Larry D. Spears
Cash-Secured Puts: Keep the Cash Flowing – Even After You've Sold the Stock
In January, I told you how you can double or even triple your yield by selling "covered" calls on your dividend stocks.
While this is a safe and highly effective strategy, selling covered calls does have a drawback – of a sort.
If the stock you're holding rises in price before the calls you sold expire, you could be forced to sell the shares at the option's designated strike price.
This isn't likely to be a huge problem since you'll be selling your stock at a profit. The problem is that if you no longer own the stock, you won't be getting the dividend.
Fortunately, this problem has an easy solution. It's a strategy called selling "cash-secured puts."
Using cash-secured puts, you can maintain your cash flow while you're waiting to repurchase the actual stock at a price equal to or below where you just sold it.
How to Use a Cash-Secured Put to Generate Income
Here's how it works.
2012 U.S. Dollar Outlook: How to Play A Short-Term Rally
[Editor's Note: This special report on the U.S. dollar is part of Money Morning's annual "Outlook" series, which forecasts the prospects for stocks, commodities, and other top profit opportunities in the New Year. Our last forecast focused on the U.S. Economy.]
The U.S. dollar will start 2012 on an upswing – but don't let it fool you.
What we're seeing is only a short-term rally inspired by Europe's travails. In the long-term, the U.S. Federal Reserve's loose monetary policy and the United States' own debt burden will drive the greenback back down.
That's the consensus among experts who follow the global money markets and the leading currencies, including several of Money Morning's own analysts.
"The dollar is going to rally in the short-term so long as the primary liquidity mechanism (used by the world's central banks) continues to be dollar swaps," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "How long that is going to last is uncertain – perhaps March, April or beyond – but once it abates, our own enormous debt problems and inflationary policies will return to the spotlight and the dollar will quickly give up its recent gains."
Indeed, the dollar rallied in the second half of 2011, as Europe's debt battle dominated the headlines. The U.S. Dollar Index, which measures the dollar's value against a basket of foreign currencies, ended about 10% higher than its May 2011 lows, gaining almost 3% in November.
That momentum is likely to continue for the first part of the New Year, but not long after.
Several economic factors will weigh far too heavily on the currency for the upward move to continue – although it's not clear exactly when the short-term surge will lose steam. And investors who understand what's really driving the U.S. dollar's value in 2012 can avoid getting burned by the currency's long-term decline.
Short-Term Help from Europe
The U.S. dollar's short-term boost will mostly come from the need to support Eurozone governments with more liquidity.
"The ECB (European Central Bank) will be left with little choice in saving banks and their sorry sovereigns other than to print, print, print euros, and more of something almost always leads to a lower price," said CNBC News' Brian Sullivan, who thinks the U.S. dollar will reach parity with the euro in 2012.
The euro fell to a 15-month low against the dollar in the last week of 2011. It traded yesterday (Monday) as low as $1.2930.
U.S. dollar value has also been driven higher recently by increased demand, since the central banks in Europe, the United States, Great Britain, Japan, Canada and Switzerland have all agreed to lower the interest rates on dollar swaps.
"Dollar swaps – you know, those little arrangements that allow foreign banks to swap their unloved currencies for dollars – … really come in handy when there's a panic and a flight to the safety of U.S. Treasuries," Money Morning Capital Waves Strategist Shah Gilani explained. Since U.S. Treasury securities must be purchased with dollars, increased demand boosts the currency's value.
However, the overwhelming long-term outlook for the U.S. currency is still bearish, mostly due to the weak U.S. economic outlook for 2012.
"The dollar is enjoying a safe-haven status, but long run I'm not a fan of the U.S. dollar," Dr. Allen Sinai, chief global economist at Decision Economics, told Forbes. "Our country has too many problems – with long run growth forecasts, deficits and how the politics of our country operates are all a negative."
Get Ahead of Semiconductor Industry Growth with These Seven Investments
The semiconductor industry struggled to maintain growth in 2011 – but that's starting to change.
The industry this year was stunted by slow global economic growth, reduced consumer demand, and supply-chain disruptions due to the Japanese earthquake and tsunami. Industry revenue was down 2.5 percentage points in the second quarter, mostly due to Japanese semiconductor companies that suffered facility damage.
While the industry's third-quarter performance was weaker than predicted, it was an improvement over previous quarter numbers. According to estimates released Nov. 17 by market researcher IHS iSuppli, semiconductor industry revenue in the third quarter grew by 3.5% to just over $78.5 billion.
Forecasts for the next two years offer an even brighter outlook.
The Semiconductor Intelligence blog compiled forecasts from eight industry research organizations and found growth estimates for 2012 ranging from 4.0% to 10.4%.
Industry executives expressed similar optimism at an investor conference Nov. 15 in Barcelona, Spain. They forecast a "return to normal business conditions in the second quarter of 2012," once inventories of unsold chips stemming from the slowdown in consumer spending are cleared.
And IHS predicted a much stronger growth rebound in 2013.
Intel Corp. (Nasdaq: INTC) President and Chief Executive Officer Paul Otellini said that, while economic conditions and consumer demand will always be a factor, innovation is driving renewed growth in the semiconductor industry.
"Computing is in a constant state of evolution," Otellini told this fall's Intel Developer Forum in San Francisco. "The unprecedented demand for computing from the client devices to the cloud is creating significant opportunity for the industry."
Investing in the Semiconductor Industry
While the semiconductor industry's top performers have shown modest gains from a year ago – Intel's 14.3% rise being one example – bigger declines elsewhere have offset the winners. That inconsistency within the broad semiconductor sector – Google Finance lists 189 companies on its industry roster, divided into roughly a dozen subsectors – is why some chip stock investors are frustrated.
The good news for investors is there's an increasing need for semiconductor companies that's not going away. Chips are now essential to virtually every product that uses power, from mainframes, PCs and laptops to TV sets, video-game consoles and mobile phones. Without chips, modern cars won't run, airplanes can't fly and many now-routine medical procedures would be impossible.
The key for investors is to focus on companies in the most in-demand subsectors, as well as industry leaders best positioned to profit from renewed growth in 2012 and 2013.
Don't Wait Until January To Play the January Effect
A lot of investors have pocketed big gains from the so-called "January Effect." In fact, the January Effect – which refers to the historical tendency for stock prices in general, and small-caps in particular, to rise during the first month of the year – has better than an 80% success rate since the mid-1920s.
Of course, based on recent performance, the phenomenon may soon require a new name – and some new timing guidelines for traders hoping to profit from it.
The January Effect was first recognized in the 1940s, but its actual strength wasn't quantified until 1982 when Donald B. Keim, now a finance professor at the University of Pennsylvania's Wharton School of Business, presented research detailing the market's January performance superiority dating back to 1925.
Since then, studies by several other groups have verified Keim's results – both in terms of positive overall January performance and the extra strength of small-cap stocks. Some of the findings include:
- Stephen Ciccone and Ahmad Etebari, professors at the University of New Hampshire's Whittemore School of Business and Economics, reviewed stock market performance from 1926 to 2006 and found that January produced "the highest returns of any month of the year." Their study determined January posted positive returns 81.48% of the time, fueled by "outstanding small-firm performance."
- Research by The Wall Street Journal, reported in early 2010, found that from 1900 through 2009, the Dow Jones Industrial Average rose 62% of the time in January, while the Nasdaq Composite Index was up in 67% of the years studied, affirming the small-cap advantage.
- The Chicago Board Options Exchange (CBOE) found that from 1980 through 2006, small-cap stocks as measured by the Russell 2000 Index averaged a return of 2.5% in the month of January. That compared to respective January returns of just 1.7% and 1.6% for the Standard & Poor's 500 Index and the Dow.
- A 2003 study by Ibbotson Associates, now a part of Morningstar Inc. (Nasdaq: MORN), found that, from 1926 through 2002, the smallest 10% of U.S. stocks outperformed the largest 10% of U.S. stocks by an average of 9.35 percentage points during the month of January. That included both up and down years, though the broad market lost ground in January only seven times during that period.
All of that would seem to be a fairly strong endorsement for playing the January Effect – but there's one small problem: In recent years – most likely due to an increased awareness of the pattern and more traders trying to play it – the upward move in the market that typifies the January Effect has actually started in December.
In fact, since January 2000, the broad market (as measured by the S&P 500) has shown a decline from Jan. 1 to Jan. 31 on seven occasions – in 2001, 2002, 2003, 2005, 2008, 2009 and 2010.
However, if you move the beginning of the January Effect time period back to December and look for a top in mid-January, the success rate returns to near its historical norm, with only two years – 2002-2003 and 2005-2006 – showing broad market declines.
Small stocks, as measured by the Russell 2000 (which currently has a median capitalization of $473 million), also continued to outperform larger ones in all but two years – 2004-2005 and 2001-2002 (when the two indexes were virtually even). However, in a few years, like 2002-2003 and 2008-2009, the advantage came in the form of smaller losses.
The exact starting date of a December-January Effect move isn't precisely identified by the newer studies, but a quick glance at the numbers indicates the smartest approach may be "the-sooner-the-better":
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Don't Miss These Three Year-End Trading Strategies
Before yesterday's Thanksgiving leftovers even got cold many U.S. consumers ventured out to catch the best Black Friday deals, already worried about how much this holiday shopping season will cost them.
But instead of fretting over how much you'll spend this year, now's the time to focus on how much more you can earn.
You see, over the next few weeks, three year-end trading strategies will come into play, all capable of producing major short-term profits for astute investors.
They are:
- Annual tax-loss selling – which, given some major stock and sector declines since early-year highs, could be heavy this year.
- A "Santa Claus rally" in late December, triggered in part by bargain hunters buying beaten down stocks.
- And the "January Effect," a strong tendency for nearly all stocks – especially small caps – to gain during the first month of the year, or even earlier.
We've outlined all three here, so you can pick your favorite option for year-end profiting.
Tax-Loss Selling
There are a few ways to play the tax-selling phenomena, depending on your goal, but the most common is to offset your taxable gains.
The best time to unload a large paper loss is the end of the year. Taking a loss on a position reduces your trading gains and limits your tax liability. You'll also see professional fund or portfolio managers do it to replace losers with stronger performers before they issue quarterly or annual reports – a process often referred to as "window dressing."
So if you're sitting on a position with a large paper loss in a stock you want to drop, go ahead and sell to realize the losses for tax purposes. But make sure you beat the crowd – begin looking for selling opportunities now, and try to get out on a day when the market – and hopefully your stock – is sharply higher. (No one wants to take a loss that's larger than absolutely necessary, even to save on taxes.)
If you have a handful of losing stocks and don't know where to begin, start with your biggest gainers, or choose those stocks with the poorest fundamentals.
But before you go cleaning house, there are few things to remember to maximize your profit potential from this trading strategy.
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