Market Update For Week Ending 4/27/2012

April 28th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,228.31         +199.05         1.53         +1,010.75         8.27        
NASDAQ 3,069.20         +68.75         2.29         +464.05         17.81        
S&P500 1,403.36         +24.83         1.80         +145.76         11.59        
Russell 2000 825.18         +21.13         2.63         +84.26         11.37        
International 1,513.11         +1.96         0.13         +100.57         7.12        
10-year bond 1.94%        -0.03%          +0.07%          
30-year T-bond 3.12%        -0.01%          +0.23%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap-Up
U.S. companies reporting increased profits pushed stock prices higher this week shaking off the effects of last weeks European debt crisis. The tech-heavy NASDAQ was the winner climbing 2.3% while the Dow industrials were up 1.5% and the S&P 500 added 1.8%. The small-cap Russell 2000 also increased 2.3%, but in dollar terms the foreign MSCI EAFE managed a small gain of 0.13%. Bond yields were up this week. So far this year, the Nasdaq is by far the leader, up 17.81% but off from its highs, and the broader stock market still maintains an impressive YTD performance. For more on recent trading activity, please read:
http://money.msn.com

Consumer Sentiment Highest in A Year
The Thomson Reuters/University of Michigan index of consumer confidence increased to the highest level in a year, beating the expectations of economists. Recent gasoline price declines and job gains may have Americans ready to increase purchases. Consumers expect an inflation rate of 3.2 percent over the next year, according to the survey. But even as consumer spending picked up, the overall economy expanded less than forecast in the first quarter as the GDP rose at a 2.2 percent annual rate, down from 3 percent.
http://www.bloomberg.com

Claiming It Would Be Reckless The Fed Declines To Increase Its Stimulus
The Fed policy-making committee ended a two-day meeting affirming that they would continue a policy of holding down interest rates as a way to increase spending. “The committee expects economic growth to remain moderate over coming quarters and then to pick up gradually” the statement said. Concerning continued high unemployment, Fed Chairman Bernake stated that the Feds longstanding commitment to keep inflation at around 2 percent limited its ability to encourage job creation.
http://www.nytimes.com

MESSAGE FROM A CONVERT

April 25th, 2012

A reader writes:
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“Sold three of the $535 June Apple Put yesterday to take in about $14 per share.
The goal was if the earnings were not good I would buy the stock at $521 roughly if it dropped to $535 or below within a month.
If the earnings were good the premium would be kept.
Since the earnings were good the premium is going to be kept on this one so could close it out now keeping about 90%+ of the premium that was taken in if I wanted to buy back and close out.
I can also wait three more weeks and keep the entire premium that was taken in.”
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This happy convert picked up over $4,000 in a three week trade with no investment, only a “risk” of acquiring apple stock at $535–which would be OK too.

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Merv

Harvey’s tools can predict the future

April 23rd, 2012

We are constantly working on tools to help visualize option trading.  The latest tools graph out complex multi-position strategies.

Take, for example, the following complex strategy:

Buy 10 170 calls (~2.04) Bought @ 1.64

Sell 20 176 calls (~1.06) Sold @ .85

Buy 10 150 puts (~1.8) Bought @ 2.25

Sell 10 145 puts (~1.02) Sold @ 1.305

Buy 3  160 calls (~5.44) Bought @ 4.67

Sell 6 166 calls (~2.99) Sold @ 2.50

Buy 3 160 puts (~5.12) Bought @ 6.06

Sell 6 155 puts (~2.95) Sold @ 3.65

This is an eight position double butterfly ratio spread on GLD, the gold ETF, when Gld was at $159.31.  The break even points are 141.62 and 180.38.  Anything outside of that range starts to create a loss.  Stop losses are set at 146 and 175, but one should not rely on stop losses.

Harvey’s Manage Hedges tool permits you to predict the profit or loss BEFORE EXPIRATION by doing a statistical analysis of the past three years to see what the odds are of a movement during any one period that would put the position into a loss.

When graphed out it looks like this:

Predict the profit or loss BEFORE EXPIRATION

The blue lines are for 60, 50, 40, 30, 20, 10, and 5 days remaining. The dark green vertical line is today’s price, and that there are 3 sets of brackets describing the probability of a 1 day move, in progressively lighter shades of green – a 20% chance, a 5% chance, and a once in 3 year chance.

You can see how they approach the black curve, which is the value at expiration. Before looking at the graph we thought that this was a pretty safe bet.  But after seeing the graph it became clear that the break-even points are much closer than we thought until we get within a few weeks of expiration.

With a major investment, users would be able to adjust their stop loss points daily.

3D COMPANIES ARE HOT

April 22nd, 2012

My wife thinks that 3D printing is the coming thing, and that we should get into it early. So I called a friend that I know is knowledgable about these things, and he referred me to several top contenders for this very competitive field. He wrote:

“I have an interest in the 3d printing companies (SSYS and DDD). I have been in them for a while, long term they are exceptional. SSYS is the better company. Xerox (XRX) is very cheap here. Harman International (HAR) is poised for rapidly expanding earnings growth.
Deluxe (DLX) has a good dividend and a very low multiple. This is a partial list.”

So I looked at the statistics on those 4 companies. One of them stood out from the rest, DLX. Here are the statistics from Yahoo Finance that I looked at:

52wk Range: 17.50 – 28.22
Volume: 443,241
Avg Vol (3m): 416,875
Market Cap: 1.15B
P/E (ttm): 8.03
EPS (ttm): 2.80
Div & Yield: 1.00 (4.40%)

The numbers that made this look good to me were, first of all, the great dividend. Secondly the low Price to earnings ratio, and third the relatively low price.

So we bought a few hundred shares at $22.40. We did not write calls against them yet, but if the stock doesn’t move up in a month or two we will begin to do that, about 10% above the market price, even if there isn’t much premium.

Right after we bought the stock, of course, SSYS announced that it had purchased one of it’s competitors, an Israeli company with a lot of hi-tech people on board. So SSYS stock jumped up. But I’m not complaining: I like that 4.4% dividend.

Merv

Bank of America, continued

April 21st, 2012

I am continuing with my test of the “Long Leap Put vs monthly put sales” strategy. As I mentioned in a prior blog, I started when Bank of America (BAC) stock was around 6, and bought the 5 put for Jan 2013 as a hedge, and began selling a 30 day put each month beginning in February.

For the first 3 months it worked well, and I collected in more than the $700 cost of the leap hedge. By last week I was short the April 9 puts. The stock went to 9, but then dipped back to about 8 ½ just before expiration. So had to buy it back at a cost of $600, wiping out $200 of prior profits, leaving me still with a small profit.

At the same time I sold the May 9 puts and took in $720, so if the stock goes back to 9 the strategy will be on track. Note that even though the stock was below my strike price, in rolling the stock up one month I ended up with $120 more than where I started.

Of course I could have taken possession of the stock at $9, and only had a cost, after premiums, of under $5, and then written calls against it. But I am still bullish on the stock and just reviewed their recent financials, so I’m giving it another month to go to $9 or more.

It still seems like a good strategy to us, and BAC is a good test for it since the stock is not expensive, so a small investment can test the strategy over the year.

Merv

Market Update For Week Ending 4/20/2012

April 21st, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,029.26         +179.67         1.40         +811.70         6.64        
NASDAQ 3,000.45         -10.88         -0.36         +395.30         15.17        
S&P500 1,378.53         +8.27         0.60         +120.93         9.62        
Russell 2000 804.05         +7.76         0.97         +63.13         8.52        
International 1,511.15         +23.13         1.55         +98.61         6.98        
10-year bond 1.97%        -0.03%          +0.10%          
30-year T-bond 3.13%        -0.02%          +0.24%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
Investors returned to the U.S. stock market from the sidelines, pushing most indicators into positive territory for the week. The blue-chip Dow industrials led the way, up 1.40%, while the small-cap Russell 2000 advanced 0.97%. The bargain-hunting mood extended to the S&P 500, which added 0.60%, but high-tech disappointments left the Nasdaq down 0.36%. Foreign shares surged 1.55% in dollar terms. Despite the week’s stock market gains, some investors also sought relatively safe havens, pushing Treasury bond prices upward and yields down. For more on recent trading activity, please read:
http://www.brisbanetimes.com.au

Global Economy Showing Signs Of Strain
European bond yields are back on the rise as traders step away from a sense that global risk is rising. Chinese economic expansion is slowing. And while the U.S. economy still appears healthy, some experts warn that conditions look less than robust. Will 2012 play out a lot like 2010 or 2011? And will that necessarily be a bad thing? For more on what economists expect for the remainder of the year, please read:
http://www.cnbc.com/id/47114936

International Monetary Fund Receives $430 Billion In New Funding
The nations of the world committed this week to double the money the IMF can provide troubled countries in emergencies. While it is unlikely that the international lender of last resort will need to tap the entire $430 billion in additional credit, news that the cash is available should help support investor confidence. In the event of a fiscal disaster in a country like Italy, for example, the IMF is now ready to step in. For more on the countries leading the charge, please read:
http://money.cnn.com

PREDICTING THE FUTURE

April 16th, 2012

I often hear people say that you can’t predict the future. But of course you can, and when you make an investment you are doing that, even if you aren’t thinking of it that way. A more accurate statement would be “you can predict the future, but very often you will be wrong.” Or, to put it as Abe Lincoln might have, “You can correctly predict the future some of the time, and you will incorrectly predict the future some of the time, but you can’t correctly predict the future all of the time.”

The big banks send out future predictions on a weekly basis. Here, for example, is the Federal Reserve’s prediction about the state of the U S economy, and—by implication—the stock market, for the next few years:

Moderately Strong Growth

What does that tell us? Well, the horizontal numbers are clearly the years. The vertical numbers refer to the percent change in the GDP – so a change from “2%” to “4%” looks pretty promising.

To take advantage of this kind of moderate growth, one might invest in the Standard and Poor index called the “SPY.” The SPY is like an ETF consisting of a basket of 500 stocks that are representative of the market. Its values usually parallel, at least approximately, the Dow Jones, and usually the S&P number times 8 also approximates the Dow Jones. But the first quarter of this year was not typical, and while the Dow Jones went up 6.8%, the S&P 500 went up almost 11%. And the QQQ, which is the basket of hi-tech stocks, went up even more. Who could have guessed?

I’ve read that people that invest in the S&P 500 usually do better than those that invest in mutual funds or hedge funds. That makes sense to me, because there is no significant fee assessed when you invest directly by buying the SPY.

But of course we all know that investing in the stock market is also a bit like going to the race track. And it should be fun like that. So most of us at least try to pick a sector that we think will go higher than the average.

So a few years ago I predicted that rentals would go up dramatically in Los Angeles county, and in a few other cities, and I invested in low-priced apartments. In one sense I have been lucky, in that they have paid a pretty solid 8% return on my investment. But the rents have not gone up so far. And except for Salt Lake City, my best investment, the values of the buildings have not gone up much either. Salt Lake was out of the ordinary because during the recession the Mormon Church made major investments there.

So I was pleasantly surprised to read in the LA Times recently that they predict an increase in rents in the LA area. Here is what they predict:

Apartment costs

The numbers on the horizontal axis are the years, 2011-2014, even though they did not put in the 2014, and the numbers on the left vertical side are rents per square foot. As you can see, the prediction from 2012 to 2013, which is as far out as I would ever want to rely on, shows a projected increase of $.20 on $1.80, or about 11%.

You can own an interest in real estate without buying buildings. As with most things, there are ETF’s that allow you to participate in the real estate market without the risk of having to get up in the middle of the night to fix a toilet. Many of these are called REITs (Real Estate Investment Trusts), a special type of tax entity. I’ve owned the SSS REIT for many years, and it has done extremely well investing in self storage units. For general real estate consider the Dow Jones REIT; this REIT’s symbol is RWR. There are a number of other REITs, many with international holdings, but I don’t recommend those at this time.

Mlh April 16, 2012

Market Update For Week Ending 4/13/2012

April 15th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,849.59         -210.55         -1.61         +632.03         5.17        
NASDAQ 3,011.33         -69.17         -2.25         +406.18         15.59        
S&P500 1,370.26         -27.82         -1.99         +112.66         8.96        
Russell 2000 796.29         -21.89         -2.68         +55.37         7.47        
International 1,488.02         -18.01         -1.20         +75.48         5.34        
10-year bond 2.00%        +0.00%          +0.13%          
30-year T-bond 3.15%        +0.02%          +0.26%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
A new round of global economic fears dragged U.S. stock prices down this week, leaving the economically sensitive Russell 2000 in particular down 2.68%. The blue-chip Dow industrials held up better, shedding 1.61%, while the technology-heavy Nasdaq sank 2.25% and the broad S&P 500 lost 1.99% of its value. Foreign shares actually held up relatively well in dollar terms, but still closed down 1.2% over the course of the week. Bond yields were flat to slightly higher as investors readjusted their holdings. For more on recent trading activity, please read:
http://abcnews.go.com/Business/wireStory/us-stock-futures-fall-slower-growth-chi
na-16130638

Fresh Cracks In The Euro Zone Leave Markets On Edge
Mere weeks after hammering out a “final” rescue for debt-ridden Greece, the European Union is now having to face the prospect that soaring financing costs will drive Spain and maybe even Italy to seek a similar solution. Investors have effectively boycotted Spanish and Italian bond auctions, forcing the governments of both countries to pay much higher interest rates on their new fixed-income offerings. As the cost of borrowing climbs, the weight on these countries gets heavier, dragging their economies closer to recession. What happened this week? For more, please read:
http://www.cnbc.com/id/47038484

The Chinese Economic Miracle Is Slowing, But Not Stalling
With the euro zone staring at a recession, global investors have turned to China as the bearer of their economic hopes — and the center of their fears. As it turns out, Chinese growth did decelerate in the recent quarter. However, at an annualized expansion rate of 8.5%, few can convincingly argue that the world’s second-biggest economy is crashing in anything like a true “hard landing” scenario. And since last year’s growth rate was actually too high for Beijing’s comfort, numbers like these may open the window to looser monetary policy or other stimulus ahead. For more on the latest from the Pacific Rim, please read:
http://money.cnn.com

Market Update For Week Ending 4/6/2012

April 6th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 13,060.14         -151.90         -1.15         +842.58         6.90        
NASDAQ 3,080.50         -11.07         -0.36         +475.35         18.25        
S&P500 1,398.08         -8.39         -0.60         +140.48         11.17        
Russell 2000 818.18         -12.12         -1.46         +77.26         10.43        
International 1,506.03         -47.43         -3.05         +93.49         6.62        
10-year bond 2.00%        -0.22%          +0.13%          
30-year T-bond 3.13%        -0.23%          +0.24%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
U.S. and foreign stock markets retreated this week as investors rebalanced their portfolios into the new fiscal quarter and adjusted their expectations for the global economy. The small-cap Russell 2000 led the way downward, giving back 1.46% of its value, while at the other end of the market the blue-chip Dow industrials lost 1.15%. The technology-heavy Nasdaq eased 0.36% and the broad S&P 500 closed down 0.60%. Overseas. renewed euro angst sent foreign stocks down 3.05%. Money flowed back into the bond market, giving Treasury yields a break. For more on recent trading activity, please read:

http://www.reuters.com

Federal Reserve Chiefs Suspect Easier Money May Be Unnecessary
No less than four members of the Federal Reserve’s monetary policy committee now see less reason to continue to stimulate the U.S. credit markets as the economic outlook improves. While investors should be gratified to hear that the nation’s top government bankers now consider the economy self-sustaining, a few speculators are still disappointed that the proverbial “punch bowl” of quantitative easing may soon be taken away. For more on the latest developments inside the Fed, please read:
http://www.businessweek.com

Unemployment Rate Declines Even As Hiring Slows
Markets were closed Friday, leaving investors with few immediate ways to respond to reports that U.S. unemployment dipped to 8.2%. Although some economists found the news of only 120,000 new jobs created in February discouraging, others were pleased to see the pace of government layoffs decelerating. In any event, the broad unemployment rate is now at its lowest level since January 2009, when the credit crunch was still inflicting massive damage on the job market. For more on the latest numbers, please read:
http://money.cnn.com

The BAC test strategy

April 5th, 2012

In November I started testing the strategy of selling puts against a leap, and described it here at that time. This is a follow-up report. So far the strategy is working extremely well, but that is in part because Bank of America stock has done so well and we have been in a strong up market.

In November I bought the Jan 2013 put at a strike price of $5, when the stock was about $6 if I recall correctly. I paid about $700 for that hedge position. At the same time I sold the December 6 and took in about $300. (I did 10 puts on each trade).

One of the reasons I selected Bank of America was because the stock was cheap, so I could test the strategy at low cost and risk.

The stock went up and the short position expired worthless so I got to keep the $300. I made the same short trade in December and took in $285, and again in January and took in $186, rolling up each time with the stock.

At this point in time I’ve taken in about $770, and invested $700 in the long hedge. So I’ve already got my money back. Right now I am short the April $9s and hope to keep another $200 in premium if the stock stays about $9. Of course each time I write a new put at a higher price, since my hedge stays at $5, I incur a greater risk than when I started with a spread of only $1.

This strategy would work well with a stock that was more stable, since that increased risk would not be present. But it is working well, and so far I’m ahead of the game. We will look at this again in a few months and see how it is doing. I will continue to write puts against the January long position, but with the stock having doubled in price, I will reduce my risk by writing further out of the money and taking in less premium.

You can do this same strategy on any stock in which you have confidence.

mlh