Subprime Insight

With the release of the new Wordpress App for the iPhone, any downtime can now be blogging time. This is great for my daily 1.5 hour train comute to and from the city (especially since I don’t have Internet at my place in Queens).

This post marks my first in a long time due to many restrictions. First off, the lack of available internet at my house is key. Second, work has been taking up a lot of time. Any post from here on needs to disclose two things: I have been interning at the JP Morgan Investment Bank middle office for the Securitized Products Group. This actually happened by pure coincidence.

On March 7^th, I wrote a post called, “Apple’s Ace up Its Sleeve.” I proclaimed that Apple was about to take off and I explained why I was stocking up on Apple options. How good was the call? Just like my calls on the market, I was spot on. However, just how good the call was surprised even me.

If you look back at my posts, you will see that I accurately called the bottom of the market. On March 7^th, I sold my Citigroup puts (I had been shorting from 29 to 20) and began stocking up on Apple options (I began buying at 122). However, I did not put my entire portfolio in Apple since that would be a very risky move. I still held onto my commodity positions in case I was wrong but overexposed myself to Apple. This way if the market crashed, I would lose money on Apple but make money on commodities but still make money if the opposite was true.

This week was the week that I finally went balls out and put all my money into Apple. I bought April 135 calls and scaled up to 145 as the price rose to gain more upside exposure. Although I would love to take you through all the technical analysis that I did to make the money I did, I can’t. That would take a three page paper. However, I will take you through the money losing play I did today. Here is the Apple chart since March 6th with the yellow oval indicating when I advised buying options (click for a larger image):

First off, I’ve written before about the selling on strength or cashing out pattern that Apple has almost always displayed after events. Knowing that, any informed individual would then buy options on the way down, not up.

I erased all my other technical analysis I did by mistake while trying to clear my technical studies. What you see today is why I sold my Apple options. Previously I had bought options at the price points defining the lower extremes that defined that trading channel. Today, when that trading channel broke, I knew it was time to sell. However, that was the last of the confirmations that I needed. Here is a closer look at the sell signal:

What were the other technical signals? From 122 to 140, the pros were at work. There were clearly defined trading patterns that everyone was taking advantage of. Once we got to 143 to 145, those trading patterns disappeared. The price fluctuations started to move in random directions. What did this signal? It was clear to me that this was uncontrolled enthusiasm and a lack of discipline at work. It is the exact opposite of what I saw on March 7^th which marked uncontrolled fear. In laymen’s terms, those late to the party wanted in and were willing to pay any price.

How does this look technically? Look at the Money flow indicator at the bottom of the chart. See how on Wednesday the flow of money into the stock stayed flat while the stock price rose? The experts were selling while the rookies were buying.

So this morning, I woke up knowing this and decided to still go long Apple with caution. As soon as that channel broke, I decided to cut losses. Taking a loss is not easy, but when technical indicators are all pointing south you have to admit defeat. I lost $2000 in about 30 minutes. Ouch. But then again I’m still up $5000 in four days from only $4000 of invested capital. If I wouldn’t have cut losses at that moment, I would be looking at a $5000 dollar loss for the day and a $2000 dollar gain for the week. It’s amazing what a couple of hours can do to returns. Options are not for the uninitiated or stubborn.

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I missed out on predicting most of the month of March due to my spring break being right in the middle of the month. However, I can finally come to my weekly article with rest and confidence as many of my predictions have, to my surprise, eerily come true all too soon. I’d like to remind everyone why it is so important to make general predictions. As I said about a month ago: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow).

• CORRECT: An inter meeting fed cut is likely to occur or a dramatic fed cut during the meeting (75 basis point).
  • This could be put on hold as inflation concerns, due to the weak dollar, underscore Fed moves. But now we know the Fed could give a rat’s ass about inflation.
  • I think it’s interesting how the market FINALLY agrees with me. It took them long enough. I’ve been saying this for the past month.

Comment on the Prediction:

When everyone said 50 basis point cut, I said 75. When everyone said 100 basis point cut, I said 75. Remember, I said 75 basis point cut back in the beginning of February, so that is foresight. I also put the bond ETF TLT in my original crash portfolio due to this prediction and it has outperformed all other bond ETFs out there. That is amazing. Why didn’t I go with a 100 basis point cut? Strategy. If the Fed cut 100 basis points, it would lose 25 basis points of future “ammunition,” as it is being called nowadays. Furthermore, giving the market less than what they expected is a bullish sign. It is the Fed telling the market, “things aren’t as bad as you think, really.” However, anyone that knows anything knows that completely false.

• CORRECT: The next time we drop to 12,000 we won’t stop there.
  • It just might be this week! If we don’t get there within two-three weeks, I don’t think we’ll test new lows.
  • All the cool kids on the block are talking about, “testing new lows.” The Market is simply comprised a bunch of followers.

Comment on Prediction:

I hit this right on the nose again. I’m even amazed how accurate the time frame I gave was. I said on March 3^rd that we could be seeing new lows within the week and said that if we didn’t cross that 12000 barrier within the next weeks, we wouldn’t test the lows. Now, two weeks later, it just so happened that we retested the lows within the week. Then, I advised wrote about why I was buying Apple call options by the end of the week because we would be seeing a rising market in the near future.

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One of the reason’s I’ve been paying close attention to the market is because a close study of them can tell you exactly what the smart money is betting on. Two months ago I came to a horrible realization that the smart money has been betting on truly catastrophic events happening for quite sometime now. We have a couple of choices, but neither are good. We could go through stagflation, which we’ve been through before, no problem. However, it’s looking like we will be going through deflation if every step is not taken to prevent it, but, again, we’ve been through that during the Great Depression. Yet, the worst of all economic outcomes is an inflationary depression. We have not been through that and the outcomes of such economic times are horrific. Here is a visualization of that possibility from MTV.

Amazing strength by the Dow this morning. I would not advise jumping just yet, but in a few short days we are going to have one of the best buying opportunities of our lifetimes. I’ve been bearish for month’s but during bear markets we always see 20 percentage point bull runs.

Why will I be stocking up on AAPL options?

As I’ve mentioned before, I have followed Apple for a long time. Yesterday, I saw a pattern I was familiar with: Selling into strength or cashing out. It says nothing about the announcement! It’s just a great buying opportunity! We are truly living in historic times. Apple has just unveiled that the iPhone is the biggest game changer since the advent of the personal computer.

I’ve written about the Nintendo Apple comparison for some time now. Just last month I claimed that Apple was copying Nintendo, not the other way around. Let’s see if I can put this in perspective. Apple has done what Microsoft couldn’t with the iPhone internet browser. Apple beat Google to the completely open platform. Apple beat Nintendo by turning gaming truly mainstream. Absolutely amazing. Now, if Apple buys Yahoo! the technological arsenal will be complete for a technological onslaught in the second half of 2008.

I’ve said it before: Apple won’t be going below $113. Why? I don’t know, it’s just a hunch. Like the 75 basis point cut call three weeks ago or that we would be retesting the lows by early march. The last time it was valued at $113 was last August when the credit markets first came under turmoil, right before the first emergency fed funds rate cut.

The day of Reckoning is finally upon us. Repent or thy will will suffer the wrath of the Market.

I hope everyone and their mother either crash proofed their investments or bought massive amounts of put options. I did both to balance out my portfolios risk-reward level to something I was comfortable with.

During the past week, we’ve seen profit taking from commodities to help out the beleaguered market. Basically, when the market got too close to 12,000 commodities were sold and the market was pumped up by 200 to keep the market afloat until Friday. Why? To make it seem like the unemployment number caused the huge drop. I’ve seen this behavior before and have written about it.

Let’s be clear: this profit taking has nothing to do with the commodities market fundamentals. I’m expecting some obscure commodities to go up substantially more than gold. Some commodities are still priced as sweet prices, if you get the drift.

Why is the Market Going Down Tomorrow?

I call it the “Dow 12,000″ theory. If you look at the last time the Dow hit 12,000 in January, there was a sharp bounce back immediately for no particular reason. Investors just “guessed”hat 11,999 was ridiculously cheap for some retarded reason and bid up the market 4.9% in the following week. Now we are at 12,000 once again and speculators have had a month of losses drill the fact that 12,000 is not cheap in their heads. I call it boot camp for the hard of mind.

This whole situation reminds me of the Titanic. Those that thought this economy unsinkable laughed at those who warned of the Armageddon unfolding before everyone’s eyes. Unfortunately, for some to win some must lose. For years, the cult of the bull raged on while sacrificing the bears to the gods of indignity. Now, reason will finally triumph.

People called me crazy when I first said that we will probably be going through the worst recession since The Great Depression. Now, it seems that the educated on Wall Street are finally agreeing with me. There is no doubt that this is going to be a “hard” landing.

Here are some views from Bloomberg:

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I’ve said it before, I’ll say it again: I started this blog to, one, inform the public of the terrible economic crisis that is coming and, two, to make money. If anyone has been following my portfolio, they will see that I have changed the positions a substantial amount. This is because as the days pass by, I learn more about the market. I’ll be posting the to-date returns and yearly adjusted rates regularly. The yearly adjusted rates, which will be very high, will be presented just to make fun of the market. The yearly adjusted rates are completely fictional. Disclaimer: I do not work on Wall Street, I am not a CFA and I plan to invest in some of these investments. This is just my subprime insight.

Here is the performance of the portfolio on Friday, February 29th 2008 after two days of entering into the positions:

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If you looked at my original crash portfolio weighting, I had TSCM at 5%. I took the stock off the portfolio this week but I didn’t explain why. After all, why would I buy a tech share when I’m so convinced the market is going down?

I’m a tech guy. I made all the money I ever have in tech. Until the beginning of this year, I was up 150% in 1 and a half years. I’ll eventually put up my returns for all to see. I didn’t give a crap about “subprime” or financial losses. I thought it was well contained, but, boy, was I proven wrong.

I started writing this blog after I noticed trading patterns fundamentally changing in the tech sector. How did I know? Intuition. The price fluctuation I was seeing in tech shares were way too big and counter previous stock market behavior. I’ve become weary of this phenomenon called “cashing out” and it’s effect after January 2nd, the start of the new tax year. Basically, investors wait until Jan 2nd to place trades after siting on them for a month or so to stall tax payments for a whole year. It’s really smart but common sense stuff.

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I missed the opening of the market this week, but I’ll still go through predictions this week. I want to move away from the, “it will happen this week” predictions and move to concrete important predictions. Think about it like this: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow). Let’s Look at last weeks predictions:

• RIGHT: Stocks will trade lower this week as February put options expired last Friday (We are in a C Wave, also).
  • Reason: The Bearish Pennant! Here’s a good article on it. I noticed it last week and was going to write a post about it, but this stuff is common trading knowledge so everyone writes about it.
  • Economic Data being released! Since I caught onto the whole subprime scandal, I made an intuitive deduction that the end of February would see the next collapse in the market. Why? This is the point when the market gets hard data that shows just how bad the economy is. Next week we’ll see no second guessing due to conflicting numbers: they’ll all just bleed red. Look for the Case-Shiller index to crash the party for the bulls.

Comment on the Prediction:
I am completely amazed at the stupidity of the market: it has no idea what is going on. For this reason, I’m going to stop predicting when it will go down, but price targets for what is going to go up when the market goes down. Last week’s rally due to foreign exchange risk will not be happening again. It is very clear that central banks are going to let their currencies appreciate against the dollar. This is not good for foreign investors. Costs for them will increase if they are going to invest in the US stock market.

• WRONG: Bond insurers will be split.
  • Well, that’s what the market rallied on Friday. I’ll go with “consensus” here.
  • Market will probably have a nice bear rally on the news. Remember: the splitting of bond insurers does not solve any problem besides saving the muni market.

Comment on Prediction:

Oh the bond insurers! First off, I have been predicting an announcement of splitting. NOT the actual splitting of the bond insurers. That takes years. I hope you guys would give me enough credit, but if not I wanted to clarify that. Alas, that announcement did not come. Second, I found an interesting page on why they were justified such a high rating. Moody’s uses the Great Depression for stress tests. I think with this in mind and the fact Pfizer got it ratings cut, Moody’s is implying a bailout. THIS IS COMPLETE SPECULATION BY ME. This is a hunch, unlike my other predictions.

Now for Future Predictions:

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