Ameritrade would be about the same though

Here's a trade I've starting thing about

I was thinking about @Zyzz 's thesis about the S&P500 going up this year

and I was thinking to research it a bit more, but here's my idea

Buy a long term (Maybe a LEAP) OTM call option, but sell a near term call at the same strike

that way trying to save on the time premium

I would need to research more to try to figure out a good window of time

thats an interesting thought

buying the dec 2018 295 strike is ~$2.60. that implies 10% appreciation over 2018

@Zyzz Yeah maybe we can put our heads together and crowdsource this together. (Since this isn't happening right away I think, then I think we have time). Here's the three questions I would like to figure out: 1. What is a reasonable price target that can be achieved this year? 2. When is a reasonable window in which it might reach that target? 3. Are there any reasonable near-term windows where we might think it *won't* hit the target? For example maybe the answers are 4%, September, and March, respectively

Hmm now we're cooking, let me pull those chains up

@ThisIsChris so heres my thought as to how we will figure out a price target. we need forward earnings predictions and then apply a reasonable multiple to it. that will allow us to back into our price target.

we are essentially taking earnings predictions and applying a multiple to it. the trick with the multiple is we need to assess if it could compress or expand

https://finance.yahoo.com/quote/SPY/holdings?p=SPY

according to that the S&P is trading at 21x P/E

which is very rich.. historically the S&P trades at ~15x

@Zyzz @Deleted User phew, chains:

"according to that the S&P is trading at 21x P/E
which is very rich.. historically the S&P trades at ~15x" @Zyzz what do you think? Is that necessarily bad news? Or should we try to see if earnings might go up?

@ThisIsChris its really about reversion to the mean and from this vantage point it means go down

Doing it this way, I wonder if we should be looking at an ETF with fewer holdings so that we can look into each major holding individually, though if there is another way I would love to know

individual stock research is a lot of work and even with all the research there could be something you just miss or never thought about that tanks the stock.. it could be bad or greedy management.. which for us would be tough for us to be privy to

Hey that's OK then, maybe SPY going up isn't the thing, maybe we should be looking at SPY to go down over the year then. That's actually kind of more interesting because we might expect a slight boost at the beginning thanks to the tax cuts, and then a reversion later in the year

i used to pick stocks and i did not do very well and it was mostly due to stock specific issues so i changed to pick sectors or invest in income producing securities like preferred stock

yeah my issue with that is i have no idea when the market will tank. i know we are in a bubble but it seems like trump and everyone else in congress is deadset on blowing it until it pops on its own. i am not about to be short this market it just seems like their is too much momentum with the tax bill etc. it'd be like shorting the market in 2005/2006 imo

I'm back, catching up to the thread...

I agree with @Zyzz The aggregate P/E of the S&P is too high for me to be comfortable making large bets on upwards moves

If I were to do that, I would want to hedge for a big crash

I think it's going to go up 10% on the year or nosedive hard.

but that and $4 will get you a coffee at (((Starbucks)))

@Zyzz here's a question, do you think we could say that even if the market goes up possibily, can we be confident saying it *won't* go up 10%? Maybe selling those OTM calls is a way to go on this

@Deleted User what catalyst do you see for a nose dive?

War is the most obvious thing, but a general bubble-popping correction seems overdue.

Nose dive not sure, but we could get interest rate hikes from the fed

@ThisIsChris i am seeing dec 2018 295 strike calls sell at ~2.6. i dont think thats enough premium for me to hold for a year with unlimited loss potential

I don't see things staying static is all I'm sayin'

@Deleted User war is a possibility with NK no question. What would pop the bubble?

I think a broad-scale pullback on credit

i am expecting rate hikes from the fed.. i think cadence of rate increases is key

too many rate hikes, too quickly will spell disater

IMO the american consumer is tapped out

agreed

The outstanding credit numbers are nuts, both in the consumer and corporate spheres

I think that's what is driving a lot of the increase in stock prices

@Zyzz agreed on the decembers, now I'm looking at chains for more near term (also included on the pdf)

lenders get frightened? i can see that happening. what would cause them to get frightened?

I'm saying that there will be a pull back on people seeking credit

especially if interest rates rise

i 100% agree that consumers are buying on credit rather than actual money they are earning

or rather, I'm saying that pullback would be the catalyst

I guess what always frightens lenders, if people default. @Zyzz you gave a pretty good analysis the other day on default rates for the largest asset classes. I actually wanted to ask where you find that data

gonna be AFK for a bit but I'll rejoin later and jump in if I have anything to say.

Hope you do!

@ThisIsChris https://seekingalpha.com/news/3319607-p-e-players-trouble-cashing-subprime-auto-plays

i get a lot of my student loan info from zerohedge

@Zyzz Interesting. If I understand the process your analysis took: 1. You knew that understanding the size and eliinquincy rates of different asset classes was important to know, and then 2. you googled around for articles that talked to each asset class and its delinquincy rates. Is that correct? I'm just trying to understand process, I thought there might just be a single database where you go to get these types of facts, but I also wouldn't be surprised if such a database didn't exist and you just have to know the right question to ask and start googling

And the reason I'm trying to understand process is I'm also trying to learn how to do good research myself of course

Not trying to "question" or something

@ThisIsChris at work we talk about this stuff a lot. that seeking alpha link was something i knew intuitively (subprime auto defaults) but didn't know an actual %. there are a lot of people in SoFl with nicer cars than me and I know damn well they do not make as much money as I do.

student loans I knew about by reading zerohedge. i have also heard anecdotal stories of high debt loads and parent cosigners (you remember cannoliqueen?)

we understand recessions happen every 8 or so years.. the last one was in 2009

we are about due for one. i know the market is frothy and not just the stock market but the RE market as well

its not a question of if but when and what will trigger it

my position is the tax cut will kick out the possibility for a recession a few years. i dont think it'll happen until after trumps reelection

if we look at 2008's recession that was triggered because you had this massive asset class getting bid up in price with easy money (teaser interest rates, very high LTV (loan to value), no doc/no income loans, subprime borrowing, diversity programs for home loans, etc.). and of course you had some predatory practices such as adjustable rate mortgages amongst other things.

the financials crisis could have been avoided if they would have done: 1) require 20% down payment no matter what, 2) require documentation as to the borrower's job and current income. and of course forget about the other social engineering bullshit

poeple like to blame the financial sector for the financial instruments that were created. that only became an issue because the paper they were securitizing was worthless. if the loans were quality loans then that all would have been fine and you never would have had all the defaults and bankruptcies you saw

we are simply trying to kick around some ideas as to what will cause the next recession

it could be an asset price bubble that pops or it could be the fed raising rates to quickly

if trump is successful with cutting immigration you will have upward pressure on wages which will help kick the can down the road. i do think he will be successful here and i do think you will see upward pressure on wages. again, all of this will help

Hmm, that might have to wait for a new congress. Which could help recover from any recession that starts this year. I wonder, do you think the next recession will be so bad as the 2009 one? Will any coming recession even put us into negative growth or just slow us down for a bit?

I wonder if Student Loan defaults would only grow after a recession starts instead of leading to it, looking at this: "The U.S. Department of Education today announced that the three-year federal student loan cohort default rate dropped from 11.8 percent to 11.3 percent for students who entered repayment between fiscal years 2012 and 2013. The trend has moved downward since FY 2010, when the cohort default rate stood at 14.7 percent." https://www.ed.gov/news/press-releases/national-student-loan-cohort-default-rate-declines-steadily

the technical definition of a recession is two or more quarters of negative GDP growth

i am hopeful at the state of the union trump will talk abut the need for immigration reform

aw yiss I hope so

i think the next recession will probably be more akin to 2009 because the boom will have gone on for ~11 or so years. will it be as bad? i dont think so but it wont just be a blip either

yes, i believe student loan defaults may be a lagging indicator of job losses

i wonder if we go thru a period of rapid automation (self driving cars, bank tellers, fast food cashiers, other job??) if the fall out for low IQ people will be so bad to cause a recession

the question is what would come before job losses?

interest rates being too high and companies being unable to get investment project expected returns to pencil?

"to pencil"?

it means to get numbers to make sense to the point where you'd want to invest

if a company needs a 20% IRR (internal rate of return) and getting to 20% requires a discount rate of say 2% but the discount rate is at 3%. the numbers arent going to pencil

Thanks for the thoughts and explanations. It's late here now (on vacation in Italy) so I will have to come back to this later. Good night!

sound good man good night

@Zyzz All this makes sense and is in line with my thinking. Here's one question I've never seen addressed to my satisfaction: what, if anything, will be the consequence of holding interest rates so low for so long? It seems to me that there was a gigantic bolus of new credit created under this ZIRP/near-ZIRP regime that kept things humming since 2009.

@Deleted User you will see big deflation in interest rate sensitive assets. this will be especially pronounced in RE notably single family homes. that is assuming rates rise rapidly over a short period of time. if we have gradual rate hikes over a decade or so and stabilize at a more normal level you will see a stagnant decade of home price appreciation but you will not see a rapid fall out in prices

So you think RE will be the main area of impact then?

it could be

depends on what type

and where of course

What do you think about the corporate buybacks aspect of the stock market rise?

buybacks have historically been a poor use of capital for firms over time. as an investor i always like seeing it because it shrinks the available supply of stock available which means prices go up in the near term (all else holding equal)

exactly. Do you think that will have negative reprecussions beyond the individual companies though?

i think the only drawback could be if they took out a lot of debt to fund those buybacks and having that heavy debt load gets them into trouble when the economy eventually tanks

itll be something that prolongs the recession rather than drives us to it imo

makes sense

an example being in 2008 what caused the recession was giving loans to anyone who was willing to sign their name. what prolonged the recessions were all the derivatives that went bad that caused banks and other financial institutions to go bankrupt

Yup. And it seems to be this was done on a broader scale during ZIRP

e.g. the subprime auto loans mentioned above

yup although companies are much better managers of money than individuals so my hope is they will be able to handle their maturity schedule and not overleverage themselves especially not after 2008/2009