Tom and Jerry have nothing on Senate leaders Chuck Schumer and Mitch McConnell when it comes to tit-for-tat legislation. One party’s legislation priority is the other party’s number one legislative target.

Reconciliation is the Brass Ring

This week’s short commentary will center around my perspective of the U.S. Senate using the Reconciliation budgetary tactic to pass one of the most extensive tax and spend bills in U.S. history. Is it reasonable to use this tactic given the massive breath of the proposed bill? Is it an abuse of the parliamentary process to circumvent the Filibuster rules?

Geopolitics that affect my Vertical Spreads

Geopolitical events (like Federal Budget negotiations) are the number one influencers to my existing inventory of Vertical Bull Put Credit Spreads. I can be on track for a great couple of weeks of winning closes, and a badly timed political stunt can turn a winning position toward implosion – and fast. That is why this week, I want to know if the Federal Budget machinations will put my positions at risk.

Reconciliation Rule

Reconciliation became part of the Congressional Budget rules back in 1974. The intent was to give Congress the ability to respond to national emergencies that require quick changes to U.S. spending priorities – without delays from endless debates, minor point bargaining, and needless politicizing.

Such national issues that the new Reconciliation rule was intended encompasses national disasters, wars, or a pandemic. One such apropos example of this rule was the series of COVID relief bills passed via Reconciliation between 2020 and 2021 to provide crisis-level relief to individuals, businesses, and schools in response to the pandemic.

But within the past several Congresses, the Reconciliation Rule has become the ‘Brass Ring’ prize a political party can grab when they win the trifecta in our national elections – House, Senate, and Presidential. With this Brass Ring, the party in power gets a free pass across the political rubican – aka filibuster.

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The Price of Governmental Overreach

Passing enormous and only tangential national issue bills via Reconciliation has its safeguards as well. American people of all parties do not like overt government overreach. So, there is a huge risk of losing congressional control from the party that does so.

For example, Clinton’s retroactive massive tax hike of 1993 passed via Reconciliation and was seen as governmental overreach. That overreach resulted in losing his party control of both the House and Senate in the 1994 U.S. midterm elections (remember the Gingrich Revolution?).

Likewise, the Affordable Care Act (Obamacare) was a farcical response to a manufactured national crisis. The Democrats used Reconciliation to pass large parts of the ACA with no Republican votes, and, as a result, they lost control of both houses in the 2010 midterm elections.

It can also be argued that the Trump Tax Cuts (also passed by Reconciliation) was seen as overreach and was one of the reasons for the Republicans losing control of the House of Representatives in 2014.

American Political System Works Well!

At this point, the breath of the $4.5 trillion spending plan will most likely pass. Also, at this point, the House and Senate will likely flip to Republican during the 2022 midterm elections. This political policy transfer will mute or moderate much of the budgeted $4.5T spending bill before anything gets started. The end result will be what should have been a bipartisan agreement from the beginning.

The vast majority of Americans are NOT as divided as the media’s messaging wants us to believe. We all want pretty much the same thing (see post “Two Sides of the Same Coin“). Nobody wants to bring back the Misery Index.

Our national posturing typically tilts from one side to the other at a frustratingly slow pace. But after the tit-for-tat legislation battles that take many years to level out, the end results always side for the collective good.

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This Week’s Market Sentiment

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be a week old.

(As of 07/18/2021)

In this section, I review five indicators: VIX, Put/Call Ratio, S&P 500, Consumer Sentiment Index, and Geopolitical events that could affect the market’s direction. I will use these indicators to help guide my trading decisions for this week.

Each of my five indicators will “vote” on a DEFCON (Damocles Options Trading Readiness Signal) level, exclusive to that indicator. Then, In the final sub-section “My sentiment for this coming week” below, I’ll compile the votes into a DEFCON level for the week.

Geopolitical Tree-Shakers (GTS):

Geopolitical events can be breaking news, political machinations, Federal Reserve musings, or even Twitter Trends. They are events that can abruptly change the dynamics of the current markets.

GTS is like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The GTS can significantly disrupt all the other indicators at the drop of a hat.

  • OPEC+ agreed to raise oil production levels (to help lower oil prices)
  • Inflation raising more than expected (by some) is stoking fear that the Feds will consiter rasing Interest Rates sooner than projected
  • A $6 Trillion Federal Budget is throwing gas on the Inflation fear fire
  • COVID 2.0 (delta version) is rasing eyebrows
  • States’ voting laws changes being used as a distraction
  • The Stock Markets are showing continue weakness, lead by the pull backs in the NASDAQ

Regardless of the upcoming $4.5T budget deal, the inevitable increase in inflation and the acknowledgment that higher Interest rates will follow is casting a dark cloud over the broader markets. As a result, I expect several kneejerk Market reactions every time news about this deal pops up.

Will we be bringing back the Misery Index?

Increase rhetoric about the dire effects of the Delta version of COVID is stoking the renewing of the dreaded pandemic protocols. The political leadership’s attempts to scare the unvaccinated will put pressure on the markets for some time to come. I expect the Travel Sector (such as airlines, hotels, and cruise ships) to take it on the chin and drag the rest of the Markets down.

The heightening distress over the States’ revisions of their voting laws is to distract us sheeple from talking about the Federal Budget deal – since it is up to each State to manage its own national election. But the real threat to our democracy is the “For the People Act of 2021.” If it becomes law and passes constitutional mustard (doubtful), it will be a big step towards nationalizing elections and will be another gigantic step towards the socialization of America.

The Broader Markets have been enjoying record highs for quite some time. With these kinds of GTS pressure, I’m expecting some profit taking fairly soon.

The health of Corporate America is pretty good and I continue to feel optimistic about the long-term growth. But the partisan rhetoric is hitting a fever pitch over the upcoming budget deals and the onslaught of the misinformation campaigns to distract focus from the budget is going to push my Vertical Spreads lower. I think this environment will push the indexes down.

GTS votes a DEFCON 3

VIX: Broad Market Volatility

The VIX is an emotion-gauge for the general investing population. It is thought to be driven by the Marketeers’ current level of greed or fear. As one-month forward-looking volatility, it is not designed to tell us which direction the market will be going, but more of how fast it can get there.

A VIX of 15% is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or below will have an innate tendency to rise.

ThinkorSwim/CBOE Market Volatility Index - 07/18/2021
ThinkorSwim/CBOE Market Volatility Index – 07/18/2021

The 1-month Regression Channel for the VIX did a slight rotation up from last week. And the trajectory for the last two weeks is confirming a growing concern on the intensity of the current Bull Markets.

The VIX ended last week at 18.5%, up from 16.2% the week before, which was up from the week before that. The 9-Day SMA is below the 50-Day SMA, and the current VIX has leap above the 50-Day. SMA.

These values suggest a growing concern for the continued pandemic-plagued recovery. But the VIX is not so high to suggest a change in the Market’s trajectory.

The VIX has hovered in the 16%-17% range for the past three months. This is not all that bad, but it does show an ongoing nervous nervousness over the recovery outlook.

The 1-month is still tracking down, albeit at a slower pace.

VIX votes a DEFCON 4

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Put/Call Ratio:

Put Options are frequently used as protection against existing investments falling. When the ratio between Put Options bought versus Call Options bought is above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying more than selling.

ThinkorSwim/S&P 500 Put/Call Ratio - as of 07/18/21
ThinkorSwim/S&P 500 Put/Call Ratio – as of 07/18/21

The Put/Call Ratio took a decisive jump above the 0.5 line by the middle of last week. This jump corresponds to the unexpected jump in the Inflation report. The Feds were quick to state that the uptick is not unmanageable, but they did not sound too convincing.

The 9-Day and 50-Day SMA are starting this week below 0.5, but may not last. This indicator is agreeing with the GTS that there are a few general market concerns.

Put/Call Ration votes a DEFCON 3

Consumer Sentiment Index (CSI):

I’m searching for a new Consumer Sentiment Index (CSI) chart as provided by the University of Michigan.

A low CSI index is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change. A high satisfaction rating suggests approval of the current policy management and implies market stability.

Consumer Sentiment Index as of 7/16/2021
Consumer Sentiment Index as of 7/16/2021

Contrary to my prediction last week, the CSI dropped @5% from the end of June. Even though retail sales are up, out-of-control inflation is becoming an across-the-board concern.

From a year-to-year perspective, we are still moving in the right direction, but a year ago fro now, we were in the bowls of a national lockdown and an election day feeding frenzy. So I’m not convinced that being up this little is a positive.

CSI votes a DEFCON 3

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Market Indexes:

DOW (DJX) = 34,688 – Down 0.5% from 34,870 last week. (4 week deviation: 438 up from 376 last week)
S&P 500 (SPX) = 4,327 – up 1.0% from 4,370 last week. (4 week deviation: 57.08 up from 52.54 week)

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization for the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

ThinkorSwim/Daily S&P 500 Index - Four Months Trend (Updated 07/18/2021)
ThinkorSwim/Daily S&P 500 Index – Four Months Trend (Updated 07/18/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 438 points or 1.3% of the market’s volume is up from 1.0% last week.
4-Week Thrashing of SPX = +/- 57.08 points or 1.3% of the market’s volume is up from 1.2% last week.

The slight uptick in thrashing is tantamount to the Marketeers are raising their collective eyebrows. Likewise, both the DOW and S&P’s current prices have dropped below the 9-Day SMA. Both of these are suggesting a building up of headwinds going into the next week or two.

The 4-month Trend Channel is maintaining a long-term Bullish bent, and the 4-week trajectory aligns.

The Market Thrashing is now above 1.0%. This might be an indication of a slowdown.

Market Index votes a DEFCON 4

My sentiment for this coming week:

Of the five indicators:

  • The GTS suggests some manufactured hystaria to get the Budget deal across the line – BOO!
  • The VIX is slowly fallng but hovers round 16% for the past 3 months – BLAH!
  • The P/C Ratio shows a kneejerk reaction that may spil over to this comming week- BOO!
  • The CSI shows a consumer base getting excited about our economic future, but still well below 95% – BOO!
  • The Market Movement inching bullish – YEAH!

There is more of a consensus in “BOOs” with this week’s indicators. But I do have a positive outlook that the BOOS will not last for eight weeks, and will no be “THAT” severe.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

My short-term outlook for my Vertical Bull Put Credit Spreads is positive.

Last Friday, I had a QQQ Vertical Spread exit early due to a winning trade trigger. This closing transaction cost me $11.00. I will therefore go deeper in one of my spreads this week to make back that charge.

  • Two 20 Strike-Wide < $3.75K risk) – as the Markets see fit
  • Spread term of 8-weeks or less
  • Probability of OTM > 83%
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Profit and Loss Statement

(As of 07/23/2021)

Balance Sheet

Year
2021
Month
July
Week
#29
Beginning Account Balance$16,000.00$18,415.81$18,814.69
Deposits (Div. & Int.)$0.65$0.00$0.00
Withdraws (paycheck)-$1,800.00-$0.00-$0.00
Premiums on Open$5,248.01$613.00$197.00
Premiums on Close-$372.00-$21.00-$10.00
Fees Paid (total)-$78.18-$9.18-$3.06
Ending Account Balance$18,998.63$18,998.63$18,998.63
Total Gain/Loss$2,998.63$582.82$183.94
ROR3.2%1.0%
ROC18.7%

Progress Graph

YOD Vertical Options Spreads Running P&L - As of 07/23/21
YOD Vertical Options Spreads Running P&L – As of 07/23/21

(Note: the negative weekly results for weeks 4, 8, 12, 17, 21, and 25 are when I withdrew $300 from the Trading Account for my paycheck.)

My Performance vs. SPY

Hypothetically, instead of depositing $16,000 in my Options Trading Account, could I have done better if I bought $16,000 of the ETF/SPY instead?

Options Trading
Account
SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.39 shares @ $368.55)
Funds Added$5,248.81
(Premiums)
0.31 shares
(Dividends Reinvested)
Funds Removed-$450.18
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$20,798.63
(Cash)
$18,974.17
(43.70 shares * $434.24 CV)
ROI+30.0%+18.6%
As of 7/23/2021
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Schedule for this Week

Goals for this week: (07/19/2021 – 07/23/2021) (Week #29)

  • Document lessons learned or new thoughts
  • Open one or two wide-strike spread
  • Update Trading Log as trades occurs

Monday:

  • Determine/update this week’s market sentiment section
  • Calculate/record Put/Call Ratios for all stocks on the watch list
  • Review/tweak Trend-Channels for all stocks in the watch list
  • Set target expiration dates for all Options as follows:
    • Bull Credit Spreads: Sep 10 (6-8 weeks)
      Note: If there are no Options Chains published for the 8-week expiration, then use the next Options Chain down from 8-weeks (7-weeks, 6-weeks). Beyond 4-week expirations, if only the monthly chains are available to trade.
  • Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
  • Stage possible trades for all watch list stocks by 10:00 AM
  • NO TRADING BEFORE 10 AM. (Let the Market find its direction after the weekend.)
  • Watch one Webcast or take one online mini-course to be completed by Friday.

Tuesday – Thursday:

  • Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movements.
  • Submit a couple of Spreads, but keep a close watch. If one is accepted, cancel the others (we want only one new active trade per day).
  • Be mindful of Entry Rules.

Friday:

  • Review the total technical dollars at risk for this week. If significantly below $500, then submit additional spreads if prudent.
  • Update and post weekly journal (this blog) with any lessons learned or strategy changes.
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This Week’s Trade Activity

(As of 07/23/2021)

Spread Count Summary:

Year
2021
Month
July
Week
#29
Vertical Bull Put Credit Spread5372
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total5472

Current Dollars at Risk:

Year
2021
Month
July
Week
#29
Vertical Bull Put Credit Spread$14,968.$8,916.$3,803.
Vertical Bear Call Credit Spread$0.$0.$0.
Vertical Bull Put Debit Spread$0.$0.$0.
Vertical Bull Call Debit Spread$0.$0.$0.
Iron Condor$0.$0.$0.
Total Dollar Risk$14,968.$8,916.$3,803.
Max Risk Allowed$16,000.00$12,000$3,000.
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Vertical Spreads Opened This Week

(07/19/2021 – 07/23/2021)

Both of the Spreads opened this week have an expiration date of 8/13 (three weeks). The primary reason for the short term is that I already had three open Spreads with an expiration date of 8/27. Additionally, I had no existing open Spreads with an exp. date of 8/13.

QQQ: 340p/320p  – Open 07/22/21 – Expires 08/13/21 – Max Gain = $84.00 – Open Price = $363.15
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.8%, Headroom=-6.3%, Max Loss=$1,916, AROR=71.9%

Vertical Bull Put Credit Spread – QQQ – Short: 340 Put – Long: 320 Put
Vertical Bull Put Credit Spread – QQQ – Short: 340 Put – Long: 320 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($14,968)
  • Max dollar at risk this week < $3,750? No ($3,803)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (22 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? Yes (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.5 down from 1.8)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=$343.55)
  • Short-strikes Prob-OTM > 83%? Yes (85.8%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: No (see chart)
  • Long-strike at maximum width (>= 10)? Yes (20 strike width)

SPY: 410p/390p  – Open 07/21/21 – Expires 08/13/21 – Max Gain = $113.00 – Open Price = $433.20
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, Headroom=-5.3%, Max Loss=$1,887, AROR=94.2%

Vertical Bull Put Credit Spread – SPY – Short: 410 Put – Long: 390 Put
Vertical Bull Put Credit Spread – SPY – Short: 410 Put – Long: 390 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($13,052)
  • Max dollar at risk this week < $3,750? Yes ($1,887)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (23 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (0.9)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=$413.51)
  • Short-strikes Prob-OTM > 83%? No (82.99%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: Yes (see chart)
  • Long-strike at maximum width (>= 10)? Yes (20 strike width)
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Vertical Spreads Currently Cooking

(As of 07/23/2021)

QQQ: 330p/315p  – Open 07/15/21 – Expires 08/27/21 – Max Gain = $102.00 – Open Price = $362.23
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.7%, Headroom=-8.9%, Max Loss=$1,398, AROR=61.3%
Now: Prob. OTM=87.8%, Headroom=-9.3%

SPY: 410p/395p  – Open 07/13/21 – Expires 08/27/21 – Max Gain = $109.00 – Open Price = $437.47
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-6.3%, Max Loss=$1,391, AROR=63.0%
Now: Prob. OTM=81.4%, Headroom=-5.8%

IWM: 205p/185p  – Open 07/09/21 – Expires 08/27/21 – Max Gain = $135.00 – Open Price = $225.54
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-9.1%, Max Loss=$1,865.00, AROR=53.5%
Now: Prob. OTM=76.2%, Headroom=-6.2%

DIA: 325p/320p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $82.00 – Open Price = $346.97
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.5%, Headroom=-6.3%, Max Loss=$918.00, AROR=72.3%
Now: Prob. OTM=86.7%, Headroom=-6.7%

IWM: 205p/195p  – Open 07/02/21 – Expires 08/20/21 – Max Gain = $56.00 – Open Price = $229.36
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.2%, Headroom=-10.6%, Max Loss=$944, AROR=43.4%
Now: Prob. OTM=79.0%, Headroom=-6.2%

QQQ: 325p/315p  – Open 07/01/21 – Expires 08/20/21 – Max Gain = $80.00 – Open Price = $354.06
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.3%, Headroom=-8.2%, Max Loss=$920, AROR=62.71%, 50d Dev = $10.21
Now: Prob. OTM=92.4%, Headroom=-10.7%

DIA: 325p/310p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $70.00 – Open Price = $344.22
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.0%, Headroom=-7.0%, Max Loss=$930, AROR=53.1%, 52d Dev = $3.20
Now: Prob. OTM=86.7%, Headroom=-6.7%

SPY: 400p/390p  – Open 06/29/21 – Expires 08/20/21 – Max Gain = $74.00 – Open Price = $428.20
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.9%, Headroom=-6.6%, Max Loss=$926, AROR=55.3%, 52d Dev = $5.00
Now: Prob. OTM=89.6%, Headroom=-8.1%

DIA: 320p/310p  – Open 06/24/21 – Expires 08/06/21 – Max Gain = $71.00 – Open Price = $341.52
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Headroom=-6.3%, Max Loss=$929, ROC 7.5%, 43d Dev = $1.56
Now: Prob. OTM=93.8%, Headroom=-8.1%

Vertical Spreads Closed This Week

(As of 07/23/2021)

QQQ: 315p/295p  – Open 06/22/21 – Expires 07/30/21 – Max Gain = $101.00 – Open Price = $345.02
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.1%, Headroom=-8.7%, Max Loss=$1,899, AROR 50.6%, 38d Dev = $6.89
At Close: Prob. OTM=98.0%, Head Room=-12.3%, AROR= 60%

Cost to open: $1.01 premium collected * 100 shares = $101.00
Cost to close: $0.10 premium paid * 100 shares = 10.00
Net Profit= $101.00 to open – $10.00 to close – $2.00 fees = $89.00
AROR= ($89.00 / 29 days in play) * 365 / $1,899 = 60%

This position closed 9 days early via the 90% of max-gain trade trigger – by accident. Since this position was within two weeks of expiration, I should have removed the trade trigger and allow it to expire worthless next week. Opps!

SPY: 400p/390p  – Open 06/10/21 – Expires 07/23/21 – Max Gain = $85.00 – Open Price = $423.75
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=78.8%, Headroom=-5.4%, Max Loss=$915, AROR 77.9%, 43d Dev = $2.93
At Close: Prob. OTM=99.9%, Head Room=-8.1%, AROR= 77.9%

Cost to open: $0.85 premium collected * 100 shares = $85.00
Cost to close: $0.00 premium paid * 100 shares = 0.00 (Closed Worthless)
Net Profit= $85.00 to open – $0.00 to close – $1.00 fees = $84.00
AROR= ($84.00 / 43 days in play) * 365 / $915 = 77.9%

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Conclusion

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Disclaimer

Even though I have tried to make it clear that this blog is my personal trading journal, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes…

“This blog and the information contained herein is not intended to be a source of advice or analysis concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

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