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With the first round of the SLO ended and a month until the new competition resumes, I am left with a portfolio in limbo. What do I do with "jaudio shorts"? Staying with the same strategy may work out with more troubles being reported every day, but that would be a bit boring. In real life, I believe that boring is the way to riches. In real life, I believe frequent trading is the express lane on the road to ruin. In real life, volatility can wreak havoc on emotions as well as portfolios. In the SLO, volatility is my drug of choice. I love volatility. It's a great way to make a boatload of money, but also a great way to lose big. The highs are high and the lows are real, real low. I am now in the testing phases of a new strategy and did some housecleaning on my original portfolio.
I stated back in August my belief that the market had up to 24 months of contraction before we hit bottom. I still stand by that belief, revised to 18 months from today. Several earnings reports are due and several economic numbers will come out before the new competition begins that will either confirm or deny it. The Ultra Short Financials (SKF) and Ultra Short Real Estate (SRS) have been very good to me, clocking between 25-30% before I sold portions of each. The Ultra Short Nasdaq (QID), Dow (DXD), and S&P (SDS) are just now back to the break even point. I trimmed DXD, and will trim QID and SDS soon in order to raise cash for my current strategy. I will describe more on the new strategy later.
Piling all of my cash in Ultra Short ETFs was insane, as I said a few blog posts ago. After all the insanity, I wound up almost in the same place I started, with a wild ride in between. The experience toughened me up to taking hits and tolerating volatility. There's only one problem, though. Where I once tolerated volatility, I now crave it. I'm addicted to high volatility.
This next round is one that could very well leave my virtual account near zero. If there was only a prize for finishing last, I would chase it to the poor house. Depending on how the market performs in the next month, I would like to keep between 30-40% in the Ultra Shorts. Some of the Ultra Shorts may have well made their money, so I may not buy. My price targets are all set, but the market's behavior will dictate the decision. My wish would be for a quick market rally before the competition starts, but the bad news is pretty heavy. As for the other 60-70% of my portfolio, I will risk it in the most volatile stocks I can find.
In the first round of the SLO, I employed a buy and hold strategy with the Ultra Shorts. In this one, I will be a frequent trader. Since January 4th, I have made 40 plus trades, and I will be making at least 30 per week once the competition starts. The Ultra Shorts are extremely volatile. It was not uncommon to have days when the ETF would go up or down by 6%, and there were even some bigger days than that. Just a few days ago REW, the Ultra Short Semiconductors ETF, had a 10% plus day, which has now put it at a 28% gain since Christmas. Instead of buying and holding, I am now going to be selling on strength and buying on weakness. I cashed out a good portion of REW, reducing the position to a "sane" level. My goal is to keep all of my holdings, including the Ultra Shorts, at 3-4% of the portfolio, with a maximum of 7% when buying on weakness. With the high volatility, I need to be what very few are and what I have never been: a correct market timer. Having a large chunk of cash in reserve to buy on weakness will help, and selling on strength will keep the cycle going. At least, that is the theory. You know what they say about the battle plan once rounds are being fired down range.
I also will be buying individual stocks and long ETFs also. Ultra Long ETFs aren't out of the question. After all, if I don't think the highly volatile short is going to make me money, then it's long counterpart can. The individual stocks will be more difficult, more risky, and could be cannonball that sinks the ship if the frequent trading doesn't sink it first. I want to buy the ugly, the really ugly. I want the black sheep, the puppy no one wants, the disowned, disavowed, and dismembered. Countrywide, Sallie Mae, Citi? They are all candidates. I'm really looking for individual stocks that have not only been hammered, but also that have a huge number of shares sold short. My hope is that I can capitalize on a "short squeeze". Those that have sold individual stocks short will cash out sooner or later to lock in profit, pushing the price upward. My challenge is to create a list of possible candidates, preferably 40-50, screen those candidates for the qualities I am looking for, and then strike when they get beat up 5% or more. CFC got hammered 28% on Tuesday . . .that is a short seller's dream. I expect that even though CFC may have further to fall, there will be short sellers who will "cover", sending the price back up temporarily. I bought a small amount, a little over 1000 shares, at the end of the day when the carnage was over. Will it get that bump that I am banking on or will it tank further? We will see. CFC is less than 2% of my portfolio, so it is controlled risk. I have a "bail out" price on all of the short squeeze candidates, so as to minimize my own damage. The insanity continues.
Like I said before, my tendency is to buy and hold, so frequent trading takes me out of my comfort zone. I believe that frequent trading is the fastest way to end up penniless. I should know soon enough.
****WARNING! Portfolio testing in progress!****
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Comments (2)
While I was testing out my idea of high conviction picks, I found a couple of stocks that might meet your criteria and took large positions in both, to my sorrow.
MBI & ABK have both been hammered mercilessly, are shorted something like 30% of the shares outstanding, and were off more than 10% today. Both are trading at approximately 1/3 of their adjusted book value, which I have been treating as my margin of security.
I have been holding on the grounds that a Hedge Fund with a few billion to spare could buy either, add 1 or 2 billion capital to lock in the triple A rating, and precipitate a short squeeze.
My SLO experience suggests that these crisis type stocks can just keep going down, once the price gets out its normal range, there doesn't seem to be any logical limit. Probably this is the uncertainty element - nobody knows right now how bad things are going to get.
I like the idea of volatility, you get a lot of movement, but getting the direction right is hard. I did a screen of Increasing Free Cash Flow, near a 52 week low with a price turn (up) on MSN and then went through it checking volatility on CBOE. I haven't decided whether to use any of the prospects.
Tom
Posted by | January 8, 2008 11:04 PM
Jon ( Athan Aapl SEEd )
so - now U Komet to Yuseff. Who DUn-Nit[Wit]
DoughNUT a'fore ?
I don't MEAN ( not a mean BINE on my Body ) 2 SLANDER butt take a GanDER :
Countrywide: Lending stabilizes, foreclosures UP
January 9, 2008 9:02 AM ET
Reuters newsNEW YORK (Reuters) -
Countrywide Financial Corp , whose shares have tumbled on concern it might not survive the nation's housing crisis, said on Wednesday it made more loans than expected in the fourth quarter, though foreclosures among loans it services increased.
Shares of Countrywide rose 34 cents, or 6.2 percent, in pre-market trading to $5.81 from Tuesday's composite close, after earlier rising as much as 21 percent to $6.62.
In its monthly operating report, the largest U.S. mortgage lender said it funded $23.4 billion of home loans in December, up 1 percent from the prior month, though down 44 percent from $41.7 billion a year earlier. Average daily mortgage loan applications fell 17 percent from November to $1.54 billion.
"Management is pleased with the progress we have made in positioning the company to navigate the current challenging environment," Chief Operating Officer David Sambol said in a statement.
For the quarter, Countrywide said it funded $68.5 billion of mortgage loans, and $69.2 billion of total loans.
The lender also said it has cut 10,986 jobs since the end of July, achieving its goal of eliminating 10,000 to 12,000 jobs by the end of 2007. Countrywide said it ended the year with 50,600 employees, down from 61,586 in July.
Countrywide shares had fallen 27.4 percent on Tuesday, even after the Calabasas, California-based company rejected market rumors it was considering filing for bankruptcy protection.
Like many rivals, Countrywide has been hurt by falling home prices, rising defaults, and tighter capital markets. Chief Executive Angelo Mozilo has said the housing slump is the worst since the Great Depression.
In its monthly report, Countrywide said foreclosures and delinquencies among the 9.03 million mortgage loans for which it collects payments rose in December to the highest level since 2002, the earliest period for which data are available.
It said the pending foreclosure rate rose to 1.44 percent from 1.28 percent in November and 0.70 percent a year earlier, while the delinquency rate rose to 7.20 percent from 6.52 percent in November, and 4.60 percent in December 2006.
Countrywide's mortgage loan servicing portfolio rose to $1.48 trillion at year end, as homeowners prepaid fewer loans.
(Reporting by Jonathan Stempel; Editing by Derek Caney and Dave Zimmerman)
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M/IA to cut dividend, raise funds to stay triple-A
January 9, 2008 10:19 AM ET
All Reuters newsNEW YORK (Reuters) -
MBIA Inc , the world's largest bond insurer, on Wednesday slashed its common stock dividend 62 percent and said it will raise $1 billion of new capital to preserve the "triple-A" ratings it needs to operate normally in a mortgage market under siege.
The plan prompted Fitch Ratings to say it would end its threat to take away MBIA's triple-A financial strength rating if MBIA sells the debt. MBIA's quarterly dividend would fall to 13 cents per share from 34 cents.
Shares of MBIA fell 38 cents to $13.57 in volatile early morning trading. Ambac Financial Group Inc , MBIA's largest rival, saw its shares fall 99 cents to $18.43.
"It's good news for MBIA," said Jim Ryan, an equity analyst for Morningstar Inc in Chicago. "Most of the stock's recent decline stemmed from fear it wouldn't be able to raise enough capital to keep the triple-A rating. That issue now seems to be put to bed."
Still, he said bond insurers aren't out of the woods with the housing downturn expected to persist, perhaps beyond 2008.
"The main concern has been a lack of reserves to cover increased defaults from insurance of mortgage-related derivatives, primarily CDOs (collateralized debt obligations)," he said. "Elevated claims would eat into future profitability and force them to add reserves, taking away from capital."
Through Tuesday, MBIA shares had tumbled 81 percent in the last year, as rising mortgage defaults left investors worried the Armonk, New York-based company wouldn't be able to cover potential losses as easily.
Such weakness can lead to falling prices on the hundreds of billions of dollars of bonds they insure, and prompt investors who demand triple-A ratings to look elsewhere.
Last month, Warren Buffett's Berkshire Hathaway Inc started a bond insurer, Berkshire Hathaway Assurance Corp, likely to lure business from MBIA and Ambac.
MBIA Chief Financial Officer C. Edward Chaplin in a statement said the dividend cut "significantly enhances our financial flexibility." MBIA expects it to save $80 million a year.
The company also said it nevertheless expects to incur $737 million of losses in the fourth quarter, largely for securities comprised of prime residential home equity loans and lines of credit.
While the nation's housing crisis originally focused on subprime mortgages, it expanded to cover many higher-quality mortgage and home equity loans as defaults began to rise, and investors stopped buying loans they no longer considered safe.
Fitch said a sale of the new debt, which matures in 2033, would "effectively address the existing capital deficiency" at MBIA, and fix potential capital shortfalls related to the company's exposure to lower quality, subprime home loans.
The rating agency threatened to downgrade MBIA last month, after the company surprised investors in saying it guaranteed $8.1 billion of particularly risky mortgage securities.
Last month, MBIA said private equity firm Warburg Pincus LLC agreed to invest $500 million in MBIA common stock and receive warrants to buy additional shares.
Fitch and larger rival Standard & Poor's on Wednesday rated the new MBIA debt "AA," their third-highest grade.
(Reporting by Jonathan Stempel; Editing by John Wallace and Dave Zimmerman)
Posted by | January 9, 2008 11:07 AM