Myopathy

I tend to be rather myopic in my investment philosophy and that can be a blessing and a curse. Since this is often the case, I have to force myself to step back and consider the contrary point of view quite often, just to check myself.
As those who know me can attest, I have been a proponent of silver for several years. The question is, has this become an obsession for me?
I think not.

As the prices for commodities and commodity related stocks have been hammered lately, the urge to take your lumps and sell out is almost overwhelming and questioning your reasons for investing in this sector becomes constant.
This is the danger that is ever present in the investing world. It is insidious and expensive. It is what causes the average investor to buy high and sell low. It is that nervous pit in the bottom of your stomach that keeps reminding you of how much money you've lost and it doesn't care that the losses are not yet realised until you sell and that voice has been obeyed.

If I were one of the unfortunate people who had to ride the housing market and the financials down into oblivion, I wouldn't have much credibility but I have been warning against those investments for years. Long before the words "sub-prime" became part of our national lexicon.

Everything that has been happening has been predicted. But for every accurate prediction there are infinite inaccurate predictions. So much so that it is easy to be swept up and carried away by someones "story". And as their story fails to pan out, that someone, justifies, rationalises and flat out invents their way out of their theory. I see that happening now. Everyone is pointing at the latest pull back in commodities and saying commodities are dead and the dollar reigns supreme.
Well that remains to be seen. I would much rather look at the macro-picture and remember why I buy precious metals, energy and agri-business. And here is the macro as I see it and how I have seen it for years;

Let's start at the Internet bubble. As that mania deflated and 9-11 played itself out, interest rates were cut to stop a major recession. Rather than let the free markets self correct, the government stepped in to artificially prop up the markets. The creation of essentially free money, through artificially low interest rates, inflated the housing sector. At the same time our financial institutions discovered that they could use this housing boom to make a ton of money by manipulating their books and abandoning traditional reserve requirements (lending money they didn't have). This was allowed by changes in government policy. Seeing the trillions of dollars in the derivatives market and the runaway inflation that they were causing, Uncle Sam, got scared and tried to tap the brakes by successive interest rate increases. Just like a car flying down an icy road, tapping the breaks caused the inevitable spin out. Housing collapsed. All that money that the banks created out of thin air went POP! And disappeared.

Now our government, which caused the problem to start with, is going to fix it by replacing the phony money that the banks created and subsequently lost, with "real" money.
Casey Research reports that in just the last 2 months alone, monetary supply has increased 38%
And they are just getting started.
Now back to the macro-picture.
Bull markets are defined as too many dollars chasing too few goods.
Despite an imminent global economic slowdown, people still have to eat and last I checked world population is increasing faster than our food supply.
It takes energy to grow food and support those people. We are years behind in the development of new energy resources and sources.
Gold and silver are monetary metals and by the very nature of their scarcity, will rise in price as monetary supply is increased. Monetary supply is growing world wide at alarming rates.
Commodity bull markets last for years, typically 15 years. We are currently in year 8.
The only two things that end a bull cycle is when the supply increases to meet demand, or when demand is reduced to relieve the strain on supply. Neither of these has happened in commodities and in the case of the food supply, demand destruction is truly a frightening thought.
There are many arguments and scenarios that people will offer to debate the positive case for commodities, but it is just noise. A lame attempt to invent their way out of a bad theory.
With this pull back in prices, comes what I believe to be a rare opportunity to add high quality resource stocks to your portfolio at discount prices. This will give you and your families safety and security in what are, unarguably, tough times ahead.

It is not that I think I am smarter than anyone else, it's that I have "been there, done that" before. I know what those voices sound like and I know that once you hear them it is crucial to understand their nature, step back and logically re-evaluate, then either listen to them and act or tell them to shut up and stick to your guns.
You can do what you want, but I'm, not only sticking to my guns, I am reloading, taking aim and emptying the magazine.

JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

New View

Invest in Dow Chemical?

Johnson and Johnson?

Boring.

What, Dow chemical pays a 7% dividend?

It's P/E ratio is what? 8?

Are you kidding me?

That's amazing but it's still a boring stock, it never moves very much. Wait a minute. Right now that's not really a bad thing. Besides it has moved quite a bit. Moved down.

Hey I get it now!

It's on sale!

But it's still trending down.

That's right and if there is any hint that it is basing or even breaking that down trend line, I'm jumping in with both feet. In the mean time I am going to be developing a list of blue chips that are deeply discounted.

I have never seen myself as someone who would trade Blue Chips but somewhere in my brain is the thought that I would love to have a portfolio with Blue Chips as core holdings. So if I don't add these positions at a deeply discounted price, when will I have another opportunity like this? Maybe never.
But when should I buy them?

The trick is in knowing when the bottom is in. Since my crystal ball is currently at the shop being repaired from the last time I threw it at the wall, I'm going to be buying with insurance.



Protective puts;

Puts are option contracts that bet on a downward move in a stocks price. Why would you make a bet that a stock that you own is going to drop? The same reason that you buy auto insurance. You are not wishing for an auto accident, but IF it happens, you are covered.

The same applies with protective Puts. If the stock drops, your option contract gains value, thus off setting the loss in stock value.

At that point you can then decide to sell your stock and the option contract, just the option contract or just the stock. you can also sell the option at a profit and buy one dated further out for continued protection. If the stock rises or stays the same your contract will expire worthless and you may or may not decide to buy another(renew your policy).



This is one of the intended purposes of options, it is a strategy that most serious traders employ and it will serve you well when you can't see the bottom through your busted crystal ball.





JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

Re-evaluate

It looks like it is decision time again.

For the silver;
Silver is still taking it on the chin, on paper. Physical silver, however is traded at a premium that has never before been seen. The spot price is quoted around 9-10 bucks. If you wanted to buy physical bullion, you would be paying as much as 50% over that price for most forms, ie. Silver Eagles, 100 oz bars, 10oz bars and even 90% halves, quarters and dimes. That is, if you can find any.
Physical silver is near sold out levels everywhere throughout the world, with the exception of 1000 oz bars and jewelry items. There is some supply of Eagles and Maples, intermittently, but they don't stay on the shelves very long. Indeed one of the scenarios that I subscribe to is that once the shortage gets serious enough, people will resort to purchasing the 1000oz bars because that is all that is left. And it looks as if this is happening.
Once that comes to pass, there is the fear that the COMEX could default. It is a fact that there is a significant gap between the physical(1000oz COMEX deliverable bars) silver that is actually in the COMEX warehouses, and the amount of silver paper contracts that are traded on the futures markets.
What this means is that, when the industrial users buy silver, this is often the form and method they choose to obtain it. 1000oz bars are big, ugly and unwieldy and in order to sell them the average investor would have to have them assayed. In other words they are not as liquid as the easily recognized and universally accepted Silver Eagles. So, they are naturally the last choice for most investors. But when you can't get what you want, you'll get what you can. Once investors take the supply away from the industrial users, look out ABOVE, the price will soar because the quantities used by industry is so small per unit, that they will buy silver at any price.
At least that's the theory, but I believe it has merit
I still believe that silver will rally and break out to new highs. I think this will happen soon but there is no way I can know for sure. The price activity has shocked every expert that I have researched and everyone including myself is scratching their heads. With the whole financial world turned on it's head, The US printing money like never before, the physical demand sky rocketing, the cost of production exceeding the spot price and the worst supply shortage ever seen, the prices should be going through the roof. Go figure.
But my recommendation is to hang on and enjoy having the insurance against the worst case scenario. And if you have the stomach for it, Buy more.
SLV, because it follows the spot price, is by far the cheapest and easiest way to own silver. And since we are exploring theories lets look at one that I don't necessarily subscribe to. This one goes as follows.
There is the fear that unless you hold it in your hand, "you aint' got no silver"
Why is this view so widely accepted? Because it is pretty much the truth.
If the proverbial crap hits the oscillating wind generator, how will you get your money? if you can, will your money be worth anything?
I don't know the answer, but the real question is, do you think things will get "that bad"?
While I believe that the price of Silver will explode I don't think that the end of the world as we know it, will have to be part of that scenario. My speculation is purely fundamentally driven and I have faith that this country can and will deal with any problems that we are faced with.
Has our government done the right things up to this point?
Not even remotely, in fact I believe that the Government is what caused the mess that we are in. And I mean all the Government! Both parties, both houses and the administrations past and present. I also believe that things will have to get worse before they get better, but they will eventually get better.
Here is a major key to investing and it is crucial to your financial success; Don't be Dogmatic, don't listen to hype. Develop reasons behind your investment decisions and stick with them but stay flexible.
I learned that statement years ago and I regret that I can't remember who to credit it to, but I have lamented that I have forgotten it at certain times in my investing career.

Next time; new strategies.

JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

It's STILL not too late!

A tired old investment saying goes "The markets can stay irrational longer than you can remain solvent" Now I don't know who originally said this and to be frank, I'm a little tired of hearing it. But just like most old quotes this one proves itself correct time and again. A whole bunch of people have hit the solvency wall during this commodities correction. For those new to investing, I will explain;

Many if not most traders employ the use of margin, or credit when they trade. In other words, they borrow against their existing shares and use that money to purchase more shares. This is just one way they leverage their capital to get more exposure to a market. Margin is a legitimate tool when used correctly but it also carries with it increased risk. That risk is that the shares that you borrowed against or that your broker used as collateral for the money it loaned you, might decrease in value. If that happens the broker can issue a "Margin Call" this means that you must either;

1. Deposit more money into your brokerage account.
2. Pay back enough of the borrowed money by selling enough shares to bring your margin balance back into line.
Or
3. Do nothing and let your broker liquidate your holdings so they get their money back.
(obviously none of these are pleasant.)

This is what happened to many people in this last commodity correction. Because it was so deep and swift, it caught many by surprise and wiped out much of their previous gains.
If you are not borrowing against your shares, you are not forced to sell them when their value drops and you can just sit tight and weather the storm or if you believe that the stock itself is going down much farther you can sell on a bounce instead of the dip. Margin Calls force you to sell at the worst possible times.
And that is what validates the tired old saying.

But is the market acting irrationally? I believe that it is. Let me provide the following evidence;
The dollar has given up on it's attempted rally. Gold and the dollar have an inverse relationship and while gold is reflecting the dollars' decline, Silver is not.
The spot price of silver, as a percentage, has plummeted nearly twice that of gold.
This in the face of real physical silver supply shortages.
Some analysts say that the current spot price doesn't even pay for the cost of production(mining).
Bullion prices are 20 to 30% over the spot price. That is the premium you will pay to a dealer over the spot price, to purchase their silver, if they have any.
While above ground supply of silver is one fifth that of gold, it takes over sixty times the amount of silver to equal one of gold.
Gold's industrial uses are negligible while silver's industrial use is huge, irreplaceable in many cases and growing rapidly not withstanding reduction in photographic use.
For the last 60 years we have been using more silver than we mine, so much so, that most of the stock piles are gone forever.
The US Mint Silver Eagle sales have sky rocketed to the extent that they are rationing to their dealers. (supply doesn't meet demand for whatever reason).
So with all these factors in mind, if you are still solvent, one might conclude that Silver might not be a bad place to park your cash at a time when some of our largest banking institutions are folding like a bunch of soft tacos and the US government is increasing monetary supply(printing dollars electronically) at an exponential pace.

Or maybe it's just me.

JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

What Is Going On?

I knew this would be an interesting month, but this is epic.What is happening here is similar to the Cuban missile crisis, in that we don't know how close we are to financial Armageddon. And we won't know, at least until history tells the whole tale.
Fannie, Freddie, Lehman, AIG Wow!
I am not a doomsday kind of guy, however, this is serious. The amount of money involved in this meltdown is so large, that nobody can comprehend it. If you win a million in the lottery, well, that's a number we can grasp.
What about a thousand million? That's a billion. Now that is an interesting number. At 5% interest, that's what? 50 million a year in interest payments. What about a trillion? you guessed it 50 billion! This banking crisis will be counted in the trillions before all is said and done.
They (the Government) are already throwing around numbers like 200 billion, 85 billion, even a trillion. Now this would be fine if we were running surpluses in the Federal budget, but, , , we have a massive deficit and massive debt. In other words, the money just doesn't exist.
So what is the Government handing out in all these bailouts?
Freshly printed checks. Checks written on an account that has a massive negative balance.
Now all of this will probably work out just fine. This is still the greatest country in the world and offers the best environment for capitalism and opportunity. Is it perfect? Of course not. Can it collapse financially? Who knows. History tells us that no currency in 4000 years of monetary history has ever survived after it has been debased. We've been slowly doing that for a long time now.
So what does all this mean to me?
I'm going to apply straight common sense.
No body knows where the banking and financial markets are going, but it doesn't look good.
Commodities have been hammered recently in the markets. And are now, in my opinion, on sale.
I'm exchanging those Government checks for something solid.
Gold and Silver are solid and they are on sale!
But not for long.


JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

Covered Calls

What are covered calls?

Options contracts.

But first things first, what is a call option?

There are two basic categories of options, Calls and Puts. For now we are only concerned with Calls.

If you believe that a stock(or virtually any other traded asset) is going to rise in value in the future, you can enter into a contract with another person or entity, that will guarantee that you have the right, but not the obligation, to purchase that asset at a preset price any time on or before a preset date. But to secure that deal you have to pay a premium.

Lets see an actual example:



CHK is the ticker symbol for Chesapeake Energy Corp.

Today is September 7th 2008

Chk's price is $44.34



If you believe that CHK will increase in price to 60 dollars within the next 3 months.

you can buy an Call Option with a target price(strike) of 45 dollars that expires on the third Friday of January 2009.

This contract will cost you $580.

So what does all this mean?

If the price takes off and climbs up to, lets say $55 a share in two weeks, you can then opt to purchase shares of CHK for $45 dollars a share. How many shares? Each contract is for 100 shares. Or in this case $4500.

Wow! Buy 100 shares of a $55 stock for $45 a piece? A thousand dollar discount? whoo hoo! sign me up!

If you wanted to take an immediate profit you could then take those shares and sell them in the open market for the going rate of $55 per share or $5500 for a profit of $420 (Remember that the contract cost $580 in the first place). And don't forget commissions and exercise fees.
Or, you could just sell the contract itself.
That is generally what most traders do.
Well what's the contract worth now?
It isn't possible to know exactly to the penny but a pretty close estimate is around $1170, that works out to a profit of $590! That is before commissions and there are no exercise fees.

Much better huh?

So why not rush out and do just that?

Odds.
The odds are that over 90% of the time this contract will expire worthless because CHK will probably not rise that much in the specified time frame.
And that 90% applies to all option contracts! In other words most options buyers guess wrong.
So logically you would ask why not be on the other side of that trade?
Now that's a good question.

And the answer is that there is no good reason you can't.
IF, you do it carefully.

And there is a very safe way you can do it. And there is a way that practically guarantees profit.

Check this out;
First you buy 100 shares of CHK at the market price of $44.34, or $4434.00.
Then you sell (write) 1 call option contract.
This is called a covered call.

But what does it mean?

First you pick a price that you would be willing to sell your 100 shares. lets not get greedy how about 50 bucks a share? That's a nice $566 profit. and let's make the expiration time short, say 40 days, so we don't have to wait a long time to spend our money.

What money?

A 50 October call will cost the buyer $155. As the writer(seller) of the contract, you get that premium deposited in your account! and here's the best part, if the price of CHK doesn't hit $50 in the next 40 days you get to keep it and your 100 shares!

So what if it does hit $50?

You still keep the $155 dollars but you must sell your 100 shares at $50 per share, which is what you wanted to do in the first place. Only now your profit is not $566, it's $721 because of the premium you received for the contract. And that effectively lowers your initial purchase price to $42.79 per share which helps insure your initial investment if the price of CHK drops. You've got a built-in $1.55 cushion. And you can do it again every 40 days or sooner, or later. You pick the price and the time frame. But each time you do it you essentially lower your initial cost for the stock. Do it enough times and you can totally pay for the stock and get 100 shares of CHK for free!

So what are the drawbacks?

There really aren't any unless your tax situation is such that making a profit within the time frame puts you in a higher tax bracket or some other tax reason. But this is so rare that it hardly warrants mention. The only other risk here is the same as owning any stock. It can always fall in price. But as I pointed out, this trade only adds protection to the downside. You should only do this trade on a stock you want to own anyway.

OK, disclaimer and full disclosure time. Although I have, in the past, owned Chesapeake Energy Corp. I do not currently. I may in the future. Because I like the company. I am not recommending, for or against, any of the trade examples listed above. These examples are real world and current as of the time of this posting. The only thing I left out is the costs of commissions and fees, and that was strictly because it would have muddied up the water. Those costs must be accounted for in any trade you make. Furthermore, most of the online brokers offer training and learning centers that will go over Covered Call writing and you can always call your broker with questions, that is what you pay them for. If they don't or won't help you, find a new broker. I encourage you to research this strategy for yourself and understand it completely before you make this trade.

In closing this post I would encourage you to employ the power of covered call writing. It will bring in consistent income and add downside protection to your portfolio. If you change your mind and want to keep your 100 shares you can always buy back your own contract and by doing so, close out your contract. Depending on what the price of the underlying equity(the 100 shares of whatever) is doing, it may cost you more or less than the initial premium that you received. But I would recommend against doing this in most cases. Buying back your own contract is part of a good long term strategy but don't do it just because you think that you'll miss out on future higher returns. One in the hand vs. two in the bush and all that stuff. This strategy encourages you to take profits and keeps the gambling bug from stealing your profits. It is a great way to enforce self discipline. And if you've read my stuff in the past you'll remember that I believe that investor psychology is the biggest hurdle any investor faces. This Helps conquer that beast.

JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.

Okay, so what's up with options?

Options? OK, here we go.
Everyone is afraid of options and futures. First things first. Options and futures are not the same thing, but unfortunately people lump them together quite often. And as such, they think that both are very risky. This is absolutely false. For me Options are a way to reduce or eliminate risk and maximise profit.
However for certain people options can be as dangerous as a Vegas casino. So , , , if you've got the gambling bug , , , please please, don't read any further because you are the people that options traders prey on. And I do mean to use the term "prey".

I have a love for trading and for capitalism and for freedom and especially for America. There will always be people that abuse their freedoms. But that is at the heart of freedom isn't it? That is part of the cost of freedom, among other more consequential things. But in this country we have a right to waste our money by making risky and stupid speculations. If you want to waste yours, then jump right into options and futures without taking the time to educate yourself. Conversely we also have the right to educate ourselves and take advantage of opportunity. That, is precisely what options provide, opportunity. With the caveat of self education firmly in place, I can honestly say that Options are much less risky than most other investments. So what are Options?

(As I am writing this I am listening to Martin Sexton; Black sheep, and understanding that if I keep on with my explanations this might be part I of II)( But I will attempt to shorten it).

The Purpose of options is insurance. Plain and simple, nuthin' more nuthin' less.
This insurance allows entrepreneurs to hedge their positions, take on and manage risk, invest capital with less downside risk, expand into new markets with relative impunity, protect themselves from unexpected market conditions, natural and man made, etc.

Without getting into too much detail, here is an actual legitimate, capitalistic use of options and futures. This actually happened recently and the trader that did this had his or her 5 minutes of fame.

Southwest Airlines had forecast higher energy prices (fuel prices) and entered into a trade that guaranteed that they could buy fuel at a set level. No matter what fuel prices rose to. They guessed right!

This was a smart trade, but to guarantee that price, they had to pay a premium.

In essence they said, "I'll pay you a fee, if you guarantee to deliver fuel to my airlines at today's prices, if, and only if the price rises on or before a set, future date. If the price doesn't rise in that time frame, you keep the fee and the contract expires.

That Is a contract, No?
Yes it is.
It is an option contract.

But what if prices fall?

Had prices gone the other way, they would have given up the premium and just paid the lower fuel prices in the market, and then explained to the boss that the insurance policy had expired and it was time to renew it with another further dated policy(option).

Would the boss be angry about the loss of the premium? Probably not. Are you angry when you don't get into a traffic accident and don't "get" to use your auto insurance? Of course not, this was a legitimate business expense and a correct and prudent use of Options

On the other side of that trade was a legitimate speculator willing to take the risk that oil had peaked and wouldn't go higher. Guess what? They lost! Big time! They were buying oil at $140 to provide Southwest oil at a ridiculously low price. OUCH! There are, of course, many more details that went along with this trade and it is far more intricate than this simple explanation. The point is in the legitimacy and necessity of Options, the people that use them and the speculators that provide them.

This happens every day with Corn, Cattle, Pork, Cotton, Wheat, etc. It is what makes your food, clothes, auto parts, lumber, etc. so cheap and readily available.

Not so evil, the speculators? Huh?

One other feature of options;
Lets say a wing crack develops in one airplane (purely hypothetical) and the FAA decides to come in and ground all of Southwests' airplanes, for inspection. They no longer need the fuel in question, right? So what happens to the contract? Remember the clock is ticking and the speculator is only responsible to payoff "on or Before" the set date. That contract premium is becoming less valuable, in time value, every day. The genius of options is that you can sell the contract, it's transferable to another party! They have the right to sell that contract to someone who does need that fuel. Now that the contract is"in the money" (meaning that oil prices have already increased within the specified time frame), that premium would rise accordingly due to it's "intrinsic" value(the dollar value of getting cheap fuel) even though the time value is dwindling daily

So this is essentially the purpose of Options, but how do you and I trade them? The safest, easiest and most important way to do this through the use of covered calls. And this is the topic for my very next blog, see you then.

JT