SOME NEW THOUGHTS ON THE MARKET

August 20th, 2012

I like to write options, but not every worthwhile stock has sufficient trading in options to be a good candidate for that strategy. Two such stocks are Enbridge, Inc. (ENB) and Spectra Energy Corp (SE). Both of these are in the natural gas pipeline area, currently something many professionals are recommending.

Enbridge, primarily a Canadian pipeline company, certainly has a good dividend; currently about 2.9% and that should act as some kind of a cushion against a major decline in value. The problem I see with it is that it has a PE ratio of 51, which means the stock price is very high compared to earnings. That’s typical of stocks which the market people think are going to go up dramatically. But it means that you are, in effect, paying a price justified in the future, not now. Still, with that dividend, it seems like a good long-term holding.

Spectra has an even higher dividend, about 3.9%, which seems even more suspect. But it has a PE ration of only 17, not much above the market average. This Texas company owns and operates natural gas facilities and pipelines in the NE, SE of the US, and parts of NE Canada.

So maybe one should buy a little bit of both?

I noticed on both the radio and television lately that the Dow Jones index gets the biggest play. Sometimes the S&P 500 index is not even mentioned. That’s a mistake, and I think you will see this change over the next year or so.

The Dow Jones is not a very representative index. A very small number of companies make up the database, they are not typical of today’s market, and it is price weighted without consideration of trading volume.

The SP 500 corrects all of these deficits and is much more representative of the overall market. The only problem with this index is that it is skewed toward very large companies. That’s no problem for me, because I prefer to invest only in large companies. But for those who think otherwise, there is always the NYSE Composite index, which averages all the stocks traded on the NYSE, which is about 60% of all traded stocks. Alternatively one can look at the NASDAQ Composite index, a market-weighted index of 3,000 stocks traded over-the-counter. These tend to be smaller technology companies. For young people looking for long term very high growth, those might be the companies to invest in.

The broadest barometer of all the indices is the Wilshire 3000 Equity Index, but since few investors use it, the S&P seems favored. Personally I watch the S&P because one of the best ways to invest in options is to use the “SPY,” an option tied to the S&P 500. For both buying and selling options using that index, a basket of 500 stocks, gives a lot of diversity, and protects against the kind of major swings that occur when unexpected events happen, such as the indictment of a CEO for fraud. Even if one company in the S&P 500 has a big swing, the overall index doesn’t change much.

Finally we come to that part of the column which I’m sure is the least interesting: what as I doing this week in the market?

What I notice is that both AAPL and GOOG are taking over the internet and hi-tech areas. They look really solid and not likely to go down more than 10% over the next 30 days. Nor do I think they will go up that much in 30 days.

So I am writing put spreads on both stocks, with approximately 10-15 point spreads between the short position and the long hedge. For example, I am selling 10 puts of the AAPL 615s for SEP, and buying the 600s, for a net credit of about $2,400. At the same time, as an additional hedge, I am selling the 700 calls and buying the 715s to hedge that, for an additional credit spread of $1,400.
I take in $3,800, with a theoretical risk of $15,000 for a 30 days period, less the $3,800 or 11,200 maximum risk. But that risk can also be reduced by subsequent trades if the stock moves close to the strike prices.

If the stock stays between 615 and 700, I get to keep the $3,800. It is at 648 today.

I am doing substantially the same thing with Google. I sell the 625 puts and buy the 605’s to hedge, and sell the 700 calls and buy the 710s to hedge. I take in about $6,000 on this trade. There is not much risk if Google moves up, but there is more risk if it moves down.

Time will tell. Stay tuned.

Finally I pat myself on the back. At the beginning of the year I told a bank trust department, to whom I was acting as consultant, to sell European equities. We had a lengthy exchange, since their advisors felt those equities should be included for diversification. Here is what has happened to the leading Euro equities since then:

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Aren’t we glad we’re not invested in that group!

Merv

Nine Great American Companies That Will Never Recover

August 13th, 2012
Many American companies have been lauded for their rapid rise to greatness, a process that sometimes takes less than a decade. These firms become leaders in their industries, are renowned for innovation, phenomenal growth, and, in the case of public corporations, their soaring share prices. Google Inc. (NASDAQ: GOOG) usually makes the list, as does Apple Inc. (NASDAQ: AAPL). At the other end of the scale are well-known firms that are so crippled they go bankrupt or disappear entirely. Recently, these have included AMR, the parent of American Airlines, Borders, and Eastman Kodak.

Somewhere in the middle — between the companies that do phenomenally well and those that fail — are ones that were once leaders in their industries but have fallen hopelessly behind. They may remain in business for years or even decades after their best days. Their executives struggle to find better strategies, and often their boards seek new management. But, in the case of companies that fall permanently into trouble and well behind the leaders in their industries, the chance of a turnaround has passed. Competitors have taken too much market share, and often have stronger balance sheets. Or, their products and services are no longer in demand because of changes in the overall economy or the sectors in which they operate.

To compile a list of names that were once leaders in their industries, but are no longer and likely will never be again, 24/7 Wall St. looked at companies that have lost most of their market share, suffered sharp share price erosion, and posted a sharp drop in earnings, or even losses. We focused on companies that are included in the S&P 500. Almost all have lost money recently. Each has had a drop in share price of over 50% in the last five years. Each has powerful competitors who have built market share or moats around their businesses that are nearly impossible to overcome.

1. J.C. Penney Company Inc. (NYSE: JCP)

J.C. Penney, founded in 1913, counted itself among the primary retailers and catalog companies in the US for decades. But under CEO Myron Ullman III, who took over in 2004, its revenue began to slide, dropping from $19.9 billion in 2007 to $17.3 billion in 2011. Earnings fell from $1.1 billion to a loss of $152 million in the same period. J.C. Penney’s share price has fallen 70% in five years. By way of contrast, the shares of Macy’s Inc. (NYSE: M) and Target Corp. (NYSE: TGT) — two direct competitors — have been essentially flat over the same period. J.C. Penney was challenged by these two companies and several others, including Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale Corp. (NASDAQ: COST). Problems became so severe that J.C. Penney closed its formerly successful catalog business and reached outside for a new CEO. The board’s choice was Apple Retail Chief Ron Johnson, who was picked in June 2011. Johnson changed the company’s pricing structure, but the reaction was so poor that revenue dropped an extraordinary 20.1% to $3.2 billion in the first fiscal quarter. J.C. Penney posted a loss of $163 million. Internet sales, so essential in a world in which Amazon.com Inc. (NASDAQ: AMZN) has become a significant presence, fell 27.9% to $271 million. By contrast, Macy’s total sales, combining online and those made in stores, rose 4.3% to $6.1 billion in the last reported quarter. And Macy’s is hardly J.C. Penney’s largest competitor by revenue or workforce. Walmart’s sales were $450 billion last year, while Costco’s were $89 billion.

2. The New York Times Co. (NYSE: NYT)

The New York Times is, and has been for decades, the premier daily newspaper company in the US. But the company has been shrinking rapidly. Ten years ago, The New York Times Company made $300 million on revenue of $3.1 billion. Last year it lost $40 million on revenue of $2.3 billion. The New York Times did not move online fast enough to offset the rapid erosion of print advertising. Its tardiness allowed it to be challenged on the Internet by properties like The Huffington Post, Google News, and the news, sports, and financial properties of portals such as MSN, AOL, and Yahoo!. As an indication of how the stock market measures the value of The New York Times Company, its market cap is $1.2 billion against its revenue of $2.3 billion in 2011. Low-brow content aggregator Demand Media has a market capitalization of $865 million against 2011 revenue of $325 million. Demand lost $13 million last year. The reason the market values of the two companies are so close? The Times still relies on the dying print business for the lion’s share of its revenue. Its market cap and cash balance are too low to allow it to more aggressively move to the internet or buy large online properties. In the last quarter, The Times’ revenue was roughly flat at $515 million. The company lost 57 cents a share compared with a profit of 5 cents a share in the same period last year. The worst news from the quarter was that “Digital advertising revenues at the News Media Group decreased 1.6 percent to $52.6 million from $53.5 million mainly due to declines in national display and real estate classified advertising revenues.” The Times did make advances in online paid subscriptions, but circulation revenue barely offset the drop in advertising sales. At the heart of The New York Times’ uniqueness among American newspapers is the quality of its editorial content. The company has held the line on retaining its large editorial staff. It did lay off 100 people in 2009, which was about 8% of the news staff. The industry is in the midst of another wave of job cuts. The Times has not been able to show significant top-line growth, even with its digital subscription efforts. Print is in too much of a shambles for the company to shore itself up in the digital world.

3. Groupon Inc. (NASDAQ: GRPN)

Groupon is an unlikely candidate for a list of companies that have their best years behind them. One reason Groupon belongs on this list is its stock price has fallen by well over 70% since its November 2011 IPO. Groupon’s primary problem is that the online coupon business, in which it was the major pioneer, is a commodity business now. It has not been terribly difficult for Amazon and other large retailers like Walmart to enter the sector. Groupon was the most significant player in its industry after beginning operations in 2009, when it posted revenue of only $15 million. That number rose to over $1.6 billion last year, but Groupon paid dearly for that growth. The company lost $675 million over that same two-year period before interest and taxes. Groupon’s revenue grew 89% to $559 million in the most recently reported quarter. But expansion continued to come at a cost. Groupon’s bottom line grew from a loss of $12 million in the same quarter last year to one of $147 million. Groupon’s new competitors replicated most of its tactics very quickly. LivingSocial, the rival most like Groupon in terms of its business model, had 7.2 million unique visitors last year to Groupon’s 11 million, according to online industry research firm Comscore. LivingSocial has financial support from Amazon. Google has entered the sector with a product called Google Offers. Well-regarded industry website VentureBeat lists 33 direct competitors to Groupon, and none is a large corporation. The Chicago Sun-Times, one of the two daily papers in the city where Groupon is headquartered, summed up Groupon’s difficult challenges: “Groupon has been weighed down by high marketing and staffing costs and faces increasing competition from the likes of Amazon.com and Living Social, among hundreds of other local deals sites.” Even the hometown press has nothing positive to say about the company.

4. Sprint Nextel Corp. (NYSE: S)

Sprint finally posted some reasonably good results recently. However, these could not mask the fact that the No. 3 wireless carrier is too small to ever gain any ground on AT&T Inc. (NYSE: T) and Verizon Wireless (VZ). Sprint’s revenue rose rapidly from 2002 to 2006. Over the period, sales moved from $15.2 billion to $41 billion, aided by the buyout of Nextel at the end of 2004. Sprint paid $35 billion for Nextel, and the decision turned out to be a disaster. The Sprint network ran on a different platform from Nextel’s. Customers left the combined company. Sprint made the MSN “Customer Service Hall of Shame” several times, most recently in 2010. Sprint’s customer service ratings have improved significantly since then, but the damage has been done. While AT&T and Verizon Wireless have grown rapidly, Sprint’s revenue has fallen from $41.1 billion in 2007 to $33.7 billion last year. Sprint’s cumulative loss during that period was over $43 billion. Sprint now has about 50 million subscribers to Verizon’s 104 million and AT&T’s 95 million. As a Morningstar researcher recently noted, “While Sprint has struggled, Verizon Wireless and AT&T have benefited at its expense. Fending off these much larger rivals will be increasingly difficult as data services become more important to the industry.”

5. Barnes & Noble Inc. (NYSE: BKS)

The cause of Barnes & Noble’s downfall can be described in a word: Amazon. In 2002, Barnes & Noble made $109 million on sales of $4.9 billion. That same year, Amazon lost $149 million on revenue of $3.9 billion. Fast forward to 2011 when Amazon’s revenue reached $48.1 billion and it earned $631 million. Barnes & Noble lost $69 million on $7.1 billion last year. Amazon may sell consumer electronics equipment and internet streaming video products, but at its heart it is still the world’s largest bookstore. The highlight of Amazon’s recent quarter, in which revenue rose 29% to $12.8 billion, was that “Kindle Fire remains the No. 1 bestselling product across the millions of items available on Amazon.com since launch.” The product most visibly promoted on the Amazon.com home page? The Kindle. Barnes & Noble’s legacy business is huge and expensive. As of its April proxy filing, the company operated 1,338 bookstores in 50 states, including 647 bookstores on college campuses. Obviously those stores require inventory, rent and personnel. And Barnes & Noble mentions “the maturity of the market for traditional retail stores” as one of the risk factors in its SEC filings. Is it any wonder that in its last fiscal year, Barnes & Noble had retail sales of $4.86 billion? That part of the company’s business shrank by 2%. Its Nook segment, which encompasses the digital business (including readers, digital content and accessories), had revenue of only $933 million. Digital sales rose 34% over the previous year but remain a very modest portion of sales. Barnes & Noble’s digital division is vulnerable. That is particularly clear when the market share of its Nook e-reader is taken into account. The Nook’s share of the US market is 27%, in contrast to a 60% share for Amazon’s Kindle and 10% for Apple, according to Reuters. Barnes & Noble is hopelessly outgunned online, and the retail book business has leveled off.

6. Zynga Inc. (NASDAQ: ZNGA)

Zynga, the premier social network game company, is another name that by all rights should not be on our list. Zynga’s revenue rose from $19.4 million in 2008 to $1.14 billion last year. Zynga spent plenty of money to reach the top position in its industry, and last year lost $404 million. Investors were drawn to the company because it had been effectively piggy-backing free and premium games onto the Facebook platform, which currently has nearly one billion members. The success of the model appeared to be astonishing. In its last reported quarter, Zynga says it had 192 million monthly unique users, up 27% from the same quarter a year before. But, as the total number of virtual games has grown, the cost to maintain a lead has become almost prohibitive. Zynga lost $23 million last quarter on revenue of $332 million. In the same quarter a year ago, Zynga made $1 million on revenue of $279 million. Zynga’s growth rate is no longer impressive, and the problems it faces, apparently, will soon worsen. The company recently lowered its outlook to reflect delays in launching new games, a faster decline in existing Web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something. This bad news pushed Zynga’s shares to $3, down from a post-IPO high of $15.91. Zynga’s problems are more complex — and more permanent — than delayed games or lower returns on its Facebook presence. The game market is becoming more fragmented by the day as games migrate from consoles to PCs to tablets and smartphones. Social media is not the only place that game players gather in great numbers. Many of the most downloaded apps at the Apple App store are games. The same is true of the Google app store. Zynga’s insurmountable challenge was summed up by its CEO Mark Pincus on the company’s recent earnings call. He said, “We think social gaming is just starting to grow quickly on mobile and we think it has the potential to be the most important part of the experience on mobile and an even bigger business in the future.” Despite his vision of the future, Zynga’s shares are in the rubble. The reason, GameIndustry International reports, is that “Apple iOS and latterly Android have become the dominant platforms for growth in social gaming (not necessarily for social gaming itself, but all the growth is on mobile, not on the web)…” Zynga has been overwhelmed by hordes of new challengers.

[More from 24/7 Wall St.: America’s Nine Most Damaged Brands]

7. Dell Inc. (NASDAQ: DELL)

Dell is being hammered by the smartphone and tablet PC sectors. This is not long after its prospects were damaged by poor management decisions and the rise of Asian manufacturers, which has taken significant market share from the company. Dell was one of the companies that capitalized on the creation of the IBM PC platform. Among the others were Hewlett-Packard Co. (NYSE: HPQ), Compaq, and Gateway. International Business Machines Corp. (NYSE: IBM) exited the business when it sold its PC operations to China-based Lenovo in late 2004. After that, the PC industry went through two sets of transformations. One was consolidation: HP bought Compaq and Acer bought Gateway. The other was the emergence of large Asian PC businesses — Acer, Asus and Lenovo. All of these companies, Asian and American, face a substantial challenge today. PCs are viewed as commodities, which has put pressure on prices. Computing has moved quickly to smartphones and tablets. Dell made another substantial mistake. As its share of the global PC market has fallen, it has not aggressively followed the successful model adopted by IBM. IBM built a $100 billion business offering consulting, software, IT support, hardware and financing. It does not rely heavily on a single offering. Dell’s reliance on PC sales has continued to sting, particularly now that the PC era has given way to one dominated by smartphones.

8. Advanced Micro Devices Inc. (NYSE: AMD)

AMD’s latest quarterly report shows just how bad off the company is. Year-over-year revenue fell 10% to $1.4 billion. Non-GAAP net income fell from $70 million to $46 million. AMD was Intel Corp.’s (NASDAQ: INTC) most direct competitor five years ago, and held about 24% of the server and PC chip market in 2007. Last year, its market share fell to 19%. But that is not AMD’s single greatest problem. The company bought graphic chip maker ATI in 2006 for $5.4 billion. PC makers had begun to add more of these chips to their machines. AMD needed to keep pace with rival Intel and graphic chip maker Nvidia Corp. (NASDAQ: NVDA) The main result of the ATI transaction was that it saddled AMD with an unsustainable debt and did almost nothing to help AMD’s fortunes. AMD had revenue of $6 billion in 2007, while Intel’s was $38.3 billion. Last year, AMD’s revenue rose to only $6.6 billion, while Intel’s soared to $54 billion during the same period. AMD has had three CEOs in the last five years, as it struggled to find a strategy for growth. The company’s greatest challenge may lie ahead as much of the personal computing market moves to tablets and smartphones. The chip used in the Apple iPad was designed by Apple and made by Samsung. The Apple iPhone 5 will probably be powered by a quad core processor made by Samsung, the same chip used in the Samsung Galaxy S III. The other primary designers of the current generation of chips are Qualcomm Inc. (NASDAQ: QCOM) and ARM Holdings PLC (NASDAQ: ARMH). AMD’s products are almost nowhere to be found in this latest generation of portable devices.

9. Bank of America Corp. (NYSE: BAC)

Most of the operations that constitute Bank of America today were created through a series of mergers and buyouts, including the acquisition of FleetBoston in 2003 and credit card giant MBNA in 2005. These and other deals were engineered by Ken Lewis, who became CEO in 2001. By 2007, he had succeeded in making Bank of America the largest bank in the US by deposits. But Lewis became overzealous as he tried to make the bank even larger. As the financial system was heading toward near-collapse, Bank of America bought crippled mortgage bank Countrywide Financial in January 2008 and deeply troubled investment bank Merrill Lynch in September of that year. Bank of America’s financial troubles multiplied so rapidly that it was forced to take much more TARP money than most other large US banks — $45 billion. Lewis’s risk-taking eventually was part of the reason the federal government pressed the bank to add outside directors who had been regulators or heads of successful banks. In June 2009, four new directors were appointed, including a former member of the Board of Governors of the Federal Reserve System and a former chairman of the Federal Deposit Insurance Corporation. Lewis was out by the end of the year, and Brian Moynihan replaced him. But Moynihan’s tenure has been even more disastrous than Lewis’s. JPMorgan Chase & Co. (NYSE:JPM) passed B of A in assets to become the largest bank in the US. Crippling losses caused B of A to announce it would cut more than 30,000 jobs. In late 2011, a $50 billion class action suit was filed against B of A based on the lack of disclosures made when it bought Merrill Lynch. Bank of America has also been the target of several mortgage fraud suits, and entered into a settlement which cost it and four other large US banks a combined $25 billion. B of A still faces legal and balance sheet problems, which may force it to raise tens of billions of dollars. This will undermine the  share price. The final and most difficult challenge is its exposure to the US real estate market, which is unparalleled among its peers. This, in addition to the unhealed scars from poor management and the global financial collapse, have left Bank of America limping along.

Douglas A. McIntyre | 24/7 Wall St

A NICE TRADE ON GOOGLE

August 10th, 2012

I wanted to tell you about a trade I did in my account recently.

From a reader:

I sold a naked PUT on GOOG right before they announced earnings with the goal that the earnings would be good and the stock would go up and I would eventually keep the premiums.

I was OK with buying the stock at a lower price from what it was trading at when I made the trade if the earnings were not great and the stock had dropped backed down.

What I did is sold 4 contracts on July 10th and took in just shy of $4,000 which was an option price of close to $10.
The stock was at $581 on July 10th and this trade was for just over one month which if it backfired I would be buying a great company at a price of around $571.
I have one week left and the option is worthless now so in a week it will expire and I will keep the $4,000 I took in over just a month.
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Nice trade The stock is now at $639

How I’m making money with the SPY

August 6th, 2012

Here’s how I’m making money with the SPY.

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spy_graph

I make a profit anywhere above SPY=$121.

This started off as a skillet, but as the price went up, I got a margin call on the 149 short calls. (Only time I’ve ever got a margin call while making a profit )

So I covered them for a few cents. I kept them in the table, but with the Number set to 0.

(It was pretty silly of me to sell them in the first place at .01. I only did it for the foolish consistency of keeping the skillet symmetrical. It also lowered my margin requirement a little.)

Now, I have a completely free run on the upside.

This is probably a good strategy to use whenever you’re bullish. You not on;y make money on the upside, but even for a long way on the downside.

Last month was great – I pulled in over $8K. I had more trouble getting good deals this month, but it looks like I’ll get over $5K.

I will get more bang for the required margin buck if I use this method on less expensive stocks. SPY and GLD are a bit too expensive, but I’ve been using them because they’re so liquid and have options that go way out in both directions.

Harvey Frey

​Mid-Year in Review

August 6th, 2012

In this blog post, I decided to cover several topics briefly rather than just one or two in depth. If people like this format, I will alternate it with more in-depth posts.

Topics:
1. Stocks are far more appealing than Treasury bonds, which offer negative real returns, but other types of bonds are still attractive.
2. China’s improving economy could provide a boost to world markets.
3. Europe and the US “Fiscal Cliff”: Don’t believe all the bad news.

Emotions: An investor’s worst enemy
In 2000, everybody wanted to own stocks, including those of companies with no sales or profits. The earnings yield of the S&P 500 was only 3.4%, near an all-time low, and the dividends were a paltry 1.1%. The mood of the time was euphoric, and people were throwing money at companies that had no hope of ever showing a profit, while trying to justify their irrational behavior with platitudes like “the Internet changes everything.”
Bonds? No one wanted them back in 2000. Ten-year US Treasuries were yielding 6.5%, while 10-year TIPS (Treasury Inflation-Protected Securities), perhaps the safest asset known to man, were providing a 4% real yield. AAA corporate bonds were paying 7.9%. Why settle for boring single-digit returns when stocks were giving you 30% a year?

Emotion won out over reason. And we all know what happened next. The following decade featured two massive bear markets in stocks and the worst 10-year return in recorded history. Bonds, in the meantime, did extremely well. While the 2008 bear market was hard to foresee because stocks were no longer expensive, the one that started in 2000 should have been obvious because valuations were so out of whack.
Fast forward to 2012. The mood now is one of fear or even despair. Meanwhile, the earnings yield on stocks is 6.6% and their dividend yield is 2.2%, both about twice what they were in 2000. Ten-year Treasuries yield a paltry 1.5% and TIPS are providing an after-inflation return of –0.7%. (You read that right, people are willing to lose almost 1% a year after inflation for the privilege of lending their money to the government.)
In 2000, the difference between 10-year Treasury yields and the earnings yield of stocks was +3.1%, making the bonds a better buy. Today that difference is –5.1%, making stocks far cheaper than Treasuries. (The average yield difference between Treasuries and stocks since WWII is –1.4 %.) I can’t predict the future any better than you can, but I can both do simple arithmetic: for an extra 5.1% per year, I’ll take on some risk in my portfolio. No emotions necessary.

Bonds not all created equal
Above, I wrote how US Treasuries are overpriced and providing crappy yields. How crappy? In a taxable account, the after-tax return on the 10-year is 1.07%. Take out inflation, which the market estimates at 2.19%, and your after-tax, after-inflation return comes to -1.12% per year (even worse than the TIPS).

Congratulations! After 10 years, your $10,000 investment becomes $8,935.

But there are lots of bonds besides US Treasuries, and they almost all provide better yields. So much better, in fact, that I’m putting many of them in my portfolios. Here are some examples from mutual funds and ETFs:

Investment-grade corporates (LQD): 4.1%
High-yield bonds (JNK): 7.3%
Emerging market bonds (PYEMX): 6.2%
California municipal bonds (CXA): 3.6% double tax free

No, these aren’t double-digit yields (and total return could be higher or lower than the yield), but they do compare rather favorably with the 6.6% earnings yield on stocks. They have more risk than Treasuries, but if your portfolio is sufficiently diversified, not much more.

There are lots of investment opportunities out there besides the S&P 500 and US Treasuries. Over time, you’ll be rewarded for diversifying and taking on some risk. Nothing ventured, nothing gained.

China: Doing better than their government says?
We’ve all heard that China is slowing down and risks a “hard landing” (which translates into GDP growth of less than 7%—a number that developed countries can only dream about). Official data paint a somewhat bleak picture, and though their central bank has been easing and the government has recently added some fiscal stimulus, signs are still worrisome. Or are they?

China now has a “Beige Book” that uses similar methodology to the US version utilized by the Federal Reserve. This periodic interview of banks and businesses around the country provides a view of the economy that is timelier than official statistics. And the results from China’s last survey of 2,000 business executives and bankers about a month ago suggest a pickup in their economy, particularly in retail and manufacturing. Bankers are seeing better loan availability and increasing demand. These data are two to three months ahead of government statistics, suggesting that we may see better economic reports out of China toward the end of the summer. That would be nice Labor Day present.

Europe: What a Drag(hi)!
Last week, Mario Draghi cheered markets when he said that the European Central Bank (ECB) would do “whatever it takes” to support the Euro. Yesterday, he disappointed markets by reiterating his pledge but doing nothing concrete. This is because any intervention by the ECB has to be in tandem with the Eurozone’s bailout funds in order to put binding requirements on the countries helped by the moves. An agreement is still in the works with key Eurozone countries, Germany in particular, as to exactly how to coordinate ECB and EFSF (European Financial Stability Facility) actions. In addition, it appears that Spain and Italy would have to formally ask for aid before the EFSF could intervene and buy their bonds. So at this point, we’re still waiting for action.

That said, people who were hoping for a big bazooka from the ECB haven’t been paying enough attention to how the Europeans are working to fix their crisis. There’s a lot of politics involved, including treaty issues and concerns about national sovereignty, that don’t make for neat and quick solutions. Expect the problem to continue to improve only gradually, with bouts of disappointment like yesterday, before Europe and the world can finally put it behind them. But also don’t underestimate Europe’s commitment to solving the Eurozone’s problems, in part because the cost of not doing so would far exceed price tag to fix them. Germany, for example, stands to lose as much as $800 billion should the Euro fall apart, quite a lot of incentive to keep it together.

Fiscal Cliff or Gentle Fiscal Slope?
Much ink has been spilled recently in the press about the so-called “fiscal cliff” that the US will face at the end of this year. If Congress does nothing, taxes will go up and government spending will go down at the same time, dramatically reducing the federal deficit but choking the private sector at the same time. The result: another recession, of course! But is the cliff really that high?

Assuming Congress really lets all the various tax cuts expire while simultaneously permitting the previously-agreed-to spending cuts to take effect in January, a lot of money will be diverted from the private sector to the federal government. This will certainly hurt the economy, but won’t necessarily lead to a recession, as never in the past has a change in government spending or taxes caused a recession or bear market. And it’s not like the changes would be a surprise, as businesses and individuals have had plenty of time to prepare for them.

But I find it hard to believe that Congress won’t come to some agreement by Dec. 31. While there’s much political mileage to be gained by both parties from the debate, there’s also way too much risk to being blamed as the party that screwed up the economy. Neither political party wants to be seen as the villain here, and there are many pieces to the so-called cliff that lend themselves to easy modification. In addition, the Democrats and Republicans are not nearly as far apart as they’d like you to believe.

It’s all just politics as usual. As with the debt ceiling crisis last year that was solved at the 11th hour, I expect the fiscal cliff to turn to sand in the same way.

Dr. Ken Waltzer MD, MPH, AIF, CFA
Founder and President – Kenfield Capital Strategies (KCS)
Kenfield Capital Strategies™ (KCS) is an SEC-registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

current trading pattern

August 4th, 2012

I continue to make money writing spreads in this economy.
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Each month I’ve been writing call spreads on the SPY, the S&P 500 index. The trades for this month were:
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Sell 10 calls SPY 140 September, premium $1,600
Buy 10 calls SPY 145 September, pay $400
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This is a net premium of $1,200 with a maximum risk of about $4,000 which can be mitigated by rolling up and out if it begins to materialize with the S&P going over 1400. And of course if it does go over 1400 my underlying portfolio will have gone up much more than $4,000 anyway.
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I am also writing put spreads on a number of stocks. For example, I sold 10 puts on the AAPL 550 for August, taking in $5,280, and bought 10 puts of the Aug 530’s, paying $2,300 to hedge, for a net premium of almost $3,000.

I’m selling more put spreads than call spreads because the premiums are higher and I feel the market will continue to be strong before the election in November.

mlh