Trading Diary – Past and Present

By on September 2, 2007

Over the past few years I have maintained a trading diary that I have updated sporadically. Below are ramblings from these missives:

9/2/07

Dow 13,357
S&P 1,473
NASDAQ 2,596

The Dow closed at 14k on the nose on July 19th, and there are some that still don’t believe the market is manipulated?!? Since then it has been a wild ride with most of the action to the downside. The peaking of the housing market 2 years ago is finally having an effect and is now causing a credit crunch originating from the sub-prime mortgage loan market. ARM resets began in earnest a few months ago and will continue with a vengeance for the next year. This prospect has caused me to initiate several large short positions as a hedge against my longs. Specifically, the Ultrashort Real Estate (SRS) and Ultrashort Financials (SKF) were purchased, along with a short of the Spain ETF (EWP). The Spanish housing market has been subject to substantially more speculation than that of the U.S. I really like these Ultrashort funds as a hedge, because I always have to worry about my puts making a huge turnaround. I currently have large gains in puts on Lennar and WCI Communities, which I have hedged to a degree by purchasing the underlying stocks.

Many of the pundits are surprisingly complacent about the continuing credit crunch and the potential fall-out. President Bush came out with an almost meaningless support plan for the housing market which was almost entirely political. Fed chairman Bernanke has been taking baby steps in adding liquidity, much to his credit. However, in the end, I believe the unraveling of the ponzi scheme that is the U. S. economy will prove too massive to be helped by measures that are even more substantive.

4/15/07

Dow 12,612
S&P 1,452
NASDAQ 2,491

The housing market is really starting to weaken, but it hasn’t affected the stock market yet. There was a scary 400+ point plunge in the Dow about a month ago, but the market has regained all of that lost ground. The only places that seem prudent to put money in are cash/bonds/large cap growth stocks. I was unable to capitalize on the housing puts because of the manipulation of those stocks, despite crumbling fundamentals. I should have bought the stocks to hedge at least ½ the position when they were cratering last summer (I was sitting on huge gains which evaporated). Luckily, I hedged my Apollo puts. It’s amazing that I picked what where subsequently the 2 absolute weakest sectors to buy puts in and didn’t profit more. Timing the trade is everything (although from reading my previous posts, Tom O’Brien has been shown to be completely wrong and irresponsible).

4/15/06

Dow 11,137
S&P 1,289
NASDAQ 2,326

The market continues to have an upward bias. It is quite shocking to look at some of the stocks I owned in 2002 and 2003, but sold too soon. Tesoro and Allegheny Technologies were both below $5 per share, but now fetch over $50. The stimulation conducted by the fed and federal government lifted a lot of low quality shares to the stratosphere and continues to do so. However, inflation seems to be awakened and gold is now over $600; oil is $68 per barrel. So short term rates are still being raised in 25 basis point increments (fed funds is at 4.75%, which will give some leeway for the Fed during the next debacle). The housing stocks are deflating gradually so my LEAP puts are close to break even, overall.

11/19/05

Dow 10,766
S&P 1,247
NASDAQ 2,227

Time flies. A lot has changed (divorce mainly). The market is having a year-end rally (November is historically the strongest month). I have a lot of cash expecting a weak 2006 with S. T. interest rates on the rise (the fed has raised about 7 times now). The stocks I sold in 2002 and 2003 have skyrocketed which has altered my philosophy. Buy stocks when they are cheap and just hold them. Use Bob Grumbine’s method of buying small positions (1/2 to 1 percent of total equity). If the position rises to between 2-3 percent of the portfolio, sell 30-50% of the stock. It’s easier psychologically. There are few things worse than watching a stock rise 10-fold or more after you sell it. Stocks should probably be accumulated around October 2006, sold the last 6 months of 2008 and accumulated again in the fall of 2010.

I’ve been following the news on the housing bubble which by all accounts seems to be peaking. Therefore, I hold leap puts on 3 homebuilders (CTX, TOL and BZH) expiring in Jan 2007. Most of the HBs have had moving average crossovers to the downside which implies that it’s over for them. If this trade doesn’t work out I might as well conclude that reading the news and doing any kind of analysis on major trends is a complete waste of time, because this is the most obvious thing to crash in the next year that I’ve seen since the internet stocks.

4/25/04
Dow 10,157
S&P 1,152
NASDAQ 1,932

A long time has passed since I’ve written here and a lot has happened. I’m very defensive right now with a lot of money in bonds and cash. Probably about 40% overall in stocks when you consider the TSP is 100% cash. I sold stuff way too early using stop losses (note: never use a stop loss too soon, if ever) in 2002 and early 2003. A lot of the stocks I sold have doubled and tripled. However, it is always difficult to gauge how much effect stimulative efforts will have. This time they had a lot of effect. Right now I’m waiting for a high reading on the fear index to get back into stocks. I feel it could take another year and ½ to get a good bottom which would be mid-way through the presidential term (right on cue). It would be nice if things worked out that easy, but the market has started out weakly this year so we seem to be on track for this scenario. The XLU is over 29 right now. I remember all the analysts hated utilities back when XLU was in the 15 – 18 range. Now they love them, especially Jonathon Hoenig on Fox Bulls and Bears. What an idiot. At the end of last year people were writing about how years ending in 5 are always up. It has been going that way yet. The Dow was close to 10,800 then. Housing is in a bubble. I just bought some puts in KB Home recently after taking a loss on my Lennar LEAPS. It’s only a matter of time before this implodes. Ed Hyman, the economist, who supposedly has a good track record, predicts housing will be firm through 2007. We’ll see.

12/14/03
Dow 10,042
S&P 1,074
NASDAQ 1,949

Saddam Hussein was captured today. The market has skyrocketed since the last time I wrote in this. Of course, just about everyone is bullish now. I probably should cash in some more chips here, because things don’t look that good to me. It makes me uncomfortable to do this because the economy appears to be making a comeback which is probably just due to the tax cuts and printing of money by Greenspan. Consumers are in debt up to their eyeballs and the stimulative effect will probably dissipate much more than expected.

10/25/02
Dow 8,444
S&P 898
NASDAQ 1,331

There are reasons to be bullish. Burt Badger of the Stock Doctors radio program has said a 12-15 month bull market is starting. He has been very accurate in predicting short term trends, so we’ll see how he does with the longer term. This came from a Barron’s article:

If there is a bright side to the two-and-a-half-year exodus from equities, it is the mass of investors who already have left the party and now have their cash in — yes, cash. That represents yummy feed for a bull. Since 2000, money has flooded into uninsured interest-bearing deposits. As a result, money-market-fund assets equalled almost 28% of the market value of the Willshire 5000 index as of September 30. The last time this ratio stood so high was in 1982, the very year the late, great bull market of the 1990s was born.

I’ve been selling some stocks at losses and replacing them with ETFs. Specifically the SMH, which I plan on placing a stop under support levels so I don’t get killed in an unexpected downturn.

10/16/02
Dow 8,036
S&P 860
NASDAQ 1,232

The market melted up around 900 points in the 4 days prior to today, which was down 220 points. The Put/Call ratio was about 1.2 today so there is a lot of skepticism still. I think this could be the start of something big on the upside. The ratio of bears in the AAII poll and Investors Intelligence polls was unusually high. Tom O’ Brien is predicting the S&P will eventually go to 300 which is an irresponsible prediction in my opinion. Likewise, Gary Kaltbaum pegged Intel as a sub-$10 stock. It’s around $13 right now. It could happen, but I doubt it. Of course, my recent purchase of the XLU (S&P utilities index) is lower than the $18.10, $17.51 and $16.45 lots I purchased. It stands a tad below $16. Catching falling knives is not my forte’. Never forget MIR, ELN and TSO which devastated the aggressive portfolio at my Stock Market Advantage site. I think it’s probably best to buy stocks that have moderately good news and are in a general uptrend. I’ve been burned badly trying to pick turnarounds. It’s probably best to buy stocks that have been in multi-year consolidations that are emerging to new highs. Buying stocks right after they have fallen doesn’t give enough time for excess capacity to be worked off.

10/7/02
Dow 7,442.84
S&P 785.28
NASDAQ 1,119.40

We actually did head down big time. My portfolios have been whacked. The semiconductors have crashed. It’s so bad that I was afraid to put on any new positions today. I have one bid for the XLU at 16.45, just above the 52 week low. Gary “Right as Rain” Kaltbaum has been riding the momentum pretty successfully to this point. Of course, when the market starts rising it’s “everything looks perfect,” so he can claim victory on the way up also. My fear index stands at 7.5 which is fairly high, but not screamingly so. The market has been down 6 weeks in a row and the last 4 days have been down so we must be due for some sort of bounce. My current margin is at an uncomfortable 67% of current equity.

8/25/02

Watched Bulls and Bears on Fox today. Gary Kaltbaum, of all people, was a guest predicting a 1,000 point decline in the Dow and then he’d “re-evaluate.” Gary B. Smith and the hyper blonde male with the glasses were also predicting a 1,000 point decline to 8,000 and then a rise. Since I’m negative and they’re all negative, it looks like we’ll be heading up.

8/23/02
S&P 940
NAS 1,380

The market had a bad day today with the Dow down 180. However, this Friday marked 5 up weeks in a row which the market hadn’t done in a couple of years. My sentiment is pretty negative. I feel the U.S. economy is a house of cards because the 11 rate cuts engineered by the Fed haven’t done much to get the economy going and the debt is enormous. Jim Rogers says Greenspan is printing money like a madman so maybe he can stave off a disaster. I think the trend is down and there is no need to be greedy. I think it is only worthwhile to buy stocks when the VIX is over 50 and then wait several weeks to take profits. Otherwise, the stock market is going to be poor until most of the 10,000 mutual funds are closed. That is just one aspect of the bubble that hasn’t been corrected by any means.

Roger Arnold wrote this on August 14:
“Credit Spreads are at record highs and rose again today for the entire yield curve even as the equity traders; i.e. morons, have been driving equity values higher since July 23rd. On May 15th, 3 months ago, speculative grade credit spreads were at 875 basis points. On July 23rd, the start of the near term equity run, they stood at 1205 basis points. Today they increased again to 1385. During this same time frame investment grade spreads have increased from 202 to 258.”

I was wondering where he gets this information.

I’ve outperformed since 9/26/01:

Then my equity was $*, margin $*, Today *,*.

8/20/02
S&P 937
NAS 1,376

The market backtracked a bit. Tom O’Brien made some interesting predictions. TYC which is over $15 now will go back to $7. It’s funny listening to these radio shows because almost all the callers are asking about their short sales. This seems like it would be a pretty good contrary indicator. I’ve been concerned about the debt in the economy which not too many analysts ever talk about. Louis Rukeyser never mentions it and all the other mainstream people on his show completely ignore the problem. The debt problem has worried me a lot in the past and gives me second thoughts about my heavy margin position. It is a dangerous thing to be so heavily indebted and I intend to control myself more in this regard (not let margin balance get so large). I need to make a limit of my own (say no more than 35%). I would have done better if I had held off buying until the VIX got over 50. The prices seemed to be getting to be bargains when it got over 35 so I had a hard time controlling myself, although I think I did a better job this time than in August/September 2001. Ned Davis made some interesting points in a recent interview:
A:The other big bubble is the explosion in debt. When the debt was issued there was collateral to back it up, so it didn’t look all that dangerous at the top. What always happens, though, is that the assets disappear and the liabilities don’t. While 257 public companies with $258 billion worth of assets defaulted last year and went bankrupt, the debt actually has continued to grow right through the bear market.
Q: Are you worried only about corporate debt?
A: No. It’s pretty much across the board. The only area of debt that has shown any great improvement is margin debt, and it is still way above the 15-year mean average. While margin debt has almost been cut in half, it’s not fully corrected. The rest of the debt — household debt and corporate debt and overall credit-market debt — is now $29.9 trillion dollars, or 2.9 times GDP. And there is less collateral for the debt, and that makes it a more serious situation. The debt bubble is our biggest concern.

8/19/02
S&P 950
NASDAQ 1,395

The market looked OK today with NYSE volume at 1.2 billion and NASDAQ at 1.56 billion. The S&P gained about 28 points today. The S&P was 2 points above confluence, which was the point Tom O’ Brien said the market was destined to hit a wall and head down. O’ Brien got stopped out of MSFT today (his short position). He told a caller that the Dow would absolutely not make it to 9,400 in this move. It’s about 8,950 right now. A lot of talking heads on TV are now starting to sound bullish. Even Jim Rogers thinks stocks will head up quite a bit before they head down again. This is a bit worrisome when people start thinking the same thing.

8/14/02
S&P 500 919
NASDAQ 1,334

Capitulation entered my mind today. The S&P was down about 10 points mid-day and I thought it wouldn’t be bad to walk away from this market with $* in the bank. That would be down about 25% from the peak, but not a small amount of money. Right after thoughts of capitulation, the market had a remarkable end of day rally where the Dow rose about 400 points from its low. The S&P finished today up 35 points! What caused these thoughts of capitulation? I listened to Tom O’ Brien’s radio show yesterday and he said we were heading down, his guest Roger Arnold said we were heading down because Greenspan didn’t lower rates yesterday since monetary policy wasn’t working. Fed funds are at 1.75%. Roger Arnold has raised all kinds of ugly scenarios lately. The GSEs (Fannie Mae and Freddie Mac) have over $1 trillion loaned out which is more than all the other banks combined. They are loaning money to recent college grads for houses they can’t afford. Right now I’ve got over $* on margin so it is a bit worrisome. I figure the margin calls would come in if the Dow hit 6,000, the S&P around 600. Today Tom O’ Brien predicted this market would drop below S&P 500 500 (no timeframe given). He also said GE was going to re-test 24 “bar none.” AOLs going to 5 according to him (toast is his word). The banks are also toast (C to 25 and JPM to 15). About 2 years ago he said 3,000 was the bottom on the NASDAQ, so he is definitely fallible, although his targets have been pretty accurate the past month. Probably should turn off the radio and just watch the VIX and P/C ratio.

Here is what Roger Arnold had to say today at Suite 101 (pretty scary stuff):
Credit Spreads are at record highs and rose again today for the entire yield curve even as the equity traders; i.e. morons, have been driving equity values higher since July 23rd. On May 15th, 3 months ago, speculative grade credit spreads were at 875 basis points. On July 23rd, the start of the near term equity run, they stood at 1205 basis points. Today they increased again to 1385. During this same time frame investment grade spreads have increased from 202 to 258.
The marginal cost of borrowing for the 80% of US companies that fall in speculative grade has increased by 250% in just the last 3 months and that assumes they can still access the capital, which of course they can’t.
The 20% of companies falling within investment grade have experienced an increase in their costs to a lesser degree but they already have too much debt and aren’t borrowing any more.
Companies are being suffocated. The only option left for many of them is to begin firing people and shutting down.
If consumers don’t have jobs or income it doesn’t matter how cheap mortgage rates or car loans get.
And when the ones that do have jobs catch on they won’t spend either.
You are an intelligent man.
How do we get out of this without a deflationary spiral?
How long is it going to be before the equity traders realize that the bond traders already decided what the outcome of this is going to be and start racing for the doors like someone just shouted fire in a crowded theater?
The debt bubble is getting ready to implode. Deflation is the inevitable result.
I do not offer these comments as an attack. I really want to know why you believe the probability of deflation is decreasing.

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