So, here is the bounce back. After a full week of destruction, as I am writing this, the Dow is up over 8% and the European and Asian markets are up as well for the day. Hong Kong (Hang Seng Index) was up over 10%! I think this run up will last for the short term (possibly as long as a few months, esp with a new US President to be elected soon). I went ahead and took profits from my precious metals investments this morning since this run up should be adverse for both gold and silver. I am still bullish in this area for the longer term for the following reasons:
- The $700 billion bailout in the US is inherently flawed. Today, the announced that they will only invest in healthy banks. Are there any of a significant size in existence?
- The US credit system is broken and to allocate more money to it doesn’t make sense.
- Derivatives are the real problem. Over the last 5-10 years, the investment banks and other financial institutions didn’t make their money through lending but rather through in-house trading and securitization of debt.
- Flooding the market with USDs, eroding consumer confidence, and decreasing consumer spending are all positives for gold.
Rather than allow for the big banks to off load their junk, we should be working with the smaller, regional banks to increase lending with individuals. These bailout funds should only go towards the smaller banks that are somewhat well capitalized. This $700 billion at a conservative and healthy leverage of 10 to 1 would provide for $7 trillion of credit for these banks to use…this $7 trillion is more than the entire private mortgage market!
As of recent data I collected, the overseas bailout is staggering and I think the numbers will continue to grow:
- France: 340 billion euros
- Germany: 500 billion euros
- Spain: 100 billion euros
- Austria: 85 billion euros
Here is the list of the most recent recessions according to the National Bureau of Economic Research (NBER).
- April 1960 to February 1961
- December 1969 to November 1970
- November 1973 to March 1975
- January 1980 to July 1980
- July 1981 to November 1982
- July 1990 to March 1991
- March 2001 to November 2001
After each recession, you will notice that there was an incredible rally in the stock markets. Once the dust settles on the current recession, there should be another great rally. Right now, you can buy great companies at current prices and ride out the gyrations (requires lots of discipline), get accustomed to trading more than you are used to, or continue to wait for the dust to settle before getting back in to take advantage of the great buys. Regardless, don’t blow it. This is probably the one chance in your life you’ll have to buy world-class blue-chip companies for less than five times earnings. I really feel that you should be buying. At least dip your toe in and keep buying on the dips and take some profits on the upswings.
The best way to buy right now is through selling puts. Selling a put allows you to get paid a premium for agreeing to buy a stock at a lower price. Right now, with all of the volatility, the premiums are very attractive. For example, if you’ll agree to buy Bank of America at $15 – 25% lower than where it’s trading between now and 1/16/09, you can earn about $2.90 per share right now. That’s a 19% premium to the conversion price. And the stock would have to fall 25% in three months to trigger the conversion. The chances are very good you’ll simply take your 19% for doing absolutely nothing. However, on the other hand, if the stock does fall that far, since you’ve already been paid $2.90 for agreeing to buy it, your real capital cost will only be $13.10. That’s a 34.5% discount from its current price. It’s hard to see how you can lose money in this situation, no matter what happens.
Here is some humor from a good friend of mine. During tough times, a little humor can go a long way. “If you had purchased $1000 of Nortel stock one year ago, it would now be worth $49. With Enron, you would have $16.50 left of the original $1000. With WorldCom, you would have less than $5 left. If you had purchased $1000 of Delta Air Lines stock you would have $49 left. If you had purchased United Airlines, you would have nothing left. But, if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the cans for recycling, you would have $214. Based on the above, the best current investment advise is to drink heavily and recycle. This is called the 401-Keg Plan.”
Hope your week has started off well and look forward to chatting more throughout the week. As always, if you have any questions, don’t hesitate to either post a comment or e-mail me directly at moolahtimeletter@gmail.com.
cheers,
Moolah
