I hope that I do as well in 2014 as I did in 2013. This was a remarkable year for me.¬† I started the year with a small profit from most positions, and a big loss in Apple option trading (but a profit on the underlying stock). In 2013, I more than recouped my 2012 losses on Apple option positions, and I‚Äôm heading into 2014 with the likelihood of another few thousand dollars of options profit if the stock stays above 530 until the January expiration date. I‚Äôve taken my profits on the stock.
Now I‚Äôm selling call spreads to pick up additional premium income. I never understand why more people don‚Äôt do that. You can get a full explanation of how it‚Äôs done in my book, “How to Make Money with Stock Options,” available on Amazon or the updated version on my website DoubleYourYield.com.
But you should watch out for unhedged strategies promoted by option traders on the web. I follow a few of these sites, track their strategies, and very often they lose money. I watched one option guru lose money both on an unhedged Nike strategy in October and on a risky Apple strategy in November.
For 2014, all the expert opinions I‚Äôve read anticipate another good year for high quality stocks, at least after the first quarter. Economists claim that the recession is over, and the upturn has finally hit Europe, which will also be good for our economy. My friend Dick Rosecrance of Harvard has written a book suggesting that the U.S. may eventually form closer trading ties to the EU market, and include Japan in the new alliance. If that happens he predicts a decline in the importance and economy of China.¬† But this will not happen in 2014. Others as well are predicting an eventual decline in Chinese economic growth for various reasons.
Here are a few of my predictions for 2014:
1) Oil prices will come down a bit, maybe 10 percent, and then level off. The U.S. is producing more and more oil, and this will continue as oil share production increases.¬† At the same time, natural gas and electric vehicles are increasing in numbers. There is a strong possibility of increased production from Iran and Libya as political tensions decrease. As countries like Mexico (ninth in worldwide production) seek outside help in production, U.S. companies such as Schlumberger (SLB) and Halliburton (HAL) will benefit. The PXJ index, already up quite a bit, may well continue its upward movement.
2) Natural gas use will increase, and the price will go up. This will strongly impact the pipeline price performance. Pipeline indexes such as SPX and AMZ will benefit from this.
3) Most of the economists I follow predict continuing low interest rates for the coming year, and a decline in unemployment. This should translate into at least a 6 percent increase in the S&P, which when coupled with a 2 percent dividend rate makes that a pretty good looking investment for the year.
4) Gold is so far down, including the gold mining company index GDX, that some are recommending it now. That might be right, but I‚Äôve taken my losses on GDX and put those funds into the silver index instead. I think that silver is a better investment for 2014 than gold and that investment is more likely to recoup my gold losses from 2013. I base that solely on performance to date, which shows silver less susceptible to decline based on increasing economic performance.
5) As the economy continues to pick up, companies that did well in 2013 and have a backlog of cash are good candidates for increasing dividends and small gains in price.¬† This group includes Boeing (BA), with its recent dividend increase and stock buy-back program, and Ford Motor (F), although I personally do not invest in auto stocks because of the competition in the field. Green energy companies have a bright future, and one could speculate on Abengoa (ABGB) a Spanish company that is making a name for itself in the field of desalination and related energy areas.
6) Food is here to stay, and from what I see people are trending toward more expensive and allegedly healthier products. Whole Foods Market (WFM) has experienced a nice dip lately, and I‚Äôm buying 100 shares at a time on dips. While many are skeptical because of increased competition, the company is putting in more and more stores even in small market areas and I believe it‚Äôs a well run company with a good expansion program. I help run one of their subsidiaries and I‚Äôm impressed with their dedication. They grew about 13 percent in 2013, and while the 33 PE ratio is high, I see no reason not to expect similar growth in 2014.
7) The top equity investments in my opinion continue to be those companies paying a good dividend that consistently increases. Companies in this category include RPM International (RPM), a chemical producer; Diebold (DBD), which makes ATM machines; and Automatic Data Processing (ADP). But the safest way to benefit from this trend is to invest in one of the many “high dividend yield” funds that are available.
8) I still say the best way to profit in the market is to write covered calls on high quality stocks that pay good dividends. If the stock goes down you still get the same dividend yield, and you can keep rewriting calls for premiums. If the stock goes up you take the premium plus the profit. Some good candidates for this are Baxter (BAX) with a 3 percent dividend at $67 a share; IBM, which has come down and now pays about 2.2 percent at $180 a share; Intel (INTC) which at $25 pays a 3.7 percent dividend; and Air Products (APD) which, at $110 (it‚Äôs gone way up) still pays 2.6 percent.
And with those thoughts I wish you a terrific New 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.