The stock market’s rebound from the lows of March has been amazingly strong and is beginning to make many wonder whether stocks have become overvalued again. Without doubt, the lack of desirable alternatives to stocks continues to fuel the rally. Stocks may no longer be such a bargain, but with cash yielding nothing and 10-year treasury bonds yielding 3.4%, what are the options?

For those who are not eager to accept the low yields offered by cash and bonds and are nervous about enduring the volatility of the stock market, I propose an alternative: selling call options against stock holdings (also known as writing covered calls). This strategy generates income and reduces the risk of the portfolio, while giving up some of the upside of holding stocks. I consider this a particularly attractive strategy for those who are retired or near retirement and need to derive an income from their investment portfolio. As stocks are called away (when their price is higher than the strike price at expiration) the equity part of the portfolio is reduced and stocks are sold at prices that have been determined to be acceptable.

Now, I realize that none of this is much comfort for Americans who are still out of work or struggling to make ends meet. And when we receive our monthly job report next week, it is likely to show that we are continuing to lose far too many jobs in this country. As far as I’m concerned, we will not have a recovery as long as we keep losing jobs. And I won’t rest until every American who wants a job can find one.”

Low inflation expectations

The best example of this is an infamous Business Week front-page story entitled “The Death of Equities,” published in August of 1979. Then, as now, investors were weary of a long, painful bear market. While that story didn’t mark an exact bottom in the market, in the two decades that followed the S&P 500 increased more than tenfold.

Yet, as high as stock valuations were in 1998, people were generally very eager to buy stocks then, just as people cannot seem to get rid of stocks, or any risky assets, quickly enough now. Given the uncertainties ahead, it is understandable that many investors are waiting to see clear signs of a bottom — there is nothing to keep cheap stocks from getting cheaper.

The last time this indicator flashed a buy signal was on August 31 of last year. I wrote about the signal at the time and gave my reasons for taking action cautiously. In short, the market was still near peak levels, a credit crunch was starting and the economy seemed to be heading towards a recession. The caution was warranted, as the signal, which closed on May 29, turned out to be the only unprofitable such signal since the indicator’s inception in 1994.

Out of the 20 biases Pompian discusses, I have singled out 8 which I consider most relevant at this time. In order to keep my blog posts within reasonable length, I will divide these into two sections. The biases are separated into emotional biases and cognitive biases. This post will deal with emotional biases and the next one with cognitive biases. I am not making any specific recommendations, but merely reminding you to be aware of these common pitfalls.

Looking at a shorter period within that drought, we can see a prolonged bear market that started in January of 1973. The highs of that first month were not permanently surpassed until September 1982. That is over 9 ½ years.

The ultimate survivor of this process was Syneron Medical Ltd. (ELOS), an Israeli company which makes non-invasive aesthetic medical products using proprietary electro-optical technology. Its products are used for a wide range of aesthetic applications, such as hair removal, wrinkle reduction, rejuvenation of the skin’s appearance and treatment of cellulite.

After a prolonged period of low volatility, investors start to feel comfortable taking on greater risk, often with borrowed money. No matter what the latest risk control methods are, it is inevitable that an increase in risk-seeking behavior and use of leverage will eventually lead to a spike in volatility, as has been witnessed in the markets in recent weeks.

In an environment where tankers are in short supply, Tsakos has managed to build a modern fleet with several new ships being delivered in coming years. This has also allowed the company to realize profits from sales of older ships. Such sales have already been announced for the second and third quarters of this year, adding $31 million to the bottom line each quarter.

My approach here is to first look for financial institutions with attractive valuations and then find the ones that are least exposed to the aforementioned risk factors. For the valuation, I set up a scatter diagram with a five-year average return on equity on the x-axis and price / book value of equity on the y-axis. As we want to find banks with a high return on equity in relation to P/B, we focus our attention on the data points below and to the right of the trend line. Each dot on the graph represents a large bank (the smallest has a market cap. of around $15 billion). Most of them are North-American with a couple of European banks thrown in for good measure.