SURVIVING THE GAME
FEBRUARY 9, 2009
2009 – 11

I have spent the last six weeks doing far more research and study of the markets than I normally would. One of my main strategies of investing is to intentionally avoid the day-to-day clutter that the markets produce. It allows me to stay focused on the big picture and not be swayed by a single event such as an employment report or Fed meeting. My quest, given that we are in the most difficult market conditions any of us have ever seen, was to try and decipher something unique, something different from normal. I am sorry to report that my quest has failed. I see nothing different today than I did a year or two ago. What I mean is that I see nothing that would sway me in any particular direction. No clear signs that tell me that we will rally strongly or that the next wave down is imminent. I mean that for all markets, not just the stock markets. I see the same, nothing clear. I think that is why the markets are so difficult to trade. They give few clear signals. Everything is hidden or disguised as something else. I believe that the failure of most traders and investors is that they believe they can see through the clutter and decipher something others cannot see.

The information coming out of the reports certainly paints a grim picture. The economy, particularly in the US is not just slowing but collapsing. Employment is weak, confidence is low, house prices continue to decline, not what I would call a very rosy outlook. But, the markets are supposed to be forward looking, seeing past the next 3-6 months and looking into next year and beyond. If that’s the case it appears that things will be bleak for some time to come. I have read several newsletters and reports and I am baffled that some of them have the nerve to predict any future market movements given the uncertain economy, etc. Some are bearish, some bullish, I guess that’s why the markets work the way they do. The never ending push and pull of the different sides of the market. I certainly don’t see anything that says we will go either way.

This leads me to my pet peeve. My biggest complaint about market newsletters, commentators on TV and the like is two fold. First most are very vague about how to trade their opinions. They love to use statements like “I think oil looks good down here”. What exactly does that mean? I believe this is intentional so that if they are correct they can say 6 months from now after oil is up $20, “see, I said it looked good $20 ago”. If they are wrong they can save face and stay in business. Second, those that are more forward, more clear in their direction, tend to hang their hat on one theory and ride it out, good or bad.

I will use The Dines Letter as an example. I have subscribed to TDL for many years so I feel safe commenting on his performance. Clearly Dines is not unintelligent. His career spans decades and I guarantee he has a whole lot more money than I do. I made money following his uranium recommendations up and was stopped out in stages as they retreated. But, I think he has either lost his mind or is too stubborn to back down. He is as guilty as any of using intentionally vague statements to express his views but my biggest concern is his ridiculous stance that the only way to make money in stocks going forward is uranium or gold/silver. I owned a basket of uranium stocks such as PNP, MGA, DML, UUU, PDN, etc. At one point the basket was worth $220,000.00 I was out of the last few as the basket fell below $160,000.00. I have tracked this basket of stocks ever since. It bottomed last fall at about $27,000 and is currently worth about $38,000. That is a decline of 83% and he is still fully invested. His latest newsletter switched all these shares to BUY, BUY, BUY. The problem is that he has been saying that almost all the way down. 83%, how does one recover from a beating like that? Most of these stocks need to rally 500% or more to regain their old highs, which is where he was still recommending them as BUYS. These are the “ good quality “ stocks of his uranium picks. The smaller stocks are doing even worse, some down as much as 98% from his entry point. I do not understand why he has been so stubborn, despite the terrible loses. It is fine to believe in the uranium story, I still do myself, but to bet the ranch on it is crazy. What if he is wrong? It can be argued that the huge declines in the uranium stocks are, as he says, due to liquidation by hedge funds, but what if they are not? It is too late to get out with a decent amount of capital intact so what to do? I think he is just being stubborn. He has staked his reputation on his uranium call and given his age, may not be alive to see if he was right or wrong. If he is right and these stocks recover and push on to new heights he will be hailed as one of the most astute investors of all time. If wrong, he will be mocked, much as he has his whole career, and tossed into the pile of market has-beens. The problem is that he has a huge following of investors who will see their net worth tossed into the same pile. I hope for the sake of his followers that he is right and they get their money back. I just don’t understand how it got to this point. Why didn’t he take most of the money off the table as we declined? Only he knows and he is not likely to tell me.

I have read several other reports put out by firms such as Merryl Lynch, Raymond James and others. I have also read reports and newsletters by other market commentators such as HS Dent, Dennis Gartman, etc. They give very conflicting and very different views. All give their opinions on what the future holds but no clear direction on how to act on that information. Lots of vague statements like “housing may decline into the 3rd quarter” or “ the US dollar should peak late this year”. How do they expect you to make a profit from that?

A side note on housing. As an investment category, real estate scares the hell out of me. By its very nature you are encouraged to use leverage. Investors put down only a percentage of the purchase price, mortgaging the rest. Typically investment property is 25% down, 75% borrowed. When times are good this leverage works in your favor but when the tide turns, a decline of only 25% wipes out your entire investment. This is no different than buying stocks on margin. If you told anyone you always leveraged yourself 4:1 by borrowing 75% as margin for your stocks, you would rightfully be looked at as crazy. But what really scares me is that real estate is NOT liquid. If you want out, you had better hope the market is good or you left holding the bag as they say. Many investors have investment properties and would like to liquidate them. The market has turned and turning those properties into cash is a lot harder than it was last year. If you are holding for the long term the liquidity isn’t an issue…today. Real estate has been seen as a more stable, predictable investment than stocks. Try telling that to someone living in California. And, if you think that what has happened in California ( a 50% decline ) can’t happen here, think again. I’m not predicting a real estate crash here but there are lots of signs that tell me that the peak we saw 18 months ago will hold for a long, long time. I prefer to stay in financial instruments that can be valued daily and can be liquidated in short order.

NEW TRADES:

Soybeans had another spike in volatility late last week. Volatility in Soybeans ( and agricultural products in general ) is opposite the stock market. In the stock market, down is always easier than up, therefore when the market drops quickly, volatility rises. With agricultural products, up is always the danger. A drought or some other weather issue can send agricultural commodities soaring, therefore when soybeans rally, volatility rises. Sell 5 each of the APRIL $10.00 calls and puts at 120 or better. This collects $30000.00 in option premium. April options are based on the May Soybeans contract. May beans closed at $10.06. Exit stops at 860 and 1140 basis the May Soybean contract. Expiry is March 27th, 6 weeks and 4 days from now. Risk is approx 20 cents or $1000 per straddle with total risk of $5000 or 1.5% of portfolio value. Soybeans trade in both the pits and electronically. For straddles it is better to enter them as straddle orders through the pit traded options rather than trying to execute them yourself through the electronically traded options.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca