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Fibonacci Rules – Sometimes, the Old Ways Are the Best!

Crazy stuff, right?

If you have never before paid attention to Fibonacci Retracement Levels, I would strongly consider paying attention to the S&P chart below.  This chart shows, 2 years later, a consolidation and breakout that could have been predicted in March of 2009.  That's right, if you asked a Fibonacci technical guy where the S&P was going to consolidate on March 10th of 2009 – he would have said: "Assuming that yesterday was the bottom and coming off our high of 1,576, then I would say we will consolidate between 1,014 and 1,229." 

Leonardo of Pisa (and independent republic at the time) was born in 1,175 and died at the ripe old age of 65.  Pisa was a city of about 10,000 people – a mixture of Muslims, Christians and Jews.  Construction on the great tower began in 1,173 and was not completed until 1,319 (so don't complain about modern union jobs!) but they knew that it was listing in 1,178 so the point is: Leonardo was born in a small town that had a huge architectural  problem.  

Fibonacci's father was a State customs worker (essentially overseeing floor trading) and encouraged his son to take up studies in mathematics which, at the time, included learning Hindu Vedic math, which was the foundation of modern algebra and which Fibonacci came to greatly respect, saying:

The knowledge of the art very much appealed to me before all others, and for it I realized that all its aspects were studied in Egypt, Syria, Greece, Sicily, and Provence, with their varying methods; and at these places thereafter, while on business. I pursued my study in depth and learned the give-and-take of disputation. But all this even, and the algorism, as well as the art of Pythagoras I considered as almost a mistake in respect to the method of the Hindus.

Thus Fibonacci became the driving force by which Hindu-Arabic numerals came to replace the Roman ones.  Fortunately, at the time, the arts and sciences were still supported and he found the favor Emperor Frederick II, who funded his studies – even though they didn't make him any money (imagine that!).  Fibonacci did not invent Fibonacci numbers (it was probably India's Pingala in 200 BC), he just realized they could be applied to natural growth and regression sequences and, as it turned out, commerce and trading tended to follow a similar pattern as growth tends to exhaust itself at certain, predictable levels – except when it is artificially stimulated, it seems!  

Stimulus does make a huge difference.   Our official government stimulus program ($819Bn) peaked out in early 2010 and the market took a very sharp dip as that began to ease off and the Fed's QE1 program wound down at about the same time.  It is interesting to note that the Fed tends to write their biggest checks of the month, virtually without fail, during options expiration weeks.  Perhaps this is why some people get the impression that Ben Bernanke is a lying bastard when he says the Fed has no intention of manipulating the stock market:  

The second round of Quantitative Easting (explanation by Teddy Bears can be found here and here is a visual take on it that incorporates inflation effects) began in late November but the announcement of it in September began our latest rally.  Originally, QE1 began in November of 2008 and the Fed bought $1.75 Trillion of bank debt, MBS, and Treasury notes, and their balance sheet reached a peak of $2.1 trillion in June 2010 and was projected, at the time, to fall to $1.7Tn by next year (2012).  Unfortunately, the winding down of QE1, in May of 2010, immediately led to a 20% drop in the S&P between May and July.  

Since we were well aware that the "recovery" was BS at the time, we began to get short in late April, as I put up the Member Virtual Portfolio titled: "Hedging for Disaster – 5 Plays that Make 500% if the Market Falls" and on May 5th, I put up "5% Rules!  How Can We Be So Right?" with the following chart, showing how we were then using a combination of our 5% Rule and THESE SAME Fibonacci numbers to chart the future moves of the S&P, which we projected would pull back to test our 1,014 support using this chart at the time:

We had our "Flash Crash" that day, of all things, and the S&P plunged to 1,065.79, right to that rising 50 dma.  Rising DMA's, by the way offer better support than falling ones and falling DMAs offer more upside resistance than rising ones.  So THAT DAY, we fell right to the line of the rising 50 dma but we also very sharply recovered back to – you guessed it – 1,128.15, right back at that 50% line on the Fibonacci Table. 

By May 26th, we were back at 1,067 but still holding our 50 dma, so I put up the "Down and Dirty Buy List" that morning, filled with the same stocks you always hear me ramble on about but at prices I REALLY liked for the first time in a while.  We still expected the additional sell-off down to our target and, I said to Members at the time: "Scale, SCale, SCAle, SCALe, SCALE into entries!"  But what entries they were:  

AET $30 (now $38), AFL $40 (now $59), BA $63 (now $73), BAX $43 (now $53), C $3.78 (now $4.91), DCTH $14.50 (now $11.30 – yes, we did mis one!), DIG $27.67 (now $58.68),  ES $6.35 (now $6.65), FAS $23 (now $34), FCX (yes, I was bullish on metals then!) $33.81 (now $52.95), GE $16.21 (now $21.44) and about 30 more stocks that came later in the Alphabet.  

Sure, it was like shooting fish in a barrel and our hedged AND leveraged entries gave us stunning gains that outperformed the S&P by a mile but why was that?  It was because WE WAITED!  We waited patiently as we stopped buying the market around March because it was toppy and clearly only held up by stimulus so we waited for reality to hit and then we used our cash (and the bonus cash from our shorts) and we did, in fact BUYBUYBUY!  

On June 7th we once again tested the 1,040 line on the S&P and that was good enough for me to narrow the Buy List down to our "Top 20" after I had decided the doomsayers were wrong.  I had laid out my Global Bullish Premise in that weekend's "Getting Real With the Global GDP!" which all bears should read and in which I, as I often do, list out companies that I expect to survive any kind of global catastrophe.  Even if you were not a Member, benefiting from our precise entries and leveraged option strategies – simply buying the basket of blue-chips I listed in that free post would have put you up an average of 37% in 8 months.  That's not too shabby

Beating the S&P is all about timing.  Our buy/write strategy gives us 20% wriggle room on that timing and that means we can afford to be a little braver in our dip buying than unhedged investors while our ability to cover with bearish "Disaster Hedges" can give us additional protection on the way down and additional confidence on the way up.  Keep in mind we were "Buying the F'ing Dip" before it was fashionable as my original bottom call was on March 6th of the prior year, the Friday before we hit rock bottom so the S&P was up 50% already and we were still very, VERY bullish.  

As a timeline for our Virtual Portfolios from the June Buy List Forward (which can be viewed in our Virtual Portfolio Section), we next had our first $10,000 Virtual Portfolio on June 11th (finished at $36,000), I finished my top 20 picks on June 26th and added "9 Fabulous Dow Plays Plus a Chip Shot" as we bottomed on July 7th.  Notice the pattern – on the dips I tend to put up buy lists.  In between, we wait to see how our levels test out.  I encourage Members to go back and see the picks, the plays and the fundamental logic we used to construct our virtual portfolios and keep the S&P chart handy to think about the mindset at the time.  We are not contrarians – we are value investors who wait for the right price to make our entries and, when the right price comes – we do not walk away from the sale! 

Notice the shift we undergo on August 29th.  It had been almost tow months since our last Bullish Virtual Portfolio and we finally got another correction.  We decided to go cautious and I put up "Defending Your Virtual Portfolio With Dividends" saying: "In uncertain markets, dividends can give you a critical investing edge" as evidenced by the chart on the left.  

QE2 was announced in late August and, Fed watchers that we are, we decided we were not being bullish enough so, on Sept 3rd – just 5 days after putting up a conservative list, I put up a dozen highly leveraged trade idea designed to make very big short-term money which I called the "September's Dozen."  My comment to Members in that Virtual Portfolio's introduction was: 

Not bullish enough? Let’s take a look at a quick dozen trade ideas for short-term gains. I like all these stocks long-term too (it’s always better to play short-term where your fallback is you own the stock long-term) but we haven’t been doing much gambling lately as it’s all been boring-old hedged positions that were smart, but not really giving us that immediate satisfaction you can get from some quick, monthly gains.

Are these trades riskier? Sure they are and they are trade ideas under the assumption that we hold our levels today and next week so no staying in them if the market sours but $75 oil and $3.40 copper and 2,200 on the Nas and 1,088 on the S&P give us some pretty easy markers to know if we’re still healthy.

Sound familiar?  It's the same thing I've been saying to Members for the past couple of weeks as we slowly get more and more bullish as we push through our resistance levels.  The last set of levels to be conquered, just shy of 6 months since our September Dozen ultra-bullish virtual portfolio are our 100% lines (off the bottom) at: Dow 12,938, S&P 1,332, Nasdaq 2,530, NYSE 8,362 and Russell 684.  After the September Dozen, we took a brief walk on the bearish side with "October's Overbought Eight."  At this point, if you read that last sentence and looked on the chart and looked at that 50% Fibonacci line we were hitting in October and said to yourself "Ah, I can see why they went a little short that day" then – Congratulations!  You have learned our secret system!  

We expected a pullback at about the 1,150 line but, all we got was token resistance and the short virtual portfolio died a quick death.  By October 23rd, we had reconciled ourselves to go back to being bullish but it was again by "Defending Your Virtual Portfolio With Dividends," where I put up 10 high-yield stocks that we were able to play with great downside protection.  Into Thanksgiving though, we finally lost our nerve as the S&P flat-lined along the 1,200 mark coming into the holidays and we thought it was to risky to push the 50% run in the markets we'd been riding any further.  

After Thanksgiving, the World did not end and we were already bored sitting in cash so I suggested allocating a small portion of our virtual portfolios to "Breakout Defense" a virtual portfolio aimed at making 5,000% in 5 trades or less.  The idea was that putting just 5% of your virtual portfolio's cash to work on highly-leveraged trades like these could give you a 25% gain on a fairly modest rise in the market.  That way, we could sit out the holidays, almost entirely in cash (margin is used though) without worrying about missing the rally that actually happened.  

Needless to say, we hit our goal of 5,000% as the S&P rose another 10% already!  The market was rising so fast that, on Christmas Day, I put up "Secret Santa's Inflation Hedges for 2011" which were taking advantage of the rampant inflation that was very obvious to PSW Members, if not the Members of the Federal Reserve's Board of Governors.  Unlike our Breakout Defense plays, the Secret Santa set was aimed at more conservative (well, for us!) trade ideas that a reasonably large position could be taken in to protect a percentage of your virtual portfolio (or, in my specific examples, your household budget) from inflation.  

I was so confident in my XLF trade idea that I promised there than anyone who signed up for a full-year Membership that week would get an additional year for free if that trade did not return 100% by expiration day in January of 2012.  The logic was (see post) that $2,500 played on this trade (not mandatory but would be 63 contracts) would either give you back $5,000 by the year's end, so a 50% discount on one year – or it would give you a free year of Membership in 2012, so a 50% discount next year.  As an added bonus, the maximum payout on the trade was $6,300, so a $3,800, profit is possible if all goes well (150%).  The trade idea was:

  • Buy XLF Jan 2012 $12/13 bull call spread for .80
  • Sell 2012 Jan $11 puts for .40.  

That is net .40 on the $1 spread and I am happy to report that the Jan $12/13 bull call spread is now .95 and the Jan $11 puts are now .20, which is net .75 and up 87.5% in just 7 weeks – very much on target for the full gain!  Of course the other trades are doing very well too as they were all conservative (XLF was $15.87 and we picked a $12/13 spread) and all three (DBA, XHB, XLE) are in fine shape at the moment.  It is important to go over these virtual portfolios regularly both to help new Members get on track with the flow of where the Members are generally investing as well as to hopefully remind all Members that you don't need to day trade to make good money in the markets – day trading is what we do to amuse ourselves while we wait for our boring, old, conservative hedges to pay us our 20, 40, 50 and 100% gains on the bulk of our investments.  Look over these virtual portfolios and you'll find over 100 stocks I REALLY, REALLY like – even now, some of them are still on sale.  

We were still on fire on Jan 31st and the Members wanted to be even more aggressive so we decided to roll our $10,000 Virtual Portfolio (now $34,000) into a new $25,000 Virtual Portfolio where we would aim to get to $100,000 by the end of the year.  We initiated that one with a bearish stance, as we did expect a pullback at our old Breakout 2 levels but, just in case, the next week (Feb 5th) we once again went for the ultra bullish set of "Breakout Defense Part Deux – 5 More Trades that Make 500% in a Rising Market."  

That was our last Virtual Portfolio.  The month is only half over so not a lot of pressure to come up with another one and I am trying to work through my inclination to put up another Disaster Hedge virtual portfolio, which this backward-looking exercise is all about…  The Fed's current POMO schedule (QE2) runs through May and we've gotten very clear indicators (as discussed in this week's posts) that The Bernank is in "Damn the torpedoes and full speed ahead" mode.  

That expression is very appropriate as it was uttered by Admiral Farragut during the civil war, when our country turned on itself in 1864 as the lead ship in the fleet was blown up by a torpedo, which was actually their word for mines back then.  Farragut knew the battle was lost if they tried to slowly poke through the mined harbor, so it was victory or die as he had the fleet plow through the minefield on the way to what turned out to be a glorious, and very lucky victory (the mines were poorly made and most failed to explode).  

That is very much the game admiral Beranke is playing with the US and even the Global economy as he ignores all the mines that are clearly in our economic path and forces the economy up to ramming speed – hoping to accomplish with momentum what he could not accomplish through finesse.  

God help us all if he's wrong!


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  1. Phil:
    Been trying to roll March VIX 18′s to April 15′s for 3 days with no luck getting the prices I want (set between the bid and ask). It has hit the price I wanted several times and even fell below it once yet the trade still did not execute. Am I resigned to accept the market price to get the trade to execute or is there some trick to getting the price you want on VIX? Thanks.

  2. Fibonacci – I like the historic background, Phil, and I understand the Fibonacci series from the standpoint of a zoologist/ecologist/epidemiologist, but I don’t understand the application at all to stock prices over time. I’ll do a little research – any recommendations?
    e is another one of those numbers with uses in both nature and finance – weird, eh.

  3. Fibonacci – ok, got it – Wikipedia to the rescue again – it’s the ratios with varying lags, not the numbers themselves. Hmmm. Does it work because of some intrinsic property, or because we believe it works?

  4. Phil,
    Good piece.
    Whatt is the historical significance of a breakout of the 61.8 line?  Would that suggest the next significant resistence is 100% level?

  5. Are Fib levels reinforced because so many in this market are sophisticated investors who understand them and program their systems around them? Thereby making them even more significant?

    Interesting that the Arab world descends deeper into turmoil, yet the dollar is tanking….are we becoming less of a safety hedge? Is this a HUGE indicator the our currency reserve status is already more undermined than we suspect? If the EU PIIGS fail, do they turn to China, PMs and let the dollar go? If so, DXY might not bounce on Irish revolt or Greek default….something to ponder…

  6.  Phil
    Do you still see a pull back coming in the short term? The market has gone up since December with no significant correction.
    Also – with all the reverse splits coming next week in the bear ETFs, what do you recommend to do about existing shorts (TZA, QID)?

  7. Trend Trading – more old rules (1907 Stock Market Wisdom) as shared by Michael Covel.

  8. Phil-as you can see I am still suffering from jet lag—-thought I would try to catch up on the month long posts I missed—could I or more to the point should I still get into some of the breakout defense part deux trades listed on Feb 5th?

  9. Good morning!  

    If anyone is interested, I have 5 long-term E&P trades at the end of Friday’s comments as well as a rant on the American Revolution.  Let’s keep the forward-discussion here though as I don’t want to flip back and forth.  


  10. VIX/DC – Well, you’ve been watching it for a few days and you see it goes up and down so try to identify the channel and sell your March $18s when it’s high in the channel and then buy the April $15s when it’s low in the channel.  On Friday, for example, the March $18 ranged from $1.65 to $1.95 and the Apr $15s ranged from $4.50 to $5 so your best case roll would have been $2.55 and your worst case $3.35 – that’s quite a range.  The day before you could have observed that the Apr $15s went from $4.50 to $4.85 and the March $18s went from $1.65 to $1.80.  So, your conclusion for Friday could have been that $4.50 was a good entry for the Aprils and, as long as you got at least $1.65 for the March calls (the previous day’s low) then you would have a net 2.85 roll and anything more you got for the March calls if you decided to wait for a bounce would just be a bonus.  

    Fibs/Snow – I think it works for stocks because the large population growth studies he worked our are very similar to large capital inflows into (or outflows out of) the markets.  I often refer to money flows as tides and waves – that’s kind of how I envision them in my mind and I talk about riding a surfboard waiting for prices to crest – that’s all really Fibonacci imagery I suppose, the math says that growth simply leads to natural retracements and we can see that the introduction of QE2 has caused a very unnatural break at the moment.  The assumption is that the resistance will pile up and, at some point – there WILL be Hell to pay when (and if) the Fed ever stops priming the pump.  

    Fibs/Hoss – Yes, I’ve consulted on many programs that use Fib levels in their TA.  That’s why all these things work – if just 10% of the people use it as a primary indicator to drive their entry and exit decisions – that becomes a self-reinforcing system that then has a great chance of triggering other systems that get a violation of their own s/r strategies.  The reason I came up with the 5% rule was, after looking at so many competing systems all trying to gain a "unique" competitive advantage, I realized that they all ended up merging at similar places so we look for those consolidation points and THEN we calculate the likely moves off that and it’s not coincidental that the 5% rule and Fib numbers treat 40%, 50%, 60% and 100% very significantly.  The difference is the Fib numbers are looking at natural growth, which tends to get to that 40% mark with little resistance while the 5% rule looks at the cross-currents that are caused by a combination of various investing strategies, taking into account the human tendency to fixate on whole numbers and the tendency of both people and programmers to round things off to 5s and the fact of programs that round things off to 0.1 or whatever.  Put all that together and you end up getting significant resistance at 0.675%, 1.25%, 2.5%, 5%, 10%, 20%, 40%, 50%, 60%, 80% and 100%. 

    Dollar/Hoss – You know Glenn Beck says we have just 15 days between the time China announces they won’t buy US treasuries and the day we will be hunkered down in our bunkers with our guns and our gold, shooting anything that moves on our land. 

  11. Pullback/Ysen – Well, on a scale of not worried to Glenn Beck, I am sorry to say I and slightly on Glenn Beck’s side!  Still, that’s about 100 miles from Crazy Town and Glenn is not only at the station but he’s been elected mayor so I’d have to say that I do believe it is a strong possibility that something happens globally that is too big for the fed to paper over.   Look at the spike above just after March 9th on the Fed chart – that is what they will do again if we have a sell-off because it worked then.  That was $175Bn thrown at the IBanks on option expiration week to juice the markets and "regain investor confidence."  How about not lying to us to regain our confidence?  Nope, they’re not going to try that!  

    I still like TZA as a hedge as it would seem the small-caps will be most likely to be damaged by inflation and I like EDZ as most foreign stocks are like small caps and we sure as hell have sent inflation over there and, of course, those countries don’t tend to just paper over everything like the Fed does or, if they do (Brazil), they get punished for it by the Bond Vigilantes because they are not a reserve currency with a Fed providing infinite liquidity.  If you have hedges and are worried about adjustments.  Cash them out, wait for the split and buy new ones – that’s pretty simple, right? 

    Rules/Scott – Thanks, I like those:

    Breakouts/Savi – I hate chasing but XLF is still cheap (assuming we keep going up).  Just check in on Tuesday or Wednesday if we’re still trending up and I can look for possible entries.  

  12. From the NYTimes – "Money Won’t Buy You Health Insurance"

    Redwood City, Calif.
    THIS isn’t the story of a poor family with a mother who has a dreadful disease that bankrupts them, or with a child who has to go without vital medicines. Unlike many others, my family can afford medical care, with or without insurance.
    Instead, this is a story about how broken the market for health insurance is, even for those who are healthy and who are willing and able to pay for it.
    Most employees assume that if they lose their job and the health coverage that comes along with it, they’ll be able to purchase insurance somewhere. The members of Congress who want to repeal the provision of last year’s health insurance law that makes it easier for individuals to buy coverage must assume that uninsured people do not want to buy it, or are just too cheap or too poor to do so.
    The truth is that individual health insurance is not easy to get.
    I found this out the hard way. Six years ago, my company was acquired. Since my husband had retired a few years earlier, we found ourselves without an employer and thus without health insurance.
    My husband, teenage daughter and I were all active and healthy, and I naïvely thought getting health insurance would be simple.
    Why did we even need insurance? First, we wanted to know that, if we had a medical catastrophe, we would not exhaust our savings. Second, uninsured patients are billed more than the rates that insurers negotiate with doctors and hospitals, and we wanted to pay those lower rates. The difference is significant: my recent M.R.I. cost $1,300 at the “retail” rate, while the rate negotiated by the insurance company was $700.
    An insurance broker helped me sort through the options. I settled on a high-deductible plan, and filled out the long application. I diligently listed the various minor complaints for which we had been seen over the years, knowing that these might turn up later and be a basis for revoking coverage if they were not disclosed.
    Then the first letter arrived — denied. It never occurred to me that we would be denied! Yes, we had listed a bunch of minor ailments, but nothing serious. No cancer, no chronic diseases like asthma or diabetes, no hospital stays.
    Why were we denied? What were these pre-existing conditions that put us into high-risk categories? For me, it was a corn on my toe for which my podiatrist had recommended an in-office procedure. My daughter was denied because she takes regular medication for a common teenage issue. My husband was denied because his ophthalmologist had identified a slow-growing cataract. Basically, if there is any possible procedure in your future, insurers will deny you.
    The broker then proposed that the three of us make individual applications. Perhaps one or two of us might be accepted, rather than the family as a group.
    As I filled out more applications, I discovered a critical error in my strategy. The first question was “Have you ever been denied health insurance”? Now my answer was yes, giving the new companies reason to be wary of my application. I learned too late that the best tactic is to apply simultaneously to as many companies as possible, so that you don’t have to admit to a denial.
    I completed four applications for each of the three of us, using reams of paper. I learned to read the questions carefully. I mulled over the difference between a “condition” and “something for which you have sought treatment.” I was precise and succinct. I felt as if I was doing a deposition: Give the minimum true information, and not a word more. I was accepted by exactly one insurance company. So was my daughter, although at a 50 percent premium over the standard charge for a girl her age. My husband was also accepted by one insurer but was denied by the company that approved me.
    Our premiums, which were reasonable at first, have increased substantially over the last six years; the average annual increase has been 20 percent. I now am paying premiums that are more than double what they were initially. And because these are high-deductible policies, we still are paying most of the medical bills ourselves.
    The new health care reform legislation is not perfect. Nothing that complex could be. But I have no doubt that the system is broken and reform is absolutely essential. If we are not going to have universal coverage but are going to rely on employer plans, then we must offer individuals, self-employed people and small businesses a place to purchase insurance at a reasonable price.
    If members of Congress feel so strongly about undoing this important legislation, perhaps we should stop providing them with health insurance. Let’s credit their pay for the amount that has been paid by the taxpayers, and let them try to buy health insurance in the individual market. My bet is that they all would be denied. Health insurance reform might suddenly not seem to them like such a bad idea. 

  13. Also great (but depressing) from the NYTimes:  "Empire at the End of Decadence


    America is great in many ways, but on a whole host of measures — some of which are shown in the accompanying chart — we have become the laggards of the industrialized world. Not only are we not No. 1 — “U.S.A.! U.S.A.!” — we are among the worst of the worst.
    Yet this reality and the urgency that it ushers in is too hard for many Americans to digest. They would prefer to continue to bathe in platitudes about America’s greatness, to view our eroding empire through the gauzy vapors of past grandeur.
    Republicans have even submitted a draconian budget that would make deep cuts into the tiny vein that is nonsecurity discretionary spending, cuts that would prove devastating to the poor and working class.
    At the very time that many Americans — and the very country itself — are struggling to emerge from a very deep hole, the Republican proposal would simply throw the dirt in on top of us.
    This cannot be. Financing for education and social services isn’t simply about handouts to the hardscrabble, it is about building an infrastructure that can produce healthy, engaged and well-educated citizens who can compete in an increasingly cutthroat global economy.
    One of President Obama’s new catchphrases is “win the future,” but we can’t win the future by ceding the present and romanticizing the past.


  14. Phil/History:
    Did you study history?
    Damn……from the looks of that chart above, the rest of the world can’t begin to compete with our ability to lock people up.

  15. My Uncle taught history at Cambridge and my college roommate (still one of my best friends) was a history major and I tend to read everything in a room if I’m there long enough so between college and hanging out at his house on weekends and reading his library and visiting my Uncle once in a while (his stories are worth paying to hear!) – I picked up a few things.  

    I love the fact on this chart that we can’t even get democracy right – would be funny if not so tragic!

    This chart almost makes me reconsider my Jersey/Guernsey escape route in favor of Amsterdam again but Amsterdam fell off my list based on the fact that they (along with the rest of Europe) were way too easily conquered in a ground war.  If we’re trying to watch out for a scenario in which the world goes to chaos – you want some water between yourself and a continent full of potential conquerers…  

    Of course the Channel Islands are lumped in with the rest of the UK but I think it’s more like a wealthy suburb, on the whole.  

  16. Phil--just finished reading a month of posts--whew--it is amazing how much I have to  learn
    I am  very sorry to hear about your father-- deepest condolences to you and your family--also wanted to mention the  tribute you wrote to your father--beautiful

  17. Phil/Adm:
    On your recommendation of buy ADM stock and sell 2013 $30 C at $8.75 and sell 2013 $35 P at$5 for net $22.90 and 31 % return or 16% annually. If I do this in my IRA account, I have to pledge 100% cash against the put which significently changes the return to 11% annually since the put only generates 7.2 % annually against the 100 % cash margin.Any suggestions as to how to improve the return? Thank You 

  18.  Phil,
      You asked me to remind you about the book project this weekend.

  19. Phil/escape

    Do you remember when the USA was the escape route? It is sad that we have to consider fleeing to find sanity.

  20. You may well flee the U.S. in order to find political or intellectual sanity, but I wouldn’t go much farther than Canada if you’re trying to preserve your hide.  

  21. wow the prison number is totally crazy. That is just absolutely insane. When I see people cheering the destruction of the Dept. of Education (republicans actually gave this a standing ovation), I just think ‘better build some more prisons.’ Lack of education and increasing crime rates are about as closely correlated as sodium and chloride. Maybe being so heavily armed isn’t such a great thing? (oh no, the shock and awe of it all — crusty old cronies raising their bony arms in the air and going "not my guns!"). Pathetic.
    The US tried to play catch-up on life expectancy by banning smoking inside most everywhere that matters (note how I leave most of the middle of this country out of that equation). Europe caught up on that one quick though. I mean, even in France now you gotta stand outside to kill yourself… oh the humanity!
    On the positive side, where does a Microsoft or a Google or a Facebook in this world start other than in a US college dorm room? We still innovate. Educate, innovate, motivate. 
    Maybe people should just try harder to be nicer to one another. Then your happier, feel more secure, and enjoy life more no matter what the bank account is reading that day or how your stock portfolio faired. Maybe you should go knock on your neighbors door right now and say hi. If you don’t, ask yourself why you wouldn’t?
    Phil, how is your start-up coming along? I changed fields, working hard in a new anaerobic digestion outfit and not had much time to go online at PSW. Still just long/cash with some usual hedges. For example, I like JNK Jun11-39.39 puts for 60 or 65 cents. Waiting on QE2 to finish and "unintended consequences" to punish bonds. Patience is key. Is there a Fib level for TBT?

  22. BDC – that is why I think we should LEGALIZE DRUGs.  Everyone can be on happy pills, and throw their guns away.  Free love, free drugs, and shiny happy people…..oh…..

  23. and …..lose the religion in politics.  On another note for politics, regardless of which side of the isle one is one….this really urks me….
    But the speaker of the House, John Boehner, made it clear on the NBC program “Meet the Press” last Sunday that he had no interest in quashing these fantasies or stopping his fellow Republicans from accusing Mr. Obama of lying about his citizenship and his faith.
    Pressed by the show’s host, David Gregory, Mr. Boehner said — grudgingly — that an assurance from the government of Hawaii that Mr. Obama was born an American citizen was “good enough for me.” And that when Mr. Obama says he is a Christian, “I’ll take him at his word.” But he said it was “not my job” to try to do anything about it. “The American people have the right to think what they think,” he said.

  24. "Our premiums, which were reasonable at first, have increased substantially over the last six years; the average annual increase has been 20 percent. I now am paying premiums that are more than double what they were initially. And because these are high-deductible policies, we still are paying most of the medical bills ourselves."
    That story hits home as it is my own. Thought the "public option" was the best option for people on their own but we didn’t  get that chance. Still at the mercy of the United Health/Blue Cross type giants. 

  25. Channel islands, Phil, just a bombing zone for the US military in CA!  I’ll sell you some land at a huge discount!

  26. Pharm
    Great REM reminders, enjoying the new song "Oh My Heart". Hopefully the rest of the new one is up to that quality.

  27.  /CL up 2.59

  28.  Pharm, let’s look at it another way.   Why should David Gregory be Hectoring Boehner about whether Obama is a Muslim or not …  Its not a proper question; and Boehner answered it once anyway.
    I don’t see him hectoring Democrats in a similar manner: 
    Say to Reid …. do you really believe Bush is a moron ?  Do you believe Bush is a war criminal ?  Should he be compared to Hitler ?   and so on …
    Why don’t you speak out and tell folks who believe that what idiots they are ?
    What does Boehner have to do with Birthers ?   Why isn’t he asking Pelosi similarly stupid questions ?
    Why should Boehner know anything more about where Obama was born than anyone else ?   What is gregory’s own definitive view ?
    How is Boehner supposed to quash people’s fantasies ?
    Should he also quash the "9-11 was an inside job" idiots ?
    Why do people focus on such non stories ?

  29.  Phil — few things from Friday’s post …
    1.  Economist / mideast … send that rag my way; i will set them straight !
    2.  Health Care … ObamaCare hasn’t fixed anything.  It makes it worse; at devastating cost.  And it is unconstitutional.
    Of course these problems could be fixed, but not in this monstrosity that Obama/Pelosi and Reid recklessly jammed on the country   (and this is Bush’s fault, for leaving us with a 2-year Democrat super majority in his wake).
    Hopefully, the new Congress, the courts and the people will fix this mistake.

  30.  3.  Trader’s Expo.    Today thru Tuesday.   Tomorrow the main day; and fortunately the market is closed.
    Come on by; we can hang out and not talk politics.

  31.  If you are not watching the NBA All Start game, please take note that all hell is breaking loose in the mideast (Libya, Bahrain, elsewhere); even China is starting to have protests; Oil is up $2+ (Brent), Silver is over $33.
    Time for Ben to fire up the printing press some more; can’t have a down day y’know.

  32.  and Merkel’s party is facing bailout blowback in local elections.  (Germany)

  33. Thanks Savi!  

    IRA/Dflam – Well, you can blow off the small dividend and still agree to buy the stock for $35 but go with the 2012 $35 puts at $2.80 and go for the 2013 $30/40 bull call spread at $5.10.  That puts you in the long $10 spread at net $2.30 and your commitment is $35 for this year so $37.30 for 12 months to possibly make $7.70 (and you are $7.65 in the money now) in Jan 2013.  That’s a 20% ROI and it’s not that sexy the first year but you can layer them every year, rolling the same $35 (or whatever the strike is) commitment for one year against 20% to be made in 2.  Once you layer a few cycles (and I’m talking about this style of trade, not necessarily the same stock every time), you can have a diversified set of trades turning profits on a regular basis.  

    Keep in mind that if you set this up to possibly buy ADM and possibly buy XOM and possibly buy GE and possibly buy CSCO and possibly buy INTC for 10% discounts while leaving yourself with longer-term trades that make 20% on the money you don’t end up spending (if we’re over the strikes) then the next year, you have 5 bull call spreads with 20% upsides.  As the put obligations are released, you can look for another set of targets and do it again.  If, perchance, one or two of the positions is actually put to you, then you have a position you can hedge into the next year.  This is particularly effective if you are scaling in to long-term positions and don’t mind doing a buy/write in round 2 to knock another 20% off. 

    Now, here’s a bonus you may not realize.  If, for example, ADM is $28 (now $37.65), ADM will be put to you at $35 in Jan BUT you have a 2013 $30 call which is on the money so we can assume it would be worth about what a Jan $40 call is worth now, which is $2.75.  That means you can cash the 2013 $30 call for $2.75 and now your net assignment is "just" $34.55 and $6.55 out of the money and you can DD at $28 for a $31.28 average and then you can sell 2014 $30 calls for $6 (estimating of course) and then you are in for net $25.28 with a $4.72 upside on 2x (17%) plus the 0.64 dividend, which is another $1.28, which is another 5% over 2 year.  

    This may not sound "exciting" to HOPEFULLY make 22% on 2x in 2014 but that’s AFTER the stock drops 20% on you.  If you can do this with your losing trades, your winning trades can take care of themselves.  Over time, you end up with a portfolio of very cheap stocks and, if you stick with blue chip-type stocks and you are not too old – then time should take care of the rest of your problems.  

    Book project/Kevin – Yes, thanks, I will try to get on that tomorrow.  

    USA/Exec – Yes, it’s how we all got here, right?  

    Canada/ZZ – Are you crazy!  Canada is right next to the country with the most per capita criminals by a factor of 2!  If society begins to break down – I don’t know how good we’ll be at penning in those millions of prisoners.  Of course, Canada is my current "safety" country but I’m talking about a place to go when the US breaks down and I think we could drag Canada with us if things really hit the fan over here.  

    Education/BDC – You are right but the Twitter Party won’t stand for any investment that doesn’t pay off in time to make the evening news.  As to my start-up.  We are still dealing with tire kickers and are about to give up on private investors.  We didn’t need the money to keep moving forward – just to go large later this year so we’re going to probably go to the customers to fund it now – which is what I did with my original title service business.  I think we’ll take one shot at raising an angel round with a PPM if there’s interest but, starting next month, we’re going to be hitting the clients anyway so we may as well kill two birds with one stone there.  

    JNK is an interesting pick.  They have a nice dividend but you have to really have faith that the Fed can pull things out, don’t you?  The options don’t really trade, which makes it extra scary.  On TBT, I don’t do Fibs on individual stocks.  Really I’m all about the 5% rule and, on major indexes, I might use Fibs to confirm it but the last time I looked at Fibs was like September before yesterday.   Also, with an ultra, any charting you do looking for a bounce is going to give you a false reading because it won’t take the rollover decay into account.  I do think TBT is good for 50 this year but it’s so hard to fight the Fed, the only trades I like are the ones that pay off at $40. 

    Boehner/Pharm – Oh don’t get me started!  I did love that line that appeals so well to the T (for tin-foil hat) Party constituents, that the American people "have the right to think what they think" despite the very simply provable (and proven over and over) facts.  It’s the same kind of anti-intellectual arrogance that marches into ill-conceived wars and drives suicidal tax policies and allows people to stick their heads in the sand rather than confront very real threats to our nation like Global Warming, Unemployment and, of course, the aging population.  How many times can your strategy be "Deny, deny, ignore, deny and just try to make it through the next election?

    “I am disappointed that Speaker Boehner doesn’t believe he has the votes to avoid a government shutdown, unless his members get their way on all of their demands,” Senate Majority Leader Harry Reid, D-Nev., said yesterday. “It is unproductive to resort to threats of a shutdown without any negotiations.”

    “President Obama has acknowledged the challenges we face, but – thus far – he has done nothing to offer solutions,” Boehner said in a statement. “Now, worse, his political organization is colluding with special-interest allies across the country to demagogue reform-minded governors who are making the tough choices that the President is avoiding.”
    As state workers marched on the state capitol building in Madison this week, Obama called Republican Gov. Scott Walker’s proposal an “assault on unions.” The governor wants to let public workers bargain only over wages, and to double their health-care premiums and require them to start paying part of their pension costs. Police and firefighters wouldn’t be covered by the plan.


    I love the lady on the right side of Boehner in that video – she looks like one of the Joker’s smilex poison victims from the original Batman movie!  

  34. Phil
    I have a issue on a Real Estate deal that I am involved with a national food chain.  Since your company was a RE co. maybe you could pass on some ideas to me. 
    The interested party is an LLC that has 400 locations around the US and they have cut a deal with the franchisor for a territory in SE Wisconsin.  Their plan is to open 35 new locations.  I have a corner on a busy intersection which is next to a large medical center and down the street on the next block is the largest employer in the county the county building.  also a 1/2 a mile away is the areas hospital.  A coffee chain across the street on the corner in front of a strip mall  opened 2 years ago and is doing 1.5m a year which is supposedly the best in SE Wisc for that chains locations. 

    My problem is how would you deal with the threat of inflation?  tying rent increases to CPI seems useless, do you have any other ideas?  If you are willing to pass on your thoughts perhaps you have a private email as I view this a little personal.

  35.  williex -
    you could have regular fixed increases (say, like 3% per year).
    if its a NNN (triple net) lease, the tenant would bear all costs, including cost increases  … taxes, insurance, etc.
    No ways are perfect, but these are a couple of suggestions.

  36. Oooh fun!  Gold just under $1,400 again in futures.  Oil $91.37 (now the April contract).   Dollar bouncing off 77.50 and silver at $33.  

    Economist/Cap – I’ll see if you can get in on the next roundtable.   

    Trader Expo/Cap – I wish you had told me sooner, I thought it was end of week.  Can’t change plans tomorrow.

    Mideast very crazy this week.  It’s spreading like a wildfire but it’s also driving all those Mideast leaders buy gold and silver and US equities – whatever they can send their 20 wives and 80 sons around the World with to stick away in safety deposit boxes "just in case".   

    There is a great quote in Stock World Weekly (which I hope everyone reads) from Sharon Johnson:


    Discussing the source of increasing commodity  prices and  the   latest  spike in  c o t t o n  p r i c e s ,  Sharon Johnson of Penson Futures remarked: “I  cannot  say  this  clearly enough…this  is not mill buying, mills cannot buy at  these prices.”  If mills are not driving the price demand,  this  leaves only speculators as a source.  (Chinese Exporters Going Down, Western Importers Ambushed.)


    This is something I’m probably going to want to talk more about in the morning post.  

  37. Rents/Willie – Well you could tie the annual increase to the 10 year bond rate or some multiplier thereof and, if they balk at that then you can say you will index it to the average prices on their menu because that way, they are assured the only way they are paying you more is if they are collecting more.  With a long-term tenant issue like that, I prefer to approach the issue as a partnership, voicing my side’s concerns and trying to work out a mutually fair solution that will keep us on the same page long-term.  Cap’s points are good too – your mortgage is, I assume fixed so, as long as you are offloading the cost increases – it shouldn’t be a major issue.   

  38.  Sorry Phil; I can barely keep track of the dates myself … lol

  39. Teachers’ salaries – Phil and all – got a kick out of this:

    Are you sick of highly paid teachers?

    by Meredith Menden on Friday, February 18, 2011 at 3:32pm

    Are you sick of highly paid teachers?
         Teachers’ hefty salaries are driving up taxes, and they only work 9 or10 months a year! It’s time we put things in perspective and pay them for what they do – babysit!
    We can get that for less than minimum wage.
         That’s right. Let’s give them $3.00 an hour and only the hours they worked; not any of that silly planning time, or any time they spend before or after school. That would be $19.50 a day (7:45 to 3:00 PM with 45 min. off for lunch and plan-- that equals 6 1/2 hours).
         Each parent should pay $19.50 a day for these teachers to baby-sit their children. Now how many students do they teach in a day…maybe 30? So that’s $19.50 x 30 = $585.00 a day.
    However, remember they only work 180 days a year!!! I am not going to pay them for any vacations.
    LET’S SEE….
    That’s $585 X 180= $105,300
    per year. (Hold on! My calculator needs new batteries).
         What about those special
    education teachers and the ones with Master’s degrees? Well, we could pay them minimum wage ($7.75), and just to be fair, round it off to $8.00 an
    hour. That would be $8 X 6 1/2 hours X 30 children X 180 days = $280,800 per year.
    Wait a minute — there’s
    something wrong here! There sure is!
    The average teacher’s salary
    (nation wide) is $50,000. $50,000/180 days
    = $277.77/per day/30
    students=$9.25/6.5 hours = $1.42 per hour per student--a very inexpensive baby-sitter and they even EDUCATE your kids!) WHAT A DEAL!!!!
    Make a teacher smile; repost this to show appreciation for all educators.

  40. Cap – Asking about Bush being a moron is a bit extreme don’t you think (thou shalt not lie, but he is/was, wasn’t he?)?  A bit different than asking if he is a Muslim?  or American?  How about Mr. B talk with his constituents….???


    Here is another for the Repub’s blunders….where they cannot add up the numbers, or can they? 

  41. Cap—there is absolutely no comparison with re to your Bush being a moron and asking if Obama is a citizen stmt--I often wonder if Obama looked more white and identified more with whites will he be getting all this flack re birth etc

  42. Seems to me you guys all miss the point about the Muslim question. It is an old reporter’s device to try to generate a story. Ask a question about some issue in the hope of getting the subject to say something to add to the controversy. Then, they can go to the other parties and say- so and so said X, what is your reaction? They do it because it works. It got all of you talking about something which is silly. 

  43.  Rents/Willie- this is not my field but perhaps you could do a deal including a percent of the gross? I think this is done with retail outlets in shopping centers/ strip malls? 

  44. If I were a member of  the elite politicians’ club, it would gratify me to no end to see you peeps arguing about whether a democrat or republican is this or that.
    For a fairly sophisticated bunch, y’all sure don’t understand, and Phil does little to encourage you, that there is only one party, the party of  Incumbency.  As long as the Incumbents with some seniority can provoke you partisans to destroy one another, keep your controversies alive, instead of uniting against anyone serving more than one term, they win, you lose.
    So keep it up.  The senior members of the both state and federal committees that run this country--at the auspices of  the men behind the curtain financing them—-can meet in tents in the desert so they can silently steal away with all the power and money like the Arabs in the night, while you bicker like couple of old married folks. Suckers.

  45.  Phil,
    I’m looking for ways to make short term profits while managing risk  from high volatility stocks like PCLN reporting in four days.  To my sorrow I learned the hard way in recent weeks that even a very loose strangle can "tear your face off" as when NFLX went from $170 to $250 in a matter of days.
    What do you think of the following structure using an Iron Condor with PCLN
    Buy PCLN Feb-25 $500 Call @ $5.30    -     Sell PCLN Feb-25 $495 Call @ $6.00            -           Cash in = $0.70
    Buy PCLN Feb-25 $410 Put @ $6.10     –      Sell PCLN Feb-25 $415 Put @ $7.20            -           Cash in = $1.10
    Maximum gain = $1.80 provided PCLN doesn’t move more than 10% in either direction from the current $450 (est) & max loss = $3.20 with an opportunity to roll the losing Caller or Putter into a somewhat more benign strike range after the earnings hoopla.
    Your thoughts?

  46. Exactly Flip. Divide et impera. Quite old trick and we still fall for it.

  47. Hello Phil, what do you think about the idea of naked short-selling of UAL or, maybe, LCC tomorrow at the market opening (in the past these stocks reacted quite violently to oil price spikes). In particular, LCC does not hedge future fuel prices (unlike UAL).

  48. Williex. Your best way to handle this issue is with a percentage rent clause, in which the tenant would pay their base rent plus a percentage of their sales once they hit a breakpoint, I.e the clause wouldn’t kick in until their percentage rent calculation is greater than the base rent. If you are dealing with a 400+ location chain, then watch out because they will have sharks negotiating their leases, and you should make sure that you have some representation who has dealt with them before. Good luck.

  49. Williex:  A commonly used technique is to  tie part or all of rent increases to revenue generated by the tenants.  As inflation hits, their revenue increases as does your rental income.    Of course triple net is mandatory on your part (so that  you pass through all the expenses to the tenant).

  50. cslanson2:  you’re willing to lose 2X your potential gain that a momo stock won’t move more than 10% on earnings--i think you get better odds in Vegas

  51. Wlliex/rent:
    I used to have a business brokerage business with 18 brokers before I retired and sold lots and lots of food business over 25 years. Typically, you should be negotiating to obtain a "triple net lease: ( tennant pays taxes,insurance,and CAM; common area maintenance) plus 6 % of the GROSS sales. As inflation hits,they will raise their prices (or go out of business) and  your rent will automatically rise. Any increase in the triple net will also be paid by the tenant. You may ask for  more than 6% , in the begiining of negotiation, but the terms I outlined are most likely fair to both parties.Keep in mind that 6% of the gross,plus triple net is about 20% % of the net . Food businesses strive for 1/3 cost of goods,1/3 operating expenses including rent,and 1/3 profit. If profit gets lower,thehy gofind another location.Also, as a landlord, it’s very beneficial to you to get a quality tennant which will give you few hassles & that’s worth giving them a better deal than normal.Good luck