Lean and Mean and Miniscule: The Downsizing of America

The recent “surprise earnings” that have led to this recent market rally may have surprised most, but not all. Some of us knew that this round of earnings would be good because of several factors.                                                                                                                                               The first is the fact that the financials, which are responsible for starting this whole rally, made money by trading during a three month run-up while using a crap load of free capital given to them by you (taxpayers). This is a topic for another blog entry to be sure.
The second factor is Wall Street’s ability to get investors to believe in the significance of these “earnings estimates” instead of looking for real earnings growth. Instead of real, positive increases in earnings, all you have to do is to do better than the analysts expect you to…..even if you still do badly! And the worst part is that the people who are doing the estimating have a vested, financial interest in the company beating the estimates. Talk about a conflict of interest!
But the real factor that gets me is how most, if not all of the companies in the US increased their earnings per share (EPS), not their revenues! They did this by cutting back expenses including labor and ultimately increasing earnings by decreasing their size. I hear so many analysts talking about these companies getting “lean and mean” and how good it will be for the future of the company…..what a laugh! American companies are downsizing to generate better earnings results but they may potentially be damaging their ability to compete on the global level. Eventually, this will have to be bad. Currently, we can begin to see the error in this concept by looking at the US automotive industry and the US banking industry.
The demise and downsizing of GM and Chrysler and the weakening of Ford have allowed foreign car makers to gain significant chunks of market share not only in the US but globally as well. Plant closings and massive layoffs have shrunk our car makers. This is creating a competitive disadvantage for the US car makers. Meanwhile, the banks have had to sell off assets to meet capital requirements and pay down losses in the credit markets. US banks are nowhere to be seen in the ranks of the top ten banks in the world!  When it comes to competing in the global financial markets, size matters!
My father once told me that in basketball, a good big man will always beat a great little man. The saying goes that you can’t teach size. And size (asset base) matters a great deal in this game too….the game of global business. Bigger is often better when in competition. Economies of scale really pay benefits to the companies big enough to exploit that scale. By diminishing the size of our companies here in the US, we lose the advantage of economies of scale and thereby hurt our pricing ability which is already hampered by US law as compared with other countries.
Lean and mean is one thing…..miniscule is another. The US could wind up having trouble competing globally with the big boys in the future because we may no longer be a “big boy” ourselves!



Wall Street is Not Your Friend

Wall Street Is Not Your Friend 

One of my little sayings is “Wall Street makes money OFF you….NOT for you! I have been saying this for years now and I am not sure how many individual investors have been listening to me! Finally, someone that most of you listen to is blowing the horn that I have been carrying for all these many years! Warren Buffet has something to say about this very matter. Click the link below to read what he has to say about this!


Wall Street and Wall Streeters always make money for themselves mainly due to their fees and commissions, not due to trading profits. Look at how much your funds have made you over the last 10 years versus how much money your fund manager has made from you charging you 2% a year!!! This is exactly why you need to take matters into your own hands and handle your investing yourself! A year or so ago I ran a class entitled “Hire Yourself..Fire Your Fund Manager” which shows you exactly how to do that! I think that the recording is available on our site.

This articles shows that at least one person that we all presume is in the know agrees with me!!!

Option Mini Contracts Debut

In what I believe is very good news for investors, option mini-contracts made their debut (test) yesterday as a pilot program. The test is in 5 different securities……AAPL, GOOG, AMZN, SPY, and GLD. Where I can understand AAPL, GOOG, and AMZN due to their price, I am not sure why they included SPY and GLD. However, I can easily see why the three stocks were included. They offer an opportunity for the individual investor that was not previously there.

For whatever reason, today companies seem to be enamored with high dollar stock prices.  In the past, once stock prices got into the triple digits, companies split their stock in order to keep the dollar prices reasonable enough to keep the individual investor interested and able to buy. Recently however, triple digit stock prices have become “sexy”- a way for companies to show they are “hot” (successful). The problem is that the total dollar price of these high flyers all but eliminates the ability for an individual investor to play.

Even option traders have problems with the total cost of these expensive stocks. The Stock Replacement Strategy can be very cost efficient and can help investors neutralize the expensiveness. However, even this strategy can be cost prohibitive when prices soar way beyond the norm. For instance, if today, I wanted to buy a stock replacement option six months out in GOOG that option would cost $120.00. Calculate $120.00 x 100 shares and that means $12,000 for one contract. That is just too much money for one contract for the average investor!

As option traders, we  do have a strategy that can offset some of that expense, give us a limited downside risk and a decent percentage return. That strategy is the Vertical Spread. The problem is that the vertical spread also gives us a very limited profit potential! That is definitely NOT what we want in stocks like AAPL, GOOG, and AMZN! These stocks can have huge runs and we don’t want to make $3.00 on a $60 or more movement!

The mini-contract allows the investor to create the right strategy at the right price. Now, with the mini-contract available, we can buy one contract worth 10 shares for $1,200 a contract. This allows an investor to get into a position at a tenth of the cost! The Stock Replacement Strategy becomes affordable for almost everyone and now these sexy stocks can be once again played by individual investors!

The Ultimate Put

The best way to protect your long position is to buy puts against it. This can be done on an individual position or an entire portfolio. But, if I have learned anything in this market environment it is that my thought that options are the ultimate hedge was never correct. The real ultimate hedge, as it is today, is the US Federal Reserve Bank…..The Fed!

Ever since the Financial Crisis, the Fed has been bailing people out, pumping money into the economy and now buying every piece of US Government Debt that they can get their hands on.  They need to buy to keep interest rates at near zero and have promised to do so through 2014 and possibly longer. This tactic has the effect of a put on the market that allows for huge downside protection like a real put would. All dips are suddenly buying opportunities because there is nowhere else to put your money.

But, it is more than that just that. With the Fed buying so much of this debt at ridiculously low levels for an obscenely long period of time, the Fed is creating an opportunity for bond traders. This is what makes this the ultimate put. You see, the long term buying of the debt at such low rates gives traders the chance to short the debt securities with the very high probability that the bonds and bills will decrease in value as rates go up and that is very likely down the road.

Shorting these securities puts money in their accounts……..money they need to put to work. And with rates so low, the money managers have only the stock market to put the money into to create any kind of acceptable returns. With all of this additional money going into the market, it would be very difficult for it to go down.

Wow, that is one hell of a put! It is the Ultimate put! It is the Fed that is the Ultimate Put!

Too Much Action Causing too Little Reaction

When I go through the news headlines, I can’t help but notice the number of “major” stories that are out there right now that could move the market rather dramatically in one direction or another. We have the troubled US economy, the stalled Chinese economy, the European Debt Crisis, civil unrest in the Middle East, the US Fiscal Cliff, the Santa Clause Rally, Year End Window Dressing, and the list probably goes on.  Am I missing anything?

Among these stories are both bullish and bearish connotations…….sometimes in the same story. With so much unsettled in these stories, so much uncertainty in both directions, is it possible that this potential market moving news tug of war will create a standoff……..a draw? Will the pull of both sides cancel out any advantage of either direction?

It could happen! As I see it, it is possible that the market finishes this month….and thus the year… off where it is now. As long as we have no deal in the Fiscal Cliff, no definite direction in the US Economy, no answer to the European Debt Crisis, no heating up of the Chinese Economy, and no truce or war in the Middle East, we will probably finish the year very close to where we are now. Between the bullishness of the Santa Clause Rally and Year End window dressing, and the bearishness of the idea of capital gains and dividends being taxed as ordinary income, we could see a relatively stagnant close to 2012.

With more and more external factors influencing the US markets to a greater and greater extent due to Economic Globalization, there will be more and more occurrences where several stories on both sides of the market will come together and offset each other for periods of time. The key to these market events will be uncertainty. Certainty will bring direction to the markets by allowing the stronger stories to dictate direction and break the standoff. But, with multiple stories in the headlines reeking with uncertainty, these market standoffs will become the likely scenario.

Never a More Perfect Time for Stock Replacement

From the day after the election was over, the market has gotten absolutely killed! The major problem is the specter of the Fiscal Cliff. The Fiscal Cliff encompasses several different topics surrounding taxes. The biggest concern that most investors have concerning the market and taxes is the Capital Gains Tax. With Obama winning the election, investors are expecting a rise in the Capital Gains Tax: investors are expecting and dreading that the discounted Capital Gains Tax will be eliminated and that Capital Gains will be taxed at the rate of ordinary income.

Because of this expectation, many people sold their stocks that had long term gains before the Capital Gains Tax Rate goes up. This is a large reason for the current selling and may continue for a bit. But, at some point, the uncertainty will be solved and the market will bounce back. When will it……..well that is unknown! But when it does it will probably be quick and aggressive. The problem is that everyone will have already sold out their stock positions and will miss the run back.

But not if they used stock replacement! When they sold out their stock, they could have purchased a call option to replace the stock they sold. This way, when the market does turn around and run back, you would be able to participate in the rally. I have not seen a situation in a long while where the stock replacement strategy was so useful and timely as right now!

Earnings Don’t Matter!

Here we are in the midst of a very important earnings season and I am the first to say that I can’t believe I am saying that earnings do not matter! From the day that the market started trading, earnings were always the major factor in stock evaluation. Earnings per Share (EPS) and Price Earnings Ratio (PE) have been two of the most popular and most used gauges of a company’s stock price and both stress the importance of earnings. That is how it always was but not anymore. Wall Street has been able to convince investors that a company does not actually have to improve or increase their earnings but just to do better than predetermined estimates.  That better than the estimates is determined by a preselected judge (Wall Street itself) with a separate agenda. You don’t have to be Einstein to know that it is in Wall Street’s best interest to make stocks look as attractive to investors as possible in order for them to move out their inventory at a profit. So, Wall Street uses these estimates to control your opinion on stock valuations by always making them look attractive. This has been going on for a while now and should come as no surprise to anyone. But things have changed even from there. Now, forward guidance seems to have become more important than earnings. What the company says about what they think will happen next quarter trumps the performance of the company for the last quarter. When you combine forward guidance and Wall Street estimates, you have gone pretty far toward making earnings pretty insignificant. Again, this is not necessarily a new thing. There have been recent articles that show that the market has diverged from the economy and earnings and how that fact has led to historically poor performances from the hedge funds this year. But the fact is that there is an even bigger reason why the divergence has occurred……government intervention. No matter how bad the earnings are and no matter how bad the forward guidance is, the market will not go down because the Fed will not let it. They will continue to pump money into the economy through whatever means possible. This lone factor has confused and stymied the “smart money” hedge fund managers all year. Their natural instincts force them to take notice of company earnings and macroscopically, the overall economy. Over the past several months, the economy has seen negative news and earnings estimates have been slashed repeatedly and the fund managers know that means trouble for the market. Unlike me, however, they just don’t know that today, it just doesn’t matter!


Could the Fed be Smarter than I Think?

The United States faces a Federal debt of epic proportions that will get even bigger over the next few years. Way back when the European debt crisis started, I made mention to the fact that we were going to have to go through what Europe is going through and probably worse. Many people offered what I thought were overly optimistic cutback ideas that they said would significantly decrease our debt.
Personally, I went on record saying that none of it would work and that the situation was very, very serious. But, the crisis in Europe and our own problems with our economy plus the slowdown in China have diverted people’s attention from the seriousness of our own debt crisis. Because there were more pressing problems, our debt situation has continued and worsened.
Sticking to my guns, I still feel that the only way that we can get out of our debt is to devalue the US Dollar substantially. This, of course, will not endear us to the rest of the world especially those holding our debt. Further, it will not be endearing to the people of the US as inflation will spike to unprecedented highs and those who travel abroad will be especially unhappy as the US dollar will not be worth anything near what it has been.
We might possibly get away with a devalued dollar’s effect on the citizens of the US but not on foreign countries. By devaluing the US Dollar, you would be decreasing the real value of the debt held in our currency by a foreign country. With the amount that we would need to devalue the dollar, we would probably be chopping the value of the debt held in dollars in half at least! If the US did this, it would seriously tick off a lot of trading partners both allies and competitors. This could create very big problems for the US.
But, what if the US devalued the US Dollar unintentionally? Remember, in order to devalue a currency, you must flood (print dollars) the market with that currency which decreases the value of the currency against other currencies…….just in the same way you would flood the market with currency in order to stimulate growth. QE3 was seen by some experts as not needed and by other experts as useless. This begs the question as to why the Fed would do it. Even two of the voting Fed board members questioned the potential success of QE3 feeling that it would not work!
Even with the doubters and doomsayers, the Fed did it anyway. Seems pretty stupid to me, unless the Fed is using the threat of the US slipping back into a recession and the overall global economic slowdown as an excuse to flood the markets with US dollars even though they know that it will not make a difference to the current economic situation….it just will not matter. At least, it will not make a difference in terms of stimulating the economy. But what if their goal has nothing to do with stimulating the economy? What if their goal was to use this environment as a good reason, a warranted excuse, to flood the market with dollars with the sole purpose of eventually devaluing the US dollar to pay off the debt?
Now, when the economies of the world start to recover and their growth rates begin to heat up, and countries have to start raising rates to quell an increasing inflation, all the Fed has to do is nothing! If the Fed holds rates down and accepts some increasing inflation, then global currencies will rise against the dollar thereby weakening or devaluing the dollar. At that moment in time, all the Fed has to do is to say that they do not feel comfortable with the growth in the US and they need to keep rates low until they are certain that the recovery has strong legs. Then, it would appear that the devaluing of the US dollar was not done purposely to cheapen our debt but as collateral damage associated with lowering rates to combat recession.
Could the Fed actually be thinking this way? Could they be this smart? I for one would really like to believe so!