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Weekend Reading – Reviewing the Reviews

 I am still trying to get more bullish

I was thinking about writing something cute like I resolve to get more bullish but that would be wrong.  I try, in my own humble way, to "get" the market right.  That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert's use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting."  Confucious reminds us that there are three methods by which we may learn wisdom:  "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."

In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.  

This post is not about me – We had a fantastic year and I've already given some outlook for 2011 back on the 19th in that weekend's "It's Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.  

After that, we are expecting a return to steady gains but without the irrational exuberance we're currently experiencing.  So no, I am not bearish – I simply think we've gotten ahead of ourselves.  Since we don't know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.   

How much is "a lot"?  Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time.  GE has gained about .75 since the 11th and the short puts have dropped to $1 while the bull call spread has gone up to $1.10 so already net .10 is realized on that trade, up .25 in 3 weeks on a trade that PAID YOU .15 to take it!  This is the way to hedge the upside when we're unsure of the market – pick stocks that, even if they drop, we will be happy to buy them for the long-term at a discount and then lever that credit into upside plays that give us additional, significant returns.  In addition to the 5 original plays, I added 2 more in the comments under that post and PFE took off like GE but CAKE is still a great entry opportunity so it's worth going back to the post to take a look.  

These are not fast gainers because we are NOT bullish.  These are hedges that will slowly but surely grind out huge returns if we are WRONG and the market keeps going up and the beauty of them is that they are just as slow to lose us money if our short-term premise is correct and the market goes down.  What's the worst thing they can do to us on this trade?  Sell us GE for net $12.15, 33% off the current price – oh boo hoo, please Brother Fox – PLEASE don't throw us into that there briar patch!  I find it amusing when people point out the "flaw" in this strategy – that if the market crashes, we may be "forced" to buy GE for $12.50.

As I mentioned that weekend, the following is a list of stocks that you may force us to buy at 33% off: BA, GE, VLO, XOM, MO, WFR, UNG, PFE, MCD, KO, JPM, FDX, HPQ, GS, GOOG, AAPL, DIS, T, VZ and AA.  Anyone who has some now that they would like to unload for 2/3 of the current price – just give us a call and we'll be happy to accommodate you.  If not though, then we can always find someone who is willing to buy put contracts from us, which obligate us to buy those stocks for 33% off in 2013 in exchange for cash today.  I call this approach the Wimpy strategy, in honor of J. Wellington Wimpy, who very famously offered to eat now and pay later – technically inventing the first credit card in the 1930s.   

Notice that we are willing to buy mainly blue-chip stocks and, of course, our favorites change from time to time and we get the occasional great opportunities like BP and RIG this year as well as IMAX, MON and VLO – those are all ones we're done with at this point.  Timing is important too as we get a lot more cash when the market is down and the VIX is high but there's always individual stock stories we can jump on because we are VALUE, LONG-TERM investors at heart – our goal is to build solid virtual portfolios that will still pay us an income on Tuesdays along the way.  Let's keep that in mind as we contemplate the year that was and the year that is yet to come:

Looking backwards, there's one overriding FACT that we can hang our hats on – Since the March lows (S&P 1,050ish), the market cap of US stocks has gained $6Tn.  At a p/e of 20, we would expect to see at least $300Bn of additional earnings to justify that and I don't think I have to run the math to show you that didn't happen.  

As for where the hell did $6,000 Billion come from – TrimTabs points out that Corporate America has been SELLING stock, raising the overall float by $133Bn since April (new issues, conversion).  Retail funds and ETFs have had just net $17Bn of inflows while foreign investors have put in $109Bn while Pension Funds have moved less than $100Bn from bonds and cash to equities since the rally began.  That leaves only Hedge Funds, who showed a net outflow of $12Bn from April to November so are not a likely source, retail investors, who have lost 30% of their net worth since 2008 – even after the bounce and then there's the Fed and their pet IBanks (or is it the IBanks and their pet Fed?).

Of course you don't need $6Tn to move the markets up $6Tn – as a rule of thumb, net 10% is generally enough to push the markets around, the rest is taken on faith that, if one out of ten people is willing to buy a stock for some silly price today, then of course you can find 9 other suckers to pay that price down the road.  This model makes sense in a "regular" market but what if that 10% injection of $600Bn (exactly what Bernanke promised for QE2) requires those other $5,400Bn worth of suckers investors – isn't that a lot of money?  I don't know, maybe I'm out of touch with the "new normal" but back in my day, $5.4Tn was the entire GDP of China or Japan and almost double that of Germany – it just seems like a lot of free money that's expected to be floated around and that, of course, assumes the US is the only market that went up and demands to be fed fresh cash.  

That leaves us with a $36Tn US Market Cap and many of our top prognosticators are looking for another 20% run in the markets in 2011.  One of the annoying things about consecutive runs like this is that you now need $20% of $36Tn to move the markets up, as opposed to 20% of $30Tn which means, ignoring valuations concerns, that the market needs another $7.2Tn in 2011 to get us to S&P 1,450.  Even if we run the next $7,200Bn on the same exuberance that allowed us to jump the first $6,000Bn, we still need inflows of ANOTHER $720Bn in net cash.  

I'm a little hard pressed to find that at the moment but that's why we're hearing all this noise about QE3 and QE4 and EU stimulus and Japan stimulus and China stimulus – because there is no other logical, rational way for another $720Bn to come into the market in 2011, even if we assume values will be able to rise $13,200Bn on $1,320Bn over a two year period.  

The great problem with rapid market rises that inflate the price of the markets 10 times faster than the cash comes in is you can't count on only 1/10th of the people to turn around and trying to sell over the same length of time as the buying took place nor can you be certain that there will be $600Bn worth of buyers to relieve the pressure in a declining market.  Of course, nothing like that has ever happened in th stock markets since 2008 – as long as we don't count March of 2009 or last January or last April or that silly "flash crash" thing that will never happen again because they looked REALLY hard and it turns out it was nobody's fault.  Yep – I'm about as confident as I can be for 2011!  

Stock World Weekly has some nice forward-looking views on 2011 that make for nice reading today.  The Dow finished the year up 11.02%, up 1,149.46 since Jan first and has, in fact, been up 4 of the last 5 years.  Unfortunately, that one year was a doozy although, overall, we're up 5% (600 points) since Jan 3rd 2006, when the Dow opened at 10,959 and all of those gains thanks, of course, to our mighty post Thanksgiving run.  As SWW points out::

One important thing to keep in mind while looking at these charts is that in August the Fed decided to renew quantitative easing and began by buying $30Bn in 2-10 year Treasury notes per month. In September Bernanke expressed concerns about high unemployment rates in the U.S., and began dropping hints of a greatly expanded program of quantitative easing which would become known as “QE2”. On November 3rd, the Fed then officially announced the launching of the $600Bn+ program of Treasury purchases.

So we can pretty much chart the run from Aug (S&P 1,050) to Nov (S&P 1,175) as costing the Fed about $30Bn a month to engineer and, when that began running out of gas (don't forget that formula that requires more and more fresh cash to sustain the rally), The Bernank stepped it up a few notches with QE2, which is putting 3x more money in each month for 6 more months.  Already that has given us another 60 market points in 60 days but are we getting more bang for 333% more Federal Bucks or are we merely compressing the time-frame of the same effect? has a nice 2010 synopsis and sums up 2010 as a continuation of the recovery off 2008's 39% drop.  As Barry Ritholtz points out with the chart on the left, losing 40% means you NEED 66.7% just to recover.  It's also worth noting from this chart why 20% is our key inflection point in taking losses or adjusting – note how quickly things turn against you once you cross that line!  Anyway, let's focus on the positive as we made our 11% gain DESPITE the following little set-backs:

The European Debt Crisis, the Flash Crash, the BP Oil Spill, Foreclosuregate, FinReg, South Korea and Republicans taking over Congress.  That last one may be considered a positive by some but it was on their list too, along with the continued monetary stimulus from major Central Banks – even as many of our emerging markets began to slam on the brakes and tighten their own policies.  This was offset by a 19% rise in global M&A with $728Bn worth of activity going on in the US but not much compared to 2007's $4Tn global total that was led by the US at the time. is optimistic and calculates the forward p/e of the S&P at 13.5x, assuming a 13% rise in earnings next year and we'll get our first indication of how well things are shaping up as companies report their Q4 earnings in January.  

Oddly enough, the Airline industry was our top performing sector in 2012 with a 41.9% gain for the year with Consumer Discretionary #2 at 27%, pretty much tied with Transports and Industrials and closely followed by Retail (25.7%).  Materials were "only" up 22.2% for the year despite the 81.2% rise in silver as gold was up "just" 28.8% as gold has gotten so expensive people are buying the 1/1,000th as rare and 1/50th as expensive silver instead because – well because people are kind of idiots – sorry, but there's no sugar-coating this one…

In the middle of the pack we had the Energy Sector, up 20.3% for the year, which is very interesting because Utilities performed poorly due to low demand by the same consumers with just a 5.5% increase.  What's the difference?  One sector uses meters to measure actual demand and one uses CNBC to make it up.  

Our beloved Financials only gained 11.9% for the year, 4th sector from the bottom, beating out Info Tech (10%), Utilities and poor Health Care, who went up just 2.9% on a 17% increase in costs again in 2010.  Just above Financials were Consumer Staples (14.1%) and Semiconductors (15.6%) to round out our sector list.  Top stocks were a more diverse mix, with CAT leading the Dow with a 64.7% gain followed by DD (47.6%), MCD (22.9%) and who cares about the rest when NFLX gained 224.7% on the Nas followed by FFIV (149.4%), CMI (140.2%) and the resurrected AIG (91.9%).  Honorable mention should go to CMG (146.1%), who were a letter short of making the Nasdaq and DECK (137.9%) who are still in the Midcaps.  

Why were HPQ (-18%), CSCO (-15.5%) and MSFT (-8.7%) 3 of the 4 worst Dow performers if the Nasdaq and Semis did so well?  MU (-25.2%) and WDC (-23.8%) were stinking up the S&P and NVDA (-19.8%), STX (-17.6%) and ADBE (-16,9%) were dragging the Nasdaq as 3 or it's 10 worst performers.  This is a real flashback to 1999 when people who actually made technology underperformed people who had cool-sounding ideas (PCLN, NFLX, BIDU) by miles.  That sure ended with a bang so I'm sure there's nothing to worry about here – even though it's kind of the exact same thing…

In 1999 it was venture capital money driving the markets through Silicone Valley but in 2010 it's Fed money driving the markets through Wall Street and Jr. Deputy Accountant does a great job of following the Billions, from Bernanke to Blankfein with a very nice run-down of the year's shenanigans.  It will take another year of shenanigans for funds indexed to the S&P to get back to even.  As Paul Price points out, index funds with $1M in January of 2007 gained 4% that year to $1,040,000 but then dove to $665,000 at the end of 2008, back to $825,344 in 2009 and clawing back to $932,639 as of December 29th – down "just" 6.74% after all that drama.  Of course, the fund managers still get their fees so all is well I suppose.  

All is supposed to be well in Retail Land but not, according to retail expert Howard Davidowitz, who says it's the top 30%'s spending that drove the season as they had a little relief rally (those that kept their jobs), especially the Financial sector professionals who were delivered a record round of bonuses from Uncles Ben and Lloyd this Christmas.  Davidowitz points out it cost us $2Tn in debt last year to buy these gains and we've already committed another $2Tn in 2011 and what has it bought us so far?


  • Walmart is 10% of US retail sales, has 150 million customers, and its stock it is down 6 consecutive quarters;
  • Sears is the largest department store in America: "their stock is terrible"
  • Best Buy had a huge earnings miss
  • Toys’R'Us loss increased last quarter
  • A&P filed bankruptcy
  • Loehmann’s filed bankruptcy
  • Charming Shoppes is going to close 100 stores
  • TJMaxx just liquidated AJ Right 

The biggest losers: commercial real estate landlords. Read REITs:


Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems and everything else right now. I don’t think the CRE problems are fixed by any means. That’s why we are going to close hundreds of community banks going forward, we are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We’ve got lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time.

There's another major issue to watch in 2011 – if interest rates tick up, all kinds of crap is going to hit the fan!  Dave Moenning does a nice job of reviewing which market truisms worked out in 2010 and it would do us all very well this month to remember that anyone on TV who says "As January goes, so goes the year" doesn't even remember that last January we were down 3.8% on the S&P so we can take that one with a huge grain of salt.  We did set a new record for Bank Failures with 157 in 2010, ending the year with a bang on Friday with 6 final closings costing the FDIC another $600M and putting them $8Bn in the red for the year.  Fortunately, we have been trained never to question the fact that the American People's $4.5Tn of cash on deposit is backed by an insurance fund that is $8Bn in the hole.  I mean, what's the point of worrying about a potentially horrifying catastrophe you can't do anything about, right?  

Hale Stewart is downright cheery by comparison with his chart-fest entitled: "2010 – The Year we didn't Fall into the Abyss" while the Simple Accountant charts out some of the broader indexes and the intermarket relationships for a good rear-view look.  Zacks' Steve Reitmeister got my attention with his 3 great lessons of 2010, which were: 1) Don't Fight the Fed 2) A Bird in the Hand is Better than Two in the Bush and 3) Timing the Market is a Fool's Errand.  If Steve ever gets bored at Zacks, he can always come over and teach at PSW.  As Steve notes: "I’m not swearing off market timing forever. I just think that I will do a lot less of it going forward. As long as the economic conditions are favorable to stocks, then I will stay heavily long the market as not to miss out on any of the major bull runs that can truly arise at any time."

Despite my annoyance at the overall Rupertization of the paper, the Wall Street Journal still puts out a large quantity of damn good articles and Tom Lauricella wrote one this weekend reviewing the year in Government intervention saying:

As was the case in 2009, investors can thank continued, unprecedented efforts by governments and central banks around the globe to keep their economies and financial markets afloat for those good returns… The benefits to investors could be seen in 2010. When major stock or bond markets faltered and ostensibly signaled alarm, policy makers responded aggressively with measures that, at least in the short term, directly or indirectly drove prices higher across a wide variety of asset classes.


 At some point, Lauricella says, Governments will look to reverse their stimulative strategies as their economies and markets can stand on their own. But for now the betting is that in the U.S., Europe and Japan, at least, that support will continue for months to come.  We can only hope that's the case – it is very possible that the massive stimulus of QE2, still in it's very early stages coupled with Obama's Trillion Dollar tax cut will be enough to keep the party flowing – all this despite many emerging markets trying their best to fight the Fed as well as the other loose Central Banks of the World – pretty much the same Keynes vs Hayek smackdown we've been tracking all year so I'll let the boys close it out for me:


 Good luck to all of us in 2011 – we're going to need it.  We already have our aggressive upside plays as well as last week's "Secret Santa Inflation Hedges for 2011" but there's a lot of cash on the side and, like Steve Reitmeister, we'd hate to miss out on the fun if this thing is going all the way to the moon before falling back to Earth.


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  1. Phil,
    I am so confused by this market.  Just about everyone I know and everything you hear or read is predicting the rally to continue. 
    Isn’t there an old saying like "everyone is always wrong" and "the market loves to climb a wall of fear"
    Just this morning I recieved this from a guy I know that works for BA.

    Here it is: Trim Tabs reported that there were finally positive flows into stock mutual funds for the first time this year on December 2oth.   Prior to that, individual investors had been continuing to buy more bonds than stocks through the entire market climb from March ’09 until now.  There should still be plenty of kindling to add to the fire to take this higher.  
    Plus it’s the 3rd year of the Presidential Cycle. Plus the conservatives can limit further damage by the communists, er, liberals.  Plus economic news has been better than expected (it always surprises the pessimists coming out of a recession).  Plus the average person is getting $2,000 back from the reduction of the social security tax.   Plus retail sales have been better than expected.  Plus auto sales are about to go to 13 million.  Plus, plus…
    We go higher.  Not in a straight line, but we go higher.
    That said, you know a correction will come soon enough.  Of course, all the shills are calling for one in mid/late January…which probably guarantees it won’t happen then.
    Happy New Year to all.
    I don’t know Phil…….all this optimism scars me.

  2. Exec / bull — I have a similar view in that QE2 still seems to be driving the market higher (although not as efficiently) and QE3&QE4 might come and drive the markets even higher. Crazy? Yes, but so was QE2, the bailouts and the government getting into the auto business so plenty of precedent for crazy.  I think that’s exactly why a trade like the GE trade above is needed to remain in good standing either way the market heads. The other nice thing about that trade is that you also profit if the market goes nowhere. 

  3.  Great article on the benefits and disadvantages of India.

  4. DIS claims IMAX buyout rumors are "pure fiction" and a SNE purchase might create anti-trust issues.  We might see a lower prices again.

  5. rainman: agreed.  Phil’s 20% discount plays are just as good at market tops as at bottoms.

  6. Phil:
    I know you say that you are "kind of " bearish, but what’s wrong with setting our sights on a group of stocks that we want to own and do the same kind of plays that you suggested with GE? This way we cover both sides. And if we are "put to", so what?  We end up owning the things we want and are ready for the next run up. Of course we can turn all of those stocks in to buy/writes and we would continue to be hedged with downside protections.
    I know you have proposed some bullish trades,but you have, at the same time, recommend that we stay mostly in cash. Do you not think everything is overpriced? Or do you think there is broad risk to all stocks in which case you are a lot more bearish than you think?
    Lastly, Do you look for specific stocks that you want to own or do you look for specific characteristics in any tradable stocks? What are you waiting for?  I get the feeling you would not put your money in anything (long term) until "it" happens.
    This was written with the utmost respect for your talent.

  7.  Phil: rolling
    Could you give me an idea of the process you go through to estimate the future prices of the strikes you consider as the path to roll to if the stock moves and you would rather roll than than take assignment?  For example say I look at a selling a GE Feb18 P for .53, I want to have plan if GE drops to 16 at Feb expiration, how would I  estimate a likely month that I could roll down to 16 even?  It’s really your thought process I’m interested in not this specific trade. TIA

  8.  Happy New Year all,
    Phil very good strategy to sell puts of stocks which we love to own long term, just an advice for guys: first, make crush test of your portfolio, let say, if market make 20 % correction and volatility jump to 40 -50 range, will your portfolio have enough margin? you can do it in TOS Analyze tab

  9. @Phil
    Along with your bearishiness, do you expect that the Dollar will continue to move inversely to the stock market? Will the coupling between the $ and other assets act as confirmation of your thesis?
    Or to put it the other way, do you ever expect the relationship to de-couple?

  10.  Need some tech advice- 
    My old Dell PC is starting to act up and it is time to look at a replacement. I want a set up which is geared toward trading which means a lot of charts running simultaneously. Also want  the capability to run 4+ monitors. 
    I ran across this website- Falcon- wondering if anyone has had experience with their equipment or can offer some suggestions. 

  11. Good morning!  

    Confusion/Exec – Well I imagine that confusion is normal when the markets are confusing, right?  As you can see above, I’m measuring the numbers but that doesn’t mean things can’t continue to be crazy.  I think it’s also bad to cling to "everyone is always wrong" – as I said a couple of weeks ago, Lincoln had it right and you CAN fool ALL off the people SOME of the time as well as SOME of the people ALL of the time – the only thing you can’t do is fool ALL of the people ALL of the time.  So the question for us (assuming we are not fools and pretty much everyone else is) is how long can "ALL" of the people be fooled for?  

    Also, you need to consider that it is possible that WE are missing the bigger picture.  It’s possible that the amount of free money being injected into the system is enough to overcome all the negatives that exist out there.  It’s possible that the reason EVERYONE is betting on the markets going up is because what they see on the surface is what’s real.  If the NY Jets are matched up against my daughter’s football team and EVERYONE is betting on the Jets to win – it’s not necessarily a good idea to take the opposite side of that bet, is it?  

    To be bearish at the moment is to bet against a $100Bn per month advantage on the part of the bulls, given to them by the Fed and, starting Friday, against another $9Bn per week handed out through tax cuts although the vast majority of that money is already part of the existing tax cuts.  There’s my real bearish bet – that the boost we got from the QE2 may have been correctly measured to S&P 1,200 but the bonus 50 points we got from the tax cut extension was granted under the premise that the expiration of the tax cuts were baked into the market price and that the extension was a "new" factor that would improve the economy and raise market values.  

    Meanwhile, where is the "wall of worry?"   I love the platitudes like the market climbs a wall of worry but how does a VIX that is off 20% while the market climbs 20% considered climbing a wall of worry?  A little worry would make me feel MUCH better about the rally.  It’s good that you’re scared of the optimism in much the same way that it’s good to keep a fire extinguisher near a fire pit you make in the woods – you probably won’t need it but, if you do, you’re pretty screwed if you don’t have it….

    Here’s my attitude on the MACRO, LONG-TERM scale:

    • I am going to be investing for 30 years.  
    • I am going to try to make 20% every year.  If I succeed in that I will raise my portfolio by 2,400%.  
    • If I am overly cautious in a year the market goes up 40% and only make 20%, it will not be a big deal as I will be no more than 20% behind the market, even if it goes up an average of 20% every year. 
    • If I am overly optimistic and lose 20% along with the market then I lose 2 years of gains (this one and the one it takes me to get even) and that costs me 700% long-term!  (change 30 years to 28 years in the calculator and see what happens).
    • Therefore, the cost of NOT being cautious enough is 35 TIMES what the cost of being too cautious is.  

    There is a reason that most of the long-term investing stars you read about are in the cautious camp.  Slow and steady does indeed win the race.  In 1980 the S&P was 100 and while you may THINK that missing out on the .com boom and missing out on the current boom would make it impossible to keep up with the markets, inflation and whatever – the fact is that $100 invested in 1980 and compounded at 20% for 30 years is 23,737.63 or S&P 23,737 – that is 18.5 TIMES better than the 1,155 gain the S&P actually had.  

    The annual compounded return that took the S&P from 100 to 1,255 over the past 30 years is 8.5% – a figure we’ve all heard before.  Your job is to do just a little better than 8.5%.  I often say I would rather be Ty Cobb than Babe Ruth but then I point out that the reason Babe Ruth was great is that he not only hit a lot of home runs but he also had the 7th highest lifetime batting average (.342) of all time.  

    So I do try to be Babe Ruth in truth, I like my big winners and it’s fun to sacrifice a little average swinging for the fences but Ty Cobb was right to scorn the home run hitters as even Cobb’s .367 vs Ruth’s .342 would have made him 100% richer over a 40-year career in investing (try 36.7% vs 34.2% in the calculator).  Think about that – is the thrill of the occasional home run really worth giving up 21 points of average or 2.1% of average portfolio gains?  The numbers don’t lie, that is incremental money that has a MASSIVE compounding effect over time – only when we’re young and foolish do we think it’s OK to gamble with out futures…

    The hardest thing I have to teach people here is to learn to love the boredom.  You all know it drives me nuts when people have locked in 20-30% gains on buy/writes and want to convert them into riskier trades.  Those 20-30% gains should be the bedrock of your portfolio and AFTER they are performing well and looking so safe you can’t stand to look at the "dead" money anymore – THEN it’s OK to take a few hard swings at the ball because you have those sure-thing gains to fall back on.  

    So consider what I’ve said and keep the BIG PICTURE in mind – be proud to be the tortoise and let the hares have their fun – in the history of the market, they have NEVER won any race that was measured over more than 10 years.  

  12. Thanks Phil,
    Makes sense.

  13.  pstas   We have the falcon systems and love them.  I have two of the 4 monitor systems for about a year
    and a half and have had no problems.  I don’t have any techy advice for you though as i am a turn it on and go person. 

  14.  Willsons- thanks for the input. What model? I have been reading some reviews and there was a complaint about fan noise- any issue with that on your end? 
    Have you had any need for tech support? Wondering about their response time, etc. 
    Finally- any problems with running other software or compatibility with printers, etc?

  15. Setting sights/DC – There’s nothing wrong with that, we do it every day.  I think it is premature to overload with obligations as, even if you can withstand a 30% drop in the markets through hedges – why should you when you can be patient and buy 30% more stock instead?  I’ve been saying 75% cash and even in the above post I’m restating stocks we’ve been pushing into whenever we get the chance.  We had a huge year where we caught the downturn and the upturn for massive gains but that works when we are PATIENT and wait for the right time to get into trades.  We still have a risk of a major blow-up that will yank the markets down 20% or more and that risk will be around through April earnings at least.   That doesn’t mean WFR isn’t a buy at $11 or SKX at $20 or HOV at $4 – it just means that you’d damn well better be prepared to DD on them at $5.50 and $10 and $2 – just in case there’s a global panic sell-off.  

    As to what I look for – I look for stocks that are a good deal.  It’s like buying a car – there are lots of considerations that change from time to time but the basics are always there and for a stock, it’s mainly "do I see this stock gaining 20% in two years with very little chance of losing 20%"  Right now, there are not too many stocks I don’t think will lose 20% along with the rest of the market on a dip so I’m only interested on stocks I’d be happy to DD on when they are down 40%.  

    Let’s say you have $100,000, all cash, and you want to participate in the upside.  Just agree to buy 10,000 shares of GE by selling 10 2013 $15 puts for $1.75.  That puts $1,750 in your pocket and the net margin according to TOS is $1,500 so this is pretty much free money.  Realistically, if you are assigned 1,000 shares of GE at $15, that’s $15,000 out of your portfolio, which is $7,500 in ordinary margin and if they drop to $8 you would happily double down to 2,000 shares at avg $11.50 and wait for a recovery with GE about 20% of the portfolio (selling calls, of course).  Also, of course, we would adjust long before that but that’s the "worst case" scenario off the entry.  

    Now, we have $1,750 burning a hole in our pocket so we pick up 20 XLF Jan $2012 $14/17 bull call spreads for $1.70 so net .82.5 on 20 $3 spreads is a $4,350 upside on one trade and that’s 4% of the whole $100K portfolio in 12 months if XLF gains $1 yet you still have over $96,000 in cash and margin ready to deploy for other opportunities.  Set up 3 or 4 trades like that and maybe take a hedge to keep them out of trouble and you are still 80% cash with a 12-15% upside if you do NOTHING else and the market takes off.

    Of course, if the market goes up, then these aggressive upside hedges start to look "safe" and they become a buffer for a more conservative layer you can add on top and then, as we did in the September Dozen this year, you can add another aggressive layer if it looks like your 2nd set of bullish but conservative plays are looking good and then (and I’ll bet you can guess where this is going) if those aggressive 3rd set of bullish plays begin to look "safe", we can then add a conservative layer on top of that, probably cashing out our first aggressive layer by then as we would be ridiculously far in the money (again, like we did in September!).  

    Keep watching "The Man Who Planted Trees" – you can plant your trades any time you want but you’ll get much better results if you wait for the right time of year and the right soil conditions than if you try to drop seeds all over the hard ground in the Winter – just because they are burning a hole in your pocket….

    Rolling/Red – That’s easy, just look at strikes that have the same relationship as the one you are looking at now.  With the GE Feb $18 puts, sold for .53, GE is at $18.29 now and you’re thinking it’s down $2 at Feb expiraiton so we assume that the $18 puts will be the same price as the Jan Weekly $20 puts are now ($1.70).  So now I look and say, what strike in April would I roll the Jan $20 puts to now and that would be the April $19 puts at $1.45 but we have to remember to shift $2 down to adjust for your premise and that means it would be the April $17 puts or possibly the June $17 puts (now .85) if time decay outpaces what should be increased volatility as GE declines.  

    Over time, you will realize that you are taking Feb $18 puts now for .53 and that relationship matches the Apr $17 puts at .53 and the June $16 puts at .58 and that relationship tends to hold unless something extreme happens, which is how you can "know" where you will ultimately end up – even if you have to make 2 years worth of rolls. 

    Crush test/Tcha – Very good advice.  As I noted above – when you sell 10 GE 2013 $15 puts, you should assume you’ll need $7,500 of margin to cover it down the line on the assumption it’s put to you.  That is, of course, assuming your broker assesses you 50% margin on stocks you actually own!  Always keep that "worst case" scenario in mind so you know what’s actually at stake if we begin breaking those 20% drops and you think it’s a good idea to "ride out" the dip.  ALWAYS keep your eye on that chart of Barry’s I put in the post too – Once you get past a 20% loss, it starts to get ridiculous to think you can get it back easily.  That’s why we scale at 20% inflection points:  Put in 1x, stock drops 20%, add 1x and you are down 10% (easy to get back).  If the stock drops another 20% and you still want to stick with it, then you can add 2x more and you are again down an average of 10% but the stock is down 40% from where you started and if you get a small bounce and can get 1/2 back off the table even, then you are in 2x the stock at a 30% lower entry than the one you started at. 

    Meanwhile, if 4x is $10K and you buy 1x for $2,500 and the stock drops 20% and you buy 1x more, you have deployed $4,500 to buy 2x with the stock at $4,000.  Now if the stock drops another 25% to $3,000 for your 2x – you have 2x at $4,500 and you are down $1,500 but that’s "just" 15% of your full allocation.  If you still want to stay with it, you can buy 2x more for $3K more and then you are in 4x for $7,500 and you STILL have $2,500 on the side and you are down $1,500 on the stock but the stock is now trading at $1,500 per X, down 40% from where you started and your average entry is $1,875 per X so it won’t take much of a move up (20%) for you to get back to even as opposed to the 66% move up you would need to recover from a straight 40% drop. 

    If you combine scaling in with option hedging – it’s a very powerful combination but, again – this is a strategy that works best over the course of YEARS, not days.  This is how you buy GE and XOM and BA and PFE and other stocks you are pretty sure you want in your retirement account.  You can use scaling to enter shorter-term trades, as we are in the 1050P but, as you can see – a short clock is not your friend there, nor is not buying the underlying securities, as we have nothing of value remaining at expiration date.  

  16. Phil / Oil Unfortunately I cashed in my gains in my large position in the oil majors a couple of months ago. On your thesis that oil prices are too high and hurting demand, some thoughts. There is great inelasticity of demand in America as public transit sucks and Europeans have been happy(sic) buying $8/9 gas for years. Second hand clunkers, which is all the poor can afford, tend to be V8’s. The rich are consuming much more as they buy more private jet time and luxury boats (usage disproportionate to the their population, eg how many 30 mile commutes = gulf stream round trip LA /NY?). Meanwhile air travel and oil usage in developing countries is growing at maybe 15% per year? Plus, Opec and the oil majors will do whatever to maximize revenues, and don’t give a toss about hurting America’s working class.
    Maybe we are being too resistant to the concept of increasingly higher oil prices. I agree, something else has to give for the American and European poor, like less restaurant meals, clothes, slower replacement of vehicles, rent vs. buy, smaller homes, less savings etc. Maybe we should be shorting some of these other sectors which will be hurt by rising oil, while continuing to own big oil? ie I’m concerned that we are underestimating the power and will of Lloyd and Big Oil to continue crushing the little people – and there is certainly no political interest in saving the working class peasants (Americans love to call them the ‘Middle Class’ LOL!) Should we get reinvested in oil and drink the $100 Kool-Aid since the p/e’s on some oil cos still look low.  I have to confess at a macro level I’m intuitively reluctant since I have a very negative view on the ability of the US and European economies to recover based on current fiscal and trade policies and looming RE 2nd downdraft effect on consumers, municipalities and banks.  Yep, I know the US accounts for about a fifth of global oil consumption, but that % is shrinking fast and we have tremendous inelasticity up to maybe $120.

  17.  pstas    We have the FX25 model.  Needed tech support one time.  Response was immediate. i dont know what to tell you about fan noise, my cpu is under my desk.  When i stick my head under there i would say it is normal fan noise???  I have not had any issues with software or printers.  I would definitely recommend the falcons. From the trade side i run 3 chart programs on each system and have never had any issues.  Lots of speed and capability.  Hope this helps

  18.   Dollar/Flips – Will it continue to move inversely?  I would think it always has and always will because stocks and commodities are priced in dollars.  What’s odd at the moment is the drastic relationship the two have – usually the dollar down gives a subtle push to the market over time and vs vs the dollar up.  These days, it’s practically a tick by tick reaction.  The whole thing is like a giant spider-web of connections though and it is possible, if the US collapses, that we can have dollar weakness, stock weakness and commodity weakness (other than precious metals) all at the same time but, unless a flight to dollar safety clearly becomes a poor alternative, it’s going to be hard to break the global link.   

    Set-up/Pstas – I think the key is a ton of ram, dual processors and multiple video card support (with video co-processors, which I think they all have now) – especially if you are going to run multiple streams.  I only run 3 monitors off my main (now old Dell server) and have a laptop on my right with 2 more screens and a 30" IMac on my left side that runs a bunch of ETrade Pro screens so I keep the major streaming apps on different processors while my main, front 30" screeen usually has 3 main windows with tabs for all my research and reading as the charts and broker windows can all be on my side screens.   

    While the Falcone stuff looks cool – my eyes have been much happier since I got the AAPL Cinema Display for my main as it’s super high-resolution which keeps eye-strain down and I keep it dull and pump up the windows 115% from max resolution so I have 3 only slightly overlapping full-page displays directly front-center. On each side of the main monitor are 2 Dell 21" monitors and they generally run one full-page app at a time each but, with tabs, it’s super easy to switch back and forth between 10 apps on each.  

    Another thing about my new IMac – I LOVE the new magic pad, which is like a desktop version of the track pad from the middle of laptop keyboards but cooled up by AAPL (no wires for keyboard or pad and it’s month 3 and no battery changes yet).  I also love the dead silence of the thing (no fans – they use heat sinks to dissipate heat) and the screen is just as good as my Cinema Display but with a free computer thrown in.  Speakers are nice too, also built in.  

    Copper/Diamond – Thanks

    Oil/Tusca – Well VLO was the one I thought would overcome any slowdown in oil and it’s outperformed the XLE by almost 50% the past few months and XOM and CVX even more as they have tailed off by comparison so I think that starting off your investing on the premise that it was too early to get out of the oil majors can get you in trouble right off the bat.  As we expected, the oil majors are rolling over (relatively) DESPITE the massive rise in oil.  Look at your logic – sure people will buy $100 oil because they’ll just give up even more necessities to pay for it.  Perhaps the demand for food, clothing and shelter is also inelastic – that’s what happened in 2008.  There’s no way to know where this idiocy will stop but something will give and if your premise is that a bunch of rich assholes can out consume the other 99% of the population by 100:1 in order to maintain demand for $100 oil – I really can’t help you because I have not a single pick I can make that I would feel good about there.  Only a weak dollar driven by bottom up inflation can sustain $100 oil for any length of time.  In Europe, oil is up 20% this year and still down 22% from 2008 highs.  In Japan, oil is DEAD FLAT for the year and still down almost 50% off the 2008 highs.  Even in dollar terms, oil is up just 10% for the year – this is not some indication of any actual demand strength – we had the same BS run-up in December of last year as oil went from $70 to $84 so be sure to study your history before betting the farm on the trend of the minute.  

  19.  Fundamentals might not support +$100 oil but war in the middle east might…

  20.  Phil
    one of the best performer in my portfolio in 2010 is HOV even they don’t go anywhere, I plan to add some to  my portfolio and sell against it 5s Put and 2.5s Calls, unless HOV will go through bancropcy it is a safe and very profitable strategy, just would like you opinion what is possibility for them will be out of market

  21. Phil – As always I love the way you write and your responses to questions put to you. Your way of explaining the facts has opened my mind to think differently!  
     The following questions are in response to the answer you gave ‘exec’ on Thursday the 30th: 
    1) How much is competing related to education?
    2) Do you think it is better to send kids to private schools vs. public schools?
    3) What happens to people who have no skill set or are unwilling to develop them?

    "..It’s not so easy for everyone to adapt to compete in this globally cut-throat environment but we all have to think long and hard about our skill sets, our position in life and our goals and make sure we are ready to compete in the 21st Century or, like Exec’s sister-in-law, we will find our businesses chewed away piece by piece as our work goes to the low bidder overseas."

  22. I was in Singapore for vacation and it is one of the best country I ever seen, and I guess it is aim for China and they will be there in 20-50 years, I think it is a good strategy to push our grandchildren to lern some chinese :)

  23. Phil:
    Really good posts this weekend.  Very helpful for a newbie.

  24. Phil:
    I’m considering taking a position on a slight weakening of the Euro early in January.  I’m thinking of selling 20 JAN 137 calls, buying 20 JAN 132 puts and selling 40 JAN 127 puts.  Does the premise and the trade make sense to you?  Thanks!

  25. Phil,
      This is the list of funds available to me in Deferred Comp. All the Internationals have restrictions. The others allow you to go in/out once a day.



    T Rowe Price Retire 2010



    T Rowe Price Retire 2015



    T Rowe Price Retire 2020



    T Rowe Price Retire 2025



    T Rowe Price Retire 2030



    T Rowe Price Retire 2035



    T Rowe Price Retire 2040



    T Rowe Price Retire 2045



    T Rowe Price Retire 2050



    T Rowe Price Retire 2055






    Intl Equity Fund – Active



    Intl Equity Fund – Index



    MSIF Emerging Markets






    Columbia Acorn USA Z



    Vanguard Small Cap Index



    Wells Fargo Advantage Sm Cap Value 1





    Perkins Mid Cap Value T



    Vanguard Cap Opp Fund



    Vanguard Mid Cap Index






    Davis NY Venture A



    Eaton Vance Large Cap Value



    Fidelity OTC



    Hartford Capital Appreciation IA


    Janus Fd  T



    Principal Lrge Cap Gr Inst



    T Rowe Price Eq Inc Fd



    Vanguard Institutional Index Fund


    Vanguard Primecap Fund Adm






    Pax World Balanced – Inst



    Vanguard Wellington Fund AD






    Federated Total Return Govt IS


    Vanguard Bond Index Fund






    Stable Income Fund



  26. CES This week something to keep a close eye on for possible trades, INTC AMD HPQ VZ MOT MSFT,2817,2374541,00.asp,2817,2374812,00.asp

  27. Phil,
    Regarding your comment: "This is a real flashback to 1999 when people who actually made technology underperformed people who had cool-sounding ideas (PCLN, NFLX, BIDU) by miles.  That sure ended with a bang so I’m sure there’s nothing to worry about here – even though it’s kind of the exact same thing…"
    It’s not the same.  Today’s innovative companies have REAL earnings, and the market is paying up for their earnings growth trends.
    Regarding market bullishness.  At P/E of 15, S&P 500 is properly valued at 1269.  If we get the expected 14% earnings growth and any P/E expansion, a +20% in 2011 is not unreasonable.  The 3rd year of a presidential term has averaged +22% since 1950, and has not been negative since 1939.
    Best Regards!

  28. Phil,
    In your example above to DC, did you mean to write 1000 shares of GE rather than 10,000 shares?

  29. Phil/Spread,
    I’m confused on the math in your bull call spread example above.
    14 XLF calls @ $2.90
    17 XLF shorts @ $1.19
    Spread $1.71
    ($17-$14) – $1.71 = Net $1.29
    You are saying Net $82.5
    How is my math wrong?

  30. Phil good morning Just in case you still on this page you reported this morning oil at 82 I wish you were right it is 92 just for the once not watching the ticker.

  31.  XLF/Exec – The sale was selling 10 GE 2013 $15 puts for $1.75.  The buy was 20 XLF 2012 $14/17 bull call spreads at $1.70.  10 x $1.75 is $1,750 collected on GE and 20 x $1.70 is $3,400 spent on the spread.  It looks to me like $3,400 – $1,750 is $1,650 and 20 spreads is 2,000 and (and now I need my calculator for the tough stuff) $1,650/2,000 = .825 per long contract. 

  32. I noticed the pic of the playing cards and drinking beers, they are drinking Arrogant Bastard Ale, which is brewed in Escondido, CA  my home town!!