I am not bullish at the moment so I sold a call spread

September 29th, 2012

On Sept 21 I sold 5 calls of the SPY at a strike price of 150, expiring on Dec 22. I took in $952 on that trade.
-
At the same time, for protection, I bought the same calls but with a strike price of 160.
-
That limits my loss to 10 points, or $5,000, but as a practical matter the potential loss
-
if the market goes crazy up, is much less because of the chance to roll up. I paid $135
-
for this insurance, so the net premium in the account is about $820 for about 3 months.
-
I get to keep the $820 unless the SPY, a basket of 500 stocks reflecting the market as
-
a whole, goes up from the 144 price it is now, to over 150. While that is possible, I don’t
-
think it will happen. If it does I will take defensive action, but it also means my other stocks
-
will have gone up a lot in value. As you can tell from this trade, I am not bullish at the moment.
-
Merv

MARKET WEEK: SEPTEMBER 24, 2012

September 25th, 2012

The Markets

Equity markets paused to digest the strong gains of the previous two weeks, but still managed to remain close to multiyear highs. Small caps, which had seen the biggest gains recently, gave back the most.

Market/Index

2011 Close

Prior Week

As of 9/21

Week Change

YTD Change

DJIA

12217.56

13593.37

13579.47

-..10%

11.15%

Nasdaq

2605.15

3183.95

3179.96

-..13%

22.06%

S&P 500

1257.60

1465.77

1460.15

-..38%

16.11%

Russell 2000

740.92

864.70

855.54

-1.06%

15.47%

Global Dow

1801.60

1988.62

1973.65

-..75%

9..55%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..89%

1..88%

1..77%

-11 bps

-12 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· The housing market continued to strengthen. The National Association of Realtors® said August sales of existing homes were up 7.8% for the month and were 9.3% higher than last August. Also, the NAR said August was the sixth straight month in which prices were higher than the year before.

· Another encouraging housing report came from the Census Bureau, which said housing starts were up 2.3% in August from the month before and were almost 30% higher than August 2011. And though building permits were down 1% from July, they were still almost 25% higher than a year earlier.

· Manufacturing news was somewhat mixed. The Federal Reserve’s Empire State manufacturing survey for September hit -10.4, its second straight negative monthly reading. However, a similar survey for the mid-Atlantic region, while still negative (-1.9), showed strong improvement in August after several consecutive months of declines.

Eye on the Week Ahead

As the end of the quarter approaches, housing and manufacturing data as well as the final estimate of the nation’s Q2 gross domestic product will highlight domestic news. Spain will likely continue to dominate European news. The government is expected to release both its latest financial reform package and the results of stress tests on Spanish banks, and could also make a formal bailout request.

Key dates and data releases: home prices (9/25); new home sales (9/26); final estimate of Q2 gross domestic product, durable goods orders (9/27); personal income/spending (9/28).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

I’M GETTING OUT OF WHR BECAUSE IT HAS RUN WAY UP

September 19th, 2012

WHR, which I recommended some time ago, has moved up from 55 to 85. For me, that’s enough. I bought the stock some time ago, and
lost some money writing calls against it as it soared above my expectations from time to to time. Then it leveled off and I made some money.
At the beginning of December I was about even on the option trading, but way ahead on the stock. I was also way ahead on naked puts, but
lost a bit when the stock went over $75.
=
So this week I decided enough with this stock at this price, and I closed out all my positions. I made a handsome profit on the stock and the
puts, and about broke even on recent calls, but lost a bit on older calls. All in all it was a profitable run, but stocks with that much volatility are
not ideal for option writing. I was fortunate that I also bought the stock, and lucky that I sold puts at a low point.
=
MLH

QE3: The ship has sailed

September 18th, 2012

Last Thursday, the US Federal Reserve announced what is commonly called “QE3,” which stands for “quantitative easing, round 3.” This is an unconventional form of monetary easing in which the Fed buys longer-term bonds on the open market, either Treasuries or US Agency securities. For this particular round, the Fed says that they will buy $40 billion each month of Agencies, specifically mortgage-backed securities. There is no dollar target or limit on QE3, which means they will continue to buy $40 billion of bonds each month until they are satisfied that the economy is on the right track.

What does this mean to the economy and to the financial markets? Well, if yesterday’s +1.6% rise in the S&P 500 is any indication, it’s good news for the latter. Overseas markets did even better, and many currencies, including the euro, rose against the dollar. Both oil and copper moved up as well. The reason QE3 is good for financial assets and commodities is that by putting more cash in banks’ hands, there are more dollars available with which to buy those assets. In addition, QE3 will tend to keep longer-term interest rates down, helping the mortgage market and making borrowing for corporations and individuals cheaper. It also keeps down borrowing costs for hedge funds, which are big buyers of “risk” assets such as stocks.

As for the US economy, QE3’s effects are less clear. The Fed’s main reason for initiating it was to help drive down the unemployment rate, based on an economic theory known as the “Phillips Curve.” The curve illustrates an inverse relationship between inflation and unemployment, suggesting that higher inflation can reduce the unemployment rate. Conversely, high unemployment leads to lower inflation. The Fed may thus be trying to increase the inflation rate in order to generate a pickup in hiring. They did this quite successfully in the years following WWII, but ran into trouble trying it again in the 1960s, when there was little slack in the economy. Some argue (I am one of them) that this was a major cause of accelerating inflation in the 1970s.

Runaway inflation is unlikely this time around because the US economy is still operating well below capacity. Once excess capacity and unemployed workers are soaked up, however, the Fed will need to back off quickly and “mop up” the excess liquidity (cash) in the system. Do this too early, and they could trigger another recession. Wait too long and they could create another 1970s-style wage-price spiral. Bernanke may be hoping he’s no longer Fed chief when these decisions have to be made.

Many argue that the US economy doesn’t “need” QE3, and that the risks outweigh the potential benefits. This may be true, but one must not underestimate the positive effects on business and consumer confidence of lower interest rates, brisker home sales and refinances, and higher stock prices. I know many of our clients are smiling already!

Lastly, although Fed policy has certainly been sufficiently loose for a while and probably doesn’t need to get any looser, there are two central banks that are still too tight in my opinion: the ECB and the Bank of China. One of the beneficial side effects of QE3 may be to spur these central banks to increase their money supplies in response, in order to keep their currencies from appreciating too much against the dollar and reducing the attractiveness of their exports. Should they loosen meaningfully, we should see a significant rebound in European and Chinese economies, which will in turn lead to an acceleration of global economic growth, including in the US. So in the end, the Fed’s actions may be targeted overseas as much as here at home.

Kenfield Capital Strategies

MARKET WEEK: SEPTEMBER 17, 2012

September 18th, 2012

September 17, 2012

The Markets

Equities had a second strong week, helped along by a German court and the Federal Reserve. The S&P 500 has now gained more than 4% in the last two weeks, and all four indices are at their year-to-date highs. The renewed enthusiasm for stocks helped send Treasury yields soaring as prices fell.

Market/Index

2011 Close

Prior Week

As of 9/14

Week Change

YTD Change

DJIA

12217.56

13306.64

13593.37

2.15%

11.26%

Nasdaq

2605.15

3136.42

3183.95

1.52%

22.22%

S&P 500

1257.60

1437.92

1465.77

1.94%

16.55%

Russell 2000

740.92

842.27

864.70

2.66%

16.71%

Global Dow

1801.60

1928.18

1988.62

3.13%

10.38%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.89%

1.67%

1.88%

21 bps

-1 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· With 11 of 12 members deciding that the economy needed a third round of economic support, the Federal Open Market Committee launched a new program to buy $40 billion of agency mortgage-backed bonds each month for an indefinite period. Including continued Operation Twist buying, Fed purchases will total roughly $85 billion a month. The Fed also said it now expects to keep interest rates at current low levels until mid-2015 instead of late 2014.

· Investors heaved a sigh of relief after Germany’s constitutional court refused to halt the country’s participation in the European Stability Mechanism. The decision could have blocked implementation of the permanent euro bailout fund. However, the court said it would enforce the €190 billion limit on Germany’s contribution to the ESM, and will not allow the ESM to borrow directly from the European Central Bank. It also reserved the right to review any additional measures and all relevant information involved in them.

· Both consumer and wholesale prices saw their biggest monthly increases in more than three years, according to the Bureau of Labor Statistics. A 9% increase in gas prices sent the Consumer Price Index up 0.6% in August, while wholesale prices jumped 1.7% because of a 13.6% increase in gas at the wholesale level. Not counting energy and food prices, which can vary greatly from month to month, consumer prices were up 0.1% for the month, putting the annual inflation rate for the last year at 1.7%.

· According to the Commerce Department, the U.S. trade deficit increased slightly in July as exports declined more than imports. The $42 billion gap was up from $41.9 billion in June.

· The median inflation-adjusted household income fell 1.5% in 2011 to $50,054; according to a Census Bureau report on income, poverty, and health insurance coverage, the second consecutive annual decline left median household income 8.1% lower than in 2007. The report also said that 15% of the U.S. population was living in poverty (up to $23,021 a year for a family of four), and that one gauge of income inequality increased 1.6% during the year–the first increase since the bureau began tracking the data almost 20 years ago. Meanwhile, both the number (260.2 million) and percentage (84%) of people with health insurance increased from 2010.

· Retail sales rose 0.9% in August, according to the Commerce Department, and were 4.7% higher than a year ago. However, manufacturing stats weren’t as encouraging; the Federal Reserve’s measure of industrial production fell 1.2%, affected in part by Hurricane Isaac, and utilization of the nation’s manufacturing capacity was down 1% for the month.

Eye on the Week Ahead

Investors will be watching to see if the excitement over QE3 peaked last week or will lead to continued buying. Data on manufacturing both here and abroad as well as the U.S. housing market will round out the week. Equities also could be affected by quadruple witching options expiration at week’s end.

Key dates and data releases: Empire State manufacturing survey (9/17); international capital flows (9/18); housing starts, home resales (9/19); Philadelphia Fed manufacturing survey (9/20); quadruple witching options expiration (9/21).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Buy Europe

September 12th, 2012

Europe: Bastion of the free market??
Who are the most competitive countries in the world, places where business really gets done? Perhaps surprisingly, Switzerland takes the #1 spot in The Global Competitiveness Report 2011-2012. Singapore is now #2, overtaking Sweden, which holds the bronze. Perhaps even more unexpected, European countries dominate the top 10, with Finland in 4th place, Germany 6th, the Netherlands 7th, Denmark 8th and the United Kingdom 10th.

Meanwhile, the United States continued its decline for a third year, falling another notch to 5th. Despite Europe’s well-known problems, several of these countries continue to be good places for business, and are gaining ground on the US. Obviously, the size of government is not the sole determinant of the economic climate.

Not all of Europe is business friendly, however. This year, France drop three places to 18th, and Greece is down at #90 (no shock here). Emerging markets still have a long way to go in improving their competitiveness, but are steadily moving up the rankings. The People’s Republic of China is now 26th, while Brazil has only made it to 53rd and India is stuck at 56th place. If these countries continue to improve their regulatory climate, tax codes, corporate governance and market transparency, who knows what kind of growth they’ll see.

More good news from Europe
A study by the Association of German Chambers of Industry and Commerce (DIHK) suggests that struggling European countries are becoming more competitive. Unit labor costs have fallen significantly in Greece, Ireland and Spain. Greece, in particular, has done a decent job of reducing labor costs, which are down about 15% since 2010.

Another positive indicator is that national current account deficits—the difference between the value of exports and imports—are also falling in many countries. Greece has managed to reduce its current account deficit by 54% between 2008 and 2011. If fact, Greece now exports as much as it did in 2007, even in the face of a 27% contraction in the Greek economy. Spain and Portugal cut their current account deficits by 50% and 40%, respectively, during the period, while Italy trimmed its trade deficit to almost zero in the first half of 2012. Could even bloated Greece eventually become a competitive economy and rise above 90th place? Stranger things have happened.

Even more good news from Europe
You’ve probably heard over and over that if interest rates on Spain’s or Italy’s bonds hit 7%, they will need a bailout like the one received by Greece, Ireland and Portugal. However, One of the persistent fears about the European crisis is that the euro zone partners won’t be able to save Italy and Spain if there’s a run on their sovereign bonds.

But a recent study (Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach) by the Peterson Institute for International Economics offers hope. In short, it concludes that the sovereign debt of both countries is sustainable for a long time, even at interest rates as high as 7.5%.

The author says that Spain and Italy “have been and should continue to be treated as solvent and capable of carrying their debt rather than requiring some form … of debt forgiveness.” This is because both countries are doing a good job at reaching their fiscal targets and improving their debt situation.
Of course, this doesn’t mean that the markets won’t continue to punish these countries anyway, and high borrowing costs for companies based in Spain and Italy, as well as significant capital flight, are persistent problems that need to be fixed. But it seems that things may not be as bad as they seem, and markets may be overreacting (as they so often do).

Buy European stocks now!
Although they’ve recovered quite a bit from their early June lows, stocks in Europe are still on sale for cheap. Companies in Italy and especially Spain are mostly trading at going-out-of-business prices, much as US stocks were in March 2009. I’m buying several of these looking for eventual recovery to more normal valuations. Stocks in Germany are also a good buy, as are those in other competitive European countries because, while not quite as beaten down as those of southern Europe, offer good value because these economies have the tools to rebound rapidly once the crisis is fully under control. Less competitive countries, such as France and certainly Greece, are not so interesting. (I don’t know if I’ll ever buy a Greek stock, but with labor costs falling, some companies there might eventually become attractive. I’m not holding my breath, though.)
The US has outperformed the Eurozone by a substantial margin since the beginning of 2010. Eventually, it will be Europe’s turn to shine. Get in before everyone else does!

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.

MARKET WEEK: SEPTEMBER 10, 2012

September 12th, 2012

The Markets

After a plan for attacking high European borrowing costs was announced on Thursday, buying was the order of the day as the Dow rose 245 points. The S&P 500 hit a level it hasn't seen since January 2008, and the last time the tech-heavy Nasdaq was at Friday's level was November 2000, not long after the tech bubble burst. Even disappointing employment data didn't dent the enthusiasm, as it raised hopes for fresh measures from the Fed. Meanwhile, Treasury yields rose as prices fell.

Market/Index

2011 Close

Prior Week

As of 9/7

Week Change

YTD Change

DJIA

12217.56

13090.76

13306.64

1.65%

8.91%

Nasdaq

2605.15

3066.96

3136.42

2.26%

20.39%

S&P 500

1257.60

1406.57

1437.92

2.23%

14.34%

Russell 2000

740.92

812.09

842.27

3.72%

13.68%

Global Dow

1801.60

1869.92

1928.18

3.12%

7.03%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.89%

1.57%

1.67%

10 bps

-22 bps

Equities data reflect price changes, not total return.

Last Week's Headlines

·         The U.S. unemployment rate fell to 8.1% in August from 8.3%, in part because more people left the workforce. According to the Bureau of Labor Statistics, the rate has now been stuck between 8.1% and 8.3% since the beginning of the year. While there were 96,000 new jobs, that's substantially lower than the 139,000 monthly average since the beginning of 2012. Private companies added 103,000 jobs, especially in food/beverage service, health care, and professional/technical services, while government employers cut 7,000 positions.

·         The European Central Bank launched both another alphabet-soup acronym and an offensive against high sovereign bond rates as President Mario Draghi said the ECB will begin buying one- to three-year bonds on the open market. The program of "outright monetary transactions" (OMT) is designed to help fight high interest rates in Spain and Italy; after the announcement, Spain's 10-year bond yield fell below 6% for the first time in several months. The ECB's claims won't take priority over those of other bondholders, and there are no limits on the total amount of investment as long as issuers request the purchases and adhere to the eurozone's fiscal guidelines.

·         The ECB also forecast an economic contraction of -0.2% to -0.6% for the region in 2012 and a growth rate of -0.4% to 1.4% for 2013, with inflation of between 2.4% and 2.6% for 2012 and 1.3% to 2.5% in 2013.

·         The Institute for Supply Management's index of U.S. manufacturing showed a third straight month of contraction, falling 0.2% to 49.6. Meanwhile, the Bureau of Labor Statistics said business productivity rose at a 2.2% annual rate during the second quarter.

Eye on the Week Ahead

There are several potential catalysts for volatility this week. A German court is scheduled to rule Wednesday on the constitutionality of the eurozone's bailout mechanism. An Apple press conference will be of interest, since the company is a significant factor in Nasdaq-based indices. Also, the Federal Open Market Committee's announcement could affect a Treasury auction of long-term bonds scheduled for later the same day, as well as markets hoping for new economic support.

Key dates and data releases: balance of trade (9/11); import/export prices (9/12); Federal Open Market Committee announcement, wholesale inflation (9/13); consumer inflation, retail sales, industrial production, business inventories (9/14).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

MARKET WEEK: SEPTEMBER 4, 2012

September 10th, 2012

The Markets

With the exception of the small caps of the Russell 2000, equities continued to slump on low trading volumes. The S&P 500 remained tantalizingly close to its year-to-date high, and the Dow and Nasdaq were only a little over 1% away from hitting theirs. Meanwhile, the Global Dow benefitted from last month’s promises that the euro would be preserved at all costs. Oil and gold ended the month higher, helped by a somewhat weaker dollar.

Market/Index

2011 Close

Prior Week

As of 8/31

Week Change

YTD Change

DJIA

12217.56

13157.97

13090.76

-.51%

7.15%

Nasdaq

2605.15

3069.79

3066.96

-.09%

17.73%

S&P 500

1257.60

1411.13

1406.57

-.32%

11.85%

Russell 2000

740.92

809.18

812.09

.36%

9.61%

Global Dow

1801.60

1885.92

1869.92

-.85%

3.79%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.89%

1.68%

1.57%

-11 bps

-32 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· The U.S. economy grew at an annual rate of 1.7% in the second quarter rather than the 1.5% previously estimated by the Bureau of Economic Analysis. That’s slightly higher than previously thought, but also slightly lower than Q1’s 2%. Corporate after-tax profits were up 1.1% from the previous quarter, and up 3.3% from a year ago.

· Consumer spending, which accounts for 70% of the U.S. economy, was up 0.4% in July after falling in June and being flat in May. According to the Commerce Department, it was the biggest increase since February. Unfortunately, the spending increase outpaced gains in income, which rose 0.3% for the third consecutive month. As a result, the savings rate edged downward to 4.2% of income after reaching a year-long high the month before.

· June was the second straight month of higher sales prices for new homes; the 2.3% gain in the S&P/Case-Shiller 20-city index, which followed a similar gain in May, left it 6% higher than the recent low seen in March. Though the index is still more than 30% from its 2006 peak, all 20 cities in the index saw increases, which ranged from Charlotte’s +1% to Detroit’s +6%. Even better, the year-over-year change in the index (+0.5%) was positive for the first time in almost two years.

· Federal Reserve Chairman Ben Bernanke defended the Fed’s quantitative easing measures and said the Fed is ready to do more if needed. However, he stopped short of promising to supply additional measures at the Federal Open Market Committee’s September 13 meeting.

Eye on the Week Ahead

Light summer trading volumes will likely increase as traders begin to position themselves for the end of the quarter. Unemployment data will likely get extra attention because its release date is so close to the next FOMC meeting, and the European Central Bank’s September 6 action on interest rates could be of interest.

Key dates and data releases: U.S. manufacturing sector, construction spending (9/4); labor productivity/costs (9/5); U.S. services sector, European Central Bank meeting (9/6); unemployment/payrolls (9/7).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

TIRED OF WAITING FOR GE

September 1st, 2012

I’ve owned GE stock for a long time. I bought it at $19, saw it decline, then come back up.
At the moment is is $20.70. But the statistics don’t look very good on it, and I don’t see any
reason why it will go up. And the market is up so if anything I supposed it might go down a point
or so over the next few months.

So under these conditions what I decided to do is to sell an “in the money” call. I sold the $20 calls
for December, taking in a premium of $1.30 per hundred shares. Since I have 1000 shares, that’s
10 calls, taking in $1,300 in premium.

If the stock stays the same or goes up, I will have effectively sold it at $21.30, about $.60 more than
the value today. If the stock goes down below $20 I will have collected the premium as a hedge. If
it goes below $19 between now and the end of the year I will not have made a very good deal.

Merv