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TranceAddict Investors Club @ Marketocracy (pg. 144)
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| jerZ07002 |
| quote: | Originally posted by Joss Weatherby
I dont have an options trading contract at the moment. I don't want to short GM either, too risky. Besides all my currency was restricted to stocks over $4 since I just put it in on Friday. |
i'm not sure that shorting GM is that risky. Don't the government loans have a convertible feature? If so, that will have an enormous dillutive effect on the equity. |
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| Capitalizt |
Flood of US Debt Threatens To 'Crowd Out' Other Borrowers
| quote: | All the government borrowing programs aimed at increasing liquidity have some economists worried that there could be a steep price to pay down the road—especially for borrowers.
The influx of cash that government borrowing will push into the economy is expected to cause inflation, which in turn will send up interest rates. As savings stagnate and unemployment rises, already-burdened consumers and businesses may not be able to afford to borrow at those rates.
"The prescription of massive debt, of money printing, of releveraging the economy, is exactly what engendered the depression of 2008, and all of the remedies are the same virus that killed us," says Michael Pento, chief economists at Delta Global Advisors in Huntington Beach, Calif. "You've exacerbated everything that went wrong in the beginning. You're increasing the money supply and you're releveraging the economy."
"Crowding out," an economic term that pops into view during times of inflation, is being discussed more as government cash is set to flood the marketplace in the months ahead. The phenomenon would be felt in several ways—through savings as well as borrowing.
And while the coast seems clear for the moment—credit spreads have narrowed slightly and borrowing seems at least anecdotally to be on the rise—there's fear that the cure for the credit blues could be worse than the disease. |
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| Shakka |
| quote: | Originally posted by jerZ07002
i'm not sure that shorting GM is that risky. Don't the government loans have a convertible feature? If so, that will have an enormous dillutive effect on the equity. |
GM stock is in the neighborhood of impossible to borrow these days. The stock loan department is charging -100% for the borrow last I checked. There are better ideas out there.
Edit: Assuming your broker can even give you a good locate. Also, May GM puts with a $2 strike are currently going for ~$0.88, so based on my own calculations you'd need at least a 40% decline in the stock by May 16 in order to just break even on your purchase. If they go BK, that's certainly a likely scenario, but it's a pretty risky game to play in a 1 month timeframe (though we all know the situation is getting dire and we're close to some sort of important event). Let's say you hypothetically spent $10,000 on some of the aforementioned puts, GM goes to zero and you cash in. You basically buy about 115 puts with a $2 strike. Stock goes to zero, you exercise (or more smartly just sell the puts to minimize transaction costs and maximize the leverage). You know are short 11,500 shares of GM with a $2 cost. You get $23,000 from the effective short sale (from exercising the puts). Net of your $10,000 purchase price, you made ~$13,000--a 130% return in 1 month. Not bad, though probably not exactly how things play out.
One problem I see with the strategy is that once companies declare bankruptcy, their stocks do not automatically go to zero overnight. FNM and FRE, which are essentially worthless equities given effective government nationalization, are still trading around $1 each---more than 6 months after the fact. If that happened with GM, you'd have the right call and would make next to nothing for it, if anything at all. Bottom line, it's not as easy a trade as you might think.
If you were to stretch out your horizon a bit to try to give the stock more time to go to zero, you'd have to pay up on the premium for your puts. Fwiw, September $2 puts on GM are going for $1.40ish. Even if the stock went to zero, you'd make a pretty paltry return for the amount of risk you'd be taking on. (~70 contracts...sell 7,000 shares short at $2, leaves you $4,000 of profit on a $10,000 investment. 40% return is great, but certainly not a trade I'd want to make given how stomach wrenching it would likely be to watch over time.) And that is the max you'd be able to make. More realistically, I'd bet you wouldn't even clear $3,000 on such a trade. And to put it in perspective, if you sold the puts outright instead of exercising them--with GM at $0, the puts would theoretically be worth a maximum of $2 each. So on your original purchase, you net $0.60 of profit on each contract leaving you $4200 of profit. That was more to show that you can get a little better return by selling the options as opposed to exercising them, though not a huge amount.
And none of my calculations took into account any transaction costs which would certainly whittle away your profits. |
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| Moongoose |
Well sometimes you make a killing on he market, and then the other times the market kills you. Remember the start of the earnings season when Alcoa posted a huge loss and their stock price went up about 10%. Well BAC posted really good earnings today (0.44$/share vs 0.04$/share EST!) and the stock price?
FFS why did the stress test results have to leak today. |
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| Shakka |
| quote: | Originally posted by Moongoose
Well sometimes you make a killing on he market, and then the other times the market kills you. Remember the start of the earnings season when Alcoa posted a huge loss and their stock price went up about 10%. Well BAC posted really good earnings today (0.44$/share vs 0.04$/share EST!) and the stock price?
FFS why did the stress test results have to leak today. |
Not to mention that every other bank that has reported earnings so far has managed to beat expectations and seen huge rallies/short squeezes in their stocks. Leave it to Ken Lewis to fart out another stinker. I still don't know why he has a job after making two of the worst acquisitions in corporate history. Stunning. |
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| yukii |
| quote: | Originally posted by Shakka
Not to mention that every other bank that has reported earnings so far has managed to beat expectations and seen huge rallies/short squeezes in their stocks. Leave it to Ken Lewis to fart out another stinker. I still don't know why he has a job after making two of the worst acquisitions in corporate history. Stunning. |
Talking about BAC? What acquisitions did he make? |
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| Shakka |
| quote: | Originally posted by yukii
Talking about BAC? What acquisitions did he make? |
Merrill Lynch and Countrywide were the last two. |
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| Krypton |
| quote: | Originally posted by Shakka
Merrill Lynch and Countrywide were the last two. |
I heard Merill lynch contributed nicely to BAC's bottom line. Countrywide, yea, horrible idea. |
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| Shakka |
| quote: | Originally posted by Krypton
I heard Merill lynch contributed nicely to BAC's bottom line. Countrywide, yea, horrible idea. |
Yeah, after they had to write down another $8+ Billion for Q4 they got some trading revenues and get to write up some asset values thanks to the suspension of disbelief in changes to mark-to-market accounting rules. Doesn't change the fact that they vastly overpaid for something that they could've easily purchased for half the price even considering everything that they knew when they made the offer. |
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| Krypton |
| quote: | Originally posted by Shakka
Yeah, after they had to write down another $8+ Billion for Q4 they got some trading revenues and get to write up some asset values thanks to the suspension of disbelief in changes to mark-to-market accounting rules. Doesn't change the fact that they vastly overpaid for something that they could've easily purchased for half the price even considering everything that they knew when they made the offer. |
Should'v used my models! :p |
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| Groundhog Boy |
| quote: | Originally posted by Shakka
Not to mention that every other bank that has reported earnings so far has managed to beat expectations and seen huge rallies/short squeezes in their stocks. Leave it to Ken Lewis to fart out another stinker. I still don't know why he has a job after making two of the worst acquisitions in corporate history. Stunning. |
Every other big bank has been killed after earnings. Just look at Goldman & Citi, same thing as BoA today, though not quite as extreme.
And what did everyone expect following the moves that they've made lately? BAC and C all quadrupled off of their March 6 lows (C down at .97 and BAC below 3, up to almost $4 and $12 respectively before this latest pullback. |
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| Shakka |
| quote: | Originally posted by Groundhog Boy
Every other big bank has been killed after earnings. Just look at Goldman & Citi, same thing as BoA today, though not quite as extreme.
And what did everyone expect following the moves that they've made lately? BAC and C all quadrupled off of their March 6 lows (C down at .97 and BAC below 3, up to almost $4 and $12 respectively before this latest pullback. |
That's not entirely true for the Q1 reports. It's been a massive bear market rally that has gone up in the face of good and bad news. I actually think yesterday's selloff was more tied to renewed fears of nationalization (via government conversion of the preferred stock they received from capital infusions), combined with a market that has run very far, very fast and as a result is very "overbought" at the moment. |
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