Spring Cleaning (UUP,SLV)
Propagandists and sales and marketing professionals know the value of repeating the message ad nauseum. They know that with enough time they’ll eventually crack through their audience’s cortex and implant themselves there for good.
There’s something about the human psyche, it seems (call it an inborn weakness), that eventually relents, and then wholeheartedly believes after the 650th repetition of “CLEANS WHILE IT DISINFECTS” that the product actually does what it says.
The marketing pros in the brokerage and mutual fund businesses are also aware of this, and the techniques they use are exactly the same.
When we first started out in this business nearly thirty years ago, we experienced an epiphanic moment, when one of the more experienced brokers in our office, a highly strung chap in a camel colored suit, burst into the training session where we rookies were just about to break for lunch and yelled in an almost desperate voice, “If you guys think this business is any different from selling vacuum cleaners door-to-door, you’re wrong!”
Puzzled, we were at the time.
But today we understand.
Success on Wall Street resides in repeating the same message a thousand and one times, day after day, year after year, decade after decade, until your sales numbers start to grow large enough to make you wealthy. It’s all rather boring actually. But that’s more or less the way wealth is built, whether it be on Wall Street or via the latest model hoover a la Willy Loman. The question is simply whether one has the stick-to-itiveness to see it through.
But wealth is not what we take issue with here. Rather, it’s the falsities and outright brash fibbery that the Street resorts to that fires our unction.
For example, Wall Street will repeatedly tell you the following –
- Stocks will generate the highest rates of return over the long term. You’ll therefore need them to keep pace with inflation and help your money last through retirement.
- Bonds, on the other hand, are a low risk/low return investment.
- What young investors need most is long-term growth, not fixed-income assets that just get in the way of that growth.
- Smart investors possess a long investment horizon and use bear markets as opportunities to buy stock cheap. Only in this manner can one maximize that greatest contributor to wealth: time.
- Lest you miss out by timing the market, you must remain invested in equities at all times; indeed, you must BUY & HOLD. Investors who do so can expect annual returns of between 7% and 10%.
- , etc.
But prepared in glossy, colorful brochures and repeated often enough, it sells equities hand over fist to Main Street and keeps the financial industry laughing all the way to its offshore banking getaway in Bermuda.
A 1000 Words of Debunkature
Unfortunately, we haven’t the space to debunk all this nonsense methodically, but a single picture may serve to show just how whacked all the above really is.
Have a look –
This is a graph of the last 120 years’ performance of the S&P 500. Shown in red is the amount of time an investor would have to wait to break even on his initial stock purchase had he got in at the ‘wrong time’.
Clearly, anyone ponying up cash in 1904, 1929, 1965 or 1999 would have been dreadfully disappointed as the market ground its way sideways to lower for decades at a time before breaking to new highs.
What Wall Street fails to mention (repeatedly) is that average returns of seven to ten percent per year can, indeed, be accrued over the long haul, but only given the fulfillment of two conditions, 1) you’re invested in the highest quality dividend yield stocks available (as dividends account for almost sixty percent of your return over nearly every examined time frame), and 2) you have sixty years to wait before you withdraw your capital.
And how many of us have that kind of time?
The charbroiled reality is that failing to account for where the market is today could leave you waiting for DECADES before you recover your capital.
You must ALWAYS consider where you are and where the market is currently situated. And you must make all your investment decisions accordingly.
Our approach at Normandy accounts for the current reality and appreciates that the best approach is to play the intermediate trend of the market and not to stretch our investment horizons too far. To do so is to risk a worst case scenario.
Before we get to this week’s trade, we have to reexamine our SLV initiative from just two weeks back. The letter was called Precious Metals Bear in ICU, and there we urged you to sell the SLV October 20th 17 PUT for $1.12 and buy the SLV October 20th 17 CALL for $1.13. Total debit on the trade was a penny.
And it was all looking good until last Friday, when the following occurred –
As you can see, SLV opened higher, then closed lower than the previous day’s action, enveloping, in fact, all the previous two weeks’ trade in a vicious, wham-doggy of a bearish engulfing pattern (enlarged, in red).
And that bodes ill for the trade.
So we’re getting out.
As of this writing, the CALL sells for $1.15 and the PUT changes hands for $1.01. Sell the former, buy back the latter and you net $0.13 on a penny laid out. That’s 1200%.
And it beats a potential loss.
Shut her down.
This Week’s Action
We’re keeping with the precious metals for this week’s trade and matching them against the dollar, represented by the PowerShares Deutsche Bank US Dollar Index Bullish Fund (NYSE:UUP), which has had a fine run of late, reversing course after what has been a several month bout of weakness. We like the near term prospects for the trade, particularly after silver’s bullet to the heart last week.
The trade goes as follows –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Your UUP CALL is over a dollar in the money, while the SLV CALL is just three cents ITM!
With kind regards,
Hugh L. O’Haynew