Bye-Bye Surplus; Hedging Your Portfolio

“This Congress will protect 100 percent of the Social Security and [Medicare] trust funds. Period. No speculation. No supposition.” – Jim Nussle, Republican House Budget Committee Chairman last month

“Yes, that was me. I still mean that today as much as I did then. Unfortunately the economy wasn’t listening.” – Jim Nussle, Republican House Budget Committee Chairman last Thursday

Guess what, folks. The giant budget surplus that stretches as far as the eye can see and will help pay down some of our $5.7 trillion National Debt is gone. (Not that we have to pay it off, but it would be good, when we can, to pay it down so that in bad times there’s room for it to build back up.) Yet we’re now locked in to massive tax cuts for the wealthy as far as the eye can see.

Much of this will presumably be rolled back sometime down the road – it’s hard to imagine we will really cut the estate tax for centi-millionaires to zero.

But we had this lovely fiscal balance, which still allowed upper-income folks to do very nicely, thank you, and to grow their after-tax incomes faster than everybody else . . . and the Republican leadership felt that just wasn’t good enough – a prescription drug benefit for the elderly might have to wait or be trimmed or be shelved altogether – the research budget for alternative energy and better-mileage-cars might have to be halved, and money to boys’ and girls’ clubs cut back – but, first things first, let’s pass this urgently needed tax cut for America’s most fortunate. It’s a matter of priorities.

It is a grand time to be rich in America.

Pete Kirby (worried that the market may drop): ‘I am looking for a decent way to hedge my portfolio. I have looked at the QQQ [the NASDAQ 100 index tracking stock] and while its spread is narrow, the puts you can buy on it don’t drop very much even with a relatively large market drop. OEX puts [options you buy betting that the Standard & Poor’s 100 index will fall] track the market better but the spread you suffer between the bid and asked price of the option is not very attractive. Can you tell me why the bid/ask spread is so high on OEX options?’

☞ No. But I can tell you that the best way to hedge the market, in my experience, is simply to sell some of your holdings. If you have to take a big tax hit to do so, it makes it less appealing. But ordinarily, even then, the simple way – selling some of your shares – winds up working out better than, in effect, buying insurance against a market decline. Insurance, whether purchased via puts on a stock index or in some other way, doesn’t come cheap.

Well, as you may have noticed, Marc Fest (Quickbrowse founder and my very over-qualified webmaster) got tired of listening to all my reasons for not adding a search capability to this site and just went ahead and did it. See the new SEARCH field for this site at lower left. I really should raise the subscription rate for this so I can pay him TWO dollars a year instead of one.