Posts
So what is a Ponzi Scheme?
In the early 1920's Charles Ponzi successfully convinced a large group of people that he was an investment genius. His supposed investment vehicle of choice was postal reply coupons, with which he claimed returns of 400%. Postal reply coupons where postage stamps purchased in another country and redeemed in the target country whose currency was stronger than the country in which they were purchased. In short he was supposedly playing a currency exchange program. Essentially an early type of Forex trading.
What he was really doing was paying returns to earlier investors with the deposits from new investors. There were no real returns from the initial investors deposits. Those and portions of subsequent deposits were skimmed off by Ponzi to fund a lavish lifestyle and continue the illusion of success. As the mania grew and grew, people were throwing money at Ponzi to cash in on his promised riches. At one point taking in $250,000 a day.
Eventually, of course, the pyramid scheme crashed and investors were financially destroyed.
Ponzi schemes are simple to pull off if you have no moral compass. They are also extremely easy to detect if you have the desire and easier yet to avoid if you apply the common sense.
How many times have we heard the mantra, "if it sounds too good to be true ..."? You know the rest.
Bernie Madoff pulled it off for years before the end came. In fact his scam would probably be rolling right along still if the markets hadn't tanked. These scams are always out there in one form or another. In fact our government is running two of the biggest Ponzi schemes in the history of the world. In broad daylight none the less!
Social Security and Medicare. The scary part is that we know there is no money in the Social Security "Trust Fund" Yet we let politicians get away with that term and the term, Social Security "Lock Box".
The money just ain't there.
If nothing is done to change these pyramid structures they will fail. Unfortunately the political will to accomplish those changes, doesn't exist.
And yet there is one more Ponzi scheme developing out there that will dwarf these two government mandated schemes. The US Economy.
I know that sounds hysterical and unpatriotic, but bear with me for a moment longer.
This is the greatest country the world has ever seen. We have been a force for good throughout the world. Whenever a disaster hits anywhere in the world we are the first to offer assistance, even to our enemies.
Our workers are the most productive, innovative and determined people on the planet.
Medically we are second to none. Our compassion for and reverence of life is a wonderful thing to behold. Even our pets and livestock enjoy a quality of life seldom seen anywhere else.
When we defeat an enemy we give back the territory as long as they demonstrate that they will play nicely with the other kids in the sandbox. Germany, Japan, Italy, half of Korea and Grenada. We are attempting to do the same with Afghanistan and Iraq.
Of course there are exceptions to all of these. However the vast majority of the time these statements hold true.
The one thing that makes this possible is wealth and the promise to attain it. That is the American dream. The American Capitalist is the reason we can be philanthropic as a nation.
The reason we make advances in medicine, quality of life, even environmental awareness.
It is the reason we conquer our enemies but don't expand an Empire.
All of these things make good business sense.
Take away that dream and you take away our greatness as a nation.
The financial world knows this is true as well, that is why the dollar is the reserve currency for the world. For now.
If we continue to try and print our way out of this financial crisis and into even more and more international debt, there will come a time that the international financial community will see the Ponzi scheme that is building in our economy and want out. Even if we reverse course right now, the national debt, if applied to every household throughout the country, would be around 500 thousand per household.
There will be only two ways we can pay off that debt. One is to grow our way out of it and, at the same time, have the politicians stop spending our money. That is apparently, not going to happen. The other way is through hyperinflation.
If you borrowed 100 dollars 20 years ago and had to pay it off today, no big deal right? back then you could have dinner and a movie for 2 for around 25 bucks. Today it's about $75-100 . That's mild inflation. With hyperinflation, foreign creditors would be lucky to receive 10 cents on the dollar, return on investment.
Will hyperinflation happen?
I believe it is already a done deal.
Bernanke has stated that he will print his way out of a deflation, to whatever extent that is required. He is in the process of doing just that.
So where does all this leave us average Joe's and Josephine's? Out in the cold, unless, , ,
We buy real, tangible assets.
In addition to our core holdings of real gold and silver, held in our own possession, we should be acquiring food and energy related stocks, various mining companies as well as shares of companies that provide products, which will be required no matter what happens with the economy. These will hold their value as the dollar drops. The more indispensable the commodity, the more it will hold it's value.
The unbelievable part of all this is that these things are on sale right now.
Even small amounts of tangible stock can become very valuable in a hyper inflationary market.
I'm building that house brick by brick, as we speak.
Even if I'm wrong about all this, these sectors should, at the minimum, hold their value or return to it, first as the economy turns for the better.
Good luck and Godspeed
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.
Saturday, December 27, 2008
Thursday, December 11, 2008
The most common mistake.
What is the most common investment mistake that people make?
"This time it's different"
That's it. Ask any investor, either amateur or professional, if they have said this before and then ask them how it worked out for them.
My guess is that, if they were being honest, they would tell you, overwhelmingly, that it was a failure as a strategy.
Things do repeat themselves in the markets. That's because capitalism is predictable, with known outcomes. And while history doesn't repeat itself precisely, the frame work remains constant. It is mostly the timing and intensity that varies.
The LAW of supply and demand.
This really is a law. You can't screw around with one and not effect the other. This is one of many things that Capitalism teaches us. And it is born out time and again.
But don't confuse capitalism with democracy. That is also a common mistake. Capitalists have existed in every form of man made government since the beginning of time. Some systems of government tend to promote capitalism, like democracies and some try to crush it, such as socialistic systems. Both systems of government will, however, ultimately fail in their efforts to manipulate markets either up or down, because market forces will always prevail in the long run and overthrow the forces of governments, whether well intentioned toward capitalism or not.
Our government has forgotten that market down turns are corrections, necessary corrections for a healthy economy. They balance out supply and demand.
After the Internet crash in 2000 the Fed came in and re inflated the economy by lowering rates and pumping up the housing markets sky high all the while congress was pushing banks to make as many high risk, low reward, loans as possible. They should have let the markets correct.
Why the attempted lecture on Social Sciences? And what does this have to do with investment mistakes?
The answer is that we are in the middle of major market forces at work and, unfortunately, the collective wisdom of our government is to move toward socialism in an attempt to prevent natural market forces from reaching their inevitable goals. By nationalizing some banks, insurance companies, even mortgage rates and apparently to some degree the auto makers, they are trying to stop those forces from doing what they have to do. Which in this case is a long overdue and massive correction of those market places. Will they succeed?
Not in the long term. We have the ability to look into the past at 4000 years of monetary history. But much to my dismay no one in the halls of power has the desire. Or maybe I should say the intelligence or the integrity.
That history, were it heeded, would tell the tale that NO country, state or empire has ever successfully devalued their currency without destroying it. We began devaluing our currency under FDR around 80 years ago with the complete conversion to fiat currency occurring in 1971 when Nixon closed the gold window. Fiat money is money that is backed only by our faith in government, or more accurately money created by government decree. Since 1971 we have steadily been creating money out of thin air.
The framers of our constitution and overall government, were students of history and they knew the dangers of fiat currency. In fact they specified what a dollar was, and that was Silver. A very specific weight and purity of silver. Furthermore they imposed a penalty against anyone who devalued that currency and as penalties go, it was a little severe. Death.
I am not saying we should ship off our elected officials to the gas chamber, although I'm sure there are those who would disagree, but we should look at how serious they felt about this and why, instead of doing what our politicians have been doing. Which is saying "This time it's different".
People tend to look at the time in which they are running around in this world as the most important time in history. In doing so, they over emphasize their importance in the world and forget that in the context of all of human history, their time on this earth amounts to little more than flea flatulence in Yankee Stadium. Thinking that we are larger than this, is delusional and it leads one to believe that, "this time it's different" because "now I'm here".
Socialism has never worked in the past but it's sounds so compassionate and noble that it has to succeed now because "this time is different".
Printing money will stave off deflation and save the economy but it won't cause inflation because "this time is different".
I know I should buy Silver and Gold to protect my wealth, but I don't believe that inflation is a problem and I don't believe that Gold and Silver are valuable as money anymore because "this time is different".
As historians look back on this time, with the clarity of hindsight, I believe that they will scratch their heads and say, "How could they ignore 4000 years of monetary history? All the clues were so obvious, how come they couldn't see it coming?".
And I will answer for them one more time.
Because they thought that "this time was different".
Good Luck and Godspeed
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.
"This time it's different"
That's it. Ask any investor, either amateur or professional, if they have said this before and then ask them how it worked out for them.
My guess is that, if they were being honest, they would tell you, overwhelmingly, that it was a failure as a strategy.
It is what people do when the markets are going up and they should be selling into strength and taking profits because they believe that the bad times are behind them never to return, because "this time is different".
It is also what people do when markets are falling and they should be buying quality stocks when they are dirt cheap. They are selling on the way down because things are awful and they will never recover because, "this time is different".
Things do repeat themselves in the markets. That's because capitalism is predictable, with known outcomes. And while history doesn't repeat itself precisely, the frame work remains constant. It is mostly the timing and intensity that varies.
The LAW of supply and demand.
This really is a law. You can't screw around with one and not effect the other. This is one of many things that Capitalism teaches us. And it is born out time and again.
But don't confuse capitalism with democracy. That is also a common mistake. Capitalists have existed in every form of man made government since the beginning of time. Some systems of government tend to promote capitalism, like democracies and some try to crush it, such as socialistic systems. Both systems of government will, however, ultimately fail in their efforts to manipulate markets either up or down, because market forces will always prevail in the long run and overthrow the forces of governments, whether well intentioned toward capitalism or not.
Our government has forgotten that market down turns are corrections, necessary corrections for a healthy economy. They balance out supply and demand.
After the Internet crash in 2000 the Fed came in and re inflated the economy by lowering rates and pumping up the housing markets sky high all the while congress was pushing banks to make as many high risk, low reward, loans as possible. They should have let the markets correct.
Why the attempted lecture on Social Sciences? And what does this have to do with investment mistakes?
The answer is that we are in the middle of major market forces at work and, unfortunately, the collective wisdom of our government is to move toward socialism in an attempt to prevent natural market forces from reaching their inevitable goals. By nationalizing some banks, insurance companies, even mortgage rates and apparently to some degree the auto makers, they are trying to stop those forces from doing what they have to do. Which in this case is a long overdue and massive correction of those market places. Will they succeed?
Not in the long term. We have the ability to look into the past at 4000 years of monetary history. But much to my dismay no one in the halls of power has the desire. Or maybe I should say the intelligence or the integrity.
That history, were it heeded, would tell the tale that NO country, state or empire has ever successfully devalued their currency without destroying it. We began devaluing our currency under FDR around 80 years ago with the complete conversion to fiat currency occurring in 1971 when Nixon closed the gold window. Fiat money is money that is backed only by our faith in government, or more accurately money created by government decree. Since 1971 we have steadily been creating money out of thin air.
The framers of our constitution and overall government, were students of history and they knew the dangers of fiat currency. In fact they specified what a dollar was, and that was Silver. A very specific weight and purity of silver. Furthermore they imposed a penalty against anyone who devalued that currency and as penalties go, it was a little severe. Death.
I am not saying we should ship off our elected officials to the gas chamber, although I'm sure there are those who would disagree, but we should look at how serious they felt about this and why, instead of doing what our politicians have been doing. Which is saying "This time it's different".
People tend to look at the time in which they are running around in this world as the most important time in history. In doing so, they over emphasize their importance in the world and forget that in the context of all of human history, their time on this earth amounts to little more than flea flatulence in Yankee Stadium. Thinking that we are larger than this, is delusional and it leads one to believe that, "this time it's different" because "now I'm here".
Socialism has never worked in the past but it's sounds so compassionate and noble that it has to succeed now because "this time is different".
Printing money will stave off deflation and save the economy but it won't cause inflation because "this time is different".
I know I should buy Silver and Gold to protect my wealth, but I don't believe that inflation is a problem and I don't believe that Gold and Silver are valuable as money anymore because "this time is different".
As historians look back on this time, with the clarity of hindsight, I believe that they will scratch their heads and say, "How could they ignore 4000 years of monetary history? All the clues were so obvious, how come they couldn't see it coming?".
And I will answer for them one more time.
Because they thought that "this time was different".
Good Luck and Godspeed
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.
Monday, December 8, 2008
Santa Claus Rally?
Are we in for a year end rally?
I think so.
Looking at past crashes(I think this officially qualifies as a crash) tells us some very interesting things.
First is that the big ones, have all started about the same time of year. This one falls into that category.
The second is that, within the context of crashes, about this time of the year the markets rally. If you look at charts for broad sectors you will see basing patterns are occurring. This indicates a good possibility for a rally.
Let me sidetrack a little here because I know I haven't done much in the way of discussing charts.
Charts are not the be all, end all of investment techniques. But the interesting thing about charts is that, it is a very technical way to gauge investor psychology. Just that concept alone is enough to make Sigmund Freud shriek from his grave. That aside, human behavior is fairly predictable. Particularly large groups of people. And the larger the group, the more predictable. The investment community is a pretty big community.
What charts do is to illustrate patterns. They point out what the majority is doing and by comparing past patterns they give you an indication of what could happen in the future. But here is the catch. Humans aren't technical creatures.
While we are fairly predictable, we don't always repeat the same behavior. That ability to adapt, invent, innovate and improvise is what makes us so strong. It not only allows us to survive, but it makes us thrive and succeed and it is also what points out the inherent flaw in charting techniques.
The difficulty in charting is in applying the right historical behavior, to the current climate. Therefore the question is; Is this the same environment that existed in the early 1930's?
The fact that so many people are comparing today's markets to those of the Great Depression, makes me instinctively nervous. Group Think is invariably inaccurate.
Group Think makes you reevaluate what you instinctively know and believe and then question it.
Taking all this into account, what my research and instincts are telling me is that, we are in for an INTERIM rally. And the charts confirm it.
And that is what charts should be used for. Do your research, develop reasons, check your fundamentals and then confirm it with the charts.
We are still in a falling market and we have a lot of work to do before we get out of it. But every crash has some up days and I suspect that we are close to those days.
So, if you've been paying attention, you probably already know what I'm going to say.
IF we do get a rally, I'm going to ride it up and then sell, sell, sell. Everything except my core holdings of Silver, Gold, mining companies and blue chips. It is entirely possible that commodities will decouple from the broad market and continue up or stabilize on their own. Watch for this.
In closing I will say that human behavior is unpredictable and history doesn't always repeat itself precisely. The only thing we can do is prepare to the best of our abilities and execute what we know. The outcome is only uncertain to us. It's all part of the plan and our job is to deal with that plan as it unfolds.
Good luck and Godspeed
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.
I think so.
Looking at past crashes(I think this officially qualifies as a crash) tells us some very interesting things.
First is that the big ones, have all started about the same time of year. This one falls into that category.
The second is that, within the context of crashes, about this time of the year the markets rally. If you look at charts for broad sectors you will see basing patterns are occurring. This indicates a good possibility for a rally.
Let me sidetrack a little here because I know I haven't done much in the way of discussing charts.
Charts are not the be all, end all of investment techniques. But the interesting thing about charts is that, it is a very technical way to gauge investor psychology. Just that concept alone is enough to make Sigmund Freud shriek from his grave. That aside, human behavior is fairly predictable. Particularly large groups of people. And the larger the group, the more predictable. The investment community is a pretty big community.
What charts do is to illustrate patterns. They point out what the majority is doing and by comparing past patterns they give you an indication of what could happen in the future. But here is the catch. Humans aren't technical creatures.
While we are fairly predictable, we don't always repeat the same behavior. That ability to adapt, invent, innovate and improvise is what makes us so strong. It not only allows us to survive, but it makes us thrive and succeed and it is also what points out the inherent flaw in charting techniques.
The difficulty in charting is in applying the right historical behavior, to the current climate. Therefore the question is; Is this the same environment that existed in the early 1930's?
The fact that so many people are comparing today's markets to those of the Great Depression, makes me instinctively nervous. Group Think is invariably inaccurate.
Group Think makes you reevaluate what you instinctively know and believe and then question it.
Taking all this into account, what my research and instincts are telling me is that, we are in for an INTERIM rally. And the charts confirm it.
And that is what charts should be used for. Do your research, develop reasons, check your fundamentals and then confirm it with the charts.
We are still in a falling market and we have a lot of work to do before we get out of it. But every crash has some up days and I suspect that we are close to those days.
So, if you've been paying attention, you probably already know what I'm going to say.
IF we do get a rally, I'm going to ride it up and then sell, sell, sell. Everything except my core holdings of Silver, Gold, mining companies and blue chips. It is entirely possible that commodities will decouple from the broad market and continue up or stabilize on their own. Watch for this.
In closing I will say that human behavior is unpredictable and history doesn't always repeat itself precisely. The only thing we can do is prepare to the best of our abilities and execute what we know. The outcome is only uncertain to us. It's all part of the plan and our job is to deal with that plan as it unfolds.
Good luck and Godspeed
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.
Wednesday, December 3, 2008
Last Chance?
It's always dangerous calling tops and bottoms. So I won't.
OK maybe I will.
I am already on record saying that silver will rise. I have already said that I don't know exactly when.
But what do I really think? you might ask.
I suspect that it will be soon, possibly within the next three or four months. Indeed I would not be surprised if, upon finishing this post, I discovered that the next major upswing in the price had begun.
So why do I believe this? After all I'll be the first to admit that I was completely surprised by the intensity and depth of this pull back (some would call it a price collapse).
The reasons for my confidence are many but here are a few. First is Ted Butlers commentary on the COT structure. I'm no expert on the Commitment Of Traders report and I wouldn't even attempt to explain it to you( I'll leave that to the experts). But it is Mr Butlers opinion that the Big Money is setting itself up to make a killing and he presents a pretty powerful case. His analysis is followed by the analysis of many of the most respected people in the metals market.
I have seen more and more of the experts that I follow, convinced of the very timing I'm sharing with you. Then there is the list of spectacular fundamentals that I've been writing about for some time now. Another piece of the puzzle that has been coming together lately is that the fundamentalists and the chartists are beginning to agree with each other. In fact my own conclusions, after analyzing a multitude of charts, Elliot waves and oversold levels, couldn't be more bullish.
My timing could be off, but if I'm wrong, I have the company of people that are smarter than I and I also have the confidence that, being wrong on the timing really doesn't matter because Silver is such a wonderful buy at these levels, it simply prolongs the buying opportunity.
Could I be wrong about Silver? Of course. There are no guarantees in the market place. The markets are going to do what they do. All we can do is analyze as best we can, make sure we haven't missed anything and have the courage to execute our plans. History will tell the whole story in due time. But I'm OK with that, it's what makes this such an exciting business.
But what if I'm wrong? These markets have been pretty screwy.
I have back up plans and trading discipline to fall back on.
But what if that doesn't work? Everything could fall apart.
If that doesn't work folks, the only thing that is going to help is guns, ammo, food, water, shelter and faith.
I've already gone over that check list and I got 'em covered.
As always
Good Luck and Godspeed
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.
OK maybe I will.
I am already on record saying that silver will rise. I have already said that I don't know exactly when.
But what do I really think? you might ask.
I suspect that it will be soon, possibly within the next three or four months. Indeed I would not be surprised if, upon finishing this post, I discovered that the next major upswing in the price had begun.
So why do I believe this? After all I'll be the first to admit that I was completely surprised by the intensity and depth of this pull back (some would call it a price collapse).
The reasons for my confidence are many but here are a few. First is Ted Butlers commentary on the COT structure. I'm no expert on the Commitment Of Traders report and I wouldn't even attempt to explain it to you( I'll leave that to the experts). But it is Mr Butlers opinion that the Big Money is setting itself up to make a killing and he presents a pretty powerful case. His analysis is followed by the analysis of many of the most respected people in the metals market.
I have seen more and more of the experts that I follow, convinced of the very timing I'm sharing with you. Then there is the list of spectacular fundamentals that I've been writing about for some time now. Another piece of the puzzle that has been coming together lately is that the fundamentalists and the chartists are beginning to agree with each other. In fact my own conclusions, after analyzing a multitude of charts, Elliot waves and oversold levels, couldn't be more bullish.
My timing could be off, but if I'm wrong, I have the company of people that are smarter than I and I also have the confidence that, being wrong on the timing really doesn't matter because Silver is such a wonderful buy at these levels, it simply prolongs the buying opportunity.
Could I be wrong about Silver? Of course. There are no guarantees in the market place. The markets are going to do what they do. All we can do is analyze as best we can, make sure we haven't missed anything and have the courage to execute our plans. History will tell the whole story in due time. But I'm OK with that, it's what makes this such an exciting business.
But what if I'm wrong? These markets have been pretty screwy.
I have back up plans and trading discipline to fall back on.
But what if that doesn't work? Everything could fall apart.
If that doesn't work folks, the only thing that is going to help is guns, ammo, food, water, shelter and faith.
I've already gone over that check list and I got 'em covered.
As always
Good Luck and Godspeed
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.
Sunday, November 30, 2008
Time to fill up your gas tank?
Is it time to fill up that old gas hog before prices start going back up?
First let's take a look at the world of oil.
The price of oil has been slashed from it's high near $140 to somewhere around $50 where it seems to be seeing some support. At the 140 dollar level, everything was different. Any and all alternative energy sources were being explored and developed because they were profitable with oil north of $100 dollars. The average consumers(myself included) were being absolutely hammered at the pumps. Businesses were being equally hammered and some areas of commerce, like trucking, were dangerously close to being completely shutdown. Impossible you say? Go ask an independent trucker what he was doing back then. The answer I got was that they were looking for cheap, long term parking.
The message is that the US Economy can not function at $140 per barrel. At least not yet. Not without higher wages and higher prices across the board.
Oil will eventually return to the $140 level if new technologies and/or new sources are not developed. But the equation will have to change before we can get there. Wages and productivity will have to rise and prices will have to rise for all goods and services. In short, the market has proven that $140 per barrel is not a sustainable price level.
At that level something called demand destruction occurs. People stop using the commodity in question. This is a long way of saying that the cure for high prices is high prices. But how low will we go? The reverse is also true. The cure for low prices is low prices and low prices call for supply destruction. There is no incentive for the producers to supply the product. In other words it's not profitable. These are basic tenants of capitalism. At $140 everyone with a shovel was out there looking for oil. At $50 it's not so exciting. We are already seeing supply destruction beginning in the oil sector.
Here is my opinion on the course of things; We are at or near the bottom for oil. It could go lower but I don't believe it will stay there because the fundamentals(there's that word again) have not changed. The Middle East has not suddenly become stable, Venezuela has not changed dictators and their oil services sector has not been suddenly revitalized. There have been no major, new oil field discoveries.
And much to my disappointment there have been no new technological breakthroughs on alternatives. And with oil at these levels I don't expect any. There is no longer the great financial incentives for entrepreneurs to take risks on alternatives.
But here is what I believe will happen; Something will break loose in the Middle East, China and or Russia. This new administration will be tested by one or all of the above mentioned. This is no great prediction, it always happens with new administrations. In addition there will probably be some government intervention in the price level of oil. Indeed President Elect Obama has already indicated his interest in a gas tax hike. Whether or not it's a good idea is irrelevant from an investment perspective. We need to be in position to profit from all of these things.
I believe that 70 or 80 dollar oil is a sustainable level and I think we will eventually stabilize around there.
I'll be building up holdings in large oil companies, top quality oil service companies as well as natural gas companies. Slowly and consistently, starting small and buying incrementally. This will be a little expensive in terms of extra commissions but it will give me some measure of downside protection if prices fall further. By doing this I don't use up all my capital(money) at once, saving some to buy more shares cheaper, if the price moves down, thus reducing my overall cost for the position. If the price moves up from here, I'll either buy more, wait for a temporary dip or reallocate entirely to a different strategy. This is investing 101, it is a technique that is tried and true and it's how the big boys and girls do it.
To put all this together into an overall investment strategy We are positioning ourselves for a ten year time frame. I don't think everything is going to turn around overnight. There is more pain coming but it's time to build core holdings by putting money aside regularly and buying undervalued companies that have tangible assets. Spending huge amounts of money on each position is not necessary, in fact with today's climate, it just might be stupid.
In conclusion, to answer the gas tank question, yeah it's time.
Fill 'er up!
Good Luck and Godspeed
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.
First let's take a look at the world of oil.
The price of oil has been slashed from it's high near $140 to somewhere around $50 where it seems to be seeing some support. At the 140 dollar level, everything was different. Any and all alternative energy sources were being explored and developed because they were profitable with oil north of $100 dollars. The average consumers(myself included) were being absolutely hammered at the pumps. Businesses were being equally hammered and some areas of commerce, like trucking, were dangerously close to being completely shutdown. Impossible you say? Go ask an independent trucker what he was doing back then. The answer I got was that they were looking for cheap, long term parking.
The message is that the US Economy can not function at $140 per barrel. At least not yet. Not without higher wages and higher prices across the board.
Oil will eventually return to the $140 level if new technologies and/or new sources are not developed. But the equation will have to change before we can get there. Wages and productivity will have to rise and prices will have to rise for all goods and services. In short, the market has proven that $140 per barrel is not a sustainable price level.
At that level something called demand destruction occurs. People stop using the commodity in question. This is a long way of saying that the cure for high prices is high prices. But how low will we go? The reverse is also true. The cure for low prices is low prices and low prices call for supply destruction. There is no incentive for the producers to supply the product. In other words it's not profitable. These are basic tenants of capitalism. At $140 everyone with a shovel was out there looking for oil. At $50 it's not so exciting. We are already seeing supply destruction beginning in the oil sector.
Here is my opinion on the course of things; We are at or near the bottom for oil. It could go lower but I don't believe it will stay there because the fundamentals(there's that word again) have not changed. The Middle East has not suddenly become stable, Venezuela has not changed dictators and their oil services sector has not been suddenly revitalized. There have been no major, new oil field discoveries.
And much to my disappointment there have been no new technological breakthroughs on alternatives. And with oil at these levels I don't expect any. There is no longer the great financial incentives for entrepreneurs to take risks on alternatives.
But here is what I believe will happen; Something will break loose in the Middle East, China and or Russia. This new administration will be tested by one or all of the above mentioned. This is no great prediction, it always happens with new administrations. In addition there will probably be some government intervention in the price level of oil. Indeed President Elect Obama has already indicated his interest in a gas tax hike. Whether or not it's a good idea is irrelevant from an investment perspective. We need to be in position to profit from all of these things.
I believe that 70 or 80 dollar oil is a sustainable level and I think we will eventually stabilize around there.
I'll be building up holdings in large oil companies, top quality oil service companies as well as natural gas companies. Slowly and consistently, starting small and buying incrementally. This will be a little expensive in terms of extra commissions but it will give me some measure of downside protection if prices fall further. By doing this I don't use up all my capital(money) at once, saving some to buy more shares cheaper, if the price moves down, thus reducing my overall cost for the position. If the price moves up from here, I'll either buy more, wait for a temporary dip or reallocate entirely to a different strategy. This is investing 101, it is a technique that is tried and true and it's how the big boys and girls do it.
To put all this together into an overall investment strategy We are positioning ourselves for a ten year time frame. I don't think everything is going to turn around overnight. There is more pain coming but it's time to build core holdings by putting money aside regularly and buying undervalued companies that have tangible assets. Spending huge amounts of money on each position is not necessary, in fact with today's climate, it just might be stupid.
In conclusion, to answer the gas tank question, yeah it's time.
Fill 'er up!
Good Luck and Godspeed
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.
Tuesday, November 25, 2008
I don't want silver to rise!
I don't want silver to rise, , , , yet!
I'm not done buying and I don't think it will ever be this cheap again. I know we have all been beaten up lately, but turning tough price moves to your favor is what makes the difference.
Most people who invest do everything backwards. They see the price of an equity rising and rush in and buy. As it continues to go higher they either hold on in anticipation of further upward movement, or worse yet, they add to their position.
It is important to point out that, when I say that they add to their position, I am looking at the whole sector. For instance if you have Exxon shares and you buy Occidental Petroleum, you have added to your position, because you are positioned for an advance in the oil sector. If Exxon makes an upward move chances are Occidental will follow and the inverse is particularly true. Equities tend to move in sync. Some follow and some lead. Very rarely does a stock move unilaterally unless it is because of company specific news.
As these amateur investors feed into the hysteria and are buying on the way up, the pros are slowly selling into the price strength, reducing their position in the sector in anticipation of the fall. When the price rolls over and starts to nose dive, the pros bail out of their remaining shares and don't look back. The amateur investors hang on and ride the train over the cliff.
When a stock bottoms out, it doesn't bounce right back, it usually bounces along the bottom for quite a while, here is where the amateurs finally get shaken off and this is where the pros move back in. You'll hear them use words like "nibbling"or "dipping my toes in the water"or "take a taste", cautionary statements indeed. This is what you must train yourself to do because it's not in our nature to buy investments that are cheap. If it's that cheap nobody wants it. It isn't valuable, right?
Sometimes, but sometimes it's not right.
That's where you have to dig into the fundamentals, to find it's value and compare that to it's price. Find the diamond in the rough or in this case, the silver.
I am continually blown away by the professionalism of the silver investors. They haven't panicked. They know the value of silver and no one is selling. The supplies of bullion, when you can find it, are not coming from the private investors. For the most part, suppliers are getting the bullion from the large institutional holders or from various mints, government and private. Imagine if you will, a crazed, raging, wild horse, bucking, spinning, and flipping about while the cowboy tenaciously hangs on, refusing to be thrown. This has been the ferocity of the private investors in this price collapse. I am not hearing capitulation from them, in fact I'm not hearing much in the way of complaints other than the usual cry of foul about manipulation from the speculators. They, or maybe I should say We, are resolved to dig in deep and build a large supply of bullion and good quality junior mining stocks.
But why such strong resolve?
I have yet to hear one rational, reason why not.
Everything is in place for a colossal price movement. Will it happen today? tomorrow? next week? next year? I don't know but I really hope this weakness lasts for a long time and allows me to build an even larger position, but I know that won't happen. This is because the price is too low to support the miners. They have already halted work in their more expensive operations and in projects that haven't been completed and many have gone out of business altogether. Coupled with the facts that financing and credit have dried up and stock prices throughout the sector have tumbled, many more operations are threatened. It is true that manufacturing demand has fallen off somewhat, but the extent of that is not yet fully known. I suspect the dramatic increase in investor demand will more than compensate for this.
These factors are enough for me to be bullish on silver. When you take into account the monetary aspects of silver it becomes even more imperative to buy bullion. The amount of money that governments across the globe are printing, is far too large to even contemplate. In fact the latest buzz on the financial news networks, Internet and papers is that, it is the stated policy of governments to stave off depression by inflating their respective currencies. How scary is that? They are not even being secretive about it!
Just so you understand the seriousness of this, think of it as a hidden tax. As they inflate, your savings lose purchasing power. You become poorer and the governments spend to their little hearts content. If that is not a tax what is?
Buying gold and/or silver checkmates the the monetary manipulation. It denies the government the ability to impose this hidden tax on you. It preserves your wealth.
Add in the potential to dramatically increase your wealth and we have the perfect relationship. I know of nothing that can match silver in all the areas that I have mentioned.
Good Luck and Godspeed
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.
I'm not done buying and I don't think it will ever be this cheap again. I know we have all been beaten up lately, but turning tough price moves to your favor is what makes the difference.
Most people who invest do everything backwards. They see the price of an equity rising and rush in and buy. As it continues to go higher they either hold on in anticipation of further upward movement, or worse yet, they add to their position.
It is important to point out that, when I say that they add to their position, I am looking at the whole sector. For instance if you have Exxon shares and you buy Occidental Petroleum, you have added to your position, because you are positioned for an advance in the oil sector. If Exxon makes an upward move chances are Occidental will follow and the inverse is particularly true. Equities tend to move in sync. Some follow and some lead. Very rarely does a stock move unilaterally unless it is because of company specific news.
As these amateur investors feed into the hysteria and are buying on the way up, the pros are slowly selling into the price strength, reducing their position in the sector in anticipation of the fall. When the price rolls over and starts to nose dive, the pros bail out of their remaining shares and don't look back. The amateur investors hang on and ride the train over the cliff.
When a stock bottoms out, it doesn't bounce right back, it usually bounces along the bottom for quite a while, here is where the amateurs finally get shaken off and this is where the pros move back in. You'll hear them use words like "nibbling"or "dipping my toes in the water"or "take a taste", cautionary statements indeed. This is what you must train yourself to do because it's not in our nature to buy investments that are cheap. If it's that cheap nobody wants it. It isn't valuable, right?
Sometimes, but sometimes it's not right.
That's where you have to dig into the fundamentals, to find it's value and compare that to it's price. Find the diamond in the rough or in this case, the silver.
I am continually blown away by the professionalism of the silver investors. They haven't panicked. They know the value of silver and no one is selling. The supplies of bullion, when you can find it, are not coming from the private investors. For the most part, suppliers are getting the bullion from the large institutional holders or from various mints, government and private. Imagine if you will, a crazed, raging, wild horse, bucking, spinning, and flipping about while the cowboy tenaciously hangs on, refusing to be thrown. This has been the ferocity of the private investors in this price collapse. I am not hearing capitulation from them, in fact I'm not hearing much in the way of complaints other than the usual cry of foul about manipulation from the speculators. They, or maybe I should say We, are resolved to dig in deep and build a large supply of bullion and good quality junior mining stocks.
But why such strong resolve?
I have yet to hear one rational, reason why not.
Everything is in place for a colossal price movement. Will it happen today? tomorrow? next week? next year? I don't know but I really hope this weakness lasts for a long time and allows me to build an even larger position, but I know that won't happen. This is because the price is too low to support the miners. They have already halted work in their more expensive operations and in projects that haven't been completed and many have gone out of business altogether. Coupled with the facts that financing and credit have dried up and stock prices throughout the sector have tumbled, many more operations are threatened. It is true that manufacturing demand has fallen off somewhat, but the extent of that is not yet fully known. I suspect the dramatic increase in investor demand will more than compensate for this.
These factors are enough for me to be bullish on silver. When you take into account the monetary aspects of silver it becomes even more imperative to buy bullion. The amount of money that governments across the globe are printing, is far too large to even contemplate. In fact the latest buzz on the financial news networks, Internet and papers is that, it is the stated policy of governments to stave off depression by inflating their respective currencies. How scary is that? They are not even being secretive about it!
Just so you understand the seriousness of this, think of it as a hidden tax. As they inflate, your savings lose purchasing power. You become poorer and the governments spend to their little hearts content. If that is not a tax what is?
Buying gold and/or silver checkmates the the monetary manipulation. It denies the government the ability to impose this hidden tax on you. It preserves your wealth.
Add in the potential to dramatically increase your wealth and we have the perfect relationship. I know of nothing that can match silver in all the areas that I have mentioned.
Good Luck and Godspeed
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.
Wednesday, November 19, 2008
Fairness Doctrine oportunity?
I try to avoid taking a position on political matters, because as I've said before, you run the risk of alienating half your clients. This is one, however, that goes to the heart of capitalism and free market principles as well as free speech and freedom of choice, so I am afraid that my somewhat Libertarian tendencies might show through in my analysis. But please bear with me and forgive me if I gore your Ox.
I remember when the Fairness Doctrine was in place. It essentially said that anyone that uses the public airways, must program equal time for both sides of any political commentary. If I remember correctly, it was very unwieldy, highly subjective and extremely unpopular with the conservatives and they believed that it was anything but fair. To prove this last point I present to you Ronald Reagan who, promptly upon taking office, did away with it. Fast forward to Barak Obama and democratic majorities in both houses and you guessed it, there is renewed interest in reestablishing this doctrine with an eye bent squarely at conservative talk radio.
If this occurs Talk radio as we know it today may become history. Some of you might be saying so what? or who cares? The answer is that WE care. Remember we are here to make money.
This is not about politics.
Yes, I think it is more of big brother getting involved in more peoples lives, I think it is Government meddling in the free markets and it worries me to think about who is going to be judging what speech is liberal and what is conservative. All that aside let's take a look at the investment potential here.
The conservative side of the argument goes something like this. Liberal talk radio has failed in just about every AM market out there. The demographics are such that people who tend to listen to talk radio tend to be more conservative. They believe that liberal political speech, can't compete in this particular market. If the government mandates equal time for the opposing view, there is the fear that listeners will turn off the radio during the liberal hours and that the stations will loose advertising revenue and thus move completely away from the talk radio format to another format that is still working. Bottom line is revenue.
The question is, will this really happen? and the answer is I don't know. But here is what I do know, "buy the rumor sell the news".
If the above scenario plays itself out here's how the speculation goes; If the radio stations begin to change formats, away from talk radio, these syndicated talk shows will make adjustments. They are big business. Big, profitable business. They will simply migrate to the Internet and satellite radio. The fairness doctrine can't touch them there. Remember that it is only the fact that they are using the "public airways" that gives the government any control over them.
So here's what I am going to do; Since I can't figure out a vulnerable position on the Internet side of this equation, I'll be buying Sirius Satellite, symbol SIRI. I'll be using risk capital(money that I can afford to loose) and I'll be establishing a very small position. If I do get some upward movement in the stock price, I'll take profits early but maybe leave a little on the table just to see what happens.
This is a 16 cent stock that trades at a negative P/E ratio, the company has a legal monopoly on satellite radio and that means zero competition and they have been beaten badly lately.
As far as I know, no one else has made this connection from an investing perspective and maybe no one else will, but if I can't have a little fun and take a wild speculation every now and then, then why bother with this stock market stuff anyway?
So know this, I am not recommending this trade, I'm just sharing my intentions with you.
Good luck and Godspeed
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.
I remember when the Fairness Doctrine was in place. It essentially said that anyone that uses the public airways, must program equal time for both sides of any political commentary. If I remember correctly, it was very unwieldy, highly subjective and extremely unpopular with the conservatives and they believed that it was anything but fair. To prove this last point I present to you Ronald Reagan who, promptly upon taking office, did away with it. Fast forward to Barak Obama and democratic majorities in both houses and you guessed it, there is renewed interest in reestablishing this doctrine with an eye bent squarely at conservative talk radio.
If this occurs Talk radio as we know it today may become history. Some of you might be saying so what? or who cares? The answer is that WE care. Remember we are here to make money.
This is not about politics.
Yes, I think it is more of big brother getting involved in more peoples lives, I think it is Government meddling in the free markets and it worries me to think about who is going to be judging what speech is liberal and what is conservative. All that aside let's take a look at the investment potential here.
The conservative side of the argument goes something like this. Liberal talk radio has failed in just about every AM market out there. The demographics are such that people who tend to listen to talk radio tend to be more conservative. They believe that liberal political speech, can't compete in this particular market. If the government mandates equal time for the opposing view, there is the fear that listeners will turn off the radio during the liberal hours and that the stations will loose advertising revenue and thus move completely away from the talk radio format to another format that is still working. Bottom line is revenue.
The question is, will this really happen? and the answer is I don't know. But here is what I do know, "buy the rumor sell the news".
If the above scenario plays itself out here's how the speculation goes; If the radio stations begin to change formats, away from talk radio, these syndicated talk shows will make adjustments. They are big business. Big, profitable business. They will simply migrate to the Internet and satellite radio. The fairness doctrine can't touch them there. Remember that it is only the fact that they are using the "public airways" that gives the government any control over them.
So here's what I am going to do; Since I can't figure out a vulnerable position on the Internet side of this equation, I'll be buying Sirius Satellite, symbol SIRI. I'll be using risk capital(money that I can afford to loose) and I'll be establishing a very small position. If I do get some upward movement in the stock price, I'll take profits early but maybe leave a little on the table just to see what happens.
This is a 16 cent stock that trades at a negative P/E ratio, the company has a legal monopoly on satellite radio and that means zero competition and they have been beaten badly lately.
As far as I know, no one else has made this connection from an investing perspective and maybe no one else will, but if I can't have a little fun and take a wild speculation every now and then, then why bother with this stock market stuff anyway?
So know this, I am not recommending this trade, I'm just sharing my intentions with you.
Good luck and Godspeed
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.
Friday, November 14, 2008
Put up or shut up
OK so every investment advisor says they can help you make money in any market, up, down or sideways. Right? Well come on bring it.
What's that sound?
Sounds like nuthin'
Nothing is working in this market right? Nobody is making money right?
Of course you know what's coming.
Yes there are ways to make money in this market and I'm going to tell you how I'm doing it. It's not for everyone but it does work. If you decide to use any of these strategies, do your homework, and learn everything you can before trying these.
Here's the key; don't get cocky. Cause there will come the day when it stops working. But let us start at the beginning.
There are three good tools that I am using right now. Here is the first.
Until the trend is broken; I am buying puts and calls on the diamonds and spiders. When the Dow rallies like it did yesterday, I will move in and buy puts on DIA and SPY. These are ETFs that follow the moves of the Dow Jones industrial average and Standard and Poors.
Puts are options contracts that bet on a downward move in the underlying security(I am betting the Dow and S and P are gonna fall).
When they do fall, which has been the trend, I wait until the drop exceeds the rebound, which again has been the trend, I sell my puts and buy calls. The call side is the tough side and where you can get caught. Listen carefully here. TAKE PROFITS. Any profits and get out, Then start over again with the puts.
Here is what is going to happen. One day the rally is going to be real, and you will lose on the put side. It is going to happen. Whether it's today, tomorrow or five years from now I don't know and I don't care. The trick is to NEVER get cocky and increase the amount of money you commit to this trade. Let's say you put a thousand into this strategy. Then stick with it. I know this sounds superstitious but as soon as you say to yourself "This works so well I'm going to put 5 thousand into this and really make a killing" That's when the market is going to turn around and punch you right in the freakin' nose. Mark my words.
This is known as channel trading and it involves the use of charting techniques. Do your education thing on this one, it's worth it.
Strategy two. This is a variation on the same strategy above. It is a much more conservative strategy and you will have to do some more studying on your own to understand it. But here it is in a nutshell. It's a Bear credit spread. This is a nuts and bolts trade that is designed to bring in consistent revenue. It is simple really, but it sounds complicated. If you think a stock is NOT going up, You write(sell) an "at or near the money" call option and buy a further out of the money call for protection in case it does go up. The result is a net credit because the call you sell is worth more than the one you buy. Expect about 50 to 200 bucks per spread after commissions. The nice part about this trade is that you have two directions on your side. If the stock moves down you win, if the stock moves sideways you win, however if the stock goes up you will have to unwind the trade quickly(buy back the call and sell the further out of the money call), so it does require your time and attention. Again do your own research and understand this trade fully before you try it. Your on-line broker will have tutorials to teach you all about this trade but it is safe if you pay attention.
The third and last trade is simply covered call writing and since I have already written about that (See Covered calls dated 9/7/08), I will only say that down markets are perfect markets for this trade. Even if you do get caught and are forced to sell, you will most likely be given an opportunity to get back into your stock on the cheap.
You can use these strategies and make some income or you can sit on the sidelines and wait out this screwy market. It is, as always, up to you. Good luck and Godspeed.
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's that sound?
Sounds like nuthin'
Nothing is working in this market right? Nobody is making money right?
Of course you know what's coming.
Yes there are ways to make money in this market and I'm going to tell you how I'm doing it. It's not for everyone but it does work. If you decide to use any of these strategies, do your homework, and learn everything you can before trying these.
Here's the key; don't get cocky. Cause there will come the day when it stops working. But let us start at the beginning.
There are three good tools that I am using right now. Here is the first.
Until the trend is broken; I am buying puts and calls on the diamonds and spiders. When the Dow rallies like it did yesterday, I will move in and buy puts on DIA and SPY. These are ETFs that follow the moves of the Dow Jones industrial average and Standard and Poors.
Puts are options contracts that bet on a downward move in the underlying security(I am betting the Dow and S and P are gonna fall).
When they do fall, which has been the trend, I wait until the drop exceeds the rebound, which again has been the trend, I sell my puts and buy calls. The call side is the tough side and where you can get caught. Listen carefully here. TAKE PROFITS. Any profits and get out, Then start over again with the puts.
Here is what is going to happen. One day the rally is going to be real, and you will lose on the put side. It is going to happen. Whether it's today, tomorrow or five years from now I don't know and I don't care. The trick is to NEVER get cocky and increase the amount of money you commit to this trade. Let's say you put a thousand into this strategy. Then stick with it. I know this sounds superstitious but as soon as you say to yourself "This works so well I'm going to put 5 thousand into this and really make a killing" That's when the market is going to turn around and punch you right in the freakin' nose. Mark my words.
This is known as channel trading and it involves the use of charting techniques. Do your education thing on this one, it's worth it.
Strategy two. This is a variation on the same strategy above. It is a much more conservative strategy and you will have to do some more studying on your own to understand it. But here it is in a nutshell. It's a Bear credit spread. This is a nuts and bolts trade that is designed to bring in consistent revenue. It is simple really, but it sounds complicated. If you think a stock is NOT going up, You write(sell) an "at or near the money" call option and buy a further out of the money call for protection in case it does go up. The result is a net credit because the call you sell is worth more than the one you buy. Expect about 50 to 200 bucks per spread after commissions. The nice part about this trade is that you have two directions on your side. If the stock moves down you win, if the stock moves sideways you win, however if the stock goes up you will have to unwind the trade quickly(buy back the call and sell the further out of the money call), so it does require your time and attention. Again do your own research and understand this trade fully before you try it. Your on-line broker will have tutorials to teach you all about this trade but it is safe if you pay attention.
The third and last trade is simply covered call writing and since I have already written about that (See Covered calls dated 9/7/08), I will only say that down markets are perfect markets for this trade. Even if you do get caught and are forced to sell, you will most likely be given an opportunity to get back into your stock on the cheap.
You can use these strategies and make some income or you can sit on the sidelines and wait out this screwy market. It is, as always, up to you. Good luck and Godspeed.
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.
Monday, November 10, 2008
Veterans Day
I know it's tomorrow but many, particularly civil servants, are observing Vets Day today.
Just a quick note to say thanks.
No agenda.
Just thank you for your service to this great country.
JT
Just a quick note to say thanks.
No agenda.
Just thank you for your service to this great country.
JT
Sunday, November 9, 2008
Of Oyster Jacuzzis, Music, Smokers, Dogs and Butter
When I began this blog, my intention was to write about whatever I was interested in at any given moment. In this crazy market that we are in, dealing with investing has been like baby sitting a spoiled child.
We are doing what we have to do to get through the temper tantrums that the markets have been throwing, waiting desperately for the parents to come home and take this brat off our hands.
So naturally most of my thoughts and energies have been directed toward navigating these tough financial markets
In so doing, it is easy to forget some of the fun things that make life such a wonderful journey and I thought I'd take a minute or two and jot down some of those things. So for those that only want to read about investing, you can skip to the bottom, I'll throw in some incoherent thoughts that I had the other day, toward the end of this post.
A week ago we had a little BBQ.
Assembled for our considerable enjoyment, were wonderful friends, 8 dozen oysters, three smoking BBQs, tri tip, pork ribs, tasty side dishes, ice chests full of beer, a classic car show parading by and a rain threatening sky which respected our fun and frivolity and waited until we were done with our day, to let loose with a beautiful early winter rain.
Oyster Jacuzzis, Here's how I did them;
Oysters
Butter
Lots of minced garlic (always fresh, never jarred)
Chicken stock
Chopped green onion
Red pepper flake
Cholula or Tapitio brand hot sauce
Combine all but the oysters and hot sauce over low heat and make a nice broth. Put oysters on the grill and let them cook. Eventually they will start to open, using one gloved hand take them off and with a knife separate the meat from the top shell, peel the shell back and remove it. It can be tricky on some shells to find the top, but whichever side gives you a deeper bowl, is the bottom. Loosen the meat from the bottom so it will be easy to eat. Return them to the grill and cover them with your broth. Very soon they will start to bubble in their little tub, all happy, covered in bubbly, buttery, garlicky, goodness.
Remove from heat, slap away eager hands to allow them to cool slightly, add hot sauce to taste and enjoy!
Once you try them you'll be forever addicted.
It made for a beautiful day. Indeed the only thing that was missing, due to technical difficulties beyond our control, was some good music. But that will be remedied before our next get together.
Thanks to all who showed up and thanks to Ray for finding those awesome oysters!
Speaking of music, that takes us to my next topic.
As soon as I can figure it out I am going to post a link to my favorite artist, Martin Sexton.
Martin is a bit of an acquired taste for some, for others like myself, it was instantly obvious that I had found something extraordinary. I will leave it to you to discover whether or not his music is your style. For a sample of his stuff, you can check out his "My space" website. It's got a great jukebox on it. Just Google, Martin Sexton and it'll pop up for you.
There is no smooth way to move into my next topic so I will just hit you with it.
Smokers.
I'm currently in deep discussion with my girlfriend Lynn, my buddy Ray(of the supplier of oyster fame) and many others, on the design and construction of a trailer mounted combination, Santa Maria style Grill and BBQ smoker. If anyone has any good tips or links email me at Torocreekinvest@aol.com. Thanks.
Dogs.
Still looking for a new dog. I'll know it when the right one comes along. When I get one they become part of the family, so I want to be sure it's a good fit for all concerned. I've been checking the shelters regularly, so we will see what happens.
And finally
Butter.
(believe it or not, this is the investment part)
I was checking the sales paper for our local supermarket, and like always, I found some stuff we needed that was on sale. I also found plenty of stuff we didn't need that was on sale. But while I was looking at the butter (2 for $5, lately it's been goin' for 4 bucks a pop) I started a chain of thought that I still haven't completely worked through.
It went something like this;
We don't need any butter I still have plenty left over from the oyster jacuzzi party.
But it's cheap.
Can you freeze butter?
Probably, but will it taste funny?
I don't know.
Naw I'll just pay the usual price next time we need more.
It's worth it for good tasting butter.
What else is on sale?
Beer.
Now that I can store without it going bad. My shop stays nice and cool especially this time of year.
What else is on sale?
Gasoline
I can't store enough of that to make it worth the hassle.
What else is cheap right now?
Hey stocks are on sale too, aren't they? and you don't have to store them, but they do go bad sometimes, not all of them go bad, but that's the hard part about stock picking, but that's what I do, so I better keep buying stocks, I just gotta keep buying good companies, and what about gold? naw, silvers better, yeah I know
and, , , one time, , , at band camp.....
Did someone say beer was on sale?
JT
We are doing what we have to do to get through the temper tantrums that the markets have been throwing, waiting desperately for the parents to come home and take this brat off our hands.
So naturally most of my thoughts and energies have been directed toward navigating these tough financial markets
In so doing, it is easy to forget some of the fun things that make life such a wonderful journey and I thought I'd take a minute or two and jot down some of those things. So for those that only want to read about investing, you can skip to the bottom, I'll throw in some incoherent thoughts that I had the other day, toward the end of this post.
A week ago we had a little BBQ.
Assembled for our considerable enjoyment, were wonderful friends, 8 dozen oysters, three smoking BBQs, tri tip, pork ribs, tasty side dishes, ice chests full of beer, a classic car show parading by and a rain threatening sky which respected our fun and frivolity and waited until we were done with our day, to let loose with a beautiful early winter rain.
Oyster Jacuzzis, Here's how I did them;
Oysters
Butter
Lots of minced garlic (always fresh, never jarred)
Chicken stock
Chopped green onion
Red pepper flake
Cholula or Tapitio brand hot sauce
Combine all but the oysters and hot sauce over low heat and make a nice broth. Put oysters on the grill and let them cook. Eventually they will start to open, using one gloved hand take them off and with a knife separate the meat from the top shell, peel the shell back and remove it. It can be tricky on some shells to find the top, but whichever side gives you a deeper bowl, is the bottom. Loosen the meat from the bottom so it will be easy to eat. Return them to the grill and cover them with your broth. Very soon they will start to bubble in their little tub, all happy, covered in bubbly, buttery, garlicky, goodness.
Remove from heat, slap away eager hands to allow them to cool slightly, add hot sauce to taste and enjoy!
Once you try them you'll be forever addicted.
It made for a beautiful day. Indeed the only thing that was missing, due to technical difficulties beyond our control, was some good music. But that will be remedied before our next get together.
Thanks to all who showed up and thanks to Ray for finding those awesome oysters!
Speaking of music, that takes us to my next topic.
As soon as I can figure it out I am going to post a link to my favorite artist, Martin Sexton.
Martin is a bit of an acquired taste for some, for others like myself, it was instantly obvious that I had found something extraordinary. I will leave it to you to discover whether or not his music is your style. For a sample of his stuff, you can check out his "My space" website. It's got a great jukebox on it. Just Google, Martin Sexton and it'll pop up for you.
There is no smooth way to move into my next topic so I will just hit you with it.
Smokers.
I'm currently in deep discussion with my girlfriend Lynn, my buddy Ray(of the supplier of oyster fame) and many others, on the design and construction of a trailer mounted combination, Santa Maria style Grill and BBQ smoker. If anyone has any good tips or links email me at Torocreekinvest@aol.com. Thanks.
Dogs.
Still looking for a new dog. I'll know it when the right one comes along. When I get one they become part of the family, so I want to be sure it's a good fit for all concerned. I've been checking the shelters regularly, so we will see what happens.
And finally
Butter.
(believe it or not, this is the investment part)
I was checking the sales paper for our local supermarket, and like always, I found some stuff we needed that was on sale. I also found plenty of stuff we didn't need that was on sale. But while I was looking at the butter (2 for $5, lately it's been goin' for 4 bucks a pop) I started a chain of thought that I still haven't completely worked through.
It went something like this;
We don't need any butter I still have plenty left over from the oyster jacuzzi party.
But it's cheap.
Can you freeze butter?
Probably, but will it taste funny?
I don't know.
Naw I'll just pay the usual price next time we need more.
It's worth it for good tasting butter.
What else is on sale?
Beer.
Now that I can store without it going bad. My shop stays nice and cool especially this time of year.
What else is on sale?
Gasoline
I can't store enough of that to make it worth the hassle.
What else is cheap right now?
Hey stocks are on sale too, aren't they? and you don't have to store them, but they do go bad sometimes, not all of them go bad, but that's the hard part about stock picking, but that's what I do, so I better keep buying stocks, I just gotta keep buying good companies, and what about gold? naw, silvers better, yeah I know
and, , , one time, , , at band camp.....
Did someone say beer was on sale?
JT
Thursday, November 6, 2008
Election Ramifications
I am on record as not wanting either of the candidates elected. Having worked for the Government for 20 years, I am painfully aware that there are only a few things that the Government does well. Despite the best intentions of even the brightest, most ethical and competent people in civil service, one saying always stands out as accurate, "We are the Government, if it ain't broke, we'll fix it till it is". And neither politician, convinced me that they would be any different than most of the others that have preceded them.
Having said that, I won't go into a political rant for or against the current Electee. I'll leave that to the political pundits.
Indeed this has always befuddled me when it comes to the Hollywood and music types as they spout off about political issues. Why would a performer take a political position that by it's very nature is going to alienate, in most cases, at least half of their customers.
As harsh as this sounds my only concern is to help you make money, despite the Governments' best efforts to prevent it.
If you are upset about the current choice for president you have my condolences or if you are happy about it, you have my congratulations. But here's the thing; it needs to be compartmentalized in order for you to be a superior investor.
Obama may or may not save the country from real or imagined dangers and he may make things worse, who knows. But to go out and buy or sell investments because he has been elected or because George W is leaving office is a sure recipe for disaster. Keep your eyes on the big picture and see what IS happening, not what people say is going to happen.
Remember the admonition I shared with you a couple of posts ago. Don't be dogmatic, develop reasons. Politics are dripping with dogma and it's easy to translate passion into action, but passion very rarely yields logical investment action.
JT
Having said that, I won't go into a political rant for or against the current Electee. I'll leave that to the political pundits.
Indeed this has always befuddled me when it comes to the Hollywood and music types as they spout off about political issues. Why would a performer take a political position that by it's very nature is going to alienate, in most cases, at least half of their customers.
As harsh as this sounds my only concern is to help you make money, despite the Governments' best efforts to prevent it.
If you are upset about the current choice for president you have my condolences or if you are happy about it, you have my congratulations. But here's the thing; it needs to be compartmentalized in order for you to be a superior investor.
Obama may or may not save the country from real or imagined dangers and he may make things worse, who knows. But to go out and buy or sell investments because he has been elected or because George W is leaving office is a sure recipe for disaster. Keep your eyes on the big picture and see what IS happening, not what people say is going to happen.
Remember the admonition I shared with you a couple of posts ago. Don't be dogmatic, develop reasons. Politics are dripping with dogma and it's easy to translate passion into action, but passion very rarely yields logical investment action.
JT
Saturday, November 1, 2008
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.
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.
Monday, October 27, 2008
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.
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.
Saturday, October 25, 2008
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.
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.
Sunday, September 28, 2008
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.
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.
Wednesday, September 17, 2008
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.
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.
Sunday, September 7, 2008
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.
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.
Monday, September 1, 2008
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?
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
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
Sunday, August 24, 2008
The Diversification Myth
I am proud to say that my investments are not diversified.
A client said to me, the other day, after looking at my portfolio, "that's not diversified!" An indignant finger pointing at my computer screen. As if he had caught me with my hand in the cookie jar.
To which I replied, "So?" After a moments consideration I saw the lights go on in his head. Seeing that there was a mind in there willing to hear a new point of view, I continued with another question, "Should I have some of my money in Financials?, how about real estate? Home builders?"
"Well, I suppose not, at least not right now" Came his reply.
"Good thinkin'" I said.
Being diversified means several things to me that some financial advisers may not agree with.
A portfolio that is too broadly diversified lacks commitment and shows a deficit in research and maintenance. A portfolio is a living breathing thing and it requires care and feeding and constant attention.
I know of several cases where, during this credit meltdown, many money managers have let their clients ride the elevator right down into the basement. And they did it under the mantel of diversification. Why? because that is what they where told to do in "Investing 101"
Well that's not what we do here. We are engaged, tuned in and turned on. This is fun, it's not about following a formula. We look for whatever is working and employ tools to take the greatest advantage of opportunity.
To me being diversified is an inferior method of insurance and it practically guarantees a mediocre return on investment. You want insurnce? Buy some options, Put on a spread trade, use an inverse ETF, employ some leverage. There are so many great products and tools out there, that hiding behind portfolio diversification just means that you don't know about them or how to use them.
Time to enroll in "investing 102"
Get educated. I do this myself constantly. As a matter of fact, Just this week, I picked up an Options strategy book that I haven't looked at in years. It's old enough that it refers to options pricing in fractions, but it contains some really good techniques that I had forgotten about.
Market conditions are constantly changing and so should your portfolio and your strategies. Stay tuned in, turned on and energetic. If not, just put it all in a mutual fund and forget it. If you are lucky you might just manage to keep pace with inflation.
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.
A client said to me, the other day, after looking at my portfolio, "that's not diversified!" An indignant finger pointing at my computer screen. As if he had caught me with my hand in the cookie jar.
To which I replied, "So?" After a moments consideration I saw the lights go on in his head. Seeing that there was a mind in there willing to hear a new point of view, I continued with another question, "Should I have some of my money in Financials?, how about real estate? Home builders?"
"Well, I suppose not, at least not right now" Came his reply.
"Good thinkin'" I said.
Being diversified means several things to me that some financial advisers may not agree with.
A portfolio that is too broadly diversified lacks commitment and shows a deficit in research and maintenance. A portfolio is a living breathing thing and it requires care and feeding and constant attention.
I know of several cases where, during this credit meltdown, many money managers have let their clients ride the elevator right down into the basement. And they did it under the mantel of diversification. Why? because that is what they where told to do in "Investing 101"
Well that's not what we do here. We are engaged, tuned in and turned on. This is fun, it's not about following a formula. We look for whatever is working and employ tools to take the greatest advantage of opportunity.
To me being diversified is an inferior method of insurance and it practically guarantees a mediocre return on investment. You want insurnce? Buy some options, Put on a spread trade, use an inverse ETF, employ some leverage. There are so many great products and tools out there, that hiding behind portfolio diversification just means that you don't know about them or how to use them.
Time to enroll in "investing 102"
Get educated. I do this myself constantly. As a matter of fact, Just this week, I picked up an Options strategy book that I haven't looked at in years. It's old enough that it refers to options pricing in fractions, but it contains some really good techniques that I had forgotten about.
Market conditions are constantly changing and so should your portfolio and your strategies. Stay tuned in, turned on and energetic. If not, just put it all in a mutual fund and forget it. If you are lucky you might just manage to keep pace with inflation.
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.
Sunday, July 27, 2008
How bad will it get?
How bad will it get?
I don't know.
Any one that tells you that they do know, is delusional.
So what is an investor to do in this, shall we say, "challenging environment"? First and foremost, remember that there is always money to be made in any environment.
You can;
1). Buy the dips and sell the rips:
In a consolidating or falling market, recognize that no financial instrument, goes straight up or straight down. Watch and wait for a pause in the down side, buy small amounts and wait for a mini rally. Sell on any positive movement and TAKE PROFITS! This is my least favorite strategy. It is very risky, requires great discipline, constant attention and yields minimal results. Some would argue this last point with me and my answer to them is, "I guess you're just better than me, oh well".
2). Use Put options and short selling to bet on obviously weak sectors.
This is probably the most profitable on a day to day basis but requires great discipline, constant attention, and plenty of research. For me short selling is very risky and should be approached with caution. I don't put on short positions through the borrowing of shares, I buy Put options. Contrary to popular myth, options are not risky investments. (More to come on options in another blog)
3). Identify the next trend, buy into an investment when it is on sale, build a large core position, then wait patiently.
This is obviously easier said than done and also requires great discipline and massive research, but is much less risky.
4). Identify other financial vehicles that are working and work with them.
This requires the most amount of research and tends to be a bit more boring and less profitable and will probably require more self education. It is however a must for any investor to know where to put their money when nothing else seems to be working. This could include money market accounts, bonds, REITs, etc.
5). Do nothing.
While this is rarely necessary in large measure, it is useful in small measure at most times. I know that sounds confusing but remember that "sometimes the best trade is no trade". I am not sure who to credit the latter phrase to, but it is true.
Which approach do I recommend?
All of them.
I even advocate the use of shorting through borrowing, IF and only if, you educate yourself, protect yourself and can demonstrate flawless discipline. I fall short on the discipline side. Which is why I don't short through borrowing. And as Clint says, " a man's gotta know his limitations".
Each of these approaches have their time and place. Most of them apply in all markets, up, down or sideways. This is because within each market there are sectors which move in opposite, complimentary and confusing directions. The common threads between all these points are discipline, research and paying attention. Remember investing is a job, a profitable, fun and intellectually rewarding job, but a job none the less. If you approach it with professionalism and passion, you will be compensated accordingly.
JT
I don't know.
Any one that tells you that they do know, is delusional.
So what is an investor to do in this, shall we say, "challenging environment"? First and foremost, remember that there is always money to be made in any environment.
You can;
1). Buy the dips and sell the rips:
In a consolidating or falling market, recognize that no financial instrument, goes straight up or straight down. Watch and wait for a pause in the down side, buy small amounts and wait for a mini rally. Sell on any positive movement and TAKE PROFITS! This is my least favorite strategy. It is very risky, requires great discipline, constant attention and yields minimal results. Some would argue this last point with me and my answer to them is, "I guess you're just better than me, oh well".
2). Use Put options and short selling to bet on obviously weak sectors.
This is probably the most profitable on a day to day basis but requires great discipline, constant attention, and plenty of research. For me short selling is very risky and should be approached with caution. I don't put on short positions through the borrowing of shares, I buy Put options. Contrary to popular myth, options are not risky investments. (More to come on options in another blog)
3). Identify the next trend, buy into an investment when it is on sale, build a large core position, then wait patiently.
This is obviously easier said than done and also requires great discipline and massive research, but is much less risky.
4). Identify other financial vehicles that are working and work with them.
This requires the most amount of research and tends to be a bit more boring and less profitable and will probably require more self education. It is however a must for any investor to know where to put their money when nothing else seems to be working. This could include money market accounts, bonds, REITs, etc.
5). Do nothing.
While this is rarely necessary in large measure, it is useful in small measure at most times. I know that sounds confusing but remember that "sometimes the best trade is no trade". I am not sure who to credit the latter phrase to, but it is true.
Which approach do I recommend?
All of them.
I even advocate the use of shorting through borrowing, IF and only if, you educate yourself, protect yourself and can demonstrate flawless discipline. I fall short on the discipline side. Which is why I don't short through borrowing. And as Clint says, " a man's gotta know his limitations".
Each of these approaches have their time and place. Most of them apply in all markets, up, down or sideways. This is because within each market there are sectors which move in opposite, complimentary and confusing directions. The common threads between all these points are discipline, research and paying attention. Remember investing is a job, a profitable, fun and intellectually rewarding job, but a job none the less. If you approach it with professionalism and passion, you will be compensated accordingly.
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.
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