In the award winning musical "Cabaret" ex-expatriates sang and danced their way through the collapsing landscape that was the German Wiemar Republic. In reality however, there was very little to sing and dance about in Germany at that time. Hyperinflation had devastated the mark to such an extent that it was far more beneficial to burn money in the stove because wood kindling had more value. The nation began to operate on a barter system and alternate currencies backed by certain commodities in agricultural areas began to take hold as an "official" currency. The image of a man pushing a wheelbarrow laden with marks to buy a loaf of bread was a peculiar sight to those seeing it in the magazines of the day but to Germans it was an everyday occurrence.
Two things brought about the destruction of the mark. Kaiser Wilhelm's financing of World War I through debt instead of taxation and the punitive reparations policy that was put into effect by the victors that stripped Germany of its colonies, its resources, its industrial output, and most of its army. It also saddled the country with gargantuan monetary restitution payments which over time would be increasingly difficult to pay given that much of its production capabilities were be taken by others. While American president Woodrow Wilson sought a far more just approach to punishment through his 14 Points, Europe and in particular France, sought to destroy what was left of its already vanquished enemy. So, in order to pay its debt, Germany was forced to fire up the printing presses.
An interesting phenomenon during this time was the German stock market's rally. Speculation was the order of the day and cash profits could be converted into much more favorable foreign currencies. Anyone who had access to the markets played them to the hilt. This became a necessity because bond yields were virtually non existent and no one trusted government paper anyway.
As inflation spiraled out of control, people found new ways to get by. As stated earlier; secondary currencies started to develop based on rye and other collateral. Barter became an important aspect of everyday life and it has been reported that one could rent an apartment for a half stick of butter. Labor sought wage increases to keep up with rising prices but this caused more marks to be printed which in turn further devalued the currency and caused the price of goods inflate. It became a no win situation for the average worker when it took a year's salary to pay for a month's living expenses.
Fast forward nearly a century later and let us consider the current U.S. economy. Now, obviously the economy of the United States today is nowhere near that of Germany in the 1920's. There are however, parallels that should be noted.
The U.S. has a tremendous amount of national debt; much of which was brought on by financing wars through the issuance of bonds and the great bank and business bailouts of 2008. Quantitative Easing has continuously pumped more money into the economy and the stock market has been moving higher because of this. Recently when the Federal Reserve pointed out that a tapering might be in order the market fell 300 points and only started to move higher when it was determined that QE would continue unabated for a few more months. Volume on the Dow Jones Industrials has dropped over 70% since 2008 and does not justify its performance otherwise.
Inflation, we are told is under control but a trip to the grocery store and the gas station however, might give one cause to ponder the veracity of such a claim. Inflation is gauged by how much money is in circulation. The more of it that is available the less it is worth. The M-1 money supply measures things like cash, checking accounts and immediately liquid instruments. The M-2 supply measures all of M-1 plus savings accounts and certificate of deposits under $100,000.00 and the M-3 money supply measures large accounts like CD's over $100,000.00, funds held by Americans in foreign banks and large institutional money funds. In 2006 the Federal Reserve stopped publishing M-3. So only M-1 and M-2 are used in the calculation. Therefore large deposits are no longer reported which may give a different appearance as to how much money is really out there and may distort the actual rate of inflation.
Bitcoin is making its rounds as an alternative currency and its future was even given a tacit endorsement from none other than Chairman of the Federal Reserve.
The demand for a $15.00 minimum wage to keep up with the cost of living is akin to the demands of German workers to double their earnings in the '20's. It is a futile effort to raise the minimum wage if high paying manufacturing jobs are not also available and plentiful. Inflation can only be curbed by taxation and only the government has the authority to remove money permanently from the economy. Larger paychecks for skilled labor coupled with corporations who domicile themselves in the U.S. and do not seek tax havens out of the country will create a larger tax benefit and ultimately ease inflation. In short the United States must reclaim its manufacturing base, widen its tax base and cut spending. A tapering of Quantitative Easing is also a necessary component in the reduction of inflation but there will be a serious side effect to the market and its investors if it is too much at once.
History is a teacher that repeats herself to varying degrees when a generation has forgotten the previous lessons.
Read the first chapter of "The Book on Put Option Writing" absolutely free by clicking here.
Friday, December 6, 2013
Wednesday, November 13, 2013
TURN UP THE VOLUME, PLEASE
One of the most important factors in economics is the balance between supply and demand. Too little supply and too much demand leads the price of goods higher. Too little demand and too much supply means a drop in prices. It is through the imbalance of the first description that observers witness the forming and then eventually, the gradual deflation or outright bursting of bubbles. This phenomenon has been played out countless times and one need only look to recent examples in the real estate market or the gold market to see what happens when demand dries up. The stock market is the quintessential example of supply and demand, and what is developing currently is very unnerving.
Volume is the key to demand. The number of shares bought and sold on a given day indicates the interest of investors in a company's stock and in the market overall. Consider that from January 2008 to the September 15, 2008 collapse of Lehman Brothers, the Dow Jones Industrials reported an average daily volume in the in the neighborhood of 300,000,000 shares. The market breadth was evenly spread and the market was breaking new highs. Today the market continues to break new highs but from January 2, 2013 to November 13, 2013 the average volume for the year is roughly 85,000,000 or nearly a 72% decline.
A little buying pressure can move a stock dramatically upwards. If the volume is light but weighted in one direction it can send a stock irrationally higher or lower. There are few things to consider when looking at the current market. First, we must assume that the majority of individual investors who were devastated in the crash of 2008 have yet to recoup their losses and return to the market. Secondly, only a few high priced stocks are moving higher. Stocks that trade over $100.00 per share (or over $1000.00 on the S&P) are purchased by forces greater than most individuals. This leaves mutual funds, institutional investors and hedge funds in charge of the markets and their selections consist of what is moving; and what is moving is what they are buying. Today, on a day where the Dow closed up 70 points and hit another new high; 14 of the companies listed closed up with less than a .50¢ gain, 6 closed above .50¢ but less than $1.00, 6 closed negatively, and only 4 closed above $1.00. All on light trading volume.
The last thing to look at is margin. The current market has the highest margin debit balance in its history. When markets crash, margin calls are the reason. Investors who are over leveraged on margin must either bring in funds or sell stock (sometimes two to three times the amount they have borrowed) when the margin call comes. This is one of the reasons many individual investors have not been able to participate in the market after 2008.
It is hard to say if a market bubble is now forming or about to burst, but there are enough warning signs pointing to dangerous conditions on Wall Street.
Chapter 1 of my book The Book on Put Option Writing is available to read FOR FREE. Click here.
Volume is the key to demand. The number of shares bought and sold on a given day indicates the interest of investors in a company's stock and in the market overall. Consider that from January 2008 to the September 15, 2008 collapse of Lehman Brothers, the Dow Jones Industrials reported an average daily volume in the in the neighborhood of 300,000,000 shares. The market breadth was evenly spread and the market was breaking new highs. Today the market continues to break new highs but from January 2, 2013 to November 13, 2013 the average volume for the year is roughly 85,000,000 or nearly a 72% decline.
A little buying pressure can move a stock dramatically upwards. If the volume is light but weighted in one direction it can send a stock irrationally higher or lower. There are few things to consider when looking at the current market. First, we must assume that the majority of individual investors who were devastated in the crash of 2008 have yet to recoup their losses and return to the market. Secondly, only a few high priced stocks are moving higher. Stocks that trade over $100.00 per share (or over $1000.00 on the S&P) are purchased by forces greater than most individuals. This leaves mutual funds, institutional investors and hedge funds in charge of the markets and their selections consist of what is moving; and what is moving is what they are buying. Today, on a day where the Dow closed up 70 points and hit another new high; 14 of the companies listed closed up with less than a .50¢ gain, 6 closed above .50¢ but less than $1.00, 6 closed negatively, and only 4 closed above $1.00. All on light trading volume.
The last thing to look at is margin. The current market has the highest margin debit balance in its history. When markets crash, margin calls are the reason. Investors who are over leveraged on margin must either bring in funds or sell stock (sometimes two to three times the amount they have borrowed) when the margin call comes. This is one of the reasons many individual investors have not been able to participate in the market after 2008.
It is hard to say if a market bubble is now forming or about to burst, but there are enough warning signs pointing to dangerous conditions on Wall Street.
Chapter 1 of my book The Book on Put Option Writing is available to read FOR FREE. Click here.
Sunday, November 10, 2013
MARKETS AND MADNESS AND GREED (OH, MY)
Jesse Livermore, once said that the book that influenced him the most was "Extraordinary Popular Delusions and The Madness of Crowds" by Charles MacKay. It might appear odd at first glance, that one of the greatest stock traders in history chose a book about mass psychological hysteria instead of some arcane academic study of economics, but in actuality, this is the perfect book to cite. What Livermore is saying, in no uncertain terms, is that the stock market runs simply on speculation and greed. For every fundamental or technical analyst that picks his or her stocks carefully, there are tens of thousands that are trying to catch the next big winner. People will buy a Certificate of Deposit at their local bank and wait six months to get a fraction of a percent at today's rates; If they purchase a stock however, they will want a double within the hour.
Any market that exists solely on ill conceived logic is destined to be volatile, and a volatile environment is nothing more than backroom card game with a fancy address. There is no difference between Tulipomania in the 1600's and The Internet Bubble of the 1990's. As raw speculators enter the markets, bubbles form in those markets and when they bust, so too does the bankroll that created them. Current volume on the Dow Jones Industrial Average compared to pre-2008 volume is all the proof one needs to conclude that a vast majority of investors are gone and despite the easy flow of money, very few people have as much of it as they did five or six years ago. Any insane and unjustified run where buying enters a maniacal phase is sure to ultimately lead to a destruction of wealth. As Euripides might have said; "Whom the markets would destroy, they first make mad."
Is there another bubble forming? That will be the subject of the next blog entry.
Click the title to read Chapter I of "The Book on Put Option Writing" for free.
Any market that exists solely on ill conceived logic is destined to be volatile, and a volatile environment is nothing more than backroom card game with a fancy address. There is no difference between Tulipomania in the 1600's and The Internet Bubble of the 1990's. As raw speculators enter the markets, bubbles form in those markets and when they bust, so too does the bankroll that created them. Current volume on the Dow Jones Industrial Average compared to pre-2008 volume is all the proof one needs to conclude that a vast majority of investors are gone and despite the easy flow of money, very few people have as much of it as they did five or six years ago. Any insane and unjustified run where buying enters a maniacal phase is sure to ultimately lead to a destruction of wealth. As Euripides might have said; "Whom the markets would destroy, they first make mad."
Is there another bubble forming? That will be the subject of the next blog entry.
Click the title to read Chapter I of "The Book on Put Option Writing" for free.
Sunday, November 3, 2013
THE BOOK ON PUT OPTION WRITING (and a freebie).
"The Book on Put Option Writing" is available in paperback and as an e-book. But even better, the first chapter can be downloaded for free by clicking here.
"The Book on Put Option Writing" focuses on a single option strategy that generates an immediate cash credit to the trader's account upon execution or can be used to create a "paid limit order". The strategy can be utilized in a bullish, neutral, or even slightly bearish market.
Many option books being sold are simply long technical descriptions of puts, calls, and the strategies that employ them. They tend to be nothing more than dry text books which most new investors either loose interest in by the first chapter or become completely lost by the second.
"The Book on Put Option Writing" was written with the novice investor in mind. Chapters are written in clear and easy to understand language. Many have quizzes at the end for the reader to measure his or her comprehension of the material and there are real world examples that are dissected to show the logic and strategies behind them. Experienced traders will also find this book helpful; finding new insights to old practices.
While other books try to explain the technical aspects of every single type of option trade, "The Book on Put Option Writing" only deals with selling puts. What might only be limited to a few paragraphs or pages in other books, is expanded and transformed into 80 pages in this book.
"The Book on Put Option Writing." It's concise, It's thorough, and it's worth a look. Click here to read the first chapter for free.
"The Book on Put Option Writing" focuses on a single option strategy that generates an immediate cash credit to the trader's account upon execution or can be used to create a "paid limit order". The strategy can be utilized in a bullish, neutral, or even slightly bearish market.
Many option books being sold are simply long technical descriptions of puts, calls, and the strategies that employ them. They tend to be nothing more than dry text books which most new investors either loose interest in by the first chapter or become completely lost by the second.
"The Book on Put Option Writing" was written with the novice investor in mind. Chapters are written in clear and easy to understand language. Many have quizzes at the end for the reader to measure his or her comprehension of the material and there are real world examples that are dissected to show the logic and strategies behind them. Experienced traders will also find this book helpful; finding new insights to old practices.
While other books try to explain the technical aspects of every single type of option trade, "The Book on Put Option Writing" only deals with selling puts. What might only be limited to a few paragraphs or pages in other books, is expanded and transformed into 80 pages in this book.
"The Book on Put Option Writing." It's concise, It's thorough, and it's worth a look. Click here to read the first chapter for free.
Monday, October 28, 2013
INTRODUCTION
Premium Capital Management, LLC., is an investment advisory firm. Our blog was set up to share our opinions with the financial world, not to give investing advice. So, anything read here should be considered only as the author's opinion and nothing more. We hope that our readers will enjoy and ponder our insights. If anything is taken away from this blog we hope it is a better understanding of the markets and the topics surrounding them. For more information about us please visit our website at www.optionspcm.com.
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