Sunday, October 8, 2017

OCTOBER 2017 DESERT OF THE REAL NEWSLETTER


OPTIONS IN OPERATION

This newsletter for October 2017 will take a look at common Call and Put Strategies that a stock investor may employ in his or her portfolio.

ANOTHER MATRIX

Investors buy or sell options because of their beliefs about the future direction of stock prices.  (There are other strategies that seek to earn money from the non-movement of the underlying stock, but that is a topic for another month. The matrix below correlates future belief about stock prices with some common option strategies.

BASIC OPTION STRATEGIES

If an Investor owns ICBM stock and:

1. Investor thinks Stock may rise somewhat or
maintain its current price: Sell Call.
This Strategy is called selling a “Covered Call.” It is a covered call because the option investor owns the underlying stock. If the stock behaves as the investor believes, the investor will receive a premium for selling the Call and will pocket the money from selling the premium. 

2. Investor is concerned Stock will fall: Buy Put.

This Strategy is called buying a Protective Put. Owning the Put will give them the right to exercise the option and sell the stock at the Put Strike Price. Also, the value of the Put will rise so the Investor may close out the position and make money on the position.

COMMON STRATEGIES

Numbers 1 and 2 are commonly used. The analysis below will expand upon these strategies and the assumptions that underlie them.

Selling a Covered Call. This is an income generating strategy that a stockholder might use if they believe the stock price will remain steady or fall a small amount. The stockholder must also be ready to sell their shares if the stock rises or buy back the Call at a higher price. Jane owned 100 shares of ICBM. She felt that ICBM stock might fall or stay about the same. She did not think that the stock would rise, but if it did, she was willing to sell her ICBM stock if she was exercised. She had bought it at $40 and it was currently selling at $52. She sells a Covered Call at $55 and gets a $100 premium. Jane read that selling Covered Calls was a way to generate a little more money from a stock that she would be willing to sell anyway.

If Jane is right about ICBM falling in price or staying the same, she will keep her stock and the $100 Call premium. If she is wrong and ICBM goes up to $55 or beyond, she will have to buy back the Call at a higher price (lose her premium) or  have the Cal exercised and lose the stock. She will make $15 per share from the sale of the stock and keep the $1 premium. (55 Call Strike Price - $40 basis on stock = $15 gain on ICBM share).

The downside for Jane is that if ICBM shoots up to $70, she will miss out on the price increase beyond $55, the Strike Price of the ICBM call. In summary, the assumptions behind a Covered Call sale are:

1. The belief that the Stock will fall somewhat or stay the same. (If you think it will fall a lot, you should sell it!).
2. A willingness to sell the stock at the Strike Price of the Call or buy back the Call at a higher price than which you sold it.


Buying a Protective Put
. This is a common protective strategy to protect a stockholder from fall in the stock price. If Jane holds ICBM and is concerned that it may fall, she has two choices. She can sell the stock outright right now or buy a Put. Jane still likes ICBM’s prospects for the long term. To protect herself from a short-term price declines, she decides to buy a Protective Put. ICBM is currently trading at $52 and Jane buys a Put with a Strike Price of $50. If ICBM falls to $50 or below, Jane can exercise her Put and sell ICBM for $50. She can also sell the Put at a profit.


MORE SPECULATIVE STRATEGY IN A FALLING MARKET

A popular strategy in a falling market is to sell stocks and indexes short. Short selling is a little complex and carries some measure of risk. Another strategy is to buy a Put on the stock that you believe will fall in price.  You do not need to own the stock. It puts less capital at risk than short selling. And it also give the investor leverage. Let’s look at an example:

Jungle Jim does a lot of stock research. He believes that the stock of the American motorcycle behemoth, Hogsome-Darlington (HOG), will fall in price. It is currently trading at $49 per share. Jim thinks that the stock is only worth $40 per share. He also thinks that its next earnings report, to be issued in early January 2018, will be very disappointing and will send the stock falling. Instead of selling HOG stock short, he buys a February 2018 Put with a Strike Price of $55.00.

This Put costs him $3.00 per share, or $300 for the standardized 100 share options contract. Because the stock is trading at $50 and Jim’s Put has a Strike Price of $55, this Put is considered an “In the Money Put”. The Put is considered “In the Money” because the Strike Price is higher than the price of the HOG stock.

Options can be “In the Money”, “At the Money” or “Out of the Money.” For an explanation of these terms, take a look at the chart below:

STRIKE PRICE/HOG STOCK PRICE/PUT STATUS

$55    /   $50  /    Put In the Money by $5 – The Put at $55 give you the right to sell stock at $55 when the going price in the market is $50.
If Strike Price > Market, Put is in the Money (ITM)
$55 /  $50   / In the Money by $5

$50  / $50  / At the Money (ATM)
Strike Price=Market Price
$50 / $50  /  At the Money

$50  /  $55 /      Out of the Money by $5 ()TM)
If Market Price > Strike

Now let’s keep in mind that Jim does not own HOG stock. He is hoping that HOG will fall in price and the Put will rise in price beyond the $3 he paid for it. And Jim knows that as the Price of HOG falls, his Put will rise in price. Remember, a Put gives you the right to sell the stock at the Strike Price. So if Jim (or some HOG stockholder) has the right to sell HOG shares at $50 when the market price of HOG is at $40, he has a valuable right. And as HOG price falls, the value of the Put will rise.

Brokerage firms require that customers execute options agreements to trade options and that they understand the risks involved. In this last example, the risk of buying a Put when you do not own the underlying stock is that the price of the stock will rise instead of fall and that the put may expire worthless. The risk of buying a put is less than short-selling the underlying stock, however. In this case, Jim’s loss is capped at $300, the amount he spent on the Put. But if Jim sells HOG short and HOG rises, he will have to buy 100 shared of HOG to cover. If HOG makes a substantial move upward, Jim could lose thousands of dollars.

THERE ARE ALWAYS OPTIONS IN THE DESERT OF THE REAL!


[i] The Author has discussed the Secular Bear Market in several editions of the Newsletter and on the post of September 19th.
http://desertoftherealecononomicanalysis.blogspot.com/2005_09_18_
desertoftherealecononomicanalysis_archive.html
[ii] http//desertoftherealecononomicanalysis.blogspot.com/2005_10_09_
desertoftherealecononomicanalysis_archive.html
[iii]
http://www.cboe.com/. The website of the Chicago Board of Options Exchange has lots of information on all of these option topics, including Delta. The exchange will also send you a CD with Option information and tutorials.






Sunday, October 1, 2017

Of Idiots and Idealogues

IDIOCY IS TO BE EXPECTED FROM IDEALOGUES.

North Korea, or the easier to write, DPRK, is the last communist country on earth. And it one of the last few absolute monarchies. The DPRK shares this unique distinction with only had handful of fundamentalist Arabic countries. So it combines the worst forms of government. We have Kim Il-Sung (the father), Kim Jong Il (the son) and now Kim Jong-Un (grandson). In the DPRK, Kim Il-Sung has nearly mythic status. Many in the country, some by force but many by choice, see him as the “Father” of North Korea. Then came the “Son” Kim Jong Il, and the heavier, shorter, but probably much more shrewd “Son” Kim Jong Un. In only a somewhat crude metaphorical, and irreligious for the religious, terms, we have two pieces of the Christian Trinity.

THE WHOLLY SPIRIT?

The official state doctrine of the DPRK is Juche. Juche literally means self-reliance, but it is composed of three linked doctrines:
  1. Political Independence.
  2. Economic Self-reliance.
  3. Self-reliance in Defense.

Many scholars have suggested that juche completes the DPRK “trinity.”  It functions as the “holy spirit” that animates the many North Koreans. Call juche what it is, but it has generally worked. The nation is independent of a larger block of mutual defense partners. It engage is some trade, but it hangs on even as the sanction screws are cranked down. But number three is the salient.

In the mind of the North Koreans, they did not lose the Korean War. And in fact, the war has not really ended. There is only an armistice agreement in place. And the war ended three years after it began, the 38th parallel. 

The highly militarized regime has a million-man army. It is a defensive fortress. It has the 38th parallel lined with artillery pieces. More than 11.000 are aimed at Seoul. In a shooting war Seoul would suffer hundreds of thousands of causalities. A conventional war up the peninsula to Pyongyang would be fought hill by hill. Fortified position by position. Corpse by corpse.

COOLER HEADS???

The DPRK has been in-artfully cranking out belligerent babble for quite some time.  It has been the policy of America (and all Western nations) not to lower itself to responding to the lunacy. No longer. Kim keeps his place on orange alert all of the time. Militarist propaganda is everywhere. The military is worshipped. And its members are well paid and well treated, relative to the masses. 

Over the years, tensions have ebbed and flowed between the DPRK and the west. Trump has matched Kim’s belligerent mistranslations with two am tweets. The US and most advanced nations would not trade taunts, but Trump is all thumbs. In a most miniscule and certainly unforeseen way, and ever the “business man,” Trump has leveraged “egging on” economies of scale. North Korea likely employs hundreds of bureaucrats to figure out new ways to call American leaders capitalists running dogs. Trump does it solo and without a stipend. But we all digress…

WHY ALL THIS BARKING BACK?
There is an Arab folk saying that says “When dogs bark, don’t bark back.” That thought could be rephrased as “don’t stoop to their level.” Or maybe, “that remark is beneath contempt.” Or maybe do anything but feed the DPRK mouth machine. 

Stunts and chest pounding keep Kim firmly ensconced in power. A bowl of rice a day, a bed on the floor of cold two room apartment and a bicycle to ride to and from the munitions factory. But the is very effective method to what looks like to many America is “madness.” Kim has two goals and they are linked. Stay in power and survive to dictate another day. He has achieved the first and the second seems highly likely. 

When the PDRK got nukes, it got tenure. The history of the last 20 years makes it clear that nukes are necessary for rouge regimes to remain in power. Since the fall of the USSR, Russia can no longer maintain the independence of its former client states. After the first Gulf War, Saddam abandoned both his hamstrung nuclear program and his chemical weapons. Mohammar Khadafy in Libya similarly gave up his quest for weapons of mass destruction. Both men were later overthrown and pulled out of holes to be executed. 

IRAN AND THE KIM BOYS GOT THE MESSAGE…

One of the pillars of juche is an independent self-defense.  Nuclear weapons are the way to assure that self-defense will work and assure the states’ existence. An analogy can be drawn to seemingly inapposite places-Israel and Iran. 

Both Israel and Iran are non-Arabic countries in a predominantly Arab region.  Israel has the US as a strong ally, but does not want to draw directly upon it for its defense. And the last thing the US would wish to do is intervene militarily for Israel. 

Iran has no strong ally that it can call upon. It occupies a very strategic position but is militarily surpassed by US forces. It could obstruct the Straights of Hormuz for a short time, but the narrow passage would soon be reopened and Iran would pay a severe price.
Israel has a core principle that it won’t rely upon other countries for its defense.  To that end, it has nuclear weapons, probably around 100 of them. Iran does not currently have nuclear weapons, but its program is on hold because of an agreement with the US that lifted sanctions.  

MUZZLE THE MUTTS…

Ego and idiocy has no place in measured diplomacy. The facts on the ground must guide the policy choices and implementation. It should not be left to idiots or ideologues. 

THERE IS NOT NUCLEAR DEFENSES OVER THE DESERT OF THE REAL!

.


           


Friday, September 15, 2017

DESERT OF THE REAL SEPTEMBER 2017 NEWSLETTER



This Newsletter will come at a basic economic problem from a couple of different angles.  The Author Rob hits this topic often and there is a relationship, albeit tenuous. Here is the paradox in question form:

            How does the nation (and this region) attract and retain skilled labor and professionals while planning for a future that will need far less labor?


The nature of work, and the lack of it, will be significant issues in the coming decades. AI and the Robot Revolution will displace many workers. AI is displacing professional workers, such as lawyers and investment analysts. Robots on the factory floor displace labor. And the fast food and the healthcare industry are the next targets for AI and robotics. 

There are those that rightly point out that fears of automation wiping out all work have been overblown. And it has been demonstrated that automation opens up new jobs as it displaces old ones. But past automation displacement has been machinery taking away manual labor jobs. Changing the nature of work from below the neck to above the neck. This displacement is different, however, AI is taking the place of the above the neck workers. AI is smarter, faster and better than wet ware. 

But the topic is as much as matching up the skills required for the future with the higher paying jobs that will exist. On the one hand (as two-handed economists are given to saying), robotics requires trained technicians and engineers. But one the other hand, the work force in great supply are untrained young people, many which cannot even pass drug tests. Here in Northern Indiana, nearly every factory has a help-wanted sign. Restaurants and convenience stores are begging for help.  Some places have to close early because of a lack of help.

HOW CAN WE BE PROACTIVE?

A recent commentary in the Indiana Economic Digest presents the issues well. In an article entitled “These projects can keep Wells County in 'the game' - if it wants,” written by Mark Miller, the issue is both raising the quality of life in Northeast Indiana and providing the skilled work force. Miller describes some community improvements the cities of Bluffton and Decatur are making to their downtown areas.  Along with these improvements will come other efforts at attracting new people into the area? Miller states that the 11-county Northeast Indiana currently has 800,000 people and the goal is to grow to one million by 2031. And not to be snarky, but will the people coming in be the “right people.”

The region needs skilled workers that want to live in Northeast Indiana. And it wants the newcomers to enjoy living in Northeast Indiana because of the area’s quality of life. A tough task. A very tough task.

Northeast Indiana is not the Mississippi Delta or the Ozarks, but it is not Santa Clara County or Seattle. Miller presents the issue as “quality of place.”

Miller states that many younger workers, and mid-career workers are relocating to the place they wish to live. You move where you want to live and the work will appear. And with more work moving online, co-location is very possible.

The Author Rob cannot but see this draw of “Quality of Place” as almost impossible or Northeast Indiana. Fort Wayne is a generally nice small city, but it is not Austin Texas. Northeast Indiana has a good number of small lakes, but it is not Cape Cod.

Sure, we sometimes here that Fort Wayne “is a good place to raise a family.” The Author Rob’s primary care doctor said that when he was moving from the high quality of life Minneapolis suburb Eden Prairie to Fargo, North Dakota. Translated, “a good place to raise a family” means a place with cheap housing.  Fort Wayne has that in great abundance.

These high identity projects such as the one in Bluffton and Decatur generate activity and civic pride, but can these one-offs bring in a meaningful number of skilled technicians, professionals and other high tech workers? The Author Rob doubts it.

Many communities and Ivy Tech recognize the need for training workers for the existing and promised jobs. The apprentice model, very common in Europe, but almost abandoned in America, trains people in skilled trades. Employers contribute much of the funding in these apprentice models.

But in recent years, the training has been commoditized and taught at community colleges and the proprietary colleges.  This shifts the cost to the students in the form of student loans, and ultimately some of it to the taxpayers when students with worthless degrees from unscrupulous college default.

In an ideal world, workers would be happily employed in meaningful work. The Star Trek utopia. But perhaps were are only setting ourselves up for the Blade Runner Dystopia.

LET THE ROBOTS TAKE THE HINDMOST IN THE DESERT OF THE REAL



Monday, September 11, 2017

DESERT OF THE REAL SEPTEMBER 2017 NEWSLETTER



This Newsletter will come at a basic economic problem from a couple of different angles.  The Author Rob hits this topic often and there is a relationship, albeit tenuous. Here is the paradox in question form:

            How does the nation (and this region) attract and retain skilled labor and professionals while planning for a future that will need far less labor?


The nature of work, and the lack of it, will be significant issues in the coming decades. AI and the Robot Revolution will displace many workers. AI is displacing professional workers, such as lawyers and investment analysts. Robots on the factory floor displace labor. And the fast food and the healthcare industry are the next targets for AI and robotics.

But the topic is as much as matching up the skills required for the future with the higher paying jobs that will exist. On the one hand (as two-handed economists are given to saying), robotics requires trained technicians and engineers. But one the other hand, the work force in great supply are untrained young people, many which cannot even pass drug tests. Here in Northern Indiana, nearly every factory has a help-wanted sign. Restaurants and convenience stores are begging for help.  Some places have to close early because of a lack of help.

HOW CAN WE BE PROACTIVE?

A recent commentary in the Indiana Economic Digest presents the issues well. In an article entitled “These projects can keep Wells County in 'the game' - if it wants,” written by Mark Miller, the issue is both raising the quality of life in Northeast Indiana and providing the skilled work force. Miller describes some community improvements the cities of Bluffton and Decatur are making to their downtown areas.  Along with these improvements will come other efforts at attracting new people into the area? Miller states that the 11-county Northeast Indiana currently has 800,000 people and the goal is to grow to one million by 2031. And not to be snarky, but will the people coming in be the “right people.”

The region needs skilled workers that want to live in Northeast Indiana. And it wants the newcomers to enjoy living in Northeast Indiana because of the area’s quality of life. A tough task. A very tough task.

Northeast Indiana is not the Mississippi Delta or the Ozarks, but it is not Santa Clara County, California. Miller presents the issue as “quality of place.”

Miller states that many younger workers, and mid-career workers are relocating to the place they wish to live. You move where you want to live and the work will appear. And with more work moving online, co-location is very possible.

The Author Rob cannot but see this draw of “Quality of Place” as almost impossible. Fort Wayne is a generally nice small city, but it is not Austin Texas. Northeast Indiana has a good number of small lakes, but it is not Cape Cod.

These high identity projects such as the one in Bluffton and Decatur generate activity and civic pride, but can these one-offs bring in a meaningful number of skilled technicians, professionals and other high tech workers? The Author Rob doubts it.

Many communities and Ivy Tech recognize the need for training workers for the existing and promised jobs. The apprentice model, very common in Europe, but almost abandoned in America, trains people in skilled trades. Employers contribute much of the funding in these apprentice models.

But in recent years, the training has been commoditized and taught at community colleges and the proprietary colleges.  This shifts the cost to the students in the form of student loans, and ultimately some of it to the taxpayers when students with worthless degrees from unscrupulous college default.

In an ideal world, workers would be happily employed in meaningful work. The Star Trek utopia. Perhaps were are only setting ourselves up for the Blade Runner Dystopia.

LET THE ROBOTS TAKE THE HINDMOST IN THE DESERT OF THE REAL!


Monday, September 4, 2017

TAXES AND THE TROIKA OF TERRIBLE IDEAS


We are a long way from income tax season. But it is never far from many peoples’ minds.  Quarterlies for the self-employed earn disdain. But it means that you are making money. The alternative to paying tax is worse. No income.

Another driver of the discussion is the trillion dollars of debt that mount up because of the structural tax underfunding. Unless and until the nation decides to match up government spending with government revenue, the debt will pose substantial risk to the nation and the world.

Many people incorrectly conceive the problem.  Deficits are nearly always at “record levels” in nominal terms. The nation’s economy grows nearly every year so the actual debt figure will be higher than the year before, even if the national debt as a percentage of GDP falls. The “real” rate is what matters, not the “nominal” rate.

Debt as a percentage of GDP is a better way to look at deficits.  The highest national debt for the nation as a percentage of GDP was at the end of World War II. Financing the war was a mammoth moral and financial undertaking. Debt to GDP was about 160% after the War. It fell to under 50% in 1980, then ramped back up in 1981. It fell again to 70% in 2000, but skyrocketed during the Great Recession of 2008.  Further tax cuts will further increase it.

NATIONAL SALES TAX TO REPLACE INCOME TAX

Every few years there are “tax simplification” ideas floated. Some of the most troubling proposals are the so-called “Fair Tax,” a national sales tax of around 15%.  It sounds simple, because people are already accustomed to state and local sales tax. The [Un]fair Tax is usually pitched as being a tax that is under everyone one’s control.  Don’t spend much money and you don’t pay much tax.  But this ignores reality.  Most Americans live paycheck to paycheck, even many middle class people. Even if food is exempted from the tax, they will pay close to 15% of their income in federal tax. A person who earns one million dollars per year will spend perhaps 40% of their earnings. The rest will be saved and invested.

There is another thing to consider. Sales tax is usually imposed only on goods, not services. This makes the [Un] fair tax even unfair, as lower income people take on DYI projects out of necessity. Richer people pay others for services[i].  Lets take a look.

Johnny Paycheck, Mama Paycheck and the little Paychecks  $50,000.

The average American family pays $550 per month on food.  $550 * 12= $6,600.

$50,000 - $6,600=$43,400.  90% is spent on taxable goods.  $43,400 *.9= $39,060.

$39,060 * 15% = $5,589.

This is an effective tax rate of 12%.

Fletcher Grift, Muffy Grift, and the little Grifts.  $1,000,000.

The Grifts pay 900 per month on Food. $900 * 12 = $11,800.

$1,000,000 - $11,800 = $988, 120.

The Grift kids go to a private school. They pay for lawn care, pool care, cleaning services, repair of their Lexus SUV and Porsche Carrera.  School costs $80,000 per year. They save  $250,000 per year.  All told, they pay $211,000 for goods in a year.

$211111* 15% = 31,665 in tax paid.

This is an effective tax rate of 3.1%.

Who’s cheatin’ who[m].

TAX “SIMPLIFICATION.” NOTHING, EXCEPT FOR THE HIGH EARNERS’ INCOME TAX BILL, IS “SIMPLIFIED

Income tax “simplification” comes in many flavors. There is no doubt that the IRS code is long and many of the provisions are difficult for anyone except a tax accountant or a tax lawyer to understand. [ii]  One variety of “simplification” is compressing the number of tax codes from the current seven to three. Below is the current tax rate schedule.   

2017 tax brackets (for taxes due in April 17, 2018)
Tax rate
Single
Head of household
10%
Up to $9,325
Up to $13,350
15%
$9,326 to $37,950
$13,351 to $50,800
25%
$37,951 to $91,900
$50,801 to $131,200
28%
$91,901 to $191,650
$131,201 to $212,500
33%
$191,651 to $416,700
$212,501 to $416,700
35%
$416,701 to $418,400
$416,701 to $444,550
39.6%
$418,401 or more
$444,551 or more
Tax rate
Married filing jointly or qualifying widow
Married filing separately
10%
Up to $18,650
Up to $9,325
15%
$18,651 to $75,900
$9,326 to $37,950
25%
$75,901 to $153,100
$37,951 to $76,550
28%
$153,101 to $233,350
$76,551 to $116,675
33%
$233,351 to $416,700
$116,676 to $208,350
35%
$416,701 to $470,700
$208,351 to $235,350
39.6%
$470,701 or more


Trump has released rather simplified versions of his tax plan. Meaningful detail is difficult to come by.  He proposes three rates: 10%, 20% and 25%. It raises the tax on capital gains from 15% to 20%. Trump also proposes a maximum of 15% income tax earned from “pass-through entities” such as LLCs and S-Corporations.  Most all small to medium businesses are owned in this manner[iii]. This means that the owner of a local manufacturing company could pay a lower effective tax rate than the plant manager or the plant engineer.   

There is another think to notice. Top rates are eliminated. Every rate above 25% is eliminated. Cutting and lowering the number of tax rates simplify nothing.[iv] They may sound good to the most simple-minded, like the many millions of southerners, Appalachians and high plains hillbillies that live off of government largesse like Medicaid, SNAP benefits and Social Security Disability. These folk cling to the elegiac[v] life that they have lived since the early 1980s, a life in states that are net takers from the federal government. And anything would be simple for people that have not paid income taxes for two generations.

 The Trump tax plan simply cuts revenue without replacing it with other revenue increases or commensurate cuts in government spending. Medicaid, SNAP and SSDI elimination in Red states might be a good first cut.

PAUL RYAN AND THE “POST CARD” TAX RETURN

A quixotic quest is always ongoing to make filing taxes simpler. The 1040EZ form is a good cut at simplification for many taxpayers. But it can only address wage income and does not support itemized deductions. But even this quick fix is more than many people will tackle. Many people of all levels of income and sophistication run to preparation firms to do what a sixth-grader could do.

House Speaker Paul Ryan is peddling a proposal for a “post card” return. But there’s just one problem. Unless you are filing a 1040 EZ, you cannot merely fill out a postcard.[vi]

Filling out the “post card” is easy. But calculating the figures to put in the postcard would require the same number of schedules and forms that support a 1040. Remember, though, simplicity sells well to simple minds.

FILING TAXES COULD BE SIMPLIFIED AND STREAMLINED. BUT IT WON’T

There are two groups vehemently opposed to filing simplicity. First is online and shopping mall tax preparers like Intuit, H.R. Block, Liberty Tax Services and the thousands of mom and pop tax preparers. One can understand their opposition. But there is another large group of filing simplification.  Anti-tax conservatives.
These anti-tax zealots believe that complicated rules and burdensome filing requirements will keep many Americans frustrated and angered by the IRS. 

Simplifying filing can be done relatively easy. [vii]  Japan, the UK and other countries have a system that is called “precision withholding.” The taxing authorities take out the correct amount of tax from wages. If they need adjusted for charitable contributions or other tax events, this is often done automatically with the data the taxing authorities possess. Such proposals have been proposed in the US but have gone nowhere.

WE ARE ALWAYS GOING SOMEWHERE IN THE DESERT OF THE REAL!






[i] Some states, such as New Mexico, charge sales tax on services. This takes a lot of the regressivity out of the sales tax.
[ii] Many people have the idea that the law should be simple and understandable. A laudable goal. But is it expected that the average person should be able to pick up a schematic for a computer chip or the blue prints for the Lucas Oil Stadium and be understandable to a lay person. Another reason the IRS code is complex is because rich people and large companies have legions of lawyers looking at loopholes to dodge paying their taxes.
[iii] And it is not just small medium companies that are LLCs. Here is a list of the largest privately owned companies in 2017 in the US. ihttps://www.forbes.com/sites/andreamurphy/2017/08/09/americas-largest-private-companies-2/#3bf84b2f247c   This list contains companies such as Koch Industries, Albertson’s store chain and the Mars candy company.
[iv] Three tax rates or thirty can be easily calculated on a $.99 dollar store calculator. Also, see https://www.vox.com/policy-and-politics/2017/8/30/16219906/paul-ryans-postcard-tax-return
[v] A book entitled “Hillbilly Elegy” offers solutions to the problems of the rural white people. Some are good solutions. They should try them. And be less quick to cast others as underserving moochers while selling SNAP benefits for heroin, booze and tobacco. https://newrepublic.com/article/138717/jd-vance-false-prophet-blue-america
[vi] http://www.businessinsider.com/republican-trump-post-card-individual-tax-return-plan-2017-4
[vii] https://www.vox.com/policy-and-politics/2017/8/30/16219906/paul-ryans-postcard-tax-return

Sunday, August 20, 2017

MOB CONNECTIONS? ONLY IF YOU DRINK ALMOND MILK*


In the heart of the Author Rob, meat is murder. He has not knowingly eaten meat since February 28, 2001. He is almost vegan, but dairy sometimes sneaks by.

Vegetarianism is a choice made by a meaningful, if not substantial portion of Americans. Perhaps as many as 10% of Americans consider themselves as vegetarians[i] Statistics also demonstrate that about one-quarter of vegetarians are vegan. Vegans eschew all animal products including eggs, milk and cheese.

The number of vegetarians is growing. And the number of people that are “vegetarian inclined” has also grown. There are very reasons for a vegetarian diet. Some do it because a vegetarian diet is usually more healthy.  Some, like the Author Rob, do it for moral reasons. Living beings do not need to die or suffer so that he may live. For others, the reason might be religious or spiritual.  And the properly educated people also recognize that the meat and diary industry do emit a substantial portion of global warming gases and foul waterways with animal waste.

SANS MEAT. MUCHO MONEY?

Well, this is an economics and investment newsletter. And as readers might be expecting, there are investment opportunities in the meatless world. A group of vegan investigators, who call themselves the “Vegan Mafia,” are jumping on the chance to grow this industry. In a recent article on CNBC, Met the 'vegan mafia,' a secret group of investors betting on the future of food,” a group of investors, entrepreneurs, and financiers are pouring funds into meatless business opportunities.  And these companies aren’t solely aimed at vegans. They seek to substitute for ivory and rhinoceros horns.

The best-known start-ups in the space include Beyond Meat and Impossible Foods, which make plant-based meat-like and cheese-like products; and Pembient, which bioengineers wildlife products in a lab, like rhino horn and elephant ivory.[ii]

Several matters conflate to produce these investment opportunities. One is the expanding market for vegetarians and vegans. Also, vegetarian and vegan foods are cheaper[iii] and healthier.  Another investment source will be meat producers and grocery chains seeking to cross produce, shut down upstarts and improve supply chains. And finally, as most observers can see, the current meat and dairy cartel is unsustainable, especially when one considers that as nations emerge economically, their citizens wish to eat meat, seafood and poultry.

SO WHAT’S IN IT FOR ME?

Well for the Author Rob, it is his one if his deepest moral commitments. But for retail investors, vegan investments are slim. There are a handful of companies in that space, but the industry is immature and unpredictable. Here is a list of vegan companies.http://investsnips.com/list-of-publicly-traded-vegan-companies/

A better investment would be going vegetarian seeking returns in your health, the environment, and the hideous suffering that billions of animals suffer for the voluntary dietary choices of a “higher” animal.

WITH IRRIGATION, THE DESERT OF THE REAL BLOOMS IN EVERY SEASON!


 *https://www.theatlantic.com/business/archive/2016/07/dairy-versus-almond-milk/491


[i] Accurate statistics on vegetarianism in America is hard to come by. People often over-report. Also, many people consider themselves vegetarian, but occasionally eat chicken or seafood. http://www.statisticbrain.com/vegetarian-statistics/ A small cohort of vegetarians get drunk and “fall of the wagon.” They eat burgers when bombed.
[iii] Currently, many vegan products are more expensive than their animal looted competitors. But this will change as the markets for these products grow. It takes approximately 24 pounds of grain to produce a pound of meat. If one takes out “the middle man (mammal),” as farmers often gripe, food prices would plummet. Most farmland would become unnecessary and would revert to forest, plains and wetland. Waterways would quickly clean and clear.  It would be Edenic.

Thursday, August 3, 2017

AUGUST 2017 DESERT OF THE REAL ECONOMICS NEWLSETTER



HAD WE BUT WORLD ENOUGH, AND TIME 

HAD WE BUT WORLD ENOUGH, AND TIME. ([i])

It is beyond cliché to say, “Time is Money”. But it usually is and that is why the oft-cited aphorism survives. This Newsletter will look at some options basics, as that is all the Authors are trading. This post will look at the “time value” component of options and how the limited life of an option affects the value of an option. But first let’s talk a bit about where we are at in the markets.

The Dow has broken 22,000 and the S&P and NSDQ are also at record levels.  And The S&P 500 hasn't suffered a downturn of 5% or more since June 26, 2016. And the VIX, a key volatility index, is coming in at record lows. So effectively this market is driven to higher and higher returns on low volume.  Everyone assumes a pull back is coming. But when? August, September, and October are typically weaker months for the market.

THE EXPIRATION CYCLE OF OPTIONS

As we know, options are contracts to buy or sell a specific security at a specific price on or before a specific date. The expiration cycles of options are standardized. The three cycles are:

1. January, April, July and October. (JAJO).
2. February, May, August and November. (FMAN).
3. March, June, September and December. (MJSD).

Options expire on the third Saturday of the month. The last time to execute an option is at close of the Options exchange on the Friday before. After the option expires, the option is worthless. So in addition to considering the type and strike price of the option, we must also consider the time until the option expires.

TIME VALUE AND INTRINSIC VALUE

Options have two types of values: Time Value and Intrinsic Value. We will do a little review on the concept of “in the money”, “at the money” and “out of the money”, and then montage into the concept of time value.

Options can be “in the money”, “at the money”, or “out of the money”. To illustrate, we will use Call examples for the bloatware company MonopolySoft (MPST). MPST is currently trading for $25 per share. We are interested in the April 16 Calls.

We believe that MonopolySoft will rise in price when its 2015 earnings report is issued in late January or early February. We believe that it will rise to $30. So we go to the MonopolySoft options montage in our online brokerage site. There are three April 16 Calls we are considering:

1. Call with a Strike Price of $23. The premium for this Call is $3. This call is in the money by $2. ($25 (stock price) -$23 (strike price)= $2.)
2. Call with a Strike Price of $25. The premium for this Call is $1.00. This Call is at the money because the stock price equals the strike price.
3. Call with Strike Price of $27. The premium for this Call is $.33. This call is out of the money because the strike price is higher than the stock price.

TIME VALUE AND INTRINSIC VALUE CALCULATION

Intrinsic value is the amount that the option is in the money. If it is a Call, it is the amount by which the stock price exceeds the strike price. If it is a Put, it is the amount by which the strike price exceeds the stock price. Stated another way, the intrinsic value is the amount we could make on the option if we exercised it. If we exercised the Call with the $23 Strike Price we could buy MPST at $23, sell it at the market price of $25, and make $2. This $2 profit is drawn from the option’s intrinsic value.

We could do that and earn the intrinsic value of the Call of $2. But if we did exercise we would still lose $1. Remember, we paid a premium of $3. So if we sell it for $2, we would lose a dollar. It is this $1 difference between the intrinsic value and the premium we paid that is the time value of the Call.

TIME (AT LEAST FOR NOW) IS ON OUR SIDE

The April 16 MPST Calls will expire on April 15th (Hmm, what a coincidence). They must be exercised no later that Friday, April 14th. So if we buy an April 16 Call it has almost 5 months until expiration. A lot can happen in that those five months, and that is to our advantage. There is an aphorism in Options trading that says: “Give yourself enough time to be right”. Many things can go right in the five-month life-span of the April 16 Call to cause MPST stock to go up in price. And if MPST goes up in price, our Call will go up in value. And even if MPST slips in price tomorrow, we still have nearly five months for the stock to turn around.

So with nearly five months to go in the April 16 Call, time is on our side. Let’s put a number to the time value of this April 16 MPST $23 Call:

$25 Stock Price - $23 Strike Price = $2 Intrinsic Value.

But since the Premium cost us $3 and the Intrinsic Value is $2, the Call has a Time Value of $1:

$3 Call Premium - $2 Intrinsic Value = $1 Time Value. So the Time Value is the cost, or value of the premium that exceeds its Intrinsic Value.

But what would happen if we have a Call that has no intrinsic value? Like a call that is at the money or out of the money? The entire value of these calls is composed of time value. We will look at this issue and the affect of option values as they approach expiration in another post or newsletter.

And yonder all before us lie[ii] The Desert of the Real.

For fun and for your literary enrichment.

To His Coy Mistress

by
Andrew Marvell

Had we but world enough, and time,
This coyness, Lady, were no crime.
We would sit down and think which way
To walk and pass our long love's day.
Thou by the Indian Ganges' side
Shouldst rubies find: I by the tide
Of Humber would complain. I would
Love you ten years before the Flood,
And you should, if you please, refuse
Till the conversion of the Jews.
My vegetable love should grow
Vaster than empires, and more slow;
An hundred years should go to praise
Thine eyes and on thy forehead gaze;
Two hundred to adore each breast;
But thirty thousand to the rest;
An age at least to every part,
And the last age should show your heart;
For, Lady, you deserve this state,
Nor would I love at lower rate.
But at my back I always hear
Time's wingèd chariot hurrying near;
And yonder all before us lie
Deserts of vast eternity.
Thy beauty shall no more be found,
Nor, in thy marble vault, shall sound
My echoing song: then worms shall try
That long preserved virginity,
And your quaint honour turn to dust,
And into ashes all my lust:
The grave's a fine and private place,
But none, I think, do there embrace.

Now therefore, while the youthful hue
Sits on thy skin like morning dew,
And while thy willing soul transpires
At every pore with instant fires,
Now let us sport us while we may,
And now, like amorous birds of prey,
Rather at once our time devour
Than languish in his slow-chapt power.
Let us roll all our strength and all
Our sweetness up into one ball,
And tear our pleasures with rough strife
Thorough the iron gates of life:
Thus, though we cannot make our sun
Stand still, yet we will make him run.


[i] Marvell, Andrew, “To his Coy Mistress”. Some readers may have read this poem in high school or college literature classes. All though some of the phraseology is dated, the message is universal. And the Author Rob does not even wear a watch.
[ii] “To his Coy Mistress”.