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Five Inflation Fighters Set to Fly – Part 2

And we're back!

This is a continuation of yesterday's post, which laid the background for our inflation premise and discussed F as our first trade idea.  That means we'll need 4 more to round this set off and the chart on the right, from Bespoke, illustrates another premise we've been touting since the Fall – BUY AMERICAN

F is American, of course and one of the reasons we like them is that most of their revenues come from domestic auto sales and domestic financing.  As you can see from the chart, there's a pretty strong correlation between NOT relying on Europe and Asia and market performance this year.

This is why we also like domestic Materials plays, like CLF, who do over 68.5% of their business in the US.  Yes, International demand as well as International pricing for iron ore does leave them at the mercy of overall global demand but that's already happened and CLF is already down from $96 in 2011 to $74 last year and $40 at the beginning of this year — all the way to $17.63 at Friday's close, the lowest it's been priced since March of 2009.

We already took a stab at CLF at net $19.90 in our Income Portfolio on 2/26 and added another round (through short put sales) at net $13.50 on 3/27 and, if we can double down again at net $10 – we probably will but for now, and as a new trade idea – I'm very happy with our recent sale of the 2015 $18 puts, which are now $5.25 for a net entry of just $12.75.  As with Ford, this is a margin-efficient sale with a net margin of just $3,551 to collect $5,250 for selling 10 contracts.  Doing nothing else on this trade can return up to 147% on margin in 20 months (Jan 2015) and all CLF has to do is struggle back over $18 – from $17.63 today (2%). 

Figuring out ways to make 147% on 2% stock moves is what options trading is all about!  And what's our worst case here?  We are obligated to own 1,000 shares of CLF at $18 per share ($18,000), less the $5,250 we were paid to accept that obligation so net $12,750, which is 27% below the current price.  Now we can get fancy, let's say we're happy to pay $15 for CLF – that leaves us $2,250 to play with, right?  We can use that money to pick up 6 of the 2015 $15/25 bull call spreads for $3.45 ($2.070) and that leaves us with $180 to buy a year's subscription to Stock World Weekly AND gives us an upside potential for another $3,930 in gains (above the $5,250) if CLF should finish all the way up at $25.  Even if CLF "only" makes it to $18 – we get $1,800 of our $2,070 back from our $15 calls while the short $25s would expire worthless.  

Now we're talking a very serious return of $9,180 against that $3,551 in margin and $2,070 in cash (but it wasn't even our cash!) so that's 163% back on $5,621 cash + margin if CLF makes it to $25 or $3,180 at $18 or, worst case, we own 10,000 shares of CLF for net under $15 ($15,000).  Again, a very nice way to stay ahead of inflation with a big kicker in any kind of improvement in the global economy.   

I'm not advocating you put your whole portfolio into trades like this, this is like our "5 Trade Ideas that Can Make 500% in an Up Market" – it's an upside hedge, especially if you are worried you are too bearish or simply not aggressive enough.  

For example, if you have a $100,000 portfolio that's socked away in 30-year notes that pay 3%, allocating $5,621 of the money to a trade like this can boost your total returns by 5% a year – more than double your rate of "safe" return.  If CLF does fly higher on inflation over 2 years – you're REALLY going to want that extra 5%!  And you don't have to get 10 shares of CLF – you can buy one or two contract on a few different ones to spread the risk – and the love!  

Speaking of love – who doesn't love Banksters?  BAC was our "Stock of the Year" for 2012 and it did, in fact, turn out to be the stock of the year.  When asked if I still liked BAC this year back in a January interview – I said not so much at $12 but I do see $15 over time.  Now that we've consolidated between $11 and $13 for 4 months – I'm willing to get back on the wagon at $11.66.  $11.66 is just 85% of tangible book ($13.46), so a good place to start with any stock and the bank is buying their own shares and, of course, they have written a massive property loan portfolio down to nothing and will gain magnificent amounts of book value if the housing market continues to inflate (up 10% from last year – keeping pace with REAL inflation).  

1,000 shares of BAC cost $11,660 and you can sell 10 of the 2015 $10 calls for $2.81 ($2,810) and 10 of the $12 puts for $2.06 ($2,060) and that drops your net to $6,790 – 41.7% off the current price and, if you get called away at $10 (14% BELOW the current price) with the stock above $12, your profit in 20 months would be $3,210 – 47.2% profit.  If the stock is below $12 and you are assigned another 1,000 shares at $12, your break-even is $9.395, 19.5% below the current price.   We could get fancier, but it's a nice return and BAC is a fantastic long-term hold as they'll probably crank up the dividends at some point.  Currently they are just .04.   

"As good as gold" is no longer a good thing to say if you are trying to convince someone of the value of something but even BitCoins climbed back to $136 last week and finished at $120 – more than double their panic low of $50.  We've discussed ABX many times over the past month and the general silliness of the gold market (and BitCoins for that matter) so I won't get into merit discussions here, but ABX is my favorite miner and, at $18.17, have a market cap of just $18Bn for a company that made $3.6Bn in 2010 and $4.5Bn in 2011.  

I don't know about you but if you tell me you have a machine that spit out $5 bills twice in the last 3 years but last year needed $1 to keep running and didn't pay off – I think I'd be willing to pay the buck and see what happens next year.  Not so much the typical ABX investor, who fled like rats off the proverbial sinking ship and have dropped the stock from $50 in 2011 to bottom out at $17.50 last week.  

We've been catching those ABX knives for a while and, if you want to join in the pain, the 2015 $15 puts can be sold for $2.65 and the 2015 $20/30 bull call spread is $1.90 so you keep .75 in your pocket for a net $14.25 entry on ABX (an additional 21.5% discount) and this is super margin-efficient with just $1.55 in margin on the short puts.  Obviously, this is a more speculative play but, off a net credit of .75, at $30 you can make an additional $10 for $10.75 or a 1,433% return in less than two years if ABX retakes HALF of what it lost in the past two years.  

So a single-contract ABX spread would cost you $155 in margin, $190 in cash and you obligate yourself to buy 100 shares of ABX for net $14.25 ($1,425) and the upside on the trade is as much as $1,075, 312% of your cash and margin.  It's not an all or nothing trade either – even at $25, you would clear $575 in profits – not bad for setting a little money aside for a couple of years.  

For our final trade idea – let's go for a real inflation hedge – food.  DBA is an agricultural basket and plentiful supply in the US and depressed Global demand has this ETF of Sugar, Cattle, Corn, Soybeans, Cocoa, Coffee, Hogs and Wheat trading at $25.97 – that's 27% below the 2011 high of $35.58.  

Did your food get 27% cheaper over the last two years?  No, this is another silly sell-off, like gold, that has no basis in reality and is the result of manipulation by the Banksters who are busy cornering the commodities markets by driving everyone else out before they turn around and raise all their inflation targets – after they get their fill of shares, of course.  

Again, it's an article for another day but suffice to say DBA bottomed out at about $22 in 2008 and traded between there and $27 until the summer of 2010 (call it 18 months) but then zoomed up to $35 before journeying back down.  Sure it's a scam but it's a scam we can all benefit from and we can sell MCD 2015 $75 puts for $2.25, which has a rough margin of $7.50 but don't tell me I have to convince you McDonald's is a good deal at $75.  We can then use that $2.25 to buy the DBA 2015 $26 calls for $2.15 and that puts us effectively in DBA at net $25.90, a bit lower than it is now – so we benefit from 100% of the upside from here and, if we don't – then McDonald's input costs (Sugar, Cattle, Corn, Coffee, Hogs, Wheat) are cheaper and they should be doing just fine – making this a fabulous pair trade.  

Anything over DBA $33.50 is going to give you a 100% return on margin and that would be a 7,500% return on cash (the dime) so another fun one to play and an excellent hedge against inflation.  Think about it every time you get yourself an Egg McMuffin.

So that's the first 5.  We'll identify more this week in Member Chat and, of course, it's earnings season and, with 20% of the S&P 500 clocking in – we're beginning to get a handle on earnings plays so make sure you have some cash on the sidelines to make some fast money while we wait for these slow, boring plays to make us doubles and better over the longer run.  


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  1. Phil

    Housing: Some thoughts on Investor Buying, Inventory and recent Price Increases
    http://www.calculatedriskblog.com/2013/04/housing-some-thoughts-on-investor.html

  2. Phil

    I'm testing a new system tha let's us (admins) send articles to an Email addresss that automatically posts to comments (as above).  Let me know if you have suggestions.  Thanks.  

  3. dawnr

     Gold and Silver:
    Someone noted last week that the physical silver market was trading at a $5-6 premium without explanation.  This article touches on the 'why's' of the disconnect to the paper market (mainly supply/demand).  
     
    Also, I am not one for conspiracy theories but found the actions driving the prices down at 5 standard deviations interesting.
     
    http://seekingalpha.com/article/1356931-precious-metals-massive-paper-selling-begets-unprecedented-physical-buying

  4. dawnr

    AAPL-Phil-I found that article I posted interesting in how the market moves a growth stock to a value stock based on dividends, etc. and how price decline correlates with that.  I also thought the charts comparing them to the Dow 30 in terms of debt, free cash, dividend yield, etc. very telling and supportive of your view this stock has intrinsic value the market is not yet recognizing.
     
    On Tues what do you think of a strangle?  I have to look at chain Monday as may be too expensive but we know this sucker is gonna move in a big way (either way)…
     
    Terrapin-AC not sure I can get the child logistics to work this time…still trying.  Also, hesitant to crash the guy party as the only female ;-)  

  5. 8800

    qqqkkk## gh
    Phil,
    Thanks for the clarification re wage infl plays in China vs USA – part of 10K hours.
    Now, if you  can get Tim C to produce a 5" screen iPhone, partner with CHL (instead of CHU) and put a little pizzaz in his new product development and presentation skills we may be able to order something besides Egg McMuffins.

  6. jabobeast

    ABX—is this normal for them to report before the open and have the CC after the close?
     
    First Quarter Results Release
    April 24th before market open
    Conference Call and Webcast
    April 24th 4:30 pm ET

  7. Phil

    Now The Koch Brothers Want To Buy Chicago Tribune, LA Times, Et Al, To ‘Make Sure Our Voice Is Heard’
    http://www.businessinsider.com/koch-brothers-buying-chicago-tribune-los-angeles-times-2013-4

  8. Phil

    Americans Can’t Stop Talking About Income Inequality, But No One Is Doing Anything About It
    http://www.businessinsider.com/nothing-is-being-done-about-inequality-2013-4

  9. Phil

    Why The Cheap Yen Isn’t Boosting Japan’s Exports
    http://www.businessinsider.com/credit-suisse-yen-down-exports-down-2013-4

  10. 1020

    Gold – I agree with the piece that Fareed Zakaria had on his Sunday show  (Thanks Turning1!)
    http://www.cnn.com/video/#/video/bestoftv/2013/04/21/exp-gps-0421-witw.cnn
     
    In 2004, I bought a beautiful 1961 T-Bird convertible, corinthian white on red, from a guy who felt the end of the world was near and was going to use the money to buy gold.  While I know his gold investment has performed much better than my 'bird, his investment is in a safe and mine, in a garage. While he can admire and hold his investment, I can take my family on a Sunday morning drive along the PCH…. :)

  11. Investwizard

    1020/ yup, the experience of driving a convertible on PCH is awesome, even gold does hold and appreciate its value. Gotta enjoy life a little bit if you could afford it. :)

  12. Phil

    Good morning! 

    Futures up about 0.3% but off the highs since Europe opened.  

    Still, we're doing quite well with the Dollar at 82.90 and the Yen topped out at 99.88 and the Euro bottomed out at $1.304 and the Pound hit $1.52.  Our own S&P, in a long-term perspective, is doing just fine:

    Dow 16,000 was the cover of Barron's this weekend.  

    expand

    The U.S. economy will become 3% larger in July as the government becomes one of the first to use a new international standard for GDP accounting. Among other things, statisticians will now take into account R&D investment, which will add just over 2%, and creative works, which will add another 0.5%. The government will backdate the changes to 1929, so there are unlikely to be changes in trends or cycles. - But it will magically lower our debt to GDP ratio – clever!

    Oil laying about at 88.27, gold $1,422, silver $23.34, copper even worse at $3.10, Nat gas came down a ton (I knew that was a good short) to $4.32 and gasoline still low(ish) at $2.76.  

    Not much going on.  Europe is up about half a point, led by Spain, up 1.8%.  National Bank of Greece up 8% – interesting.  

    On the other hand, Philips is down 4% and Commerzbank is also down 4% so I don't know what people are so excited about – must read more…

    Govt watchdog is calculating size of implicit subsidy of TBTF banks (Barron’s)

    Shiller: Before Housing Bubbles, There Was Land Fever (NYT)

    A Heretical, Rational Perspective on Gold (Cognitive Concord)

    The Nikkei topped out at 13,700 on the button and fell back to 13,600 but now 13,630.  Always makes a good short below 100 lines if our markets turn down or the Dollar starts falling relative to the Yen – especially as there aren't too many people in Europe or China buying Japanese goods at the moment.  

    China had an earthquake but their markets ended the day flat.  

    China earthquake shears off mountainsides, kills 186 people. A strong earthquake that struck the southwestern Chinese province of Sichuan this weekend has killed 186 people, sent nearly 8,200 to hospitals and created a dire dearth of drinking water, Chinese state-run Xinhua reported Sunday. Earlier reports had said as many as 11,200 people were injured.

    Copper Drops for Second Day as China Quake Raises Demand Concern. Copper declined for a second day in London amid speculation that an earthquake in China’s Sichuan province will hurt demand for the metal in the near-term before it boosts consumption in the reconstruction. Metal for delivery in three months fell as much as 1.5 percent to $6,888.75 a metric ton on the London Metal Exchange, before trading at $6,935.50 at 9:44 a.m. Shanghai time, headed for the lowest close since October 2011. Copper declined for a fifth consecutive week and dropped into a bear market. The August futures contract on the Shanghai Futures Exchange dropped 1.1 percent to 50,110 yuan ($8,107) a ton. 

    China Rebar Falls as Iron Ore Price Decline, Steel Supply Rises. Steel reinforcement-bar futures fell, extending the biggest weekly decline in two months, amid rising output from domestic mills and a decline in the price of iron ore. The contract for October delivery on the Shanghai Futures Exchange fell as much as 0.6 percent to 3,665 yuan ($593) before trading at 3,678 at 10:12 a.m. local time. Futures lost 4 percent last week, the biggest weekly decline since Feb. 22. Spot iron ore at Tianjin port fell for the fifth day to $138 a dry ton on April 19, the Steel Index Ltd. data show. China’s daily crude steel output nationwide in early April was estimated to have risen 2.5 percent from late-March, Custeel.com analyst Hu Yanping said on April 18. “Supply still exceeds demand in the rebar market,” Jiang Yuying, an analyst at Chengdu Brilliant Futures Co., said by phone from Shanghai today. 

    Oil prices have been weakened by oversupply of 1.5 million barrels a day, citing Mohammad Ali Khatibi, Iran's governor to OPEC.

    Barron's Money Poll:

    image

    Lot's of earnings this week along with housing data – should be an exciting week, especially with AAPL tomorrow.  

    Chicago Fed should be a bummer at 8:30 but Existing Home Sales at 10 ought to be nice.  

    Jeremy Grantham on population growth, China and climate sceptics (The Guardian)

    The Remarkable Decline in the Wall Street Journal’s Long-Form Journalism (Atlantic)

  13. Phil

    CAT with a miss, it seems.  Guidance down too.  

    Metals/Dawn – I like to think I can tell the difference between a real move and a fake one and that move was about as fake as it gets.  Unfortunately, it takes a long time for evidence to catch up with my gut.  

    AAPL/Dawn – I don't like paying double the premium to capture a move – especially when I do have an opinion on direction.  As to AC – I didn't know you'd be the only girl there but, if you don't come – who are we going to sacrifice?  I guess, if it would make you feel better, we could all chip in for a couple of strippers so there would be more women…  8)  

    You're welcome 8800, it's a good example of how some things just don't come up until you have years of experience and see the variants in economic situations.  

    ABX/Jabob – I don't know if that's normal but it indicates to me they're not worried about spinning earnings. 

    Gold/1020 – Depends how much gold you gave the guy, I suppose.  Had he bought $5,000 worth of gold at $35 an ounce in 1961 instead of the car, he'd have $205,000 today, which is enough to buy about 7 of the new Thunderbird Convertibles…  With that kind of money, I can pay a guy to drive my family around on Sunday mornings.  8)

    Seriously though, that was 50 years ago and gold is up 40x and it's not like no one had ever heard of gold back in 1961, right?  So realistically, gold has really been ahead of inflation for the last 50 years and, if you plan on living 50 more years – it's not very likely you'll lose by buying it now.  

    On the whole though, it's only a 6% compounded return on the $5,000 investment which really shows you what idiots people are for not just saving money or investing in safe, reliable, dividend-paying stocks as it's MORE exciting over 50 years than buying gold for $35 and selling it for $1,435 – but no one believes me – no matter how many times I tell them or show them…

  14. yodi

    Phil Sorry no strippers at AC my wife will be there as well!!!

  15. Turning1

    Phil / C
    Unfortunately, I have no choice as far as switching to another broker from Fidelity. I am stuck with them.
    Phil what do you think of this idea.
    Sell 50% of my C holdings which I paid $25, now $45.
    Sell 2015 $45 Call for $7.15
    Sell 2015 $50 Put for $9.70
    This will bring my basis $7.15/ $ 28.58
    529% profit if Call away at $45
    75% if put to me at $50, with a cost of $28.58 which $3.58 more than my basis now.
    Because of a 401K, Fidelity will hold the put cash of $50 – $9.70=  $40.30 per share which i will use from the sell of half of C at $45

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