Archive for August, 2014

Safe Again

Sunday, 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 ?

Friday, 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