Economics Teacher has a plan

Greg Mankiw, Economics teacher at Harvard has a plan to reduce the budget deficit.  The essence of the plan is the federal government writes him a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving him that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving him that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with the handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over health care reform.

Health care reform, its advocates tell us, is fiscal reform.  The health care reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well.  Because of this bill, the advocates say, the federal government is on a sounder fiscal footing.  Repealing it, they say, would make the budget deficit worse.

So, by that logic, giving Professor Mankiw $1 billion is fiscal reform as well.  He says that he doesn't need the money, but if he can help promote long-term fiscal sustainability, He is ready to do his part. And so am I. I volunteer to be the next billionaire. The national debt now stands at a little over 14 trillion dollars, so we only need 6,998 more people to step up and take on this burden of becoming a billionaire under this plan to wipe away the debt. Who else is interested?  

Carpenter forgets the biggest reason to fear municipal bonds

Five reasons not to fear municipal bonds

In regards to the article above the author fails to discuss what a rising interest rate will do for cash strapped municipalities and the value of their previously issued bonds. As the author said the economy is improving, and with that, rates will rise. Countries, states and cities that are built upon easy credit will find it more difficult to continue the borrow now for growth tomorrow that has prevailed for nearly 20 years. 

As rates continue to rise, values of bonds will fall. A bond's coupon rate is inversely related to its price. So why would someone hold onto a bond paying 3% when they can have one that pays 6%? Many municipalities have grown to comfortable with being able to roll over these debts, which will no longer be done as easily has it has been in the past. 

Therefore, states and cities in the most trouble, states such as California and Illinois and cities such as Detroit and Cincinnati, will find their new rates higher than prevailing market rates. The same thing happened to your sub-prime borrowers, and mark my words it will take a government bailout to save "sub-prime" municipalities.

As rates rise we will see even left wing liberals recognizing value in the fact that smaller government is cheaper government and in order to save some services they will have to cut others.  

What’s An Option?

Here is a good answer to What’s An Option?


An option is a choice. If you buy a call or put option, you can choose to either buy or sell a stock at a specific price for a pre-determined period of time. The price is known as the strike price. The life of an options contract is determined by the expiration date. After the option expires, it no longer exists. Each contract can be defined by its underlying security, the strike price of the option, and the expiration date. Options can be used to speculate or to hedge I have helped investors do a little of both using options. The industry is growing and options volumes continue to set records. Yet, many people still don’t know how to get started or are still wondering, “What’s an option?” Here are a few questions and answers designed to help makes sense of the options product.

What’s the difference between a put and a call? Both are options contracts or agreements between two parties. If I buy an Intel (INTC) January 20 call option at $0.90 per contract, I have purchased the right to buy 100 shares at $20.00 each. I can exercise my contract and buy the stock through the third Friday of January (before the options expire on Saturday, January 22). The stock is at $20.68 and so if Intel shares rally 6.4% to $22.00, I can exercise my call and buy the stock at $20, sell it in the market for $20.00, and make $2.00 per share profit (minus the $0.90 paid for the calls). An Intel January 20 put, on the other hand, gives me the right to sell 100 shares at $20.00 through the January 22 options expiration.

Who sells options? Anybody can sell an options contract, provided their brokerage firm allows them too. In fact, for every options buyer, there’s a seller. In fact, some traders prefer to sell options rather than buy them because of time decay. Since options contracts expire on specific days, the contracts lose value over time. The seller or “writer” of an options contract is taking on the obligation to buy (for puts) or sell (for calls) the stock during the life of an options contract. For example, if I sell an Intel January 20 put at $0.90, I’m on the hook to buy the stock at $20.00 no matter what happens. If the stock falls to $10.00, I would be asked to buy it at $20.00. If so, I have been assigned on the contract and there is nothing I can do. When a call writer is assigned, they are asked to sell the underlying stock – 100 shares for every call option.

If an options contract is an agreement between two parties, what if I can’t find someone to take the other side of the trade? Don’t worry about it. If there is a quote for an options contract, the market maker fulfills the role of executing the trade. You enter the order with your broker and that’s all you really need to worry about.

How do I find options quotes? Your brokerage firm can provide options quotes, but many other web sites offer them as well. The easiest way to view options prices is with an options chain. 

The "Pick Your Price" Trade

Did you know that there's a trade that not only allows you to name your buy price, but also helps you determine your return?

Don't expect many brokers to tell you about this one - it's a little-known "trick" that they'd rather keep to themselves as the commission just isn't worth their time. But there's no better time than now to dodge past them and lock in the gains that you want, rather than being held hostage by whatever the market dictates.

Even better... it doesn't require you to leaf through a stuffy textbook to show you how to do it. The details are right here...Two Trades... One Transaction

It's called a buy-write strategy - one that you use with covered call trades to ensure that you get the best entry price and, as a result, the best return, too.

The first step is to pick a stock that you like. Let's take blue-chip communications firm Verizon (NYSE: VZ) for this example. The company is one of the largest telecommunications companies in the world, with a strong presence in wireless communications, entertainment delivery and smartphone technology who should be able to sell the iPhone later this year.

When you execute a buy-write trade, you buy the stock and sell call options against the shares in one simultaneous transaction. Here's a step-by-step guide to your Buy-Write Battle Plan...

Right now, Verizon is trading for around $36 per share, with the July 2011 $36 call options trading for $2.

To execute a normal covered call trade, you'd place a buy order on VZ shares at $36 and then a sell order for the VZ options at $2 in order to get a net price of $34. But there are a couple of drawbacks...

It involves two separate transactions - and if the stock moves while you're getting ready to place the options trade, you may get less for the option than you hoped.  If you're using a strict limit order strategy, where you're looking for a specific cost target, you may be left in the cold.  And of course, the more volatile the shares are, the more the likelihood there is that you won't get filled at the price you want.

To combat this, you can use a buy-write, where the two trades are executed at the same time. 

Once you enter the stock and options symbols, plus the net debit price, the broker will then try to buy the stock and sell the option at your chosen price. And don't worry... the trade will not execute until your parameters are met - it's that simple.

So next time you want to buy a stock and sell call options against the shares at the same time, use the buy-write strategy. It's a great one to use if you're not in a hurry to get the trade done immediately, but are more interested in getting the price and return that you want from the trade instead.

Get more ideas like this by signing up for my newsletter at my business Blue Horseshoe Investments and Research or hire me to help you accomplish it in your own portfolio.