Tuesday, January 6, 2009

More Bad News

Acknowledging that earlier cost-cutting moves are insufficient due to the sustained economic downturn, aluminum maker Alcoa Inc. announced deeper work-force cuts, more plant closures and a 50% reduction in capital expenditures.

BofA Lewis expects results to be below expectations: WSJ

Toyota orders 11-day output halt as sales slump
A sweeping suspension of domestic production is almost unprecedented. In 1993, Toyota halted output for one day as a strong yen hammered sales.

[New York] state's unemployment insurance claims systems crashed today after more than 10,000 people were calling it every hour.

Potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on.

Buying puts this rally is absurd.


Anonymous said...

"Buying puts this rally is absurd."

I agree 100 percent. This rally has burned me - but I'm still in the game. Which companies would you suggest to buy puts on? My picks are COF, SPG, X, and BBY. Also own SRS, EEV, DUG and QID.

I think the market is overbought in the short term. I'd be very surprised if this rally makes it through to next week.

Homercydal said...

I made an excellent return on DUG on the big turn down. Honestly, be very careful buying DUG so long as you're below $50/barrel. The cost to supply oil for a lot of suppliers is 40 (i.e. they'll stop pumping).

Of course this is IMHO. :)

Anonymous said...

Back to reality today. I'm cautious we may have another rally in response to this (forming a short term double top - and then a sell off).But, as you say, staying power is important.

Mickey, thanks for that on DUG. I'll sell it once I see XOM around 75. right now DUG is up +8.71%. I agree with your thesis, but I believe demand destruction is going to be around for a while.

CP said...

Recently I bought MPGa and bought MPG puts - a little capital structure trade.

I am short COF and BBY.

I hate the SRS etc ultra shorts. Because they are path-dependent I think they are garbage.

Don't know how long the rally will last but it won't be forever.

PD said...

Ultra Shorts are very hard to make money on in the long run- here long run means more than a day! Here is why...

They make some mission statement like they are going to promise some return multiple on the inverse daily performance of a specific commodity, index, industry, etc. In the example of dug they say 2x inverse of the Dow oil and gas index. Like communism in theory this looks great.

The key here is daily. That means every morning (or afternoon) the fund has to be in a position to reset their portfolio to 100% capture 2x the next days performance- this is needed because they are leveraging (remember 2x daily performance), so they are continually giving up optionality. If they don't reset on a daily basis they give up more optionality and then they also increases their risk.

All of this adds up to a large hurdle to overcome! First they charge fairly steep fees to manage the fund. Secondly, if they are resetting on a daily basis- (2x the portfolio value) they are paying huge transaction costs in the course of a year. Thirdly, and potentially the largest hurdle is that they have huge leakages due to optionality/resetting.

The proof! Look at dug over a six month period. Over that period they paid out ~$7.80 in dividends/cap gains. The stock currently trades lower than it did in Aug 2008 (oil was over 100/bbl then) - 23.22 today vs. 32.00 in August. Their model says that you should have made 400-500%. As it turns out it is just not a predictable way to make money. Shorting say Talisman or the index you would have at least doubled your money during that time compared to being less than break even. In theory even Communism works.

They have their time and place for example Mickey made money on them, but he obviously timed the market. If Mickey could always time the market he wouldn’t be writing on a website blog about his successes he would be on the front page of the wall street journal and we would be reading about his successes.

CP in hindsight your DSL research was bang on! I have been looking at BB&T because they could be in a similar bind-but not as bad! St. Joe should also be testing their balance sheet in lower of cost or market for their PP&E/lands, because their timberlands and land for development has lost tons of value. Timberlands have two options harvest or grow. They have been in harvest mode for 20 years. Now they should be in grow mode, but they can't because they need the money.