The Debt Problem  The U.S. and Europe may be entering into a long term deflationary period Enormous debt which can not be repaid Enormous debt which can not be repaid Policy makers have not made the necessary decisions to resolve the debt issue Policy makers have not made the necessary decisions to resolve the debt issue Markets move for reasons that transcend their basic fundamentals Markets move for reasons that transcend their basic fundamentals

Types of Debt We Owe Sources: FT, IBD, The Economist, WSJ, Barron’s, Bloomberg  Federal debt near 16 trillion  Student loan debt: 870 billion  Personal debt: over 2.4 trillion Mostly mortgage related Mostly mortgage related  Corporate debt: 8 trillion  Unfunded state and municipal debt: 3.9 trillion Pension and health care for public service retirees Pension and health care for public service retirees  Unfunded Medicare Liability: 25 trillion  Unfunded Social Security Liability: 8 trillion

Historical Reactions to Debt  Grow your way out Demographics rule against it for Europe Demographics rule against it for Europe U.S. attitudes towards immigrants help U.S. attitudes towards immigrants help

Historical Reactions to Debt  Grow your way out Demographics rule against it for Europe Demographics rule against it for Europe U.S. attitudes towards immigrants help U.S. attitudes towards immigrants help  Stagnation Japan is the primary example Japan is the primary example

Historical Reactions to Debt  Default Greece has already defaulted Greece has already defaulted Spain, Italy, and others will likely default Spain, Italy, and others will likely default

Historical Reactions to Debt  Default Greece has already defaulted Greece has already defaulted Spain, Italy, and others will likely default Spain, Italy, and others will likely default  Inflation QE1, QE2, Operation Twist, and Twist Again have not resulted in inflation QE1, QE2, Operation Twist, and Twist Again have not resulted in inflation

What Can Investors Do? Use strategies that offer protection against catastrophic losses

Keep Yourself Informed  Daily Treasury Yield Curve Rates Flight to safety Flight to safety Lower yields – investors are fleeing stocks Lower yields – investors are fleeing stocks Danger is that a bond bubble is forming Danger is that a bond bubble is forming

Keep Yourself Informed  Bureau of Labor Statistics (Table A15) U3 rate – This gets all the attention U3 rate – This gets all the attention U6 rate – The “real” unemployment rate U6 rate – The “real” unemployment rate

A Good Investment  Buy: American companies with a strong international presence American companies with a strong international presence Companies that pay dividends and have a history of dividend growth Companies that pay dividends and have a history of dividend growth Dividend payout ratio less than 60% Dividend payout ratio less than 60% Positive and growing cash flow Positive and growing cash flow Low or no debt Low or no debt

Basic Risk Management Strategies  Sell Puts Generate yield Generate yield Buy stocks at less than current price Buy stocks at less than current price  Sell Calls Generate yield Generate yield Sell stocks at higher than current price Sell stocks at higher than current price

Why Sell Options? “I’ve been rich, and I’ve been poor. Rich is better.” - Sophie Tucker

The Option Buyer Must Be Correct About Three Things Direction of the move Magnitude of the move Duration of the move

The Call or Put Seller Needs To Be Correct About Only One Thing  Direction (sort of) OK if the stock rises slightly OK if the stock rises slightly OK if the stock goes sideways - does nothing OK if the stock goes sideways - does nothing OK if the stock drops slightly OK if the stock drops slightly