New Portfolio Lineup versus SPY

October 29th, 2014

 

October  29 , 2014

This Post is further to my Post of September 27, 2014 ..” My Journey  Continues “.   It represents an effort to design an investment platform for IRA individuals  ( me ) which will squeeze more return from a mildly  uptrending market than I can from SPY.  Year to date, SPY has appreciated  7.9% and I can’t settle for that given my annual expense budget.

The new platform will represent far more ” work ” than simply monitoring SPY.    But,  the offset of this work is that it  will keep me on top of USA and International political and economic developments.  For me,  and that is a huge return  since I consider world events a fascinating giant jigsaw puzzle .  But, I should say,  I don’t know how anybody with a full time job could put in the amount of work I’ve set out for myself.

 

Here Goes:

# 1 – I reject the notion that my age determines the proportion of my portfolio to be invested in fixed income securities. For instance  60 bonds /40, stocks,  70 bonds /30 stocks etc. My contention is that equity allocation can be anywhere from 100% to 5%  depending on what’s happening in the market. Five %  represents my normal  ” fully invested” cash reserve for  fixed income ETFs.

#2 – I can see from a review of  my activities during  2014 that I always have a lot of money sloshing around in money market accounts because, not being  in sync with the December 30, 2011 VTI trade,  I fear getting  caught out accepting a more than reasonable loss at the point a sell signal is triggered.  I intend to address this leakage as follows…

#3 – Any money not invested ( cash in money market accounts )  will be split between writing short term, out of the money,  SPY Puts for an annual return aimed at  three times the 10 year Treasury note yield.  The balance will be invested in fixed income securities.

Here is the makeup of my planned portfolio

INDEX ETFs – 58% of available investment funds to include ( in proportions to be determined and discussed ) VTI, SPY, IWM, IWB, QQQ, and OEF.

SECTOR ETF FUNDS – Part A ENERGY  – 5%  May Include one or more  ETFs such as VDE, XOP, and OIH

SECTOR ETF FUNDS – Part B – Miscellaneous -5 %  May  Include one or more  ETFs such as  FBT, IYT, XLF, XLV and  ITA .

SMART ETFs 10% – May Include one or more ETFs such as PKW, SYLD,  VIG, MOAT and BFOR

SMART EQUITIES – 7%  – May Include one or more of TWX, DIS, DFS, VZ, CVS,  UNH, C, GLW, and SNE and others as determined by analysis.

MOMENTUM EQUITIES -5%   May Include one or more of  TSLA,FB, BIDU, AAPL, NTES,  AOL, MU, UA

INCOME ETFs -  Part A  Dividends 5%  – May Include one or more of DTN, XLU, VNQ, SDY, PFF, VYM ( VIG is included under Smart ETFs )

INCOME ETFs – Part B Interest ( Cash Reserve in lieu of Cash )  5% May Include one or more of IEF, VCIT, LQD,  BND, SHYG,  HYG, JNK,  VGSH, BOND, BSV and VCSH .

TOTAL = 100 % Financial Investment Assets

To determine whether all this work can equal or beat the appreciation I can achieve with one or two  ETF holdings…SPY or VTI. following 200 day, month end rules

Distance: November 1 2014 – May 1 2015 …Buy and  Hold….unless VTI violates its 200 day moving average at a month end.

This platform is hypothetical because I don’t want the extra work of   being  accountable  ( to me or you ) for exact numbers.  This is just to give you a general idea of what I am doing.  I will advise if there is a drastic change in my thinking and always when my Put positions change..

Will indicate on October 31 portfolio makeup to be bought Monday,  November 3, 2014

Richard Maurice Gore

 

 

The Focus of this Blog

October 26th, 2014

October 25, 2014

Anyone who reads my Posts has probably noticed I’ve veered more and more toward financial topics and have moved away from commenting on world event dynamics.

The reason for focusing more and more on markets is that I want to accomplish my original goal of designing a system to immunize me  (and you )  from the poisonous creatures the innocent can and do  encounter in the Wall Street jungle.

But, in recognition  of recent comments by Janet Yellen, Chairman,  U.S  Federal Reserve, expressing her concern about the widening gap between rich and poor, and an article in  Barron’s citing an analysis of financial data by Roll Call indicating there are 189 millionaires out of 538 members of Congress , I thought that this may be a good time to return to my Post of December 28, 2011 to enumerate the primary systemic issues which I believe exacerbate the perception among us that the system is rigged to perpetuate the status quo and result in a widening of  the wealth and influence gap  in the USA.

1-   Term Limits for Congress.  Government should not be an industry.

2-   Line item veto  for the President – Don’t throw the baby out with the bath water.

3-   Encouragement via protection and awards for whistle blowers. Example, that Ebola  nurse speaking out about he lack of leadership at her Texas hospital.

4-   Congressional staff conflicts of interest. Mainly with Lobbyists.

5-  Greater oversight of Lobbyists and increased transparency of Lobbyist activities and record keeping.

6-   Congressional ” legal” insider trading and front running based on information from  closed door Congressional meetings.

7-   Earmarks – Pork attached to important legislation .

8-   Elected officials and staff crossing the employment line between government and industrial companies  they have helped regulate.

9-   How corporate Boards are selected and audited.

10-  Investor rights .  The CEO is an employee in the employ of shareholders…He and the Board should be at  arms length not cronies.

11-  Flat Tax or Value Added Income Tax …no loopholes.

12  How Congressmen  report to constituents.

 

OK. So we are not perfect. But all the above can be impacted by the collective will of a democracy through the ballot box by having an electorate familiar with the issues. That’s where we need to improve…awareness / involvement via selecting candidates dedicated to improving the process via reform.

BUT,…. after all is said and done, I’d much rather be a Richard Gore, citizen of the US of A than a Richard Gorochovsky, living in Russia  and looking toward KGB Putin as my one and only beacon lighting the path toward  social justice.

Talk about hopelessness , the  new Russia vision of Gorbachev has devolved into a kind of commune run by a cabal of  cronnies who dispense their version of  justice. based on winks and nods and the corruption  they grew up with  and accept.   Take a good look at Putin’s face and ask yourself what your gut reaction would be if he entered the room as your interrogator.  And to tell the truth, I’d prefer him to someone  I imagine as one of his assistants !

No, …for all his supposed procedural  failures  I’ll take Barak Obama as my interrogator.  In his face I see idealism and compassion backed up by a Harvard Law  degree and a resolve to do the right thing..

Conclusion: We can stand some reform, but we are light years ahead of Russia and China in our quest for social justice.

Case Closed.

Richard Maurice Gore

 

 

Taking a bow….Part 2

October 16th, 2014

October 16,2014

Taking a bow can make your back  end a better target !

To be able ( smart / lucky ) to predict what will  happen to the dollar ( 90 days in the future ) in terms of Oil, Gold, Yen, Euro and the 10 year note… is great ! Take a bow.

But, concluding that this means an instant boost to the stock market is a bit more tricky because of all the moving parts which comprise market analysis.  That is why I used the word “SHOULD”  in caps in my last post.

Also as indicated in my last post, I did buy 500 shares of SPY at $197.49 ( todays price  $183.60 – unrealized loss $6,945 ).

It would have been more prudent, and only slightly less bullish ,  to have been paid approximately $2,000 to sell 10 puts ( 1000 shares- $180,000 ) of SPY for assignment to me at $180.

Yesterday, with the Dow down 400 points I did sell for $1,080 ten ( 10 ) December 20th  SPY Puts for assignment to me at $161. And, I’ll follow the market down ,taking bites ( writing options as I go )  till my overall position is rational in terms of the future.

My basic premise remains that with the 10 year note dipping below 2%  investors would rather own the growth and profit  outlook of a JNJ selling for $ 97.62 ( 10 %  below its 52 week high and yielding 2.87% ).

So what is happening to equities ?  Well, it seems that  some investors with a lot trading capital have decided they have waited long enough for a correction.  Using EBOLA, ISIS,  the Ukraine and a weak European economy as sentiment drivers, they have shouted ” fire ” and expect to capitalize on equities being shaken out of weak hands. They are buying Puts and I am selling Puts.

So, nowhere near fully invested, I’m just battening down the  hatches until the storm passes.  Of course, if VTI ends  October below its 200 day moving average, everything goes except option positions which will allow me to be assigned shares at prices I believe hold promise.

Richard Maurice Gore

I may not be a George Soros, but I’ll take a bow anyway !

October 1st, 2014

September 30, 2014

For me, there isn’t  much that’s more intellectually satisfying than correctly predicting the direction of  the Euro, Gold, the Dollar, and Oil and where the stock market SHOULD  be heading.

As  I get ready to take my bow,  please access, the Archives,  my Post of July 4,2014,  almost three months ago, ” Second thoughts on Gold ” wherein I indicated  the reasons why the Dollar would strengthen against the Euro, the Yen, Gold and Oil, ultimately  to the  benefit of Equities.  As predicted,  the Dollar has significantly strengthened ! ,. … but not terribly much to the benefit of Equities……Yet! )

In my opinion, as we enter October, the case for US Equities is still compelling,.. the Swans of  Hong Kong, ISIS, and KGB Putin notwithstanding.

Bottom line, I’m convinced there is no safer place to put money than in the USA Equities Market…. .

As we close September,  my  VTI market canary is still chirping away, 3.52%%  above its 200 day moving average,  giving me the courage to invest 1/12 of my remaining liquid assets in SPY over the next few days.

Richard Maurice Gore

PS I’ll also take a small bow for having stayed the course and publishing this Post… # 100

My Journey Continues

September 27th, 2014

September 26 ,2014

When I discovered ” SPY ” , I thought my investment journey was at an end.  All I had to do was  trade  VTI /  SPY  trends  and  be assured  of controlled losses and unlimited gains.  And , last year,  I did,  in fact, cover almost  all  of my household expenses.

This year is a different story.  I am ahead, but I had  better come up with an improved method  to reach my annual financial goal.

For instance, year to date,  SPY has appreciated 7.7%.  That is $77,700 on a 1 million dollar investment, $38,500 on $500,000 invested,  $19,250 on $250,000 and $7,700 on a $100,000 investment.  The Real Estate taxes on my house are almost  $36,000 so there is a need either  to build a better mouse trap or burn savings to cover living expenses.  Of course, another alternative would be to reduce living expenses.  But, this journey is not about austerity budgets. Its about moving on up,  instead of moving down and out. .  Its about  what keeps the blood circulating in my brain.

Because there have been no opportunities to trade SPY this year , ( VTI hasn’t ended a month lower than its 200 day moving average ), and, because I intend to leave expenses at their current level, I have no choice  other than taking on more risk  than the market timing risk that accompanies “SPY ” via my market canary VTI.

I am going to review my alternatives out loud.  And, I’m not going to make any significant moves until this is thought through…in the open, in this and subsequent posts.

SPY is the performance benchmark that all analysts, advisors, hedge funds etc are measured against .  And, according to John Bogle, Founder  of Vanguard, the majority of paid professionals don’t measure up to the results achieved  by VTI or  SPY.  And, his opinion is shared by Warren Buffett  It just so happens that I intend to invest most ( at least 51% ) of my liquid net assets in SPY or VTI or IWB or IWM  based on which of these indexes is leading the market.

On the other hand, its just been reported that the YALE endowment returned something north of 20% this year.  The middle ground between the  SPY  result and the Yale result,  (+/- 13.5%  ) is where I want to be.

I know that endowments are usually  involved in alternative investments,  supposedly giving them an advantage over  traditionally assembled equity  portfolios.   The closest I can come to that, on my own, is to  invest in the Blackstone Group, symbol BX, which has investments in residential real estate mortgages and consumer paper.  Blackstone has $270 billion in assets under management, yields 5.40% per annum and,  at $31  is almost all the way  back from its visit to below $5 per share in 2007.  Clearly, I can’t wait eight years for an investment to re-emerge from the watery depths.  But, I will invest in Blackstone, purchasing  just a few shares. They are supposed to be the best of their breed and whatever small investment I make should yield information about the  alternative investment universe.

One step down from SPY, ( but up one step  in risk ), are  ETF  sector funds.  Investors Business Daily organizes the stock market  market into 33 broad sectors containing  197 sub-industry groups. IBD estimates that 12% of a stock’s performance depends on the broad sector in which it operates and 37% of a stocks performance is dependent on its sub-industry group.  I suppose that means the balance of its performance ( 51% ) relates to the specific issues a company confronts.

For  my convenience , I’m going to reduce the broad sector head count from IBD’s 33  sectors to a more manageable State Street Global Investor’s 9 SPDR -ETFs.  They are listed with their 2014 year to date results as follows;

XLP ( Consumer Staples ) 4.5% , XLY ( Consumer Discretionary ) 0.2%, XLI ( Industrial ) 1.1%,  XLB (  Materials)  8.0%,  XLK ( Technology ) 10.6%,  XLU ( Utilities ) 10.3%, XLE ( Energy ) 2.6%,  XLF ( Financial ) 5.9%,  XLV ( Health Care )  16.2%..

Unless, a sector ETF or sub-Industry Group ETF  is outperforming SPY there is no reason to be invested in it….because of the extra risk involved….and, because our goal is to beat the benchmark’s 7.7% return.

Broad sectors and sub-industry groups are more risky than SPY because of  ” rotation risk”.  Sectors and industry groups come into favor and go out of favor at different times and for different reasons and at different speeds.  Here is where charts come in handy.

I want to be on the lookout, not just  for chart trend line crossovers of the ETF’s price,  but the crossover of one trend line above or below another.    Just last week there was a lot of buzz about the 50 day trend line of IWM ( Russell 2000 index  ) crossing below its 200 day trend line….an ominous  ” death cross ”  for the entire stock market.  I want to  check to make certain money is flowing into the subject ETF and not leaving.  I also want to determine whether or not volume ( in relation to 90 days average  volume ) is above the 90 day average on increases in price ( conviction ).  Finally, I want to select and sort, top down,  what I consider are the healthiest looking charts and then ask the question ….why?

If I’m not comfortable with the answer to the question ….Why?,  then no investment.  If I am comfortable I will invest.  The amount of money for investment in sector and sub sector ETFs is yet to be determined.  An initial run through the list of ETFs I follow shows very few have outperformed SPY ( 7.7% YTD ).  A sprinkling of those who have are FBT ( Biotech 13% ) RPG ( Fastest growing third of S&P 500 index )  11%,  QQQ ( Nasdaq 100) 12.1%, INP ( India ) 25.6%,  XLV ( Healthcare )16.2%, and XLK ( Technology ) 11.1%.   At some point,  soon, I’ll publish a list of the Charts I follow.

And then, there is the recent development of ” smart ” ETFs whose component stocks have been handpicked for a reason.  Stocks selected for inclusion can come from any ETF sector.  These stocks are included because they share  predetermined business operating  and performance criteria.

For instance, stocks selected for the PKW and SYLD baskets are based on the propensity of the included companies  to buy back shares from shareholders at lower than fair market prices,  to the benefit of the remaining shareholders.  And, ( my criteria ),  these repurchases must not be financed by debt.  These component companies share revenue growth, healthy operating margins, and free cash flow that is not required for capital reinvestment and / or acquisitions .  Companies in the VIG basket  operate the same way but focus on increasing dividends rather than share re-purchases. The level of dividends isn’t as important as the record of increases…demonstrating continually improving operating performance.  And, then, there is ” MOAT” , an ETF containing 20 companies who have demonstrated they enjoy a sustainable advantage over their competition by virtue of product patents, scale,  systems that are not easily transferrable etc..

What I especially like about these four ETFs is that their portfolio components represent the ” cream” of a ton of research to arrive at what I consider to be the safest possible investment in stocks, and well diversified, as follows ; PKW   (175 holdings ) , SYLD ( 102 holdings ), VIG (163 holdings ), MOAT ( 20 holdings ).  These are real businesses which subscribe to practices which result in the creation of long term value.  You don’t date these stocks, you marry them.. except for temporary separation during severe market downturns.  This is as close to “buy and hold ” as I will ever get.

All that’s left here,  is for  me to refine this ” cream ” by gradually analyzing all 460 of the above components ( I’m positive there are quite a few duplications because of redundancy of selection criteria ).  The result will be 20 entrants into the RMG personal ETF portfolio.

Want returns north of 25%. ?   This is where you really take on risk unless you manage the risk by the size of the investment in relation to the balance of your financial investments  and the number of names in the portfolio.

Everybody gets excited about names like Facebook, Twitter, Baidu,  Stratasys, Tesla,  Sales Force .com, Apple, Ali Baba, Netflix and Amazon.  All great businesses except I’m not 100% comfortable with what the management wants versus what I want.  An illustration would be Jeff Bezos vision of how he sees Amazon.  I believe many of these entrepreneurs see their creations as a reflection of themselves, and I don’t trust that.  I’d rather they thought that the growth rate of their free cash flow is a better, more flattering reflection.  That doesn’t mean I don’t admire  what these entrepreneurs  are accomplishing.  It just means I see my money more as a hostage than as an investment and that makes me nervous.  My goal is to create an RMG 20 stock  momentum portfolio with the riskiest  5% of my liquid assets and accept the risk that goes with it.  Who knows how this will track ? !  It will be subject to my rules for selling VTI.

SUMMARY of Risk /  Return progression

1 )  Index ETFs……. VTI ,SPY,  only market risk.

2) Additional Index ETFs with a bit more risk / reward baked in….QQQ, IWM, IWB.  Contents of these baskets already  in VTI.  If VTI wins, these win.

3 ) Smart ETFs ….PKW, SYLD, VIG, MOAT ..Stocks can come from any sector based using the fruits of high performance to  enhance shareholder value

4 ) More Risk / More Reward ….” rotational risk ”  Sectors such as Energy  / VDE,  Transportation / IYT,  Biotech / IBB,  Defense / ITA  etcetera

5 ) Start to add specific risk by screening  individual stocks from Smart ETFs pool with an eye toward marriage. ( suggestion: 20 positions of 5% )

6 ) Add specific risk plus mania risk to Stocks that ( for me ) are difficult to value for the long term…I call these ” dating stocks “. SSYS, TSLA, FB,  TWTR, YHOO etc.

So that is it for now – just  preliminary thinking to make my journey more rewarding and fun without exposing myself too much.

Stay tuned

Richard Maurice Gore

 

 

 

 

I Found a Gem !

September 13th, 2014

September 13, 2014

Nothing to say following my Post of August 31, except it looks like Mr. V. Putin is giving the market an excuse to catch its breath while October,  and its reputation for sell offs,  begins to rise over the horizon.

Normally, I’d be looking for the slightest excuse to sell stocks, even though my VTI canary is still  chirping away  in the coal mine.  Instead,  not being in the VTI trade,  I am looking for a safe rational way to improve on my VTI and SPY results.  And, lo and behold, I found 3 ETFs that I want to own.

They are PKW. IPKW and SYLD and all their  investments are based on the idea that good things happen to firms that are generating sufficient cash to buy back shares below fair market value.

According tro Morningstar,  PKW with $2.5 billion in assets has outpaced the S&P 500 Index ( SPY ) by 2.4% annualized between December 2006 and June 2014.  Interesting, but why ?,  more risk ?, …not exactly.  This ETF is known as Power Shares Buy Back Achievers targets companies that have reduced their shares outstanding by at least 5% in the previous year. The thinking goes…if a company is buying back shares ( and not borrowing to do it ),  it is doing so with excess free cash it earns from profitable operations after all expenses, including any cash it needs for capital expenditures and research and development.  This same free cash could have been used to pay dividends ( taxable to shareholders ),  fund an acquisition, or build a monument to the CEO on the front lawn.

Of more recent origin is IPKW (Power Shares  International Buy Back Achievers )  This ETF has only  $ 17.99 million under management but follows the same methodology as PKW except the names are foreign.  Its holdings include names such American Movil,  ( Mexico ) , Nippon Telegraph and Telephone,  ( Japan ), Magna  International, ( Canada ),  Westfield Corp, ( Australia ) .  The third buyback ETF, Cambria Shareholders Yield ETF,     SYLD,  follows a rigorous criteria checklist which measures dividend payments, net share repurchases and net debt reduction .  It picks a winning 100 and then equal weights each inclusion.  Also, more recent than PKW.

All the above methodology is based on having a company that is generating more and more free cash, based on operations, and a management  smart enough to know when its shares are undervalued and should be bought back.

Bottom line…these three ETFs appeal to me very much based on the PKW’s  8 year result vis a vis SPY  and the philosophy and methodology they follow.

On Monday morning, or thereabouts, I intend to purchase 300  shares each of PKW and SYLD and 50 shares of IPKW.  And more, once the V.Putin cloud either passes by or causes the market to correct..

 

Richard Maurice Gore

 

PS – I’ve been spending lots of hours turning over ETF stones, looking for  winning concepts,  for more than eight years.  How PKW escaped my attention till now,  I’ll never know !

 

Safe Again

August 31st, 2014

August 31,2014

As of Friday’s close the VTI trade of December 31, 2011 is still open and ahead 69.74%.   That amounts to a 28 month average gain of 2.49% per month,  an average gain  of 29.88% per annnum.

As of today,  VTI ….( Vanguard total USA stock market )….is 7.41% above its 200 day simple moving  average.   VTI is 6.9% ahead since January 1, 2014.  Its beginning to lag the ETF….”SPY” by a bit because ( it is explained that the small cap stocks in VTI will create a drag because small cap  stocks are very reliant on borrowed capital to grow and the market expects their cost of capital ( interest rates ) to rise.  On the other hand SPY , ( the S&P 500 )  contains far fewer stocks needing borrowed money to grow.

Since I’m not in sync with the VTI trade, I use VTI as the coal mine canary indicating its safe to invest in the general market.

Accordingly, on Tuesday,  September 2, I will invest 1/12 of my liquid investment assets to purchase more SPY.

Supporting this decision is my assessment that an analysis of  fundamental factors leads to a clinching conclusion that the widening gap between USA bond yields and USA equity yields is highly favorable to equities.

The only cloud on the horizon is Mr. V. Putin.  I believe that ultimately we will be smart enough to fold our cards,  this hand, because we are over reaching….especially in view of the fact that our European allies have not taken the lead on this.  The longer this goes on , the weaker the Obama administration  is going to look.  Remember we gave Hitler the Rhineland,  Austria and  Chechoslovakia before he went  over the line in Poland.  I think we should acknowledge that this hand  is Putin’s simultaneously putting him on notice that we are keenly interested in how he acts in the Baltic region.  Obama has telegraphed that we are not interested in getting involved  in ground wars.  Do you think Putin considers this  a sign of strength or weakness ?.  Uncertainty over the Ukraine could keep the stock market in check, despite powerful underlying fundamentals which I am positive will reassert themselves as soon as the Ukraine issue is peaceably settled..

Richard Maurice Gore

 

PS…This is my 97th post since I started this blog August 2010.  I don’t know how helpful its been for you…I hope it has been….but, its been a big help  for me in terms of organizing my thoughts before action.

 

 

 

 

 

A Remedy for Low Interest Rates ?

August 15th, 2014

August 14, 2014

Just finished listening to a debate on CNBC relating to the likelihood of a 10% market correction even though this market is generally considered healthy and probably is  headed higher.

Lets leave out Vlad Putin , third world debt,  surprise terrorist attacks etc,  all of which have the capability of triggering a temporary  selloff.

Lets say you have $ 97,400 of  IRA  money invested in the market ETF , ” SPY,” ,  ( 500 shares ) and you are nervous because of all that correction talk.

Leaving all other equity  and  ETFs aside, ( assuming all boats go out with the tide ),  the two  obvious paths to follow  are

1 ) You can bail out  of SPY , ( $  194.84 per share ) and invest the proceeds in money market, CDs or other instruments yielding probably less than 1% and thereby insure your capital will shrink in purchasing power.

2 ) You can leave your investment alone assuming the market will come back if it sells off. ( the wait can be 10 years or longer )

3)  You can establish a tighter than normal ” stop loss ”  that will allow your investment  to run and get you out reasonably intact if there is a sudden drop.

If you follow any of the above three courses you will be considered an ” investor ”

But, what would you be called if you followed the path outlined below ?

Here’s the deal.

You sell your 500 shares of  SPY and allow your broker to segregate $87,500 of the sale proceeds from your control to protect his firm against what you intend to do next.

You sell ( write ) 5 Put contracts on SPY….namely the December expiry  $175 contract.  ( 5 Puts = 500 shares ). This gives your counter party the right to assign 500 shares of SPY to you at a price of $175 if by December 19 the price of SPY is $175 or less.  ( todays price $ 194.84 ).  He hopes that by December 19 the price of SPY is ….say $156 per share….a 20% correction.   He would buy 500 shares somewhere  at $156  and turn around and sell them to you at the $175 price you agreed to. ( you assumed the correction would not be more than 10% ) and you liked the premium you received for selling a Put at that level……$1,225 (  $2.45 for each of the  500 shares ).  You were  paid that money upfront when your broker  simultaneously closed  down your access to $87,500 of your money to make certain you had sufficient funds to buy the 500 shares of SPY at $175 if they get assigned..

The day the Put contract expires, December 19,  ( providing you didn’t buy back the contract in the interim ) you will either recognize the gain of $1,225 ( because the Put expired worthless ), or your broker will use the $87,500 set aside, to purchase the 500 SPY assigned to your account. In any case , you keep the $1,225.

Let’s say you get assigned the shares.  You now have two possible paths.  You can sell the 500 SPY and recognize a loss of $ 9,500 or,  you can sit with the shares hoping that the market rebounds to at least $175 or beyond.  If you hold tight you will collect a $3.75 annual dividend per share ( 1.8% per annum ).  Of course there is nothing to say the market won’t continue to head even lower at that point.

But,  if the correction comes , and its only 10%,  you will look brilliant for having been paid $1,225 to have  bought SPY at $175 per  share instead of sitting with it at  $194.84. and taking the ride to $175.

One thing is for sure, I’d rather own SPY at $175 than at $194.84.

If  you told anyone about this transaction you would probably be considered a ” speculator ” .. at best ,  because you ” play ” with options,.

I don’t agree with this characterization.  Why buy SPY today @ $195 if you think there is any chance of a correction.   Why not get paid to buy SPY now but at the price you wish it was today ?

Over the years, I have lost a LOT of money writing Put options on individual stocks.  My most recent loss was on J.P. Morgan, delivered to me at $52.50 per share. And then , they reduced the dividend.  So there I sat with 500 shares  well above the market and no way out for years and years.  That is the danger of writing ( selling )  Put (assignment ) options on individual stocks.  I think writing an option on a share that combines the top 500 stocks in the US stock market is far less risky on a relative basis.

The person to whom you sold the Put has the possibility of a much larger return on his $1,225 investment,  But, his risk of failure is greater also.  As soon as you inject December 19 into the risk equation, the odds change in your favor.  Its one thing to say a bridge will collapse because you think its unsound.  But, its quite another thing to ” bet ” on the collapse by December 19…..unless you intend to intervene or know something not in common knowledge that tilts the odds irreversibly in your favor.

It all boils down to your appetite for risk…. and your psyche.  There  ARE alternatives to low interest rates.  Is it better to be totally ” safe ” ie. receive money market type interest rates that don’t  even come close to covering mild inflation, ….a sure loser…..OR,  risk being accused of ” playing ” with options for  being paid  $1,225 ( 4.2 % per annum) up front to buy SPY  at a price 10% lower than today’s price !

What do you think ?

 

Richard Maurice Gore

 

July 31 All Clear

July 31st, 2014

July 31, 2014

No black swans in sight.

My technical barometer, the Vanguard VTI ( total  stock market ) trade of December 30, 2011 , in which I have no investment, is now 647 days old and returning 66.36%.  For my purposes it confirms stock market trend until August 31.  At that time, I’ll look to see if VTI’s price is still above it’s 2oo day moving average.  If it is, my technical barometer signals positive.  If VTI’s price is below it’s 200 day moving average, I sell everything and wait at least  until October 1, for  a safe to re-enter signal.

Confirming my technical barometer is my take on global interest rates.  European central banks are attempting to reflate similar to our early QE  efforts. by pumping money into their economies.  This money  will flow to the highest return ( after considering risk ).  That means that the US 10 year treasury note ( yielding 2.5 % ) is competing for new money with say  Spain’s risky debt at  approximately  the same interest rate.  Let’s say ( and I do say ) it is  logical for a lot of this new money to flow here to relatively risk free instruments. In this market, the yield on bonds competes for money with the earnings yields  ( earnings divided by price )  on stocks..  As more overseas investors move money the Dollar will strengthen, the Euro will weaken and Gold will weaken and bond yields will exhibit a downward bias as bond prices are bid up.  Now entering the ring is USA stocks whose earnings yields are widening in relation to USA bonds  ( whose yields are under downward pressure because of increased demand and shrinking supply) .  And the winner is…..USA stocks.  For me, this is additional confirmation that the positive trend for stocks continues.

My QQQ/Zacks theoretical  portfolio of February 18, plus 10.2%, is outperforming  SPY. But, this is momentum stuff and can turn on a dime and underperform SPY on the downside.

But, this outperformance has caused me to invest ( as of yesterday ) $28,000 in the seven Zacks number 1 rated equities which appear as a component of the QQQ 100. How is that for no research !  Just Zacks opinion and being a component of the outperforming QQQ 100…since April 30. I invested $7,000 apiece in  Avgo Technologies, Broadcom Corp., Celgene, Charter Communications, F5 Networks, Intel and Nividia. This portfolio will be on a very short leash.

I will continue to Dollar Cost Average into SPY….( 1/12 of my remaining cash ) using VTI rules.

I will continue to monitor daily  volume activity of a whole host of  equities and ETFs I’m interested in.

And I will get back to you, new IRA investors,  to let you know what I’m up to and why.

 

Richard Maurice Gore

PS – With the market falling today as a result of overseas debt problems – I will postpone my SPY purchase for a day or two to see if I can purchase at a more attractive price. My thesis still stands.  Fear money arriving from Europe will only serve to lower US Bond yields making US stock yields even more attractive on a relative basis.  The dollar is strengthening as the fear level rises. Here comes the money !

PS 2-  I don’t see Argentina and Portugal as Black Swan events because third world debt problems are no surprise to the global market.  Maybe this is a good opportunity to shake equities from weak hands.  The 200 day moving average model is good till August 31.  Could be a long 30 days. !

PS3 – According to Friday NY Times , citing Bloomberg as its source,  the yield on the 10 year Treasury note is less than half it’s fifty year average.  Compare that to the projected earning yield on USA stocks and I think it makes a pretty compelling case for the continuance of the USA bull market  ..especially against the backdrop of Europe creating even cheaper money to spur reflation.

 

 

 

 

 

 

 

 

Second Thoughts on Gold

July 4th, 2014

July 4, 2014..

I think my GLD position needs to get skinnier.  So skinny,….. it disappears.

True, GLD is on a mechanical buy signal, as are SPY and VTI.  But, if my thinking about why stocks will head higher is correct,…..(yield differentials among USA bonds , European bonds  and the earnings yield of USA stocks.) then,

1 ) The USA dollar will appreciate against  the Euro and Yen.

2) Gold will fall against the dollar.

3) I should exit GLD and eat a small loss ( $169 of a $25,000 position ) before I end up shaking hands with myself on SPY and VTI but biting my lip on GLD.

Thursdays abbreviated stock market session confirmed that yield differentials are widening and the markets are reacting as I thought they would.  If what I see is true, GLD can’t  move higher unless a Black Swan suddenly appears from behind the curtains.

For now overseas QE is the theme and that could make for a fun SPY ride.

 

Richard Maurice Gore