Here are a few observations. By the time you read this, of course, it will be completely out of date:
1. Apple stock seems to have hit bottom, at around 520, and now seems on the way back up. A friend of mine that follows it closely says it should be back to the mid 600s by mid-January. I believe it, but of course it depends on holiday sales. Even though it has come up 7 percent in just one day, to 565, I still consider it a “buy.” We have a new iPad Mini and we love it.
2. Wal-Mart stock is starting to look pretty good. It seems to be going up every year, and as it fixes its website it seems to be a better competitor for Amazon. And, as I see it, Internet shopping with quick delivery is where it’s at now. The new smart phone feature, to help you find stuff in the stores, seems like a good idea. With a 2.3 percent dividend and a 14 PE, at anything under $70 it seems like a good buy. Here’s how it looked over the past three months:
3. A friend sent me a detailed report on the world economy, and especially on problems with debt structure around the world. A lot of the article talked about Japan, which it selected as the country that is in the most financial trouble of all — even more than Greece and Portugal and the EU in general. Germany was not spared. The article was so scary it’s enough to make you want to go short on all of the country ETFs. But the bottom line for my friend was that he shorted the Japanese yen.
Shorting the currency of a major economic power, even if it is in trouble, takes internal fortitude. I never do it. I think of it as the weather forecasters: do you notice that they cannot always get the weather forecasts right because there are so many variables. A little breeze comes in from here or there and the forecast proves to be wrong. And so it is with currencies. There are so many variables it seems to me to be hard to forecast. Standard economic factors are only some of the variables.
If I were going to short any country, it would be France. Under the current leadership this has to be a country about to fail. But with the currency tied to the Euro one can’t short the currency. How do you short a country?
4. I read a lot of reports from economic and investment advisors. One recently wrote that it makes no sense to invest in bonds right now, when good quality stocks at low PE ratios are paying dividends that are higher than bank interest or safe bonds. I tend to agree. In this period of really low interest rates, the usual reason to invest in bonds — safety — no longer applies. It’s never safe to invest in something that returns less than the expected rate of inflation. That’s investing in a guaranteed loss.
5. By the time you read this Green Mountain Coffee should have reported third quarter earnings. Just before the report I note that the stock has moved up. Do some in the investment community know something the public doesn’t know? In any event I expect the earnings to be pretty good, and to get even better during the holiday season. This is the kind of stock I like for naked put writing. Taking in premiums anywhere around a $20 strike price seems almost like a gift.
6. And, finally, have you ever heard of the “skillet?” Probably not. It’s an invention by my friend Harvey, who writes the complex computer research tools for my website DoubleYourYield.com. Since he started working on my website he became interested in options, and now has made an average of $6,000 a month over the past six months with very little investment (but a stock portfolio to support margin requirements). I don’t recommend what he does, because it’s a strategy that requires you to watch it every day, and I never like those. And I never invest in a way that doesn’t have a guaranteed limit, by hedging, on the potential loss.
Nevertheless, the skillet is an interesting investment strategy. Harvey buys a put and a call, or several of each, at the current market price. That gives him a profit if there is enough movement in either direction over the following 30 days. At the same time he sells a large number of puts below the current price, and a large number of calls above the current price. He titrates the sales so that the proceeds from the sales exceed the cost of the straddle by $1,000.
That means that if there is no significant movement in the stock price over the 30-day period he makes a $1,000 profit. But usually there is movement. And if there is enough movement the profit goes way up. Unless it’s too much movement, beyond the strike prices of the puts and calls. Then there is a very large loss potential. So he watches it closely every day, and if the stock moves anywhere close to the potential loss points, he closes it out and takes his profit.
It’s a terrific strategy for the right kind of investor. If you graph it out, which some of the tools on the website do, it looks like an upside-down skillet, with a flat surface in the middle and steep drops on the ends (the losses). It seems like a great strategy for someone confined to his home who can watch the market every day. But that would be a big detriment to my golf game, which is already suffering!
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.