Socialism, really?

Socialism is defined on the Merriam-Webster website as follows:

1: any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods

2 a: a system of society or group living in which there is no private property

b: a system or condition of society in which the means of production are owned and controlled by the state

3: a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done

People who call Obama a Socialist can only be referring to the third definition, because Obama is certainly not an advocate of state ownership. Well, I say that . . . but what politician isn't an advocate of state ownership these days given the recent nationalization of Fannie Mae and Freddie Mac? That point aside (and hopefully that decision will turn a profit for the federal government), here is the issue: Anyone who supports a progressive tax system is a Socialist according to the third definition above. Even John McCain.

Here is the difference between McCain and Obama: Obama wants to reinstitute the 39% tax bracket immediately as opposed to waiting for 2010 when the Bush tax cuts expire. McCain would probably push to make 35% the top tax bracket permanently. So if you want to call Obama a Socialist, it would be nice if you could acknowledge that by the same standard, i.e. Merriam-Webster's definition number three, John McCain is a Socialist too.

There is a wonderful New Yorker article that highlights John McCain in the following exchange back in 2000 on the show Hardball:

YOUNG WOMAN: "Are we getting closer and closer to, like, socialism and stuff?. . . ."
MCCAIN: "Here’s what I really believe: That when you reach a certain level of comfort, there’s nothing wrong with paying somewhat more."

SKYWAYNE (ME): "Ummm, isn't that, like, the same thing as 'spreading the wealth?"

You can read the entire article, which is very good, HERE.

The tax policy differences between the candidates can be read in this report by the nonpartisan Tax Policy Center.

A very smart person recently told me that reducing capital gains taxes results in more revenue to the federal government, since a lower rate incentivizes "churning." That turns out to be correct. For that reason, I am for a lower capital gains rate, but the same logic does not seem to apply to ordinary income. As a result, I would personally support finding the optimal capital gains rate that produces the highest marginal revenue and at the same time reverting to the higher top income bracket for ordinary income . . . that is, until we figure out a way to drastically cut spending. But the cardinal rule of governmental fiscal responsibility is to pay as you go.

As for higher taxes and the progressive tax system, if you have more, you have more to lose. As the great John Locke said, the main purpose of government is to protect the wealth we produce by our labour. I am not necessarily pro progressive tax system, but we need it until the government stops doing things like lowering taxes during a time when we are financing a war. Just my two cents!

My Bold Call

We have seen the market bottom. Dow 7882.51 is my prediction for the Dow low of 2008 and probably 2009. Bottoms are marked by extreme volatility, which has been a proverb for the month of October but has eased now from a VIX high of over 80 to the still ridiculously high of about 65. It is subsiding nonetheless. Funds typically end their fiscal years in October, so selling to lock in profits and realize losses fueled what was already a tenuous news month. Moreover, I believe that mutual and hedge fund redemption are "baked in" at this point. In other words, I think that managers are anticipating future redemptions and have raised sufficient capital to meet demand. That is just a gut feeling though.

My other reasons include a better than expected slow down in GDP growth and the Fed's recent 50 basis point cut on the overnight rate. It looks as if the federal bailout is going to sufficiently thaw the credit market, but that will still take time. I expect the stock market to begin a rebound as the economy lumbers to a halt and then begins to ramp up again toward the end of 2009.

Next week will be volatile again. I think that Japan's bank and the ECB have meetings next week (not sure though). If those countries (and China) cut rates, foreign trade will be bolstered and we can avoid a serious global recession. In addition, we have a presidential election. I will be buying on dips next week. I finally have some conviction, even though I expect some more downside--commercial real estate still has a way to drop--but I do believe that banks are poised to see record profits in the next three to five years. And as unbelievable as it sounds, I like KMX. It along with anything auto-related is completely unloved. I believe that KMX will weather this storm and that it represent a good long-term play.

Whoa!

What a day. The market (the Dow) was flat, then up, then down, then up 245 points five minutes before the close, and we ended down 74. That kind of action can "clean your clock" if you're a trader, but the old buy and hold cannon has investors exactly where they were ten years ago. What to do, what to do?

I was greedy today. I sold my RIO but wanted the top at $12.95 per share. That order didn't fill, so as I saw the market begin to reverse in the two minutes before the close, I sold for $12.50 and watch RIO close at $12.37. I am still short put options on RIO, GE, and KMP.

Apple is up significantly over the last two sessions. That's one I'm watching closely and would be willing to buy on its way back up. Lots of good news and products coming out of the company, in addition to very positive investor sentiment and a ridiculously strong balance sheet, so we may have seen a bottom in Apple and the rest of the market could follow. I will be taking advantage of every blip down along the way, but you still have to be careful. Visa (a quasi-financial stock), for example, just posted earnings and beat expectations but went from up 3% to down 1%. Things are crazy out there!

In other news, I managed to pick up four free tickets to see Jimmy Buffett this Sunday. He is holding a free concert to rally voters for Obama. Should be a good time.

Fed Decision . . .

. . . in less than one minute.

I am long RIO and and short puts on RIO, GE, and KMP.

Beautiful Day

Went to see Joe Biden speak in Ocala this morning. Then I spent the rest of the day in a shimmering green grassy field filled with recently weaned horses. The weather was perfect--about 65 degrees with no clouds in the sky. I always spend time in the fall scoping out the newest crop of horses, because it's about this time of year that one can begin to get an accurate sense of a horse's confirmation. I'll just leave at this: Once again, dad has raised a superb class of fillies and colts.

The stock market had a blistering day as well. I participated in some of the gains but am kicking myself for setting such a tight stop on EWZ, because I know that stock leaps higher when the market ticks upward. The good news, however, is that it's looking like I will simply get to keep the premiums I collected on GE and RIO put options, and my long RIO position was up about 11% today. Not a bad day's work, considering that I spent most of my time playing with horsies!

The Real Issue

I hate arguing with people who are ignorant of the facts. More than that, I feel angry with myself for even engaging such people, often without precondition. I just end up feeling pissed off, and that only hurts me.

Let me give an example. Tonight, in response to a family member expressing nervousness about Obama's impending victory, I said something to the effect of "Luckily, Presidents are limited to two terms. Thank goodness for that or George W. Bush might be running again, and nothing would be worse than that."

A different family member attacked, saying, "Nobody gives Bush credit for preventing another attack on the United States."

"I give him credit for that, but my biggest problem with Bush is the War in Iraq, which has nothing to do with the fact that we haven't been attacked again, and we spend $10 billion per month there. Besides that, do you give credit to every other post-World War II President, including Clinton, for preventing a 9/11-like attack in the first place?"

Somehow, the conversation devolved into my relative stating that "Clinton's moral actions in the White House cost us far more than the $10 billion we are spending per month in Iraq."

Yeah, right. Ad hominem at its best.

Here are the facts about the War in Iraq:

1. At the latest, Bush started planning an invasion of Iraq in January or February of 2001, so the invasion was clearly not part of the post-9/11 war on terror.
2. Bush circumvented George Tenet and the C.I.A. in order to judge raw intelligence for himself without the benefit of the professional analysis that consistently failed to corroborate the evidence he wanted to find.
3. Even Colin Powell stated that the intelligence he relied upon to present his case to the U.N. was, in some cases, "deliberately misleading."
4. Bush continually alleged (even in the State of Union Address) that Iraq was attempting to buy yellowcake uranium for the production of nuclear weapons, despite the fact that C.I.A. intelligence "unequivocally" showed that to be wrong.
5. In clear violation of a federal statute, someone in the Bush White House "outed" Valerie Plame as a C.I.A. agent after the New York Times published an op-ed authored by her husband that stated Iraq was not attempting to purchase nuclear materials from Nigeria. Nobody has been prosecuted for that illegal leak, although "Scooter" Libby was found guilty for perjury in conjunction with an investigation of the matter.
6. The U.S. invaded Iraq and made no major discoveries of weapons of mass destruction.
7. In October of 2004, an Iraqi terrorist organization pledged its allegiance to Osama bin Laden's Al-Qaeda. To the best of my research and knowledge, Al-Qaeda had not operated in Iraq prior to that date.
8. Many lives have been lost. We have spent hundreds of billions of dollars, and polls indicate that Iraqis do not want us in their country any longer.
9. Somehow the above-factors play a role in the fact that our country hasn't suffered another 9/11-like attack?

I feel a lot better now.

Stopped Out

Anyone who has ever talked "trading" with me knows that I place tight trailing stop orders on the stocks that I buy. As a result of this practice, I was stopped out of both Goldman Sachs and EWZ (Brazil Exchange Traded Fund) today. Because the stops are trailing, my loss on GS was limited to $.50 per share and a little less than $1.00 on EWZ. Losses, yes, but at least the downside was predefined and limited.

In addition to trailing stop losses, I also add adjustable stops to most orders. In other words, once a stock hits a particular trigger, the trailing stop order is adjusted. Normally, I simply adjust the stop trigger. As an example, say that I buy a stock for $100 per share. I will place a trailing stop order at $5, which automatically sells the stock when it hits $95. If the stock trades at $110, then the stop price is adjusted to $105 automatically. That's the trailing feature. If, however, the stock hits $115, then the stop is adjusted to $1 (stop loss, i.e. sell, if the stock moves down to $114), allowing me to lock in higher profits.

These protectionist measures can be frustrating on days like today, when I have no short positions and it seems like I am losing money with potential upside, but at the end of the day, I am always thankful for the certainty of knowing what losses I might suffer.

The weekend was fantastic. Celebrated Mason's 1st birthday and spent some time with Maya, my favorite Miniature Pincher. Today I drove a friend to the Tampa Airport with a slight detour to Rockaway Frenchy's on the beach. It was an absolutely perfect day. Ate Grouper, watched waves break on the pure white sand, and enjoyed looking at beautiful women.

Today's Action

Woke up this morning and thought there would be blood on the streets by the action in the futures market, but we all know that didn't happen. Traders simply didn't overreact, and prices are too low for seasoned traders to cash in. The name of the game is buy low and sell high, not the other way around.

Here is a list of the trades I took today:

RIO at $10.50
GS at $97.50
EWZ at $30.00

I also sold the November 21 puts in RIO ($10 strike) and GE ($16 strike) for $1.30 and $1.15 respectively. Worst case scenario, I will have to buy round lots of RIO for $8.85 per share and GE for $14.70 per share. Those prices are well off the lows for those stocks, and I see long-term value and would happy to make the purchases there.

Otherwise, I ate lunch at The Villages in central Florida with close friends. That place is amazing, and the story of the man who developed it is even more impressive.

Hitting Bottom

Natalie Imbruglia's song Torn says it very well:

I'm all out of faith, this is how I feel
I'm cold and I am shamed lying naked on the floor
Illusion never changed into something real
I'm wide awake and I can see the perfect sky is torn
You're a little late, I'm already torn

Ever felt that way? Torn is a powerful song to me. It brings out thoughts and emotions that I often believe to be long gone. What could be closer to a nullified existence than being cold and shamed lying naked on the floor? Or is the experience of living extremely rich there because of what we learn when down and out?

And along the same lines as Ms. Imbruglia, the great Tyler Durden said that losing all hope is freedom. This is an interesting line of thinking to pursue. Theoretically, when one hits bottom, there is literally no place to go but up or sideways along the bottom. What intrigues me, however, is how we all fear hitting bottom. Yet how many successful people have been there? It's just part of the matrix in which we live.

Is it possible that there's nothing to be afraid of down there at rock bottom, so people who have run aground know that losing material possessions is not much of a consequence--they realize there is no reason to be afraid? I cannot imagine how profound that perception must be. Is this the reason that "rags to riches" stories are so commonplace? Which person would be incited to take more risk and accordingly reap greater rewards if successful, one who knows that he or she will be fine if everything is lost or the person who falsely believes they have something to lose in the first place?

I like to believe that I understand the concept, but for some reason, I just don't think it's deeply ingrained in me.

There are a few layers of thought here that I am not exploring, and my questions are not posed with exacting parity, but that is an intentional attempt to make a point. Namely, that regardless of what we earn or build, all things in this life are borrowed. A borrower is not an owner, and as a result, we have nothing to lose but the experience of living. Everything else is leveraged.

Regardless, I think we can all agree that Natalie Imbruglia is really, very, very smoking hot. Click HERE to buy Torn DRM free from Amazon.com.

Infuriating Trades

I watched the market closely today leading up to the sell-off that I expected in the last hour of trading, which arrived right on time. Unfortunately, none of my trades executed. Especially infuriating was my buy order on EWZ at $31.50. The ETF hit that price, but my trade didn't execute, and EWZ was trading at $33.00 a mere fifteen minutes later. In other words, I missed out on an almost 5% gain.

What did execute for me was RIO at $11.25. Then I remembered that it is "earnings season" and found out that RIO reports tomorrow. That's not a game I like to play with a large position, so I immediately closed RIO with a very small gain.

The next two days leading into the weekend will be very interesting. I still believe the best play in this sort of market is to sell puts on companies that you would like to own. That way I either get to buy stocks at long-term bargain prices or rake the unreasonably high volatility premium and walk away at expiration. The stocks I am looking at right now are RIO, EWZ, MCD, JNJ, GE, T, HNZ, USB, and GS.

A one month chart of the Dow shows that we are in a descending triangle, with a low of about 7,900 achieved on October 10th. Pay attention as the Dow approaches that line again. If it breaks downward out of the triangle, we could go much lower. If we hit the line and bounce up, that's called a retest of support and it indicates that it might be time to go long. Whether you go long or short, set tight stops on equity positions and pay attention. This volatility can be dangerous.

A New Day

It's a new day! Thank goodness for R.E.M. sleep. It is cleansing. I did not trade in the markets yesterday but played golf, enjoyed a very engaging conversation on the economy with two very smart people, drank a few beers, and ate fish at Rockaway Frenchy's on Clearwater Beach while watching the sky turn pink over the ocean in the western horizon. Unemployment does have some benefits!

I love identifying stars, planets, and constellations. Unfortunately, I wasn't able to locate the Northern Cross last night. Maybe I'll have better luck tonight . . . ah, tonight . . . game one of the World Series between the Tampa Bay Rays and the Philadelphia Phillies . . . I will be there, and I am excited!

Today I went to lunch in Tampa on south Howard Boulevard at a small restaurant called Daily Eats. I loved it. While eating on the patio, I noticed a car drive in with a black Delaware license plate and a dog hanging its head out the window. I lived in Delaware once upon a time and have always wondered about those black license plates. A beautiful young woman wearing a Phillies ball cap emerged from the vehicle and came into the restaurant, so I decided it was time to find out about the enigmatic black Delaware tags. The girl really didn't flirt with me though, which I still think is weird. She must be gay. She did tell me that her father handed the license plate down to her and that it is "worth a fortune," because the black tags are sequential and no longer being produced. Then, strangely, she said, "They are illegal, but the cops in Delaware don't know that." Hmmm. The encounter wasn't a total loss, I guess, since I obtained some new information, but I still wish she had batted her eyes at me or given me a Sarah Palin wink!

S&P 500

This chart demonstrates the extreme volatility in the market during the month of October. My sense from the last several trading sessions is that volatility is subsiding, although it still seems surreal to say that, i.e. it's not normal to feel like a 200+ point move in any direction on the Dow is a "flat" day. Buffett is a long-term buyer, and so I am I at these levels, but only on dips. I especially like RIO at $11.50 or better.

Burlington Northern

Warren Buffett, the worlds greatest investor, is selling December expiration put options in Burlington Northern Railroad (BNI) at the $80 and $77 strike prices. Essentially, he is a buyer of the stock at those prices. Look at it this way: Buffett received a $7 premium for selling the $80 strike, so if the option is exercised, Buffett is only paying $73 per share of BNI ($80 strike - $7 premium). The $77 strike netted Buffett about $5 in premium, so he would be paying around $72 per share if that option is exercised and he is forced to buy. So Buffett is a buyer at $72 and $73.

Any guesses at to where the worlds greatest investor thinks BNI will bottom? According to the two year chart, $72 seems to be a pretty good guess.

My Vote

I will vote for the McCain/Palin ticket if and only if Sarah Palin and Ann Coulter are nationally televised making out prior to election day.

It's actually conceivable that Sarah Palin's best chance to positively contribute to the economy is as a star in a pornographic film. Think about it, a plumber named Joe shows up at the White House to fix a leak. One thing leads to another . . . . That said, I do not like, watch, spend money on, or endorse any form of pornography.

Coincidentally, I am voting "No" on Amendment No. 2 to the Florida Constitution, which is solely aimed at discrimination against homosexuals. Among other motives behind my vote is the wish that Sarah Palin and Ann Coulter will eventually realize that they're "meant for each other" and choose to enter into a civil union and live in Florida. If nothing else, I want them to have the option.

Traditions

Since becoming unemployed, I've spent a lot of time with my grandparents. I can tell you a million and one stories of the crazy things I've witnessed in the last year. One ritual I absolutely love is having a drink with my grandfather every day at five o'clock. It's almost always rum with him. Over drinks this afternoon, he told me stories about Cuba. According to Pirata (my grandfather's nickname), the prevailing north winds of Havana winters ushered in reading season. "There were no girls in the square who wanted to play," he said in his still-broken English, so he would spend his time in the biblioteca. People weren't allowed to checkout books, so he would start reading a few and then hide the ones he liked in the stacks. Jules Verne was his favorite. "I read Twenty Thousand Leagues Under the Sea a long time ago, and good. I loved the books about Malaysian pirates too. Jules Verne was never on a boat, but he knew everything about the sea. He learned it all by spending time in sailor bars."

Then we were off to Hemingway. "Do you know where The Old Man And The Sea came from? An old man in Cojimar had gone out fishing and hooked a huge shark. The shark pulled him four miles from the coast, where an easterly current took the old man away from Cuba. After three days, the old man beat the shark but couldn't pull it into his small boat. Other sharks began circling, and the old man had to cut his prize away. By that time, the Marines and other fisherman had spent days looking for the old man, who had begun to make his way back toward the coast to catch an east-bound current. On the day that the old man arrived home to Cojimar, Hemingway happened to be at the bar on the beach. And Hemingway was smart; right away."

I am too damn nostalgic.

As for today's suggestions regarding the stock market, my picks made a small fortune!

The Debates

The debate last night was clearly the most heated of the three between McCain and Obama, but nobody promised to completely wean the U.S. off foreign oil by 2020 or cure AIDS. I thought that Obama had an interesting but very risky opportunity to put McCain away on the question regarding the negativity of both campaigns. McCain is on the ropes at this point and basically has no choice but to continue the jabs. Obama, however, could have offered a quid pro quo--something like "I am willing to stop referencing you in all my ads and focus only on my platform and the positive attributes I bring to the table, if you are willing to do the same." McCain could not have accepted those terms, because negativity is his only chance of winning at this point.

The second debate is over what the market will do in the near term. As I write the this, the Dow Jones Industrial Average has gone from positive territory to as low as about -350 and is currently at -100. Crude is sliding down too. As happened before, I am expecting a rally down the road, with the possibility of more downside first. (Helpful, huh?) Right now my portfolio is 100% cash, but I will begin scaling into the market today, as the VIX has hit another new high.

A great strategy on a volatile day like today is to pick stocks that already seem like a bargain and sell out-of-the-money put options on them. This will work especially well for stocks with good dividends that you would like to hold for a while, e.g. KMP, JNJ, LINE, T, PBT, CVX, MO. Selling put options is especially risky, because if the option expires in the money, you'll be required to buy stock at the strike price, even if the market price is way below the strike. In other words, you'll suffer an immediate loss to the following extent: Loss=strike price - premium received for selling option - market price.

One way to alleviate this risk is with a spread, which means selling a lower strike price option and buying a higher strike on the same underlying (bear put spread, i.e. you expect the price of the underlying to fall) or selling the higher strike and buying the lower strike (bull put spread, i.e. you expect the price of the underlying to rise).

I will also start dabbling in indexes and index options. The S&P has support at about 850, so I will buy it there with a tight stop.

Good News

The doctor called me yesterday afternoon at 5:30 with good news. I am fine--cancer free. The suspense was awesome though. Really felt like I was living there for a while. Later, I'll post my life to-do list. On to more important matters.

Polls show Obama pulling way ahead. I am still waiting for one of these guys to make an audacious commitment, something akin to J.F.K.'s promise to land on the moon. We won't see that from Obama tonight. As the front-runner, he'll just try not to stumble. McCain is getting desperate, so it could happen, although with little force behind any bold commitments coming from a flailing campaign this late in the game.

Speaking of races, the Breeder's Cup is a little more than two weeks away. For those not in the know, it is the "richest day" in thoroughbred racing. The Classic is a $5 million race that will feature a field of great horses, Curlin and Go Between among them. Unfortunately, Big Brown is out due to an injury. Keep an eye on Go Between. My dad foaled, raised, broke, and trained him on the farm prior to the start of his racing career, in addition to pairing Go Between's dam and sire (although Dad isn't the technical "Breeder"). Naturally, Saturday, October 25th will be a big day in my father's career.

In other news, it looks like the Somali pirates are going to get $8 million for the ship, cargo (Russian tanks and ammo), and crew they're holding hostage. One question: How the hell do they plan to get off the boat?

Real From The Start

Two weeks ago I administered a self-exam and found a lump on my left testicle. Naturally I went to see a urologist who said, "Yep, you have a lump there." Best $185 I ever spent. An hour later I was paying $950 to put my balls in a vice for an ultrasound. That was last Wednesday, and nobody has called me (or returned my calls) with the results yet.

On Friday, I told my very good friend and tennis partner about the scenario--told him that I was assuming the worst to better empathize with people who actually go through cancer, in the event that I am healthy, but hoping for the best. He simply responded, "Like I've always said, 'live like you're dying."

That comment sent my mind racing. If I had months to live, what would be important? How exactly does one live like he's dying? Two questions finally emerged: First, what do I want to experience before dying? Second, what do I want to leave behind? Those are big questions.

Assuming good health and good luck, I hope to live about another 18,000 days. That doesn't seem like a lot. Mortality marches on. It's time to get to work.

As an aside, I'll let you know when I hear from the doctor, and hopefully I'll be able to post some images from the ultrasound.