It was a tough week all around, and
five bloggers dealt with it in their own ways. Once again this weekend, we'd like to share the "Best of the Blogs" with
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readers. These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Now, let's take a look at
on staying in the game,
on the problems with averaging down,
on options backdating,
on the CME going eurostyle; and
on why Treasuries rallied this week.
here for information on
where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Cutting and Running Is Wrong Here!
Originally published on 5/19/2006 at 12:44 PM EDT
Another thing I feel like telling people: Just sell everything. Enough. Get out. I can't take it anymore.
Why don't I do it? Because every time I have ever done that, it has been wrong. Every time. That's the most consistently Wrong! thing I have ever done. It has to do with the need to stay in the game. Cutting and running doesn't work.
Throwing a maiden into the volcano works. That is, getting rid of one or two stocks that have been
you. I have done that. Today.
Another trick to staying in the game: Circling the wagons. Pick your best winners. Don't subsidize them by holding losers. Cut the losers, even if it means taking big losses. Losers being
that aren't doing well,
stocks that are faltering.
Don't succumb to the lunacy of trying to expect a big turn. It can't happen as long as there is panic selling. Let them clear out. In particular, I am seeing incredibly negative action coming from the options on the
Nasdaq 100 Unit Trust
Oil Service HOLDRs
U.S. Oil Fund
, all of which are wagging the common-stock dogs.
Finally, put some stuff on your trading sheets and then
go for a walk around the block
-- even if it's raining. Remember this: Even after you bought stock on the worst day ever to buy, the day before the crash of 1987, you were up nicely one year later.
A year's a lifetime.
But it is also a better measure to judge yourself against more than one afternoon.
At the time of publication, Cramer had no positions in the stocks mentioned.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider U.S. Oil Fund to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Rev Shark's Blog: Depends on Who's Averaging Down
Originally published on 05/19/2006 at 12:51 PM
Jim Cramer writes that "there are tons of people who are second-guessing the strategy of picking on the way down, including some on this site. But if it's such a losing strategy, why did it make me so much money, including during one crash, one minicrash, two meltdowns of the
and the financials, and in 2001?"
That is an excellent question. This really goes to a much more basic issue, which is what is the right style for a small individual investor? A hedge fund trading hundreds of millions of dollars is much better suited for an averaging-down strategy than an individual with $100,000 in capital. A fund not only can implement an incremental approach over a wide range, but probably needs to because they are less flexible than an individual.
The problem with the averaging-down strategy for most individual investors is that they average in too fast and too big. They find themselves fully invested, and trapped, as stocks continue to fall.
I've worn both hats as a hedge fund manager and as an individual trader, and the averaging-down strategy makes much greater sense with the hedge fund simply because you have the ability to make dozens of buys over time, which you can't do as an individual as easily. I strongly believe that averaging down is not the best style for small individual investors. They have great flexibility and the luxury of waiting for a market turn. Why squander those advantages by trying to mimic what a huge hedge fund might do?
Cody Willard's Blog: Pandora Holds Options
Originally published on 05/19/2006 at 10:41 AM
Options backdating. As if tech stocks don't have enough baggage to carry around from their bubbled days of yore, it seems Pandora Fed Ex'd us yet another box.
I'd written the other day in regard to the Gemstar fraud-case update in the
front page, "Sure are a lot of fraud deals from the bubble still winding down. Sure seems like there's a lot less risk of fraud in most of my stocks since the bubble popped. But why don't we just hang these guys by their toes for 20 years for this garbage?"
Talk about being wrong and perhaps complacent!
new rumors around
, it appears that there's a whole new risk that needs to be factored into what multiples we're willing to pay for these stocks, as any company that's backdated options without disclosing that to investors is rightly going to get hit hard.
This issue is far different from the silly accounting change that some bureaucrats think more accurately measures the actual earnings power of companies. (They're 100% wrong to think that they can accurately value the options as an expense anyway.) This backdating issue is about companies hiding and sneaking around to secretly enrich an elite few executives by apparently trying to make sure any option grants are issued at the lowest possible price without any disclosure.
Let's review then:
Options: Something you shouldn't care much about as long as it's disclosed.
At the time of publication, the firm in which Willard is a partner was net long JNPR, although positions can change at any time and without notice.
Steve Smith's Blog: CME Goes Metric
Originally published on 05/17/2006 at 2:20 PM
Readers are asking why the options on the
cease trading on Thursday rather than Friday along with most other equity and even index options.
The reason for the early cessation of trading, which I believe was
implemented in 1997, was to dampen the effect of quarterly triple, or even the normal monthly double, witching by staggering the expiration of the index options from equity and futures markets and their related options. Also note that the SPX options use a
special settlement price based on the components' opening prices on Friday morning to determine the cash-settlement price. The S&P 100 (OEX) and most other indices and ETFs cease trading on the third Friday of the month and use the closing price as the basis for settlement.
Somewhat related is the
Chicago Mercantile Exchange's
plans to introduce
(EOM) on both its S&P 500 futures and the e-mini S&P 500 futures contracts.
The theory behind this product is to align expiration with standard month-end accounting and reduce early assignment and pin risk. The options will be European style, meaning there is no chance of early exercise. There will be an automatic exercise for any contract that is even just a penny in-the-money. Currently, the auto-exercise on most index options doesn't get triggered unless it is 15 cents in-the-money, so this will eliminate some of the guesswork of whether you be assigned and what your position will be coming in the following morning. In fact, the settlement will be based on the 3:00 PM CDT closing price, which, since the futures trade until 3:15, will allow traders another 15 minutes to square up positions.
This makes a lot of sense to me, and apparently the first groups to embrace this product will be hedge funds that get marked to market at month's end and spreaders that have assignment risk. But just as the metric system makes a lot more sense than the King's foot ruler, the CME has no current plans to phase out the third Friday of the month options, nor is it promoting this as something the average retailer must embrace.
The first OEM contracts are slated to begin trading next Monday. They will be May options , meaning they will only have two weeks remaining until expiration, and will settle into the June futures. Once those expire, quarterly June options will be listed and, they will settle into the September futures.
Finally, what is with
's commitment to bringing us the minute-by-minute updates from the Enron trial? It seems equally as absurd and as much a misdirection play as Skilling/Lay's defense of blaming short-sellers for the company's demise. I know the network needs to get its money's worth for putting Scott Cohen up at the local Red Roof, but reporting that the jury is about to go into deliberations is not exactly value added. Some five years after Enron's bankruptcy, I think I can wait another two days for the actual verdict. Meanwhile, I
actually want to hear from some of the bullish pundits they had trotted out last week that had pegged the S&P 500 to hit 1500 by the end of the year. I guess JB and AJC are not taking calls today. Must be in strategy sessions.
Tony Crescenzi's Blog: Why Treasuries Rallied This Week
Originally published on 05/19/2006 8:58 AM
The Treasury market is set to end the week higher, with the yield on the 10-year note at 5.07% vs. 5.196% last Friday. The gains on the short-end of the yield curve have been smaller, with the yield on the 2-year note falling half as much.
The flattening of the yield curve seen over the past week is intriguing in light of the poor result of the April consumer price index.
It shows that investors will readily turn their backs on bad inflation news so long as it is felt that underlying forces are acting to ultimately reduce inflation pressures. This week's improvement in inflation expectations is evidence that investors have become somewhat more forward-looking and accepting of the notion that inflation is a lagging indicator, which is quite apparent in the TIPS market.
The yield spread between the Treasury's 10-year inflation-protected security (TIPS) and 10-year Treasuries has narrowed to 2.69% from 2.76% a week ago, indicating that investors actually lowered their inflation expectations over the past week, despite the higher-than-expected CPI. One of the reasons is this week's decline in commodity prices and the rally in the dollar, two forces that pushed yields upward in previous weeks.
Another factor that has lowered inflation expectations is the increase in rate-hike odds. The market is now priced for 58% odds of a rate hike at the June 29 FOMC meeting, up from 42% a week ago. The increase in rate-hike odds has calmed those who believe that the Fed is behind the curve.
George Moriarty is managing editor of RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.