Arnbjorn Ingimundarson

What if U.S. Social Fabric Tears?

I am by no means a leftist and I think this is an excellent article. There is no country where the bottom 20% has it very good (that is how many are unemployed in Spain currently), but it is not hard to imagine how social cohesion might break down in the U.S. if the ranks of the poor grow much beyond their current size. That could lead to some unfortunate changes in the political climate, as mentioned in the article, and as some might say is already happening.

NASDAQ OMX Group – Over the Counter appears Undervalued

Thanks for the idea. I'm guessing the expiration date should be Jan 2011 instead of 2010, in case you want to correct it before the article gets published.

The U.S. could lose its AAA rating if it fails to reduce its deficit over the next 3-4 years, Moody's says. Earlier this year, markets were spooked after S&P cut its outlook on Britain to Negative from Stable. Meanwhile, Moody's said today European countries' rising debt won't trigger across-the-board downgrades.

Given the recent confrontation with the health insurers, I suspect that the U.S. government will inform the rating agencies that a downgrade might not be in the best interests of those agencies.

Updated thoughts from a Past Posting

"If you can keep your head when all about you are losing theirs...". Well done!

How to Use Leveraged ETFs to Your Advantage

wheelsnaustin,

The math does not work the other way. To use a comparable example, let's say the index goes from 1 to 1.2 and the leveraged fund goes from 1 to 1.4. The index would have to drop 1/6th to go back to 1. The leveraged fund would in that instance drop by a third, which would leave it lower than it started (0.933).

How to Use Leveraged ETFs to Your Advantage

F. Bradeen, I think your comment is problematic. I will address the points you mention.

The charts and return numbers I showed for SSO and SDS included the distributions. For someone who is selling calls on those ETFs, distributions are a good thing as they will limit the price increases of the funds, although the option prices should take this into account.

This article gave a conceptual trading idea and explained the reasoning behind it. I gave an example of the mechanics of the trade in the article for the sake of clarification, I was not trying to give a precise prescription for a trade. Specific expiration dates and strike prices would depend on each investor's expectations for overall market movements and risk tolerance and should take into account how the trade fits into a portfolio. Furthermore, a bear call spread on SDS is just that. "Bearish" in this context refers to the instrument in question, not your overall market sentiment. A careful reading of the article would show that writing calls on both SSO and SDS, in the expectation that neither would rise a lot over an extended time period is exactly what I want. If you want to pay me for investment advice, you may ask me to give more specific trading recommendations. Otherwise you will just have to take or leave what I write.

The last part of your comment makes no sense. You have to factor in the probability of each outcome and the maximum gain is obviously much more probable than the maximum loss. Using your logic, shorting stocks would never be a good idea since the most you can gain is 100% while the loss is unlimited. Also, if you were to write calls on both SSO and SDS, you would be getting roughly twice the premiums while keeping the maximum loss about the same, which changes the gain/loss ratio a lot. However, if you do not like the trade after a careful analysis of it, by all means do not make it.

How to Use Leveraged ETFs to Your Advantage

guruji, thank you for the correction. It is, of course, a net credit (income generating) trade and I also managed to botch the break even price (I was adjusting the option prices from intraday to closing prices and forgot to adjust the price in the text). I will correct this on my blog as soon as I get a chance. My apologies for the sloppiness.

jsgilbert, it is possible to short the ETFs and it could make sense to short them for the long-term. I prefer the approach I outlined in the article as you can profit on the trades if the ETFs stay unchanged or even if they move against you, as long as the change is not too drastic. It also takes up less capacity in a margin account and has a specified end date.

Former IBM CEO Louis Gerstner urges regulators to shut down the Wall Street casino by taxing daytrading gains by 80%. Six-months later, it should be 60%. And five-year gains should be tax free, he says. (via) That's one way to bring back buy-and-hold in a hurry.

What an awful idea. Taxes on trading profits in the U.S. are already high. All this would accomplish would be to drive traders out of the country (if the taxes are limited to U.S. residents) or drive public companies to trade on stock exchanges elsewhere. Liquidity in the market would obviously diminish tremendously and pricing would become less, rather than more, efficient.

It is hard to believe that a man who has been an executive at several huge companies would come up with such a monumentally stupid idea. An idea which would accomplish nothing except reduce U.S. competitiveness. He is less hasty when it comes to punitive curbs on executive compensation, something he is more familiar with. The scary thing is that ideas of this sort could gain some traction with people being as confused by the recession as they are.

Leaving a Miserable Trade and How to Avoid Future Problems

No mention? I show a graph of the S&P 500 with the entry and exit points. It is plain to see how much the market fell in the meantime. I also acknowledge that it was a mistake not to use a stop-loss -- had I done that the trade would have been stopped in early September. Essentially, the whole point of this post is to own up to a mistake. However, I did have the discipline to stick to my original plan, which was to close the trade when the sell signal came, so I consider the results of that method much more meaningful than the maximum drawdown.

Please keep the context of my original recommendation in mind. I expected another leg down in the market, as I stated in my blog post, although it came sooner than I expected. For that reason I kept a substantial amount of cash on the sidelines.

As for continuing to monitor the SMMI, it is just one tool in the toolbox. I believe it can be useful, although of course not infallible, as long as you understand how it works.

Leaving a Miserable Trade and How to Avoid Future Problems

The last paragraph is meant to read "...given the current overbought conditions...", in reference to the rally that started in March. I mistakenly wrote "oversold". I just fixed this on my blog.

Leaving a Miserable Trade and How to Avoid Future Problems

As it is a momentum trade, it makes sense to keep a fairly tight stop-loss. I would say 7% or less from the purchase price.

Paired Trade: Columbia Sportswear vs. Under Armour

Thanks for the trading idea, Alan.

An alternative you might want to consider for the short leg is Lululemon Athletica (LULU). It is a very high end brand (with a much softer image than Under Armour), with even more growth priced in than UA. For instance, EV/Sales is 2.63 and P/TB is 6.72. Like UA, LULU has a lot of short interest and you should have a good look at its chart to see if you have the stomach for shorting it.

5 (More) Profitable Smallcaps Trading at a Fraction of Tangible Book Value

Thanks for a helpful article. What a great year this is to pick up some true bargains, although it is likely to come with some anxiety.

I noticed in AWX's annual report that management is considering a delisting, which along with the liquidity issue is keeping me away from this extremely cheap looking stock. Picked up some BNHNA shares, however, and I am tempted to get some SORL too.

Inflation Risk Is Underpriced

Karl, I think you are doing yourself a disservice by dismissing everything associated with Friedman out of contempt for his political views. Even if the real world applications of monetary economics are more complicated than the neat MV = PY equation you will see in textbooks, the concept of money supply is hardly an absurd one.

Surely you would agree that if every household were sent a million dollars in the mail, inflation would be unavoidable. Hypothetical examples aside, if you think inflation can only occur during boom times, you need look no further back than to the 70s for an example to the contrary.

Inflation Risk Is Underpriced

nym: I wanted to focus on the money supply and inflation expectations in the bond market in this article. I do agree that once inflation expectations increase, investors will again look to commodities and I can see commodity prices rising sharply again in the not too distant future. I will probably write a separate post on this later.

Chris B: Thanks for a thoughtful comment and the ETF suggestions.