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2010 Outlook – A Tale of Two Economies

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only." – Charles Dickens, 1859

Dickens famous novel (which was originally written as a weekly series in 31 installments) depicts life in the time of the French revolution but was also a parable, meant to warn the British aristocracy that they should not ingore the parallels to the social inequities that existed at the time in England.  Dickens warned the nobles that the seeds of revolution were planted through unjust acts and surely there would be a time of reaping yet to come

It is said that the French Revolution was sparked by outrage over a statement by the Queen Mary Antoinette who, when told that the peasants had no bread to eat, supposedly replied (she never actually said this) "Qu’ils mangent de la brioche" or "Then let them eat cake."  It’s hard for us to imagine the impact of this statement in modern times but "peasants" were 90% of the population at the time and bread was 90% of what they ate, consuming 50% of the average family’s income (people weren’t silly enough to pay for housing back then – they just found a bit of land, bought some wood and nails and built their own homes).  Brioche was a luxury combination of bread enriched with flour and butter so the statement "Qu’ils mangent de la brioche" implies both lack of caring and cluelessness on the part of the Queen. 

The United States had what passes for a revolution between 2006 and 2008 as we threw out the Republicans and went with a Democrat-controlled government.  While the Bush administration, the Republican Congress and Fox News may have been as clueless as a French Queen to the plight of the people – the fact of the matter is that the base pay of top management rose 78% from 2002-2007 while the pay for workers went up just 24%.  The top 10% of executives and professional workers drew 33% of all income paid in the US ($2.1Tn) and that does not take into account stock options and bonuses that more than doubled that figure. 

At the same time as the income gap was widening to historic levels, commodity prices doubled, taking the cost of food and fuel from 12% to 20% of household income.  Add in skyrocketing health care costs and you can see where the seeds of revolution had been sown long before the 2008 election.  Disposable income has fallen from 8% in 2000 to actual negative numbers in 2009 (families must borrow just to survive).  Is it any wonder that people in America were hungry for change as the decade, and their incomes, wound down?

Despite the change in leadership, 2009 has not been kind to the American proletariat.  There has been a $539Bn decrease in real income and, since 2006, Americans have lost $3.7Tn housing value (15%).  Homes represent 42% of the average family’s total net worth but it’s worse than that because home mortgage debt is at $10.4Tn, which is 57% of total home worth.  US home equity has dropped from 58% in 2003 to 43% this year, a loss of over 25% in 6 years.  This is reality for American peasants, the 300M people who aren’t in the top 10% and don’t read the Wall Street Journal (as they have nothing to invest) and don’t shop at WSM or TIF or SKS or JWN – all stocks that have been off to the races in the second half of 2009 as the rich grow far, far richer.

How much richer, you may ask?  Well the chart on the right says it all.  In the past quarter century, the inflation-adjusted household income for the top 3% of Americans has tripled while the other 97% have gained about 50%, roughly 2% per year over inflation.  Since 1979, 80% of the vast GDP growth in the United States has been diverted to less than 10M of its citizens, while the other 295M people struggle to maintain their lifestyles.  Forcing the vast majority of Americans into a life of wage slavery has, of course, been an economic renaisance for those of us fortunate enough to be at the top of the economic pyramid.  

Since 1979, the hourly earnings for 80% of American workers  (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation.  The average hourly wage was $17.71 at the end of 2007. For male workers, the average wage has actually slid by 5 percent since 1979. Worker productivity, meanwhile, has climbed 60 percent.  If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece but have instead, kept that 60% gain almost entirely for themselves.  

The typical American worker toils 1,804 hours a year, 135 hours more per year than the typical British worker (3.5 weeks), 240 hours more than the average French worker (6 weeks), and 370 hours (or nine full-time weeks) more than the average German worker. No one in the world’s advanced economies works more for less.  A 2007 report by the Congressional Budget Office found that the top 1 percent of households had pre-tax income in 2005 that was 140% larger than that of the bottom 40 percent so let’s not kid ourselves, America, we have effectively re-created a slave-driven economy but we’ve wrapped it in the flag and keep the slaves in line by providing them with cheap beer, happy meals and 200 channels of corporate entertainment while drumming into their heads that all they need is a dollar and a dream and they too can step right over the fallen bodies of their fellow workers to join us at the top of the pyramid.

With the fall of Communism, the global economy has become more and more like us.  One of the great accomplishments of capitalism is that we have made the rich into heroic figures while the working man or the soldier is just the anonymous cog in the great machine.  2,000 years ago, the masses were kept in line with tales of Hector an Achilles as any man with a sword that was strong enough could gain immortality.  A thousand years later ordinary men could aspire to be knights or saints but, after the dark ages, that mythos was lost as the noble class tightened their grip and denied upward mobility to the masses which, of course, led to revolution.  America, France, Russia, China – all went through revolutions and England even had one in the mid 1600s and many small revolutions swept through Europe in the mid 1800s (around the time of Dicken’s writings). 

The cure for all this revolutionary nonsense in the Western World was Capitalism, which was embodied by another writer in the late 1800s called Horatio Alger, who became famous for writing over 100 books along the lines of "rags to riches" stories.  By leading exemplary lives, struggling valiantly against poverty and adversity, Alger’s protagonists gain both wealth and honor, ultimately realizing the American Dream. The characters in his formulaic stories sometimes improved their social position through auspicious accidents instead of hard work and denial but the bottom line is the myth of upward mobility that lets us all aspire to be modern economic heroes like Rockefeller, Hughes, Buffett, Gates, Oprah, Soros and Pickens – sure there’s only 1,000 of those guys on the planet but we all like to believe it could be us too, right? 

Capitalism is so good at keeping the masses in line that even China and Russia have now adopted our model as it turns out you can effectively squeeze much more out of your workers with carrots than with sticks.  The dream of modern capitalism also has the added benefit of relieving the wealthy of the burden of guilt by envisioning a level playing field in which they have triumphed through their own hard work and perseverance making it poor people’s own damn fault if they can’t be motivated enough to improve their lot in life.  It is necessary to engender this feeling amongst the rich lest the conscience of some may lead them to "overpay" their workers, which makes their fellow entrepreneurs look bad so we have devised a system (the stock market) in which only the most ruthless practices of capitalism are rewarded over time.

OK, liberal rant over now – I feel better having indulged my Dickensian side and identifying with the plight of the workers but workers don’t buy stock market newsletters so f*ck them, right?  We are investors and we shouldn’t be worried about if it’s FAIR or RIGHT that we have established an economic engine that funnels the wealth of the nation to the top – if you are reading this article, then chances are you are on or near the top and our job is to figure out how to maintain or improve our position and my biggest failing of 2009 has probably been worrying about the long-term repercussions of impoverishing 295M people when really it’s just us (me and my 9,999,9999 economically close friends) that we need to worry about and we have jobs and money and assets and stocks so, once again – F*ck those people!

Now that we have Russia and China on board with this Capitalism thing, we are more efficient at exploiting the global labor force than ever.  Corporate profits, other than 2008, have climbed an average of 13% a year without increasing wages a single cent over that same time period.  Corporate profits have climbed to their highest share of national income in sixty-four years, while the share going to wages has sunk to its lowest level since 1929 – Perhaps there has never been a better time to invest in Corporate America than right now.  Our global GDP has climbed to about $55Tn, up 100% in 20 years and, the best news of all is that we’ve made sure that over $21.5Tn (71%) of that growth went to the top 10% of the population.  By keeping the money amongst ourselves, we can be sure that it goes where we WANT it to. 

What does it matter if the capital allocation to the great, unwashed masses barely keeps up with their population growth when our cut grows by leaps and bounds?  We only need them to have just enough to eat and to be able to dress and transport themselves to a place where we can get that 1,800 hours of highly-productive work out of them.  This makes good, economic sense.  If we give money to the world’s 6Bn poor people, they’re only going to go and buy bread (or dare I say cake) and maybe shoes or clean shirt and mostly they will buy them at Wal-Mart or, even worse, make it themselves and there’s little profit for us in that.  By keeping the vast global wealth "in the family," so to speak, we can sell IPods and Hummers and luxury homes and diamonds and gold and other high-margin, unnecessary items to each other that allow the corporations we invest in to make obscene profits which, in turn, makes us EVEN RICHER!  Isn’t that fantastic?

So let’s not kid ourselves that anything in this country is being done for the benefit of the 90% who serve us.  We provide the basics and there are even many fine companies who can make money selling those basics like KO, MCD, JNJ, WMT… that we can invest in.  One of the big issues we had been facing the past few years is that the damned poor people kept dying because they didn’t have adequate health care as they squandered their meager wages on cheap Chinese treats from the dollar store or whatever it is poor people do when you let them have money.  Now we have taken a great step towards mandating that a portion of their meager wages goes towards health care and, in doing so, we have created 40M new patients for our wonderful medical industry to exploit.

Back on August 10th, we had discussed IHI (medical equipment) as a great growth ETF to play in this space and they have done well, up 20% so far and I still like them, and the components I had also picked at the time:  ISRG (who were a Fall favorite of ours and up over 200% since our pick), MDT (11.8%), TMO (7.5%), BSX (7.3%), STJ (7%) and SYK (6.1%) with BSX and STJ acting as the laggards of the group.  I still like BSX but can do without STJ now.  We are expecting a possible pullback now that we’ve hit $53 as this is goal for now.  What I had said on August 10th was: "If the ETF does make it over $47.50, then it will likely fill the gap at $53, which would make a nice 50% (on our option play) or better profit on the bull side."

GE is also big on medical devices and also infrastructure plays that should do well next year.  Big Pharma (MRK, PFE) should do well with 40M new patients coming on line and we always like Biotech like CELG and AMGN and let’s not forget the actual hospitals like UHS and THC, who have millions of new patients to take care of.  It’s hard to get a grip on how big the impact of national health care without understanding that the bottom 90% of this country have no disposable income at all and now, through a government mandate, we have now enabled them to buy hundreds of Billions of dollars in medical care – what a country!

I don’t think there was a single play in our August 8th selection of Pharmboy’s Phavorites that didn’t pay off other than OGXI, which I said was my least favorite.  We’ll be doing a lot of these articles in the coming year as health care looks to be the most exciting sector for long-term growth, especially with the aging baby boomers lining up to join the poor to be diagnosed and medicated in the 2nd decade of the century. 

The 295,000,000 that share 28% of this nation’s wealth in 95M households are normally supported by about 140M non-farm jobs but that was down to just 120M jobs as of Nov 17th so, as a group, we’re sure not going to be counting on the poor to be splurging next year as even record job growth (6M) would only replace about 1/3 of all jobs lost.  What do the poor do when times are hard?  Mainly they shift their spending so we can expect more money spent at MCD and BKC with less money spent on "casual dining."  We can expect pasta and bread to do well and meat to do worse because those items depend on large numbers of buyers

The disposable income of the poor this year will depend very much on the price of oil and other commodities and that’s going to be one of the year’s trickier issues.  To some extent, the price of oil is based on consumption but, since speculators took over the market, it’s been fairly disconnected from reality and speculation is a rich man’s game so it’s really a question of how much pain can be inflicted on the working classes before they change their habits so much that it spurs actual price competition among the oil producers - something that is also avoided through the formation of cartels.  Consumption of oil fell 5% this year yet the price of oil is up nearly 100% from last winter – go figure. 

 

While the commodity pushers can charge us (the top 10%) whatever they wish for oil, gold, copper, food and lumber – it seems they have already squeezed the bottom 90% to the breaking point.  The $3.5Tn that was overcharged for commodities in the last few years was withdrawn from household wealth and without an expansion of household values, increases in lending or (gasp) higher wages – I just don’t see that they have any room to push the commodity train.  Even inflation and dollar devaluation doesn’t work until you get those dollars into the hands of the bottom 90% so they can trade them for gas or bread.  That’s the great joke about the inflation pundits – they seem to think it can magically appear just because the banks are hoarding our increased money supply.  Unless the banks start buying a few million barrels of oil per week, we’re going to have to wait for the citizens to catch up.

And keep in mind that our poor people are the richest poor people in the world.  Over 4Bn people in this world get by on less than $2,000 a year while our welfare recipients get a whopping $12,000 a year – enough to be considered upper class in many of the World’s nations.  So our nation’s poor can actually afford to eat cake, as well as many other foods loaded with delicious and relatively inexpensive polyunsaturated fats (that are leading to those health problems that are killing them).  Keep in mind that, in the above chart, you are looking at the percentage of the AVERAGE US household but imagine how that changes for households on the bottom half of that $48,000 average income, especially for the 34M homes that make less than $20,000 a year yet still need to eat as much as the average family of 4 and probably still want things like heat, clothing and maybe a bed to sleep in – it simply doesn’t leave a lot of room for "other."

So forget those people – they are simply not going to be customers of much next year.  Let’s concentrate on the people who have money – us!  With 71% of the nation’s net worth and 66% of it’s annual income, the top 10% are the real customers for US business.  Unfortunately, it’s just 10M households with 30M people so we need to focus on things that can be sold to relatively few people at high margins.  That’s going to rule out cars (other than Porsche or BMW), mid-priced homes (but look for luxury home sales to come back) and mid-priced merchandise as the middle class is a vanishing myth, which is going to leave the merchants who try to service them out in the cold.

Financial services will do well as we shuffle our money around through various investments but don’t look for banks who rely on lending to the masses as they are all tied too tightly together to separate the good from the bad and that makes the whole sector a bit too dodgy although we continue to like XLF and UYG as the sector in general should recover over time. 

Another problem with the banking sector is the probable end to the free money train that’s been supporting them since last November.  While there are 30M of us who are ready, willing and able to borrow money for our various endeavors, banks need volume and it’s not very likely the other 275M Americans will be filling out successful loan applications in 2010.  That limits the amounts of homes that can be bought and the total volume of credit that can be extended and also runs up the risk of default as we are now spreading our risk over a smaller borrowing pool. 

With global debt piling up at a rate of over $10Bn a day, we are rapidly reaching the end of the game where we pretend interest rates can stay this low (especially if the economy really does heat up and creates a demand for money) and that brings us back to our favorite ETF: TBT, the ultra-short on the value of a 20-year treasury note.  The higher rates go, the lower the value of the fixed-rate notes that suckers have been buying for less than 3% interest this past year.  We’ve been in TBT since the low 40s but we are very confident rates have only one way to go in 2010, good for another 20% from the current 50 at least.

Travel should do well next year as many of us put off vacations while waiting to see how the economy shakes out.  As we get more confident the world is not ending in 2010.  PCLN is out of control but I still like OWW as a value play and CCL should perform well long-term as high fuel prices are not likely to return as fast as passengers.  CAL is still an airline stock I like and MAR is the place to stay as business travelers once again venture out of the office.  IHG is also a good pick in the luxury travel area

I mentioned that GE should do well on infrastructure building.  My big concern with them remains Commercial Real Estate but no one else seems worried about that sector.  GE is also big on solar projects, which should do well and my favorite pure play on Solar remains SPWRA, who are the quality leader but I also like STP and, of course, WFR on the chip side.  Also in the chip space is AMAT and INTC while GLW should have a great year supplying glass for all the new electronic devices us top 10%’ers love to buy. 

I wouldn’t go so far as to stick my neck out on luxury retail as some of that is affected by aspirational buyers, of which there are far fewer these days as aspirations have been crushed into dust by the latest downturn.  My main concern for the US and the global economy is that rising rates and other credit risks, reflected in various CDS rates, will begin to bring down some of the marginal global economies like Spain, Greece and anything ending in "stan" or "ia."  Also, 20M unemployed in the US and 400M globally is nothing to sneeze at.  Will we, the top 10%, bear the cost of taking care of them or shall we, like old Scrooge, wish them to die quickly and help decrease the surplus population?

2010 is going to be an interesting year and it seems the majority of investors believe that we can keep living on this harshly divided planet and keep squeezing productivity gains out of the working masses even as we continue to hold wages down and drive the cost of their basic necessities higher.  Even the slave owners had to provide food, clothing, shelter and medical care to their workers although I suppose we can feel good about the fact that slave owners outlawed education while we simply provide a very poor quality one – not enough for true upward mobility but certainly enough to hammer home the message that all they need is a dollar and that great American dream. 

As long as we can keep the peasants from revolting we can keep partying like it’s 1999 but I do have reservations (obviously) and we will continue to exercise a degree of caution in our investing but history has taught us that the rich can indeed get richer and we have plenty of good places to focus our bullish attention as we begin this centrury’s second decade. 

 


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  1. llorens

    Hey Phil – following up on my recent request for advice. If you were ~$40k short on QID with a $19.21 basis, would you stick it out for this upcoming low-volume week or get out in pre-market trading tomorrow morning and wait for the first of January? I realize it’s a low volume week so anything can happen, but everybody and their dog is predicting an up week, which usually means the opposite happens. Not a huge loss so far but may want to Run Away to Fight Another Day.
    Thanks

  2. Phil

    At $18.88 you can sell the Jan $18s for $1.12 which is effectively selling back at $19.12  and, of course rollable.   QID fell off a cliff and then rolled to another cliff and fell off that but if retail sales crap out (still not sure from what I’ve read) then it can take off like a shot.  You can take a bit more risk by selling the $19s for .60 instead and that drops your basis to $18.61 but does maintain some upside.  

    At the rate QID has been falling, it’s kind of surprising how cheap the puts are, Jan $18 puts are just .20 and Jan $19 puts are .65.  I’m very much expecting a pullback by mid January but this run-up (on no volume) has been brutal to short positions.  Of course, shaking the shorts out of their positions is exactly what they do do before a big crash, isn’t it?

  3. dflam

    Phil: Outstanding article.Educational & entertaining. You should be writing for the New Yorker.
    dflam 

  4. Phil

    Thanks Dflam. I probably should submit stuff to magaizines sometimes but I never have time for it.  I need an agent I think…

    I went to the mall with my kids (Willowbrook in Wayne, NJ) and it was more crowded than before Xmas but might have had something to do with it being Sunday and our neighboring county is closed on Sundays so everyone comes here.  Apple store was amazing with 30 reps that I counted in front of store and at least 100 people inside and there was a constant stream of people coming from the stock room to re-stock items. 

    I realized something very cool and smart about the Apple store – unlike the Sony Store or the Bose Store, Apple carries and features lots of stuff made by other people that works with their products.  That makes you feel more like buying because you don’t get the feeling that there is anything else to look at (including PCs since they offer plenty with INTC now).  They had a 27" IMac for $1,699.  I think I paid $2,499 for just my 30" display when I bought it years ago and this thing is thinner and includes a whole computer!

    My kids got the IPod Touch for XMas and they were going nuts looking at all the accessories they can get.  You can really see how great these entry-level things are to suck new customers into the Apple lifesyle.  They are also clever with the Apps because my kids have about 50 free games already loaded (and there are some 2 player games they can play together on Wi-Fi) but they are already making lists of which ones they "need" to upgrade to pay to get all the features etc..

    The rest of the mall was full of people but not too many bags.  Perhaps people looking for post-holiday sales and not finding anything too exciting (at least I wasn’t excited).  We were just as bad as we ate lunch (CAKE was packed at 2pm) but bought nothing – my kids have gift cards but we don’t let them make impulse purchases so they have to decide what they really want for next week now.

    Don’t forget we’re still looking for your input under the PSW Holiday Shopping Survey

    Thanks!

  5. samz3700

     Phil -
    Love the article – disclosure – I have an advance degree from the New School for Social Research in Political Science – read  (I went there to study critical theory, continental philosophy, and marxism) silly me – does not seem to pay the bills -
    Think article would be improved if you gave a breakdown by income – who are the top 1% by wealth and by income – who are the top 5% etc. – it’s hard to read off of the chart -
    Key here is that people who qualify for the top 10% of wealth and income often do not perceive themselves as wealthy because they are comparing themselves to their friends and co-workers – we should be more frank about what class we inhabit in this country
    I think one of the awful feature of this rise in income inequality is to create a greater sense of anxiety among the middle and upper middle classes as they struggle to maintain their incomes and lifestyles because they rightly perceive their is no safety net in this country – as you mention we work longer hours than other industrialized countries.
    We have greater inequality in this country than Europe b/c we have not working class consciousness – politics are mostly race based – rather than class based – we all live under the illusion that we are middle class.
    Go Phil! 

  6. Phil

    Thanks Samz – There is a fine line between my diatribes and a research paper sometimes.  One day I will have the time and venue to just go on and on for 10 pages outlining what wealth really is within the context of an article but I mainly have to stop myself from getting too into detail.  I could write a whole book on the wealth gap and the coming revolution but, for the purposes of the main audience here, I try to stick to the highlights. 

    Actually the joke of the whole thing is how many people think they are wealthy that aren’t.  Clearly, from the inflation-adjusted income chart, you need to be over $100K in annual income just to be in the top 10% but the funny thing is that the people in the top 10-4% THINK they are wealthy when their "wealth" is barely the interest income of the top 3%.  The top 10-2% make 10 times more money on average than the bottom 90% but the top 1% make 10x more money than the next 9%.  That means the top 1% make 100x more than the average person (probably about $42K) as an annual income. 

    So if you want an idea of where you stand, to be comfortably in the upper end of the top 10-2% you should be making around $400K a year and to be invited to rub shoulders with TBoone (but not too close) you’d better be bringing home $4M – THAT’s what they mean by wealthy – and keep in mind that TBoone made $3.6Bn in 2008 (close to 100x the median of the top 1%) so he’s not going to be very impressed by your earning potential until you move to the top 0.1% at least.

    Rob Reich just put up an article on how Main Street got shafted in this "recovery."

  7. josiah

    Phil – Perfect Article. I’ve just spent two semesters researching both the French Revolution of 1789 and the Chinese revolutions of 1911 and 1949. Social order seems to be just that until those on the bottom figure it all out. I think the parallel between now and 1789 is, unfortunately quite strong in many ways when comparing income disparities. We need a Charles Dickens.

  8. EricL

    People will live closer to their true income level as easy credit disappears, which I think is happening now. Think about it: if banks are currently steadily restricting consumer credit ,even though they are under intense political pressure to expand it and can borrow near 0% themselves, why think they are going to ease up on consumer credit later?  As we probably all know, so much of the wealth polarization that Phil describes was hidden by easy credit which allowed the lower and middle classes to feel rich through debt.
     
    I’m always amazed: my wife and I are in the top 10% of household incomes (albeit near the lower end of it), have no kids, modest expenses, and have no debt except a small remaining mortgage that will be paid off soon. Yet by refusing to use credit to buy things like cars, trips, etc., we live what many would regard as a middle- or even lower-middle class existence (I still drive a 90s-era Honda, e.g.). Short of taking money of our long-term savings or brokerage accounts, it would be hard for us to save enough to buy something like a $40K vehicle, for example. Yet I see these all over the place, and I live in lower Alabama!
     
    Barring a resumption of easy credit, I think the current 10m car sales/year number is close to the new reality for America — likewise for the recent declines in housing prices and in all areas of discretionary spending. They are likely permanent, IMO, and with these reduced levels of consumption, we’ll see the wealth polarization much more clearly than we did in the last decade.

  9. ocelli7

    Phil, great article…..I think many do no know that one of the biggest shifts of wealth know occurred in the last 30 years. With regards to whether or not everyone experiences an "even playing field" to obtain their share of wealth, I suggest people read Outliers, which attempts to shed light on opportunities. These two topics are quite related in my view.

  10. ocelli7

    Phil, regarding using futures as part of a strategy, I collected some info and wanted you to check my numbers for accuracy.
     
    Futures: trade cost on TOS $3.50 or less if you do volume
    no daytrading rules apply so you can go in and out without restriction
    /ES = S&P500 e-minis
    cost: approx $1120 per contract
    tick .25= $12.50
    four ticks = 1 point on the SP500
    1 point change in index = $50 change

    so if the index/futures moved 5 points, then the change in value of the future would be $250.

    margin requirements: since the delta is 50, you are controlling about $56,000 of index:
    $5625 required per contract;
    however intraday (9:30-4:15 ET) is 25% of regular margin, but need $15k in liquid assets
    A full list of futures products offered by thinkorswim, their margin requirements, and their trading hours is available here, about halfway down the page:
    https://www.thinkorswim.com/tos/displayPage.tos?webpage=servicesOrderTypes&displayFormat=hide
    For the /YM, (DOW mini) a one point move would constitute one minimum fluctuation of $1.00, which in turn equals a $5.00 change in the value of the mini contract. Margin= $6500
    Notes:
    volume very high during trading day, but falls after hours, but still significant
    closed 45 minutes per day
    closes Friday afternoon 4:15 ET, opens Sunday 6pm ET
    Hours vary for each type of future, such as the RUT
     
    So Phil, if this is correct, maybe all you need to do is to demo one or two trades as you suggested last week (and add anything you think might be useful, such as understanding the contracts so you don’t actually have 1000 barrels of oil delivered to your driveway)
     

  11. allen060

    Phil, great article. Will it be posted on Seeking Alpha soon. I would like o send the link to some folks.
    By the way, you might want to replace one word in the paragraph following the pie chart that show average typical expenses. You refer to "inexpensive polyunsaturated fats." I think you meant "saturated" fats – those are the cheap, unhealthy fats.

  12. pstas

    Ah, I love the smell of class  warfare among the Marxists. So entertaining.

  13. tchayipov

    how mr. Churchill said: Capitallizm is a terrible think, but nobody yet discover anything better

  14. gel1

    Phil:
    I believe as you, there is a disparity between those who earn enough income to place them in the upper 10% vs the alternative 90% who earn less. The real disparity is not just in the income numbers that are obvious, but more in the comparisons of the preparation, effort, discipline, sacrifice, risk of capital and skills acquired through years of experience and education in order to earn the income.  In evaluating the disparity, I believe you will find that those who are in the top 10% have made these investments in their effort to attain a higher income, and have paid the price. It was not free and it was not attained through luck. I believe, while studying the differences between the two classes, most of those in the lower 90% contributed far less in the investment needed to succeed and therefore should not expect parity. The most glaring disparity between the two groups nulifys your position of inequity between the two, ie, the government levels the playing field through its taxation policy. The upper 10% pay almost all of the taxes (income) needed to operate the government. The real comparison should be a table of who gets to keep the income after taxes - not how much you earned.  IMHO . I found your editorial very interesting, however in order to equate a test for fairness, I believe my points should be a part of the mix.

  15. ocelli7

    yes, a lot of success can be attributed to hard work, etc., but not all. Read Outliers by Gladwell if you want to begin to see how different things beyond your control contribute to success. For each of us that is successful, there are 5-10 others who could do what we do if they were born in the right place, the right date, had an uncle who helped, etc…..all things we have no control over. You gotta have the brains and motivation to succeed, but you also need the other stuff and it is not an even playing field.

  16. tchayipov

    Gel
    bravo, good said

  17. gel1

    When you dig really deep, in determining what really was the primary catalyst for achieving success, I believe it is the level of prepardness, motivation to achieve the pre-determined goals, acceptance of the risk, and common sense. I have always believed you have to create your own luck, and recognize it when it becomes apparent. There is a price for financial success, and most who fail can blame themselves. I have known scores of trust fund recipients, who in a very short period of time.desicrated the fortune they inherited. All they had to do was sit on the sidelines and be passive, but they were not even able to achieve that – We are pretty much in control of our own destiny. When faced with adversity, (it is inevitable), there is always a way to overcome it, assuming you have made preparation for the unexpected. and have acquired the skills in order to deal with it. It is very unfortunate that such a large percentage of our population is willing to turn over to the government the responsibility of cradle to grave care for even the basic needs….. Just procreate and the government takes care of everything else. This mindset will over time expand the gap between the financially responsible and the vast majority of those who live from paycheck to paycheck, and dependant on others for their financial security

  18. allen060

    Gel,
    I have heard your argument so many times that those who worked hard, got a great education, etc . succeeded and therefore deserve to enjoy the fruits of their labor. But you are looking at the world only through a money lens. Not everyone sets money as their goal. Many work their entire lives for more altruistic causes that benefit society enormously: teachers, social workers, those who work in all sorts of non-profit organizations, etc.  They are the ones who educate our children, care for us when we are sick or disabled, and work to make our world better. But their pay is typically very low.
     
    Then you have those work in in the arts but typically earn very little: writers, artists, musicians, actors, even the legions of people who work for years in Hollywood, many of whom barely scrape by (I’ve been in LA for the past 10 months and I have witnessed this first-hand), but the result of their work is the TV and movies we all watch. All of these folks enrich our lives in myriad ways and, without them, our culture would be an empty shell.
     
    And then there are the legions of parents, mostly women, who choose to raise their children and not work because they believe that our country and the world need children raised with love and attention – that children need parents who are present and not absent, even through adolescence (perhaps most importantly then).
     
    And finally, there are those who have other abilities that do not lead to high earning professions but still contribute greatly to society through their work, perhaps far more than the professions that our society has decided through various mechanisms to reward with high earnings.
     
    If you follow your kind of argument to its natural conclusion, all of these people do not deserve decent health care and a decent standard of living because they chose to not make a lot of money but rather chose other areas of work that benefited society, at least in some cases far more than those professions that make a ton of money (think mortgage bankers and Wall Street during this past decade). The ability to make large sums of money should not be the sole determinant for a decent standard of living. I am not advocating total financial equality, or a form of socialism — I recognize the benefits that capitalism offers( with some constraints) — but rather a balance in society that, as Phil pointed out above, is no longer the case in our country.

  19. humvee4me

    Yeah, I’d rather be a guitar player and receive all the benefits so many of you advocate; but I knew I couldn’t buy a decent standard of living and with that skill, so I became educated and worked my butt off to get where I am today. 
    We capitalists who are profiting from our system are greedy
    You socialists who are profiting from this system that keeps the working class down are evil

  20. bord

    Phil, What are your thoughts about AMZN short term. Despite the run up, it seems like there’s nothing to stop it between now and new year’s at least. Is it a good short term, get in and get out trade?

  21. bord

    Question for TOSers, I am looking to maybe move my accounts on to TOS. The commission question has been covered enough here, but I am curious about gains/loss tracking and support that TOS provided (and at what cost). TD Ameritrade tracks gains/losses for free with Gainskeeper, generates D-1s, etc.-- which is important to me as I shudder to think how much time/hassle it would be to do it on my own. What does TOS offer in this regard?

  22. Phil

    Oh I love the smell of class warfare in the morning!

    Good morning all – hope you had a merry Christmas. 

    I may be a bleeding heart liberal but I would ask those that feel that 100%, 90% or even 80% of the people in the bottom 90% of the wealth pool are there because they are just not as good as you to consider, just for a moment, that that might not be the case.  That’s all I ask in this season of joy and giving – to simply allow for the possibility that one, maybe two or three of the Billions of poor people in the world may be a person JUST like you who simply was less fortunate than you were.  Allow for the possibility that your help COULD make an actual difference in someone’s life and wouldn’t be simply wasted on people who just aren’t motivated enough to succeed.  Humanizing the poor doesn’t demonize you for being rich – don’t be so afraid to care

    Dickens/Josiah – Ah but who would read him?  Unless GE, Disney, Viacom or Fox choose to make a TV show out of it (good luck), he’d be talking to an audience of maybe a million people, even if he wrote a best-seller (that’s all it takes).  In Dicken’s time, he was read by virtually everyone in England who could read – the market wasn’t so crowded back then.  Dicken’s father was thrown in debtor’s prison – maybe he wouldn’t have cared so much had that not happened to his family and Dickens, like Scrooge, had to work to support his family at 12 but, LUCKILY, very shortly after that Dickens’ father inherited a huge sum of money, was released from jail.  This allowed Dickens to finish his school, clerk with a lawyer and decide to become a writer.  But for the timely death of his grandmother, Charles Dickens may have been a shoemaker who died of cholera in a workhouse.  Same man, same talent, same drive – one path having to support his mother and sister and one path leading him to become one of the great contributors to human literacy…

    One of the great shames of modern Capitalism is that if Einstein were alive today, he’d be considered a failure if he didn’t learn programming and get rich writing something cool – there’s no money in Physics and you can’t go to MIT unless you can afford it.  Einstien’s father’s business failed, arguably through no fault of his own (he had a DC power company and AC became the power of choice) and had it not been for the charity of the local Jewish community and the value they placed on education, Einstein would have never had the special tutor he had from 10-16, who developed his passion for science. 

    The great leaps of progress we have made have very often come from people working far outside the box – to create a society where only the accumulation of wealth defines success stifles progress in the long run.  DaVinci had no father (illegitimate) and a peasant mother, if art were not so valued in the 15th centrury, he never would have had a chance to explore his own scientific side.  It’s sad that patronage of the arts has gone from a thing of presige to an object of derision these days but the general attitude is – it’s a waste of money because most artists don’t amount to much.

    Credit/Eric – You are very right but sadly in the minorty still.  People in this country are in no way prepared to live within their means.

    Outliers/Ocelli – Great book.  Gladwell is a propenent of the 10,000 hour rule too (the time you must spend at something to become and "expert" at it).  It is a very good book that I suggest people read.  Interestingly, the concept of ignoring outliers is very important in 5% rule determinations…

    Futures/Ocelli – Damn, that should be a post.  Very nice job going over the Futures basics.  I will keep an eye out.  Oil at $78.50 or S&P 1,125 may make good short plays today. 

    Alpha/Allen – I think they thought it was a bit controversial or something as they are waiting for the bosses to decide if they will run it.  This is how capitalism subtly enforces conformity – you don’t want to jeopardize your readership by rocking the boat do you?  Thanks for the notes – I appreciate corrections – it makes me look smarter!

    Class warfare/Pstas – It’s been far too long and everyone takes this stuff way too lightly, as if it couldn’t possibly happen but if you push enough people down far enough, long enough – all it takes is one charismatic guy to get a little buzzworthy attention and start chipping away at the sytem.

    Capitalism/Tcha – There is nothing better at efficiently exploiting resources and driving efficiency and innovation and those are good things but there’s an underlying assumption that there will always be more resources and that we will innovate out of any problem and, like all great plans – that works great until it doesn’t, then you’d better have a new plan.

    Alternative 90%/Gel – As a business consultant, I often tell people that the reason 9 out of 10 small businesses fail is because 9 out of 10 people are not prepared to put in the work and make the sacrificices it takes to make a small business succeed.  Probably it’s more than 9 out of 10 and some of the ones who succeed simply luck out.   There is no doubt that there are some people (and many of us are those people) who will find a way to succeed in almost any situation but that doesn’t make it "fair."  If the world were a football game and you weren’t a 300-pound guy who could run 50 yards in 6 seconds would it be fair to classify you as one of the Alternative 90%?  As to the tax thing, the upper 10% make 66% of the money and pay 54% of the taxes – totally unfair is right, they are undertaxed by 12% and that’s not even taking into account the gross hoarding of assets by the top 10% who make it impossible for the other 90% by leaving them to fight over the 20% that’s left.  Let’s say everyone had the  "effort, discipline, sacrifice, risk of capital and skills acquired through years of experience and education in order to earn the income" – who would pick up your trash?  Who would teach your kids?  Who would mow your lawn? 

    You NEED an underclass in order for you to function, you need a chicken farmer and you need people who shuck corn 10 hours a day and you need people breaking their backs picking strawberries – your life would not be possible without some coal miner dying of lung cancer at 55 because it was the only way he could support his family.  I don’t mind discourse on the subject but let’s not start by being delusional – our system is based on maintaining a pool of very cheap labor to handle the hundreds of small jobs that go into making your life run smoothly every day.  If all of those people simply demanded $10 a day more for their labor, you would have to give up (assuming 200 people want $10 and they service 20 people each) $100 a day to maintain your lifestyle or you would need to figure out which things you can do without.  Just look at all the ingredients on your next meal and think about how many people had to be involved to get it to you.  If all those people weren’t willing (or forced) to work for roughly minimum wage, what would it cost you?  What if even a couple of those people decided they were 1/2 as good as you and wanted to be paid accordingly?  Why fire them of course – can’t have that attitude from a food worker can we?  8-)

    I agree with Allen’s 12:37 comment and I think the factor you fail to take into account is that your success depends on there being an underclass and I’m not even saying there shouldn’t be one – it’s just not possible.  I do think that all people should be given an equal opportunity to advance themselves.  Only those that are at the top based on luck, like trust fund recipients, really fear having competition for their spot.  The real question is how we, the winners, then choose to conduct ourselves going forward.  Does the "loser" who ended up picking strawberries and has no money for medical care deserve to get the same vaccine you do or do we let them die as they are more disposable than you are? 

    Medical care, education, food, shelter, heat…  these are just part of the prize pool in the great capitalistic system where everything is for sale and nothing is a human right.  My personal philosophy, which is pretty much the European one – is that we agree on on a basic level of each that people have an absolute right to and that burden is the responsibility of all of society to provide.  We are all then free to fight for our share of the surplus and may the best man win.

    Guitar/Humvee – There’s a point made in Outliers that the reason the Beatles were able to become successful is because they put in a couple of years in Hamburg where they constantly performed, hitting their 10,000-hour mark as a band so when they went back to England they were tighter and better sounding than other bands.  Perhaps had you been able to take a few years and pursued your talent you would be the next Eric Clapton now and you’d have the music and the money.  We all make choices and we all have to decide what we’re willing to sacrifice to get to our goals.  As a parent, I want my children to be able to pursue their dreams.  My 7-year old wants to be vet but my 9-year old wants to be an artist and she’s pretty good.  At what point should I stomp out that dream because it’s not a valuable skill?

    Why do we place so much value on success and individual accomplishments but then choose to narrowly define what we consider success?

    AMZN/Bord – It’s all up to retail sales really, could go either way but, overall, too expensive at this price.

  23. japarikh

    Phil,
      Couple of questions for this week:
    1) Still have both MAR DIA 106 and DIA 108 puts for 6.4 and 5.35, respectively. Thinking about staying put (no pun intended) on these for now. Agree?
    2) I had SRS put to me at $9. Also have 30 of APR SRS 10 calls. Not sure if I should roll to APR 8 or JUN 8. Also would like to sell calls against my SRS shares. Please help.
    3) In RTH Jan 90 puts for $1. DD or roll?
    Thanks for your insights.
    Janak

  24. barfinger

    I have no doubt that the left will get its revenge for the Bush years, and I have no doubt I will have to cut back to pay what the left feels is my fair share. I very seriously doubt that all of our money will accomplish much of anything beyond increasing job opportunities for government workers. More or less, that’s the record. I know it doesn’t matter, but I would wish for a more thoughtful approach than what I have seen employed so far by this government.
     
    I refuse to argue the points you made, Phil, beyond saying that your data leads one to a conclusion that is false. If Bill Gates gets richer, thus growing the gap between "the rich" and me, am I worse off?
     
    Now, I’m going to face higher health care costs, higher energy costs, and higher taxes, so lets get busy and figure out how I can make some more money.

  25. jamie

    allen060 and Gel,
    allen060 you make the correct observation "CHOICE" we all have the right to choose our paths in this country and we must be prepared to live the consequences

  26. barfinger

    2007 began with a string of days like we have just seen. A slow, steady grind higher – lower VIX and premiums, tougher and tougher trades. This grind continued until late February, when on a single day, the SP500 fell 60 points (not sure if that was the print or interday). I do not want to see a sequel. Any thoughts on short term movement?

  27. 1020

    Good Morning!  Phil, I will print off this entire article and its comments. It is great reading for anyone, but especially for young people trying to get their head straight, on what path to take in life. I enjoyed all the comments, especially allen060 and Gel, but your comments are the most profound. Phil, your kids are very fortunate to have a model of an entrepreneur with a compassionate heart all wrapped up in a father, as they have in you. It feels good to have some confirmation that my efforts are on the right track as well.  Thank You,  Randy

  28. humvee4me

    Yeah, I might have become the next Clapton, but the odds are enormously stacked against that.  Aren’t we dealing with probabilities is most of life, including options trading?  How many people are sure they will succeed at  American Idol?  People should pursue their dreams and I appreciate the arts more than most, and the occasional one will be able to able pursue it as a lifestyle.  However, when are children are forty years ago and live in our garages, it’s probably too late to discuss career paths with them. 
    Enough philosophy, let’s make some money.

  29. humvee4me

    oops forgive the typos

  30. Phil

    Bill Gates/Barf – Actually it depends what Bill Gates does with his money and how he gets richer.  If Bill Gates gets rich charging your 100,000 person company $100 more than an open market would bear for his software then you are $10M poorer so Bill can be $10M richer.  I’m not saying MSFT has that kind of pricing power through monopoly but, like I said, it depends.  When Donald Trump sells you a $2M condo and makes $700,000 from you, perhaps you don’t feel exploited as you are getting the "Trump lifestyle" for your money but every level of society has wolves and sheep and this level’s wolves are simply sheep for the level above. 

    Where the super-rich really begin to harm the rich is in competition for services and resources.  If Bill Gates buys up 30 acres of land at the base of Apen Mountain and knocks down 20 of 50 homes that were there, then he drives the price of the other 30 homes up significantly.  That means I have to pay twice as much for the same home, same location etc.  If Bill Gates decides he’s going to start collecting Dalis and instructs his people to buy whatever comes up for auction this year – I’m either going to pay through the nose or do without.  I wrote about this sort of thing a while ago in "The Dooh Nibor Economy."

    Short-Term/Barf – I think the same, that we are setting up for a big, sudden fall but when?  It simply makes investing very, very dangerous right now but to be bullish over this weekend for sure is nuts because Al Queda just tried to blow up a plane on Christmas Day so why should we think that this country will be able to secure a thousand New Year’s eve celebrations by Thursday, not to mention the rest of the World? 

    Thanks 1020/Randy!

    Garages/Humvee – I don’t know – I turned 15 in ’78 so I missed most of the fun of the 60′s and 70s (just in time for disco, though) but I knew enough "hippies" and, after "wasting" the first 25 or 30 years of their lives pursuing their own interests and fulfilling themselves as people, most of them turned out to be productive members of society anyway.  My friend and I ran out of HS graduation and back-packed across Europe, something hardly anyone does anymore (American’s anyway).  I was the "responsible one" and went home after 6 weeks to work for the rest of the Summer while he went on to China and India, where he ended up staying for years.  He’s a lawyer now…  So maybe that’s why I feel people should indulge themselves, the odds may be stacked against you but I have a showbiz side of my family where there are plenty of people who make money doing what they love every day and I think it’s a shame we don’t encourage more people to explore their artistic side just because "there’s no money in it."

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