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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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  • 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
  • Analyzing A Synthetic Portfolio

    One of the problems associated with the synthetic portfolio idea is the uncertainty regarding the amount of leverage being applied, and the extent to which market movements will be exaggerated. It's fun going up, but it's important to ease up on the gas after making a long climb.

    Ameritrade very conveniently provides delta as part of their portfolio display, and exports files to Excel very easily. My spreadsheet has a "getprice" function that will get current prices for the underlying. Armed with this information, multiplying contracts X 100 X delta X share price provides $Delta. Briefly, this number predicts that the options position will behave like $Delta worth of stock, over the short run.

    Adding beta to the formula develops $Delta Beta, a number that represents the size of a equivalent position in the S&P 500 (NYSEARCA:SPY) index.

    Summing up all portfolio positions, portfolio $Delta Beta when divided by actual portfolio value yields a leverage figure. As of today, my synthetic portfolio is still levered 1.23:1 vs. the index. Last week it was 1.73:1.

    After doing the analysis last week, I concluded that the leverage was too aggressive for market conditions. Being ahead by approximately 15% on the year, it seems like a good idea to set things up so as not to give it back if the market corrects. Corrective action consisted of cutting outsize positions in Prudential Financial (NYSE:PRU), MetLife (NYSE:MET) and Assured Guaranty (NYSE:AGO) in half.

    From there, covered calls were sold over all portfolio positions where there was some premium available with the strike of the call sold in the vicinity of the target price.

    Finally, all long LEAPS positions with delta greater than .90 were considered for rolling up. As an example of the type of trade involved, Xerox (NYSE:XRX) Jan 2014 3.0 calls were rolled up to XRX Jan 2014 5.0 calls at a net credit of $1.94. This serves to define downside risk and increases the IRR of the position, due to less funds being deployed. It also makes a better defensive position in the event the market declines.

    When taken together, these actions decreased the leverage as discussed earlier in the article. Cash was increased to 43% of the portfolio.

    Now what?

    I would be more comfortable if the portfolio were deleveraged even further. I've been building a hedge, deep in the money distant expiration puts on SPY. Every time SPY goes up $1, I add another increment to the hedge. If the run continues next week, simply continuing the hedging process will eventually get things down under 1:1 leverage.

    Time to Segue from Deep Value to Dividend Growth

    I can't resist the word - segway. Just a spiffy word, I knew I could work it in somewhere.

    In any event, the funds that have been liberated by the corrective actions above can, in due course, be deployed into more defensive selections. Diagonal spreads on JNJ, OXY, NSC and MMM, done in December last year, are so far in the money that I have very little exposure to further price movement on the underlying.

    Seeking Alpha has many articles listing the stocks needed to represent a diversified Dividend Growth portfolio. Checking them against FASTGraphs (where I am a paid subscriber), I can do diagonal spreads on various selections that appear undervalued, in small size.

    Once I have some skin in the game, I can do my due diligence and bring the positions up to full size as the situation develops.

    Hopefully the market will run up a little further, maybe to 1,540, before heading down.

    Disclosure: I am long OXY, NSC, JNJ, MMM, MET, PRU, AGO, XRX.

    Feb 08 9:02 PM | Link | 6 Comments
  • A Better Analogy For The World Economy

    David Rosenberg says has a striking analogy for the world economy. Where others see stability and recovery, he sees "a car being driven by a drunk, lurching from side to side on the road, narrowly avoiding the ditches each time."

    A better analogy would be, an irresponsible parent who throws a house party for his teen-age children, and provides an open bar for all their under-age friends. The result is chaos and destruction, and much criticism and complaining from his loyal spouse.

    To make amends, the guilty party immediately orders repairs to the house, sparing no expense, and overdrawing the joint checking account by huge sums. Within a few weeks, all is returned to normal.

    Beaming with joy at the success of his repair efforts, he announces to his spouse and teen-age children "Now we are going to have a really, really great party," and proceeds to order in all the food and beverage the house will hold, and invite all comers.

    I'm thinking of the Fed, and other Central Banks.

    Disclosure: I am long SPY.

    Feb 03 10:06 AM | Link | Comment!
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