Mar 12, 2023

First my warning. The best advice I can give is don’t take my advice. Second is, I am wrong more often than I am right. (However, Soros once said, if I am right one ought of three times I am happy)

I don’t often write my opinions regarding financial matters but right now things are getting interesting.

We have had the second largest bank failure announced this last Friday (SVB Silicon Valley Bank). There are few reasons why and all banks are feeling these squeezes. Interest rates are going up. The average for this Country has been around 4 1/2% and we are finally getting there. When rates go up banks see a couple of things happen. People now have other attractive places to put their money than in a bank because they will get a better return. Banks who are issuing bonds see their prices fall in order to get yields to purchasers to an attractive level. And that is where SVB got crunched.

The M2 money supply (liquid savings essentially) is shrinking so there is less money surfing through the economy. This slows down the speed of money and less money will effect the consumer and when the consumer slows down, so do earnings. When earnings slow down then the Price/Earnings Ratios all go up - for me that is a huge stop sign for buying a stock.

We are seeing almost all the larger companies reduce expenses (money is tighter) so employee reductions occur, less profitable departments are eliminated, research and development investments are eventually reduced. Look at all the companies recently who have announce staff reductions (Google [Alphabet], Amazon, Microsoft, Twillo, Twitter, Disney, Paypal, Goldman Sachs…). Yes unemployment is still low but it won’t stay that way. And when you hear about layoffs, you get concerned and reduce risk and big purchases, when your neighbor gets laid off you look for all the ways to reduce risk and expenditures.

This VIX is up and that means the sense of risk is up.

If you have your powder dry (some liquid assets ready to reallocated) then we are approaching a period of opportunity. We aren’t there yet but we are on the cusp. And it is harder right now to sell off your profitable investments to prepare for re-allocations.

I look at times like this as a season to be careful but vigilant for those “opportunities”. I am generally conservative and a contrarian (i.e. I look for dislodged pricing, where reversion to the mean is inevitable).

Recently I have been selling more cash secured puts, but I got caught by one (CVS) when it fell way past my put at 87.5. All of my typical puts are about 30 days out when I sell them and I try to get 1% return on my secured cash amount. So I rolled out the put to a later date with a lower strike. I bought the put back (Buy to Close) and sold a new one at 82.5 for a loss of about 300$ per lot and for an expiration date a little further out. Then the stock promptly fell right through that strike and I was trapped again. This stock did not co-operate and fell way past my strike price. So I sold a near-by (two days out) weekly put just under it’s current price at 78. It got executed so I ended up with 100 shares of CVS. I like the stock and don’t mind having but I still have this outstanding put at 82.5 and it hurts me to think I might have to buy a 78$ stock for 82.5. I have a little time. This situation will force me to watch this stock very carefully and I will watch to see how I can roll that put out and do another bear spread put or just take the hit. I did not handle this one very well.

In the mean time this weekend I offered few more puts (for sale):

• BAC Apr 21 @ strike 26 (w/current price: 30.27 ),
• USB Apr 21 @ strike 35 (w/current price: 40.62),
• PNC Apr 21 @ strike 120 (w/current price: 137.16)

And of course my problem trade CVS Apr 21 @ strike 82.5 (w/current price: 77.10) which I will watch to see if I can trade my way out of.

Enjoy, life is all about opportunities (some are made, some are lucky but if you are not prepared and watchful then they aren’t really opportunities), the more the merrier.