Roubini VS Buffett

Dr Doom Roubini speaks out today. The following are some of the minutes of his speech.

1. Those aren’t “green shoots”–they’re yellow weeds
2. The crisis isn’t over, and everyone has become way too complacent
3. We’ll be in recession for another 6-9 months
4. The recovery after that will be weak
5. Big risk of a double-dip
6. Households aren’t deleveraging
7. Oil could go to $200 just as economy starts to recover
8. Real interest rates could spike, killing housing, etc.
9. Concern about hyper-inflation
10. All this could lead to “perfect storm” that will clip wings of economic and financial recovery
11. So we need to stay focused on averting disaster before we redesign regulatory architecture.

See original here

So Roubini or Buffet who is going to be right? Buffet was very optimistic. He called for the stock market bottom last quarter when the Dow was at around 8000 and it later dropped to 6500. Roubini called for the financial melt down more than a year ealier and he was right. Buffet was onto banks and he was right too. For most part their views may not be contradicted with each other. For example their views on the risk of inflation. But their views on housing seem to be different. Buffet was optimistic on housing market going forward. Roubini’s view was kind of depressed. Who do you believe.

I am more on Roubini’s side on housing because I just don’t think housing price will go back to 2006 without a major raise in wage. Banks will not provide those exotic mortgages again. Housing price went crazy during 2005 and 2006 majorly because of those exotic mortgages. No money down, stated income, 110% finance and reverse mortgage. Those things are not easily coming back.

As for inflation some economist think it won’t come until consumer borrowing increase. But consumer borrowing is still decreasing so inflation will probably come eventually but not that early. However inflation expectation will built into commodity price before the economy recover. Roubini predict “Oil could go to $200 just as economy starts to recover” that is about 6 to 9 months later. So it is probably a good move to load up the oil share like CEO or PTR now.

Banks in a short time will run up because some of them will repay TRAP and no matter what it will be seen a positive sign for the sector. Anyway I just want to jog down some of the ideas I want to keep in mind going forward.

I make some profit today and I feel comfortable with it. I said I didn’t want to trade option but I trade again. I sold USB put again. Next weekend will be the expiration day let’s see if I can pocket the $450 bucks. I said I want to be on the long side of banks but I took the short side when BAC was above $12. I trade a couple times and make profit. Another thinking I change is that I don’t want trading cost get into my mind and affect my decision whether to close a position or not. As long as I can make money net of commission I don’t want to care about how much it is.

Account Balance Change: +$196.98

Does Stock Trading’s Technical Analysis Really Work?

Looks like Epena is on technical analysis. See her comment on Baidu. No offensive but I don’t completely believe in technical analysis and I don’t rely on technical analysis to do any of my trades. My take on technical analysis is that it will just work 50-50. Because I think any well known stock trading theory is self-destructive. It only works when I am the only one understand it and use it. When many people understand it and use it it will become ineffective. Since technical analysis is well known strategy I don’t think it will work. But if anyone use technical analysis find it works let us know here. Let’s see what the odd is.

I have a silly theory. That is the stock price movement is the weighted average result of tarders’ sentiment on a stock. The weighted factor is the money held in traders’ hand. Let’s say Baidu if the number of bearish and bullish traders on Baidu are equal and they are holding the same amount of trading power then stock price should not move. However if the bearish side of the traders hold a larger position than the bullish side then price will be pushed downward. On the opposite when bullish traders hold a bigger trading position then price will be pushed upward. Simply put price movement is to achieve new balance of the bulls and bears. What we do is to find the imbalance between the bulls and bears and take advantage of it. It would be like guessing the mood of a group of people. I usually make a trade based on the price level, its previous movement and what is happening on the company, the industry and the economy. I don’t usually look at graph.

Take Baidu again. I think it will get close to 300 in a couple weeks and then it will come back and stay around 290 till next earning release. It went up today simply because Goldman Sachs upgraded it otherwise it should back down to $270 level. Goldman Sachs has a lot of power on Baidu and it can easily turn bears into bulls.

I guess I babble too much on my theory. But let’s put it on if you have another one

You’ve Got to Follow Goldman Sachs Opinion on Baidu

In a previous post that I discussed whether technical analysis worked in stock trading I mentioned that Baidu’s price was going up simply because its price target was raised by Goldman Sachs. Looking at Baidu’s price now it stands at $304. If I brought its shares at that time I should have made good profit buy now. I didn’t buy it because Baidu share was too expensive and I can not follow my guidelines if I trade Baidu’s share and it happened that I was considering whether I was wrong not following guidelines. Because of the hesitation I missed an obvious earning opportunity.

Goldman Sachs was the major underwriter helping Baidu go public five years ago. Its opinion has been a major driving force behind the ups and downs of this stock. Next earning will be big because it is a good chance for the analyst to play a big game. Baidu’s valuation at this level is supper high compare to many other stocks. If Baidu miss analyst expectation it can trigger a streak of downgrades and Baidu’s price could be pushed back to $220 level. If they beat expectation the stock may go up a bit say 10% to around $330 and still analyst other than Goldman Sachs will downgrade it using the excuse of high evaluation. I am thinking may be I should watch out for any shorting opportunity after the next earning report.

There is still a long way to go though.

Questions About Option Trading

The other day I post a message on Yahoo stock message board to asked suggestions on what direction I should take going forward with regard to the 4000 thousand shares of Bank of America I bought. The average share price I get in is at $11.25. So it is under water and I didn’t know what will happen on next Tuesday. A few person on the board have suggested that I sell call options while I am waiting for the stock price to bounce back. Frankly I never traded options and I have always considered options were something I should never touch. But the suggestions really interested me. It is not the first time I hear that. As you can see Bob’s on comment on this post Wells Fargo Is Over Valued at $25.70

I’m a long term holder and will own it for the next 5 years or more. I see this as an opportunity to sell options against the stock. I recently sold June 28 calls @ 1.60 and I am willing to risk having some shares called away at 28.

So I have study the options trading procedure in my stock trading account. The minute I finished the study I felt it open up my eyes and I felt I have missed out some big big earning opportunities for the past 10 year when I was a long term holder of some of the stocks. But I really have doubt and I need some help to clearing them out.

Bank of America Jun Options Chain

I look at Bank of America’s June 20th call options. See the above picture.The bid pice of Jun 20th call option with stick price at $12 has a premium iof $0.61. My question is If I sell 40 this contracts (40 X 100 share per contact = 4000 shares) I can net 4000 X $0.61 = $2,440 doesn’t matter where BAC stock price is heading next Tuesday. Am I right?

My next question is if some time in the next few weeks before the option expiration day Jun 20th BAC’s price come above $12 then someone who purchased my calls will exercise the calls and pay me $12 per share for my 4,000 share. Am I right? When the buyer exercise the calls I can make 4,000 X ($12-$11.25)=$3,000. So if I decided to hold the $4,000 share potentially I can make $5,440 before Jun 20th but I can make $2,440 for sure. Am I right?

My third question is if I decide to hold past June 20th and I sold 40 contract of this calls. Do I need to do anything to close the option position. If the buyers do exercise the options to buy my shares do I need to do anything?

Thank you very much for help me out.

The Reasoning Behind Bank of America’s Upgrade

The following is the reasoning behind Bank of America’s upgrade by Goldman Sachs and Morgan Stanley which is posted in yahoo message board by a person named Perry, screen name tothemoon8. It seems to me it is from a professional analyst’s mind and I found it is quite convincing. Of course I buy into his view because I am holding 4000 shares of BAC. The strange thing I feel is I should’ve read it from news release of Goldman Sachs or Morgan Stanley instead of from Yahoo message board. Anyhow it found it help me firming my mind. I will certainly hold.

BofA, according to Barrons, orchestrated a brilliant stock sale to raise the capital that was mandated by the FEDS. Apparently a tremendous number of mutual funds and hedge funds were interested in the offer which required a minimum of 1 million shares purchased and BofA sold these shares off the market so that it does not disturb the stock price. Next, they rejected the stock issues to any funds that had shorted BofA in the past year (call it a pay back if you will) and last they require the purchasers to hold the stocks for a substantial amount of time.

According to Goldman and Barrons BofA’s stock offerings will conclude and finalize by the end of today. By next week BofA will announce that it has raised over $25 Billion from it’s stock offerings and asset sales which with the earnings that they have ear marked will close the gap to their $35 Billion capital requirments. Here are some interesting facts:

1) When BofA took over Merryl they also inherited 51% of BlackRock Group which manages over $1.3 TRILLION in assets. Imagine the fees collected annually on this amount.

2) BofA could easily say couple of years from today complete an IPO on Merryl again and hold 60% majority stake. This will make BofA and its shareholders an astounding stock price gain.

3) Over ONE THIRD of all daily ACH transactions completed in the U.S. goes through BofA.

4) As of today BofA has a nest egg of $178 BILLION for loan loss provisions and cash. When in the near future the economy turns around, unused loan loss provisions have to be accounted backward and be recognized as earnings… this is the event that will take the stock to $40 level and beyond. Which is why Goldman has now added BofA to their conviction buy list and Morgan Stanely upgraded BofA with a $32 price target.

5) BofA is still tracking a $38 Billion + quarterly revenue for this quarter which will net them between $3.5 to $5 Billion in income again which is massive by any standard. Why? They are borrowing money from the Fed at ZERO percent rate and lending it out at 500% to 600% profit. Also, the mark to market accounting rules all but gone, BofA and other banks get the breathing room to recognize the loss of some assets over the next few years as their earnings and income pick up momentum and off sets those book value losses.

It is from If you are longs check out this facts

Federal Reserve’s Credibility is More Imporant Than Bank’s Captial Rasing

Yesterday when I shorted 4000 share of Bank of America I was preparing to lost big because I thought Federal Reserve would play along with the banks and issue somewhat bullish meeting minutes to help the banks raising capital. I was wrong and I felt I was very lucky. I could easily lost several thousand dollar yesterday.

I guess the Fed looked at the reality and decided that it can not play along with the banks. The world is already very skeptical about the stress test result. The Fed just can push the limit further. If the Fed lost its credibility it will post serious damage to the market. I believe the banks’ problem is far from over. It is not over until one day they start declaring regular dividend again. By that time the banks evaluation will be based on the projected dividend stream. Right now the market just claim whatever price they think the banks worth. Price of Bank of American can go back and forth between $10 and $15.

In fact we can see the realty from the statistics no matter how the banks spin them. Our GDP was down more than expected last quarter, unemployment rate is higher, foreclosure is more, home price is still going down and consumer credit is still deteriorating. Former Fed chairman Greenspan has the following comments lately

There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded.

Home prices will only start to stabilize once the liquidation rate of single-family homes has peaked. I don’t think we’re there yet.

until the price of homes flattens out we still have a very serious potential mortgage crisis

Things are definitely improved but not as rosy as the picture that Bank of America CEO painted

Stock Market is Irrational and Full of Manipulation

I posted on yahoo Well Fargo Stock board that the more I thought about the banks upgrading the more I felt it was a skim for the banks to upgrading each other so that they all can make money underwriting billions of new banking shares. There are still more to come after WFC and USB so they have to pump the market to finish their job. Once they are done they may manipulate the market downward. The recent bank rally and upgrade just show how easy the stock market can be manipulated. The government tries to manipulate it. Investment banks try to manipulate it. Big investors try to manipulate it.

Reply has it that event if what I say is true what chance do I have trying to fight the tide. I think no matter how irrational the market is it can not derail too far from reality isn’t it? I know I was wrong on taking a huge short position just two weeks ago. Now I am really tamped to fight the tide again. I really shouldn’t take more short position to make the same mistake again.

I think I should just wait and see how my current short position turns out to be at the end of this week.