Tuesday, October 28, 2008

Holy Guacamole!

I have my small double long exposures in DIG, SSO and UPW, accordingly I didn't feel like I was missing the party! I also have DUG, which was my hedge to some of my double longs. This may sound nutty to you, but I don't like to be in and out of positions over the course of the day. There are so many gap ups and gap downs overnight that I prefer to stay in my positions (in the anticipated direction of the gap) with an obverse hedge, so that I'm not killed if the market gaps the opposite of where I'm leaning.

You could rightly ask, "Well why don't you just keep a smaller position in the direction that you think that it will go?" It's a perspicacoius and wholly reasonable question. This is where "Know thyself" comes into play. It's hard for me to chase up positions. It's actually easier for me to sell positions that are down. It's a personal flaw, but sometimes you have to trick yourself.

I bought some HERO today. I've been in and out of this stock with mostly good results. Here's a chart that looks like many oil service companies!

It's worth noting, that in the not too distant past, Barron's had an article that HERO might go to $60. I do not buy stocks based on analysts or media people's expectations of price. If you look at most stocks that have fallen from grace, you will still price estimates FAR ABOVE the current price.

One of the things that the Barron's article had noted were the insider buys. Well, all of those folks lost a good bit of money. HERO's chart is NOT one that would indicate a buy by any stretch of the imagination, as it is still in a down trend. However, at 4.84 - 4.91, I felt that even if it went to zero, I'd not get killed! (Plus, I still have DUG).

Given that so much of the unrelenting selling, I think that the market would just go up in absence of sellers--forget about buyers. It seemed to be a good risk reward. I also entered UYG today at $7.67. Same thing--risk reward seemed reasonable. I think that a goose from the Fed and any good news (even if it is absence of bad news) may clear the deck of snarky and tenacious shorts.

Prior to today, and even during today, my UPW and SSO were solidly in the double digit down range. That first digit being a 2. At the close of the day, SSO was still double digit, but it now starts with a 1. UPW is in single digit loss range. My puts, though, helped buffer that. I'm still up for the year marginally in one account and 30% in another. But, it only takes one material mistake to undo all of that!

I hope that you had a good day.


sysin3 said...


posting real-time trades is only de rigueur for the really good traders, or the soon to be bankrupt.

You and I are neither of the above (near as I can tell). We can, however, benefit from the parties of the first part.

Anonymous said...

"As I was driving today, I wondered about the plus side that balances the minus of this equation. Money does not evaporate. For every loss; there is a gain. I didn't get very far with that musing."

Your above comment caught my attention. Through the process of debt destruction, units of currency evaporate, and if the units of currency happen to be dollars, the dollar appreciates. There's the reaction.

I'm not sure what you mean by "for every loss, there is a gain." If we are talking about the theoretical zero-sum game of the CDS market, then for every loss there is a gain, at least in theory. But the reality is that swap writers could never make good on paying off all of the swaps. Thus, those who wrote the swap won't actually take a loss, since they don't have the money to pay the swap, and those who bought the swap won't report a gain, since they won't collect anything for the swap's theoretical value. This is essentially the entire problem of all of these derivatives.

I'd like to get your response.


Chris Stankiewicz

(I post under SpeedSkt1 on the Rev Blog.)

Leisa said...

Chris/Ah, my readers already set me straight on that half-assed thought. I was thinking very narrowly on realized gains and losses (sold homes, sold stocks. I was not thinking about unrealized losses--severe devaluation beyond what was paid. You hold GE at 30 and it trades at 17. That is real wealth destruction for the holder. I suppose too (which is how I was thinking about it) it is a loss avoidance for the seller. But these are compounded transactions among holders, so I really have to back up and think about it more globally. I've not done that. I do need to understand that aspect a little better though! Sometimes I'm mentally lazy.

To your example of the CDS's, I'd offer this which is a bit amplified over what you stated.
Those who bought the underlying security (CDO) AND bought the swap (CDS) on debt (for insurance) that defaulted got a swift kick in the shorts. They endured a loss on an asset that they thought was secure. The gain/loss on the CDS was immaterial relative to the underlying debt.

Interestingly enough, it appears that LEH wiped out about 142B in debt for which it had issued CDS's for...they had determined (arbitrarily) that the holders of the swap did not own the underlying debt (which speaks to the 'traders' of CDS's, rather than the holders to insure the debt).

That still left about 42B on their books. I found that very interesting that no journalist discussed this. There's lots to be found if one pokes around.