My Darden Puts were heading into expiration this week and I elected to close out the position with a decent profit.  I sold for $2.85 and bought for $2.25 for a gain of $60.  The profits were not enough to cover the loss on the Nasdaq Puts, but I learned many valuable lessons, which I will share below.

There are several reasons why I decided to take my gains last Friday and not get greedy:

  • Even though I am still bearish, I feel uncomfortable spending money in a market that is as distorted and manipulated as our current one.  There are too many examples to go into right now, but there are excellent examples of overt manipulation here, here, here and here.
  • Maximum Pain dictated that I sell before expiration and lock in my gains.   In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group.
  • Technical analysts were broadcasting a head and shoulders pattern break (see below), which leads me to believe a lot of CNBC followers (non-institutional investors) are piling onto the short side for the “easy money”.  It makes sense to bet against the “easy money” crowd and not expect a decline.  On Monday, the market rallied very sharply.  Glad I got out.
Head and Shoulder - DJIA
Head and Shoulder – DJIA
  • My price target had been hit and the price was unlikely to go much lower.  Darden filled in the “gap” between $29 and $33 like I thought it would.
Darden Restaurant Group Chart
Darden Restaurant Group Chart
  • As a wise man told me, you never go broke taking profits!

Epilogue:  I have decided not to continue buying options since the market is clearly not a normal, healthy one.  Unrealistic balance sheets, excessive program trading and monetary manipulation have turned me off from the market.

Options buying is extremely difficult since it involves both forecasting the market and timing it.  I am proud I made money on the Darden trade, but I realize I got impatient with my Nasdaq trade.  Overall, a great learning experience.

Since capital gains are difficult to lock in without being an active trader, I am considering doing covered call writing on certain stocks.  If I decide to buy some shares and write calls on them for income, I’ll post it here.

I will continue to add to my RWM position, which I feel comfortable holding for the long-term.

The problem with corporate welfare is that, unlike personal welfare, the most sinister elements go unnoticed.  A government subsidized contract, bailout or tax break which rips off the taxpayer is far less obvious than the person cashing their welfare check or food stamps.

One of the biggest beneficiaries of corporate welfare is Citigroup.  Aside from TARP funds and asset buybacks (taxpayer buying their lousy loans at full value), there are even more nefarious examples of how Citigroup is ripping off the taxpayer.

Below you will find the Standard and Poor’s and Moody’s credit ratings for Citigroup.

Further down, you can see how these rating agencies gave Citigroup very safe ratings days before Citigroup would have gone bankrupt and gone out of business if not for the bailout.

In other words, these rating agencies, Moody’s and S&P, gave Citigroup ratings of AA- and Aa3, respectively, while Citigroup was days away from dying.

In their own words…

Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but “their susceptibility to long-term risks appears somewhat greater – Moody’s

An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong. – S&P

c

Current Citigroup ratings - click for a larger view

citi updates

Moody's ratings for Citigroup - note that the October 2008 bailout just put them on Credit Watch negative until December 2008

citi updates sp

S&P's ratings for Citigroup - again, only a slight downgrade before the 10/2008 bailout

You’ll notice that Citigroup’s ratings have never fallen below investment grade.  So, despite needing and continuing to need your tax money to operate, these credit rating agencies never saw the need to downgrade them significantly.

Normally an incompetent credit rating is nothing to get worked up about, however, Citigroup’s bogus credit ratings have consequences that ripple all across the capital markets, which subsequently affect the taxpayer.

Here is how:  With an artificially high credit rating and numerous government handouts, Citigroup’s cost of capital (the rate at which it borrows money), is artificially low. This allows Citigroup to borrow money at artificially low interest rates.

Since its credit rating and government handouts allow it to borrow money very cheaply, it sucks up productive capital from other enterprises competing for capital. This is called “crowding out“.

This means healthier companies and local governments have to pay higher rates of interest to borrow when they issue corporate bonds and municipal bonds, respectively.

Guess who pays the artificially higher interest payments on municipal debt?

The taxpayer.

So, in a sad way, Citigroup gets two forms of corporate welfare.  One is explicit, the other implicit.

Explicitly, your federal taxes pay to keep alive Citigroup via asset buybacks and other federal programs to “save the (inherently flawed!) financial system”

Implicitly, bogus credit ratings and government handouts give Citigroup a facade of safety, allowing it let it borrow cheaply, which force other, legitimate debt issuers (companies and municipalities) to pay more in interest to receive funding.

Even if the federal government were scared of a run on all the banks, they could have easily unwound Citigroup in a reasonable fashion.  They could have zeroed out all the equity (stockholders) and, in an orderly way, liquidated the firm to other institutions which could buy up productive assets cheaply and let the creditors take losses on the parts which no one wanted.

Since Washington is afraid to say no to the financial bozos that own Citigroup stock, this strategy was not employed.  Instead, they are flooding Citigroup with cheap money and hoping the money will be lent out or miraculously make Citigroup solvent.

A free market efficiently allocates capital and provides price transparency which allows individuals to make accurate decisions on how to best maximize their resources.  Government intervention is permanently damaging our economy by obscuring these valuable pricing mechanisms with bailouts, “liquidity facilities” and other forms of corporate welfare.

Intervention via corporate welfare all in the name of helping the little guy is a gross form of statism and market distortion.

Takeaway:  Government intervention to save banks is not a Democrat/Republican issue, it is a right/wrong issueMore intervention, bailouts and stimuli are not the answer.

Used to be we stole the trade secrets in the form of automated looms textile manufacture, or pillaged a patented steam harnessing device. This must be the ultra postindustrial state. Trade secrets are computer algorithms which make automated low latency entrance and exit to markets with no intent of ever taking delivery of any physical product nor are making purchases/sells based on any business, but are merely exploiting market rules to ratchet numerals to their gain.

How did we get here? How sick is that person who draws a paycheck and has neither produced, manufactured, distributed, or made any useful service? Isn’t that the very definition of a Babylon? An economy so distanced from agriculture, mining, manufacture that it provisions life with intangibles? Please wake me up. Please let me out of such a vacuous existence.

– Ben Frananke, Zero Hedge comment (emphasis Inthon)

“No warning can save a people determined to grow suddenly rich.” – Lord Overstone

Fortune Magazine’s cover story “The Best Advice I Ever Got” features some great pearls of wisdom for fathers.

The father of Bill Gates, William Gates, has some great wisdom to share about raising his son.  You can read the entire interview here.

As a child, Bill Gates was introduced to a psychologist/psychiatrist who imparted on him the following valuable lesson:

Best advice

There isn’t any benefit to fighting with your parents.  It was all about the issues, the battles were going to be about the real world, and they were really on my side.  And that was fantastic.  It just changed my mindset.  I was only 12 or 13 at the time.  I think it made things a lot smoother from that point on.

Inthon:  Our actions as children and parents should definitely mirror that important concept.  Honestly expressing your love for your child in a way that your child implicitly knows you care about them and that they can trust that you will be on their side in the long run.

Parents can also play a role in articulating that while fights are borne out of a disagreement about what is best for the child, parents should acknowledge that both parties want the exact same outcome

a healthy, successful child.

Obviously… easier said than done.

Bill Gates goes on to mention:

And the thing that people there taught us and emphasized, which is so significant is that you should never demean your child.

Inthon:  We all remember when our parents accidentally or intentionally demean us or put us down.  They can often overshadow great things that they taught us.  As adults, we must be mindful that, no matter what happens, demeaning does not produce positive results.

Lastly, Mohammed El-Erian of PIMCO had good advice on intellectual honesty:

Unless you read different points of view, your mind will eventually close, and you’ll become a prisoner to a certain point of view that you’ll never question.

I agree with this principle and I have made it a priority to get my information from radically different and opinionated sources.  It has been invaluable in expanding my worldview.

This issue of Fortune is on the newsstands now and is definitely worth checking out.

Takeaway: Life does not come with an instruction manual.  I have found it beneficial to learn as I go along for roles and duties which I will eventually face… in this case, fatherhood.  Feel free to submit ideas and tips to inthonblog@gmail.com

The passing of Michael Jackson brought back memories of some of his greatest hits, some of them popular 20 years after being created.

Jackson had a terrible childhood.  A childhood I cannot even begin to imagine:

The trauma he suffered from his childhood, the constant media attention and a medical condition which altered his appearance obviously had a role in bringing forth some of his bizarre behaviors.

Child molestation charges aside (he was acquitted), he managed to come up with some very inspiring music, which can often touch us in ways that other mediums cannot.

One of his hits, Man in the Mirror, deals with a man’s realization of how lucky he is and how he plans to make a change.

As I turned up the collar on
My favorite winter coat
This wind is blowin’ my mind
I see the kids in the street
With not enough to eat
Who am I to be blind
Pretending not to see their needs

I’m starting with the man in the mirror
I’m asking hi
m to change his ways
And no message could have been any clearer
If you wanna make the world a better place
Take a look at yourself, and then make a change

Man in the Mirror brings to mind another poem about being honest with oneself.

The Guy in the Glass is a poem about being true to yourself.  It is amazing how we can enjoy great food, wine, luxuries and still feel miserable if we’ve cheated “The Guy in the Glass”.

When you get what you want in your struggle for pelf,
And the world makes you King for a day,
Then go to the mirror and look at yourself,
And see what that guy has to say.

For it isn’t your Father, or Mother, or Wife,
Who judgement upon you must pass.
The feller whose verdict counts most in your life
Is the guy staring back from the glass.

He’s the feller to please, never mind all the rest,
For he’s with you clear up to the end,
And you’ve passed your most dangerous, difficult test
If the guy in the glass is your friend.

You may be like Jack Horner and “chisel” a plum,
And think you’re a wonderful guy,
But the man in the glass says you’re only a bum
If you can’t look him straight in the eye.

You can fool the whole world down the pathway of years,
And get pats on the back as you pass,
But your final reward will be heartaches and tears
If you’ve cheated the guy in the glass.

The word pelf in the first line means “wealth.” The word self is often incorrectly substituted.

It is startling how true that poem is.  Our minds have an innate ability to give us credit when we know we’ve earned it and feel guilty when we’ve done something wrong.

To improve, we should listen to these signals as closely as possible despite what social conditioning tells us.

You must be the change you wish to see in the world. – Mohondas Gandhi

Takeaway:  The hard work of improving yourself, your family, your country or anything begins with you.  We, as men, get the government/family/self-respect we deserve.

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