THE GOOD NEWS!

Unemployment unexpectedly fell down to 10%. Shouldn’t that be a happy sign celebrated by all? Well, it was… for an hour.

As an afterthought, market movers realized that the drug they enjoyed for the last few years – FREE MONEY – can be taken away. If recession is over and unemployment is improving, there is no reason to keep low interest rates. This means that the dollar will strengthen and eventually Wall Street gamblers would have to pay back a more valuable green bucks.

The current Ponzi Scheme orchestrated by Bernanke and abused by anyone who has access to  liquid assets is very simple – get as much cheap money as you are allowed, pump it into the stock market, wait to make fat profits, sell the stocks and repay back the dollars that by this time might compete in value with the toilet paper.

This scheme should keep everybody happy (at least for a while) – retirees, municipalities, hedge-funds and mutual-funds whose current gains would erase all the previous losses, big players who make killing and little players who find a new hope. After all, what lamb has been sacrificed – dollar, future and morality? Not a biggie for today’s enjoyment.

Weak dollar also helps to expand export and narrow US trade deficit – let’s do it at cost to other nations. Sorry for the repetition, but wouldn’t it be beneficial for everybody to pay China’s 2 trillion dollars reserves back with the toilet paper money? It should be enough to cover the needs of 1.4 billion Chinese people. Who would say that Fed’s Chairman is not a genius?

And only a few people ask the right question – is Bernanke an idiot or a prostitute? There is no free lunch on Wall Street. Someone would have to pay. Just think of it like a swing – if you want to stop it, don’t push it in the opposite direction – try to slow it down. Obvious? Nope.

When market collapsed, did Bernanke thought of you and me, homeowners, employees, taxpayers? NO! All the money were given to the banks, so they can keep it, make easy profits and pay bonuses. This funding was not for Main street people. Fed Funds discount rate went down from 6.25% in June of 2006 to 0.5% in December of 2008. Did you get a 5.75% break on you mortgage? … Me neither.

“There is a Chinese saying that one could quench the thirst by drinking poison,” said [Andy] Xie (former Morgan Stanley chief Asian economist), who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.” Read the whole article from Bloomberg News.

Are we all getting poisoned by Fed chairman and Wall Street Co.?

On Thursday, Dec 3, I was looking at the US Dollar value. PowerShares DB US Dollar Bullish Fund (Symbol: UUP) was near its all time low, barely hanging above 22. Nice, clean support area with a tight stop, thought I to myself. The risk is limited and small, the reward probability is way greater and in more significant amount… Just my type of trade.

Then, I got an e-mail: DANGER: Dollar Crash Looms, Take Action Now! It came from the Weiss Research, Inc.

From the marketing point of view the report is brilliant:
“A RUN ON THE DOLLAR,” (Screams Huge Green Headline)
…
WHAT WILL IT MEAN FOR YOU?

The report is written by Lee Bellinger, publisher of Independent Living, as an urgent briefing:
… Anyone holding dollars or dollar-denominated assets is sitting on a ticking time bomb, and the fuse is burning short. There isn’t a moment to lose before we see a worldwide rush to the exits…
“The Dollar’s Coming “Reckoning Day”:
On a Par With Pearl Harbor and 9/11″ cries another green sub-head.
One more follows shortly thereafter:
“You Must Plan for the Coming Dollar Collapse: NOW”

That definitely messes up my thinking. Now I am more concerned with the question: “Should I buy that subscription to Independent Living for $69 and receive well-promoted Dollar Destruction Defense Manual NOW, or should I use my own brain and come up with the answers first, before looking at the offered “cheat-sheet”?”

Next day, on Friday Dec. 4, Dollar posts 1.7 percent gain – the most since Jan. 20, after the Labor Department said employers cut the fewest jobs in November since the recession began.

However, missing a trade is not a big deal. What’s really got me, was the necessity to change a diaper and drive kids to school just when the news broke. Then use the cell phone on the red lights to check 20-min delayed Google quotes and wonder what numbers I’ll see on the computer screen when I finally make it back home.

If it was hard to trade with two kids, it’s pretty much impossible to do with three.

For anyone who is somewhat familiar with the definition of calls, this would make very little sense. Call options are the financial instruments that derive their value from the underlying product. They give the right to the holder to buy underlying product at a set price (strike price). If current price of the underlying instrument is higher than the strike price, the owner can simply buy the underlying instrument at a set price and unload it at the market price. (This is very simplistic explanation and is not advisable to act upon. Options have embedded time value and should be sold, rather than executed before the expiration).

Getting back to $VIX.X – on 11/02/09 it closed at 29.78 and on 11/03/09 it closed 28.79. Meanwhile, I hold +VIXLF – VIX December Call Options with strike price 30. Yet, the price of my call option has risen to 2.45-2.55 from yesterday’s 2.35 level. How could that be?

If you received your MS from NYU Courant Institute in Math in Finance, as I did (or a similar program at a few other universities), you know the answer. If not, below it is.

Have you ever heard about Black-Scholes Option Pricing Model? For 3 semesters most of my classes were centered around this model one way, or the other. Every single interview I had on Wall Street consisted of Black-Scholes model questions.

So, what is that model? It’s like a secret soup recipe If you put bunch of ingredients in the pot and cook it, you’ll get the price of the option (soup). (SORRY, I don’t cook much, but I had so much theoretical math, that I can come up with the theories in any life dimensions). The price of the underlying instrument is just one of the ingredients; there is also time to the expiration, risk-free interest rate, strike price, volatility and the cooking procedure (functions). If you know all the ingredients you can guess how the soup will taste. If you tried the soup, you can guess the ingredients. If you put too much salt – the soup is salty, if the soup is salty, it’s fair to assume that there was too much salt put in.

Now, on the left side of the equation we have decrease in the spot price, on the right side – increase in the option price. Working back through the model, we deduce that Implied Volatility of the underlying instrument has increased. What is “Implied Volatility”? It’s market opinion about future volatility.

Let me repeat this one: In Market opinion, future volatility of the Volatility Index will increase. Or to make it digestible – market expects a big move.

Look at the following chart of Dow Jones Industrial Average:

This technical analysis may explain why even good news can’t pull DJIA higher in the last few days.

Here is a 3-yr chart of Dow Jones Industrial Average, as I see it:

If my technical analysis is correct, we are going to see a significant decline in stock prices and formation of a “double bottom”.

There is also a possibility of a different scenario: The market will continue moving up, extending the 3-wave of correction into 11,000 territory. Such move would transform the correction trend into a 3rd wave of a Bull Market.

In my opinion, the first scenario is much more likely, considering the fundamental information. Unemployment is creeping up; “affordable real estate” has definitely improved, but luxury homes are just hitting bottom and Commercial real estate is falling deeper and faster; Banks didn’t learn any lessons and are robbing taxpayers in broad daylight; dollar is week and may lose the ground; government is printing money for the wrong means…

The main question now – when would cheap as dirt money improve the economy (and create a new bubble)?

Accordingly, CBOE Volatility Index $VIX.X is near its support level at 23.59.

$VIX.X 52 weeks low is 22.19 and high is 89.53.

I just bought a chunk of +VIXLF contracts, that stands for VIX Dec 30 Calls. In other words, those are Call Options on CBOE Volatility Index with strike at $30 and expiration date of December 16, 2009.

In addition to the technical analysis, there is some fundamental support for my decision, and I’ll give more details shortly.

It looks like I have to advice anyone against following my strategy. First, because I don’t guarantee the results. Second, because I don’t collect a fee for it.

So far, most of my trading was ahead of its time. Whatever was clear to me, took a while for market to absorb, digest and act upon.

Maybe it’s me who needs to adjust and think like masses. High unemployment, ton of foreclosures, commercial loan defaults, low consumer confidence, …? Who cares. It could have been worse. The data shows that everything is collapsing at the slower pace. Buy Goldman, buy Morgan Stanley, buy American Express – government will come and give them money, and let them pay bonuses, and tax you to shut up. The DJIA will go back up to 14,000 or maybe 20,000…

In any case, I have to have discipline and manage my account, so not to be wiped out by the market’s irrational behavior. Considering that I am long oil and gas and short dow, builders and financials, my total market position is about 2:1 short vs. long. However, in absolute dollars it is leveraged by about 50%.

Next week I will unwind at least some of my positions – I don’t like to be leveraged and I don’t like to overtrade.

Usually, I never overtrade. So, dumping close to 60% of my account (discounting the offset) into one market direction is probably an impulsive move. Especially since I keep it overnight.

Let me just briefly explain the reason.

$INDU has moved up almost 1,000 points in the last two weeks, without any major set-backs. Now, it looks like it reached the resistance and is stuck near 9,100 level for the last 4 days. Any negative news shall send it way down. Since DOG is effectively a short position on the $INDU, I went long DOG.

TOL – Toll Brothers, Inc – stock has moved up $4 or 25% in the same two weeks and now bounces around $19.60. Meanwhile, builders still have to deal with the number of issues: oversupply, decline in prices, rising unemployment, buyers’ increased difficulty to obtain a loan, secondary market competition and credit crunch. My bet – it will fall off the resistance.

We shall get an answer in a few short hours.

NO, I didn’t lose all my money, nor I lost interest in Trading.

I had a real excuse for disappearing for a while – I had one more baby. Ariela was born in November of 2008, and now I am a proud Mom of three kids: Brian – 5 y.o., Connor 2 y.o. and Ariela – 5 months old.

My last blog post was back in October of 2008. Since that time, there were many instances when I wanted to trade and blog, but I had to adjust to reality – being in charge of three kids, involved in Real Estate and helping my husband in his business, didn’t leave much time or energy to do either. Adding any trading on top of it was simply overambitious and I had to remind myself constantly of not getting emotionally affected by missing opportunities.

Finally, it all broke lose yesterday, when I loged in to my trading account and realized that market has been going up for over 2 months and now started to turn down again. There were so many instances when I didn’t follow my own advice and missed a ton of quick profit, that I immediately recalled my e-mail exchange with one of my Real Estate clients:

On Tue, Mar 3, 2009 at 9:40 AM, JOHN …. wrote:

ANJELINA,

Help! When is the bottom coming? What do your charts tell you oh wise one?

John
_____________________________________________________________
On Tue, Mar 3, 2009 at 10:09 AM, Anjelina Belakovskaia wrote:

Hey, John!

What’s up? Are you stuck in the market? I thought you got out. What exactly would you like to know? If charts are correct, DJIA has to hit 4,000 – the previous resistance. However, it looks like it is currently at the end of its 3-rd down leg of the 2nd Elliot wave -http://tradingmom.com/unnoticed-elliot-wave/. This means it might go a little bit up before it goes way down. But who knows, the market is crazy right now.

What are your thoughts?

Anjelina

The market (DJIA) hit its bottom on March 6 at 6,470.1 and went up for the next two months to reach 8,587.2 on May 8th. Why didn’t I buy anything? Who knows?

Goldman Sachs Group, Inc. (GS) went up from $72.78 to $141.56. = 94.5% return on investment.
Morgan Stanley (MS) went up from $16.12 to $29.05 = 80.2% ROI.
Borders Group, Inc. (BGP) went up from $0.39 to $3.43 = 779.5% ROI.
MGM MIRAGE (MGM) went up from $1.81 to $14.01 = 674% ROI.
Apple Inc. (AAPL) went up from $82.33 to $130.22 = 58.2% ROI.
Royal Caribbean Cr (RCL) went up from $5.40 to $17.88 = 231.1% ROI.

Anyway, yesterday I realized that it might be that start of the next slide down I predicted and I didn’t want to miss everything again.

Since I didn’t have much time to analyze, I sold short only 2 stocks – American Express Company
(AXP) at $25.40 and Morgan Stanley (MS) at $26.11.

Today, I am back to blogging, as it helps me to stay on top of my trades.

It looks like US government is taking a bite it can’t chew.

Socialism in USSR fell apart in 1991. Capitalism in USA is falling apart right now.

How many more companies and financial institutions are going to get bailed out and why? Why do taxpayers – you and me – have to pay for some greedy or not-too-smart people and share with them our hard earned money? Why do we have to pay our mortgages & our bills,  while those “delinquent” don’t? Why nobody bails me & you out of all the losing trades, while letting us keep all the trades making money?

This is a Decline and Fall of the American Empire.

I don’t know what is going to happen to the stock market tomorrow – Monday, September 8, 2008. Probably it will run. As I pointed out quite a while ago to one of my colleagues – “America is a country of happy idiots”. The more I am involved in the stock market, the stronger I am convinced in it.

I can’t otherwise explain the irrational stock market behavior in many instances. For example, last Friday the news came out that the number of foreclosures has dramatically increased AND unemployment rate surged to 5-year high of 6.1%. What would be the rational reaction to such news by the stock prices of homebuilders?  More homes for sale + less buyers = less sales & less profit (if any). Yet, almost all the homebuilders have gained in price on September 5th:

KBH +$1.29

MTH +$0.65

DHI +$0.95

PHM +$1.07

TOL -$0.21

LEN +$1.48

BZH +$0.90

HOV +$0.25

CTX  +$1.26

XHB +$1.23

I still hope that at least gold will go up on Monday, as expected $300,000 billions cost of Fannie Mae and Freddie Mac bailout can be only covered by the new printed money. Does anyone except for me understand this?