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Sticking with the Plan

|Includes:HCBK, HIG, IP, ITW, MET, PRU, SPDR S&P 500 Trust ETF (SPY), XLF

Reviewing trades for last week, I cashed in the bulk of my hedges. Scaled out of SPY Dec 2012 140.0 puts at intervals of 2.5, making the last sale when SPY stood at 117.5. Also scaled out of Dec 2011 XLF puts at intervals of .25, last sale when XLF stood at 13.25. 

Remaining hedges would be completely sold out when SPY hits 112.5 and XLF hits 12.5. 

The funds were deployed rolling LEAPS positions down. Example, with IP at 25.22, sold to close 10 IP Jan 2012 25.0 calls and buy to open 10 IP Jan 2012 22.5 calls, net debit of 1.45, for the 2.50 spread.  Similar trades done on HCBK, HPQ, and ITW.

MET, PRU and HIG are also candidates to roll the LEAPS positions down.  I held off because they are financials, volatile, and would likely participate in a further market decline, in which case better prices will be available.

Reviewed portfolio early in the week, using delta and beta, it will go up or down 3.27 for every 1 on the S&P.  Probably more because I liquidated a lot of the hedge during the week. Also reviewed average p/b, p/s, etc., per Morningstar, average price to book is 1.10, vs. a 5 year average of 1.58.  Similar results with p/s.  Reversion to the mean would be a 43% increase. 

Average stars rating is 3.89 per Morningstar, a little higher than normal, due to prices declines increaing stars under their system.

Plan to watch market behavior Monday and make a decision whether to liquidate the rest of the hedges or not.  Also plan to roll LEAPS for MET, PRU and HIG down, may need to sell off the hedge to provide the funds.

I think the S&P downgrade of US will not make a big impression on the markets, it makes a certain amount of sense if you consider the attitude of the Republicans and the likelihood of inflation long term.  An investor in US Bonds runs the risk of waiting for his money, or receiving debased dollars in repayment, sufficient to warrant the downgrade.

I expect that the Euro situation around Italy and Spain will stabilize.  Those who hope to profit from creating difficulties need for the interest rates on their 10 years to get up to 7% and hang there, a credible plan to provide emergency liquidity should resolve the issue.