Hecla of a silver trade

Ill be quick - the Hecla (HL) speculation went well as the bullishness in silver and gold is currently surprising even me. I may be getting a bit ahead of myself but I took the proceeds from the Hecla sale and put them into Freddie Mac puts. I overlooked one important fact - mainly that there is a major event coming up tomorrow as the company will go over their financials from past several years in a conference call. I expect the trading to be volatile tomorrow and I am probably too leveraged in this position as well and could get cleared out. Luckily I have maintained the system rules and did not enter the position with more than 20% of capital. I am too tired tonight to enter all the system paremeters. Suffice to say that I estimate leverage on the Freddie Mac position is greater than 25-1. It broke some important technical levels today and I am hoping that it was not a headfake. If the stock proceeds to break down it will be a good one - however if all negative news is already priced into the stock - then it could be rallied tomorrow and I will get my ass handed to me. Anyways............here are the details for the Hecla trade and the current portfolio snapshot.


Regards,

BG

Portfolio update

Countrywide reacted the way I had hoped following the Fed meeting - it fell like a rock. Don't know if the trend will continue for sure - but chart makes it look like it could trade downt 34 range no problem. At that point I would probably close out part of position following system rules - and maybe exit the whole thing. I am tempted to add more gold/silver exposure with any proceeds. Here is the portfolio/snapshot:

Regards,

BG

Countrywide again

Portfolio is holding tight. I have had some fantastic gains so far in Hecla and a decent return in Countrywide. The Fed announcement today could impact both positions. I am not so concerned what happens in the price trading this afternoon - so much as what happens tomorrow - so I will be watching the two positions a bit more closely tomorrow.

Regards,

BG

Big Plans

I had big plans for this weekend's blog posts, but as usual I just got too caught up with other stuff. I did accomplish a few nice things - I completed the VPN hookup from home to work and also got a new shelf installed in my room for my shoes. Back on the speculation front it is pretty much more of the same. I am leaning towards shutting the Countrywide short down if it does not react properly in the first days of this coming week.

As I discussed in the first blog posts earlier this month, my two investing ideas for this year are pretty simple and can be summed up as follows: precious metals up, real estate down. Those ideas alone are unfortunately not enough. In practice I had to build 1) the framework for analyzing the real estate downturn and 2) a trading program to speculate in both areas. Luckily I was able to complete both - although their success remains to be tested over the course of this year.

The topic of interest today is how I plan to rotate through the different real estate related sectors on the downside during the course of this year. My plan is to use charts. I will not being using charts to "predict" anything. My only goal is to be able to gauge at what point the particular stock or ETF is at in its decline. I want to primarily focus on sectors or stocks that are below their 50 day / 200 day moving averages. Not all of the stocks in my spreadsheet fit this bill. There are several that are still in clearly defined uptrends - re: Mortgage Insurers, Banks, REITs. As a result I am forced to focus on the weaker areas - re: Homebuilders, Title Insurers, Mortgae Lenders, Mortgage Investments Trusts, etc.

This would seem to be entirely common sense - but I did not capture this detail last fall when I foolhardly shorted the XLF not once but twice during its stratospheric ascent to 33 from 29. As a result I lost money. By focusing on the weaker sectors first, I expect to have some trading gains and slowly build up my capital so that when the other sectors also begin to turn, I will be able to rotate into those that are just becoming vulnerable for greater declines in price. Timing in this endeavor will quite honestly be everything.

I have seen one effective fundamental explanation for the current pace of the rotation (props to Uncle Ben for this insight.) We are seeing the first declines in price in those areas of real estate stocks that are focused on transactional volume. The mortgage lenders, title insurers, and homebuilders must turn over an increasing volume of business to keep their earnings growth rates up. If we have a decline in growth of home purchases - it should show up in these areas first. Sure enough if we look at the charts - that is the case.

Best Regards,

BG

Position Update

Precious metals prices are rocking today, however financial stocks are also relatively strong. I am giving some back in Countrywide and may close it out if it does not proceed with downtrend next week. Here is the portfolio recap let's keep it goin:



Regards,

BG

Next up on the block - Freddie Mac

No comments today on the speculation opportunities in the GSE mortgage companies. However I will discuss some recent developments at Freddie Mac and you can decide for yourself whether this is a good "value" play. I see it more as the short-sale of a lifetime.

Timeline:

Background: Freddie Mac has not filed formal financial reports with the SEC in several years. Apparently they were exempt from filing requirements until 2002 when some regulation subjected them to the same filing requirements as other public companies - re: 10-Q and 10-K (quarterly and annual reports filings.) Since then its been a race to the bottom to get the accounting straightened out and the financials filed and the comedy of errors rolls on. Below are the most recent/scary updates.

March 10, 2006 - Article Link - Relevant Quote from CFO Martin Baumann - "We've made enormous strides in fixing our financial infrastructure but, as we have previously disclosed, the effort is not yet complete," said Martin F. Baumann, Freddie Mac's chief financial officer. "When we found this error, we corrected it immediately. We are continuing to move forward to complete the job of producing timely, accurate financial reports early in 2006. We've also made great progress this year in our business – increasing our market share, building on our already strong capital position and maintaining excellence in risk management."

Relevant follow up comment: "The company also expects to release fourth quarter and full-year 2005 results and to begin filing timely, GAAP-compliant monthly capital reports with its regulator, the Office of Federal Housing Enterprise Oversight, no later than the end of March 2006."

March 22, 2006 - Article Link (its on WSJ sorry) - Relevant quotes - "Freddie Mac said it will replace its chief financial officer, Martin F. Baumann, just three months after offering him a $2 million retention bonus."

"The move follows two embarrassing snags that have delayed the U.S. mortgage-finance company's effort to return to regular, timely reporting of results in the wake of a 2003 accounting scandal. In light of those snags, Mr. Baumann said in an interview, he and the company's top officers -- Chief Executive Richard Syron and Chief Operating Officer Eugene McQuade -- agreed that Freddie needed a finance chief with more expertise in upgrading the computer systems used to generate financial results."

The way that I see it we are headed for tough times ahead with both Fannie Made and Freddie Mac. Talk about moral hazards in lending. I agree that home ownership is a great thing for anyone and a worthy goal for all Americans - I will even go so far to say that it is truly part of the American way of life - and I respect that.

What I don't respect is a system where the commercial banks no longer retain any of the lending risk and instead turn over their loans as fast as possible so that they can then sell them off to the GSEs to retain. I have a feeling we are going to find out that the retention, servicing, etc. of the loans at least the way it is currently being done- is much less profitable than previously anticipated. Guess who is going to foot the bill when this is widely accepted and understood? Joe Q Taxpayer - on two levels:

1) In his taxes
2) In his pension or retirement portfolio where his company most likely is holding a decent amount of securitized mortgage backed securities.

Best regards,

BG

Positions Update

Quick and dirty on the positions:

Countrywide & Chart:



This trade is working out best so far. Only a couple days into it but it looks like the price could correct to 34 or even 32 level if I am lucky. I will probably sell one contract if it gets to 34 and other 2 if it reaches 32. Likewise if it breaks out into high 30s I will have to sell out.

Hecla Mining & Chart:


This one is hanging in there - but chart looks like it could collapse just as much as it could take off. I am optimistic short term as this one has a major interest in silver production and that has been very hot lately due to speculation about release of Silver ETF in a few weeks on the market.

I am very tempted to add additional positions here on the short side, but I am loving that I can stick to the system and remain with only initial 20% of capital committed - certainly the more prudent course - although current positions are certainly speculative enough to not be prudent..... :)

Will be interesting to see what the rest of the week brings - so far so good.

Regards,

BG

Countrywide

Here is the quick and dirty system parameters for Countrywide. First I will calculate the position leverage. 3 PUT contracts control a total of 300 shares or $11,007. My position only has a market value of 300*$3.40= $1020. That gives a total leverage ratio of 10.79.

Now the system rules:

1. Stop loss rule. 10% * amount of leverage (10.79). This gives an amount greater than 10% - which means this position is expected to be highly volatile. I will compensate to add a new rule for cases where leverage ratio is over 10.79 the stop loss will be adjusted to 5% * leverage amount. My stop loss will be at 53.95% decline from the entry point of $3.10. This means that I must liquidate the position if it reaches $1.43 in value per contract.

2. Gain rule. Need to take at least 1/3 of gain if contract reaches $6.20 in price.

3. Portfolio sizing. I went 1% over guideline as by adding the new position the total portfolio exposure is at 21% when I had previously limited myself to 20%. I am going to let this one slide due to rounding error I used to get that third contract.

Those are the super boring rules out of the way - but they are necessary. Now it is time to watch the positions in action. I am feeling better about the Countrywide trade than the Gold trade so far but am sticking with both for time being.

Regards,

BG

New Position - Countrywide

Added another position this morning. Bought the $40 Put options - expiring in April for Countrywide (CFC). Purchased 3 contracts at $3.10 each. I will hit the checklist later tonight or tomorrow morning - in order to get the stop loss and lock-in-gain limit.

Best regards,

BG

Rambling on

I am going to take a few minutes tonight to elaborate on the property market put option strategy and how I expect the short side game to play out. I will try to outline my key assumptions first and the factual basis for those assumptions so that it will be easier to criticize my approach. I would like to make the plan as robust as possible I think that the profit potential will be great in due time.

Key assumptions:

1. Real Estate market on both coasts of the USA is currently in a bubble and is overpriced by 100-200%.

Notes: I can speak to this point by personal experience. In my hometown prices have appreciated approximately 250% since 2002. In some areas of San Diego and Southern California the price increase has been closer to 300-350%. Granted there has been inflation over the past 4 years and also growth in the economy incomes. Interest rates have also been at historical lows making homes more affordable. This logically makes the home price increase. At 10% interest rate you may afford a $200,000 home. But at 5% interest rate you can make the same payment and own a $400,000 home. If everyone had locked in a fixed rate mortgage at the bottom of the cycle - then maybe the market could just level off for 5 years before accelerating again to the positive. Instead - we are looking at here is a climate where many, I would say even the majority of owners have variable rate mortgages where the costs will increase along with interest rates over the coming years. This means that maybe someone started out with the 5% interest rate that they could afford the $400,000 house but when their mortgage rate adjusts to 8% they can only afford the $280,000 home. They will be able to stretch for a while but if interest rate stays elevated they are forced to sell or worse are foreclosed on and the market price is further impacted to the downside. This paragraph was mainly dedicated to affordability issues and the impact of low interest rates on asset prices - but the following paragraphs will more closely dissect the interdependence of the economy and home prices and real estate gains.


2. The bubble impacts more than just house prices. Many sectors of the economy are dependent on continued home price appreciation.

Notes: Certain sectors of the real estate industry have experienced enormous cyclical growth over the past five years that most people falsely consider a secular story. Construction workers, real estate agents, real estate appraisers, escrow companies, mortgage brokers, property management companies, banks, mortgage insurers, title companies, and homebuilders. Who among you has a friend or even family member who works in one of these industries or just got a great new job in one of the above. These have been and continue to be the "growth" areas of the economy for the average joe. Home prices do not have to decline 50% for these areas to be impacted. We can experience a modest 5-10% decline in prices that is coupled with slower sales volume/turnover and 20-30% of the workers in the above industries can lose their jobs or experience a large % decline in their earnings power. This action is precisely what leads to further declines in property prices and further attrition in these key industries as the previous workers that were stimulating the economy through spending and home purchases are now out of work and forced into savings or lower paying jobs.

The above scenario has not even mentioned the end to home equity extraction. Home equity extraction can only juice spending though as long as 1) home price increases and 2) low interest rates are in the works. Alan Greenspan published a paper on the Fed website last year discussing precisely this phenomenon. Here is the link: Greenspan Paper
Thats right - the "maestro" himself. He estimated that home equity extraction hit $1 trillion dollars in 2004. Think of the commissions that generated for workers in the sub-sector industries discussed in the above paragraph as well as the extra dollars in homeowners pockets to lay down some dough for that new SUV.

3. When the bubble does crack and the price declines begin, we will reach a certain point where the down cycle becomes self-reinforcing so that the price decline and growth decline in correlated industries will accelerate until they overshoot to the downside past the point of intrinsic value (if there is such a thing.)

Notes: I expect the downcycle to play out over several years. I also expect the negative economic impact of the failure of the sector to have a slowing impact on the economy and a slow down on inflation. I expect the Fed to become concerned about deflation again quickly and perhaps only 6 months - 1 year into the decline. This leads to the next assumption.

4. The property market "crash" is going to impact the economy so negatively that the government will be forced to formulate numerous regulatory solutions. All of the practical regulatory responses lead us to inflationary / hyperinflationary endgame.

Notes:

This point is highly debatable and speculative as the crash has not happened yet. I am not going to hit on this point too much tonight as it is too bullshit even for me to tackle right now. Still this is what I expect in the longrun and it is how I am ultimatelyh planning on positioning my capital when time has arrived. Marc Faber discusses this topic pretty thoroughly in his book Tomorrow's Gold.

Implications:

Well folks - that took longer than I expected, but I am glad to get it out of my system. That is the rationale behind the whole strategy, but the actual mechanics of it merit the most discussion. The first point is when does the downside game start? And what industries will it affect? I am publishing the following list of sectors and subsectors again so that we can check out the companies that I am tracking on a weekly basis. The chart just measures the % decline from 52 week high. This data is useful just to the extent that it tells us when the better and higher probability shorting setups will present themselves. The best opportunites should not arrive until the stocks are down at least 30-40% from their 52-week highs. It will only be at that point that the stocks are in a confirmed downtrend and we can more surely enact a technically based trading plan that will have us selling at price resistance instead of selling at support levels. :)

Here are the details on the sectors and stocks. I will sign off here tonight and we will probably do a case study on Freddie Mac sometime in next few weeks. There we will look at the value of trying to pick a top and whether I will jump the gun or not. Still - the best and highest probability setups are not going to arrive until most of these sectors are at 30-40% below 52-week high and in confirmed downtrends.

Summary - % Decrease from 52-Week High
Sector	Change
REIT - Retail	-0.70%
REIT - Industrial	-1.66%
REIT - Hotels	-1.67%
Humongous Banker and Broker(Major US Financial Institutions)	-1.83%
Mortgage Insurers	-2.07%
REIT - Diversified	-2.11%
REIT - Office	-3.42%
REIT - Healthcare	-4.23%
Real Estate Manager / Developer	-6.75%
Mortgage Companies / Government Affiliated	-9.97%
Mortgage Companies	-11.22%
Title Insurers	-14.78%
Homebuilders	-22.78%
Mortgage Investment Trusts	-29.98%

Best regards,

BG

Morning Update

Checking in on the position and the markets really quick. Gold price appears to be hanging in there in the $550s. I would like to see it retest the $570 level as I think it would allow me to book a nice profit on the Hecla trade in a relatively short period of time.

I am still really interested in the short side of things, but appears unwise, as new bull market is starting to spread its wings as shocking as that may seem. Indexes are at 52 week highs and stocks are reporting record earnings. We have apparently not reached the cycle peak yet, although we must be getting pretty damn close with the prime rate at 7.50% and two-three more fed funds hikes on the table.

Check out the following charts as what my gut is telling me would be great shorts by the end of the year but are still outperforming in the meantime:

Freddie Mac:


XLF (Financial Sector ETF):



MGIC Investmente (mortgage insurer) (MTG):

The above are charts of the some of the problem children or future problem children that I anticipate based on sectors to stage a decline over coming year. Still if bull market is beginning again (no matter how short lived even - 2 or 3 months) - I will not be short........anything.

That begs the question then of what can we be long? I still like precious metals. I love that PDLI chart as well and am watching for a breakout on volume abovfe 32. I need to find a few more good ones on the long side - but I will keep everybodyposted. Suggestions are welcome.

Best regards,

BG

First Trade On New Program

Began a new trade today using the new system. Long 5 calls of Hecla Mining (symbol: HL). Exercise price $2.50 per share. Stock currently trading around $5.15. Option price was $2.65 per contract so ($2.65*100*5)= $1325 position / $10,700 capital = 12.3% portfolio size. Lets see how it fits into the system:



Requirement 1: Stop loss rule. My leverage is 1.94. So if I multiple that times 10% - I must exit trade as a loss at 19.4% decrease in the position price from my entry point - or $2.14 per contract.

Requirement 2: Winning rule - would have to sell at least 2 contracts if the position hit $5.30 per contract.

Requirement 3: Position size at 12.3% of portfolio is less than 20% requirement for portfolio.

All system requirements are met and we can proceed with position. Lets make sure that I follow through on requirements 2 and most IMPORTANTLY - #1. :)

Rationale for trade and a little on Hecla - Hecla is a very speculative junior gold mining stock. The stock was ranked in Morningstar's recent announcement as one of the four WORST gold stocks no one should invest in. I am taking the other side on this one. I think the company has some issues - re: major gold mine it owns in Venezuela being a big one. Still - it has exposure to both gold and silver and I like the chart. Hopefully any corrections that are coming again in the metals will not be too strong. I see gold going to $750 an ounce by the end of 2006. This is even into the face of the interest rate hikes which is pretty astounding in and of itself.

Additional notes - speaking of beautiful charts / trade setups - here is a picture of the recent action in PDLI. I have been looking at some slightly in the money call options on this one - as it looks like it could make a major move soon:


Looking at above chart - it looks like stock has been basing in range betwen 26 and 32 for the past 6 months. It has been trying recently to break through that 32 area. If it does - I think the stock can go much higher and I may ditch the gold position to chase.

Here are some of the May 2006 call options. I was thinking of the $30 or $25 strike price. Offers a really nice leverage and risk reward ratio apparently:


Great to be back in the game again. More updates coming later this week and following week. It is still too early to drop the entire real estate game plan but that will be coming in due time as well.

Best regards,

BG

System Rules

I have decided to get the boring, but most important part of this year's speculation game out of the way first. The development of the trading system - or perhaps more correctly phrased - "money management system" has not been easy. The system will require refinement and adaptation as it is applied, but I must have some type of rule based method or I will be unable to make the tough call when it arrives on my own free will.

Here are the key rules for my system. The rules will adapt to a long or short position and use leverage as part of the money management function. The stricter rules will not only require me to closely follow the system, but they will also force adaptation of my entire trading approach. I will have to pick entry and exit points more carefully now as I will be aware that if I do not pick a good starting point I may be quickly shaken out of my position and forced to take the 10% loss - unable to wait for the price pattern to collect itself.

The system's success or failure will only be measured at the end of year by looking at the bottom line and the number of successful trades v. failed trades. If I look at last year's trades I let several positions - gold and financials decline in value to zero. Even a 50% stop loss system would have likely saved close to $2,000 and would have clearly influenced the year's results for the better.

So, enough reminiscing and back to the system and its requirements:

1) Stop-loss rule.

/ Decrease in stock price of (10% X the amount of leverage in the position) and position is sold /

Pure stock trades have 1.0 as the amount of leverage, whereas options trades will contain the leverage component which can be measured by dividing the total value of the position in theory (total number of shares controlled via options X market price) by the current position value.

The measuring point for the 10% is the initial entry point. If the trade goes against me the 10% will be the automatic sale point. If the position is successful the 10% will be used from the peak price point. This should work quite in well theory, because as the position increases in value the amount of leverage should also decrease.

Major advantages of the stop-loss component. Forces me to admit I was wrong and take losses at some point. Major disadvantages - its components especially the leverage aspect may be too loose and force me to liquidate certain positions too late. Example - if I have taken on 10X leverage or more in the position - I will be wiped out before the stock itself declines 10%. If I find this to be a problem in practice I may reduce the stop-loss % for options trades to 5% from entry point or I may find some other technique.

2) Profit-taking rule.

/ Take one-third of profits at 100% gain in position. Allow additional two-thirds profits to run subject to application of the stop-loss rule. /

This rules speaks for itself I think. It may need to be modified or broken down into two parts if experience later requires. There are really three considerations. One is - time frame - or when to take the profit. The second is - amount - how much profit to take. The third - is price - or is there a certain price level or target that would require the position to be liquidated. I think the current rule will deal with all of these considerations sufficiently for now.

3) Position-sizing rule.

/ Never place (initially at trade outset) more than 20% of the portfolio at risk. This means starting out with the account equity of 10K I cannot risk more than 2K at one time. /

This rule is to prevent meltdowns like last fall - there is no major reason to have more than 20% of capital at risk as with options leverage that I am using on average 5X-10X leverage the effect is that a successful trade can give the result of having my entire portfolio invested, while the downside is protected and limited to the position size.

Conclusions

The system is deceptively simple. I expect its application to prove difficult in practice however because I will have to follow the rules! :)

Now that the hard stuff is out of the way I will discuss the two themes of this year's speculations. The time horizons that are associated with the speculations and also the individual securities that I will be trading to execute on those themes and expectations.

This is the interesting part as we get to bullshit about the expected future course of the economy. I have realized that in practice this is what I really enjoy most about investing / trading - however, without the money management component I will meet my end too soon and be unable to continue. Let's stick to the system and refine it throughout the course of the year.

Best regards,

BG

Buen Dia

Been a long time since the last post.....I am glad to be back. I do not expect a ton of posts over coming months, but there are two major developments / plans for this year's trading that I hope to discuss on at least a weekly basis during rest of the year.

First Point:

I see two themes for this year's speculations. One is the gold market. Second is the real property market. My plan is to be long the gold market in second half of this year and short the real property market at some point as well. I have spent some time over last few weeks identifying the gold stocks and options that I think will benefit most from the end of the rate tightening cycle. I have also assembled a spreadsheet that tracks the different sectors of the real property market by assembling a list of 3-7 companies in each subsector and then taking a simple average of the % the stocks in the sector are down from their 52 week highs. Here is the current printout:

Summary - % Decrease from 52-Week High	Date - 03/10/2006
Sector	%Change
Mortgage Investment Trusts	-34.58%
Homebuilders	-30.04%
Title Insurers	-18.09%
Mortgage Companies	-16.18%
REIT - Healthcare	-8.10%
Mortgage Companies / Government Affiliated	-9.93%
Real Estate Manager / Developer	-8.80%
REIT - Office	-6.09%
Mortgage Insurers	-5.19%
Humongous Banker and Broker(Major US Financial Institutions)	-3.87%
REIT - Diversified	-3.67%
REIT - Hotels	-2.47%
REIT - Retail	-2.27%
REIT - Industrial	-1.26%

It is hopefully evident from the above grouping of the sectors that the phase of the decline in the real property market will affect different sectors earlier than others. This will be similar to the collapse of the internet bubble in 2000 and will probably playout over a 2-3 year period. Then the dotcoms went early, followed by the B2B companies, followed by the telecom carriers and the fiberoptic vendors.

Many of the best opportunities for shorting / buying puts may not occur until the above sectors are down 40-50% from their 52-week highs - because only then will a clear downtrend / bear market in the sector be established. Timing will be key here - and I have also modified a framework taken from Soros to try to understand the course of the cycle to point out where exactly we are in the industry's boom and bust. This will be interesting / exciting to work with.

Second Point:

This is probably more important than all of the above discussion combined although less interesting at least to me. I am planning on instituting a system trading program. I will still execute the trades - but I will post the plan in terms of maximum % loss allowed on any one trade before liquidation, maximum % of capital committed to any one position or sector, and finally (I am still toying with this part) - at what points to take any profits on the successful trades (I am leaning toward taking in 1/3s...but we will see.) I expect the powerful move of posting the program on the blog will force me to hold to its parameters and hopefully not let my emotions get the better of me as occurred several times last year.

So - we are 2.5 months into the new year and I am a bit late on this. I apologize to any readers who are still out there. Still - I think that we have a lot to be excited about for this year and a ton of learning yet to do. We can't let last year's lessons evaporate ........ need to put the hard earned experience to work for the better. :)

Best regards,

BG