Ask Rande

Top 1779. Aug 13, 1999 6:02 PM

» RandeS - Norm,

Norm,

Said I was debating it. That was up until this week when the bond market over did it on yields without a major sell-off in stocks (at least in my opinion). What I was waiting for was a 6.25% yield on the 30-year to make a move (wish we had a search engine here -- could probably list a dozen posts to that affect). This was my primary objective, a play on zeros not a shift from fixed to stocks. Then, last week, I commented that should stocks sell off dramatically relative to the bond market then the risk/return tradeoff might favor equities. This week, we got to slightly over 6.25% on the long bond without a commensurate selloff in stocks. So, I pulled the trigger by shifting short-term bond funds to the 2025 target maturity fund in the IRAs. For or better, or worse, advance notice was given. So far, for better. I will be thoroughly surprised, however, should we get any solid follow-through in either stocks or bonds on Monday prior to Tuesday's CPI. Exuberance ruled the day on this 17th anniversary of the Bull. I would imagine sobriety will rule the day come Monday. How the CPI comes in on Tuesday morning will tell the tale thereafter.

-- posted by RandeS

Top 1780. Aug 13, 1999 6:03 PM

» JenL_3 - Barrons Article

Tony - Here are excerpts "The Striking Price" column from 8/2 Barron's:

Frisky Dog Days - Turns out August isn't so dull after all

By MICHAEL SANTOLI

It's summertime in the stock market, and the living is queasy. Doldrums and dog days, terms from the nautical and astronomical realm, conjure in most minds an image of late summer as a languid and uneventful period. And why should investors be different when setting expectations about the market? A look at the recent historical record, though, reveals that August has proven itself to be a rather rollicking month for stock prices.

Larry McMillan, the brains behind the McMillan Analysis options-strategy firm, recently canvassed the last couple of decades' worth of data for seasonal characteristics of the market and determined that August is, counterintuitively, quite volatile on average.

He took the Dow Jones Industrial Average's level on August 1 of each year since 1981 and then noted its change during the ensuing month, sometimes extending into September if a pronounced move was still in force. The results showed that "the absolute distance of the average move was 8.7%," McMillan reports. Even if the largest two and slimmest two moves are excluded, the average remains 7.9%.

That kind of volatility won't necessarily surprise anyone who traded through last August's crisis-addled market, when the Dow gave up almost 15%. But the fact that the late-summer jumpiness is so consistent is an eye-opener.

Because there is no particular tendency for the market to rise or fall in August -- there were eight down months and 18 up months since 1981 -- McMillan figures the way to capture the summer choppiness is to buy straddles, which means owning both a call and put on a stock or index at similar strike levels. This trade stands to be profitable in any dramatic jump or dive in stocks.

Predictably, the volatility implied by the pricing of options tends to rise during those Augusts when the market has dropped, a time when protective put prices usually ramp up. This year, the expansion in index-option pricing may have gotten a head start during the selloff that wracked investors in late July. In just two weeks, the VIX has jumped from 18 to 26, a 44% increase, though of course that doesn't preclude further gains if fear continues to drape itself over the market. August of last year saw a VIX above 40.

Also handicapping the prospects for volatility down the road are the derivatives analysts at Lehman Brothers, who have pieced together a report on which industry sectors tend to react most acutely to various economic data. Of greatest note is the fact that market segments move most in response to the monthly employment report, which will hit the market this Friday. It is the single most-potent market mover among macroeconomic indicators, according to the report by Lehman's Murali Ramaswami.

He concludes that, as one might guess, the greatest winners when the jobs number comes in low (and thus may herald lower interest rates) are the bank and brokerage sectors. But there are also ways to profit from a larger-than-forecast job report. Ramaswami determined that the Philadelphia Semiconductor, the Morgan Stanley High-Tech and the Morgan Stanley Cyclical indexes all get juiced upward when the number prints to the high side.....

...Jen

-- posted by JenL_3

Top 1781. Aug 13, 1999 6:17 PM

» TONYBRIG - Thanks Jen! Rande your on!

Thanks Jen! Rande your on!

Rande:

The last 2 paragraphs of The Striking Price
is what I had referred to in my question bout the
Employment figs.

Can you handle it now?
smile

vbolhh

-- posted by TONYBRIG

Top 1782. Aug 13, 1999 6:59 PM

» RandeS - I agree that a strong jobs report is generally negative for stoc

I agree that a strong jobs report is generally negative for stocks, particularly interest-rate sensitive issues such as financials and utilities (especially right now with the economy so strong – might be different during a recession) since it indicates pressure on the Fed to raise rates. Typically, one would expect high-tech firms to suffer along with the rest given the generally high P/Es. Did a little searching and did find some evidence that semi-conductor and computer stocks, however, have risen recently when the jobs numbers came in strong. Why would this be? Best I can figure is more people working means greater demand for PCs. Hard to believe this would countermand the affects of potentially higher rates, though. Also, would need to investigate any seemingly causal relationship between the jobs report and semis in particular to see if there really is a connection. Could be other coincidental factors involved (worldwide demand which has nothing to do with American jobs, for example). Still, did a little searching on Ramaswami too and it appears he has pretty good credentials:

Before joining Lehman as senior VP in its equity derivative research group (reporting to John Wickham, global head of equity derivatives sales and marketing for the firm), Ramaswami was with Bankers Trust & Co., where he was responsible for marketing, sales, research and product development of its risk management system. Prior to that he was at Salomon Brothers as a senior member of its equity derivatives research team. Unless his name is the equivalent of John Smith in India, he has also published quite a bit –

"Active Currency Management." Charlottesville, VA: Research Foundation of the Institute of Chartered Financial Analysts, 1993)

"Stock Market Perception of Industrial Firm Bankruptcy." The Financial Review (May 1987):

"Return Enhancement With Size and Styles." Presented at Blending Quantitative and Traditional Equity Analysis, Association for Investment Management and Research, March 31 1994.

Nice pick-up Tony. Shows you’ve got a good analytical eye.

-- posted by RandeS

Top 1783. Aug 13, 1999 8:45 PM

» TONYBRIG - Thanks Rande!

Great research job.
That guys no slouch either!
Interesting to hear if you come up with anything expanded on this subject.

vbolhh

-- posted by TONYBRIG

Top 1784. Aug 14, 1999 6:03 AM

» TONYBRIG - Options a little more!

Options a little more!

Rande: Maybe if we keep this dialogue going much
longer people will get interested in Options?
Will certainly check out that publication you
mentioned. Hope I can understand it cause if I
cant the IRS probably cant either.
But lets take a real example:
I sold 6 covered calls in INTC strike price 90
expiration Jan. I understand this is a short-term gain for 99. But what happens if I buy it back
in Jan at a loss. Short term loss for 2000?
Dont make sense or did I misunderstand you?
Seems to me it should be in suspense until
the expiration year in case of buy-back.

vbolhh

-- posted by TONYBRIG

Top 1785. Aug 14, 1999 6:43 AM

» RandeS - Tony,

Tony,

Let's go through it. When you write a call you receive the proceeds at that time. You now have an open position that can only be closed if one of three things happens:

1. The call expires
2. The other party exercises the call
3. You cover

If you cover or the call expires, then you have a short-term gain or loss (no matter the holding period because you were "short"). If the other party exercises, you have to deliver the stock and the premium you received when you wrote the call will be added to your proceeds in computing the gain/loss on the stock.

Now, when a position is open going from one tax year to the next, there is no reporting on the tax return. You don't even need to reconcile Schedule D to your broker Form 1099B since option transactions are reported on this form (you would need to do so for any open stock short sales, since the proceeds would be reported but you haven't closed yet). So, in your example, you would have a realized gain/loss in the year 2000 if that is when the transaction closes. It's counter-intuitive when you go short because the normal chain of events are reversed -- sale date and proceeds come before purchase date and cost.

-- posted by RandeS

Top 1786. Aug 14, 1999 6:46 AM

» RandeS - Meant to say option transactions are NOT reported to IRS on Form

Meant to say option transactions are NOT reported to IRS on Form 1099B. You darn well better report them, though, or could come back to haunt you (besides, it's illegal not to). BTW, Pub 550 is written in plain English, unlike the Code itself, and it covers everything from options to dividends, interest, straddles, gains, losses, etc. Good resource on how to report investment income and expenses on the tax return.

-- posted by RandeS

Top 1787. Aug 14, 1999 7:03 AM

» TONYBRIG - Chapter closed and understood!

Chapter closed and understood!
Makes sense for a minute thought I had to
report my open positions.

Very well done and explained.
Not let me read that publication.
Wonder if I can get it online?
Kirk you learning?

vbolhh

-- posted by TONYBRIG