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America is 234 Years Old Today – Is It Finished?

"The average age of the world’s greatest civilizations has been two hundred years. These nations have progressed through this sequence. From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance, from abundance to complacency; from complacency to apathy, from apathy to dependence, from dependence back into bondage." – Professor Joseph Olson

Is America, then, living on borrowed time?  Are we so far past our prime and so into old age as a civilization that we are now senile and oblivious to our present surroundings, causing a danger to ourselves and others?  Do we find ourselves living in the past and repeating the same old tales of our former glories over and over again to anyone who will listen?  Are we barely kept alive by various medications that only stave off conditions that are getting worse every day while still imagining that, if there were a need, we could rise up and be strong again — but not today as there's rice pudding for desert and we don't want to miss that!

Well I have news for you – This country isn't old and it isn't sick but it has been drugged and it has been beaten down and robbed and I am going to tell you that I not only saw it happen, but I think I got a pretty good look at the 10,000 guys who did it.  It was the top 0.01%!  Who are the top 0,01%?  They are the top 10,000 income earners in the United States of America.  If you THINK you are in the top 0.01%, you are not.  People in the top 10,000 know only KNOW they are in the top 0.01% but they know where they rank as well.  The median ANNUAL income of a person in the top 0.01% is $50,000,0000.  They have $350,000,000 in assets and, since 1978, that is an increase of 550% – how have you done the past 30 years?


Now we are (or used to be) a pretty rich country and the median income of the 118M people who earn enough money to pay income taxes is about $50,000 but the cost of living in the same country as people who earn an average of 976 times more than that is pretty high as well (see "The Dooh Nibor Economy").  Even worse, The 10,000 paid just $112Bn in taxes last year – that's just over 20% of their income, while the rest of the country, of course, paid a much higher percentage of their income to make up for the shortfall.  Warren Buffett, the third richest man in the world (behind Gates and Slim) paid 17.7% tax and made a point of checking and found out his employees paid an average of 32.9%. 

God bless Buffett becuase he made this point in a speech that was given to 400 of the 10,000, who were gathered at a Hillary Clinton fund raiser in 2007.  It got a little attention at the time but then was swept under the rug – as if that didn't matter.  But it DOES MATTER and it matters a lot – the life of this country depends on it!  If this were just a case of 10,000 people not paying $100Bn in taxes, maybe we could move on and forget it but it's not.  US corporations, who are (according to to the Supreme Court) also citizens of this country, paid just $300Bn in taxes last year on $6 TRILLION in income (5%).  That's right, if US corporations simply paid the same amount of tax as Mr. Buffett – that would, by itself, be enough to wipe out our deficit.  But, things have gone decidedly the other way in the past 30 years:

Take GE, for example.  GE has $36Bn in sales and paid $431M in taxes (15% of net profits) in 2009.  They also paid out $9Bn in dividends and over $24Bn in 2008 and 2007 and in 2007 they bought back their own stock but, in those three years, they paid -(NEGATIVE) $900M in taxes!  Are you feeling victimized yet?  Does GE use our infrastructure?  Do they use our public airwaves?  Are they protected by our police?  Is our army out there fighting and dying to protect them?  Do they take money from our government?  Do we educate their employees?  This is the INSANITY of the US tax system.

No wonder they are so anti-change – it’s friggin’ great to be GE and have a 304,000 person company that pays no taxes but pays the top 5 guys in the company $50M in cash and bonuses while getting government bailouts for all the poor decisions they’ve made.  It's especially great to be GE when you control the media – along with fellow top 0.01%'ers like Rupert Murdoch, Sumner Redstone, Bertelsmann, Time Warner and Disney.  Think about it, all the media you consume, all the information, you get is pretty much controlled by these 6 uber-rich entities.  Don't you think there's something wrong with that?

Sadly, most people in the investing class don't see it.  Generally, if you are the type of person reading a stock market newsletter than you are aspirational and, to some extent at least, you have already worked hard and gotten ahead (or your Dad gave you a bunch of cash) so you believe the system is fair, just like the 100 people who walk out winners from a casino think it's fair while the 10,000 people who lost that day may feel otherwise.  It's a big country, we have 300M people and every day one of them is struck by lightning but only one in 5 of those people is killed.  We generate about 240 "luckiest people on earth" every year so it shouldn't be too surprising to you that we still generate some winners in the great game of Capitalism, not matter how much the odds are stacked against you.  How stacked against you are they?  Let's play some Poker:

The main problem with the system of distribution of wealth in this country is the TOTAL LACK of distribution.  Of course you don’t see that when you are in the deep end of the distribution pool…  10,000 people make 30% of the income in the United States of America and the next 29.99M people make another 40% and the next 30M people make 12% and THE OTHER 240M people have to fight over the remaining 18%.  This is your idea of fair? Let’s say it’s a poker tournament:

  • Table 1 has 10,000 people who have $1M each to play with
  • Table 2 (top 10-0.01%) has 30M people who have $433 each to play with
  • Table 3 (top 20-10%) has 30M people who have $133 each to play with
  • Table 4 (bottom 60%) has 240M people who have $25 each to play with.

poker-1.jpg image by soundandfuryandpeaceWhat are the chances of someone from the lower tables winning enough money to compete at table 1?  First of all, the only way to advance is to take money away from other players, that should be obvious.  Second of all, even if someone from table 2 accumulates the wealth of 1,000 people (who are knocked down to table 4 or out of the tournament entirely), they are still at a huge disadvantage once they have to move up to table 1 and, of course, what effectively happens is the person from the lower table who accumulates the wealth of his neighbors and takes his winning up to Table One – if often swatted back down to nothing as the more experienced, better funded players at the big table make short work of him

What’s the net effect?  The money that our lucky/skillful player from the lower tables takes from his fellow players in the lower ranks is either left on Table One and added to their very exclusive wealth or, failing to wipe out the new guy, they may reluctantly make room for another seat at the table and chant "One of us" at the initiation ceremony but, what they WON’T do, UNDER ANY CIRCUMSTANCES, is put that money back into circulation in the lower tables – the tournament just isn’t designed to work that way is it? 

Eventually, inevitably, when you design a system like that and you refuse to redistribute the wealth back from top to bottom – there can be only one winner in the end but, as I’ve always said, it’s a long, slow game that grinds away for decades and the money goes up and up the ladder and is a long, painful death for those down below, who don’t even realize what they are losing it all until there’s nothing they can do about it.

The joke of the thing (and believe me it is a joke to The 10,000) is how vociferously the players at table 2 and even table 3 will defend the same system that is working against them.  In part, it's because they are so close to the main table that they can almost smell the money and, for many, that drives them into a frenzy where nothing else matters but getting to Table One and playing with the big boys for their chance at Fame and Fortune

Why is that?  Why do we feel that way?  Perhaps it's because we have an entire culture that emphasizes this behavior from birth.  When was the last time you played a game where your primary objective was to help others?  When is the sidekick, the person who helps a hero, not the joke of the movie?  Have you ever seen Superman build low-income housing or watched Batman feed the homeless?  No, we are trained to fight and win and people who don't win are left in the dust, not worthy of a second thought other than as a foil for the hero to deliver his catch-phrase to

The media shapes the way we think, the education system shapes the way we think and THE SYSTEM shapes the way we see the World and there doesn't have to be a grand conspiracy and secret meetings when a bunch of bullies make up the rules to a playground game.  They know what rules are good for them and they know what rules are bad so they design the games so they can win all the time.  Not most of the time – ALL THE TIME

Goldman Sachs, JPMorgan Chase, Citigroup AND Morgan Stanly ALL had PERFECT quarters in Q1, not having a single loss in the markes in over 250 combined chances with GS alone making $9.74Bn in trading profits without having a single bad day.  Let's assume GS was the best of the best and that they hedged so well that they are normally up 7 out of 10 days using their system.  What are the odds of a single firm having 63 consecutive wins, EVEN if they already have a 70% advantage?  ONE IN 5.7 BILLION!  And don't forget, Q1 was a wild quarter with huge ups and huge downs – yet they were NEVER wrong.  We are blessed, on this planet Earth, with a population of 6 Billion, to be in the company of 4 firms that have pulled this off AT THE SAME TIME.  What will it take to wake people up to this scam?

Americans are so deeply vested in the game of capitalism that they can't see how it's been perverted by the top 0.01% to deny the other 99.99% any real chance of winning.  Low taxes on the top 10,000 and corporations (including low "death taxes") creates a money funnel that pools ridiculous amounts of capital in the hands of very few people.  Rather than using that money to build more wealth and create jobs and grow the economy,  the rich tend to funnel their capital into various schemes that protect and grow their wealth, mainly by exploiting the labor of others – creating systems where they lend money with virtually no risk for usurious interest rates or they participate, as venture capitalists, where they take half a business away for a small sum and contribute nothing.  The more they pool the money, the less opportunity for others to have some and the entrepreneurial spirit of the nation is destroyed.  Inheritance taxes and income taxes on the very wealthy are are meant to put the capital back to work in the country where it was created – how is that a bad thing? 

You can’t have Capitalism without CAPITAL and if capital is pooled in the hands of very few people, it is no longer a fair system.  This is NOT complicated.  Stop playing someone else's game – we still have the ability to vote to level the playing field but new laws allowing unlimited political contributions by corporations may soon be closing that door to the rest of us.  Is that the America you want to leave for your children?


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  1. Hi Phil: Sorry to bother you on July 4th, but I have been breaking my head over the TZa hedge. These are my conclusions. Let’s say I have a portfolio of 150,000 invested. IF Rut drops 20% To 478, I need to protect 20% drop of my portfolio, i.e. 30,000. I would do that with TZA. 2 questions how many contracts of TZA would I need to hdge 30000 K?. I have thought about this strategy but I do not know if I am thinking correctly. buy TZA 2011 C 8 for 2.83 and sell TZA 13 call for 1.83 and sell TZA 2011 6 Put for 1.10, so maybe net credit of .10. Now my question is this a good hedge? I know TZA varies 3x in relation to the RUT, but how do I calculate that in the difference in strike prices? Can you please do the math with me, so I really get it once and for all. Thanks a lot.

  2. Happy Holiday Phil!    Since you are in the middle of this politics debate, I’m assume your mind is preoccupied with it, but I do have an investing question. We can deal with it later if you wish.
    A week ago Chaps made an observation for possible buy/write, and you came back with a suggestion for synthetic buy/write:
    June 25th, 2010 at 10:08 am | Permalink  
    RIG: Jan 2012 50 P + Cs can be sold for about $28.50 as part of a buy-write on a $50 stock price.
    RIG/Chaps – I’d go for the 2012 $40/65 bull call spread at $11 and sell the $35 puts for $7.60 for net $3.40 on the $25 spread and your worst case is you own RIG for net $38.40 (now $50.24) with a 635% upside at $65 and a BE at $43.40.  Your buy/write is good too.
    I seem to remember you saying in a post several months ago that you don’t own a lot of stock, that you prefer to work with the options…. am I remembering correctly? Also, do you always look at both possibilities, the buy/write and the synthetic? And what parameters make you chose one over the other?
    Couldn’t find anything about this in the archives, although I’ll bet it’s there. Thanks.

  3. Phil cheers, you are one hell of a writer, that was a great article.

  4. Good Morning Phil:
    I have read your post from yesterday and am equally concerned about where we are headed in the market:
    Equity position $344(22% current) with additional commitments in July $143, in Jan 11- $42,  in Jan12 – $143.
    Currently have the TZA hedge for Jan 2011, bull call 6/12 10 contracts, paired with Jan $5 Puts- 5 contracts.
    Please help formulate an appropriate hedge for the above portfolio and commitments.  
    Thanks—and will hopefully become an educated pupil….

  5.  Phil this is an incredible article….honestly you should send it to our lawmakers in DC; it’s that good.
    I have been a member of PSW for about a week or two and spent some good time on the site this past weekend reviewing educational materials, etc. I went to cash in mid May, was up about 10% for the year at that point, then took down cash 50% in mid June following IBD which said the market was in a confirmed uptrend. Now I am down significantly from there. I have 14 positions all anywhere from 2-5% each. Like the above poster I am wondering if you prefer holding few stoxx and working with options. My question I guess is what to do at this point—my inclinaiton is to wait for the inevitable bounce, sell into it no matter what, get back to cash and go from there???

  6. Good morning!

    Gosh, everyone thinks it’s a great article but I’m not even done.  Maybe I should stop here before I screw it up…

    I’m not around too much today and I’m not doing a Monday post but I’ll finish this one eventually

    Asia was mixed this morning with Japan cheering up slightly (0.69%) but it was on a BS Yen pump that took it down to 88 around 3am and back up to 87.65 already (it’s confusing because the lower number is less Yen to buy one Dollar).  This happens almost every day and I hope someone is making money off this daily pump job.  China is off 0.32 on the Hang Seng, but that’s kind of a flatline for them (see chart). 

    On the whole, I have to call hanging around 20,000 on the Hang Seng still fairly bullish as they were at 11,344 in March, 09 so when people say markets are failing because they dropped from +100% to + 75% it does strike me as a bit funny because what they are saying is anything less than up and up and up without a pullback is a reason to panic. 

    The S&P was at 666, went to 1,220 (up 83%) and is now 1,022 (up 53%), so we’re a lot worse off than China so far but the question is, are they under-reacting and should be down aroun 16,000 or have we over-reacted and the S&P should be back at 1,140 (up 72%)?  Don’t forget our lesson the dangers of exrapolating:

    To be more bearish here is to assume this chart will be worse than it was in the ’08 panic and we’re already passing the ’09 panic.  Earnings have to be TERRIBLE to justify this movement.  Taking a look at the Dow, do you really think all of these companies are not really ovesold – that once they report earnings THEN we will see how they are still 20% overpriced?  Think about it – it’s not all that likely.  Don’t think about the economy and your fears and the Dow index as an abstract – the Dow is a reflection of the performance of these 30 companies just as the Nasdaq is a reflection of 100 (well, mostly just AAPL these days) and the S&P is a refelection of 500:

    So let’s be cautious but not crazy.  I put up a new round of disaster hedges because we need to be prepared and there is no limit to how far you can panic retail investors and, frankly, we would love another crack at the March 2009 lows to buy in but, if we wait for that as a target, we may be waiting a very long time.  Even Europe is bored with going down and is flatlining today and may do so until July 23rd, when the bank stress tests are published but the French Finance minister is upbeat about it

    Remember, China tends to lead us up and down and not vice versa in a long-term view and India, has very interestingly gone the opposite way since mid-may and they are up 114% since March ’09.  One might wonder what they have to be so happy about or one can wonder why are we acting so miserably? 

  7. A very interesting read Phil. I very much understand how you feel, my country has also been "drugged, beaten down and robbed" although in its own way (less classy lol). Enjoy the rest of the day and happy 4th you guys!

  8. An article worth sharing, but I’m a bit slow, so would someone give a brief explanation of the Bush tax cuts table. Esp what does the top half of the table reflect & the bottom half. thanks

  9. morxlntway
    I know a few things about taxes but need the table you ask about. Please post a link or tell where to find it please.

  10.  You know it’s insane to think, being alive during the clinton years, and then the bush years, but no during those years when the income tax rate was over 80%, to look back and remember the media meme’s……
    Clinton = socialist pig
    Bush = capitalism loving freedom fighter
    ……. and we’re talking about an income bracket difference of 4.6%.  Yes that is right, the difference between capitalism and socialism is the difference between 35% and 39.6% as a tax bracket. 
    Go ahead and try, just try to balance a budget with an income tax rate of 50%, I dare you. You’ll be a one0term has-been IF YOU SURVIVE the pending impeachment trial.
    Another question, if Warren Buffet is in the 35% bracket for the majority of his income, why does he pay 17.7%? Maybe the brackets are less the problem, and more the loopholes?
    I’ve always been a big fan of having a "living wage" deductible. Exemption + standard deduction should be in the 50k range (married), or somewhere around there. Then address the remaining brackets to compensate. And also, 75% estate tax after a reasonable deductible is more than fair.

  11.  my mother in law wants to trade dollars into yen at 100 (her husband gets paid in dollars).
    I just started laughing. Take 88 and run ….

  12. Buffett/Chris: I think its probably the average of his income tax and the taxes on his capital gains, which is around 15%.  He earns $100K/year in salary and the rest is capital gains.

  13.  I soon as I hit ‘submit’ I realized this is probably the case.
    Shouldn’t all income be lumped together and then subject to the bracket? The tax code needs substantial revamping.

  14. Bio, the answer is INCOME TAX DEDUCTIONS.  As congress has created loophole after loophole, I mean deduction after deduction, in our tax code, it has allowed individuals and businesses to deduct many common expenditures (and even non expenditures) from their taxes, thus lowering the effective rate of the person.  
    Income tax deductions distort markets and also are an invitation to tax fraud because people naturally push the envelope in listing their deductions in order to maximize them.  These are the primary reasons that the tax code should be scrapped for a simple flat tax with no deductions for anything, perhaps a flat tax with three brackets.    Of course, we not will get that outcome until we have undergone an economic collapse 1000 times worse than anything to date, as congress is in the back pocket of those individuals and businesses who benefit the most from the deductions, i.e. the wealthy.  Of course, these income tax deductions are paid to wealthy individuals on the backs of our kids and grandkids since there is no money to pay them.  Instead, we deficit spend and thereby continue the wholesale destruction of the future of the unborn who will inherit our debt. Woe to children who will curse us as ’the selfish generation.’ 
    Another question, if Warren Buffet is in the 35% bracket for the majority of his income, why does he pay 17.7%? Maybe the brackets are less the problem, and more the loopholes?

  15. Phil, in the US, India, China graph, it shows Shanghai is only up 12.5 percent since March 2009; it also has been going down since May, contrary to what you said in the text. Is the graph label wrong?

  16. Thanks Shadow, hit page up abt 10 times and you will see the table. kind of a gray color.

  17. Phil / 2nd qtr eps   Manufacturing stats suggest will be continued good eps for Dow components, but guidance may become very conservative in view of the employment and housing stats.  I’m gambling on an earnings popup, but what is the chance negative guidance will negate the reported performance?

  18. biodieselchris
    What Phil said and he is correct is the death tax was 77% 30 years ago and now 45%. You are correct about the Clinton vs Bush tax rates. What you don’t get is Buffet pays 35% on the first $100,000 but it goes way down after that ending at 17% of total meaning that he doesn’t need or could spend money is taxed extremely low or not at all. The other things you fail to see is the Bush tax cuts withheld 1.3 trillion dollars in tax collections that were collected during the Clinton years, and about the same amount starting wars that Clinton avoided and that pproduced a surplus which Bush was determined to give to the ultra rich who also happen to be the owners of the the war machine industries that get those unquestioned contracts that sell $500 toilet seats and $100 hammers even thought they can be bought for less than $20. My 94 year old father was a planner and estimator working civilian for the US Navy when Nixon was president. 100′s of fighter jets were waiting for fuel pumps while 100s died without air backup. He purchased those pumps and was blamed for the problem. Being a WWII vet he went out of the office and found about 1,000 of them in 2 hours at the same base where the jets were parked. He was rewarded with being layed off forever by the Navy. Clinton was also a puppet for the war machine by restocking munitions spent during the Gulf War which was stopped just short of Bagdad and victory.
    This is the same cycle that has gone on forever pay the machine to arm up, war machine makes money, creat a reason to expend thos munitions, pay the machine to arm up, create a reason to expend again, over and over. This is the mission of the new world order that includes those 10,000 Phil mentioned plus the same group throughout the world makeing up most of the worlds money and if successful also gives an excuse to control populatoins of the undesired very similar to germany WWII. It is not coincedental that GW Bush and Tony Blair, related, were in power at the same time or why a person who had trouble speaking english becomeing president, they would follow orders by the order, Bush esp. because he lost most of his fathers oil money and where was the war and what was it over oil and that war machine. Also Bush ramped up the war on drugs, scared the masses, created excessive police power who happen to buy guns, expensive equipment, and as not the brightest lights on the street are now paid too much. This by a man who smoked pot, snorted coke, and got omre than 1 DUI. In Idaho and Wyoming school budgets were cut and police control expanded and given raises.
    This inturn creates an undereducated population with no analitical skills that believes everything on the controled internet is fact while the drug war continues to not stop enough drugs to actually make a difference like stopping short of Bagdad and takeing over control and the money continues it’s long term goal. I have always believed if you are not part of the solution you are part of the problem. The idea of conservatism is perfect. The problem is the republicans are no longer conservatives they are the puppets of the ultra rich, new world order, and that control the world war machine. I sincerely hope this makes what is and has been happening a little clearer.

  19. shadow, I agree totally

  20. Phil / Liquidity gridlock     Is it possible that the mkt is trapped in a ‘liquidity gridlock’.  The two $ trillion of easing has found it’s way into the hands of the banks and in turn hedge funds.  Don’t they have a vested interest in continuing to prop up the mkt with their machines.  They can’t all go short and if they tank the mkt they have to give back all the free or cheap money, which seems self defeating.  I’m sceptical that the retail or mutual fund crowd can beat these guys, regardless of how bad the economic outlook appears.  Bearish fundamentalists like myself may be disappointed as the massive proprietary trading desks decide to party on, keeping the game of musical chairs going indefinately?
    Perhaps the Gov’t, Fed and big banks are stuck in a symbiotic relationship where none can afford a mkt collapse as it would be disasterous for all.  So, the Fed will keep feeding banks free cash to buy Treasuries and stocks to keep our system functioning.  This could be onerous for shorts and those continuing to hold TBT?  (not clear though why March 09 was allowed to happen?  did the infinate cheap Fed liquidity kick in afterwards?).

  21. morxlntway
    What this chart shows is that only the top 10% received eirher reductions in tax rate or total tax. It also shows that the 0 to 89.5% received both increases in tax rate and total tax. Notice where the plus and minus numbers are. I will also add that the poorest people who spend all their money subject all that money to sales tax while the ultra rich who couldn’t spend all their income and therefore subject to sales tax do not. Therefore the sales tax is born by the poor that can least afford it. This is defined as an inverted tax structure or upside down taxes. This is why the rich want the Bush tax cuts left in place. I will also remind you that those tax cuts were put to the public as trickle down economics, that in order for the poor to prosper you had to give money to the big corps, rich people, the money. This also didn’t work during the Reagan years then called supply side economics, invented terms to sell a BS story. The difference between the 2 is Reagan reversed his taxes in his second trem when he saw that it wasn’t working. Reagan would have been perfect except he left banking changes that led to our problem today. He also never said he knew everything and stopped the cold war instead of starting one and was not controled by that new world order war machine I refer to above. The population is being trained to follow orders and not pay attention. Does that kind of sound like what military people are trained to do?

  22. of course, the tax code should be an annual net worth assessment and NOT an income assessment:
    0-100K no tax
    100-500k, 2%
    500-2000k, 5%
    2000k + 10%
    example: you are worth 3.3M, tax = (2% * 400k + 5%*1.5M + 10% * 1.3M) = $213,000
    Some other examples: net worth of $150k = $1,000 in tax
    $50 billion = $5B (10%) in tax, $100MM = $9,883,000.
    I call this the "erosion tax" because eventually it all goes to the house. This allows the complete eradication of income tax AND estate/death tax. Problem solved!!! Corporations are people too — sorry! no exemption for you! Now everyone must buy Quickbooks though and learn about depreciation. Probably good for them anyways…. Even better, a net worth <$0 the gov’t pays you $5k! Boy that would piss off those hard working inheritance earners — seeing their hard earned inheritance go to the very same wage-laborers they have somehow managed to convince for so long to support a tax structure that doesn’t benefit them…
    somebody do the math for me, tell me how much the gov’t makes in 2011 …… 

  23. tuscadog
     The liquidity was put in after and to people like me believe that the program was to flush out the retail traders even though they were not making much money, any profit was too much. Then when at rock bottom and the masses scared out give the to big to fail, why not let the crooks fail, free money to run the market up and justify huge bonuses on moey they took from the government like they were actual profits, which they couldn’t be as banks make money by lending which they were not doing. If the market fails now the conspiracy to steal the money is complet and they never lost the banks money in the crash, they lost the free money that the stupid politicions gave them because they are paid by the secret ultra rich to help them keep their sheeple working like told and never spend the banks  or  mmmmmmmmmmmmmmmmmmMY MONEYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  24. Phil,  Re: DXD Hedge trade from your 5 Plays from a couple of days ago.     I have a 100K portfolio in an IRA at TOS and currently am 1/3 invested in buy-writes.   The IRA automatically requires a loss of buying power of $31K for me with my buy-writes.    If I am looking for a $5K downside hedge and buy the Oct $30 DXD Calls and sell the Oct $38 Puts and Sell the Jan $26 Puts,  I spend $20 for each set of contracts and if I buy 6 to obtain about $5k of insurance against a Dow decline,  TOS will take another $15,660 in buying power from me.    Should I be doing this or is there another strategy I should be looking at inside my IRA?       Thanks for your wisdom,   I am learning so much from you.

  25. biodiesel
    The government will not make any money in 2011, they will spend your great great grandchildren’s money. You heard it first hear. Your idea is one of millions that are better than what is law now. A forth grader with a calculator could out do the unethical politicians or pimps for the crimanals. If we steal $1,000 were are fellons, stripped of our rights, but corporations taking billions are subject to SEC violations and a given fraction of what was taken in fines while we will spend time in jail, 100% restitution, community service, probation at another cost, and how do you payy all this not being employable. BP is still selling gas and making a profit. The solution is send the ultra rich to jail for conspricy which carries a penalty of 25 years to life in prison! Then maybe at best they will be the richest dead guys in the cemetary, I like to call this incentive for fairness!

  26.  wow.  futures down right off the bat.  

  27. Wow, what the heck happened today?  Futures are dumping!  9,545 on the Dow, 1,008 on the S&P but RUT flatlining at 594 for some reason.  Oil down to 71.65, gold $1,210 and copper $2.91.  Let’s hope this doesn’t keep up all night!  I’m not taking this too seriously at 7pm but it would be nice if we could stop going down for just one day.  Europe finished down about half a point with a last 15-min sell-off in all the indexes – just a coincidence, I’m sure…

    TZA/Arbolito – OK, let’s try to get through this logic.  You have $150K invested and I assume it’s all bullish (it is nice to mixe things up just a little).  If the RUT falls 20% to 478 and you have good correlation (or bad correlation in that case) then you’ll lose about $30K.  How many contracts is about $3,000 worth of the spread or:

    • Selling 20 TZA 2012 $5 puts fro $1.65, collecting $3,300. 
    • Buying 20 TNA 2012 $25/30 bull call spreads at $2 , spending $4,000 (net $1,000)
    • Selling 4 2012 TNA $20 puts at $7, collecting $2,800 (net credit $1,800)
    • Buying 30 TZA 2012 10/20 bull call spreads at $1 (net cost $1,200)

    So what happens if the RUT drops 20% (and this is into Jan 2012 expiration, not in between).  That should (but there will be decay on both legs) send TZA up 60% (3x) to $13.76 and TNA down 60% to $13.81.  Which will leave you with:

    • 20 TZA 2012 $5 short puts expiring worthless.
    • 20 TNA 2012 $25/30 bull call spreads expiring worthless
    • 4 TNA 2012 $20 puts that you owe $6.19 on (debit $2,476)
    • 30 TZA $10/20 bull call spreads worth $3.76 (credit $8,804).

    So you end up with $8,800 mitigating barely 1/4 of your loss so this is not gong to be a good protector for you if you have unhedged longs because this position (and you seem to have missed the point) was designed to be revenue neutral outside of an extrem move that blew our built-in 20% protection on the buy/writes.  If your long posiitons are not buy/writes in the first place, then this strategy is not very useful and you are better off sticking with the simpler hedges. 

    RIG/Chaps – Several months ago we were moving to cash and stock was expensive so I thought owning it was a bad idea.  Now we are buying things for, not 20% less but 40% less with our buy/writes taking advantage of a high vix so I feel differently about them.  Also, when the market may be going down to crazy lows and you don’t know where it will stop, or for how long – any option premium you pay for leaps may well be money wasted.  I am more apt to go synthetic when I’m worried about overcomitting like if AAPL loses Jobs I’m not REALLY going to be thrilled to have 2x at $165 or if RIG ends up named in a lawsuit with BP, then suddenly owning it for $35 a share isn’t as sexy as it seemed back in June of 2010, when the stock was at $45.  If I do a buy/write, then I’m stuck with 2x at $35 and maybe the stock is at $22 but if I do an artificial buy/write, then I have 1x put to me at $38.40 and I DD at $22 and now I’m in for net $30.20 – so, more flexibility…

    Hedge/Jsur – I’m sorry but I have no idea what those numbers mean.  I assume $344K invested, which is 22% and you will have another $143K put to you in July (33% invested) and then $42K in Jan (36% invested) and another $143K in Jan 2012 (47% invested)???  If that’s right then you are worried that your $700K will be down more than 10% ($70K) because down less than 10% with $750,000 cash on the side in a prolonged bear market is actually doing great so you want to hedge for about $100K of downside past 10%.  It’s pointless to hedge July, you just need to take your lumps and decide to roll or stick with what you have but a nice $28K invested in 70 SDS Jan $30/39 at $4 pays a nice $42,000 profit if the S&P is rude enough not to go up from here and you don’t lose your $28K until the S&P is up over 10%, at which point I should very much hope you are pleased with the performance of your other $500K in upside plays.  For 2012,  you can simply cover with 50 DIA $105/80 bear put spreads at $10.50 ($52,500), which pays a $72,500 profit if the Dow drops 20% and, if we head up more than 10%, you can probably take the $105 puts off with a $5 loss and let the naked puts (now 2,500 Dow points out of the money) ride and if they expire worthless then the cover was free.  As long as you slap a cover back on if the Dow heads down too far, you should be ok. 

    Thanks Chip!  I think we are oversold but I also see that we are in a global panic and there’s nothing my fundmentals are going to do to stop that.   The best we can do is just heavily protect ourselves (or stay in cash and wait for the panic to subside but I would not make too mahy bearish bets here.  You can make a ton of money with small bets on disaster plays like this so why take big risks on the market snapping back at you

    Also, keep in mind that as long as we get the NET prices we’re looking for on these spreads, the exact price of each leg doesn’t matter very much so if we open low tomorrow and the VIX is high, we can take some puts (or calls on ultra-shorts) as momentum plays and work our way into the spread as things start to calm down (if ever).

  28. Phil,
    Please check out $NYA50R which shows 15.13% of NYSE  stocks above their 50 day MA
    Also $NAA50R which shows 13.97 % of Nasdaq stocks above their 50 day MA
    Even $SPXA50R as of Friday’s close shows 7% although it did hit 5.4% on June 30th.
    All of these %s are from StockCharts.
    Additionally, Worden’s T2108 is at 25.34% and hasn’t much changed in the last 5 trading sessions which is awfully strong.
    In general, the broader U.S. market is showing up stronger than $SPX and if you look at EEM and EDC there is considerable strength in them as well. 
    Okay, I’m bullish and am looking for data to support that bias; but it’s there nevertheless.

  29.  Hi Phil,
    I had this posted over the weekend regarding your leveraged etf hedges:
     Hi Phil,
    As I’m sure you’re much aware of already, leverage ETFs experience degenerative decay and tracking error.  Given these are LT hedges, wouldn’t going long both either through buying call spreads and/or selling puts ultimately put us at a disadvantage?  Would we not be better off buying put spreads and selling calls? Just trying to wrap my head around these things as  LT position as I’m used to holding them by no more than a few days/couple of weeks as I’ve been burned by SRS and FAZ holding them for for way too long.

  30. Empathy/RussianQ – Yes, this weekend we celebrate our independence from wealthy, unsympathetic men who only sought to use the American people as as cheap labor to exploit the resources of this great country.  Thank goodness we got out of that one, right?

    Tax cuts/Morx  – The top is what percent of people in each bracket got tax cuts under Bush and the second is the percentage change in Federal tax payments.  The insane 628% increase to the bottom 20% in the bottom chart is from the AMT, which took their effective tax payments from nothing to something, costing the poorest 60M people in this county about $1,843 per family more in order to give the top 3M people a $54,182 tax break.  Come on – SING THE PROPOGANDA SONG WITH ME: 

    If tomorrow all the things were gone, (because Bush and Co. took it all away)
    I’d worked for all my life. (but now they are cutting my retirement benefits after the fact)
    And I had to start again, (in India or China, where they are still hiring, at least)
    with just my children and my wife. (because they took my home and my furninture in the foreclosure sale)

    I’d thank my lucky stars,
    to be livin here today. (providing we don’t need medical care or housing or food stamps or a good education)
    ‘Cause the flag still stands for freedom,
    and they can’t take that away. (unless the bank thinks they can get something for it in the sale). 

    And I’m proud to be an American, (because this song tells me to be)
    where at least I know I’m free. (because that’s all they are willing to pay me now)
    And I wont forget the men who died,
    who gave that right to me. (Jefferson is rolling over in his grave)

    And I gladly stand up,
    next to you and defend her still today. (unless you disagree with me, then you are a commie!)
    ‘Cause there ain’t no doubt I love this land,
    God bless the USA.

    Buffett/BDC – That’s his dividends and long-term capital gains.  Don’t forget he doesn’t realize 90% of his gains for many many years so his wealth could grow $10Bn (it pretty much did) but that’s not "income" so it doesn’t count – execept to those who lost the $10Bn he gained (as it is, more or less, a zero-sum game).  That’s another way the rich avoid taxes, losses are taken in the short-term or whatever but gains, for the most part, don’t have to be taken until they are in the lowest possible tax bracket so you deduct at 35% and pay at 15%.  You are right, these are structural faults in the system that need to be addressed but good luck with that!

    And what FJD said!

    88/BDC – Too late, back to 87.50.

    Shanhai/Sean – I was talking about India going up, not China. 

    Guidance/Tusca – If I were a CEO and the market is still down like this at earnings, my guidance is going to be super-conservative.  Will it be conservative enough to send stocks down further?  I don’t think so.  GE has a forwad p/e of 10 at $1.33 next year, that estimate is up from $1.22 guidance in April, when they beat by 31%.  Even if they guide all the way back to $1.20 (super doubtful), they are still at 11 on p/e and that’s still 36% lower than usual (15).  Unless they cut their dividend, which is accidentally back to 3% now, GE is arugably a 3x better risk/reward than a 3% TBill – at some point logic has to kick in on these stocks.

    War Machine/Shadow:

    Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense. We have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security alone more than the net income of all United States corporations.

    Now this conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual --is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources, and livelihood are all involved. So is the very structure of our society.

    In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together. – Dwight D Eisenhower, Farewell Address – 1961

    Gridlock/Tusca – There was not $2Tn in easing.  The banks had a $20Tn hole in their balance sheets and the government gave them $2Tn and let them lever it 10:1 to plug the whole before everyone noticed they were all broke.  The don’t have any money to put to work because they put it to work over the last decade and blew it already and all the past profits were sucked out as bonuses to ——— you guessed it, the top 0.01%!  That’s been my underlying fear all along, that this sham would be uncovered (or everyone would stop ignoring it) but instead what’s happened is they seem to be taking the markets up, selling to bullish investors that they suck in and droping them down and buying and then going for another cycle.  I imagine they’ll do this until the bottom 99.99% have nothing left to give them.

    Erosion tax/BDC – Hmm, I don’t know how I feel about that.  It certainly doesn’t encourage much for the rich.   I am very happy with simply closing out loopholes and deductions and going flat 25% on earnings from $250K to $10M and then 50% over $10M.  For coporations, either 10% of sales or 25% of gross profit with no deductions, then let’s see if GS still wants to give 75% of their GP out as bonuses.  That would drop about $3Tn a year more into the Government and if we earmark all that for debt repayment, we’ll be done in 5 years and once again the world’s strongest economy (but, of course, as soon as we start that would happen).  Your system would bring in something like $7Tn the first year but it would diminsh to very little after 10 years.  You do want people to be encouraged to earn money, but if they want to earn MORE than enough, that’s when I think government should step in, just like it’s OK to start a campfire, but when you burn down 10,000 acres of California woodland then that’s kind of the place you want government to get involved.  Moderation!

    DXD/Blue – That’s a bit harsh as it takes you out of the short-term trading game with just $15K buying power left.  Try it with selling the 2012 DIA $50 puts for $2 – I think that should cut your margin in half.  Let me know if it doesn’t. 

    Futures bottomed out at about down 1%, now let’s see what they’ve got now that Japan is opening (still 87.5 Yen to the buck).

    B% Indicators/Dezev – That has been my working theory, the narrow and easy to manipulate indexes are being pushed down in order to force a retail sell-off so the big boys can do a reload before taking the market back up.  I underestimated their enthusiasm for the downspike it seems or maybe they let it slide too far now and momentum has taken over.  Hard to say and we could still be back at 10,200-10,500 at expiraitons and, once again, nothing that happens between options expiraiton dates will have any lasting effect. 

    Decay/Jdub – Always something we are aware of and the reason we take profits quickly once we get a good turn down.  All I can say is look at the April 28th set of 500% plays and look at the results.  Selling calls is very dangerous, especially since we are not really that bearish and we don’t want to be trapped in unlimited upside plays going against us.  The key to these plays is, if we end up having the ETFs put to us at those low levles, they still make good downside protection for our next leg of upside plays.  You can’t look at this and only think of a single move – it’s a 20 move match and we are just trying to put ourselves in a good defensive posture – just in case.

  31. Phil,
    I tried adding the 2012 DIA $50 Puts for $2 to the DXD Hedge trade, in my IRA, instead of the Jan DXD $26 Puts and the new buying power effect for 6 contracts of each of the 3 legs would be ($31,320).    The IRA rules have me tied up.

  32. Shanghai: sorry Phil, I misread your text. Btw, are you going to finish the article?

  33. Good morning!

    Nice little improvement in the futures.  Let’s hope it sticks and we won’t need those disaster hedges after all (or less of them at least).  Big turn-around in Asia after lunch and Europe took off like a rocket and us up almost 2% but CNBC is having another teddy bear picnic this morning so we’ll see how long it lasts.

    Magin/Blue – When in doubt, sell what’s cheap!  Try selling TZA 2012 $5 puts, you can sell 10 of them to raise $1,750, at least and they can’t possibly cost you more than $5,000 (net $3,250) if put to you!

    Finishing/Sean – That was my morning plan….

  34. Decay/jdub
    I had the same question a while back. Perhaps instead of selling the calls naked it’s safer to top off the risk with a very far OTM long call. I have als been looking at the ES future options as a hedging alternative to the triple ETFs as these FOPS seem to have a much lower margin requirement – at least in my Reg T IB account. Any thoughts?  

  35. Decay/ Maxim: Problem I have with buying OTM calls on both TZA and TNA is that if theory of decay is correct, then I’m doing something totally against something I wanted to guard against.
    As for the /es futures, might not be a bad idea.  I know Phil isn’t a fan of buying the VIX but I’ve made some money on some of those VIX calls and call spreads the past 3 months.  

  36. Jdub/decay
    No I meant buying the triple bull ETF bear put spread and selling the bull call spread instead of naked calls to protect the unlimited upside risk with a the far OTM long call leg.
    I think Phil’s objection to using the ES FOPS for hedging is that a naked call sold on the ES is a very risky proposition which definitely requires hedging to the upside. Also you don’t want to end up short an ES future if assigned so you must either roll or stop out the hedge. Perhaps for the ES based edging approach better to just purchase the bear put spread at strikes and expiry dates where you need the protection.