Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

No Fear

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I've been kind of irked lately at all the hand-wringing, particularly here in California, about the radiation coming from Japan. I'm a cautious chap, but it seems to me people get in a tizzy over the most irrational things. I shall cite a few examples from my own experience in years past.

Twenty years ago, there was a fire in the hills near Oakland, California. It was a pretty big fire, and it lasted a couple of days. I found out later than a friend's mother doused her roof with water as a preventative measure.

If this mother lived in the midst of the fire, sure, I could understand the precaution. But her house was at least ten miles away, as indicated by the arrow below:

0319-moraga

So I was bugged on two levels: (1) by the sheer stupidity of trying to prevent one's house catching on fire when the likelihood of a meteor striking the house was greater than the very distant fire spreading that far; (2) the waste of water. Stupid, stupid, stupid.

Since we get earthquakes here from time to time, another pet peeve of mine is the aftermath of a moderate earthquake. Invariably, two things happen:

(1) Utter morons call 911 to ask if there was an earthquake; I fervantly believe there should be a $75 surcharge, charged directly to one's phone bill, for making a 911 call that isn't an emergency. Simple, effective, and revenue-generating.

(2) The next day's newspaper is filled with accounts of what people said the earthquake felt like. "It was a jolt"……….."First it was a shake, then it was a rolling motion"………."It was like my wedding night." I mean, for God's sake, I don't need to read what an earthquake feels like, anymore than I need to know that a hurricane is windy and rainy.

I remember back in 1995, my wife and I were in Hawaii, and an earthquake struck in the Western Pacific. The tidal wave sirens shrieked, and everyone waited for the very specific time that the tidal wave came to obliterate the coastline. The appointed time came………everyone was on the high ground……….and the tidal wave came. It measured, I was told, at three inches high. How they could discern this from the regular wave action is beyond me, but thank God we were spared the ravages of a three-inch tall tsunami.

This all came to a head for me when I heard a friend had taken his entire family to "high ground", away from Palo Alto, because of the incoming tsunami. The arrow below indicates Palo Alto's location relative to the Pacific Ocean – – it's about twenty-five miles or so. Added to which, there are 1500 foot tall hills between here and there. I suppose if a 2,000 foot high wave were coming, evacuation might make sense, but in this case – – how shall I say this kindly? – – the act was unnecessary.

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And the latest, of course, is the mania over iodine, which people are satisfying by buying out whole inventories of salt. This is a whole new level of idiocy. Unless you are right there in the midst of the radiation, and unless you consume huge quantities of salt, it's not going to help you. And even if it does, it only addresses a very specific kind of cancer. It's not like eating lots of salt prevents you being affected by radiation.

I'll wager that there will be hundreds of deaths – maybe even thousands – from hypertension-induced heart attacks caused by wolfing down all this salt – and not a single, solitary human life will be saved due to its intended medicinal effects. Isn't that ironic? People are literally killing themselves in order to give themselves a misplaced sense of security. I suppose people yearn to feel proactive.

Do you want to be safe? I'll tell you how to be safe. Look both ways before you cross the street. Don't drink and drive. Keep a close eye on your kids when they're swimming. Don't go out driving on New Year's Eve. Don't keep loaded firmarms in the house. Stay away from bad neighborhoods. Avoid walking alone.

But spritzing your roof for a fire that's not within eyesight? Going to higher ground for a 5-foot wave that's thirty miles from here? Choking down salt that won't do you any good? No.

Sirius Questions about Hedging and Risk (by Pinsen)

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Hey Fellow Slopers,

This post might be a little basic for some of you, but since Slope has a broad range of readers, I figured this might be educational to some of them.

Yesterday, a financial professional Portfolio Armor subscriber contacted me with a question: he said he’d been unable to find optimal put option contracts to hedge his client’s position in Sirius XM Radio Inc. (SIRI). I sent the note below in response, and since it covers some basics about hedging and risk, I thought it might make an educational blog post. First, though, a quick explanation of what Portfolio Armor does:

How Portfolio Armor Works:

You enter your stock and ETF holdings, and the maximum downside risk you are willing to accept for each holding. Then, using its proprietary algorithm (which was developed by a finance Ph.D. candidate), Portfolio Armor shows you the optimal put options to buy to obtain the level of protection you want at the lowest cost.

How does Portfolio Armor differ from other options tools?

Portfolio Armor is unique in that it shows the optimal put options to buy for you to obtain the precise level of protection that you want at the lowest cost.

What about just scanning Yahoo! Finance or Morningstar to manually find puts to buy?

A very good, experienced, and savvy investor might be able to find the right number of contracts and the right strike price to protect against a certain loss level, but when taking price into account he at risk of paying too much for too little coverage.

My note to the financial professional looking to hedge his client’s SIRI position:

Please see the two attached screen prints. The screen print titled “SIRI Portfolio Armor” shows that 23% is the smallest threshold for which Portfolio Armor was able to find optimal protective put option contracts for SIRI (“threshold” refers to the maximum decline you are willing to risk in your stock or ETF).

What that means is this: if you wanted to protect against a smaller loss in SIRI today (say, a greater-than-20% loss), the cost of protection would be greater than the loss you were looking to protect against (20% of your portfolio value).

That would be like spending $1000 on collision insurance for a car with a Blue Book value of less than $1000: it wouldn’t make sense. Which is why Portfolio Armor doesn’t show any contracts when the cost of protection is greater than the threshold entered.

There are a number of factors that determine how much it costs to hedge a position with protective puts. One of them is the perceived risk of the security. The other screen print, “SIRI Altman Score” shows that SIRI currently has an Altman Z”-Score of about -4.25.

Scores below 1.1 indicate risk of bankruptcy within two years, according to the Altman Z”-Score bankruptcy model (more detail on that here). That risk may help explain why SIRI is so expensive to hedge.

Another factor that affects the cost of hedging is general volatility. Volatility spiked today (due in part, most likely, to fears related to Japan)1. In general, it’s cheaper to hedge when markets are up and volatility is low (“buying umbrellas when it’s sunny out“).

It’s also generally cheaper to buy protection on a diversified ETF (e.g., SPY, which tracks the S&P 500 Index) than to buy protection on an individual stock. An index-tracking ETF such as SPY is subject to market risk, but it’s diversification pretty much eliminates idiosyncratic risk; an individual stock, on the other hand, is subject to both market risk and idiosyncratic risk.

1I wrote this note Wednesday night, after the VIX had spiked about 20% on the day. It fell about 10% today.

If You’re Not Going to Use Stops… (By Ryan Mallory)

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If you are not going to use stops, because either 1) you prefer mental stops 2) the MM's will "steal" my shares or 3) you're afraid of it popping back up as soon as you get stopped out, is no excuse to not use stops, in fact, if you don't do it, you better confine yourself to a life defined by Dwight Schrute – pay careful attention to what he is doing AND what he says is the reason for doing what he is doing!

Is it extreme what I am saying here? No, it isn't. In fact, it couldn't be any more true. Take for example last week, MasterCard (MA) and Visa (V), after the fed introduced a proposal for interchange fee regulation right in the middle of the trading day. Had you decided to buy MA and subsequently take an 'extended bathroom break", within 20 minutes MA would have dropped from $253.35 down to $232.50 for an 8.1% decline. Had you decided to grab a bite to eat (assuming you washed your hands of course), you would have come back to a 12.5% loss. Visa was even worse, a quick run to the local Piggly-Wiggly and within 30 minutes you have an 8.8% loss on your hands, and if you go back for desert, you have 14.6% in losses. And let me tell you, your stomach isn't going to be the only thing hurting after that quick bite to eat.

Don't think that Visa and Mastercard are the only instances of this, stocks like Dendreon (DNDN) saw its stock drop from $22.50 all the way down to $7.50 in a few moments back on 4/28/09. Yes it did recover, the next day, as it resumed trading in the $20's, but when the bottom was literally falling out from underneath it, you had no clue what its fate would be the next day, and I for one, would rather be stopped out 4 or 5% below the current share price and see it pop back up the next day (which of course happens to me quite often), rather than wondering at sub-$10, whether the stock would recover or not. Because, folks when stocks get torn up like that, and at a pace as ferocious as what I just explained, you're not thinking about the what-if's for tomorrow, instead you are staring solely at the deep bloody red color in your account with a loss larger than what you had ever desired to take on.

You see, small losses are okay and are very recoverable, and at times, if you continuously take small losses over time, you will have instances, where the Market Makers stole or shook you out of your shares, you'll see your stop triggered only to have it go on to be a would be stock pick of the year, and many other cases that seem unjust and unfair. But that is part of the game, and trust me, I'd rather take a small loss from someone who wants to take my shares at a cheap price, then let one of these stocks (or a flash-crash too) rip me a new one, because my ego was too big to control losses by any means other than a stop-loss. And because of the examples outlined above, and how close I was to buying Visa (V) as a legit breakout play back on 12/15, that if I didn't use hard stops I'd be like Dwight with the a 2-liter bottle in hand for when nature calls. 

Checkout Ryan's Blog at SharePlanner.com

Core Laboratories and Portfolio Update

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1115-CLB

I did the above graphic yesterday but didn't bother posting it until now. I remain short the above.

I'd like to tell you how I am positioned. I entered the day totally short. I covered my big short positions (OIH, IWM) and day traded them quite successfully as well.

Since then, I have covered a handful of my shorts, and I currently have 101. I have balanced these with four large longs – SLV, SPY, LQD, and GDX. I am using these only to survive any bounce back up to about 71.90 on the IWM, at which time I will throw them under the proverbial bus and load up on shorts.

My current split is 40% long/60% short (again, I was 100% short this morning) and I will be happy to neither make nor lose money until such time as a bounce, such as it is, may take place.

Today's sell-off was marvelous, but I have taken a heaping spoonful of Prudence.

The Looming Tower

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Well, after all this waiting, the big day – – November 3 – – is finally upon us.

I have mixed feelings about it. On the one hand, I'm terribly apprehensive about the bears getting a nuclear bomb dropped on their heads when QE2 is announced and the election results have sunk in. One can imagine a scenario where:

+ The announcement comes out;

+ The market instantly rips ten points lower (or whatever), getting everyone excited;

+ It promptly shakes off the loss and explodes to the upside, as the dollar utterly collapses.

I mean, who knows? Anything could happen.

The other feeling I have is relief that it's finally going to be out of the way……..for a while, at least. I don't think they'll start talking about QE3 on Thursday (although at this point, there's no telling). One thing I can promise you, though, is that I'm as sick of hearing about QE2 as I am sick of getting robocalls from politicians.

The safest thing to do would be to be completely in cash. Of course, that's always the safest thing to do. It also guarantees you will forgo any opportunity to make a profit.

I am taking a less conservative approach, but somewhat conservative nonetheless. My positioning is:

+ 85% committed (that is, 15% in cash and no margin being used);

+ 25% long positions;

+ 75% short positions

This way, tomorrow could wind up somewhat bad for me – – or somewhat good – – but it's pretty unlikely that it will be a disaster, no matter what Big Ben does to us.

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