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Mental Midgets and More

March 29, 2010


Good morning. Another quiet week in terms of volatility last week, but again the market did finish with a gain. The SPY was up fractionally again, gaining .61 to close at 116.58. At times, both Thursday and Friday, it looked like there was a chance of a real upside breakout, but late sell-offs dampened the mood. On Thursday, for instance, the SPY traded all the way up to 118.17 before closing near the day’s lows at 116.65. Normally that would be the sign of a tired market, but any attempt at a sell-off seems to be met by buyers below the market (at least so far).  The VIX was actually up on the week, although fractionally, closing up .82 to 17.77. If anything, the upward skew in the implied volatility going forward worsened, and it remains significantly more expensive, in terms of implied volatility, to buy far out protective puts than it does to buy anything near term. For example, in AT&T (trading $26.24), the January 25 puts of 2012 are trading for a 23 implied volatility vs. the near term April 26 options at a 15 implied volatility. I am not sure what sort of relative carnage or volatility spike the market is collectively expecting going forward, but it is sure priced in.

It is pretty hard to not get caught up in the increasingly bitter rhetoric regarding the recent Health Care Bill. Scenes from the tea party in Nevada, and speeches by serious statesmen like Mitt Romney are abounding on the TV, as well as some Democrats who are just as hard to listen to. Actually, there is one part of me that seriously applauds the energy that some in America are finally bringing to an issue. For a long while it has seemed that Americans were immune or deaf to the incredible fraud and bungling in the various governmental units in the last 15 years. I do have to ask, however, why this issue? Why, after a war fought for fake reasons, overwhelming government bungling and fraud in Homeland Security and Katrina, serious larceny in virtually every governmental program, is Health Care the issue? Or is it just the issue around at the time when people are finally tired of what is happening? It is hard to tell for sure. I do know it is the issue Sarah Palin, along with other right wing lunatics, are jumping on, but can’t we be smarter than they are? Are we really ready to look at the world through the eyes of demagogues? Some of their followers are obviously not real bright, as evidenced by the mental midget at one of the rallies last week carrying the sign saying government should stay out of “his” Medicare. What school wants to claim him as a graduate?

It seems like the Health Care opposition (and constitutional challenges by Attorney Generals in many Republican states) is centering on the idea that this group of socialist fanatics in office (Obama et. al.) is forcing independent and law abiding Americans to buy health insurance, and that this is an act of pure outrage. Has anyone stopped to think that the Republican side of the aisle originally put forth this idea? I direct you to an article written by Ricardo Alfonso-Zaldivar of the Associated Press on March 27 where he states that Republicans originally brought up the idea as an alternative to the Hillary Clinton proposal 20 years ago. He goes on the say that when then Republican Governor of Massachusetts Mitt Romney (why does he remind me of the politician Christopher Walken was after in The Dead Zone?) signed something very similar into law he referred to the “must have” requirement as “a personal responsibility principle”. In fact, it was the Republican way to keep private enterprise in the health care system, and according to Zaldivar, should have been the basis for compromise on any sort of Bill.  Is the real requirement of politics now just to vehemently oppose anything the opposing party in office is doing? As a quick aside, I spent some time talking to a terrific couple of emigrants to the U.S. last week (country does not matter). The fellow, now an engineer here for a major steel company, said to me “I love being a citizen here, it has been a good life for me and my family. I never thought I would see in this country a group of people actually hoping that “our” President, regardless of your individual politics or whether you voted for him, fail at everything he tries. If we were to enter a war, I actually think these people would want to see casualties and for us to lose just to show the man up. I disagree with a lot of his policies, but I do not hope that he fails so I can say I was right at a cocktail party. That cannot be the America of the future.”

Let me set the record straight on the forcing people to have insurance issue. There are basically three ways you can deal with the uninsured issue (leaving out for another debate those the insurance companies do not want to insure). The first way to include everyone is the single payer system, like Canada, England, and many others. In essence, the day you are born you are issued your lifetime insurance card, and the government pays all medical bills for a lifetime. Fortunately for the U.S. we were able to see how these plans played out over time, and there appear to be some serious problems regarding access, innovation, long wait times, etc. even though most statistics would show (in terms of life expectancy, birth deaths, etc.) that they have performed pretty well as compared to health care in the U.S.

The second method would be to just say no to care for anyone without insurance. The conundrum at the bottom of this whole problem is that even though some people seem perfectly able to buy insurance, a lot do not. We have made the determination as a society that in times of serious (or not so serious) injury or illness that person still needs to be cared for. We are not going to have a line of people with broken legs or exploding appendix’s outside hospital doors. We could do it that way; they took the chance, the hell with them. If you do not buy collision insurance on your car and you wreck it, no one comes to your rescue and fixes it for you. If you did not have insurance you should not have played softball, or surely not slid into second base and broken you ankle. I just don’t think most people are ready for this hard approach.

The third method, and the original Republican answer to any potential Hillary single payer system, was in forcing people to participate in a market approach to the problem. If we are, in essence, going to treat everyone (at least on life threatening issues) we need to insure everyone. If we do not you have the messed up system you have now where those with insurance are subsidizing those that do not. If we can “force” those who do not currently have insurance to participate in the market based system we have now, maybe we can get everyone covered without the government intervention as seen in Canada. Other than forcing you to have insurance, and maybe helping you buy it if you honestly could not afford it, it “theoretically” would keep the system as market driven as any solution I have seen. There is a lot in the Bill not to like, but the one part of the Bill that should have support on both sides is this forcing people to be insured through the private sector. Of the three possible approaches to coverage I have identified here, it is clearly the best.

So where should this new found enthusiasm for calling out he government be directed? Well, maybe in a direction right in front of everyone’s nose, and a little too complicated for the likes of our new leaders of dissent (Sara, Rush, and Glenn). Are any of you having a little problem with making money? As in, how come I can’t get any return on my cash balances anywhere, and how come even those pros at PTI are having so much trouble making money selling covered call options? Let’s get away from the Health Care diversion, and focus on the assault on the average American’s wealth that is happening by way of the Banking Industry.

Maybe I can give an example using another industry. What if the restaurant business was allowed to become very concentrated, and some combined problem, say, gross mismanagement, afflicted all the restaurant chains that remained? Maybe the restaurant owners would be successful in hiring a bunch of slimy lobbyists that would race to Washington and sell everyone on the idea that the industry was too important to the economy to fail. However, they are all in financial trouble and need “help” to survive. What if someone in government would conceive of a sinister plan to give the remaining restaurant owners, at public expense, all their bacon, eggs, flour, sugar, etc. for free to help prop them up? Of course, there would be no companion requirement for them to lower the price of breakfast, and in fact they were enough of a cartel to actually raise prices? Most of us would say they would really do well for a while, basically on the backs of the normal suppliers of the bacon, etc. who would now be getting nothing for their efforts. We would (through out government) essentially be shifting massive wealth to the restaurant owners from the normal providers of the ingredients, who are now getting nothing.

It is not a perfect example, but very similar to what is happening in the Banking sector. The normal suppliers of the money Banks use for lending are you and me and anyone else that puts money on deposit, and Banks normally “pay” us for those deposits (in the way of interest and services). Now, however, we have been taken out of the loop and the government is essentially providing those funds for free (or certainly cheap enough for banks to not have to pay us much). Because they are seriously a cartel they have not passed much of their savings on, and in some cases (credit cards) have arguably raised prices. It is just like someone is handing them their bacon for free. It is unconscionable that these thieves are being re-floated on the backs of regular Americans and their hard earned retirement accounts. Is anyone other than me shocked at how fast the “official” governmental loans have been repaid by these people? For example, I have Citigroup with $1.7 Trillion dollars of liabilities. If half of that is various cash deposits from regular people and companies, and they are able to pay out 2% less on average in interest, that is $17 B to their bottom line that did not go to those depositors. Does anyone even like these people? I wish some of those with the bullhorn on Health Care would tell the real bad story. Then again, Sarah may need their cash for her political future.

So, how do I really feel? I think that lack of income on risk free cash balances is a much bigger concern to the wealth of this country than any screw-ups in this Health Care Bill. Just in the accounts I manage I would say that the lack of normal interest on free balances is costing my clients $300,000 plus a year, and the prices of the calls we write (in the PIP Strategy and others) are being decreased by another $750,000 to $1,000,000 (remember, interest is a large part of the value of a call option). For my clients, those figures represent way more of an adverse effect on their wealth than any I have found in the Health Care Bill. I would be right up there with urging the President to take charge of the Bernanke (due to blind faith in institutions), Geithner, Dodd, Frank (maybe due to years of pay-offs) cabal and straighten this mess out before it buries a lot of hard-working Americans I think most of us would identify with.

As for trading, briefly, I think we need to take advantage of some of the very low implied volatilities in the near term. It may involve some newer types of positions than most of us are used to, but every market iteration has its own brand of opportunity. Those that were unable to attend last Saturday’s lecture about some of these new spreads should be sure to call so we can discuss whether they may be appropriate for you. We are starting to see the steady rise in long term interest rates on government Bonds, which may be due to some combination of decreased confidence in fiscal discipline, increased inflationary expectations, or increased demand for money. Again, take a look at any bonds you may hold and their maturities, and whether thy may be vulnerable to rate going up. Be sure to call us if you have any questions.