Intel (INTC-NASDAQ) reported very strong numbers last week, and gave even better guidance than expected. The shares rallied early then ended the day with a whimper. Still, the news was better than expected and that gives the bulls hope that a double-dip is not in the cards. Does it matter, really, whether we go into a double-dip or just keep plodding along with below average growth?
Well, a lower growth environment will prevent the market from crashing back to its May 2009 lows, but it’s not going to do much for the market in terms of an explosive rally. Sooner or later, the earnings guidance will begin to reflect reality.
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The reality is that with no jobs and a crappy housing market, there is only so much growth that companies can tap into. Add to this the reality of greater costs thanks to government involvement in every aspect of the dealings of businesses and individuals, and me thinks that the light in the tunnel is dim at best.
Just when you, or I, think the market is about to fade, it makes a miraculous recovery and heads higher. It pays to have a portfolio that can take advantage of both types of moves. One way is to make sure that the investments that you have the most money in are not high beta names. High beta means that the stocks react more sharply then the general market both up and down.
Preserving capital is one of the most overlooked strategies. You shouldn’t be forced to preserve capital because the market is making you scared. Rather, you need to use strategies that allow you to do both…make money when the market goes up and also make money when it goes down.
One strategy that comes to mind uses options. Now, most people just glaze over when they hear the word options. Too bad really, because used the right way, options can make you money very consistently. I’ve written in the past about put selling where you can collect money while waiting for stocks to fall…but not everybody can sell puts.
So, there is another way. That way requires that you buy stocks and you SELL call options against your shares. This is called COVERED CALL investing. But, there is more. Regular covered call investing works like this: you buy a stock at $30 and you sell an option with a $35 strike price. This means that you have sold someone the right to buy your shares at $35. In return he pays you for that right. That reduces your cost. Fair and well. But, what if the shares don’t go up. What if they go lower?
In that scenario, a more likely scenario in this market, you will lose money. So, that really doesn’t do you much good. Instead, what you need to do is to adopt a strategy that allows you to take into account a negative market environment. You can do this by selling options BELOW the price of the shares that you bought. When you sell an option at a lower price, you are engaging in a strategy called deep-in-the-money covered call investing. You can do this in any account, including your IRA. It works like this: You buy a stock at $30 and you sell a $20 option against it. You get at least $10 back (intrinsic value between $30 and $20) plus you get money for time and risk, let’s say another $2. In effect you are being paid $2 to own the shares at $18 ($30 cost minus $20 strike minus $2 in risk/time premium). Your return is over 10% and you have the luxury of a 40% downside cushion.
If you don’t want to do the work, then you may want to look at a fund that invests using covered calls and also uses the strategy I just mentioned. It’s called the Madison Claymore Covered Call fun and it sports a nice healthy 8.7% plus annual dividend. The symbol is MCN on the NYSE.
Will the Bear be Back?
My bet is that it will. There are just too many unresolved issues on Wall Street and Main Street for the scenario to be anything but negative in the short-term. Of course time will tell all. For now I think a defensive posture is warranted.
The Federal Government is leaning towards a business unfriendly regime. That’s not good news for stocks or for investors. Clarity is lacking from the highest office in the land. Mid-term elections are on the horizon and that will prove to be an extremely volatile period for the market. Republican victories don’t assure anything. After all they are as much to blame for the mess as are the Democrats. Sad to say that both parties have embraced incompetence equally well.
Slower growth in the second half of this year is all but assured by the numbers coming out of economic indicators like the Manufacturing Index, the Purchasing Managers Index, the Leading Economic Indicators and anecdotal evidence. Employment, while growing, is doing so at a paltry pace and consumers who don’t have jobs simply can’t spend.
For investors the news is not all bleak. The recession will end at some point…there is just too much money being printed for it not to. When it ends, it will be too late to buy stocks, as they will have already rallied. That is why you have to put strategies in place now to buy good companies. If the market heads lower, then you might want to put some capital at risk. The key is not to invest whole hog thinking that there are no alternatives to holding cash. There are alternatives – you could lose a big chunk of your portfolio. No one ever said that alternatives had to be positive!
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