Wall Street Ready To Tank Tomorrow

[Colinito]

X your posts on this thread are like greek to me but I enjoy reading them. (Sorry, I was a communist for most of my life. The closest I got to free market was dividing an ounce into eighths.) I don't think I'd ever have the balls for the stock market. It's kind of a trust issue.

[Hunter Morrow]

Dividing an ounce into eighths you say?
:bongterrio:
Anyhow, Mr. X, do you think the government was participating in massive stock purchase to keep the market from totally dying? Some conspiracy theory sort of thing has been put forth concerning that. I think its the "Plunge Protection Team".

[S197]

Keep in mind GE was up on Friday while the market was tanking. I don't think GE will fall to 15 unless we have a massive sell-off, but anything is possible in this market. Right now the better play is probably long GE bonds although the spread has come down considerably since last week.

The market was so oversold it was a classic snapback rally on Monday. If you're a trader, there's some money to be made in those types of conditions. Berkshire B-shares were filling at $3,000 on Friday. I made over 20% in one day on a single stock.

This is probably a classic bear rally but the fear is leading to some high quality stocks taking unnecessary beatings. If we hit Dow 8K, start averaging in. Buy blue chip dividend payers that do well in recessions, PG, JNJ, WMT, etc. etc. Do covered call writes if you want some extra downside protection, the volatility is making for some nice option spreads and these should provide decent returns over the long term.

As always, do your own due diligence but fear can be a really big asset if you know how to use it.

[Mr. X]

Keep in mind GE was up on Friday while the market was tanking. I don't think GE will fall to 15 unless we have a massive sell-off, but anything is possible in this market. Right now the better play is probably long GE bonds although the spread has come down considerably since last week.

GE was one of the stocks I was looking at starting a position in but after Monday I am no longer interested. You are right that it was up on Friday (that got my interest) but it was only up a point and half. On Monday with the Dow in a 1K point rally it was the only dow component to decline. That was a pretty big red flag for me. They have over 40% of their revenue stream in the finance arm and heading into a recession that could spell some trouble.

This is probably a classic bear rally but the fear is leading to some high quality stocks taking unnecessary beatings. If we hit Dow 8K, start averaging in. Buy blue chip dividend payers that do well in recessions, PG, JNJ, WMT, etc. etc.

JNJ might be the safest of the dow components but I think that trade is over for now. It's up around 25%. I'd have to see a pullback from there to get interested. I agree that dividend paying stocks make sense right now but I think a lot of small investors get sucked into counting on those dividend yields and in a recession companies often times cut their dividends rates. If dividend yields are the draw I'd rather play that in the utilities sector where the payout is safer.

On averaging in ... that only works for me if I'm in a mutual fund. Using the averaging-in approach gets too pricey for me in terms of commissions.

Do covered call writes if you want some extra downside protection, the volatility is making for some nice option spreads and these should provide decent returns over the long term.

I got close to writing a covered call option a few years ago but in the end I chickened out. Too much work and I was never really comfortable with the process (using a discount broker). Also didn't like the extra layer of commissions eating into the transaction. I leave options to the pros. Lots of people use them but personally I think the average investor (as opposed to an active trader) is more likely to get their pocket picked using options, especially if they are writing options. If I were to do anything I would buy a put as a hedge but I'd probably muck it up.

As always, do your own due diligence but fear can be a really big asset if you know how to use it.

My fear is that we have just replicated the Japanese model and the NYSE will be stuck in the mud for a decade to come just like the NIKKEI was. The problem is that when the Japanese did their big government intervention after their bubble they had a very high savings rate (and still do). We have a negative savings rate. One thing is for sure ... the game is changing. Not sure the old rules apply anymore.

[S197]

GE was one of the stocks I was looking at starting a position in but after Monday I am no longer interested.

If someone told me they bought @ 19 (which its trading at now) I could see the logic but also understand the apprehension. Consider the long bond though. The 10-year was yielding 8% last week, it's still close at 7.79% (CUSIP: 36962G3U6 if you want to take a look). If someone told you you can earn an 8% rate of return over the next decade, most people would jump at that. Especially considering the S&P has returned nothing for the last decade. Unless GE goes under (AAA company, won't happen) your return is basically safe.

JNJ might be the safest of the dow components but I think that trade is over for now. It's up around 25%. I'd have to see a pullback from there to get interested. I agree that dividend paying stocks make sense right now but I think a lot of small investors get sucked into counting on those dividend yields and in a recession companies often times cut their dividends rates. If dividend yields are the draw I'd rather play that in the utilities sector where the payout is safer.

Looks like JNJ is pulling back, worthwhile to keep an eye on. I agree on utilities, have my eye on a few. While yields can be cut, the following is true of dividend (especially blue chip) payers:

1)the business is producing CASH, not just "profits" which can be manipulated via accounting rules and tax laws

2) the management of the firm can continue producing earnings without plowing every net dollar back into acquisitions (can you say "Tyco"?) that are often used to hide failing business models or continual product redesigns that may imply limited barriers to entry for competition ("moats" in Berkshire terminology)

3) by virtue of #1 and #2, the firm is operating in an industry or industries involving a viable long-term business model, especially when the firm has produced consistent dividends over multiple business cycles

I got close to writing a covered call option a few years ago but in the end I chickened out. Too much work and I was never really comfortable with the process (using a discount broker).

Comfort is the key. I was against options for a long time because they're complicated and a zero sum game and while certain option strategies are very speculative and dangerous, there are also very conservative (covered call writing, put buying) strategies as well.

Consider this, a stock can only move in 5 directions (down big, down slightly, flat, up slightly, up big). In 4 out of 5 of those scenarios, being long a stock is more risky than in a covered call position. In the one scenario (up big) where the covered call loses out to the long stock, you would still make money just not as much.

Again its all about comfort. A put option as a hedge is another good strategy but with the VIX so high, I'd rather be selling options than buying.

My last disclaimer, I'm just an anonymous poster on an internet message board. Take any advice you receive with that in mind.

Whatever your strategy, goodluck to us all, I think we're going to need it.

[Mr. X]

Consider the long bond though. The 10-year was yielding 8% last week, it's still close at 7.79% (CUSIP: 36962G3U6 if you want to take a look).

I would only consider it if I was willing to hold to maturity and ten years is a long time. The yield curve is already starting to steepen. Adding all this enormous amount of public sector debt is probably setting ourselves up for not just inflation but hyper-inflation at some point in the future. Five years from now that 8% yield could be seriously underwater if you needed to tap it. It would make sense for an IRA if you were comfortable holding to maturity.

Have you looked at REITs or MLPs? If I'm chasing yields that's where I want to be. Probably the later instead of the former. One of the problems however is that you're buying partnership units and get a K-1 instead of a 1099. Those K-1s can be a real pain to navigate and they are almost always very late in being issued (as in late March early April).

I'm looking at a couple of ETFs that short treasuries. Not sure if I have the stones to do it. I've never shorted anything in my life. Way too risky for my profile. If I were to go short it would have to be through an inverse ETF where you don't have to be monitoring your position every five minutes. I'm not even sure how an individual retail investor could short treasuries without using an inverse EFT.

I see the Dow is down 733 today. Wow! That didn't take long. We're almost back to where we were at the end of Friday. Instead of testing 8K by the end of the year we might test it by the end of this week. The market has gone completely schizophrenic. Usually you'd see a nice uptick in gold on a day like to day. Didn't happen; it's flat at 850. What's going on with gold? It should be past 900 in these conditions. If gold isn't a flight to quality hedge then maybe we are heading back to 4 basis points on the T-bill. Of course there's the Mattress Option and you never want to take that off the table.

The small retail investors who were in mutual funds and got out the last 10 days ... I don't think they are getting back in anytime soon as they see these wild swings from one day to the next. Can't blame. Heck, I might even join them.

[S197]

I would only consider it if I was willing to hold to maturity and ten years is a long time. <snip> It would make sense for an IRA if you were comfortable holding to maturity.

Very true. I was strongly considering it last week but never pulled the trigger. I'm relatively young so it would be a hold to maturity for me. There are shorter durations with decent yields, probably the way I'd play GE vs. going long the common if I had to pick right now.

Have you looked at REITs or MLPs?

Haven't looked at a REIT in a while but it might be a good time to start. I've heard some of the preferred shares are starting to look attractive but haven't really dug into it.

I owned one MLP but like you said the K-1s are a headache. Personally, if I'm chasing yields I like the Canroys. Tax changes coming down the road and all, we're so oil and nat gas dependent (and I believe at peak oil) I like the long term value and they've taken a real beating as of late. The one I own also has a big enough reserve to defer the tax burden well past the 2011 tax change.

I'm looking at a couple of ETFs that short treasuries. Not sure if I have the stones to do it.

Interesting that you bring that up, I was looking into shorting treasuries when the treasury yield was approaching zero. Only two ETFs I know of are TBT and PST. Problem is they're both ultrashort funds, which I don't care for since they don't seem to track a 2x inverse over the long-term like they claim. Are there any others?

If you believe we'll be seeing hyperinflation down the road, might be the trade of the decade.

What's going on with gold?

I can only speculate but I think it's two things. One, hedge and mutual fund redemptions are through the roof so everything is getting sold. Two, the market is anticipating deflation.

With the amount of money being printed around the world, I'm still long term bullish on gold but as with any commodity I would only keep it as a small percentage of an overall portfolio.

I'm already setting up my buy list for DOW 8K... the way this market is going we might get there by tomorrow.

[Mr. X]

Personally, if I'm chasing yields I like the Canroys.

Whoa! We must be reading the same stuff or following the same gurus. I started a watch list on that sector about a week ago. Still have lots of work to do.

Interesting that you bring that up, I was looking into shorting treasuries when the treasury yield was approaching zero. Only two ETFs I know of are TBT and PST. Problem is they're both ultrashort funds, which I don't care for since they don't seem to track a 2x inverse over the long-term like they claim. Are there any others?

Ha! Those were the two I was looking at. There are also: DXKSX PHBRX RRPIX RYJUX. I don't like any of them but I'm tracking them just the same. I tried to back test both TBT and PST and the results were mixed.

If you believe we'll be seeing hyperinflation down the road, might be the trade of the decade.

Either that or the poor house. Can't have inflation and deflation at the same time. Looks like the bias is still towards deflation for the short term, oil is down again today and will probably get below 70 before it finds a bottom. I read where United Airlines has hedged it's next six month fuel costs assuming crude at $137. That's gonna leave a mark.

[S197]

Since you're looking into Canroys, add Penn West Energy Trust (PWE) to the list if you haven't already. I'd be curious to hear your take after you've had some time to look over the industry.

[Mr. X]

Since you're looking into Canroys, add Penn West Energy Trust (PWE) to the list if you haven't already. I'd be curious to hear your take after you've had some time to look over the industry.

Think I logged well over 20 hours researching the energy MLPs and Canroys. Came to the conclusion somewhat early on that if I were to go this route that I'd stay in the US and avoid the Canroys. As for the MLPs, I looked at almost half of the Alerian Index components. I wanted to narrow the field to just the midstream partnerships that did not take ownership of the commodity. That proved harder than I thought it would be. The goal was to find a basket of midstream MLPs that function in the same way as rails are to coal and then pick a best of breed without regard to yield.

There are lots of attractive yields in the MLPs but those over 10% have significant hedging risks, lots of debt and big cap ex requirements. Along the way I found out that Mark Cuban is in the MLPs in a big way but he is using a very complex hedging strategy that comes with having a multimillion dollar trading account. Bottom line: I'm staying away. Too much hassle with the K-1s and I cannot get comfortable understanding the risk profile. There's an ETF with the ticker BSR but the BS stands for Bear Stearns and that alone appears to have a dampening effect of volume. You don't get the tax deferral with the etf and I imagine that accounts for the thin volume.

The Dow retested the prior low from Oct 10th and blew right though it. YIKES! Looks like we still haven't put in a bottom. The next big test will be the intraday low of 7800. If 7800 does not hold I think we might see another 15% to the downside. We we're at 14000 a year ago and we might end up at 6500 by year end. You're basic 50% haircut.

My 401K is now my 201K.

[S197]

And today we close above 9,000. The market never ceases to surprise me.

Curious as to what turned you off the Canroys, was it the upcoming tax changes?

[Mr. X]

Curious as to what turned you off the Canroys, was it the upcoming tax changes?

It was that plus:
15% withholding for non-Canadiens (who wants to file a tax refund with Ottawa)
Currency fluctuations
Cost of tax advice (more complicated than MLPs in the US)

I've been tracking the natural gas industry in the US for awhile and have a comfort level with that but have no clue on how to evaluate the Canadian market. If I can get a comparable yield with an MLP in the US, I'd rather do that but I'm not going that route as I think there are better (and much less complicated) plays.

Have you jumped in on anything lately? Did you get out of your gold position before it sunk?

I started a small position in DE and MOS last Friday. Finally had some good timing. MOS had a 4 year standstill with Cargill that expired this week which makes it a very plausible takeover target. Already had a nice pop on both of those. Will probably sell DE in the next few days but I'm thinking of adding to MOS on the first dip.

Looking hard at the emerging market ETFs. FIX and EEM were both up around 15% today. That sector has been beaten down badly and China especially looks like it could have a bigger bounce than the US.

Buy the dips; sell the rips. Still think we'll retest the lows before year end.

[S197]

I bought a little after the Oct intra-day low. All blue chips with decent dividends (MMM, WMT, EMR, DOW (chemical), and my canroy PWE). Still mostly in cash. Also been making some money selling call options thanks to the volatility but that's just a side/speculation type thing to keep me entertained.

Got out of gold thankfully but unfortunately I also got out of my BEARX fund way too early. All signs (especially TIPS) are pointing to deflation so I think holding cash will be good for now.

I'm still keeping a close watch on that treasury short. We're in for a good period of deflation but hyperinflation may follow down the road. We'll see.

Edit: I'm wary of the emerging markets right now. A global recession can have very severe impacts on them. Just look at how the Euro is tanking because of their emerging market loans.

[TrenchGoon]

I would imagine the market will tank tomorrow, but perhaps it has already adjusted. I suspect most of what was gained yesterday will be lost in the overall average tomorrow.