Geldpress

Andrew Hall is back in the news lately, this time fo his role in contributing to a $104 million pretax loss to Phibro, the commodity gambling trading spinoff from Citibank.   Back in 2008, Andrew Hall made an enormous energy gamble using the capital of Citibank, based on explicit United States government guarantees.  There were essentially two possible outcomes of that gamble.  If it paid off, then Hall would “earn” an enormous bonus.  If the gamble failed, it would have failed on the backs of every American taxpayer, and Hall would have still received his outrageous paycheck.

Way to go, Hall.  You successfully extracted $100 million from the taxpayer via a coin toss lucky gamble, but at least you are now exposed as the fraud you are.

The Wall Street Journal just had an interesting piece on The Hidden Costs Of Mutual Funds.   For most long term investors that do not dollar cost average, an ETF approach may be a better alternative than the mutual funds, which come with significant management fees.  As an example, consider the Fidelity Select Transportation mutual fund, which according to the Fidelity webpage, carries an expense ratio of 1.03%.  The iShares transportation ETF, on the other hand, carries an expense ratio of less than half that, or .48%.

Back to the hidden costs article.  The WSJ notes that the mutual fund management fees are just part of the espenses:

In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc.

But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.

“These trading and transaction costs are very real,” says Stephen Horan, head of professional education content and private wealth at CFA Institute, a nonprofit association of investment professionals. “While it’s very important to look at that expense ratio, it’s just not going to capture” all of the costs, Mr. Horan says…

A study updated last year of thousands of U.S.-stock funds put the average trading costs at 1.44% of total assets, with an average of 0.14% in the bottom quintile and 2.96% in the top.

Adding a financial advisor into the mix could eat even more into the returns of your funds.  A typical financial advisor would pass along the management and trading fees already associated with the funds.  But they would also add their own management fees to the mix, justified by their “expertise” in picking the funds on your behalf.

If all of those fees are a bit shocking, and you want to learn more about the lower cost ETF approach to investing, you should check out one of these two books:

The ETF Book is a great start for those wanting more in depth information on ETF’s and a more hands off approach to buying into the low cost ETF craze.

The ETF Book: All You Need to Know About Exchange-Traded Funds by Richard A. Ferri

If you are looking to supercharge your ETF investing experience, then consider Trading ETF’s.  It adds more in depth information on ETF trend analysis, entry and exit timing criteria, and even sections on balanced portfolios – mixing a handful of short ETF’s with long ETF’s.

Trading ETFs: Gaining an Edge with Technical Analysis by Deron Wagner

Also check out:

• Most Active Optionable ETF’s – Lower BID ASK Spreads
• Correlation Error With Leveraged ETF’s
• Portfolio Hedging With Index Puts
• Married Puts, Collars, And Hybrid Hedging
• Portfolio protection – hedging todays roller coaster market ride

Washington state, like so many other states in the union has huge budgetary problems. An OpEd opinion in the Seattle Times recently asked leaders in the state for their advice to our legislature.   There were two opinions showcased, one of which appeals to the peoples emotions with little regard for financial responsibility.  The other co written opinion was dead on the money about everything wrong with general government spending habits, and Washington state’s specifically.

Richard Davis, the president of the Washington Research Council and Kriss Sjoblom, the council’s economist and vice president of research offered up these choice words.

…What’s been called the state’s structural deficit — an enduring mismatch between revenues and spending — may be better understood as a durable legislative appetite for betting on windfall revenues to bail out overextended budgets. To a remarkable degree, budgetary gambles have paid off over the past decade, as the tech, housing and construction bubbles swelled state coffers.

In 2007, lawmakers raised the stakes, writing a two-year budget that increased spending at twice the forecast rate of revenue growth. Because of the Great Recession, however, 2007-09 revenues came in well below forecast. Only the 2009 federal stimulus windfall averted an even greater budget disaster. The federal monies will be gone in 18 months.

The National Governors Association estimates state budgets will be in the tank through at least 2014. Recent statistics from the Philadelphia Federal Reserve Bank peg Washington’s economy as the fourth-weakest in the nation at present.

It is past time for lawmakers to reset spending and focus on economic growth…

That pretty much sums up the root of our problems.  When additional spending is desired beyond the projected revenue levels, the quick and irresponsible means to achieve additional spending is to just raise the revenue projection numbers – whether achievable or not.

Also See:

• Washington state debt history – does Dino Rossi understand it?
• The United States Has Not Had A Balanced Budget Since 1957!
• The United States National Debt Limit Has Become A Joke
• California Goes Broke – Issues IOU’s
• California’s Exploding Debt Problem

There are dozens of good book on options trading theory and practice.  But there is only one I have seen that does a great job with covering the inevitable – how to manage, adjust and refine losing option trades.  And that book is just about to get better with a newly revised edition.  Click the link to pre-order your copy today.  Or if you already have a Kindle, you can access the new book immediately.

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Were you one of the ones that thought the financial collapse would never happen? Did you think Bear Stearns, Lehman Brothers, Washington Mutual, Citibank, and AIG would never collapse? Did you think our national debt would ever approach $12 trillion dollars, with an additional $12 trillion in off balance sheet “bailout obligations”? And do you still think its completely safe to buy California municipal bonds and Federal treasuries?

If you answered YES to any or all of these questions, then perhaps you might be interested in reading This Time is Different – Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. Industrialized nations quickly forget their debt obligation defaults throughout history. When the authors published a paper on global defaults, they received official letters from around the world of nations denying that they ever defaulted. In the case of Japan, when the authors corrected them with the proof, Japan’s remark was “Well OK, but it was only to our enemies”.

If you are interested in the history of financial crisis’s, currency collapses, and the history of government defaults, then this book is for you.

This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart

There are several posts on covered calls at Geldpress, including:

• Time for cover – the covered call
• Covered Calls – Scottrade, Tradeking, Fidelity
• The VIX index and covered calls
• Covered Call Writers Love High Volatility
• Picking A Strike Price For Covered Call On McDonalds
• Covered calls – removing the covers and going naked

I successfully use covered calls, married puts and collars within my own accounts on a regular basis. My recent trading activity in Mosaic (symbol MOS) will show some examples of covered calls and their adjustments.  It is not necessary to keep a covered call on though the expiration date.  When the underlying stock within a covered call drops significantly, there will often be an opportunity to buy back the covered call (BUY TO CLOSE) for a modest profit.  Buying back the covered call early leaves the shares naked, and fully able to capitalize on a rebound in share price, without the limits of the profit restricting covered call.  It is purely a judgement call on exactly when to buy back the calls, but as a general rule consider buying back covered calls early for the following reasons:

1. You are still bullish on the underlying shares, and happy to own them naked (without the protection of the covered call)
2. You can realize a significant profit on the covered calls by closing them early, and there is a potential for a rebound in the share price.
3. The potential for realized profit occurs with at least 1-2 weeks prior to expiration.

A summary of the points regarding the activity above:

• Purchased 400 total shares at an average price of $51.39
• Sold (2) MOS Sep calls for $2.86 and (2) MOS Dec calls for $6.91 – SELL TO OPEN
• On Sep 10th, I rolled the Sep calls to October for more protection and to collect more premium.  This resulted in a $210 realized profit from the (2) sep 50 calls when they were closed (BUY TO CLOSE).
• On Oct 5th, with Mosaic stock down, I bought back the Oct 50 calls for a $566 realized profit.
• Mosaic reported earnings on Oct 5th at the close.  To prepare for a potential disaster, I protected the Mosaic position by buying (4) Sep 45 puts. (married put)
• With earnings over, I sold off the puts on October 6th.  I took a realized loss on the puts of $376.
• On Oct 6th, I re-covered some of my naked Mosaic position by adding (1) Nov 50 covered call.  The final 100 shares were left naked to gauge the reaction of the market on Mosaic over the next few days.
• On Oct 16th after a small rally in Mosaic (I was hoping for a major rally, but settled for a small one), I covered the remainder of my shares with another November covered call.  Note that by waiting, the second covered call sold for $120 more than the first.
• My current position is long 400 shares of Mosaic, short (2) November covered calls, and short (2) December covered calls.

The point of the above is only meant to display one such example of trading, rolling and adjusting covered calls, and not to dissect all the other possible trading ideas possible – better or worse.  Trading is a judgement call, and the above is a recent history of my own trades and adjustments based on how I felt at the time the trades were made.  You are free to have your own opinions.

Disclosure: Still long Mosaic covered calls.

Disclaimer: Trade at your own risk!  The above is an example only of recent activity in my own account, and not to be considered an opinion or trading advice of any kind.

For more information on covered calls, please consider purchasing one of the following books:

Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper

Covered Call Writing Demystified: Double-Digit Returns on Stocks in a Slower Growth Market for the Conservative Investor by Paul D. Kadavy

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Despite all the newly released investing and trading books available. some of the older ones still remain on the top of the “must have” list.  Price Headley’s Big Trends in Trading is one of those. 


The book is divided into three major sections.

1. Getting the Market Right First – info on put/call ratios, Bix, mutual fund flows, volume and other indicators, and survey systems.
2. Stock selection techniques – ket technical indicators such as classic trend indicators, acceleration bands, momentum divergences, relative strength and more.
3. Options – a mixture of stock options strategies, trading psychology and money management.

The Price Headley trading rules are one small section of part 3.  Price’s well defined trading system is detailed out and is a model for anyone to use as a guide to developing their own system.  It’s a well known fact that all successful traders have one thing in commmon – a written plan to guide them in their quest to master the markets.

Excerpts from Price’s plan follow.

PRICE’s PRUPOSE:  To continuously learn and grow to become the best trader I can be, by simplifying and focusing my energy to achieve a balanced, centered state that controls the emotions of fear and greed, allowing me to take action when my analysis says the time is now.

PRICE’S PHILOSOPHY:  Big Trends – via Accelerations, Divergences and Relative Strength – to define the best opportunities.

Price also provides more specific trading suggestions that can be used in your own plan, such as:

• focusing on a small number of trades
• take big profits and small losses (sounds simple, but I have read or hear many top notch traders quote the same concept).
• Adjusting stops with the market
• Pre-planned entry and exit points – BEFORE placing the trades

The appendices cover a stock picking checklist, types of orders (contingency order, market and limit orders, not held order, once cancels the other, all or none, fill or kill), favorite web sites, and last but not least the favorite quotes.

“There is only one side of the market and it is not the bull side or the bear side, but the right side.” – Edwin Lefevre, Reminiscences of a Stock Operator

Big Trends in Trading: Strategies to Master Major Market Moves (A Marketplace Book) by Price Headley

The San Francisco Money show started today with a handful of keynote speakers, including Steve Forbes, who delivered the final speech.   If his republican bias was not apparent beforehand, it was pretty clear during his presentation, entitled “Battling the Anti-Capitalist Administration and Washington Politicians–Can They Be Stopped“.

Forbes delivered some compelling arguments on what makes sense for healthcare reform, such as removing restrictions that prevent consumers from buying health insurance across state lines.  He seemed to oppose most of the reforms being pushed by the Obama administration, and cited the example of Britain denying dialysis treatments to the elderly purely due to costs.  Here is a google books link that briefly mentions this, but it’s not entirely clear if these treatment denial policies are still in effect today.

On the topic of government size, Forbes supports small government, lower taxes, and a free market system.  He was of the opinion that the only reward for failure in this country occur in government and not in private industry.  This, we know is completely false, especially in light of the multi trillions in recent government bailouts of private enterprise financial institutions.  Sorry Forbes, nice try.  Almost immediately after this pro-private enterprise anti-government intervention remark, he seemed to give his approval of the bailouts by stressing what a mistake it was to let Lehman Brothers fail.  He also seemed disappointed that the government had not yet stepped in to buy worthless consumer credit card debt from private enterprises.  Despite the obvious misgivings and contradictions in his beliefs, it was a pretty entertaining speech.

Fibonacci retracement levels are a popular and sometimes wildly successful trading method.  It can be thought of as either a technical trading tool, or even a psycological trading tool.

Leonardo Fibonacci was born in Pisa Italy in the 12th century.  His father Guglielmo was a trading post director near Algiers.  Leonardo often travelled there to help his father and became fascinated with numbers and trading.  At the age of 32 he published Liber Abaci, or Book of Calculation.   One problem discussed in the book was the hypothetical population growth of rabbits, which was based on a sequence of numbers called the Fibonacci numbers.  In the sequence, each number is the sum of the preceding two – 0, 1, 1, 2, 3,  5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on.  And the ratio of any number to its subsequent number approaches the golden ratio, or .618.  That golden ratio is very popular in nature, and is also sometimes effective in predicting retracement levels in the stock market.

Creating Fibonacci retracement lines is very easy to do from within Optionsxpress.  First, select Flexcharts from the Quote menu.  Next enter the desired symbol or index, select the timeframe and line type, and use the select tool to choose Fibonacci retracement, as shown below.

Fibonacci retracement lines are drawn from two extreme points within a clear past trend.  They can be drawn on a minute by minute day trading chart or a larger weekly, monthly or yearly chart.  The example below is from a 6 month daily chart of Walmart, and the Fibonacci lines are drawn using the peak and low from the large downward trend during April.  Once the Fibonacci retracement select tool is chosen, just point and click twice on the chart – once for each extreme point within the desired trend.  The example is shown below.

Exactly how well do these retracement zones work?  That you will have to decide for yourself, but do it with your own money and at your own risk! I would also recommend reading a bit more on the subject before diving in with real money.

For a more in depth explanation of Fibonacci trading, I highly recommend the following book:

Fibonacci Trading: How to Master the Time and Price Advantage by Carolyn Boroden

Here is the latest snapshot from the prophet.net free industry group rankings, showing which industries are drawing in the most money.  The market has been on fire for the last several months, all while delivering fatal sucker punches to those who remain short.

Is this continued rally a sign of real economic growth and recovery, or just another suckers rally and head fake before the next leg down?

Answer:  It doesn’t really matter.  The strategy of the Geldpress trading team remains the same.  Continue to ride the wave up, but remain cautious, and keep the position hedges on – covered calls, married puts or collars.

Also see:

• Covered Calls – Scottrade, Tradeking, Fidelity
• Time for cover – the covered call
• Married Puts, Collars, And Hybrid Hedging
• Option Collar Length – Front Month Or Leaps