Jun242013

Why Raising the Retirement Age is a Bad Idea

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Retirement LineThe recent suggestion to increase the minimum wage to $15 has received some spirited and predictable reactions on both sides of the issue.

I read Felix Salmon’s Seeking Alpha article that offers a reasoned analysis of why doing so should be cause for back slapping all around. other than the fact that the lack of legislative backbone would preclude it from ever happening.

Now that I’m no longer in the business of paying employees, I wholeheartedly agree with the need to provide higher levels of pay for those at the bottom of the economic ladder. Perhaps legislating a minimum wage is an entitlement of sorts, but it is also a means of introducing some justice into what can devolve into a merciless system of indenture.

While we’ve been hearing about trickle down economics for nearly 30 years, the raising of the minimum wage would likely create a “trickle up” phenomenon, as it seems fairly logical that the same amount of money in the hands of people that have basic unmet needs is more likely to be spent on goods and services than is money in the hands of the most wealthy.

Certainly investing newly found money in stocks does nothing to propel the economy forward unless you continue to believe that money will generate dividends and capital gains that themselves find their way into the economy, rather than simply being re-invested.

But we all know that on the whole, that just isn’t the case. The money essentially disappears from circulation and adds nothing to economic growth. It often just adds to the tally in the game of “who can die with the most to his name.”

Surely the argument that trickle down would create jobs has by now been dismissed. The US population has grown nearly 35% in the past 30 years since the start of the 1982 bull market and the implementation of supply side economic theory. According to the Bureau of Labor Statistics, based upon preliminary May 2013 data, approximately 34% more jobs have been created in that same time span.

Most everyone will agree that the creation of jobs has by and large been in service sectors and increasingly entry level wages have replaced higher wages of many in the workforce, particularly after “right sizing.”

As an investor and avid capitalist, I can live with reduced profit margins by the likes of Wal-Mart (WMT), McDonald’s (MCD), Disney (DIS) and others. Investors and a market that clings to the gospel of Price/Earnings ratios can learn to re-acclimate, as we get used to the new normal for corporate profit margins and realize that there’s really no need to see stock prices adjusted accordingly. How in the world Apple (AAPL) can call it’s store employees “Geniuses” and pay them minimum wage is a curious thing. Maybe that’s why Einstein couldn’t afford a new sweater or a haircut.

But the capitalist in me takes a little different view when it comes to changing the retirement age. Is it really an entitlement if you have paid for it and have further had limitations placed upon how the funds could be invested while you waited some 40 years for their disbursement in tiny aliquots?

Look, to start, I’m already biased on this issue. Not that I’ve been objective ever before, but for some reason this time I feel compelled to make full disclosure.

I’m 59 and work about zero days a year, down from about 10 days just 2 years ago. My “Sugar Momma,” who coincidentally has increased her time away from home as I’ve devoted my life to staying at home doesn’t like it when I refer to myself as being “semi-retired”. I just enjoy having moved the retirement age border closer and closer to my current age. Mentally, I retired about 30 years ago, but in some form of transfigurative migration, I had left my soul behind as I dutifully trudged off to work in places past.

Over the past few years we’ve heard various economists turned social engineers deign to suggest that our society can’t afford retirement at its current age levels. They want to raise the age at which workers can retire and collect benefits.

What are they possibly thinking?

The same story has already made its round on the European continent, where citizens are far more capable of genteelly indicating their displeasure with changes in government policy by letting their Molotov cocktails do the talking for them.

In Athens, the cradle of democracy, a nation that arguably, per capita, has contributed more to mankind throughout civilization’s history, has sadly been in great turmoil for the past two years. The last thing anyone there wants to do is to keep working longer at a job that they’ve barely worked on during the span of their lives.

The economic and financial engines in Greece are a mess, but certainly not the only mess in the world. Protesters tossing Molotov cocktails, police firing tear gas, all while in the shadow of the great wonders of the world, are sad. In some other places those events may pass for national reconciliation day activities, but in the civilized world, people take notice and wonder if the same thing could overcome their basic civility.

The idea of significantly raising taxes, dropping social and government services and increasing the retirement age is a hard one to swallow, especially if, as a citizen, you blame external forces for your economic crisis, just as the today’s initial market decline was being blamed on China or Ben Bernanke was blamed for the recent precipitous market decline.

I really don’t have the motivation to look up the details, but Greek citizens can retire far younger than can the typical American and they certainly have figured out a mechanism to avoid paying taxes. While some pseudo-economists distort the American story and claim that 50% of US citizens pay no income taxes, it isn’t quite that skewed.

While I do understand the need to raise revenues and decrease services, as a general strategy during difficult times, it’s the retirement issue that bothers me.

I actually have not been effected by the gradual increase in our own social security age eligibility, although my Sugar Momma is effected.

But besides the fact that I didn’t really want to work any longer, there are some very pragmatic reasons why increasing the US retirement age may not be the way to go, at least not with the direction that the economy has been headed these past few years. While the markets were wildly enthusiastic about the June 2013 Employment situation Report, if you listened to Ben Bernanke, the growth in employment is not yet sufficient to cause a tapering of the current level of Quantitative Easing.

We simply don’t have a sufficient number of jobs for our current population.

Unless you’ve been hiding away someplace for the past 20 years, certain jobs are disappearing from the United States. The jobs and industries that were created to replace those missing sectors of our economy are now disappearing, as well. I’m also now old enough to remember when unions were decried and criticized for acting like Chicken Little when suggesting that technology and automation would replace humans in the equation.

Nonsense, was the polite response to that uncanny ability to see into the future of the American workplace.

Have you seen the unemployment rate lately? Everyone seems to agree that number is under-stated due to the people that have simply given up even looking for employment.

It’s hard to believe that anyone would actually give up on the search unless they were already within sight of retirement. Push that age higher and the unemployment rate goes with it.

As our population grows, albeit, it is now growing slowly, newly minted adults will need jobs. But where are those jobs coming from? Increasing the retirement age, coupled with decreasing standards of living simply dry up the existing pool of available jobs, as the now elderly won’t even be able to afford to retire.

Of course, from an employer’s short-term perspective, given the expense of a codger like employee pool and their attendant medical needs, a cheaper and healthier alternative may be irresistibly beckoning toward them to fire those highly experienced leeches.

Disequilibrium in immigration, birth rates, death rates and retirement rates can have drastic effects on our society.

Instead of listening to annual summertime stories of how inner city youth are unable to find summer employment and how that bodes poorly for street crime statistics, lets transport that model to every population around the entire country.

Take your choice. Marauding gangs of unemployed and disaffected youth or hobbling throngs of terminated geezers eating away at the fabric of American society, all clawing for the few jobs left in the United States.

So where will the job-seeking migration send Americans? It’s not like the south or southwest are going to be booming anytime soon. It’s also not very likely that China will find itself with a shortage in its labor pool. Libya’s burgeoning domain shortening industry is mostly run by an savant in a basement somewhere in Detroit, so that’s not going to be the solution, either.

Right now we look at Greece. Not long ago we looked at Tunisia. Well educated, yet high unemployment.

That turned out to be a good combination for civil unrest.

I’m just trying to do my part as a citizen who cares about our youth’s future livelihood and don’t want to see generational warfare in the streets.

I’m more than happy to stay at home, especially on those days that I can make more money by just tapping a few keyboard entries.

So I’m trying to do my part. I’m staying away from the employment market, despite Sugar Momma’s recent exhortations.

What can I say. I’m just a patriot who doesn’t want to see fellow citizens rioting in the streets.

You’re welcome.

 

Jun202013

A Final Thought About the Pfizer Tender Offer

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In the weeks since Pfizer’s (PFE) announcement that it was offering the remainder of its 400+ million holding in Zoetis (ZTS) in exchange for Pfizer shares many opinions have been offered regarding the relative merits of the tender offer.

My own opinion, previously cast some skepticism regarding what appeared to be a very favorable offer that might provide as much as a 7.52% premium for individuals offering their shares of Pfizer in exchange for Zoetis shares.

I did not offer my shares for tender, with the deadline for having done so, passing on Monday, June 17, 2013.

However, Pfizer has announced that its tender offer for exchange of its shares for Zoetis shares has been over-subscribed and that the offer has been automatically extended, as provided by the terms of the tender offer.

“The final exchange ratio is 0.9898 because the upper limit is in effect. Accordingly, the exchange offer has been automatically extended by its terms until 12:00 midnight, New York City time, on June 21, 2013”

That simple phrase means one very important thing for those that had believed a quick pay day by selling their new shares of Zoetis..

As explained in the prospectus, plainly in sight on the cover page, although the exchange premium was 7.52%, it was subject to an “upper limit” of 0.9898 shares of Zoetis for each share of Pfizer exchanged. The prospectus warned that the actual amount of in-kind value received could end up being substantially less if the “upper limit” was reached.

And it was.

At the conclusion of the initial phase of the tender offer, more than 800 million shares of Pfizer had been tendered for about 400 million shares of Zoetis.

That means that on a pro-rated basis an individual will have less than half of their tendered Pfizer shares accepted for exchange. The potential impact and costs associated with small share lots was discussed in my previous article that included the impact of transaction administrative fees that could wipe out any potential profit for those seeking to immediately sell shares in order to capitalize on any exchange premium.

While the final exchange rate is known, 0.9898 shares of Zoetis for each share of Pfizer tendered and accepted, it isn’t yet known what the pro-rated figure will be. In other words, what proportion of each 100 shares of Pfizer tendered will be accepted. It will likely be less than the current ratio. The greater the additional number of shares tendered the greater the adverse impact on small share holders.

For those still considering tendering shares, you have until midnight, Friday, June 22, 2013 to do so.

The following may be helpful:

At Zoetis’ current price of $30.19 after the close of trading on Thursday, June 20, 2013, each share of Pfizer that is accepted for tender will be worth $29.88, as compared to the Pfizer actual closing price of $28.64 on Thursday. That represents a 4.32% premium, which is substantially below the initial 7.52% premium.

Since the tender offer was made public Zoetis shares have subsequently fallen more on a percentage basis than have Pfizer shares and the premium has contracted. The Zoetis share price may or may not be maintained at that level when trading begins, so even that reduced premium may or may not be realized for those seeking to sell their new Zoetis shares.

For those that decide to accept the extended offer and had sold June 22, 2013 call options on their shares, you must be certain that your shares were not assigned. Strictly speaking, option contracts that expire at the end of a monthly cycle, do not expire until Saturday, which is after the extended deadline to tender shares.

If you accept the tender offer and your Pfizer shares were subsequently discovered to have been assigned you would still be obligated to deliver Pfizer shares in exchange for Zoetis shares and could do so by purchasing them in the after-market. That has additional risk if the price of Pfizer shares increase while the price of Zoetis shares decrease.

What to do?

Stick with Pfizer. If and when there is a time to own Zoetis shares you can always do so based on its own merits and without a clock ticking away in the background.

May312013

Picking a Winner in the Pfizer-Zoetis Divorce

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Strictly speaking, Pfizer’s (PFE) decision to separate from Zoetis (ZTS) is called a spin-off.

It did so initially on February 1, 2013 and there was much excitement about the prospects of being able to invest in the pets and livestock healthcare business, which was being touted as that portion of Pfizer that had the greater growth potential and by inference the greatest likelihood of out-performing the market and certainly out-performing stodgy old Pfizer, itself.

Certainly, if you are able to remember back to the heady days of Pfizer when Viagra was brought to an eager consumer demographic, there isn’t much reason to believe that sort of growth is in Pfizer’s future. From every logical point of view the best way to unlock shareholder value was to unleash hidden gems that were buried inside of a behemoth.

Additionally, if you look at the recent experience of the spin off by Conoco Phillips (COP) of its refiner arm, Phillips 66 (PSX) you might be of the belief that such spin-offs are akin to a license to print money.

By now Pfizer shareholders may have received the offer to exchange shares of Pfizer for Zoetis. With consummation of this offer, the separation of the two entities will be complete.

Pfizer refers to it as an “exchange offer to separate the Zoetis animal health business from Pfizer’s bio-pharmaceutical businesses in a tax-efficient manner, thereby enhancing stockholder value and better positioning Pfizer to focus on its core bio-pharmaceutical business.”I call that a divorce.

In some situations, I suppose that the children of divorce could see themselves as winners, particularly if they are able to leverage their parents against one another, but that sort of thing may be more common in situational comedies than in real life.

Perhaps shareholders of Pfizer see themselves as winners, as well, although, Zoetis shareholders may have a very different view of melding families.

On the surface, the offer looks very attractive. In a nutshell Pfizer shareholders are being given the opportunity to exchange $100 worth of their Pfizer shares for approximately $107.52 of Zoetis shares.

When in a red hot stock market, that kind of exchange is actually more than just appealing. Where else can you get a 7.52% return from one minute to the next?

For me, the decision isn’t quite so straightforward, as I have sold Pfizer calls with an expiration of June 22, 2013, while the deadline to respond to the offer is on June 17, 2013. There is no mechanism in the option market, particularly for contracts that may be exercised to identify those Pfizer shares that have been offered for tender.

There may, in fact, be some liability if, having sold calls and accepted the tender offer, the shares are subsequently assigned as a result of option exercise. That would be potentially onerous, especially if Zoetis shares were to go on a run higher, but I’m not overly concerned about that occurring.

But forget about me and my problems, or the problems of an option buyer. For the ordinary buy and hold investor the decision should be a fairly easy one to make.

Right?

Well not so fast.

For starters, the likelihood of being able to exchange all of your shares is small. There are over 7 billion shares of Pfizer and only about 400 million shares of Zoetis being offered. That’s good enough reason to inform shareholders that the exchange may be made on a pro-rata basis. Unlike a Facebook (FB) IPO offering you’re not likely to get more shares than you imagined.

Incidentally, about 75% of Pfizer’s shares are institutionally owned. The greatest likelihood is that those holdings are in excess of 100 shares per institution, but more on that later.

Assuming that everyone in the world salivates at the prospect of that 7.52% premium and the ability to cash in by selling shares of Zoetis, there are a number of considerations before counting your profits.

Among those considerations is that institutions, which currently only own approximately 18% of Zoetis shares, would be more facile in being able to unload shares quickly, as they are freely transferable upon exchange. That 7.52% premium may not be destined to withstand a lack of buyers, even if some discipline existed and there was an attempt to create orderly selling.

With the differential in the number of shares between the two companies, assuming that all shares were tendered, each shareholder would receive an allocation of about 6% of their request.

Before you get exposed to too much math, you should also know that there is a $30 fee to exchange shares. As with all investing transactions, there is an economy achieved in volume, especially when there’s a fixed price involved.

In the event that someone holds 100 shares of Pfizer, approximately 6 of those would be eligible for exchange, based on the assumption that all outstanding Pfizer shares would be offered for tender. The final number of shares of Zoetis received in exchange for Pfizer shares will be based upon an exchange rate as determined by the 3 day weighted closing price as announced on June 19, 2013, or after, if the deadline is extended by Pfizer.

For illustrative purposes, let’s assume the final Pfizer share price was $29. That would entitle the shareholder to $31.18 worth of Zoetis shares.

Your 6 share allocation would mean a profit on the exchange of $13.08, less the $30 transaction fee, leaving you with a loss of nearly $17.

That is an example of snatching defeat from the jaws of victory.

Of course if less than all shares are tendered the 100 share stock owner would fare better. If only 3 billion shares are offered for exchange he would break even.

Or would he?

The next part of the equation is what happens to Zoetis. At the moment the float is approximately 500 million shares, which will increase from one moment to the next to 900 million shares.

Then comes the real fun as there will certainly be those looking to quickly capitalize on that 7.52% differential before the opportunity disappears.

One can only imagine that would put some downward pressure on share price, which incidentally hasn’t fared terribly well since the initial spin-off.

Zoetis became a publicly traded company in a successful IPO, having been priced above expectations and closing up 19% on its first day of trading, from an IPO price of $26. Unlike Phillips 66, however, it hasn’t left its parent in the dust.

In fact, despite an early positive showing, Zoetis has lagged Pfizer in its performance, while both have trailed the S&P 500.

As with many stocks that hold the promise of growth, Zoetis doesn’t offer a terribly appealing dividend, although that could change as it has already been increased for Phillips 66. Currently the Zoetis yield is 0.8%. Compare that to the stodgy Pfizer that is yielding 3.4%

Ultimately. in terms of the offer itself, the fewer that express an interest, the far better the offer would likely be as allocations would be increased and pricing pressure on Zoetis would be decreased.

A classic battle of greed versus common sense.

As an inveterate option seller, I have an additional consideration. Zoetis does offer option contracts, but unlike Pfizer it does not offer weekly contracts, nor does it have a multitude of unit denominated strike prices, making the prospects of holding shares less attractive for me.

With a bit more than two weeks until a decision is required my initial reaction to the offer has undergone quite a transformation, but I’ll still end up following the numbers and determining whether some additional return can be squeezed out of the transaction owing to the size of my Pfizer position

While I now anticipate the possibility of continuing to hold onto my Pfizer shares, I do hope that perhaps someone who hasn’t given the subject too much thought may end up exercising their $29 option early, at a price below the strike, as they may perceive Pfizer priced at anything greater than $27 to be the equivalent of Zoetis priced at $29 and hope to make a killing in what they believe to be an arbitrage opportunity.

Maybe divorce isn’t that bad? At least if you don’t think about it too much.

 

May12013

Shame on you, Apple

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Oh, and congratulations, too.

Shame and congratulations on you for completing the world’s most successful corporate issuance of bonds. $52 Billion in bids clamoring for $17 Billion of product.

Remember when Apple (AAPL) products had that kind of demand?

Remember when its stock had that kind of demand?

Remember, the cynics say that dividends and stock buybacks are the sort of things that you do when you can’t propel the business forward.

A few years ago, in a ruling that will forever remain controversial, the United States Supreme Court essentially ruled, that in at least a narrow definition, corporations were people.

For most purposes that designation is somewhat non-sensical, but for the all important world of campaign financing making corporations animate objects had a great benefit. Namely, the privilege of donating obscene amounts of money to political campaigns.

But along with all of the great privileges of belonging to the human race, there have to be some downsides, as well. Social obligations and the burdens and joys of human emotions come to mind.

Like Adam and Eve in the Garden of Eden, one of the very first human traits that they exhibited after they had done something very wrong and against the “rules” was to feel shame. Ironically, what they did wrong was to have eaten from “The Apple.”

This week, Apple should feel shame.

They borrowed money, as much as 75 basis points above US Treasuries in order to fund a planned $50 Billion buyback and the costs of three years worth of dividend payments.

From a business perspective, Apple should be congratulated, having found a way to satisfy increasingly noisy shareholders and hold the tax man at bay. Although I do wonder why they even had to go 75 basis points above US Treasuries, you can’t argue with the success of the initiative. You would, however, think that Apple was more credit worthy than our own government, but apparently they don’t even measure up to Microsoft (MSFT) in that regard.

While the interest payments are a deductible expense, the real beauty is that Apple is able to put cash directly and perhaps indirectly back in the hands of shareholders without the need to repatriate tons of foreign cash and pay US taxes once having done so. Of course, they also figured out a way to turn down the heat on Tim Cook, just a bit.

Having been an Apple shareholder as recently as last week, I suppose I would have lauded that move by Tim Cook, but now, I find it shameful.

Firstly, not that I expect any devastating news at Apple, but suddenly shareholders have taken a subordinate position to new bond buying stakeholders. The risk to shareholders is certainly small in that regard, but it is also certainly unnecessary.

Secondly, what happened to the ideals?

Although he was a ruthless competitor, the late Steve Jobs had ideals. First and foremost, they related to the products offered by Apple. But they also extended to the financial practices that eschewed capital markets and were ruggedly self-reliant in order to meet its corporate objectives.

While Apple still has exquisite products, among my previous critiques of the company quality of products has never been at issue, they are straying from the founder’s ideals on all counts.

While it can be safely said that the last time Apple ventured into the bond market, it did so to save itself from financial ruination, Steve Jobs had not yet returned to the company. We’ll never know whether Apple under Jobs’ leadership would have been driven to the point of desperation, but we do know that in the 25 subsequent years that source was never tapped again.

Whatever the basis for his ideals, they included a disdain for share buybacks and dividends. As recently as a 2010 shareholder meeting, Jobs stated that Apple needed to keep its cash for growth opportunities and further said that paying a dividend or buying back stock would not change the stock price. You can argue those points, but what you can’t argue is that Jobs’ idealism exchanged the illusory effects of dividends and buybacks for the real effects of stock appreciation.

So here we are. Shares had fallen in excess of $300, the pipeline appears dry and questions regarding TIm Cook’s continuing leadership have popped up.

In response, Apple has gone where the beleaguered go. They have gone the route of buybacks and dividends. Nothing terribly creative, but a step designed to quiet some of the complaints from shareholders and activists.

Yet, they went to the bond markets to get the necessary cash to perform what may in and of itself been unnecessary. By all reports they did so to avoid repatriation of foreign held cash and to avoid paying U.S. taxes upon those funds.

Remember the 2012 elections? Remember candidate Romney and the controversy surrounding his taxes? There was never a question as to whether Romney had broken the law or done anything illegal. It was an issue of his taking advantage of every loophole in the tax code that was imaginable. Not illegal, but most people innately believed that there was just something wrong about navigating a path that no one creating regulation or legislation could have imagined would exist.

Bill Gates and Warren Buffett believe that to be the case. I suppose that’s another way that Apple doesn’t measure up to Microsoft.

On its surface you know that there is something wrong when an individual can have an IRA valued in excess of $100 Million. Not because the amount is so large, but rather because of the annual contribution thresholds. For example, assuming Mr. Romney made a maximum $5,000 contribution each year for 30 years and achieved an annual 35% return, he would still only have $40 million.

Shameful.

Yet here Apple has garnered its own shame. Exploiting the tax code in a way that the average person, perhaps even investors in Apple, intuitively know is wrong. Maintaining a significant cash reserve overseas to avoid paying taxes just doesn’t pass the smell test for most people, despite being legal.

But by so doing, they are also not re-investing any significant portion of their $150 Billion cash reserve into the business, nor are they pursuing meaningful acquisitions. The money sits in a low interest environment.

Given that shameful disregard for shareholders,you could understand why there was a growing chorus for something substantive to be done.

While corporations traditionally did not have social responsibilities, that too is a burden of now joining the human race. Among the social responsibilities is to put their money to work and to pay taxes, without hiding behind the loopholes or the unanticipated escape routes found in existing regulations and legislation.

I’m not really certain whatever happened to Adam and Eve after their banishment from the Garden of Eden. Their expulsion was swift, and perhaps the entire human race paid a steep price for their actions.

I think Apple’s recent action will result in the same steep price for its shareholders as the euphoria around the offering has already disappeared. The future looks less optimistic as Apple settles into a state where they are no different from the rest and beginning to rely on smoke, mirrors and lapses in tax policy to perpetuate their leadership.

In the meantime, without anything substantive in its future, Apple will remain a trading vehicle that may offer risk to those looking at it as a long term value.

While I can’t hold Apple in esteem for their anti-social behavior, and blatant thumbing of its corporate nose at its responsibilities, I do think that if offers some exceptional short term opportunities, especially when coupled with a covered call program.

I look forward to more of those positions as shares come back down in price to the $410-420 range, which I anticipate occurring prior to next week’s ex-dividend date.

As long as they’ve already made a deal with the devil, I may as well get my piece.

 

Mar142013

The Clock is Ticking on the S&P 500

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The age old question and certainly having its application in the stock markets is how does one see the glass. Is it half full or half empty? Is the market going higher from the current levels or have we already seen its best days?

I often like to say that I neither believe in technical nor fundamental analyses. Saying so is probably a reflection of the denial that has me refusing to believe that my intellectual capacity has greatly diminished.

While not really spending terribly much time with charts, I do glance at them. Like the spooky kid from “The Sixth Sense,” I do think I occasionally see patterns. I suppose to some degree that’s somehow related to a very basic aspect of technical analysis.

About a month ago, I started getting a bit leery about the market’s climb and have found it increasingly difficult to commit funds to new positions. That feeling was based upon what I perceived to be a very similar path that the market was following to that exhibited in the beginning of 2012.

Both paths are the kind that covered option sellers dislike, but fortunately don’t come along very often. Both times the market has essentially done nothing but climb higher.

This Thursday morning we’re fresh off closing higher nine straight days. In fact, March 2013 has yet to see a lower close. Needless to say, my prescience has yet to be fulfilled.

The last time that the market enjoyed a nine day winning streak was in November 1996 and it do so in May 1996, as well. I can say “enjoyed” because back then i wasn’t selling call options, so I’m fairly certain that I enjoyed those periods as well.

Out of curiosity and with an abundance of time on my hands as I await something to break in one direction or another, I was interested in seeing just how the market has done historically following such consistent daily climbs higher.

The short and quick answer is that such climbs in the S&P 500 or its related trading products, such as SPDR S&P 500 ETF (SPY) do not result in a reactive and sharp drop once the string of advances has come to an end. The market continues to climb.

So much for my theory and hopes that I could return to the more fulfilling days of trading ups and downs in the market.

While the current advance should, therefore, be a source of continued optimism, there may be a competing dynamic to be considered.

Looking at the bigger picture, beginning in May 1996, when that first 9 day advance occurred, which happened to be at the beginning of a secular market climb, it seems as if some kind of pattern was appearing.

Looking at the 17 year period illustrated above there may be some reason to believe that we are in the process of completing a 52 month cycle.

In each of the two previous broad and sustained market rallies the time frame has been approximately 52 months and the rallies have been on the order of 100% or greater. For those not chased out of the market as the nadirs were reached the recoveries were satisfying.

However, that satisfaction may have been tempered by the large market drops that ensued. In both previous cases the market plunged more than 40% over the course of the subsequent 18-30 months. Greed, optimism, a sense of invincibility may all have been factors in being caught in the continued downdrafts that devoured paper profits.

In hindsight, there were certainly precipitating factors that may have played a role in these drops, not all of which could have been predicted.

While perhaps the technology bubble should have been no surprise, nor should the real estate bubble, extrinsic factors, such as the terrorist attack of September 11, 2001 contributed to market declines during an already susceptible period. However, in the period from May 1996 to the present, there have also been an astonishing 18 periods of time when the market fell 10% or more.

As hard as it is to understand that the occasional fire that burns down a beloved forest is part of a cycle that sustains and evolves the environment, so too are those market declines an apparently necessary, or at least unavoidable component of reaching greater heights.

Clearly, and again, focusing on the big picture, those intermediate declines have been part of a healthy process as the S&P 500 has appreciated by more than 130% since that nine day trading range in 1996. Of course, that’s little solace to those that did see their profits disappear and that may have exited the market and greatly delayed their re-entry.

Being prepared for those declines is the tricky part. Balancing the need to be invested with the knowledge that much of your good work can be undone by a simple hiccough is disconcerting.

As we are now in the fifth year of the current climb and may be appro
aching that wall that we’ve seen twice before in the past 17 years, I continue to believe that there is ample reason to create reserves and take profits, even if that means leaving some on the table. Transitioning a portfolio may be a good strategy to gradually respond to future uncertainty.

In my case, that means being less likely to rollover covered contracts into the next cycle and instead being happy to see share assignments and realization of cash proceeds. It may also mean writing longer term contracts for those positions not likely to be assigned and grabbing larger premiums, albeit at lower time adjusted ROIs, in order to have a better chance of riding out any reversal.

Timing the market is something that most sane people would agree is impossible, certainly on a consistent basis. Everyone has the same charts to look at, yet the interpretations are in a wide range, often fitting personal outlooks and human emotions. The cynic and the optimist see the same data very differently and respond consistent with their own biases.

I am, by nature, a long term optimist, but a short term pessimist. Rarely, however, have I felt this level of pessimism. Sadly, I didn’t feel it in 2007, even after first having one of those warning mini- drops of 8% in July 2007.

The nice thing about being wrong is that you can always get back, although given that scenario, I have to believe that I would be even more pessimistic, as I don’t care to chase stocks as they’ve moved higher.

The other nice thing is as today (Thursday March 14, 2013) is thus far shaping up to be the 10th straight day of gains, I can look at the data all over again and perhaps arrive at a completely different conclusion.

Just like the professionals.