What to do?

August 30th, 2014

When the market is at all times highs—almost every week—it’s psychologically hard to invest. Take Starwood hotels. At about $87 a share it’s at a high. The PE is about 29 and the dividend pays about a 1.7% yield. That’s not so great, but it does seem like the company is on a roll and not likely to drop much. You can get about $2.50 by selling a January 80 put, and to buy the stock at $80 doesn’t look bad.

But with the market so high, incipient war between Russia the Ukraine, conflict with radical Muslims around the world, one can’t but expect something will blow up and cause a dip in the market, resulting in a better buying opportunity.

And what to do about copper? I bought (and recommended to you) FCX at around $30 a share. Now it’s $36. I’m getting a 4% yield on my investment, so I hate to sell it. But some of the pundits say that copper is history, and everyone is moving to aluminum. How can I tell? I guess the answer there is to buy some aluminum stock as a hedge against a decline in my copper position.

The leading aluminum stock is Alcoa (AA). It has moved up from $7 to $17 in just a few months, in spite of the fact it has no earnings. Who can have the fortitude to invest in that? What is the value of a company with losses instead of earnings that’s not even in hi-tech?

And so I’m trying to play it safe. With the SPY at around 195 I sold a September call spread at 200 vs 210. Naturally it promptly moved over 200 so in order to retain my $1,300 premium I had to buy back the position and sell the January 205 v. 215s. So unless it moves over 205 by January I will have made some money on it, but not as much as I’d hoped because I can only write the spread once instead of twice.

The good news is that as the SPY moves up, so does the value of my portfolio, so this position, in addition to providing a potential profits, also acts as a hedge against a dip in the market. If I lose money on this spread, it can only be because the overall market have moved way up again.

The one investment I feel best about is medium level apartments. The best deals are private syndications, but even the public syndications look pretty good to me. I’m convinced that rents are going up in those areas, like the Western US, where there remains an influx of people, and increasing number of jobs.

Overall I’m conflicted. I would be glad to hear your views. Email me.

Merv Hecht

Market Week: August 25, 2014

August 25th, 2014

The Markets

A horrific week around the globe did little to discourage investors–that is, the few who were actually trading. The Nasdaq reached a level it hadn’t seen since March 2000, the S&P 500 had its 28th record close of the year, and the Dow industrials’ gains took the index above 17,000 once again. The Russell 2000, which has struggled much of the summer, came within a hair of returning to positive territory year-to-date. Meanwhile, the benchmark 10-year Treasury yield rose as demand fell.

Market/Index

2013 Close

Prior Week

As of 8/22

Weekly Change

YTD Change

DJIA

16576.66

16662.91

17001.22

2.03%

2.56%

Nasdaq

4176.59

4464.93

4538.55

1.65%

8.67%

S&P 500

1848.36

1955.06

1988.40

1.71%

7.58%

Russell 2000

1163.64

1141.65

1160.34

1.64%

-.28%

Global Dow

2484.10

2575.60

2606.33

1.19%

4.92%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.34%

2.40%

6 bps

-64 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Minutes of the most recent meeting of the Fed’s monetary policy committee showed intensified debate over whether to accelerate an increase in interest rates once the Fed’s bond-buying program ends. However, Fed Chair Janet Yellen’s speech at the annual Jackson Hole gathering shed little light on how that debate might be resolved, focusing instead on the slack that still remains in the labor market.

· Increases in the cost of food and shelter in July were partly offset by lower airline fares and the first decline in the cost of energy since March. That left the Consumer Price Index up 0.1% for the month–the smallest monthly increase since February, according to the Bureau of Labor Statistics.

· Housing starts leaped 15.7% in July; that meant they were up 21.7% from last July, according to the Commerce Department. Building permits–an indicator of future activity–also were up 8.1% for the month.

· There also was some good news about sales of existing homes. The National Association of Realtors® said July’s 2.4% gain was the fourth straight monthly increase, though sales were still 4.3% lower than a year earlier. Foreclosures and short sales represented 9% of all sales–far below the 15% of July 2013, and the first time since October 2008 that the percentage has been in the single digits.

· The Philly Fed’s August manufacturing survey showed a strong increase, rising to 28 from 23.9 in July. It was the third straight month of gains and the highest reading since March 2011. However, growth in new orders and shipments fell slightly.

· The Conference Board’s index of leading economic indicators saw sharp improvement in July. The 0.9% increase was helped by gains in building permits, financial markets, and employment.

· Bank of America will pay $16.65 billion to settle accusations by the Justice Department, Securities and Exchange Commission, several states, and other governmental agencies that it deliberately misrepresented mortgage-backed securities that were backed by home loans that subsequently went bad. The settlement is reportedly the largest to result from government investigations into bank practices that led up to the 2008 financial crisis. Under the agreement, $7 billion of the money will be used to help modify borrowers who are underwater on home loans and deal with abandoned properties.

Eye on the Week Ahead

As the release of Q2 earnings reports winds to a close, the GDP number for Q2 will be watched to see if the robust 4% initial estimate is revised downward. Home prices and durable goods orders will have to contend with end-of-summer activities for traders’ attention.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Market is Down – Wait a Minute, The Market Is Up – Or Is It?

August 21st, 2014

As usual, the market goes down, then it goes up. Then it goes down, and then it goes up. I don’t really care that much. I’m an option writer. I buy a stock I think looks good, or an index, and I sell calls against it. Usually I buy a good dividend stock and collect the dividends plus the option premiums.

Sometimes, when I think a stock is overheated, I sell naked puts on it, and either keep the premium or buy the stock (when it’s put to me) at a price below what the market price was. At least then I know the possibility of an increase exists, since it once was at a higher price. When I get put the stock I write calls against it to get more premium income.

Those lucky souls that read this blog regularly will remember that I sold puts on CRM. The stock when down and I bought it at $55. It continued down around $53 and my thousand shares lost a couple thousand dollars. But I wrote the 55 calls and picked up a second premium, so I had more premium income in my pocket than the decline in value. Now the stock is over $55 again, and I’m way ahead. I hope it will be called away from me in October. Then I’ll start the process again.

That’s why I like the fact that the market goes up, then it goes down, then it goes up……

And what about Europe? I bought 100 shares of FEZ in several accounts at $44, against the advice of a number of people worried about Russia. The stock is down to $40, a 10% drop. But I still think the Ukrainian mess will eventually be over, and the European market will flourish. Don’t ask me when.

That loss is nothing compared to my losses so far in Whole Foods WFM. But I keep looking at the financials and the growth, and reading about how organic foods are more and more popular, so I have to believe it will come back. Meanwhile I’m selling the $37.50 puts and the $40 calls while I’m waiting, and still getting a reasonable return on my $55,000 investment, even though the value is way down (my worst pick of the year to date).

My best pick was to sell long term puts on Radio Shack. I did that after they sold me an amplifier without the power cord and wouldn’t replace the power cord. I decided it was a bad company and would never be able to stay in business that way. When I sold the puts the stock was at $10. Now it’s $.61 and I doubt the company will stay in business. So I picked that one. Too bad I only made a few hundred dollars on that trade.

But think of all the fun I’m having!

Merv.

Market Week: August 19, 2014

August 19th, 2014

The Markets

Last week domestic equities managed to build on the gains of the week before. The Dow industrials finally returned to positive territory for the year, and the Nasdaq had the kind of weekly gain it hasn’t seen since late May. Meanwhile, geopolitical tensions helped spur interest in the relative safety of the benchmark 10-year Treasury, cutting the yield to its lowest level since June 2013.

Market/Index

2013 Close

Prior Week

As of 8/15

Weekly Change

YTD Change

DJIA

16576.66

16553.93

16662.91

.66%

.52%

Nasdaq

4176.59

4370.90

4464.93

2.15%

6.90%

S&P 500

1848.36

1931.59

1955.06

1.22%

5.77%

Russell 2000

1163.64

1131.35

1141.65

.91%

-1.89%

Global Dow

2484.10

2532.94

2575.60

1.68%

3.68%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.44%

2.34%

-10 bps

-70 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Auto and department store sales declined in July, while grocery stores, gas stations, restaurants, clothing stores, and building supply stores all saw gains. That left total retail sales essentially flat for the month, though the Commerce Department said they were up nearly 4% from a year earlier.

· Wholesale prices rose 0.1% in July, according to the Bureau of Labor Statistics. That was slightly less than June’s 0.4% increase, and cut the annual wholesale inflation rate for the last 12 months to 1.7% from June’s 1.9%. The biggest monthly increases were seen in transportation and warehousing, which were up 0.5%, while wholesale food costs rose 0.4% and energy prices fell 0.6%.

· Led by a 10.1% increase in auto manufacturing, U.S. industrial production rose 0.4% in July, according to the Federal Reserve. The overall increase represented the sixth straight monthly gain. Even aside from the surge in autos, production was up 0.2%, and the percentage of the nation’s manufacturing capacity that’s being used rose to 79.2%.

· After the Fed’s Empire State manufacturing survey hit a four-year high, the August report showed that improvement had slowed substantially as the reading fell 11 points to 14.7.

· Sluggish economic recovery in the 18-member eurozone stalled completely during Q2 as growth fell from 0.2% in Q1 to 0. More worrisome was the -0.2% decline in both the German and Italian economies, which are two of the tentpoles of the region’s economy. The larger 28-member European Union saw a 0.2% increase in gross domestic product, and the official EU statistics agency said GDP had risen in both areas compared to a year earlier (0.7% for the eurozone and 1.2% for the EU).

Eye on the Week Ahead

Speeches at the Fed’s annual Jackson Hole conference could influence markets given the internal debate over the timing of interest rate hikes. Investors will continue to monitor the situations in Ukraine, Gaza, and Iraq, and housing and consumer inflation data also are on tap.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Market Week: August 12, 2014

August 11th, 2014

The Markets

Investor indecision about the future of equities prices, coupled with light summer trading volumes, led to volatility across the board last week. Friday’s 186-point rally gave the Dow some relief after two down weeks, though not enough to nudge the index into positive territory for the year. The small caps of the Russell 2000 had their strongest week since early July, though they also remained down year-to-date. Meanwhile, geopolitical tensions increased demand for the relative security of the benchmark 10-year Treasury bond, sending its yield down. However, riskier high-yield bonds saw some selling pressure.

Market/Index

2013 Close

Prior Week

As of 8/8

Weekly Change

YTD Change

DJIA

16576.66

16493.37

16553.93

.37%

-.14%

Nasdaq

4176.59

4352.64

4370.90

.42%

4.65%

S&P 500

1848.36

1925.15

1931.59

.33%

4.50%

Russell 2000

1163.64

1114.86

1131.35

1.48%

-2.77%

Global Dow

2484.10

2561.22

2532.94

-1.10%

1.97%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.52%

2.44%

-8 bps

-60 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Growth in the U.S. services sector accelerated in July. The Institute for Supply Management’s gauge of activity in service industries rose 2.7% to 58.7%–its highest level since the index was launched in 2008.

· New orders at U.S. manufacturers were up 1.1% in June. The Commerce Department said the gain boosted factory orders to their highest level since record-keeping began in 1992 and that June was the fourth month of the last five to see an increase.

· A drop in oil imports helped cut the U.S. trade deficit by 7% in June, according to the Commerce Department. U.S. exports rose 0.1% to their highest level on record, while imports dropped 1.2%.

· Italy’s economy fell back into recession, falling 0.2% in Q2; it was the second consecutive quarterly contraction. The GDP of the eurozone’s third largest economy also was down 0.3% from the same quarter a year earlier.

· In retaliation for new European Union and U.S. economic sanctions, Russia imposed a one-year ban on a variety of food imports and said it’s considering prohibiting EU and U.S. flights from Russian airspace over Siberia.

· As expected, the European Central Bank left key interest rates unchanged. President Mario Draghi said measures already adopted are having an effect and that it was too early to assess the potential impact of Russia’s ban on European food imports.

· Eleven of the largest U.S. banks must rewrite their proposed plans for handling a potential bankruptcy. The Federal Reserve and Federal Deposit Insurance Corp. said the plans contained “no credible or clear path” to achieve an orderly failure and avert any need for the type of bailouts provided during the 2008 financial crisis. The banks have until July 2015 to submit revised so-called “living wills.”

· Fair Isaac Corp. said it will change the way it calculates credit scores, underweighting unpaid medical bills and excluding overdue bills that are subsequently paid or settled with a collection agency. The changes could make it easier to get credit.

Eye on the Week Ahead

With the Q2 earnings season winding down, retail sales and wholesale inflation data will vie with global conflicts for investor attention. Speeches by two members of the Fed’s monetary policy committee are likely to review the arguments for and against accelerating an interest rate hike. Finally, options expiration at week’s end plus trading volumes that are likely to remain relatively low could mean additional volatility.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Mortgage lending: Have we really learned from the past?

August 9th, 2014
We are happy to unveil the first KCS Wealth Advisory eNewsletter. If you have been a loyal reader of the Kenfield Capital Strategies eNewsletter, you will be used to our approach. If you are new to our newsletter, you may notice that it’s a bit unlike other financial newsletters.
We approach financial information differently, both in the topics we choose, and how we present information. We try to write about areas relevant to you—our clients and friends—in a clear and jargon-free way. You may also find that our point of view is different from what you’ll hear from media “pundits” and “experts.”
We hope you’ll find our newsletters interesting and informative, and we encourage feedback and questions, which have often helped create past newsletter content.
Now, without further ado…
Mortgage lending: Have we really learned from the past?
There are almost as many explanations for the 2007-2009 financial crisis as there are people trying to explain it. Clearly, mortgage defaults figured prominently, as did shoddy lending standards, reckless mortgage brokers, clueless borrowers, greedy Wall Street bankers, evil hedge fund managers, incompetent government officials, and a host of other players. We’re not going to rehash the crisis or offer yet another explanation for it here. Rather, we’re going to look at mortgage lending practices and how they’ve changed in the past 5 years.
2000-2006: The “Easy Money” Years
Prior to 2007, it was so easy to get a mortgage that millions of borrowers received loans that they had little hope of paying back. This is starkly illustrated by the default rate during the financial crisis, which peaked at 25%! While default only means missing a single payment, we know that many borrowers completely abandoned their mortgages—and in some cases, their homes. You probably don’t need an economist to tell you that if 1 out of 4 borrowers can’t pay their loans on time, this is a major problem.
Rather than play the Blame Game, let’s just agree a that lot of mortgages were made during the 2000 to 2006 period that—in retrospect—probably should not have. As you probably know, a significant percentage of these mortgages were refinances in which the borrower took out cash. By itself, this may not be a bad move, unless you decide to spend that cash rather than investing it or putting it back into your home. And many people did spend that borrowed cash rather than invest it, leaving no cushion when the crisis hit and they lost their jobs.
2014: The Credit Noose Has Tightened
Human nature is like a pendulum, swinging too far in each direction. Thus, our solution to lending standards that were too loose is to subsequently make them too tight. Anyone who has tried (successfully or not) to secure a mortgage in the past few years knows how tough it’s been, even for creditworthy borrowers. The graph below compares the various measurements of mortgage lending standards today to those same measurements from 2000-2002:
As you can see, 6 of 7 mortgage lending standards have tightened (meaning borrowing has become more difficult). The only standard that has loosened is loan-to-value (the loan balance divided by the property value). However, the situation is more complex than the graphic implies.
Same-Same But Different?
The Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), commonly referred to as Fannie Mae and Freddie Mac, are two entities that buy mortgages from banks and other financial institutions. By selling mortgages for cash, banks are able to make more loans than they otherwise could, thus making more credit available to Americans. Fannie and Freddie were originally government-sponsored entities (GSEs), but became private in the 1960s. However, they continued to behave as if they were government backed and would be rescued if they got into trouble.
Starting in the early 1990s, both Fannie and Freddie began to reduce their standards for buying loans. This enabled banks to loosen their own credit standards, making riskier loans that they knew they could sell to Fannie and Freddie. (Even so, their lending standards were much tighter than those of many private mortgage lenders that obtained financing from Wall Street.) What happened was predictable: many of these loans went bad, and the US government had to step in to rescue the GSEs. Today the government owns 80% of Fannie and Freddie, and their debt is essentially an obligation of the government (and thus of you, the taxpayer).
In 2014, financial institutions continue to make loans that can be sold to Fannie and Freddie under their new, much tighter, lending standards. Mortgages are thus harder to get than they used to be—or are they? Enter the FHA (Federal Housing Administration). This government entity provides mortgage insurance to certain borrowers who earn a steady salary but don’t have the standard 10% to 20% down payment saved and may not have stellar credit, either. By paying an FHA insurance premium up front and with each mortgage payment, these borrowers can qualify for mortgages with a mere 3.5% down payment and a credit score in the mid-600s.
If almost nothing down and a mediocre credit score can still get you a mortgage, clearly the credit market hasn’t completely dried up for “less than ideal” borrowers. Yes, the FHA insures lenders against default by these borrowers, but what happens if we have another credit crisis? The FHA is funded by mortgage insurance premiums, and their reserves will be quickly depleted if defaults rise to anywhere near where they were in 2008. As they are a US government agency, they will have to be bailed out just like Fannie and Freddie. You can try to move risk around from one bucket to another, but in the end the same people will foot the bill—American taxpayers.
We are not saying that lending standards are too loose today; in the majority of cases, they are too tight. We are, however, concerned about the growth in FHA loans, which now account for nearly 1/3 of home purchase mortgage originations. If there is another mortgage crisis in the next several years, we believe that the FHA will be ground zero.
Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory
​Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory
Adam Bragman
Investment Research Analyst, KCS Wealth Advisory

Market Week: August 4, 2014

August 4th, 2014

The Markets

A strong GDP report, generally positive corporate earnings, and a slightly more optimistic outlook from the Fed couldn’t offset the ongoing stream of bleak news about geopolitical problems and investor desire to take some money off the table. The Russell 2000’s recent losing streak spread to the large caps as the S&P 500 had its worst week of the year. Argentina’s default on sovereign debt helped prompt a selloff on Thursday, which cut 317 points from the Dow and sent it back into negative territory for the year.

Market/Index

2013 Close

Prior Week

As of 8/1

Weekly Change

YTD Change

DJIA

16576.66

16960.57

16493.37

-2.75%

-.50%

Nasdaq

4176.59

4449.56

4352.64

-2.18%

4.22%

S&P 500

1848.36

1978.34

1925.15

-2.69%

4.15%

Russell 2000

1163.64

1144.72

1114.86

-2.61%

-4.19%

Global Dow

2484.10

2630.48

2561.22

-2.63%

3.10%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.48%

2.52%

4 bps

-52 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The initial estimate of 4% U.S. economic growth in Q2 showed a strong rebound from Q1’s 2.1% contraction. However, the Bureau of Economic Analysis’s initial estimate is subject to revisions over the next two months (for example, the initial Q1 estimate showed a 0.1% gain). Increases in exports and consumer spending (especially on durable goods) as well as more business inventory investment and state/local government spending drove the gains in gross domestic product.

· The unemployment rate ticked up slightly to 6.2% in July but was still at its lowest level in almost six years and more than a full percentage point below a year earlier. The Bureau of Labor Statistics also said the 209,000 new jobs added to payrolls in July roughly equaled the average monthly job gains over the last year; though that’s down from the pace of the last three months, July was the sixth straight month in which 200,000+ new jobs have been added.

· Home prices continued to improve, but at a slower pace. All the cities in the S&P/Case-Shiller 20-City Composite Index report issued last week saw increases, but the 9.4% increase over last May was down from the previous month’s 10.8% year-over-year gain.

· The Federal Reserve’s monetary policy committee continued to reduce its bond purchases, cutting them to $25 billion a month. The Federal Open Market Committee statement noted increased spending by both consumers and businesses as well as improvements in employment, though it also said there continues to be slack in the labor market. It also said that as long as inflation remains below 2%, its target interest rate is likely to remain at its current level for “a considerable time” after new bond purchases end completely. However, the moderately more positive language plus hawkish comments from one committee member helped elevate concerns about the timing of rate increases.

· Both the European Union and the United States attempted to increase pressure on Russia to end support for Ukrainian rebels. Previous sanctions have been largely directed toward individuals; the new measures are expected to affect Russian banks, the country’s oil industry, and the military. The EU agreement is designed to isolate Russia economically without hampering Europe’s fragile economic recovery.

· After Argentina failed to reach a settlement with large holders of $13 billion of sovereign bonds that have already been restructured once, Standard & Poor’s declared it in default on other interest payments. Coupled with a quarterly loss reported by Portugal’s second-largest bank, Argentina’s debt problems once again raised questions about the resilience of emerging economies.

· Trustees of the fund that finances Medicare reported that slower growth in federal health-care spending as a result of the Affordable Care Act appears to have helped delay by four years the date by which Medicare is expected to run out of money. The trustees now see that occurring in 2030. Social Security is expected to be solvent until 2033, but trustees of the Social Security Trust Fund said that unless action is taken, a shortfall might require cuts in disability benefits starting in late 2016.

· According to the Commerce Department, U.S. construction spending slumped nearly 2% in June. However, that was still 5.5% higher than in June 2013. Both public and private spending on residential and commercial building fell.

· The Institute for Supply Management said U.S. manufacturing continued to accelerate in July as its survey of purchasing managers rose to 57.1 from 55.3 (any number above 50 indicates expansion).

Eye on the Week Ahead

Investors will try to gauge whether last week’s downdraft was the start of something bigger or a much-needed breather for a lengthy bull market.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Best Time to Evaluate Option Strategies

August 3rd, 2014

The best time to evaluate option strategies is when there is a sharp dip in the market. If you just buy and hold stocks, when the market goes down you can be pretty sure that the value of your portfolio will go down as well.

But hopefully with option trades that’s not necessarily true.

So let’s took at my most recent option trades in this light. In April of this year I identified CRM as a stock likely not to go down much. So I wrote 5 puts for July and collected a premium of $1,500. My risk at that point in time was to be forced to buy 500 shares at the equivalent of $53.50. Buying stock at below market price is part of the beauty of option writing.

CRM then went down to about that figure (it’s $53.50 as I write this) and I was put the stock.

Following what I call in my book the “in and out strategy,” I immediately sold 5 calls with a $55 strike price and took in a new premium of $1,280. So I now have $2,780 in premium income, and 500 shares at $55 a share. My effective cost is under $53, so if I sold today I would still have a profit. And if the stock goes down lower I will just buy back the current calls at a profit and write new one for new premium income.

Did you read that correctly? Even though the stock went down, I still made a profit! That’s option trading for you.

Of course I can in theory lose equity value if the stock drops a lot more. But if I continue to write options I will continue to have a good yield on my investment no matter how far the stock drops (within reasonable expectations).

Maybe I’m a crazy optimist, but I still think that sometime in the next 12 months the stock will go back to $55 a share and will be called away from me at that price. Then I will break even on the stock and just keep all the premiums.

_______________________________________________________

As I predicted a few months ago, copper has finally started to move up, and has moved up 6% since that time. As a hedge in a commodity it is still a good buy in my opinion. I bought FXC, but some people prefer the copper index fund CPER as a more pure play.
_______________________________________________________

I’m consistently reading how apartment prices are going up. So I thought about buying a listed apartment REIT (Real Estate Investment Trust). I’ve done well with them in the past few years. This is among the few non-option investments I make.

But after a lot of research I decided that the prices of the top quality apartment REITs are just too high for me, and since I can’t write options on them I decided to pass.

So, for the moment, with the market in a down mode and fearful October looming in the near future, I’m not adding to my portfolio, and I’m waiting for another buying opportunity.

MLH
August 3, 2014