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My Best Advice

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One conflict of interest that exists in most instances of the typical advisor/broker/client relationship is the simple fact that brokers make the bulk of their profits only when clients do something in the market. Buying, selling, rolling positions- that's the bread and butter for the sell-side (brokerage) industry. While most brokers are set up to earn a bit of 'vig' on a number of other factors, including margin interest, stock loan, market data surcharges, wire fees, etc., the primary revenue stream for your broker is directly tied to volume transacted.

While options volume is down a bit this year vs 2012, numbers are still much healthier than those in the straight equity area- with recent average volume in the 14+million contract area- translating to something like $21 million a day in commissions to the industry (using an over-simplified $1.50/contract gross average rate), or $5.2 billion a year in commissions paid by end-users in the options market. While impressive, option brokers will quickly remind anyone willing to listen that costs to participate in the high-speed, fragmented US options industry are high and continue to climb, and a large part (I'd guesstimate 50%) of this revenue goes 'downstream' to inter-dealer brokers, floor brokers, and a number of direct costs involved in doing business.

Since brokers do best when clients trade more, you don't often see an expert recommendation to sit on the sidelines -- and this is one reason we see a bias of broker-dealer analysts to recommending buys over holds and sells historically- for academics, one paper that looked at ratings into the bubble can be found here.

My view on current market conditions and economic issues is simply that one would be best off to 'sit back' and see how things shake out. US markets have done fine this year -- helped by good earnings and a great deal of fed-encouraged capital sloshing around the market. It's important to keep in mind that even cruddy business models can do pretty well when the cost of capital (or competing investments) is zero, and I believe that's what we have been seeing lately. That is unlikely to change much because the Fed is committed to keeping liquidity high and rates low for the foreseeable future.

The cliff appears to be coming, or perhaps we'll get some stopgap action out of Washington to keep people from freaking out, but everyone knows at this point that taxes are going up and benefits are being cut, and while this might be uncomfortable compared to what we had over the past decade, it's simply time to stop borrowing from our kids (and their kids) and live within our means as a country. And hey, we are still paying less taxes and enjoying more in benefits than much of the industrialized world.

So as far as the market goes, my best advice is to do nothing for a week or two. Enjoy the holidays and as much family time as you can and don't force trades at a time when liquidity is poor and the short-term path for the economy (at least as Washington wants to paint it) is in flux.

Happy Holidays -- don't trade.

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