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we are now in the space between... cheap and bubble

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September 23, 2009 – Comments (10)

From my spot in the cheap seats we are now square in between cheap stocks begging to be bought (like march even while they don't want to buy, with valuations making a braindead monkey able to make huge returns if he just doesn't buy whats in favor), and some kind of bubble begging people to exit (even while they don't want ot leave) because valuations are silly. 

I turned market neutral 50 S&P points ago.  In real life i'm still net long because one of my 3-4 biggest positions is RJET which is unhedged.  In the top 10 are BZ and CNO. also unhedged.  And if you summed them, also top 10 would be high yielding BDCs, also unhedged.  My DOW (alto top 10) is very minimally hedged, and I have alot of hedges on other stocks.

I'm wildly underwater on my ASH and LVS and WYNN hedges.  sucks.  ASH will go much higher in the fullness of time...  but i may still profit from those hedges if we get any kind of correction or flat period.  I'm gonna win on my WYNN and LVS hedges yet, those 2 casino names are officially overpriced and i will not back down from the hedges but may double down on them.  :)

I turned non-bullish a while back.  Am I wrong?  

Is the severe cost-cutting that corporate america has undergone so powerufl that it has leveraged the companies to huge bottom line gains from any top line growth (bottom line is profit, top line is revenue)?  The inventory restocking cycle.. has it even begun, or are we still drawing down inventories?  If we are still drawing down, ... careful ont he bear side, we may still have a ways up to go.

Have I panicked from the wild success of my picks this year (3+x my money since january, 4+x since march).   And bailed too early? 

Was I wrong to hedge up WFC thorougly at 28?  Underwater on that so far.  Just think it has a step back before a step forward, its hardly cheap at 1.6x book.

Was I wrong to bet that XLs monster rally stops at about 25?  Or that GNWs monster move stops  at 18-20? 

I'm underwater on all buy my F hedges right now, ... and my BAC ones.  

Did i blow it?  underestimate the power of a trend once it gets a head of steam?  are we going up 0.4% a day for week sand weeks and months?

Or do I look like a genius as we step back 5-10%... 

We will see.

I'm definitely not ahead on my shorts of UYG and SSO, lol.  Not remotely at all.  

Is the power of a cost-cutting enabled potentially power if top-line-growth occurs earnings cycle going to blow away the potenital for future economic problems.  

What do you folks thing?  Dow 11000 or Dow 9000, what comes first?  

I'm currently down 2-3% net on hedges...  Which is painful.  Will I win for them in thend, or do we not see S&P 9xx again for a while?

The markets are overbought, stuff could unwind quick.  But will it?

What say ye?

10 Comments – Post Your Own

#1) On September 23, 2009 at 7:02 AM, JakilaTheHun (99.94) wrote:

I've been market neutral for about a month or two now.  It seems like some things are still relatively cheap, but I'm not finding the screaming bargains I was a few months ago.  Still, I think the market as a whole is close to being fairly valued. 

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#2) On September 23, 2009 at 8:21 AM, rofgile (99.31) wrote:

Checklist34:

 Looking at charts, I think to myself that I should sell now or hedge.  Remembering my original investment timeline, I know I should hold till 2010 at least before selling my shares (unless there is a better deal/investment to move into).  

 I have been of the opinion that on the macroeconomic scene, Q3 and Q4 will show clear benefits of an economic recovery occurring for companies.  That should mean increased revenue and earnings (without one-time markdowns).

 So, I'm holding through till November, and waiting for S&P 1100 to happen this year, with 1200 next year.

 -Rof

-----

 I don't think the markets are overbought - as I think they are a reflection of large funds realizing that the macroeconomic scene has been improving.  Lots of small investors may be missing out (all the alstry's and GMXs of this world). 

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#3) On September 23, 2009 at 9:02 AM, anticitrade (99.61) wrote:

Like Jakila, I am not seeing the quantity of screaming deals I saw in March. My model suggests that stocks are much MUCH more consistantly priced now, than they were a few months ago.  If I had the time, I think their is potential for using a model like mine to track the larger market movements....  I will put this on my long list of things I want to research.

Checklist,

It sounds like you are getting pretty serious about your investing.  I would like to talk with you about your plans, if you are willing to discuss them, please email me at anticitrade@gmail.com.

 

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#4) On September 23, 2009 at 9:05 AM, Huayra (< 20) wrote:

I have taken some money of the table in recent weeks to lock in some profits & to have some cash on hand in case the market was to have a correction back to 8500-9000 on the DOW by the end of the year or early Q1 2010.

But it's also useless to trade against the market and for now it still seems we are still in a rising trend. If the DOW were to punch though 10.000 this rally could have some more steam, supported by decent worldwide Q3 GDP figures and some recovery in corporate earnings especially compared to last years Q3, which was horrible.

No matter the market conditions I have found that price-to-book is an extremely handy tool for long term investing. There are still many decent companies with price-to-book of 1 or even less, paying dividends, good business plans and very important good growth numbers and potential, etc.

Although P/B is less useful with financial companies, I'd rather buy shares in a decent company at P/B less then 1, with more shareholder equity per share then what I'm paying at the time, then a company with many multiples.

It's a good way to initially search out companies, but it's far more difficult and time consuming to find the 10-20 stocks within those 1000 initial hits that are actually good companies with good long term investment potential. Most of the companies in My Caps, which I am also invested in among others, fit this catagory.

But then not everyone necessarily agrees otherwise it would not be possible to buy these companies at these prices to book, so perhaps my approach is incorrect. But then time will tell and that's also why I'm currently only 60% invested at these levels and have 40% cash waiting on the sidelines. Best to cover all the bases. The story with the dollar declining and its effect on the USD denominated commodities will have a large impact on in which markets and sectors best to invest in. 

 

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#5) On September 23, 2009 at 9:41 AM, bigpeach (29.39) wrote:

I always liked your investing style checklist. I employ a similar one myself. I'm confused about what you've been doing with your "hedges" for the last couple of months. I put hedges in quotes, because it sounds like they're not hedges at all. You should hope to lose money on a hedge. The purpose of a hedge is not to make money, but to reduce risk, and for that you have to pay a premium. Losing money on a hedge means you make money overall, so you should be quite happy with this. If your portfolio is such that you will profit from hedge gains, then you are over hedged, which is not a hedge at all, but a speculative position. Personally, I've taken out an intermediate term hedge, but I'm quite happy on days it loses money.

As always, I have no idea where the markets will go next.

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#6) On September 25, 2009 at 12:04 PM, checklist34 (99.71) wrote:

jakila, i agree that we're reasonably close to fair value here.  I've judged it to be a little higher, maybe 1100ish, i don't think 1150 or even 1200 would be "expensive" but i'd make my way to the door at that level.

 

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#7) On September 25, 2009 at 12:08 PM, checklist34 (99.71) wrote:

rof, I've had that same 1100 in 2009 thing ever since I blogged a few threads about valuations on the S&P a month or 2 ago.

I came up with, roughly, S&P 1200 being consistent with historical valuations for price/sales, price/book, price/cash flow and price/GDP

Then I assumed a roughly 10% discount due to the long secular bear market we are still in and the recession and figured 1100 was a good target.  We got close enough to declare that we hit 1100...

on a side note, though, i'm not a seller until next year of most of my shares for tax reasons.  I know that its common knowledge to not hold for tax purposes, but...  with options available to hedge up things I think are overvalued and so forth, it doesn't hurt to hold and you make 20% tax savings by holding 4-5-6-7 more months.  Thats pretty darn good.

S&P 1200 in 2010 would be awesome!  I hope we dip to 980 here...  that would put in a big ol panic and shake out some weak hands and create some bargains.  I could clear out some hedges at a profit...

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#8) On September 25, 2009 at 12:17 PM, checklist34 (99.71) wrote:

RVblackbird:  i agree it is useless to trade against the market, and for me its useless to even attempt to predict short term market moves.  All I seem good at it identifying undervalued companies and picking which ones will live -vs- which ones won't, which ones can get out of trouble -vs- which ones are permanently troubled.

except for ACAS where I misjudged the degree of their trouble.  Oh well, still made tons of money on it, and will be paying tons of taxes on it.  lol

When I use options to hedge I pick the longtest-dated options available OR options that expire more than 1 year after I first bought the shares.  So like march 2010 or jan 2011 options and so forth.  That gives me time to be right and puts time on my side.  I can sell a $60 WYNN call when WYNN was $62 for jan 2011, take in i think it was 17 bucks.  No downside on WYNN unless it goes under $43.  If its 62 again in 8 months the call will have decayed from time and I can buy it back for maybe 8 or 10 bucks.  If WYNN is 100 in 6 months it'll be worth about $40, I can buy it back take an income tax loss and sell WYNN for a capital gains tax gain.  Except in cases where a stock goes far, far higher than I judged it possible its a fairly low risk potentially high reward scenario.

I used to mess withs elling front month covered calls, but frankly i got it wrong so often that I have lost money on that strategy overall. 

I just have no market timing skills at all.  In fact ... just as I question my own fallin bullishness, the market takes a 3.5% (more to come?) downturn...

I think we retrace to the early september point of 980ish.  

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#9) On September 25, 2009 at 12:31 PM, checklist34 (99.71) wrote:

peach. 

The strategy is this:  I have bought puts and sold calls to "hedge" positions.  

I've done so in a variety of ways based on my estimations (hopefully decent estimations) for fair value.  

But say I sell a covered call or a costless collar, I usually do so for dates far in the future at whatever price I deem appropriate.  

If the market tanks over the short or intermediate term, the value of those hedges will rise.  The value of my long positions will fall.  

Say we dip to S&P 950 and the value of a call I sold on ASH for $10 drops to $3 or 4 or whatever.  I'll just buy it back.  Ditto the puts I own on BAC, CBI, WFC, USB, and many more names.  If those names correct significantly I'll sell the puts for a profit.

The last time around, in May I sold some covered calls, long term ones, on LVS, USG, DIN, ASH and many more.  I bought them back in july (very negative period) for typically60-70% less than I sold them for.  Then I sold puts.

In the move up here I have bought basically all of the puts back. 

If we don't get a correction or if the market continues to go up up and away, the hedges will lose me money and as you note, that is a good thing.

But if we do get a big correction as ... as is certainly possible ... I will just buy them back for a profit when the profit gets ripe in some of them and hopefully sell them again when we move back up.

Say there was 20 bucks in my portfolio at the may highs.  and 21 at the june highs.  there was about 17 at the july lows where I cleared out short calls and sold puts and went all in with cash (pretty much zero cash at the july bottom).  I had 22.50 when we got to the june high levels and 33 bucks at mondays high here.

If we dip back to the june levels again hopefully I'll have maybe 26-27 bucks instead of 22.50, then clear out the hedges and hopfully have like 35 bucks if we get back to 1080.  or whatever.

thats the overall plan.  

1.  get long into the crash and wait a while until the stocks at least approach fair value.  done

2.  (learned as I went here) try to "trade" a little bit in hedges.  That has gone badly every time I tried it with short term hedges, but it went well when I tried it with longer term hedges before.

So i'm trying it on a grand scale with longer term hedges this time.  

that may have been rambling and nonsensical but I think its a good strategy if I am able to communicate it.

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#10) On September 25, 2009 at 12:37 PM, checklist34 (99.71) wrote:

my cash levels are pretty low right now, like 10%.

I've sold many shares into this strength and taken in a great amount of premium (probably close to 15-20%), but I spent alot of it buying puts back and buying RJET after it won the Fronteir auction. 

So I don't have a big stash of cash to put in if we take a big tank in the markets, because I spent most of it on RJET and clearing out puts (buying back a naked put is a hedge, more o rless).

I guess its gone really well so far, but frankly... its been a bit disorganized and I think I can do better the next time all this happens.

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