Friday, June 13, 2008

I Hate Smugness

"Smugness is a terrible quality."-cab driver, Seinfeld

Indeed, yet I was feeling awfully smug Wednesday as I sold my LEH puts for a 40%, 6-day gain. While I was busy emailing my loyal readers and family touting my genius, LEH management was taken out to the woodshed and beaten along with the stock. While I'm thrilled I was able to parlay a one-week trade into payment for a year's worth of Propecia and razors, I settled for a double instead of a long homerun.

Mistakes I made on this trade:
1. Buying too high
2. Selling too early
3. Thinking I knew something about the next bounce up
4. Not putting enough balls (money) into it
5. Thinking volatility would remain low (went from 12 cents/dollar to 40 cents/dollar)

Mistakes I didn't make on this trade:
1. Buying the right put
2. Getting out before the next big bounce (today)

Live and learn.

Rolling those profits into a purchase that doubled my Cummins stake also seems fortuitous. Cummins had been hammered recently down to $63. Not long after I bought, Caterpillar said they'd be pulling out of the N.A. truck market, leaving really only Cummins as the major player. A nice 14% run ensued.

A recheck of my recent "Don't Mess with Texas" shorts reveals some staggering results. If you've read the comments from that post, you'll know we had a little run-in with a bank analyst who criticized lumping EWBC with the other losers. I've since corresponded with him personally and he was very thorough in his defense of the stock, even computing the Texas Ratio for us as requested. Even more fairly, he admitted the stock might not be a good trade in the next 6 months. Here are how those recommended puts have played out, then and now pricing:

Synovus SNV 1/09 7.50s .2-.45 last 0.95 111-375% gain
Corus CORS 1/09 2.50s .25-.5 last 0.45 80% gain-10% loss
East West Bancorp EWBC 1/09 10s .4-.6 last $1.80 200-350% gain
Colonial CNB 12/08 5s .8-1 last $1.20 20-50% gain

Yikes. As I pointed out with Lehman, some of these out of the money options have significantly different returns with just a few dimes difference. Had I bought the next day when Lehman briefly jumped to $34, my cost would've been about 15% cheaper and gains exponentially higher. Don't be afraid to stick to your lowball bid.

Foreclosures up 48% year-over-year, yewwww. And by the way, in case you didn't know before, you know now that the NBA is fixed. Referees receiving instructions on who to call fouls on right before and during games? C'mon! Why? Because, if you don't remember, not long ago NBA games were getting ratings lower than women's pool....

http://www.cnbc.com/id/25135697

http://www.marketwatch.com/news/story/caterpillar-exiting-highway-truck-engines-navistar/story.aspx?guid=%7B72E5EA62%2D6BD4%2D4063%2D9693%2DE5D902C3AF6B%7D&dist=TQP_Mod_mktwN

http://sports.espn.go.com/nba/news/story?id=3439554

2 comments:

Tiger Coach said...

Ax... Don't second guess your trade on LEH. Anyone...ANYONE on Wall Street (including the smug) would gladly take a profit of 40% and RUN.

Question, how far out did you run the puts on that one (LEH)??? I assume that will drop to the teens before it is all said and done! By the way, did they ever respond to Einhorn's request to open the books? Are they hiding a dirty little secret?

Question, how long will it take for a shake-up in the revolving consumer credit...can the Market "shrug-off" ugly numbers, higher unemployment, etc.?

I almost punched COF and BAC a third time this week, believing that the "big rally" on Friday will be short-lived. Maybe a big bounce from G8...maybe a less than positive reaction from the Middle East. After all, the real question becomes...how much should a barrel of oil be priced at in our "weak dollar?"

OIL and Dollars...
Make no doubt that there is a correlation between the spike in oil, and the commodity prices
as the commodity producing countries are putting a lot of pressure on the oil producing states... This is a similar scenario to the Oil Crisis in 1973...however, there is one SIGNIFICANT difference...the Arabs cut oil production then, now there have been increases in production yet little ease in the price of oil!!!

Check out the pike in the price of oil from 1973-1978...Could it happen again?
http://en.wikipedia.org/wiki/1973_oil_crisis

AX said...

Very interesting graph, TC. I'll address you in order. LEH puts were 1/09 22.50s. The market is a joke. Recent best guess by iTulip was Dow 10K by end of year. I insist 2nd half of year will be disastrous for consumer credit.

Major difference in oil scenario between then and now. As you point out, production has not been cut. Also, US ain't the only game in town anymore. China, India, Brazil, African nations, S. American, all thirsting for oil and willing to pay or subsidize. I don't think we'll have a run below $100 anytime soon. Shocking to think oil retreated to $10 less than 20 years ago....

Also right about oil pressuring the dollar along with our hugely inflationary policies...