Daily Investment Interpretations

November 9, 2010

2010-11-9 (Tuesday Night):   The markets dropped significantly today.. The NASDAQ Composite fell 17.07 points (-0.68%) to end the day  at 2,562.98  The Dow dropped 60.09 points (-0.53%) to close at 11,346.75, and the S&P 500 slipped 9.85 points (-0.81%) to end at 1,213.40. Oil rose to $85.84 a barrel, and Gold hit a new high of $1,388 on expectations of a falling dollar. The VIX rose 0.81 to 19.10.  
    My investment advisory service considers the action yesterday and today to (probably) be a consolidation phase.
    Ashbaugh: Stocks escape crash territory  The thrust of this article is that the markets have escaped from their trading ranges.
    Jumping on the bullish bandwagon  Mark Hulbert observes that investor sentiment has skyrocketed in a few days time. A market pullback is likely.
    Why business people make lousy politicians  This article by Brett Arends explains why business leaders like Meg Whitman, Ross Perot, and Steve Forbes have failed to become politicians.
    On Wall Street, pay is the problem, again  This article was written by David Weidner.
    Gridlock means your taxes will rise  This article comes courtesy of Dr. Irwin Kellner. 

    What should we do about our portfolios to take advantage of the market rise that's expected through at least the end of the year, and perhaps, through next April? I've been working on this, and have gotten some ideas. Here are a few of them.
    In my own case, in order to recoup my losses during the Great Recession, I'm going to be strongly tempted to leverage my portfolio. (Part of it is already leveraged two-to-one.) I know of three ways to accomplish this.
(1) 2X ultra-ETFs.
The problem with this approach is that these ETFs, which are rebalanced to update their 2:1 status every night after the market closes, tend to fall behind the market indices that they track, and in a way that's always detrimental to their owners. Over time, these failures can become quite large.

(2) Long-term call options. What's valuable about options is that you can get leverage without necessarily paying for it. This subject is tricky, and I'll talk about it more tomorrow night. Basically, an option is a way to "rent" 100 shares of a stock or an exchange-traded fund (ETF) for some period of time at a fraction of the cost of the 100 shares of the stock or the 100 shares of the exchange-traded fund itself. (An option is always for 100 shares of stock. You can't buy a fraction of an option.) For example, owning a $40, January, 2012, call option on the iShares MSCI Brazil Index exchange-traded fund EWZ will allow me to reap the profits (and losses) on 100 shares of EWZ for about half the cost of 100 shares of EWZ, giving me approximately a 2:1 leverage. On January 21st, 2012, my call option will turn back into a pumpkin, but I can sell my call before then and take whatever profit or loss I garner in the meantime. And what we do is trade the options (which track the prices of the underlying stocks) rather than dealing with the stocks themselves. As soon as the January, 2013, calls become available, I plan to sell my $40, January, 2012, calls and buy January, 2013 calls. (They'll cost about the same.) And if I choose, I can keep doing this year-after-year. So it becomes a "buy-and-hold" with 2-to-1 leverage.

To be continued