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business newsRandom Thoughts: Positioning Into Europe
By
Todd Harrison
Dec 07, 2011 10:20 am
A binary outcome awaits investors.
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I've been trading around some gamma in the stock market (click here if you just thought of the Hulk). My two long rentals—Bank America (BAC) and Research in Motion (RIMM)—are on the left side of my T-account, and a smattering of S&P puts are positioned against them. On Monday, when the tape spiked higher toward S&P 1265 I rounded up (read: added to) my puts as a function of price and leaned short into Turnaround Tuesday.
Yesterday, during the downside dip toward S&P 1250, I peeled out of that overage (read: sold the additional puts I bought on Monday) and adopted a more neutral stance (I was still small short, but no great shakes). When a rumor made the rounds that Europe would effectively double down on their firewall, the market rallied sharply back toward S&P 1265 and I decided not to layer back into more puts.
Why, you ask, would I defer given the tape had just rallied more than 9% in seven sessions, and directly into resistance at the 200-day moving average to boot? A few reasons; first, I spied a potentially bullish reverse head & shoulders formation that, if triggered, "works" all the way to S&P 1350 (which happens to be a price target being bandied around by those who get paid to do such things). Second, with a potentially binary sequence of events emerging out of Europe at the end of the week, I'm content to trade a bit less until I see the whites of their eyes.
This morning, when I awoke at 5:40 a.m., I checked my mobile Bloomberg app and saw the futures nine points higher. "Discipline over conviction," I reminded myself before I dragged myself out of bed, spent vibe time with the fam and settled into some plain vanilla yoga. Two hours later, as I sat to scribe this particular vibe, the market was already trading lower, some 10 points below where I contemplated adding short side exposure.
I'm not complaining; I learned a long time ago that if you look back at what was or could have been, you'll miss what is and will soon be. Profitability, as we say in the 'Ville, resides in the ride ahead and is often found in the friction between perception and reality. I'm not smart enough to forecast what the world will look like by this time next week, but I'm seasoned enough to map a probability spectrum and position myself in a manner that is consistent with that vibe.If you put a gun to my head, given the rally we've witnessed into this next EU event, I would offer that in the absence of an outright bazooka—euro bonds or a massively leveraged bailout package (which, to my knowledge, would be difficult given the insolvency of the proposed lifeguards)—investors may well sell the news. That would be an easier call in June or July, when animal spirits aren't jockeying to gain exposure into a higher market, but we must play the hand we're dealt rather than the one we would like.
For my part, I've been nibbling and picking my way toward year-end, taking shots when I see them and staying tight when I don't, and my current posture (trading tight, with positive gamma) is well within my comfort zone. Given the proximity of BKX 40—which has been the "go-to" tell for some time—I'm not married to my long bank rental, we're just dating, and as I peel off one side of my book, I'll reduce the other and continue to hit for average as the post-season approaches.
It's not as sexy as past strategies, I know, but sexy, along with crazy, is on the bus. My goal is to make some hay when the sun shines and keep that straw dry when it rains. There will be better days and easier trades coming down the pipe, and a lot less traders will be around to capture them. Our goal, in Minyanville, is to empower you to get there, and perhaps even share some smiles along the way.
Random Thoughts
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While I'm dubious that the enormity of the economic condition (that took decades to build) can be "solved" or otherwise unwound in a matter of weeks, or even months, I respect the motivated agendas of cornered politicians to save themselves (and by extension, their countries) through a coordinated, and perhaps even leveraged, effort.
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I felt much better about the "performance anxiety into year-end" vibe on October 5 (17% ago) than I do here, as it's emerged as conventional wisdom. That doesn't mean it won't continue to self-fulfill (I have a longstanding habit of being earlier on both sides) but it's most certainly worthy of a mention.
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The stock market had a good year last week, and the issues surrounding the world are structural in nature; ultimately, we'll need to take our medicine rather than inventing mechanisms to mask the root causes, but this you know.
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On my radar? Glad you asked! The dollar (any rally is asset class negative), BKX 40 (as mentioned above; it’s within spitting distance yet again), gold (wouldn’t it be acting better if QE3 was in the immediate pipe?), market breadth and Deutsche Bank (DB) (-4.45%) and Barclays (BCS) (-3%) as European banking proxies.
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Our one-of-a-kind (in the U.S) LOUIS XIII Le Jeroboam remains on the auction block, and I'm currently high bid—and while I'm all about giving back (100% of the net proceeds will benefit The Ruby Peck Foundation for Children's Education), I will tell you that in this particular instance, I'm wearing a speculator's hat. I believe in my heart of hearts that this puppy will trade (at least) 2x in five years, and that's a bet I'm willing to make!
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House GOP Leader Eric Cantor is going to hold a “Festivus” themed fundraiser? Dude, come on now—really?
- If I told you before the NFL season started that Philip Rivers would be the only QB in the AFC west to still be starting in December, would you have imagined that the Bolts would be in last place?
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Has anybody thought ahead to what would happen if European leaders succeeded with regard to their austerity and taxation agendas?
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As most Minyans know, I have two buckets of capital; a long-term nest egg, which has been in 100% cash since 2007 and an active trading account, as discussed above. We are actively looking to add a third investment to that portfolio—a home outside the city. I’m not proclaiming a “bottom” in real estate—there is a lot of capacity that will take years to resolve—but there are good deals out there, and while land can, and likely will devalue further before it again appreciates, it won’t trade to zero and there are psychic dividends involved. Just keeping you up, as this has been a long time coming.
- As always, I hope this finds you well.
Twitter: @todd_harrison
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Position in BAC, RIMM, S&P
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.
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