MAY HOT TOPIC: American Manufacturing: Rebound or Renaissance?

May 29th, 2012

Dear Clients & Friends,

As the economy rebounds, albeit slowly, business owners and investors are increasingly looking to savings for retirement or simply to replace business income, whether through large contributions to defined benefit plans, or to steady contributions in to 401ks. Either way, the favor for guaranteed income streams in times of market turbulence has increased. Attached is an article published by Morningstar addressing those people who seek pension-like paychecks in retirement. And who wouldn’t want one of those? Enjoy this months, topics! Daniel

Links to Hot Financial Topics for May 2012

HOT TOPIC: American Manufacturing: Rebound or Renaissance?
During the last decade, U.S. manufacturing lost millions of jobs to foreign competition. The sector appears to be coming back strong, adding almost half a million jobs since 2010 as productivity rises. This article examines the conditions that originally caused the exodus of U.S. industrial production and those that may bode well for its future.

Small Companies Face Costly Cyber Security Threats
For many small businesses, the Internet is an important tool, but cyber security risks are growing. 40% of all targeted Internet attacks are now directed toward companies with fewer than 500 employees, and just over half of small businesses have a basic cyber security plan. This article provides tips to the small business owner about how to shore up their online defenses.

Investing in the Future
Due to the fiscal struggles of state governments, in-state tuition and fees at public four-year colleges and universities rose dramatically for the 2011-12 school year. The cost of private institutions also continues to increase. This article presents information on the cost of a college education and how a 529 plan may be a helpful savings vehicle.

Averaging Ups and Downs
Stock market volatility was the norm in 2011, and that can be hard on an investor’s nerves. Utilizing a dollar-cost averaging strategy may help even out your portfolio’s ups and downs, as explained in this article.

Pick Up This Split for Long-Term Retirement Income
The number of Americans aged 90 or older almost tripled from 1980 through 2010 and is projected to quadruple by 2050. As people live longer they may need to fund a longer-than-expected retirement. This article discusses how a split-annuity strategy could help provide a long-term income stream.

Designating Retirement Plan Beneficiaries
IRAs and defined-contribution plans have become an important component of personal wealth for households. Designating account beneficiaries and keeping the designations current can be a complex — but important — process to perform on a regular basis as certain life events and tax situations can necessitate a change.

Also, please take note – our business is growing and we are looking for talented individuals who are interested in financial services to join our team. If you know of someone who is looking for a mid-career transition, we would appreciate an introduction.

All the best!
Daniel Bennett

Market Update For Week Ending 5/25/2012

May 25th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,454.83         +85.45         0.69         +237.27         1.94        
NASDAQ 2,837.53         +58.74         2.11         +232.38         8.92        
S&P500 1,317.82         +22.70         1.75         +60.22         4.79        
Russell 2000 766.41         +20.33         2.72         +25.49         3.44        
International 1,350.38         -6.52         -0.48         -62.16         -4.40        
10-year bond 1.75%        +0.05%          -0.12%          
30-year T-bond 2.85%        +0.06%          -0.04%          
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-Up
All three major indexes, despite concerns about Spain’s finances, posted their best weekly gains for the month, snapping a three-week losing streak. For the week, the Dow gained 0.69%, the S&P 500 rallied 1.75%, and the Nasdaq soared 2.11%. Home Depot was the biggest weekly gainer on the Dow, while Pfizer lagged. The U.S. stock market will be closed on May 28 for a holiday.
For more, please read

http://www.cnbc.com/id/47564724

Gains In Consumer Confidence Continue
Consumer confidence, bolstered by favorable job and wage prospects, rose in May to its highest level since October 2007. The Thomson Reuters/University of Michigan final index of sentiment rose to 79.3, the ninth straight increase, from 76.4 the prior month. “Record numbers of consumers mentioned that they heard of favorable employment trends,” said Richard Curtin, an economist at the University of Michigan. For more, please read:
http://www.bloomberg.com

U.S. Economy Plodding Along Despite Headwinds From China and Europe
The number of Americans filing new claims for jobless benefits dipped last week, suggesting that the economy is plodding along despite headwinds from China and Europe. Though this week’s economic reports were a bit lackluster, they offered no signs of deterioration in the world’s largest economy as growth in countries like China slows and the euro zone edges towards a recession. For more, please read:
http://www.reuters.com

Past, present, future

May 23rd, 2012

Most investors are familiar with the hackneyed phrase, “past performance is no guarantee of future performance.” That’s the “cover your backside” sentence that professional advisors put in their recommendation advisories. They do that because they spend a lot of time talking about the past, and trying to figure out from the past what is going to happen in the future.

But in fact it’s only the future that an investor is interested in, not the past. And, to put it more bluntly, looking at the past is not a very good methodology for predicting the future. Investment indicia are constantly changing, and as the ancient Greek philosopher once said, “you can’t dip your toe into the same river twice.”

Of course, no one wants to take investment advice from Greeks right now.

Many investors have become weary of trying to predict the future at all, and just put their money into bonds to receive a fixed, predictable return. That used to be a pretty good strategy from a psychological point of view: no risk, no worry. But with interest rates well below inflation, as Warren Buffet recently wrote, an investment in bonds today is a guaranteed way to lose money over time. And Warren had something similar to say about gold: if you buy a gold brick now and hold it for 10 years, at the end of the 10 years all you have is the same gold brick. Your only hope for a profit is that some bigger fool thinks it’s worth more.

Others put their investment dollars into the S&P index, known at the SPY. That gives them the same up or down performance as the stock market in general because it’s a basket of 500 of the leading public stocks. Some commentators claim that this investment has, historically, out-performed most of the expensive investment advisors that are picking individual stocks. The only problem with it is that you never know how much investment dollars you will have from time to time, because you never know if the market will go up or down.

Because of that uncertainly, some investors opt to forget the market and put their money into income producing real estate. One reason to do that is because, absent major vacancies, real estate produces a pretty stable source of income, and while the underlying value might go up or down, the income can stay pretty much the same. And over time, real estate does tend to protect against inflation.

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That’s a good argument, but the downside of investing most of your investment capital into real estate is that it’s not liquid. And just when you need another $50,000 or so for a payment on college tuition is when the real estate market is down and you don’t want to sell — or interest rates are way up and you don’t want to refinance.

So I take a middle ground. I keep liquid by investing in the market, but I use the assets that I purchase to produce a stable income, and I do not depend primarily on the sale of appreciated stocks to generate my profits. I do this by writing options.

There are two kinds of options that I write to achieve this goal. One is the sale of covered calls. I look for a company that is fairly stable in a market that is stable, and has public stock that pays a dividend to hedge against inflation. An example of this is Proctor & Gamble (PG). Over the past year the stock has moved up and down between $58 to $68 a share, somewhat more change than one would like, but not bad considering the extremes of the market during that time period.

At the moment the stock is in the middle of that range, about $64. It pays a dividend equal to a 3.5 percent yield, probably better than the current rate of inflation. It’s in a stable market — consumer goods — and it sells both in the U.S. and internationally, which is a good diversification for stability.

So I buy 1,000 shares for $64,000 (or less, depending on cash on hand). At the same time I sell 10 calls. There are a lot of potential calls I can sell. I want to select the earliest date that will give me a reasonable premium since the sooner I earn the money the less risk I have, but a strike price (the price I agree to sell at) that is enough above my cost to show an additional profit.

In this case I select the October $67.50 calls. That’s further out than I prefer to go, but I need to give the buyer that much time in order to receive almost $1 in premium, for a total of a bit under $1,000.

The net result of this is that I own the stock and receive a nice dividend. Someone pays me $1,000 (and I can do that twice a year, for a total of $2,000 a year — an additional 3 percent or so on my investment), and nothing special happens unless the stock goes up to $67.50 and is purchased from me. And I don’t mind selling it at that price over the next five months and taking that nice profit. Meanwhile, I’ve raised my return from 3.5 to 6.5 percent.

The other strategy I follow on a regular basis is to sell what are called “put spreads.” For example, I have believed for some time that Apple stock will not drop below 10 percent in any three month period. So I sell a put at about 10 percent below current market value. The “put” is a contract under which I agree to buy the stock if it drops below the “strike price” we agree upon. In exchange for my agreement, I am paid a premium, which in this case on 10 puts can be quite large, around $8,000.

But I don’t want to take the risk of buying 1,000 shares of Apple stock, even if it drops, because it’s too expensive and would require too much of my capital. So to protect myself I buy a protective position 10 points below the sales position, and pay out about $6,500. Now I have a potential profit of $1,500 on these two positions, but my potential loss in the worst case, if the stock drops about 15 percent in the next three months, is only $10,000 ($1,000 per point) less the $1,500 I received, or a net $8,500. This is an amount that I could afford to lose in a bad scenario.

But there are ways to even avoid that loss if things go poorly. And in my next column I will give some examples of this strategy, because I realize people find it complicated, and will explain the additional methodologies available to recover from the unlikely case where the put spread ends up in a loss.

– Merv Hecht
Original article.

Latest Strategy

May 23rd, 2012

The naked-put, covered call strategy hasn’t been working well, at least in this market. The drops overshoot my put strikes, leaving me well below the market, and then the call premiums evaporate. So I make money by the hundreds and lose it by the thousands. Ditto on my time spreads.

I’m now beginning to wind all those up and concentrate on what I call “skillets”, because of the shape of the profit curve – a modest flat constant profit for changes of several percent around the initial stock price, climbing to a substantial profit for a much wider range of stock prices on each side, then falling to terrifying depths beyond that, but with stop loss orders way before I reach the danger point. I refuse to bet on market direction, but it’s not too rash to assume that prices will move in Some direction or stay still.

It’s essentially a narrow long strangle and a wide short strangle with a high enough ratio to result in a net credit.

I write these for only a month at a time, and try to keep the width between stop-loss points within the historic 95% monthly range of the stock. I make a nice return if the stock goes nowhere, and a much better return if it moves moderately in either direction.

It works best for very popular options with high volume and a wide selection of strike prices, like SPY and GLD.

The limit here is available margin for the shorts, so as the marginable securities, I’ve been investing in stocks with super-high dividends. It’s also nice that my broker has arranged for a significantly lower margin interest rate than Schwab ordinarily charges.

– Harvey Frey

Green Mountain Coffee Roasters

May 23rd, 2012

I’ve written here about this company and its ups and downs. But finally this week I took action:
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I sold 10 puts of the Sep 20s for $2,240 and bought 10 puts of the Sep 16s for $1,145 as a hedge against disaster, for a net premium
in my pocket of just over $1,000. The stock has moved up slightly since the trade on May 17 when the stock dipped to around $24.
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I’m OK just keeping the $1,000 if the stock holds or moves up, and I’m also OK with buying it at $20 if it moves down. The company has
a large installed base of customers with its coffee makers, and I still drink coffee myself every morning.

-
Merv

COMING SOON TO YOU AS A NEW TOOL ON DOUBLE-YOUR-YIELD: STOCKPICKER 1.

May 22nd, 2012

You give the program a list of stocks, typically similar in some respect, and you want to decide which are better.

- The program looks up or calculates several criteria that people might be interested in to compare stocks, and lists them for each stock.
- But most people don’t have a feel for what’s a good or bad value for most of those criteria.
- Where the criteria have a clear direction from best to worst, it computes the deciles of the criteria and color codes the boxes. If there’s no clear better/worse direction, It leaves the boxes white.
- So if a stock is among the top 10% of stocks on that criterion, it’s colored bright green, if among the worst 10%, it’s colored bright red, with steps in between, so for a stock that’s in the middle 10% of that criterion, the box is a kind of brown.
- So you can scan across a row, and a lot of green boxes are good, and a lot of red boxes are bad, or at least means you should think about whether that criterion matters to you for what you plan to do with the stock. If you’re planning on shorting, maybe a lot of reds are good.
- If you don’t know what the criterion definitions are, there’s a link at the bottom that goes to a page that explains them all.

Here is an example:
table

GLD hedge with a potential for $4000 for the month

May 20th, 2012

A couple of months ago I wrote a broad symmetrical hedge on GLD, expiring in June.

With the Euro so parlous, I expected GLD to rise, but it has dropped dramatically, though not yet at my stop loss point.

I was considering aggressively protecting my left flank by writing a cash-positive ratio straddle on that end.

But, since I don’t understand why GLD is dropping, and therefore having no idea of how far it could drop, I decided instead to liquidate at a modest $400 profit.

Now I’ve written a new June hedge, centered at the current price, bringing in apx. $900 but with a potential for $4000 for the month.

It’s a narrow long strangle and a wide short strangle. I call it a ’skillet’, because it has a flat profit in the middle, sloping up to the edge, and then falling steeply into the fire.

scr

Black line is profit at expiration.
Red lines are stop loss points.
Blue lines are the predicted profit curves before expiration. They’re labeled (on the right) with the days left till expiration.
Green lines are current price, flanked by historic probabilities of one-day moves each way, 80%, 95%, and 99.9%.

-Harvey Frey

Market Update For Week Ending 5/18/2012

May 19th, 2012
Market Update For Week Ending 5/18/2012
Index Close Net Change % Change YTD YTD %
DJIA 12,369.38         -451.22         -3.52         +151.82         1.24        
NASDAQ 2,778.79         -155.03         -5.28         +173.64         6.67        
S&P500 1,295.12         -58.27         -4.31         +37.52         2.98        
Russell 2000 746.08         -43.98         -5.57         +5.16         0.70        
International 1,356.90         -89.29         -6.17         -55.64         -3.94        
10-year bond 1.70%        -0.15%          -0.17%          
30-year T-bond 2.79%        -0.23%          -0.10%          
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-Up
Despite the hoopla surrounding the initial public offering for social media giant Facebook, stocks continued their week-long swoon–in fact it was the largest weekly loss since November. The S&P 500 fell 4.31% for the week and breached the 1,300 level for the first time since January amid renewed concerns about Europe’s debt crisis and disappointing economic data.

Financial, healthcare, consumer staples and technology companies led losses among the 10 main industry groups on Friday, while telephone stocks and energy producers gained.

The S&P 500 has declined almost 9% from its four-year high in April and about $4 trillion has been erased from global equities this month amid renewed concern about Europe’s debt crisis and disappointing economic data.
Year to date, the S&P has still managed to climb 3%.

The Nasdaq fell 5.3% for the week, but has returned nearly 7% since the beginning of the year.

Treasury 10-year yields declined for the week, they rose slightly on Friday. Oil lost 1.2% to a six-month low.
http://www.bloomberg.com

Now May Be Best Time To Buy A House In Two Decades
Purchasing a home may be more affordable now than it has been in more than 20 years. Almost 78% of homes sold during the first quarter of 2012 were affordable to people earning the U.S. median income of $65,000, according to a report released Wednesday by the National Association of Home Builders and Wells Fargo.

Home prices nationwide have fallen about 36% from their peak, while median income has risen by about 10%. At the same time, mortgage rates are below 4%. There is one catch for home buyers, however: mortgage availability. Lending conditions are still tight. Without this significant issue, the housing and economic recovery could be proceeding at a much stronger pace.

Indianapolis was the most reasonably priced housing market in the U.S. In fact, 96% of all homes sold in the metro area could be easily afforded by the typical family, according to the report. Wages in Indianapolis are reasonably high with the median family income at $66,900, about $2,000 above the national median. Meanwhile, the median price for homes sold there during the first three months of 2012 was $102,000.

Other major markets that ranked high on the most affordable list included Dayton, Ohio, where 94% of homes sold could be purchased by a typical family; Lakeland, Fla., with a 93% affordability score and Modesto, Calif. at 93%.

In contrast, New York City’s housing market was ranked as quite expensive, where only 31% of homes sold were affordable to median income families, who earned $69,200. The median home price in the metro area was a whopping $400,000. Other least affordable large markets included San Francisco (40%), Honolulu (48%), and Los Angeles (50%).

http://money.cnn.com

Payrolls Up In 32 U.S. States; Unemployment Declined In 37
Last month, payrolls rose in 32 U.S. states, while the unemployment rate fell in 37. The data demonstrated that the labor market was healthier across much of the U.S. Indiana led the nation after creating 17,100 net new jobs, followed by Texas with 13,200 additional jobs. The unemployment rate dropped the most in Arizona and Oklahoma from March.

The U.S. added the fewest number of workers in April, while the jobless rate unexpectedly fell to a three-year low of 8.1% as people left the labor force, according to data released this month. For the U.S. economy to move back to full strength, the pace of hiring needs to be more robust to generate more consumer spending and to help reduce unemployment, which Federal Reserve policy makers have said remains high.

At 3%, North Dakota had the nation’s lowest unemploymentin April, followed by Nebraska, where it fell to 3.9% from 4%. Nevada continued to have the highest jobless rate even after dropping to 11.7% in April, its lowest level since June 2009, from 12% in March. Rhode Island’s unemployment climbed to 11.2% from 11.1%, placing it in second place, followed by California at 10.9%.

The central bank expects joblessness to be in the 7.8-8.0% range by the final three months of this year, according to forecasts released by bank in April.
http://www.bloomberg.com

A Walmart put spread

May 15th, 2012

On may 10th I wrote a put spread on Wal-mart. I’ve been watching the stock, and I like it, but with the market moving down I thought a put spread is a chance to pick up some cash and maybe get the stock at a bargain.

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So I sold 10 puts sep 55s for $1210 and bought 10 puts sep 45s paying $210, for a net credit of $1,000. I hope the stock goes down to 54 and I buy it there, but if not the $1,000 in my bank account won’t hurt.
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Merv

Market Update For Week Ending 5/11/2012

May 13th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,820.60         -217.67         -1.67         +603.04         4.94        
NASDAQ 2,933.82         -22.52         -0.76         +328.67         12.62        
S&P500 1,353.39         -15.71         -1.15         +95.79         7.62        
Russell 2000 790.06         -2.69         -0.34         +49.14         6.63        
International 1,446.19         -57.48         -3.82         +33.65         2.38        
10-year bond 1.85%        -0.03%          -0.02%          
30-year T-bond 3.02%        -0.06%          +0.13%          
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-Up
U.S. stocks lost ground Friday as the major indexes were on track for a second weekly loss. Wall Street gave greater weight to J.P. Morgan Chase & Co.’s $2 billion trading loss than a rise in consumer sentiment and pushed stock prices down. Decliners edged past advancers the last trading day of the week – nearly 2 to 1 on the New York Stock Exchange, where 575 million shares traded at the close of the trading day. For the week, the S&P 500 Index fell 15.71 points, with financials receiving the largest hit among its 10 sectors and the index moving down 1.15%. The Nasdaq Composite Index held on with only a 0.7% decline from last Friday’s close. For more details, go to:
http://www.marketwatch.com

Issues Moving The Financial Markets This Week
Confidence among U.S. consumers, especially those in households earning $75,000 a year or more, reached its highest level since 2008. The Thomson Reuters/University of Michigan preliminary sentiment index for May climbed to 77.8, the best number since January 2008, from 76.4 in April. The survey also found that a large percentage of respondents felt it that it may be a good time to purchase cars, furniture or other big-ticket items. Factors that may be lifting consumer’s spirits include a jobless rate that has fallen to the lowest level in three years and a housing market that shows signs of stabilizing. For more details, go to:
http://www.bloomberg.com

Finally Some Good News At The Gas Station
Crude for June delivery fell 95 cents, or 1%, to settle at $96.13 a barrel in trading on the New York Mercantile Exchange on Friday. Crude-oil futures declined as weak data out of China and ongoing demand concerns combined to pull prices to their lowest settlement of the year. Oil product futures followed crude lower to cap off the trading week, but natural gas posted gains for the day to end higher for the week. For more, go to:
http://www.marketwatch.com