Tag: investing

Democracy in the Middle East Bad For Your Portfolio?

 

A colleague mentioned that they overheard someone ranting about the people in the middle east rioting.  Apparently this person’s portfolio was taking a beating because of all the uncertainty there.  There are many ethical issues at play with this approach. Should we cheer for the dictator to protect our portfolio as well as their power?  With the right strategy we can cheer for democracy, delight in the fall of a dictator, and watch our portfolio maintain the status quo or grow even larger.

Don’t Sweat It

If you’re investing for the long run, don’t look at your portfolio! You’ll be like “that guy” who always complains about every little negative mood.  Go outside and enjoy the fresh air, read a book, or do something else with your time.  You haven’t lost any money until you actually sell.

Defend Your Profits

Using Stop Loss orders in this environment is essential.  A Stop Loss is an order to sell if the price of the stock drops to a level you have set.  You can use it to lock in profits.  If you bought something at $50 and the current price is at $80, you can set a stop loss at $70 to lock in $20 worth of gains.  If it suddenly falls from $80 down to $50 you don’t have to do anything.  An order to sell at $70 will execute on the way down.  Wouldn’t you rather sell at $70, make $20 in profit, and then buy it back again around $50?

Sell Everything

If you think the world is going to end, just sell everything, wait for it to bottom out, and then buy the dip. 

Sell Some Things

Pick a few stocks that are doing just OK and would be affected by volatility.  Take your small profit on those.  Don’t let a small gain turn into a big loss.

Sell a Portion

Besides using Stop Loss orders, you can sell half or a quarter of your portfolio positions to lock in those profits.  If things pull back your loss won’t be as big.  You can always buy back in if things start going up again.

Hedge The Portfolio

Hedging is a somewhat advanced topic.  In general you allocate a certain percentage of your portfolio to some short positions that will lessen the impact of a pull back.  Usually this is done using S&P 500 Options or Futures contracts.  For example if 100% of your portfolio is long stock, you may decide to sell 30% of your holdings and then take the proceeds to temporarily buy Put Options on the S&P 500 Index or short the S&P 500 Futures.  The short positions will gain if the index pulls back which will lighten the impact of losses in the rest of your portfolio.  You’ll want to quickly close these short positions out if the market goes up.   Individual investors do have the option of selling everything and sitting out a storm, while fund managers usually have to be 100% in the market at all times. The advantage of hedging is that you don’t have to sell everything to minimize risk, which is great if you have a lot of open positions.

Defeating the Dictator

With the proper hedging strategy it is possible to make money while the stock market goes down.  Not all stocks will pull back if it is a short term market dip.  Some of your positions may continue to go up.  If your hedge goes up more than your losing positions have declined you’ve experienced bi-winning, as Charlie Sheen would say.  It is possible through troubled times to still have a winning portfolio and delight in the fall of the dictator.  That’s having your cake and eating it too.  As for the dictators, we don’t want to “let them eat cake” because that would mean that we would have to share.

Boosting The Economy With Sunday Alcohol Sales

There has been some discussion of legalizing Sunday alcohol sales in Georgia to boost revenue to the state.  Instead of boosting revenue to the state with alcohol, let’s take a look at how alcohol can boost our revenue.  Here are some well known alcohol companies.

 

TAP Molson Coors Brewing Co

Stock-Chart---TAP-2011-02-27

 

BUD Anheuser-Busch Inbev

Stock-Chart---BUD-2011-02-27

SAM Boston Beer Co

Stock-Chart---SAM-2011-02-27

 

HOOK Craft Brewers Alliance

Stock-Chart---HOOK-2011-02-07

 

DEO Diageo Plc

Stock-Chart---DEO-2011-02-27

 

As we can see most of these look pretty terrible.  Good old Sam Adams appears to have some potential opportunity.  It appears to be range bound since the gap up in December.  The low end of support is around 88.  There is a bounce off this with a two day rally.  If it moves above the 50 day it could be a good entry point.  A bull put spread of 90/85 might be a good play for a 1.30 Credit.  Adding another pair of legs on the call side at 100/105 to create an Iron Condor for a .60 Credit could also be a good play after the price rises.  Exiting or hedging each side of the iron condor with a butterfly debit spread can also give you some breathing room.  Earnings will be announced on March 9 so there is risk that SAM could miss or it could have upside risk if we go with an Iron Condor.  These options also aren’t very liquid so there is the risk of not being able to exit if there is movement that doesn’t go our way.  This may be a good time to enjoy a Sam Adams in our glass, but not in our portfolio.

 

 

Stock-Chart---SAM-2011-02-27--trendlines

NOA North American Energy Partners Idea

NOA is involved in oil drilling. With the tensions in the Middle East heating up any company that is involved in oil may experience a bounce.  NOA didn’t have a good quarter due to some project delays that ate into revenue.  They could still be a good technical play.

The Weekly chart shows multiple tops near 12.70  A break above 12.80 could go for an extended run.  Multiple tops are usually bearish so it would not be a good idea to jump in without confirmation.  A buy stop above 12.80 might be a good entry. 

Stock-Chart---NOA-2011-02-16

JWN Nordstrom Idea

Nordstrom has been doing very well lately and should continue to rise.

Nordstrom closed Friday at 46.15.  We have prior resistance at 44 which is now support.  It could run up to 50 if earnings go well.

Stock-Chart---JWN-2011-02-13

One thing we can try to do is a long call vertical.

Buy March 46 Call 1.96 Debit
Sell March 49 Call .76 Credit

Total cost is 1.15

Since previous support is 44 we could also sell a Put below it.  We will go with the March 43 which is about 7% lower than the current price.

Sell  March 43 PUT .86

Total Cost is now .27
On one contract we will pay $27 for the opportunity to make $270 which is 10x our pay out.

The downside is that we may have to buy the stock at 43 no matter how far it falls, but Nordstrom isn’t going to zero tomorrow.  If we get an option assignment then we can start selling covered calls to make some revenue from the trade.

DDS Dillards Trade Idea

Dillard’s Inc. (DDS) is on a nice uptrend and above all of the key averages.  One way to get in on DDS is to play option verticals.  If we think DDS will continue to go up we can sell a bull put spread against the stock.  A bull put spread is formed by selling one put option and buying one put option below it. 

Stock-Chart---DDS-2011-01-17

 

We’re going to target the February options which are 32 days from expiration.  Using the Risk Profile in Think or Swim we can click on set slices and set the graph to 1 standard deviation from the current price and set the date for 2/18/11 which is February Expiration.  The Risk Profile shows us that 1 standard deviation from the current price is 44.71 and 35.45.  We can create a simulated order where we sell the February 35 Put and buy the February 33 Put and collect a premium of $20 per contract.  This sets our maximum gain at $20 per contract and $180 is our maximum loss per contract. 

 

 

Stock-Risk---DDS-2010-01-17

 

The 20/180 risk reward may sound crazy, but when we move over to the Probability Analysis tab and Set Slices to Break Even we see that our break even price is 34.80.  In order to make money DDS simply has to stay above 34.80.  The probability of it being below 34.80 as of today is 14.23% and above 34.80 is 85.77%.  You can adjust the date forward on this tab to see the probability of success go up as we get closer to expiration.  That is of course assuming everything remains the same.  You can also click the wrench below the date on this tab to change the stock price and volatility to see how that affects the probability of being above 34.80 by February expiration.  86% of being successful is very good odds. 

To calculate our return on investment you take the max loss minus the initial credit (180-20=160) and divide that into the initial credit of 20.  So we have 20/160=.125, or 12.5%.  We have an 86% chance of making 12.5% in approximately 32 days. 

 

Stock-Probability---DDS-2010-01-17

Short Trade Ideas in Retail

 

Interesting setup in JC Penny.  Multiple bottoms near 30 which would indicate strong support.  There is a descending triangle which could indicate a bounce or a break below support.  The 100 SMA is also on a collision course with the support line.  The 10 and 20 SMA are in a downtrend.  Entry strategy could include a short position below 29.90 with a stop market order, or just keep an eye on it.  The triangle appears to be 4 in length from the top to the base.  If there is a drop expect a turnaround at around 26.  A conservative play would be to exit at the 200 SMA.

Stock-Chart---JCP-2011-01-17

 

A little late to the game on Macys.  It gapped down and appears to be on its way to the 200 SMA and previous support at 22.  There may not be much room left in this one before it may see support again.

Stock-Chart---M-2011-01-17

 

Nordstrom is another one to keep an eye on.  It has been in a range and appears to be stuck below the 10,20, &50 SMA.  A move below current support could place it near 40 at previous support.  The 100 MA is upward trending and approaching 40 as well.  It could also break above 44 and continue upward.  Keep an eye on this one or set an alert.

Stock-Chart---JWN-2011-01-17

How The Rich Create Jobs

After hearing a caller on Sean Hannity’s show profess that the rich never create jobs, I began to think about how this applies to the younger generation.  Being born into Generation X gives one an interesting vantage point.  We were born after the Baby Boomers and entered the work force knowing that layoffs are normal. The working relationship is no longer about loyalty, but to the benefit of the worker or the employer.  According to a friend who works in HR the mentality has gone from working for one or two companies for life to the average Generation X worker staying at one job for 5 years and upwardly mobile workers only staying for 2 years or less.  This frustrates Baby Boomer executives who expect people to stay under their hire for 10-15 years. If Generation X frustrates the Baby Boomers, what does Generation Y do?

One of the biggest problems that HR executives have encountered with Generation Y is that they don’t want a job.  At first one may think that they are bigger slackers than GenX who defined modern slacking.  Actually this is not the case.  The biggest problem facing HR executives is that GenY has entered the professional workforce as freelancers while still in college.  A large number of these young ambitious people already have Limited Liability Companies or Corporations they’ve started while in college.  One complaint that HR executives hear is that taking a full time job means only 2 weeks of vacation and you have to show up for work every day even if there is no real work to do.  GenY wants to be able to take 6 weeks off at a time if there is no work to do.

For those who have not experienced the bureaucracy of an extremely large company it is possible for there to be no work for anyone to do.  If you’re a software engineer you can’t start work on a project until sales has settled on a price with the customer.  That can take 2-4 weeks.  Then the lawyers take another 2-4 weeks to agree on the contract.  Then purchasing has to buy the equipment for the project, that has its own sales and lawyer cycle.  During that time there is nothing to do for the workforce because you don’t have a customer to bill the work to, or you don’t have the equipment to actually do the work.

The end result is that getting a job for GenY means not taking a salaried position with a company full time, but working for themselves.  If they don’t “get a job” then how do the rich fit into this?  That’s the next stop in our education about how the world works today. 

Angel Investors are individual rich people who invest their own money into other people’s businesses.  Venture Capitalists on the other hand are companies who manage a pool of money and invest into companies.  Usually that pool of money is from a group of individual angel investors.  These are the rich people that create the jobs for GenY.  Angel investors can contribute a small amount in the four digits all the way up in to the tens of millions of dollars.  If you ask a friend or relative to buy a portion of your lawn service or convenience store, they are an angel investor.  Many people in GenX and GenY whom I have worked with on launching their business ask the question early on, “Who can we find to give us money and how much can we sell our idea for?” 

For example, lets look at advertising firm trueAnthem.  I picked them because they were the most recently listed in CrunchBase, a database of start up companies that tracks investment and other facts.  They received $2 million in angel funding on 7/28/08.  They have 10 employees.  If they pay each employee $50,000 per year, they can afford to pay salaries for 2 years and still have $1 million left over for office rent and other expenses, assuming they make no money.  They managed to survive long enough to receive another $2.88 million in Series A financing at the end of 2010.

What happened here is a rich person gave someone a job by providing $2 million in start up capital, who then hired a several employees.  In the world of GenY, to say that a rich person never gave you a job is inaccurate. The average person may believe that because a wealthy person did not hire them directly they did not get a job from a rich person.  Once you follow the money trail it usually leads back to someone with extra money to spare.   In a future article I will cover why taking money from a rich person for a job is better than going to the SBA or your local bank to get a loan.

RINO Class Action Lawsuit Deadline

 

The environmental remediation company RINO International Corporation has been delisted due to some questionable business practices.  RINO had a recent peak of around $20 near the beginning of November and dropped like a rock since then.  If you were an owner of RINO between May 28, 2008 and Nov 17, 2010 you have until January 14, 2011 to get in on the action.   The class action alleges that :

  1. That the Company did not enter into at least two customer contracts and 20-40% of the Company’s other contracts had problems for which it reported revenues during its 2008 and 2009 fiscal years
  2. That the Company’s reported revenues for fiscal year 2009 to the SEC that were inflated by 94%
  3. That the Company’s management was draining cash from the Company for its own business and personal uses
  4. That the Company lacked adequate internal and financial controls
  5. That, as a result of the foregoing, the Company’s financial results were materially false and misleading at all relevant times.

If you are a shareholder who purchased RINO securities during the Class Period, you have until January 14, 2011 to ask the Court to appoint you as lead plaintiff for the class. A copy of the complaint can be obtained at www.pomerantzlaw.com . To discuss this action, contact Rachelle R. Boyle at rrboyle@pomlaw.com or 888.476.6529 (or 888.4-POMLAW), toll free. Those who inquire by e-mail are encouraged to include their mailing address and telephone number.

This is a serious blow to the environmental movement since RINO was one of the companies that makes equipment to reduce pollution from industrial processes.  If the first issue is true, then RINO was doing a lot less for the environment than they were leading shareholders to believe.

We were bullish on the stock earlier in the year and had identified several limited gain/risk strategies. We had used a 13/12 Bull Put Vertical in October cash in on an upward movement of the stock.  Our max loss would have been limited $100 per contract had RINO gone against us.  Imagine going from $20/share down to $2.  Having an exit strategy using stop loss orders or put options is essential when bad news breaks.  Using option credit spreads allows you to exit the stock each month while still collecting premium.