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The Geldpress team is going away for the Thanksgiving holiday.  We will return in early December for more insightful market commentary, and financial insights.  In the meantime, have a wonderful holiday shopping experience!  The economy needs you.

The black Friday holiday shopping starts this Friday, and you can expect some amazing deals, especially on electronics products.  But before you go spending your hard earned money on a new digital camera this holiday season, please consider the cost saving benefits of buying a high end used, or refurbished camera from Amazon.  Celebrate the recession by saving money on high end, but out of date electronics.  Here are two recommendations in two different price points:

Canon Powershot prosumer line - This is the line that Canon refers to as the “prosumer” category.  The first in the series was the Canon Powershot G1.  It came out around 2000, and retailed for $999.  But it was and still is an amazing camera, with a 3.2 megapixel sensor and automatic, and full manual controls.   The latest in the series is the Powershot G10, which retails for $435 on Amazon.  My personal favorite, and best bang for the buck is the Powershot G5.  It came out in 2003, and is a 5 megapixel full manual prosumer digital, with a remarkable f2.0-3.0 4x optical zoom lens.  Manual shutter speeds can be controlled from 1/2000 to 15 seconds.  There are also fully automatic or manual adjustments for white balance, ISO, metering, flash and continuous shooting.  And it can shoot close to 2 framers per second in continuous mode.  This is an out of date camera, but it’s easily worth the $150-$175 average used selling price on Amazon.

Canon Digital Rebel - The Rebel SLR was one of Canon’s best selling SLR cameras, and it was no surprise that the first digital version of the Rebel, the EOS 300D, was an instant success.  It came out in 2003 and originally sold for $899.  The latest in the Rebel line is the EOS Rebel XS, and it currently sells for $473 on Amazon.  But the original Rebel EOS 300D is still an amazing camera if you can find it at a decent price ($250-$275 is a great deal) from a used seller on Amazon.  It has a 6.3 megapixel sensor, has full automatic and full manual shooting modes, and can shoot an amazing 2.5 frames per second.

These home auctions are very common all across Las Vegas, California, Florida and Phoenix.  But the last real estate holdout market of Seattle has not seen these panic auction sales - until now that is.  There is wide scale evidence that the Seattle market is tapering off - increasing inventory, lower sales numbers, and falling prices.  But interestingly enough, most Seattle homeowners are still in denial about the risks of vanishing equity.  Until recently, those 50% off auction sales were limited to those other bubble areas, and surely, Seattle would not take part in the madness.   Well Seattle, the game is over.  Say good-bye to your equity.  The auctions have landed.

Here’s a helpful tip for those wanting to learn and utilize stock options in today’s market - sell options when volatility is high and buy options when volatility is low.  If you are still uncertain as to whether 2008 is a high or low volatility market, then you probably need to just stay out of the market.

For those that recognize the answer that 2008 is a high volatility market and want to SELL OPTIONS, then covered calls are one of the best ways to do so.  Once you pick a stock to utilize a covered call on, you then need to pick an expiration month and strike price to sell for your cover.  Below is the December option chain for McDonalds from Yahoo Finance, as of the close of day November 13th.  McDonalds closed today’s trading session at $52.91.

If you are going to do a covered call on McDonalds, here are the steps:

Step 1 -  Buy and read the following book from Amazon.  It’s just to dangerous to think you can trade options after reading this short post.  Just click on the book cover below to purchase.

Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper

Step 2 - Pick an expiration month.  November expiration has only 1 trading day left so that is out of the question.  December expiration is on December 19th, which gives plenty of time to collect some good premium, especially in this high volatility market.  January expiration is also an option.  Going beyond January is also possible, but not very appealing to me personally because it ties up the position for to long without much benefit of additional premium.

Step 3 - Analyze the potential return for getting called out of the position based on each strike you are considering.  The most popular strikes are going to be at the money, or a few strikes in or out of the money.  The separation of “IN” and “OUT” of the money is shown above by the change from yellow to white shading.

Example:  Analyze the potential called out return of purchasing 100 shares of McDonalds and selling a December 50 strike.  Assume today’s closing price and option chain are still available.

- Buy 100 shares for $5,291 and SELL TO OPEN (1) contract of the December 50 for $520.

- Net outlay and net risk is $5,291 - $520 = $4,771

- Assume McDonalds follow through with the promised dividend payment of $50 prior to expiration

- If McDonalds ontinues to trade above $50 on December 19th, then you will be forced to sell your 100 shares for $50 each, or $5,000

- Total collected from being called out is $5,000 + $50 (dividend) = $5,050

- Profit from trade = $5,050 - $4,771 = $279

- Net return if called out = $279 / $4,771 = 5.8%

- Downside protection breakeven point = $4,771 - $50 (dividend) = $4,721

Can you live with this scenario?  If so, then it is a good candidate.  If not, then perform the same analysis for other strike prices, and possibly other expiration months.

Step 4 - Decide on the combination of strike price and expiration month that is the most appealing to you personally.  It is a personal and subjective decision that takes your personal risk tolerance into play.  Nobody can tell you the correct answer except for you.

Good Luck, and as always, trade at your own risk!

This week is shaping up to be another ugly and painful week in the market.  The major indexes were all down five to six percent or more on the day.  But that market pain has largely been avoided for those in the newly debuted Direxion triple leverage bear funds.  Take a look at the weekly chart for two of the stellar performers this week.

FAZ is up over 130% in just 5 days, and BGZ is up just half that mark at a still incredible 63% return!  For more information on these new 3X leveraged ETF’s, check out the Direxion website.  Be sure to check out the prospectus as these new ultra leveraged ETF’s carry significant risks not associated with other ETF’s.  Also be sure to carefully design any portfolio using such leveraged bear instruments.  Sooner or later, the blood on Wall Street may taper off and undergo a violent reversal.  Getting into these leveraged bear funds at the wrong time could potentially destroy your portfolio even more than the losses on your long positions.

My personal preferred method of using these leveraged bear funds is to use them as a balance - part of a combination with other long positions.  Check out Trading strategy - hidden jewel in the shorts for more information.  But as always, do so at your own risk!

I’ve recently received several similar e-mails from family and friends warning me of upcoming store closures.  The e-mail mentions that the “Security Exchange” had been notified of all upcoming store closures to occur between October 2008 and January 2009.  Consumers are supposed to be particularly careful about purchasing gift cards at such stores because they apparently may not be around after January to honor those gift cards.

At first glance the e-mail seems legitimate because virtually everyone receiving it can recognize some familiar names - some of which are known to be closing - in their own neighborhoods.  Circuit City is on top of the companies closing shop but in actuality, they have announced that only 20% of their stores will be closing.  Other stores mentioned in the ridiculous e-mail were Eddie Bauer, GAP, Foot Locker, Ann Taylor, Disney, Home Depot, Macy’s, Sprint Nextel, Linens N Things and others.  But the bottom line regarding store closings is that stores close all the time and new stores open all the time, regardless of how the economy is doing. Stores that do poorly will close their doors, and successful stores will have new grand openings across the country.

So what exactly is the point of this e-mail?  If it is only a reminder to be careful with purchasing holiday gift cards, then I have a better idea.  Don’t ever purchase any gift cards, period, regardless of store closings! If you feel inclined to give a gift to someone and you just can’t decide what to buy, then give them a wad of cash in lieu of a gift card.  If a wad of cash is good enough for the mafia, then it is good enough for your giftees. A wad of cash can be spent without limitations throughout the world, where a gift card serves no purpose other than forcing your giftee to buy something they ultimately did not want and at a store they do not like.

And the other point of this store closing e-mail? It could be a number of things, including scare tactics to stop consumers from shopping and buying (perhaps the authors of the e-mail are shorting General Growth stock and other retailers), boredom, insanity, stupidity or a simple desire to waste time.

And what about the Security Exchange notification? - Quite simply, there is no such thing as the “Security Exchange”.  There is another government agency called the Security and Exchange Commission (SEC), but their mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”, and not be burdened with concerns for store closings.

Action Items for Readers - Delete those stupid store closing e-mails, and get out their and SPEND, SPEND, SPEND.  Your country and the economy needs you!

If you have been attempting iron condors on the Russell 2000 index, then you may be feeling some pain lately, in the form of lost money.  Iron condors can do very well when the underlying index trades within a smooth and pre-determined channel.  Take a look at the Russell 2000 over the last year, and notice two distinct environments - a friendly iron condor environment and a potentially fatal iron condor environment.

There are many iron condor trade alert services that promise big monthly gains with iron condors.  And I’ve seen some make claims that iron condors are big money makers with only 5 minutes of work per week.  In a friendly iron condor environment that may be the case, but if you are not prepared for the unfriendly iron condor environments (Hint:  NOW!), then you probably should just stay away altogether.  Unfriendly iron condor environments can be navigated through successfully, but they are tricky and require knowledge and planning - prior to the unfriendly environment striking.

In the latest issue of SFO, John Sarkett interviewed Dan Harvey, considered the “Supertrader of Index Condors”.  Dan Sheridan of Sheridan mentoring is also mentioned in the article.  The article is freely available and highly recommended for any iron condor trader.  In the article, Dan Harvey outlines his condor trading rules and guidelines:

• Place your short strikes correctly with low deltas of between five to seven
• Watch the current psychology of the market
• Study position greeks, charts and graphs every night
• Make timely adjustments when necessary
• If you stay in the iron condor trade during expiration week, then make sure you are 2.5 to 3 standard deviations out of the money to avoid delta and gamma risk
• Optionally, place contingent orders to protect against unpleasant surprises

Dan refers to three alternative adjustments to make to iron condors entering undesirable territories, including:

1. Mickey Mouse ear - an example would be a long put debit spread near the lower limit of the original condor channel.
2. Embedded calendar - Dan mentions adding an embedded calendar two standard deviations out of the money, and either taking profit and repositioning further out on a continuation movement, or stopping out for a loss on a reversal.
3. Mighty Mouse ear - This adjustment is more expensive than the mighty mouse ear or the embedded calendar.  It refers to buying additional puts two to three strikes in front of the short strike.

Iron condors are great when they work, but you must be prepared for the potential losses, and learn the skills necessary to adjust and steer clear from trouble.  In addition to reading the entire SFO article, I’d also recommend purchasing the following book on option trading adjustments.

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

By all rights, Steve Wynn, CEO of Wynn Resorts, should be very stressed these days.  The Wynn Resorts company, per their Yahoo Finance profile, engages in the development, ownership, and operation of destination casino resorts.  The company owns and operates Wynn Las Vegas and Wynn Macau.  Wynn Las Vegas reported a loss for the most recent quarter ending September 30, 2008 of $16.1 million.  Las Vegas traffic is down substantially and all the Las Vegas casino operators are suffering dearly, at least according to their stock charts.

Steve Wynn just appeared on a Bloomberg television interview earlier today, and he appeared very calm.  He recognizes the difficult environment in today’s economy, but he had already anticipated it, planned for it, and is now ready to navigate through it.

In a similar interview from the Straitstime, here is what he had to say:

In any economy, growth has to be done in phases.  If someone tries to build six hotels at once and finds the market can’t accommodate it, there’s a problem with the planning.

The interview laregely relates to his Wynn Macau property, where the Las Vegas Sands corporation is also involved.  Both companies are struggling with existing and anticipated continuing revenues.  A Las Vegas Sands senior executive chose to blame the government of Macua for their troubles, stating that “government decisions may have hurt the development of Macau casinos”.  Steve Wynn on the other hand views himself as a servant to his dedicated employees, and has already planned for such challenges. He recognizes that the rapid Macau expansion will take time to succeed.

The community has to be given a chance to absorb such expansion in an orderly fashion.  I found the government’s policies are evenhanded.

So there we have two casino operators in the same industry and the same markets.  Las Vegas Sands focuses their priorities on blaming others, while Wynn Resorts takes responsibility and looks forward.  If only the CEO’s of the other gambling industries - housing, banking, insurance, and auto - could take note of Steve Wynn’s attitude on economic cycles.  Perhaps they should have planned better for the expected downturn and foregone the need to beg for tax breaks, bailouts, and special subsides!

The latest gambling CEO bailout begging? - The chairman of Hovnanian is begging for direct government to consumer housing loans of 3%, as well as additional tax credits for buyers.

Jim Jubak, number one columnist for MSN Money, just named his list of the “10 financials you’ll want to buy“, broken down into two categories - “famous but broken” and “Survivors ready to pick up the pieces”.  Of the ten, only one looks mildly appealing to me.  Read on to learn more.

Among the first category are Banc of America (symbol BAC), ICICI bank (symbol IBN), ING Group (symbol ING), Ping An Insurance Group (symbol PNGAY), and State Street (symbol STT).  Of that list, I’m not so sure Ping An Insurance is very famous; I haven’t heard of it until reading his article.  But more importantly, I’m not ready to put a single dollar of my money into any of those five financial, as the broken in Jubak’s “famous but broken” is far understated.  Those five names are on serious life support!

The other five “survivors” are a little more interesting, and a lot less scary.  The list includes HSBC (symbol HBC), Banco Itau Financeira (symbol ITU), Northern Trust (symbol NTRS), US Bancorp (symbol USB) and Wells Fargo (symbol WFC).

Here is my quick and dirty opinion of the Jubak’s “survivor” list:

• HBC - Not easy to find financial data on Yahoo or Google Finance.  Also, to much exposure to emerging markets that are now waiting in line for IMF bailouts!
• ITU - Based in Brazil.  No thank you!  Can you say whacky accounting and emerging market bailout?!?!
• NTRS - I wouldn’t classify a company that lost $148 million last quarter as a “survivor”.
• *USB - Much healthier than most other banks, and also heavily owned by Warren Buffett at prices higher than the current $25.80 per share.  They did post a $576 million profit in the latest quarter ending September 30, but they are certainly not immune from the financial crisis.  Net loan charge offs increased nearly 250% from Q3 2007 to Q3 2008, largely due to commercial loans gone wrong.  There latest charge off rate for the quarter was 1.19%.  But overall, I would agree with classifying them as a potential “survivor”.
• WFC - It’s recent purchase of Wachovia makes them just to difficult to analyze.  It makes me wonder if the entire acquisition was performed solely as a tactic to complicate their reporting and conceal some of their ugliness.  On top of that, they are based in San Francisco, one of the biggest and still deflating real estate bubble markets in the country.  This one is just to risky for my taste!

Summary - A nice list of 10 potential financial investments from Jubak, but certainly not a list I want to blindly throw my money at.  The only one that looks even mildly appealing is US Bancorp, but even that one is not worth diving into.  Perhaps dipping a toe in is the preferred strategy.

Disclosure - I currently do not own shares in USB, but I may or may not purchase them in the future.  Also, as always, TRADE AT YOUR OWN RISK!

In John Mauldin’s former #1 seller, but still very timely book Bull’s Eye Investing, John mentions that everything ALWAYS returns to trend, sooner or later.  The return to trendline is exactly what is happening in the housing market right now.  Housing prices have a long term historical return of 3-4%, just above the inflation rate.  In the last decade, housing appreciated in many cities in the high double digits.  But now we can sit and watch as those prices return to trendline - either through additional falling prices, or by simply flatlining and waiting for the rest of the economy to catch up.

Back to Microsoft.  When Microsoft went public in 1986, it took off like a rocket and never looked back, that is until the dot-com-crash of 2001.  Since then it has flatlined for seven straight years, and looks to continue down that horizontal path indefinitely.

Microsoft went public on March 13, 1986 for $28 per share.  Adjusting for multiple stock splits, the last of which occured in 2003, the initial IPO price of Microsoft shares were just $.097.  In 1996, Microsoft shares hit $157, or $9.87 in split adjusted prices.  Those first 10 years of substantial growth resulted in an average annual investment return of near 58%.  But fast forward to 2008, and include the last seven years of near death flatline, and the Microsoft average annual returns since IPO drop substantially to near 27%.

Fast forward to 2030.  If Microsoft continues down that flatline, or slow leak trail and enters 2030 with a stock price of around $14, then its average annual return since the 1986 IPO will be around 12%, much more in line with an attainable long term trendline of any other public company.

As John Mauldin says, everything, sooner or later, returns to trend.  John Mauldin is often misrepresented as a perma-bear.  But in actuality, he is just a realist, and refuses to get caught up in the temporary hype of Wall Street.  Instead, he focuses on the hidden depths of balance sheets, unfunded pension liabilities, risky expectations and poor assumptions, demographical changes, collapsing p/e ratios and more.  It’s one of those rare and timeless pieces that needs to be purchased and read by everyone seeking better returns, or even a better understanding of the current economic climate.

Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market by John F. Mauldin

Volatility is definitely the name of the game in 2008.  But today’s action in the S&P Index showed that volatility and wild swings are not just for weekly or monthly cycles.  Intraday volatility was in full force today with multiple crosses of the zero line, and a S&P Index trading range (820-913) that approached 100 points from low to high.  That 92 point trading day measured against yesterday’s S&P close of 852 is a staggering 11%! The S&P itself closed up just short of 7%.

So how do you trade these crazy high volatility markets that have become the norm?

A) Buy and Hold!  No Trading for me.

B)  Forget trading.  My money’s much safer under the mattress.

C)  I’m a bank CEO, and I have no time to trade.  I’m to busy spending the taxpayer bailout money!

D)  No money to trade.  I went broke from attempting to trade the market earlier in the year!

E)  Very patiently, and methodically, with well hedged positions and a mix of long and shorts.

If you answered E, then there’s a good chance your 2008 returns are crushing the rest of the market participants, perhaps even etching out a modest gain for the year.

With my own account, I stay away from intraday trading, and leave that type of behavior to the maniacs on TV.  But I’m not even close to a buy and hold investor either.  On the contracy, I do pay my broker several trade commissions on any given week, but I hedge almost everything I buy, and I almost always have trades on both sides of the fence - long and short.

My methods for hedging my positions:

Covered calls - great to hedge a portion of your downside, and do very well in a flat market, but they won’t protect you against a radical decline that goes past the point of your covers.

• Time for cover - the covered call
• Covered calls - removing the covers and going naked
• Covered call writers love high volatility
• Covered Calls - Scottrade, Tradeking, Fidelity

Collars, Index puts or Proshares Inverse ETF’s - Collars limit both downside but also cap your upside potential.  Index puts protect your downside but leave your upside uncapped.  But the two disadvantages are that they can be very costly (especially during times of high volatility), and they are often difficult to implement correctly for beginners.  Proshares Inverse ETF’s offer a quick and convenient way to play the downside in the market, without worrying about option pricing or short selling rules.  But it is critical to check the prospectus of proshares to understand the risks of using them, including counterparty risk and correlation risk.

• Bring your collar into these volatile markets
• Proshares and Profunds leveraged ETF’s
• Proshares biggest counterparty risk is US Government (Article on the risk of using proshares)

Mix of long and short positions - Balance your portfolio with a mix of long and short positions to reduce some of the wild swings in your account, and help you sleep better at night.

• Balanced and hedged portfolio using proshares
• Trading strategy - hidden jewel in the shorts