Market Update For Week Ending 8/26/2011

August 29th, 2011
Index Close Net Change % Change YTD YTD %
DJIA 11,284.54 +466.89 4.32 -292.97 -2.53
NASDAQ 2,479.85 +138.01 5.89 -173.02 -6.52
S&P500 1,176.80 +53.27 4.74 -80.84 -6.43
Russell 2000 691.79 +40.09 6.15 -91.86 -11.72
International 1,455.41 +9.27 0.64 -202.88 -12.23
10-year bond 2.19% +0.12% -1.10%
30-year T-bond 3.53% +0.14% -0.80%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

More market data

Market Wrap

After a month in retreat, Wall Street finally bounced back. The growth-driven Russell 2000 fared best, surging 6.15% as investors became a bit more sanguine about the U.S. economy’s outlook, while the Nasdaq soared 5.89%. The broad S&P 500 gained 4.74% and the Dow industrials ended the week up 4.32%. Foreign shares lagged in dollar terms, up a mere 0.64%. Bond yields reflated as the Treasury market relaxed. For more on recent trading activity, please read:

http://finance.yahoo.com

Economic Growth Remains Elusive, But Profits Are Rising

While some investors spent August wondering when the economy would demonstrate its ability to expand more robustly, corporate profits are still rising. New numbers from the Bureau of Economic Analysis revealed that U.S. companies improved their bottom lines by about 8.3% over the last 12 months, and factoring out banks and other financial companies, the numbers were even better. For more on the relationship between Wall Street and Main Street, please read:

http://latimesblogs.latimes.com/money_co/2011/08/corporate-profits-increase.html

Bernanke Says The Fed Will Do All It Can

Investors were initially disappointed when a much-anticipated speech from Federal Reserve Chairman Ben Bernanke failed to contain news of a new economic stimulus program. Instead, Bernanke simply noted that the Fed will do everything in its power to support the economy and the financial markets. Economists eventually applauded the honesty. For more on Bernanke’s commentary and the hope and frustrations surrounding it, please read:

http://money.cnn.com

Putting Market Volatility in Perspective: Coping with Volatility

August 29th, 2011

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

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Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved.

WATCHING GYRATIONS

August 24th, 2011

With the market gyrating like a kite in a hurricane I am watching it more often, but trading less. When I perceived the market as going down I bought a put spread on VECO by buying the Oct 40’s and selling the Oct 35’s for premium. With VECO now around 35 that still looks like a good trade.

I also sold the UN Nov 35 calls,and with UN at 34 now that is doing OK.

I bought some EWZ, the Brazil ETF, when it went way down, and paid $58. It is now almost $61, and I remain optimistic.

On the other hand, I paid $64 for WHR and sold the Sep 65 calls. With the stock down to $57 1/2 that trade is losing money even with the call premium. Yet I remain optimistic on this trade as well, as I can keep selling calls against the underlying stock. mlh

Stop Making Sense

August 22nd, 2011

Another day, another crazy market. We’ve had moves of plus or minus 3% on 7 of the last 11 trading days. This doesn’t happen very often; in fact, we’ve only seen this about a dozen times in the past 100 years. So you’re not imagining it: the stock market has been unusually volatile recently.

What does this mean for the future? Obviously, history never repeats exactly, but after prior periods of extremely high volatility, the markets have typically calmed down gradually as they seek a bottom. After that, stocks have always resumed climbing, often very strongly. We saw this after the panic of 2008, after the correction of 1998, after the crash of 1987, etc.

In a few cases, it took 2 to 4 months for the market to turn decisively upward; at other times, it took only a couple of weeks. Sometimes, the low was put in during the panic phase; at other times, the low occurred several weeks later. But in every previous panic the decline came to an end and prices rebounded. And in only 1/3 of cases did we have a recession following the decline. In 2008, the panic occurred halfway through a recession; in both 1998 and 1987, there was no recession for at least 3 more years.

“Panic” is a good descriptor of what’s happening now, at least during the big down days. Market prices are being driven by perception rather than reality. What could possibly have happened in just 24 hours to make the world’s companies worth $2 trillion less today than yesterday? But that’s the nature of panics: people sell first and ask questions later (while trying to justify their selling with every doomsday scenario they can think of).

Panics spell opportunity as assets become dramatically mispriced. I’ve give you a couple of examples of how asset values have stopped making sense. Today, the 10-year US Treasury bond yields 2.06%, and was briefly below 2% for the first time in history. Even at the depths of the Great Depression, long-term Treasury yields were over 3%. And at that time, we had annual deflation of 5.5%; today we have inflation of over 3% per year.

So In 1932, you were getting a real yield (after inflation but before taxes) of about 9%; today, the real yield will be -1.5% if inflation stays constant. Yes, investors are willing to lock in a loss of 1.5% per year for the next 10 years (more after taxes). Why? Because who cares about the next 10 years when you’re scared to death of the next 10 minutes? Make sense? Of course not.

Meanwhile, the earnings yield on stocks (the reciprocal of the price/earnings ratio) is 8.0%, nearly 6% higher than 10-year Treasuries. And unlike Treasuries, this yield should increase at least at the rate of inflation, even if the economy never grew again. So that’s a real (after inflation) yield of 8%, vs. -1.5%. That 9.5% spread is the widest it’s been since the stock market bottom of 1974!

Either Treasuries are wildly overpriced, stocks are wildly underpriced, or both. I don’t know about you, but I prefer to buy cheap and sell dear, even if I have to wait a while for the world to start making sense again.

Ken
Dr. Ken Waltzer MD, MPH, AIF, CFA
Founder and President – Kenfield Capital Strategies (KCS)

Market Update For Week Ending 8/19/2011

August 20th, 2011
Index Close Net Change % Change YTD YTD %
DJIA 10,817.65 -451.37 -4.01 -759.86 -6.56
NASDAQ 2,341.84 -166.14 -6.62 -311.03 -11.72
S&P500 1,123.53 -55.28 -4.69 -134.11 -10.66
Russell 2000 651.70 -45.80 -6.57 -131.95 -16.84
International 1,446.14 -52.42 -3.50 -212.16 -12.79
10-year bond 2.07% -0.17% -1.22%
30-year T-bond 3.39% -0.31% -0.94%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

More market data

Market Wrap

U.S. stocks extended their recent losses, culminating the worst four-week period on Wall Street since the depths of the 2008-2009 credit crunch. The Dow industrials shed 4.01% while the broad S&P 500 lost 4.69%. The Nasdaq plunged 6.62% and the small-cap Russell 2000 retreated a full 6.57%. Foreign shares also suffered, down 3.50%. Money fled to bonds and other assets traditionally considered havens from risk, pushing Treasury yields sharply lower yet again. For more on recent trading activity, please read:

http://finance.yahoo.com/news/Stocks-fall-as-traders-worry-apf-4253851125.html

Market Guru Finds Recession Unlikely In Any Scenario

Abby Joseph Cohen, the legendary investment strategist, recently told the media that she finds U.S. markets priced for no economic growth at all for several years to come. In the long term, she says, that prospect is nowhere near likely. She notes that corporate balance sheets remain strong and some are still creating jobs. For more, please read:

http://www.cnbc.com/id/44206921

What Will It Take To End Europe’s Credit Crisis?

Another week left the European Union no closer to a resolution when it comes to managing its members’ debt problems. A much-anticipated summit between French and German leaders delivered little in the way of concrete solutions. Will Greece need to default on its debt before the world can move past this situation? For more, please read:

http://money.cnn.com/2011/08/19/news/international/european_union_debt_crisis

IS THIS A GOOD MARKET FOR PUT WRITERS?

August 19th, 2011

Generally when the market goes down sharply, premiums go up and it’s a good time to write puts.  When you write puts in a down market one of two things happens: if the market rebounds you just keep the premiums you collected, but if the market keeps going down you acquire the stock.  If your judgment was good about the stock, buying it when it’s down, coupled with the reduced cost as a result of collecting an enhanced premium, should end up with a good result over time.

So we will see what we see, said the blind man.  This week I wrote puts on Unilever at $35, expiring in November, and took in just under $3,000 in premium.  So far the stock has continued to drop and is just over $33 right now.  With a net cost of $32 so far it seems OK, and I will be happy if I am put the stock at $32 or greater, as I think it will be quite profitable within 1-2 years.

I also wrote 5 puts on VEECO Instruments, the Oct $35’s, taking in $1,250.  This is proving to be a less promising write.  Just after I bought it poor earnings were published and several commentators wrote negative reviews on the company.  Today the stock is at $34, so with my potential net cost of 33 ¾ so far I’m OK.

I will put these trades into Merv’s Trades on this site so we can watch them together and get a feeling about put writing.

I leave for France this weekend, and will be less in touch until November.  But if you have questions I will be able to reply to them, it just might take a bit longer.

Merv

Market Update For Week Ending 8/12/2011

August 19th, 2011
Index Close Net Change % Change YTD YTD %
DJIA 11,269.02 -175.59 -1.53 -308.49 -2.66
NASDAQ 2,507.98 -24.43 -0.96 -144.89 -5.46
S&P500 1,178.81 -20.57 -1.72 -78.83 -6.27
Russell 2000 697.50 -17.13 -2.40 -86.15 -10.99
International 1,498.56 -14.67 -0.97 -159.74 -9.63
10-year bond 2.24% -0.32% -1.05%
30-year T-bond 3.70% -0.12% -0.63%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

More market dataMarket Wrap

Global stock markets survived last Friday night’s surprise downgrade of U.S. credit, although the aftermath was sometimes extremely volatile. After a week of wild swings, the Dow industrials ended down 1.53%, the S&P 500 lost 0.96%, and the Nasdaq fell 1.72%. The growth-dependent Russell 2000 shed 2.40%, while foreign shares embodied by the EAFE index dropped 0.97%. Money crowded into the Treasury market despite these bonds’ newly reduced rating, driving long-term yields downward. For more on recent trading activity, please read:

http://money.cnn.com/2011/08/12/markets/markets_newyork/

SEC Probes S&P Downgrade Of U.S. Debt

The circumstances surrounding the U.S. Treasury’s credit downgrade — including its timing and whether the move was leaked in advance — have led the SEC to investigate Standard & Poor’s, the rating agency behind the decision. Meanwhile, politicians and the public are all looking for someone to blame. For more on the downgrade and its aftershocks, please read:

http://www.economist.com/node/21525905

Treasury Yields Deflate Despite Downgrade

The interest rates the federal government pays on its debt actually declined this week, moving in exactly the opposite direction that some pundits had indicated would follow a credit downgrade. In fact, the Treasury market posted its biggest rally since late 2008 as global investors returned to the relative security of U.S. government securities — no matter what their official rating might be. For more on the surprising developments in the bond market, please read:

http://www.cnbc.com/id/44117537

I CONTINUE TO SELL PUTS

August 15th, 2011

I still view the recent drop as temporary, and I continue to use it to take long positions.  Of course, like everyone else I have limited capital.

So for those stocks with good dividends I buy the stock and write calls against the stock.  For stocks without dividends I tend to just write out of

the money puts.  Examples:

VECO doesn’t pay a dividend.  But it looks like a good stock.  It dropped from $57 to $37 in the recent period.  When the stock was at 37 1/2, which it still is,

I sold 5 puts of the NOV 35’s at $2.60.  If the price declines my effective cost will be $35, and I’m OK buying the stock at that price.  If the price doesn’t decline,

which is my most likely scenario, I will just keep the $1,250.

WHR didn’t fare so well during the big drop.  I bought 300 shares at $69 and the stock dropped to $59. But I still like it and it pays a dividend of almost 4%, a lot

more than you can get at a bank CD now.  So at $59 I bought another 200 shares to round out at 500 shares, and sold the Sep 65 calls at $1.32.  That’s not a

great premium, but the stock is now at $63, which is about my break even if it doesn’t move past $65, and if it does go over $65 I will buy back those calls and

sell the $70’s.  That’s what I expect to happen. Otherwise I will keep selling the 65 calls every few months and more than double the 4% yield.  Double your Yield!

merv

INSIDER TRADING PEAKING

August 11th, 2011

There are rumors all over the internet that there is a peak in insider buying.  If true, that means that

the top people in the public companies think this is a short term drop in the market and a good time

to buy.  See:  http://saxangle.com/2011/08/while-retail-has-been-dumping-insiders-have-been-scooping-it-up/




BUY

August 10th, 2011

I think the current stock market is a great buying opportunity, if the buys are carefully selected.  I have been buying two positions:

WHY (Whirlpool corp)  is an old line company with a good profit, and business is going up as a result of foreign sales.  At today’s price you get a 3.5% dividend!

The price has gone down from around $70 a share since my original purchase, to around $58-59 today.  I am buying and selling the 65 calls.  If the stock moves

up to 65 I will buy back those calls and write the 70’s.  I originally sold the $72.50 calls and bought them back at a nice profit when the market declined.

PG (Proctor and Gamble) is in a similar position and also pays a current dividend of 3.5%.  You won’t see these bargains for long.

Merv