Social and Economic Health

August 31, 2009

Good morning. Sort of an inside week for the market last week, what we in the business would call a premium sellers dream. The SPY was up a whole .41 on the week, moving from 102.97 to 103.38 (.4%). The VIX was down a little, from 25.01 to 24.76, not much of a drop considering how little movement there was. For those looking to buy long term put protection, as we do in the PIP Program, the cost for at the money put protection for December of 2011 is in the 15.5-17% of the underlying range for 28 months. That number has surely been higher, exceeding 25% last March, but it also has been a lot lower, reaching 8% or less when the market was making record highs. Sixteen or seventeen dollars is a lot to make up for in 28 months of writing calls, certainly doable, but not as easy as when the protection was cheaper. What you are seeing in the VIX calculation is a little more willingness to sell shorter-term premium, but still a reluctance to sell further out protection. It is as if people are saying, “It looks like not a whole lot is going to happen (meaning market movement) in the next few weeks, but who knows after we see what the stimulus package does and whether inflation occurs, and whether politics changes next November.” You know what, maybe that is exactly what the put prices are telling us.

If you’re interested in learning more about the PIP Program, my brother Dan will be hosting a free Protected Index Program Teleconference on Wednesday, September 9th, 2009 from 6:00pm – 7:30pm Central Time. All you need to participate is a PC and a phone. You can view the syllabus for this session as well as register (you must register to attend) at www.PTISecurities.com/Education.htm.

I do have to take a moment to mourn the loss of Senator Ted Kennedy. Although flawed in some ways (unlike the perfect people that made a living out of making personal attacks against him and others) he clearly was a beacon for a certain point of view and worked tirelessly towards the achievement of those goals. Even though I have been branded a liberal, I have always resisted an increased governmental role in most things. It is hard to argue, however, with an agenda that really was based on health care for everyone, help for old people, and better education for everyone. Last weekend I traveled to Pittsburgh and Toronto to see their ball parks, and on the way was treated to a dose of right wing radio that I usually am happily ignorant of first hand (I do know it exists). I think I was listening to the sub for the suspended Beck guy. Anyway, a couple of days before his death Sen. Kennedy was referred to, by this person of dubious (if any) achievement as a useless bloated alcoholic (or something along those lines). I will tell you what, loud and clear, that is not my America. I was never a fan of George Bush’s politics, but never questioned his personal integrity or intentions, and unlike an increasing number, believe he would deserve all the deference and respect accorded to a man who achieved the positions he has. I also believe that if we ever had a cup of coffee (he does not drink) we would have amazing common ground to go with the things we disagree on (plus he may be one of the few that loves baseball as much as I do). These people (right and left) that make their living by fanning the fires of hatred between Americans really should get in a time ship and head back to the early 30’s in a few countries I can name and that a lot of great Americans fought against. Their hatred would be welcome there I am sure.

Enough of that, where are we in this recovery? We had a seminar last Saturday, attended by around twenty-five very attentive people, and the confidence in the economy and market going forward was tepid at best. It is funny, the attendees show up because they learn something about the PIP Program and trading, and I show up to learn from the attendees what they are seeing in places I can’t look. The group was real negative and really did not feel that they were confident in the outcome of the incredible policy decisions made really in the last year. Just the volume of economic news is overwhelming, and the size and pace of programs seemingly not well thought out is making pretty smart people very uneasy. It is not, as I could tell, a feeling that government was trying to purposely harm them, just the feeling (that I share totally) that government is in over their head with both the size and complexity of some of these programs (and that the right people are getting rich somewhere).

Also, on Saturday, I had the occasion to attend a surprise fiftieth birthday party, which is obviously not news in itself. I did happen to sit next to a fellow who sold material for commercial building facades worldwide, something I do not know a lot about (other than when they replaced the crumbling façade of the Standard Oil Building after 30 years it cost more than the original building). Anyway, this fellows company sells every façade imaginable to every corner of the world, and really gets involved in the total architecture of the building. He was saying without hesitation that all the real quality building was being done overseas. Europeans want and will pay for a building expected to be still there after 200 years, people in the Middle East and Asia almost the same way, while here we get by with the absolute least we can. Even in areas of energy efficiency we are way behind in what people are willing to pay for. According to him, none of the cutting edge architecture in terms of beauty, longevity, or efficiency is happening here. Do all these people just talk about doing the right thing? What is happening to us? If we built the Golden Gate now would it have an expiration date on it? Maybe instead of lobbing hate grenades at each other we should build something worth building.I know I am ranting some, but I do believe that there is a fine line between social health and economic health. In fact, Economics is a social science. If we do not fix the trends towards not making things worthwhile, borrowing constantly to maintain a lifestyle, making it totally impossible with laws, fees, and taxes for anyone to start and grow a business, and instead figure out how to challenge people towards a better future we will not be the place we all think we still are.

How do we trade it? Even if things do not get fixed we need some money to move to Monte Carlo or somewhere similar. Last week the market either looked like it was resting or tired, depending on whether you are bullish or bearish. The situation seems to be one of slight improvements in the economic numbers, which should indicate that the economy has stopped the free fall and may actually be marginally growing off the lows. That, I think, everyone agrees with. The debate about the future comes in two other areas. Is the stop in the free fall and very modest up tick in numbers enough given the amount of stimulus applied? It sure looks like in Japan they had a fairly robust increase in the second quarter almost totally due to Chinese stimulus orders, and now it appears that they are falling again with those orders declining. The stimulus does not appear to have become self-sustaining to the degree desired, at least so far. Are we going to be similar, spend the money and go back to the blahs? Hopefully not, but the fact that much of the projects I see are just backed up pork projects does not give me a lot of confidence.

On the market note, given that economic numbers are getting better, has the market over or under-estimated the pace of recovery? The market has made a 50+% recovery, is that too much or too little? To blindly say that things appear better, you had better buy stocks, totally ignores the run up we have seen already. On the other hand, if the recovery catches fire and somehow a lot of sustained good jobs appear the market is still cheap. Like virtually every day in stock market history, it is easy to argue both the bull and bear cases. My personal opinion is that the market will take a wait and see approach, and we will stagnate some for a while. That is only an opinion, as and the saying goes “Opinions are like noses, everybody has one.” (cleaned that up a little). I think we are ok being on average 70 % or so invested here, and protected. We are looking to roll up our in the money calls and “catch” the market in the next couple of months, but continue to be mindful of any sort of double dip drop. Once we get the calls up a little, maybe this week, we will be rolling up the protected puts. One thing I would advise is for everyone to check your portfolios (not just here) for interest rate exposure. Anything you have, with time out over a few years, be it muni bond, bond fund, corporate bond, or government bond, needs to be evaluated as to risk if long term rates were to advance. If you own a long-term bond and long term rates were to go to 7 or 8% you might be out 30-50% of your investment. I am not predicting that, I just think we should look at the risk. We will help if needed.