So much for my prediction that the market would go up after the election! Of course it’s still after the election, and maybe the market will go up. But the event itself has not created the result I expected.
There are so many issues influencing the market that predictions are virtually worthless. When you focus on one, something else overshadows it. Today it’s the fiscal cliff, yesterday it was Europe.
But in some sectors it’s not so bad. Whirlpool continues its spectacular rise to almost $100 a share. Bank of America remains strong in spite of continuing bad news from its purchase of Countrywide. The one amazing fall has been the darling of the market, Apple.
I was shocked at how far Apple fell, from over $700 to around $540 or so. But then I realized that this 20 percent or so drop is not so different from the several 15 percent declines it has suffered before. And the holiday season is coming and lots of people are going to buy the new mini iPad, including our daughter. So I have to think that at around $540 this is a great buy.
For myself, I have rolled down my 580 puts, rolled down my 625/600 put spread to a 580/600 put spread, and sold a 625 over 600 call spread, which immediately turned a $4,000 profit as the stock went down, so I took that profit and put on a new call spread at 580, hedged at 600. If the stock continues down I make money on the call spread, but lose overall. If it goes up beyond 580 I lose on the call spread but make it back and more on the reduced loss on the put spread and the naked put.
The bottom line is that I am bullish on the stock over the coming three-month period, and I am recommending that you buy it, or write options that benefit from a rise in the stock. One well-read guru is recommending a “vertical call spread” on Apple. That’s an option combination where you buy a deep in-the-money call — today that could be, say, the 520 for January — and sell an out-of-the-money call — say at 560. You pay a bit more for the in-the-money call than you receive back from the sale, but the proceeds of the sale mitigate the cost of owning the calls. If the stock goes up you benefit just as you would from owning the stock, but at a much cheaper entry price. The difference is that you don’t get the dividends, and you don’t get any profit over the short call price if the stock goes over 560. With a stock this expensive, that can be a good way to “own” it without having to pay much for it.
What else is happening in the market? The experts I talk to are taking some profits and holding a lot of cash. Current volatility is scary. If the market continues down another 10 percent they are coming back into it. But a lot of the recommended areas are too high to warrant buying into them.
Housing ETFs are a good example. I bought it, and made a nice profit on it, and sold it. Now it’s even higher than when I sold it and I can’t justify buying into it again unless there is a pretty good drop in price.
As I mentioned, along with my Apple shock came the rise in Whirlpool from around $55 to almost $100 a share. I bought in at various prices in the 60s and 70s, and sold calls at $85 thinking the stock would never go above that. Wrong again, and I left some money on the table, but I don’t look a nice profit in the mouth, to butcher an old saying.
What can you do with cash right now? Not much. I had occasion to review the recommendations of one of the leading investment advisory companies last month. I noticed that they had put municipal bonds in a portfolio, paying less than one-half of one percent interest. Why? I asked. Well, they replied, a tax free return of a half a percent in a short term, almost risk free investment is not bad these days!
And so we sit with cash for awhile while we wait to see if we can foretell a direction in the market. For myself, I am waiting to see how the politicians work out the fiscal cliff. As soon as there appears to be a likely resolution, where only the rich 1 percent incur higher taxes, I will go back into the market.
In the meantime, with the likelihood that taxes on capital gains will go up from 15 percent to 20 percent next year, I am taking profits, selling off most of the individual stocks, and holding cash.
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.