Good Bet on AAPL/RIMM Paired Trade and Lottery Ticket

My paired trade of long-AAPL-short-RIMM is going to pay handsomely tomorrow as RIMM dropped 20% after hours. I’m going to take my profit tomorrow and put maybe about half of it toward my I-don’t-care-if-I-loss-it-all fund. I’m going to keep a small position on AAPL since I believe the market risk has subsided a little bit and I do believe Apple with tons of cash can and will eventually come of this economic downturn as a winner.

My lottery ticket FNM is also going pretty well. FNM is trading close to $2 the level I was hoping for.

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Time to get out of dollar

What the Fed is doing simply worries me. The Fed’s job is to provide liquidity to the banking system, the oil to engine if you will. That’s fine as long as the banks who need loan put up some risk free asset like treasuries for collateral. What they’re doing now is basically accepting any kind of crap, which investors and regulators have no idea how to price, as collateral. I’d like to see my local pawnshop run like that.

Bear Stern got what basically a margin call and couldn’t cough up the extra capital. Lehman and AIG got into the same trap when their asset went down in value. The GSEs were under capitalized and regulators not only let them, but encouraged them to dig a deeper hole. What did capital hill and the Feb do to save the day? They let election year politics clouded their judgement and quick-fix-smoke-and-mirror took precedent. Now the Fed has God knows how much non-performing assets in its book and Treasury is on the hook for huge potential loss.

The US government owns so much money, the jokes aren’t even funny anymore. The Treasury department has been running a deficit for years, and there will be no surplus for the foreseeable future. Year 2008 tax revenue outlook is not encouraging. So we own a lot of money, we make less money than we spend, we’re getting a pay cut the coming years…you know how the story ends. Since we have no surplus to pay down principle, and our national debt’s interest obligation is only met by issuing more new debt; we are paying interests on interest or compound interest. That’s pretty bad, right? Yeah, it is very bad. But even with that, I was bullish on the dollar vs. euro or sterling since May when the dollar depreciated too much against all major currencies.

With recent events, my view has changed. The US government is now on the hook to own a very big sum of CDO, MBS and mortgages Fannie and Feddie couldn’t buy. These fixed-income instruments generates income stream. As long as the cash generated from interest payment is attractive, these securities will trade at high price and the US government balance sheet looks good. There are many factors affecting the attractiveness/price of these securities. The fall of financial institutions holding these securities doesn’t give me a lot of confident regarding to our ability to accurately price these kind of securities. Who would have known house price falling 15% can cause some securities backed by mortgages to trade 20 cents on the dollar? I’m pretty sure the current price is wrong and correction is going to come when the smoke is cleared and dust is settled. The question is which way the correction is going to go?

In order for Dollar to be strong, the Fed must have the will and ability to raise rate. It looks like the Feb has neither. Tax revenue is heading to a decline due partly to stock market crash, slowing economy, and we won’t see tax coming from those trouble financial institutions anytime soon. With election year politics, you won’t see any spending cut. That left only one option: borrow money. When borrowing money, the interest rate is directly related to some benchmark such as LIBOR or the Fed rate. When the Treasury issue bond, it may pay very little spread over the Fed rate if the market has huge appetite for risk-fee treasury bonds. But you won’t see a lot of buyers when the treasury bond pay less than the Fed rate. That tied the Fed’s hands; in order to borrow cheap money, they can’t raise rate without printing money.

Is there any chance the dollar may go up? Strangely, yes. If the so call toxic securities the Fed took off trouble bank’s books turned out to be pears not lemons, the Fed may end up making a huge profit. I’m not holding my breath for that. The more realistic scenario is the US economy recovers faster than expected. Until that happens, USD is a sell for me.

Crazy Week

It has been a crazy week. Trading FNM and WM with mixed results. The market simply moved too fast for me. The good news is I didn’t lost my shirt. The bad news is I spent tens of hours treading the equity market and have very little to show for. Not worth my time. I could have gone to the beach, seen a Broadway show, or gotten some much needed sleep.

I closed out all Forex positions. The USD is at a level where I hesitate to pull the trigger. I do believe USD will trade in a trading range but volatility is too high for my taste.

 

The plan for next week is to spend my time researching and wait for the market to give me an entry point for EUR/USD and JPY/USD. INTC put spread I sold is losing money big time, but I still like Intel and I’m looking to buy some INTC calls next week. My NOK call spread performed well last week, I should take some off the table. Premium of options I sold has gone up last thanks to the crazy volatility. Except for INTC all other options I sold are still out of the money, thank God.

Racing to The Buttom

From The Telegrapth:

Mr King also warned that the Treasury risked sending inflation expectations higher unless it brings its own finances under control. It came as the Bank’s own survey showed inflation expectations for the general public rose to 4.4pc for the year ahead – the highest since the survey began in late 1999.

Comment: B2 Britons should brace themselves for a “horrible surprise” in unemployment this autumn, according to Monetary Policy Committee member David Blanchflower.

This make me fell a bit batter about my USD long position. Things are bad here in the US. The good news is – other parts of the world aren’t doing too good either. My worry about the credit crisis grew as the US seems more vulnerable to more bank bailout. I’m not selling my USD yet, but adding to it is not what I will do at this moment in time.

London Stock Exchange Outage

According this and this.

The world’s fourth-largest market doesn’t have a side-by-side fail over system and runs on Microsoft Windows?

EUR/USD Broke 1.4 Next Stop 1.33 and Going Lower. Only Obama Can Stop It.

The Reserve Bank of New Zealand cut OCR by 50 basis points to 7.5 percent (link) may have helped pushing Euro down. The RBNZ admitted that inflation is evil, but cutting rate too little too late and causing prolonged recession is equally bad. ECB, are you listening?

As long as you still hear retail ForEx sites chanting COT index, bad US economic outlook, and retail traders desperately trying defend their EUR long positions, you can keep your EUR shorts.

The US economy is bad but as far as the Dollar’s concern, it has seen its worse time. That is until after the election. Nobody know exactly how the next administration is going to deal with the challenging economic issues, but one thing I do know is if corporate tax, upper bracket personal income tax, and capital gain tax increase significantly. I’ll short USD faster than you can say President Obama. I’m simply trying to stay at the right side of a trade, I have nothing against Barack Obama.

According to a USA Today article:

Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals’ units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined. Viewed another way, each employee of a U.S. multinational in Ireland was worth more than $539,000 in profits, while their counterparts in Germany brought in about $16,000, according to the BEA.

Multinationals realized much bigger profits in lower corporate tax counties than higher tax ones. Also the recent UBS tax evasion case proves that rich people are hiding their money offshore. The reason is simple. Rich people and profitable multinational companies can and will find ways to move their income or profit elsewhere when the incentive is high enough.

Is Apple (AAPL) a Buy?

Apple released new iPods and updates to iPhone. Stock down more than $6 or 4%. Is AAPL a buy at this point?

The answer is YES and NO. Yes, I believe AAPL is going to outperform the market in the 3-9 month horizon. No, I don’t think the market is heading to the up side very quickly very soon, and AAPL can easily go down with the market. I want fast money, I don’t like carrying trade that “requires” more than 9 months to realize any gain.

In normal days I might just sell some AAPL puts, but in this market, selling any kind of naked option is just crazy talk, I don’t have that kind of capital to trade like that.

So how do I trade AAPL? I will do a simple pair trade – long AAPL and short something to hedge the market risk. The long AAPL part is easy – either buy the underline equity (AAPL stock) or 3-9 month call options. How to hedge gets tricky. I need to put more thought into it, but just thinking out loud…shorting RIMM as the hedge might work. I have three things going for me in this AAPL/RIMM pair trade. First of all, RIMM is trading at 36 P/E vs. 29 for AAPL. From what I heard, RIMM’s grow story is over. RIMM can not break into the consumer market like they did in the corporate world. No high growth, no high P/E, lower stock price is coming. Second, if consumers stop buying shiny new phones every 6 months and the cell phone makers stock tanked, guess who got hurt the most? You’re right, the high P/E ones. Third, Research In Motion is a Canadian company. That by itself is a handicap. You know I’m just joking about the third point, eh? Joking aside, I think the strength of Canadian Dollar (CAD) may not hurt RIM in the short run but it certainly doesn’t help RIM in expanding markets outside of North America in the long run.