How To Box Clever Against A Hostile Market And Score “Knockout” Yields Of 21.5%
August 28, 2008
Guest Editorial by Nathan Slaughter, Chief Investment Strategist, The ETF Authority
Managing Editor’s Note: Today, we welcome back our friends from The Street Authority, with a special piece on ETF investing. As you may know, ETFs offer investors a flexible way to capture the performance of an entire sector/industry/currency, etc. through just one investment. They offer diversity, flexibility, and a lower-risk way to invest in specific areas of the market. And in today’s column, Chief Investment Strategist of The Street Authority’s “ETF Authority” group will show you how to track down the highest-yielding ETFs. Enjoy. ~Martin Denholm, Managing Editor, Smart Profits Report
ETFs Are A Smarter Investment Choice In A Rollercoaster Market
It’s easy to feel pummeled by today’s market. But smart investors have started to realize that exclusively chasing growth stocks is like setting themselves up for repeated sucker punches - especially when there are better choices.
I’m talking about the 150 exchange-traded funds (ETFs) paying double-digit yields - some as high as 21.5%.
Sometimes, changing your strategy is the only way to succeed, regardless of whether it’s a business venture, investing, or even boxing. In fact, today’s investors would be wise to take a page out of boxing champ Muhammad Ali’s playbook…
Float Like A Butterfly, Sting Like A Bee
No one thought Muhammad Ali could come out of retirement and beat George Foreman. After all, Big George had positively murdered Joe Frazier and Ken Norton - the only two men who’d beaten Ali before.
It seemed it would happen again as the ferocious-hitting Foreman got Ali on the ropes, pounding him mercilessly.
But by Round 8, Foreman was exhausted. Ali, on the other hand, still had vast reserves of energy - despite taking a beating earlier. He turned on the speed, accuracy and raw power that the world had momentarily forgotten. Result? Foreman went down and Ali was heavyweight champion of the world once again.
So what can we learn from this?
Change Can Be A Good Thing
Faced with a new opponent, Ali had to change his approach. His rival could hit, but Ali saw through it and focused on his own stamina and devised a simple strategy.
Many investors today probably feel like Ali did, as Foreman battered him with punch after punch. They feel bloodied by the sub-prime meltdown, real estate woes, the financial sector crisis, and bruised by energy and commodity prices. Some have quit the game altogether.
After all, profiting from rising prices works great in bull markets, but it’s a tough strategy to pull off when the bears are prowling. In fact, it’s a classic example of making things harder than they need to be. There’s no point in fighting a market downtrend.
But that doesn’t mean you need to give up. You just need a change of strategy. If market conditions mean you can’t juice your portfolio with capital gains, then it’s time to focus on a strategy that does help generate income.
The Benefits Of Focusing On Income
Why shift to income? Simply put, companies that pay dividends tend to be very stable and represent mature industries. Many do business in non-cyclical sectors like utilities and these “defensive” companies pull in steady sales, even during tough times.
And dividend-paying investments fare much better during bear markets. For example, during 2000, 2001 and 2002, the dividend-paying stocks in the S&P 500 actually rose 10.46% while others sank 33.19%. And other 10-year periods have seen dividends provide the only return for the S&P.
So you can take a chance and continue to bet against the market. Or you can collect double digit yields on investments proven to weather the storm. I know which approach I’m taking - and ETFs offer dozens of outstanding choices for income investors.
In this area, high yields are the norm, not the exception. As of the end of July 2008, 198 ETFs sported yields of more than 10%. Only 132 common stocks can say the same.
And ETFs are particularly convenient those who simply invest to pick up some consistent, extra income. Why? Because more than 500 ETFs pay distributions on a monthly basis, rather than a quarterly or yearly rate.
Score Your Own K.O. With These ETF Choices
Take a look at these three high-yielding ETFs, all of which are generating double-digit income streams:
- One “flexible” ETF we found boasts a 12.0% yield and has an impressive track record of adjusting its strategy to capture the best gains the market has to offer in high-yield bonds, royalty trusts and other equities. That strategy - which includes buying stocks with low P/E ratios while shortening stocks with high P/E ratios - has really paid off over the last year.
- Another appealing choice invests in real-estate investment trusts (REITs) - entities required by law to pass along 90% of their earnings to shareholders. Our favorite in this space owns a portfolio that’s double-diversified by both property type and geography. It’s an approach that is paying off with a yield of 14.8%.
- The third ETF focuses on Asian stocks, which owns mature, dividend-paying companies such as telecoms, financials and utilities. And it pays a 21.5% yield. This fund has increased its dividend payout by 200% in the past three years.
When the opening bell rings on Wall Street tomorrow, take the opportunity to think differently. Remember Ali and Foreman’s “Rumble in the Jungle” and focus your efforts on your eighth-round comeback, even if the past seven rounds have been abysmal. This is your chance to deploy a knockout income ETF strategy.
And The ETF Authority can be next to you in the ring, providing the coaching you need as you seek the best places to put your money to work. My research staff and I just put the finishing touches on an in-depth report that will show you the three best ways to profit from ETFs right now.
This special report will reveal more on how to use ETFs to capture double-digit dividend yields - including more information about some of my favorite picks - and how to profit from today’s most promising sectors and foreign markets. (Our favorite foreign chart-leader is an ETF focused on Brazil, which has returned 702% over the past five years!) For more information, just click here.
Best regards,
Nathan Slaughter
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ETFs Present Solid Investment Opportunities
Sphere: Related ContentPaul Moore - Technology Research Analyst
August 28, 2008
Paul Moore is Technology Research Analyst for the Xcelerated Profits Report and Smart Profits Report with a specialty in technology. Paul has 13 years of experience generating technology research with buy and sell side institutions including two hedge funds and Morgan Stanley. His undergraduate degree is in Computer Science and he considers himself to be a technologist before an investor. He has obtained his NASD Series 7, 63, 86 & 87 licenses (required for all sell-side analysts).
Paul joined the team to help individual investors profit from thematic technology trends in both the long and short term. His portfolio strategy entails buying thematic growth names under technical pressure while trading ideas follow the “reversion to the mean” principle. By focusing on thematic technology names, Paul believes individual investors can outperform professional investors who’s actions are often governed by short term performance measures.
Sphere: Related ContentThe Dollar’s Gain Could Be Tech’s Loss…
August 26, 2008
Why Accenture And IBM Should Worry About The Euro
The Smart Profits Report #552 - by Paul Moore, Technology Specialist, Smart Profits Report
Mediocre at best.
That’s how you can sum up the growth rate for the S&P 500 index over the past six-and-a-half years.
In fact, since the end of the first quarter of 2002, the index has risen by a total of 12.8%. That’s just 1.87% on an annualized basis, as the following chart shows…
Even if you add in the 2% dividend yield, you get a whopping 3.87% return per year.
That might be bad news for companies that do the bulk of their business in the U.S. But multi-national companies have enjoyed some serious benefits during this six-and-a-half year period, as the performance of the euro has pummeled that of the S&P, soaring 73%.
This strengthening euro has dramatically increased the buying power of European technology customers, who pay American companies in euros. And in turn, it’s created a great tailwind that may be unwinding…
A Rough 2009 For These Tech Multi-Nationals?
As the broader U.S. economy plods along sluggishly and the dollar has sunk, American multi-national companies like IBM (NYSE: IBM) and Accenture (NYSE: ACN) have seen international markets drive their growth.
However, as the combination of weakening European economies and the strengthening dollar eliminate this growth source, companies will have a difficult time meeting analysts estimates for 2009. For example…
Accenture: Revenues from the EMEA region (Europe, Middle East and Africa) increased 23% in U.S. dollars, but only 11% in constant currency. So even without constraints on demand, the revenue growth would be cut in half.
IBM: The company has also benefited from the weakening dollar and stronger euro. Its European business grew at 17.9% in dollar terms, but only 6% in constant currency.
Both Accenture and IBM will see the growth contribution from these regions more than cut in half in the coming quarters at a time where the domestic business is continuing to languish.
In short, 2009 has the potential to be a tough year for multinationals. If the Euro/Dollar exchange rate holds constant at 1.545 (shown in the chart below), the year-over-year growth of the euro drops to 3.2% in the first quarter of 2009.
So as you can see on the chart below, what had provided a strong tailwind of between 13% and 15% over the first three quarters of 2008 disappears towards the end of the year - the historically weakest period for technology companies and the time that management gives guidance for the forthcoming year.
And this could be the best-case scenario…
Breaking Down The Bottom-Line Damage
What if the exchange rate doesn’t stabilize in this area? It’s very possible that the dollar could continue to appreciate. Considering that the European Central Bank just announced its first quarter of GDP growth contraction and the strengthening dollar has reduced the impact of inflation, we believe there’s a real chance of seeing European interest rates decline, while domestic rates remain stable.
How much damage could there be?
~ In Accenture’s case, EMEA represents 50% of revenue, but since the domestic business is growing more slowly, it’s more than 50% of the growth.
~ IBM is in somewhat better shape, with 37% of revenue coming from EMEA, but this is still a sizeable portion of both revenue and growth.
The flip side of the strengthening dollar is the benefit to operating expenses. When a company is in business-building mode (and European operations have a lower margin than domestic), this can have a positive impact on profit, despite the negative impact on revenue.
Since companies are not required to break out operating expenses by currency and some engage in hedging programs to reduce the impact of foreign exchange fluctuations, the impact on profit will vary on a case-by-case basis.
So when will this happen?
Tech Trouble Towards The End Of This Year As Guidance Goes Awry
The timing for this issue to be incorporated into financial expectations will be either during the third quarter reporting season, or as the end of the year approaches.
Companies typically don’t offer guidance for 2009 until the end of 2008, but this trend is large enough that it will be addressed sooner than later.
For example, in its conference call where it issued financial guidance for the coming quarter, Hewlett-Packard (NYSE: HPQ) mentioned that its projections are based on exchange rates as of the end of July and that currency fluctuations could cause revenue to be below guidance.
Management also addressed the profit issue and said that even in the case of a strengthening dollar, the company would meet earnings-per-share projections. This may yet prove to be accurate, but it would come at the expense of potential earnings upside.
Since the end of July, the dollar has appreciated 4.6% versus the euro and considering the market’s current volatility, investors should remain more cautious than dismissive of the impact of this trend.
Paul Moore
P.S. Speaking of Europe and European growth, Investment Director Karim Rahemtulla just shot me an e-mail about his upcoming “Grand Essential Tour” to two of the region’s biggest economic players: France and Italy.
Cities like Paris, Rome, Venice, and Florence are all on the agenda - and guiding you through them with Karim will be acclaimed author and founder of Agora Inc, Bill Bonner, and Colin Wells, a recognized authority on Roman history and archaeology. Between the three of them you’re promised the kind of lively, diverse banter that you simply won’t find on any other tour!
You’ll gain knowledge about these cities’ legendary status in Europe - the history, culture, geography, art, and architecture, and the inventions that make them the forces they are today. But you’ll also learn about the countless innovations, disciplines, and practices that are commonplace today. For example, the world’s first public issue of company stock … the world’s first multi-national currency … the foundations of our Senate … the story behind the Capitol building… and more.
And of course, today’s best investment opportunities. It’s an exclusive tour, full of history, art, culture, roots, ideas, camaraderie, luxury, and taste. Click here for more information and to reserve your seat now as the tour is filling up quickly.
Today’s Smart Profits Notes
- Chordiant Software, Inc. and IBM announced an extended partnership they believe will profit global brands that interact with their clientele on a larger scale. This has already proved a profitable alliance as seen in their mutual products used by German health insurance provider DAK and Poland’s ING Bank Slaski. According to the contract, their next plans include Asian and Eastern European businesses.
- The iPhone might be big news in the U.S., but you have to pay people to take interest in it in Poland. Literally. In order to beef up sales, Orange, the country’s largest mobile operator is paying dozens of actors to stand in lines in the hopes that they’ll start a trend. While the July launch was profitable back in the U.S., Polish consumers might be more difficult to win over due to the hefty additional monthly charges tacked on to full usage.
P.S. We also have a couple of fun optional excursions planned in and around Nicaragua & Panama (including Rancho Santana), so be sure to get all the details.
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Sphere: Related ContentSector Watch: Let The “Waves” Guide You Towards Profits On Oil, Natural Gas, & Gold
August 25, 2008
Monday, August 25, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Not to steal the show from my colleague and commodities expert Lee Lowell, but I want to take a moment to chat about oil, natural gas, and gold.
Of course, I do things slightly differently, looking at the ETFs that represent these markets, rather than the more direct futures market.
In my last column, I pointed out that the U.S. Oil (AMEX: USO) ETF and natural gas ETF, U.S. Natural Gas (AMEX: UNG), were in the process of tracing out at least an A-B-C correction to the downside.
Click this link to check out the chart from two weeks ago. Since then, USO has rallied enough to qualify for the “B” wave rally. From here, there are basically two scenarios…
- 1. If the “C” decline has already begun, the stock should trade down to at least the $86.50 area.
- 2. If the “B” wave rally is not yet complete, and USO trades above last week’s highs, the next resistance level is around $100.95.
Either way, USO should make new correction lows before a sustainable rally could unfold.
Gas Still In The “A” Wave
The natural gas market has performed more weakly than crude oil, and made new lows again last Friday. This means that UNG is still in the “A” wave decline and alert investors could have an opportunity to short the stock on the first decent rally, which would be the “B” wave.
Aside from that, most commodities have endured heavy selling pressure since topping out in early July. We’ve seen oil trade below $112 a barrel and gold dip below $800 an ounce before both rebounded last week.
Part of the rebound came as a result of a pullback for the U.S. dollar. So since commodities are strongly correlated to the dollar - and that appeared to be the focus of many traders last week - I’m going to take a look at a couple of the most active and interesting-looking charts this week…
This PowerShares ETF Is Powering Down
The chart below shows the daily performance of the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC). As you can see, it looks very similar to the USO chart.
In mid July, DBC triggered a sell signal - and based on the chart pattern, it appears to be in the “B” wave of at least and A-B-C decline.
If DBC and all of the ETFs mentioned above have put in major, long-term tops, these three wave (A-B-C) declines could actually turn out to be longer-term, five-wave declines. However, it’s too early to determine if that’s the case yet, so we’ll stick with what we know for now.
So if the “B” wave on DBC is complete, the stock should trade down to the $35 area before a sustainable rally could get underway.
When Three Waves Becomes Five Waves
This next chart caught my eye because it traded down to its long-term trendline last week and has so far held above it.
Because the commodity futures create more accurate charts, while the ETFs just follow their lead, I’m going to break with tradition a little bit and use a weekly chart of the December Gold futures (GCZ8) for analysis here, rather than the SPDR Gold Shares (NYSE: GLD) chart.
The trendline on this chart goes all the way back to July 2005 and you can see that it was tested when the futures price traded down to $778 on August 15. Since that low, gold has rallied by about $55, but we still haven’t seen any significant buy signals get triggered so far - something that would tell us that the correction is complete.
However, this development spilled into GLD, as the stock posted an equivalent low of $76.61 on August 15. This was also around the same time that the dollar peaked.
The sharp dollar rally was a mirror image of the drop in GLD and usually after this type of action, the odds are that these markets could consolidate before making their next major move.
The Next Moves
The price action over the next week or so should be a good indicator of where GLD is headed next. If GLD begins to consolidate in the $80-86 area for a while, there’s a good chance that once the consolidation is complete, the next move will be down - especially since DBC still looks bearish.
If GLD and the December Gold futures make new correction lows, the selling could intensify, as we’re not the only folks watching the long-term trendline. However, if GLD begins to rally strongly on heavier volume, and closes above $88.50, the correction may be over.
According to the trading model used in my 1-2-3 Trader service, we could see buy signals triggered on GLD prior to reaching the $88.50 area, so I’ll keep you posted on the situation right here.
Until next time…
Jim Stanton
Sphere: Related ContentHow To Handle The Stock Market’s Current Turmoil
August 21, 2008
Thursday, August 21, 2008
Smart Profits Report #551
by Aaron Lehmann, Contributing Editor, Smart Profits Report
One year and counting…
That’s about how long the financial markets have been in turmoil.
And when the stock market finally recorded a 20% decline from its October highs (the technical definition of a bear market), it provided plenty of fodder for the “experts” to shout about.
It seems the so-called astute investment community adopted the traits often found in government or public officials: The usual inability to identify problems until well after they’ve occurred, banishing the chance to be proactive in dealing with them.
In truth, the dramatic decline in the U.S. financial and housing markets was quite evident in early 2007, yet the Federal Reserve, Treasury Department, and investment bankers alike were all lulled into dangerous states of inactivity. Combined with the extraordinary rise in energy costs and commodity prices, these factors have taken a heavy negative impression toll on the economy.
Here’s what you need to know - and which companies could combat the current situation best from here…
The Market’s 2008 Burden
Although the U.S. dollar has climbed against other major foreign currencies like the euro, British pound and Japanese yen over the past 10 days, its overall devaluation hurts Americans traveling abroad, but helps U.S. exporters and foreigners traveling here to pick up bargains.
Still, the picture remains bleak, as we’ve witnessed the demise of Bear Stearns, billions of dollars in bank write-offs, the implosion of Fannie Mae and Freddie Mac, the continuation of the sub-prime mortgage debacle and resulting foreclosures as real estate prices sink.
At the same time, Americans’ spending power is rapidly eroding, as inflation continues to rise. So what can we do now to prepare for the future?
Invest More… Speculate Less
Although the next 6-12 months seems bleak (if you listen to a lot of the mainstream press anyway), I believe it will create significant investment opportunities for patient investors, who rely on facts, rather than following the panicking herd out the door.
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Yes, while factors both here and abroad warrant caution (examples include the resurgence of Russia as an aggressive nation, a changing of the guard in Pakistan, nuclear tensions in Iran, an economic slowdown in Europe, and the U.S. presidential election), they certainly don’t signify financial ruin.
The difference between investors and speculators is knowledge. Yes, every investment is somewhat speculative, no matter how safe you think the asset may be. But a good analyst relies on a wide array of data in selecting a pick in order to give the best possible chance for success.
Those tools include monitoring industry trends, and thoroughly analyzing balance sheets, income statements, cash flow analysis and the history of that entity under various scenarios. Many go even further by interviewing management, competitors and customers.
You can then make a better judgment about when the asset should be bought or sold, plus the probability of success. It takes time - but it’s time well spent. And that’s exactly what we strive to do for you here and in our premium content newsletter, the Xcelerated Profits Report.
Don’t Bet On The Fed This Time
Don’t pin your hopes on the Federal Reserve. The bankers are virtually out of options that can save the system, short of bailing out every struggling financial institution or creating rampant inflation.
The fact is, the “good old days” are gone… the financial sector shakeout probably has further to go… and the value of underlying assets and the ability of the various institutions to raise capital is still uncertain.
In the absence of much leadership, I continue to remain skeptical about a sustained rally or the beginning of a new bull market. But there is hope.
Signs of a market bottom (which will be the first indication of full recovery) might include market capitulation, a shakeout of money managers, including hedge funds, and even greater negative sentiment.
Longer-term positives would include oil prices dropping closer to about $70 a barrel, a rally in the U.S. dollar to about $1.10-1.25 versus the euro, and a basing in the housing market, with stable housing starts and fewer foreclosures.
In the present, though, U.S. corporate balance sheets are quite strong, and stable share prices can create a major stimulus to cash flow and corporate profits.
Two More Stocks For Your Watchlist
In my last column, I mentioned two companies that might be within striking distance of a bottom - Walgreen Co. (NYSE: WAG) and Verizon Communications Inc. (NYSE: VZ). Since that time, Walgreen is up slightly and Verizon is down a bit. But both are still worth considering on pullbacks.
Today, you could take a look at Nokia Corp (NYSE: NOK) - the world’s largest cell phone manufacturer. It’s another large-cap company that provides a relative degree of safety and is dominant in its respective markets. Two of the most dominant include China and India, where the firm is still expanding.
Selling at less than 10 times next year’s earnings, the stock yields about 3.3% and has a strong balance sheet. Even if it approaches its 52-week high of $42.22, it would appreciate by nearly 70% excluding dividends. And that gives long-term investors a potential return of 30% per annum over a 24-month time horizon.
If you can take on more risk, check out Enzo Biochem (NYSE-ENZ) - a small biotechnology company that has made several acquisitions over the past year. Those purchases should enhance revenue growth and give the firm a strategic presence in its markets, while simultaneously giving it the ability to pursue its vast intellectual property
All told, Enzo Biochem has significant long-term opportunities and I’m confident that it will enhance its future prospects - especially with $75 million in cash and new management.
Good investing,
Aaron Lehmann
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Sphere: Related Content“Commodities Corner”: Commodities Take More Hits, But Fay Could Change That
August 18, 2008
Monday, August 18
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Here’s our latest bi-weekly roundup of the commodities markets – with yet more wild action, and a hurricane on its way to Florida as I write.
In stark contrast to the situation just a couple of months ago, the last two weeks have featured extreme selling across the board. No commodity has been spared.
Without a doubt, the energy and metals markets have endured the hardest hits. As I mentioned in the last update, I believe many commodity funds have been liquidating and we’re probably seeing the latecomers to the commodity bull market finally giving up, too.
Late entrants to a market are known as the “weak hands,” because they decide to jump in after a market has already made most of its moves. And once the market turns around against them, they end up bailing quickly.
Another reason for the downslide we’re seeing is the state of the U.S. dollar. When the dollar does well, it usually has an adverse reaction on commodities – a scenario we’re seeing at the moment. So we have a few things working against the commodity bulls.
Oil And Gas Ready For A Short-Term Fuel Up On Fay?
With Tropical Storm Fay making its way towards the southern tip of Florida, we’re going to start with the energy markets this week, since a big chunk of oil and natural gas supplies are located near this area in the Gulf of Mexico.
Last we checked, the crude oil September futures contract topped out at $147.90/barrel on July 11. But as you probably know, it’s dropped like a rock, down to its current level around $114 a barrel – $34/barrel from its high.
That equates to a $34,000 move on one futures contract alone. There’s a possibility it could fall further, but not surprisingly, we’ve seen some volatile action today, as Fay swirls towards south Florida.
However, current projections have the storm steering clear of the major oil platforms in the Gulf of Mexico. And when the short-term dust settles, the downward move could end with oil landing at the $108 area. That would put it right at the 200-day moving average line, which would be its last hope for a bounce.
A Six-Week, $55,000 Move For Natural Gas
Recent action has seen natural gas getting whacked to the downside, losing another 1,500 points or so since our last update.
That equates to a $15,000 move on one futures contract and an unbelievable $55,000 move from its high price on July 2. We’re getting very close to possible support levels here, as the market has now given up all its gains for 2008.
Tropical Storm Fay could have an impact here, as the first potential hurricane to hit Florida. And with more storms likely on the way, this should help possibly prop up the natural gas market.
Gas Chart
Last, but not least, the metals…
Metal Mauling Almost Over?
At the moment, both silver and gold are taking their cues from the oil and dollar markets, just like everything else.
Last week, for example, silver endured a nasty intraday selloff of more than $2 an ounce. Although it bounced during the day, much of the damage held. A $2 move in silver is equal to a $10,000 change in equity – huge for one day’s worth of trading. And this is on top of the large drop it endured the two weeks before that.
This mass liquidation means silver really is extremely oversold from a technical perspective. If the dollar starts to sell off and the oil market starts to move back up, we could possibly see silver have a very nice rebound.
Because both gold and silver tend to move in tandem, the gold market has dutifully followed silver downward.
The yellow metal topped out near $1,000 an ounce back on July 15 and has since shed $200. That’s a $20,000 move in equity – and yet another big swing.
Where to from here? Well, just like silver, gold is way oversold and could also see an impressive bounce if investors start to pile in.
That’s all for this edition. I’ll catch you back here in a couple of weeks.
Lee Lowell
Sphere: Related ContentWhy Changes To Ebay’s Pricing Plan Could Whack Its Shares By 20%
August 14, 2008
The Smart Profits Report Issue #549
by Paul Moore, Technology Specialist, Smart Profits Report
A high-growth retail play? Check.
This firm saw its quarterly revenue growth bounce by 19.7% (year-over-year), while quarterly earnings growth jumped 22.5%. Its users sold $927 million in goods during the second quarter, which dumped $35.7 million into the company’s coffers in transaction fees. Not bad, given the sluggish state of the economy and inflation forcing consumers to cut back on purchases.
A recession-resistant retailer? Check.
The company is one of the most well-known and popular names throughout many parts of the world and has built a rock-solid brand. Ease of use, an extremely diverse range of products, and efforts to boost customer interaction translates to customer loyalty and a lot of repeat business.
Over the years, the company’s robust business model has resulted in some outstanding gains for investors as a high-growth play on events like the Christmas shopping season and as a stock that offers protection during tougher times.
Its strong cash flow (almost $3 billion over the past 12 months) has provided security for shareholders, as has the management policy of consistently initiating large share buybacks in the event of downturns, returning this cash flow to investors. These buybacks prevented dilution from management stock option grants, but also supported the stock price.
The company is eBay (Nasdaq: EBAY). And while that’s the upside part of the story, a new development could shave as much as 20% from its share price.
The Lowdown On Listings
The unique aspect of eBay’s business model that has allowed it to consistently offer security to investors is a pricing model that relies on listing fees.
Listing fees are upfront commissions that a seller must pay in order to have his/her item appear on eBay’s website. As a component of a single sale, listing fees typically account for 50% of the cost to a seller.
However, if an item doesn’t sell on the first auction, online merchants must pay this fee a second time, making listing fees a much bigger factor in the calculation for eBay’s cost.
In categories where eBay has a high sell-through rate, this has less of an impact on its profits. But in categories where the sell-through rates are low, it dramatically drives up the cost.
And a possible change to eBay’s pricing model may force a 20% drop for its shares.
De-Duplication And The Buy.com DevelopmentsRecently, two developments have exacerbated the pain of having to pay eBay multiple listing fees:
- Searches now limit the number of items that can be seen by an individual seller.
- Buy.com recently started marketing through eBay’s platform and is not paying listing fees.
Let’s look at each one…
Limited Exposure & Listing De-Duplication: eBay now limits the number of items visible in a search by a given seller to 10. This prevents one seller from flooding the market with his/her items and eroding his/her competitors’ visibility. This category ownership is a strategy employed by eBay powersellers.
But the introduction of Buy.com to the platform forced a rule change, since Buy.com’s business is considerably larger than the $5 million per month power seller who owns a niche category.
With de-duplication, eBay removes items from the same seller that it believes are duplicates. However, this can present confusion in instances when items are similar, but not exactly the same. While de-duplication represents less of an impact to online merchants, it has sellers scratching their heads, asking why they’re paying listing fees for items that aren’t getting immediate visibility.
Buy.com: eBay’s agreement with Buy.com aims to dramatically increase the number of listings on the eBay platform.
This would be great if Buy.com was paying listing fees. But it isn’t - and it’s a fact that initially caused much concern. Since then, it’s come to light that Buy.com is not the low cost provider of goods that results in limited impact on other sellers. In fact, I’ve heard estimates that its sell-through rate is as low as 2%.
This represents the first extremely large seller on the platform and likely also represents the first noticeable point of a change in strategy, where eBay uses one large vendor in a given category to act as an anchor tenant.
Even though Buy.com is not having a material impact on many merchants, the mom and pop sellers are asking themselves why the vendors who helped eBay build its business over the last 13 years are paying upfront listing fees while new large sellers don’t seem to have to.
So what’s the bottom line? Simple…
Could Investors Be Poised To Bid eBay’s Share Price Down?
The days of listing fees on eBay could be numbered - a development that could result in a 20% share price correction.
In fact, there’s a growing rumor among the eBay Powerseller base that the company may well eliminate listing fees before the Christmas season.
Such a move doesn’t mean that eBay will lose the revenue from listing fees entirely; it’s more likely to shift the fees to the back end after a transaction takes place. This would align the interests of the merchant and the marketplace and improve the relationships with eBay’s Powersellers.
What concerns me, though, is that eBay would have to dramatically increase its back-end fees in order to account for the revenue that would be lost from listing fees on items that are listed multiple times.
And that lost revenue translates directly into profits - which are incorporated into the company’s current earnings guidance and Wall Street’s consensus estimates. If the elimination of listing fees does occur - and there are many reasons for it to happen - there would likely either be a reduction in its guidance or an earnings miss that, in my estimation, could bring the stock price down 20%.
Something to consider if you’re a current eBay shareholder. And if you’re not, you could look to play it by taking a bearish position on the stock and/or put options.
Paul Moore
Today’s Smart Profits Notes
- With just over $4 billion swimming around in eBay’s bank account (and a further $2.3 billion in cash projected by the end of the year), the company plans to use it to fuel its overseas expansion - not a bad policy, given the depressed U.S. dollar. The firm just announced that it will spend $404 million to buy a stake in South Korean e-commerce company Gmarket. Pending approval from the authorities, this would not only help eBay expand in the busy Asian market, but also eat into some of the market share that Yahoo! (Nasdaq: YHOO) has built through its 40% holding in Alibaba Group and 10% share in Gmarket in 2006.
- Ownership stakes like this are integral to eBay’s success, since it garners just over 40% of its revenue from acquisitions. In addition to its latest Gmarket purchase, it also holds a 49% stake in another Asian company, China-based Internet firm, Tom Online. And it owns 18.7% of Latin American online shopping company MercadoLibre.
- eBay is a stock that the Xcelerated Profits Report team knows well. Having recommended buying both the stock and selling January 2008 covered call options, the group cashed out of the position at the start of this year for a 21% profit. This covered call strategy is just one of several professional investment techniques the team shows to any investor, in order to beat the market… beat 99% of “ordinary” investors… and build wealth as safely and consistently as possible. They’re strategies that Wall Street’s top investors use every day to do the very same thing. And you can, too. Simply click this link.
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http://www.smartprofitsreport.com/archives/2008/good_stocks_to_invest_in491.html
How To Size Up Risk And Reward To Ramp Up Your Returns
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Sphere: Related Content
When The Market Says, “Jump!” The Economy Asks, “How High?”
August 12, 2008
Tuesday, August 12, 2008
The Smart Profits Report #548 -
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
One of the most fascinating lectures I’ve ever sat through came early in my career. On the stage… renowned Elliott Wave Theory expert, Bob Prechter.
The fact that I think this way is all the more surprising, since I actually don’t believe in Elliott Wave Theory. In case you don’t know, the theory suggests that the stock market moves in a series of repetitive, predictable waves - a five-wave move when trading upward and a three-wave move when trading downward.
But Prechter’s talk that day did not focus on Elliott Wave Theory. Instead, he showed that markets do not respond to macro events. In fact, just the opposite - the market is an excellent predictor of economies and world events, with the economy typically following the market’s lead 6-9 months later.
Here’s his reasoning…
The Market Predicts The Economy, Not The Other Way Around
In his talk, Prechter detailed how during bull markets (and up to about nine months after them), birth rates go up. And during bear markets, wars get started and missile testing increases. Most importantly, Prechter said that markets tend to predict the economy’s activity several months in advance.
So when a significant event occurs, take a look and see how the market responds. If it shrugs it off, then that may not be too important to the markets.
I bring this up because after picking up the newspaper this weekend and reading the details of the Russian attack in Georgia, I said to my seven-year old son and four-year old daughter, “This is going to be significant. Gold and oil are going to be up big on Monday.”
After all, I reasoned, when Russia starts a war, that’s important stuff, right?
|
But the oil and gold markets didn’t really think so. They both responded in much the way as my children did: With complete indifference.
So what’s the deal here?
Don’t Question The “Why”… Just Be Prepared To Respond To It
How can the oil and gold markets not care that Russia has invaded a sovereign nation and attempted to disrupt its oil transport lines? Surely, both oil and gold would respond to that and prices would rise. The fact that they didn’t made absolutely no sense to me.
But you know what? It doesn’t have to make sense. The market doesn’t answer to me or any of us. We don’t necessarily need to know why. Instead, our job is merely to see the way the market reacts and take action.
Now, it’s only been two business days since this all went down, so we need to give it some time to play out and see what happens. But the preliminary indications are that this situation is not going to have a major impact on markets or our economy.
An Early 2009 Rebound On Tap?
I’ve also been wrestling with the question as to whether we’ve hit a bottom in the markets. Strong action in financials, consumer discretionary stocks and transport shares seem to indicate that the economy could be in store for a rebound in early 2009.
Of course, that’s if the rally holds up. Bear markets are notorious for sharp rebounds that suck investors in, only to decline again. At this point, however, I think it’s OK to be a little more optimistic that the U.S. economy will pull itself back up next year. Just don’t get carried away yet, though. It’s a long road ahead and we must wait for the market to sound the all-clear before we can feel more confident.
Marc Lichtenfeld
Today’s Smart Profits Notes
- June saw a long-awaited rebound in the housing market, with the news that home prices edged up 1.1% from May’s demoralizing 20.1% plunge and April’s 3.2% drop. However, the fact remains that prices are still down 11.5% on average from this time last year, according to the Integrated Asset Services House Price Index, amid the real estate market’s worst slump since the 1930s. The Midwest region led the sector higher, with home prices up 4.7% in June.The more widely followed Standard & Poor/Case-Shiller home price index showed that home prices in the 20 U.S. metropolitan areas fell 0.9% in May, and down 15.8% on the year.Meanwhile, the national Association of Realtors reported last week that the number of home sale contracts in June climbed to the highest level since October. The group also said the number of pending home sales also appears to indicate that the market is at least attempting to stabilize.
- While the depressed state of the U.S. dollar continues to make headline news, America’s manufacturers and exporters are enjoying the ride. With their goods cheaper abroad, exports rose by 4% to a record $164.4 billion in June - the biggest rise since 2004. As a result, the U.S. trade deficit dropped by 4.1% - from $59.2 billion in May to $56.8 billion in June. It’s the smallest deficit in three months and handily beat the $61.5 billion consensus estimate from Wall Street.
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Sphere: Related ContentSector Watch: It’s As Easy As A-B-C… Or 1-2-3: How To Crack The Market’s Code
August 11, 2008
Monday, August 11, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
In today’s “Sector Watch,” I’m going to play off not only my last edition here on July 28, but also my Smart Profits Report column last Thursday.
I want to achieve two things here. First, I want to use it to follow up on my previous chart analysis. And second, I also want to give you a bit more insight into the “code” I cracked - and now use all the time in the chart pattern recognition component of my trading system, so you can see how it works.
I know this may seem confusing, but it’s really quite simple.
Just ask the subscribers to my service - 1-2-3 Trader - who recently racked up quick gains on Boeing (NYSE: BA), Coca-Cola (NYSE: KO) and Harley Davidson (NYSE: HOG).
Here’s how they did it…
Cracking The Energy Sector Code
In my last “Sector Watch” column, I pointed out that Crude Oil futures had generated a daily sell signal and, in keeping with the sector ETF analysis that I do here, the way to play the oil market was by using the U.S. Oil Fund (AMEX: USO) - the ETF that tracks the performance of West Texas Intermediate (WTI) light, sweet crude oil by investing in futures contracts for WTI, as well as other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels.
So what did the “code” tell us?
Quite simply, the way the daily chart pattern looked, USO was tracing out at least an A-B-C (or 1-2-3) Elliott Wave Theory correction.
This means that the initial drop is the “A” (or “1″) wave down, followed by a “B” (or “2″) wave rally, then finally, a “C” (or “3″) wave decline to new correction lows.
This forms just one of the three parts of the system that I use to accurately pinpoint index and stock movements, so I can guide my readers toward profits.
But it’s also really as easy as “1-2-3.” Which is why I decided it had to make up the name of my trading service - the 1-2-3 Trader.
As for USO, the stock was trading above $99 when I last wrote to you two weeks ago. Today, however, it’s fallen to around $91.50.
If you want to play USO, the good news is that it’s still in the “A” (1) wave down, which means that we’re still waiting for the “B” (2) wave rally to begin - the point where we can initiate a put position.
Now onto this week’s highlighted stock…
An Opportunity To Profit From Oil’s Partner In Crime
In last Thursday’s Smart Profits Report, I showed you an example of how the pattern recognition component of my system generated a profitable trade on Harley Davidson (NYSE: HOG).
Specifically, we bagged a 112% gain in less than a month.
The very same “1-2-3″ system also churned out three other winners…
- An 80.4% gain in just three days on Boeing
- An 89.1% gain in a week on Coca-Cola
- A 53.4% gain in a day on Federal Express
As good as those profits were, they’re in the past now. It’s time to show you how the pattern recognition component of my system can predict what’s going to happen in the future.
Take a look at the daily chart of the U.S. Natural Gas Fund (AMEX: UNG) - the ETF that reflects the performance of natural gas prices. Whenever possible, I like to look at other stocks in the same sector to confirm my analysis and UNG has a very similar chart pattern to USO.
Yes, UNG has undergone a much larger correction than USO, but the chart patterns are almost identical.
The 1-2-3 Way To Profit From Natural Gas
Since reaching its high of $63.89 on July1, UNG triggered a daily sell signal and has fallen by more than 35%.
Once a sell (or buy) signal is triggered, my trading system calls for at least a three-wave move.
As you can see, the current chart pattern suggests that UNG is still in the “A” (or “1″) wave of the selloff, and when the initial selling is complete, a “B” (or “2″) wave rally should get underway.
Right now, there is no way to tell for sure if the “A” wave is complete, or how high the “B” or “2″ wave will go when it gets underway. But we can say one thing:
Assuming that no damaging hurricanes enter the Gulf of Mexico, when the inevitable, counter-trend rally begins, I would buy put options on a retracement of 30% to 50%.
And an important word of warning: When trading the short side of the energy markets during hurricane season, it is very important that you only use put options.
While you may be tempted to short the stock in question, the risk is just too high. Put options limit your risk, which is necessary this time of year.
Keep An Eye Out For This Special Report
That’s just a brief illustration of how I use my system to generate profits - even in a market that is sending many other investors scattering in fear. So as I said in last Thursday’s column, don’t listen to the naysayers on television, who say you can’t predict, or time, the market. You can - and the proof is in the 591% cumulative profits that this simple “1-2-3″ pattern recognition system has generated this year. It tells you exactly when to buy for minimal cost and exactly when to sell for maximum profit.
If you’d like to find out more, look for a special report from the Smart Profits Report team in your e-mail tomorrow, which will focus on the “1-2-3″ code - what it is and how it works - in much more detail. It’s exactly the same one that I use every day for my subscribers, who’ve enjoyed some handsome profits recently - even in a market that the so-called experts say you can’t beat.
Jim Stanton
Sphere: Related ContentIf you’re not selling covered call options then you are throwing away free money!Here’s How To Get Cash On Stocks You Already Own…
August 8, 2008
| “You can sell one option for every 100 shares of stock you own.” |
Selling covered calls is such a great strategy for padding your bank account that I still can’t believe there are investors who aren’t taking advantage of it. It’s one of the best ways to take in extra cash flow that you never thought you could have.
Here’s how it works…
How to Get “Premium Income”… By Renting Out Your Stocks
A covered call combines two instruments: an option and a stock.
It works like this: You buy shares of a company like Coca Cola at, let’s say, $50. You think Coke will go no higher than $55 in the next 12 months. If it goes higher, you will sell since that is your target price.
So far, that’s just normal investing. Well, if you can handle that, then why not make MORE money than just the $5 that you projected to make?
To do this you would WRITE (or sell) a $55 call option against your Coke position. You can sell one option for every 100 shares of stock you own. When you write a covered call, you will be obligated to deliver the shares if requested. That may or may not happen. Nonetheless, you will be sure to receive something for the option you sold. It’s called a premium. And it can amount to a good deal of money.
One way to view this premium is as rental income on your stock. You get the “rent” the minute you sell the option.
The transaction you entered - when you sold your call and collected your premium - has one consequence you have to find acceptable. It limits your upside gain on the stock to $55, since that is the strike price at which you’re obligated to sell your shares.
Writing Covered Calls - The Safest Way to Buy Stocks at a Discount…
That’s the way I see it. Writing covered calls is one of the best ways to make steady, conservative gains. Why should you care if the strike price is hit and the option buyer calls away your shares? You’ve already made the disciplined decision to sell at $55. So you’ll have all the profit you originally wanted
| “Writing covered calls is one of the best ways to make steady, conservative gains.” |
from the stock… and more. (The premium you would receive in this case would be around $1.50.)
You can look at this as additional gains. I prefer to think of the money I collect writing covered calls as a way to reduce the cost of my stock. It goes like this:
The Coke stock costs $50. Your $1.50 option premium reduces your cost in Coke to $48.50. If the shares hit the strike price, your upside is now $6.50 (the $55 strike price minus $48.50, your base price per share) versus the mere $5 ($55 strike minus $50, the stock cost to you without an option).
You can see the difference. Buying Coke at $50 and selling at $55 is a nice 10% profit. When writing a covered call for another $1.50, it becomes a 13% profit… and that’s a very conservative example.
By writing the covered call you have accomplished two things:
- Reduced your cost
- Increased your upside.
All the while your target price has not changed.
If Coke closes below $55 at expiration, you keep your shares as well as the premium you received. If Coke trades above $55, then you’re obliged to sell at $55. This transaction (the sell at $55) will be done automatically by your broker.
Multiple Profits on the Same Stock
While the example I just gave obliged you to sell at the $55 level, there are ways to continue to build on your profits or to get out of the position early and profit again.
Let’s say that Coke was trading at $54 a month from expiration. At this point, it looks like the stock is going to go to $55 or more by expiration. You have two choices:
- You can surrender the shares when they’re called away, as in the example above.
- You can buy back your option so that you’ll be able to keep your shares and do it all over again.
Why would buying an option you previously sold make sense? After all, you decided you’d be fine with selling the shares at $55.
Well, here’s where an option seller takes advantage of time. When there’s only a month left on the option, you could now buy back your $55 call option on the cheap - for about 50 cents, this close to expiration. Then, you write another covered call going out another six to 12 months with the same $55 strike price.
Since the current share price is $54, you would pick up about $3 in premium for a 12-month option this time. (The closer the current market price of the stock is to the option strike price, the more valuable the option.)
Doing The Math When Writing Covered Calls
Now your adjusted cost per share would be:
- $48.50
- + $0.50 (cost to buy back the option)
- - $3.00 (premium received from selling the new option)
- = $46.00 (your cost per share of Coke)…
So, you’d be paying and your upside would still be capped at $55. Now, instead of a 10% profit on owning the shares alone, you would make a 19% profit after selling calls twice before surrendering the shares at $55.
This type of strategy is especially effective on stocks that trade in a very narrow range or in a flat market environment.
Oh, and you may be wondering… Who is buying those options that you are writing? It’s the gambler who thinks Coke will go higher than $56.50 at expiration. His cost of owning Coke is $55 plus $1.50 (the amount he paid you for the right to buy your coke shares at $55).
I’m betting you’ll come out ahead on the deal…
Selling “Longshots” On Intel With Out-of-the-Money Calls
Let’s say you own 500 shares of Intel Corp (INTC) that you bought in 1997 for $25.50/share. How have you done?
Well, if you didn’t sell during the tech bubble in 2000, then you are breaking even as of today, with INTC trading for about $26/share. Bummer. All that time and you still haven’t made any money on it. You probably could’ve used that money to invest in something else, or at least buy yourself a nice gift after all that time. Who knew? Nobody knows how an investment will turn out over time.
What could you have done in the meantime? Sold covered call options against your shares. There are two great things about this strategy:
- It allows you to passively accumulate income over time by having someone else pay you money. You become the option seller. For every 100 shares of INTC you own, you can sell one option contract. In this case, you can sell five option contracts.
- It reduces your cost basis of the stock by the amount of the option you sold. If you sell enough covered calls over time, your cost basis could be zero! Let’s look at an example.
Below is an option chain for INTC with an April 2006 expiration date. The last price for INTC was $25.97 (upper right corner).
What we want to do is concentrate on selling out-of-the-money (OTM) call options. An OTM call option has a strike price that’s higher than the current price of the stock. In this example, we will focus on the $30 strike calls.
We see from the “Bid” column that the $30 calls are bidding at $.25. This means that for every $30 call we sell, we will take in $25 ($.25 x $100 multiplier). Since we own 500 shares, we can sell five option contracts and net a take-home pay of $125.
This strategy is great if we really like the stock and want to keep it in our portfolio. The only way we give up the stock is if it moves a good deal higher. Instead of waiting to see if INTC will ever go up in price, we are taking a proactive trading strategy and making some extra cash on the side.
What happens when we sell the $30 strike calls? It means that if INTC trades above $30 by April 2006 expiration, and stays above $30, we will be forced to sell our INTC shares to someone for $30/share. It’s called getting “assigned on our short options.” But is that a bad thing?
Well, considering that INTC hasn’t been above $30 in almost two years, and you don’t really want to give up your shares, I don’t think it’s a bad bet. Plus, the trade is only good until April 2006. If INTC doesn’t get above $30/share by April 2006 expiration, then the trade is over and we get to keep the $125 free and clear… and we also keep our long INTC stock. We can also repeat the trade for a different expiration month.
If you happen to get assigned on your call options and are forced to sell the stock, then so be it. You still came out ahead. Not only did you make $125 from the options, but you also have a gain on the stock from your original purchase price of $25.50. That’s a $2,250 gain.
Using The Force When Selling Covered Calls
Selling OTM covered calls forces you to take some profits along the way (assuming you are selling calls with strike prices above your initial stock buy price). Also, since we are selling the calls for $.25, it reduces our cost basis to $25.25. Do that enough times over the years and your cost basis could be zero!
Some investors will worry about causing a capital gains tax event if they are assigned and forced to sell their shares. That’s true. But in my opinion, it’s better to take a profit somewhere along the way.
Would you rather hold your stock just to avoid the IRS? Look at all the stocks that have imploded since the 2000 meltdown. I’m sure there are many folks kicking themselves for not selling at some point, either through a regular stock sale or by an option assignment.
In the case of our INTC example, if we had been selling covered calls all along, taking in $125 once every three months or so, we could have netted a nice sum while the stock lingered for seven years. It’s sort of like a consolation prize while you’re waiting. Everyone else who didn’t sell covered calls has nothing to show for it.
This strategy is a way to gain sideline income while you wait for an eventual sell price (you do have a sell point, don’t you?) Why not sell potentially worthless options, repeat the process many times during the year, lower your cost basis and enjoy the income?
How to Buy Right with a “Buy-Write”
There are several methods of executing a covered call trades depending on the type of account you have and your tolerance for risk. One of the most common is a “market order”: a simultaneous trade “at the market.”
But market orders are not advisable because you are basically saying, “Fill me at whatever price is out there.” (And considering that an options market maker can manipulate option prices almost at will, the risks are obvious.)
The other way is to use a “limit price” on the stock, check the execution, and then when you’re filled, put in your option trade using another limit order.
But there is a third way that will bring you increased piece of mind, while also providing you with the highest possible profits on each of your covered call trades: having your broker execute a buy-write.
Why Prodding Your Broker Can Bring Electric Results
He might be reluctant when you first bring up this technique, but don’t let your broker talk you out of it. Buy-writes take a little more time and attention for him to pull off, but it’s worth it (and even accounting for occasional human error, a decent options broker should be able to successfully handle a buy-write, say, 99.7% of the time).
A buy-write requires you to set two specific prices at which you want the entire order to be filled: one target price for the stock and one for the option you’re selling against the stock. (The net cost, or “net debit,” is the “discount price” you pay for the stock once the option premium you make is deducted from the stock’s price…)
Let’s say you like Lucent Technologies at $3 and you want to sell the $3 call option against it. The option is trading for $0.25 on the bid and $0.35 on the offer. You can tell your broker to execute a buy-write in which he:
- Buys Lucent stock at $3 a share…
- Sells the same number of Lucent calls at $0.25…
- Or, if he can’t reach your “net debit” target, he doesn’t execute any trade at all…
This buy-write would guarantee that you either pay a net cost (or net debit) of $2.75 per share, or back away from the table.
You’re also guaranteed NOT to play the whack-a-mole game of chasing a stock price and an option price simultaneously, or asking your broker to make an attempt at this impossibly frustrating task.
Exactly How a Good Buy-Write Is Executed Online
Here’s exactly how that Lucent trade would go down if you were using an online broker…
- Buy 1,000 shares of Lucent (no price entered on the buy-write screen)
- Sell 10 contracts of the Lucent option (you must enter the symbol - again, no price is entered)
- Then on the following line it asks for the “net debit.” This is where you enter your net target price. In this case you would enter $2.75 as your net debit.
What this means is that the trade will NOT be executed until and unless your net debit price is met. Period. No ifs ands or buts. If you felt a little greedier - after all, each penny counts - you could enter a net debit of $2.72 for an extra 3 cents. You will most likely get filled at some point, unless your spread is absurd.
The only downside to this type of trade is that you may have to wait a while to get filled. It’s not exactly waiting for the sun, moon and planets to line up, but it is a trade that is basically done at the broker’s convenience, not yours.
And while the time element isn’t fully within your control, the pricing element is - and that means you DO control your profits.
Deep-In-The-Money Covered Calls
I am often asked which strategy I like best. My answer is always the same. I like buying stocks and selling deep-in-the-money covered calls against them.
Is this a “boring” strategy, as some investors seem to think? Well, only if you find annualized returns that consistently beat the markets boring.
That’s what we keep doing in my covered-call trading service. And today, I’ll reveal the secret behind those terrific returns - returns that should beat stocks again this year by averaging about 12%.
By using covered calls in your own options trading, you can take the most dynamic, profitable investing tool out there (options) and make it safe as a blue chip stock. Here’s how to beat stocks and lower risk at the same time using options…
The Income Trader Secret
Now in its seventh year, the Income Trader has been able to maintain a win rate of more than 70%.
That’s right - more than seven out of every 10 recommendations is a winner. The other three are either break-even or losers. Still, some people say that’s too boring.
These days, people want the big numbers… even ridiculous ones, like 10,000% overnight!
Me, I’d rather get rich off boring ideas…
The goal with covered calls is to safely make between 1% and 2% on our investment every month and roll the money over to do it again. That way we create annualized returns of between 12% and 24%.
This month, for example, we closed out five winners - the best returning about 12% and the worst about 2%. All of the open positions on our books right now, about six of them, are profitable and should make us an average of 12% this year alone.
Now, I don’t have a problem understanding these numbers or getting excited about them… Remember, this is a safe money strategy, and it’s only fair to compare apples to apples. Last year we not only beat safe-money investments like CDs - by miles - we also beat all of the stock indexes when our returns were annualized.
So you might say: “Why do you annualize? That is not fair.”
If You Do It All Year Long…
I agree. In most cases annualizing your returns is at best an iffy marketing technique. It is definitely questionable to make 10% in one month and then claim that it’s an annualized return of 120%.
But, hear me out on this one. There are times when annualized returns do make sense, and that’s when the money is continually reinvested to create a steady stream of returns all year long.
When we do a trade in the Income Trader, we have a finite amount of time and are looking for a specific and predictable return. We are not shooting for the moon or hoping “it goes up” and then wondering when to sell.
So when a trade expires, it is over, and if we made 5% in two months, we then roll that money over. That 5% is a real return on capital invested. Period.
Here is how the system works. We buy a stock that we like (this can cost you money) and then we sell an option against the stock (we get money back).
But instead of betting that the shares are going higher, as most people do, we sell deep-in-the-money covered calls. That’s actually a bet that the shares are going down.
By doing this, we do several things. We dramatically reduce our cost, we win if the stock goes up, we win if the stock goes nowhere, and we usually win even if the stock goes down… but not as much as our cushion.
Buying and Selling Covered Calls
Let me give you an example from real life… We made this trade in October of 2002 but the lesson is just as valid today.
| “…covered calls are one of the few options strategies approved for your IRA…” |
We like Cisco Systems and, using deep-in-the-money covered calls, we had a choice: Either we would own Cisco at $6.30 or we would make 19%.
Both choices sound boring, but let me explain the beauty here…
Cisco was trading at $10 per share. Down from $77, you would have thought Cisco was a good buy on fundamentals. But since the NASDAQ was crashing and burning around you, you really didn’t want to pull the trigger…
So here is what we did…
We bought Cisco at $10 and sold the January 2004 $7.50 call options against our position. At the time, these options were trading for $3.70. So when we sold the option, we got $3.70 back for each share of Cisco. Our cost was now $6.30 (10 minus 3.70).
Our upside, however, was limited to $7.50 - the strike price on the call.
Our return on this trade was 19%. (Our adjusted share price was $6.30, so our profit when our shares were called away at $7.50 was $1.20. Divide the profit by the cost - $1.20 / $6.30 - and you get 19%).
Because we bought deep-in-the-money covered calls, we were able to profit as long as Cisco didn’t drop more than 37% (that is, below $6.30, our cost).
Why Isn’t a Win-Win-Win Deal Sexy, Anyway?
What a deal! If Cisco went up, you would have made 19%. If it stayed where it was, you would have made 19%. If it went down, but stayed above $7.50, you would have made 19%.
As long as it didn’t go below $6.30, you would have made money.
I liked those odds. And in fact, it was an exciting trade. And a profitable one…
Consider too that covered calls are one of the few options strategies approved for your IRA, so you can even defer your taxes. What’s not to like?
The investors who have taken the Income Trader service are profitable, loyal and very happy. And now you know why: they understand the beauty of “boring” covered calls.
Your Next Step - Check Out the Smart Profits Report Archives for other investment strategies and ways to profit like the pros!
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~Joe B., Wilton, CT
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who you have been vastly outperforming. I did very well one of your recommended positions,
one of the few good positions I've had this year. Good job. Keep up the good work!
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