Frugal Friday

I’m going to do this posting in two parts. One, quick and now, to point out that JPM passed gas in church so is selling at a 7%+ discount for the best bank in the USA (world?) today. I’ve taken 1/2 a position (and will fill it out if price drops more) this morning.

Later today I’ll add some more broad value and bottom fishing ideas.

JPM J.P. Morgan Chase Bank

The “deal” here is that they had a “surprise” $2 Billion “paper loss” in their derivatives hedging portfolio. They had an offsetting $1 Billion gain in the trade portfolio, net a $1 Billion loss in 6 weeks. The basic problem was that their “Model” had one set of expectations about total risk exposure ( $ 1/4 Billion ) when reality was that the particular derivatives were a bit “mis-priced” ( i.e. the Efficient Market Hypothesis is often wrong…) and actual risk exposure was, well, $2 Billion.

Everyone was stunned as Jamie Dimon is held up as a detail freak with incredible focus on risk control. So folks are astounded to learn that folks can make mistakes at all levels and that even J.D. can miss something. ( I’d assert “Especially when he has to spend so much time hanging out in Washington D.C. as congress critters are looking to damage, er, pardon “regulate” banks even more.)

OK, a couple of numbers. Market Cap is down $12 Billion today. On a $1 Billion net loss. Panic and worry that Congress will Act (and usually they act badly). The assets of JPM are about $2 Trillion IIRC the “talking heads”. So the loss is about like a dollar loss on a $1000 asset base. Hmmmm…..

So we have a fire sale over ‘penny on the dollar’ loss?

The chart:

JPM J.P.Morgan 11 May 2012

JPM J.P.Morgan 11 May 2012

Notice the BIG spike in volume? LOTS of folks just dumping. The “Market Maker” must buy, but can set the price. He will be setting it low enough to pretty much assure a profit once the flood ebbs. Time to make a ‘Friend Of The Market Maker’ trade and buy with him.

Also notice that price had made an entry a couple of months back in January. “Failure to advance” to the downside. SMA stack ‘merged’ into a weave. Price rises over it and barely touches from above. RSI was ‘near 20’ in August then started making ‘higher lows’. MACD went to ‘blue on top’ and with slope upward, then crossed above zero. Typical “Buy the bottom”.

Now we had had a nice run up and gotten a bit toppy. Volume at the bottom was very high. In the last couple of weeks it had gone low, and MACD had gone to “red on top”. Time for a ‘correction’ back to the SMA stack and a ‘buy the touch in the trend’… but the news hit and knocked price back to what it was in January. You don’t get that kind of chance to pick up 4 months of gain on the cheap very often.

Could it go lower on Monday? Maybe, but not likely. Usually there is a 2 or 3 day length to these kinds of things (as it takes 3 days for the ‘average rube’ to find out an panic sell). But this one has been so widely covered in the news and the “Talking Heads” have been so biasd to the side of “I’m buying”, that I think the Rubes will be offset by the professional bottom fishers. If it does go down more, I’ll be buying more. “Scaling in” to a full position (or perhaps even a double position). We’ve got a decent dividend (over 3%) with growth in a stellar bank at a discount. If it gets even lower in price, the dividend is a higher percentage. RSI is ‘near 20’, so a buy indicate for ‘soon’ anyway.

Realize that “Bottom Fishing” comes in two forms. A ‘fast trade’ where you do what the market maker does. A ‘slow accumulate’ for the long term. The Market Maker will be looking to exit his trade on Tuesday or Wednesday next week. So toward the middle or end of the week it ought to be going up some. You can ‘buy a chunk and flip it’ in a couple of days trading with the market maker. Often buying on the first 2 days of trading and selling on days 3-6. Or you can just pick up a very nice bank at a steep discount and with a dividend that makes bonds look crummy. I’ll be doing some of each.

Live Chart:

JPM 1 year Daily with Volume

JPM 1 year Daily with Volume

Day Trade or Rapid Swing Trade Time Scale

On a trade timing, or Day Trade basis, it is important to look at a faster chart. These are 10 day 15 minute tick mark charts. All it takes is setting the controls to those values on the left hand side of the Advanced Chart option at

There are two of these. The first one has “Bollinger Bands” on them. It compares price to the standard deviation, so they make wider bubbles when prices move a lot and the standard deviation expands. Notice how price ‘pulls away’ from whichever BB it is tracking at major reversals? Yet tends to track an edge during trends? The first chart also has a 40 period (or 10 hour) Simple Moving Average line. Price tending to ‘kiss’ it from below, then fall away. Until the bad news and the “Market Open” price plunged down. So we’d had a typical ‘surfing down’ that happens in a correction. Then the news hit and prices shot through the SMA stack on the longer term chart above. BB bubble blows out huge.

Typical of a ‘bad news’ event. IFF you think that bad news is just the start of things, you run away screaming as soon as you can. Notice that the typical pattern is a plunge at the open, a rise at about 10 am (Pacific Time) and then a drop back into the close. Best “Friend of the Market Maker” buy times are very early / at the open, or near the close. The market maker usually buys ‘way low’ at the open on bad news, then runs it up a buck or two to redistribute that volume to institutional buyers bottom fishing, then runs it back down a bit for the late sellers. Likely even lower Monday (depends on news over the weekend) and when the flood of sellers thins out (see those volume bars decreasing?) the Market Maker will slowly raise the price on any volume he had to absorb and carry for a few days.

If you look at RSI on this time scale, it’s a bit different shape, but the same effect. It said “sell” back on Tuesday a week ago (you get a ‘touch 80’ more often and the ‘lower highs’ tends to be too late for the best trade on fast charts) and it is now at 20, saying ‘buy’.

Notice that MACD on this time scale it is way below zero (as stock price is falling), but has had a crossover to ‘blue on top’. Slope is a bit shallow, so likely another day low to come, still, a fair bet to ‘buy now’ for the fast swing trade.

DMI has ‘red on top’, but it’s a slow indicator. DMI- has crossed over the black ADX line. That usually means ‘trend ending’, and if you look at the prices today, other than the typical low-high-low-again of the Market Maker buying-selling-buying, it’s overall a flat range. So again a reasonable indication. (Things that are horrible and not a reasonable risk to buy tend to: start down, try to get a bit of 10am rise, and just fall off a cliff.)

So as a ‘Day Trade’ (buy open sell 10am Pacific) or as a fast swing trade (buy open or close, sell in a few days when the Market Maker sheds inventory) it’s an OK indication on this chart.

JPM 10d 15m RMD 11May2012

JPM 10d 15m RMD 11May2012

Here’s another chart with Volume+, Momentum, and Rate Of Change ROC for another view.

JPM 10d 15m VMRoc 11 May 2012

JPM 10d 15m VMRoc 11 May 2012

Here you can see how volume is fading during the say. Panic is abating.

On this time scale, Momentum and ROC are very similar. You can see the general ‘below zero with dips’ of the slide back toward a ‘buy the touch in a rising trend’ moment, then the plunge on a surprise bad news. More interesting is how during today we have the Big Dipper at the open, then back to zero on the Market Maker Makes Lunch Money moment, then a shallower dip toward the close. Confirming lower downward momentum toward the end of the trade day. Those “higher lows” on Momentum and ROC excursions also tend to indicate “positive turn coming soon”. (But remember, on this time scale “soon” could be Monday Noon Lunch Money trade, not a week from now… )

OK, price goal? Look back on the longer term chart. It has a down trend. Project it forward. When the price hits that point, it’s a trade point exit. Perhaps even a bit before. IFF the price crosses that trend line and establishes a new upward trend, then you can establish a “trend trade”, but as long as the present trend is down, we’re just doing a ‘counter trend trade’ and that means you exit back at the trend line (or a bit before).

I probably also ought to note that this is a High Risk Trade Behaviour. Like trading BP on the oil well blowout. IFF you are a trader, you can do the ‘buy sell buy sell’ shuffle on the 10 d Hr chart. If you are a long term investor, the key is to know the risks. For BP, we had entirely unknown risks, largely in the hands of the courts and lawyers with pot stirring by politicians. For JPM, doesn’t look like any court issues and the politicians were already pot stirring so unlikely to change much on this news (i.e. ‘priced in’). It’s an internal trade boo-boo and J.D. is going to be spanking parties involved as needed. All limiting risk.

Realize BOTH of BP and JPM as trades work about the same. For investments, though, it’s all about those long term risk questions. If you can’t answer them, it’s better to step back. The general rule of thumb is “Never try to catch a falling knife.” so buying on this dip is a high risk trade, not for the typical investor. For them, you wait for a clear “cross the SMA stack” after a “bottom weave” moment.

Natural Gas

A more typical “bottom fish” trade looks more like Natural Gas. The main ticker here is UNG a USA Natural Gas ETF. The comparison tickers are a wide collection of natural gas companies, “integrated oils” with a lot of natural gas exposure, pipeline partnerships, etc.

UNG vs Industry 1yr d MacMoDmi

UNG vs Industry 1yr d MacMoDmi

Live chart at

Several things here. First off, notice how as Nat Gas plunged, the folks who produce or transport it went up nicely. More product being bought cheap, so more fees from transporting it…

At the end, UNG has a nice reversal. It had reached abut 20 CENTS / gallon of gasoline equivalent… So price is pretty darned cheap. With the Obama admin kicking coal when it is down, folks all over the place will be converting things to run on natural gas. Heck, my utility company sells me Nat Gas at about $1 / GGE and just running that through a home sized generator ( couple of hundred bucks) I can make electricity for lower price than the tariff they charge me. (Over 20 cents / kW-hr in my marginal tier). I can get about 6 kW-hr / GGE.

Now your average home owner won’t be doing that, but a whole lot of companies will. Expect to see buses and transport swapping. Even my local high school put in a cogeneration plant that uses the waste heat to keep the swimming pool warm. (Made by Capstone Turbine who are selling units like crazy, but the stock just lays there at about $1 and wobbles…) So if I’m putting in a large factory that needs electricity and heat, I’m going to be looking at cogeneration plant.

Honda DOES sell a small home sized gogen system, but only in the North East right now (as they need the home heating). In Texas and California we need one that makes A/C too ;-)

So there are a lot of ‘derivative trades’ off of a falling ticker, especially in a commodity. In this case, the commodity is bottoming, so the major trade comes in the commodity itself at this point. There is likely still some room to run in the transportation companies from higher volumes, but that’s not a bottom fish trade at this point. (One I mentioned some long time ago, TGP, is an LNG tanker company that’s now yielding over 6%. The USA is likely to be shipping more LNG for years to come. WMB is paying over 3% and KMP is just shy of 6%.)

So look at the chart. MACD crossing over zero to the positive side with a nice slope up. Momentum, after a long ‘below zero’ with only minor pips above making a nice strong ‘blob’ over zero. At the end of April, DMI going to “blue on top” and with the black ADX line over 30, it is a strong positive move.

Price itself is over the SMA stack (not on this chart). All in all a nice “buy nat gas” just off a bottom.

Typically there will be a ‘Dead Cat Bounce’ where this kind of rise drops back to the SMA stack and makes a ‘higher low’. Right now the short sellers are covering. That moment comes when the shorts are out and their buying pressure ends. That’s the safest entry point. I typically buy 1/2 a position for the DCB trade, then a whole position at the ‘retest of the bottom’.

This is a pretty good example of how to do a “bottom fish” trade. If something is falling, ask who wins from that. They will likely have nice rises. Companies that are largely owners of a product, like CHK, tend to fall with it. The plunge in the last couple of months form what looked like a bottom was due to some scandal about the CEO doing odd deals and self deals… so I’d not be buying CHK until that “headline risk” is dealt with.

COP – Conoco Phillips, just spun out Phillips as a downstream business.

That’s why PSX only shows up as that blue wiggle at the end and why COP takes that “dip” on the spin out. COP is more or less flat over the chart. The fall in nat gas being offset some by their oil holdings and the spinout news. But now? If nat gas makes a price recovery, that goes right to their profit margin. Not a very exciting stock (essentially flat over 5 years (but with a drop / recover in the market crash). PE is 5.6 and dividend just under 5%. For folks not wanting excitement, it’s better than a bond. And with some “upside sweetener” if natural gas rises at all.

Similarly (though backwards – a merger) EP El Paso and KMI Kinder Morgan (not KMP the Kinder Morgan Partners that’s related) are merging. So EP takes that BIG jump on the buyout news. EP and KMI have both either gone flat or taken a drop as UNG makes a bottom. So these look sort of like a natural hedge. Buying some of each of those dampens the average volatility of the package.

My “play”? It would depend on what you want to do. For me, playing the DCB on UNG is attractive. Oh, and starting to shop for a natural gas generator ;-) For the spouse, some COP and WMB look nice, but I likely need to do more digging into all the players and see if the old XTO energy (that turned into something else) is still yielding more. Then there’s a further derivative play in utilities that are getting a bit ‘spread’ out of the UNG price. (PG&E is paying a bit over 30 cents / Therm and selling at 80 / 120 depending on usage traunch.) One could also look for companies selling “CNG conversion” kits and / or the folks who retrofit coal burners to natural gas.

Construction companies that build pipelines, companies that make pipeline equipment, even shipbuilders who make LNG tankers all become places to “dig”.

But for now, I’m just doing the UNG trade. And swapping the stove top from electricity to gas ;-)

OK, more later…

Subscribe to feed


About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , , , , , . Bookmark the permalink.

16 Responses to Frugal Friday

  1. Panther77 says:

    They say $2billion, what if its more? Zerohedge says $3 billion. What if its $200billion?

    [ Reply: The position is still held, so it is an open position. Given how much J.Dimon was peeved, they will have taken other positions to prevent / reduce further movement against them. The loss from the particular TRADE is $2B now. There is a $1B GAIN from securities in a related TRADE likely part of the same STRATEGY for a net $1 Billion PAPER LOSS. This is a “Mark to Market” loss, not a “realized loss”, so isn’t even an actual loss yet. It simply can not be $200 Billion. Get a grip. The trade is KNOWN and the head guy is on record. If he was hiding a 100 x he would end up in prison. That’s just not J.D. The STRUCTURE of the loss is also a known. Some derivatives contracts had higher volatility than the model for “risk control” was expecting. It was a HEDGE, so if one leg is more volatile than the other, it can be a less perfect hedge. A less perfect hedge is still a risk mitigation strategy, just not as perfect a one as expected. Oh, and JPM is unwinding the trade, so has likely already reduced or mitigated a large part of it. In short “Don’t Panic!”. Ok… And yes, bottom fishing and catching falling knives has risk. It also has great rewards if done well. It takes a LOT of practice to pick the 1 in 50 that is worth the risk. In many cases the pattern is a drop like at the open today, the Lunch Money Hump, then a drop into the close. The next 2 or 3 days plunge even MORE as more dirt comes out. Sometimes even weeks later more dirt is showing up. (Think Enron or Lehman Bros.) So it is critically important to have pretty good odds that it is not one of those events. In this case, much hinges on Jamie Dimon and his reputation. HE is the one saying he is pissed about it and cleaning it up. I trust HIM. The trader in question is likely toast at this point. J.D. doesn’t hide things. If you listened to him on the conference call about it, that was very clear. So the nature of this kind of trade is pretty simple: MOST of the time I look for “Crash!!, Bang!, tinkle…” before I’ll bottom fish. 3 different down plunges, each smaller, eventually with “failure to advance” to the downside. Then a DCB. THEN I’ll buy. But every so often, there is an overdone plunge Day One, and it just rockets up on following days and you missed the trade. This “smells like” one of those, to me, based on over 30 years of looking at just such events. (Unlike BP where I stayed away as the risk was of unknown degree, ongoing, and management was part of the problem). So I buy a 1/4 or 1/2 of a position on speculation. If I’m right, I start winning Monday. If I’m wrong, I’ll “average down” on the “Crash Bang Tinkle” cutting my cost basis and doing a “work out” of a busted first traunch. This is hard core trading, not investing. Pay to play, expect an adrenalin rush, watch out for sharks, dive into the ice water naked, and expect scars. BUT, it can give you a 10% gain in 2 months. Downside limited (by the nature of the asset). I’ll take those odds. I’ll also be watching prices hourly at most for the next 5 trading days and if at any time I’m clearly wrong I’ll leave the trade so fast it makes your head spin. -E.M.Smith ]

  2. p.g.sharrow says:

    It appears to me that you are making a very good call on JPMorgan. When the taking heads started the reports it sounded like the world had ended but after the day wore on and there was more depth to the reports it became plain that Diamond was on top of it and the problem was a fairly minor hit. Sometimes stuff happens and if you are not asleep at the switch, you catch it and minimize the damage and go on. That London trader that screwed up will have some splainin to do! It takes a computer program creator to create this kind of mess 8-) pg

  3. Andrew Newberg says:


    I think you are correct on JPM, not a falling knife. Plus they will be picking up some nice fees on the Facebook IPO.

    Your gas play… I like your thoughts on ‘digging’ for some other ways to play gas. Pipelines may offer some interesting opportunities in the junk bond market place as well. High up front infrastructure costs, long term profitability…I think its worth exploring.

    Sometimes Closed End funds can offer some attractive dividends as well, but you do give up some liquidity. When you start seeing LARGE spreads over Treasuries it may be a good opportunity in Preferred’s, Junk and closed end funds.

  4. Tim Clark says:

    Thanks again E.M.
    Enjoy the financial posts.

  5. E.M.Smith says:


    Thanks for the feedback.

    Political topics get more response, and I’ve just assumed the low response rate on the financial stuff was just folks doing more listening and less talking; but it is nice to have confirmation that even with low comment rates, folks find them useful.

    I’d wanted to put more “value plays” in this one, but Mother’s Day Weekend it overtaking me.

    Maybe it’s enough to just have 2 or 3 per posting… or maybe next weekend I’ll be less ‘pressed’ ;-)

  6. Panther77 says:

    I think maybe NEM/ABX are worth a look, maybe closer to bottom? Shorters were getting hit the last few days. ING also could be close to bottoms?

  7. E.M.Smith says:


    The Chart for ING looks like it is near the lows of 6 to 9 months ago so likely to find some support there, yet still in a ‘not rising’ configuration. RSI can “wobble” between 20 and 50 on a bottomed “dead money” stock as it just wobbles on the bottom. MACD is “below zero with flat slope” (or can be “below zero with mildly wobbling slopes”) that indicates ‘just laying there with a slight drop bias’. DMI is a solid “red on top”, still saying ‘be out”.

    Look back at Aug / Sept. That’s what a bottom moment looks like. Then the SMA stack starts to weave sideways and price crosses it. Nov / Dec. Nice trades on MACD crossovers. But now? Now it is, at most, a rapid trade on European news.

    Part of that comes from a judgment call that the European Financials are just not going to be fixed any time soon. Greece, Italy, Spain, are staying in the dumper and Germany is tapped out with a marginal power grid to run their industry (that is keeping Europe alive financially). The “negative catalysts” are still in place and there is no ‘positive catalyst’ visible.

    So it is likely that this is a decent buy point for a decaying “swing trade” (see how price ranged decrease as price swings ‘wedge in’ back in Oct Nov Dec on that chart). After that kind of prolonged ‘bottoming process’ on a pending good news catalyst, then it MIGHT be a buy for a run up like in January.

    I’ve added the two Gold Mining stocks along with GDX and GDXJ (the miners ETF and the Junior Miners ETF). All the Gold Miners are just in a ‘upper left to lower right’ falling pattern. Not seeing any signs of flatting of the decent at the right margin. No reason to even think about them yet.

    Gold needs to stop falling first, and the global economy needs to be showing signs of recovery too, before folks will want to mine a lot of new gold. For now they are just another capital intensive basic materials stock in a “risk off” stock market. Worth watching, but not a time to buy. Wait for the “Crash!!, Bang!, Tinkle…” of a failure to advance to the downside and prices “wedging in” to a weaving SMA stack….

  8. E.M.Smith says:

    Looks like the 10 day 15 minute chart on JPM has the “crash bang tinkle” done.

    Prices higher today than yesterday. Volume dropping back to normal. MACD above zero and DMI with “blue on top”. I’ve finished filling out my position in JPM.

    Now I wait.

  9. Panther77 says:

    In 1666, The Great Fire of London caused massive systemic damage. Outdated complex building structures made of combustible material were huddled together and caught fire one after the other at rapid speed. Why did this happen nearly 350 years ago? The wood-and-straw structures were haphazard implementations of unethical building practices that paid little heed to risk management and were allowed by the oversight of regulation. Is the Great Derivatives Fire engulfing JPMorgan et al now similarly out of control and in resonance with 1666? Losses from trading bets made by “London Whale” at JPMorgan have risen from $2bn to $3bn in just four working days and they continue to rise much faster than originally anticipated. Have Too Big To Fail (TBTF) financial institutions become Too Big To Manage (TBTM) or simply Too Big (TB)? As other TB financial institutions eventually get roped into interlinked losses via complex derivatives’ entanglements — tracking different asset classes — is the $1.4 quadrillion derivatives pyramid about to catch fire a la 1666 and come tumbling down along with all the Too Bigs or TBs.

    [ Reply: I will say this once. Only once. You have been “on probation” for a while due to the antisemitic post and a general tendency to post a few dozen poorly selected things in a giant batch. I’ve also several times suggested things that have been soundly ignored. (In fact, it is entirely unclear if you ever read them or just post endless links…)

    So here’s the deal: In trading it is absolutely imperative that it be done with a neutral emotional state. You’ve put up two comments in this one thread that are not neutral and are clearly designed as snark and to illicit emotions and in particular negative emotions. For you, that is forbidden.

    I’ve deleted your other comment as it contributes nothing. It was well known from the beginning that JPM continued to hold an open position and that it could lose more, and that the actual state would be unknown for some time. They’ve almost certainly put on some additional hedging as they unwind the position. It means nothing. The magnitude of the hedge losses are NOTHING compared to the income of JPM. Got it? All the market movement will be due to the political games being played by Obama and congress about their desire for more direct bank control. That is the real risk.

    ALL trading involves risks and it is approximately NEVER that you can exactly time the bottom. To think otherwise is foolish at best. So the goal is to get close. There are three ways to do that. My typical is “buy late” after the reversal is clear. Typically that costs me about 4% or a bit more as the reversal can be rocket fast on short cover Dead Cat Bounces. Another is “scale in over a long period”. This is guaranteed to miss the bottom as you get an average over a long chunk of time. The final one in “scale in fast”. That has the risk that additional downside can happen over a longer period, but is best for really sound companies where major players may jump in FAST. That’s the case with JPM. ( I had one company jump up 9% the second day while I was waiting for the reversal…) There were no less than 4 major traders stating they were buying and at higher prices than I got. Folks on Fast Money, for example. The share price is now below “tangible book value”. JPM has a buyback program in place. At Tangible Book they will be buying with both hands. When? Depends on how good their traders are in that department.

    Now, if you can’t handle that kind of dispassionate decision making about entering a trade don’t do it and sit quietly in the corner while I work.

    Failure to follow this guidance will get you moved to the SPAM queue.

    Got it?

    I take a great risk in letting some of my “book of trade” be seen. Anyone who doesn’t like what I have to say about AGW, for example, could try to “play me”. And with folks like Soros on the other side, he could do it from coffee money and not notice. The only real protection I have against that is that I’m frankly just not very important. I’m a “nobody” and haven’t done much that matters. It would be an incredible waste of time and I doubt that anyone is that stupid. However, it is a risk. Why mention this? Because I do not let ALL my book of trade be seen. So, for example, having a “hedge” on may not be divulged. Say, holding SKF the financials short, against a long JPM position; or buying an out of the money “put” on JPM or on a related ticker. I describe how to do those things in some postings, but do not divulge the full set of my actual trade. That means two things: 1) Someone trying to “play me” will fail. 2) Snark about a given divulged trade can be particularly ignorant and stupid.

    Now, the part of your comment that I care about is much smaller: Petty emotion driven snarky behaviour does not contribute anything. You are trying to play a game of “gotcha” in some small way. A “see I told you so”. Such recrimination is damaging to the mind set needed for trading. If you can’t accept that, internalize it, and live it; you have no place in trading and certainly no place in my trading.

    Per “the trade”: There were fair odds that JPM would bounce up day 2. It hasn’t, and has instead followed the more typical “crash bang tinkle” pattern. I’m fine with that. My projected holding period for the part that wasn’t flipped on a bounce is about 6 months. Maybe longer. (Heck, if it looks promising for a Republican White House I’ll likely hold it through next January). I’m expecting over that time frame a probable rise to “Forty Something”. If it goes down much more from here, I’ll likely reduce my cost basis even further by taking a ‘double position’ in it. (That is something I’ll do as part of a ‘work out’. If the initial ‘buy’ was not a low enough cost basis, and the eventual clear bottom signal is slow enough and low enough, I’ll double up at that point and split the difference on the cost basis.)

    This is all simple mechanics of The Trade. It has ZERO emotional content. If you can not maintain a ZERO emotional content on the trade then shut up. Why? Because all it can do is be a potentially damaging distraction. So learn it, do it, or “don’t bug me”. In this trade, the “follow on” news was dominated by various congress critters making negative regulation noises. It could just as easily have been J.D. announcing an expanded buy back program. Price has held up better than expected even with the bad news flow. I’m OK with that.

    It’s really this simple: I’m sharing what I do so others can learn. Either as a good example or bad, makes no difference. Folks are welcome to watch, to ask questions, to make positive or neutral suggestions about an open trade. But “negative vibes” in trading is a very bad juju. I don’t need it. So don’t go there. IF a trader is lucky, they can get 55% vs 45% good vs bad trades. Then you cut your broken trades short and let your winning trades run. It is a dispassionate mechanical act. IF you ever let it become more than that, you start to make very bad mistakes. Things like “knowing silver will go up” or being unwilling to sell gold “because inflation is coming” or even being unable to just say “down 10% I’m cutting it loose” and being married to a position. (BTW, that’s one of the trade rules. Have a fixed stop loss point where if you hit it, it’s a busted trade and you just sell. Period. No feelings. No baggage. Not even if the very next day it shoots up 20% on a surprise merger or whatever.) So yes, tomorrow J.Dimon could be doing a perp walk to Congress and JPM could be at 20 and falling and I’d call it a busted trade and sell. But no, it is just not relevant to be getting wound around the axle on all the stories that will be flowing around in the news. You will hear everything from “He’s Fixed It ALL buy buy buy” to “Congress is going to indict.” None of it matters. Half of it is lies and you don’t know which half.

    Per your snarky comment:

    NO, the derivatives market is not going to burst into flames. If it was going to do that it would have happened long ago. What you don’t mention is that the bulk of the derivatives are offsetting positions. So, for example, if I buy JPM stock and a ‘put’ at 33 under it, I have a “long” with an offsetting put. I’ve ‘hedged’ my downside risk. I fully expect that ‘put’ to expire worthless. BUT, if the stock drops from my average cost basis of $35 to $34 the ‘put’ protects me. Similarly, when a bank has a risky mortgage package, they can buy a ‘derivative contract’ to protect it as well. They are largely just insurance contracts. In trading options, one of the things that is often done is to buy an offsetting position instead of selling the original position. I buy a “call” on JPM at $36. The price moves up to $37 and my “call” has more value in it. So I buy an ‘out of the money put’ below it. That locks in some of my gain against a drop, and if the stock just starts running up, I get more gain from my call. Yet at the end of the period both options expire. One pays me a lot, the other costs me a little. Now, do I really CARE at that point if the stock price moves? Well, it would be nice if it went up, but it isn’t a big deal if it doesn’t.

    And that’s the basic fault in lumping it all together into the “$1.4 Quadrillion derivatives market”. A whole lot of those “positions” are offsetting by design and a net zero even to the holder. I’ll regularly do a “long A / short B”. Tomorrow I’m likely to buy more short positions. (The market is going down generally for a while). BUT, since it is a 3 day settlement and my money will be ‘dirty’ for that time, IF that short starts moving against me I will not sell it; I’ll buy an offsetting long. Now I can sell whichever leg I wish once the trend stabilizes. I can hold it all, or only one side of it, for any length of time. IFF I’d done a ‘buy the short’ then ‘sell it’ – my cash would be unavailable until ‘settlement’. I’m locked out of changing positions for 3 days. Would I care if my long / short hedge got closed out? Not at all.

    Now I’m just some small player. But think about someone like JPM or even Warren Buffett. They may have a $Trillion portfolio of various financial instruments. Think maybe they put some ‘insurance’ around it with derivatives from time to time? Think maybe sometimes they then ‘offset’ one derivative with another rather than buy/sell/buy/sell? Think when a major company gives a few $Million in ‘stock options’ (a derivative) to an executive at $10 under market price that they are worried?

    Now, as a bit of homework. JPM is selling at a book to price ratio of 0.71 as of today. Do you know what that means?

    It means that for every dollar spent on the stock, you get about $1.40 of tangible assets above liabilities. Think about that for just a while. What is known to be one of The Best Banks on the planet with The Strongest Manager running it and The Best Balance sheet. And you can buy tangible assets at a discount. This is the kind of market inefficiency that is rarely handed to you so cleanly. It also means that as soon as he is ready, J.D. can sell $0.71 of those assets and buy $1 of stock. Getting an immediate 29 cents gain. That won’t last. (And frankly, if it does, I’ll be levering up to buy on margin and getting call options too…)

    So a suggestion for you: If you don’t understand how all this works; ask polite questions or just be quiet. Even stupid and novice questions are welcome (they are easier to answer ;-) but negative snark is forbidden.

    -E.M.Smith ]

  10. Panther77 says:

    ABX and NEM nice move up we’ll see if it can follow thru?

    [ Reply: One day does not an up trend make. That RSI is ‘near 20’ on one and “near 20 then rising” on the other is a good start. That gold did a jump up for ONE DAY is nice. But MACD has not yet gone to “blue on top” and is still below zero. DMI is still ‘red on top’. There is no upward momentum yet. This is in the context of a generally falling market. So it is worth watching them for a ‘confirmed new rise’; but we are not there yet. IFF we are entering a new run on strength, there will be plenty left with a 3 or 4 day ‘late’ entry. I’d also not buy on a Friday. It might be nothing more than some short covering for the weekend. Tuesday is likely a better time. By then it’s a 4 trade day run and the weekend ‘go neutral on the book’ is past. -E.M.Smith]

  11. NickS says:

    I think you just have to be careful with the financial stocks. Because if the EU breaks up with Greece (the small problem) and Spain, Italy, Portugal and Ireland. The gold stocks may still be actually paying out some dividends while these others have problems. I wasn’t trying to be smart, I just think that this 2 billion thing is just a hint to others to get out. Now it’s $5billion “But the losses could be even bigger if the company sells its positions into a market that has turned against its positions, ”

  12. Pingback: WSW, Sunday, 20 May 2012 | Musings from the Chiefio

  13. Panther77 says: $6 Billion now, looks like the hedge funds are playing games with them making the loss worse?

    The cut the buy back as well now

  14. Pingback: JPM Revisited | Musings from the Chiefio

Comments are closed.