Portfolio Judgement Day

I was long on Apple when it went up, shorted Citigroup (Citibank) as it went down, and was recovering my portfolio YTD returns to the heights of a month ago.

Then came judgement day. Judgement days do come in stock markets, and more often than people think.

The SEC changed the rules, and banned naked short selling on Fannae Mae, Freddie Mac and a few other financial stocks – including Citibank. This meant that investors couldn’t so easily make bets that share prices were going to go down, and so the share prices went up. My bet on Citigroup was big, and so I lost big. Meanwhile Apple went down on rumours of Steve Job’s health.

It was a pretty low probability few days – two big events affecting the shares that I was most heavily invested in.

So – how was the damage?

In a few days the value of the portfolio dropped from a 28% return for the year to slightly negative (0.4%). That’s a 22% drop. It hurt.

Meanwhile the S&P500 benchmark rose 3%.At least I’m still ahead year to date, but judgement days are harsh on volitile portfolios like mine, and I expect more (though I’d like to be on the right side of them)

Since then I’ve recovered a little, but Citigroup still keeps rising (I still have the put ptions) and Apple recovered a little (I bought some more call options).


I suppose I should be bitter at the SEC for blatantly changing the rules in a bout of corporate protectionism, but for Freddie and Fannie there was always an implicit Government guarantee. No – but I am upset that they also protected Citibank and the other financials. It’s poor economics.

However I’m a firm believer that economics wins in the end – when a stock is lousy then changing a few rules is not going to change the bottom line lousiness. So people will figure out how to short these guys, the price will eventually go down, and judgement day will appear for them. I hope.

Published by Lance Wiggs


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