Apr 28, 2008 - Issue #108
Out of Gas?
Out of gas? The primary description of the current market, in my opinion, would be
price up, volume down. Running on fumes, if not on empty. Like driving up a steep
mountain with the 'pedal to the metal' with gravity steadily slowing you down.
The CNBC commentators should be asking their expert guests: Is the worst over or are
we witnessing a rally within a bear market?
Last week, I asked the question: Is KO signalling a significant deline coming? It
definitely gave ground this week, especially on Friday, despite favorable reports from
Standard & Poors.
Investors may not like the yields available from short term Treasuries, but at least
the principal would be safe until such time that attractive equities become available.
An attractive conservative strategy often used by institutional investors is known as
the 'collar'. It consists of buying Puts to protect long stock positions and
simultaneously selling Calls to cover the cost of the Puts. Think of it as a covered
Call position with Put protection.
Usually, the examples given, show the purchase of 'out-of-the-money' Puts. That's like
an auto insurance policy with a large deductible. The reason given is to keep the price
of the purchased Puts low.
But consider the advantage of buying stock slightly below the strike price of the Puts.
The risk would then be the 'time value' only and none of the 'intrinsic value'.
Therefore, all that would be needed to make the position completely risk-free, in my
judgement, would be to find a Call with sufficient premium to cover the 'time value' of
The usual examples use Calls with the same expiration dates as the Puts. Institutional
investors don't limit themselves. If they need more premium, they simply sell Calls
further out in time. It's called 'diagonalizing'. You don't have to be an institution to
benefit from this strategy.
Dow score card for the week ending 4/25/08.
DJ-30: 12891.86 +42.50 +0.33%. The Real World (arithmetical) DJ-30: 52.78 +0.18 +0.33%.
UP: 16, Down: 14.
Trends (weekly charts): This is the subjective part.
Rising (Generally Higher Highs/Higher Lows) 10 (-5) 33%:
+*AXP, +*BA, C, +*DIS, +*GM, INTC, JNJ, +*JPM, MCD, WMT.
Consolidating (Generally Lower Highs/Higher Lows) 16 (+3) 53%:
AA, -*AIG, BAC, -*CAT, -*CVX, -*DD, GE, HD, -*HPQ, -*IBM, MRK, -*MSFT, T, -*UTX, VZ, -*XOM.
Declining (Generally Lower Highs/Lower Lows) 4 (+2) 13%:
KO, -*MMM, -*PFE, PG.
+/- denotes change of direction.
* denotes change of category.
Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!