In Search of the Perfect Investment

Yesterday I wrote, get out of most equities now.

In posted comments, my readers agreed. PrivateMorris wrote

Yes, indeed, the bad news is accelerating Harry. It’s the “Cockroach Theory” in action. For every piece of bad news that you actually see, a thousand more are in hiding. I wouldn’t be comfortable investing in this economy at current prices.

You can read yesterday’s column here. I’ve also updated the list of stocks we like — the list on the right. Notice that NLY is hitting new 52 week highs. Even at last night’s close of $18.48, it’s still yielding 13.42%.

It’s time for a hedging collar.When things go awry (like recently) and you don’t want to sell and get into cash, you can try this strategy from options expert and reader, Steve Littlejohn who warns “this kind of trade should be only undertaken by someone who knows options basics.”

If you own stock and you want to hedge because you don’t want to sell due to tax or other reasons then one way you can hedge with what is known as a collar. Basically a collar is a 2 part trade. If you have ever sold a call against your stock to generate income, then you already know half of the trade. If you know how a put option gives you the right to sell a stock at the strike price of the put option up to the time of expiration of this option and you know how to buy a put option, then you know the other half. You just have to put them together.

Normally you set collars when the stock is going up, but feel nervous about the market or the particular stock. This way the premium you receive for selling slightly out of the money calls can cover the cost of at or near the money put options. With such a collar, up to the time of expiration, you are protected to the downside at the strike price of the put option that you purchased and yet you have a bit of room for the stock to go up and still make a bit. If the stock rallies past the strike of the call that you sold at (or sometimes even before) the expiration of the option, you will get called away (ie forced to sell the stock). If that happens, you still have the put option which can be sold if it has any time value left. This scenario does leave you with a profit though.

When a market gets ugly, like I saw in the gold market on Monday this week where the gold futures were breaking out and most of the gold miners were going down and the general market looks to be rolling into a correction (which always takes the miners down) then you can get aggressive with these collars.

For example, I saw on Monday that Goldcorp (GG) was going up a bit and most of the rest of the miners are going down. I have had GG for years and I didn’t want to sell so I set an aggressive collar. With GG at about the 49.50 level I sold July 49 calls and received 2.29 and purchased July 50 puts for 2.15 at the time. By aggressive, I mean the calls I sold and the puts I bought were both in the money and this has no room for the stock to gain value (not normally the kind of collar one would normally put on). In this case, it is a pure play to the downside. I would only do this if I felt pretty certain that it is going down.

Today at the close, GG was at 47.02 and the calls I sold for 2.29 could be bought back at 1.02 and the puts I bought for 2.15 could be sold for 3.75. GG has dropped about 2.5 points and I have picked up about 2.87 points with the collar so far. Plus I received 2.29 -2.19 or .14 in my account when I set this collar on Monday. As the puts go deeper in the money, they will approach moving 1 point to each 1 point movement in the stock. Hence I am well protected and can end up selling my GG for 50.00 when it was actually under that level when I set this aggressive collar. It is truly making lemonade out of lemons if you get this right.

Cash on their balance sheets. who cares? I have cash on my balance sheet. If I were an “investment” I’d be a lousy one. I have cash because:

+ I need a cushion if the world collapses.

+ I don’t feel comfortable enough to bet the ranch on any one thing.

Why am I different to a corporation? I’m not.

Yet brokers, analysts and friends tell me, breathlessly,  “the company has $XX per share in cash.” As though cash is a reason to buy. Here are three companies with cash. I would argue their cash has made absolutely no difference to the performance of their stock. Three examples of tech companies with cash. Here’s their stock over the past ten years:

Which would you rather have owned? This is not a trick question. The answer is Apple, And would you own Apple because of their cash or their management? Da!

Now we have wars in four places. Count them: Iraq, Afghanistan, Libya and Yemen. From today’s New York Times:

U.S. Is Intensifying a Secret Campaign of Yemen Airstrikes

The Obama administration has intensified the American covert war in Yemen, exploiting a growing power vacuum in the country to strike at militant suspects with armed drones and fighter jets, according to American officials.

The acceleration of the American campaign in recent weeks comes amid a violent conflict in Yemen that has left the government in Sana, a United States ally, struggling to cling to power. Yemeni troops that had been battling militants linked to Al Qaeda in the south have been pulled back to the capital, and American officials see the strikes as one of the few options to keep the militants from consolidating power.

I think the U.S. should invade Australia.

Australia can quickly surrender. And then Australia will get lots of aid money. Sydney could do with some new roads.

Heck, why bother invading? Australia will surrender pre-invasion. Just send the money, please.

Typical native views on Sydney’s Bondi Beach. The natives are ultra-friendly.

All you have is your credibility. A friend organized a tennis game for me with a 22-year old, who’s looking for a job in New York City.

I said I’d help.

It’s a week later. Despite several promises, he still hasn’t sent me his resume.

How dumb can you be?

Will I help now? No way.

Robin Williams is not a great actor. Nor will this new play on Broadway make you feel good. It will show you what insanity happens in war.

It’s also appropriate because of today’s Washington debate about what we should do in Afghanistan. One statistic: Today we (the United States and its taxpayers) spend a little over $10 billion a month in Afghanistan.  If we ran Washington, think of what we could do with $10 billion a month — at $10 million a school, that’s a thousand new schools a month. Figures also a few bridges, tunnels and roads. Now think about what that might do to our real unemployment rate — 15%-17%.

How bad is the economy.

+ I met a Mormon with only one wife.

+ I bought a toaster oven and my free gift was the bank.

+ Angelina Jolie has adopted a child from America .

+ Motel Six won’t leave the light on anymore.

+ A picture is now only worth 200 words.

+ When Bill and Hillary travel together, they now have to share a room.

Harry Newton who apologizes for LinkedIn. If you received an invitation from me, I didn’t send it. LinkedIn is trying to boost its users and its stock price. Remember I said it was a good short? It still is.

The high on this piece of junk was $122.6991. It closed last night at $75.91, down 38%. It’s going lower.

I’ll get to the Internet startups tomorrow. I ran out of time searching for Bondi Beach scenes.