Category Archives: Dope
Playing off of my last post on mutual funds, I wanted to say something about diversification. Wall Street, FA’s, and basically anyone involved with finance has increasingly banged into us the idea of diversification. It’s the old theory of “don’t put all your eggs in one basket”. While this is a great way to reduce risk, it’s also a great way to put a ceiling on returns. Take a minute to think about some of the richest people in the world, many of which happen to be in finance. Bill Gates–Microsoft. Carlos Slim–Mexican Telecoms. Warren Buffett–Berkshire Hathaway. The list is long as fuck, but you get the idea. All these guys were/are FAR from diversified. They focused on one area, and crushed it. While diversification is good for someone who can’t afford to lose, it’s not very useful for those looking to really make some money.
Why do you invest your savings? Not to have the smallest losses, but to have the biggest returns. If you hand your money off to a broker who is WILD good at trading options, why would you want him to invest some of your money in commodities? This isn’t to say you shouldn’t keep some money invested in safe assets, such as Treasuries/gold/low-volatility currencies, but if you think the tech industry is going to skyrocket, what’s the point of having 50% exposure to tech stocks and 50% exposure to say, utility stocks? Like life in general, you should stick to what you’re good at with investing. You can’t allow emotions to dictate your trades, and you can’t be good at every strategy. Speaking of which, just handed in some homework for an econ class, part of which was a problem about diversification. If I split my exposure to half China and half US, my expected utility is greater than just investing in the US! Dope! I think Jing Zhang woulda been pissed if I wrote “fuck that” as my answer.
So I basically haven’t even thought about posting on this blog anymore once I started my summer internship, but I thought I might as well keep the bitch goin’. I got in an argument the other day with my mom after telling her about the stocks I’ve been looking at lately. I told her OpenTable Inc. (OPEN) was trading at 160/share the day before, and she gave me this look like I was a complete idiot. For the sake of me looking only slightly retarded, I was thinking of Salesforce Inc. (CRM), while OPEN was closer to 80 (down to 75 since then). Well the argument came when she said something like, “Oh are you looking at it that high so you can wait for it to split?” And I said something like, “Uhhh no not really, there’s a lot of stocks above 100/share”. Then came the ever-present tone of, “Oh DopiesChron, don’t act like you’re some big shot know-it-all nobody likes that blah blah blah”. Well… I went to work the next day and asked my boss what he thought about the conversation, and it turns out we were both right for different reasons.
My point was that I wasn’t playing these stocks for the split, but for the fact that they should grow regardless of a split. And that 1000 shares at 50 should be no different from 500 shares at 100. Academics love that last point–and it turns out it’s total bullshit and I’m an idiot (can I call my econ profs idiots now too?). The rationale behind a lot of stock splits is this: many people see a triple digit price and think it’s too expensive for them, but once a stock splits they think they’re getting a bargain and will snap them up. This is because many investors feel wealth based on their share amount, not the total value of their shares. While this may not seem like “rational behavior”, it makes a lot of sense. Grams over here didn’t wanna buy 20 AAPL shares at 300 because it looks like the only way it can go to her is down… now she’s crying herself to sleep as the price hits 370. Then there’s a 4:1 split and she thinks 75/share is the deal of a lifetime. Not only that, she can have 80 shares instead of 20… and that makes her feel goodski.
I saw on Bloomberg the other day some guy pull up a pie chart. It showed the share of the stock market held by… I wanna say Hedge Funds, Brokers (as in Wealth Advisors, etc.), and Institutional Investors. It showed that Brokers, who have clients ranging from $40 grand to $20 mil in assets, make up about 44% of that pie. In other words, a large amount of people are susceptible to behaving exactly like what I just described. Obviously, there’s a simple way to play off of this. Looking at historical prices, you’ll notice a lot of good, growing companies will have pops in their share price after the announcement of a split. Once the split occurs, people will be calling their brokers telling them to buy shares while the price is so low. So, the pop that occurs after the announcement is usually due to people trying to get a position in before the split, so they can ride out the bull when smaller investors get in.
Now, what usually happens is the price can jump as much as 20% the first day after a split is announced, with some earlier gains maybe being attributed to speculation of a split (or you know Rajat Gupta personally and you don’t have to speculate, you just know exactly when they’ll announce it). So, the trick is being able to get in before that initial price pop. Moreover, a 2:1 split is great, and the above scenario will likely play out. But a 3:1 or higher will usually make the institutionals back out, because they don’t want to hold so many shares. So, they’ll liquidate some or all of their position after (or before) the split.
This brings me back to my initial point: that I was looking at CRM for strong growth, not specifically to play a split. This is because we currently have way more triple digit stocks now than ever before. Whether or not they’ll eventually split is above my head, but there could be a few reasons why they’ve stayed so high. For one, the high prices reduce volatility, making their stock appear strong and their board members appear smart (the ones who decide on a split). Another more low-brow approach is that share price has become almost like dick-size to board members and chief officers. I can see it now… Reed Hastings of Netflix walking around a party saying “Hey slut, Netflix is trading at 280 right now… and if you stay at my place it might be 290 by the time you wake up”. Fuckin’ CEO’s. Always a party.
I was reading a Reuters article this morning, and they mentioned how euro risk reversals are at a 6-month high, presumably because hedge funds are shorting the euro. For the sake of news, the euro has been unable to break the $1.4500 mark lately, and is at $1.4169 after dropping 271 pips today (.0271 percentage points). Good news for those who think the Fed is trying to inflate away our debts, I’ll be doing a post on that bullshit sometime soon (basically people who think that are fuckin’ morons). BUT, just reading that one headline I realized I have no idea what a risk reversal is for. So, I did some fuckin’ readin’ and now I know what it is. And because I took the time to read up on what they’re used for… I’m gonna spread some god damn knowledge on ya ass. For clarity, I’m gonna explain it as if my friend, Petrone, is bullish on Microsoft stock (he heard they bought Skype and thinks they’re gonna gain like 20 fuckin’ points or some shit).
So, Petrone hears about the Skype buyout and gets all excited about Microsoft stock. It’s at about $24/share, but let’s assume it’s $50/share for this example. Petrone thinks Microsoft is gonna enjoy a big rally and wants to go long the stock. But, he doesn’t just wanna have a straight-up position in a market as uncertain as today’s. So instead of just buying the stock for $24/share, he’s going to enter into 2 option contracts, this is the risk reversal strategy.
First, a quick refresher on the options he’ll buy. Petrone will go long a call option. Buying a call option means you pay a premium (say $5) for the right to buy the underlying (MSFT stock in this case, $50 right now) at a specified future price, the strike price (say $60), at or before the expiration date (say 1 year). If you are the buyer of the option you don’t have to purchase the underlying, you just pay the premium for the right to purchase it before the contract expires. So, when Petrone is long a call option, he’s hoping the underlying current stock price (spot) will be greater than the strike price before the option expires. If that’s the case, he can turn around and sell the stock he just bought for the market/spot price. If the difference between the spot and strike is greater than the premium he paid, then he’ll make a profit. In our example, if MSFT is worth $70/share at some point before the expiration, Petrone will make a profit of $5 ($70-$60-$5=$5) if he exercises the option at that point. He pays the premium when purchasing the option and the strike price when exercising the option, then sells the asset at the market/spot price and hopefully profits.
Now, in the case of a risk reversal, Petrone is going to short a put option before he’s does the above. Much like buying a call option, shorting a put option means Petrone thinks MSFT’s spot price will rise in the future. Again, the buyer of a put option pays a premium (say $5) for the right to sell an underlying asset to the seller of the option, Petrone, at the strike price (say $40). So, the buyer is hoping the spot price will fall below the strike price by at least the value of the premium, because then he’ll be selling the stock at a strike that’s higher than the market/spot price and will profit. In Petrone’s case, he’s going to be the seller of the put option, so he’s hoping the spot price stays above the strike price (the buyer of the put option won’t exercise the option, and Petrone will make a profit of $5, the premium).
The reason Petrone shorts a put option first, is so he can use the premium he earns from it, $5, to buy the call option at $5. So, if the spot price is originally $50 and never falls below $40 or rises above $60, neither option will be exercised, and he’ll break even. If the spot rises above $60, then Petrone will exercise the call option and make a profit of the spot minus $60. For instance, if 7 months after he enters both contracts the spot is $70, he’ll make $10 (spot-strike-call premium+put premium; $70-$60-$5+$5=$10). If the spot falls below $40, the buyer of the put he sold will exercise the option, and he’ll lose the amount it falls below $40. For instance, if 7 months later the spot is $30, he’ll lose $10 ($30-$40-$5+$5=-$10).
So, instead of just buying MSFT at a $50 face value, Petrone can make a synthetic long position with both a long call and short put with very little money to begin with ($0 in our example). Risk is reduced big time as you can see, and so is the possible reward. The increased leverage he can use more than makes up for the difference in volatility. If there’s a lot of volatility (spot goes ±$10) there’s a fat possible gain/loss with big leverage, but if there’s low volatility (spot above $40/below $60) there’s very little cost, if any.
Back to the original reason for writing about this, euro risk reversals are at a 6-month high. A high risk reversal means that the call option is more volatile than the put option. In other words, long positions on the euro/dollar are riskier positions than short positions. So, the risk reversal levels are good indicators of where an asset’s price is going, especially on currencies. In this case, the euro is not going to be doing well in the future.
… That probably made no fuckin’ sense.
For those like myself who have only a few tidbits of knowledge of the Israeli-Palestinian conflict, here’s a good six-part documentary done by Al Jazeera a few years ago. Al Jazeera is usually very good at being unbiased, but I will say this is a little slanted towards Palestinians. Nonetheless, good series with a lot of facts and only about an hour and a half in total.
Dow is down 172 11,951 and S&P is down 18 to 1,270 on the day. I’m beginning to get the feeling that the markets are playing off the news too much. Not only that, but expectations for the year were just incredibly too high. Now, Obama’s analogy of “if you get hit by a truck… it’s gonna take a while to mend ya know?” may be extremely retared, but he’s not wrong on the original point. You don’t have the Dow literally lose like 50% over a year and a half and just expect 3% yearly growth right off the bat. To reiterate what many have pointed out, this was the worst recession we’ve had since the Great Depression. These high expectations are only hindering growth. Record corporate profits obviously imply they’re hoarding a lot of cash, but it’s not like they’re gonna keep it forever. That money will be reinvested. Unemployment will eventually decrease. Have some faith in the market.
Larry Fink was on CNBC today giving his insights. Dudes a baller, I usually believe almost everything he says. Plus he just doesn’t look like a scumbag. He’s bullish on equities. One of his main reasons is the fact that the bond market is extremely overstuffed. I just posted a day or two ago about how some people are hoppin’ on bonds because they’re just looking for any safe rate of return. Well, there’s almost no profit opportunity now. The private sector benefitting a lot with the weak dollar and are in a great position to grow. Honestly, there’s not much room for this economy to go south unless you consider a depression a possibility. Which it’s not, and a “double dip” won’t happen either. There’s far too much liquidity for another recession. The worst possibility I see is just very slow growth for another year or two from uneasy investment. But the markets, and the economy as well, will pick up.
As for my thoughts on the speculation of QE3, I’ve found myself getting consistently annoyed of those who say it has failed. Investment has increased over the past year. The unemployment rate has dropped over 1% since it started, and I’d venture to say that without QE it wouldn’t have dropped nearly that much (as in it would probably be the same). People are so quick to say QE has failed because the growth is so slow, but where’s the evidence that the economy would be in a better position without it? I don’t see it and I haven’t heard it. All these fuckin’ bears are just scaring everybody, that’s what I think. A little more optimism would help ease consumer confidence.
Love how the guy with the camera is like “that will be mine one day… betchyu that’s a lambo”. Nah brah. Ain’t gonna be yours one day. God… I bet that guy shat his pants the second he realized he was dumpin’ that thing in the water. Then again, if you can not only afford a $2 million car, but actually BUY a $2 million car… this doesn’t even phase you right? He probably did it on purpose come to think of it. Talkin’ to his other super loaded friend he was probably like “I’ll bet you $1 million I can get my Bugatti to drive on water for at least 5 seconds”. Just tossin’ money around while everyone else is lining up for food stamps. What a life.
I’m at a crossroads right now. It’d be unreal if DeShawn Stevenson somehow shutdown LeBron tonight. But don’t kid yourself… it’d be a defining career moment to see LBJ put up 40 tonight and shut everyone up. As someone who fucking hates how much ESPN and other people can blow one god damn game out of proportion, I love when people shut the media up. On the other hand… DeShawn’s been so heinous yet so unreal it’s bizarro world out there. A 3 in Bron’s face would be dopies.
Hate all you want… these are fuckin’ dope. Who cares if they’re not actually a throwback to any kind of jersey. I need one of these like I need air: I’m not sure how, but I’m pretty sure I’ll die if I don’t have it. God DAMN I can’t wait for this night game. Too bad Bouba isn’t on the team anymore, the stripes are totally his style. (I feel bad just writing that… Bouba you’re unreal!)
During the Fed Chairman’s press conference today, Bernanke got a tough question from dopeboy Dimon. He asked:
“Has anyone bothered to study the cumulative effect of these things, and do you have the fear, like I do, that when we look at it all, it will be the reason” why banks aren’t lending, he asked. “Is this holding us back at this point?”
He goes on to mention that exotic derivatives are few and far between now, boards and regulators are tougher, banks’ liquidity and capital levels are very high, and lending practices are far tighter than in the past. On top of that, the new proposed 3% surcharge for “big banks” out of the Basel III discussions has created even more uncertainty.
People have been fuckin’ loving Jamie Dimon over the past year or two. JPMorgan is arguably on top of the financial sector right now, especially with GS on the ropes. One of the issues with him asking this question all the way down in Atlanta is pretty obvious: why did he have to ask such a basic (but important) question in a public forum? Two possibilities. The first is he’s had this conversation with Bernanke before, but didn’t get the answer he wanted. Asking it in front of an international audience might force Bernanke to give a different, crowd-pleasing answer. The second, and more intriguing one is that he’s actually never been able to ask the question. In other words, he’s tried to get an answer out of the Fed (preferably Bernanke) and has never gotten one. If that’s the case, then that’s not good. Even though conspiracy theorists would consider it a sign of our impending enslavement to the Fed, the CEO of JPMorgan should be able to have a conversation with the Chairman of the Fed pretty easily.
Now I’d love to have a strong opinion on this, but there’s not much of a point to that. Banking regulations could be a reason for slow growth (strict lending reduces consumer spending), but businesses are borrowing at ridiculously low levels. Corporate capital accumulation and investment is very strong right now. The uncertainty in the banking sector could just as easily be a symptom of the slow recovery. Some of that chicken or the egg bullshit I guess.