I would like to elaborate on my May 2011 idea to go long straddles on Silver when the contracts value at 15% or less.
The last two months (since the end of April), Silver (ETF - SLV) has been trading at a range between $32.00 and $37.50 per share and currently resides around $35.00. A very important component to pay attention to on these contracts is that the volume is back to levels prior to April 2011.
If the average volume holds true over the next few quarters, one can expect a much less volatility on the action of the price. Being the case, long straddles will not pay off since the current cost to put on the trade is 19% of the price out to October and 24% out to January 2012.
Also, it appears the market has sustained limited volatility, even after the announcement of a potential default of Greece.
The writing is on the wall that we have a ton of liquidity in the market place to sustain a growing economy. Whether the growth (over the long-run) is real growth is irrelevant as I'm in the camp that the price of volatility will decrease.
Since these contracts cost well of 15%, at this point, I feel the edge would be to those that are going short straddles and strangles on Silver and perhaps, other commodity investments.
Take care and Avenge!
Monday, June 20, 2011
Friday, June 3, 2011
The Monthly Employment Report, CEOs, Game Theory and the Government
Today, economists were way off on the non-farm payroll report, which stated that job growth for May was only 54,000 - versus a predicted 175,000. In addition, the national unemployment rate rose from 9.0% to 9.1%.
As a result of this gross underestimation, equity markets opened down over 1% and bond markets rallied. To add to the disappointment in job growth, House Republicans have publicly declared that "Obamanomics" has not worked, and employers' confidence has depleted due to the uncertainty in the U.S. Government being able to control the budget deficit.
I've always been in the camp to question everything that a politician says. However, I think they may be onto something with the statement about confidence. At the end of the day, CEOs in the United States have a tough job (for those who create real value outside the financial services industry) and I believe they generally have the proper skills, background and incentives in place to lead their firm going forward.
With that being said - assuming I'm correct about my assumption that we have excellent CEOs in non-financial firms - why would CEOs want to risk their firm's liquid assets into projects that have a much greater degree of uncertainty than ever before? Assuming a smart decision maker, who were to invest in a project requiring a 5-year wait for a return on investment, and may anticipate (a) a slowing in consumer spending, (b) an increase in the savings rate, (c) increasingly massive government debt (d) a bloated Fed balance sheet, (e) a potential corporate tax rate hikes and (f) the Board of Directors not rewarding managers & CEOs for taking risk like they did in the past, why would any smart business leader want to hire someone when the risk/reward profile is not in balance?
If incentive structures were properly set up to compensate managers to take on additional risk in search of further growth & innovation, then perhaps more firms would hire.
The major problem can be described using Game Theory 101. Back in business school, I learned simple yet powerful concepts on the theory of decisions and payoffs.
Currently, CEOs collectively have two major choices: (A) they can take risks, increase capital expenditures - hire employees, increase outsourced work, invest in technology, etc. - or (B) they can invest in the bare minimum to appease the shareholders and board of directors.
Now, an important component on the decision is the payoff. For example, say the CEO chooses A and if the project succeeds, the payoff will be X and if the project fails, the payoff will be Y.
In addition, assuming the CEO chooses B and, if competitor's projects succeed, the payoff will be M and if the competitor's project fails, the payoff will be N.
The CEO's current dilemma is to decide whether or not to increase investment of their firm's capital. In today's environment, the difference between Y and N (if the project fails), is not even close enough to warrant the ensuing risk to the CEO's job or career. Even if the difference is relatively great between X and M (if the project succeeds), the dramatic difference to the downside is what causes the CEO's to not take the risk.
The key is to decrease the gap between case Y and N.
To take this one step further: since most, if not all, senior managers are taking the conservative approach, the risk/reward profile will not improve. The increase in investing and hiring needs to get to a Tipping Point before other CEOs feel that they better start to put their firm's assets to work before the shareholders and board of directors lose patience and fire them.
Currently this is not the case and CEOs collectively sit on the sidelines. It's a question of who will be the first brave enough to jump in, and then others feeling they have to follow suit.
If only our government - federal, state, and local - could inspire confidence among businesses of all sizes. Otherwise this "great recession" will only prolong itself even further.
Take care & Avenge!
As a result of this gross underestimation, equity markets opened down over 1% and bond markets rallied. To add to the disappointment in job growth, House Republicans have publicly declared that "Obamanomics" has not worked, and employers' confidence has depleted due to the uncertainty in the U.S. Government being able to control the budget deficit.
I've always been in the camp to question everything that a politician says. However, I think they may be onto something with the statement about confidence. At the end of the day, CEOs in the United States have a tough job (for those who create real value outside the financial services industry) and I believe they generally have the proper skills, background and incentives in place to lead their firm going forward.
With that being said - assuming I'm correct about my assumption that we have excellent CEOs in non-financial firms - why would CEOs want to risk their firm's liquid assets into projects that have a much greater degree of uncertainty than ever before? Assuming a smart decision maker, who were to invest in a project requiring a 5-year wait for a return on investment, and may anticipate (a) a slowing in consumer spending, (b) an increase in the savings rate, (c) increasingly massive government debt (d) a bloated Fed balance sheet, (e) a potential corporate tax rate hikes and (f) the Board of Directors not rewarding managers & CEOs for taking risk like they did in the past, why would any smart business leader want to hire someone when the risk/reward profile is not in balance?
If incentive structures were properly set up to compensate managers to take on additional risk in search of further growth & innovation, then perhaps more firms would hire.
The major problem can be described using Game Theory 101. Back in business school, I learned simple yet powerful concepts on the theory of decisions and payoffs.
Currently, CEOs collectively have two major choices: (A) they can take risks, increase capital expenditures - hire employees, increase outsourced work, invest in technology, etc. - or (B) they can invest in the bare minimum to appease the shareholders and board of directors.
Now, an important component on the decision is the payoff. For example, say the CEO chooses A and if the project succeeds, the payoff will be X and if the project fails, the payoff will be Y.
In addition, assuming the CEO chooses B and, if competitor's projects succeed, the payoff will be M and if the competitor's project fails, the payoff will be N.
The CEO's current dilemma is to decide whether or not to increase investment of their firm's capital. In today's environment, the difference between Y and N (if the project fails), is not even close enough to warrant the ensuing risk to the CEO's job or career. Even if the difference is relatively great between X and M (if the project succeeds), the dramatic difference to the downside is what causes the CEO's to not take the risk.
The key is to decrease the gap between case Y and N.
To take this one step further: since most, if not all, senior managers are taking the conservative approach, the risk/reward profile will not improve. The increase in investing and hiring needs to get to a Tipping Point before other CEOs feel that they better start to put their firm's assets to work before the shareholders and board of directors lose patience and fire them.
Currently this is not the case and CEOs collectively sit on the sidelines. It's a question of who will be the first brave enough to jump in, and then others feeling they have to follow suit.
If only our government - federal, state, and local - could inspire confidence among businesses of all sizes. Otherwise this "great recession" will only prolong itself even further.
Take care & Avenge!
Wednesday, June 1, 2011
When giving a Financial Advisor your money, ALWAYS do your homework!
In the modern era of the financial markets, specifically since the Reaganomics time in the 1980's when money became easy, the banking industry grew faster (except for Technology) than any other industry. The growth of the banking industry led to legislation to de-regulate the Glass-Steagall Act to allow banks, insurance companies, and investment banks to merge. This has been the top of mind or all of those on Capital Hill to determine what is best for the financial markets.
While all of this was going on, the financial media does not talk much about how much the financial advice industry has boomed. In today's era, everyone is giving financial advice (and making a ton of money doing it) from branch banks, insurance representatives, advisors in discount brokerage houses, large investment banks, registered reps in the accounting field, and many others. This means that you can leave your house to go to the grocery store and chances are you've passed at least five different places to get financial advice and park your investments.
What this means is that the loose regulations has allows just about anyone to obtain a Series 7 and Series 66 Licenses (Investment Securities Licenses necessary in order to legally get compensated) in order to make money offering one's expertise.
Here's the catch! It's not so much how much experience (however, it's very important) the financial advisor has and how successful he/she is, it's what the framework of the "business model" is as to where this advisor is giving you advice.
Remember this: The financial advisor that you speak or meet with face-to-face giving you the advice is spending most of their time selling to obtain commissions or recurring revenues. This means that there may likely be a centralized model that has been designed and they are just executing on the model for sales purposes.
The questions that need to be asked are as follows:
1) What are all the different investments that you offer to clients (irregardless of compensation)?
2) How much do you get paid (absolute amount and/or % of assets) regarding the different offerings at your firm?
3) If you are confined to only certain types of investments for clients to invest in, why is this the case and please provide the detailed research as to why you made this choices? What are the relationships between these investment choices? Are the proprietary or third-party? Please explain the details on differences of compensation.
***This parts gets tricky because if you receive the data from the financial advisor, most of you will not understand what it means. You will need to consult with a "trusted" expert that understand this information and they can help you make sense of it.
4) If you leave the company, who will be handling my assets? (This question is important because if they answer the question with ease, that means you are a tiny part of a big system. You need to be aware of this if you want a long-term personalized relationships.)
These are just some of the questions to consider, however, I don't want to provide too much information all in one published article.
Always keep in mind that the business model of the place you invest in is the most important indicator of your long term experience. ALWAYS do your homework and find an independent person you trust to help answer your questions. It's a complicated financial marketplace so it's always nice to have someone simply it for you.
Take care and Avenge-
While all of this was going on, the financial media does not talk much about how much the financial advice industry has boomed. In today's era, everyone is giving financial advice (and making a ton of money doing it) from branch banks, insurance representatives, advisors in discount brokerage houses, large investment banks, registered reps in the accounting field, and many others. This means that you can leave your house to go to the grocery store and chances are you've passed at least five different places to get financial advice and park your investments.
What this means is that the loose regulations has allows just about anyone to obtain a Series 7 and Series 66 Licenses (Investment Securities Licenses necessary in order to legally get compensated) in order to make money offering one's expertise.
Here's the catch! It's not so much how much experience (however, it's very important) the financial advisor has and how successful he/she is, it's what the framework of the "business model" is as to where this advisor is giving you advice.
Remember this: The financial advisor that you speak or meet with face-to-face giving you the advice is spending most of their time selling to obtain commissions or recurring revenues. This means that there may likely be a centralized model that has been designed and they are just executing on the model for sales purposes.
The questions that need to be asked are as follows:
1) What are all the different investments that you offer to clients (irregardless of compensation)?
2) How much do you get paid (absolute amount and/or % of assets) regarding the different offerings at your firm?
3) If you are confined to only certain types of investments for clients to invest in, why is this the case and please provide the detailed research as to why you made this choices? What are the relationships between these investment choices? Are the proprietary or third-party? Please explain the details on differences of compensation.
***This parts gets tricky because if you receive the data from the financial advisor, most of you will not understand what it means. You will need to consult with a "trusted" expert that understand this information and they can help you make sense of it.
4) If you leave the company, who will be handling my assets? (This question is important because if they answer the question with ease, that means you are a tiny part of a big system. You need to be aware of this if you want a long-term personalized relationships.)
These are just some of the questions to consider, however, I don't want to provide too much information all in one published article.
Always keep in mind that the business model of the place you invest in is the most important indicator of your long term experience. ALWAYS do your homework and find an independent person you trust to help answer your questions. It's a complicated financial marketplace so it's always nice to have someone simply it for you.
Take care and Avenge-
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