We’ve harped on this issue for well over a year now, but it bears repeating, albeit in a slightly different form, in order to drive the point home.
And it goes like this –
We’re currently passing through an investment environment that’s simply unprecedented. Until roughly five years ago, the financial system as a whole was roughly the same as it was ten years ago, twenty years ago and fifty years ago. That is to say, it was certainly fiddled with over the years and corrupted in any variety of ways, but it wasn’t so outrageously sodomized as it was after the Lehman Brothers fiasco that brought markets down 50% from their former highs at the end of 2008/beginning of 2009.
At that point, fearing a deflationary meltdown from which there would be no return, the financial authorities, with the full backing of the governments that appoint them, overreacted.
And they overreacted not just in the United States, but across the globe, pumping extraordinary sums of new cash into the planetary monetary pulmonary in order to get banks lending, folks spending and prevent the economy from descending.
That was 2008/09.
But it didn’t stop there. The money continued to roll into the system (and still does) to give those same banks and folks the impression that everything’s fine, there’s plenty of cash, no need to put a hold on life and worry about superfluous exigencies, the state is here to look after the issue, wipe up the mess, etc., etc.
And yet the mess remains.
And because it’s not so visible as yet, no one is really worried about it, though they should be.
Because whereas the mess created by the sub-prime lending fiasco and subsequent market meltdown of 2008 manifested itself in an immediate deflationary earthquake, the current mess is creating the opposite – a stealthy but overpowering inflation that has only begun to manifest itself in rising asset prices.
The Real Danger
The danger we face today is clear and present, and it will not be the limited in scope as was the inflation of Weimar Germany, where a similar irresponsible running of the monetary printing press brought economic disaster to Germany in the early 1920’s.
Whether we face the same kind of bankruptcies and unemployment, strikes, hunger, violence and collapse of the civil order is not in question, as far as we’re concerned. Whether insurrection and revolution inevitably follow is another issue. But we’ll take that up at a different time. For the time being we’re focused exclusively on the financial
quandary and its meaning for individual investors like us.
Keeping the Family Fed
The problem the average Joe-Who faces is, on the one hand, how to keep up with inflation, and then, how to avoid seeing it all slip away when the inevitable disintegration arrives. They’re issues that occur separately in time, thankfully, with the former already begun, and the latter perhaps still a year or more away.
Let’s focus, then, on the problem at hand – keeping astride with inflation.
Quite simply, you don’t have many options. If what you buy tomorrow will cost you three times what it costs you today, you’re wisest to spend your money now, stock up and obviate the need to purchase later when the money you’re earning is worth less (though not yet worthless).
That includes everything from food (or a means of growing and properly storing it) to your investments and all else in between.
And when it comes to investing, there is nothing in an inflationary storm that will outperform U.S. equities.
Already we see the money flows gathering speed. Stocks are rising regardless of the news and earnings beats are consistently besting Wall Street’s downbeat projections.
But that doesn’t mean you go out and buy just anything. There are principles involved. Yes, even when the foundations are cratering and the plates are beginning to rattle, some rules still pertain.
And those rules look like this –
You must buy in a manner that exposes you to the full possibility of stock market gains.
You must do it in a manner that limits the possibility of capital loss.
And you must remain invested so long as the markets are rising.
And there’s really only one way to accomplish that – as far as we can tell.
Deep-in-the-Money CALL Options
The reason we like to go deep-in-the-money on the indexes is simple. Deep-in-the-money means we invest slightly more, but with very little premium. That is, the normal time value that comprises the cost of an option is either negligible or not non-existent with a DIM option. For example, a CALL option with a strike of 50 when the underlying trades for 100, shouldn’t cost more than a few cents above $50.
But cost is only part of the equation. Deep-in-the-money options also allow you to control the same action with less funds.
Consider, for example, a DIM CALL option on the SPDR S&P 500 ETF (NYSE:SPY) with a strike of 100 (December, 2016 expiry). That option would cost you $9,672 today to purchase.
Yet with the stock trading at $196.52, buying 100 shares of SPY would run you nearly $20,000.
Now consider your potential gain.
When SPY rises to a hypothetical 250, the gain on your stock would be $5000, or 25%.
But the gain on the option would far superior. The intrinsic value of the option would be 150, or $15,000. Your $5,000 profit would garner you a 50% gain for having laid down half the money.
And that’s why we’re recommending you get it on right now.
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With the major market indexes having receded slightly from their all-time highs, we say it’s a perfectly good time to take shelter from the coming storm.
Wall Street Elite recommends you consider the purchase of the SPY December 2016 100 CALL, now trading for $96.72.
Up to 20% of your portfolio can be dedicated to this position.
With kind regards,
Hugh L. O’Haynew, Senior Analyst, Normandy Research