Love Letters (Weekend Reading on Valentine’s Day)

February 14, 2010

493

Happy Valentine's Day!

Last Valentine's Day was as Saturday, following a frightening Friday the 13th, where we had fallen through the 8,000 line on the Dow. I wrote a very interesting post that morning discussing how I came about my political views, which is good for new Members to check out. We also flipped short that day on SKF, too early at $130 but that ended well as we kept after them and it was our biggest bet by March 6th, which eventually returned over 1,000%. We also stopped shorting GOOG at $350 (it did keep going to $300 but the upside was nice too). I closed the morning post with:

For us, it’s all about the levels as we try to remain unbiased as investors, no matter how voraciously we defend our political views. Dow 7,800, S&P 820, Nas 1,460, NYSE 5,100, Russell 437 and SOX 203 all better continue to hold today but, even if they do, we’re nowhere near where we want to be and we’re going to take some bearish covers into the weekend – just in case. So whether you are a witch celebrating the horrors of the 13th or waiting for a rose from your true love the next day, remember to be careful out there – we are certainly still deep, deep in the woods!

That Tuesday (Monday was President's day) we fell 300 points and another 300 points by the end of the week! That was a fitting way to mark the 80th anniversary of the St. Valentine’s Day Massacre when Al Capone’s "South Side" gang, dressed as cops, rousted a garage run by Bugs Moran’s "North Side" gang and had them stand against the wall and then executed all 7 men. They shot them 70 times with machine guns and made their escape by using the Capone men dressed as cops to "arrest" the other Capone men and drive them away from the scene in broad daylight. Now that's what I call a good plan!

Here's a great chart that summarizes our year to date. Someone else found this, I wish I knew how to use StockCharts this well, they have tons of good things in there:

It's a bit worrying that XLU is doing so poorly – so much for diversification keeping you safe… It's going to be worth rummaging through the utility companies looking for good dividend payers who are on sale. SO is one we like to play with a 5.6% dividend and, as long as they hold the 200 dma at $30.75, I like the entry down here (now $31) selling Jan $30 puts and calls for $5 for a net $26/28 entry. $25.05 was their spike low last March and the $1.75 dividend (assuming it holds up) makes them worth sticking with long-term especially as our discounted entry makes that an 8.8% dividend!

Here's another kick ass graphic. Our top imports and exports of the last two years from Loans and Credit:

Our friend Joe Stiglitz is at it again, writing in the Guardian that:

Nothing has changed since August 2007, and the political running in the United States is being made by the right-wing anti-state Tea Party. "There was a moment of euphoria when we were all Keynesians, those ideas were working and every government stood behind them. It was not just Keynesian macro-economic policies, it was the need for regulation and the recognition that economics had failed."

Since those heady days of optimism a year ago, when unprecedented government action hauled the global economy back from the brink of a new Depression, Stiglitz says two things have happened to derail prospects of change. "Plans to re-regulate the financial markets have run into a political quagmire and there has been a resurgence of deficit fetishism." He says he is surprised at how fast the forces in favour of the pre-2007 status quo have re-grouped. "The optimist in me is hopeful we won't need another crisis to finally motivate the political process," he said. "The pessimist in me says it may need to happen."

Speaking of economists, Paul Krugman makes a good point. He thinks economics is entering the equivalent of "the Dark Ages," in that it seems to be a time where we are forgetting all the lessons of the past. “We’re living in a dark age of macroeconomics,” Krugman said during his lecture, before an audience of several hundred students (and several of his former MIT colleagues) in the Stata Center. “Economists themselves are confused,” he added. “It’s been really amazing within the economics profession to see how much has been lost. We are caught in a situation more than a little reminiscent of the mid-1930s,” Krugman emphasized. “How can we be replaying the past so badly?” he added. “That is the question that has worried me a lot.”

Kiplinger's March issue is out and it looks like like 11% of the US workforce (such as it is) are now temps, up 23% from July. There's people, of course, count as "employed" While historically temp hiring is a positive sign for future employment, Kiplinger says: "What’s different about this recovery is that companies, many of which cut staffs to the quick, seem committed to staying flexible in the long term by using contingent workers to manage everything from special projects to whole departments. Moreover, instead of the typists and factory workers who have traditionally populated the ranks of temps, these days you’re likely to be working alongside an engineer, accountant, doctor, lawyer or technology guru."

Some Dividend Plays We Can Look At:

Motley Fool had a good premise that you can invest in foreign stocks that do NOT do business with the US as a way to headge against the dollar. STD is in Spain and does half it's business in South America, which all sounds scary but they are a solid lender with a 4.2% dividend. I love low cost stocks as we can protect reasonable and with STD at $13.16, we can sell the Sept $12.50 puts and calls for a very nice $3.80 for a net entry of $9.36/10.93, which is 17% off if put to you – not bad, so let's go out and get some STDs this week!

CHL is another one they mentioned and, surprisingly, they pay a 3.2% dividend and are volatile enough that we can go for a deep discount buying the stock at $48.59 and selling the 2012 $40 puts and calls for $17.30 for a net $31.29/35.65, which is just $2 higher than their Nov '08 spike low ($33.13). According to TOS, margin is about $420 per short contract in a non-PM account so don't be scared of doing these deals. If you get called away, aside from the dividends, you are up $8.71 (28%) at $40, which is 20% lower than it is now! Also, since the payoff is so good, you can also buy the 2011 $35 puts for $1.30 (about the amount of the dividend), which covers you on any move below $35 through Jan on the short side. When you want to guage the effect this has on your position, just add the $1.30 to the cost of your purchase so you end up with $32.59/36.30 so you still have a 23% upside but you can be a lot more relaxed through 2011.

Another victim of the Greek crisis is OTE, a Telco that serves Greece, Albania, Bulgaria and Romania and pays a 7.3% dividend at $6.40 and has no options. They are back near the '08 lows of $5, down from $9.72 in October and there are no options but worth a shot as one to put under your pillow and forget about. Forward p/e is estimated to be 7.71 so room for error as a long-term hold.

CIM is a wild stock at $3.67. It's an investment REIT (one that buys MBS's) that pays an 18.5% dividend. Of course that means they use leverage and take on risk so they go on a wild ride but the 200 DMA at $3.57 held up last week and they were on my secondary watch list and passed the test. There's not much point to selling calls here, like most high-dividend stocks they have awful premiums but you can sell Sept $5 puts for $1.80, which is net $3.20 so you can consider it an entry with free .47 buffer, which doesn't sound exciting but that's 13%. Just buying the stock is fine too but, like many REITs, CIM totally collaped in '08 and was $1.35 so just make sure you have a plan to DD there.

ELNK is still around and, in fact, had a really good Q but sold off and now bounced yet again. While you watch the action, they are willing to pay you 6.7% and with the stock at $8.35, selling the Jan $7.50 puts and calls for $2.10 net's $6.25/6.88%.

PDLI is a fun play. We all love our little Biotechs but how about one that pays a 15% dividend? PDL manaages patents, licenses and royalty assets, mainly on their own antibody treatment that expires in 2014 so not a long-term hold. There are only 6 people in the whole company so we need to hope they are all straight shooters but this company is 94% held by institutions so someone is certainly watching them regardless. The stock is just $6.67 and you can sell the Jan $7.50 puts and calls for $2.25 for a net $5.25/5.96 entry. No tragedy to get called away at $7.50 (up 43%) and, we don't mind owning them in 2012 if not but that would be it so more conservative on the roll.

AINV is kind of like investing in a Hedge Fund and they just took a hit from realizing some losses as they purged the virtual portfolio, which dropped them from $11.50 but they bounced off $9.50 and are back to $10.68 already. They pay a 10.5% dividendand we can do a buy/write, selling the Sept $10 puts and calls for $2.50 for net $8.18/9.09 – not a bad entry for the first 6 months.

HIMX is a nice little semi that does a lot of LED and LCD stuff AND pays a 9.5% dividend. It may not seem like much but selling the Sept $2.50 puts and calls $1 against the $2.96 stock brings the net down to $1.96/2.23 and that's a nice entry for a stock that was $5 in '08.

DT is one we talked about this week. They pay a nice 8.1% dividend at $12.86 and they are in the sweet spot for selling July $12.50 puts and calls for $2.10 for a net $10.40/11.45 entry. $10.29 was their spike low so I feel good about this one as long as the world doesn't actually end.

Other news items:

Eleven lessons that can be learned from Iceland.
Greece looks set on a collision course with the EC after its finance minister denied it needs to take further debt reduction measures. George Papaconstantinou: "If we announce today new measures, will that stop markets attacking Greece?… We are trying to change the course of the Titanic; it cannot be done in a day. If additional fiscal measures are needed, we will take them." Note to George – I don't know about Greek but, in English, calling your country the Titanic has negative connotataions that do not inspire a great deal of confidence…
Dubai stocks falter after reports Dubai World is looking to offer creditors a scant 60 cents on the dollar, stretched out over seven years. Dubai was quick to deny.
A new Dr. Death? Paul Volcker supports assisted suicide: "If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it – not save it," he told CNN Sunday. "It's called euthanasia, not a rescue."
Central bankers line up behind the dollar as the world's reserve currency, if only because they can't find a better option.
On the other hand: A massive wave of euro (ETF: FXE) shorting shows no signs of letting up. Despite the widespread negativity, contrarians remain wary: "Yes, [negative bets] are large," State Street's Monica Fan says. "But does that mean they can't get larger? Absolutely not."
In the euromess blame game, fiscal indescretion takes a back seat to Europe's impetuous move to a single currency, Paul Krugman writes. With a euro breakup all but unthinkable, the coming years will probably bring more of the same: "bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by grinding deflation."
A top Saudi energy official says world oil demand has peaked or will peak soon, as developed nations move aggressively toward renewable energy sources. Saudi Arabia is preparing for the eventuality by laying the groundwork to become a top solar power exporter.
AT&T (T), Sprint (S) and Verizon (VZ) launch a 24-member alliance looking to unseat Apple's (AAPL) App Store. "The alliance's stated goal is to create a wholesale applications ecosystem that will establish a simple route to market for developers to deliver the latest innovative applications and services to the widest possible base of customers around the world."
Microsoft's (MSFT) new Windows Phone 7 Series mobile OS – unveiled today in Barcelona – is spiffy. But in a market already crowded with heavy hitters like Apple (AAPL) and Google (GOOG), it may be too late.
Reporters turn to blogs for tips: 89% of journalists say they use blogs for online research; 65% use social media sites; and 52% use microblogging services.
Speaking of which, didn't I start this story the other day?: Traditionally considered a harbinger of new permanent jobs, analysts say a recent rise in temporary hires is more likely just a sign of manufacturers' unease. Wells Fargo's John Silvia: "Companies aren't testing the waters by turning to temporary firms. They just want part-time workers."