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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Miscellaneous Musings At A Market Midpoint

    Friday while the S&P 500 (NYSEARCA:SPY) was working on a new high, I stuck to my knitting and closed out a position in Bemis (NYSE:BMS), based on valuation. That left an empty slot in my Synthetic DGI Portfolio, which I filled with Darden (NYSE:DRI).

    One of the problems with a portfolio strategy that builds off a screen, and suspends the analysis of individual holdings, is that you do things you wouldn't normally do. Bemis is over-valued by my preferred metric, and while it is optionable, there are no LEAPS and the spreads are too wide.

    Bemis had gone up since I opened the position, but the hedged nature of the diagonal spread, plus a market maker who was intent on collecting his cut in full, reduced my profit. It's too bad, sometimes the training wheels get in the way.

    Running my screen again at Portfolio123, Darden showed up, so I went for it. It's fairly valued by my methods, which is fine, and LEAPS are available. I'm long deep in the money LEAPS and short out of the money calls, the usual diagonal spread.

    Watching CNBC, they were fairly hyper about the new highs. As a practical matter, the market is almost exactly at fair value, by my methods, by Morningstar's methods, or by any other common sense method out there. I'm not talking about Shiller, and CAPE, or Grantham, or Hussman, or Rosenberg, or Roubini, or any of the doomsayers cult leaders.

    My thinking is, that with the market at a midpoint, you can't expect much more than 7% annualized - 2% real growth, 2% inflation, 2% dividends and 1% financial engineering. That 7% comes with the risk of maybe 35% down if something funky comes out of the woodwork.

    Doing the Chuckie Wuckie, the investor can dance while the music's playing. I'm dancing in a corner, with a hoard of cash, and my long-term holdings in S&P 500 type index funds. A part of my play money is in the Synthetic DGI Portfolio, where leverage will help it respond to a rising market, while the defensive nature of the stocks selected and the options strategy employed will help me reduce losses in the event the market tanks. It's kind of a barbell approach.

    The most likely scenario is that the market continues upward, with the occasional dip to suck in any remaining cowards from the sidelines. It could go on for a while. I stopped doing bullish macro analyses when the market got into the fair value area by my calculations, but if it goes up to over-valued you could see 2,000 on the S&P before you see 1,300 again.

    I was rummaging around in my drafts for articles that never where completed and published. One of them caught my eye: it was titled "Stop Buying Cheap Stocks - You'll Make More Money." Apparently I had done some backtesting to support the idea, and developed an impressive chart, for which I am now unable to locate the supporting data.

    Then I started going over my old articles, many of them on value type stocks, comparing my old target prices to current prices, and patting myself on the back, and wishing I hadn't sold out so early, and so on and so forth. The targets were good, very good. Of course two years ago if you had the macro call right you could just throw those targets up there based on common sense and generic projections, there was no rocket science, it was hard to miss with so many tempting targets.

    I dislike holding cash as cash, with interest rates as low as they are. I've resisted the urge to do something with fixed income, which is finally starting to look like a good decision. But when I think back to the depths of the financial crisis, $50,000 was a lot of money then, if you had the courage (or desperation) to put it on the table and lever it up.

    I'm much more risk averse than I was back then. I don't think it's age per se: I have a unique combination of the natural impetuosity of youth with the reduced cognitive functions of old age. It's more about relative well-being. I have enough to cover my retirement now, and I don't want to lose it. Five years ago my retirement was in a smoking crater, and I looked at the rewards for even a mediocre recovery and went risk on and stayed risk on for a long time. That was then, this is now.

    Disclosure: I am long SPY.

    Additional disclosure: I'm long the market, via Vanguard S&P 500 index funds and value funds, also long various dividend growth type stocks by means of diagonal spreads. I have some reservations, expressed by holding above average cash.

    Tags: SPY
    Jul 13 4:13 PM | Link | 7 Comments
  • Adjusting The Synthetic Dividend Growth Portfolio

    Friday I adjusted the portfolio by rolling short calls expiring in October and November out to January and February. Trading calendar spreads in very small size, I was gratified that market makers for the most part met me close to mid bid/ask. I started there and kept lowering my limit until they filled.

    Before trading, I verified that the premiums received for the approximate 90 day increase in the time to expiration, when multiplied by four, were greater than the annualized dividend for owning the stock. Portfolio strategy attempts to earn options premiums equal to or greater than the dividend income for the underlying.

    Going forward, I plan to roll December expirations out to March when they become available, and continue to roll out as new quarterly options start trading. The thinking is, by selling more distant expirations, I've locked in the premium income. Also, by doing the rolls on a monthly basis, the overall work is reduced since I don't have to think about it at other times.

    There were a total of seven trades involved, a couple of hours to get them all entered and closed. Both realized profit(loss) and premiums received for the roll were consistent with a 4% return on the hypothetical $250,000 portfolio amount.

    There were no adjustments to the long positions. The plan is, to adjust when the underlying moves 10% either way, by rolling in the same direction. By putting the starting prices of the underlying into a portfolio here on Seeking Alpha, I can check for the % change when I'm on the site, and deal with any that change by 10% or more.

    Jun 30 3:02 PM | Link | 3 Comments
  • A New Addition To The Wall Street Bestiary

    First, a definition, from Yahoo:

    Bestiary: A medieval collection of stories providing physical and allegorical descriptions of real or imaginary animals along with an interpretation of the moral significance each animal was thought to embody. A number of common misconceptions relating to natural history were preserved in these popular accounts.

    On Wall Street, there are arguably only three items in the collection: bulls, bears and pigs. According to the old aphorism, "Bulls make money, bears make money, and pigs get slaughtered."

    Now the Fed's Fisher has added a subspecies to the bestiary. The feral hog roots around in the bond industry, interfering with the Fed's plans to direct the market in an orderly fashion to its ultimate goal of permanent prosperity. Feral hogs, at least in Texas, can be hunted from helicopters, with AK47s. Great sport.

    Now on the Appalachian Trail, they are seen as a nuisance that destroys desirable ecosystems. They are fenced out, or trapped and euthanized.

    (click to enlarge)

    I have a better idea, at least for Wall Street. These feral hogs are energetic creatures, extraordinarily greedy. Greed, as we know, is good, since it drives the perfect efficiency of the markets.

    Why not use an agricultural metaphor here? The economy and financial system can be envisioned as a field, which needs to be plowed and fertilized before it can be planted and harvested.

    Why not seed the field with some delicacy for the feral hogs, perhaps tulip bulbs? As they root around for nourishment, they will plow the field. Meanwhile, their defecations will provide nourishment for future crops, in due course.

    Some may argue that it will not work, citing Lemuel Gulliver:

    In another apartment I was highly pleased with a projector who had found a device for plowing the ground with hogs to save the charges of plows, cattle, and labor. The method is this: in an acre of ground you bury, at six inches distance and eight deep, a quantity of acorns, dates, chestnuts, and other mast or vegetables, whereof these animals are fondest; then you drive six hundred or more of them into the field, where, in a few days, they will root up the whole ground in search of their food and make it fit for sowing; at the same time manuring it with their dung: it is true, upon experiment, they found the charge and trouble very great, and they had little or no crop. However, it is not doubted that this invention may be capable of great improvement.

    I see the prospect of great improvement, in view of modern technology - computers and algorithms come to mind. There is no need to restrict them to the bond market. Set them loose on the equity markets as well. The S&P 500 (NYSEARCA:SPY) will soon regain its lost ground, and go on to new highs. Dow 20,000 (NYSEARCA:DIA) will be in sight. Indeed, it will be the dawn of a new era.

    Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I'm long the S&P 500 by means of a Vanguard Index fund.

    Jun 26 10:46 AM | Link | 4 Comments
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