Financial News 10/31/2011

• WP: Social Security budget in a multi-billion dollar deficit
• MarketWatch: Japan sells ¥en to alleviate currency appreciation
• Daily Mail: London Bishop not compassionate about economic protestors
• FinAid.org: 69.1% of scholarship winners receive under $2,500
• WSJ: U.S. Treasury likely to postpone selling AIG shares
• Bloomberg: Commercial protectionism evident in China

Risks associated with equity inflation

Equity inflation is an increase in the price of stock, but a decrease in the purchasing power and actual underlying value of that stock. Like monetary inflation, equity inflation gives the impression of more money, but in actuality means lower wealth. This is a financial phenomenon also described in the Quarterly Journal of Economics as “The Money Illusion Hypothesis”.

Image source: Value Stream CC0 1.0-PD

Risk #1: Currency devaluation deflates increases in stock price

According to The Money Illusion Hypothesis investors can lose track of actual purchasing power of liquid assets such as stock via corresponding financial events such as monetary inflation. In other words, for each unit rise of stock prices with corresponding increases in market values, this increase loses actual value in proportion to the value of money. This however, is just one of several explanations and risks associated with the occurrence of equity inflation.

Risk #2: Stock investing expenses rise

Another cost associated with investing that may be overlooked are commissions, fees, margin interest, option contract premiums and management expenses. With a rise in the value of equities, fund managers, brokerage firms and investing services may find it easier to justify higher brokerage account costs. Yet if these costs amount to just 1% more, added to monetary inflation the total cost could be 3-4% off the total unadjusted yield of stock not including capital gains taxes.

Risk #3: Decline in business financial fundamentals

A corresponding decline in currency value and increase in equity related costs are not the only way equity inflation can occur however. This is because worth is determined by more than just yields and the currency  in which a stock is valuated. Moreover, if a company's revenue declines 5%, but earnings increase 7%, a business has essentially shrunk in size especially if the increase in earnings is due to downsizing, accounting techniques such as mark-to-market accounting, and sales of assets. These methods are further elaborated upon by Aswath  Damadoran of the Stern School of Business. 

Risk #4:  Increased potential for future devaluation

Eventually, investors are believed to price in shorter-term inconsistencies in price valuation such as asset bubbles  according to the 'Efficient Market Hypothesis' described by Burton G. Malkiel of Princeton University.  One reason for this is because equity inflation is not sustainable unless underlying growth in revenue, and/or improvements in a company's operational assets occurs. Moreover, business that have products and services with clearly defined increases in revenue, market share, and competitive positioning are more justified in valuating assets in a way that can increase equity prices, than those that do not.

Financial News 10/28/2011

• BEA: September personal income up .1%, savings down .5%
• Moody's: Banking mark-to-market gains are "illusory"
• SBT: Bank of Japan downgrades 2011 growth forecast to .3%
• WSJ: Eurozone financing liquidity not solvency
• Bloomberg: Unemployment in Spain rises to 21%
• DXY, VIX & BDIY down for the week, gold and oil up

Pros and cons of Constant Proportion Portfolio Insurance (CPPI)

Constant proportion portfolio insurance is a form of investment risk management that is based on asset allocation. In other words, it is investment insurance however it is not insured by a company that provides the insurance. According to Rama Cont and Peter Tankov of the University of Columbia Center for Financial Engineering, constant proportion portfolio insurance allows investors to make risky investments that can grow by using multiples i.e. having more 'risk-free' assets to counterbalance the riskier assets.

How it works

To insure against risky investments constant proportion portfolio insurance requires the following three  amounts and one allocation per Investment Week. In other words, one has to first define how much capital one has to invest, then decide how much is an acceptable amount to lose, then assign a percentage loss the risky allocation of assets. These measurements are entered into a formula to arrive at an amount for asset allocation.

1. Capital              Ex. $200,000 (C)
2. Risk metric       Ex. $20,000   (D)
3. Maximum loss  Ex 75%          (M)
4. Asset structure. Ex. $26,000 in Stocks, $174,000 in Treasury Bonds

In order to arrive at #4's asset structure numbers 1-3 have to be entered into the CPPI formula. This formula basically determines how much money is allowed to be invested in a high-risk asset in order to not exceed more than $20,000 loss with a maximum asset price drop of 75%. In other words, 75% of $26,000 is equal to $20,000 using the formula  (1/M)x (D)=(1/.75) x ($20,000)= $26,000. 

To illustrate further, suppose Mr. A has $200,000 and wishes to lose no more than $20,000 and expects the riskiest assets can fall as much as 75% in value. Given these parameters constant proportion portfolio insurance can be calculated using the aforementioned formula. This however, is only half the process, as there is still the question of return on investment, and asset instruments. That is to say, what investment instruments will yield a high enough return to justify a 75% risk. First it is a good idea to look at the advantages and disadvantages of CPPI.

Advantages

1. Does not require derivatives

Since constant proportion portfolio insurance is more of a formula or technique the financial instruments used to fulfill the requirements of that technique are flexible. This means an investor can choose investments he or she feels comfortable with rather than something more complicated or unknown.

2. Fewer management expenses

Since derivatives are not required and flexibility is allowable within the CPPI formula, financial instruments that have lower management expenses, commissions and fees can be selected to optimize the portfolios cost effectiveness.

3. Adjustable risk and reward

Another advantage of constant proportion portfolio insurance is it can be periodically adjusted. For example, if an investors risk level or total investment capital changes, the formula can easily be recalculated and assets reapportioned to suit that change.

Disadvantages

There are a few disadvantages to constant proportion portfolio insurance. These disadvantages can be minimized with effective decision making, and accurate assessment of market risk but should be addressed to properly meet financial objectives, risk tolerance and goals.

1. Upside ROI may be unknown

Risky investments tend to not have fixed rates of return which means the portfolio could lose value and not gain a cent. For someone seeking steady consistent growth this type of asset insurance allocation is less likely to be acceptable. However, this does not have to be the case, CPPI can still be used with fixed rates of return and very low risk levels but then becomes somewhat pointless as there is nothing to really insure against.

2. Risk level estimate may be wrong

Another potential problem with CPPI is the risk level estimate may be wrong. For example, the market may drop more than the investor expects for a given asset. Moreover, a faulty risk assessment can dampen the potential ROI or cause the investor to lose more than thought possible. In light of this, it is important to balance realistic expectation  about what the market can do, and what is also most likely to occur.

3. Opportunity cost of insurance

A third problem with constant proportion portfolio insurance is the opportunity cost. Money used to insure risky assets is money not invested in other risky assets. Granted that opportunity cost may actually amount to opportunity savings if those risky assets do not perform. However, there may also be safer assets with higher returns that increase the cost of financial opportunity provided by CPPI.

Financial News 10/27/2011

• Yahoo Finance: Europe s EFSF leveraged to stabilize sovereign fiscal costs
• BEA: Q3 2011 GDP 2.5%
• SBT: Chinese inflation spurs increased investor worry to threat of bad loans
• WSJ via NARIG: State tax receipts rise 10.8%, local tax revenue declines
• BLS: Jobless claims for week ending 10/22/2011, 402,000
• OT: Oakland economic protests turn contentious after police raid

CEO Resignations on The Rise?

US-PD

In the last few months there has been a glut of business executive resignations sweeping the market. This multitude of corporate resignations has showered the news headlines indicating possibly hazardous business conditions. It appears the markets have tested the wherewithal or oversight ability of some of the best senior executives and managers to the point of no confidence, lack of fortitude and resignation.

If there is no index measuring executive resignations maybe there should be. An executive resignation index could serve as an economic and business performance indicator, especially if the reasons for the executive resignations are also documented. For example, of the companies below several resignations are directly linked to performance failure whether that be related to scandal, insider trading or operational shortcomings.

First Solar

Solyndra

Active Power

IBM

Telco Zain

GE Healthcare India

Walmart China

UBS

Sino-Forest Corporation

Cosi Inc

Dow Jones Europe

An executive resignation index cross-referenced to profit margins, earnings per share etc. might actually have a reasonably correlated beta coefficient worth consideration in investments decisions. This would make such an index a useful investment decision making tool. Granted the employee turnover-ratio does measure employee turnover and is an  indicator of possible internal problems, but it is not quite the same as an executive resignation index which may serve to measure not just corporate volcanic activity, but total eruptions.

Financial News 10/26/11

• Bloomberg: Italian 182 day bond yields rise to 3 year high
• ABC: German chancellor seeks private Greek debt write downs
• IP: Several large tech stocks fell short on earnings in Q3
• BW: Cain, Romney and Perry differ on tax changes
• MarketWatch: Oil prices surpass $93.00 again
• U.S. Census: September durable goods orders fell .08%

Why finance for A is not always finance for B

Finance like most things can be as simple or as complicated as one chooses to make it. With roots stretching back in history, finance began when things of value began to be equivocated with wealth. However, financial management does not have to be about wealth at all, it also pertains to debt management and the valuation of resources considered essential in day to day life.

How assets and debts are measured, utilized, exchanged and valued also differ considerably from individual to individual and society to society, in part because of an aspect of behavioral finance called behavioral heuristics, but also because of variances among individual and cultural values, and knowledge systems.

Money Transfer from person A to B: Each have different financial goals

Image attribution: Horatius License: Public Domain

Financial measurement is constructed

As with many modernizations, finance is a socially constructed reality that makes use of a selectively chosen deductive knowledge. For example, our numerical system is 'base 10' which according to Kenny Felder of North Carolina University really only means that all numbers larger than 9 are created using the original numbers 0-9. In a base 5 system, all numbers larger than 4 are derived from the numbers 0-4 and 5-9 are not used. Thus, numbers are only the result of meaning we as human allow them to have.

Different financial systems represent the same things

Multiple financial meanings can also be construed from exactly the same phenomenon. To illustrate, a commodity futures contract for the delivery of 5 tons of seal meat  may represent a present value of future cash flow to an investor, but absolutely nothing to a traditional Inuit who's currency consists of seal meat and not a derivative financial instrument. Both realities are the same, i.e. 5 tons of seal meat, but the former creates things based on other things whereas the latter simply deals with what is easily accounted for.

Financial management is linked to cultural values

In addition to the system used to measure things of value, and the extent to which that system derives meaning, finance also has cultural values associated with it. In a post-apocalyptic or purely agrarian culture, non-technological culture with limited products, currency may still exist, but may play a considerably smaller role in civilization. For example, a culture with no factories, automobiles, laboratories etc. is more likely to be indicative of one with less materialistic goals, and consequently, less products and services. Such being the case, finance and economics is less elaborate and are less likely to be a priority in that society.

The goals of finance are not always the same

Another inconsistency in finance is that financial goals are not always the same. Investing for one person may both be a completely different activity and may even serve antithetical purposes. To illustrate, suppose a farmer plants a seed that is intended to grow into an apple tree that will provide fruit for his family and livestock. That seed is an investment and has no affiliation with money because it was traded for a different kind of seed. Yet, another person may invest $100 which itself is a digital concept because it was transferred  through an Automated Clearinghouse, an electronic funds transfer service managed by the Department of the Treasury. Moreover, the goal of that investment is for it to appreciate in value alone.

Financial News 10/25/2011

• Conference Board: Consumer confidence down 6.6 points to 39.8
• MarketWatch: Inflation affecting Chinese profit margins
• WSJ: Euro zone recession risk rising on political differences
• The Economist: Family planning no answer for managing resources
• Standard & Poor's: U.S. home prices up .2% in August
• SBT: Indian inflation to slow to 7%, GDP revised down to 7.6%

What Happened to the Federal Reserve Bank?

The thought of debasing economies in order for centralized banking powers to swoop in and globally centralize and consolidate financial and economic power sounds far fetched, but is it really? Naturally with any claim, a good way to find out is to actually investigate the facts to determine their validity. International banking is a centuries old institution so  really getting to the bottom of this question involves looking at the history of banking to connect the dots between current banking systems, and banking institutions. To find all the dots or greatly elaborate on this would conceivably take more than one blog post, but some of the bigger more obvious dots might help discern an outline of the basic picture of what happened to the Federal Reserve Bank.

Source: US PD

In the last two decades the Federal Reserve Bank has allowed economic bubbles to inflate and burst repeatedly indicating a likely awareness of how monetary policy was influencing the economy. This is corroborated by Lawrence H. White of the Cato Institute, despite mention of former Fed Chairman Allen Greenspan's denial of such. Moreover, a lowering of interest rates fueled the housing bubble that later became a housing crisis. This was embellished by deregulation that took place in the late 1990's and thereafter; for example,  the Gram Leach Bliley Act of 1999 aka the Financial Services Modernization Act which deregulated interstate banking services among other things.

The Federal Reserve was formed via a congressional compromise to solve decades of prior banking problems according to Mint. Whether or not bankers deliberately perpetrated an environment that could be exploited in this way is investigated by various research groups and investigations such as Political Research Associates. This group believes the Federal Reserve Act was indeed a congress wide bipartisan compromise, and not the result of a secret meeting between bankers and senators. 

The Center for Research on Globalization claims the Federal Reserve is owned by ten financial institutions including N.M. Rothschild of London, Rothschild Bank of Berlin, Warburg Bank of Hamburg, Warburg Bank of Amsterdam, Lehman Brothers of New York, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Bank of Italy, Goldman Sachs of New York and JP Morgan Chase Bank of New York. If this is true then there may be reason to belief there is a least a conflict of interest. See Moneycation's October 19th and May 16th posts for more on this. 

The Federal Reserve bank has the power to lower interest rates through its monetary policy in addition to the ability to purchase assets in the open market. It was also formed to solve a banking crisis, but has contributed to future banking crises and is owned by a cluster of specific banks that may indicate of a conflict of interest. This makes sense given the nature of the bank is a hybrid of government and banking interests and a lot can happen in 100 years including a rerouting of those banking objectives. There may be confusion between conspiracy and mismanagement, where the former is about subversive plots and the latter is more about misguided policy.

Financial News 10/24/2011

• WSJ: European leaders admit failure on previous debt plan
• BP: Thai stock exchange down 4.13% after deluge heads to capital
• Bloomberg: Revised productivity growth signals lower incomes
• SBT: Saudi stock exchange may soon open to international investors
• Reuters: Exports in Japan improved; currency intervention possible
• Chicago Fed: September national economic activity declined .22%
• BB: U.S. private, corporate and government debt is 289% of GDP

Financial News 10/21/2011

• Boston Fed: Civilian labor force growth down .3% in Q3 2011
• Moody's: "9 business sectors switch to stable from positive"
• BI: Occupy Wall Street potential class warfare per Nassim Taleb
• WSJ: Greek government passes additional austerity despite protests
• Moody's: Spanish bonds downgraded to A1
• SBT: Chinese private lending a 529.8 USD billion industry

Key aspects of investment decision making

Investment decisions are made to reach financial planning goals. For example, make $100,000 by age 50. Traditional investment plans often assume an interest rate and consistent periodic contribution. In reality this can be easily disrupted by a lay off, change in market returns, or other unplanned for life disruptions. These models of investing are outdated in some ways; in such case, a new way of thinking about investing is needed. The following are key factors in many investment plans whether they are traditional or not.

Inflation

Inflation is the increase in the cost of goods and services according to the U.S. Bureau of Labor Statistics (BLS). Inflation usually occurs every year and amounts to approximately 2-3 percent. This means a $100 can only buy $97-$98 of goods after one year's time at that rate. In light of that, investments should at a minimum cover the cost of inflation if only to preserve the value of money. Treasury Inflation Protected Securities (TIPS) are a government financial security  that periodically adjust for an inflation adjusted return.  

Time 

Time is another important factor in investing. Time really is valuable, and when diligent savings is added with the discipline to only increase the amount, financial results can be pleasing. Everyone retires or dies, and money is needed in retirement.  To see time in action try a savings calculator like the one at the Financial Regulatory Authority (FINRA) and play around with the numbers. To illustrate, $1,000.00 at 5% compounded annually yields  $7,078.04 inflation adjusted over 10 years with monthly deposits of $50.00 and $19,590.82 in 30 years. 

Interest 

Interest is also very valuable and can turn small amounts into big amounts over time. When investing small amounts with a disrupted schedule look for the highest fixed interest rate available. For example, assuming a beginning savings of $8,000.00, low income, and monthly investments of just $50 a month at just 2% one can accumulate $39,205.94 over 30 years with annual compounding i.e. interest added yearly. At 5% the amount rises to $77,354.89 and at 7% the value is $125,930.53.  An international bond fund with fixed returns and low management fees is one place to look. An example of a bond fund is the Total Return Bond Fund (TGLMX) listed by US News Money.

Risk

Bond funds are also low-risk if they are high quality bonds. For those individuals with a higher risk tolerance, yields can be higher, but losses can also occur wiping out previous year's gains. Be careful to properly consider risk level in terms of time as risk can sometimes even out over time while providing a higher return. The investment risk pyramid below describes the types of risk and possible returns. Also, be sure to consider schemes and scams described by the Securities and Exchange Commission (SEC).  

Image source: New York State Office of the Attorney General

Contributions

In a volatile working environment and unsteady economic conditions it is a good idea to assume no consistent investment contributions, nor a steady return on investment. Using this method, one's investment plan is not caught off guard when a disruption such as unforeseen expenses, or changes in cash flow do occur. Keep in mind starting off with a high savings balance is a good way to leverage and begin earning more by saving. For example, 2% on $1000 is $20 but 2% on $100 is $2.  A key is to be consistent and keep the amount manageable, a low risk investment won't be exciting to watch but sticking with it can make all the difference.

Instrument

Financial instruments can make or break an investment. High risk investments such as leveraged stock options can destroy savings and kill years of investment savings; be careful. In reality, investors might not have enough to diverse risk across multiple investments. In such case safer long-term, medium-volatility utility stocks with high income dividends might be an option. The Motley Fool provides some examples of dividend paying utility stocks with yields above 6%.   Be forewarned though, even utility stocks can move with the market. The Empire District Electric Company Stock (EDE) listed by the Motley Fool declined over 50% from its 2007 high and still hasn't returned to that price. 

Financial News 10/20/2011

• BLS: 403,000 jobless claims for week ending 10/15/2011
• DXY reclaims 77.25, VIX up near 35, BDIY up near 2140
• Existing home sales down 3 percent per the NAR
• Conference Board: September LEI .2, down .1 from August
• October manufacturing up in Philadelphia region per Philly Fed
• WSJ: Euro-zone bond guarantees off the table

The Shady Side of Banking

The following separate public complaints, legislative investigation and media reports about banking activities go as high up as the Federal Reserve Bank. On first impression they certainly show a dubious side to banking. What is demonstrated by these banking issues are questionable practices that may constitute extortion of money from tax payers, participation in conflict of interest, and violation of securities law all without serious repercussion.

Complaint 1: BofA shifting derivatives to FDIC insured accounts

This was reported by Bloomberg and highlighted by The Daily Bail on October 18th, 2011. Derivatives are the same type of financial instruments that caused the financial crisis of 2008; they are risky assets. To protect the bank from this risk the assets are claimed to have been moved to accounts that the Federal Depository Insurance Corporation insures. This is the same insurer that protects savings and checking accounts and is financing by the government. The complaint is that Bank of America is leaning on the U.S. Government, and hence U.S. Taxpayers, to hedge its risky decisions.

Complaint 2: Federal Reserve financing foreign governments

The Federal Reserve Bank is supposed to be the U.S. Central bank, not the global central bank or 'socialism for the wealthy'. It's primary mandate is portrayed to be the inflationary and economic concerns of the U.S. People, however  a legislative audit of the Federal Reserve Bank show $16 trillion in additional previously undisclosed liabilities, an amount not evident on its 'selected liabilities'  The fact these loans were not openly disclosed seems a little strange since the Federal Reserve Balance Sheet gives the impression of being complete, the Wall Street Journal does not show it on one of its versions of the Fed Balance sheet, and according to Senator Sanders of Vermont, a reasonable suspicion of conflict of interest occurs when banking officials receiving loans also serve the Federal Reserve Bank. The following video elaborates on this issue.

Complaint 3: JP Morgan Chase manipulating silver price

This particular concern has been spearheaded by Max Kesier of the Keiser Report on Russian Television. The claim, as illustrated in the video below is that JP Morgan Chase & Co. (JPM) practiced naked short selling, a trading method in which shares not owned are traded, with the aim of price manipulation.  A congressional hearing also took place in regard to this.

Complaint 4: Banks using loan loss reserves to report profits

This is a recent concern during Q3 2011 earnings season in reference to Citi Group in particular. NDTV describes how Citigroup earned 74 percent in Q3 using loan loss reserves to offset bad loan expenses. The accounting basis for this is also described in an October 17th, 2011 Moneycation Financial News reference to the Economic Review.

Financial News 10/19/2011

• SSA: Social Security Recipients to receive a 2012 3.6% COLA
• BLS: September Consumer Price Index up .3 percent
• Forbes: Goldman Sachs and Apple earnings fell short in Q3
• CNN Money: French government credit rating under review
• SBT: Chinese real estate market possibly slowing per data
• U.S. Census: September single Family home construction up 1.7%

Stock Options Trading: The Long Strangle Doesn't Lie

Another exotic sounding name for a financial instrument about nothing guaranteed. These types of financial tools challenge the mind to think in dynamic ways, but are more like working for a fee than investing. In other words, to implement the long-strangle stock option, traders are charged a fee to purchase two stock options making it more like paying to play with a sophisticated financial toy. It might make one look like they're clever, but if the money is not flowing, who cares about that. Bottom line is if it costs money, and does not guarantee payment, there is room for either party to win or lose. Moreover, a strong market sense can help leverage the power of stock options, but recognizing if one has that sense or not is a good idea. 

To clarify further, the long-strangle is a trading method and not an investment strategy. The technique involves the purchase of a long-call and long-put per the Options Industry Council (OIC). Don't be fooled by the elaborate language, it's financial jargon for the option to purchase at a discount while simultaneously having the option to sell at a little less of a discount. Figuratively speaking, it's not really comparing pears to grapes to say if someone buys 10 apples on discount but sells 9, their net worth will rise if apples increase in value and a lower  pre-arranged price was negotiated. So why not just buy 10 apples? Better yet, why not grow them?

The long-strangle insures the purchase of stock shares on discount through the long-put which is the instrument that sells on discount. In other words, the call option gives the purchaser the right to buy shares at a price lower than the future market price if the price rises and the put option gives the purchaser the right to sell shares at a higher price than a future market price if shares decline in value. In both cases the options might cost a little less than actually buying the shares directly if the contract fee doesn't offset that discount. If only the call option had been purchased there is no downside protection. In this sense, the put option is like a partial refund if the apples go bad before eating or selling them. Sounds complicated doesn't it. If it is too confusing to invest without knowing exactly what is going on, consider that a red flag.

Why is it called a long-strangle? TD Ameritrade's “Think or Swim” says it's because the stock option  strangle takes advantage of both sides of the position i.e. up or down price movements. So it is like strangling the price from both sides but applying a little less pressure on the upside because you think that's the direction it's going to go. It's also an intellectual stranglehold on common sense for the 13 reasons described by Ex-Options trader Stephen Whitney who came clean on his losses. Learn from Mr. Whitney's mistakes, you don't necessarily need to think very hard to swim, you just have to know how. In other words, if making money is more about understanding how to do it instead of knowing when more is better than less, then stock options trading tactics such as the long-strangle might not necessarily be such a good technique to be using.

Financial News 10/18/2011

• Reuters: CFTC to vote on commodities trading caps
• Fiscal support of European sovereign debt limited per Moody's
• Occupy Together movement now global per the Atlantic
• Chinese GDP growth slowed to 9.1% per CNN Money
• SBT: U.K. 2011 GDP forecast revised down to .9%
• Trade producer inflation in August up 1.6% per the BLS

Options Trading: Collar Strategy Overview

The 'collar' is one of several types of stock options techniques, and is a relatively conservative way to insure investment  gains in corporate shares, and in some cases, a way to multiply dividend profit. The option involves three simultaneous transactions per the Options Industry Council. This  stock option strategy in effect locks in capital gains, for a time, without having to sell shares.  For example, if a shareholder has experienced an increase of .20 cents per share on 100 shares and believes the price of Coca-Cola shares could fall, writing a 'call option' against those 100 shares  pays for the premium of buying the protective put option which increases in value when the share price falls.

In order to fully grasp this stock option strategy it is necessary to understand the component parts of the collar strategy i.e. the long-put and call option. A put option is a bet that increases in value as share prices fall. These transactions can either be 'written' or 'bought'. The writer of a put option buys shares on margin or owns underlying shares, then charges a fee or premium to the buyer. Each stock option is 100 shares and gives the buyer of the option to sell shares at a pre-determined price. If the price per share falls, the buyer of the put option can sell for a profit at the expense of the option writer.

A call option is the inverse of a put option and allows the option holder to buy shares at pre-determined amount. For example, Mr. A buys 10 call options to buy ABC Corporation at $1.00 per share for a cost of .10 cents per share. This means the premium will be 1000 x .10 cents= $100. In order to make a profit above unrealized gains for a call option alone, the price per share must increase more than .10 cents per share. When purchased, a call option is a form of leveraging to higher level than might be possible than buying on margin. However in a collar, the call is leveraged by the underlying shares owned by the seller and the premium is used to purchase the put.

The Options Industry Council states collar options are good for protecting 'unrealized gains'. In other words, if the share price falls, the collar option covers the cost of that fall while allowing the shareholder to continue holding the underlying shares. It's a slightly bullish strategy and can also be used to claim dividends without risk according to  Michael Thomsett of Minyanville. In both cases the strike price of the options and the cost of the collar premiums is going to be an important factor in determining whether or not the options is a profitable technique to use.

To be profitable and work, the premium from writing the call option should be close to the premium for buying the put option. Additionally, the strike price for both options should be equidistant from the out-of-the-money price which should be the same for both options. For example, if Mr. A writes a call option for ABC Corporation and purchases a 'long-put' option, the out of the money price is ideally $1.00 per share for both option contracts. Moreover, the option cost is also ideally the same; for example, .10 cents per share.

Financial News 10/17/2011

• The Economist: State and local pensions in $4.4 trillion deficit 
• Bloomberg: Euro to weaken to $1.25 per Morgan Stanley analyst
• SBT: 28-50 European banks face bond related solvency issues
• IMF: Strained European Financial infrastructure to remain 'intact' 

• FRB: Industrial production rose .2 percent in September
• CPM: State of Illinois in severe debt with low credit rating
• NY Fed: New York State experiencing business deterioration
• AP: Garbage accumulating in Greece due to strikes

Eurozone fiscal crisis information:

Greek national debt is $579.7 billion and the EFSF is €440 billion or $607 billion. Italy's national debt of $2.602 trillion is 120 percent of its gross domestic product per the European Central Bank.  Spain has a national debt of $2.46 trillion per CNBC. However, external debt of 179.4 percent of GDP is not the same as the 60.114 percent of "government finance" made public by the European Central Bank. 

The difference between 'government finance' and external debt is the former does not include long-term debt according to the World Bank. The Eurozone has a -6 percent deficit budget and inflation of 3 percent. In addition to a credit downgrade to A/A-1 with a negative outlook by Standard and Poor's as reported by Reuters, Italy's 10 year bond yields have risen almost 2 percent since November, 2010 meaning their national debt is getting more expensive. Spain also recently had its credit rating downgraded by S&P to AA-  per the Wall Street Journal.

Bloomberg reports the October 23rd crisis solution date will be postponed. This is due in part to the reluctance of banks to write down debts related to Greek bond assets per Douglas McIntyre in Wall Street 24/7, and the overall complexity of coordinating the use of the EFSF to solve the Eurozone's fiscal problems. Essentially, Greek's debt can be solved at the expense of large Euro-banks, the EFSF, and additional funding. However, Italy and Spain are too big to save and too big too fail and therefore must reduce deficit spending, increase gross receipts and lower bond yields to keep national costs under control.

Investors beware:

According to the Economic Review loan loss reserves affect bank profitability. In other words, by using those reserves to account for bad debt, write-off expenses are reduced or eliminated effectively increasing income.  This type of accounting can be misleading to investors who may do well to take note of such use of loan loss reserves when reviewing financial data.

Market, economic and financial commentary for the business week ending 10/14/2011

Stocks rallied for a second week erasing losses. The Dow Jones Industrial Average (^DJI) has almost risen 1000 points or approximately 9.4 percent from its 10/3/2011 low. The reason(s)? Some of the statistical economic data such as September retail sales has been positive and Euro-zone sovereign nations have collectively voted to increase their European Financial Stability Facility (EFSF) to  €440 billion or $610.89 billion to help keep banking solvency and national debt under control. 

There are also short-term trading aspects to the market that can either be ignored or not depending on if one is investing long-term or not. The short-term technical patterns i.e. the way the DJIA line moves up and down quite possibly indicated a slow down in the momentum of rate of change thereby signaling purchases. In other words, less and less people might have began selling when the DJIA approached 10,655 which served as reason to lock in profits from selling-short i.e. buying stocks at an out of the money price to sell at a later point when that out of money price is in the money. High frequency trading algorithms are also designed to look for patterns in market buying and selling which can also accelerate short-term market efficiency.

That said, not much seems to have changed. The trade deficit, deficit spending, unemployment, and lack of strong consumer sentiment remain high, and economic outlooks for Asia and Europe are low or have been lowered. The U.S. may avoid a recession based on recent data, but not by much and that could be all it takes for the global economic engine to also gear down which itself tends to have an accelerator affect i.e. reactionary economics causes spending to slow until a realistic spending opportunity occurs.  

If countries are buying less, why spend more? Europe is spending all its money throwing good money after bad at flailing banks and inefficient economies within an environment of credit downgrades, and the U.S. government has no money left. Corporations claim to be too afraid of regulations, taxes and future economic conditions to justify spending their $1.8 trillion  in capital per the Washington Post, an amount  about $500 billion higher than the Federal fiscal budget deficit of $1.3 trillion per the Congressional Budget Office. That deficit will be added on to last years deficit and the year before that, it's high. 

Corporations are left in the driver's seat because last year government spending was included in GDP data, unemployment will hold back consumer spending and according to the Bureau of Economic Analysis (BEA), the "increase in GDP during the 3rd quarter of 2011 was due to a "decline in imports, and an increase in government spending in addition to fixed residential spending." Interesting how net imports and exports are included in 'gross national product'. Next year the American Recovery and Reinvestment Act funding will wane even more, and what to do with Bush tax cuts in an election year?

Financial News 10/14/2011

• Bloomberg: Regulators seek to avert 'farmland dark horse bubble'
• IMF: Asian economic outlooks facing growing growth risks
• S&P has recently downgraded both Italy and Spain's credit rating
• OWS: "neo-liberalism" a cause of economic woes & continues
• Chinese trade surplus falls 18.5%, but so does inflation by .1%
• U.S. Census: September retail sales w/exclusion up 1.1%

Why pathological wealth addiction causes excessive income disparity

When wealth becomes an addiction it has social consequences. In 'The Psychology of Money', authors Adrian Furnham and Michael Argyle describe a term called 'Money Sanity'. In testing of subjects, research aimed to assess how different types of behaviors associated with money influence money sanity. A question discussed in the book is whether or not emotional issues become expressed through attitudes about money. This is a question also discussed by Eric J. Dammann Phd in Fortune magazine.

PD-US

According to the Fortune magazine publication, money is associated with psychological beliefs about what it can do.  For example, some believe money gives one control and others equate money with higher self-esteem. Moreover, Dammann states irrationality and learned behaviors can influence how money is used and the affects of channeling non-financial logic via money. On a mass scale, the suggestion is pandemic mis-management of money, potentially regardless of social class.

If the above psychological researchers are correct in their assessments, there is a notable possibility of emotional transference of individual psychology on to the use of and beliefs about money. Consequently, this could lead to excessive income disparity via money pathology or simply psychologically unhealthy money management. Since those with the most money are not immune from these psychological concerns, it would make sense to state the same issue in wealthy people would have a larger affect since their portion of total wealth is higher. 

To illustrate how pathological wealth addiction can cause income disparity suppose Person A makes $2.5 million per year and Person B makes $40,000 per year. Each have the same emotional issue and believe how much money they have in contrast to others primarily defines who they are as individuals. This belief transferred to money management could lead to behaviors such as hoarding money that's affect would be greater for the higher income individual. On a national scale, mass psychology of money management behavior could actually encourage income disparity to reinforce misconceptions about what wealth can do. 

Financial News 10/13/2011

• AP: Philadelphia cop uses a prisoner's debit and credit card
• Bloomberg: Eurozone August industrial production up .1 percent
• Moody's downgrades Merrill Lynch affordable housing funds
• BEA: August U.S. Trade deficit unchanged at $45.6 billion
• SBT: Indian industrial growth for August short at 4.1%
• BLS: Four week U.S. jobless claims moving average 408,000

How Much Gold is in Fort Knox?

 Image source: Agnico-Eagle

The World Gold Council, an authority on gold markets, states the United States holds 8,133.5 tons of gold. This is an amount equivalent to 75 percent of the total U.S. reserves, and approximately 26.5 percent of the World's gold. Of this gold, the Federal Reserve Bank of New York, that's gold vault is shown below, holds five percent of the United States' gold according to CNN Money. Denver and West Point also hold U.S. gold according to "America's Book of Secrets," which also claims only a Presidential order can reveal Fort Knox's contents.

Federal Reserve Bank of New York via Public Domain

Fort Knox, also known as the 'U.S. Bullion Depository', is believed to hold an unconfirmed amount of gold. The World Gold Council claims Fort Knox holds 4,600 tons of gold, or 147.89 million Troy ounces. Moneywatch states Fort Knox holds 147.3 million ounces of gold, an amount closer to 4,582 tons of gold. Maybe someone miscounted a mere 18 tons of gold valued at roughly $.946 trillion at $1,635 per Troy ounce.  

If Fort Knox actually holds this much gold, then the U.S. holds approximately $1.261 trillion in reserves if the World Gold Council statistics are referring to percent of U.S. reserves in terms of value and not weight. This would be very encouraging were it not for the fact Fort Knox has not been formally audited in recent times per Congressman Ron Paul (R) of Texas. In July 2012, a very large majority of Republicans voted to do just that per Business Insider. The last audit was around 1978 and allegedly only accounted for 11 percent of the presumed gold in Fort Knox per David P. Sorando of the United States General Accounting Office; eye witnesses report seeing what might have been copper content within the gold per Lew Rockwell.

According to the Gold Anti-Trust Action Committee, in the past central banks secretly infused gold in to the markets over time to lower its price and as a result, have less than half the amount believed to be held by the public. Since Fort Knox holds gold for central banks, then it follows that if central banks can withdraw such gold, then the amount in Fort Knox could indeed be less. SHTF Plan cites government correspondence as stating the privately held U.S. Central Bank has no gold. Yet, according to Number Sleuth, in 2010 the U.S. held 8,000 metric tons of gold, 75 percent of which was held for "foreign exchange reserves."

The accounts of the gold in Fort Knox vary. One official says one thing, another says something else. For example, according to CNBC The Treasury Secretary General sent a letter to Ron Paul saying "he had personally seen the gold reserves located in each of the gold storage compartments" at Fort Knox, yet CNBC was told otherwise when conducting its own research. Perhaps the Secretary General of the Treasury only personally saw the gold in a picture, rather than seeing the gold in person? Words can be misleading at times.

CNBC is not the only organization to research the gold in Fort Knox. The History Channel series 'Decoded' also conducted an investigation about it. All they could come up with were some interesting first hand accounts from residents who either worked or knew people who worked in Fort Knox. Decoded's researchers also interviewed the Mayor of the jurisdiction in which Fort Knox is located, but he did not know the answer either. Decoded's conclusion, it is a matter of faith! as evident in the host's analogy that the Wizard of Oz was possibly about a gold brick road that led to a manipulating wizard of 'OZs' or Gold Ounces! 

When the Congressman who is the Chairman of a Domestic Monetary Policy Sub-committee, and a national cable station cannot confirm something, it is at least a little odd. Of the doubts and speculation that have arisen from the lack of information about the American People's Gold is that it has already been sold, or that is used as collateral for financial security exchanges.  This echoes what the Gold Anti-Trust Committee has said. Furthermore, Zero Hedge has uncovered de-classified government documents that indicate central banking intent to manipulate gold supply. The fact of the matter though, is that there is no official confirmation about how much gold is in Fort Knox.

Multiple Pantheons of Wealth Gods

Ebisu: God of Good Fortune

Image source: Rudof Ammann: Public Domain

In history and in current times a multitude of wealth gods and goddesses dwell in mythology and ritual practices. These deities and religious representatives signify, bestow and encourage belief in a more than human aspect to the notion of abundance. 

Complete article link: http://www.helium.com/items/2239865-financial-mythology-gods-and-goddesses-of-wealth

Financial News 10/12/2011

• Ernst & Young: Euro tax policy shifting to pre-disclosure
• SBT: Nobel Prize winners advocate Eurozone fiscal union
• EFSF vote optimistically delayed for Slovakian revote per PBS
• CNBC: Alcoa misses 3Q, 2011 earnings estimates
• MW: $447 billion job legislation faces stiff opposition
• WSJ: U.S. Senate challenges Chinese currency policy

Free Camping In Downtown Washington D.C.

The Occupy D.C. Protest was recently granted a four month permit according to NBC Washington. That means one thing among others to the homeless, free camping in a great downtown location without the same stigma of sleeping under newspapers on a curbside. In a word, depressing; this public camping shares similar themes to the 1930's Hooverville shantytowns built across the U.S. to protest President Hoover's administration.

Image attribution: Community of the Ark of Lanza del Vasto

If the 'Occupy Together' movement does not sound recessionary, economists that use the GDP decline measure of recession may be fooling themselves. According to the New York Times, the measure of recession used by the U.S Bureau of Economic Research emphasizes business cycles in their recession metric. Since some business cycles can have down trends during GDP up-trends, the concentration of the GDP metric is somewhat illusory in its representation of the 'whole' economy.

To add credence to the view recessionary conditions are represented by the Occupy Together movement, government statistics prove helpful. For example, The New York Times also reported that a U.S. Census study found inflation adjusted median household income declined 6.2 percent between June 2009 and June 2011. In other words, in terms of household income, the recession never ended during that period. 

The principle of recessionary conditions can also be applied to median household net worth which declined a staggering 26.5 percent or $17.5 trillion between Q3 2007 and Q1 2009 per the Washington Post. The recession may have ended for some businesses, but not for the average American which has something to do with what Occupy D.C. is all about i.e. a growing concern over a widening income disparity, and a need for free camping.

Financial News 10/11/2011

• Bank of Ireland credit rating downgraded to Ba1 by Moody's 

• SBT: Inflation adjusted household income declined 6.2%

• Small businesses end 6 months of pessimism per the NFIB 

• UKG: Politician claims securities trading influenced by cocaine  

• Eurozone nations shadow ECB influence per the Economist 

• WSJ: Alcoa expected to disappoint on aluminum overcapacity  

Financial News 10/10/2011

• U.S. Markets open Columbus day with over 2% surge

• Belgium's credit rating on review by Moody's after Dexia bailout 

• Yen has appreciated over 33% against the dollar since 2007 

• Japanese GDP forecast at .6% in 2011 per Nikkei 

• VIX lower but elevated;  BDIY continues indicating economic stress

• Q3 corporate earnings begin Tuesday 4:00 PM with AA 

Steve Jobs Memorial at Apple Shop Shows Business Done Right

Occupy DC Demonstrates Widespread Discontent

The Occupy DC protest is an indicator of growing discontent with corporate and political practices in the United States.  So far the protests in downtown D.C. have been peaceful and legally permitted per the Washington Post. A worry lawmakers, and police have probably already considered is how masses of people protesting provides catalyst for escalation. According to Defense Actions LLC, flash mobs can occur in environments quite similar to those of public protests. 

The Occupy DC website clearly defines their cause. They are protesting poverty, economic disparity and corruptive corporate influences on political decision making. Occupy DC, Occupy Wall Street and the growing Occupations nation wide  can be characterized as  a left-wing political movement and echo some of the sentiments made in Wisconsin several months ago. Specifically, after the Wisconsin State Government sought to legislate against Union collective bargaining rights and higher insurance premiums, unionized labor protested according to the New York Times. and other agencies back in February 2011. 

According to Internet Broadcasting Systems, Inc., the Occupy Together movement is reenergizing that sentiment expressed in Wisconsin. Posters on the Chanel 3000 website explain themselves. For example, according to 'Middle Class Moving Downward', "The hypocrisy is that many of the tea people have plenty yet feel entitled to their social security benefits when they could afford not to collect the benefits." The themes of both the Wisconsin protests and the Occupy Together movement share a doubt that legislative decision making is not effectively taking the middle class into account via pro-corporate votes and political gridlock.

There is an underlying theme to much of what is going on now. For the first time in many decades the U.S. economy is showing signs of wear and tear in the sense that its resilience to adversity might be weakening. This is apparent in economic indicators such as the uncharacteristically long period of high unemployment, high national debt and deficit spending, government cut backs and sluggish economic growth.  Perhaps we are not used to not having widespread wealth and are facing economic realities have living within means that have been normal for economies the world over. In such case, functional adaptation is key, a challenge we owe it to ourselves to rise above.