I made a crop inspection tour from Winnipeg to Vegerville, Alta. in the middle of June. At that time, there were a lot of puddles in the fields on both sides of the road for hundreds of miles. With the hot weather since, I hear there are lots of good crops coming. I hope they get into your bins safe and sound.
The drought in the U.S. Midwest is driving up prices. Some say this drought is as bad as 1988. I remember that year well. I drove the U.S. Midwest that summer, and in the last half of July the corn was white, short and definitely lacking rain.
Corn needs about half an inch of rain a day, or two to three inches a week as it starts to tassel. With no rain in the U.S. Midwest, famers in Western Canada may have a powerful combination of good crops and good prices this year.
My stocks enjoyed a good start to 2012, but then dropped as we went into summer. “Sell in May and go away” worked this year, as it does about two thirds of the time. Except this year the better timing was “sell in April,” and for our silver stocks, the right time to sell was at the end of February.
I often joke that I don’t care what month it is, or who says what about when stocks will go up or down. All that matters to me is what my stocks are doing. Most of my silver stocks peaked on February 28, and so did silver and gold.
I don’t want to get into “woulda, shoulda, coulda” but as each year goes by I’m seeing more and more proof of several things that should help us manage risk and perhaps make money whether stocks are going up or down.
When to sell
When the daily price crosses the 10-day moving average (dma) going down, it’s time to sell.
Anyone who doesn’t like that sell signal could look at selling when the 10 dma crosses the 30 dma going down. That takes a little longer, but several times in the past few years either sell signal would have done investors well.
For example, at the end of February, 2012, the price of Silver Wheaton (SLW) was $38. The shares had made a double bottom at about $28 in October and late December and went up $10 in the next two months. The first sell signal was around $36 around February 20. The next one was at the end of February when the price was $38. The third sell signal was around March 10, when the price was $36 and the 10 dma crossed the 30 dma going down.
In case anyone was worried about missing out on that last $2, the shares dropped $15 to $23. On a drop like that, two bucks doesn’t really mean much.
Most years the price of silver bottoms in June, or within a couple of weeks on either side. But in the past year, the price of silver hit a low of $26 around the third week of September, late December and again in late June. SLW dropped in step with the price of silver to around $28 in early October, late December and a lower low of $23 in May.
Anyone who sold when the sell signals were talking has had lots of time to buy that silver stock back for a lot less than the selling price.
SLW is not a silver mining company. It lends money to up-and-coming mines and takes silver back in payment at around $4.25 an ounce. Then they smelt the silver and sell it. The company has 24 employees and approximately 17 deals where it collects payment in silver.
SLW prices are volatile, so I had to figure out how to buy it right. If you buy at the right time, you can do several things to make money with a stock.
When the sell signals spoke in late February and March, instead of selling the shares I could have sold a call for June with a strike price of $28. At that time, the premium was about $10.50 per share. In other words, by selling a call at what is called “deep in the money” at $28, I would have been almost totally protected as SLW share prices dropped. Why would I choose $28? Because at that time $28 looked like the support price. As it turned out, share prices did drop below $28, but they didn’t stay down long. I didn’t do it but selling calls with a June strike price of $28 per share would have been a good move. I live and learn.
I now own 2,500 shares of SLW. I only sold calls on 500 of these, at a strike price of $28 per share, just to stay in practice. I haven’t sold calls on the rest because I expect SLW share prices to rise through the summer.
There are several ways to protect a portfolio that includes volatile stocks (and these days, most stocks are volatile). I also could have bought puts on SLW. Buying puts costs money, but the price of puts goes up as share prices drop, so that would have bought protection too.
First Majestic (FR) is another example of a stock where selling calls to lower volatility would make sense. FR is a true silver mine. It, too, will likely be okay if we buy it at the right time. I didn’t sell my FR shares as prices dropped. Instead, I paid around $18 for most of my shares, then sold a call for July at a strike price of $18 per share and collected between $2.50 to $2.90 per share in premiums. I bought most of those back for 35 cents, then sold calls back again at a strike price of $18 per share for October. By selling calls, I dropped my paper cost of FR from over $18 per share to around $15.
By the end of 2012, Russia is going to stop selling its warhead uranium. Japan is slowly starting up its nuclear reactors. A bunch of new reactors are being built or planned. Over time, I expect the price of uranium to go up. I might buy Cameco (CCO) shares.
So far I have bought a few thousand shares of Uranium One (UUU), a Canadian based uranium mining company. I paid $2.92 for the first few thousand shares, then sold calls for July with a strike price of $3, collecting $0.40 per share, so my paper cost is around $2.50 per share. When share prices fell to $2.52, I bought another 2,000 shares. I could sell calls for January with a strike price of $2.50 or $3 and make good money.
I’m also watching Uranium Energy Corp. (UEC), a start-up uranium mine in Texas, but I don’t own shares at this time.
I don’t own any natural gas stocks, but if I was to buy I’d buy shares in Tourmaline (TOU) or BonaVista (BNP). After some thought, I bought shares in Canadian Natural Resources (CNQ), and I’ve been buying more as shares have dropped from $36 to $27 per share. I think my average cost is around $32, and I have sold some calls.
Note that I say I bought shares as the price dropped. I try not to make a habit of averaging down unless I know the stock well. So I started out by buying 200 or 300 shares and then bought more as the price dropped. I like CNQ — it has done a decent job of managing through fires, break downs and fluctuating oil prices. I could have picked Suncor (SU) just as well.
Natural gas is getting a lot of attention as a fuel for transport trucks, ferries and so on. Some feel natural gas engines are fine for stationary use but not on highways.
Westport Transport (WPT) is designing systems that would let truck engines burn natural gas. The company has deals with motor makers but its share prices have been quite volatile. I lost a few thousand dollars on WPT as share prices dropped from $46 to $26. Now prices are $37.
The price of coal dropped, so I bought 1,000 shares of Arch Coal (ACI) at $7 just to keep my foot in the door. The price dropped to under $6 and lately has been around $7. About six billion tonnes of coal is used in the world so the coal industry is not going away. Although the U.S. government wants to convert coal fired generators into natural gas, but the world (including the U.S.) keeps on using coal.
In August the U.S. will hold the Jackson Hole Conference. If Ben Bernanke is to announce a new round of easy money, he likely has to do so before or around that convention. That’s what he did in 2010. This year, any later would put him a little too close to the political arena.
In case a new round of easy money is announced, I’ve learned how to buy naked calls, since they would likely go up a lot faster, percentage wise, than shares. I also could sell naked puts on gold and silver stocks we do not own.
Selling naked puts and buying naked calls are just two parts of the strategy of using options to make money. The first step is to buy shares right. Then, be in season with these volatile resource stocks. The next step is to learn how to make money with all this knowledge and last but not least is not to be too greedy and sell at a good time. Selling near the top when the daily price crosses the 10 dma often is a good thing to do. We might miss out on some extra gains, but we might also not give back profits. †