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Year-end portfolio update

A lot has happened since December 1, 2012 and most things have raised the value of my portfolio.

As I write on December 18, 2012, the American administration is still playing “catch me if you can” over higher taxes and lower entitlements. From what I can find, the U.S. constitution was designed to create this sort of discussion even if it makes the public think the political parties don’t know what they are doing.

The President needs to make it look like he won the discussion while the Republicans need to make it look like they fought against higher taxes to the bitter end. I suspect Republican leaders will continue to lobby for their side but when the deadline becomes real, enough Republicans will break rank and vote with the Democrats to raise some taxes and cut some expenses.

It won’t be enough to solve the U.S.’s trillion dollar deficit, but most will look at it as a start while the President will look at it as a victory.

In the meantime, the Labor Party in Japan has been re-elected and it favours nuclear energy. Almost at the same time the Shanghai Exchange ($SSEC) on Stockcharts looks to be bottoming, the price of copper is inching up, the price of nickel has inched up, the price of coal has bounced off its low and the price of natural gas ($natgas) looks like it peaked at $4 in November.

China is publicly saying it wants to grow its economy at 7.5 per cent for several years. While cynics don’t think China can save the world’s economy, it does look like the country is back to buying coal, copper and wood.

My portfolio took a big hit after the Leap Day Massacre (February 29, 2012), when the price of gold dropped $80 or so in one day. That was the peak of silver, gold, and related shares and we lots of those shares. I often say it takes a year to wind a portfolio back up from a big hit and as far as I’m concerned, this is close.

Watch the 10-day moving average

One of the main things I learned the hard way in 2012 is that this is a volatile market. Selling high is one of the key things to do to farm volatility. Last winter I started studying what happens when volatile stocks drop through the 10-day moving average (dma). I’ve concluded that most of the time when the daily price of a volatile stock drops through its 10 dma, the price keeps falling.

Here, in a nutshell, is what I’ve seen happen over and over again in 2012. First the stock or the commodity needs a catalyst that looks like it will push prices down. Then high frequency trading (HFT) investors enter offers to sell small numbers of shares at lower and lower prices, hoping to trigger the stop losses that other investors have put on their shares.

The next part is to pull all the bids on the chosen stock or commodity and then put in some stink bids at a price that looks like it could be a support price. Many investors have been spooked by this volatility and they have a hair trigger finger on their sell button on the computer.

We saw the price of silver drop to $23 per ounce, the price of gold drop to $1,540 per ounce and the price of many stocks drop from a nice high to a support price in a few days or a week. The decrease gets aggravated as the prices hit stop losses until the price drops enough to attract attention from patient buyers.

There is nothing illegal about this; it is the market at work under a strategy called farming volatility. Some investors have fled this volatile market. Me, I’m brave or stupid enough to think I can learn to farm the volatility.

First Majestic

One of the first stocks I bought in big numbers last winter was First Majestic (FR), when the price was around $18 per share. Then I sold calls for July at my cost — that is called the strike price. I collected about $2.25 or more per share from those calls and earned 12 per cent or so for half a year.

That dropped my paper cost to under $16. If the shares got exercised my selling price would be $20.25.

Throughout the year I collected $5,85 per share selling calls, netting $5.85 per share over 14 months.

Some days the strategy seemed to make a lot of sense and some days not. I chose to sell these shares at $18 because that was my cost and because I figured that sooner or later something would happen to drive the price of FR down.

In the middle of December, the management of FR bought a big silver deposit in Mexico called the La Parrella mine using shares of FR as currency. The company issued 14 per cent more shares to buy the silver deposit. The deposit is supposed to be one of the largest undeveloped deposits known in the world.

FR has been one of the first stocks to recover after a smack down and think it has a good future. At $20 I might just buy a few more shares.

Bonavista (BNP)

BNP is part oil and part other fuels like butane and propane. The dividend was over eight per cent when I started to buy shares at under $17. Then the price fell to about $14.10 which could be called a support or just under support. I try not to average down on a falling stock but I was quite sure BNP would turn out fine so I bought more shares at $16, and more at $15.64.

Share prices kept dropping so one day I bought another 300 for under $15 and then another 200 right near the low. My average cost is about $15.90. But get this: at under $15 the dividend is over 10 per cent.

My theory is that some investors wanted to buy those shares low enough to earn 10 per cent so they ganged up on the stock. In three days over six million shares were sold by weak hands to new owners who now would earn 10 per cent on their shares and have a good chance of some capital gain.

I did not sell. As I write, the shares have bounced 60 cents off their low and I get a dividend check of 12 cents per month (on my 3,500 shares this is $420), taxed at preferential rates. Plus I can sell calls when it’s appropriate.

Sherritt (S)

These days, Sherritt is mostly a nickel mine in Cuba that got going this past fall. Hurricane Sandi hit that area and some mines were shut down but apparently S kept going at a slower capacity. I started buying S at $15.15.

Copper Mountain (CUM)

This stock has had a very weak start up. I own shares from $7.23 down, but most of my shares cost me $4.00 or less. How?

First I sold calls on a few thousand shares for last July. I collected a dollar and paid 20 cents or so to buy them back. That dropped the per share cost.

Then I sold puts on 2,000 shares for Jan with a six dollar strike price and collected $2.10 and “got put” the shares. That means I had to buy the shares for $6.00 less $2.10 ($3.90). The shares have inched up and are $4.20 as I write.

This stock has tested my patience but it should work out.

Thompson Creek Mines (TCM)

I found this one a few months ago and sold puts on 5,000 shares for April with a strike price of $4, collecting $1.10 per share (over $5,000). TCM has an operating molybdenum mine in Nevada. Last spring management sold shares to raise money to develop a copper mine in British Columbia, driving down share prices.

Franco Nevada (FNV)

I like this streamer stock and plan to own some most of the time. I sold 1,900 shares at $58 and change and bought back 1,200 at $56 or so. †

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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