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The Water Is Still Cold

August 10, 2009


Good morning. First off, I would like to extend an invitation to you to attend our Saturday, August 29th Protected Index Program In-Office Seminar, which will be from 9:00am – 12:00pm at our downtown Chicago office. It is completely complimentary and we provide a nice continental breakfast, coffee bar and classroom materials. My brother Dan and I will be presenting and you will also get to meet some of the PTI brokers and staff and ask all the questions you want. Seats are still available but you must register to attend. Click here to view the details and register. I hope to see you there!

Yet another positive week for the market last week, propelled mainly by Friday’s rally after the relatively positive jobs data. For the week the SPY was up 2.4%, from 98.81 to 101.20, with most (1.31 points) of that gain coming on Friday. The VIX was also down on the week, from 25.92 to 24.76, although curiously still above the 23.09 close of two weeks ago. The even more amazing thing is the moves in individual stocks, mostly those that are steeped in government involvement. AIG, for instance, traded $12.50 on July 30, and closed $27.30 last Friday. Here is a company that was so buried by CDO’s and governmental bail out debt that they would never see the light of day. They were also the vehicle used by the government to funnel billions to Goldman, Society General, Deutsche Bank, Barclay’s, Merrill Lynch, Bank America, Morgan, etc. We have been treated to a steady stream of everyone’s buddy “Hank” Greenberg on every business channel telling all caught listening how poor AIG could not possibly survive with the onerous terms. Guess what, they either were not that onerous, are being gradually lightened or forgiven (known only to a few), or the resulting franchise has such a license to steal that most can’t even imagine. In any case, the governmental involvement and “selective” sharing of information makes it difficult to get involved.

I am certainly not naïve enough to think (especially after 29 years of solid evidence to the contrary) that the flow of information regarding the market is even. Remember when people foolishly thought that the advent of the “internet” would result in this instant and relatively free flow of market information, and make the days of people trading blind in Iowa compared with the buzz of information on the NYSE floor obsolete. Now that was naïve. Timely information is money, especially now when the government is involved in business generally and individual companies specifically to a degree never before imagined. Couple that with a mentality that all stealing associated with a positive market move might actually be a good thing, because the market is going up. Nothing can be wrong if the market is going up, right?

How about that employment report last Friday? Recession over? Employment issues over? To hear people talk a minus 247,000 number is actually positive, because it is less than the 600,000+ numbers of a few months ago. That much is true, it is better than 600,000, but with almost 3 million lost jobs in the past two years the number of new jobs lost has to come down at some point. You can only lay the same person off once, and even though the number officially was 247,000, the number of long term unemployed, those unemployed over 27 months, rose by 584,000. How does that work? The better news is that the unemployment rate dropped to 9.4%, given the fact that 422,000 people were judged to leave the labor force. Where did they go exactly? The best is the number of jobs in the auto-manufacturing sector, where generally this time of year the auto industry lays off workers to retool for the coming model year. This year, as you may have speculated, there are so few people working in the sector that those lay-offs are not forthcoming. The resulting seasonal adjustment has the statistics showing a positive 28,000 new jobs in that sector, where I think most of us would suspect that hardly anyone has actually been hired.

It is not my assigned task to throw cold water on relatively good news. Just remember that the money managers and brokers on TV usually only make money if the market goes up, so they are always going to tell you to buy. We also have a government, now, that has quite a stake in the market, more than the usual political trick of just taking credit for any rally. All you have to do is look at the Cash for Clunkers program, the government has a big stake in an auto firm and they now give people your and my money to buy cars. The government is also involved in BAC, and even the normally complicit Federal Judiciary has had to hold up a settlement fine negotiated between BAC and the SEC as being way too light (how can you fine someone who owes you money). Even more disturbing is the rampant feel by some very smart people that Friday’s employment data had leaked well before the official announcement Friday. That was all but confirmed by news stories on many channels that the President’s Staff all had the numbers Thursday night, and maybe did not even tell the President. I will just bet they told some people, and I really doubt if all the major players that the government would really like to “re-capitalize” were shocked by the 7:30 AM announcement. If you happened to miss it last Thursday, Goldman Sachs lowered their official estimate to 250,000 from 350,000, so it appears they were on the list. It is early in the administration, but I am beginning to suspect that the current group has just as little honor and morality as the last group. Most of you are aware, that even though I voted for President Obama and hoped for positive change, I was always very worried about the very idea of reform coming from a state as crooked as Illinois. It turns out it is just like here, if the right people make money all is well.  I guess it is okay for most, though, as long as the market goes up. I just think that stealing is stealing, and the idea that it is positive thing for the financial community to retune itself in a non-competitive way on the backs of the average citizen really does not work with me.

As for the market, all appears well, but is it? The move up has been one for the ages, and may not be over. The SPY traded 87.35 on July 10, and closed at 101.20 last Friday. That is a move of 13.85, or 15.8 %, in 25 trading days. In terms of relative performance it is the worst nightmare of any type of covered writing program, such as the Protected Index Program. In the almost 11 years we have been managing the Program, this has happened on three occasions. The first was the Long Term Capital issues, and Russian currency issues, in 1998. The second was the huge run-up in the early part of 2007. In these cases we, and anyone else involved in a covered writing program, found themselves with in the money calls and not participating in the market run-up as much as they would like. It is also compounded by a decrease in volatility on the protective puts, as everyone feels (amazingly) that protection is less necessary as the market goes up. What are we going to do about it? Most of you have probably noticed that we have put on a couple of additional spreads, including last Friday, to get us a little longer in case the market continues to advance. We also will use any decent pullback to roll up the calls we currently have. As we make progress in rolling up the calls we will also roll up the puts. In the other two instances when this has happened, in 1998 and 2007, we have eventually “caught” the market and made up our lack of initial participation. Will we do it again? We are sure going to do our best, but does the market have another 15% in it in the next 25 days to make it even more difficult? Maybe, but I doubt it, we will eventually get our chance to recover.