Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Wrong Way Weekly Wrap-Up

I am trying to get bullish, really I am.

As I said to Members on Thursday morning in chat, like Sam Jackson in Pulp Fiction: "I'm trying hard to be the (bullish) shepherd" but the data makes it hard – so very hard!  Anyway, I'm not here to complain about the market forces moving against us but to review the carnage of our picks going all the way back to Sept 10th, when we decided the prior day's beige book was not going to be enough to break out over 9,600 on the Dow.  Now, with the Dow at 9,820 after testing 9,900 it's a good idea to look back and see what we missed in this last 2.5% leg up

On Thursday the 10th, we talked about patterns.  One pattern I recommended following right in the morning post was the famous "stick save" investment.  Simply buying high-delta DIA calls at about 2:30 each afternoon and selling into the pumped-up close.  That was a winning play on the 10th, 11th (Fri), 14th and 16th but not the last two days, when we turned a lot more bearish – but we'll get to that further down this review. 4 out of 5 days is pretty good for a patten and seeing it broken 3 of the past 5 days is also significant.  I did promise that Thursday that we will look for more bullish opportunities once we have a clear break over our last two levels (NYSE 6,959 and S&P 1,056) and we did make those this week.  If we hold it through Tuesday, it will be time and we're going to line up some trades this weekend.  True to my word on that Thursday, we chose a variety of bullish and bearish plays in Member Chat.  I'm posting the plays along with suggested adjustments if needed as it's a nice way to review our various strategies in progress – especially under "adverse" conditions.

Trade ideas of the day for Members were:

  • DIA $95 puts that ended up being rolled and doubled down for a net 20% gain (too much bother to detail).
  • SUN at $23.36, now $28.45 (up $5.09), short Oct $25 calls at $2.20, now 3.70 (down $1.50) and short the Jan $22.50 puts at $1.15, now .70 (up .45).

    • Another buy/write at net $23.01/22.76, already up 17.5% so can be closed early here. 
  • FDO short Apr $25 puts at $2.10, now $2.40 (down 14%).  No change.
  • CEPH 2011 $50/$60 bull call spread at net $5.50, still 5.50.  Short 2011 $40 puts at $2.50, now $2.15 (up 14%).
  • DF at $18, now $18.40 (up .40), short March $17.50 puts and calls at $3.80, now $3.70 (up .10).  

    • Net entry on the buy/write was $14.20/15.85 so up a quick 3.5% in 10 days is a good start.  These plays are meant to be dull! 
  • ABT Jan $42.50/46 bull call spread at net $2.30, now $2.20 (down 4.5%).  No change.
  • FXP March $5/9 bull call spread at net $2.20, now $2.10 (down 4.5%).  No change.
  • USO $39 puts at $2.20, hit $4 the next day – up 81%
  • SRS Jan $7/10 bull call spread at $1.80, now $1.20 (down 25%). 

    • Adjustment would be spending .60 to roll down Jan $7s to Jan $6s.
  • BIDU $390/370 bear put spread at $13, now $6.60 (down 50%). 

    • Adjustment is to buy back the $370 puts for $9 (up 61%) leaving us in the $390 puts for net $22, now $15.90 – net down 28%. 
    • This is an important thing to realize about spreads, often they are nowhere near as bad as you think if you break them up (assuming you want to stick with your premise).
  • OIH Oct $100 puts at $2.17.  Those went to $3 the next day and were cashed (up 38%).
  • BXP Oct $65/60 bear put spread at net $2.60, now .95 (down 63%). 

    • We just discussed the way BHI has been used to run up the OIH this week and I'm willing to test that premise with a roll up to the Oct $70 puts at $3.50, which is + $1.85, raising the net to $5.45 on the $10 spread that is net $2.75 so still down 50% but hopeful.
  • CAL short Oct $15 calls at $1.20, now $1.70 (down .50), short the Dec $13 puts at $1.50, now $1.10 (up .40) and in the stock (covering a bearish position) at $15, now $15.93 (up .93). 

    • That's what we call a buy/write and our net entry is $12.30 with a goal of getting called away at $15 and currently up net .83 (6.7%).  
  • AMZN Oct $80 puts at $2.50, stopped out at $2 (down 20%)..

So that was a busy day of buying!  Into the close we made note of the fact that the Gang of 12 was on the upgrade warpath, with DB, CS, RBC and C all coming out with higher price targets for the S&P and all over 1,100.  We do have the overall feeling that "THEY" want this year to close with at least 10% gains across the board and those levels take us to no about Dow 9,650, S&P 1,000, Nasdaq 1,787, NYSE 6,347 and Russell 550.  These are the levels we expect to see strongly defended on a pullback and, if we get a proper sell-off, those will be our upside targets for the next move up

The next morning, as things were looking bullish, I updated our Buy/Write Strategy post and put up 3 long-term trade ideas on BAC, C and PARD that are all nicely on track and very relaxing – as our buy/write trades are meant to be!  As I said in that Friday morning's post, regarding using the Buy/Write Strategy:

This is why we can afford to be patient as we wait for our breakout levels – WE DON’T MISS ANYTHING!  At PSW, we can STILL buy BAC for $14.41 (16% off) and C for $3.43 (27% off) and PARD for $3.79 (51% off) and now that we have made our tops, we feel a lot more comfortable working in at those prices than we would have when the market was 20% lower in early July.

That morning (a week ago) I pointed out that the weekly chart of the S&P priced in barrels of oil, which was not at all pretty but beautiful compared to looking at the decline in the parity value of the S&P priced in constant dollars.  Clearly it is only the tremendous de-valuing of our currency that is giving us this renewed feeling of wealth

Of course, it is not just dollars that are falling in value, all global currencies are falling in value (hence gold and oil rise) – just the dollar is a bit worse than the others…  So it's Paper Money, that is worth less (worthless?) in this cycle and another reason investors are willing to buy Bonds and T-Bills with relatively low yields is that the believe this will not continue forever.  Looking at the weekly dollar to SPX chart between last September and March (over 100% gain), you can see the attraction of putting your assets into this relatively low-cost paper.  Once you make that decision, gold is a reasonable hedge in case things go the other way on you.

FDX pre-announced earnings that Friday and that sent the transports flying up 7% over the next few days (most of it on Friday) and that was the push the Dow needed to break higher – yet another move that seemed tailor-made to draw money off the sidelines.  FDX is back at 70% their 2007 highs despite earnings that are 50% lower than last year and not even 1/20th what they were in 2007.  This give FDX a current p/e of 242 with an optimistic forward p/e of 18 – THIS was the major market moving  news that took us to new highs?  Even worse (and again, this is not the article where I examine the economy but points must be made), according to TMF's Rich Smith:

FedEx's Freight unit — the people responsible for trucking big loads of goods to major less-than-truckload shipments to customers like Best Buy and Lowe's -- suffered the biggest drop of all as revenues tumbled 27% and operating profit margin dwindled to a mere 0.2%. Operating profits all but evaporated.  At the risk of courting a conviction for necrotic equine abuse, let me emphasize that last point for you: FedEx is still hurting everywhere, but it's feeling the most pain in shipments to major retailers. Revenues in this segment are down significantly, which suggests business is hurting across the country (as evidenced by Best Buy's recent results).  FedEx CFO Alan Graf sums up the situation thusly: despite "signs of improvement in the economy, the year-over-year comparisons will remain very difficult for our second quarter.

With only 97 days until Christmas, you might think information like this would concern the RTH or perhaps the IYR, which is made up of many REITs who rent space to the Retailers but, instead, RTH is up 2% for the week and IYR is up 5% so we'll just assume that elves are working diligently in all those empty storefronts you see at the mall and they are going to be supplying the stores that are still open with holiday goods, which is the only logical explanation for how people can be bullish on these sectors in the face of an almost total lack of shipping activity at any measured stage in the process.

Apple Tablet  IPadIt's no wonder I had titled the Sept 11th post "Friday Market Follies."  EDZ was taken as a protective Jan buy/write at $4.85/5.82, now $7.05 – other than our usual DIA plays, we made no new trades on that Friday and stayed bearish into the close.  Over the weekend I did do a feature on my favorite company, AAPL with their new IPad and boy, did they take off this week – from $172 to $185!  We also updated our $100K Virtual Portfolio but we were too bearish in our adjustments and took a 5% hit this week (more on that in a later article) but it's only a paper loss as we also added $15,000 of other people's cash to our virtual portfolio by selling options against our goal is only $2,500 a month.  All of our losses come from GE and AMZN, who went far higher than we thought likely, if they pull back we'll be fixed in a jiffy and rolling in cash.

Monday was the anniversary of the Lehman collapse and Mr. Obama went to Wall Street backed up by speeches by three Fed Governors.  That made it obvious enough to call for bullish positioningg out of the gate so I called the DIA puts stopped out in the 9:33 Alert to Members and we even flipped around and sold Sept $96 puts for $1.50 (up 100% by weeks' end) and the Oct $95 puts at $2.15, now $1.12 (up 47%).  Also in the morning I put up a list of $100KP moves and we added a March/Oct calendar spread on BTU, which is right on track.

In the afternoon I had 2 trade ideas for C with a March buy/write at $2.73/3.66 and a March $3/5 bull call spread at $1.04 paired with a short sale of the March $4 puts at .63 and is off to a shaky start.  An AIG double diagonal is right on track (anything between $35 and $45 on Oct 15th) but SRS was yet another mistake at $10.25 but the 2011 spread is working as the $10 calls we sold for $4.50 were bought back at $2.50 (up 44%) when SRS hit our $8.50 target on Thursday and the 2011 $2.50 calls held $6.80 in value from an $8.80 entry.  The stock play also worked out as getting in for $10.25 and then doubling down at $8.50 gave us an average of $9.38 and we're half back out there so the basis is back near the current price.  Could we finally be getting a handle on this crazy ETF?  Probably not

Of course, not sooner do we stop losing money on SRS than we find a new white whale to chase as our TZA Oct $12.50/15 bull call spread fell from net .70 to net .60 already.  The XMass protection of the Apr $7.50/12.50 bull spread did even worse, falling from $2.30 to $1.90 (17%) but I still like it with a break-even at $9.40 and the ETF at $11.45.  To quote Melville: "To the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee. Sink all coffins and all hearses to one common pool! and since neither can be mine, let me then tow to pieces, while still chasing thee, though tied to thee."  In other words, I think we'll stick with this one!

Of course shorting the small caps was our last trade of the day, with the Russell just having broken up to just under 600, where we thought they'd have trouble (now 617).  It was also AFTER we made plenty of bullish plays and this is how balance works.  I see too many people who are near 100% bearish and ignore the bullish plays and make only the bearish ones and that is just not how it's supposed to be.  

Try to have some balance at all times.  If you are 60% bullish, going neutral is no problem.  Even from 70% bearish you can make adjustments when the market moves against you but if you are 80% of more one way or the other, then your virtual portfolio will go up or down at the whim of the market and we've already seen it is far too violent, in either direction, for that.  

Speaking of covering, I also put up 3 ways to short treasuries on Monday night:  PST Apr $50/55 bull calls spread at $2.70 (still there) as well as a Apr/Oct calendar spread that looks fine so far.  TBT 2011 $38/46 bull call spread is up a bit already and TMV is a 3x ultra and the naked Fed put sale is on track while the Feb/Oct calendar spread is on track and still playable.  We also executed a double diagonal on BBY into earnings that paid off huge – up 155%  the next day.

Tuesday morning I said we had to go with the flow but we were looking for shorting opportunities on the Dow and oil, expecting a pullback that never came.  At 9:55, with the Dow at 9,691, I thought we could get some mileage out of the DIA $96 puts for .60 but they stopped us out quickly with a 20% gain which we lost an our later on a re-entry.  Our short straddle on RIMM had to be rolled to short Oct $90 calls, now 3.05 with our adjusted $1.80 basis and we'll have to wait that out.

KFT looked good at 11:19 and we went with an aggressive artificial buy/write of the March $22s at $4.30 (now $4.80), selling the Oct $26 puts and calls for $1.50, now $1.40 so right on track there with a quick 20% gain on cash.  We gave up on the short USO $36 calls with a quick .10 loss around noon as the dollar was just looking hopeless.  In the afternoon I put up a short straddle on DNDN aiming for between $25 and $30 in Jan with a $7 credit but a quick move up on Thursday put the $30s up to $5.10 with the $25s holding $3.40 so down $1.50 so far on the spread (not the kind of thing you worry about with 3 months left).  We were on a much better track that day until, around lunch, Ben Bernanke declared the recession to be over.    

Some sucker paid us .80 for the GLD $99 calls, they expired worthless (up 100%) and we jumped back on selling the USO $36 calls for $1, which made 60% into the close that time.  Our last trade of the day on Tuesday was to short UYM Oct $30 calls at $1.30 and they are up at $1.75 now (35% against us).  I still like the Feb $33/29 bear put spread, still $2.40 as a way to play a pop in that bubble.   

Wednesday morning I pointed out that Bernanke's economic forecasting record had been spotty to say the least over the past 4 years but our man Cramer says people who disagree with his rally premise, even if they are Nobel Prize-winning economists, are: "So stupid, wrong and anti-empirical that it’s just downright silly that it doesn’t even dignify the use of video-tape or digital or whatever they do now."  Well, you sure can't argue with logic like that, especially when it's broadcast by GE/CNBC to more than 300M households globally.   

We decided to switch to the DIA Oct $97 puts at net $1.80 after 2 tries, now $1.75 but we feel good about the weekend protection.  This was the day we popped our S&P (1,056) and NYSE (6,959) but we weren't ready to go too bullish yet and we alternated plays like a bullish PARD Dec buy/write at $1.46/3.23 with bearish plays that are getting more cautious (longer-term) like the FXP March $5/9 bull call spread for $2 (still $2) and the 2011 $5/9 bull call spread at $1.40 (also the same).  We did get a little aggressive with the Oct $9 calls at .55 and they too are the same so we'll just have to see.  SDS was the next bear play we looked at with the Dec $35/39 bull call spread at $2.20 and they are STILL $2.20 – which is why we like the long protectors when we're not sure of the direction!


Back on the bull side we picked the DIA Dec $93/96 bull call spread for net $2 (if you didn't work into it as suggested in the Alert), now $2.10 and, as I said, the Dow can drop 200 points and you still get a 50% gain so that's the kind of upside protection we like!  VZ was bottom fished a little early with a naked sale of the Oct $30s at .95, now $1.30 (down 47%) and ripe for a DD as we really do want to own them for net $28.90.  We still weren't bullish enough for the rally and my 12:24 Alert to Members said: "This is a serious breakout and all you can do is grin an bear it on the short side and hope it ends.  Taking the lower end of the DIA long spread above (the Dec $93 calls) and waiting to cover is one way to stop the losses on your short plays."  In that Alert I also suggested a GOOG Dec $450/490 bull call spread for $25, up a whopping .70 so far but looking good – as well as the short sale of the $450 puts at $12.20, now $11.70 so another .50 over there!   

We debated whether or not there was enough volume to constitute a "blow-off top" in the afternoon and the consensus is clearly that we expect a pullback but the question is more as to where is the floor.  I will be thrilled to see 9,100 tested as a new floor on the Dow but I'll grudgingly accept 9,600 for now if we get a proper volume test.  Later in the afternoon we did an ORCL put spread ahead of earnings and those are on target so far and we added a call spread a little later for net $270 that paid us $375 the next morning so a nice 39% profit overnight and we are loving these "volatility crush" plays on earnings so far

Thursday, as we often do when the market looks like it's breaking out, we did a Big Chart Review, which led us to conclude that the run wasn't all that exciting (and this is why we do these reviews, as it puts things into long-term perspective) and we realized we needed to see a bit more from the SOX and the Transports, as well as the Shanghai, CAC and Nikkei before we start inviting Cramer over for tea to apologize. 

OIH Oct $120 calls seemed like a good short sale at $5, now $4.60, in our morning Alert and by 10:29 we jumped on selling short the FSLR Oct $155 calls for $8.50 and we picked up a quick buck on them and then sold them again for $10.20 the next day (still $10).  I reminded members to DD on SRS for $8.50 and they rocketed back over $9, hopefully indicating some signs of market sanity.  After taking a day off we decided to play for the stick at 1:59 with the DIA $97 calls at $1.07 and those gave us a quick $1.25 back.  We also sold the Sept $98 puts for .50 and those hit $98 on the nose on Friday for a 100% gain.  As I has said at the time, there was no reason not to take them as we sold .50 in premium with one day left and we intended to sell Oct puts anyway so our worst-case scenario was a roll. 

A FAZ Apr $16/20 bull call spread for net $1.40 was picked in the afternoon along with yet another crush play on PALM, looking for a finish between $14 and $16, which we missed by .05 so up "just" .80 out of $1 on that one.  80% in a day on relatively low-risk earnings plays is certainly the way to go this week…  One of the reasons we do these reviews is so we can focus on the plays that work and the plays that don't so we can adjust our strategy for the current market environment

Friday morning the SEC was considering a ban on flash trading and GS opened into fairly heavy selling along with the rest of the market but, once the volume died down, we were pretty much up until the afternoon, when we drifted back down to a not very exciting close.   I compared the markets to an out of control college kegger – we're playing along but we are not going to stick around when the cops come to break it up…

We added the DIA Oct $98 puts at $2.10, now $2.15 to our DIA $97 puts at $1.75, still $1.75 so it's easy to catch up with us if you want.  There are still Sept 30th puts to sell so the extra layer gives us the ability to get a quick .85 for selling the 9/30 $77 puts if we don't get our sell-off by Tuesday.  At 10:11, I reminded members to take the DD money and run on the SRS calls (and stock) as we did expect the stick, especially after we saw the big morning volume quickly dry off. 

ARNA seemed like fun and we sold the Aug $5 puts short for .50 and they've survived a wild run down and up and down again intact so far.  Also, the Apr $3/5 bull call spread is still $1.  SKF Jan $21/25 bull call spread was our newest bear play $1.80 (still $1.80) and notice how we are pretty much alternating bull and bear trade ideas as it's very hard to have a preference in this market but that was it for the day – we had a pretty exhaustive week with tons of picks that, on the whole, didn't do too badly considering we were much too bearish. 

We went into the weekend naked on our long DIA Dec $99 puts, now $4.95 so 60% bearish despite my determination to get more bullish.   It really is hard to be the shepherd in this market as I see wolves everywhere, waiting to pounce on the flock as the mainstream media leads them off to slaughter.  Or maybe (hopefully) I'm just being paranoid and everything's fine


Tags: , , , , , , , , , , , , , , , , , , , , , ,

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!

Comments (reverse order)

    You must be logged in to make a comment.
    You can sign up for a membership or log in

    Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

    Click here to see some testimonials from our members!

  1. I found a possible economic bullish scenario, courtesy of DB, in the credit markets. A lot of the continued bearishness on the economy, including mine, stems from the massive and ongoing contraction in consumer credit and C&I lending — a contraction which is concealed if you focus on bank balance sheets, which are artificially inflated. But the DB authors argue that the growth in new credit issued (‘credit impluse’ vs. growth in total credit) correlates strongly with GDP growth, and that the credit impulse can improve (and hence GDP move up sharply) if the deleveraging merely stabilizes.

    As others point out in comments in the link, the deleveraging from the collapse of the securitized debt market is so massive it may make these predictions from the credit impulse moot. But since Phil is trying to be bullish, here’s a possible bull scenario for 2010.

  2. Thanks Eric – that is just the sort of thing I’m looking for as I try to build a balanced outlook for 2010.

  3. Phil -  I am trying hard to get aligned with your more bullish position without falling victim to "capitulation" type thinking that historically occurs at market topping/reversals and lures investors back in. Is it wise to invest in BAC buy/writes at $17 if we feel the price could fall back to $8.17 – which was the previous price of BAC in the prior edition of  "How to buy stock at 15/20% discount"? So what has changed over last few months: 1) yes, clearly the market has gone against bearish positions 2) yes, technicals are break ing through resistance and establishing new floors. 3) More evidence this is all a prop job on low computer traded volumes run by a select few insider trading companies 4) More evidence we can’t time market tops. But have the fundamentals really changed, and isn’t it true the higher it goes the farther it should fall – assuming again the fundamentals (unemployment, housing, commerce etc) haven’t changed?  Why would markets only correct down to 9600 and not 8500 – the previous target. Or even lower as employment/housing etc. continue to decline. Why get into a buy write BAC at 17 when sentiment could reverse in next couple months and then get buried down to 8? Might a better strategy for now be "to know when to walk away" (K Rogers) until a reversal shows its beautifully ugly head, then set downward targets w/stops? Not critical, just asking. thanks

  4. LANSING – Some 52,000 state employees are receiving layoff notices as the state nears an Oct. 1 deadline without a new budget in place.

  5.  Phil – I was looking into opening a TOS account, but I could NOT find anyplace to give you credit. What is up with that?

  6. Diamond  – email Scott at  Tell him that PSW sent you…..he should get you a rate of at least 1.5/contract or better.

  7. Spending the weekend scrutenizing my portfolio for the appropriate positions for 2010, and putting the laggards on the sale rack.(including all the lousy recommendations from Bernie which were equal in value to the guidance received from my local Acorn Office).  I know Phil is looking forward and making an assessment for the future positions he will take, given the current circumstances in the market, and the anticipated moves that will evolve.
    My take is as follows and my positioning will be reflected accordingly – I believe we are in a bullish market, (not Bull), that has much more room to expand, as the big guys (hedge funds and day traders) are now present and accounted for, slowly adding volume to shares traded.(still a long way to go) The last participants to enter the party (retail traders) are starting to take notice and will join the festival eventually. After all – most will not want to miss the fun that is so clearly evident in an upward movement. I believe the current statistical data relating to corporate health is less than positive, but the euphoria of a moving market, and the anticipated potential profits from trading trandcends the real picture of iffy corporate health. Lots of money managers and retail investors want to get even from their horrific losses of the recent past, and prove to themselves and their clients that they still "have it". Therefore I believe the market is on a upward trajectory (with the usual corrections interspersed) as most sentiment today is of the belief fundamentals are getting better, although slowly. Our market here in the US will be lagging for a long period of time compared to some  other markets that represent countries with better GDP growth, therefore a portfolio that encompases some of these opportunities will do better over time, IMHO.
    My strategy for the future follows what I have been doing, and mirroring  the skills learned from PSW and the many terrific ideas and  contributions made by the members. Market sentiment, as stupid as it seems, based upon fundamentals, is still a factor in determining market direction. Like all of us who love concerts, I think it is good to jump in early and get the best seats, because they go up in price as time goes on. Remrmber, you can always hedge your position, and roll it if necessary, and still come out on top, and you still have the best seat.

  8. Phil, I bought BXP OCT $65 puts for 5.35 and  sold the BXP OCT $60 puts for $2.75 for a net of $2.60. Are you saying that I need to buy back $65 puts for $6.90 and then buy $70 puts for $3.50?

  9. Phil
    I have been scoping out a few Buy/ Write candidates that I like – T which pays over 6% dividend and is selling at what I think is an attractive price. I was thinking of selling January 30 c&p for a 30% discount. I also like Q which has a dividend yield of over 9% and the fundamentals look pretty good. Any suggestions for a short straddle on this one. I like both stocks long term and don’t mind being assigned. Thanks

  10. Mauldin’s article is quite a depressing one.  He has been on them for quite some time!

  11. Alignment/Concreata – I think, on the whole, there is a great difference between us taking SOME bullish positions and the average bagholders jumping into the market late.  As I mention above with the stick save investing pattern – we know when something is working and we don’t have to get smacked in the face too many times before we see that it stops working.  I am not advocating capitulating on the bearish side and going all, or even 70% bullish but clearly being 60% bearish is not working so a move to 50/50 at least is warranted. 

    I do not believe the fundamentals support a move past 33% off the highs as the highs of 2007 were theselves based on the idea that most companies would grow at a rate of 10-15% a year FROM THAT LEVEL.  Given the Q2 earnings reports, the average company is earning 33% LESS than they were in 2007 and they are unlikely to get back to 2007 levels until 2012.  So, from a discounted cash-flow perspective, 33% discounts to 2007 highs are generous in the least, especially considering there are MORE risk factors to growth now than were actively accounted for at the time.

    I think much of the support being found in stocks at the moment is the same as the "fundamentals" supporting oil and gold at the moment – the fear of a devalued dollar.  Stocks are, to some extent, a commodity – there are limited amounts of shares of companies and more weaker dollars are required to buy them at auction (the market).  Inflation also inflates forward earnings, even if the buying power is in worthless dollars and that positive gain is being priced into equities much the way the last 20% run in gold has (predicting inflation to hit double digits at some point). 

    So KO earns $6Bn ($3/share) this year and $6.6Bn ($3.27/share, 9% growth) next year with normal growth at "normal" 3% inflation but at 6% inflation they earn $3.37 next year (12.3% growth).   Use this DCF calculator and you’ll see that changing KOs official 8.9% estimate to 12.3% raises the estimated value per share from $51.61 to $59.17 – that’s where the justification for paying these prices comes from. 

    Of course what this model doesn’t tell you is that there are also costs that increase with inflation.  That’s why we were so concerned this week that a very hot PPI number was not being passed through to the consumers in the CPI.  This is a pretty straightforward concept, KO’s cost of revenues rise from $11.37Bn last year by 4% to $11.82Bn ($450M) but revenues only rise 1% from $31.94Bn to $32.26 ($319M) so they earn LESS money if they can’t pass through inflated costs.  Also, inflation may bump up the cost of KO’s $12Bn in debt.  A 2% rise there costs them another $240M.

    A lot of the cost cutting has already been done:  Work forces have been slashed, advertising cut, dividends cut, refinancing completed for those who could, management bonuses cut and, luckily for Q2 companies, there was a lot of government stimulus and the 6M people who are currently "officially" unemployed had their benefits extended while the US military continues to "employ" 150,000 soldiers and 250,000 support people in Iraq and Afghanistan and government spending has gone from 37% of GDP to 49% – how long can this be sustained with a $1.5Tn deficit this year?

    So yes, you have to know when to walk away but I don’t think we’re going to get a "shock" that sends us back down so fast we can’t adjust (especially if we don’t get too bullish in the first place) so, as to using buy/writes – One thing we do "know" is that we can still find stocks that may fall 20% but very unlikely 30% so if we scale into KO (not my first choice but as we’re discussing them) with 100 at $53.76, selling the Jan $52.50 puts and calls for $5.40 for a $48.36/50.43 buy/write and they drop 20% to $43 and we don’t adjust, we would be in 200 shares at $50.43 with the stock at $43 (down 14%).  If we then do another buy/write on the Apr $45 puts and calls at $5 (guessing), we are then in 200 at $45.43/45.22 with the stock at $43. 

    If KO doesn’t recover and instead falls another 20% to $34.40 (their 1995 level) you will (again assuming we do nothing in between) end up with 400 shares at $45.22 (down 23%).  Even at the lower price, we should still get $5 for the June $40 puts and calls and that brings our basis down to $40.22/$40.11 with the possiblility of owning 800 shares of KO at $40.11, which is 25% lower than the current price.  If KP stays at $36 (down 10%) or heads even lower – Congratulations – you and Warren Buffet are in for the long haul at about the same net entry!

    If you don’t WANT to own 800 shares of KO at $40.11 in June then DON’T buy 100 shares now for $53.76.  I don’t want 800 shares of KO for $32,088, even though it is $10,920 cheaper than the current price. 

    CROX, on the other hand, is $6.69 and pays $2.75 for selling the Jan $6 puts and calls for a net $3.94/4.97 and if I can pick up another $2 for selling the March $4s if 200 are assigned to me then that’s net $2.97/3.49 and if I have 400 of those at $3.49 and I get $1.50 for the June $3 puts and calls, that’s net $1.99/2.50.  So the question becomes, am I willing to buy 800 shares of CROX for $2.50 ($2,000) with the stock currently at $6.69 and the anwer to that on is YES!

    I like KO and think they are a great company but, compared to CROX it’s a poor relative allocation of capital.  It costs me $10,086 to commit to 200 shares of KO in Jan while $4,000 can buy me 400 shares of CROX at net $3.94 with the obligation to own 800 shares at $4.97 if they blow $5.  Should I get called away on CROX at $6, I make 400 x $2.06 = $824 vs 100 x 4.14 if KO is called away at $52.50.  CROX would have to drop 10% to fail us in Jan and KO would have to drop 2.3% and, of course, we still have $6,000 left to take other diversified positions for the same $10,000.

    That was the point of the buy/write article.  You have to think of it as a long-term transaction, not a one-time pass or fail play.  If you REALLY want to own a stock and you are prepared to ride it out throgh another downturn then this can be a good time to buy and, if we cover our downside with some index protection – we won’t mind at all getting assigned our favorite stocks cheaply.

  12. Phil
    Terrific comparison between KO and CROX and the relative values. I have trouble personally buying stock in a company that is a "fashion whim" and the product is real ugly-ass (OJ’s terminology). For me, I would look at a shorter investment window for them, as they will never be a Nike.

  13. Nice review of our past 5 recessions

    Jobs/Kustomz – Check out this article on California, now at 12.2% unemployment – the most since 1940.  Total building levels in California have fallen to $23 billion this year from $63 billion in 2005; home building this year is less than a quarter of what it was in 2005, according to the Center for Continuing Study of the California Economy. Roughly 500,000 of the state’s job losses have been in construction, finance, real estate and industries related to construction.

    TOS/Diamon – Thanks, I appreciate the effort.  We don’t really get anything out of TOS other than a little better rates for members but it’s good to make sure they know how strong we are as we can always come back at them for a better price one they settle down with their new corporate masters. 

    Seating plan/Gel – Well said.

    BXP/Jlui – I thought we discussed another adjustment for those on Friday?  I’m not sure what you are saying about buying back $65 puts for $6.90 the Oct $65 puts are $1.70 from what I see.  You spent net $2.60 and the spread is now .85.  If you roll up to the $70 puts for + $1.85, you are in for net $4.45 on the $70 puts, which are currently $3.50, down the same .95 but in a better position and a .46 delta vs. the .26 delta of the $65 puts.  That means a $2 move down should get you even.

    T/Gel – They are a good one with the 6% dividend.  I don’t see a 30% discount but if you sell the Apr $27 calls and $25 puts for $3.40, it puts you in at $23.65/25.33, which isn’t bad with .40 quarterly dividends coming in.  Q is a little crazy for me and they only have $2.50s or $5s to sell so I can’t get protected enough.  S is kind of fun as you can sell Jan $4 puts and calls for $1.40 for net $2.88/3.44, which is 39% if called away so who cares if you don’t get a dividend?

    Mauldin/Pharm – I know, I have to be in the mood to read him! 

    CROX/Gel – Just a relative example but I do like CROX because, ugly or not, they sell and with a market cap at about 0.66 times sales, which drops to .5 x sales if they dip 20% – they make a good acquisition target for a major shoe seller so I see a value floor underneath them that I’m comfortable with.  Don’t forget the point is that I DO want to get called away at $6 with a quick 52% gain for the quarter and then I can decide fresh if I still like them or if something else looks fun.  If you are going for serious long-term holds, it’s a different track, of course – maybe DECK, which is still low.  As they are $80, they lend themselves better to an artificial buy/write with the March $65s at $20, selling the Oct $80 calls for $4 and the Dec $70 puts for $3.80 which is net $12.20 on the $20 spread with plenty of time to roll. 

  14. Geetings from San Diego!
    It’s now wonder people love this place, the weather is great.
    Casual observation re:CRE- drove through a major office park area (Mira Mar) and , no surprise, many, many vacancies/for lease/for sale signs.
    Re CROX & KO,: the difference is KO will be there forever, CROX could go poof for any number of unforseen reasons. IMO, if you have doubts, then one should so do some of both.
    Now, off to the beach.

  15. Phil
    Good reasoning re CROX… Philosopher says "when dating a woman who is not pretty – look beyond to the checkbook balance and the trust fund terms.

  16. Phil:
    My original T calculation was done with Jan. ’011 strikes at $30.00. Your Jan. ’10 strikes are far better I and can sell much more premium during the time difference. Thanks!

  17. Phil
    I brought some BSX Jan 2010 at 1.9 now 1.550
    What do think I should do ? We were going to sell Jan 12.50

  18. Phil and Pharmboy – Thanks with regard to TOS info. I am looking at them as well as several other possibilities. 
    Do either of you know anything about the brokerage: They seem to have very competitive option trading rates …

  19. Phil
    I am the "weekend dummy"-  but do you have any sentiments on DUG, the Ultra Short Oil & Gas ETF, as I have more than my share and am contemplating liquidating this position.

  20. Yes, pstas – we are in a great place in SD.  Although, I am here every day!!!!

  21. SRS
    Trying to climb out of a hole.  Currently have
    72 Oct10C basis 1.50 now .55 – just DD’d at .5
    What do you think of the following buy/write
    Buy 11Jan10C about 3.55
    Sell 10Jan10 Calls and 9 Puts for about 3.55
    BE about  7/30, net 3.55/7.72
    Thanks, edro

  22. Diamond – don’t know anything about Trademonster.