Wednesday, August 31, 2011

THE BANKING INDUSTRY

STOCK MARKET, BofA AND WARREN BUFFET.
In keeping with the theme of many recent posts by me, I want to weigh in again with a commentary on the government's sickening attempt to ride banks. Any quotes are from the Wall Street Journal.
The WSJ asked a good question: "How much cost and uncertainty can the government impose on a U.S. Bank before it buckles under the strain?"
Here are some points to bolster the need to get to the bottom of this pain in the Banking Industry.
$$$ Bank of America (under the new Dodd-Frank fiasco) are being stress-tested.
$$$ The government wants BofA to pick up the tab (for the ruin they {The U.S.}) have caused. Then once they ruin Bank of America they will have the taxpayers pick up the tab for this failure.
$$$ But Bank of America is doing better. They have $400 Billion in cash. They can fund their problems without much difficulty.
$$$ Warren Buffett's Berkshire Hathaway takes a stand. They're trying to change the discussion. "Washington flirting with bank nationalization."
$$$ The mortgage problem that Bank of America has primarily stems from the acquisition of CountryWide Financial, which the government cheered at the time. Funny, how the government turns on people.
$$$ A lot of the current problems also stem from "Robo-Signing" foreclosure paperwork, but the government has failed to uncover any actual victims. But the government has demanded billions from these banks.
$$$ New York's Attorney General, Eric Scheiderman, is driving a swath of destruction because he's so bone-headed. Get this: he was kicked off the negotiating committee by the Attorneys General of the other states. He wanted to interrupt the settlement between Bank of America and Mellon Bank.
$$$ The new financial bill, dubbed Dodd-Frank should be repealed. It's almost as bad for America as ObamaCare.
$$$ Speaking of which, all these banks from Main Street to Wall Street are having and will continue to have problems fighting "Obamanomics."
CONCLUSION:  Since I started writing these blogs about the Buffett/BofA deal, the stock is up over a dollar, a 12% move. The stock looks like it wants to go up, the only thing holding it back are two forces that have come together to cripple American Free Enterprise---GOVERNMENT GRAVITY. The new G-Men.
Stay tuned. I have more comments to make about this. I'll try to do so tomorrow.
WADE

Tuesday, August 30, 2011

Horses and Memories

Life here is not that much fun. It's very boring. But once in awhile I see something, read something, or with my vast memory---almost photogenic in nature---I remember something that once made me happy..
We are a horse family. My daughters and wife, and now my grand-daughters have grown up loving these equine miracles.
So, here I am reading a book on a crime investigation called FREE FALL by Robert Crais, and on page 237 I find this paragraph: "The park was crowded, and most of the trail riders were families and kids, but most of the pen riders were serious young women with tight riding pants and heavy leather riding boots and their hair up in buns. We bought diet Cokes and watched them ride."
Those of you know my family and my caffeine proclivities should get a kick out of this. Hopefully not a horse kick. They hurt.
That's all for now.
I sure miss my kids and those fun times.
Wade

OPTION PRICING BAC

   I want to follow up on the Warren Buffett/Bank of America trade. The announcement came as the market was about to open. Within seconds the stock shot up, but very quickly it backed off. But very quickly after this open, the options seemed stuck. In fact, later, with the stock at the mid $7.50 range, there were some crazy prices coming out of the option guys. That is what I'd like to comment on.
In general, when there is a gap up or down, meaning the stock (especially at the open) trades significantly higher or lower, it takes awhile for the option market makers to settle in. It's called going through rotation. In fact, the option market opens a few minutes after the stock market opens, giving the market makers time to adjust, catch their breath, and adjust their prices, coming from their computer models.
   Just think of the complexity of this. Bank of America for example: It has $1 incremental strike prices---say the 3, 4, 5, 6, 7, 8 dollar calls and many more----for September. It has puts to adjust as well. Now go to the October option strike prices and all other months out for about nine months. Add in two years of the January Leaps (R), and you have a computer running fast and hard. In three more seconds, the stock is up 10 cents, and all of those prices have to adjust again. This goes on all day. Now imagine doing this, even with the fastest computers, while trading---rapid and heavy---is also occuring. It can boggle the mind, especially a mind so finite as mine.
   So what would you do? If I were a market maker I'd stop trading for awhile. Let it go through its rotation and settle down.
   Here's an example: Bank of America stock was at $7.67. The $7 call would be 75 cents to $1 or so. The $8 call would be 30 or 40 cents. Now the price includes the in-the-money portion, time to expiration, but other components of their formulas. Not so this time. The $7 calls were going for 57 X 60 cents. That's not even representative of the in-the-money portion of 67 cents. It tells me the market is locked, meaning not active.
   And what about the $8 calls? I thought you'd never ask. They were trading (NOT) at 0 X .01 cents. That confirmend to me that the trading was stopped.
   Later in the day, when the big runoff was over, the stock was still at $7.76. The $7 calls were $1.03 X $1.05. The $8 calls were going for 44 X 45 cents. The spread between the bid and ask also tightened up, showing more confidence by the option market makers.
   So, in closing, let's look at this stock as a covered call possibility:
1) We'll buy 1,000 shares of stock at $7.76, or $7,760---or half of that on margin. Now sell 10 contracts (representing our 1,000 shares) for $1.03. That's $1,030. Yes we'd have to give back 76 cents, or $760 if called out, but that is not bad.
2) Now, let's look at the $8 call. If you bought the stock and sold this strike price, it would look like this, You would have the same cash into the stock. Now, sell the $8 call for 44 cents, and take in $440. Someone now has the right to buy your stock, anytime on or before the third Friday of September for $8. If they were to do so, you would take in $8,000. That's $240 more than you paid for it and you also get to keep the option premium of $440.
A couple of quick points: a. make sure you protect the downside movement of the stock. Maybe put in a stop-loss at $6.90 to $7.20---whatever makes you happy and secure. b. By selling the out-of-the money (actually either of them) you can always buy-back the option, meaning you would end the obligation to deliver the stock at one of the two prices. On the next rise in the stock price, you could sell it again, or even sell the October's. This way, you're selling more time, and putting more cash into your account. You can pull out this received option premium anytime you want to.
   Tomorrow and this week, I think we'll see some good movements in the market. August is one of the three most down months in the market, but the last week has been kind for many years. It's funny, because so many brokers go on vacation, but oftentimes (like the day after Thanksgiving, the day before Christmas, or even Friday before Easter and others), the market rises on light volume. It doesn't make sense, but there you go.
   As we get ready to post this blog entry, BAC stock is at $8.19. The $8 calls are going for .56 x .57. These prices are all snapshots in time. Be sure to do your own homework and consult your financial professionals before entering into any trades.
Have a great week. Watch and learn to connect the dots.
I standby ready to help.
Wade

Saturday, August 27, 2011

STOCK MARKET VALUATIONS

STOCK MARKET VALUATIONS---AND THE WARREN BUFFETT MOVE INTO BANK OF AMERICA
   I hope in this blog to share some vitally important information on how companies value their assets, and how you might be able to find bargain stocks and build your wealth.
   Years ago, as a new real estate investor, I had acquired about a dozen properties. I got some really good deals, and I spent quite a bit of money fixing them up. I needed to do a financial statement and took all of my paperwork to a big accounting firm, at least for Tacoma, it was big. The CPA took all of my forms, paperwork and verifications and went to work. A week later I went in and looked at this beautifully bound Financial Statement. I was shocked. My net worth was nowhere near what I thought it would be.
   That day, I learned a valuable lesson in accounting. Let me introduce you to GAAP -- or Generally Accepted Accounting Principles. There is not enough time here to mouth off about all of it, suffice it to say, the valuations they wanted to use were not what I thought.
   For example. One property, which I had purchased for $60,000 was listed at about $60,000, even after some depreciation expense and some capital investments. It was worth $120,000, easily. "Not according to GAAP," he stated. "You have to list your assets at cost (meaning the adjusted cost basis) or the market value, whichever is less." I thought I misheard him. "You meant to say more, not less, right?" "No, it's whichever is less." "But that means on some properties I would have a negative basis, as I owe more in mortgages than this lower valuation." I started to get the picture. The only thing he would do is let me footnote the numbers, and explain in subsequent pages the real street values.
   Let me give two examples from today. First, a publicly traded company buys a $10,000,000 property. It depreciates it down to $9,500,000 over the years. They've taken good care of it, and the real street value is $12,000,000. They just refinanced the mortgage for $10,000,000. Now do the financial statement. Assets? Liabilities? The asset is listed at $9,500,000. Remember, cost or market whichever is less. Liabilities, $10,000,000, the mortgage. Yep, you added right. This property shows up as a net ($500,000) in equity, whereas in real life there's a $2,500,000 net equity.
   Example two: Your company has a chance to buy some private stock in a technical company to help it go public. The stock sold for $1, and you bought 10,000,000 shares. You list it on your books at $10,000,000. In six months they need more money and go out for a new round of financing at $2 per share. You're excited. Your stock value just doubled. Your balance sheet is going to look great. You're thinking your investment has turned into $20,000,000. It may have, but you must list it at $1, or the original $10,000,000, as your cost basis is lower than the new $2 per share. Then, a year later, they still haven't gone public and they need a little more money, but no one wants to get involved. They lower the price to 50 cents, and now guess what? That's right, your value is cut in half. Your 10,000,000 shares times 50 cents, the new market value, equals $5,000,000. Hopefully it will go public soon and you can list the stock at a public market value.

QUESTION OF IMPORTANCE
   Do you see that a company can have assets on its books that are worth far more in the real world than how they're characterized on their financials? And we can't go out and kick the tires all the time. The point is that many companies have huge values that are worth so much more than depicted.
   Okay, let's get back to banks and how their financial statements are different. Everything is backwards with banks. Let's just deal with real estate loans, as this type of loan, and Bank of America's purchase of Countrywide Financial is a big problem.
   Where we would list the property as an asset, banks list the outstanding (and performing) loan as the asset. They list the house as a liability. The property is their negative. If they take back too many properties (called REOs, or Real Estate Owned), they may not be able to make new loans, until they clean up their books. That's why banks will do almost anything to get rid of  REOs. In fact, this is the reason why banks are forestalling the foreclosure process on hundreds of thousands of delinquent mortgages.
   And it gets worse. Our benevolent government has now imposed new accounting rules, under the dubious title. "STRESS TEST." Here's how it goes with one mortgage. Imagine how bad their books would look with 10,000 of these foreclosed properties or non-performing loans. A bank loans $300,000 of a $350,000 home. Everything looks good. Real estate prices were stable but now their squishy. The test is this: How much would that loan be worth if you had to sell it now for cash? What? They don't have to do that. It's a stupid scenario, but it's government. Take it from someone who has seen government in action, up close and personal. It makes no sense.
   That's like asking this: You buy a car and two days later, you have to sell it now. I mean now. Your $25,000 is worth how much, especially if the buyers smell blood in the water? What can you get, 70%, 60%, or even less.
   The government test comes in around 30 cents on the dollar. I've heard of some at even 10 cents on the dollar. Who could stand such scrutiny? By the way, everyday you hear of banks closing their doors, or trying to become a different institution other than a bank. ABC $300,000 mortgage, (performing or not) is now valued at $90,000 on a good day. That's their asset. Their liability is the real estate. Are you starting to get the picture?

DOUBLE DOWN
   Now, let's even look deeper into this government mess. A bank could be perfectly healthy. Billions in reserve---enough to meet any normal contingency. But their balance sheet shows them running in the red. It could look bleak. Pardon me while I put in a little political commentary. I honestly believe this administration did this to take over certain banks (Like AIG, GM, etc) and to possibly nationalize the whole banking system. They started by nationalizing the student loan program, which took an important and vital money-making service away from banks. They have taken over others, and shut down others. It is quite sickening.
   Okay, back to the numbers, and then we'll get back to the Bank of America deal with Warren Buffet. Remember the loans? Tens of thousands of loans, underwater houses. Loans foreclosed on. Loans not performing quite right. The books look bad. Think it through. The bank created this $300,000 loan. The government poison makes them stress test it down to market, at say $90,000. The loan is in default so it's written down further, and the liability---the house (which in the real world could be close to $300,000 or more if the government would get their hands off of things)---which to everyone else is a positive asset shows up as a liability, skewing the whole picture. Now take this times hundreds of thousands. Aren't you glad we have a kind government that is willing to step in and save the day?
It's all bogus. Now, take some shrewd investors and/or attorneys and sic them on this situation. They know the real value. They position themselves to take advantage of the system. Bankruptcy judges are oblivious to GAAP, and the unsettling valuations the attorneys rip off.

WHAT'S THE TRUE VALUE?
   Let's speak to Book Value, or Break-Up Value. As the assets are listed on their financials, filed every quarter, so is the company valued and evaluated. Here's a rule-of-thumb number. Say a company has a book value of $8, which is what Microsoft used to be. Their stock will typically trade at 3 times this amount. If the book value is $50 (the current evaluation of all their assets---at the lesser value) the stock might trade at close to $150.
   What if you could find a company with a negative book value compared to their stock price. Say you have a company with a Book Value of $14 or $15, and the stock is going for $7? If this were a piece of real estate, valued at $250,000 and you could buy it for $125,000, wouldn't you jump at the chance?
So, just what did Warren Buffett see in Bank of America? Barron's listed the stock at trading at 57% of book value. And, (I know I've crossed the line of redundancy and circumlocution), this book value is way under the real value, but it is according to GAAP. What would you do? He saw the opportunity and he took it.
   He made the loan, getting preferred stock. He's getting 6% per year while he waits to convert the stock into shares locked in at $7.14. He's got unlimited upside potential with virtually no downside risk. So how do we tag along? Jump in the game, because the game is afoot.

BANK OF AMERICA AND P/E RATIOS.
   This won't take long. It's important to look at the P/E (Stock Price divided by the Earnings Per Share [EPS]---either past tense, future estimates of the P/E or a blend of both). Simply put, the P/E tells you how many dollars it takes to buy $1 worth of earnings. If the share price is $30 and the EPS is $1, the P/E is 30. If the EPS were $2, the P/E would be 15---stated as 15 times earnings. This is a simple, cabdriver's explanation.
   You want to find companies with a low P/E. The historical P/E, across the board, and through history, is 15.5. Today it is common to talk of stocks on the NYSE at 20 times earnings. NASDAQ at 30 to 40 times earnings. You can use this in a way to judge the stock you are thinking of buying. Say your target stock is trading at 18 Xs earnings. In that sector (banks, food, airlines, computer chips, etc.) the average P/E is 12. You would be paying a premium for your stock. If the average P/E is 25, then you would be getting your stock at a discount. This ratio applies to all prices of stocks. You could have a stock at 50 cents, $50, or $500. The ratio works out. You can also look at the earnings and see if they're growing from quarter to quarter, or year to year. I will write more on this in future blogs.
   Let's look at BofA. Barron's reported that the current P/E ratio was 4.9 times the estimated future year's earnings. That is really low. Yes, it could change, but often when the company makes a projection, or gives "guidance," the new word dujour, such guidance is on the low side. Companies love to give low numbers, reduce expectations, and then work like crazy to beat their numbers.

CONCLUSION
   4.9 times earnings. It's a bargain. The book value is upside down, in a positive way, even though we call it Negative Book Value. Like the jargon of the day---"BAD" means "GOOD." They have plenty of cash, and I still do not think they had to do this deal with Warren Buffet. It was to look good, and maybe get the FEDS to back off a little, with Warren and Barack being buddies like they are.
   Add all of this information to information in the previous blog and again I think you will see the game is afoot.
NOTE: Right now the option premiums say the stock is going nowhere. That will change very shortly. I like this as a covered call candidate, using the buy-back as I explained in my covered call book, STOCK MARKET MONEY MACHINE. Check out the book at Amazon.com---Create Space. It's available as an eBook or as a softbound book.
I have two more blogs on this topic. One is on government stress-tests, and the other is on the pricing of options. Stay tuned.
Abundantly Yours,
Wade

CONNECT THE DOTS--THE WIZARD OF OMAHA STRIKES AGAIN

STOCK MARKET---CONNECT THE DOTS---#1 (THE WIZARD OF OMAHA STRIKES AGAIN)
I had occasion last night to sit out at the picnic tables with a bunch of curmudgeons. The big news of the day was Warren Buffett (Berkshire-Hathaway [BRK.A]) investing $5,000,000,000, yes as in B for Billion, into Bank of America. Upon the announcement and shortly after the market opened, the stock went up to over $8.50 from around $7.01, and then settled for the day around $7.50. This caused me to think long and hard about this stock, the foundation of the company, and this news announcement. As always, it never is what meets the eye. I love these moves, and I love figuring things out. You will read here my analysis of this transaction, broken into two parts. One is my initial take, and then today when I was e-mailed more news about this new deal.
The reason this is important to me right now, is two-fold:
1) I've been writing about the stock as a covered call candidate. The options were really good, about 10% for the September calls. Example, the stock was $7.01 and the $7 calls were going for about 70 cents. You could buy the stock, and then sell to someone the risky option for 70 cents. If you owned 1,000 shares, and then sell 10 contracts of the options, you'd take in $700. Now the stock will rise, stay the same, or go down. Whatever, you get to keep the $700. If you sell the stock at $7 you would lose $10, that's the one cent. This scenario is not that important to this discussion, but it proves a mighty powerful point about option pricing, which I'll share as one punchline at the end of this blog.
2) This is a piece of Americana---both Bank of America and Warren Buffett---and add to that the deal that was made, you too will say, "Only in America." It's brilliant or it's crazy, you decide.
To summarize: The first announcement just said that Warren Buffett is buying $5 Billion of Bank of America stock. What would you think if you owned this stock? It's going to go up, right? It's a bullish sign for American Banks. Other bank stocks might also go up. $5 Billion dollars in the market place will do a lot of good. You would have been mostly wrong.
I've noticed that so many people just read the Headlines. Everything on TV is condensed to sound-bites, headlines flashing across the screen. OnE constant in the stock market is that everybody over-reacts. They over-react when the news is good, and buy. They over-react when the news is bad, and sell. It all works out after people read the whole article, get more news, and delve into the details.
BACK TO LAST NIGHT
I said to everyone last night, that the news was not what it seemed. This was not an open-market purchase. The only way a deal like this (a guaranteed 6% return, and the right to buy the stock at $7.14) would go down, is if there was a new SEC filing, new stock created, etc. This type of trade will be like the Oil Sheiks buying stock when banks were in need of cash ten plus years ago. Everyone asked what it means. I tried to explain preferred stock, and warrents, and then book value and negative book value. I tried to shed some light on GAAP (Generally Accepted Accounting Principles), and how America works at the Billion Dollar level. It made sense to me and I hope I can help you see this. The effort is worth it. Believe me, this type of knowledge is very powerful.
NOTE TO READERS: This is where I'd like to explain how some of the accounting principles work, and how the banking accounting is different. I need to explain, "Marked to Market," and the like. The deal is powerful because this is a purchase of an under-valued stock, as you will see. In the next blog I will share some very powerful information that will help a lot of this make more sense. Usually I interrupt an article and wind along a winding road to get to the destination, but this information is supplemental, though interesting and casually important to this topic. If you like connecting the dots, go there, read it and come back here and pick up this story.
Moving On: Here was the infomation gleaned from the first pass at the news. Warren Buffet is investing $5 Billion in Bank of America. He will receive a guarenteed 6% each year, or $300,000,000. He will be able to buy the stock at $7.14. The market reacted, the stock shot up. Later in the day the details became apparent and the stock backed off.
My thoughts were that this had to be a new class of stock. Also, Bank of America was getting the money. Why, you might ask? They have $400 Billion cash on hand, and they're sitting on deposits of over $1 Trillion dollars. Out of a Barron's article (Jacqueline Doherty) we learn that they made $6 Billion last quarter. Within the article is the statement that banks stocks are near the cheapest they've been in history, based on Book Value and P/E ratios. Why do they need $5 Billion from Mr. Buffett? The truth from my perspective---THEY DON'T. So why the deal? To bolster the stock price. PR. To show Mr. Buffet is the investor of last resort. More PR.
To summarize part of the information of Book Value and P/E ratios, look at this. BAC is trading at 57% of tangible book value (Ibid. Doherty) and at 4.9 times next years estimated earnings. Remember 20 times earnings is about average for a New York Stock Exchange stock. Yes, banks stocks are down, but this is way down. Look at the Book Value. A little over 50 percent. That means this company has assets (based on their last earnings filing) where their stock is trading at a percentage of their listed assets (57%). In reality that means that the stock could and should be trading at a $12 to $14 price. Think of this. If you wanted to buy real estate or a company and could get it for 50% or so of its value, would that not be a heck of a bargain? And remember, these asset values ("Cost Basis or Market Value, whichever is less) are much lower than their worth in the real world.
So, from Mr. Buffett's point of view, he's getting the company for 50% or realistically 20% to 30% of the real value. Now let me share a paragraph from a news article. Then I'll do my best to parse the words so it makes sense.
 "The terms of the deal were favorable to Buffett. He received 50,000 shares of cumulative perpetual preferred shares costing $100,000 each that will pay a 6% annual dividend, which is a good return in a low-return world in which the Treasury note yields 2.23%. Buffett's Berkshire Hathaway will net $300 Million in dividends per year."
"Buffett also got warrants, or the right over the next 10 years to purchase shares of BofA common stock at a price of $7.14 per share."
MY EXPLANATION
  • Preferred Shares are a special breed. They act like debt in some ways. If the company liquidates, for example, preferred shareholders would be paid in advance of creditors. Notice that this 6% is called a dividend, not interest. This avoids double-taxation (one of my pet peeves, which we'll save for another day); and keeps the transaction off the books as debt, or a loan, unless Mr. Buffett has a special arrangement with Mr. Obama's IRS. They have become pretty chummy lately.
  • This transaction looks more like a convertible debenture. But does it quack like a duck?
  • The stock did not go into the market and buy shares like the rest of us have to. This deal came from a cigar-filled backroom. It has a smell to it.
  • The money goes to B of A. They have $5 Billion to add to their balance sheet.
SUMMARY
Here's how I see it. Mr. Buffett loans (invests) $5,000,000,000. He buys 50,000 shares of a type of preferred stock for $100,000 each. Everyone here who read the article missed the word "each." He gets 6% or $300,000,000 a year in interest (OOPS---in dividends). He has 10 years to convert these shares into 700,000,000 shares of common stock at $7.14 per share. $7.14 times 700,000,000 is $5,000,000,000, minus a little change for arbitrage.
He gets paid every year for the investment/loan. If the stock goes up, to say $15 to $20 (I think it can easily go to $30 over the next year or so, especially if Mr. O goes packing, back to the streets of Chicago). The stock is undervalued. If the Banking Authorities wise up, and get rid of the ridicules stress-test, and let banks run on good, solid banking principles, they will recover quite nicely.
He's taken a small fraction of the cash reserve of Berkshire Hathaway and added it to the huge cash reserve of Bank of America, and everybody benefits.
Yeah, the only conclusion is the PROMO trick and if they're successful, then everyone wins. I sure hope so.


Wednesday, August 24, 2011

A Little Political Humor

My wife got this on her Facebook Feed from the page "Government Gone Wild". I thought it was pretty good:

"The President has just confirmed that the D.C. earthquake occurred on a rare and obscure fault-line, apparently known as "Bush's Fault". The President also announced that the Secret Service and Maxine Waters continues an investigation of the quakes's suspicious ties to the Tea Party. Conservatives however have proven that it was caused by the founding fathers rolling over in their graves."

Tuesday, August 23, 2011

Red Light - Green Light

I've been watching the stock market a lot lately. This sell-off is weird. Companies are making millions but afraid to expand and grow---meaning hiring new people. But in a market like this it's important to keep things in perspective. Years ago I isolated what I think is the most important discovery I or anyone has ever made in the market. Understanding this and mastering the simple mechanics is very important to wise trading.

I am speaking of my "Red-Light, Green-Light" phenomenon. Basically it deals with the quarterly news cycles. As the CEO of a publicly traded company there were times when I could talk about earnings and such and times when I had to be quiet. These dealt with the times throughout the year when a company comes up on earnings but hasn't released the numbers yet. I thought what if I and 25,000 other CEOs, CFOs, COOs and other insiders had to be quiet all at the same time? No news, except that issued by analysts, pundits, and lay citizens? What would happen to the market in general and to that particular stock? News to stocks is like gas to a car. You need it to get to the next station. The news could also be bad, but let's just categorize it as news. You've heard, "No news is good news?" Not to the stock market. "NO news is bad news."

Without going into detail here, let me summarize. The market goes down in February, May, August into September, and often the first few weeks of December, then rallies into the year end---called the Santa Clause Rally. If you can get my book RED-LIGHT, GREEN-LIGHT, and read the first two chapters, you'll see how this works. In fact I show the charts of a 40 year study in the market, which shows this quite clearly. In fact it's quite remarkable.

You've all heard things like this: We're entering the earnings season." We're in the earnings reporting season." This week (say, mid-July) 190 of the S & P 500 companies will give their earnings. What you never hear is this: Hey everyone, we're leaving the earnings season. Get your money out of harms way." And for option traders this can be devastating, because they own a fixed time investment and it expires. Time becomes the enemy for option investors.

Now, to this year. We've had a double whammy. We' had the typical summer rally, but it was stepped on by the talk of the Debt Ceiling. Now we're in the August red-light period and it's tough. It will come back.

Also, note that everyone is talking about the DOW selling off 10%. It seems like the media is trying to run cover for this administration. They use the figure from August 1st to the present. Go back four weeks before that and you'll see the DOW at 12,800. It's now at 10,700 (and it's been lower). That's about 20% in anyone's book (except Liberal Commentators). Oh, and 20% down in any given time period signals a bear market. That's the technical definition.

Have heart though. In 1987, we had the largest sell-off in my history. However, if you had $100,000 invested it would have gone do to $60,000. That's bad, but if you did not panic, within 13 months you would have been back up to $120,000. That's $20,000 ahead. So keep you head and don't panic.

To see all of this in chart format go to YahooFinance.com, or Bigcharts.com or Stockcharts.com and look at the whole market for this year. You will be amazed how these months play out.

Happy investing.
I'll have some more political commentary and some covered calls later.

Thursday, August 18, 2011

Confidence in the Business Community

Hello my friends.
I heard a good quote today by President Obama. I think it's the first thing he's said that I agree with.
Here goes: "What the business community needs is confidence."
The question is how do they grow their confidence? I suggest their confidence has to increase before they grow their businesses.
My answer is to cut taxes and stablize them. Cut regulations, not adding hundreds of new pages EVERYDAY. Get rid of the uncertainty of the unconstitutional ObamaCare. Repeal Dodd-Frank (Another batch of onerous and harmful regulations), and cut spending.
He says we can't cut our way to prosperity. Another falsehood. We sure can. We surely cannot tax our way to prosperity.
We cannot spend our way to prosperity---especially with bogus Green Energy boondoggles and Union enforcing machinations. We cannot borrow our way to prosperity. We cannot regulate our way to prosperity.
We need to: GROW OUT OF OUR PROBLEMS. The only way to do this is to employ Reagan-Like tax cuts, austerity measures and fiscally sane economic expansion strategies.
It's simple, get the government out of the way and let the free enterprise system work like is has for centuries.  The real choice in things Government/Financial comes down to two philosophies: Capitalism Versus Socialism. Freedom Versus Tyranny. And we need to choose wisely.
I have a lot more on this that I will write later.

Wednesday, August 17, 2011

COVERED CALL PREMIUMS

CASH FLOWING THE STOCK MARKET.

Here's what I'm looking for in covered calls:
If the stock is around $8 right now, and if the $8 calls out a month, say Sept are about 10% of the same $8 that would be really good. 6% to 10% is good. The $9 call should be around 4-5%, say 40 to 50 cents.
If the option is going for $2, everyone gets excited. The cash flow would be awesome, but the stock is too risky. One just like this awhile ago, looked great from a cash flow point of view, but the stock went down to $1.75 in two days. This was the problem a few years ago. Everyone got mesmerized by these high option premiums.
If the option is going for 20 to 50 cents, it signals a more stable stock, but it's boring. It's not worth doing the trade.
There has to be balance, figuring out the risk and reward. And then don't forget about stop losses on the stock  (at say $7.20 on an $8 stock) or just under a good support level.
I would welcome any questions or comments!

Monday, August 15, 2011

STOCK MARKET UPDATE

I have a quick observation. I think the market will settle down now as people get used to our Obama-Downgraded economy.
Barring some unforeseen crisis, the market should move up and down 30 to 100 points a day. The huge gyrations are not over, but are surely toned down for now.
Also, remember we are in a classic red-light---August---period. Choose wisely. Watch and learn.
I'll be following up on RENN and LULU when I hear what my friends are doing. 

Friday, August 12, 2011

Earnings on RENN

Hello my friends,
I really do not have too much to report. The market has been up or down more than 400 points in each of the last four days. It's a wild ride. One commentator said, "the market is a porpoise." Another cliche, but a good one.
There will be more of the same as the scrutiny is high. Everyone is watching and looking for any type of good or bad news at all. One thing you can do is keep your powder dry. There will be really good buying opportunities. These situations always produce such.
About RENN. Again this is the Facebook of China. Maybe there are more companies over, even private ones. After all, The American Facebook is still private, trying to go public at the end of September or the first part of October. Anyway, RenRen came out with great numbers after the market closed today. Sales were up. Advertising revenue was up. Gross profits and net profits were substantially better than last year (when it was still private). Activity, meaning subscriptions/users were up and increasing.
I thought this spelled a solid increase, but remember the old stock market maxim: "Buy on rumor, sell on fact (news)." And then the inevitable happened. The CEO, or some mucky-muck (I don't know how to say that in Chinese), said that they had a lot of competition. So, down it went. It was off about $1, to around $6.80. It closed in regular trading at $7.77. This morning is is up to around $8.08.
I don't like after hour trading. Many people lose money. The stocks are thinly traded, usually, and I don't think it's a fair reflection of pricing. So tomorrow will be important. Also note that our Friday here is China's Saturday, and their market is closed. Expiration is next Friday and it should be a good ride.
More later, Wade

"HEY, CLICHES . . . YOU'RE UP TO BAT!"

So what cliches would you like to affix to this latest market? How about: "Roller Coaster," or, "Yo-Yo," of even, "Rubber Ball (I come bouncing back to you)?"
There is no certainty right now. Some will play the intra-day, and even the inter-day swings, but it is way to uncertain for me. It's like trying to guess which way the wind will blow. Sorry, too many cliches. I went back to the well too many times. Oops, there I go again.
The President could end this malaise in fifteen minutes. If you want to know how, I can write it later. I'd love to hear from you. These blogs are supposed to be a conversation.
Please let me know what you think.
Share this blog with others, and let's pick up our own economy.

Tuesday, August 9, 2011

MORE ON THE ECONOMY

Hello my friends,
It has been quite a time for the economy and the stock market. Most of you know of my passion for all things financial. I love business, both big and small. I have plenty of opportunities to share ideas here. There is a ready audience.
I've written recently about the stock market and the so-called Debt Ceiling Crisis, and then the S & P credit downgrade over the weekend. I nailed the market reaction and thought it best to sit out the uncertainty, unless you wanted to play puts, betting that the market would go down. Well, down it went. The Dow is down 2,000 points in the last month. It was at 12,800 and hit 10,700 yesterday. It has a lot of work to do to climb back up, but it will---inspire of the Liberals in Washington.
I thought I'd take a day off, it being a burden to be right so often. However I told others here (just ask them---Slice, Crosshairs, Speedy and Lefty) that I thought the market would settle in as it found a good bottom, a good support level.
So for today, Tuesday, and for the next several days I think the market will be very erratic. It will have 100 and 200 point swings. It will be in positive territory and then negative and then back to positive again. The market always does this as it tests new highs and lows.
______________________________________________
Second Note: This sell-off presents many bargain buying opportunities. Look at BIDU, even GOOG. I have a friend from Fairbanks who just bought RenRen (RENN), the new Facebook of China, for $7.25. He was willing to buy it last week for $10 to $11. With the uncertainty, he decided to wait. RENN is doing earnings on Thursday. High or low, the most important thing is how many new users, new subscribers they have. Many companies like this are in a growth mode.
Now, He will wait and then on a rise, sell the $9 or $10 covered call. One great strategy is to sell the last run-up. Often when a stock is coming up on earnings, the rumors abound, but then on earnings, the stock goes down, again, even if the numbers are good. It not so much about the actual numbers, but about the commentary on the numbers.
   "A STOCK PRICE TODAY IS BASED ON THE ANTICIPATION OF FUTURE EARNINGS."
That's all for now. We'll keep you posted. Keep those cards and letters (posts and emails) coming. Thanks.
Wade

STOCK MARKET/DEBT DOWNGRADE

It is really difficult to be right all of the time. Just kidding. I remain your cabdriver friend who sits here and tries to connect the dots.
Again, where the last blog left off. After I wrote it I kept watching the news, and felt the Dow could sell off, 800 to a 1000.
I didn't really think so, as it has really good support here somewhere. So, if it had done so, that would present a great buying opportunity, but not so fast.
Now I think the market will bounce around quite erratically, with 100 to 200 point swings, even intraday. It is very volatile.
The vix---or volatility index is around 35, even 40. I've never seen it so high. Let me shed some light on this index. It is a measure of volatility/movement, more particularly price instability. If a stock has a volatility of 15, that is translated as 15%. What the speculators are saying is that the stock can move up 15% or down 15% in the next year. A $50 stock, according to this could go to $65 or down to $35.
The whole market presents a snapshot in time. The vix (ticker symbol is often .vix) is usually around 15. Lately it's been climbing to 25, now today up to 35+. That is an amazing high point. Yes, this means some speculators are saying the Dow could go up 35-40% from here, or down 35-40% from here. What a swing that would be.
With the Down just under 11,000 that would be someone's guess that it could go up to 15,000 or down to . . . well, I hate to write it, because I don't want to be the bearer of bad news. I don't think it will go down that far. In fact, maybe only a bit lower then it will bottom out and start to recover. This market needs to get back to solid pro-market, pro-growth and anti-tax sentiment. I just don't see that coming out of the White House.
Quick point in closing. In the market there are several maxims that we live by. One is this: "When stocks go up, implied volatility goes down." Stocks climb a wall of worry, curtailing further increases, at least making them harder. Option market makers suck all of the "fluffiness" out of the premiums, as reality sets in. The second part of this maxim is this: "When stocks go down, especially when they tank, implied volatility goes up."---Sometime way up as we've seen today.
It will settle down. The sun will rise. Get ready to find some bargains.
I'll keep looking and reporting.
REQUEST: Will you share these thoughts and messages with your friends? Feel free to cut and paste or include a link. If you know any of my old students or employees please share with them. I'd love to hear from you.

Sunday, August 7, 2011

MORE DEBT INFORMATION

Picking up where the last blog left off, let me try to make some sense of the Downgrade of the Debt Status of America.
Much of this talk and the response is purely psychological. The market always over-reacts. It will happen again this week. It is the sign of the times.
I mentioned in the last blog that if the talking heads this weekend continue to parse, comment on, and try to explain away that which is about to happen, it will make the matters worse. That has happened. Every show I turn on, every radio program I listen to, it's all about the S & P Downgrade. One twist is the Democrats fabricating the truth and saying the stupidest things. It is their fault. Imagine the bragging they would be doing if the Stock Market went up 700 points in two days instead of down 700 points.
There are several things to think about:
1) The interest rates of the current debt has been higher in the past. No one wants to see the credit status changed, but it is what it is. We need to deal with it. Teleprompters will not come to the rescue.
2) It won't happen right away. Current debt will not be changed. This is very important. There are people saying even a 1% rise in the interest rates will cost billions more---even trillions more over a longer period. This is a statement that is not entirely based on the truth. The current debt (All $14.3 Trillion) has interest rates in place. The new rates will apply to new debt.
3) Another point on existing debt. It is not "callable." This means China or the Bank of England, or The Maltese government cannot call our debt in and make us pay it off. It's like a mortgage. If you make the payments, you're just fine. You can pay the debt off early, but China can't force us to pay off the principle.
4) And speaking of that: Why is there no talk of using current rates (they're much lower than 6 to 8 years ago) and creating new debt at say 2 1/2 Percent and paying off the higher rate debt? It's like refinancing your mortgage. We could save billions in annual interest. Yes, this is from the mind of a cabdriver. Democrats don't like this because they want to borrow to spend more on their wasteful programs.
5) We don't have to borrow at the higher rates. What say, we cut spending immediately. Just say no. Don't borrow, or do so at a rate that is still right. S & P and Moody's do not control the world.
WHAT TO DO
I say sit this one out. Confusion and uncertainty mean "NO." It will be a rocky road for the next few weeks. I think the market will sell off tomorrow, and by this I mean the Dow. It may go down about 200 to 400 points. Try practicing on a put. Look at the DJX $114 Puts, representing the DJIA at 11,400. As the Dow goes down, these puts should increase in value. Try to get a double. Practice trade this before you ever put real money in harms way.
Next, the market, the Dow and the broader market will be looking for a bottom, a support level. It may take a few days, but it will happen. If the liberals are not replaced this will be a tough row to hoe---for several years. We need fiscal sanity, by true conservatives, true believers in free markets, small and limited govrnment and individual freedom.
               "THE BIGGER THE GOVERNMENT THE SMALLER THE ECONOMY,
                 THE SMALLER THE GOVERNMENT THE BIGGER THE ECONOMY."
                                                                                                   By Wade Cook

CREDIT RATING and the STOCK MARKET

Well, it seems like another crisis has surfaced to the top. Thank you mis-managed government. Starting Friday, the rumors turned to solid speculation that certain bond rating services---namely Standard and Poor's, but soon to follow, Moody's and Fitch---will change the rating on U.S. sovereign debt, meaning our Treasury Bills, Bonds and Notes. I think the perception is worse than what the consequences will actually be, but perception becomes reality. More on this in a few paragraphs.
We have had a Triple A, AAA, rating since ratings began. What this means is a perfect score. We can raise money, by selling bonds, at the best prices going. Just like your own personal credit score, the higher the better. If you have a tough patch and your score goes down, your ability to get loans, credit, and mortgages is diminished. You may be able to get the credit, but it may cost you more money down, or a higher interest rate.
We cherish our national rating---remember the old (I write this nostalgically) adage, "the full faith and pledge of the United States Government?" Now thanks to the Commie-Pinko-Bedwetting Liberals, our debt has skyrocketed and it's now virtually in dangerous territory. It is unsustainable. Yes, we've raised the debt limit before, but nothing like today. The Republicans, which are historically as guilty as any politician, have seen the error of their ways, and are trying to bring sanity and a curtailment model to Washington. It will take awhile. We need deep spending cuts, we don't need tax increases. I've written on this extensively. Write cabdriver22@msn.com and ask for a report on Whether Raising Tax Rates Actually Raises More Revenue. You'll be surprised at the answer.
Okay, back to the issue at hand. I love trading in the stock market. No one wants to see it go down. This last week, with the debt deal signed by the President, the market tanked. It had gone down 10 days in a row. Wall Street, much to my pleasure, felt the same way that I do. Yes, it's the best the Republicans can do until they get control of the Senate and make Mr. Obama a one term President. But the real problem did not get addressed in this go-round.
Then Friday came and the rumors went wild. Watch the market on Monday. I said to others on Friday night that if the topic continues this weekend on all the news/talk shows, than watch out Monday. No one knows for sure. Maybe this next crisis is already built in to the current Dow---DJIA--- which you can buy calls and puts on under Ticker Symbol: DJX. The market could easily go down 200 to 400 more points. It has good support at this level, but it could break support. Remember, "Buy on Rumor, Sell on Fact." This is really bad, and it all depends on the speculators. It will settle down in a day or so, or a week or so. But, in short, this market isn't going anywhere until the cancer is eradicated and that means voting the President out of office---along with a bunch of Anti-American Liberals.
I will write more on the actual workings of the debt-limit change in the next blog. Any comments, send them along.

Thursday, August 4, 2011

WHO KNEW?

What a day in the market. Who would ever have guessed that the Dow would sell off by 512 points. Funny thing: you could lay this whole thing at the feet of the uncertainty created by the politicians, especially the liberals. They live for crisis.
Now what? The market will receive the news about jobs and unemployment tomorrow, I think before the market opens.
It could sell off more, or recover a bit here. I think the negatives about the bad numbers is built into the markets, but the Asian markets are way down, this fine Thursday evening. They're open and falling.
Remember: A stock price today is based on the anticipation of future earnings. We're in the middle of earnings season and many companies are doing really well. But the uncertainty and fear surrounding this political class is stifling. Look for another rocky day.
If you want to learn how to trade the market as a whole, or the Dow in particular, try buying puts or calls on the DJX. The 114 puts, for example, represent the Dow at 11,400. Say they're going for $1.20, ten contracts would cost $1,200. Now put an order in to sell for double, or whatever you think you want to make. Yes, you're just paper trading, so what the hey? If you think it's going to go up, buy the calls.
To learn twice as much, paper trade both of them and do a straddle. I don't normally like straddles because you have the cost of two trades to overcome to make a profit, but we're in the learning mode, right?

The Stock Market and the Economy

Bob Dylan once said: "Everything is Broken." Was he talking about now? I sit here and watch the political games being played and setting this Country up for failure. It is discouraging, but as Jim Cramer says" "There's always a bull market somewhere." I have so much faith in the soundness and values of the American people, that it's a wait and "throw the Bums out" moment for me. The next year should be very enlightening. We have before our eyes the effects of Liberalism. Soon, smelling the petri dish will stink to high heavens. No one will be able to deny the negative consequences of the left way of thinking and acting.
The stock market (DJIA) was today, at one time, down about 400 points. It has shed 1,100 points in the last eleven days. It has given back all the gains of 2011. Is the slide over? I'm not sure. The market anticipates, then over reacts. Some of this slide is in advance of the jobs report tomorrow---expected to be not so favorable. This however is indicative of the larger response in the economy to:
1)  Negative business and economic comments by this administration. Never, at least since the hatred espoused by the FDR administration, has the vitriol been so vile. The President should be ashamed.
2)  The talk of more taxation, and the imposition of huge government regulatory agencies and all their destruction.
My solution: Cut taxes, not raise them. Repeal ObamaCare and the insidious Dodd-Frank Bill. Have the President stay home and be quiet. He is not the solution. He is the problem. I know it won't happen, so the electorate will have to shut him up at the ballot box. And they will.
On last point on the Dow. I've looked hard at the charts. There is good support at 11,800 and better (more solid) support at 11,600. The news could be really bad, but I think most of the bad news (Jobs) has been already calculated in. We still need our summer rally. I hope it comes.
In the meantime, because uncertainty means "no," I like getting back to cash. This market turmoil needs to end, before it's safe to go back in the water.
More to come after the market close today...

Tuesday, August 2, 2011

How to look for Rolling Stocks

Hello again, my friends,
There are several stocks to look at for rolling possibilities. This is given here as a way to help you spot good looking charts.
Run six month charts on these (and other ticker symbols), symbols. Look for a wave pattern that rises at least 50 cents, and then goes back down the same or close to it. Now look for a pattern that goes up and down every 3 to 5 weeks. Faster is better, but the pattern is more important.
While you're there, check and see if the stock has options. There may be some covered call possibilities.
Here are the symbols, after a quick perusal of a few stock pages, plus a few from memory:
BRCD, COOL, RENN (See notes below), ZX, RF, CIS, MBI (Check it out as a covered call possibility), BORN (Another roller {?} or covered call candidate), and EK, see below.
EK (Note the Eastman Kodak is way down. It's in a lawsuit they may win. They have a Billion $$$$$$ in the bank. A few days ago the stock was at $2.40, and the Sept calls were 35 cents to sell. That would be $2,400 for 1000 shares, and then take in $350 for selling the option. You keep this no matter what happens. If you get called out {Sell} the stock you make another 10 cents, or $100. A little longer than I normally like but not bad.) Check this info for currency and accuracy.
Let's look at RENN---the supposed new FaceBook of China. The stock was $10.50 the other day. The August $10 call were $1.35. That's $10,500 to make $1,350, of which you'd have to give back $500 is you were called out. Don't forget the buyback on this trade. While looking at it's pattern, consider it as a roller and as a covered call candidate. Also, think about this one as hold, or even a straight option play. If this company comes through it could take off. It's growing rapidly (adding users), but I don't think it's profitable yet. It just went public a few months ago.
More Later,
Wade