Tuesday, November 11, 2008

Amero 2009? World Economic Collapse? Who knows

World markets have been crazy, whether the Amero 2009 will be a reality or is just a conspiracy is a great topic of debate, I want to thank everyone for voting on the Amero Currency poll as we near 2000 votes, its been fun watching the results. I want to get a little off topic for one post and talk about the stock market, right now is a very difficult time for those invested or stuck in the stock market. If you must invest or are stuck HEDGE!!!!

I Wanted to explain one simple method to help. Using covered calls is a great way to generate income while you hold stocks. This method is best used if you think the market will be flat or down 6-8 months from now. Its also best if you find a nice dividend paying stock that you are comfortable holding long. Your covered call pays you to wait for a turn around.

I'm going to use a Canadian Bank in my example. Bank of Montreal(BMO) I do actually believe Canadian banks are safer than US counterparts as well, but there are plenty of US stocks ripe for covered calls. I prefer to write calls that yield less income but are only about 2 months out but for our example 5 months works best.

(Buy BMO @ 42.25) today, at the same time (Sell April 2009 48 calls@2.50) Your calls right away give you 5.9% back on your investment! Now lets look at what happens after that. Prices from TSE

Scenario #1) The stock closes above 48 on the 3rd Friday in April and your option is executed. You receive 5.95% from calls+you will have gotten a dividend 1.65%+capital gain on stock of 13.6% total return 21.2% for a little over 5 months. Not to shabby!!

Scenario #2) Stock close below 48, you receive 5.95% from calls+1.65% Dividend total 7.6% return over 5 months. Now the stock maybe down or could still be above your purchase price of $42.25. Worst case is you lowered your break even from $42.25 to about $39. Plus you are only a few trading days from another dividend which would take break even to $38.30 Now at this point you may want to write another call 2 or 3 months out or sell the stock if your in the black.

Obviously if your stock is a falling knife this will not save you, but if you believe you have a solid company, especially one paying a good dividend, writing calls can help a lot over the year. DO NOT USE THIS METHOD IF YOU ARE A PERMA-BULL! and believe the market is about to take off.

Why is this method so good right now? Simple Calls are trading at a premium because of the extreme volatility.

2 comments:

Gerald said...

Economic value is created only when you grow something in the earth, extract something from the earth, or make (manufacture or construct) something that is consumable (or useful). Transportation/distribution/warehousing/tax/sales/delivery/packaging costs are added to the value (cost) of the product that was initially created by these basic creative efforts.

Industrious nations like China grow wealthy and secure by making enough products to support their needs on their farms, factories and mines, plus earn additional currency by creating additional wealth by exporting products that they manufactured. The health of every other business depends upon these productive industries.

Do US farms, factories, and mines manufacture, grow or mine enough products to maintain us? NO!!! Could They? YES! Do we need to import additional products and increase the current trade deficit if we do not want to work to make whatever we want to consume? YES!!!

Borrowing money from China and other wealth generating nations to pay US citizens for raking leaves, environmental cleanup, mortgage bailout, union retirements, TARP, wars, business failures, government payrolls, and etc. to stimulate the economy just makes the existing money have less value and less buying power, but does nothing in the long run solution to the foreign trade deficit problem.

US Trade Deficit: The USA has created a situation that US gold; US currency; and title to US property and other assets are leaving the USA in amounts of annual value that are greater than they would be if US citizens were manufacturing the things that US citizens consumed. We must change this situation or we could become a post WWI Germany economically, and this could happen overnight.

A Trade Deficit is created when the USA importing, transportation, distributing and retail sales companies such as WalMart, Home Depot, NTB and etc. pay companies and individuals in foreign countries like China with US dollars to manufacture the things that these US businesses import, distribute, and then sell to the US consumers. Manufacturers such as GM, Ford, GE, Chrysler, GE, Westinghouse and etc. manufacture vehicles, appliances, and equipment made with imported parts that they paid the companies in the foreign countries with US currency to manufacture these parts for assembly of the finished product in the USA that is then sold to US consumers. What is the dollar value percentage of USA manufactured and assembled products that are made with imported foreign manufactured parts and/or sub-assemblies?

The US government also "borrows" US dollars (actually they sell freshly printed-paper T-Bills, US Government Bonds, and other US securities at public auction to China, private individuals, and other industrialized countries that earn US dollars mostly by manufacturing things for international trade) to pay US government expenses including negative balance of trade, wars, military jets with active duty military USAF pilots for the personal use of specially privileged members of congress (Pelosi), employee payrolls, government retirement checks, courts, federal police, failed business bailouts, cash bonuses to the various Wall Street forgers of SEC documents that contributed to political campaigns, Las Vegas corporation junkets for failed corporation employees, house mortgages for big spenders with bad credit, new multi-million dollar French manufactured personal corporate jets for political contributor's bankrupt corporations, pork barrel projects, research contracts, welfare, social security, Medicare, Medicaid, SSI, expensive corporate vacations, new infrastructure, wealth re-distribution, mental health, imported consumer goods and etc., and any other thing that congress and the president decides to use taxpayer money to acquire, build or just give to their political contributors and various other privileged individuals with borrowed US dollars.

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