It’s been an exciting week. Apple is down and Netflix is up. Many experts predicted just the opposite. And my views have changed dramatically in January.
First of all I am looking at the economic forecasts for 2013. The forecast for the U.S. market doesn’t look all that exciting in spite of the great corporate earnings reports. In general the experts are predicting a 3 to 4 percent uptick in the stock market for the year. But clearly that’s too conservative since the S&P is already up 3 percent and the year has just begun. Many experts think the S&P will get to 1,600 this year.
But the bigger predicted jump is in the Asian markets. For that reason I’m putting a little money into the Asian ETFs. There are a lot to choose from. Here is part of the selection:
• iShares MSCI Pacific ex-Japan Index Fund (EPP)
• BLDRS Asia 50 ADR Index ETF (ADRA)
• First Trust ISE Chindia Index Fund (FNI)
• FTSE RAFI Asia Pacific ex-Japan Portfolio ETF (PAF)
• Global X FTSE ASEAN 40 ETF (ASEA)
• iShares FTSE EPRA/NAREIT Asia Index Fund (IFAS)
• iShares MSCI All Country Asia ex Japan Index Fund (AAXJ)
From these, EPP and GMF have, for some reason, been recommended to me. As I’ve mentioned before, my preference is always to invest in the U.S. where we have good monitoring of investment information. But economists are predicting that 80 percent of the economic growth in 2013 will be in Asia (40 percent in China alone) and I don’t want to be left out.
And, by the way, I’m completely out of Eurozone stocks, with that area likely to be level or slightly down for 2013.
I bought a few hundred shares of Apple stock when it dropped down around $450 a share. I don’t know when, but I believe that someday it will go back up into the $500-plus range. After all, the earnings report was good, and the products are still selling. What more could one expect? And that 2 percent dividend doesn’t hurt, either.
But in some accounts I’m losing on the $570 Apple puts I sold when the stock was about 100 points higher than now. With the stock down 100 points my 5 put position is losing $50,000 less the $16,000 I’ve taken in on the initial premium from the put sale, plus some premiums on call spreads I’m continuously writing since the stock went down. That’s one of the advantages of dealing in options, instead of just buying stock. When things go against you there are various strategies to recover losses, not just waiting for the stock to recover.
So now I am “rolling” the Apple puts “down and out” (a lower strike price and an expiration date further away) each month at a break-even price, thereby holding on to my initial premium ($12,000) and writing call spreads to try to take in an additional $2,000 a month in hopes of an eventual rebound in the stock. So far it’s working, but slowly. My break-even point is about $550, but I consider it only 50-50 that the stock will hit that price during 2013. It depends on what they do with their cash. If they buy something exciting the stock will spike up.
I remain surprised by a lot of other actions taking place in the market. I’m surprised that the price of copper doesn’t go up more quickly in light of the rise in construction. I’m surprised that, after an initial upswing, digital printer company stocks, although rising, are not moving up more than they are; it seems like such an exciting technology. But DDD and SSYS have done well.
Another area of interest is natural gas pipelines. There are at least eight companies offering promising returns in this area, and a few look particularly good:
• ENB.N at $43 yields about 3 percent in dividend and payout
• KMI.N at $38 yields about 4 percent
Perhaps the best play there is an MLP fund or an ETF to have a basket of those companies. AMLP is an example.
With S&P yields leveling off at just over 2 percent, the average yield of this sector, at around 3.5 percent, is attractive and someday the U.S. will figure out how to take advantage of all the natural gas supply we have.
Otherwise I’m stymied by the market’s treatment of top-notch companies with good, consistent earnings. Even though the volatility index is way down, there remains a few stocks every so often that experience extreme price shifts. My impression is that market psychology is becoming a stronger force in the price of stocks.
For that reason, I think 2013 is a good year to invest a significant portion of investment dollars in the S&P index. If the experts are right it will move up, primarily during the second half of the year. Couple that with the dividends, and the return is not so bad. And if you buy the S&P index and write covered calls against it way out of the money, you can enhance the yield and I would expect an overall return from that strategy of 8 to 10 percent for the year.
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.