My Grandfather told my Father (who then in turn told me) there are two things that "they" cannot take from you: your education and your land. That stuck with me and as I grow older I certainly agree with half of that. No matter what, whatever I learn in whatever form "education" takes is mine forever. That is a very comforting thing because I have control of that. But the part about my land I fear is something that may not be the sage truth as it once was. I do believe that it was true when my Grandfather told my Father that. Owning land was sacred and beyond someone forcibly separating you from your land physically, was a hard truth. Why? Because it was paid for and beyond your fair share of property taxes, the land was yours free and clear. Now people don't own land, they pretend they do in the form of taking out a mortgage on a piece of land or a home. Guess who ends up as the ultimate owner? Our government does in the form of Freddie, Fannie, FHA and VA. Sure delinquencies have fallen off their all-time highs, but they are still well above historical norms.
What the heck is going to happen if/when delinquencies rise again?
Ramsey Su of Acting Man says:
"As the market has witnessed since 2007, the Government could dictate the conditions of real estate ownership, even when it was not the lender. Today, it is in full control. What would this government do when the defaults return? There will be forbearance, credit counseling, tax credits, tax forgiveness, refinancing, principal reduction, anything but foreclosures. In other words, real estate ownership may become a subsidy, or some form of government housing. Would debt servicing be based on one's ability to pay? May be the principal will be adjusted based on market conditions? What type of real estate market is that?"
Do I really want to have a significant part of my net worth rolled up in an asset class that the Government can set the price of? They can do that whether I own the land in full or if I hold a mortgage? Perhaps not, then begs the question: where to go?
Trade well and follow the trend, not the perma-bull OR perma-bear "experts."
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.
We are now a month into the new calendar year, and we are still facing some pretty extreme volatility in the markets. This time it was to the upside. After aggressively selling off on Friday, it looked like the selling momentum carried over into yesterday's session. Instead, we rebounded off the lows and climbed back up into the close. The DJI almost finished up 200 points for the session. Considering it was down more than 100 points at the lows, it was quite a rebound. Look for the carry over effect if crude futures is higher again. A large part of the rally was attributed to the energy sector rallying strong. We have seen the correlation to the downside in the markets as crude prices fell. We can see the same correlation here to the upside. If crude is up strong, we can see that rally bounce come into play. This also syncs up with the key support range in the SPX and E-Mini S&P, as they deflected near the 200 day moving average and a key swing low support price range. All in all it had led to the pip. In recent week in the SPX, anytime a new swing low was established, it was met with some aggressive buying. This time was the same as before. Let's see if we push back to the 2064 level to test the recent ceiling.
I have noticed a lot of emails cycling through my account and questions posed by some of our students that are touting the high (almost guaranteed) profits that can be made in credit spreads. Claims like "personal monthly ATM machine", 90% chance of profits, etc. If it is too good to be true, is usually is, right? You can be profitable trading credit spreads, you can be profitable trading debit spreads. To categorize yourself as one or the other is just misguided. The big logical fallacy lies with this: The claim that 90% of options expire worthless, and that therefore it is better to be a seller of options than a buyer of options.
This claim misstates a statistic published by the Chicago Board Options Exchange (CBOE), which is that only 10% of option contracts are exercised.
But just because only 10% are exercised does not mean the other 90% expire worthless. Instead, according to the CBOE, between 55% and 60% of options contracts are closed out prior to expiration. In other words, a seller who sold-to-open a contract will, on average, buy-to-close it 55-60% of the time, rather than holding the contract through to expiration. The seller's profitability of this 55% to 60% cannot be known.
If 10% of options contracts end up being exercised, and 55-60% get closed out before expiration, that leaves only 30-35% of contracts that actually expire worthless. This is a far cry from 90% and no reason to build a trading methodology around it. When we consider a signal, we go in with open eyes and allow the data to determine our bias. We do not go into a potential signal with the preconceived notion that "we are looking for a credit spread".
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Keep a civil tongue.