Stocks slipped this week but the 6+ point decline in the S&P still managed to keep the index above 1,000. Really, I have no faith in what is going on but as I mentioned a few days ago, I question whether there really was a recession in the first place or was it all a big sham to funnel more dollars to the banks?
I continue to stay hedged but occasionally take a shot. For example I bought some Bank of America the other day at 15 or so. There was no denying the banks. They have been on a phenomenal run and why not? The government has already determined that 19 of them are too big to fail and no matter what comes down the pipe in the future, Uncle Sugar has guaranteed to sustain them.
Look at the run of BAC in just the past few days. I remember years ago when the S&L crisis hit and remember how cheap BAC got. Think it was down to 6 or so. Then it sky rocketed until the next banking crisis. Well, I got in a little above 15 and as it was approaching 17.5 last week, I sold January 17.5 calls and got another 2.5 in premium. Not a bad strategy considering. Should the stock continue to run for the next five months, I get a 5 point total return on a 15 investment or 33% in just five months.
Should the market fall back and BAC decline, my cost basis has been reduced to 12 1/2 instead of 15. I can continue to sell options on rallies and enhance my income.
What are Interst Rates Headed??
As rates fell today, I was thinking that perhaps those who are calling 10 year rates to fall to 3% might have a point. After a subdued CPI number, increasing unemployment claims, increasing mortgage defaults, anticipated commercial real estate debacle, etc., how can one think that the market or interest rates can possibly go up? We all know that the recent spurt in the economy was due to the stimulus packages. What would the retail sales number have looked like without the 2% increase in auto sales??? Things are really bad and are bound to get worse.
Could we have a "double dip?"
Well, as we know, as the market goes, rates SHOULD go. Diversification is a good key now as the two vehicles, stocks and rates are pretty well correlated. You can protect yourself well now against anything that might happen. If you are thinking that rates will rise, the TBT ultra short 20+ plus ETF is a great hedge to have in your portfolio against rising rates, especially if you are long bonds and interest rate vehicles.
For now, all evidence appears to be strong for higher stock market prices and interest rates. As mentioned in a previous blog, I think that the 1029 S&P level is the critical point. Expect a bit more upside action.
While some famous technicians on tv state that another October meltdown is out of the question at this point, I am a child of October meltdowns and make sure that all of the puts that I buy on selected stocks run at least until Jan 2010.