Archives for May 2012

May 2012 - Page 12 of 15 - Money Morning - Only the News You Can Profit From

Options Trading: Three Ways to Win Big with a Bearish Calendar Spread

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Think some of Wall Street's higher flyers look vulnerable to a broad market pullback?

If so, they could be perfect candidates for a low-cost, low-risk options trading strategy that could pay off big time if we get another move like last Friday's 169-point Dow plunge.

The strategy is called a "calendar put spread," and it works like this:

  • You sell a slightly out-of-the-money put option with a strike price just below the current market price of the underlying stock – with a near-term expiration date.
  • You then simultaneously buy a put option with the same strike price but with a more distant expiration date.

The cost – and the maximum risk – is the difference between the two option premiums, referred to as the "debit" on the spread. But because the longer-term put you buy "covers" the shorter-term put you sell, there's no added margin requirement.

It may sound complicated, but it's not once you understand how to employ this bearish options trading strategy.

Options Trading Primer: A Potential 900% Gain in Six Weeks

Here's how a bearish calendar spread might work with Exxon Mobil Corp. (NYSE: XOM), which has held up better than many other oil stocks in recent weeks, closing last Friday at $84.57, barely $3.00 off its 52-week high:

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Obamanomics: What You Can Expect if President Obama Wins the Election

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Now that we are left with a two-horse race for president, the markets are going to begin to handicap the November results.

However, when the markets begin to handicap the race it will be about a lot more than just picking the eventual winner.

Instead, everything will revolve around the policies and consequences that come along with the winner.

The difference in approach promises to be stark with "Obamanomics" on the left and "Romneynomics" on the right.

Each one comes with its own set of consequences, though.

Today I'm going to look at "Obamanomics II," or the policies we will get if President Obama is re-elected.

But those on the left shouldn't despair…In my next piece, it's Romney's turn.

As for the horserace itself, it's too close to call, with neither side having much chance of winning a big victory.

President Obama Has the Edge

Even still at the moment, President Obama appears to be ahead. Apart from his modest lead in the polls, my former home state of Virginia appears to be swinging definitively toward the Democrats.

Yes, Republican Bob McDonnell did win the Virginia governorship handily in 2009, but he was a very good candidate. Moreover, turnout in gubernatorial elections is normally low. Thus I believe the latest polls showing Obama with a 7% lead in Virginia are accurate, and without Virginia Romney has a very difficult path to the presidency.

If we believe the presidential election will be close, then it follows that Congress and the Senate elections must be close, too.

If Obama wins in November, the most likely outcome must be that the Democrats will hang on to the Senate, while the Republican House majority survives, albeit much smaller than at present.

With this combination, the president's more extreme wishes (or those of his team) will be restrained. But as a newly re-elected figure he will nevertheless have more power to get what he wants than he does currently.

Whatever the congressional numbers may be, the president's first task will be to face the "fiscal cliff" of January 2013, when the Bush tax cuts and temporary payroll tax cuts expire and automatic spending "sequestration" comes into effect.

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Does the "Showroom Effect" Spell Trouble for Amazon (Nasdaq: AMZN)?

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Thanks to the "Showroom Effect," Target Corp. (NYSE: TGT) and Amazon.com Inc. (Nasdaq: AMZN) have parted ways.

That means Amazon's hot new Kindle e-reader will no longer be found on the shelves of one of the biggest U.S. chain retailers.

The "Showroom Effect" is a phenomenon in which consumers use brick-and-mortar stores to test drive certain products before purchasing them online at a lower price.

This isn't the first shot fired in the war between the world's largest online retailer and the second largest discount retailer in the United States.

The Beef with Amazon

Retailers have long complained of Amazon's unfair competitive advantage because the online retailer is exempt from charging state and local sales taxes.

Last spring, Target, along with Wal-Mart Stores Inc. (NYSE: WMT), Best Buy Co. Inc. (NYSE: BBY), The Home Depot Inc. (NYSE: HD), and other retailers threw their collective weight behind the Alliance for Main Street Fairness, a coalition that is leading efforts to change sales-tax laws in more than a dozen states, including Texas and California.

But the sales tax gap is just part of the problem.

During last year's holiday shopping season, Amazon offered 5% discounts up to $5 to "show-rooming" consumers who used the online giant's Price Check mobile app in a physical store-in essence, encouraging the Showroom Effect.

In response, Target sent a letter to its suppliers urging them to help combat the Showroom Effect, either by delivering more in-store exclusive products, or by helping to them to match the prices of Target's online rivals, including Amazon, TigerDirect, Overstock.com Inc. (NasdaqGM: OSTK), and eBay Inc. (NasdaqGS: EBAY).

Even still, retailers like Target have other issues with online competitors like Amazon – such as what happens after the sale.

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Natural Gas Industry: How Legal Troubles Could Derail this Company's Export Plans

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Over the last month, we've spent a great deal of time discussing the potential for Cheniere Energy (AMEX: LNG) to export liquefied natural gas out of the Sabine Pass in 2014.

The Sabine Pass isn't the only terminal being eyed for natural gas exports. Applications for seven other exporting facilities throughout the U.S. are pending with the Federal Energy Regulatory Commission (FERC).

That includes Virginia-based Dominion Resources (NYSE: D), which wants to export more than one billion cubic feet of natural gas per day through its Cove Point terminal in Maryland.

Just this morning, The Washington Post highlighted the potential of Dominion Resources' Cove Point facility.

"Just off Cove Point on Maryland's Western Shore sits an array of empty docks. Built to accommodate massive tankers bearing natural gas from abroad, the facility saw only five ships pass through in 2011, reports Dominion Resources, the owner. None have come this year. American firms have increased their production of natural gas from unconventional shale formations so much in the past few years that they are running out of places to store it, the price has plummeted and Cove Point's expensive facilities are all but idle.

On the other side of the planet, in Japan, the price of natural gas has soared. An energy-hungry world is coping with the shutdown of Japan's nuclear reactors after last year's Fukushima Daiichi meltdown, which left the country scrambling to find fuel for backup power plants. Japanese companies are investing hundreds of millions of dollars in natural gas projects and have paid 10 times the American price for imports.

The opportunity here is obvious: The United States should export some of its bountiful stocks of natural gas to Japan and other countries with fewer supplies and high demand."

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Berkshire’s Annual Meeting: Warren Buffett Talks Stocks and Successors

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Billionaire investor Warren Buffett held court this weekend at Berkshire's annual meeting, fielding dozens of pressing questions about the company, investing strategies, and a new CEO.

Some 40,000 gathered to hear what the leader of the storied Berkshire Hathaway (NYSE: BRK A, BRK B) had to say about the state of the company and its fate following Buffett's recent diagnosis with prostate cancer. The Oracle of Omaha triggers such an enthusiastic investing response the event ends up more like a festival than a shareholders' meeting.

Buffett dismissed the health news as a mere non-event, barely touching on the subject.

The investing legend instead focused on the money.

Buffett on Berkshire

Berkshire posted first-quarter earnings Friday after the close that doubled compared to the same period a year ago, fueled by gains in its insurance, manufacturing, service and retail businesses.

The company reported earnings of $3.25 billion for first quarter 2012, translating to $1,966 per Class A share, versus $1.51 billon in the first quarter of 2011.

Operating income came in light at $1,615 a share. Analysts surveyed by Thomas Reuters had forecast $1,780.

The company also posted gains from its derivates holdings – investments that Buffett once referred to as "financial weapons of mass destruction."

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Investing in the Robotics Revolution

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You may not live or work with any robots today… but you will soon.

The robotics market is about to explode.

I predict that, in the next few years, we will see swarms of robots entering the workplace.

Of course, we've had bots working in factories for years now. But as they get both cheaper and smarter, we will find lots of new jobs for them to do. And they'll do those jobs better and better.

Robots of all sizes are already capable of doing some very complex tasks: They can perform surgery, hair transplants, and even climb inside the human body – through the mouth – to "eat" stomach cancers.

To understand the scale of the robotics revolution, just look at what's happening in China.

Cheap labor in that nation not only stole U.S. jobs, it vaulted China to the front ranks of fast-growing markets. But now robots are invading Chinese factories in a big way.

Take the case of Foxconn International Holdings Ltd., which is based in Taiwan and makes electronic components and other goods for big computer firms (it supplies parts for the iPad, iPhone, Xbox, and Kindle).

Well, Foxconn announced it plans to buy enough robots to replace roughly half the firm's 1.2 million workers in China. This is the largest robotics rollout in the history.

The trade group the International Federation of Robotics says there are about one million industrial robots now in use around the world. So, based on Foxconn's rollout alone – one company in one country – we know that figure is set to more than double by the end of the decade.

The robotics revolution is here.

So what's a clever tech investor to do?

Let's dig into the latest activities of one visionary robotics expert who's so engrossed in the field, he once told a reporter he winced when RoboCop went "belly up"…

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The Commodities Bull Market: Insights on Gold, Energy and Agriculture

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Despite the setback caused by the 2008 financial crisis, the commodities bull market rolls on. A short four years later, many commodities are trading at or near all-time highs.

And thanks to huge swaths of the developing world moving up the ranks, the current bull market in commodities promises to be one for the history books– both in time and size.

After all, the wants and needs of 7 billion people are an irresistible and monumental force.

Soon virtually every substance vital to modern life will become enormously expensive − and profitable for investors who know how to play it.

In fact, today's scarcity and soaring costs could spur history's biggest gains.

It is one of the reasons why I recently sat down with resource investor extraordinaire Rick Rule.

A leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture, Rick has dedicated his entire life to all aspects of the natural resource industry.

Rick is without question something of a heavy hitter.

At Sprott Global Companies, he leads a team of professionals trained in resource-related disciplines such as geology and engineering. Together, they work to evaluate commodities-related investment opportunities.

I think you'll enjoy what Rick had to say during our recent Q&A.

Insights on the Commodities Bull Market

Peter Krauth: What is your general outlook for commodities – the commodities market over the next, say, one to three years and even beyond that?

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The Natural Gas Budget Shortfall

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State policy leaders around the country are coming to realize the long-term importance of natural gas exports to the health of their economies.

They are struggling to pass their 2013 budgets this year.

The recent low in natural gas prices is doing more than just hamstring production around the country. It's also slashing government budget forecasts due to the loss of tax revenue associated with natural gas sales.

So much so, that states are predicting steep decreases in revenues through 2014.

USA Today reported this week that "Energy-producing states are bracing for lower tax revenue from the plummeting price of natural gas, which is just above half of what some states forecast when they put together budgets for 2013 and beyond."

Low natural gas prices could cost Wyoming $125 million next year, and that the state will likely have to enact budget cuts of 8% for the year 2014 if prices don't recover by then. In Oklahoma, just a $1 drop in gas prices leads to a roughly $70 million shortfall for the state each year.

It's a rather staggering figure.

But Oklahoma's state Treasurer Ken Miller states that the "free market" will work itself out over the long term and natural gas prices will rise, particularly as large-scale coal-fired power plants convert to natural gas use.

More on that in a second.

As we've said before, the price rebound is inevitable. But we have to look at how we got here and where we're going to make sense of this situation.

First, the major technological breakthroughs in fracking and horizontal drilling have significantly increased the amount of unconventional resources available around the country. So much natural gas has been produced, combined with an unseasonably warm winter, that natural gas prices have slumped significantly.

This has naturally affected producers in the short-term, although midstream storage and pipeline companies remain healthy due to their contract structures as value chain suppliers.

But low natural gas prices won't last forever. Overtime, we're going to see prices begin to rise for four reasons.

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