Questions And Answers On California’s IOUs

Q: What are state-issued IOUs? A: They’re promises to pay a certain amount of money plus interest. By issuing IOUs, the state can hold onto cash to pay state workers and cover other debts. The interest rate will be set today as will the maturation date, which will likely be about 90 days from now.

Q: Has this been done before? A: In summer 1992, Gov. Pete Wilson issued about $4 billion in IOUs. However, since then, the federal courts have ruled that it is illegal to issue IOUs to state workers. The Constitution also gives priority to debt holders and schools. Officials must continue to pay into pension plans, in-home supportive services and Medi-Cal providers. Businesses with state contracts and taxpayers awaiting refunds are among the likely recipients of the IOUs.

Earlier this year, the state delayed some payments but did not issue IOUs.

Q: Can you sell or cash an IOU? A: While the state won’t redeem them before the maturity date, they likely will be accepted by some banks and credit unions, which will pocket the interest after maturation. Some large banks have not yet decided whether to accept the IOUs as if they were regular checks.

Q: What if the governor and Legislature agree to a budget solution after the IOUs are sent? A: The state controller decides when to stop issuing IOUs. However, a budget fix doesn’t mean you could cash an IOU early. You’ll still have to wait until the maturation date to redeem the IOU if your bank refuses to cash it before then.

Q: Who should I complain to about this? A: Your elected officials. The governor’s office telephone number is (916) 445-2841.

 

The Case For Investing In Water ETFs

last week and it makes for some grim reading. But it also provides global investors with some insights into the best markets to invest in.

The global population of high net worth individuals, or HNWIs - those with investible assets of more than $1 million - declined 14.9% in 2008, while their total wealth dropped 19.5% to $32.8 trillion. Throughout the world, there are now 8.6 million high-net-worth investors - millionaires or better, the report concludes.

Among the ultra-high-net-worth-investors (ultra-HNWI) - those with investible assets of $30 million or more - the population plunged 24.6% and their wealth by 23.9%. That’s as you might have expected, in a year when global equity values fell close to 50% and real estate was also weak. Nevertheless, there were some regional variations that were significant - and that should help us decide which global markets to play for profit, and which ones to avoid.

Location, Location, Location …

For a start, how bad the year was depended very much on where you lived. German HNWI wealth declined only 2.7% in U.S. dollar terms, and Brazilian HNWI wealth only 8.7%, in spite of a sharp fall in the value of the Brazilian real against the American dollar. At the other extreme, Hong Kong-based HNWIs saw their wealth decline 61.3% and Indian HNWIs 31.6%, in spite of the fact that the Indian economy remained robust.

These disparate performances reflect the different asset allocations of the various HNWI groups. German and Brazilian HNWIs invest primarily in bonds, while - at the opposite extreme - Hong Kong HNWIs were very heavily invested in stocks, with the total value of the Hong Kong stock market being five times the island’s gross domestic product (GDP) - the highest ratio anywhere the world.

U.S. and British HNWIs found themselves among the worst performers on the list, reflecting not only the downturns in their stock portfolios but also their tendency to invest in hedge funds and “structured investments” sold to them by Wall Street that proved to be thoroughly unsound. Indeed, the worse relative performance of ultra-high-net-worth investors compared to their more-modestly wealthy peers was due to the tendency of the ultra-high-net-worth crowd to invest more aggressively, using leverage and investing in hedge funds.

(Ultra-HNWIs are of course more attractive “marks” for the slick salesmen of Wall Street because their wealth is greater and the commissions that can be generated correspondingly more juicy.)

The wealth performance of HNWIs has important implications for us as non-HNWI global investors. A market such as Hong Kong - where the wealthy last year lost 60% of their money - is likely to be highly unstable, with a high level of bankruptcies in entrepreneurial companies whose founders are in financial difficulty. Conversely, the relative stability of German and Brazilian wealth suggests there should be no real reasons that the current worldwide recession should lead to any real problems in the small businesses operated in Germany and Brazil. As investors, we should seek the stable - as opposed to the volatile - particularly in such difficult economic circumstances as those we face here in the U.S. market; hence, both German and Brazilian investments should be looked at closely.

In general, Latin American HNWIs did relatively well as a group in spite of the economic problems and attacks on the rich in such badly governed countries as Argentina and Venezuela. Hence, investments in politically and economically stable Latin American countries such as Colombia, Chile and Mexico may be attractive.

Inflation a Growing Concern

A second lesson investors can learn from the experiences of the HNWIs is that many of the so-called “alternative” asset classes provide poor diversification. Real estate and commodities did poorly in 2008, while hedge funds and structured investment vehicles did only slightly better than equities - but with a lack of transparency and an excessive fee structure that made those alternative investments truly unattractive.

Each investor will be more comfortable with some of these investment areas than others; if you are involved day to day in real estate, you may be more able to understand risk in that area than in tech stocks or exotic emerging markets, for example. Nevertheless overall investors are well repaid by devoting a higher proportion of their investible assets to cash and bonds, and a lower percentage to alternative assets that in reality provide little useful diversification in a downturn.

Apart from the performance of their investments, The Global Wealth Report also showed us that HNWI purchases of such luxury assets as private airplanes, yachts and luxury cars also declined, although sales of such lower-cost (on a relative basis) items held up fairly well (even in a downturn, millionaires feel the need to pamper themselves, even if it’s just a bit).

Most notably, the Forbes “Cost of Living Extremely Well Index,” a price index for high-end luxury items continues to at more than double the rate of inflation: From 1976 to 2008, it was up 800%, compared with 360% for consumer prices generally. That probably reflects the increasing disparity of global wealth, with planetary nouveaux riches pushing up the prices of all their favorite goodies. But if the recession drags on for several more years, expect the ripple effects to show up in such places as the art market, or in the demand for luxury autos.

Apart from putting all your money in cash and bonds (which will not help if we get high inflation, about the only one of the deadly financial plagues mercifully absent in 2008), The Global Wealth Report offered no real defenses against sharp wealth downturns in recessions. I would suggest one only: A purchase of long-dated out-of-the-money index “put” options, traded on the Chicago Board Options Exchange. In flat or rising markets, these will lose you money, but they have the huge advantage that in a real bear market - such as that of September to March - they will potentially provide a real lump of cash if sold near the market bottom. And that cash can then be used to buy stocks and other assets while they are at their cheapest.

The final strategy is much simpler and more direct: In a market collapse, you want your portfolio to be focused on Brazil or Germany, and not Hong Kong!

In A Market Collapse, You Want Your Portfolio To Be Focused On Brazil Or Germany, And Not Hong Kong!

last week and it makes for some grim reading. But it also provides global investors with some insights into the best markets to invest in.

The global population of high net worth individuals, or HNWIs - those with investible assets of more than $1 million - declined 14.9% in 2008, while their total wealth dropped 19.5% to $32.8 trillion. Throughout the world, there are now 8.6 million high-net-worth investors - millionaires or better, the report concludes.

Among the ultra-high-net-worth-investors (ultra-HNWI) - those with investible assets of $30 million or more - the population plunged 24.6% and their wealth by 23.9%. That’s as you might have expected, in a year when global equity values fell close to 50% and real estate was also weak. Nevertheless, there were some regional variations that were significant - and that should help us decide which global markets to play for profit, and which ones to avoid.

Location, Location, Location …

For a start, how bad the year was depended very much on where you lived. German HNWI wealth declined only 2.7% in U.S. dollar terms, and Brazilian HNWI wealth only 8.7%, in spite of a sharp fall in the value of the Brazilian real against the American dollar. At the other extreme, Hong Kong-based HNWIs saw their wealth decline 61.3% and Indian HNWIs 31.6%, in spite of the fact that the Indian economy remained robust.

These disparate performances reflect the different asset allocations of the various HNWI groups. German and Brazilian HNWIs invest primarily in bonds, while - at the opposite extreme - Hong Kong HNWIs were very heavily invested in stocks, with the total value of the Hong Kong stock market being five times the island’s gross domestic product (GDP) - the highest ratio anywhere the world.

U.S. and British HNWIs found themselves among the worst performers on the list, reflecting not only the downturns in their stock portfolios but also their tendency to invest in hedge funds and “structured investments” sold to them by Wall Street that proved to be thoroughly unsound. Indeed, the worse relative performance of ultra-high-net-worth investors compared to their more-modestly wealthy peers was due to the tendency of the ultra-high-net-worth crowd to invest more aggressively, using leverage and investing in hedge funds.

(Ultra-HNWIs are of course more attractive “marks” for the slick salesmen of Wall Street because their wealth is greater and the commissions that can be generated correspondingly more juicy.)

The wealth performance of HNWIs has important implications for us as non-HNWI global investors. A market such as Hong Kong - where the wealthy last year lost 60% of their money - is likely to be highly unstable, with a high level of bankruptcies in entrepreneurial companies whose founders are in financial difficulty. Conversely, the relative stability of German and Brazilian wealth suggests there should be no real reasons that the current worldwide recession should lead to any real problems in the small businesses operated in Germany and Brazil. As investors, we should seek the stable - as opposed to the volatile - particularly in such difficult economic circumstances as those we face here in the U.S. market; hence, both German and Brazilian investments should be looked at closely.

In general, Latin American HNWIs did relatively well as a group in spite of the economic problems and attacks on the rich in such badly governed countries as Argentina and Venezuela. Hence, investments in politically and economically stable Latin American countries such as Colombia, Chile and Mexico may be attractive.

Inflation a Growing Concern

A second lesson investors can learn from the experiences of the HNWIs is that many of the so-called “alternative” asset classes provide poor diversification. Real estate and commodities did poorly in 2008, while hedge funds and structured investment vehicles did only slightly better than equities - but with a lack of transparency and an excessive fee structure that made those alternative investments truly unattractive.

Each investor will be more comfortable with some of these investment areas than others; if you are involved day to day in real estate, you may be more able to understand risk in that area than in tech stocks or exotic emerging markets, for example. Nevertheless overall investors are well repaid by devoting a higher proportion of their investible assets to cash and bonds, and a lower percentage to alternative assets that in reality provide little useful diversification in a downturn.

Apart from the performance of their investments, The Global Wealth Report also showed us that HNWI purchases of such luxury assets as private airplanes, yachts and luxury cars also declined, although sales of such lower-cost (on a relative basis) items held up fairly well (even in a downturn, millionaires feel the need to pamper themselves, even if it’s just a bit).

Most notably, the Forbes “Cost of Living Extremely Well Index,” a price index for high-end luxury items continues to at more than double the rate of inflation: From 1976 to 2008, it was up 800%, compared with 360% for consumer prices generally. That probably reflects the increasing disparity of global wealth, with planetary nouveaux riches pushing up the prices of all their favorite goodies. But if the recession drags on for several more years, expect the ripple effects to show up in such places as the art market, or in the demand for luxury autos.

Apart from putting all your money in cash and bonds (which will not help if we get high inflation, about the only one of the deadly financial plagues mercifully absent in 2008), The Global Wealth Report offered no real defenses against sharp wealth downturns in recessions. I would suggest one only: A purchase of long-dated out-of-the-money index “put” options, traded on the Chicago Board Options Exchange. In flat or rising markets, these will lose you money, but they have the huge advantage that in a real bear market - such as that of September to March - they will potentially provide a real lump of cash if sold near the market bottom. And that cash can then be used to buy stocks and other assets while they are at their cheapest.

The final strategy is much simpler and more direct: In a market collapse, you want your portfolio to be focused on Brazil or Germany, and not Hong Kong!

Sell Signal On S&P 500 Monthly Chart?

June’s monthly candle closed with a ‘doji’ at Fibonacci resistance - that’s a bearish development as we start the new month of July.  Let’s take  a look at the S&P 500 monthly chart to see its current structure.

We see the S&P 500 is still below levels from 1998 - in fact, price recently came into the 950 level which was prior support in late 1998 (and for the September spike-down in 2001).

Most importantly, we have come into the 38.2% Fibonacci resistance level of the May 2008 highs to the March 2009 lows - virtually to the point.

In combination with that, we have a bearish doji candle formation at overhead resistance - and as of June 2nd, we have a down-candle.

Don’t put so much emphasis on the two trading days in July as equal to the full months the other candles represent - but it’s telling.

If price continues in the direction it appears to be traveling (down), then we will have a confirmed reversal/retracement down off the 950 highs in mid-June.

The above chart shows a simplified version of the current S&P 500 structure.

For those interested, we are now offering a new weekly report entitled “Weekly Inter-market Technical Analysis” which analyzes each of the Ten-Year Note, S&P 500, Gold, Crude Oil, and the US Dollar Index on a monthly timeframe perspective, beginning with an analysis of the Monthly frame then moving down to the Weekly and Daily frames, noting key areas to watch and possible opportunities ahead.

 

Bullish Vibes Radiate From Energy Fund

(XLE: 46.16 -1.93 -4.01%) - Energy Select Sector SPDR - Investors were observed making bullish plays on the energy ETF today amid a modest share price rally of less than 1% to $48.17. The August 49 strike price had more than 10,000 calls purchased for an average premium of 2.09 per contract. Traders long of the calls are hoping to see shares of the XLE increase 6% to breach the breakeven point at $51.09 by expiration. Elsewhere, investors shed 10,000 puts at the January 2010 45 strike price for 3.65 apiece. It would seem that the put-sellers expect shares of the energy fund to remain higher than $45.00 at the start of 2010. The full premium received today for writing the puts is retained as long as the puts land out-of-the-money by expiration. Investors short the contracts bear the risk of having shares put to them at an effective price of $41.35.

(USU: 5.22 -0.12 -2.25%) - USEC, Inc. - The supplier of low enriched uranium (LEU) for commercial nuclear power plants was launched onto our ‘most active by options volume’ market scanner after a massive bearish play was initiated on the stock. Shares of USU are currently off by less than .5% to $5.30. An investor looking to extend downside protection on the stock through expiration in October appears to have sold 47,500 puts at the July 5.0 strike price for a premium of 40 cents apiece. The trader then purchased 47,500 puts at the October 5.0 strike for 1.00 per contract. The net cost of the spread amounts to 60 cents or a total of $2,850,000. It is unclear whether the investor was long 47,500 puts prior to today’s transaction. If he were originally long the puts, the trade today would merely represent an extension of downside protection through expiration in October. However, if the trader has sold 47,500 puts short in the July contract to fund the purchase of the October puts, he bears the risk of having shares of the underlying put to him at an effective price of $4.60 by expiration. Downside protection on the October 5.0 strike puts kicks in beneath the breakeven share price of $4.40.

(XLP: 22.89 -0.49 -2.10%) - Consumer Staples Select Sector SPDR - Shares of the consumer staples ETF have rallied approximately 2% to $23.45. The fund caught our eye after some 7,500 puts were purchased in the January 2010 contract at the 19 strike price for 35 cents apiece. At first glance the transaction looks bearish as well as contrarian in the face of today’s rally. However, we believe the transaction is the work of a bullish investor who has simultaneously picked up shares of the underlying in combination with protective put options. The trader is hoping for continued upward movement in the price of XLP. But, in case shares reverse direction, he has extended downside protection through expiration in January. Downside protection would kick in beneath the breakeven point at $18.65.

(MYGN: 26.00 -0.02 -0.08%) - Myriad Genetics, Inc. - The biotechnology company’s shares have plummeted more than 26.5% today to $26.12 amid a downgrade to ‘market perform’ from ‘outperform’ by analysts at Oppenheimer & Co. The maker of tests used to detect inherited breast cancer announced that its molecular diagnostic sales for fiscal year 2009 came in at $330 million. Sales for the year were below previously forecast estimates due, in part, to rising unemployment. The massive decline in the stock today has pushed the price per share closer to the 52-week low of $22.42 attained exactly one year ago on July 1, 2008. Option traders were seen bracing for continued bearish movement in the stock through expiration in November. Investors long July 25 strike puts were likely responsible for the calendar roll involving the sale of approximately 1,000 lots at that strike for a premium of 1.40 apiece spread against the purchase of 1,000 puts at the November 25 strike price for 2.76 per contract. The net cost of the transaction amounts to 1.36 and provides downside protection beginning at the breakeven point of $23.64. Elsewhere, bearish investors who do not foresee shares rallying any time soon, sold more than 1,000 calls at the August 30 strike price for 1.19 apiece. The full premium will be retained by call-writers as long as the contracts land out-of-the-money at expiration. MYGN appeared at the top of our ‘top option implied volatility % gainers’ market scanner as the volatility reading on the stock surged 25.92% to 55.04% today.

(NYX: 26.07 -1.28 -4.68%) - NYSE Euronext, Inc. - The parent company of NYSE Group, Euronext, and their combined subsidiaries, has enjoyed a more than 1.5% rally in shares to $27.73. The rise in shares follows the news that the NYSE has finished installing the Super Display Book system over the past three months. The new system, which has replaced the 25-year-old SuperDOT trading system, has cut the time needed to process trades by 95%. The NYSE, the world’s largest bourse by value of listed companies, explained that investors can now execute trades in 5 milliseconds down from 105 milliseconds. One investor anticipating a significant rally in NYX over the next year and a half established a call spread in the January 2011 contract. The trader purchased 5,000 calls at the January 30 strike price for a premium of 5.40 apiece spread against the sale of 5,000 calls at the higher January 45 strike for 1.90 each. The net cost of enacting the bullish stance amounts to 3.50 and yields maximum potential profits to the individual of 11.50 if shares can climb to $45.00 by expiration. Nearly one year has elapsed since shares of NYX were trading higher than $45.00. The option trader observed today believes it will take at least one more year for the stock to return to such great heights.

(ELN: 7.60 +0.60 +8.57%) - Elan Corporation PLC - In contrast to the bearish reversal observed on the Irish biotechnology company yesterday afternoon, traders today appear bullish amid a rally of nearly 7% in shares of the underlying to $6.81. Investors frolicking in the July and August contracts on ELN were seen scooping up call options in anticipation of continued bullish movement in the stock. The July 7.0 strike price had 1,000 calls purchased for an average premium of 40 cents apiece. More telling of optimistic sentiment were the 10,000 calls picked up at the August 7.0 strike price for approximately 75 cents per contract. Perhaps the gloom and doom of yesterday has been overshadowed by the positive news that Elan is set to receive 7% of the upfront and milestone payments allocated to Acorda Therapeutics by Biogen Idec Inc for its role in manufacturing experimental multiple sclerosis drug, Fampridine-SR. The rights to the drug have been purchased from Acorda by Biogen for an up-front payment of $110 million.