Searching For Income Alongside The Fed And The Eurozone

Includes: AAPL, DE, NLY
by: Michael Shulman

The Fed has put a lock on interest rates – the bond market pretty much knows what short-term and ten-year interest rates will be for a couple of years – or longer. Corporate bonds are not very pricey; ditto for safe municipals; the best yield can be fond in Greek bonds, but well, let’s not go there.

In this era of financial instability, political and financial uncertainty, and economic, financial and political malaise, where does an individual investor find relatively low-risk assets to generate monthly cash and income? The market itself.


There are three things driving the market: economic weakness and recession, financial instability, including the internal chaos of the market itself and political uncertainty as it is government that is now the backstop of the economy, not the banks, not business, not individual spending. The prognosis is pretty clear for the next two years at least.

I am not interested in GDP data that gets revised and revised again, and I bet three years from now will show we grew one percent, and not 2.5%, in the past quarter. Real world unemployment and under-employment is 23% or more, not too far form Depression-era levels and the labor force participation rate, the critical driver of national income and consumer spending, is the lowest since data has been collected by the Bureau of Labor Statistics. Bottom line: We never really left the last recession, and between European uncertainty and political chaos in the US, here we go again. Until the housing market rebounds – based on the current rate of defaults and foreclosures, that is 2016-2017, nothing else happens.

US and European banks are wobbly again – in the US, due to a lack of transparency in the fictions they call their balance sheets (and what they hold off balance sheet). No one knows -- although we do know those toxic assets are not gone, and if we re-instated accounting rules from 2008, many banks would be insolvent. European banks are far, far worse off, especially those paragons of virtue, the Germans banks. They hold toxic assets from the last crash, and now have a lot of Greek, Portuguese, Irish, and Spanish debt.

They too have been saved from insolvency by the European Central Bank, changing rules on what constitutes core capital. And they are going to get another hit when kicks in. Austerity is hitting everyone – everyone want to be German, don’t you see? – and Greece will have 20% unemployment, Portugal will have close to that, Spain is already above 22% and Italy will go into double digits next year. That means the Germans cannot sell them as much stuff, and with China slowing down and Iran up to its ears in centrifuges and bunkers, the German export machine will slow, and I expect their unemployment rate to top 7% by year-end 2012. Weak economies means weak lending and mounting bad debts, and that is more trouble for already troubled banks.

Politically, the big winners are Comedy Central, Politico, and hot dog vendors making money hand over fist feeding the Occupy Wall Street crowd. Actually, they probably get their food at Starbucks, solidarity with the downtrodden baristas and all that. Nothing is going to happen to solve deficit and debt problems in a serious way until after the presidential election, and given the way Mitt and the Seven Dwarves are performing, Obama will be back in office. If Romney does not win the nomination, Obama won’t even have to waste money campaigning (so say the polls, not me; I do stocks, not politics).

In Europe a technocrat is taking over Greece; a technocrat is going to take over Italy. No one cares about Greece now that Italy is a problem, but when Greece needs a second default next year, it will probably leave the euro, or something equivalent to that, in an “orderly” fashion. Oh, yes, the 50% haircut on Greek bonds planned for the next few weeks is not enough, for it is only privately held debt and does not include bonds held by the ECB or ESFS. Their debt will still be too high, the economy will be in depression, default coming. And with that a rejection of austerity that may stay in Greece, may spread to Portugal, it will not spread to Italy. And through it all, political indecision and instability.

All of this is a traders’ dream – uncertainty, chaos, spikes, moving in and out, going to parties and bragging about how much money you made (forgetting how much you lost the day before) and so on. Right now, the market is a casino; as we go through this, it will become a casino owned by the sheriff’s brother.

And that is how you make money, generate consistent monthly cash and income. Sell the market what it wants. It wants to buy options to capitalize on chaos, sell them options, puts or covered calls, the latter being written against long term core assets you plan to hold for 5 to 10 years.

In my service, Options Income Blueprint, I shoot for 1.5%-2% a month return on capital, and can do better than that if I aggressively write calls on core assets such as Apple (NASDAQ:AAPL) – writing monthly calls on AAPL I can generate a 15%-18% dividend.

I have been called out just once, and I got lucky; the stock opened up below the strike price on Monday, and I bought it back. It is a dream long-term asset, like other great outfits such a Deere & Company (NYSE:DE). Own them, ride out volatility, and write calls along the way -- every month, or in the case of AAPL and DE, every week.

I have never been put a stock, ever.

In turbulent times, I also play the names that directly benefit from fear – gold, gold miners, silver and the volatility index, the VIX. I also turbo-charge my dividend stocks, such as Annaly Capital (NYSE:NLY), writing calls and puts and turning their hefty 14% dividend yield into something north of 20%.

Ignore the world a bit more than to have learned to ignore the world in order to get out of bed in the morning. Take what the market gives you – cash – and sell those traders some risk. Every week, every month.