Daily Investment Interpretations

October 10, 2010

2010-10-10 (Sunday Night):  I'm suffering from a sudden attack of rationality tonight. Let's see now. We're probably in a super-bear market until something like 2016. The U. S. economy is limping along so slowly that the Fed's going to try to juice it up. PIMCO's Mohammed El-Erian says that the markets have already priced in another round of quantitative easing. There's a concern that quantitative easing requires such enormous infusions of capital to rival fiscal stimulus that it may no do much by way of stimulating the economy.
    It seems to me that it's time to rethink investment strategies. (Generally, when I reach an investment  conclusion, it's time for just the opposite to happen. I'm a contrary indicator.) 
    So what can we do to escape these less-than-stellar prospects?
    Emerging market economies are doing quite well, thank you, even though we're not. The long-term rates of rise of merging markets economies should drive the long-term rates of rise of their stock markets. China's and India's economies are growing at 8%-to-10% a year, so I'm speculating that their stock markets might rise by 8%-to10% a year plus their rates of inflation plus, perhaps, a percent for a risk premium. You can roughly double these rates of return by buying deep-in-the-money LEAPS (Long-Term Equity Anticipation Securities) calls on index funds that specialize in these markets. Then if everything goes well, you can update these annually at a nominal cost to extend their striking dates by a year each year. That should lead to rates of return in the 20% per year level.
    Today, the farthest-out striking date for calls on the iShares FTSE/Xinhua China 25 Index Fund (FXI) just switched form January 21, 2012, to January 19, 2013. I just sold my January, 2012, $25 FXI calls, and am waiting for a little better entry point (I hope) to buy January, 2013, $30 FXI calls. ($30 is the lowest value available for these calls.)
    So what's the downside to this idea?
    For one thing, the percentage gains are asymmetrical. If you lose, you take all the losses. For a grossly oversimplified example, if you bought $25 calls on "Sell-It-and-Run" when it was selling for $50 a share and a year later, when it came time to roll it over into next year's calls, it had fallen to $25 a share, you'd lose all your money. (Actually, calls are more complicated than that. You'd have some money left if the price of the underlying stock fell to the striking price of your calls ($25 a share) at the time you had to sell them, but you'd take a bath on your calls.) On the other hand, if the underlying stock price rose to $75, you'd double your money .. which is nice, but it's double or nothing. You'd better be pretty sure that over the next year, your stock is going to go up rather than down.
    Another bet is Berkshire Hathaway.Class B (non-voting) stock: BRK.B. Over the past ten years, it's gone from about $38 a share to about $82 a share today. That's a little over 2:1, or a little over 7% a year. If that doesn't thrill you, compare it to the S&P 500, which has traveled from about 1,400 ten years ago to about 1,165 today.. a loss of about 17% or 1.5% a year. You can buy call options on Berkshire Hathaway; the warning about call options applies.
    Another possibility is commodities. Long-term, commodities have nowhere to go but up. January, 2013, $20 calls are available for the Proshares Ultra Basic Materials exchange-traded fund, UYM. However, this fund is already leveraged two-to-one, and leveraging it further might not be a salutary idea.

(To Be Continued)