the Nationwide cited was "rising oil and food prices", so not sure why that makes a rate cut more likely...I'll have a closer look at Sterling another day.

So now the dollar has recovered some ground against both the Canadian dollar (over 10% from the recent lows), and now 7 or 8 points against Sterling, which was around 2.10 just a month or so ago (down to below 2.03 today). The Euro meanwhile has held up surprisingly well, and probably just needs a change of opinion in the rate cycle of the Eurozone, where the ECB continues to have a hawkish rhetoric. And there is plenty anecdotal data suggesting manufacturers have been moving facilities from Europe to the US, due to weakness in the USD Dollar versus the Euro. At some point, this will affect relative growth rates, and make being in the US Dollar more attractive. So lets position early.


1y Graph of Euro versus US Dollar


Oh and if anyone knows a good (free) place on the web to graph and copy FX rates, let me know. None of the sites I found allowed long-term graphing along with saving of the graphs.

What say you?



Yours,
2and20

First trade - Selling some S&P 500 Futures

Selling a little under $30,000 worth of December S&P 500 futures @ 1465.25.

The US recession appears to be coming head-on, as a liquidity crunch spreads from what was originally sub-prime mortgages to all asset classes. Property values look like they only have one way to go for the next 3-5 years, barring a miracle. Consumer debt levels are high and refinancing at any sort of a reasonable level appears off the table for a while. The bear case has been thoroughly laid out recently by Mish and Nouriel Roubini, and the inescapable downtrend for both residential and commercial real estate has of course been put forward clearly at Calculated Risk.

Whilst if you only read the blogosphere, you'd be convinced that EVERYONE is bearish, I think back in the real world there is still too much optimism and hope, especially in some of the dumb bail-out ideas recently put forward. So reality is yet to set in for the bulk of market participants, and this is what could destroy equities.



3 Year chart of S&P 500


But lets just have a brief look at the POSITIVES in the US stock markets:
- they haven't gone up nearly as much as the rest of the world, with the S&P 500 up only ~23% in the last 3 years. So it has already been lagging
- Market has been sold fairly severely prior to last week's bounce
- The weak dollar will be beneficial to those companies earning overseas, as foreign earnings translate into more dollars. However a slowdown in the developed world seems to be beginning, I suspect China will follow, and the US dollar seems oversold relative to the likes of the Euro/Sterling/Canadian Dollar, and could benefit as those economies also start cutting rates.
- The US is still the most dynamic and innovative economy in the world, and will have world-leading companies in every market sector for years to come.

However these don't sway me much in wanting to be short the market...lower growth and a peak in the corporate earnings cycle can only reak havoc on share prices.

What say you?



Yours,
2and20

Post number 1

OK so to kick off my blog, just a few explanatory notes:

Most of my trading is done via futures. So pretty much all of the trades you will see in the spreadsheet I plan to keep will typically be the futures, not any ETF of an index etc. However, whilst I want to try and keep the live P+L as close as possible to reality, Yahoo! Finance doesn't have interest rate or currency futures in it (that I can find anyway), so in those cases I'll just use the live price of the actual underlying. I will make adjustments to P+L once trades have been closed out.

The implications shouldn't be major, although FX is a little tricky due to the forwards being different from the spot due to the carry/interest-rate differential on the trade. We'll see how it goes though.

For single stocks, it will be the single stocks I list. I haven't found a way to integrate dividends live into the spreadsheet, so again a little manual adjustment will be required from time to time.

For commodities, like equity indices, it will be the futures in the spreadsheet, so exactly as my trades will be.

In any case, I'll try and make it clear at all times, and the P+L numbers I end up posting will be EXACTLY what I make (or lose...)

Hopefully we can get some constructive dialogue going here, as I feel that whilst there are many excellent blogs out there that offer broad analysis, there aren't many purely dedicated to trading, despite the fact that many readers will be as interested as I am in making cold hard cash. I also hope to integrate polls at some point to get readers to pick some trades.

I'll do my best to not get bored with posting and keep it lively. I've been a professional trader for over 10 years now so I usually have a view on most stuff at any point in time. I warn you up front that I am typically of a skeptical nature (often described as bearish) but I try my best to keep an open-mind of opportunities and not get dragged into the perma-bear camp...although it's kinda difficult not to be these days!

Good luck to anyone following me into trades!

Yours,
2and20