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Phil Davis Provides Sense on Cents

Posted by Larry Doyle on March 20, 2010 9:27 AM |

What better way to prep for my conversation with Phil Davis tomorrow evening on No Quarter Radio’s Sense on Cents with Larry Doyle than reviewing Phil’s “sense on cents” thoughts today.

There are many reasons why Phil Davis is one of the most widely read and highly regarded trading strategists and market analysts in the country today. Phil’s commentary, Options, and Patience, Expire Today, posted at Seeking Alpha provides insights and perspectives not often found on or off Wall Street.

Phil writes:

Well, now we’re officially cashed out!

As I always do before options expiration, I reviewed our Buy List, which, this quarter, is a list of 37 stocks we’ve been playing since late December and, sadly, after reviewing 37 of our favorite investments very carefully this week, I could only conclude that cashing them out was the only decision I could be comfortable with.

Of 66 trades we had on our 37 stocks, 64 are winners with an average return since 2/8 of 28%. Since most of the trades were designed to make 40% for the year, it just seems silly not to take the money and run now, on March 19th.

You are not supposed to have 64 out of 66 winners in 6 weeks, you are not supposed to make 3/4 of what you anticipate for the year in 6 weeks – that is NOT how the markets are supposed to work! When the markets go against you in some ridiculous “black swan” fashion, it is easy to throw up your hands and walk away, but when the markets go in your favor in some ridiculous, “white swan” fashion – maybe it’s also a good idea to use those same hands to stuff your pockets with cash and walk away.

There’s nothing wrong with cash – the Fed tells us there will be no inflation in the foreseeable future and, in fact, they are fighting deflation so our sideline dollars will gain more and more buying power while we wait. Actually, despite my best efforts, there are still 15 positions that weren’t worth getting rid of (too much reward, not enough risk), even in a worrying market. Generally they are positions we expect to get at least another 20% from by January – still a pretty good return in this low-VIX market.

Our plan is to take opportunistic trades between now and April earnings. We’re still expecting a pullback and I’d be very motivated to go back into our old friends if they go back on sale, but most of those picks were made for a defensive market posture that won’t be necessary if we break over our levels from here, and they certainly weren’t worth riding back down after hitting 75% of our goal in 25% of the year!

We have Health Care Reform passing this weekend and there should be some great opportunities to pick up stocks people panic out of, once that goes though. Money has been flying out of Money Market Funds at record levels as $73.7Bn (out of $3Tn) was withdrawn in a single week, so it looks like we’ll be fighting the tide as we put some in! Our old pal, Greenspan, suggested that regulators should compel banks to raise capital levels by 40% to ensure stability which, in Greenspeak, sounds like this: “The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital. Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”

As to regulations, Greenspan clearly states: “The notion of an effective ‘systemic regulator’ as part of a regulatory reform package is ill-advised. The current sad state of economic forecasting should give governments pause on the issue. Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for.” Gosh I miss him!

Another reason to keep some cash on the side is the new Health Care Bill will add a 3.8% tax on investment income. Will that be before or after Wall Street bonuses? So let’s see, we made 28% in 3 months and the government wants us to take 1.064% and use that money to generate $210Bn to pay for overhauling the health care system and insuring 50M of our fellow citizens who otherwise cannot afford medical care. Gosh, I think I can live with that… Of course, it’s not worth complaining if you made $28,000 on $100,000 and the government is taking $1,000 or even if you made $280,000 on $1,000,000 and the government wants $10,000 because you know you are going to be helping millions of people improve their quality of life. But, if, like Goldman, you made $28Bn and the government wants $1Bn – well you can be damn sure you’re going to go out and get some lobbyists to stop the government bloodsuckers from using your precious profits as a handout to the kind of people you step over on the way to work! See – it’s all a matter of perspective…

That is where most of these things fall apart. Billionaires and Corporations have all sorts of ways to avoid paying taxes and that shifts the burden down to us. In fact, 57% of all US companies and 72% of all foreign corporations doing business in the US paid no taxes at all despite having, according to a GAO study, as a group $2,500,000,000,0000 in sales. Anyway, that’s an article for a different day.

Speaking of guys who need a handout – our man George Papandreou is racking up the frequent-flier miles and knocking on everyone’s door in an effort to secures some aid before his next $27Bn debt bill comes due on April 20th and May 19th. Papandreou’s appeal to the European Union to help him steer interest rates lower is being stymied by a deepening split among the bloc’s leaders. While French President Nicolas Sarkozy said the euro region would rescue Greece if necessary, German Chancellor Angela Merkel’s government yesterday signaled it’s ready to turn its back and force Papandreou to seek International Monetary Fund assistance.

This is all sending the Euro into its biggest weekly decline since January, falling against all but one of its 16 major peers as Greece set a one-week deadline for an aid mechanism from the EU, while German officials said the International Monetary Fund is the preferred option. The Swiss franc rose against the euro for a sixth straight day, its longest run of gains since December 2008. The pound dropped against all 16 most-traded currencies after Bank of England policymaker Andrew Sentance said Britain may return to recession. “The Greek story is far from over and will continue to haunt the euro,” Geoffrey Yu, a foreign-exchange strategist at UBS AG in London, wrote in a report today. “For the euro, weakness will persist, making us very comfortable with our three-month target of $1.30.” Meanwhile BNP is lowering their forecast all the way down to $1.19 by June of next year (down 12%)!

None of this stopped Europe’s markets from marching up half a point across the board this morning on no particular news, while Asia was also up about the same despite a senior Chinese trade official warning that any further appreciation of their currency would wipe out the profits of exporters, many of whom are operating on margins below 2% already. Mr. Zhong talked about a potential tipping-point effect to describe the fragile situation of many exporters. “Water doesn’t boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree,” he said. Likewise, “a further rise in the yuan by a very small magnitude might cause fundamental changes” to exporters in China, he said.

That is possibly the best description yet of what I think is happening in the world – we have so many things that are pushing right up against the edge of the cliff and now we’ve all tied ourselves together “for safety” and it’s really just a matter of ONE MORE THING and we are all in very, very, BIG TROUBLE. I have been saying for some time that SOMEBODY is losing money with a rising PPI and a declining or flat CPI, and Mr. Zhong confirms that this is just another way China is subsidizing the global recession – their manufacturers can absorb losses in a way ours can’t – because idiot global investors (we talked about this in yesterday’s post) can’t read balance sheets anyway and invest in Chinese companies as if every one’s a winner.

Mr. Zhong said China is willing to purchase more American goods and take other steps to reduce its trade surplus with the U.S. But he urged the U.S. to find a solution at home rather than put pressure on China. He noted that China found ways to cope when tens of millions of workers were thrown into unemployment in the late 1990s when the government shuttered unprofitable state-run enterprises. “When we have a problem, we usually look for the causes internally. However, the U.S. tends to look for reasons from the outside. There’s a cultural difference between our two nations,” Mr. Zhong said. This is a wise man!

Phil’s commentary is nothing short of a seven course exquisitely presented fine dining financial experience. I am thrilled to present it here at Sense on Cents and to talk with the master chef tomorrow evening.  Invite your friends to this ‘dining’ experience, as well. Seating is unlimited. Please make a point of joining us.


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