Gee, Think.

Last night we met once again with our financial advisor. I’ve got to say I’m really liking this situation. It’s great to have someone whose coming around to explain taxes, retirement savings options, and insurance. It’s like having a coach for anything, he keeps us on the ball and continuing to plan our savings.

I learned about something I had never heard of until last night, Cash Value Life Insurance. This appears to be a combination of an insurance policy, mutual fund, and savings account. In this product, you make monthly payments, of say, $125. $25 of this payment goes toward the cost of insurance. Perhaps you can get $250,000 of life insurance for that premium, if your young and in good health. The rest of your payment, $100, goes toward your own account balance. This balance is invested by the insurance company to earn a target rate of return. Hopefully this rate of return is around 8%. At least, that’s what the insurance firm shoots for but does not guarantee. The money that you contribute to this account is post tax money. You are able to withdraw the balance at anytime. I believe that this money also grows tax free. In addition, these funds are not considered when your assets are reviewed for government programs such as tuition assistance for higher education. So to me this seems like a dual purpose vehicle. On the one hand you are getting life insurance. On the other, you are saving for longer term needs such as buying a house or sending the kids to college.

Take my advice for what it’s worth because I have yet to use the product, but it does sound good to me.

Why is all the recent data which shows that the economy is slowing
talked about as benign? I think the logic is that a slowing economy
will cause the Federal Reserve to stop and possibly reverse their
interest rate policy. While lower short term interest rates will make
bonds less competitive to stocks in terms of yield, the fact the the
federal reserve is lowering rates is a bad sign for the economy. The
Fed tends to lower rates in an effort to stimulate economic growth and
increase the speed at which money flows through our economy. The only
reason for stimulating the economy, however, is that the economy is
already slowing.
So how can a slowing economy be a good thing for stocks? I think the
only answer is that traders believe the economic slowdown will be of
minor scale. They believe it will be a period of slowing growth for a
short period, followed by a resumption of a roaring economy. I tend to
think we are in for more of a shake-up than that.
The housing market is in really bad shape as of late. I read recently
that there is a record high number of sellers in the market. Sellers
have far out numbered the buyers and so prices are falling. Falling
prices encourage potential buyers to wait further until prices fall even
further.
Falling real estate prices are not just bad for the sellers though, they
are also bad for the overextended “owners” who have an overall negative
equity position. For these owners, the value of their home may fall,
but the size of their equity loan will remain the same. They will need
to continue making the same payments, and may even need to increase the
payments as mortage rates rise. Specifically, those with adjustable
rate mortgages may need to prepare for higher payments due to higher
interest rates.
If the economy does go through a significant slowdown, wages will fall.
If wages fall, making mortgage payments will become more difficult.
So what happens if a number of borrowers default on their home
mortgages? Banks will become less willing to lend to new borrowers. I
can’t speak from experience, but my best guess is that lender will
express an unwillingness to extend credit by offering loans at
unattractively high interest rates. What does this do to the adjustable
rate mortgage holder? It increases their interest payments. This could
in turn cause more foreclosures in a vicious cycle. We call this credit
contraction.
As mortgages defaults occur in a falling real estate market, the lender
will lose money on the sale of the home in cases where the borrower had
built little equity. For example, a borrower who had built 30% equity
in their home defaults on their payments. The bank recovers the
property and they can break even on the loan they extended if they can
sell the house for 70% of its value. It is possible for a lending
institution to profit from froeclose in a stable or rising housing
market. Falling markets however, can actaully hurt the lender. If the
price of the home has fallen to 50% of its value at the time the
mortgage was taken, the bank will only be able to secure, at best, a 20%
loss by selling the house for 50% and keeping the borrower’s 30%
equity. This returns 80% of the loan to the lender through the
foreclosure process, which is also quite time consuming.
So in summary, since we have an all time high level of credit in this
country, and a negative savings rate, I think any sign of a slowdown
could be very bad news. The last question is what will cause the real
slowdown? Will it be something obvious such as a political event? Or
perhaps the slow effects of globalization? I’m not sure, but as we say
in the northeast, I’m keeping my eyes peeled.

This morning I took a couple minutes to try and supplement my Qs analysis. I pulled up the 60 day chart of the Dow 30 and the Gold / Silver indices. I’ve learned through John Murphy’s “Intermarket Analysis” that the common trend is to see Gold (as well as silver and other commodities) rising as stocks are falling. Now maybe I didn’t quite have something right, but I could swear that this morning around 6:15 am I was looking at uptrends in both charts! How could the gold / silver index be rising as stocks are rising? Perhaps this is foreshadowing a future fall in stock prices. Maybe this has something to do with the strength of the dollar. Right now I’m not sure, but am confused.

I did a quick fibonacci tracing of the gold silver index and I think its currently bouncing between two fibonacci levels, and is either basing before heading up or forming a double or triple top before heading down more sharply. I saw the index moving between these levels through its action over the last several days.

Man I really need a bigger view of the picture, and a bit more analysis expertise because I’d like to be able to say that I think its moving one direction or the other!

I’ve just received the latest addition to the Masterminds Unlimited
technical analysis library, the tenth edition of “The Elliot Wave
Principal” by Prechter and another distinguished market technician.
After reading through the first 30 pages or so I have to say that this
theory of Ralph Nelson Elliot’s is no joke. It’s details are intense
and I believe it will take many hours of work and practice to master.

So it looks like I made a pretty good call of the market today. I
bought into my spread position when the Qs were up 20 cents, and they
finished the day down 25 cents. That’s a range of 45 cents, which would
have been an awesome move to catch.
I caught the move, but I didn’t really profit from it. When I bought
into the spread at 1.85, I was down 10 cents because of the spread. I
ended the day down 5 cents.
Looking at this decision, I feel like I missed out. I really didn’t
want to just dive into the position without some sort of hedge, but my
hedge sucked out all my profit.
In the first straddle that I bought, there was a point when the two
positions did not move in sync with each other. They moved in a way
that the put I had bought was 30 cents ahead of the call. This
opportunity may not have lasted very long, I’m not sure because I didn’t
wait around. I sold out of the position wheni saw that gain.
In the last straddle, I didn’t check the respective deltas of the
options I was using. This time I did. The delta for the call was
0.35. The delta for the put was -0.52. Now today we had a 50 cent
move. Using thesw deltas, the call should have decreased in value by 17
cents. The put should have increased in value by 26 cents. This would
give me a 9 cent move. However, I only ended up with a 5 cent move. I
guess that’s not really much of a difference, three cents.
It would have been much nicer to catch more than 5 cents of a 50 cent
move. One guess I have about the reason the position moved so little
was that the strike prices in this straddle were 1 dollar apart. In the
last straddle they were equal. I have a guess that a put and a call
will have inverse deltas, but that’s only a guess. Maybe a better guess
is that options at the same strike have more different deltas than
options that are at differnt prices…. I’l have to refine this
strategy…

So I did it. I entered my secong Qs straddle today. I looked at the
put and call prices on the train the morning. I went with a 40 put and
a 39 call for the month of July. I got in at 1.80, which was a lot
cheaper than I was expecting. I thought I would be getting in at around
2.00. I bought at about 10am, when the Qs were up about 25 cents. I
think that will be shortlived enthusiam. We shall see.
Be sure to read the disclaimer post regarding my trading experience and
amatuer status.

When people ask me “Why ‘Get The Money 2006′?” I have one simple answer:
jewels!
I am running this campaign single mindedly. I have one objective, and
that is to game the options market in order to buy rubies, emeralds,
diamonds, and other precious stones.
Jewels are not just about dazzling jewelry, they’re also important for
treasure chests. There’s nothing like having a chest of jewels buried
away somewhere to give you piece of mind. Where else could you turn
when your home is ran sacked? That’s when you want to have a treasure
map with an X marking the spot, the jewel spot.

I’m trying to take a more surveyed approach to my next options play.
I’ve looked at the annual report for the company from 2005, and it looks
good. The company is also a driller, and those stocks are really hot
lately. The company is also getting ready for a stock split, and I hear
that can be a profitable play when you buy out of the money call
options on the other side of the split.
Now, you can buy the in the money calls as well. In the money calls are
a bit more expensive because they carry a lot of intrinsic value. Out
of the money calls are cheaper because most of their value is time
value, and that’s not more than $2 or so per contract if your buying a
couple months out.
I’ve been watching this option contract, and it seems to have choppy
trading volume. The open interest is several thousand, but it seems
like there are only a few trades each day. It’s interesting to think
that if there is an open interest of 3500, meaning there are 3500
contratcs that have been bought, and each person holds an average of 10
contarcts, we’re only trading with 350 other people. That feels like a
tiny group, but I guess when it comes time to execute your trade you
only need one person to trade with, the market maker. I hear that he’s
not going to give you a very good deal though.

I’ve found a new favorite blog, http://bigpicture.typepad.com. This guy
also writes for TheStreet.com on weekends. I’m going to be reading him
all week. Sometimes I run out of artciles on thestreet.com, and I need
other sites to go to.
I like the way this guy has his posts broken up into nice categories
with simple icons in the header. Nice design!