For the past few weeks I almost always playing on short position of the bank stocks because I believed the recent banks run up was too much and being on the short side had more chance to make money. I was right most of the time except the Well Fargo bet which caused me to lost more than nine thousand dollars. Now the Federal Reserve has presented to the market some reality and the world market retreated. I feel that maybe a buying opportunity and here is what I think.
There are still many market participants that are not convinced by the Fed and they are more buying into the view that the banks problem is behind us. They may also see it as a buying opportunity. It is the second down day after the Fed released it minutes. People hope the market will go up tomorrow.
The average offering price of Bank of America’s new shares was $10.77. From the past two days’ trading I saw the market hope to trade it at a price close to $12. Even today when the DOW dropped 1.5% its price only went down a little bit at close and it was traded higher in after market. In fact it was traded above yesterday’s closing price most of the time today.
I don’t plan to hold Bank of America for a long time. If a big sell off is coming I don’t think it will come tomorrow. There are no data released tomorrow. It doesn’t seem that the world market will be over reacting fallowing US market’s drop. I feel it is kind of save to hold BAC till tomorrow or maybe a bit longer.
I took a big long position in banks and I didn’t feel I am gambling. I am 80% sure I will make some profit of the position I have today. I shorted 2000 shares of BAC in the morning at about $11.85 but I covered it too early at about $11.75. Close to the end of the day I bought 2000 shares of BAC at about $11.45 and 1000 Share of USB at about $17.99. My account balance is up almost $200 when calculated using the closing price
Account Balance Change: +$195.35
Yesterday when I shorted 4000 share of Bank of America I was preparing to lost big because I thought Federal Reserve would play along with the banks and issue somewhat bullish meeting minutes to help the banks raising capital. I was wrong and I felt I was very lucky. I could easily lost several thousand dollar yesterday.
I guess the Fed looked at the reality and decided that it can not play along with the banks. The world is already very skeptical about the stress test result. The Fed just can push the limit further. If the Fed lost its credibility it will post serious damage to the market. I believe the banks’ problem is far from over. It is not over until one day they start declaring regular dividend again. By that time the banks evaluation will be based on the projected dividend stream. Right now the market just claim whatever price they think the banks worth. Price of Bank of American can go back and forth between $10 and $15.
In fact we can see the realty from the statistics no matter how the banks spin them. Our GDP was down more than expected last quarter, unemployment rate is higher, foreclosure is more, home price is still going down and consumer credit is still deteriorating. Former Fed chairman Greenspan has the following comments lately
There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded.
Home prices will only start to stabilize once the liquidation rate of single-family homes has peaked. I don’t think we’re there yet.
until the price of homes flattens out we still have a very serious potential mortgage crisis
Things are definitely improved but not as rosy as the picture that Bank of America CEO painted
I feel like to tell a little more about me. If you read my blog you may wonder what on earth I do to make a living and how could I trade, write blogs and have a full time job at the same time.
First of all having a full time job doesn’t prevent me from trading at all. I can do my research and set up the trading orders before I go to work and I can occasionally check my order status while at work. That may distract me from working though. I don’t usually trade that often but the company I am working for is folding up my department and I almost don’t have to do anything while at work at this transition time. I just need to stay with the company till my final day comes. So I have plenty of time to watch the market and write my blog. I expect I will be in that situation for several months to come.
With that said I am about to join the unemployed force and became one of the victims of the recession. So I will be looking for job pretty soon. My dream job is to be a Wall Street professional trader but I never see this kind of job opening on the internet and don’t know what the requirements are and how to become one. If you have an idea I beg you give me some hint =)
Act out of emotion:
I keep reminding myself that the most dangerous enemy is my emotion. But still I can not help being emotional today. When I thought about how Goldman Sachs manipulated the stock price of Wells Fargo and Bank of America for their underwriting job, when I thought about those so called influential financial analyst are only corporate puppets, when I thought about how investors are given investment suggestion without providing with sounded quantitative analysis my emotion and my angry build up.
What kind of investment environment this is. Investors are put into very unfavorable situation when they are not connected with one of those influential investment banks. And don’t think that the US market is big and efficient. It can be easily manipulated by a number of institutions. In fact this is where the systematic risk of financial system lays in. Company like Goldman Sachs, BOAC and Citi and Well Fargo should be broken down into small pieces. However the government is going about the opposite. It is trying to build up a smaller group of bigger 
financial institutions which can direct where the market goes on a daily based. Market messages are frequently miss-interpreted to suit institutional needs. I seriously belief some kind of mechanism similar to those preventing price fixing needed to be implemented into the financial system to prevent market manipulation.
Surprised Gain:
Anyhow my trades today are totally acts out of an angry and gambling mind. I covered my 1000 share of BAC short position at $12.08 and a few minutes later I took 4000 shares of BAC short position at $12.11. I set up a trade trigger to cover it once the ask price hit $11.80 before I left for work. I was preparing to get cooked again. When I was on my way driving to work I kept thinking what BAC’s price would turn out to be when I arrived at office. If BAC’s price was over $13 how much lost I have to suffer thoughts like that. Fortunately my short position was covered at $11.79 when I arrived at office. So I feel relief and my angry subside.
Reflection:
I start thinking probably my blog is not able to provide me the control I want any more. In just a few days after I set up this blog I starting acting out of the guidelines set forth in this blog. I have to admit that today’s gain is completely surprise to me.
I went over the exact same situation when Wells Fargo offered new shares. Wells Fargo’s stock was actively traded above the closing price in after market on the day it announced the offer at $20 ~ $22 a share. The next day Wells Fargo was traded higher in pre-market and it trended upward toward market opening. The same thing happened to BAC yesterday. It was actively traded above the closing price yesterday. It opened higher in pre-market and trended upward toward market opening. This was happening with the same pattern.
A vice strategy would be to go long yesterday after-market or to go long today early in pre-market then sell on market opening. If I went with that strategy I would net the same gain with a lot less money at risk. I actually thought about that yesterday but I chose to fight the tide because of emotion get involved. In any case I shouldn’t do that again.
Account Balance Change: +$508.51
Now it became crystal clear where those strong buys and upgrades come about. Bank of America issue 800 million new shares at $10 after the market close today. I guess they dare not to announce the offering the same day as the upgrade otherwise is will too obvious. Too bad the housing data give the bank share a big blow. Otherwise BAC shares could be manipulated well above $13.
I was angry because the rule of the game is never fair for small investor like me. I felt being played and cheated almost ten thousand dollar by those market manipulators. I feel shame of the government and the banks. The whole stress test, the spin on Bank of America’s capital short fall, the strong buys and the upgrades on Wells Fargo and BOAC are totally scam only to entice investors’ money. And they are even spinning on repaying the TRAP will hurt taxpayer. That is bull shit.
I have learned a big lesson out of it. Out of the angry I shorted Bank of America 2000 shares after market at $11.19 and $11.32 and cover all of them it at $11. My balance went up about $500 more. But it is no comparison to my ten thousand dollar lost.
I frequently asked myself these couple questions. Is trading stock equal to gambling? Are you an addicted gambler if you are tempted to trade stocks? I answer both questions, “NO”. These are the answers that I prefer. But I really don’t know whether I answer these questions based on my own bias.
I answer both questions based on a fact that I believe to be true. I already mentioned that in my blog mission. It is that when you are gambling you are always playing on the side that statistically the probability of losing money is always higher than the probability of winning money. You may win from time to time in gambling but if you are playing long enough or the number of times you play is large enough there is only one out come and that is you lost. That is how the casinos games are designed. Interestingly a lot of people keep playing in an attempt to win their money back. Casino will tell you who won a million but they won’t tell you who lost a million. It is a marketing effort to entice you to keep playing. People have no problem sharing their joy and victory with the public but they tend to keep the sadness and failure within their closest friends and family.
Theoretically there is one casino game that you can beat the dealer. And that game is black jack. There are all kinds of card counting strategy out there telling you how to beat the dealer. And those strategies have one common nature that is to identify a situation where the probability of wining is greater than losing and increase your bet accordingly. I believe the same applies to stock market. The stock market is emotional and it derails from reality from time to time. The more it derails the high the probability it will heading back toward the rational level. If we can identify those irrational price levels and take the right side then the chance of making money is higher then losing money. If we are always able to find the irrational level and trading on it long enough then we should be able to see substantial gain. With that said I am not saying you will make money on every trade. I mean if you are able to do that you will find you can win more and lost less.
Well I am just talking and I am trying to prove my point with my blog. Successful or not time will tell. Nevertheless the hard work lays in how to identify those irrational pricing. That is the critical part. In traditional financial theory those irrational price is not existing because the market is efficient enough to prevent them from appearing. That is so called the efficient market theory. In that theory no one is able to beat the market index in terms of return per risk. But we can see this market is far from efficient with all kinds of manipulation in place.
Event though the 
Commerce Department said earlier today that construction of new homes and apartments fell 12.8 percent last month to a seasonally adjusted annual rate of 458,000 units — the lowest pace on records going back a half-century the market’s reaction is pretty much neutral. If the number were to be inline with expectation I guess the market will explode. From there I can see how strong the bulls are and how they are brain washed. Think about what brought the economy down to today’s level and think about what is able to fix the economy — only one thing that is the housing sector.
Data shows that foreclosure is going up, housing price is still going down, unemployment is still going up and construction is going down. I think there are too many evidence to show our economy is not going to grow if it is not going down more. With the banks stuck with trillions of toxic asset, share dilution and dividend cut people are still buying into those analysts’ upgrade. Look at what they did. They upgraded Well Fargo to strong buy when it was at $28. They upgraded bank of America when it was at $12. Think about how far the banks can go up without paying dividend. Many of them are not even able to pay back the government of the TRAP money.
Anyhow the housing number saved my day and my account balance is up more than $800 today. It seems to me I have to learn to think irrational I have to think what the other side of the people thinks in order to trade well. And I think at least I have to play the long side more nowadays to do better.
I covered IBN at $28.95 and covered Wells Fargo at $26.20. That is probably it for today.
Added at 5:14 pm
I ended up with more trades on Bank of America and I ended up with $1000 share short position on BAC. Please see this post Shame About the Banks and Government
I just don’t believe the public will be stupid enough to be manipulated again just like they are on Wells Fargo’s share
Account Balance Change: +$1,411.15 revised from previous $842.02 after the BAC trades
I posted on yahoo Well Fargo Stock board that the more I thought about the banks upgrading the more I felt it was a skim for the banks to upgrading each other so that they all can make money underwriting billions of new banking shares. There are still more to come after WFC and USB so they have to pump the market to finish their job. Once they are done they may manipulate the market downward. The recent bank rally and upgrade just show how easy the stock market can be manipulated. The government tries to manipulate it. Investment banks try to manipulate it. Big investors try to manipulate it.
Reply has it that event if what I say is true what chance do I have trying to fight the tide. I think no matter how irrational the market is it can not derail too far from reality isn’t it? I know I was wrong on taking a huge short position just two weeks ago. Now I am really tamped to fight the tide again. I really shouldn’t take more short position to make the same mistake again.
I think I should just wait and see how my current short position turns out to be at the end of this week.
The Dow 
is up but my balance is down. I took 500 shares of short position of Wells Fargo pre-market at $25.86. After that I took another 300 shares short position of IBN at $30.24. Down $281.56 at 8:34 AM.
The market is hard to predict. I think today’s up is mainly attributed to the analyst’s upgrade to the bank sector. In my previous post “US Bank Corp Should be a Good Bet in the Comming Weeks” I expected USB to rise above its offering price but I didn’t expect it happen so quickly. I was still waiting for an entry point. Looks like I have already missed out big. But for Wells Fargo I still think it is over valued. IBN is an India banking stock. It shot up 30% because of India’s election. I don’t think this kind of rise make sense at all. But who knows the stock market is irrational.
I end up in red and in a scary short situation. I shorted 500 shares more on Well Fargo at $26.80. I had the chance to make my $150 today but decided to forgo it. The market eliminated the entire week’s lost in one day. It is unbelievable. And I have put my entire account balance in short position. It is something I never think of happening so quickly again after I set up this blog. But this time is different from my shorting 3000 shares of Wells Fargo last time. This time I used little leverage. If the maket goes against me tomorrow I can wait and still feeling ok.
Account Balance Change: -$342.90
News has it that Citi Bond Sale Shows Strength
This is the first time the financial institution has sought financing away from the protection of the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee program begun in November. Demand was strong, with orders exceeding $6 billion, according to one person familiar with the deal.
I don’t feel surprise to see any of the 19 banks participating the stress test are able to sell bond without FDIC’s protection simply because the Fed chairman 
mentioned in the public that none of the 19 banks are allowed to fail. Why would anyone need FDIC’s protection when the Feb is standing behind? At the same time the government said that only banks that are able to sell debt without FDIC’s protection are able to repay TRAP. With this contradiction I am not sure if this a good news for for Citi group and the banking sector. Basically any of 19 banks that don’t need to raise capital will be allowed to repay TRAP it is a matter of whether they want to do so. And the ones that do so will certain stand out of the crowd.
