I believe that most stocks are going to trade sideways for years to come. I suspect the U.S. administration studied the mood of the American public and hopes that if it can keep the value of their investments up, that Americans will keep spending money.
A few years ago Americans were quite busy spending money they borrowed against the rising value of their homes. Americans felt richer and richer as the price of their homes went up. So they borrowed against that rising value. That added roughly 1.5 per cent to the national gross domestic product (GDP). The value of homes in most areas has dropped and is now flat at best. I doubt Ben Bernanke, chief of the Central Bank, can get the price of homes to go up any time soon. The U.S. economy likely is going to be flatter than most think.
I saw a statistic that showed when the unemployment rate in the U.S. dropped to 4.5 per cent, stocks went up 40 per cent. Now that unemployment is officially 9.1 per cent it should not be a surprise that many stocks have dropped over 20 per cent and seem to want to stay there. In fact it looks like stocks want to trade in a range of down 30 per cent from October, 2007 highs to down 90 per cent.
It looks like Bernanke can manage events to keep stocks from falling to their old lows. On October, 2007 the Dow Jones Index was 14,100. It dropped to just over 7,000 in early 2009 and hit a high of 12,800 this past winter which made it a value of 90.7 per cent of the old high. People were starting to feel better. Then the crap started: Greece, Italy, Spain, the U.S. took far too long to raise the debt ceiling and stocks dropped to under 10,000 on August 10, 2011 or 70.9 per cent of the old high.
In my opinion, Bernanke and crew will try to keep the stock market from dropping too much but the crap going on in the world will keep a ceiling on the value of many stocks for years. In late August the Dow Jones had rebounded some and was 11,149 or 79.2 per cent of the old high. In early September the Dow Jones Index was around 11,000 or 78 per cent of the old high. After several huge up-and-down days, investors are spooked. Earlier in August, Bernanke announced that the U.S. would keep interest rates near zero for two more years. That pretty well means the U.S. is going to borrow billions and billions for next to zero cost. Keep in mind low interest rates are not a good sign economy-wise.
Imagine if your loans cost you almost nothing. Debt servicing would be a lot easier, wouldn t it? Well that is what the U.S. has created or designed. It also means investors aren t getting paid for saving money. Dumb money is losing money after inflation and taxes.
Word is that U.S. banks were charging people to store their money. Imagine if the bank paid you even .25 per cent to have a loan. Still, to the amazement of many, investors lined up to buy U.S. bonds. I checked with my account at the Bank of Nova Scotia. The management fee on the money in my checking account was 56 cents more than the bank paid me interest for a month. Have you checked your accounts? I moved a bunch of money into my wife s RRSP where I have more control on the returns and we make sure not to pay interest on any bills.
A YEAR AGO
On the idea that stocks will or might move sideways for years to come, I checked the prices on some of my favourite stocks. Table 1 shows stocks we own and I marked them with an F. The other stocks I picked at random and for all stocks I have recorded the price of shares in August 2010 (which was a low for many), the date and price each stock peaked and the value in late August.
For most of my stocks I use a strategy called selling covered calls. This is where I collect the equivalent of rent on my stocks and in return I give someone the right to buy my shares at a price I choose. For example, on ABX I have been selling calls for almost a year and have brought in close to $10 of cash while the stock has gone from $44 to $55 and down to $50 on August 10, 2011.
Most of our shares of OSK cost around $8 and you see they were $13.95 on August 11, 2011. Selling calls has brought in about $3 of cash and when I add that to the current price my value would be $17.95 which means I have doubled the value of my shares long before the market doubled them. I teach this stuff in my newsletter StocksTalk.
In my past life atGrainewswe had to hold pension money in mutual funds. So I chose two: a precious metal and an energy fund. I don t recall how much we
contributed but the records show the fund was worth $39,000 in October, 2007. That was the high. On June 30, 2011 the plan was worth $36,800 and I was paying two per cent a year management fee.
I set up a second retirement fund at BMO and moved the money in August, just after the market crashed. The value of the account was $31,800. When you look at the stocks above, you can see why my mutual fund plan has dropped in value. Very few stocks are up from a year ago.
How do I deal with this flat stock business? As mentioned, I sell covered calls on most of our stocks and one example follows in this article. In this new account I have set up I likely will buy a different silver stock called First Majestic (FR). For $31,800 in August I could buy 1,400 shares with money to spare and sell a call for January strike price $22 and collect $3 per share. That comes to $4,200 cash which would bring the value of the account up to $36,000 in one transaction and
no management fee, but I do risk losing the stock.
As you can see there s lots of money out there and all we have to do is get some of it, learn how to keep it and put it to work.
WHAT ABOUT LAND?
Some months back I compared buying farmland to some stocks I own. The idea was that you or any farmer could buy a quarter section of farmland for $200,000 while I would buy a decent stock with the same amount of money. My choice of stock was Silver Wheaton (SLW). If you bought land last winter you likely had to invest another $25,000 to $30,000 to put in a crop.
Depending on the area, that quarter section might gross from a low of $30 plus crop insurance to maybe a net of $130 an acre but I don t think that net would come every year. At the top end, $130 net would bring in just over $20,000 a year so it would take 10 years to pay off the quarter.
With my SLW, the price has ranged from $42 when I wrote the article to around $30. So if we took an average of $37 we could buy 5,500 shares of SLW. In my example I chose to buy 1,500 shares per month starting in May until we invested all $200,000 so the number of shares varies according to the price after options expired.
Then I worked out the cash flow as if we sold calls the week after options expired for nearby months (e. g. In May, sell into June and so on). I listed the premiums we could have collected. As I write, we own 3,300 shares of SLW. I chose to sell calls as close as possible to the price of the day so this is the net premium I would have received. (See Table 2.)
That $24,350 is for four months so technically we could do this three times a year but let s be cautious and say it is for half a year. That still adds up to over $48,000 a year, about 24 per cent of the original cost of $200,000. Looked at another way if or when we have taken in $24,350 cash from selling calls we have dropped our cost by almost $5 per share which gives us a margin of safety. So in four months we take in $24,350 so we drop our cost to $200,000- $24,350 = $175,650.
The farmer who paid $200,000 for the land had to invest another $25,000 to $30,000 per acre to put in his crop and had to wait until September or later to get money back from his land. Then he has to wait another whole year to put in and harvest and sell another crop. In the meantime I will likely take in another $24,000 at least twice.
Is owning $200,000 worth of one stock risky? Sure, it might be so, we have to choose carefully. However, I always keep in mind that my decisions are reversible. If or when you invest $200,000 on the next quarter section of farmland your decision could be hard to reverse and for sure after you spend another $25,000 or so to put in the crop you will not be able to reverse that decision.
But the odds are pretty good that SLW could bring in between $35,000 and $48,000 a year, year after year. And if not SLW then there could easily be another stock. At the low end that s over $200 per acre and at the high end it s $300 an acre. Very few farmers in Canada net that kind of money per acre very often.
Looking back, many stocks are the same price they were a year ago. No wonder many investors have made very little money. Richard Croft, call option guru says selling calls on good gold stocks brings in about four times as much money as owning the stocks.
Looking ahead the cost of crop production inputs is not likely to go down. In the meantime I have a list of at least 10 stocks that I have learned a lot about and likely could make me more money per year than cropping $200,000 worth of farmland.
Does that mean you should sell out and go to stocks? Absolutely not. But as I said at the seminar in Teulon, Man., last winter, I m not saying quit farming. I am saying learn a new skill, how to make money with stocks. It can work for you for years and your kids likely will be a lot more willing to learn this skill than take over your farm.
Andyismostlyretired.Hegardens,playswith hisgrandchildren,fixeshiscars,travelswith hiswifePat,manageshisinvestmentsand writesanewslettercalledStocksTalk.Ifyou wanttoreaditfreeforamontheithersendan emailto [email protected] orvisitStocksTalk. net,clickonfreemonth,clickonforms,fill outafewlinesandclicksubmit
OSISKO C MTN
S WHTN IMP OIL
ARCH CO ENCANA
SHOPPERS B NOVA SC NEW GOLD
$NATGAS NAT GAS
(SLW) F (IMO)
(ACI) F (ECA)
(BNS) (NGD) F
PRICE YR. AGO
$55 DEC 6, 2010
63 APR 20, 2010
16 DEC 6, 2010
8.20 JUNE 2011
26 MAR 28, 2011
45 APRIL, 2011 54 FEB 2011
47 FEB 2011 16 AUG 2011
36 MAR 2011 34 APR 2011 69 JAN 2011 78 JULY 2011
42 MAY 2011 62 FEB 2011 13 AUG 2011 5 JUNE 2011
10 AUG 2010 35.59
19, JULY 5, 2011
(THIS IS OPPOSITE $VIX)
Is owning $200,000 worth of one stock risky? Sure