SOME COMMENTS ON THE NEW BUDGET AND RANDOM IDEAS ON THE ECONOMY

March 31st, 2012

Dear Friends and Colleagues,

In this election year, many people are turning to the government for action – either to stimulate the economy or simply get out of the way. Your preference there may very well be an indication to your political leanings, but I have found it really depends on whether we are talking about other people’s livelihoods or our own. Such is human nature. As a thought exercise, examine how much of your income or your clients’ income come from government spending (e.g. defense contracts, government employees, servicing public infrastructure, . . . etc.). This may take doing some research, as it is not always obvious. You may be pleasantly or unpleasantly surprised, as the case may be.

Our hot topic for this month is an analysis of the key issues of the Federal Government’s FY 2013 budget. It appears to be a mixture of higher taxes and budget cuts – which sounds all too much like the European austerity measures. A little belt tightening is good, but of course it always feels better when it is around someone else’s waist. In 2011 government layoffs were the singular drag on employment, which is apparently what the people desire. Expect this trend to continue – which might seem like a pain in the waist, but hey at least we will a look the better for it, right?

Hot Financial Topics

· March 2012

HOT TOPIC: Breaking Down the Proposed FY 2013 Budget
The 2013 budget released by the White House on February 13 contains proposed fiscal measures that could affect the business and investment climate, the income tax code, and government spending. Considering that Congress will debate and discuss the budget in detail, many of these measures are unlikely to become law as proposed, but they may indicate future developments.

Where There’s a Will, There’s a Way
Only 35% of Americans have a will, yet it’s a relatively simple legal document that every adult should have, regardless of wealth or age. Dying without a will can lead to unwanted outcomes and potential problems for heirs. This article discusses the importance of a will and other estate conservation documents.

Diving into Dividends
Dividends have traditionally been considered a source of income, but they also can be a powerful way to help build savings. A recent study found that dividends contributed 44% of S&P 500 total returns from 1930 through September 2010. This article explains how dividends work and the role that dividends could play in an investor’s savings strategy.

Balancing Stability and Growth
An investor who is 2 or 3 decades from retirement could decide to be more aggressive in pursuing investment growth than someone approaching retirement. Even though investors address this by transitioning to a more conservative asset allocation, they still need to seek growth while balancing the desire for principal preservation.

Rethinking the Role of Household Debt
Many people aspire to pay off their home mortgages before retirement, but the housing situation and a weak economy have taken a toll on the finances of many older Americans. There are some compelling reasons why pre-retirees might want to consider maximizing their retirement plan contributions and avoid carrying large amounts of debt into retirement.

Lessons from a Perilous Year
In retrospect, 2011 was a formidable year for catastrophes. Small businesses can be hit hard when extreme weather or a natural disaster causes damage or forces a temporary closure. This article considers the importance of adequate insurance protection and ways to help reduce uninsured losses.

Daniel Bennett

Market Update For Week Ending 3/30/2012

March 30th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,212.04         +131.31         1.00         +994.48         8.14        
NASDAQ 3,091.57         +23.65         0.77         +486.42         18.67        
S&P500 1,406.47         +9.36         0.67         +148.87         11.84        
Russell 2000 830.30         +0.27         0.03         +89.38         12.06        
International 1,553.46         -3.30         -0.21         +140.92         9.98        
10-year bond 2.22%        -0.02%          +0.35%          
30-year T-bond 3.35%        +0.04%          +0.46%          
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 concluded the best first quarter in over a decade with broad-based gains. The Dow industrials led the way with a 1% climb while the S&P 500 added 0.67% and the technology-heavy Nasdaq gained 0.77%. The small-cap Russell 2000 eked out a slim increase, but in dollar terms the foreign MSCI EAFE slid 0.21%. Bond yields were mixed as investors adjusted their portfolios ahead of the quarter’s end. So far this year, the Nasdaq is by far the leader, up 18.67% on the strength of several global technology giants, but the broader stock market has also generated impressive YTD performance. For more on recent trading activity, please read:
http://money.msn.com

Ben Bernanke Keeps A New Round Of Stimulus Near The Table
Testimony from the Federal Reserve chairman kept markets riveted this week, but Ben Bernanke pointedly avoided either confirming or denying that a third quantitative easing program is in store for the U.S. economy. As it is, Bernanke hinted that “continued accommodative policies” may be on the horizon in order to support what he admits is a perplexing recovery in the labor market. While deciphering Fed policy is an arcane art, investors may be interested in this interpretation. For more, please read:
http://www.ibtimes.com

European Union Adds $280 Billion To Bailout Funds
Even though Greece’s problems seem to be in remission for now, the European Union remains concerned that a potential recession may create a new round of challenges for the euro zone. The European Stability Mechanism, by which the “bailout fund” is formally known, now contains over $1 trillion. The EU hopes this will be enough to cover over any issues that Greece, Portugal, and Spain may have repaying their obligations. For more on the latest developments in Europe, please read:
http://www.cnbc.com/id/46901357

UPDATE ON NUAN

March 27th, 2012

A while back I recommended looking at NUAN, the leader in voice recognition. Since then it has moved up nicely. Here’s a note from an expert in that field bringing
us up to date:

Nuance is the speech recognition behind Apple’s Siri, and is still well positioned from a technology and patent point of view. It’s been held down because both Microsoft
and Google have speech recognition and could be viewed as giving it away (e.g., on Android and Windows phones). But Nuance is the only viable independent source
(other than perhaps AT&T), and I think there is a good chance they will eventually be acquired (possibly by Apple). Nuance has almost no competition in the health sector
and is doing well there (about 40% of revenues). I still own it myself.

Bill Meisel
President, TMA Associates
Editor, Speech Strategy News

Market Update For Week Ending 3/23/2012

March 26th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,080.73         -151.89         -1.15         +863.17         7.06        
NASDAQ 3,067.92         +12.66         0.41         +462.77         17.76        
S&P500 1,397.11         -7.06         -0.50         +139.51         11.09        
Russell 2000 830.03         -0.15         -0.02         +89.11         12.03        
International 1,556.76         -24.24         -1.53         +144.22         10.21        
10-year bond 2.24%        -0.06%          +0.37%          
30-year T-bond 3.31%        -0.10%          +0.42%          
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
A somewhat choppy week of trading left U.S. stocks mixed as some investors elected to lighten their positions. Nonetheless, the Dow industrials retained the psychologically important 13,000-point level despite retreating 1.15%. The technology-rich Nasdaq climbed 0.41%, building on its own base above 3,000, but the S&P 500 retreated 0.50% to give up the 1,400-point line. Small-cap shares in the Russell 2000 were flat while foreign stocks sank 1.53% in dollar terms. Money rotated back into the bond market, depressing the yields on long-term Treasury securities. For more on recent trading activity, please read:
http://www.reuters.com/article/2012/03/23/markets-stocks-idUSL1E8EN81Z20120323

Gas Prices Remain In The Spotlight As The Oil Industry Starts Weighing Its Options
With the last summer of the presidential cycle already heating up, many Americans are begging Washington for relief from high fuel costs. This is definitely a politically charged issue with representatives of many sectors of society — politicians, consumer advocates, and especially the oil companies — arguing over solutions. Bringing more oil into the equation seems to be the key. For more, please read:
http://money.cnn.com

Ben Bernanke To Congress: U.S. Banks Can Handle A Euro Crunch
Now that fears of a near-term euro zone crash are receding, Federal Reserve chairman Ben Bernanke is confirming what many investors already suspected. In the event of another implosion in Europe, he says, U.S. banks might feel the pain, but only a few are in real danger of a life-threatening shock. For more on Bernanke’s latest commentary on the financial sector and the economy, please read:
http://www.msnbc.msn.com

WRITING OPTIONS ON HEALTH CARE ETFs

March 25th, 2012

In response to a question asked after my post about buying healthcare ETFs in advance of the
supreme court ruling on the national healthcare plan:

In general I do not suggest these ETFs as good candidates for option writing. Most of the
ETFs mentioned do not have options available, and the few that do are thinly traded. But if
you want to invest by BUYING calls, and you can find them, that seems OK. Just remember
than when you buy a thinly traded call you can’t always get out when you want to, because
there is not always a buyer.

Here is an update on option availability on the ETFs mentioned:

Only one of those is suitable for option trading, and that one has poor volume.

XLV – low volume options

IHF – spotty options
IYH – very spotty options

FXH – no options
IHI – no options
IXJ – no options
AXHE- no options
PTH – no options
RXL – no options
RXD- no options
RYH – no options
XLVS – no options
XHE – no options
IRY – no options
VHT – no options
ZUH – no options

Merv

HEALTHCARE PREDICTIONS

March 24th, 2012

There is a lot of buzz right now from investment analysts about healthcare. That’s because the Supreme Court is about to
rule on the recently passed healthcare law, and the outcome will have a major impact on the finances of the healthcare
industry. Whenever there is something about to happen that impacts a financial sector, there’s some buzz.

From what I’ve seen, the consensus is that the law will be upheld, and that as a result there will be more money spent
on healthcare. That seems a little counter-intuitive, since what we’ve been told is that the US is going to save money
on healthcare, but when you figure that as many as an additional 20 million people are suddenly going to start to
go to doctors for healthcare, and that the doctors will be paid by insurance, it makes more sense.

And so some of the big investment firms are recommending investment in healthcare related securities in advance of
the court ruling. Since it’s a relatively short period before the ruling comes out, it seems to me to be a good idea to
make such an investment. And if the law is upheld, the psychology of the market will probably raise the prices of
healthcare stocks, at least for a short period of time.

The best way to invest in a sector is either buying an ETF long, or buying short term calls. In this scenario, most
people are going to want to buy an ETF at the outset, and then consider selling calls against it after the ruling comes
out and level out.

Buying a long call is usually not a good idea when you don’t have a fixed time frame with a definite event, such as
a dividend date, and selling a put spread seems risky when based on a decision of the Supreme Court.

So here is a list of potential ETFs that could be considered:

Health Care Select Sector SPDR Fund (XLV) Top 100
First Trust Health Care AlphaDEX Fund (FXH)
iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF)
iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH)
iShares Dow Jones U.S. Medical Devices Index Fund (IHI)
iShares S&P Global Healthcare Sector Index Fund (IXJ)
MSCI ACWI ex US Health Care Sector Index Fund (AXHE)
Powershares Dynamic Healthcare Sector Portfolio Fund (PTH)
ProShares Ultra Health Care Fund (RXL)
ProShares UltraShort Health Care Fund (RXD)
Rydex S&P Equal Weight Health Care ETF (RYH)
S&P SmallCap Health Care Portfolio ETF (XLVS)
SPDR S&P Health Care Equipment ETF (XHE) NEW!
SPDR S&P International Health Care Sector ETF (IRY)
Vanguard Health Care ETF (VHT)
BMO Equal Weight U.S. Health Care Hedged to CAD Index ETF (ZUH-TSX)

Each of these has its advantages and disadvantages. The XLVS certainly seems like one likely to
have a wider swing potential. And the IYH might be the most conservative. Let me know what
you think.

Merv

FINAL GOLD TRADE

March 22nd, 2012

The order you put in is not always what is filled by the broker. So here is the gold trade our gold bug reader
finally got filled:

Here are the executions on the Jun GLD hedge. It brought in $891, a couple of hundred more than I expected, which is my minimum profit for GLD ending anywhere between 142 and 179.

My broker said he couldn’t place a stop loss order based on the total value of the hedge, but that’s OK. I think the stop losses based on GLD price will be more than adequate.

Buy 10 170 calls (~2.04) Bought @ 1.64
Sell 20 176 calls (~1.06) Sold @ .85
Buy 10 150 puts (~1.8) Bought @ 2.25
Sell 20 145 puts (~1.02) Sold @ 1.305

Buy 3 160 calls (~5.44) Bought @ 4.67
Sell 6 166 calls (~2.99) Sold @ 2.50
Buy 3 160 puts (~5.12) Bought @ 6.06
Sell 6 155 puts (~2.95) Sold @ 3.65

This is a good example of how the DYY plotting tool helps to visualize a complex option strategy.

A Gold Hedge

March 22nd, 2012

The DYY site contains some very valuable tools. One of these is the option plotting program. This was used by a member to create the following hedge and graphic plot:

optionchain

Here’s a hedge on the Jun 16, 2012 GLD options – I’m using the reported closing bid/ask prices to minimize over-optimism:

Buy 10 170 calls (~2.04)
Sell 20 176 calls (~1.06)
Buy 10 150 puts (~1.8)
Sell 20 145 puts (~1.02)

Buy 3 160 calls (~5.44)
Sell 6 166 calls (~2.99)
Buy 3 160 puts (~5.12)
Sell 6 155 puts (~2.95)

It looks like a lot of work, but it expires worth over $700 for GLD prices anywhere between 142 and 179 (currently 160), and could be worth as much as $6000 (at 176). And I bring cash in by placing the position.

I’ve attached a screen shot of the expiration value. Unfortunately the axis labels are too jammed together to read, but you get the idea.

Is it possible to place the order to assure it brings in at least $700?

Please place stop loss orders to liquidate the whole thing if GLD is > 174 or < 147 (I don't want to get too close to those precipices) or if the overall liquidation value falls below -$200.(Is it possible to place a stop loss order that requires a computation?)

PROTECTING AGAINST A DOWNTURN, CONTINUED

March 20th, 2012

I was recently asked if I thought that the VXX was a good idea to buy as a protection against a downturn in the market.

My answer is NO. The VXX moves according to a formula that only Einstein might understand. It’s called the “fear index”
because it allegedly moves according to apprehension in the marketplace. How it determines that is a mystery.

But my experience with the VXX is that you never know how it’s going to move. For example, today the market was down.
My hedge against a downturn, the HDGE, went up a slight bit, which is what I would expect. The VXX went down.

WHY? Is there less fear in the market as it moves down? I don’t think so.

So i’m sticking with the more traditional methods of hedging against a downturn, such as the purchase of SH. But
remember, when the downturn does come, don’t try to guess the bottom, and don’t treat the hedge as a long term
hold. It should be for short periods when the market has made a big move up, as it has now. And after a correction,
get out and stay long.

Merv

Market Update For Week Ending 3/16/2012

March 16th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,232.62         +310.60         2.40         +1,015.06         8.31        
NASDAQ 3,055.26         +66.92         2.24         +450.11         17.28        
S&P500 1,404.17         +33.30         2.43         +146.57         11.65        
Russell 2000 830.18         +13.18         1.61         +89.26         12.05        
International 1,581.00         +36.87         2.39         +168.46         11.93        
10-year bond 2.30%        +0.26%          +0.43%          
30-year T-bond 3.41%        +0.22%          +0.52%          
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
Global markets rebounded this week on the absence of ominous developments overseas or in U.S. economic data. The blue-chip Dow industrials resurged above the psychologically critical 13,000-point line, gaining 2.40% in the process, while the S&P 500 rallied 2.43% to cross back above 1,400. The high-tech Nasdaq surged 2.24%, but the small-cap Russell 2000 lagged with a mere 1.61% gain. Foreign stocks bounced 2.39% in dollar terms as the Greek bailout seemed to progress with few last-minute problems. Treasury prices sagged thanks to investors shifting risk sentiment from aversion to appetite, driving bond yields upward. For more on recent trading activity, please read:
http://www.bloomberg.com

Federal Reserve Takes Slightly Less Gloomy Policy Stance
Ben Bernanke and company seem a little more cheerful about the health of the U.S. economy if this week’s policy statement is any guide. The Federal Reserve’s interest rate committee voted to keep monetary policy at current levels, promising that lending costs may remain near zero for years to come. While analysts suspect that sooner or later rates will have to rise to contain inflation, at the moment the decision is being heralded as “realistic.” For more from the Fed, please read:
http://www.chron.com/business/

Is The Economy Growing Faster Than The Experts Think?
Unemployment has been declining more quickly in recent months than the headline gross domestic product growth rate would ordinarily indicate. This may reveal structural changes in the labor market — perhaps a wave of workers retiring or filing for long-term disability benefits — or may simply be a sign that the economy is in better shape than many commentators currently believe. For more on this statistical paradox, please read:
http://finance.fortune.cnn.com/2012/03/16/okuns-law/?iid=HP_LN