3/30/09

Another AIG Scandal?

Remember how in early March the banks, starting with Citi's (C) purposefully leaked memo, announced that they had operating profits? This was the beginning of a rally of over 20% on the S&P 500, which might now be over.

Zero Hedge reports that these profits everyone thought marked a turn for the economy actually resulted from AIG unwinding its CDS positions. Basically, the government gave money to the banks through AIG, and the banks said these payments were profits.

If that's how the banks booked profits in January and February, it would seem that the current optimism will disappear. The administration, which already has credibility issues, will no doubt face another round of criticism. And maybe this time Geithner will go.

Is what Zero Hedge reports true? I don't know. I'd certainly feel more confident about the reliability of the information if it came from a more established news source. After all, I'm a guy with a blog too. I can post made up stuff and have people link to it. Especially if it sounds true, like another AIG scandal. Nevertheless, we bloggers have reputations to maintain. It wouldn't be in Mr. Durden's interest to publish what he believes to be false (though I'm sure he has that soap company of his to fall back on).

So keep in mind, maybe it's just a rumor. But I think the article is true.


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3/19/09

Sold My Calls This Morning

Market sentiment changed dramatically since I pondered about the latest rally (the bottom or just another bear market sucker's rally?) just as few days ago. After yesterday's (3/19/09) close, with the S&P 500 up around 18% in a week's worth of trading, the bulls seemed to outnumber the bears and other skeptical investors. The screaming and yelling Fast Money guys seemed particularly bullish last night. More importantly, I feel bullish and think there's no reason for the market to go lower (bearish sign).

Another thing that drove me to sell my calls (for a not so bad profit, but I wish I had bought them later than I did--and they're on the SPY if you've been wondering which calls I keep talking about; and as always, I try to update my trades on the bottom sidebar of this blog) was a video by TheStreet.com's James Altucher. (In the video he's the Sideshow Bob looking guy who is sleeping on the sidewalk and talks like he drinks too much coffee.) He says, "the bull is back." This coming from Altucher, who advises debt free homeowners to take out a mortgage because "cash is king" (genius!) is a bearish signal for me. He's been a frequent guest on Yahoo!'s Tech Ticker, and each time proclaimed that stocks are incredibly cheap or were great over the longer term just as they peaked before a leg down. November 4, 2008, July 10, 2008, December 2007. Maybe it's just poor timing of his appearances, as he'd probably say the same thing on March 9 as he's saying now (and would seem smart today). And I'm sure he's made some good calls in the past (I haven't found any), but I sell when this guy says buy.

I'm not buying puts yet, and maybe I'm a bit early in selling, but I think we're due for at least a small pullback.


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Surprise Surprise

Everyone seems surprised and upset about the AIG bonuses, but are some government officials of our banana republic just acting?

From CNBC:

In a stunning development, Sen. Christopher Dodd said that Obama administration officials asked him to add language to last month's federal stimulus bill to make sure the controversial AIG bonuses remained in place.
Dodd, chairman of the Senate Banking Committee, told CNN that Obama officials wanted the language added to an amendment limiting bonuses that could be paid by companies receiving federal bailout money. He said they were afraid that without it, the government would face numerous lawsuits from employees who were promised bonuses.


Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward.

But how could that be if the administration was asking for language to be added to the "stimulus" bill last month? Besides, CNN reported on the AIG bonuses on January 28th.

Where's the surprise? 

And the funniest thing is Geitner's proposal to get the $165 million in bonus money back: reduce AIG's bailout by that amount! Genius! How does that work? You beg me, "please, please, please, lend me some money so I can feed my kids and pay the rent." I give you the money, knowing that I'll probably never see it again, but hey it's for a good cause. Then find out that you subsequently bought everyone drinks at a bar. Geitner's solution is that I take what you've spent on the booze from you, reducing my loan by that amount. Does that change anything? I'm still the one paying for the drinks.

Geitner is either not very smart or is shameless (maybe after he resigns Obama will follow Bush's example and give him a medal). It could be both. That's what it takes to advance in Washington these days.

But we're not so bright ourselves. 

They are stealing our money right in front of us. It's not just the bailout of their Wall Street friends. (For instance, most of the AIG bailout is going out the back door to Goldman Sachs et al, for crap that AIG insured. Billions of those dollars will probably be paid out as bonuses at those firms at the end of this year. Paying off Goldman by giving money to AIG is supposed to save our financial system.)

And it's not just the previous bonuses. Are we still angry that around three fourths of Bank of America's most recent bailout was paid out as bonuses? I think we've forgotten. That's billions of dollars, and here we are livid over AIG's $165 million, which is, incidentally, about $5 million cheaper than Obama's inauguration.


Everyone seems so angry about the bonuses, whether main street's real anger or Washington's feigning. I'm not especially. 

The real outrage is the nonstop running of the printing presses. The Fed just announced that it will print an additional $1 trillion plus. I've lost count of how much money is floating around out there. This is a far larger theft than the bonuses.

The silver lining, for all you angry people, is that eventually the bonuses you're upset about won't be worth anything anyway.

I say when everything fails (and it will, as our foundation is rotten), we get out the torches and pitch forks, clean up DC and Wall Street, and start over fresh.


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3/14/09

Another Bear Market Rally or Have We Hit Bottom?

The S&P 500 is up around 10% since its low of 666.79 on Monday. (Investor's sentiment, including my own was so negative, that I decided to sell my puts and buy calls. It turned out to be a week too early, oh well (my calls are now about even).

It's remarkable how when the majority of investors are of a particular view the opposite of that view turns out to be correct. Remember, for example, the notions Nasdaq 6,000, Dow 16,000 (I'm thinking of Morningstar's call a year ago) 36,000, etc, China is safe until the Olympics, we'll have a stock rally until March? These, and many other consensus views have been proven wrong.

In early March, the consensus turned very bearish. The mood was captured in the Motley Fool article "What's Next? Dow 5,000?" and the Wall Street Journal's "Dow 5000? There's a Case for It." The WSJ piece came out on March 9--the day before the current rally started. I hope the WSJ article has the same place in history as Business Week's 1979 "The Death of Equities" cover.

There are still plenty reasons to think the market has far lower to go. We've been hearing the doom and gloom for weeks and know the story: the economy is in shambles, the previous decades' growth was based on spending borrowed money, Eastern Europe is collapsing and might take Western Europe with it, there are looming credit card and commercial loan defaults, hundreds of thousands of people continue to lose their jobs every month, housing prices are still plunging, etc.

But there are also reasons to think that the bottom in stocks was March 8th. Some consumer numbers are improving. The worst banks, if they are to be believed, are making money (but will write downs make them report losses?). The government is, at its customary slow pace, getting ready to reinstate the uptick rule and to modify the mark to market accounting rules. Whether these are good ideas or not, the market may respond positively.

The WSJ piece is another indicator. Further, the sentiment at the moment seems mixed. During all the past rallies many commentators were quick to call the bottom. There are many doing this now too. But what seems different is the growing chorus dismissing this week's market rise as just another bear market rally. The bottom callers and bear market rally callers seem about evenly mixed to me. I'd say this is a substantial improvement from the previous rallies.

Let's hope we did hit bottom. But don't be surprised if we go down another leg. I'll be looking to buy puts if we go up another 10% and I feel euphoric, or it seems to me that most investors are optimistic. An article from a major publication with a headline like "It's Safe to Invest Again" would be most helpful in making bearish bets.


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3/6/09

Risky Leveraged ETF Arbitrage Strategy

This post is yet another demonstration of why holding leveraged ETFs for a longer period is not worthwhile. It is also a brief examination of how the less risk averse among us might take advantage of this fact.

I wrote a while back about the dangers of holding leveraged ETFs over the longer term. As everyone should know, these instruments are designed to be used for short term trades. You can see this by looking at any of the leveraged bear ETFs' highs and lows. Even while the market is making new 52 week lows, many bear ETFs are off their highs, some by as much as 50% or more. This is because the longer one holds them, the more likely it is that volatility will kill performance. Morningstar recently summed this up in a two part video series.



So if holding the leveraged ETFs for a long time may not be very profitable, what about selling them? Here is a pretty risky arbitrage strategy that should work as long as the market stays volatile. This one is best left for the gamblers among us.

Sell short the leveraged ETFs in pairs. That is, sell short both the bull and bear ETFs for the same underlying index for the same dollar amount. For example, short $10,000 worth of BGZ and short $10,000 worth of BGU. This position is partially hedged. Since the ETFs essentially mirror one another's movements, as long as the market does not take one direction for too long, the position should be relatively stable. For example, suppose BGU goes up 10%. BGZ should fall 10%. You've neither gained nor lost anything. Any underperformance of the ETFs relative to the underlying index is the short seller's profit.

Take a look at the following most liquid 3x ETF pairs, and their performance since November 19, 2008 (the first date on which it was possible to buy/short both simultaneously).


Large cap stocks: BGZ and BGU.



Energy: ERY and ERX.


Small cap stocks: TNA and TZA.


Since November 19, BGZ is up around 10%. Its counterpart BGU is down close to 50%. Shorting both of these in equal dollar amounts would have produced a gain of around 40%. Since November 19, TNA is down around 50%. Its counterpart TZA is also down (although not nearly as much). Although the ETFs trade in opposite directions, one could have made money on both. The same is true for ERX and ERY from November 19 until March 5th. ERY is down around 10%, while ERX is down over 50%.

I've used various different periods, and for the most part, one ETF in each pair is down more than its counterpart is up. Occasionally, over the very short term (i.e., intra day), both ETFs in a pair were up.

If this seems too good to be true, you are right to be skeptical, for there are plenty of risks.

I say above that the strategy of shorting the bull and bear pairs is mostly hedged. It is not completely hedged. For one thing, although the ETFs trade inversely (e.g., if one goes up 1% the other falls 1%), the movements are inexact. It often happens that one ETF rises more than its counterpart falls, and vice versa. A more important reason that the strategy is not completely hedged is that while the ETFs can go up more than 100%, they cannot go lower than 0. In shorting these ETFs, one's potential losses are unlimited. Consider UYG and SKF, where one would have lost money by shorting both:



One way to guard against this would be to purchase out of the money calls (say 100% out of the money) on each position, but the cost of this insurance would likely make the enterprise not worthwhile.


Other risks include liquidity issues as well as difficulty in borrowing the shares. One's broker may also close out a position at the most inconvenient time.

Although the strategy seems to work well over the medium/longer term, it might be safer and wiser to close out the position as soon as it is possible to realize some predetermined gain, say 5% or more. Close out the position then start one anew. One must watch it like a hawk.

I am not going to try this out myself. I am too scared of short selling (perhaps irrationally so) and like to replicate short strategies with puts. Unfortunately, the puts on these ETFs do not go out past October, the strike prices are too low, and the premiums are too high.


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2/28/09

Obama Snubs Geitner?

Take a look at the last 20 seconds or so of this video. Obama shakes Dodd's hand, Frank's hand, moves past Geitner, and shakes Shelby's hand. It looks as though Geitner reaches out to shake Obama's hand and the President just moves past him.

Probably nothing, but might we have a new Treasury Secretary soon?

(Sorry about the annoying commercial; I don't know how to get rid of it.)














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2/23/09

Professor Obama's Break out Sessions

In concluding his speech at the start of the Fiscal Responsibility Summit, Obama urged those assembled to separate into groups and have "break out sessions." Then they are to come back later today and report to him what ideas they have discussed.

This may sound oddly familiar to those of us under 30 or so. We've heard this kind of thing ("break out sessions") from moron high school teachers and college professors for years. Remember this nonsense? Separate into groups, talk amongst yourselves, have someone write it down, and then read it in front of the class. The result is always the same: nothing gets done and no one learns anything. OK, we do learn something--how to talk.

And that's the problem. Obama is the end result of "break out session" education, where talking takes the place of thinking; he is the epitome of knowing nothing but sounding like you know something. That's all he knows how to do. All his speeches so far have had no substance, just buzz words. All the plans so far have laid out principals for how responsible hardworking people will bailout the irresponsible. "Transparency," "accountability," "responsibility," and so on. Repeat it enough and people will believe you. Maybe they won't question how you can sign $787 billion in new spending into law and then hold a fiscal responsibility conference with a straight face. Maybe they won't think about how the "stimulus" bill was bullied into passage in the same way the Patriot Act was, and how no one had time to read the damn thing. Very responsible and transparent.

Well here's a suggestion for your group work assignment, Professor Obama. You can save $787 billion right away. Cancel the "stimulus" bill!

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2/22/09

Where to Buy Gold and Silver

In general, people buy physical precious metals just in case there is a (currency/financial) collapse, to have a readily available store of their wealth, and because they do not trust paper. If one wants to avoid the risks of owning paper (dollars, stocks, etc), buying more paper (gold certificates, ETFs, futures) doesn't make sense.

Lots of people are currently interested in buying precious metals. When regular Joes and Janes are racing to buy something, this usually indicates the top of that market (stocks, houses, tulips, etc). On the other hand, precious metals prices can continue rising for a long time yet, given the monetary policies of most governments. Whichever way prices go, the buying and selling of physical precious metals is right now a booming business.

As is usually the case with booming markets, there is fraud. Thieves have been known to sell old ladies bricks spray painted a golden color. Companies like Cash4Gold are allegedly buying people's jewelry for as low as 1/3 of the market price. Others are trying to sell various gold coins for much higher than the market price. And so on.

So, if you're interested in buying bullion, you have to be careful. It's easy to find a gold/silver dealer through a search engine, but how do you know what they're selling you is legit and not gold plated lead?

One good place to start is USmint.gov. They have a list of dealers of American Eagle gold and silver coins. These companies are not official dealers of US bullion coins, but their listing on the government website gives them some legitimacy. I would be more comfortable buying from them than from those that are not listed.

After you've narrowed down the list, be sure to check how long the remaining companies have been in business. The longer the better. Next, try to find out how long it takes for them to ship you your order after they receive payment. If the dealer goes out of business before your order is shipped, you may lose your money. Thus, try to make more purchases for lesser amounts, just in case.

Be sure to shop around. There is always a premium over the market price that dealers charge. Some charge more than others. Remember to factor in all transaction costs, including shipping and insurance.

One company that I've been satisfied with is the American Precious Metals Exchange, operating out of Oklahoma. They've always shipped a couple of days after my credit card payment was received. The package is insured and you have to sign for it. Note that they charge cancellation and other fees.

I've never bought from Kitco, so I don't know how good they are, but the website has a wealth of resources.

Northwest Territorial Mint is one to be wary of. Many people say they have great experiences with the company. Others disagree. They complain of long shipping times and unresponsive customer service. The company has recently settled a related lawsuit. The premiums they charge are at times significantly higher than other companies'.

One of the safest (and cheapest in terms of above market premium) ways to get your hands on silver is to buy "junk silver." This includes dimes, quarters, and half dollars minted in 1964 or earlier. They have around 0.715 troy ounces of silver per dollar face value (10 dimes, 4 quarters, or 2 half dollars). (So the next time you want to pay for something with change, check the years of your dimes and quarters. You might get lucky.) Given that coins are hard to duplicate (or maybe no one bothers because the face value is low), when buying junk silver you can easily tell if it's genuine. Many people are even comfortable buying it on Ebay.

If making large purchases, you might consider opening an account with a commodities broker, buying gold or silver contracts, and then requesting delivery.

Some pictures from Zimbabwe. Let's hope that's not what awaits us.


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2/21/09

Some More Doom and Gloom

I don't know if I'm turning into one of those crazy "the world is ending lets buy physical gold and silver" types, but I found this article interesting and scary. The author provides his interpretation of the Davos Forum. The author comments about Putin's blue print for a post USA world. It seems credible, but it's not mentioned anywhere that Russia is on the verge of bankruptcy. They'll burn through cash very quickly if oil prices don't rise.

I never heard of this guy before, but he seems to be dead on:





Faber says Eastern Europe is collapsing, because they borrowed too much in foreign currencies (this does not bode well for their creditors).



It seems that everywhere I turn there is deep pessimism about the future. As I'm very pessimistic myself (and view myself as a contrary indicator), I've sold my puts and bought calls on Friday. The market can continue falling, of course, but I think we're about due for a rally (probably just shorts covering).

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2/12/09

Jim Rogers Shorting GE, JPM, IBM, Covered Treasuries

Jim Rogers, the famed investor and writer,  is always informative and fun to watch. Below is a recent Bloomberg interview.

Jim Rogers continues to be bearish on US stocks, but has covered his short position in long term Treasuries "because of Mr. Bernanke." Presumably that means Rogers thinks the Fed can keep yields low by buying Treasuries. He also briefly mentions that he's shorting IBM, GE, and JPM.

Rogers says Tim Geitner doesn't know what he's doing, and is responsible for our current situation because of his role as the NY Fed president. That seems correct to me.

Rogers also repeats his solution: let all the insolvent companies fail. Wipe them out and we'll have a fresh start. The economy will start growing again. He didn't mention Korea this time, as an example of a country that let its businesses fail and then had a great growth rate.

I agree, but here's a caveat about growth. Let's say we're at 100 right now and letting everyone fail takes us to 25 (made up numbers, just for the sake of an example). Let's say after that we grow 10% annually (an awesome growth rate). It would take us over 14 years to get back to where we are. This is to say, just because an economy is growing it doesn't mean that it's better off than it was a few years ago. Nevertheless, if we don't let the incompetent fail and keep them around as zombies, we might very well get to 25 anyway, but over a longer period of time. And then we might not grow at all. Look at Japan.

One thing is clear, as Rogers has been saying; you can't solve a problem caused by too much debt and consumption by more debt and more consumption.





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2/11/09

Higher Trading Fees Coming?

During the testimony of the bank CEOs in front of the House Financial Services Committee today (2/11/09), Congressman Stephen F. Lynch (D-MA) asked what the bankers thought of a "transaction fee" on purchases of stocks and bonds. Lynch's idea is that because a sizable minority of his district does not own stocks, those people who do own stock should pay for the financial bailout. He mentioned a fee of what sounded like "three hundredths of one percent per share." (We'll have to see what the transcript says.) It looks as though the idea I wrote about earlier is gaining ground, unfortunately.

That earlier proposal, by the liberal think tank Center for Economic and Policy Research, called for a fee of 0.25% on every financial transaction. I hope the congressman is thinking of 0.03% (that's what it sounded like he said) rather than 0.3%. We can live with a 0.03% fee, but most day traders will be out of business with a 0.3% fee. That in turn will lead to higher costs for everyone, as well as more job losses for the reasons mentioned here.

Most of the bankers sheepishly answered that "it's a good idea" (e.g. Ken Lewis) or "I don't know" (Vikram Pandit). Only one, John Mack (I think) of Morgan Stanley (MS) said that it would be a good idea if it didn't drive volume away from American markets.

Some sort of fee will ultimately be imposed. I hope it's closer to 0.03% than 0.3%, but with our current congress I wouldn't be much surprised with a fee of 1%.



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2/10/09

Bought TBT, No Plan Geitner, Minneapolis Fed Article

Oh what luck I just bought TBT for less than I planned (though it may fall more), at $46.34. Reasons for buying are in my last post here. I'll wait for a 10% decline to buy some more. Since leveraged ETFs underperform when there's volatility, a safer play would be to buy very deep in the money puts, say for Jan '11, on TLT. Say a 150 strike or higher. That's almost like shorting TLT, but your downside is limited (and the put will probably still expire in the money even if yields go back down, though anything is possible).

The market is down big today (so far, it can always turn around). Why? Sell the news: Tim Geitner unveiled his plan, which apparently is a set of principles and a new government website. The Senate also voted on and passed its version of the bailout pork spending bill. Now they'll argue with the House over how much they should spend for useless stuff. The market went even lower after Bernanke started talking.

Nothing good will happen until they close down the incompetent banks and give their assets to the competent ones.

Some interesting reading:



Disclosure: Long TBT.



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2/8/09

I'm Going Long TBT

've been watching Treasury yields for a while, looking for a sign that the bubble has burst. It looks to me like it might have. I'm certainly late to the party, as the Ultra Short Lehman 20yr+ ETF (TBT) is up considerably from its lows. However, I think it has far to go up, and the downside risk appears limited. This doesn't mean that it won't reverse course, but I think over the longer term (despite my misgivings about leveraged ETFs), it will do very well.









First some numbers.

The current US public debt outstanding is just over $10.7 trillion.



As of November 2008, major foreign holders of Treasury securities own around $3.0859 trillion in US government debt. The top five are

China $681.9 billion
Japan $577.1 billion
UK $360 billion
Caribean Banking Centers (Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama) $220.8 billion
Oil Exporters (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria) $198 billion.

The principal reason that these foreign holders have been able to buy so many US bonds was the virtuous circle created by US consumers buying foreign goods and raw materials and shipping US dollars overseas, the proceeds of which were used to buy US bonds (and mortgages, etc). We bought their junk and oil, and they bought our debt. As everyone by now knows, the circle appears to be breaking, perhaps turning into a downward (death) spiral. Despite government calls for people to borrow and spend, consumers are actually starting to save.

The Japanese economy is facing a severe decline. It is expected to contract 2.5% in 2009, according to the IMF. A former Bank of Japan official is more pessimistic, expecting a decline of at least 3.8%. This will be on top of the 10% or more annualized decline in GDP in the final months of 2008 (expected, figures not available yet--the average estimate is for an annualized late 2008 GDP drop of 11.5%). Add to this political turmoil. Japan will probably be a less willing/able bond buyer. It has already reduced its US bond holdings ($582 billion in October 2008).

The United Kingdom's GDP fell 1.5% (a downward revision is expected) in the fourth quarter of 2008. The expectation for this year is a drop of 3%. With the pound falling and some currency experts calling for parity with the dollar, the UK probably won't be able to buy as many US bonds.

China, the world's 3rd largest economy (sorry Germany), is also facing problems. Its GDP is expected to grow at 7% in 2009. This is terrible for a country that requires 15 million new jobs annually just to keep up with population growth. China has already complained about the low bond yields, and has been angered by Geitner's currency manipulation comments. It's now likelier that China will start selling its US bond holdings instead of buying more.

Oil prices have come down a long way, leaving bond buyers like Saudi Arabia with far less cash to spend. Faced with a worldwide economic decline, other major bond buyers will also have less money to invest.

The US bond buying activities of the top foreign bond purchasers, then, should be curbed. With less buying interest from a major portion of the market, it seems that Treasury yields will have to go up. Add to this increasing supply.

According to Bloomberg:

The government will need to auction $493 billion in debt this quarter, 34 percent more than initially projected, the Treasury said on Feb. 2. It will probably borrow as much as $2.5 trillion during the fiscal year ending Sept. 30, compared with $892 billion in notes and bonds it sold the prior 12 months, according to primary dealer Goldman Sachs Group Inc.


Who is going to buy all this debt? As we saw, the major foreign holders may not be as willing or able. Other market participants, will sooner rather than later demand higher yields before they start buying. While yields are up from their troughs, they are still very high historically. Barring another panic like we had in December, rates should not fall very much, if they do at all. (It's certainly possible that 30 year yields can fall to 0% in a super panic, but it is far more likely that they will continue rising. Also, if something like a 0% yield on the 30 year happens, we are royally screwed.)

The buyer of last resort is the Fed (which Marc Faber says follows the "Zimbabwe School" of economic thought). As they print money, they can buy as much debt as they want. If the bond market balks, the Fed will try to pick up the slack. The Central Bank can win a few early battles, but the market will win the war, as it always does. The more the Fed prints, the sooner the dollar's demise. If the Fed has to step in because other buyers are unwilling, those buyers will not be any more willing when the number of dollars increases. Interest rates will have to rise.

If/when interest rates rise, the economy will stagnate further. Consumers will spend less on foreign goods, which will leave less money for foreign bond purchases. Less bond demand (and ever more supply) will make rates go up even higher. We will eventually have inflation, as the Fed prints more money--more upward pressure on interest rates.

We can have inflation even if the economy continues to struggle. The Consumer Price Index was just under an annual rate of 15% in the late 1970s. They called it stagflation. The 30 year Treasury yield, which was around 8% at the end of the 1970s spiked to over 15% in 1981. It's hard to see why something similar will not repeat again.

The 30 year Treasury yield, at the time of writing, is at 3.683%. Let's say it goes back to 4.5% (the 52 week high is 4.813%) in the next few months. That's a loss of around 18.5% for the 30 year Treasury price. As TBT is twice the inverse, we can expect a gain of around 37% or more (as long as there isn't too much volatility). Over the longer term, if the US continues its massive borrowing, which it probably will, the yield can go a lot higher.

Note that if yields fall, the TBT will fall twice as much. Should the fall be significant, the expectation of a 37%+ gain if the 30 year yield is at 4.5% will have to be reduced. Example: the 30 year Treasury yield falls 10%, and then rises 11%. It's back to where it started. In this scenario TBT will fall around 20% and then will rise around 22%. It won't be back where it started. It will be down 2.6%.

I'm going long TBT. If it falls (which it might), I'll buy some more. One major caveat here is that this trade seems like such a no brainer that it's bound to go wrong somehow. Easy money is always the hardest, as they say. If you're following me into TBT (hopefully you're already in it in from the low 40s or mid 30s), don't put everything into it. And please do your own research.

Other ways to play this, as mentioned before at the last market peak, are to short the long 20 yr+ Treasury ETF (TLT), buy puts or sell calls on TLT, or buy calls or sell puts on TBT.

Another way is to sell puts or buy calls on the 30 year Treasury index. These are cash settled. If you are long the option at expiration and it is in the money, you are paid the difference between the yield and the strike price. If you are short an in the money option at expiration you pay the difference between the yield and the strike price. If you are long an out of the money option at expiration, you lose your premium. If you are short an out of the money option at expiration, you get to keep your premium. If the strike prices are puzzling in the Yahoo! link, multiply the yield by 10 (e.g., 3.683% = 36.83).

If you are long Treasury bonds, think about using some of these to hedge yourself.

And of course, if you think Treasury yields are going down, do the opposite--short TBT, go long TLT, etc.

Update 2/10/09:

Links to WSJ charts comparing S&P/DJIA and 30 year yield:



For an opposing view, check out this article at thestreet.com, which says that the bubble is in TBT, not treasuries.

Disclosure: I hold no positions in the above mentioned securities, but am planning to go long TBT.

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2/7/09

Trade Notes March 07 to Feb 09

My trade notes in the sidebar were getting too long, so I've put them here. As you can see, I was kind of busy in January--which correlates with my less frequent posting. The format for the January trades is different because I just copied and pasted to save time, whereas before I wrote out what the options were. Basically, these are puts and calls on the SPY ETF.

Not listed below, because it's in a different account, but my WFC was called in early February. I had also tried to do a dividend capture with BMY, which succeeded last year. 

I'll hopefully have some time to go over the trades below to analyze my successes (luck) and more importantly my failures.

02/10/09 .SWGBL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGBL AT $0.35
02/05/09 .SWGBL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGBL AT $0.59
02/04/09 .SZCCG BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCG AT $3.40
02/03/09 .SZCCG SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCCG AT $3.60
02/02/09 .SZCPB BOUGHT TO OPEN 6 CONTRACTS OF OPTION .SZCPB AT $5.50
01/30/09 .SZCCI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCI AT $2.70
01/28/09 .SWGNL SOLD TO CLOSE 6 CONTRACTS OF OPTION .SWGNL AT $4.75
01/28/09 .SWGNL BOUGHT TO OPEN 6 CONTRACTS OF OPTION .SWGNL AT $4.55
01/27/09 .SZCNE SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNE AT $2.67
01/27/09 .SZCNE BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNE AT $2.47
01/23/09 .SZCCI SOLD TO OPEN 3 CONTRACTS OF OPTION .SZCCI AT $3.35
01/23/09 .SZCCI SOLD TO OPEN 2 CONTRACTS OF OPTION .SZCCI AT $3.35
01/23/09 .SZCCI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCI AT $3.10
01/23/09 .SZCCI SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCCI AT $3.30
01/23/09 .SZCCI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCI AT $3.00
01/22/09 .SZCCI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCI AT $3.15
01/22/09 .SZCCI SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCCI AT $3.50
01/20/09 .SWGCL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGCL AT $2.73
01/20/09 .SZCCI SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCCI AT $3.30
01/20/09 .SZCNE SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNE AT $5.55
01/16/09 .SWGCL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGCL AT $3.10
01/16/09 .SWGCL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGCL AT $3.25
01/16/09 .SWGCL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGCL AT $3.45
01/15/09 .SZCNE BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNE AT $5.40
01/15/09 .SZCNE SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNE AT $5.50
01/15/09 .SZCNE BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNE AT $5.40
01/15/09 .SZCNE SOLD TO CLOSE 7 CONTRACTS OF OPTION .SZCNE AT $5.10
01/15/09 .SZCNE SOLD TO CLOSE 3 CONTRACTS OF OPTION .SZCNE AT $5.10
01/15/09 .SZCNE BOUGHT TO OPEN 10 CONTRACTS OF OPTION .SZCNE AT $5.00
01/15/09 .SZCCH BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCCH AT $4.80
01/14/09 .SZCNE SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNE AT $4.20
01/14/09 .SZCBJ BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCBJ AT $3.35
01/14/09 .SZCCH SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCCH AT $5.60
01/14/09 .SZCNE BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNE AT $4.05
01/13/09 .SZCBI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCBI AT $4.70
01/13/09 .SZCBI SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCBI AT $4.95
01/13/09 .SZCBI BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SZCBI AT $4.65
01/13/09 .SZCNI SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNI AT $4.90
01/13/09 .SZCBJ SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCBJ AT $4.05
01/13/09 .SZCNI SOLD TO CLOSE 5 CONTRACTS OF OPTION .SZCNI AT $4.65
01/13/09 .SZCNI BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNI AT $4.65
01/13/09 .SZCNI BOUGHT TO OPEN 5 CONTRACTS OF OPTION .SZCNI AT $4.70
01/12/09 .SZCMJ SOLD TO CLOSE 10 CONTRACTS OF OPTION .SZCMJ AT $2.00
01/12/09 .SZCMJ BOUGHT TO OPEN 10 CONTRACTS OF OPTION .SZCMJ AT $1.86
01/12/09 .SZCMJ SOLD TO CLOSE 10 CONTRACTS OF OPTION .SZCMJ AT $2.00
01/12/09 .SZCMJ BOUGHT TO OPEN 10 CONTRACTS OF OPTION .SZCMJ AT $1.91
01/12/09 .SZCBI SOLD TO OPEN 5 CONTRACTS OF OPTION .SZCBI AT $5.10
01/12/09 .SWGBL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGBL AT $3.75
01/09/09 .SWGBL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGBL AT $4.10
01/09/09 .SWGAL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGAL AT $1.59
01/09/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $1.81
01/09/09 .SWGAL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGAL AT $1.59
01/09/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $1.81
01/09/09 .SWGAL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGAL AT $1.60
01/08/09 .SWGAL BOUGHT TO CLOSE 2 CONTRACTS OF OPTION .SWGAL AT $2.11
01/08/09 .SWGAL BOUGHT TO CLOSE 1 CONTRACTS OF OPTION .SWGAL AT $2.11
01/08/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $2.50
01/08/09 .SWGAL BOUGHT TO CLOSE 2 CONTRACTS OF OPTION .SWGAL AT $2.11
01/07/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $2.74
01/07/09 .SWGAL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGAL AT $2.56
01/07/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $2.80
01/07/09 .SWGAL BOUGHT TO CLOSE 5 CONTRACTS OF OPTION .SWGAL AT $2.69
01/07/09 .SWGAL SOLD TO OPEN 5 CONTRACTS OF OPTION .SWGAL AT $2.83
01/07/09 SPY SOLD 500 SHARES OF SPY AT $91.80
01/07/09 SPY BOUGHT 500 SHARES OF SPY AT $91.59


11/26/08 Sold to close QQQQ Mar '09 34 calls @ $1.11.

11/25/08 Bought SPY Mar '09 put @ $2.45.

11/20/08 Long standing limit order executed this morning. Bought QQQQ Mar '09 34 calls @ $0.89. Jumped in too early? We'll have another rally, but from what trough?

11/19/08 Sold to close QQQQ Mar '09 26 put @ $2.92. Looking to buy March or June calls if market continues going down from here.

11/04/08 Bought WFC @ $34.93. Sold WFC Jan '10 2.5 call @ $32.38.

10/28/08 Sold to close QQQQ Dec '08 34 call @ $1.55. I'll buy a March call on any decent pull back. I don't know if the rally will continue, but I'm pretty happy with the way this trade went. Total for purchase was $3.32. Total for sale was $4.10. Not bad percentage wise, although had I bought that same call yesterday at $0.70 or so, that would've been much better.

As the market went up big today, I bought a QQQQ Mar '09 26 put for $2.25. It was a limit order I set a couple of days ago. Should have put it much lower. There's plenty of time for the market to go down again, though.

10/24/08 Sold to close QQQQ Dec '08 28 put @ $2.55.

10/22/08 Bought ESLR @ $3.05. Sold Mar '09 2.5 call @ $1.22. ESLR cost basis is now $5.18.

10/16/08 Big mistake selling Nov QQQQ 27 put.

Bought QQQQ Dec '08 28 put @ $2.00.

Bought QQQQ Dec '08 34 call @ $1.32. With enough volatility it's possible to make money on both.

10/14/08 Sold to close QQQQ Nov '08 39 calls @ $1.10. Could have sold the 27 put for over $2 on 10/10, but I got greedy. Sold to close Nov '08 27 put @ $0.51.

10/10/08 Sold to close ESLR puts @ $0.15. ESLR cost basis now $5.69.

10/9/08 Shouldn't have sold SPY put.

Going into the weekend, I want to hold puts and calls on an index. Lots of stuff has been happening on weekends recently.

Bought QQQQ Nov '08 27 put @ $1.03. This will make money if things continue down.
Bought QQQQ Nov '08 39 calls @ $0.45. Seven down sessions in a row, there's got to be a rally soon.

10/8/08 Sold SPY Mar '09 72 put @ $2.09.

10/6/08 Sold GE @ $20.11. I plan to buy it back, maybe early next year.

Bought SPY Mar '09 72 put @ $1.35. Will try to buy puts on QQQQ during the next rally.

10/1/08 Sold CPSL Mar '09 5 call @ $0.3.

9/29/08 Bought SOV Oct '08 2.5 puts @ $0.3.

Bought SOV Oct '08 10 calls @ $0.3.

Sold to close SOV Oct '08 2.5 puts @ $0.8 (set limit and left the computer. Should have been watching! I'm an idiot).

Sold to close SOV Oct '08 10 calls @ $0.25.

9/25/08 Bought to close CPSL Oct '08 5 calls @ $.05. Cost basis for CPSL now $3.97.

9/16/08 Bought to close CPSL Sep '08 5 calls @ $.05. Cost basis for CPSL now $4.37.

Sold CPSL Oct '08 5 calls @ $0.45.

Bought covered and naked ESLR Oct '08 2.5 puts @ $0.1.

9/15/08 Sold to close LEH Sep '08 2.5 puts @ $2.35.

Bought MER Sep '08 22.5 calls @ $1.24. Sold to close MER Sep '08 22.5 calls @ $1.4.

9/12/08 Bought MER Jan '08 2.5 puts @ $0.3.

9/11/08 Sold ESLR Jan '10 7.5 calls @ $1.6.

Bought LEH Sep '08 2.5 puts @ $0.51.

9/9/08 Bought to close Jan '10 5 ESLR calls for $2.95. ESLR cost basis now 5.89.

8/28/08 Sold Fannie Mae December '08 12 calls for $0.95.

8/22/08 Sold BlackRock Enhanced Equity Yield Fund (EEF) @ $13.70

8/19/08 Bought China Precision Steel (CPSL) @ $4.67. Sold September '08 5 calls for $0.35.

8/18/08 Bought Fannie Mae December '08 12 calls for $0.70.

7/24/08 - 8/5/08

Bought Johnson & Johnson (JNJ) @ average $68.53.

Bought Procter & Gamble (PG) @ average $65.13.

7/30/08 Sold 3 ESLR Jan '10 5 calls @ $6.40.

7/28/08 Bought second and third batch of Evergreen Solar (ESLR) @ $8.77. Average cost basis for ESLR now at $9.34.

7/13/08 WaMu CD matured. Moved to savings, then to buy JNJ and PG.

5/29/08 Bought first batch of Evergreen Solar (ESLR) @ $10.40.

5/21/08 Bought General Electric (GE) @ $31.00. Average cost basis now at $31.31. Dividends are reinvested automatically. Average cost basis will be lower because of fractional shares from future dividends.

5/9/08 Sold Overseas Shipholding Group (OSG) @ $80.20.

5/9/08 Sold Reynolds American (RAI) @ $54.02.

4/21/08 Sold Du Pont (DD) @ $52.00.

4/9/08 Bought Philip Morris International (PM) @ $49.99. Dividends will be reinvested automatically. Cost basis will decrease with future dividend payments.

1/4/08 Bought WaMu CD. 6 months at 5.1% APY

12/17/07 Bought RJA @ $10.90.

12/14/07 Bought Du Pont (DD) @ $44.94.

5/8/07 Bought BlackRock Enhanced Equity Yield Fund (EEF) @ $19.93

4/24/07 Bought General Electric (GE) @ $34.60.

4/23/07 Bought Overseas Shipholding Group (OSG) @ $68.5

3/21/07 Bought Royce Focus Trust (FUND) @ $11.

3/20/07 Bought Reynolds American (RAI) @ $60.02.


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