Courtesy of Money and Markets (fee based financial service), here is a good video that details how the Geithner PPIP (public private investment plan) really works.
Part I of the Geither PPIP video primer:
Part II of the Geithner PPIP primer:
The January 2009 Case Shiller housing price data was just released this morning. For the real truth on housing price trends, ignore everything (eternal cheerleading) from the NAR and MLS and go to the only source of REAL, UNBIASED and OBJECTIVE housing price data. Here is a compiled snapshot of the results, and as expected, the price declines continued in January.
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Covered calls are great for reducing risk in your portfolio, as well as potentially enhancing your returns. But the amount of protection provided by a covered call is often not enough for today’s insanely volatile markets. When you need more protection than the covered call will offer you, it’s time to consider the stock option collar.
Where a covered call will LIMIT only your GAIN on an investment, an option collar will LIMIT BOTH YOUR GAIN AND YOUR LOSS. A covered call is a 2 legged position – shares of an underlying stock in 100 share increments, and the SALE of a CALL OPTION against those shares. An option collar starts off as a covered call, but adds the PURCHASE of a PUT OPTION for added protection on the downside.
Consider the example below in the geldpress option calculator, which can be downloaded here. The top section entries (top arrow) is where the option collar simulation starts, with the following criteria shown in the example:
Notice that the effective cost of implementing an option collar is almost ZERO. The cost of the PUT option ($359) is essentially financed by SELLING a higher strike covered call ($395). At expiration, the gains on the stock are capped beyond $105 (the covered CALL strike). And the losses are capped below $95 (the PUT strike).
The simulation of all three legs (stock, covered call and put) of the option collar are shown above, assuming a stock price drop from $100 to $90, and time to expiration going from 40 days all the way to expiration (left to right).
With the collar in place and 20 days before expiration, and a $10 price drop, here is what happens:
And the real beauty of the option collar is the ability to adjust your position by doing one or more of the following, depending on your trading style:
For other ideas on Options Adjustment Techniques, BUY THE FOLLOWING BOOK:
Feel free to download and modify the tool to your liking, but remember, use at your own risk. There are NO guarantees.
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For a detailed guide on building OPTION PRICING Applications in Excel, BUY THIS BOOK.
The word “repartment” is not in the dictionary yet, but I have a feeling it will be soon. The term refers to a developer who buys an apartment complex with the intention of converting the units to condos. After dismal or no sales, the developer rightfully panics and re-converts the units to rentals.
The repartment trend is occurring all over the United States, including the Seattle area, including the Belltown Moda complex which is now a repartment community.
The eastside’s newest complex to repartment is Woodinville Village. Here is a write-up from Puget Sound Business Journal from April 2008.
Developers have put the cork back in the $200 million wine-themed Woodinville Village after two of its four winery tenants have backed out and initial financing efforts failed.
…The firm recently sent an e-mail notifying dozens of Woodinville Village’s prospective condo buyers that construction would be delayed — again. Many had eagerly signed up within the first 48 hours of the project’s initial offering last summer, (Geldpress comment: VERY DOUBTFUL!) and they expected construction to start this spring on the proposed mixed-use development that will include wineries, a boutique hotel, shops, restaurants, offices, a grocery, spa and 260 residential units when completed.
The original sale prices of the condos were so astronomical it’s not worth even mentioning. The developers brought new meaning to the term “Above and Beyond”, but it referred to the prices and not the quality. In the end, they never (substantially) broke ground on the new development, but they did convert the first phase of the adjacent rental untis purchased – “The Villas” – to condos. Those never sold, and now the repartment of those units is official. Here is a snapshot of the latest e-mail from the developer.
Some older Woodinville Village websites are still active: (for now)
The Villas (formerly Woodinville Village) may have started the eastside repartment trend, but they will certainly not be the last. On my recent unscientific tour of eastside condo developments, the common theme was a combination of construction complete and less than 20% sold.
It’s a sad day for viewers of CNBC’s Fast Money, as Dylan Ratigan will no longer be a part of it. From the New York Post:
THERE was high drama at CNBC yesterday as “Fast Money” anchor Dylan Ratigan quit — sources say today will be his last day on-air — and an insider is blaming his battles with network big Susan Krakower.
Whatever the reason for his departure, it will likely result in substantially fewer viewers for the nightly post market finance show. Since the beginning of Fast Money, CNBC has been plagued by frequent departures of the commentators. Unfortunately for the viewers, it’s usually the dull lemmings left behind at Fast Money, and those few that challenge the conventional “wisdom” of the markets end up leaving.
Now that Dylan is gone, there is only one commentator left worth listening to on Fast Money, and that’s the experienced and wise voice of Karen Finerman. Here is a recap of Karen’s latest ideas from segments aired this week.
Disclaimer: Trade at your own risk!!!
Air France shares were trading significantly lower today as the airlines announced for the 5th time this year that profits would be lower. One of the reasons for the lower profits is the expected $200 million loss from its fuel hedges gone wrong. From Marketwatch:
Making matters worse, hedges it’s employed have locked in fuel prices above the market’s level, Air France said. It’s expecting a 200 million euro hit from fuel.
It was not to long ago that nearly every CNBC commentator was praising Southwest for winning the fuel hedge gamble that kept them profitable longer than any other airline. This new twist in Air France’s luck exposes fuel hedges for what they really are – a big gamble. And in Air France’s case, the fuel hedge bet was a gamble that went wrong.
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Only one thing is clear regarding the AIG debacle and that one thing is that nothing is clear. Last week the current CEO Edward Liddy was paraded in front of congress and the media to answer questions regarding excessive retention bonuses. Since those hearings there have been reports of protests outside of some Connecticut homes of AIG executives. This came at a time when congress was threatening a 90% tax on AIG bonuses.
In a new twist, the New York Times profiled the recent AIG resignation letter today from Jake Desantis, who was allegedly working for only $1 per year along with CEO Edward Liddy. Jake Desantis has decided not to give back his yearly rentention bonus of $742,000, but will instead donate the money to “organizations that are helping people who are suffering from the global downturn”.
It’s a well written letter and perhaps one that will help dampen the public anger over current AIG employees. But despite the letter, you can be sure that the entire story is still not being told, even by Jake DeSantis. He may not have been part of the scandals that nearly destroyed AIG, but he does openly admit to being overpaid during his career – “Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.” All those “overpayments” have to come from somewhere.
The real tragedy of AIG is the failure of capitalism. A handful of idiots employees at AIG were allowed free reign to destroy the company, but the American government refused to allow it to go under. Systemic risk was to often cited for the need to prevent AIG’s collapse. Months later we all learned what that systemic risk really meant. AIG was not the only financial company with a handful of idiots who had nearly destroyed their companies and the entire global economy. What systemic risk really meant is that the government needed a scapegoat, and AIG was the obvious choice. They could spend hundreds of billions of dollars on an AIG bailout, and in the process bailout dozens of other incompetent financial institutions through CDS payments made through the biggest idiot on the block, AIG. According to businessweek, other U.S. financial institutions have gotten $43.5 billion of CDS payments from AIG, courtesy of the American taxpayer.
The new stock options book by James Bittman, Trading Options as a Professional, also includes a free copy of the Op-Eval Pro software. The free software is not as full featured as the many fee based options software packages, but it will do the trick. The software has 6 main functions for modeling stock option price behavior over time – single option analysis, spread option analysis, Graph view, Table view, portfolio view and distribution view. The images below are snapshots from the portfolio view.
First, if you are not familiar with stock option collars, go review the following:
The first image below is the initial setup of the collar in op-eval pro software, with the following assumptions:
The second screen below was created in the software by advancing time forward 20 days. Notice a few things that this free software will show you:
Software Limitations – The software is great for modeling simple positions or combinations through time. But the profit/loss graphs would be much better if they could be broken down into the various components – stock itself, and each option. The real power of options comes from the ability to monitor and adjust your options as time goes by. As an example, consider the possibility that the underlying stock in the example above goes from $100 to $80 in only 5 days. The stock loses values, but the PUT option and the Covered Call both GAIN MONEY. At this point, the experienced option trader would analyze the situation and possibly make an adjustment. One possible adjustment would be to take profits on both the PUT option and the COVERED CALL. If a quick share price recovery is expected, then you could feasibly wait for the recovery, and then RE-APPLY the COLLAR. Or, if a recovery in share price is not expected, a new collar could be placed near the new $80 strike price (after taking profits on the first collar components). These types of scenarios would be very difficult, if not impossible, to model in the Op-Eval Pro software.
Despite the limitations, the Op-Eval Pro software is decent and functional, and for the price (included with the book), you can’t beat it. It is probably adequate for beginner and intermediate option traders, especially when combined with James Bittman’s book Trading Options as a Professional. The book is great for option traders at all levels, from beginner to advanced. It is one of the best organized books I have seen on stock options. It goes into great and well written detail on the nuts to the bolts of the option market – the fundamentals, the greeks, synthetic relationships, arbitrage, volatility, a few spread systems and strategies, greek neutral trading (Brilliant write-up on this topic), and position risk and money management.
Click below to purchase James Bittman’s new book on options:
Trading Options as a Professional: Techniques for Market Makers and Experienced Traders by James Bittman
For a detailed view on how to better monitor and adjust option positions, then buy the book below with it:
The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour
The department of the treasury has the foreign bond holder information updated through January. There is a disturbing negative trend in the numbers, as shown below. I first wrote about the risks of decreasing purchases from foreign bond holders last month, and now it is apparent that those risks have materialized.
What is a highly indebted nation to do when faced with the difficult task of managing over $11 trillion in “reported” debt, while at the same time finding new foreign buyers for an expected $2 trillion yearly deficit? The answer has been discussed at length in the news over the last week, but you may have missed it. Craig Steiner (Common Sense American Conservatism blog) correctly predicted the answer when he said “the Federal Reserve will borrow the money they can borrow… and print the rest”
The current $11 trillion dollar national debt was financed by selling bonds. But as that debt burden grows to unsustainable levels, investors get nervous about the sanity of additional purchases. When that happens, the alternative is to MONETIZE THE DEBT. AllExperts.com sums up monetization of debt as follows:
the government can “monetize its debt” by borrowing from the US Federal Reserve system, which is nominally under private control but is really just another part of the government. In this case, the government sells its bonds to the Federal Reserve, which creates new bank deposits out of thin air and uses them to pay for the bonds. This process creates new money and expands the money supply: hence it is called “monetizing” the government’s debt.
For a clue to how debt monetization ends, look to Germany after World War I. Left with a deteriorating economy, and a huge repatriation bill, their defense was to simply print more and more money. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the war. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. (Source: Encyclopedia Britanica) The situation got even worse, with newspapers selling for $100 billion marks!
Bloomberg today reported on the U.S. quest to begin monetizing debt. It’s somewhat subtle and very toned down in the Bloomberg write-up, but we are in fact navigating down a very dangerous road!
Federal Reserve Chairman Ben Bernanke said the central bank is trying to counter “widening credit spreads” that are blunting efforts to pump cash into the economy after the Fed cut the main interest rate almost to zero.
This week’s Fed decision to buy $1.15 trillion of Treasuries and housing debt is “intended to improve conditions in private credit markets,” Bernanke said today in a speech in Phoenix…
Policy makers said on March 18 the central bank will try to end the worst financial crisis in seven decades by buying as much as $300 billion of long-term Treasuries and more than doubling mortgage-debt purchases to $1.45 trillion..
Be sure to check out the foreign debt holder summary below, and take notice the negative trend, which likely caused Uncle Ben to begin monetizing.
ABC News just profiled a story on Ken Karpman, the ex-CEO who is now delivering pizzas for $7.29 per hour and living off of taxpayer funded food stamps. After getting two degrees from the UCLA, he landed a job as an institutional equity sales trader. Apparently unimpressed with his $750,000 yearly salary, and his 4,000 square foot Tampa home on the golf course, he quit his job to start a hedge fund.
Karpman was so confident in his good fortune and the strong economy that he left his job in 2005 to start his own hedge fund. To pay for the new business and their standard of living, Karpman quickly burned through $500,000 in savings and, like so many Americans, took a line of credit against his house.
[Geldpress comment] Any guesses how that ended up? You guessed it, the hedge fund collapsed, like so many other hedge funds managed by gamblers ex-traders who believed in the power of easy money, and who had no concept of risk management, let alone the definition and proper implementation of a “hedge”.
The ABC News story continues…
Desperate for quick cash, Karpman tried to find a job bartending but came up empty. Finally, he drove his Mercedes to Mike’s Pizza & Deli Station in Clearwater and applied for a job.
[Geldpress comment] Apparently, it never crossed Ken’s mind to SELL the Mercedes and buy a used Chevy.
The ABC News story continues…
…The Karpmans are now on food stamps and a tight budget that doesn’t nearly cover their children’s $30,000 private school tuition.
The family’s jet skis now collect dust in the garage near the Mercedes, with its broken transmission they cannot fix.
Stephanie Karpman has closets full of clothes and handbags she likely won’t be able to take with her and is eyeing consignment shops as a place to unload them. She said she has found herself going through her closet and wearing clothes she hasn’t touched in years.
[Geldpress comment] – Does ABC News really expect to gain sympathy for the family forced to drive a Mercedes, with a garage full of jet skis and other toys, and kids in a $30,000 per year private school?
The ABC News video interview also mentions that the Karpman’s have not paid their mortgage in 2 years, and may lose their home in the next few months. It just begs the question of WHY a foreclosure would take over 2 years. It sucks for a family to lose “their” home, but I still firmly believe that the best medicine for a family struggling to pay (or not paying) their mortgage is a foreclosure, and apartment living within their means. The Karpman’s had their golden ticket but over-leveraged themselves on a hedge fund gamble, and now must pay the price.
Special message to ALL “black box of finance employees” – leverage is a bitch. It works great on the way up but does have a way of biting you in the ass on the way down. Did you really learn nothing from Enron? Did you really think that 30, 40 or 50 to 1 leverage was sustainable? Did you really think that starting and succeeding a hedge fund was easy? Did you really think over leveraging an obvious credit bubble would work?
Sorry Ken, you have no sympathy from me, but I am impressed with your humility in taking a REAL JOB, in an industry that produces a REAL, TANGIBLE, and UN-LEVERAGED products.