Annaly (NLY) plunged on Friday, lowest at -15% at one point. What happened? The major concern is about the possibility of a credit rating cut for the US debt, from AAA to AA. As I have explained before, NLY invested all in the mortgages backed up by the US government. With a AAA rating, their investment is considered risk-free and no one has ever questioned about the safety of anything backed up by the US government.
Now a crack starts to appear. With the ever worsening debt problem for the US and the amazing childish political fighting between the president and republicans regarding the debt ceiling, now S&P has warning that there is a 50-50 chance that they may downgrade the US credit rating. If so, the cost for NLY to borrow and invest will increase and it may have to cut its dividend. While I'm a firm believer that the US has already been bankrupt and its debt rating should have already been cut many times since long time ago, I doubt S&P and any rating agency will have the gut to really cut the US credit rating. These official credit rating agencies have already lost their own credibility in the past few years as they are actually one of the major causes leading us to where we are now with all kinds of financial messes. My gut feeling is that the market is a bit overreacting as always. NLY recovered quite a bit late Friday, which probably indicated that.
Let me be clear. This is an uncharted water and no one has any experience about it. I don't want to leave you with an impression that I have a crystal ball that I know for sure NLY won't drop further. I DON'T KNOW! If you have bought NLY, the best thing for you to do is to stick to your exit strategy. The wisest strategy for me is a stop loss or a trailing stop. If it drops to the price level you set for exist, you should honor it and sell it immediately. Otherwise, keep it with a close watch.
Sunday, July 31, 2011
Saturday, July 30, 2011
The current market: oversold and overbought
Ugly and Beautiful! These are the only two words coming to my mind if you ask me about the overall market in the past week. How can I use these two antonyms to describe the market at the same time?
Well, the stock market was really doing badly, while it couldn't be better for the precious metals, especially gold which has reached its all time high at $1631. If you bought gold or silver recently, you should be really enjoying what is going on with your metals. But I must warning you: in the very short-term, the stock market is quite oversold and the precious metals are quite overbought. What does it mean? The market has a tendency to return to its mean, which is probably true for everything in the world of the nature. When it is too far away from its mean either direction, it will likely move to the opposite direction regardless what is the overall trend for it. My gut feeling is that the stock market is very much oversold at the moment and is very likely to snap back fiercely. The catalyst is most likely the debt ceiling deal in the next 2 days. In contrast, the precious metals are quite overbought and most likely will contract significantly in the next few days. Mentally you should be prepared for this scenario. I would take this temporary sell off to get in more for the precious metals. I have a strong hunch that the precious metals have gone into another leg of ascending. Please don't panic regardless how violently it may look like. Don't be chicken!
Well, the stock market was really doing badly, while it couldn't be better for the precious metals, especially gold which has reached its all time high at $1631. If you bought gold or silver recently, you should be really enjoying what is going on with your metals. But I must warning you: in the very short-term, the stock market is quite oversold and the precious metals are quite overbought. What does it mean? The market has a tendency to return to its mean, which is probably true for everything in the world of the nature. When it is too far away from its mean either direction, it will likely move to the opposite direction regardless what is the overall trend for it. My gut feeling is that the stock market is very much oversold at the moment and is very likely to snap back fiercely. The catalyst is most likely the debt ceiling deal in the next 2 days. In contrast, the precious metals are quite overbought and most likely will contract significantly in the next few days. Mentally you should be prepared for this scenario. I would take this temporary sell off to get in more for the precious metals. I have a strong hunch that the precious metals have gone into another leg of ascending. Please don't panic regardless how violently it may look like. Don't be chicken!
Wednesday, July 27, 2011
My personal experience with Everbank MarketSafe CD
First of all, I stick to my gun that I strongly believe there will be a huge relief rally in the next few days. Since I'm so convinced about it, I would like to make a speculative trade. I opened some positions last night for SSO (2 times S&P 500 index) to bet for this rally. Looks like my positions got filled today. We will see the results in days. Now back to my today's topic.
Exactly 5 years ago, I bought a CD called Marketsafe issued by Everbank. There are many types of Marketsafe CDs from Everbank. The one I bought was about gold. I assume you know what a CD means. Generally with CDs from other banks, you get a fixed interest for a fixed period of time. At its maturity, you get all your principal back. Of course, the interest is usually not very competitive due to its principal guarantee. Everbank is very creative. It issues new kinds of CDs, which will guarantee your principal but without a fixed interest. The one I had was to return all my principal at its maturity in 5 years but I did not know how much interest I would get, if any. This is because its interest was tied to a gold index. I would get more if the gold index went high but I could get nothing if the index was flat or even went down on the CD’s maturity date. In other words, the only risk I had was the opportunity cost (missing the interest money).
Five years ago, I was not as savvy as I’m today in terms of investment in general and gold in particular. But I still figured that gold should be doing fine and would likely go up 5 years later. So I took the opportunity risk (did I sound like an economist?). My CD matured on Jul 25 and I just checked the result: I got close to 60% of interest payment in addition to my principal. So in average my annual yield was about 12% in the past 5 years with this CD. Not something really exciting but I can say you cannot expect much more and it is a fantastic profit margin for a boring CD regardless how you compare it with others.
Monday, July 25, 2011
A spectacular rally is likely coming
Please allow me to make a bold prediction. I think a huge rally for the stock market is coming in the next few days.
As much pessimistic and gloomy as it looks like in the market right now about the increasing possibility for missing the deadline for raising the debt ceiling by Aug 2, I'm still very positive that the politicians will make a last minute deal to avoid a default that has never happened in the US history and will have an immediate catastrophic impact on the global financial world. Regardless how definitive Obama sounds like that he will not cave in to comprise for a short-term deal, he is after all a politician. As a politician, the first and utmost important thing for him is his own interest, i.e. his re-election for the next presidency. Don't be foolish enough to even think that he will be really thinking about the interests of the general American people first.
Therefore I dare to make a call that a deal is coming very soon before Aug 2 and the market will have a huge relief rally. Due to the same reason but in an opposite direction, precious metals will be plunging severely when the deal is announced but again it will be short-lived. Whether I'm right or wrong, I'm ready for both. No panic whatsoever!
As much pessimistic and gloomy as it looks like in the market right now about the increasing possibility for missing the deadline for raising the debt ceiling by Aug 2, I'm still very positive that the politicians will make a last minute deal to avoid a default that has never happened in the US history and will have an immediate catastrophic impact on the global financial world. Regardless how definitive Obama sounds like that he will not cave in to comprise for a short-term deal, he is after all a politician. As a politician, the first and utmost important thing for him is his own interest, i.e. his re-election for the next presidency. Don't be foolish enough to even think that he will be really thinking about the interests of the general American people first.
Therefore I dare to make a call that a deal is coming very soon before Aug 2 and the market will have a huge relief rally. Due to the same reason but in an opposite direction, precious metals will be plunging severely when the deal is announced but again it will be short-lived. Whether I'm right or wrong, I'm ready for both. No panic whatsoever!
Sunday, July 24, 2011
I bet more for Bank of America
On Jun 3, I presented a case for Bank of America (BAC), reasoning that BAC was cheap and at about 15% discount in terms of its book value. I did go in with a long position with BAC. In the past month or so, BAC has been doing really badly and even slipped to below $10 a few days ago. My existing BAC positions are not doing well obviously, at least seemingly on paper. Am I worried about my positions? Not at all. As I alluded to, my BAC positions won't lose a penny as long as BAC stays above $7.5 by Jan 2013. A long way to go and I highly doubt it will happen unless some catastrophe occurs.
Do I like Bank of America? I really don't! To some extent I even dislike it. So I will not invest my money with BAC. But as a trade for speculation, I feel BAC is quite cheap at this price level. When it drops below $10, it stands at a super discount of about 40-50% in terms of its book value. Just as a metaphor: if you put in $1 now and if BAC is liquidated immediately, you will get about $2 back. Given this kind of value in front of your eyes, it is difficult to simply ignore and pretend to have seen nothing. So I bet more for BAC, expecting that in the very short term at least, it will recover significantly. I bought BAC Sep $10 call options. There is a potential that I may get a quick over 100% profit in the next few weeks. Of course, as a pure speculation, I may lose my money if it does not behave as I expect. We will see.
Do I like Bank of America? I really don't! To some extent I even dislike it. So I will not invest my money with BAC. But as a trade for speculation, I feel BAC is quite cheap at this price level. When it drops below $10, it stands at a super discount of about 40-50% in terms of its book value. Just as a metaphor: if you put in $1 now and if BAC is liquidated immediately, you will get about $2 back. Given this kind of value in front of your eyes, it is difficult to simply ignore and pretend to have seen nothing. So I bet more for BAC, expecting that in the very short term at least, it will recover significantly. I bought BAC Sep $10 call options. There is a potential that I may get a quick over 100% profit in the next few weeks. Of course, as a pure speculation, I may lose my money if it does not behave as I expect. We will see.
Friday, July 22, 2011
The tidal wave is propelling silver again
I think it has become much clearer now that the trend direction for silver has changed and is moving upward now. I told you on Jun 16 that I thought silver was likely bottoming up and I started to add new positions via AGQ. I did put my money where my mouth was. Here is the current status of my AGQ. Given that it was still very uncertain at that time, I only started with relatively small positions. Initially it was a bit against me and I even wrote a follow up blog warning about a possible continuous severe correction. But it turned around and my AGQ positions are doing very well by now as you can see (68% & 31% increases in just a few weeks):
| 30.50 | 1.00 | 3.39% | $280.00* | 1 | $18.00 | $1,234.99 | 68.04% |
| 12.70 | 0.00 | 0.00% | $-0.00 | -6 | $18.50 | $3,464.72 | 31.17% |
If you cannot tolerate the potentially higher risk with AGQ, you can read my previous blogs on some less risky ways of investing in silver. There is also a great silver mining company at a good buy price level. Will discuss about it in a few days.
Wednesday, July 20, 2011
How to invest in gold
It was almost like I was able to manipulate the market. As soon as I posted my blog 2 days ago stating that I thought gold was a bit overbought in a short-term, the gold price dropped quite a lot the next day. Of course I’m kidding and the perfect timing was simply a coincidence. But I think this blog becomes more timely now as the buying opportunities may come any time now. If you follow my blogs closely, what I’m going to tell below should not be anything really new to you. But maybe still a good idea to summarize the key methods here with respect to investing in gold.
Buying physical gold: If you have never done so, it is the most important action to buy some physical gold. As I said, treat it as saving instead of investment and simply forget about it as your saved money. You will be really happy over time if you do that now. Two basic ways:
- The safest way is to buy gold bars or coins if you can and store them somewhere no one else knows about. In Canada and China/Hong Kong, you can simply go to the major banks to buy them without any problems. Unfortunately I’m not aware of any US banks selling gold bars or coins directly. You probably have to order gold coins from the US Mint (controlled by the US government) or some coin dealers you trust. I bought a few gold coins from the US mint when they first issued pure gold coins called American Buffalo back in 2006 I think. The official price was $800 per coin (1 oz) but since they were promoting them, I got some good discount (12%) to buy them at that time. Right now this gold coin is trading in Ebay at a price around $1800. I’m afraid you will not see any such deals from the US Mint anymore due to the high demand nowadays. But still, if you can find something with a premium (i.e. the amount you pay more beyond the gold spot price) within 5%, I think it would be a good deal. I will only be interested in the pure gold coins (> 99% purity).
- Alternatively you may buy physical gold via EverBank. I see this as the best alternative option available in the US if you cannot buy physical gold directly. Check its website under “WorldMarkets” for details. An economic way is to buy unallocated gold, for which you save the storage management fees. I really like EverBank and think it is one of the best and safest banks in the US. I have also bought some unallocated gold in my EverBank account. Easy, simple and profitable as well. Please note: regardless of what you will do, don’t buy gold jewelry products for this purpose! You will pay too much for the processing fees unnecessarily and you will not get them back at all when you sell eventually. It will really not keep its value as you’d like as money.
Buy paper gold: I call them paper gold when you buy gold via funds. Although the fund values should largely reflect the gold price in some proportion depending on the setup of the fund, you don’t really own the physical gold. That’s why I call it paper gold. Some funds have claimed that they have physical gold backed up but I’m not sure you can actually authenticate it. So the risk is always there that you may not have bought the real gold value as you would have thought. That’s why I treat paper gold as investment, not as saving, and the appropriate caution for any investment should always be applied, e.g. using a trailing stop loss to protect your principle capital or profits. There are many such funds out there. Personally I have invested and traded significantly via GLD (an ETF fund) with very good profits. I haven’t encountered any issues so far for 2-3 years with this ETF and will continue to do so as a trading vehicle. It has largely tracked the gold price movement consistently on a daily basis. So you can trade it just as any other stocks. For my Canadian friends, there is a mutual fund called PHY.U (Sprott Physical Gold Trust), which I think is also a good way to buy paper gold. But I must say this fund is relatively young and I have very limited personal experience. I just know the founder of the fund is a veteran investor for precious metals with a great track record in the past decades, someone I can trust. It is also traded in the US with a symbol PHYS.
If you are a bit more aggressive and want to catch up with the lost time, there is a double long ETF for paper gold, symbol DGP. I bough a small position of it about 2 year ago and it has largely done what it is supposed to do, to track the gold price in 2:1 ratio (of course not always exact). It has increased by about 230% since I bought it. I was too conservative at that time and my position was too small. I’m thinking to add more to it when the time is right. Be careful though, it is much risky than GLD since when the gold price drops, it will also go down with it twice as much. So it is not for someone with very little tolerance of volatility and only hope to simply grasp a quick profit. It may be painfully against you in short term if you don’t get in at the right time. Over time though I’m very confident it will be doing great with the long term bull market of gold.
Gold mining stocks: As I recently discussed, gold stocks are actually very cheap in terms of their valuation relative to the gold price. In the normal time, gold stocks should appreciate much faster than the gold price itself, but at the moment they are very much lagging behind. Since I wrote about 2 weeks ago, gold stocks in general have jumped up with gold for about 10% or so. They may retreat a bit but overall they are still cheap. I like a few gold stocks as discussed before. For the example I wrote regarding GoldCorp (GG) options, I have already seen the maximum profit ($4.5 per share), for this specific setup, with GG trading at the price around $55. I have two choices at the moment: either take the max profit and waiting for the next opportunity or I decouple the setup by closing the position of selling the call options. This way I can leave my long call positions for unlimited upside potential. Given that I think gold stocks are cheap at the moment, I’m more inclined to doing the latter to capture the future potential.
Of course, gold stocks are more risky than paper gold, although with high potential for return. If you want to be relative safer, go with the ETF fund, GDX, which is much less risky compared with individual gold stocks. I have significant positions with GDX as well and again with great profits after a few years of holding. My recent GDX positions have also started to show good upward trend since I got in a couple of months ago.
Friends, if you are still among those with doubt about the gold and silver bullish trend, please wake up to face the reality now. You got to do something with your hard-earned money to protect your future life. I hate to see my friends being among those who would only regret why they did not take action earlier when they saw a huge depreciation of their assets down the road. It is inevitable if you don’t take your action now! Mark my words!!
Monday, July 18, 2011
I'm speechless - Why is gold so strong?
Gold has touched $1607/oz toady, the 10th straight up day. I’m really a bit shocked about the extremely bullishness of gold as it’s behaving now. As you all know I have been waiting for some significant correction of gold for several months now. It did correct in the past several weeks but merely about 7% or so from its all time high. This is not what I was waiting for, far from my expectation actually! While I’m very happy to see it hitting new high almost every day, given that my current holdings of gold related positions are all doing extremely well with it, I’m also a bit “frustrated” about it. I’m hoping to see more severe corrections with gold, so that I will feel more comfortable to add more money to gold. Given it has broken through its all time high, especially the important $1600 level, I’m really wondering whether we will ever see gold below $1500/oz. I’m still hoping for it but I just cannot bet for it anymore.
You may have very well heard about pundits or talking heads out there advising you that gold is in its bubble state and will be crashing soon. Don’t believe a word of them. Why can I be so “arrogant” and so sure about it? Because I have heard this again and again for years now and the fundamental problem for those so-called gold experts to have always missed the point is that they really don’t understand the true driving force behind this super gold rally in history. It was interesting to see some analysis done by some “gold experts”, claiming that they could prove that gold is not a good hedge against inflation. They checked the historical gold price movements in the context of some earlier high inflation periods and concluded that gold was actually acting poorly during such hyperinflation periods. I’m not going to challenge this as I do believe their technical analytical skills for such an analysis. I was even bamboozled badly by their so-called expertise when gold was experiencing a real severe correction in 2008, plunging from over $700/oz to about $500/oz. I was still a bit “young” back then in terms of my knowledge of precious metals and investment technical skills. I was indeed panic when seeing the plunge of the gold price, especially I was little over-leveraged with some of my positions. I started to listen to the “experts” calling of the end of the gold bubble, thought what if they were correct. So I sold my leveraged positions with some big loss, which would have given me great profits if I had held them up for just a little bit longer. You know what has happened since the 2008 correction: Gold has shot up from $500 to over $1000 and has never looked back. Fortunately I came back in shortly after the correction to build up new gold positions. Since then I’ve studied hard, trying to understand what is the fundamental reason for this run of the gold rally.
I can tell you those so-called experts all miss a critical point why gold has been so strong for over 10 years by now. It is not due to the inflation concern that gold has entered this historical bull market. It is about losing confidence on the fiat (paper) money, STUPID! Looking around the world, every country, I literally mean every and each country, is trying to debase their currency. As the result, gold is shooting up relentlessly against every currency, regardless how strong the currency may be. Just check one of the strongest currencies, Swiss Franc (Sfr), for example. No difference that gold has appreciated significantly against Sfr in the past 10 years as well, although at a much slower pace as compared with the toilet money such as Euro or the US$. In other words, even if you hold strong currencies like Sfr or Canadian $ and you are doing much better than the US$, but you are till losing your buying power every day. Do you see any sign that this trend is turning around that governments around the world are trying to make their currency stronger? Not a bit and actually the situation has become worse and worse on a daily basis. Understanding this fundamental point about the bullishness of gold, you can sleep very well to invest in gold, knowing that over time you will be among those who are way ahead of other herds to make money. Actually I should correct myself to say that if you are buying physical gold (such as gold bars or coins etc), you are not and should not even consider yourself to be investing. You are simply saving your hard earned money for your future to reserve your buying power when everyone else is crying when they eventually realize how much value of their assets has lost.
Just to make it very clear: I’m not saying that the gold price will not drop during this long-term super bull market. Even a 50% plunge will not be a surprise for me, although I’m not saying I'm predicting it will happen. But I won’t and cannot exclude such a possibility. No one can. All I’m saying is that don’t panic if such a severe plunge occurs to gold and you should take it as a gift from the God that allows you to buy more gold for your better financial future. So what I will do now regarding gold? My situation may very well be different from yours and you have to figure it out for yourself what is the most comfortable thing for you to do. Since I have already had quite a few holdings of various kinds of gold-related positions, I think I can wait a bit more before significantly adding more to them. As much as I’m super bullish about gold over the long term, actually my gut feeling tells me that gold is probably a bit overbought in the very short term. The daily new high in the past 10 days was probably due to the headline risks people were afraid of in Europe and the US. In addition to Greece which is really a mess, Italy has become increasingly more likely to be the next huge crisis for the Euro zone (I will write more about Italy later). The ongoing Congress and President fighting about raising the debt ceiling in the US and a possibility of missing the Aug 2 deadline have really spooked investors as well. All these dramas are great for gold as the safe heaven. Although as I said repeatedly that I bet the Euro will be dissolved within 5 years and the US$ will inevitably lose its world reserve currency status eventually, I bet those countries, ECB, IMF and the US government will try all they can to temporarily avert the immediate crises brewing. If that happens, I bet the current rally of gold may be “stopped”, a relief drop, so to speak. How much may the gold price drop? It is everyone’s guess but it is not something unthinkable that it may quickly drop to mid or even low $1500s/oz. I will buy more if that really happens.
It is too long for today’s blog already. I will write next time about what I’m interested in to add more gold positions. Stay tuned till the next time.
Friday, July 15, 2011
A real example how to let others pay you to wait for a fat cheque
It is a payday for me and a fat cheque is waiting for me. When I logged into my account this evening, the following was what I saw: over $4000 jump today for merely 3 contracts of call options for HK (Petrohawk Energy). Naturally I wanted to find out what was going on. It turned out that BHP, the world largest mining company for minerals from Australia, is going to buy HK (a small US oil and natural gas company) at $38.75 in cash. Instantly the HK share price jumped by 62% and its call options were also going wild.
I did not mean to show this to you for bragging how much money I had made with this trade. It is purely a luck since I certainly did not know this when I went into this trade about a year ago. Rather, I'm really happy about the strategy I used, which has turned out to be very fruitful. The more important part of this strategy is that it can really help to use the trading capital/money more efficiently. I was testing this strategy with this trade and a few others and it really works very well. Given its complexity, I will not going into its technical details but just the idea. As you can see, there are two components of this trade. I sold the HK put options to get paid for about $2500 (the lower portion). I then used this money to buy 3 contracts of the HK call options at about $2200. Net-net, I didn't pay anything but actually pocketed in about $300 to start with. In other words, I bet HK would be doing great with share prices appreciated over time and I got into this trade by using others' money to fund my bet. Of course, there is no free lunch. If I were wrong, I'd have to buy the HK stocks, but at a much lower price. To me, it is kind of win-win situation when I was so much in favor of this company, given I have been really bullish about the natural gas as a long term trend. In combo, I'm now looking at about $8000 total profit ($5474 + $2498). I was hoping for more with this trade actually over time, but with this cash purchase deal in place, this is the max I can expect now. I will cash it out ASAP.
I did not mean to show this to you for bragging how much money I had made with this trade. It is purely a luck since I certainly did not know this when I went into this trade about a year ago. Rather, I'm really happy about the strategy I used, which has turned out to be very fruitful. The more important part of this strategy is that it can really help to use the trading capital/money more efficiently. I was testing this strategy with this trade and a few others and it really works very well. Given its complexity, I will not going into its technical details but just the idea. As you can see, there are two components of this trade. I sold the HK put options to get paid for about $2500 (the lower portion). I then used this money to buy 3 contracts of the HK call options at about $2200. Net-net, I didn't pay anything but actually pocketed in about $300 to start with. In other words, I bet HK would be doing great with share prices appreciated over time and I got into this trade by using others' money to fund my bet. Of course, there is no free lunch. If I were wrong, I'd have to buy the HK stocks, but at a much lower price. To me, it is kind of win-win situation when I was so much in favor of this company, given I have been really bullish about the natural gas as a long term trend. In combo, I'm now looking at about $8000 total profit ($5474 + $2498). I was hoping for more with this trade actually over time, but with this cash purchase deal in place, this is the max I can expect now. I will cash it out ASAP.
| Trade | 12.60 | 0.00 | 0.00% | $4,125.00* | 3 | $7.35 | $5,474.96* | 246.62%* | |||||||||||
| Trade | 0.02 | -0.15 | -88.24% | $240.00* | -15 | $1.70 | $2,498.50 | 97.16% |
Thursday, July 14, 2011
What the debt ceiling means and how to protect your portfolio
You must have heard these days again and again the word: debt ceiling or debt limit. So what does it mean and does it have anything to do with you?
Debt ceiling is unique to the US. While the concept had a very good wish to start with, it has become more and more a joke, a political joke to be more precise! The idea for a debt ceiling was great that the US government should not be able to spend as much as it would like and it must be monitored and controlled. Debt ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare. The first limit was set about 100 years ago in 1917, which was $11.5 billion. How much is it now? Mind-boggling at $14.294 trillion or $14,293,975,000,000. So why I said the debt ceiling is a political joke? Because it has never done what it was supposed to do. Debt ceiling has become a tool for politicians to fight with each other, not for the benefits of people, but for their own political interests, ONLY. How can I be so sure? Just look at its history: since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001. Do you think this time it will be different? I highly doubt.
There are only 2 weeks left to the deadline of Aug 2, by which time the US government may default on its debts. Till this very moment both sides are very stubborn that they will not comprise for their positions. Obama was reported to have even stormed out of the negotiating session with top congressional lawmakers yesterday. He said he would not yield even if it meant to cost his presidency and he absolutely would not sign a deal for a short-term temporary solution. Do you really believe that? To me, it is just a political show. I think either they rush into some deal in the next few days or more likely Obama will surrender for a temporary extention for the deadline to allow them for more time to fight.
Although I'm quite suer there will be no default on Aug 2, I don't want to take any chance for my money. Who knows what may eventually turn out as the politicians nowadays have become more and more irrational and bizarre. I just cannot place any of my hope on them. So for protection purposes, I think it will be better to buy some insurrance. I think the ETF, ProShares UltraShort S&P500 (SDS), is probably a good choice. It is a leveraged inverse fund, meaning twice (200%) the inverse of the daily performance of the index of S&P500. If the index plummets due to the catastrophic impact of the missed deadline for raising the debt ceiling, the fund will protect you by increasing twice as much. If you know how to play with options, its short-term call options will be even better: relatively cheap and more importantly you can define the cap of the total loss you can tolerate.
Very important: this is not a trade for making money. You really have to treat it as it sounds: an insurrance to protect you from the worst. So be prepared to lose the money you put in for the trade as the insurrance premium. You spend the money to buy your peace and safety! If you buy SDS itself (not the call options), you should sell your positions as soon as the debt ceiling is raised. I think the S&P500 will shot up sharply when this is announced. So be careful about the size of your positions. It should not be too big and you end up losing too much, but not too small that it has no meaningful protection for you when the worst comes. You have to figure it out yourself based on your portfolio size and your risk tolerance.
Monday, July 11, 2011
Annaly's pull back after-hours
I just noticed that the price of Annaly, the best virtual bank I've liked for a couple of years, has pulled back significantly after hours, by over 2%. It is currently trading at around $17.90. Likely you may see its price at around $17.70 tomorrow. As you may know, Annaly has been constantly over $18 in the past few weeks. So this pull back is kind of big drop for it. Why? Here is the reason: Annaly will issue 120 million common stock shares at a price of $17.70 per share and will use the proceeds to purchase mortgage-backed securities for its investment portfolio and pay down its short-term indebtedness. Issuing more stock shares in general is not a good thing for companies as it dilutes the value of the existing stock shares. So usually you will see a significant stock price drop when this happens. However, for the virtual banks such as NLY, it is not a bad thing when it is done at the right time. Remember, the business model for NLY is a REIT, for which it must pay 90% of its earnings as dividends to shareholders. Without much money left, it is difficult for it to expand its portfolio. So it must try to raise more money, usually by issuing more shares, to invest when it sees more opportunities. Annaly is good at that and I belive it is the right time for it to do so.
While I won't add more shares at this reduced price given I have already held a lot of its shares, it may be a good opportunity for those who are waiting for such a pull back to buy some shares to enjoy its 14%+ high and safe dividends.
While I won't add more shares at this reduced price given I have already held a lot of its shares, it may be a good opportunity for those who are waiting for such a pull back to buy some shares to enjoy its 14%+ high and safe dividends.
Sunday, July 10, 2011
Why is Euro still above $1.40?
Honestly I'm really amazed that Euro is still above $1.40 against the dollar. It is true that Greece has been bailed out and it won't default immediately. But have the fundamental problems been really resolved in Greece? Not at all and even worse! Greece is basically using the borrowed money to pay down the interest of its debt. Supposed it could grow fast enough in the next few years so that it is financially strong and sufficiently well to be able to survive on its own. But in order to reduce its heavy debt load, it must implement stringent austerity measures by significantly cutting down spending and reducing benefits and public services etc. All of them will mean an economic recession or even depression. Just think about it. If you owe a big amount of money and at the same time your income has been significantly cut, what can you do? You fortunately find a way to borrow some money, but unfortunately with a high interest, which is only enough to pay down the debt interest (not principle). Do you think your debt problem is being resolved or getting worse? Anyone with a normal mind should easily understand the situation is getting worse. This is exactly the situation Greece is currently in. Default is not a matter of if but simply when. It is inevitable!! Don't forget, Greece is just the smallest economy among PIIGS in the Euro zone. Portugal and Italy are the likely next two countries causing financial crisis. The biggest threat is Spain, which has a size of economy bigger than the combination of the other smaller Euro countries and there is no way Spain can be bailed out if it fails but it is unfortunately facing a real possibility of failure. Greece is just the first kick of the Domino effect. That's why I'm so sure Euro is toast and it will be dissolved some day. I bet it will be within the next 5 years.
Then why Euro is still relatively strong up to now? I'm also wondering but I think I know an answer. Two main reasons: on one hand, the Wall Street is quite short sighted these days. For them 3-6 months are already a long time. What they are mostly interested is the short term interest. Since Greece is "safe" in the next few months at least, they feel good about Euro now. Who cares about its fate in the long run. On the other hand, Euro and the US dollar are almost like racing for the prize of which one is worse. One day you hear a PIIGS country is in big troubles, which will lead Euro to plummet; the next day you hear the US may not be able to raise its debt limit by Aug 2, which in turn causes the US dollar to drop. It is a kind of vicious circle, which makes Euro seem "not so bad" as compared to US$.
Now in this kind of environment, how should we better trade against Euro? For me, Euro is dead, no question about it regardless of how it may fluctuate in-between. But simply buying EUO, the inverse EFT to bet against Euro in leverage (200%), may not be the most efficient way. I started to short sell Euro about two years ago when it was at its highest level around $1.50. I sold short FXE $155 naked calls to bet that it wouldn't be able to come back again above $155. Of course it has never got back to even near $155 in the past 2 years. I made thousands on this trade. The only downside of this trade is that it requires quite a big amount of cash tied to it given the high unit price involved. So I closed the trade earlier than planned and now get into the EUO trade. Since it is an inverse ETF, what I'm doing is to sell EUO LEAP put options instead. This way, I don't need to be exactly right about its current price of Euro. Even it is up and down within certain range, I can still make money. I'm pretty certain both the time and trend are on my side and I will make more money with this trade. Compared with the FXE trade, the capital requirement is much less with the EUO trade as its unit share price is much less (less than $20/share vs around $150/share). In other words, I can be more efficient and can make more money with the same amount of cash.
Then why Euro is still relatively strong up to now? I'm also wondering but I think I know an answer. Two main reasons: on one hand, the Wall Street is quite short sighted these days. For them 3-6 months are already a long time. What they are mostly interested is the short term interest. Since Greece is "safe" in the next few months at least, they feel good about Euro now. Who cares about its fate in the long run. On the other hand, Euro and the US dollar are almost like racing for the prize of which one is worse. One day you hear a PIIGS country is in big troubles, which will lead Euro to plummet; the next day you hear the US may not be able to raise its debt limit by Aug 2, which in turn causes the US dollar to drop. It is a kind of vicious circle, which makes Euro seem "not so bad" as compared to US$.
Now in this kind of environment, how should we better trade against Euro? For me, Euro is dead, no question about it regardless of how it may fluctuate in-between. But simply buying EUO, the inverse EFT to bet against Euro in leverage (200%), may not be the most efficient way. I started to short sell Euro about two years ago when it was at its highest level around $1.50. I sold short FXE $155 naked calls to bet that it wouldn't be able to come back again above $155. Of course it has never got back to even near $155 in the past 2 years. I made thousands on this trade. The only downside of this trade is that it requires quite a big amount of cash tied to it given the high unit price involved. So I closed the trade earlier than planned and now get into the EUO trade. Since it is an inverse ETF, what I'm doing is to sell EUO LEAP put options instead. This way, I don't need to be exactly right about its current price of Euro. Even it is up and down within certain range, I can still make money. I'm pretty certain both the time and trend are on my side and I will make more money with this trade. Compared with the FXE trade, the capital requirement is much less with the EUO trade as its unit share price is much less (less than $20/share vs around $150/share). In other words, I can be more efficient and can make more money with the same amount of cash.
Thursday, July 7, 2011
Win win strategy for investing in gold stocks
Gold stocks are cheap, as I discussed a few days ago and I'm accumulating shares of them. However, there are hundreds of mining companies and you need to be careful about what to buy. Like any others companies, there are risks associated with them. The major ones include business model and environment, internal and external financial conditions, and management competence. There is another risk people often neglect: the headline risk. Regardless of truth or rumors, any negative news for a company, especially for those with less established business, may have a devastating or even fatal impact on the stock price of the company. Therefore, it is important to only buy good mining companies' stocks to minimize such risks. Personally I like a few gold companies such as Goldcorp (GG), Agnico-Eagle (AEM), Yamana Gold (AUY), and Seabridge Gold (SA). It is always better to buy a bulk of gold stocks instead of just focusing on one or two to spread out risks. Alternatively, I also like to buy GDX, an ETF for large precious metal miners. Given the large number of companies involved, it is virtually impossible to have a fatal impact on the fund price even if some of the companies go belly-up. In other words, the risks can be largely reduced with GDX as compared to individual companies. In addition to simply buying gold stocks, I have a win-win strategy with options: the best you may get is unlimited upside and the worst you may get is a cheaper stock. In-between you may get a capped profit margin. This is so-called Call Spread. Take the following real example I set up a few days ago:
I bought deep in the money GG 2012 Jan $40 call options (GG120121C00040000), for which I paid $8.95/share and at the same time I sold GG 2012 Jan $50 call options (GG120121C00050000), for which I got paid with $3.50/share. On that day, the GG price was about $48. Basically three scenarios may occur with this call option spread during the timeframe from now to Jan 2012:
1) If GG is trading between $49 to $53.50, I get a profit with a maximum of $4.5 per share. This is probably most people will be looking for, a capped profit margin.
2) If GG is trading at or above $53.50 and if I believe the upward trend will continue, I have an option of closing the call-selling positions (GG 2012 Jan $50 call options) and rolling over the long call positions (GG 2012 Jan $40 call options). Not many people may be thinking about this alternative but this will give one the opportunity for unlimited upside.
3) If GG is trading below $49, I at least can buy GG at a cheaper price at $35.5 ($49-$3.5) because I already got pay of $3.5/share from selling the call options. This is a 7% discount from the time I set up this call spread.
Is it a great strategy: with head you win; with tail you don't lose ?
I bought deep in the money GG 2012 Jan $40 call options (GG120121C00040000), for which I paid $8.95/share and at the same time I sold GG 2012 Jan $50 call options (GG120121C00050000), for which I got paid with $3.50/share. On that day, the GG price was about $48. Basically three scenarios may occur with this call option spread during the timeframe from now to Jan 2012:
1) If GG is trading between $49 to $53.50, I get a profit with a maximum of $4.5 per share. This is probably most people will be looking for, a capped profit margin.
2) If GG is trading at or above $53.50 and if I believe the upward trend will continue, I have an option of closing the call-selling positions (GG 2012 Jan $50 call options) and rolling over the long call positions (GG 2012 Jan $40 call options). Not many people may be thinking about this alternative but this will give one the opportunity for unlimited upside.
3) If GG is trading below $49, I at least can buy GG at a cheaper price at $35.5 ($49-$3.5) because I already got pay of $3.5/share from selling the call options. This is a 7% discount from the time I set up this call spread.
Is it a great strategy: with head you win; with tail you don't lose ?
Tuesday, July 5, 2011
What is cheap now?
The gold price is up and down like crazy nowadays. It was down over $20 last Friday and is up $30 today. Although the gold price is very volatile in the past several months, I must say it has held up very well. I was expecting the gold price would drop more by now but it has proven I have been wrong till now. While the gold price has increased significantly in the past 2 years and has been near its all time high at the moment, the gold mining stocks are actually very much lagging behind. Roughly, gold stocks currently are trading at the price level seen about 2 years ago when the gold price was at around $1000. This is very abnormal. Usually you should see much higher prices for gold stocks when the gold price is high. Logically if the gold price is high, the mining companies should earn more money and their stocks should be doing really well. See the long term trend of gold stocks (in various sizes or combined as gold equities) vs gold price in the chart below. However, not this time. At least not yet till now. So believe or not, while gold itself is relatively expensive or at least not cheap, gold stocks are very cheap and potentially very profitable when they catch up. I'm starting to accumulate gold stock shares. I will talk more about investing in gold stocks next time.
Monday, July 4, 2011
ADP- Another Compounding Machine for Your Retirement Money
Automatic Data Processing, Inc. (ADP) is a global provider of integrated computing and business outsourcing. ADP has nearly $9 billion in revenues and approximately 570,000 clients. ADP offers a range of HR, payroll, tax and benefits administration. ADP is one of the largest providers of business outsourcing solutions. This is an official description of ADP per Wikipedia. You may still not know what ADP is but if you check your paycheck, chances are ADP is the one which is managing your monthly or biweekly salary payment. I have worked in several big companies and all of them indeed use ADP for the paycheck management. It makes money in primarily 2 ways for this payroll service:
- It earns royalty on the money movement from employers' pockets into employees' paychecks, which involves withholding your taxes, submitting them to various government agencies, processing paychecks, and paying employees. If you envision this money movement as a transportation in the global financial system, then ADP works as a toll road.
- More amazingly, during this money movement course, ADP can also earn a substantial amount of money by simply holding your money overnight. As you can imagine, in order for ADP to process your paycheck on time, it must receive your gross salary in advance, maybe one or two days earlier than your payday. This temporary money hold in the ADP system is called "float", and actually ADP can earn interest on the float money. Given the sheer volume of the money ADP manages, the interests on float it earns become huge in hundreds of millions and actually it represents almost a quarter of its total pretax earnings. This is really a painless way of making money by using others' money to your full benefits. If the economy truly recovers, ADP will for sure manage more paycheck money and as a result, it will earn more interests on the float.
ADP is by all means a dominating company in the payroll industry. It is one of a few elite companies with the AAA debt rating, the safest companies in the world such as Berkshire Hathaway, ExxonMobil, Microsoft, and Johnson & Johnson. Parking your retirement money with ADP, you can definitely sleep well in the night. More importantly it has decades of the track record for paying dividends, which are also growing year after year. I truly consider ADP as a compounding machine, safe enough for my retirement money. At $53-$54, it is not really cheap. However, given its safety and long-term track record of dividends, I don't mind buying a few shares of ADP at the moment to start to compound and will really invest substantially more if its price drops well below $50. I don't know whether and when it will happen, but I will watch it actively and will act decisively when the day comes.
- It earns royalty on the money movement from employers' pockets into employees' paychecks, which involves withholding your taxes, submitting them to various government agencies, processing paychecks, and paying employees. If you envision this money movement as a transportation in the global financial system, then ADP works as a toll road.
- More amazingly, during this money movement course, ADP can also earn a substantial amount of money by simply holding your money overnight. As you can imagine, in order for ADP to process your paycheck on time, it must receive your gross salary in advance, maybe one or two days earlier than your payday. This temporary money hold in the ADP system is called "float", and actually ADP can earn interest on the float money. Given the sheer volume of the money ADP manages, the interests on float it earns become huge in hundreds of millions and actually it represents almost a quarter of its total pretax earnings. This is really a painless way of making money by using others' money to your full benefits. If the economy truly recovers, ADP will for sure manage more paycheck money and as a result, it will earn more interests on the float.
ADP is by all means a dominating company in the payroll industry. It is one of a few elite companies with the AAA debt rating, the safest companies in the world such as Berkshire Hathaway, ExxonMobil, Microsoft, and Johnson & Johnson. Parking your retirement money with ADP, you can definitely sleep well in the night. More importantly it has decades of the track record for paying dividends, which are also growing year after year. I truly consider ADP as a compounding machine, safe enough for my retirement money. At $53-$54, it is not really cheap. However, given its safety and long-term track record of dividends, I don't mind buying a few shares of ADP at the moment to start to compound and will really invest substantially more if its price drops well below $50. I don't know whether and when it will happen, but I will watch it actively and will act decisively when the day comes.
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