Wall Street Elite
Betting Against Odds and Good Sense
I. Open Trades
We have a number of open positions that require comment.
The first is the trade we opened back in November of last year on which we subsequently made repair in February. It was a DBA/TLT zero premium initiative for which we rolled out the (short) TLT PUT option until June.
There's still some time before expiry, but things are shaping up nicely, and we still expect our 80 strike option to expire worthless by the time expiration rolls around. TLT (the iShares Barclays 20+ Years Treasury Bond ETF) currently trades at $92.19 and would have to drop in excess of 13% in short order to put our repair in jeopardy. The option was last quoted without a bid. Ask was $0.06.
Moreover, TLT has been building a nice base recently, in the face of disasters in the Pacific, European debt insecurity and ongoing tensions in the Middle East and North Africa.
Here's six months daily trade in TLT:
TLT is now showing two months worth of bullish action, with higher highs and higher lows (in red, above) since bottoming the second week of February. It has also climbed above its short term MA and needs a bit more near term strength to bring its RSI firmly above the 'waterline' 50 level. before taking on resistance at 95 (long term MA,
At that point resistance could be strong. The long term MA at 95 (in yellow, above) looks daunting.
Until then, however, we have little reason to believe that TLT's strength will wane. Investors should worry only about trendline support failing at roughly TLT 91.
We'll have more to say about the long bond shortly.
__________
Our next trade was the February 21st XLY/IYZ 'spread' that has been in the black almost since the get-go, but hasn't broken out the way we expected. June expiry on the PUTS is also a ways away, but we prefer to close out here and reinstate the trade if we see some positive movement in the weeks ahead.
The XLY June 36 PUTS now trade for $0.50 and the IYZ May 23 PUTS are fetching $0.24. Selling the former and buying back the latter will score $26 per pair traded. Not the Tyson knockout punch we had anticipated, but a nominal profit nonetheless.
__________
Third, our trade of March 21st, a long-short piece employing the USO (long) and XLY (short) ETFs has moved in the right direction, and we're closing out. But before we get to the details, a quick flashback to some interesting words from a friendly chap named Ano, who posted the following on the Oakshire site on the 28th of last month. (Sorry, we couldn't resist.)
Your final recommendation to BUY USO and SHORT SELL XLY deserves a kick in your backside!!
From the day of your recommendation until today, you'd be down over USD4k for 1000 shares traded in USO and XLY. Assuming some folks follow your advise [sic] and traded 100,000 shares, they'd be getting a margin call about now and probably jump down the tallest building they can find.
However, if we did the exact opposite of what you recommended, i.e. SHORT SELL USO and BUY XLY, we'd be up USD4k for 1000 shares traded.
In conclusion, we'd all be richer just going the opposite of your advise [sic]. Thanks again, chump.
May the good Lord bless those that bless us. And as for Ano and his 100,000 shares (chuckle), he should feel free to cash out today (at Friday's closing prices; USO $43.17 and XLY $39.30) with a cool $98,000 profit.
And for those who, at Ano's suggestion, went for 1000 shares per side, enjoy your $9800.
Finally, for those who'd be richer for going against our advice, please continue to do so. And stay away from tall buildings.
__________
Our last trade on the block is last week's two-way, long CALL, long PUT, the first leg of which we're closing out today for a 39% profit. We bought the May 1425 CALL options for $0.90 and they last traded at $1.25. Jump here on the CALLS and hold the PUTS 'til further notice.
II. This Week's Trade
Part of the reason we decided to exit the USO/XLY trade was due to the significant risk premium already built into the price of crude. We remind subscribers that after a 50% spike in the price of oil before the Iraq war in late 2002/early 2003, crude subsequently dove by 34% when then-President Bush finally declared war.
See the graphic:
The circumstances today, of course, are not identical, but the potential does exist for a quick return to levels that preceded the Libyan OP. Of course, crude could also climb to new highs should the general Middle Eastern situation continue to deteriorate or should new elections in Nigeria bring more unrest to that country (general election April 9th). Nigeria's production is larger than Libya's.
That same risk premium is also finding expression in those higher bond prices we spoke of earlier. The middle to long end of the yield curve is now acting as a relief valve for those afraid of the continued effect of elevated oil prices.
The Big Question
We find it hard to believe the stock market can continue to rise on anything but the waves of liquidity currently sloshing about the banking cesspools. Productivity gains have been all but wrung out of an overworked labor force that's also seeing real hourly earnings significantly eroded (see chart below).
Who's going to spend in this environment?
More than that, who has money? The number unemployed is now at bedrock bottom levels. Look here:
At this stage of the game, should the risk trade come on again – and we are hedging this possibility – we believe it will have to include the financials. The telecoms, on the other hand, have been wildly overbid of late in the wake of a number of high profile deals.
Check it out:
A clear tale of overbought (telecoms) vs. downright weak (financials) that we believe is tradeable – should the market, against all reason and nature, continue to rise.
We are buying CALLS on the Financial Select Sector SPDR ETF (NYSE:XLF), and selling CALLS on the iShares Dow Jones Telecommunications ETF (NYSE:IYZ).
Wall Street Elite recommends immediate purchase of the XLF September 18 CALLS, now trading for $0.35, and selling the IYZ August 25 CALLS for the same price – in equal numbers.
With kind regards,
Hugh L. O'Haynew,
Analyst, Oakshire Financial
