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Below is a transcript of this week’s chat on TradingWithCody.com, an independent service not affiliated at MarketWatch. And on another note, if you’d like to see a few tech stocks that I think could become the next Apple, be sure to sign up for Marketwatch Revolution Investing to get my latest report “10 Tech Stocks for 2012″ free with your subscription.
Q. What about protective puts on a portfolio? Any thoughts on insurance, strikes and expirations? Thank you Cody for your thoughts…appreciated! A. I’ve been scaling into puts and shorts to hedge/protect the portfolio consistently, especially recently during the market highs. I do think there’s downside risk, and I continue to think that LPS, APOL and the other shorts I’ve got on my books are good opportunities. But I do understand what you’re asking and yes, I might at some point buy some broader market puts. Just not today — I’m already in defensive mode, as you know.
Q. Cody, what is your biggest determination when deciding how much percentage wise of your portfolio to be short? Hedging wise? A. Tough question to answer in this forum. But I’ll give you these criteria: *My conviction level in the short thesis for that security. *My overall bullishness/bearishness about the broader markets and the corresponding net long/net short positioning of my portfolio. That is, if I’m very bearish and not feeling like I’m net short enough in the portfolio, that would impact how much capital I’d want to expose to that position and all my others. *Timing of the trade’s/investment’s thesis. That is, do I think the trade’s impending or longer-term. —Like I said, not an easy question to answer in this (or any) forum.
Q. Money management is critical. Doug Kass says no more than 2% of portfolio into anyone stock. Can you give us an idea about how much you may put onto each position as a percentage? A. Another great, but tough to answer question. When I used to run a hedge fund, I’d typically keep most positions to less than 5% of the overall portfolio. But that was a mistake in hindsight, as it kept me selling my biggest winners like Apple as it ran from $7 to $14 to $28 to $56 to $128 to $170 and I’d been trimming it the whole way up to keep the position to a reasonable size according to conventional wisdom. I don’t want any position to be much bigger than that to this day, but I don’t care or bother looking at the specific allocations of each respective position any more.
Q. Cody, your service and trading involves the use of options if I am not mistaken. If one does not use options trading how can we fully utilize your trading / investing? A. If you don’t like to trade options (and there’s absolutely NO reason to if you don’t feel comfortable doing so) then you’ll want to be buying and selling common stock in tranches using the same names and timing that I’m using, but sticking with what you’re comfortable using. For example, when I was shorting AAPL puts back a few weeks ago when it was at $360 or so, you knew I thought the timing was right to be getting longer, getting more exposure to AAPL. So I’d suggest just buying the common stock instead of trying to copy the option strategies I’m using. The point of the service isn’t for you to just copy exactly the options and moves I’m making, but to help you learn to become a better trader and investor over time while getting the very best ideas and timing that I can give you.
Q. Hey Cody, so my question today is with the eurozone crisis heating up to boiling point (France probably downgraded tomorrow, IMF warning Greece to speed up reforms, etc.) should we be shorting the whole market? A. I think that’s just flat out too obvious. All — EVERY — money manager I know is betting on either a big upswing here or a big downswing here. We might get one of the two, but I think I’d rather be heavy in cash and using the puts/shorts we were scaling into during recent rallies and then be ready to strike if we do crash over Europe debt problems. The crash would be a buying opportunity of a lifetime, but I wouldn’t want to try to game the timing of it.
Q. Hello Cody, do you still think it’s the end of the road for the euro or do you think that the Eurocrats will find a way to bail out Italy? A. I think the Euro’s and the EU’s doomed as I’ve written for you guys repeatedly over the last couple months. But the guys running the IMF, EU, ECB, etc are all a bunch of former bankers, mostly from — wait for it….– Goldman Sachs and I truly didn’t think they’d have stolen trillions from us and our children over the last three years to prop up their former colleagues and investors. But they have, and they might figure out more ways to hide their theft and prop up this game longer. Feet to fire, the bailout/austerity movements last another few months or maybe a few more quarters. But that’s why we’re in a defensive crouch and have been since selling into the recent highs.
Q. Also with that auction of US bonds at historic lows, is it a good time to buy $$? or short Euros? A. Feet to fire, I’d expect to see the Euro spike back up 2-3% in a single day at some point (probably sooner rather than later), but I don’t like to game currencies for profit very often. Longer-term, the Euro is likely doomed, but I’ve no idea how that will translate into $/Eu price action.
Q. Next couple of weeks, do you see more downside or upside?? A. Feet to fire, with the Nazz down 2% on the day and nearly 5% in the last week or so, I’d expect more upside. But who the hell knows with the market being held hostage to socialist bankers running trillion dollar taxpayer funds at the IMF, ECB, and the US Fed.
Q. Why are tech stocks getting destroyed? A. Tech’s getting destroyed because it usually trades at a higher beta (that is, with more volatility) than the broader markets and today’s an ugly down day for the broader markets. No reason to panic because of the recent trashing of tech.
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Q. I know you closed out of your Marvel position but is it still on your radar? I’m seeing all these Kinects being sold and think the Feb calls could be good timing. Thanks! A. Most stocks I trade stay on my radar even when I don’t own ‘em. I see Kinects selling, but not like the iPhone or iPad…and that’s really the kind of growth I was hoping/looking for to drive MRVL. In the meantime, gaming the Thailand flood’s impact on the hard drive industry and its impact on demand for MRVL components is tough to gauge. I’m not interested in MRVL right now for these reasons.
Q. With the big hit on GOOG and AAPL, I think maybe now is the time to nibble some more? A. I like both Google and Apple a lot as far as stocks go here, but they’re likely to trade with the broader markets for the next few weeks I’d guess. I still think shorting puts is the best way to trade those names for now.
Q. Cody, I know you have good positions in AAPL and GOOG back when it was lower in August and you might not be thinking of adding because of the size you already have, but for the new people who weren’t that lucky but still want to get a position before earnings (using calls) could you be looking for a starting point for us and let us know, that would be great! A. I’d suggest to new subscribers who don’t have positions in our tech stocks that they do the same approach I almost always follow in front of you guys — scaling into the best names slowly but surely on weakness. So yeah, I’d start nibbling now if you don’t have any but I’d leave room to add more over coming days and weeks.
Q. Cody – Re FIO, do you think there is more downside because of the lockups coming off? Thanks Cody! A. I like FIO long-term and as I’ve said from the beginning, this one’s going to be wildly volatile. I don’t like to try to guess if and when a lock up will or won’t be priced into the current stock quote, so I’m just following my playbook as usual — scaling into the position over time, using weakness to buy more.
Q. I have FIO calls for Jan and March and I bought it when it was $26….help!! A. I’m sorry you’ve got losses on the FIO calls you bought, but you do realize that I do too? I bought more of them today to average down the costs. But that’s all the help I can really offer aside from telling you what I do when I’m doing and why. Hang in there and remember that trading and investing is always about the next 3000 days, not the next 30 days. Rock on and persevere.
Q. Cody, you liked BRCM in the mid 30′s in Oct, but were hesitant due to their lowered guidance. They just guided to the high end of their previous guidance for Q4 this morning. I closed my MRVL and other positions in Nov. Looking for a new entry to app. rev. semis and like BRCM long term. Thoughts on them long term as well as a play into their Q4 earnings? Thanks. A. I do like BRCM a lot more in the high $20s than I did in the $30s, and longer-term it’s a great play on the app/cloud/smartphone revolution as you imply. I don’t think you can play this upcoming earnings report after the company just told everybody how that report will come in, but yes, I do think there’s more upside than downside potential both near-term and long-term in BRCM here.
Q. When will you cover WFC? It seems like WFC is very strong. A. I am surprised at how well WFC has hung in there, but it’s still down since we initiated a short on it and I’m far from being squeezed out of it. There’s a lot of comeupance coming for that company in the forms of prosecution/litigation realities that I think will pay off for us. That said, the action in the stock does bother me and I’m on top of it.
Q. Cody, Your suggestion of trading the volatility of SLV – that is a short term trade in your opinion correct, weeks instead of months? A. Man, that volatility trade in the SLV already played out! In this morning’s note, I suggested looking at buying SLV and shorting GLD as a pair trade for the next few weeks or so.
Q. Cody, your thoughts on Amazon at this level? Thanks Cody! A. AMZN is a long-term buy, but the short-term it’ll likely trade much like AAPL and GOOG in that it’ll be a high-beta version of the broader markets.
Where’s Santa? More importantly, where’s the fear? Ugly few days, but nobody’s panicking? Anybody out there more scared today than they were last week? Okay guys, that’s it. Great time again today. Thanks for all the back and forth. And please keep the referrals coming to TradingWithCody.com if you like the service!
Cody Willard writes Revolution Investing for MarketWatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long AAPL, FIO, GOOG, MSFT, RVBD and net short LPS, WFC, SLV, APOL.
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