|
Speaking of melting. Did anyone else get whiplashed with the bounce back in the market.
Bobby Vee could have rung the closing bell today on Wall Street. The 1961 Rubber Ball was #6 in the US and #1 In Australia and #4 in the UK for Mr. Vee. And like the lyrics say, "Like a rubber ball, I'l come bouncing back to you." And the Mr. Market did bounce back from Friday's blood bath. Let see why?
Some say the jobs report triggered some dovish thing on the minds of the Fed. (Economic speak for, Bernanke might do more QE III or at least extend the current ineffective Operation Twist.) Some say it was because of the win in Wisconsin to keep Walker in office, a blow to democrats and especially organized labor. Some say it was the ECB's verbal support of bank capitalization in Spain.
You will note that these were all "Might Be The Reason" for the bounce. Now let's take a look at what actually happened today. Some of the housing stocks had nice things to say. The ECB actually did nothing to support their positive comments about Spain and left their economic policy in place, but they "stand ready" to do so. Don't know what they are waiting for as Germany had a poor industrial production number. The US Beige Book should have lowered the market as there was nothing hopeful inside.
Volume in the markets were moderate indicating that this was not a committed move, possible just some portfolio grabs of stocks a little oversold on Friday. As we looked through he Beige, I was looking for hints of inflation and found just the opposite. Wage and labor demand was easing, and with the Wisconsin recall labor will not be in a great position to ask for more wages for members. Gas prices are easing. The only sector with any noticeable increase in prices is the renter's market.
So that was the macro, here is the micro. We had sold some call options on AAPL, XOM, and WFC on Monday thinking the downward spiral would continue. Here is what selling a covered call does.
If I own 100 shares of AAPL, I can sell 1 call option against those shares. When you sell an option you are committing to sell the underlying share at a set price on set date in the future. Obviously you are betting the price will be lower and the option to buy expires and you get to keep the money you got for selling the call option. Well we sold calls for this Friday and after today it looks like all my AAPL and WFC will be called away on Friday. My other tactic would be to buy the options back, but currently that would be very expensive.
Our VXX did not perform well today with the bounce. We were in positive territory on Friday but have taken it back to a negative position. Not to worry as last year we did not get out of VXX options until November.
Yesterday I sent a note to our Salve Lucrum family of investors and thought you might like to see it. (In other words, I am tired of writing and it's getting late.)
"It's been a while since I dropped you a portfolio update. Just as well since most of you are in a cash position at the moment. I will be providing YTD summaries for those who have been with us for more than year hopefully later today. As far as market performance, we are back to where the year started as most of the indexes lost about 7% in May. If you follow the blog, you know we flew the red Flag on May 2nd. That would have been a GREAT time to tighten your stops or cash out all together. We got most of you out of the market by May 11. For those who just got their accounts opened in April and May, sorry as you will have to sit on the sidelines a bit with a slight loss as you came in at the top.
You might ask why I am not moving your cash to a Money Market account while we wait for Mr. Market to recover? Well the best interest we can hope for in a Schwab liquid Money Market account (SW2XX) is about .01% aka .0001 for a seven day rate. For 10,000 dollars that would be about 1.00 a week interest. After taxes you would be lucky to make .75. The trade would cost about 9.00 in and 9.00 out. So in 18 weeks we would break even. I hope to have your money back to work by then so I am leaving in a stagnant cash account.
Now a few of you had margin accounts and the cash for me to get you into those ugly VXX options. While spending most of the last three months in the deep bowels of negativity, we are seeing some nice positive growth in the last few days. Now these options are January 2013 $20 VXX call options. As you know, VXX is a derivative of the CBOE VIX index. The VIX index is a measure of expected 30 day volatility. The index is derived by taking many of the available options on stocks in the S&P 500 and it measures the numbers of call options (Bullish) and the number of Put options (Bearish) and compares them. It is also known as the fear index.
As the market gets scared you see the VIX (and its corresponding derivatives like the VXX) rise, and as the market gets cozy, it drops. We have been loading those who had the cash and margin accounts with the January call options while Mr. Market was all fat and happy during its recent rally from December through April. The VIX was in the 13-19 range during that period of time. We knew there would be Euro debt issues as Greece, Italy, Portugal, Spain did not address their problems last year they just kicked the can down the road. We also know we have some debt issues of our own to deal with later this year, and we made a guess that the two year program of belt tightening in China would eventually cool off their economy, and it did.
Now the mechanics of the options work like this (sorry for those who don't have these YET), you own a number of Jan 2013 $20.00 call options. Depending upon your account we got this for you at an average cost of about $6.25 an option contract (each contract controls 100 shares). So we spent $625.00 to control $2,000 worth of VXX. You have the right but not the obligation to buy 100 shares of VXX on January 19, 2013 at $20.00 a share (aka the strike price). So if the value of the VIX derivative is above $20.00 you would have made money. If not, you loose money. Since you paid $6.25 for that privileged, your true break even is $26.25. Currently, the VXX is at 21.25. It was up to 22.74 last week.
If this sounds like legalized gambling, it is. If you can keep abreast of the nuances of what makes the market nervous and know the historical ranges of the VIX, it is a relatively conservative to hedge the equity holdings in your account.
Before we let you go, many of you have one holding left, BOFI, the Internet Bank. This stock is an outlier and is holding its value through all this chaos. It was discovered using the Auer Fund Screen I have described in the blog and passed the Buffet Stick test. If the market were not to stinky, I would be adding more of this to the accounts.
If you have any questions about your accounts or about margin accounts or if you want the help me figure out why, if Barbie is so popular, why you have to buy her friends, give me a call or drop me a note."
Salve Lucrum
| 
