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Tom Armistead's  Instablog

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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  • Rolling My LEAPS Out To 2016

    I prefer to keep the expiration dates on my long options positions dated as far into the future as possible. The thinking is, that if the market tanks, the greater time to expiration will cause them to have a greater increase in time value, setting up the opportunity to roll down and harvest the volatility.

    With that in mind I started work on Jan 2015 expirations, looking to roll out to Jan 2016. Putting the trades in as calendar spreads, the bid/ask is fairly wide. However, as a rule of thumb under current conditions, I look to pay 1% of the strike as a debit to roll the position. I think of it as 1% interest on the notional loan of the strike price.

    Most of what I rolled was priced around my 1% rule of thumb, with a few higher. Even trading in very small quantities it seemed as if the market-makers were willing to go along. In a few cases I rolled up at the same time, so the spreads were diagonals. I managed to get prices that I thought were fair.

    This is a small detail, but during the financial crisis I found that the longer dated LEAPS behaved better as the market plunged to its final bottom. So for 1% to 2% why wouldn't I do it?

    Aug 25 4:05 PM | Link | Comment!
  • Looking At Nonfarm Employment After Jackson Hole

    This morning I located and read the text of Janet Yellen's speech delivered at Jackson Hole. What I saw was a very careful discussion of complexity, resulting in the conclusion that the Fed will not be relying on a single variable of any type in assessing the level of employment and the resulting indications for monetary policy.

    She also mentioned, which got my attention, that we only recently passed the previous peak of nonfarm employment.

    Monetary policy is a driver of economic activity as well as asset valuations. We don't know the exact relationships: in point of fact, there is considerable animated debate on the topic. As a way of getting away from the fuzzy thinking and forming an opinion for my own use in directing my participation in the market of stocks, I looked at nonfarm payrolls, using FRED, the graphing facility at the St. Louis Fed. Here's the chart:

    (click to enlarge)

    Because of shifting demographics and structural changes in the workforce, it's not that useful to use the information going back 50 or 60 years. So the analysis is, how long was it from the time that nonfarm employment exceeded the previous peak until the downturn heralding the crash of 2008/2009?

    It was 3.0 years, from 01/01/05 to 01/01/08. Now nonfarm payrolls most recently matched the previous peak on 05/01/14. If you add three years, we could look for the cycle to turn down in the Spring of 2017, with the market following in due course.

    My take: barring an exogenous event, employment will grow at a rate between 1.5% and 2%, carrying the economy along at a comparable pace, for the previously developed 3 years. Add some inflation and there will be nominal growth around 4%.

    The Fed, relying on fuzzy thinking, will remove accommodation at a deliberate pace, and will subsequently tighten less rapidly than during previous expansions.

    Prudential regulation will slow the onset of wretched excess in US financial markets, but will not prevent it.

    My reaction to this potential scenario is, to leave my Vanguard index funds fully invested, and to focus my attention on extracting market-like returns from my discretionary portfolio. Using options for risk management, I'm taking exposure to high quality dividend payers by means of LEAPS, selling covered calls for income, and holding substantial cash, as a cushion on personal spending, and to be deployed in the event of a decline in the market.

    Disclosure: The author is long SPY.

    Additional disclosure: As a retail investor, I don't give investment advice. I blog to expose my investment thinking and process to critical examination and comment from readers, as a way of accessing the collective wisdom of market participants.

    Tags: SPY, DIA, QQQ, Macro
    Aug 25 7:31 AM | Link | 6 Comments
  • Altera Has Historically Been Very Adroit In Repurchasing Shares

    I've been working on a bullish follow-up article on Altera (NASDAQ:ALTR), after Xilinx (NASDAQ:XLNX) laid an egg on their most recent quarter. Basically I see Altera as developing very favorably against the chip industry as a whole and against its fellow PLD designer in particular. But when I looked at the company's history of buybacks what I found was interesting, very interesting. So I thought I would put it out as an instablog, short and sweet.

    During 2007 and 2008, Altera bought back 22% of its common shares, at an average cost of $17.78 for 2008 and $21.16 for 2007. By 12/31/2010 shares were worth $35.58.

    That's very impressive performance, to double your money between 2008 and 2010, particularly with 2009 being a very difficult year, to say the least.

    It should be noted that the PLD business has this long, slow, complex cycle, some 5 or 6 years per node and many nodes in play at any one time. It's hard to analyze or predict, although management of the company has a better chance of getting it right than outsiders do.

    So for the first six months of 2014, Altera bought back 3.3% of shares outstanding, and has an authorization for more. They paid an average of $32.50. The company borrowed $1.0 billion in 2013, "for stock repurchases and general corporate purposes" and has an amount in excess of that invested in treasuries, as an economic hedge on their interest rates.

    After looking at this for a while, I see the increased repurchase activity as an indication that management expects the shares to be worth considerably more within a 2 to 3 year time frame. The last time they bought back a lot of shares, they did very well for shareholders.

    Disclosure: The author is long ALTR.

    Aug 11 9:07 AM | Link | Comment!
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