Posts Tagged ‘Insurance’

Where the Risk Premium Thinking Leads You

Where the Risk Premium Thinking Leads You

Courtesy of Eric Falkenstein of FALKENBLOG

As they say, somethings are so silly on the highly educated can believe them. John Campbell, an archetype of conventional financial academic thinking, has an interesting yet absurd piece on why the low yields of US treasuries makes sense. He starts off with the standard view, that yields of government bonds are due to three things

  • expected real interest rates
  • expected inflation
  • risk premium

As current interest rates are around 2.5%, and current inflation expectations are around 3%, even with a slight convexity adjustment there’s a negative real expected return here. To guys like Campbell, that means, bonds are some kind of insurance, because the only reason investors would accept this is if they pay off in a very bad state of nature, just as you pay for car insurance. Specifically, everyone is supposedly afraid of a recession that would also bring with it deflation. 

While the CAPM betas of bonds have historically been positive, they have been negative lately. If you believed in the CAPM, that would mean the expected negative return makes sense, it is a negative ‘risk premium’. Of course, the positive beta previously did not explain why bonds cratered from 1960 to 1980, and the CAPM does not work at all within equities, the arena it was designed for. It also does not work in corporate bonds, REITs, options, etc. But looked at in isolation it is a plausible explanation, and hope springs eternal.

I think a better explanation of the current interest rates is that the Federal Reserve has been buying hundreds of billions of dollars in US Treasuries. Considering, they have an infinite supply of capital to do this (they create the money when they write the check), the market is not going to offset this via expectations of future inflation. So, the expectations are there, but US Treasuries are a rigged market, with one huge buyer debasing the world’s most powerful currency because it’s in the standard Keynesian manual for how to treat excess unemployment when inflation is currently low. Once the evidence of this short-sighted policy becomes clear, the inflation toothpaste will be out of the tube, and on to the next bubble-crash. 

That is, the expected return on bonds is negative, because bonds are in a Fed-supported bubble. Just look at gold to see what an


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There’s No Deal Yet: Here Are The Banks, Insurers, And Sovereigns Who Will Get Crushed In A Greece Collapse

There’s No Deal Yet: Here Are The Banks, Insurers, And Sovereigns Who Will Get Crushed In A Greece Collapse

Courtesy of Gregory White at Clusterstock/The Business Insider

Morgan Stanley Greece

Source: Morgan Stanley

The EU Presidency has announced a deal to save Greece, but there’s no deal yet — just a statement.

This is following the TARP path still — lots of talk, little action, and deep political opposition.

So, who are the parties that are just praying for a deal to come through?

We’ve gone through the research to figure out the banking systems, insurance companies, and countries that will get slammed if it all falls through.

Check out what will get hit the most if Greece defaults>

See also:

Bone Up On The 9 Possible Scenarios For A Greek Bailout (TBI)

Investors Place The Biggest Short Bet In The History Of The Euro (TBI)

Bailout? Greece Don’t Need No Stinking Bailout! (Phil)


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Short Sales: The Real Issue

Karl Denninger presents a compelling argument that market makers should not be exempt from rules preventing short-selling shares that cannot be borrowed (naked short selling). Because the quantity of a given stock in "float" is fixed, traders and market makers should not be allowed to create unreal and illogical bets on stocks that result in perversion of market dynamics and wild price swings. That’s my summary, Karl explains in detail. – Ilene

Short Sales: The Real Issue 

Stack of red gambling chips over two numbers on roulette table

Courtesy of Karl Denninger at The Market Ticker

Matt Taibbi once again writes in Rolling Stone, this time on naked short sales, and while he gets a good part of the issue right, he (and many others who have opined on this situation over the years) miss the forest for the trees.

Matt writes:

But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear’s mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman (GS). Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")

Matt gets so close, but fails in the closing.

See, there are two area of naked shorting that nobody wants to really deal with, yet both have to be if we are ever to make a difference. Let’s deal with them in turn.

The first, the writing of "naked" swaps, is one that I’ve written about before. The essence of a "credit default swap" is a contract whereby the buyer of protection insures…
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The FDIC to get credit from banks even while banks restrict lending

The FDIC to get credit from banks even while banks restrict lending

Courtesy of Edward Harrison at Credit Writedowns

Edward Harrison In the latest inexplicable move to extricate the U.S. banking system from crisis, the FDIC is reportedly close to asking the very banks it regulates for a loan to top up its balances. The plan is “strongly supported by bankers and their lobbyists” according to the New York Times.

Are you kidding me? This is the most preposterous thing I have heard yet.  How is the FDIC suppose to adequately regulate banks when it owes them money?  If your looking for a textbook route to regulatory capture, I present you Exhibit A. What’s more is banks are restricting lending right now.  How is this going to help that situation?

The New York Times, like the even-handed mainstream media outlet it is supposed to be, reports this story like it is something truly reasonable.

Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

No, bankers like this idea because it makes the regulator beholden to the regulated. Am I wrong or is this the worst idea you have heard since this crisis began?

More here.

CNBC video below

 


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Wall Street’s Ghoulish New Business

Wall Street’s Ghoulish New Business

Courtesy of Tom Lindmark at But Then What

Those lovable Wall Street ghouls have cooked up a new asset class to securitize — life insurance policies. I am not kidding you, they’re going into the business of buying life insurance policies from sick people, pooling them and then selling the securities to investors.

The NYT has the story:

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

apple cart and wall streetIf you find that last paragraph confusing, the reason it could upset the insurance companies’ apple cart is that many policyholders let their policies lapse as they get older. For a variety of good reasons they quit paying the premiums. If the policies are bundled into a security, the new owners of the policy will continue to pay the premiums religiously and thus alter the actuarial assumptions of the insurance companies.

This business has been around for some time but it’s always been on the fringes. There are some good arguments in favor of it but at the same time, it’s always seemed just a bit tawdry. Then again, a bunch of guys who flooded the world with fraudulent mortgages probably aren’t too bothered about that.

I guess the contra argument would be that while smaller outfits have been doing this for some time with no apparent


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Obama Drops The Hammer On Credit Default Swaps Traders

Obama Drops The Hammer On Credit Default Swaps Traders

Courtesy of Jay Yarow at Clusterstock

obama biden whispering tbiThe Obama administration has sent its plan to regulate those financial weapons of mass destruction, credit default swaps, to Congress:

WASHINGTON (AP) — The Obama administration on Tuesday sent Congress legislation seeking to impose broad new oversight on derivatives, the complex financial instruments blamed for hastening the global economic crisis.

The plan is designed to bring transparency to, and prevent manipulation in, a $600 trillion unregulated worldwide market. Credit default swaps, a form of insurance against loan defaults, account for about $60 trillion of that market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last fall, prompting the government to support the insurance conglomerate with about $180 billion.

In a point long awaited by the financial industry, the plan defines types of derivatives broadly in a way it says will be ”capable of evolving with the markets.”

The plan sent to Capitol Hill was the final section of the administration’s sweeping legislative proposal for overhauling the U.S. financial rule book to help avert a repeat of the meltdown touched off last year. It capped a series of measures rolled out in recent weeks by the Treasury Department.

Under the proposal, the big investment banks that trade the derivatives would be subject to requirements for holding capital reserves against risk and other rules. A new network of clearinghouses would be established to provide transparency for trades in credit default swaps and other derivatives. All so-called ”standardized” derivatives would be required to go through clearinghouses and to be traded on regulated exchanges or electronic trading systems.

Customized derivative products, by contrast, are designed for specific users in a transaction and would remain largely unregulated — a gap that some critics fear could allow abuses.

The plan defines standardized derivatives broadly. An over-the-counter derivative that is accepted by an official clearinghouse would be presumed to be standardized. In addition, the Securities and Exchange Commission and the Commodity Futures Trading Commission would get authority to prevent attempts by market players to falsely portray derivatives as customized to skirt the oversight of clearinghouses and exchanges.

CFTC Chairman Gary Gensler recently estimated that about 80 percent of derivatives…
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Hundreds of Businesses Are Run Out Of Capco’s Vermont HQ

Hundreds of Businesses Are Run Out Of Capco’s Vermont HQ

jokerburningmoneytbiCourtesy of John Carney at Clusterstock

The Wall Street owned insurer Customer Asset Protection Company, known as Capco, may not be an off-shore company. But it sure operates like one of those Cayman Island based tax shelters president Barack Obama has targeted.

Capco is the mysterious company owned by WallStreet giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms, and Fidelity, the mutual fund giant. Years ago Capco moved from New York to Vermont, where state law enables it to operate without disclosing much about its finances.

It’s official address is 100 Bank Street, Suite 610, in Burlington, Vermont. But if you go there, you won’t find an office marked with the name Capco. Instead, you’ll find an office marked Marsh Captive Solutions, which is a division of Marsh & McClennen that administers captive insurance companies. A total of 185 business are run out of Suite 610.

This brings to mind the story Obama used to tell on the campaign trail about “the outrage of a building in the Cayman Islands that had over 12,000 business — businesses claim this building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.”

So how big is Suite 610? We suspect it’s a small office with a bunch of secretary types and filing cabinets.  The reason it houses so many companies is that these captive insurance companies are registered in Vermont to avoid tighter regulations in other states.

For those of you who missed it, today Capco was dragged out of the shadows by New York Times reporter Zach Kouwe. The company was formed to insure customer accounts above the $550,000 of SIPIC insurance. The idea was that customers didn’t need to worry about the insolvency of their broker because Capco was insuring it. But now Capco appears to be massively insolvent, facing a possible $11 billion in claims from the collapse of Lehman Brothers with only about $150 million with which to meet them. New York State regulators are worried, and the Wall Street owners could wind up having to pay the bill.


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AIG Is Even Worse Off Than You Think

AIG Is Even Worse Off Than You Think

aig securities lending, clusterstockCourtesy of John Carney of Clusterstock

Remember the fairy tale about AIG being an otherwise healthy insurance company that just got a little crazy selling credit default swaps? Well, it’s time to put that one to rest.

The New York Times has reviewed state regulatory filings and discovered that "AIG’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect."

"More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella," the NYT reports.

Regulators have been turning a blind eye to this sort of thing because they are worried about putting the taxpayer investment in AIG at risk.

Read that again: we invested billions in AIG and now we can’t properly regulate it without putting that investment at risk. It’s a brand new type of regulatory capture. Great work, team.

 


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Goldman’s Secret Plan: Ignore Public, Give Themselves A Raise

Goldman’s Secret Plan: Ignore Public, Give Themselves A Raise (GS)

rainingmoney tbi - Goldman Sach's secret planCourtesy of John Carney at ClusterStock

But one of our favorite parts comes at the end, when Hagan reports that Goldman CEO Lloyd Blankfein isn’t really too worried about the "vampire squid" business. (For those of you totally out of touch, Rolling Stone described Goldman as a "vampire squid" that created and profited from every financial bubble in American history.) He’s actually pretty much indifferent to public perception, except when it affects internal morale.

And internal morale problems can be remedied with that universal solvent of bad feelings: more money.

From Hagan:

In the end, Goldman’s reputation is a luxury they may well be able to do without. Robert Rubin has been privately critical of how the firm has handled the threats to its prestige, and Rogers recently addressed the firm’s reputation in seminars with Goldman staff. But a person who frequently talks to senior executives at Goldman sums up the company’s attitude this way: “If we can push the envelope without D.C. punishing us, we don’t care about our Main Street reputation.” Blankfein in particular is said to be dismissive of the firm’s critics. According to a person close to him, the CEO believes Goldman’s internal problems will disappear once compensation comes back. In other words, money will solve everything.

With enough money, perhaps he can even get the taxpayers off his back. Last week, Blankfein took a stab at assuaging public anger by paying a $1.1 billion return on the government’s $10 billion investment last fall—not a bad profit. It was a shrewd move, a prudent PR investment that prompted a round of stories about the firm’s “generosity to taxpayers.” Feel better?

Goldman Sachs

 

 

 


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AIG may be worth nothing, so quick, get the bonuses out

Here are a couple updates on AIG, courtesy of John Carney of ClusterStock.

Citi Says AIG May Be Worth Nothing

aig securities lending

You may have forgotten that America’s deepest money pit, also known as AIG, is still publicly traded somehow. In fact, they did a 1-for-20 reverse stock split a week or so ago. Since then the financial calamity manufacturer has lost half its value.

So what should AIG be worth? Our feeling is that this company has so little knowledge about what its been doing that investors would be crazy to put a dime into it. Every few months we learn of a new toxic product line AIG dealt to others. First it was credit default swaps, then stock-lending and now some mysterious derivatives sold to European banks.

Citi analysts recently said that there’s a good chance that AIG could be worth nothing at all.

“Our valuation includes a 70 percent chance that the equity at AIG is zero,” said Citi analyst Joshua Shanker. The problem is that AIG owes so much to the US government that it would need to raise $135 billion before shareholders ever see a dime.

Doug McIntyre offers a contrarian take on AIG, noting that its current market cap is so low that buyers could actually make out. "With any luck, there will be a sliver of value left over for common shareholders. It is a big bet, but one that could pay off. If the equity in the company ends up being worth only $3 billion, investors could almost double their money based on where the stock trades now," he writes.

***** 

AIG Wants To Pay Financial Products Group $235 Million In Bonuses

aig building tbi

Uh oh. Here we go again.

From The Associated Press:

After its bonus payments ignited a firestorm of criticism earlier this year, American International Group is asking the federal government to weigh in on the insurer’s plan to resume paying millions in promised retention incentives next week, according to media reports.

AIG, once the world’s largest insurer, has asked the Obama administration’s compensation czar, Kenneth R. Feinberg, to approve the payments in order to head off any public outrage, The Washington Post reported Thursday evening.

While the company isn’t required to get the government’s blessing because


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Zero Hedge

Las Vegas Isn't The Only "Sin City" In America

Courtesy of ZeroHedge View original post here.

Authored by Adam McCann via WalletHub.com,

Las Vegas isn’t the only “Sin City” in America.

In other cities, bad things happen and stay there, too. From beer-loving Milwaukee to hedonistic New Orleans, the U.S. is filled with people behaving illicitly. No place is innocent. We all have demons...

Source: ...

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Phil's Favorites

Billionaires Are Licking Their Chops Over Distressed U.S. Oil And Gas Assets

Courtesy of ZeroHedge

Like the vultures Elizabeth Warren claims they are, billionaires are now circling over the soon-to-be dead corpses of companies in the U.S. oil and gas patch, as they look to pick up assets on the cheap.

This comes at the same time that the volatility (read: decimation) of the oil and gas industry has scared off many other investors, according to Bloomberg

Names like Sam Zell, Tom Barrack Jr., and Jerry Jones are all being tossed around as investors who are looking at distressed assets. Zell has teamed up with Barrack Jr. to look at oil assets in California, Colorado and Texas. Jones' company...



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Kimble Charting Solutions

New York Stock Exchange Double Topping or Sending A Strong Bullish Message?

Courtesy of Chris Kimble

A very broad index is testing last year’s highs, as monthly momentum is creating lower highs? Which indicator is more important, price or momentum?

This chart looks at the New York Stock Exchange Index (NYSE) on a monthly basis over the past 15-years.

The index peaked in January of 2018, as momentum was the highest since the peak in 2007.

The rally off the lows around Christmas last year, has the index testing the highs of January 2018. While the rally has taken place over the past 12-months, lofty momentum has created a series of lower highs.

Can you believe th...



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Insider Scoop

10 Biggest Price Target Changes For Tuesday

Courtesy of Benzinga

  • UBS raised AbbVie Inc (NYSE: ABBV) price target from $79 to $96. AbbVie shares closed at $88.73 on Monday.
  • JP Morgan lowered the price target for Intelsat SA (NYSE: I) from $22 to $9. Intelsat shares closed at $8.03 on Monday.
  • DA Davidson boosted the price target on Okta Inc (NASDAQ: OKTA) from $131 to $135. Okta closed at $121.15 on Monday.
  • Stifel lifted the price target for Leggett & Platt, Inc. (NYSE: ...


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Lee's Free Thinking

NY Department of Welfare Announces Increased Subsidies for Primary Dealers, Thank God!

 

NY Department of Welfare Announces Increased Subsidies for Primary Dealers, Thank God!

Courtesy of , Wall Street Examiner

Here’s today’s press release (11/14/19) from the NY Fed verbatim. They’ve announced that they will be making special holiday welfare payments to the Primary Dealers this Christmas season. I have highlighted the relevant text.

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the schedule of repurchase agreement (repo)...



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The Technical Traders

VIX Warns Of Imminent Market Correction

Courtesy of Technical Traders

The VIX is warning that a market peak may be setting up in the global markets and that investors should be cautious of the extremely low price in the VIX. These extremely low prices in the VIX are typically followed by some type of increased volatility in the markets.

The US Federal Reserve continues to push an easy money policy and has recently begun acquiring more dept allowing a deeper move towards a Quantitative Easing stance. This move, along with investor confidence in the US markets, has prompted early warning signs that the market has reached near extreme levels/peaks. 

Vix Value Drops Before Monthly Expiration

When the VIX falls to levels below 12~13, this typically v...



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Biotech

Why telling people with diabetes to use Walmart insulin can be dangerous advice

Reminder: We are available to chat with Members, comments are found below each post.

 

Why telling people with diabetes to use Walmart insulin can be dangerous advice

A vial of insulin. Prices for the drug, crucial for those with diabetes, have soared in recent years. Oleksandr Nagaiets/Shutterstock.com

Courtesy of Jeffrey Bennett, Vanderbilt University

About 7.4 million people ...



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Chart School

Dow Jones cycle update and are we there yet?

Courtesy of Read the Ticker

Today the Dow and the SP500 are making new all time highs. However all long and strong bull markets end on a new all time high. Today no one knows how many new all time highs are to go, maybe 1 or 100+ more to go, who knows! So are we there yet?

readtheticker.com combine market tools from Richard Wyckoff, Jim Hurst and William Gann to understand and forecast price action. In concept terms (in order), demand and supply, market cycles, and time to price analysis. 

Cycle are excellent to understand the wider picture, after all markets do not move in a straight line and bear markets do follow bull markets. 



CHART 1: The Dow Jones Industrial average with the 900 period cycle.

A) Red Cycle:...

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Digital Currencies

Is Bitcoin a Macro Asset?

 

Is Bitcoin a Macro Asset?

Courtesy of 

As part of Coindesk’s popup podcast series centered around today’s Invest conference, I answered a few questions for Nolan Bauerly about Bitcoin from a wealth management perspective. I decided in December of 2017 that investing directly into crypto currencies was unnecessary and not a good use of a portfolio’s allocation slots. I remain in this posture today but I am openminded about how this may change in the future.

You can listen to this short exchange below:

...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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