EUO

22 Sept 11

1. Liquidated TZA before Bernanke’s speech because I wanted to minimize event risk. You can imagine I’ve thought a few times about how much money I would have made if I’d held it. 9.1% including commissions.

2. Liquidated EUO today 66.30% profit.

3. Bought AA, GE, XLF, F, EWG, EWL near the bottom of the trading range today.

4. My thinking here is that support is being retested but will hold. If it doesn’t, I have reserved enough cash to jump in with TZA to hedge.

5. These trades may be swing trades or may be long term. Generally after a big news event, the market has a knee-jerk reaction, and then reverses itself. I am thinking the market will do so here. Also with many of these stocks I am thinking they will rise up to fill the gap. Nevertheless these are also stocks I wish to hold long term, at least through January. My fractals and seasonal patterns as well would suggest a good rise mid-Oct to Jan. The question here, of course, is is this bottom going to hold? Impossible to say, but I think so.

6. I do not think the euro is done with its decline, or the dollar with its rise, however I think the quick profits have been made. There may be some catastrophe in Europe and I’ll kick myself for liquidating EUO, but I doubt it. I think we will see a slow orderly unwinding of the euro and a slow orderly rise of the dollar. Operation Twist notably has no direct increase in the monetary base and people need a liquid safe haven for their money. Funny but it’s turning out to be the dollar.

7. As remarked previously with EWL and EWG, weaker currency will mean stronger stock markets.

8. As remarked previously, blue chips AA GE F are my current alternative to gold.

9. XLF–I have remarked several times that I think the problems of the American financial sector are grossly overstated and certainly pale in comparison to Europe. Indeed our financial sector is in pretty good shape compared to previous years. I see the financials as grossly undervalued.

10. I would have bought BAC but Warren Buffet seems to have tainted it. The fundamentals don’t matter here; what matters is investor emotion. The last few companies he has “bailed out”… well, it’s been a Midas touch for Buffet anyway.

EUO

Small speculative trade. This may be a swing trade of a few days, specifically until FOMC announcement, or it might be until Oct op-ex. Bought 10 EUO @19 @ .30.

I expect the euro to make another leg down soon. First I anticipate the SPX will retrace in its range, which should mean strength for the dollar, and conversely weakness for the euro. Second, seasonal patterns make me anticipate an SPX low mid-Oct, which is why I bought the Oct options. Third, fair value for the euro is 1.17. Fourth, the euro is in a clear downtrend and has appeared to have topped this wave. Sixth, there is little good to say about the euro. Basically I’d say any strength in the euro should be sold.

I may well liquidate next week before the FOMC announcement if I have a decent profit, because any hint of easing will cause dollar weakness and hence euro strength.

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Quotes

"I'm a great believer in luck, and I find the harder I work the more I have of it." --Thomas Jefferson

"Markets are constantly in a state of uncertainty and money is made by discounting the obvious and betting on the unexpected." --George Soros

“The United States debt, foreign and domestic, was the price of liberty.” – Alexander Hamilton, 1790, First Report on the Public Credit

"There must be a beginning to any great matter, but the continuing unto the end until it be thoroughly finished yields the true glory." --Sir Francis Drake 1587

"War was where a brave man found his truest sense of life." --Guy G Kay, Lion of Al Rassan

"No! Try not. Do, or do not. There is no try." ---Yoda

"Own nothing. Control everything."---John D Rockefeller

“The game is rigged. But you cannot lose if you don't play.” –The Wire (the reason to play iron condors and butterflies)

"Capitalism is the legitimate racket of the ruling class." —Al Capone

"Only those who risk going too far find out how far they can go."---Fringe

Philosophy

May 2012
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Our basic theory of investing is that markets are chaotic, in that prices are not necessarily an efficient reflection of value; rather, prices of assets depend largely on the emotional reactions of traders who buy and sell them.

We generally trade options to minimize capital risked. Our primary aim is to preserve our capital. We trade with a 1-3 month window generally; we focus on the macro picture and are not interested in hourly movements or short term trades.

Opportunities can be found by carefully studying value; by this we mean both undervalued (buy calls) or overvalued (buy puts).

Psychology is predictable and pattern-based. People are very slow to change. Thus in the markets, history often repeats itself, and the market can be predicted by carefully studying past performance, including correlating the performance of other asset classes or other markets; this is the repetitive geometry of markets. Patterns tend to replicate across or between assets, asset classes, and time frames.

If everybody on Wall Street is saying something, it's probably wrong. We are contrarians.

We generally advocate heavily concentrated positions in which we are extremely confident, rather than wide diversification.

22 Sept 11

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