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The Debt Problem. The U.S. and Europe may be entering into a long term deflationary period Enormous debt which can not be repaid Policy makers have not made the necessary decisions to resolve the debt issue Markets move for reasons that transcend their basic fundamentals.

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the debt problem
The Debt Problem
  • The U.S. and Europe may be entering into a long term deflationary period
    • Enormous debt which can not be repaid
    • Policy makers have not made the necessary decisions to resolve the debt issue
    • Markets move for reasons that transcend their basic fundamentals
types of debt we owe sources ft ibd the economist wsj barron s bloomberg
Types of Debt We OweSources: FT, IBD, The Economist, WSJ, Barron’s, Bloomberg
  • Federal debt near 16 trillion
  • Student loan debt: 870 billion
  • Personal debt: over 2.4 trillion
    • Mostly mortgage related
  • Corporate debt: 8 trillion
  • Unfunded state and municipal debt: 3.9 trillion
    • Pension and health care for public service retirees
  • Unfunded Medicare Liability: 25 trillion
  • Unfunded Social Security Liability: 8 trillion
historical reactions to debt
Historical Reactions to Debt
  • Grow your way out
    • Demographics rule against it for Europe
    • U.S. attitudes towards immigrants help
historical reactions to debt1
Historical Reactions to Debt
  • Grow your way out
    • Demographics rule against it for Europe
    • U.S. attitudes towards immigrants help
  • Stagnation
    • Japan is the primary example
historical reactions to debt2
Historical Reactions to Debt
  • Default
    • Greece has already defaulted
    • Spain, Italy, and others will likely default
historical reactions to debt3
Historical Reactions to Debt
  • Default
    • Greece has already defaulted
    • Spain, Italy, and others will likely default
  • Inflation
    • QE1, QE2, Operation Twist, and Twist Again have not resulted in inflation
what can investors do

What Can Investors Do?

Use strategies that offer protection against catastrophic losses

keep yourself informed
Keep Yourself Informed
  • Daily Treasury Yield Curve Rates
    • Flight to safety
    • Lower yields – investors are fleeing stocks
    • Danger is that a bond bubble is forming
keep yourself informed1
Keep Yourself Informed
  • Bureau of Labor Statistics (Table A15)
    • U3 rate – This gets all the attention
    • U6 rate – The “real” unemployment rate
a good investment
A Good Investment
  • Buy:
    • American companies with a strong international presence
    • Companies that pay dividends and have a history of dividend growth
    • Dividend payout ratio less than 60%
    • Positive and growing cash flow
    • Low or no debt
basic risk management strategies
Basic Risk Management Strategies
  • Sell Puts
    • Generate yield
    • Buy stocks at less than current price
  • Sell Calls
    • Generate yield
    • Sell stocks at higher than current price
why sell options

Why Sell Options?

“I’ve been rich, and I’ve been poor. Rich is better.”

- Sophie Tucker

the option buyer must be correct about three things
The Option Buyer Must Be Correct About Three Things

Direction of the move

Magnitude of the move

Duration of the move

the call or put seller needs to be correct about only one thing
The Call or Put Seller Needs To Be Correct About Only One Thing
  • Direction (sort of)
    • OK if the stock rises slightly
    • OK if the stock goes sideways - does nothing
    • OK if the stock drops slightly