A new trade and a missed trade! Lets get long an internet stock...

I was reading about the search engine AskJeeves today, and how they are
re-branding it as Ask.com. This makes way more sense as AskJeeves name
was rubbish...having Ask.com should have a much wider appeal. And
looking at the redesigned homepage, it looks fantastic, better than
Google.

So I did a little more digging...the company that owns it is called IAC
(InterActiveCorp), which owns a variety of sites/businesses including
Match.com (a dating site) and Ticketmaster. The market cap of this
compan is only about $9.5bn, which seems TINY considering Google is
worth around $110bn!!

So, I looked at shorting Google versus getting long IAC, but just a few
minutes later Google comes out and says growth is slowing in its
markets, and the stock drops over 10%!!!!!!! Dammit, that would of been
about £4k! Ah well, I bought some Jun '06 IAC @ $29.60 in £10 a point
anyway, so just under £30,000 of stock equivalent.

I love this trade, lets keep it all year and see it double.

And a quick note on the Heinz trade from the other day...the bloody
company just came out today with results and missed analysts
estimates...stock traded down 4% in pre-trading, but is now flat on the
day...makes me even more confident in the potential LBO.

On the nightmare DAX position, I cut it today after the DAX fell 110
points following lower US consumer confidence...I was never happy with
that trade and I'll take the £705 loss "happily", so I can move on. Lets
keep an eye on DAX/FTSE/CAC, I think I want to be long DAX versus short
FTSE/CAC, as I believe in the German economic recovery.

A small option trade on EUR/GBP...and YTD P+L:

I bought some EUR/GBP FX the other week at 68.51, then a few days later
sold a ~2 week straddle struck at 68.60...I got paid 41.4 for the
straddle, and the spot rate actually was at 68.04 at the time of expiry,
so trade was a small loss. Now I said at the time of the trade that I'd
buy some more EUR/GBP if it expired outside the straddle range, but
instead I've just sold a 68.20 put to March 10th for 20.9 points in £5 a
point. Small size, but anyway the only way I lose is if EURGBP is below
68.00, in which case I'll prob buy more anyway.

Also YTD P+L is standing at £4,496. Best trade has been shorting GBP
against the dollar, and the losing trades have been shorting the DAX
(what a nightmare trade, I am really annoyed on this one as it was an
unresearched punt) and on being long General Motors stock, which I still
feel confident on.

I'm working on a way to have a simple spreadsheet with my trades on
posted on a website somewhere. Could take a while but hopefully I'll get
there eventually. As always, any thoughts/comments on my trades is
appreciated!

traderboy

Just bought some Heinz stock...

...because their tomato soup is REALLY good. Oh, and because I think its
an ideal LBO candidate. The stock has risen about 10% this month on
these rumours, and also credit spreads on Heinz have risen from about
20bps to 50bps (thats in the credit default swap market). However, even
following this rise, the market cap is only around $12bn, a prime price
for private equity interest (lets call it $15-17bn by the time the pay a
premium for the stock). Combine that with a well recognised brand, and a
business with relatively stable cashflows and it becomes even more
compelling.

I bought £5 per point (cent) at $37.95 for the Jun '06 contract (so just
under £20,000 worth of stock equivalent). Lets aim for a 10% rise before
reviewing it, and cross our fingers for $50 take-out by private equity!

And secondly today...buying more GM stock:

Just added to the £4 a cent GM (General Motors) stock position by buying
another £6 per cent at $20.82.

As mentioned before, this company is working hard to fix its problems,
and I think it will reach agreement with its unions and Delphi on how to
reduce capacity/benefits/workforce, and I think it will have a
successful sale of GMAC in some form. This will turn out to be the
surprise equity outperformer within a year or two. £10 per cent position
is equivalent to just over £20,000 of stock. Lets target a 25% return
for starters, then review it.

Adding a couple of new trades to the book today...first, long Gold:

Just paid 557.75 in £25/point (that's £25 per $1 move in the price) for
Jun '06 GOLD. Finally back into Gold (I played in it a lot last year,
always from the long side), even if it is just in small size for now.
Would like to take this up to £100 per point eventually.

The rationale for being long gold is that for too long over the last few
years, central banks and ESPECIALLY the FED, have been pumping far too
much liquidity into the financial system over the last few years,
printing dollars whilst rates were at 1%. Running huge deficits,
financed by borrowing from Asia, has increased the amount of dollars in
circulation, and devalued this fiat currency. Gold is such a pure store
of wealth, that is bound to rise further whilst government borrowing and
spending carries on, and whilst real interest rates are kept too low
(although the FED is doing its best to stop that).

I think we'll see Gold up at 1000 in the not-too-distant future, look at
the old charts of Gold versus other metals such as copper, and if Gold
was to reach equivalent levels now as copper is (versus its old historic
highs), that would put it at around 650. Given copper is most certainly
linked to inflation, and the general cost of "things", there is no
reason gold shouldn't be catching up. And like many markets, expect it
to overshoot.

Finally shorted 30 year US Treasuries...Q1 GDP is going to be a bl owout...

Sold 30 year US Treasury Marcch future at 112.88 in £5 per cent after reading a Bloomberg article saying how Q1 US GDP is going to be huge when it comes in, possibly 6%+. This will give the FED room to keep hiking rates, and at some point the long-end will wake up to the fact it should not be through base rates in an expanding economy. First stop 5%! For reference, new 30y Treasury is around 4.52% today.

GBP/USD Put we sold rolled off today....perfect...

Just a quick note to say the 1.7350 Put option on GBP/USD we sold rolled
off today...sold it at 56.8 in £7 a point, and it expired today with
spot around 1.7370, so absolutely perfect...I pocket the £398 premium.
Looking at the charts it look like cable could have a quick slide down
to 1.71 area, and on the long-term charts if it gets there it could
REALLY fall off a cliff...however I don't particularly believe in
charts, so I'll look to sell more puts when spot is between 1.71 and
1.72, so we'll keep an eye on it.

Now, its Friday night so time for some beers...

Sold EUR/GBP 1 week straddle to monetise my view...also a P+L update:

Just sold a straddle on EUR/GBP FX...expires 24-Feb (3pm UK time). I got
paid 17.1 on the Call and 24.3 on the Put, in £5 per point, so am
getting paid £207 in premium. The thought process behind this was that
at worst I either:

1) Get taken out of my long, which I put on at 68.51, above 69.00, or,
2) I double my position at effectively 68.20.

Since from 1) i will make a quick £250 from my trades, AND my GBP/USD
trades will be even more in the money, and from 2) I am happy to
increase my short against the Euro as the POUND is going DOWN!

Aside from that, just an update on YTD profits...am up £6,662 with
success from the short Cable position, the Short Sterling trade, BT
stock, and the 10y US Treasury short, and the loss-making trades have
been the DAX future (I KNEW it!) and GM stock...but I love that GM stock
trade, it will come good.

Good evening, and good trading. Please feel free to post comments on any
of my trades or any of your own!

Buy CISCO...for lots of reasons:

Just bought some CISCO stock. I paid $20.60 in £5 per tick (cent),
equivalent to £10,000 worth of stock. Would like to have double this
position but will wait a few days and see how it goes.

This is not a stock I have followed in the past, but I've been thinking
further about the whole telco/internet world. I own BT stock as you know
because I think that when they start delivering video over broadband
later this year, the market will see BTs full potential. Looking more
into WiMax now, I think this could be the technology to devastate the
mobile carries earnings (eg. Vodafone).

If you don't know, WiMax is going to be the next technology after WiFi,
but unlike WiFi which has a radius of ~100-200 feet, WiMax will have a
radius of up to 30 miles, allowing someone like BT to cover the entire
country (and other fixed line operators globally) with broadband
wireless access. New phones are already out that look and feel like
mobiles (that's cellphones to any yanks reading) but connect through
WiFi to use VoIP (Voice over Internet Protocol), so connecting to a
fixed line operators network becomes as easy as using, say Vodafone's
network. And since routing phone calls over the internet costs next to
nothing, this technology could (and I think WILL) destroy Vodafone. So
long BT/short VOD looks an awesome trade.

But I'll come back to that another time, for now I'll just sit long BT,
and to get back to the original point of this note, to get long CISCO as
well, as they essentially deliver the routing technology for the whole
internet. As this VoIP takes off, AND more and more video is delivered
over the internet, it seems there can only be increasing demand for
routing technology (indeed, as CISCO announced at their results last
week, they see growth picking up in this sector). Check the charts, now
looks an excellent entry point, with CISCO having firmly bounced off the
lows, a market cap of ~$120bn, a reasonable P/E of something like 15,
and a great rationale to own it. Target 25% rise in shares within 3
months.

Closed out the Short Sterling Dec '06...but not happy.

OK as i mentioned in yesterdays note, I closed out the Dec '06 Short
Sterling today, but not exactly to plan.

I'd planned to sell out of it before the inflation report, thinking
inflation might be high, but I never got a chance to do that and
inflation came in low, pushing the market even more in my favour. I
closed it at 95.51 (market ended a few ticks higher than that), but
despite making £375 I should have made 4 times that. I had wanted to
have on £100 per tick as I'd originally mentioned but waited for a
better entry point on the balance.

Not having a well-thought-out trade on that makes money feels even worse
than having losing trades on! So the lesson from this one is to have
more conviction, and to make sure I don't miss out on trades I believe
in!

That's it, just a short one today, but also note that on the back of the
inflation report, GBP got killed again...hoping it ends the week at
173.50 so bang on the strike of my option, but we'll see. Being short
this is a trade for the long term.

New trade...I hate GBP so much I had to sell it versus EUR now:

OK, so I've added to my bear trade on GBP...this time I sold it versus
EUR. I bought Mar '06 EURGBP @ 68.51 (it ended the day a touch lower at
68.42), since EUR rates are on the rise, and I still think that GBP
rates are more likely to come down from 4.50% as the next move.

Although talking of GBP rates, this is a close call...I may even sell
back my Dec '06 Short Sterling position tomorrow if I can make 10 ticks
on it, as 1) I should have done 4 times the size, and 2) there is data
out the UK tomorrow, CPI I think, and I may sell before that as
inflation has risk to be higher than usual. If it sells off back to
95.30 area I'll look to get long again in proper size, say £100 a point.
We'll see how it goes.

YTD P+L is currently £5,467. The bulk of this has been on the GBP/USD
short (~£5000), with some small losses on GM stock and the S&P 1350 Jun
call, but the S&P call I know my downside and have plenty time for the
market to move up. GM stock is still a long-term buy but I may try
range-trading it from the long side, so next time it is close to $25.00
I may take my profits. I'll have to make sure the GBP/USD doesn't swamp
everything else, so better make new trades a bit bigger in size.

Still watching Gold and Crude Oil which have been selling off lately...I
suspect both are a buy at the right time and level. Being patient for
the entry!

More thoughts on the short DAX trade...

OK so as i mentioned a couple of days ago, the DAX trade was rubbish...a
short-term punt I had no real belief in (although I do think risky
assets in general are overvalued and set for a fall, but we probably
need the government bond market meltdown first). Looking at FTSE versus
DAX today, I now want to be long the DAX against short the FTSE...on the
view that I think growth is going to be picking up in Europe and Germany
in particular, as it looks like the government there IS implementing the
necessary reforms for growth, whilst the UK seems to be going the
opposite way with higher taxes etc etc (you will hear a whole lot more
on my thoughts on UK economics/politics plenty more times this year!).
So the obvious trade is long DAX/short FTSE (i especially like the fact
they almost trade at the same price...hey, it makes it easy to follow
ok!).

BUT...i am short DAX. And I think we may get a correction, and I think
in a sell-off the DAX underperforms, so we'll hold the short DAX on its
own for now, and when markets are weaker I'll put the DAX/FTSE on.

A short-term punt...sold some DAX futures:

Right, today I have gone against principles and done the type of trade
that'll probably cost me the most...I traded something purely as a
short-term punt. Sold £5 a point of DAX futures at 5669 (its currently
at 5699).

There are a few rationales behind my trade, but the thing that got me
looking at it was an article in the FT on a Morgan Stanley research
piece which pointed out that we have gone one of the longest periods
ever without a 10% fall in the European equity markets. Combining that
with my general belief that ALL assets globally are over-valued due to a
prolonged period of excess liquidity, which is now being withdrawn
(through higher short-term rates in Europe/US and shortly Japan), AND
seeing commodities markets taking a beating over the last couple of
days, I thought this could turn into a decent little short.

So there you go...I've no firm belief in the trade and so am probably
asking to lose money...but hey-ho we'll see how this one goes. If we see
a 200-odd point drop, I may look at selling some OTM puts also. Lets see
if we can make 400 points = £2000 on this one.

On a side note, I just bought back a Google short which I put on last
year...it wasn't included in my blog portfolio as it was an old trade,
but Google is definitely one of the stocks I'll be back involved in, but
hopefully not taking the beating I took last year on it! Boy was that a
painful short, I was really freaking when that idiot (I forget who) put
out a $2,000 price target on it!

Portfolio update...a few things:

OK just a quick update on the "book"...I bought some more BT stock to
take it up to £100 a point (equivalent of about £21000 of stock)...just
think that this company is developing great technology and I wanted to
have a big enough position to benefit from it. See note from Jan 30 for
my thoughts.

I didn't sell 30yr Treasuries (yet)...all seems pretty volatile and I've
been surprised how well bid they've been, especially going into a new
30yr issue, PLUS I heard in pre-auction trading the new 30yr was trading
at 4.49% whilst the old (current) 30yr is trading about 4.64%...strange,
I need to look into that one. Will stop being a wimp soon and get
involved. I'm still short £10 a cent of the 10yr future anyway, which
I'm holding for the foreseeable future. And I'll be honest, I went to
the pub and didn't leave until after the Treasury market had closed (I
work on London time remember!).

See my other note from tonight on the £/$ FX trade...I still have a ton
of conviction on this one. And GMAC stock is off today, costing me a
good £600 or so, I'm a bit nervous about the UAW striking at Delphi,
could put GM into bankruptcy AWFUL fast perhaps? But if they can get
through that, I still think they solve their problems long-term.

Gold took a beating today, biggest $ fall in 13 years, still think its
an AWESOME long-term buy, perhaps versus shorting Oil, but I'll be
waiting for the right entry point on that one. Will outline the
rationale in another blog when I come to putting the trade on.

Year-To-Date P+L so far = £5,578. Pretty pleased with that. Hopefully
can be solidly past £10,000 by the end of this month...yes I know that
is not the run-rate I need to make a million but the more chips I get to
play with the bigger my bets can be! As always...feedback and ideas
appreciated!

FX...short cable dropping nicely, we are in a powerful position. Sell 1 week puts.

Well shorting the pound versus the dollar has worked exactly as
planned...the FED hiked, and the market is pricing in another hike
(market odds are over 80% that the FED goes to 4.75% at the end of
March). This has caused a dollar rally, and we are about £4,500 in the
money. Whilst I still think cable has a LONG way to drop (sub 1.50 by
year-end), lets take advantage of our P+L, the market move AND our
beliefs and sell some puts out to next Friday (the 17th). I just sold £7
a point of the 1.7350 put at 56.8, which pockets us £398, and at worst
we get taken out of half our position in 10 days time at effectively
just under 1.73
(thats 1.7350 minus the 0.0056 option premium which we keep), at which
point we'd be up ~£6,350 or more. Not a bad return in 3 weeks!

Would be great to get some opposite thoughts on why the £ might go
up...I am getting REALLY bulled up on this trade and could do with some
perspective...

US economy is growing nicely...commodity prices are out of control...sell long bonds.

So the US employment rate is now down to 4.7% (numbers came out yesterday)...yet by the end of the day, US Treasuries end the day higher...yielding essentially the same as the FED's base rate (4.50%). Why is this too tight? Well, check out a broad-based commodities index which I've attached, we have not seen commodities moves of this magnitude since the 1970's and 80's when inflation was high and interest rates were higher! It seems to me that there is a great risk of the value of money being eroded, as higher commodities = lower purchasing power.

So locking up money for an extended period of time becomes a risk. Therefore going with this logic you have to short 30yr Treasuries. They closed Friday at 4.63% (having touched 4.72% at one point after payrolls), I'll be shorting £10 a cent of 30yr futures when the market opens (i think the duration is ~14 without checking my bloomberg, so = £140 a basis point).

I'll post a note of the level I get it done at. With the market pricing the FED going to 5.00% now, the risk seems to be of 30yrs making a medium-term move to 5.50% not 4.50%, so I'm loving the upside/downside here.

A lot of fear out there...but not of the market keeping on going.

I just bought some June 2006 calls on the S&P 500...current market on
the future is 1274, I just paid 11.12 points in £100 a point for a 1350
call (ie. risking £1112). TO save you reaching for your calculator, that
requires the market to move up ~6.8% for me to get into the money.

My reasoning behind the trade:

1. The highs back in March 2000 for the S&P were just over
1500...assuming GDP growth over the last 6 years has been 3.5% (i've not
looked up the number but its probably about that), then 1500 at 3.5%
growth a year is equivalent to a 23% increase = 1845. So, that makes S&P
high's in today's "money" 1845.

Now...back in 2000, long term interest-rates were over 7%...today they
are below 5%...so since the value of equity is just the discounted value
of the future cashflow stream, discounting back at sub-5% gives a (much)
greater value than at over 7%. Even if you take the equity duration to
be only 5, then discounting 200bps (old rates - new rates) times 5 =
10%...so making the REAL old high 1845*110% = 2029.

Now, the economy seems to be ticking along nicely, unemployment is very
low, credit markets are not far off all-time tights (so also signalling
strong economic conditions), inflation is well-contained, commodities
are at all-time highs on global demand, so equities could get back to
their "highs" (which as i've explained is well above the absolute levels
they reached 6 years ago).

So a MASSIVE rise in equity prices is not crazy (although yes those old
levels in 2000 were a little bubbly). If the market did reach 2029,
that would be a 59% rise FYI.

Jun '06 was the longest call I could buy on IG Index, or I'd maybe have
gone further out.

Hope you made it through all that, would be great to get some comments
back!

P+L Recap:

OK, so from the 5 trades I've put on, the total P+L is £1402 as of end
of trading Feb 1. Not bad at all since I only started a few days ago.

Details:
Sd GBP/USD Mar '06 £13 @ 1.7792 NOW AT 1.7739 P+L =+£689

Sd GBP/USD Feb 3 (3pm UK time) 1.7900 call £5 @ 43.3 NOW AT 9.3
P+L =+£170

Bt Dec '06 Short Sterling £25 @ 95.36 NOW AT 95.32 P+L =-£100

Bt GMAC Mar '06 stock £4 @ 22.92 NOW AT 24.19 P+L =£508

Bt Mar '06 BT Stock £65 @ 209 NOW AT 206 P+L =-£195

Sd Mar '06 10y Treasuries £10 @ 108.5 NOW AT 108.17 P+L =+£330

TOTAL P+L = £1402.

Now...I'll be back in a day or two with more trades...I'll be looking to
add to the Short Sterling Dec '06 at the right moment, maybe time to get
shorting Google (yes, even after todays 15% drop), maybe get short Gilt
(UK Government bonds) futures against long Bund (European Government
bond) futures...UK gilts ~ 4.10% and Bunds ~ 3.50%...will keep an eye on
it to get the optimum entry point. Also, I suspect at some point that
Oil is a sell and Gold is a buy (even after a big rally over the last
few months/years)...more detail of why in another blog.