Seems That Baidu is Able to Predict the Market Trend

I mentioned in my previous post that Baidu’s September option pain was $300. I checked it again and the option pain was higher a little bit at $310 at the moment. What would be your guess if you predict Baidu’s price movement without looking at the option pain a couple weeks ago when Baidu was about $340? I would probably think it would go up instead of retreating. Obviously option pain can really tell something. It can tell how institutional traders see a particular stock. If option volume on an issue is large enough option pain on that issue may be able to tell how institutional traders see the market overall.

I checked INTC and BAC September and October option pain. They are trending downward. They seem to tell the bearish sentiment of the market should be extended into October. However Baidu’s Oct option pain is at $330 which is higher than September’s. I am not sure if you agree or not but I have already convinced that option pain is a very good leading indicator on the underlined issue or even the overall market.

Anyway I didn’t trade for a while. I was busy looking for a new job. I add 200 shares of CSKI at $13.09 and I sold 2 contract of Baidu Sep 290 Put at $3. I was thinking if Oct Baidu option pain is $330 I wouldn’t mind to have it at $290 in the mid of September. There is $20 difference or about 9% difference between $290 and Sep option pain. I thought it could be safe. But again who knows. We will see how it goes.

Baidu Option Went Well and I Saw a War Between CSKI Management and Professional Short Seller

My Baidu put option went well finally. I collected the $420 option premium. In my previous post I mentioned I sold a contact of Baidu Aug 320 Put. The market took a deep a few days ago. I thought the put would end up in the money and I would be forced to buy Baidu at $320. I didn’t mind if that happen though. But magically on expiration day which was the passed Friday Baidu closed at $344, a price very closed to its option pain. Seems to me the option pain theory has some credibility. It is the second time I sold put and it is the second time I saw stock price closed near option pain on expiration day. Baidu’s September option pain is $300. Does that mean institution traders are bearish on Baidu? I really want to fine out next month.

I believe CSKI is under value and I did some research on the stock to find out what was holding back this company. I found there was a so called professional short seller spreading news that he had reason to believe CSKI management was providing incorrect financial information. He even has a web site to tell his story http://waldomushman.com/. I don’t know whether I should believe this rumor. Maybe the short seller used to be a potential investor on CSKI but got opt out and felt pissed off. That is wild a guess and I hope that is the case. CSKI has to proof to all investor that the short seller is wrong. I feel there is a war between CSKI’s management and the professional short seller. I am still holding CSKI and of course I hope CSKI management will win the war at the end.

I Have Got Harsh Comments From CAP

I haven’t update the stock traders blog for a while because I was busy. I took a look today and I found someone name CAP posted some really harsh comments. I deleted most of them. Sorry about that CAP! I hope it is not because CAP followed some of my trades and lost money on them. The information on my blog can not serve as investment or trading advice by any means.

I was wrong on many of my trading positions taken lately. Especially the put position on Baidu. I sold one contract of Baidu Put and I am still holding it. As I mentioned before Baidu likes to follow its home market, the Chinese stock market. At this time PST 1:47 AM 2008-08-19 the Chinese stock market dropped some 5%. Seems to me the US market will be ugly when it open later today. In fact US future already dropped almost 100 points. If Baidu drop 5% today it will be below $320, the strike price of my Puts. There is a very high chance that I will lost money on the Puts. I will know this weekend. I added another stock to my portfolio though. That is Monlia Healthcare(MOH). I bought it at $19.95, 100 shares. And I am losing money on that again. CAP said I almost lost money on every trades and can’t believe I am holding an MBA. That’s almost true.

Indeed I wasted a lot money getting my MBA. If I didn’t take it I would have saved a lot of tuition. If I didn’t take it I wouldn’t trade stocks and I wouldn’t lost $70K. Do I regret taking it? I don’t think so. I might have gain something not in monetary terms while I lost this money. At least I felt OK that I still survive after this kind of lost.

Under Valued Stock - CHINA SKY ONE MEDICL (CSKI)

It is very hard to find under valued stock nowadays but I came across a stock that I believe under valued based on its financial statements. The company I mentioned was CHINA SKY ONE MEDICL (CSKI). I found its business is simple and its operation and its book are very easy to understand not like those banks you don’t know what is true and what is not. I brought 200 shares of this stock today at $15 something and I am planning to hold it for a while. I sold my Fortress Investment holding at $5 today. I made about $350 on that stock.

As I mentioned I like CSKI because its business is simple and easy to understand. It produces and sells over-the-counter drugs in China. I went to its web site. It has a portfolio of over-the-counter drugs. So its sales are not relying on a single drugs and it has a pretty stable sales trend. More importantly it has a very healthy cash flow. It makes profit for the past four quarters and its trailing 12 month P/E was lower than 8. Forward P/E is a bit more than 6. Price to cash flow is less then 10. Net income grow was more than 30% for the past three years. I don’t think I can find a second company like this. It was under valued by all measure.

If you are reading this post I hope you can take a look at it and post what you think about it. Are you able to find any company comparable to this one? I am thinking about all in again. By the way I bought 500 shares Dry Ship again at $6.45 a couple days ago. Planning to hold it for a while too.

Can I Be All in Selling Baidu Put

Once a while I have this crazy thoughts. I did not have too much crazy act though. Evey time I act crazy I got burned. I mentioned I ever short 300shares of Well Fargo using margin capital almost 2 times of what I had in my account. Today I had a crazy thought again. I thought about using all the cash in my account selling Baidu August 320 Put. I really don’t think that Baidu will go back to $320 a share by August 22nd. If it does I believe it will create a buying opportunity. That is why I want to sell Baidu August 320 Put. At the end I only sold 1 contract for $420. I ever mentioned that selling put is a strategy to earning more than CDs rates if you have cash sitting idl. I still believe so. But we’ve got to be very careful picking the stock and option strike price when doing that.

After I sold Baidu put I saw my account requires me to remain $6,374 of cash. So if I want to be all in the maximum number of contract I can sell is 4 only. 4*420 = $1680. So if everything works out the all in strategy can net me $1680 by August 22nd. It looks like Baidu is not going back to $320 given the current market sentiment. But my experience told me it is very hard to predict. Market sentiment can have 180 degree change over night triggered by a single story. So I dare not to be all in. Anyhow I am holding two positions now. 500 shares of Fig (Fortrest investment group) and 1 contract of short Baid Put. The picture shows my balance.

As to Fortrest investment group. I feel it will reach 6 if the market remain positive. Blackstone drop a lot today and it seem to me it will go up tomorrow and so will Fortrest investment group. let’s see what happen tomorrow.

I Bought Something Today

I finally decided to buy something today. I bought 500 shares of FIG (FORTRESS INV GP LLC). That is not much and I am planning to hold it for a while. I just bet it will report a good quarter. I thought Bank of America would go down after its earning release but that thought was proven so wrong. BAC just kept going up with the other big banks and with the overall market. If I don’t remember wrong almost all data released these few weeks exceeded expectations. The Dow went from 8150 to 9300 in a few weeks. It turned out that we should be all in when the DOW was at about 8000. And it clearly showed a V share recovery at least during the past two quarters.

Thinking back I was quite stupid to liquidate my entire portfolio back in March when the market was close to its lowest. As I mentioned I had a portfolio of about 100K back in year 2000 and when I liquidated my portfolio I got back about 30k. I still keep track of my original portfolio and my original portfolio has MSFT, INTC, ORCL, JNPR, EMC and SNPS. If I didn’t touch it I would have 65K today instead of 27k. So I started to question my new ways of investing - day trading. What I see is that there is no one way of investing to work well at all times. I bet no day trader worked better than someone that bought and held for the past couple of quarters.

I ask myself do I want to go back to buy and hold? I don’t know the answer yet. I feel there are some companies worth to buy and hold. I am recently looking at something very conservative like Q(Quest Communication), OB (OneBeacon Insurance Group) and BP. I might be too late on OB because I feel its price is going to jump starting today. I am watching the big banks also. The big banks were doing very well but somehow I feel they are just very good at hiding the bad news or postponing them. I still think they are overvalued unless they resume a reasonable size of dividend payout which could be years away.

I haven’t report my balance for a while and there is not much change. My balance stood at $27,107 and I am holding 500 shares of FIG at the moment

Off Balance Sheet Financing Example

There are a lot of concerns about the banks’ off balance sheet asset lately. New accounting rule will take effect starting next year and require banks to move certain off balance sheet asset back to their balance sheet. This change was triggered by the shady practice of using off balance sheet financing in the Enron case. Many analyst expect when that happens banks with large off balance sheet asset will be forced to raise capital again.

I tried to find an example of bank’s off balance sheeting financing but didn’t really find one. However I found the following was very close to an example and it is the best explanation about off balance sheet financing. “Uncovering Hidden Debt“

Wells Fargo and Bank of America were said to have huge off balance sheet asset.

• 2009-07-24 Wells Fargo’s Balancing Act
• 2009-07-21 Analyst sees $12 bln reserve charge for B. of A.

That was why I didn’t trade any financial stock lately. I don’t want to short. I don’t want to trade in and out as frequent as I did. I don’t believe in the banks’ balance sheet. All of these make me trading nothing lately. I am still waiting for the DOW to come down below 9000. I believe it will happen.

Wells Fargo Earning Highlights Compare

I read through Well Fargo’s first and second quarter earning releasing and jog down the hightlights of the report in a comparable list. Hightlights number 24 and 27 to 30 are the focus. I will blog more about them in later post.

Reference: https://www.wellsfargo.com/invest_relations/earnings.

Wells Fargo 2009 Second Quarter Earning Highlights

• 1, Net income: $3.17 Billion
• 2, Net income applicable to common stock: $2.58
• 3, Diluted earnings per common share: $0.57
• 4, $0.7 billion ($0.10/per common share) credit reserve build
• 5, $0.24 billion ($0.03/per common share) merger-related expenses. $0.57 billion ($0.10/per common share) FDIC assessment
• 6, Revenue: 22.5 Billion
• 7, Legacy Wells Fargo revenue 13.6 billion
• 8, Net interest margin 4.30%
• 9, Core deposit: $765.7 billion
• 10, Tangible common equity: 54.9 billion, TCE ratio 5.24%
• 11, Tier 1 capital ratio 9.80%
• 12, –
• 13, Allowance for credit losses to $23.5 billion. 2.86 percent of total loans and 1.5 times nonperforming loans
• 14, $0.04 billion write-down of impairment on debt and equity security
• 15, Pre-tax pre-provision profit: 9.8 billion
• 16, Net interest income: $11.8 billion
• 17, Total loans were $833.9 billion
• 18, Noninterest income of $10.7 billion
• 19, $1 Billion MTM gain. $2.3 billion increase in the fair value of the MSRs offset by a $1.3 billion economic hedge loss in the quarter
• 20, Trust and investment fees of $2.4 billion
• 21, Service charges on deposit accounts of $1.4 billion
• 22, Card and other fees of $1.9 billion
• 23, Trading revenue of $0.75 billion
• 24,
  

  Net unrealized losses on securities available for sale reflected in equity of only $0.4 billion down from losses of $4.7 billion at March 31, 2009. “The net unrealized losses were virtually eliminated as credit spreads narrowed during the quarter and as unrealized gains emerged on new mortgage-backed securities (MBS, purchased during the quarter at the peak in MBS yields)”

• 25, Noninterest expense was $12.7 billion
• 26, $0.57 Billion FDIC assessment. $0.24 billion merger-related expenses
• 27, Wachovia’s total net charge-offs in first quarter were only $0.98 billion
• 28, Second quarter net charge-offs were $4.4 billion
• 29, Total nonperforming assets were $18.3 billion. $15.8 billion of nonaccrual loans (nonperforming loans)
• 30, Loans 90 days or more past due and still accruing totaled $16.7 billion
• 31, –

Wells Fargo 2009 First Quarter Earning Highlights

• 1, Net income: $3.05 billion
• 2, Net income applicable to common stock: $2.38 billion
• 3, Earning per common share: $0.56
• 4, $1.3 billion ($0.19/common share) credit reserve build.
• 5, $0.2 billion ($0.03/common share) merger-related expense. $0.34 billion FDIC assessment
• 6, Revenue: $21 billion
• 7, Legacy Well Fargo revenue: $12.3 billion
• 8, Net interest margin: 4.16%
• 9, Core deposit: $756.2 billion
• 10, Tangible common equity: $41.1 billion. TCE ratio 3.28%
• 11, Tier 1 Capital: $88.9 billion. Tier 1 capital ratio 8.28%
• 12, Credit write downs from the Wachovia acquisition: $40 billion
• 13, Allowance for credit losses: $22.8 Billion. 2.7% of total loans. 2.2 times nonperforming loans
• 14, $0.5 billion write-down of impairment on debt and equity security
• 15, Pre-tax. Pre-provision profit $9.2 billion
• 16, Net interest income: $11.4 billion
• 17, Total loans: $843.6 billion. $119.4 billion of consumer loans
• 18, Noninterest income: $9.6 billion
• 19, $0.88 Billion MTM gain. $2.8 Billion Reduction of (MSRs) mortgage servicing rights and $3.7 billion hedge gain.
• 20, Trust and investment fees of $2.2 billion
• 21, Service charges on deposit accounts of $1.4 billion
• 22, Card and other fees totaling $1.8 billion
• 23, Trading revenue of $0.79 Billion
• 24,
  

  The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.

• 25, Noninterest expense: $11.8 billion
• 26, FDIC assessments: $0.34 billion. $0.12 billion additional insurance reserve. $0.2 billion merger related costs. Total integration expense to be $7.94 billion and will be spread over the integration period
• 27, Wachovia’s total net charge-offs in first quarter were only $0.37 billion after a total of $40 billion of credit write-downs have already been taken through purchase accounting adjustments.
• 28, Net charge-offs for the combined Company were $3.3 billion
• 29, Total nonperforming assets: $12.6 billion. $10.5 billion of nonperforming loans
• 30, Loans 90 days or more past due and still accruing totaled $15.1 billion
• 31,
  

  “We have built reserves for six consecutive quarters, dating back to fourth quarter 2007 when credit deterioration became evident,” said Atkins. “These reserve builds have strengthened the balance sheet and position us for the future. We view a considerable portion of the $23 billion allowance to be essentially like capital since we won’t draw on this reserve until the credit crisis ends and loan losses decline. Current accounting policies will then require us to reduce the allowance, increasing profit and increasing capital ratios at that time.”

Trading is 90% Mental and Momentum

If you followed my blog you know that I was betting on the wrong site of the market for a while. I closed all position I was holding today and I am currently down 10% from my initial investment. In order to recover my investment I need to earn more than 10% now. I am not going to be trading as often as I did going forward because I think I made too many stupid mistakes trading in and out. Just a few days ago I shorted 1000 shares of HIG (Hartford Financial Service) at $14.18 and cover it at $15.83 yesterday.

One past experience told me not to take the short side so easily but another one told me if I could hold on to my short position I would eventually see profit. I shorted HIG not without reason backing it. HIG is one of the insurer that needs TRAP money. If HIG were able to return to profit so easily it wouldn’t need TRAP money in the first place. Because of this and the later experience I shorted HIG without carefully evaluating the news that bumped HIG (U.S. insurers to get 2nd-quarter investment boost). I might be right and I might be able to see profit if I hold on to the short HIG position till tomorrow. I might be able to see profit on my puts on Starbucks Coffee and US Bank if I hold on to them. But somehow I feel it doesn’t worth to take the risk. Risk on the short side is much bigger but return doesn’t seem to be better. So going forward I will not take the short side any more.

One last thing I want to remind myself again and again: Trading is 90% Mental and Momentum.. It is news driven. My blog’s commentator also reminded me that. I have got to take it seriously.

Namstocktraders Ratio, Tangible Common Equity, Tangible and Intangible Assets, Tier 1 Capital Ratio

I don’t feel like to post my trades until I break my losing streak. I guess that is understandable. The more I want to guess bank earning right the more I want to understand what all the financial terms means. I almost read through Wells Fargo’s first quarter financial report. Wells Fargo Earns Record $3.05 Billion, $0.56 EPS. I found it was daunting to understand all the information there as I didn’t remember the meanings of all the financial terms in the report. So I am going to understand it bit by bit and understand it a few terms at a time.

Namstocktraders Ratio
It stands for Tangible common equity ratio. It equals total tangible common equity divided by total tangible assets.

Tangible Common Equity
Tangible common equity is the amount of tangible asset that common shareholders would receive if the company were closed. So it doesn’t include intangible asset

Intangible Asset
Assets that do not have a definite existence are called intangible assets. They have neither a physical form nor give their owner definite financial rights. Deferred tax assets, good will, patents and copyrights and capitalized R & D, trade names and franchises are intangible assets.

Intangible Asset
Assets that have a physical existence, or give the holders definite set of financial rights. Land, machinery, bank deposits and investments security are tangible assets.

Tier 1 Capital Ratio
The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (Source: Wikipedia). Risk-weighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator. Assets like cash and coins usually have zero risk weight, while debentures (also called note or unsecured corporate bond) might have a risk weight of 100%. Core equity capital consists primarily common stock and retained earnings. Tier 1 capital ratio is seen as a metric of a bank’s ability to sustain future losses.

I don’t know what is deferred tax asset but it shouldn’t affect me to understand Wells Fargo’s financial report

Trade Options Again Today

Well Fargo released earning and exceeded earning expectation today. I thought it wasn’t able to do so. I think analyst will still need time to look at its earning component to decide whether it worth to buy going forward. In fact it was to my surprise that Wells Fargo was able to exceed expectation. It was to my surprise too that it stock price went down. Will see what analyst have to say on its earning report.

I brought some puts on Star Bug Coffe and US Bank. I am betting they will go down and I am at lost again.

Account Blance 2009/07/22

Account Balance Changes: -$254.98

Loan Loss Reserve, Loan Loss Provision and Net Chargeoffs I am Really Confused by Them

I read many articles that talk about loan loss reserve, loan loss provision and net chargeoffs. I don’t really understand what they mean and all of a sudden I want to spend sometime to dig into their meanings. One thing I am clear is that loan loss provision, is like cost of good sold on income statement, should be subtracted from revenue to calculate net income. I did some research and find the following from A Loan Loss Reserve Primer: Beyond Simplistic Ratios

The loan loss reserve (or allowance for loan losses) is a contra-asset account on a bank’s balance sheet that is netted against gross loans. Each quarter the loan loss reserve rises by the amount of the loan loss provision (an expense item;) and reduced by the level of net chargeoffs.

I still remember this general accounting principle: Asset = Liability + Owner’s Equity. So loan loss reserve can be viewed as negative asset sitting on the asset side. The increase of loan loss reserve will decrease the total asset value. And this loss of asset value is reported on income statement as loan loss provision. Loan loss reserve on the balance sheet is similar to the stocks a company holds. Its value can fluctuate from time to time. But the stocks a company holds is normal asset type and the increase of stock price creates a gain item on income statement whereas the decrease of stock price creates a loss item on income statement. Loan loss preserve may go down and when it happen it will create negative loan loss provision and bring up net profit. It can happen when the management decides that they are over reserved for loan loss. It was the number 4 arguing point of the quote in this post The Reasoning Behind Bank of America’s Upgrade. I think he really means BOA has over 100 billion loan loss reserve(not provision) and at some point in the future when the economic turns around Bank of America may find it is over reserved. We can see loan loss preserve is a pretty flexible item where every banks can make its own decision to increase it or decrease it base on its own view on its own loan portfolio although some general guidelines apply

Net chargeoffs are loan amounts considered absolutely not collectible. It shouldn’t change the total value of asset as far as my understanding. People can look at net chargeoffs to evaluate whether loan loss is over or under reserved.

Trade For Blogging Purpose

I shorted BAC again and made a small profit. In my previous post I was asked why I dump BAC with such a small change in price. The question really make me think a lot whether it worth while to trade in and out so often. I don’t know. I don’t find I am comfortable to hold anything.

I didn’t think it worth while to hold long position on BAC. The market is already up a lot. After this earning season I think we will see profit taking. I don’t see much excuse for the market to pump BAC with its unclear earning picture. In other words I feel BAC will have more bad news coming then good ones. How about the short side? Hold a shorted BAC position for a couple of weeks. I don’t want to hold short position either because I feel uneasy holding a short position especially after I missed a better short entry point above $13. But my reasoning keeps telling me that I may see BAC touching $11 soon. Please convince me if you think I am wrong.

It was like I traded this few days for blogging purpose so that I had somthing to talk about here. It should’ve been the other way around. I blog for better trading. I am searching for some kind of confidence that I had before and I still didn’t find it back. I have no confidence in holding anything.

Anyway Wells Fargo is going to report earning tomorrow before market open. It will be the focus of the financial sector tomorrow.

Account Balance 2009/07/21

Transaction 2009/07/21

Account Balance Changes: +89.80

Earning Potential is Ultimate Driving Force of Stock Price

I lost again all because I didn’t trust my own analysis. In a previous post, “Baidu is Holding up Well Today”, I mentioned that BAC’s earning was not good in fact. Because of general market sentiment I didn’t take the short side today and I bought into BAC today at $12.32. I thought it was low enough to expect a same day rebound. It didn’t happen. I lost again. Bank of America dropped big time today all because its earning potential. I guess BAC will make no profit for the rest of the year so did many analysts. Earning Potential is ultimate driving force of stock price and that is why BAC dropped. I guess BAC will see profit only when loan loss preserve start to decline. With rising unemployment it probably won’t happen still next year. $13 is probably the CAP for BAC in the coming months. I am very disappointed as I haven’t seen a decent green amount on my account for a long while.

Account Balance 2009/07/20

Transaction 2009/07/20

Account Balance Changes: -$160.30

Kelly criterion - the Systematic Trading Methodology

In a previous post Systematic Way of Trading - Stock Board Advice I quoted an advice post on yahoo stock board by a trader. It mentioned a term called “Kelly Criterion” which I never heard of before. I did some research and found this is a term from probability theory. I studied probability theory in my MBA classes before but I didn’t recall this term. I guess MBA classes didn’t cover probability theory that deep. The following is an explanation on Wikipedia.com about Kelly criterion

The Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any essentially different strategy in the long run.

For simple bets with two outcomes, one involving losing the entire amount bet, and the other involving winning the bet amount multiplied by the payoff odds, the Kelly bet is:
f* = (bp - q)/b.
where

• f* is the fraction of the current bankroll to wager;
• b is the net odds received on the wager (that is, odds are usually quoted as “b to 1″)
• p is the probability of winning;
• q is the probability of losing, which is 1 − p.

As an example, if a gamble has a 60% chance of winning (p = 0.60, q = 0.40), but the gambler receives 1-to-1 odds on a winning bet (b = 1), then the gambler should bet 20% of the bankroll at each opportunity (f* = 0.20), in order to maximize the long-run growth rate of the bankroll. If the gambler has zero edge, i.e. if b = q/p, then the criterion will usually recommend the gambler bets nothing

It might be daunting to understand for someone never get trained on probability theory. I seem to understand it well. I presented similar concept in an early post stock trading vs gambling . But to apply this theory on stock trading a very complex mathematical model is needed to accurately determine the probability of wining and losing. I believe hedge fund and trading firm would hire a troop of Phds to work on mathematical model that calculates the probability. Believe it or not a colleague of mine is recently interviewing with a company doing such research. For general investor like me without using any proprietary software the only way is to take a guess.

Having said that it reminds me a period of time when I didn’t watch the market closely and just set up a limit order to buy or sale. Actually that was before I started this blog. I remember I was able to grow my balance from $30,000 to $40,000 within a month. Maybe a programmed trading is better then manual trading. I found my emotions always take control of my buy and sale decision when I watch the market closely.

Baidu is Holding up Well Today

Yesterday I thought about shorting Baidu at $318. I am glad I didn’t do so. Baidu is holding up above that price and didn’t follow Google dropping. I guess traders are waiting for its earning report on Jul 23rd.

I traded again today I was tire of watching. And I lost again. I short Bank of America at $13.30. It went up to $13.47 after that. I covered it when it fell back to $13.33. It kept falling after I covered it. I shorted it because its earning was not a good one basically. It reported profit only because the big gain on selling stake in China Construction Bank. The gain was more than 5 billions instead of 2 billions that I guessed in this post “Bank of America Earning Forecast and Financial Statement Analysis”. If the gain was 2 billions then Bank of America will show 1 billion lost as I was expecting.

Seems to me Bank of America will report no profit or will report loss for the coming quarters. I kind of think Bank of America will keep falling starting from here. But again I don’t trust my judgment.

Here is the trade today and balance.


Transaction 2009/07/17

Transaction 2009/07/17


Account Balance 2009/07/17

Account Balance 2009/07/17


Account Balance Changes: -$50.33

Should I Short Baidu at $318

I thought about a few trades yesterday and today but as I said in my previous post I lost confidence about my judgment lately so I didn’t make the moves. It turned out that if I made the move I would make good profit. I thought about shorting 2000 shares of Bank of America yesterday after market close at $13.40 but I didn’t do it. I thought about buying 2000 shares of BAC this morning when it dropped to 13.04 a couple times but I didn’t do it.

Now I am thinking about shorting 100 shares of Baidu at $318. As you see Google dropped $14 dollars after market close. It is like selling on the earning report. Baidu usually follow Google or the Chinese market. So I kind of think Baidu will drop and will drop $10 at some point tomorrow. I am still thinking about the move. I will have the chance to short it till 5:00PM

I post the same question on Baidu board. http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=22855&tid=273994&mid=273994&tof=6&frt=2. Seems like no one really have the same feel. I let go that thought again.,

I Need a Break

Like I felt yesterday Intel’s result dragged up the market. I lost on the Baidu put and I sold them. I traded on GCI (GANNETT CO INC) today. I noticed this stock in my trading tool’s news window. I felt this company was kind of under valued even at today’s closing price but I didn’t follow this company for long. It reported 2nd quarter profit of $0.46 a share and its stock price was at $4.50 at close. Its forward P/E is quite low. I have no confidence on my own judgment any more so I am not going to keep it. I feel I just need a break. After more than a month of hard work I am still at loss. So I may not be trading for the rest of the week.


Transaction 2009/07/15

Transaction 2009/07/15


Account Balance 2009/07/15

Account Balance 2009/07/15




Account Balance Changes: -$260.59

Again Never Underestimate the Tie Between Oil and Energy Stocks

Yesterday I kept my 800 shares of PCX (patriot coal) in hope that it would rebound when oil price rebound. In early today there was report that oil price was held stead above $60 a barrel and PCX was up at around $5.45 not long after market open. The DOW was up 40 some points at the time. I thought that was it and the rebound of PCX was disappointed to me. I was eager to find a chance to sell PCX. I sold it at $5.47 early in the morning. Looked at how it closes. PCX was at $5.63 and the Dow was only up 5 points. So once again don’t under estimate the tie between oil price and energy stocks. Energy stock can be affected by oil price more then by the general market. So this is a bad move I made today. I brought these 800 shares at $5.76 a couple days ago.

I did make a good move. I bought some Bidu (Baidu) puts and sold them later net about $120. So my total gain today is about $250. Not a lot but my account is back above my initial capital of $30,000. I have learned to be happy with small gains and I love this thinking “Go slow. Preserve capital. Learn the fundamentals. Achieve consistency”


Account Balance 2009/07/09

Account Balance 2009/07/09


Stock Trades 2009/07/09

Stock Trades 2009/07/09

I feel the overall sentiment of the market is still bearish. The market is waiting to see how the financial sector was doing in second quarter and is very cautionary. I bet the University of Michigan Consumer Sentiment Index tomorrow will not have a good reading since unemployment rate is still going high. And I feel good holding only cash.


Account Balance Changes: +$259.67

Window Dressing is a Term That I Just Learned

I read a few news that talked about window dressing at quarter end lately. I didn’t know what window dressing was about so I did some research on it and found the following definition on answer.com.

Window dressing is a strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings.

Another variation of window dressing is investing in stocks that don’t meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund’s holdings, so clients really have no idea what they are paying for.

Window dressing may make a fund appear more attractive, but you can’t hide poor performance for long.

http://www.answers.com/topic/window-dressing

So is that Bank of America’s up and Patriot Coal’s down today have something to do with window dressing? Probably. If that is case then BAC may come down a bit and PCX should go up a bit after tomorrow. We will see.

Repaying Trap is a Non-Event

Today the government announced some of the big banks that were allowed to repay Trap. I thought the banks would take that as an event to push their price up another step. But it turned out nothing happen. On the day when the government released the stress test results the market was like a wild horse. Today I feel it was like a turtle. Sometimes the market just behaves very calm and logical. It didn’t make sense the way that the market reacted to stress test results then but it made sense to me the way the market reacted to the government’s announcement today. After all we pretty much know which banks are able to repay TRAP.

I wanted to short Bank of America this morning but I wasn’t sure if today was going to be another wild day. I did not dare to do that. Thinking back I should have looked at the volume. If the volume is light then it is not going to be a big day. I wanted to take a long position but I didn’t feel BAC worth that much. After all it was not one of the banks that were able to repay TRAP. It should be categorized as a weaker bank.

Verisign Logo

In searching or a tradable stock I found Verisign. It was involved in a price fixing law suite and its stock price dropped 20% in a couple days. It seems to me that $19 per share is its support line so I got in at $19.07. I am losing money right now.


Verisign half year graph


Frankly I think the law suite has a lot of merits. Verisign owns network solution Inc which monopoly the domain name registration business. I didn’t understand why the market which was installed with anti-monopoly laws could allow a company like network solution Inc operated as monopoly in the first place. If you have an explanation of any kind I would love to hear it. I had the thought back in the DOT COM era that network solution Inc was a monopoly and would be suited. Basically everyone has to purchase domain name from them. I didn’t expect to wait till that long to see a law suite. That is one of the reasons I want to take a shot a VRSN. After all it down 20% and loss $1 Billion market capitalization already


Account Balance Change: -$79.49

Stock Market is a Box of Chocolate You Never Know What You Are Going to Get

Stock market is just as life. It is a box of Chocolate you never know what you are going to get. It makes you feel surprising, fulfilling, stock market is a box of chocolateexciting and happy at some time and makes you feel lost, sad, miserable and angry at another time. Its ups and downs are like the ups and downs in life. The differences are you can experience it all in a few days with the stock market.

Right after I created a “learn from the past” category for my trading. I made another mistake following one of those lessons I learned: Trading Out of Discipline and not Knowing How to Stop Caused Big Lost. Well I didn’t completely follow the lesson though. I still trade out of my discipline but I did KOWN HOW TO STOP and I stopped it too early.

As you know in my previous post I Had a Short Squeeze First Time in My Life I lost on a trade that I should have make money on. CCO is currently trading at $5.18. I shorted it 2000 shares at $5.60 but covered it too early at $5.87. I would have made $800 on that trade if I don’t follow my lesson learned. But I was holding other position and because of that I was a little bit scare.

After a few months of trading my account balance is not going anywhere. It was up to around $43,000 before I started this Blog from around $30,000 in a little more than a month and now it went back to where it was before I start day trading.

What do you think my balance is going to be down the road say half a year or 3 years from now? Going to zero? Going to double, triple? Take a guess here if you like and there may be interesting finding by the time when we look back.

I Had a Short Squeeze First Time in My Life

Wonder what is short squeeze? I just had one and made the most laughable mistake in my entire trading life. Yesterday I shorted 2000 my account balance falling off a cliffshares of (CCO) Clear Channel Outdoor Holdings at $5.62 after it jump 56%. $5.62 was close to yesterday’s height but I covered it this morning close to today’s height at $5.87. What a stupid decision. Now CCO is trading at $5.09. A typical short squeeze.

Bank of the Ozarks another issue I bought yesterday is going against me droped another 2.5% after dropping 6% yesterday. But I feel much easier to hold on to a long position so I am going to keep it there. Still think it is a bank that is much healthier than its bigger peers. Let me know if you have different thoughts

Big loss again today dropping $1,150 at the momment. My account balance is falling off the cliff

At market close

Account Balance Change: -$689.99

I Took a Bet on BAC Rising Above 14 Tomorrow

I am holding 2000 shares of Bank of America. Of course I am trying to rally the share holders of BAC and I post the following message on the BAC board on Yahoo.

If the conversion goes well and reach BAC’s capital raising target I believe BAC will run to $14 if data released tomorrow is not out of line. I bet on the data side a bit short of expectation will not affect BAC’s running up because the conversion price is at $12.75 as I remember. If capital raising target is met it will mean prefer share holders are bullish on BAC and it will trigger a big run up tomorrow.

If BAC announce that prefer share holders are not so enthusiastic about the conversion then longs like me will be in trouble. But I believe the investment banks will recommend prefer share holders tendering their prefer shares for conversion and I believe the chance of a successful conversion is high.

I am looking forward to seeing BAC above $14.00

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=1903&tid=1046900&mid=1046900&tof=1&frt=2

Warren Buffett Portfolio

The follow image has the equity portfolio of Warren Buffett’s company, Berkshire Hathaway Inc. I don’t remember where I got it. I kept information I got from the internet from time to time. I got this before I set up this blog and I think this is good information. This is Buffett Portfolio in 2008. It may have been changed since then.

Warren Buffett portfolio

Buffett portfolio

Market was Neverous About Alcoa Earning and so was I

Today is a perfect trading day for day traders. It is perfect because it has multiple ups and downs and that is what a trader is looking for. If a trader can master all this ups and downs then great profit can be made. But I didn’t make much profit. The market was very nervous about Alcoa’s earning and I was very nervous about it too. My nervousness made me avoid two short attacks on BAC. I bought 1000 shares of BAC at $11.95 and sold them at $11.98. I later bought 1000 shares of BAC again at $11.78 and sold them at $11.84. This two trades only net me $30 in total. I sensed the nervousness when I sold them but I dare not to take the short side. My nervousness also make me miss the big run up close to the end of the trading day. I didn’t regret for not taking the short side but I regret for not buying into BAC again when it drop below $11.50. I sold DRYS (Dry Ship) for a profit and I trade on PCX(Patriot Coal) to make some profit too. At the end of the day I still hold 800 shares of PCX and my account is up $134.61. Not a lot but I feel good that I was able to avoid a loss on trading BAC


Stock Transaction 2009/07/08

Stock Transaction 2009/07/08


Account Balance 20090708

Account Balance 20090708


Bac Stock Graph 2009/07/08

BAC Graph - Shows where the two BAC trades were taken


Account Balance Changes: +$134.61

I Have Too Many IFs in My Mind

I covered my 2000 shares of shorted Bank of America yesterday at $13.30 only to realize it dropped half a dollar more today. Half a dollar a share is translated into $1,000 lost. That means if I still keep the 2000 shares shorted BAC I would recoup almost all my lost. As I mentioned in my previous post my average price on the shorted position was $12.50. If you read my previous post I almost increased 2000 shares of shorted position on BAC when it was at $13.20. If I did that the average price would be at $12.75 and I would able to recoup all my lost today. The only thing is that I have to hold the shorted position for four days. If I increased my shorted position the day before yesterday on BAC at $13.70 which was the closing price that day (I had thought about that). My average would be $13.10 and I could make a very nice profit today.

I know there are too many IFs. Every time when I looked back at my lost I became a very sophisticated programmer making a lot of complex IF statements. I think this run up on BAC and the last one I experienced on Wells Fargo tell us something in common. If a stock runs up too fast and out paces its peers by 15% percent or more not because of fundamental changes and not because of the sentiment of the whole sector then it is doom to retreat. Of course to someone who shorted at $13.70 the day before yesterday there was a lot of luck for them because no one can predict the NY Empire Manufacturing Index drop so much yesterday.

So much so for retrospection. I made some profit today and became a holder of Bank America again at a much higher price. As you know I bought it at $12.06 last week only to sold it too fast. I bought 1000 shares of Bank of America closing to end of the market at $12.76. I made a lot of trades today. I brought MGM in pre-market and sold it for a small profit. I sold my Western Refining position for a small profit. I bought BAC at $12.99 and sold it at $13.10 before I bought it again at closing. At the end My account was up $309.78. The value of put position I am holding drop a bit. Excluding that the trades I did today net more than $400 profit. I expect I will eventually collect all the proceed from selling the puts. If I don’t trade for the rest of the week my account should still be up $400 by the end of the week and I should get back above my initial capital level which is $30,000.

Hopefully the data is good tomorrow and I can make some profit on BAC. BAC’s trading range this week will determine the common share price Bank of America uses to convert its prefer shares. I believe there will be great opportunity to make profit. I believe it is very likely that BAC’s price will trade above the conversion price right after it is announced (June 23rd) and before the final conversion deadline which is June 24th.So I will watch out and keep an estimate of the conversion price. I believe the investment banks will Jag up BAC price large enough to attract prefer share holder to tender their shares for conversion after the conversion price announcement.

Lets see if this is correct


Account Balance Change: $309.78

Minutes on of Learning From the Past Stock Tradings

I listed some of the mistakes I made more than one times here and hope to avoid them in the future. Of course history not always repeat itself and making the same move when the same situation appears in the future may turn out to be correct. Nevertheless these minutes can remind me what major mistakes I have made in the past.

1) Mistakes of trades on WFC and BAC when they did secondary offering.
Don’t Short a stock when it is trading higher then the offering price in after market on the day when the secondary offering price is announced especially when Goldman Sachs is the underwriter. I did this kind of shorting on WFC and BAC and both lost money. In fact I should long in after market and sell next day in pre-market.

2) Mistake of rushing to take a short position at market opening.
Don’t rush to take a short position at market opening even when the price of a stock runs up an unbelievable percentage. I made the mistake more than one times on LINTA, WFC, and BIDU. Seems to me the best time to take a short position is at market close given that you still believe the price up run is too much.

3) Mistake of miss judging the market trend.
If the US market opens higher after the world markets it tends to trend higher during the day given no major bad news.

4) Mistake of rushing to sell and not waiting still earning release day comes close.
Don’t rush to sell depressed issue even you believe earning is not going to be good. At least wait till the day before earning release. I ever held VISN but didn’t wait till release day come close when the price run up began. When earning release day comes close many depressed stock will become the target of price manipulators. Manipulators may identify depressed issues and push up the stock price in hope to mislead the market that good earning has been leak. There may be a good selling point when we hold the depressed stock long enough before earning release even we believe earning is not going to be good

I originally wanted to keep this minutes in a private post because obviously these are specific to my trading experience. You might experience the exact opposite and it could appear totally nonsense to you. But this is a blog and this is what blogging is about. I should still feel good if you have a good laugh reading it. Comments of all kinds are welcome!

I want to add a few lines after I post this yesterday. I found for all the mistake I made if I had hold the issues I lost long enough say two trading days. I could have realize profit on them.

ADR Tends to Follow its Home Market and the World Financial Markets Tend to Echo Each Other

I have know for long that the world financial markets tend to echoing each other and ADR issues have the tendency following its home market performance but I hardly pay attention how much the world market went up yesterday.

I just found out that China and Hong Kong index went up almost 4% yesterday. Japan went up 1.63%. Most Europe market went up 3% yesterday. For Baidu which is a high beta stock usually the percentage it went up or down will be bigger then the index. In fact its change is usually two times of the Nasdaq or its home market.

So I don’t understand why I took a short position this morning when the market was up only 100 point (DIJ). That was 1.3% only. And I don’t understand why I took the short position on Bidu when it was up only $9 which is 3.5%.

First I was wrong on taking short position. Second I was wrong on taking the short position before the market running out of its potential today. Third I was wrong on taking the short position on Bidu and fourth I was wrong on breaking two of my guidelines. I didn’t think twice the probability of a better entry point. I have doubled my initial bet of on a trading day.

What a messy day. Should I take lost right now?

Trading Out of Discipline and not Knowing How to Stop Caused Big Lost

I tend to win small but lost big. Is that a typical day trader’s fate or just me? I can not defy the temptation of the surprise gain. And of course I miss judged the market. The US market opened higher following the world. I thought the market should be trending down during the day because of the GM bankruptcy news. So when BIDU jump $9 at opening I thought it was a good opportunity to short. I took a short position at $272. I was so wrong and when it went up to $279 I increased my short position again but it went up over $287. I lost $2500 currently.

The market hardly pay attention to the GM news. In fact it seems to be celebrating it. It almost wipes out my entire gain for the past month. Just as my trade on Wells Fargo wiped out my two months of gain for about $10,000 before I started this blog I feel history is repeating itself again. I am being punished for not being discipline.

I was not convinced that this would be a bull market so I frequently took the short side. Now I am convinced that life on the long side would be a lot better. Another lesson I learn is that I don’t know how to stop. I should’ve cut my lost when BIDU went above $275 but I didn’t. I really don’t know what to do now. Let me know if you have suggestions and I would love to hear from you.

I am still holding the short position at the end. At market close my account lost $2,119.40


Account Balance Change: -$2,119.40

Systematic Way of Trading - Stock Board Advice

After I post the question Should I Short Baidu at $318 on yahoo stock board I got an advice on the board that I think is an honest opinion and worth to think about. It is from a trader with screen name jlin303. I wish the answer can be post on this bog so I quote the advice here. And once again I am grateful for the advice.

Well, I certainly wish you the best of luck. Just one last piece of advice.. I’m sure there are day traders here who make money by day trading their instincts and feelings but I, for one, am a system trader. I’ve spent many hours researching various technical and fundamental indicators, programmed a system, and then spent many more hours back testing and refining the system until I felt comfortable with the win rate, draw downs, and many other factors. I use a Kelly Criterion approach to size my trades and it’s been working well for me.

Here’s the thing: after reading through your blog, I don’t think you can honestly say you’re a long-term winning trader, in part because you’ve lost so much, and also partially because you just don’t have a long enough history to say confidently that it’s not because of variance. I suggest you look long and hard at a systematic way to trade, whether it’s through automation or manual trading. You need very specific (and proven) sets of rules and then you need to stick to them. Asking people on the boards is not the ticket. “I want to short BIDU because I FEEL it’s gone up too much” isn’t a specific proven set of rules. If you put on this trade, do you know what your chances of making money and losing money is? How much should you risk (stop-loss)? What is your exit strategy if you make money? etc.

My answer would be something like “I’m shorting BIDU because the price fell below the 5-day and 10-day EMA today on heavy volume. My research has shown that in the last 5 years, when this has happened, it goes down 10% on average about 70% of the time and it goes up 3% and average of 30% of the time. My bankroll is XXX so based on the Kelly Criterion, I’ll risk YYYY to make ZZZZ dollars. Once the price crosses the 5-day average again (moving up), I’ll be out the trade. I expect to make TTTT amount of money in the long run by putting on this trade, based on historical results.”

You seem very genuine in your quest for knowledge so I broke my silence to talk to you. Usually, I would just browse the boards for a light chuckle at those pumpers and bashers who make ridiculous farcical comments and then try to substantiate their positions by making outlandish claims about the size of their trading accounts and how much they’ve made.

This is my last post on the subject so good luck and never stop learning.

FOREX 101 Equals Stock Trading 101

I came across a blog post that talked about foreign currency trading basics. The following is a quote from the post that I found extremely helpful.

“Abandon all notions of getting rich quick. Because of leverage and due to the fact that even a broken clock is correct twice a day, the FOREX market can give you the illusion of being able to make a huge amount of money quickly. The market can randomly reward you for bad trading behavior. Until you execute your bad trading habit one too many times and the account proceeds to blow up. Capital preservation is critical simply because you need enough time to be able to discover those “bad trading habits.” Go slow. Preserve your capital. Learn the fundamentals. Achieve consistency.”

I found that if I replace the word “FOREX” with “STOCK” then it perfectly describes what I have learned from my past couple months of stock trading experience. It is a very concise summary of my “Stock Trading Lesson Learned” Category”. I couldn’t agree with this more. I guess FOREX trading 101 equals to stock trading 101.

From Bank of the Ozarks to See Bank of America

Bank of the Ozarks is one of the banks I followed. It is a very small region bank comparing to Bank of America. You may read Bank of Ozarks business profile here if interested. I have long believe that Bank of Ozarks is one of the well managed banks that is financial is much healthier than its bigger peers. Bank of the Ozarks reported earning today. So lets see if that believe still holds and see if we can get some hint about the earning of Bank of America from Bank of the Ozarks.

It reported record earning $9,501,000 and $0.56 per share. 10.4% higher than the same period last year. Q1 2009 had profit of $9,286,000 so Q2 was a bit higher. I summarized what was the change compared to Q2 2008 or Q1 2009.

• Loans and leases were 0.7% declined from last year
  
• Deposits 7.6% declined from last year
  
• Total assets 3.6% declined from last year
  
• Common stockholders’ equity and Book value per common share increased about 23% from last year but slightly decline from Q1 because of an unfavorable change during the quarter in the Company’s mark-to-market adjustment for unrealized gains and losses on AFS investment securities.
  
• Net interest income for the second quarter of 2009 increased 28.2% but slightly declined from Q1 2009
  
• Non-interest income for the second quarter of 2009 increased 306.9% to $22,610,000 compared to $5,557,000 for the comparable quarter of 2008. Q1 Non-interest income was about $9,000,000. his large increase in non-interest income was primarily attributable to significant gains on sales of investment securities during the most recent quarter.
  
• Service charges on deposit accounts were $3,047,000. Q1 was about $2,800,000. 2.7% increase from last year
  
• Mortgage lending income was $1,096,000 in the second quarter of 2009. Q1 was about $900,000. 72.3% increase from last year
  
• Trust income was a record $751,000. Q1 was about $650,000. 19.4% increase from last year
  
• Net gains on investment securities and from sales of other assets were $16,487,000. It was $206,000 last year and about $4,000,000 in Q1 2009
• Non-interest expense for the second quarter of 2009 was $17,945,000. 33% increase from last years. It includes $1.3 million for the special assessment levied by the FDIC on all insured institutions. It was about $16,000,000 in Q1 2009
  
• Nonperforming assets as a percent of total assets increased to 1.37%. It was 0.59% as of June 30, 2008 and 1.17% as of March 31, 2009
  
• the Company’s provisions to the allowance for loan and lease losses totaled $21.1 million. It was $4.0 million last year and $10.6 million the first quarter of 2009.
  

The source of this data is from
businesswire Bank of the Ozarks, Inc. Announces Record Second Quarter 2009 Earnings

What I saw from this summary is that business was about the same from Q1 to Q2. Provisions to the allowance for loan and lease losses almost doubled form Q1 to Q2. However Non-interest income, mainly the gain on sale of investment securities and other assets was able to more than offset the provisions for loans loss.

I don’t see this earning report a good news because the record income was not generated from its day to day business. Loan loss provision has huge increase and it doesn’t look good for the next quarter with employment rising. However stock price of OZRK went up 2.4% after report come out.

I kind of think we will see the same on Bank of America. Like the analysis I did on this post, “Bank of America Earning Forecast and Financial Statement Analysis”. Business may not have significant improvement compare to Q1. Loan loss provision will be huge. Mark to Market change is not favorable. And Bank of America has to rely on gain on asset sale to show a profit and most likely this gain is not able to offset loan loss provision and MTM changes. So it will likely to show loss. Book value may slightly decrease from last quarter.

What is The Credibility of Investment Firm’s Upgrade and Downgrade?

As you know I like participating discussion on yahoo stock message board. I usually post on the stocks I traded on and use screen name StockTradersBlog. Yesterday I wrote a post “Bank of America Earning Forecast and Financial Statement Analysis”. I have to remind you that I am a blogger and a stock day trader with lousy trading returns. So my analysis by no means has any investing grade quality.

I originally believe BAC will report very good earning in the second quarter. But Citi Group said that BAC would report loss and lowered its target price. I was basically trying my best to do my own earning analysis to see whether Citi Group’s opinion was going to be right. I put the link on BAC board in hope to test my analysis. I hope to see some counter arguments. But very disappointed I didn’t see any and I was called spamming by some assumably traders that are long on BAC shares.

Nowadays investment firms upgrade and downgrade stocks without any quantitative analysis showing to public to support their opinion. It is no different then telling you this stock should go up and you should buy or that stock should go down and you should sell. I personally believe this kind of practice is obscene. The only thing this kind of practice can achieve is stock price manipulation. I think it is better to be written into law that when investment firms upgrade or downgrade stocks they have to support that with numbers (quantitative analysis) and they have to give the source of the numbers and other information they use to support their arguments.

That is called fair and that way investor can make truly informed decision based on how they see the facts instead of blindly following investment firms’ opinion. But I guess putting that in regulation is a nightmare for investment firms because that will make them lose earning power. Their earning power to a large extend is deprived from their abilities to influence stock price using one sentence and I think this is not right.

Bank of America Earning Forecast and Financial Statement Analysis

Last quarter Bank of America earned 4.2 billion. That was before paying 1.4 billion prefer stock dividend including 0.4 billion paid to the US government. After paying prefer dividend earning was 2.8 Billion. Diluted earning per share was $0.44. There were about 6.4 billion common shares outstanding last quarter.

In second quarter there were about 1.45 billion new shares issued as a result of secondary offering and prefer to common share conversion. Suppose second quarter earning is the same as the first quarter diluted earning per share will be $0.36 with 7.85 billion common shares outstanding. That is P/E at 8.8 with current price at $12.60. It should be cheap and it worth to buy if Bank of America can generate 2.8 billion profit every quarter going forward. The Question is whether the earning shown in first quarter is sustainable. If the earning is sustainable given a P/E of 13 BAC should worth $18.72.

Prefer Share Dividend:
News was just released that BAC paid 0.7 billion dividend to government that was more than the 0.4 billion in first quarter. But this quarter BAC has less prefer shares so I expect there is no substantial change on prefer dividend payout.

Gain on Sale of Asset:
Gain on sale of China Construction Bank stake this quarter is expected to be 2 billion and it is about the same as last quarter.

Given the same earning for the rest of Bank of America’s operation lets consider three major factors that may cause major earning change: FDIC charges, marking to market value of Merrill lynch debt, and provision of loan loss.

FDIC Charges:
I remember JPM has 0.7 billion charged by FDIC and I believe BAC will be charged by around the same amount.

Marking to Market Change of Merrill Lynch Debt:
First quarter’s earning included gain of $2.2 billion pre-tax FVO positive adjustment on Merrill Lynch structured notes. That was because the marking to market adjustment on values of Merrill Lynch debt at a time when the debt was traded at substantial discount because our financial system was on the verge of collapse. This quarter the value of this debt will not go down so the 2.2 billions of gain will disappear. In fact the value of Merrill Lynch debt will be trading higher because the system is stabilized. That will incur a marking to market loss. Citi Group analyst Keith Horowitz predicted that loss is amount to 2 billion. So this single factor can cause Bank of America’s earning in second quarter 4 billions lower than the first quarter.

Provision of Loan Loss:
This is where Bank of America can do the trick. Last quarter loan loss provision was 13 billions. Many analysts believe that wasn’t enough. With unemployment rate higher and credit quality continue to deteriorate I expect provision for loan loss will increase. Let’s say increase by 5%. That is 0.65 billion.

So Bank of America’s second quarter earning is expected to be 5.35 (0.7 + 4 + 0.65) billions lower then the first quarter. And it will turn into 4.2 – 5.35 = -1.15 billion loss. That is -$0.12 per share with 7.85 billion common shares. You may think the expectation of loss is already built into current price.

So what is Bank of America’s earning beyond second quarter? FDIC charge shouldn’t be there and it shouldn’t be a factor in the third quarter. Suppose Merrill Lynch debt value will not change then 2 billions of gain is not there but there won’t be 2 billions of loss either so third quarter earning should be 2 billions lower compare to the first quarter given everything else not mentioned here is the same. That is 2.8 - 2 = 0.8 billion for common share. But again loan loss provision is the focus. Loan loss provision jumped from 8.5 billions in Q4 2008 to 13.4 billions in Q1 2009. It could go down or go up several billions depends on the economy and BAC’s earning can fluctuate in a wide range. I am not optimistic. US Bank executives mentioned that it will build up loan loss reserve for the rest of the year. I believe BAC needs to do so either. And that means loan loss provision will continue to increase even though Keith Horowitz predicted loan loss provision will be peak in second quarter. If that is the case BAC might be making zero profit for the rest of the year.

Fundamentally I don’t see stock price should appreciate but I believe BAC price will fluctuate between $9 and $15 base on outlook of the economy and how Bank of America report its loan loss provision going forward.

If loan loss provision trends down starting from Q3 then Bank of America may be able to generate 2.8 billions of profit quarter after quarter for at least 1 or 2 years. The number can be bigger if the other earning sources of Bank of America improve gradually. Looks like it all depends on the overall economy and Bank of America will have a beta higher then its peers meaning its earning and stock price will fluctuate in a wide range.

I feel I am a bit clear about what the market is going to go after writting this post. I feel the market recently turn bearish and worry about credit quality. I believe the finanical sector will pull the over all market lower after they report second quarter earning. Just my opinion we will probably see the DOW lower than 8000 in the comming weeks. Again credit quality and loan loss is the determining factors.

Reference:
http://newsroom.bankofamerica.com/index.php?s=43&item=8438
http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=bac&period=qtr

Non-Standard BAC Option and Cash in Lieu

I am confused about the difference between standard option and non-standard option. I originally thought that non-standard option was like European style option which could be exercised on expiration day only. If that was the case then the risk of writing this kind of option should be lower and the premium should be lower. But I found it is exactly the opposite. See the following July Bank of America options with strike price at $11. The premium for the non-standard option is a lot more. I was thinking selling the non-standard put option would make me a lot more money than the standard one.

Well I did some research and found I was wrong. Look at the following when I open up the JUL 11 PUT OPTION. It says “Non-Standard Option | $13.71 cash in lieu of shares, 85 Shares of BAC”..

This non-standard option is a result of Merger between Bank of America and Merrill Lynch. This non-standard option was originally Merrill Lynch option. Since the merge or acquisition between Bank of America and Merrill Lynch was 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, a Merrill Lynch option contract (100 shares) became Bank of America option contract with 85.95 shares. Because the fraction share can not be traded Bank of America use cash to pay Merrill Lynch share holder during the merger. And the $13.71 cash reflected the fraction share conversion.

If you sell this put options, yes you could collect a lot more than selling standard one, but when the buyer exercise the put option and sell you BAC shares they only need to deliver 85 shares of BAC plus $13.71 cash to you to fulfill the contract. So yes you get a lot more upfront by selling them but you take the risk of getting a lot less when the put option contract is fulfilled. Risk and return are always proportionate

I Got Email Comments

I just got a comment in my mail box. I am glad that I frequently get positive comments regarding this blog not long after I started it. I wish the commentator good luck. Please don’t be offended because I quoted your lines here.

I like reading your blog, keep it up please! I am day trader like you and, boy, most of your trades is basically a copy of what I do I lost big on WFC, won little on BOF but lost it all and 10 times more, so decided to leave bank stocks alone. Switch to Scottrade if you want to save on commission, they charge $7 over $10 at TD Ameritrade. And Scottrade is lightning fast compared to Etrade or TD. The downside is Scottrade often doesn’t have shares available for shorting so I keep Etrade account for short positions.

I am pleased when I read honest opinion and one of the motive that I started this blog is that I want to see honest opinion instead of reading most of the craps on Yahoo stock message board. I wish to build a community for stock traders for any experience level so that we can we can share analytical thoughts, train each other and share the joy of gain and the pain of lost honestly. One of the purposes of the blog is to promote discipline in trades for me and defying my gambling mind. But I believe it will apply to all traders and investors as well. Discipline is key.

I am Very Skeptical About Ultrashort Financial’s Viability

SKF turns out to be a ticker for an Exchange Traded fund called UltraShort Financials ProShares. Take a look at its profile on yahoo.

The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Financial’s index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is non-diversified.

I had a good laugh when I read its profile and thought the fund was some kind of scam. Please don’t be offended if you love the fund. I just don’t see the reason of such fund’s existing. To my surprise its daily volume is huge. Some 40 million shares changed hand today and the price was at $42.94. I am very skeptical about the fund because the strategy it takes is to go against the market for sake of going against it. I mean as an investor I want to buy a fund that can make me money not to going against the market. That is whole point of buying a fund right?

Think it in another way probably the fund is intended to be a hedging tool and its intention is not to grow asset or make money for investors. Still I think there are plenty of hedging vehicles in the market nowadays which can be tailor to suit different hedging needs. Why would people trade this fund which performance will be twice the inverse of the daily performance of the Dow Jones U.S. Financial’s index. Let me know if you see a reason. Take a look at its performance yesterday. It was down 7% versus the DOW’s gain of 2.37%

Shame About the Banks and Government

Now it became crystal clear where those strong buys and upgrades come about. Bank of America issue 800 million new shares at $10 after the market close today. I guess they dare not to announce the offering the same day as the upgrade otherwise is will too obvious. Too bad the housing data give the bank share a big blow. Otherwise BAC shares could be manipulated well above $13.

I was angry because the rule of the game is never fair for small investor like me. I felt being played and cheated almost ten thousand dollar by those market manipulators. I feel shame of the government and the banks. The whole stress test, the spin on Bank of America’s capital short fall, the strong buys and the upgrades on Wells Fargo and BOAC are totally scam only to entice investors’ money. And they are even spinning on repaying the TRAP will hurt taxpayer. That is bull shit.

I have learned a big lesson out of it. Out of the angry I shorted Bank of America 2000 shares after market at $11.19 and $11.32 and cover all of them it at $11. My balance went up about $500 more. But it is no comparison to my ten thousand dollar lost.

Stock Trading VS Gambling

I frequently asked myself these couple questions. Is trading stock equal to gambling? Are you an addicted gambler if you are tempted to trade stocks? I answer both questions, “NO”. These are the answers that I prefer. But I really don’t know whether I answer these questions based on my own bias.

I answer both questions based on a fact that I believe to be true. I already mentioned that in my blog mission. It is that when you are gambling you are always playing on the side that statistically the probability of losing money is always higher than the probability of winning money. You may win from time to time in gambling but if you are playing long enough or the number of times you play is large enough there is only one out come and that is you lost. That is how the casinos games are designed. Interestingly a lot of people keep playing in an attempt to win their money back. Casino will tell you who won a million but they won’t tell you who lost a million. It is a marketing effort to entice you to keep playing. People have no problem sharing their joy and victory with the public but they tend to keep the sadness and failure within their closest friends and family.

Theoretically there is one casino game that you can beat the dealer. And that game is black jack. There are all kinds of card counting strategy out there telling you how to beat the dealer. And those strategies have one common nature that is to identify a situation where the probability of wining is greater than losing and increase your bet accordingly. I believe the same applies to stock market. The stock market is emotional and it derails from reality from time to time. The more it derails the high the probability it will heading back toward the rational level. If we can identify those irrational price levels and take the right side then the chance of making money is higher then losing money. If we are always able to find the irrational level and trading on it long enough then we should be able to see substantial gain. With that said I am not saying you will make money on every trade. I mean if you are able to do that you will find you can win more and lost less.

Well I am just talking and I am trying to prove my point with my blog. Successful or not time will tell. Nevertheless the hard work lays in how to identify those irrational pricing. That is the critical part. In traditional financial theory those irrational price is not existing because the market is efficient enough to prevent them from appearing. That is so called the efficient market theory. In that theory no one is able to beat the market index in terms of return per risk. But we can see this market is far from efficient with all kinds of manipulation in place.

Keeping PCX While Oil is Dropping Means I am Disconnected From the Market

Yesterday I was planning to sell PCX and DRYS today so that my account could be up above my initial capital. I saw this opportunity in early morning but I didn’t act on it. I was expecting more. Actually news already pointed out early morning that oil was continue dropping., It made sense that it would put pressure on energy stocks however I didn’t pay attention to it. I kept expecting a 4% bounce backup on PCX after yesterday’s almost 10% drop. It certainly wouldn’t happen when oil was continue dropping. I just didn’t sense the connection between oil price and energy issues. That’s definitely another lesson learned.

There is always ups and downs in a trading day and there is always opportunity to make profit. To train myself to make more right decisions than wrong is the purpose of the “Stock Trading Lesson Learned” category. I also watched Baidu today I wanted to trade on its call options and I set an order to buy its Jul 280 Call at $6. The price was set too low however. My account was down almost $300 at today’s closing price

Account Balance 20090707

Account Balance Changes: -$272.80

Cash is King But I Can not Withstand the Temptation

Last night when future was down more then 80 points I was expecting the stock market to drop at least 100 points at close today. So I took profit when I saw opportunity. I sold BEAT and USB at a profit. I traded on FAS but lost a little bit. At market close when I saw the DOW was up 40 some points and some of the hard hit stocks didn’t bounce back I couldn’t withstand the temptation and bought a couple of them. I bought PCX (Patriot Coal) and DRYS (Dry Ship). I think if the DOW tomorrow can remain unchanged or up a little then PCX and DRYS may rebound nicely. I didn’t buy a lot though. I am still bearish on the market with the earning season coming. The following are the transactions today.

Transactions 20090706

My account was up about $100 at closing price. I believe at some point tomorrow I will have the opportunity to sell all my position to make a profit and my account can be up above $30,000 which was my initial capital.

Account Balance 20090706

Today I focus on a couple news related to Bank of America. First is “BofA’s bad loans up 10% in 2Q”. I think this is the news that caused BAC tanked today. Second is “Whitney’s New Take On Modified Loans”. Meredith Whitney thinks that with the held of regulation and government incentive loan modification will soar and that will lower loan loss reserve which will benefit banks in near term. I don’t know how this two factors will play out in Bank of America’s second quarter income. I remain cautionary on Bank stocks. Bank of America ever dropped below $12 this morning and quickly bounce back. I was busy on something else and didn’t get this opportunity.

Account Balance Changes: +$118.29

Paid 180 Dollars of Trading Commission in a Single Day

I paid 180 dollars of commission today. As you know I am using TDAmeritrade. Its stock trading commission is $10 per transaction. How did I get to that far? Well I thought trading option is also $10 per transaction. So I bought 100 contracts of Microsoft Jul 24 Call option at 0.32 per share and sold them at 0.36 or 0.37 per share. I thought I was able to net about $400 on that transaction. In fact I was only able to make about $230 on that.

MSFT option commission

It turns out that there is $0.75 commission per contract in addition to the 10 dollar transaction fee. I was trading 100 contracts so there was $150 extra commission in addition to the $10 transaction fee. That is a lot and that is something I didn’t know before I did this trade. It was lucky that I was still able to make money. A lesson learned from this is when dealing with option it is better to trading those options that prices are high. If you know any broker that offer low commission on option trading please let me know

It is a big down day. Unemployment number is not good. But my account was up thanks to the option trade. I am still holding 500 shares of Beat that I bought yesterday and at the end of the day I added 500 shares of USB (US Bank) at $17.13. I became more willing to take the long side. But I wish I shorted Bank of America this morning.

Acount Balance 20090702

Account Balance Changes: +$114.81

PS
I have to revise the gain today to +$94.81. Closing price of USB came in a bit late and it turns out to be 17.04 instead of 17.08.

Beat just Got Beaten up

Weird title isn’t it? Today I traded a stock called CardioNet Inc. Its stock ticker is “Beat”. Its stock price got beaten up today dropping more than 40% because of lower earning forecast. I got in at $9.59 and sold it at $9.90. Close to the end of the trading day I got in again at $9.60 so I am holding 500 shares of Beat right now.

In its yahoo profile it says that CardioNet, Inc. provides ambulatory, continuous, real-time outpatient management solutions for monitoring relevant and timely clinical information regarding an individual’s health in the United States. I have no idea what kind of business that is about. I did check on its financial statement and this company had a problem managing its ever increasing receivable and cash out flow. It is very suspected when receivable grows faster then sales but I was tempted by its 40% drop. Hopefully it will be up a bit tomorrow.

account balance 20090701

My account is up about $100 today. Dropping 40% in a single day seems a lot to me especially for a stock that has never traded that low. I am hopping it will bounce back above $10 in a couple days.


Account Balance Changes: +$109.93

PCX May be Short Term Bottom Out

I sold my 1000 shares of PCX (Patriot Coal) at $6.47 this morning. Net about $250. So my account is up a little bit.

PCX launched a secondary offer not long ago with offering price at $7.90. Its stock price started dropping before the offering from above $9 to $5.60 a couple days ago. I don’t know whether the secondary offering was a successful one. But I feel its stock price is stabilized. Seems to me it has a good chance to bounce back above $7 and I feel it is safe to get in around $6. It dropped to $6.08 this morning and I hope it will do that again tomorrow. I sold PCX because I am betting ADP Employment Change tomorrow won’t be good. Just a wild guess and I will see if I can get in pre-market if PCX really drop tomorrow morning.

I am bit forgetful. When I bought PCX I was planning to wait till tomorrow after the window dressing effect. I only recalled this when I read my previous post. I also notice PCX has a good volume today. Hopefully I will not miss out a good run up tomorrow.

Account Balance Changes: +$249.81

Watched the Market All Day But Didn’t Make a Move

It is a very unproductive day for me. I watched the market all day but didn’t make a move because I wanted to take the long side. I wanted to buy something but didn’t find anything attractive. I wanted to buy PCX again at $6.15. The order is still hanging around I think. Let me know if you see something you think attractive so that I can at least have something else to look at =)

Bank of America was closed at $13.14. It went up to $13.25 after market. Too Bad I sold it already. I guess I really have a bearish mind. Citi Group’s downgrade easily caught my mind. Before the conversion I believed that BAC would be trading above its conversion price and that was why I was willing to buy 2000 share of BAC at $12.50. The downgrade destroyed my belief.

There are a number of analysts that are bearish about banks. News related to bank and real estate sector are not so good actually. Malls are going out of business. More regional banks failed, etc. However market sentiment seems still bullish on BAC. I am thinking if it worth to hold BAC until earning release. My mind right now is waiting to see BAC below $12.50 again so that I can get in. Not sure if that is going to happen.

PS
Not long after I posted I bought 1000 shares of PCX at $6.18 in after market. See the following screen short of PCX right after I bought PCX. It shows the after market price at $6.18. It proved yahoo’s real time quote is really real time. =) Not sure if it this buy is a good move. We will know tomorrow.

I Just Don’t Believe I Act Too Early

Today I sold everything in my account. I mean the 2000 shares of Bank of America. I sold them at $12.59. I made some profit on that trade and my account balance went up a few hundred dollars from yesterday. But look at BAC it is closed at $12.75. From time to time I told myself not to take action too early and try to see how it close first. I just don’t believe that feeling. It is more than a few times in the pass few trading days that I regret taking buy or sell decision too early. I really just need to sit back and take it easy and not to watch the market frequently. I just need to take a peek at market close then decide whether to buy or sell. I am going to try to that next week.

I regret buying PCX and I regret selling it too early. I lost $1400 trading PCX. My account is still down $600 from its initial capital of $30,000. Hopefully I can get back to my feet next week. One thing I always feel good about is to hold only cash but nothing over the weekend.

Account Balance Changes: +$471.36