This
Week in Barrons – 3-2-2014
What should I Buy?
For the past two weeks we have been
discussing a potential global currency reset. Unfortunately there are few investments you
can make to protect yourself from a global currency devaluation. Why? Well
if this were just Argentina (for example) – you could quietly put some money in
a foreign currency via foreign exchanges, and by the time they outlawed such
things, you would already have the benefit of the increase in the foreign
exchange rate. However, on a global
reset - you won't be able to buy into a foreign currency (that may rise as your
currency is devalued), because the foreign currency will be devalued as well. Therefore, there are only 3 ‘protection’
investments: real estate (if you own it out right), gold and silver.
What about owning shares in gold
mining companies, or the GLD and SLV?
The mining companies are a good bet for the short-term, but it does not
make them immune. If things get really
ugly, there's no question that Governments would simply ‘seize control’ of the
mining companies. That said, holding
some gold and silver mining stocks should be a good choice as we get closer to
the reset. You can bet that if we had a
3-day banking holiday, only to wake up on day 4 with a new currency with a new
value, those miners would be priced considerably higher. However, if that happened, I would immediately
‘cash out’ on the initial market-pop higher for the miners – for fear that the Governments
hosting the mining operations would seize control of the mines themselves.
Both the GLD and SLV exchange traded
funds have not been attractive to me since they launched. That being said, as long as the markets are
functioning normally, they have been good ways to record gains when the metals
move up. My fear is that they are really
‘shams’ for the average investor, and are NOT the same as holding the physical
metal. Therefore, holding physical gold
and silver is the single best thing you can do.
With that in mind, what should I buy?
In gold, buying a one-ounce ‘gold eagle’
gold coin will cost upwards of $1,350, and buying groceries with that coin
becomes a little difficult. But one
ounce ‘gold eagles’ come in 4 ‘face values’: a $50 face value = one once of
gold, a $25 face = 1-half ounce of gold, $10 = 1-quarter ounce of gold, and $5
= 1-tenth ounce of gold. You can
certainly purchase a 1/10th ounce ‘American’ eagle for about $150,
it is only 91% pure gold. On the other
hand, the Royal Canadian mint makes 1/10th ounce gold coins called
‘Maple Leafs’ and they are 99.9% pure.
The ‘Maple Leafs’ will cost approximately $160 per coin, but worth the
extra $10 for the remaining gold purity.
With silver remaining ‘cheap’ in
relation to where it should be, I suggest one ounce, recognizable silver coins.
In other words, the Australian Silver
Kookaburras, Austrian Silver Philharmonics, and Chinese Silver Pandas make
great collectibles but lousy spendables.
I would stick to the U.S., one ounce, ‘silver eagle’ coins.
Honestly, I hope that I’m nuts and
way off-course. But as I look at the
Ukraine who is on the verge of war because they’re: broke (like the U.S.), have
a deep political divide (like the U.S.), and religious and racial issues (just
like the U.S.) – I keep hoping that this too shall pass.
The Market:
Let me start off by saying I was
wrong. I did not think that the S&P
would make it over 1,850 – but it did.
Candidly, I’m still waiting for those 3-day closes above the 1,850
level, but we clearly got the first one on Friday when we closed at 1,859. But, why is the S&P making new all time
highs when the economic news stinks, and the Fed is removing punch from the
bowl? The most obvious answer is that
there is no other place to go to invest.
As I look around the world, where can I put my money for some kind of a
return with a modicum of safety? Emerging markets are creaking and
groaning with the looming threat of defaults. The world is facing the possibility of a
European war over the Ukraine. And the
southern European countries continue to deteriorate. As crazy as it sounds, U.S. stocks are being looked
at as the best of a bad lot.
But notice what the corporations are
doing with their money. They are not
building plants, or investing in other capital expenditures. In record amounts, corporations are issuing debt
(borrowing) and using the proceeds to buy back their own stock. Because this reduces the amount of shares of
stock available, this gives the illusion of increasing earnings per share. To date corporations have announced over HALF
A TRILLION dollars worth of stock buy backs. Daily I see companies (a) miss their earnings
estimates, (b) guide earnings lower into the future, and (c) then announce an $X
Billion stock buy back program. This
results in the stock moving higher – not due to growth, hiring, increased
revenues, or profits – just from borrowing money to buy stock. In my world, that behavior is called ‘margin
debt’ (borrowing money to buy stock) – and that is never a good idea.
I don't know how far this can go. In the short-term, the DOW is still 250 points
shy of its all-time high, and we are still in danger of the S&P rolling
over in what amounts to a failed break out. But here’s the issue: If you buy stocks in a
trading account, and you have the time to play with your accounts, then none of
the following matters because you have the ability to buy and sell without constraints.
However, the average person has
their money in a 401k. When 401ks were first
started, you were allowed to manage them ‘daily’ on your computer. You could virtually day-trade your 401k,
moving money from cash into funds (and stocks) for a few days and then back into
cash after a potential pop in the stock.
But over the years ‘The Street’ got wise to that behavior and implemented
rules only allowing you to ‘adjust’ your 401k allocation a certain number of
times in a quarter. Often you’re only
allowed one adjustment per quarter, and sometimes only two per year.
So the problem becomes, if you
decide to push 100% of your 401k into stocks right now because the S&P has
broken out – you can’t do anything else with that money for another 3+
months. A week later, a war breaks out
in Europe and the S&P drops 800 points – you have lost your fortune all
because you could not make another 401k move.
This is the single biggest problem in
J. Q. Public’s finances today. The
stakes have been ‘tilted’ so that J. Q. Public is no longer in control of his
money. It’s currently all up to the Wall
Street fund managers. While it is fun
when the market is going up, there will be true pain and anguish when the
market is on it’s way down. Unfortunately, the market is levitating for all
the wrong reasons. Hopefully any correction will not resemble the
Japanese ‘candle stick’ that dropped from 40,000 down to 9,000 in a matter of
weeks. Please be careful out there.
Tips:
This week I strictly played the probabilities and generated
income by selling weekly ‘put credit spreads’ along with our standard earnings
plays – where we sell ‘put and call options’ one standard deviation away from
the current price. Allow me to explain:
For our Weekly Income:
-
I normally just
sell weekly ‘put credit spreads’ / either 1 or 1.5 standard deviations in the
money.
-
A ‘standard
deviation’ is an amount calculated by your trading platform – that tells you
for a period of time (often weekly) – that a stock will remain within a certain
price range – 67% of the time (for a single standard deviation).
-
Therefore, if the
stock goes up (at all) or down (slightly), the options expire worthless and I
pocket all of the ‘sales’ proceeds on a weekly basis.
-
For example:
o
On a $10 stock (if
the ‘standard deviation’ is $1 – a value calculated by your trading platform) I
would be selling either the weekly 1 or 1.5 standard deviation options.
o Therefore I would be selling either the $9.00 or
$8.50 put options – betting on the stock remaining either above $9.01 or $8.51 for
the week.
o Probability tells me that I will have an 88%+ chance
that the stock will remain above those targets, and therefore the put options
that I sell will expire worthless – and I will pocket all of the proceeds.
For Earnings Plays the behavior is similar:
-
If stock is trading
for $10, and the weekly ‘standard deviation’ (calculated by your trading
platform) is $1.00. (This means that
there is a 67% probability that the stock trades between $9.00 and $11.00 for
the week.)
-
On an earnings play
I could SELL the weekly, $11.00 ‘call option’ and SELL the weekly $9.00 ‘put
option’ for a premium amount (paid into my account) – and be right 67% of the
time.
-
However, I often
want more ‘security’ than 67% of the time – so I often go out 1.5 standard
deviations to give me that added 88% cushion of probability. Therefore I often sell the $11.50 call option
and the $8.50 put option respectively.
-
I would be
‘betting’ on the stock remaining less than $11.50 and above $8.50 for the
remainder of the week.
-
Then at the end of
the week, the options would expire worthless – leaving me to pocket the entire
premium.
I still like the following stocks: BIIB, SCTY, NFLX,
TSLA, QIHU, CMG and commodities such as USO and UCO. All of these seem to march to a different
drummer than the market itself and perform well using the above trading
philosophy.
I also like some smaller names such as: MNKD, ARIA, and FireEye (FEYE).
My
current short-term holds are:
-
QIHU – in @ $91.20 - (currently $109.55)
-
ARIA – in @ $8.43 – (currently $8.63)
-
FEYE – in @ $75.50 – (currently $85.00)
-
USO
(Oil) – in @ $34.51 - (currently $37.18)
-
UCO
(Oil) – in @ $28.75 – (currently $34.87)
-
FXY
(Japanese currency) – PUTS in @ at $96.47 - (currently $95.88 – looking for it
to go lower)
-
SIL (Silver) – in at 24.51 - (currently 14.09)
– no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
128.08) – no stop ($1,329 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 20.41)
– no stop ($21.20 per physical ounce).
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there!
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