Jib-Jab

I thought that would be a good title for inauguration day, Jib-Jab.

I had a lot of comments posted yesterday that I wanted to try to address this morning.

One comment came from someone that is concerned that we may have down a lot in the stock market very soon. The comment cites Faber, Roach and so on. The commenter (is that a word?) also says he sees several things on the charts that make him bearish. He wanted my opinion on debt, spending, asset bubbles an so on.

The thing this person should care most about (and I believe he does) is what will all the legitimately scary things do to the capital markets. The honest answer is I don't know. I have opinions I'll share but the most important thing to me is that the market will warn us if there is a problem for demand of equities. The 200 DMA for the S+P 500 (broken record time) is down at around 1130 or so. Regardless of my opinions about any of this stuff, a breach of that moving average will cause me to get defensive one way or another. There are a few different ways to accomplish this and if/when it happens I'll go over my plan, I don't have it finalized because drifting down as opposed to crashing down might cause me to act differently.

Everything that Faber and Roach say about problems the US has are true. We don't save, we have too much debt, in certain markets RE is too high and so on. These conditions have ebbed and flowed for years, we are currently at one extreme of the oscillator for them. RE can't crash because there is no national market. That does not mean that prices in Boston and the Bay Area can't drop painfully. We have already had a nasty correction in Las Vegas. I have no doubt that in certain places the wave of interest only (IO) mortgages could have negative consequences in some places. I tend to be a glass half full guy but pockets of real financial despair seems possible to me.

To close out on this readers comments he asks about over valued markets. Assuming he means stock markets, I would say we do not have overvalued markets. What I mean is that the S+P 500 is down about 21% from its 2000 high. The Nasdaq is down almost 60% from its high. The Russell 2000 is up 38% in the last 4.5 years, a little less than 9% average over that time. To me that is clearly not a bubble. The bottom line is that my clients aren't relying on me to guess correctly. I have written before that I don't think we will have down a lot in here, but I don't care about being right. I maintain my clear and simple exit strategy which is more important than my opinion.

The next question was about the impact of trading costs on my ETF dividend replacement idea. I touched on this at one point in the article, I assumed $10 per trade. If you are a 10 lot trader (10 lot is jargon for trading 10 contracts) and you pay $10 or $20 per trade you are not really changing the trade. If you are at a wirehouse firm and you pay $50 per trade it becomes less attractive. Using the XLB example from the article, I wrote about selling the June 32 calls when they were bid at $0.20. So if you sell ten contracts you bring in $200 less $15 for commission is still $185. Do that twice a year and you have $370. That generates an extra 1.25% for calls that are about 10% out of the money. In dividend terms I think that is substantial, given that XLB yields 1.7%. After yesterday's selloff and the way we will start today, all the numbers are different. But there is nothing that says you can't buy the underlying ETF one day and sell calls later. Please remember the numbers were real when I first wrote the article but these are just examples I'm not recommending you buy XLB.

There was another comment about the option article wondering if the ETF/call combo was better that an individual stock because you create a very high stock like yield. Good question and I think it depends. Using utilities to address this one, I own three utilities for clients to capture a high yield and low beta. All three have out performed XLU over 3, 4 and 5 year periods but lagged for one and two years. XLU did very poorly in 2001,2002 due to Enron and Dynegy. While I still like the individual stock better, the question makes a compelling argument. Of course I could sell calls against the individual stocks and take the yield from 4.5-5% to 6.5-7%.

Lastly were a couple of comments about Marc Faber. Faber is smart because people say he is (humor attempt). I can't cite his tack record. I can say that I have read his stuff and seen him interviewed over the years and he does have insight into things. His seeming to be anti-American is a valid criticism. My approach to everyone I read or see is to try to learn about what they do to come to their conclusion not what their conclusion is. Process not product. I believe Faber is smart, smarter than me. That does not mean he will be right more often than anyone else though.

One of the reasons I write this blog is to share my process I'm no rocket scientist to be sure but I am not as dumb as the man eating ice cream at the top of this page appears to be either. Take my process, Faber's process and others and come up with your process (or more correctly continue to refine your process). This is, I believe is the value of the blogosphere.