Cramer Explains Why I Lost Over $600 Yesterday

(c) 2010 F. Bruce Abel

From last night's Mad Money by Jim Cramer. A classic for understanding the market. I tried to get in with four stocks after setting below-market prices which didn't go off. Then an hour later I raised my prices and cut the number of shares for each order. Got in. Handled client matters and telephones. Checked midday and saw positions going from small profits to losses mounting; began selectively getting out. Still thought the market would go higher but did not want to take the pain. Stop losses would have worked better but because I had so many positions I didn't think of that.

Market took off again in mid-afternoon. I was not in. Rather I was out with losses on each new trade.

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Jim: You want to understand what caused today's magnificent rally?... You really want to understand it?... Where the Dow vaulted 273 points, and the S&P advanced an astonishing 3%?... I mean, really understand?... Not just in terms of the sterile economic news out of China or Europe that you might have heard all day today...

You have to recognize that this spectacular rebound isn't just about improving fundamentals of economies around the world. How simple would that be, right? No...

It's about the fundamentals of something I'm going to let you in on... something far more important... It's about the fundamentals of the money management business.

That's right! It's about how the managers of wealthy people trade and invest.

Sure, we got some great news... I'm not denying it! We got some great news out of China, which is why checked it off last night. Remember that checklist, as a precursor to this gigantic, fantastic move?

But, more important... more important than the events... is how the big hedge funds react to those events, so pull up a chair and listen to what really happens on a big 3% day...

More important than the facts, is how these facts are perceived, and how the big boys are positioned... which is one reason why the market can be so hard, so unfathomable, for the homegamers to understand. So, as your investing coach, let me explain to you what really happened today. You haven't heard it from anybody... how the reverberations from Asia caused the hedge funds to change their position and created a major move higher that you saw.

To get there, though, first you've got to know how the stock market really works... not how everyone publicly says it works... all the managers... no... I'm going to let you in on the secret history of the market from the hedge fund perspective... because they're the marginal buyers... they're the controllers... they're the guys who move your stocks up or down with a whim or a vengeance...

You see, the big boys... they've got a playbook... They all follow the same playbook together. It's a total "herd" mentality, and it can move mountains, let alone markets...

Go back to the colossal selloff that began in 2008. The whole thing started because some key indicators... oil, copper, the Baltic Freight Index... peaked, signaling a slowdown in the biggest market for all commodities... China. Now, these hot-money hedge funds, which control trillions of dollars, have been betting almost entirely on the so-called "China trade," playing a ton of oil, mining and fertilizer stocks, all because of growth in the land of... you've got it... Mao Tse Tung...

When China peaked, these hedge funds were borrowing vast sums from brokers to own... or really more accurately, rent... your stocks... the stocks of all the companies relying on the Chinese boom. You ask about them all the time in the Lightning Round... the copper miner, Freeport-McMoRan (FCX)... or iron producer, BHP Billiton Ltd. (BHP)... Heavy machinery makers... Joy Global (JOYG), Bucyrus International (BUCY), Caterpillar Inc. (CAT)... fertilizer giant, Potash (POT)... coal king, Peabody Energy Corp. (BTU)...

These hedge funds figured China would grow forever. And, when China downticked, they were almost all caught off guard... trying to pile out all at once... They just panicked... yeah, they panicked... and they crushed these stocks, with all their (selling)... We'd got all of these hedge funds gone wild, as they frantically raised money to meet both margin calls from the brokers, and redemption calls from their own investors who were shocked at the losses they had just racked up.

Sure, there were huge problems with the economy at the time, but it was magnified by these guys... The selloff in these china names was so colossal... that it brought the part of the whole market, that wasn't financial, to its knees.

The ripple effects were felt in everything from aerospace to industrials... from Boeing (BA), 3M Co. (MMM), Chevron Corp. (CVX), National Oilwell Varco (NOV)... There was simply nowhere to hide from these reckless death-spiraling sellers.

So... a collapse in copper, oil, coal, fertilizer prices, Baltic Freight Index... all off of China... led to the worst possible timed, industrial stock selloff that we could ever recall. It's how you got the "Great Recession," down 53%... It's how you got the third-worst decline in the stock market in history, because it was also happening at the moment that AIG, Washington Mutual, Wachovia, GM, Lehman, and Fannie and Freddie collapsed.

Then... in 2009, this whole trade started reversing again, as China stimulus... a brilliant one... all about having the consumer get more money in their pocket... started taking hold...

So what happens?... The hedge funds came right back into the exact same names. That's how you saw those unbelievable rallies... uh, because they only look at these indicators... This reversal led to the rise in all the commodity futures, which then translated to the sector ETFs and, ultimately, into the S&P, in those same stocks that I just told you about... It was the combination of the end of "hedge funds gone wild" and the beginning of the stimulus that took us out of the Chinese stimulus... not ours... Hey listen, if ours were working, we wouldn't have that 10% unemployment... okay, 9.7%... please... Out of the morass... We were aided, though, by Ben Bernanke. He used kind of a Malcolm X style "by any means necessary" monetary policy... and a "line in the sand" on bank nationalization. Hey, let's give Tim Geithner (i.e., U.S. Treasury Secretary) his due too... with that stress test thing...

Bernanke's assurances, the stress test, and the China commodities... That's what took us... That was the combination that took us from Dow 6500 to Dow 11,000.

Remember the troika?... Banks, oil and tech... That was all China, except for Bernanke... and Geithner.

Three months ago, though, China realized that its stimulus had gotten out of control... particularly when it came to construction and residential housing... and the Chinese communists decided to tighten credit to slow down the economy and property inflation. They didn't want any sub-prime housing boom like we had... And, when the hedge funds saw the vicious slump in oil and copper in reaction to the Chinese tightening... what did they do?... Well, what did the playbook say?... Once again, they dumped everything... fearing this was a 2008 redux... So we got the worst May in 40 years.

That's what happened, people... These hedge funds never learn. They kept up their "group think"... so the reversal was once again swift... especially then... the euro collapse, the Greek and Spanish tarry... you know, it all started after China.

In the last week though... really, in the last... hey, the last four days... we got China back!...

We just learned last night that Chinese exports and imports took off... exports jumping the most in six years. The Chinese had throttled back inflation, but kept up the growth. Hey, that's nirvana. You can't short nirvana.

So what happened today?...

Here they come... the hedge funds... there it is... piling right back in... and that's how we rallied 3%. Not because of some point percentage this... or some 4,6,7,8, 9% Spain... no! See, until today, the hedge funds had been shorting the China plays, and our stock index futures... and, when they sense they are wrong... oh boy... they do this dramatic shift... hence the dramatic shift we saw on our screens.

And then that tape underneath (i.e., the ticker moving right to left at the bottom of the screen)... I know it's just crazy... But it's all them... believe me. It's all their flailing and flopping and chopping... that's driving this market way down, and then way back up, like we saw today.

Look, the fundamentals can matter. I mean, don't get your hopes down, that the fundamentals don't matter, and the homework doesn't matter... But who moves... and who moves the market... matters much more... which is just the opposite of what everyone teaches. The hedge funds really do have this much power. I know. I was a hedge fund manager.

Individuals don't move stocks. Mutual funds just buy when they have money come in and, right now, they don't. Hedge funds, on the other hand, must perform every day. I used to have to report daily. Sometimes hourly. Sometime every half hour. That means you've got to make money every day, which means they've got to react every day to every single data point. Their daily pressure creates this schizoid craziness. And that's how your stocks got caught up in the bizarre maelstrom, where their movements are dependent on the kindness of money managers, not the fundamentals of the underlying companies. And there isn't a lot of kindness out there, frankly.

See, the power of the hedge funds is magnified. They use leverage. Easy credit from brokerage firms. The employ weapons of financial mass destruction, like those double and triple ultra ETFs.

Let me give you this incredible arithmetic... I used to run - or manage - $500 million. With that, the brokers lent me $250 million, okay... And, with that, if I were trading today, I could buy or short an unbelievable amount of stock. I could buy or short... literally... three times the money that I put in, alright... And that is what got this market going today. You could short triple... triple the amount of money that you had. These are "hydrogen bomb" ETFs.

Okay, so let's do the arithmetic...

Hedge funds, with half a billion dollars, can now create $2.25 billion in buying or selling power. If they stay on the sidelines, their clients just take their money away. So they're constantly over-reacting... they're constantly firing nuclear weapons as stocks that can only handle conventional firepower. There's no way anyone... retail investors, pension funds, mutual funds... can stand up against this enfilading fire that we saw... down or up...

Here's the bottom line...

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Yes... As I do my checklist... remember the checklist? I mean, we did get something good here, alright... we got this thing. I told you this yesterday. It's nice to get ahead of it, isn't it? Hey, I got tomorrow's story yesterday... that's good. But anyway... things have gotten better. landing... because they over-react to everything..But today's action wasn't just about a soft landing in China. It was about the over-reaction of the hedge funds to that soft . especially to the things they were betting against... like China. We're hostage to the hedge funds sometimes, like today. Today it was a good thing. But I don't expect anyone to like it. Only someone who started a hedge fund and worked at it for a decade and a half can understand these kinds of moves. And, from now on, you can understand them too.

News Symbol Qty Cost Proceeds P/L $ Open Date Close Date
javax.swing.ImageIcon@da89a7

AAPL 35 $8,658.85 $8,643.29 ($15.56) 06-10-10 - 10:35:20 ET 06-10-10 - 11:34:11 ET
javax.swing.ImageIcon@1833c9c

APC 100 $3,852.56 $3,753.77 ($98.79) 06-10-10 - 10:08:19 ET 06-10-10 - 12:42:13 ET
javax.swing.ImageIcon@1833c9c

APC 150 $5,778.84 $5,630.21 ($148.63) 06-10-10 - 10:08:19 ET 06-10-10 - 12:42:14 ET
javax.swing.ImageIcon@1833c9c

APC 72 $2,773.84 $2,702.56 ($71.28) 06-10-10 - 10:08:19 ET 06-10-10 - 12:42:14 ET
javax.swing.ImageIcon@1833c9c

APC 28 $1,078.72 $1,050.95 ($27.77) 06-10-10 - 10:08:19 ET 06-10-10 - 12:42:14 ET
javax.swing.ImageIcon@da89a7

LVS 500 $12,358.95 $12,295.84 ($63.11) 06-10-10 - 10:06:28 ET 06-10-10 - 11:34:47 ET

Total $34,501.76 $34,076.62 ($425.13)

Somehow the above did not pick a small (-$100) loss in a 1000 share ge trade. And a small CMI trade of similar loss.

Exported from StreetSmart.com™ for account XXXX-8342 on 6/10/2010 at 13:08 EDT

Confessions of a Pattern Day-Trader

(c)2009 F. Bruce Abel
So yesterday dawns. The grandkids are to bewith us for the day. My "Oh

Sxxx" moment of yesterday was alleviated when I checked my account's value at the close Thursday. It was up huge (for me)! The puts were moving. Would it be possible that this hideous purchase could come out ahead?

Yes! I got out before we left for the Lyceum Pool, with another $600 added on to my paper profit -- so all became a realized profit.

Confessions of a Pattern Day-Trader

There is always an "Oh xxxx" moment in day-trading. Sometimes it is caused by the market. Sometimes it is caused by you.

As readers know I feel Cramer gave a brilliant analysis on why FDO was a sell, not a buy. See my earlier blog.

So I go to "short" some shares. Not available to short.

So I go to buy some September 30 puts.

Now Schwab flashes in the asked price on a stock when you place your order, which does serve to protect you from just putting in a market order, where you will get murdered by the vultures out there.

So I click on through to buy some puts. $5000 worth.

My statement "shows" an immediate "loss" of $750 because the account values your assets at the "bid" price which is, of course, what you would get now if you sold your puts.

Oh well...

Confessions of a Pattern Day-Trader

So far it's senseless. If not dangerous.

Cramer Last Night -- Pretty Specific

Remember, Cramer's buy recommendations do not do as well as his sell recommendations. Also he advises scaling, i.e. buy 20 shares of POT today, 20 more when it's 5 points lower, etc.







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Wednesday, July 29, 2009

Jim'srating onthis stock
STOCKSYMBOL
Closingprice thatday
Full Company Name
POT
92.08
Potash (POT)

[Beginning of Cramer's verbatim comments for this segment...]Jim: China is in charge… China’s is the prism for which you have to look at this entire stock market… the Chinese, they hold the market… they have got the cards…. if you look at today’s sell off, Dow down 25 points, S&P down 4... nothing at all makes sense… thru the prism of America… the hardest hit stocks.. I am talking about like Freeport-McMoran, BHP Billiton, Caterpillar, Joy Global, Bucyrus, Norfolk Southern… they are all cyclical companies… that we know reported better than expected number, or at least in line…these are companies that the market loved a week ago…. if you were to look at America, this move would seriously confuse you… I mean what the heck is going on… why are stocks that were lauded for doing better than expected now getting pummeled… what is that all about.

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But you have to remember that America is no longer sitting on top of the world… all of the stocks that I mentioned… they are dependent on China… and they are getting crushed because the market now believes that China no longer needs anything from the rest of the world… China is full up… that is what everyone was saying behind the scenes today… and what was the tell… something that even I never saw coming… two straight weeks of copper inventory increases, where it is kept the repository is in London… for me, that was the signal that China is kaput for now… I mean, that is the reason why Shanghai’s market took a 7% plunge last night… and took our machinery and raw material companies down with it.Two straight weeks of copper inventory builds in London… leads to a huge sell off in China which then crushes cyclical stocks in America… is that crazy?… no, I am not crazy… maybe a little over reaction… but this is the new world… the new world order… where we used to be China… and China is now us… do you know that a dozen years ago China used about 10% of the worlds copper… and we used 30%… do you know that it is exactly reversed now… they use 30%, and we use 10%… and since copper is used in all kinds of construction and infrastructure, none of which we are doing, a decrease in demand from the Communist Chinese is pretty bad news… especially for American companies that need China much more than they need the good old USA… when it comes to economic growth…we used to be the top dog… but now the dog is China… and we are just its little tail that it can wag all it wants.When we awaited the results of the dead auction today… we needed to know that the Chinese liked it… when we speak of free trade, the question is… will it upset the Chinese… we are like Britain in 1946... and China is America… I thought hard where we still have a say… where we still have a choice when it comes to China… and I was struck about something that my daughter said to me on Sunday… Dad, chicken fried rice or moo-shu pork… we are lucky if they throw in the extra hoisen.That is the reason why everyone is now convinced that the commodity trade is dead… I did not care much for that story anyway… you know that I am not a big believer in commodity trade… I like technology, I like healthcare, I like the banks… but this new atmosphere has created a new opportunity… investors are now selling commodity stocks hand over fist… many of which do not deserve to be sold… because they are not even that exposed to China… but they all trade together.So, let me give you the one that I like the most… and this is new for me, I hinted on it last night, it was picked up by a lot of websites… most of which are designed to follow my every single move that I make… which I find to be actually compulsive, if not crazy… [Ed. note: Hey! We're not crazy, we're simply Cramericans through and through!]And it is… Potash (POT)… uh, Potash is back… after a downgrade 60 points ago… Potash the fertilizer company that delivered one of the best quarters that I have seen this reporting period.. it was down $1.28 today… because of the Chinese commodity sell off… even though it is far less levered to China than most of the commodity plays… including, definitely copper… do you know that the peoples republic makes up only 12% of its sales… the demand for fertilizer is much more geographically diverse… but it trades with China.In fact, fertilizer in general and Potash specifically… represents the one commodity that China does not control… despite the sympathetic decline that the fertilizer stocks experienced today… the long term thesis here behind Potash, my first fertilizer recommendation since I took TNH and made that a dividend play, rather than focus on Potash, or Mosaic, or Agrium… is that the rising population levels, not just in China, but across the globe… requiring more food… along with rising income levels in developing nations… which we will soon be considered… because it increases demand for better food, like meat and live stock… they need to be fed… creating even more demand.These are trends that I do not think will go away… regardless of what China does… but the stocks trade with China… farmers have the incentive to make land more productive… and that means using more fertilizer… that said, the reason that I told you to stay away from these stocks… because the fertilizer stocks have been horrible…. horrible… mostly because farmers held off on buying fertilizer because of economic uncertainty… this year we have seen an unprecedented 40% decline in global demand for potash fertilizer… a stunning figure… but it should be self correcting next year… simply because soil can go, with reduced fertilizer, only for about 12 to 18 months… before its productivity is substantially reduced… something that gentleman farmer Cramer should know… but I just spray Miracle-Gro on my rapidly reddening beef steak tomatoes.Low demand now has set the ground work for a massive increase in demand in 2010... and while potash prices have fallen… India just announced potash settlements of $460 per metric ton, that is the measurement that they use, that is the metric… now it is down from $650... something that should lead prices across the globe to reset lower.. but that is why the stock is down… the contract broke the impasse that was keeping the demand for potash down… buyers have now declared that they need to resume purchasing potash… and more importantly, the deferrals of potash purchases over the past year, have increased a massive void in the supply chain that will have to be filled… this is the restocking that we saw in semi conductors that we saw at the beginning of the year… remember all commodities do have similar destock, restock…
...that is why Potash (POT) believes that at last, the great fertilizer depression is over… and I am with Potash on this one.The Brazilians are now getting very active… they are seeing markets around the world starting to pick up… why Potash and not another fertilizer play, you ask… Mosaic, Agrium… first Potash sells all three main crop nutrients… potash, phosphates, and nitrogen… it is a one stop fertilizer stop… the whole foods of fertilizer… it is best of breed in fertilizer, superior cash flow, and net income… great position in the market for potash… given that it is incredibly difficult to build new plants… they cost about a billion and a half dollars… minimum… nobody has got that kind of credit anymore to build a plant… so as demand comes roaring back taking prices with it… Potash will not have to deal with pesky new competitors… and like I said before, the company told what was possibly the best story that I have heard this earnings season on its conference call.. I rate it in the top 5 conference calls that I have been on in the last 3 weeks.At the time, all of these go-go momentum managers were chasing it higher… now because the market is coming down, you have got a chance to buy it more cheaply… the great Chinese commodity sell off has created an amazing opportunity for us… one caveat, I do expect Potash (POT) to keep going down… it is a $91 stock… it has a lot of room… it does not have dividend protection… I cannot tell you where I think the bottom will be… but that is exactly what we want to see when we are trying to buy a stock… its merchandise is getting cheaper and cheaper… the way to play this one is to buy it in increments… so let’s say that you want 100 share, I would buy 20 tomorrow, then wait for Potash to come down 5 points… yes, 5 from where you bought that 20... buy your next 20... then buy 20 more shares after the next 5 points… and so on, that is called scaling in… I teach it in Jim Cramer's Real Money, the books… scaling in is the way to do it with a wild stock like this.We hate to chase stocks on this show… we hate to force trades… but we love a stock like Potash with a great long term story, that we can accumulate as it goes lower… use the now cooling market to your favor and get the best basis… your ultimate stock, the basis, imaginable… worst that happens, it starts going higher after your first 20, and you do not have enough on… my definition of a high quality problem.The bottom line…
▼ ▼ ▼ ▼ ▼
The Bottom Line!: Everything commodities is being sold off like mad since the market seems to think that China no wants to buy anything else from the rest of the world… all because there were two weeks where copper inventories in London went up… I know that this sounds so silly… but it is what happened… and I have got to give you the skinny about what is really happening… China is in charge of the stocks… and most of the companies, but not the fertilizer plays, where Potash pretty much called a bottom on its conference call is my favorite… if you want to declare independence from China… I think that you should take a look Potash (POT).




Read Jim's next Segment here
Market Results today:
Dow: - 26
Nasdaq: - 8
S&P 500: - 4

See all of tonight's stocks mentionedon Yahoo! Finance, here...








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Seize the Day

I "made" $500 yesterday by picking up the phone and holding Schwab to a promise that I had wheedled out of them in February.

As readers of this blog know, I decided in January to start trading again, the investment advisers having failed. (I having failed 8 years ago myself in the "little" world I set aside for trading.)

After opening my account and trading a couple of weeks in February I saw an ad on CNBC which said anyone who is an active trader who opens an account gets 50 free trades, whereas each trade is normally $8.95.

So I called Schwab then and talked to someone who, after some skirmishing over a "slippage" matter that cost me $400, agreed to give me that 50 free trades as soon as I put the minimum $25,000 into my account.

Then I lost my notes of the telephone call and nothing happened although I did put the $25,000 into the account.

Last night as I was preparing to go out I flipped on CNBC and saw the same ad. I called Schwab and explained the situation. After checking my account the good guy said "You've got it."

Pay attention to those ads. Seize the day!

Ex-Dividend Date on SPY

http://www.amex.com/etf/prodInf/EtPiDistributn.jsp?Product_Symbol=SPY

And paid yesterday. A surprise.

Here's How the System Collapse Occurs

(c) 2009 F. Bruce Abel


OK, here's how it happens.

Your investment advisor has lost you 40%, say.

OK, it's time to take responsibility. I used to be a trader over ten years ago, while practicing law. Although I lost money, I am wiser now and should have learned something from that distant trading experience.

OK, Schwab says if you make at least 30 trades a quarter (something like that) your commission per trade cannot go above $8.95.

OK, I open an account at Schwab in January with $5,000.

Oh! To trade on margin you need $10,000. OK, I bump this up to $10,000 in order to trade on margin.

Oh,Oh! Notice pops up on the account: Additional margin needed: $15,000. !??? Research and inquiry: "Pattern-Day-Trader Rule."

Oh, you're bad now. OK, there's this rule something like: that if you have three or more day-trades for three out of four days, you must put up enough money so that you have $25,000 in the account. If you do not do this you cannot trade in this account other than to liquidate positions.

A good rule!

They also refer you to Gamblers' Anonymous. No kidding!

I'm down $400 on the $10,000 account, the bulk of this by one "slippage" situation where Schwab had me in 200 MS when I thought I had 100 before I went off to see a client (setting a protective stop loss on the 100, but not the 200, if it was 200, we're still negotiating).

OK, the additional $15,000 (my $10,000 is about even, with 200 SPY's bringing me up) makes me have to cool off until I scrape up the money.

And did I say They also refer you to Gamblers' Anonymous. No kidding!

OK, you've got a back-up line of credit attached to your bank account at US Bank. That's exactly the amount you need to scrape up the $25,000.

Now you've got a Schwab account worth $25,000 and change. But your margin ability is $50,000 with Reg T's current requirement. And, day-trading, your limit is $39,000 for today, going up (I think) to $75,000 after today.

So you "think" of your account now as an account of $25,000, or even $50,000, or even $75,000.

Essentially it's 10 o'clock PM at the Argosy -- no I haven't been there for years -- and, whereas the Pattern Day-Trader Rule is good, it conflicts with the low commission rate for making at least 30 trades a quarter. And the Rule is good only until the trader figures out that he only needs to put the $25,000 up for one day. [ed note 3/27/2009: Schwab says this is not the case] But then when he does so his psychology gets all screwed up again: the "blackjack table" (in my mind) is no longer a $5 table; it's $10, or maybe $25, (and the big-time dealer has just moved in).

So no good rule goes unpunished. Any rule can be "gamed." And human nature will always have the potential to ruin the individual. And with so much money in hedge funds, as we are seeing, it has the potential to ruin the system.

And it looks like Asia and Europe were strong, and Geithner is about to hit a home run before Congress today -- my feeling -- by announcing return of the uptick rule and the SEC is easing the "mark-to-market" rule, and therefore the Dow should be up 3000 points, or at least up some, etc.

Oh God, what have I done?

The Pattern Day Trader

We herein introduce the concept of "The Pattern Day Trader:"

http://en.wikipedia.org/wiki/Pattern_day_trader

I note that I entered a similar item on this topic February 27, 2009.

Pattern Day Trader

Definition:

http://www.daytraders.com/day-trading/of-nasd-rule-2520-and-pattern-daytrading/

Schwab

I opened a Schwab account last night, the first time since I actively, actively traded (oh, say 1987 through 1999 or so, and, no, I didn't fall prey to the Dot-Com Bubble) and then gave it up as futile. Why did I open an account up? I was accumulating too much money in my left pocket. Although US Bank is my bank and is beyond reproach WE THINK, and all deposits are guaranteed by the US Government, it is time to "diversify."

Which leads to the $5,000 minimum to buy and sell options. But why would I do that (buy and sell options)? My long-time experience is that the options are always priced too high to make a profit in the long run. Still, I covered the minimum.

The real issue is that it is now time for us to take command of ourselves and not rely on investment advisors and others.

Along those lines this week's New Yorker has a long, valuable piece on Dmitry Orlov, a 46-year-old software engineer from Leningrad, who has written a book Reinventing Collapse: The Soviet Example and American Prospects.

"When faced with a collapsing economy, one should stop thinking of wealth in terms of money."

Think bluejeans, vodka, home gardens, boats rather than trucks (to deliver goods).