Market Week: December 17, 2012

December 17th, 2012

The Markets

As the lack of progress on fiscal cliff talks left investors wondering whether to batten down the hatches, equity markets continued to produce more vacillation than direction. Even a fresh infusion of quantitative easing from the Fed and decent economic data failed to lift investors' spirits. Of the domestic indices, only the small-cap Russell 2000 ended in positive territory. However, the Global Dow saw its fourth straight week of gains.

Market/Index

2011 Close

Prior Week

As of 12/14

Week Change

YTD Change

DJIA

12217.56

13155.13

13135.01

-..15%

7..51%

Nasdaq

2605.15

2978.04

2971.33

-..23%

14.06%

S&P 500

1257.60

1418.07

1413.58

-..32%

12.40%

Russell 2000

740.92

822.27

823.75

.18%

11.18%

Global Dow

1801.60

1955.63

1973.39

.91%

9..54%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..89%

1..64%

1..72%

8 bps

-17 bps

Equities data reflect price changes, not total return.

Last Week's Headlines

·                      The Fed said it will keep interest rates at current low levels until employment falls below 6.5% as long as projected inflation for the next 1 to 2 years doesn't exceed 2.5%. It's the first time the Fed has announced formal economic targets as guidelines for monetary policy decisions. Unfortunately, the Fed doesn't see unemployment reaching its target until mid-2015, and predicted the jobless rate would remain between 7.4% and 7.7% next year. The Fed also sees economic growth of 2.3% to 3% in 2013, and will continue into next year its monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities.

·                      A 7.4% drop in gas prices cut consumer inflation by 0.3% in November, according to the Bureau of Labor Statistics. Excluding food and energy, which can be volatile from month to month, prices were up 0.1%. The decline left the annual inflation rate for the last 12 months at 1.8%. Wholesale prices fell even further in November; they were down 0.8% for the month, leaving the Producer Price Index up only 1.5% for the last 12 months.

·                      After spending 0.3% less in October, shoppers hit the cash registers again in November. Retail sales were up 0.3% for the month, and would have been higher if not for the sharp drop in gas prices. The Commerce Department said annual retail sales were 3.7% ahead of the year before, with nonstore retailers gaining more than 11% from last November.

·                      After losing 0.7% to Hurricane Sandy in October, U.S. industrial production rose 1.1% in November, according to the Federal Reserve Board. The rebound was helped not only by hurricane-related recovery but by a 4.5% increase in auto manufacturing.

·                      HSBC agreed to pay a record $1.92 billion to end a federal and state investigation into charges that the bank laundered money for drug cartels and terrorist organizations. In return, prosecutors agreed not to pursue criminal charges against the bank.

·                      And we're out: The Treasury Department sold the last remaining shares of stock in American International Group that it acquired as part of the largest single bailout of a financial institution during the 2008 financial crisis. The Treasury said it made $22.7 billion more than the $182 billion it took to bail out AIG.

Eye on the Week Ahead

Down to the wire: A data-heavy week may not make much difference to investors keeping an anxious eye on Washington. Anyone not doing last-minute holiday shopping will face the final Q3 GDP figure, housing and consumer spending numbers, and options expiration at week's end. And here's hoping the Mayans were a little overly pessimistic about the world's prospects after this week.

Key dates and data releases: Empire State manufacturing survey, international capital flows (12/17); housing starts (12/19); final estimate Q3 gross domestic product, home resales, Philadelphia Fed manufacturing survey (12/20); personal income/spending, options expiration (12/21).

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.

Not a good year for an option writer

December 12th, 2012

At the beginning of each year I pick eight to 10 stocks that I plan to focus on for the coming year. I look for stocks that will have low volatility but are likely to go up a little bit in value (maybe 3 to 6 percent) and not decline. Then I write covered calls or spreads on those stocks during the year. Or sometimes naked puts.
While I may have made money on them, this year my picks were nothing like I expected.

Let’s start with Bank of America. When it was $5 it looked to me like a stock not likely to go down, but with all the problems banks were having, especially that bank, I did not expect much volatility — especially on the up side. So I invested $700 in 10 January 2013 puts to protect against a downslide and reduce my margin requirements, and began to sell at-the-money puts each month. For five out of six months I made a small profit while the stock went from $5 to $10. But that is not what I call a “non-volatile stock!” I made about $1,700 profit. Some option writers would say that they more than doubled their money on this group of trades, investing $700 and profiting at $1,700. I don’t look at it that way.

When I look at profits from option writing I take the risk as my investment. So when I first sold 10 puts with a strike price of $6, I was at risk of having to come up with $5,000, less a few hundred dollars of premium income, if I was to put the 1,000 shares of stock at $6 per share. So I look at my investment as $6,000. Not that a 28 percent return during six months is bad.

But I compare that to what would have happened if I had just bought the stock. In that case I would have doubled my investment. So in this case buying would have been better than option writing — if I sold now, when the stock is over $10 a share.

Now look at Whirlpool. When it was around $55 a share it looked like a great deal. The stock had not performed all that well, and with the Chinese economy going down, but the U.S. housing market starting up a little bit, it looked like a solid stock to own. It paid over 3 percent in dividend yield, which gave it downside protection, and had the increasing housing market to give it a potential slow upside.

But it didn’t happen that way. Instead the stock jumped by leaps and bounds and is now around $100 a share. I wrote calls over and over, just keeping my head above water, while the underlying stock that I bought went up in value. Finally I let the stock be called away at $85 a share. So I left some money on the table. Again, while I made a nice profit, buying and holding would have been better.

And what about Green Mountain Coffee Roaster? When it dropped from over $100 a share to about $22 I figured it had hit bottom and it was time to buy in. Being a bit short of cash at the time I sold the 20 puts and took in a nice premium. I figured that the stock had leveled out and would hover in the low 20s for some time. Wrong again. It went down to $17, but then came back up into the 20s then, more recently, jumped up in several spurts until it is now about $38. I don’t know what happened to my expectation of low volatility. I’m lucky to have made even a small profit with that much volatility. I got to keep the $1,000 premium on the sale of the 20 puts, but I didn’t benefit from the jump from 20 to 38.

I did pick a few more appropriate stocks for option writing, and made a bit of profit on them, but let’s look at the one that has not turned out so well thus far: Apple.

Looking back at it, Apple was not a good selection for an option writer. I don’t consider it a non-volatile stock. But based on research by a friend, I became convinced that it was on an upward move toward at least $800 a share. With the stock at over $400 a share it was too expensive for me to take a big position in the stock, so I bought a few hundred shares, and wrote put spreads. I was about $25,000 ahead at the peak.
This worked out well until recently. Then suddenly the stock took a big dive and I lost back all of the profits. To hedge against a continuing decline, I wrote a call spread. The stock jumped up and I lost money on the call spread. So I wrote another put spread. The stock tanked again and I lost money on the new put spread. So I wrote another call spread. Through it all I held on to five naked puts at $580.

So there went a lot of my profits for the year, depending on what happens in the next 30 days. If, lord willing, Apple stock goes up over 575 but not over 600 I will end up with a small profit on the Apple positions overall. Otherwise I will lose somewhere up to $25,000, wiping out almost all of my option writing profits for the year.

It was not a good year for an option writer like me. But I had a lot of fun!

Now I start looking at stocks for the New Year. Will Apple come back? Will RIM in fact go out of business? Will the housing ETF’s continue to go up as housing comes back? Will gold decline as the economy stabilizes? Is there really a copper shortage in China’s manufacturing sector? Will the European market continue its downslide, resulting in fewer exports for U.S. products? Will Brazil be able to begin to profit from their offshore oil?

So far I’m holding on to FRX and GDX, as a commodity play. As the economy improves one would think commodities will go up. I continue to hold WAG and write covered calls on it, thinking that some day the customers will come back, after the disastrous contract boo-boo by management. And perhaps the new health care regulations will encourage more people to go to a doctor and get prescriptions for pills. But until January I’m selling out a lot of ETF and fund positions and holding cash. With the political area as it is right now there is too much risk of volatility in the marketplace.

After the politicians decide on next year’s tax structure I will go back into the market. A rise in the capital gain tax, or the elimination of the tax deduction for home mortgages could push the market sharply down for some period of time.

There is no doubt in my mind that in 2013 we will have even more fun than we had in 2012. But I don’t guarantee any profits.

Mervyn Hecht

Market Week: December 10, 2012

December 10th, 2012

The Markets

The tech-heavy Nasdaq suffered from a drop in Apple's stock. However, other indices managed small gains for the week as investors tried to balance anticipation of any potential Santa Claus rally with uncertainty about fiscal cliff talks in Washington.

Market/Index

2011 Close

Prior Week

As of 12/7

Week Change

YTD Change

DJIA

12217.56

13025.58

13155.13

.99%

7..67%

Nasdaq

2605.15

3010.24

2978.04

-1.07%

14.31%

S&P 500

1257.60

1416.18

1418.07

.13%

12.76%

Russell 2000

740.92

821.92

822.27

.04%

10.98%

Global Dow

1801.60

1942.07

1955.63

.70%

8..55%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..89%

1..62%

1..64%

2 bps

-25 bps

Equities data reflect price changes, not total return.

Last Week's Headlines

·                      The unemployment rate continued to fall in November, hitting its lowest point since December 2008. Hurricane Sandy had minimal impact, but the addition of 148,000 jobs and an increase in the number of people halting job searches cut unemployment to 7.7% from 7.9%. According to the Bureau of Labor Statistics, that's a full percentage point lower than a year ago.

·                      U..S. manufacturing contracted for the fourth time in six months, according to the Institute for Supply Management, whose manufacturing index fell to 49.5% in November (any number below 50 indicates contraction). However, the ISM's measure of the services sector for November grew for the 35th straight month; the 54.7% reading showed growth increasing more rapidly than in October.

·                      The Census Bureau reported that construction spending rose 1.4% in October and was nearly 10% above October 2011. A 3% increase in private residential construction played a large role in October's growth, though nonresidential construction also was up by 0.3%.

·                      Greece offered to pay private bondholders anywhere from 30% to 40% of face value (depending on maturities) to buy back sovereign bonds in order to reduce its debt burden, and extended its deadline for a response until Tuesday, December 11. Greece needs a successful buyback program in order to receive its next installment of financial aid.

Eye on the Week Ahead

The Fed will issue its most recent forecasts for the economy, while the clock continues to tick on discussions about the fiscal cliff that will help determine the accuracy of those forecasts.

Key dates and data releases: balance of trade (12/11); Federal Open Market Committee meeting/forecasts, import/export prices (12/12); wholesale inflation, retail sales, 30-year Treasury bond auction (12/13); consumer inflation, industrial production (12/14).

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.

Is retirement out of reach?

December 6th, 2012

Back in 2000, with the stock market at historic highs, both in price and valuation (it was 1929 all over again), lots of ordinary people were getting rich investing in stocks, particularly technology. These lucky (and many believed, smart) investors were going to retire early and live off their portfolios, which would, of course, continue to grow at double-digit rates for many years to come. Their golden years were going to be truly golden, as they were looking forward to a lavish retirement lifestyle.

What a difference a decade makes! First came the tech bust, a 31-month bear market that took stocks down about -50%. The 2002-2007 recovery to new highs made many think that happy days were here again, but loose lending (particularly to homeowners) quickly ended that notion. The 15-month bear market that spanned late 2007 to early 2009 was even more brutal than the one that kicked off the 21st century, affecting every sector, every country, and nearly every asset class (notably real estate as well as stocks and most types of bonds). The early/plush retirement bubble had finally burst.

Today people are nearly as pessimistic about their futures as they were overly optimistic in 2000. Neither view represents reality, which is, as usual, somewhere in between. But unless you’re one of the select few with a fat pension, a comfortable retirement necessitates disciplined saving and investing. And while investing involves risk, so does not investing (see my prior eNewsletter). The latter subjects you to the guaranteed ravages of inflation, which even today at historically low levels is clearly visible in such items as food and gasoline.

What’s a prospective retiree (and we are all either retired or planning to retire, albeit at different stages of the process) to do? Throw in the towel and settle on a drastically reduced lifestyle dependent largely on Social Security, which in the future will almost certainly be even less generous than today? Plan to work to age 88? Neither option is very attractive.

Retirement Readiness
As with anything else in life that’s important, retirement requires advance planning. You can’t just decide at age 64 that you’re going to leave your job next year and expect the rest of your life to be comfortable unless you’ve put a considerable amount of thought—and action—into preparation for that hopefully joyous event. But I continue to be amazed at how many people do just that, relying mainly on hope and perhaps prayer.

It doesn’t have to be that way. Whether you’re very wealthy and mainly worried about maintaining your plush lifestyle once the paycheck stops, or you just want to leave the rate race at a reasonable age and maintain your current middle-class lifestyle, the process is the same. You must plan ahead. And it’s never too early to start (but there is a point at which it’s definitely too late!). Get serious about planning 10 years or more before retirement, and you’ll probably be OK. Wait any longer and your retirement date will almost certainly be delayed by more years than you’d probably like.

As with anything else that’s both very important and potentially very scary, many people become paralyzed and worry rather than plan. Retirement anxiety has become a highly prevalent condition these days (if only the last 12 years had never happened!). But there is an effective cure from retirement anxiety: it’s called a retirement plan. And with modern technology (and perhaps a few strategic medications), the treatment can be surprisingly painless.

At KCS, our process for retirement planning is sophisticated and detailed. I’ve described it very briefly previously (in the article linked above), but this week a description of our approach appeared in the premiere financial planning periodical for professionals: The Journal of Financial Planning. I have received permission to link to the article, so you can read it here. Though written for professional financial planners, it’s very “how to” and clearly written (if I do say so myself!), so that a layperson should understand it. I encourage you all to peruse it at your leisure.

An offer you shouldn’t refuse
Lastly, because retirement planning is so important, I’m repeating my previous offer for a free consultation to determine your Retirement Readiness. We won’t go through the whole process, which takes many hours and is only available to clients, but I am willing spend about an hour to help you answer the question, “Can I retire?” I can’t imagine why anyone would forego such an offer, unless: 1) you fear the answer so much that you’d rather keep your head in the sand; or 2) you already know the answer because you’ve gone through the process already.

Why do I make such a generous proposal (an hour of my time usually goes for at least $375)? I’m doing it because the exercise will lead to one of two possible outcomes, either of which will benefit both of us:

1. You’ll learn that you can retire when you want and live the lifestyle of your dreams during retirement. You’ll go away happy and I’ll feel good that I’ve given you peace of mind. Maybe you’ll be so impressed that you’ll become a client, and/or send a bunch of your friends to evaluate their Retirement Readiness, some of whom will become clients.

2. You’ll learn that unless you make major changes in your spending, saving and investment habits, you’ll retire poor or not at all. In this case, you’ll be depressed, but I’ll help you out of your funk by showing you exactly what it will take to get you on the right track. You’ll almost certainly become a client, unless you really prefer working until age 88.

I know that most of you who decide to accept this free consultation will do so in January and February, as part of your New Year’s resolutions. But the end of the year tends to be slow, so those of you who move quickly will find it far easier to schedule a time for us to meet. This offer will end well before tax day and isn’t likely to be extended.

Carpe diem! (In English: You snooze, you lose!)

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®

Market Week: December 3, 2012

December 3rd, 2012

The Markets

Domestic equities seemed to fluctuate with every new fiscal-cliff report out of Washington. Despite the uncertainty, investors seemed willing to take on more risk, giving the tech-heavy Nasdaq and small-cap Russell 2000 solid gains while leaving the S&P 500 and Dow industrials little changed and bond yields down a bit. Gold plummeted roughly $30 an ounce before a modest rebound to end the week at roughly $1,727.

Market/Index

2011 Close

Prior Week

As of 11/30

Week Change

YTD Change

DJIA

12217.56

13009.68

13025.58

.12%

6..61%

Nasdaq

2605.15

2966.85

3010.24

1..46%

15.55%

S&P 500

1257.60

1409.15

1416.18

.50%

12.61%

Russell 2000

740.92

807.18

821.92

1..83%

10.93%

Global Dow

1801.60

1926.45

1942.07

.81%

7..80%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..89%

1..70%

1..62%

-8 bps

-27 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· Saying that passage of austerity measures showed a good faith effort to cut spending, Greece’s three primary creditors reached an agreement that will pave the way for receipt of another €43.7 billion in financial assistance. The so-called troika–the International Monetary Fund, eurozone finance ministers, and the European Central Bank–agreed to a longer timetable for reduction of Greece’s debt burden.

· After initial conciliatory noises, participants in discussions over the so-called fiscal cliff seemed to retreat to their respective positions. Congress is not scheduled to adjourn until December 14, leaving plenty of time for more drama.

· Third-quarter economic growth was better than previously thought. The Bureau of Economic Analysis said its second estimate showed gross domestic product rising by 2.7%. That’s substantially better than either the initial 2% estimate or the 1.3% growth of the previous quarter, and was helped by higher private inventory investments and exports. Meanwhile, after-tax corporate profits rose $48.1 billion, or 3.3%; that’s an improvement over Q2’s 2.2% increase. Net dividends were up 1.5% for the quarter and were 7.5% ahead of Q3 2011.

· Home prices across the country continued to improve with a sixth consecutive month of increases. The 0.3% gain in September put the 20-city S&P/Case-Shiller index at its highest level in two years and 3% ahead of last September, though it’s still down roughly 29% from its summer 2006 peak. Meanwhile, the Commerce Department said sales of new homes slipped 0.3% in October, though they were 17.2% higher than a year earlier.

· Orders for durable goods other than autos and aircraft were up 1.5% in October, though the Commerce Department said declines in those two major categories left overall orders essentially unchanged. Nondefense capital goods orders (not including aircraft), an indicator of businesses’ willingness to invest in growth, were up 1.7%.

· Securities and Exchange Commission Chairman Mary Schapiro will leave that post a year early as of December 14. Current commission member Elisse Walter will assume Schapiro’s role until a permanent successor is named.

· Consumer spending was down 0.2% in October, though the Commerce Department said Hurricane Sandy likely played some part in the decline. It was the first spending decline since May. Meanwhile, incomes rose less than 0.1%, though it was the 11th straight month of increases, and the personal savings rate rose slightly to 3.4% of income.

Eye on the Week Ahead

Investor sentiment will likely continue to fluctuate based on how optimistic Washington seems about a tax deal, but unemployment also will be a focus, as will data on the U.S. manufacturing and services sectors.

Key dates and data releases: U.S. manufacturing, construction spending (12/3); business productivity, factory orders, U.S. services sector (12/5); unemployment/payrolls (12/7).

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.