Geldpress

Barron’s just published an excellent article on convertibles, those mysterious investment vehicles often shunned by individuals and rarely understood even by “professionals”.  According to the article, convertibles have fallen 36% so far this year.

Converts have been hit hard for three main reasons: The stock market is down, the corporate bond market has been whacked, and hedge funds, once the dominant investors in convertibles, have been forced sellers after terrible performance this year.

Convertibles can be either preferred stock or bonds, which are often high yield.  Preferred shares ranks higher then common shares in the event of a bankruptcy, but carries no voting rights that the common shares do.  Preferred shares may also offer preferred dividends which are in line ahead of common share dividends for payment.

The Barrons article mentions three companies that offer convertible funds - Fidelity, Vanguard and Putnam.  I’ve listed three of the funds to start your own research, if you buy into the potential recovery of convertible funds that Barron’s does.

• Fidelity Convertible Securities Fund (FCVSX)
• Vanguard Convertible Securities Fund (VCVSX)
• Putnam Convertible Income Growth Fund (Class A Shares:  PCONX, Class B Shares:  PCNBX)

I wrote about some of the great stock screening tools in previous posts, but those free tools seem to get better all the time.  If you are looking for some great screening tools, start off with the following:

• Easy stock picks using free screening tools
• The best free technical stock screen from etrade
• Free technical analysis stock screens

In today’s volatile environment, I look for medium sized companies with solid earnings and a decent dividend.  Here is the criteria I used just today, as shown from the google finance stock screener. The criteria I use in today’s market is going to be very similar to the above.  For a medium sized company, I’ll search for market caps between 1 and 50 billion.  I don’t like to buy companies that are losing money, so I search for positive price to earnings ratios between 5 and 15.  Dividends are king so I make sure to look for ones that are paying something back to me as an investor, and a dividend yield between 3% and 5% should do the trick.  And to top it off, I like to screen for the 52 week price change.  I like beaten down stocks, but not ones such as financial institutions that have lost 90% of their value and losing money hand over fist.  I set the threshold at negative 40% on the low side.  And on the high side, I prefer to stay away from bubble territory, so a positive 20% is good enough on the high side for 52 week change. For diversification, you can also limit the results for a particular sector or exchange.  It’s best to take a look at your own portfolio distribution.  If you are currently heavy in energy, you can limit the google screen to healthcare, conglomerates or another sector that balances your portfolio out a little more. The screen above returned 65 matches that you can do additional research on to find something to buy.  Some of the additional things I like to do are the following:

• Screen out anything based on personal biases or current portfolio weightings - If you only want American companies, you can rule out Honda Motors.  If you are fearful of anything related to the auto industry, you can rule out Genuine Parts.  You can also eliminate ETF’s which sometimes come up in the results.  The particular results above returned several iShares ETF’s.
• Limit the search to specific sectors as a tool to diversify your own portfolio - Use the drop down sector box to pick a specific industry you feel you need to buy in order to balance out your own portfolio.
• Take a look at the google finance Income Statement (example income statement here).  I personally look at the Net Income in the middle of the page and the Diluted Normalized EPS.  I like to see positive and somewhat stable numbers for the last 5 quarters.  Currently, google only has quarterly data available going back 5 quarters, but you can also look at the yearly data to go back a few years without the quarterly breakdowns.
• Take a look at the google finance Balance Sheet (example balance sheet here).  I personally like cash rich companies so I look at the Cash and Equivalents at the top of the page.  This is especially important in today’s very tight credit markets.  I also look at the Total Debt numbers in the middle of the page.  Is it a manageable number as compared to their existing Free Cash Flow?  Is their total debt increasing, decreasing, or stable?
• Take a look at the google finance Cash FLow Statement (example cash flow statement here).  I look to the Net Change in Cash near the bottom of the statement.  I like to see positive numbers for all viewable quarters and annual periods available.  I won’t necessarily rule out a company with an occasional negative cash flow, but I may have to dig deeper to justify the negative cash flow.  I also like to compare the annual positive cash flow in relation to the long term debt.  A good rule of thumb is the number 3.  If a company is capable of paying off their entire long term debt with 3 years of positive cash flow, then their debt levels are manageable.  Note, I’m not implying that a company needs to pay off their long term debt, only that they are capable of doing so.
• Optional - If you have any faith in efficient market theory, you can stop here and pick one of the results that matched your additional and manual screens.  The other approach is to analyze yourself into a corner by digging deeper into the quarterly and annual reports, listening to the conference calls, and reading research reports, and blog and message board reviews.  But it’s virtually guaranteed you will stumble into something you don’t like - pending lawsuits, consistent “one time” charges, underfunded pension liabilities, higher input costs, labor disputes and more.

The next question - to hedge or not to hedge? Once you find something you are willing to throw your money at, the next question to ask yourself is whether you want to hedge your bets.  The idea of hedging is that no matter how much research you do, you can still be wrong, and still lose money.  Hedging offers you a way to limit your downside risk in exchange for capping some of your upside risk.  Here are some other articles that discuss hedging, and a book recommendation on PUT Options (one of the most common hedging techniques).

Note:  While it’s great to have the free information in the articles at Geldpress, sometimes it really does help to buy a good book to get the entire picture.

• Trading strategy - hidden jewel in the shorts
• Portfolio protection - hedging todays roller coaster market ride
• Selling puts for income, or as a cheaper investment
• Time for cover - the covered call

Put Options : How to Use This Powerful Financial Tool for Profit & Protection by Jeffrey M. Cohen

Art Laffer just released a new book entitled The end of prosperity:

The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let It Happen by Arthur B. Laffer

The New York Times just gave him free publicity by allowing him to write his own pump piece about the book.  In the article, Mr. Laffer criticizes the administration on their $700 billion bailout and socialization of banks.  He calls for a market driven correction instead of government interference.  He cites several economic statistics in the article and in the book, but unfortunately, most of them are wrong.  In what seems to be intentional humor, he praises former president Clinton for “strengthening what had begun under President Reagan”.  Art Laffer was Reagan’s former economic adviser; many people now believe that Reagan was already undergoing severe head trauma caused by Alzheimer’s when he made that idiotic selection.

For additional information on Art Laffer, refer to:

• Peter Schiff schools Reagan economic adviser

Needless to say, this is one book I do NOT intend to buy.

The number one issue facing America today is the economy.  We need a new leader that will work to steer our ecomony in the right direction, enforce fiscal discipline, and work to resolve the underlying problems that caused the chaos in the financial sector.  Sure, there are other issues - position on abortion, civil rights, immigration, health care, Iraq, privacy, taxes, education, etc.  But they all stand a distant second to the number one issue on the economy.  If we do not fix our economy, then you can forget about every other issue on the table, because there will be no money left.

2008 has proven a very difficult year for endorsing a presidential candidate.  On the republican side, you have John McCain, the very kind hearted, but unfortunately economically illiterate man, and Sarah Palin, the housewife from Alaska that just spent $159,000 in campaign money on her new sexy wardrobe.  And what about Sarah Palin’s position on the economy and the $700 billion wall street bailout?  In the video below, she mentions that she is still unsure about her position.

On the democratic side, you have Obama and Biden, magnitudes more intelligent then either McCain or Palin, and without a doubt more fit to lead this country then their republican contenders.  They are both top notch public speakers and leadership comes natural to both of them.  They answer rapid fire and often difficult questions from the media directly and without hesitation.  That is exactly the kind of public speaking we need in front of the international media to help stem the influx of criticism still reigning from two Bush terms.  What are Obama’s view on the bailout?  Watch this short video of him responding to Paulson’s initial 3 page $700 billion bailout bill.  His thoughts are well organized and clearly communicated.

What about the third party candidates? - I’m as sickened as anyone that 3rd party candidates are intentionally ignored from the media and not invited to national debates.  But that should not stop us from researching those candidates on our own.  Bobb Barr and Wayne Root are the libertarian candidats running for office.  There is an interesting video of Bobb Barr on youtube, where he refers to 10 year old warnings on the coming financial crisis.  But similar to McCain, I question the logic of Bobb Barr’s choice of running mate, a sports handicapper, and Vegas gambler:

The King of Vegas’ Guide to Gambling: How to Win Big at POKER, Casino Gambling & Life!The Zen of Gambling updated by Wayne Allyn Root

Ralph Nader and Matt Gonzalez are also running as part of the the consumer advocate party.  I commend Nader’s hard line view on the bailout, and his pursuit of fiscal discipline.  But his public speaking skills are lacking, and both him and Gonzalez lack the experience to run this great country.   As for the other third party candidates, you can see the entire list here.

What about the Obama endorsement? - In the words of John McCain himself, Barack Obama is a “decent person and a person that you do not have to be scared of as president of the United States.”  I completely agree with McCain, but that does not mean I’m completely encouraged by the thought of an Obama presidency.  There is one sticking point that I can not get beyond with Obama, and that is his call for a foreclosure moratorium.  This is where Obama and I have fundamental differences.  Obama wants to use taxpayer money to pay down the principal of overpriced American homes.  I want those homes to be foreclosed and I want the market to reset their prices to reasonable and affordable levels.  Obama does not want to see former “homeowners” living on the street.  I want those “homeowners” living in apartments.  I think of that family of 4 struggling to buy food because of the burden of their $4,000 mortgage payment.  I want that family to realize the gain of $2,000-$3,000 in additional monthly cash flow when they save that much money by living in an apartment.

The Obama endorsement (barely) - Geldpress endorses Barack Obama and Joe Biden as the democratic ticket of choice in the 2008 presidential election.  We do so freely and not from bribes, torture or threats.  The choices were limited.  We searched long and hard for viable third party candidates but could not find one.  In the end, we came back to the two party system and started the elimination round.  McCain and Palin were the first to be eliminated, leaving Obama and Biden as our endorsed candidates (barely) for president and vice-president of the United States.

God bless America!  (We need it)

If you think there is volatility in the U.S. markets, you should look at Iceland.  The country closed its stock market entirely on October 9th due to “unusual market conditions”.  When they re-opened a few days later on October 14th, the market crashed 76% in a single day.  Those frequent 5% up and down days in the U.S. market seem pretty lame in comparison to Iceland.

In the currency markets, Iceland is also struggling, with their krona down over 50% this year, most of the losses having occured in the last few weeks.  And if that were not enough, the country just raised their key interest rate a whopping 6 percentage points to 18%.  This came as quite a surprise for a country that had just lowered their rates from 15.5% down to 12% two weeks ago.

The high interest rates of Iceland were once the appeal to Everbank foreign currency certificate of deposit buyers, who targeted high overseas rates to invest their money in.   A note on the Everbank Iceland CD page now states:

We do not currently offer any product denominated in Iceland krona.   Due to the Icelandic banking crisis, currency trading of the krona has been frozen.  This effectively locks Everbank out of this market and prevents us from offering this currency going forward.  If you currently hold a certificate of deposit in the Icelandic krona with Everbank  please know that we are making every effort to receive payments in U.S. dollars upon maturity of your account.

So much for chasing the yields on foreign currency certificates… For those still in denial on the potential for other seemingly stable countries to collapse, you will be happy to know that Everbank may still offer certificates of deposits in the Mexican peso, the Czech koruna, the Indian rupee, the Danish krone, the Brazilian real, the South African rand, the Swedish krona and many others.  I’ll pass on those offers with my own personal money, however, and invest in the good old greenback from the U.S.A.

This youtube video is one of the most important videos you can watch prior to making your vote heard in the 2008 presidential election.  Many people in government and on the streets will tell you that the financial crisis we are facing today was unavoidable and that nobody could have predicted it. But in reality, the 2008 financial crisis has been discussed at length for at least the last 10 years.  There were countless economists, savvy investors, book authors and blog writers warning of such a collapse to our financial system.  The only issue is that 90% of our government chose to ignore the warnings because they were to busy cheerleading for the phony debt based economy.

We need smarter people in government and advisers just won’t cut it in today’s economy.  I have heard some people defend McCain’s economic illiteracy because he will probably “choose a good economic adviser”.  Now that the 2008 financial crisis is in full swing, those people really need to watch this video of former economic adviser Arthur Laffer being schooled by Peter Schiff.

Don’t wait and hope to determine who the next president chooses as their economic adviser.  Instead, vote for the more intelligent presidential candidate, and preferably a well researched candidate amongst ALL of the choices, not just Republican and Democrat.  We can’t afford 4 more years of economic illiteracy in the White House and congress.  Please vote responsibly!

If you liked the video above, you will also like the following book by Peter Schiff:

Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books) by Peter D. Schiff

The VIX set another new intraday record today, topping out at 89.53.  As a reminder, the VIX is a measure of the average 30 day volatility of the S&P 500.  A reading below 20 is normal.  Over 30 is rare, over 50 is extremely rare, and levels near today’s high at just below 90 are simply unimaginable. Here is a 5 year chart of the VIX to show what I mean.

How can a high VIX help us? - Option traders can love and hate extreme volatility like we see in today’s market.  On the one hand, they hate it, because the cost of portfolio insurance just went up significantly.  But in the same respect, if you are seller of options, as is the case with either writing covered calls or selling naked puts, then high volatility can be your friend.

Pricing of options -There are 6 components that go into the pricing of options - stock price, strike price, risk free rate of return, time to expiration, dividends, and volatility.  Many covered call writers prefer to write at the money (ATM) covered calls, meaning if they buy a stock for $50 per share, then they would sell a 50 strike covered call option against it.  They also tend to write covered calls somewhere between 1-2 months prior to expiration.  The risk free rate of return and dividends(especially when dividends are small) are minor components of pricing options.  The implied volatility of the stock market can have a huge impact on the pricing of options, whether for portfolio insurance (buying puts), or collecting premium (selling covered calls).

Volatility and Strike price case study on covered calls -Take a look at the chart below that models the 56 day covered call prices for a $50 stock.  The 56 day example is based on today’s date (October 24th), and the December options expiration (December 19th), which is currently 56 days away.  You can download the geldpress option calculator here, and modify it at will.

Explanation of the chart above:

• Assumption:  Buy 100 shares of a $50 stock, and sell to open (1) December Call.
• The at the money (ATM) strikes are highlighted, but in the money (45 strike) and out of the money (55 strike and 60 strike) are also listed.
• From today (October 24), there are 56 days until December expiration.
• Notice that as the volatility increases, the premium collected for selling covered calls goes up dramatically.  Covered call writers LOVE the high volatility of today’s markets.
• Selling a 50 strike December covered call with an implied volatility of 70 yields $552.07, which is over 11% time premium (552 divided by 5000).  Getting called out of this position results in an 11% return on investment in just 56 days!

For additional information on:

• stock options
• covered calls
• volatility
• check out the Geldpress bookstore.

The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets by Jeff Augen

Today’s Fast Money show introduced several prevailing themes that Geldpress has been reporting on for some time.  There is no question that the commentators on Fast Money are magnitudes more intelligent then Cramer, but unfortunately, they are not as “fast” as the name of their show implies.

1. The dollar is rising, and there are ways to play it.  See Geldpress article from September 1st entitled:  Preparing for and playing the dollar recovery - bye bye euro
2. Rating agencies are useless and crooked companies.  See Geldpress article from August 8 entitled Why does Warren Buffett like Moody’s?
3. Hedging your investments by being long and short simultaneously.  See Geldpress articles:

• Balanced and hedged portfolio using proshares
• Trading strategy - hidden jewel in the shorts
• Portfolio protection - hedging todays roller coaster market ride

Telegraph UK on the Iceland financial crisis - Put the financial sector on steroids and pass out loans like candy on Halloween, and eventually you have over $100 billion in liabilities in a country with a mere $14 billion GDP.  Add to that a massive consumer debt problem, fueled by consumers who took on foreign currency home and auto loans to “escape” the high 15.5% interest rates of the Icelandic banking system.  Those “escapes” resulted in near doubling of principal balances as the krona, Iceland’s currency, collapsed by more then 50% and ceased trading on world currency markets.

Bloomberg reports on Iceland cutting interest rates from 15.5% to 12% - Those Icelandic foreign currency CD’s used to be very popular to U.S. residents looking to gain a leg up on the meager dollar based returns.  Purchasers of such instruments are now getting a hard lesson in risk assessment.

The Globe and Mail’s take on Iceland’s problems - Summarizes Europe, American and Icelandic bank nationalizations as a form of “corporatism”, and not “socialism”.

Daily Newscaster reports on Iceland food shortages - Iceland’s number one discount grocery store only had enough food left on shelves for 2 weeks of normal use.  Food inflation goes up 50% overnight, imports nearly cut off, and officials ask for IMF help to stem the crisis.

I wrote back in August how this year’s election would be determined by the VP nominee of Obama and McCain.   Despite John McCain’s warm heart and good will, he is simply not fit to run this country.  The financial crisis of 2008 only serves to strengthen the need for a true economic leader in office, and McCain simply does not qualify.  He may have earned my vote with a more competent running mate, but his choice of Sarah Palin is nothing more than an insult to the American people. Obama is clearly the more qualified choice of the two major parties.  He and running mate Joe Biden will likely win in November and be an adequate pair to run the country for the next four years.  But I stop short of endorsing Obama.  My endorsement for president requires fiscal conservatism, something the Democrats and Republicans alike severely lack.

Both Obama and McCain are supporters of the huge government bailout packages supporting incompetent financial institutions.  Obama takes it a step further, calling for foreclosure moratorium’s to keep unqualified “homeowners” with unpaid mortgages in their houses at taxpayer expense.  But the real solution to a family struggling with a $4,000 mortgage payment is for them to move into a $1,000 rental apartment and immediately reap the rewards of the additional $3,000 monthly cashflow.  Unfortunatley, neither McCain nor Obama understand basic economics, and would rather disrupt the natural law of supply and demand then to allow market forces to adjust housing prices to stable and affordable levels.

So who will I vote for in November?  It’s a tough choice for a qualified candidate, but my search will certainly include the other choices that main stream media conveniently ignores. Watch and listen as these ignored candidates discuss the 2008 bailout.

Bob Barr & Wayne A Root- Libertarian party

Ralph Nader and Matt Gonzalez - Peace party

Cynthia McKinney and Rosa Clemente - Pacific Green party