Ted Olshansky began his investment career in 1968 as a registered broker with Dean Witter & Co., Inc. Mr. Olshansky was a market maker and member of the Chicago Board Options Exchange (CBOE) from 1975 to...
Publish Date: January 26, 2007
Ted Olshansky
It is said that the market climbs a “Wall of Worry.” This means it often rises in spite of the negatives overhanging it.
During the last couple of years this was certainly the case. Rising oil prices, the housing bubble, terrorism, the war in Iraq, rising commodity prices and the falling dollar could not stop the Dow from closing Wednesday January 24th at a record high of 12,627.
It is this advisor’s opinion that this close may be the high or near high for several months. Why? The average bull market lasts about forty nine months, coincidently the length of this current bull. Some have run longer (1990’s) and some shorter. According to Ned Davis Research, “It has been six months without a 2% correction.” Furthermore, we note that 62% of advisors are bullish. Most major moves come from a much lower percentage of advisor bullishness, namely about 35% to 40% and after a correction in the market.
Earnings growth is likely to be in the 7%-8% range this year, which although not bad will compare unfavorably with 2006. And the Federal Reserve appears to have given up any inclination to lower interest rates. We see the ten year Treasury note yield has climbed to 4.9% up from 4.4% six months ago.
The bulls, to support their convictions are relying on falling prices, high liquidity, better corporate earnings and lower interest rates. My opinion is that only one of these is certain, high liquidity.
However, there is one issue I would like to mention which is very important as it pertains to a bull market. That is, the mood of the country. Read: Nixon Impeachment Inflation 1973-1974. Read: Bush Unpopular War and a Very Low Opinion Rating. For sure we are going to be inundated with congressional investigations into every aspect of the Iraq war from it’s planning to its landing. To be sure, these congressmen will seek to touch the highest office. This is going to wear on the country and possibly put us in a similar “bad mood” - “depressed psyche” as we were almost 35 years ago.
The writer acknowledges the differences from Nixon’s time. Most notably the Dow is not at modern record lows as it was then and we are not in a period of high inflation. However, the hate and strong dislike of Bush is arguably greater than it was for Nixon.
Whereas I do not see the market declining in any manner similar to 1973-1974, we could see a downward bias for several months. When negativity becomes more persuasive and if investors get a favorable picture on earnings and interest rates, a sustainable rally could follow. The risk reward would be more in focus for investors than it is currently.
Former president Harry Truman known for his sharp sense of humor said of economists, “The only thing they are good at saying is “But on the Other Hand.” It is my opinion (My “but on the other hand”) that if the market continues to climb, investors should focus on consumer non-cyclicals such as Colgate, Pepsi and Johnson and Johnson. These companies do well in all types of economic cycles. If you really have the desire to stay heavily invested, you can protect yourself by buying protective puts at the strike price or slightly out of the money. Covered calls should also be used.
This means that about 70% of your available investable funds should be in the market.
“I always wondered how they were so smart to place all those gas stations on corners. Just how did they know there was gas and oil underneath?” Dizzy Dean
Q. If I am long a call, can I exercise the call and get the dividend? G.H. Ramirez, Chicago, Illinois
A. Yes, but make sure the call is deep in the money and carries no premium. It should be trading at parity with the stock. Also, be prepared to have to come up with 50% of the purchase price for the stock. An alternative would be to forgo the dividend (if you didn’t want to come up with the 50% for the stock) by selling your expensive call and buying a cheaper one two or three months out.
Q. My broker told me he won’t use calls or puts, that they are too risky. Helaine Suckle, California
A. Find another broker fast. This broker is not well informed. If your broker doesn’t understand options he is saying they are too risky, to make it appear that he is acting in your best interest. When used correctly, options reduce risk.
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