August 22, 2014
- The best way to goose your investment income in a zero-interest rate world
- With football season approaching, an apt market metaphor
- Janet Yellen’s utter-waste-of-oxygen speech in Jackson Hole
- What if the U.S. Mint made some awesome coins and no one bought?
- The hand grenade hidden in the Dodd-Frank Act… how the Depression generation was prepared, and the current one isn’t… a cheaper cost of living isn’t all it’s cracked up to be… and more!
A few years ago, “the punishment of savers” was a novel concept. The Federal Reserve had just embarked on ZIRP, or zero interest rate policy.
Now the punishment has become so routine and relentless it’s a cliche: 2.42% yields on a 10-year Treasury note… 1.1% on a one-year CD… next to zilch in a savings account.
Sure, you can opt for dividend-paying stocks, and that’s an approach our income specialist Neil George endorses heartily. But limiting yourself to hefty dividend payers is also problematic: You miss out on many quality companies with the potential to deliver big capital gains.
For instance, Neil is keen on a pipe manufacturer called Flowserve (FLS). It’s a critical supplier to the oil, gas and chemical industries. Great company, paltry dividend: If you bought this morning, you’d get a payout of 0.8%.
“There’s a relatively easy way to boost your income from stocks,” says Neil — “earning regular payouts on top of the dividends.
“I’m talking about selling covered call option contracts.”
Don’t sweat the terminology if you’re feeling a bit intimidated. Neil has a plain-English explanation.
“Call options trade just like stocks. Buying a call gives you the right to buy 100 shares of a set stock at a given price, called the strike price. That right comes with a time limit — the option contract’s expiration date. The money you pay for an options contract is called a premium.
“But you can also take the other side of the trade by selling call options contracts. When you do, you’re agreeing to sell the given stock at its strike price, if the buyer so chooses. And since you’re the seller, you get to collect the premium the buyer pays.”
Here’s an example, using the aforementioned Flowserve.
Neil recommended it to his readers a year ago, when it was trading for $56 a share. This morning, it’s a shade under $76. See what we mean about great companies with a paltry dividend? But you can still pull down substantial income from Flowserve.
“Let’s say you write a call on Flowserve with a strike price of $80 and a January expiration,” Neil explains. “At current prices, you’ll collect a $200 premium for your trouble.
“Now, writing the call obligates you to sell 100 shares of Flowserve if the price goes above $80 between now and when the option expires. If the shares never go above $80, the option will expire worthless. After all, no one will exercise their right to buy your Flowserve shares for $80 if they’re worth only $75 on the market.
“If the option expires worthless, you’ll get to keep the premium — and you’ll be free to write new calls on FLS, collecting more premium.
“But what if the shares do go above $80 and are ‘called away’ from you?” says Neil, examining the flip side.
“Well, you’ll get $80 for a stock you bought for $56 a share… good for a gain of 42.9%. You’ll also get to include the $2-a-share premium you received in that total, bringing you to a per share gain of 46.4%.
“Better still, you get to keep any dividends you collect while holding the stock. If your option runs for three months, you’ll receive at least one quarterly payout for FLS. Its last dividend as of this writing was 16 cents… or $16 per 100 shares. That brings your total gain to nearly 46.7%
“Wow! Not bad for a play you didn’t even have to watch!
“The downside, of course, is that you don’t own the stock anymore. Still, you’ve made a nice profit.”
The caveat, if you haven’t figured it out already, is that you needed to own 100 shares of FLS in the first place. Getting that handsome payout required plunking down $5,600 a year ago. If you don’t want to commit that much money to one stock, this strategy probably isn’t for you.
But if you think it might be for you, here’s another unbeatable advantage: As long as the shares aren’t called away, you can keep selling options over and over again. No wonder Neil calls it the “perpetual cash machine.”
“The sky is literally the limit,” he says. “If you write just 10 $1 puts a month, you’ve boosted your income by an incredible $1,000 (minus commissions and fees, which could lower your payout to as much as $997 or so).”
Curious? You can learn much more — and take advantage of a special discount to a service that walks you through these trades step by step — by following this link. Please note: The discount expires tonight at midnight.
For the fourth year in a row, the Federal Reserve has played Lucy to the stock market’s Charlie Brown this morning.
Every year, the Federal Reserve takes over Jackson Hole, Wyoming, for a weekend in late August. And on Friday morning at 8:00 a.m. Mountain Time — a half-hour after the market open in New York — the chairman of the Federal Reserve delivers a speech.
Four years ago, Ben Bernanke used this occasion to announce second new round of money printing that goes by the fancy-pants name quantitative easing — “QE2,” as it came to be known.
Every year since, traders have eagerly kept tabs on the “Jackson Hole speech” in hopes of some new dramatic announcement. And each year, they’ve been disappointed. Lucy pulls the football away. This morning is no exception. The major indexes are nearly pancake-flat: The S&P 500 has shed three points from its record close of 1,992 yesterday. Snooze…
Janet Yellen’s first speech as Fed chair at Jackson Hole was so mealy-mouthed, we can’t even find anything worth quoting.
She talked about the job market and how things are better than they were a few years ago, but not nearly as good as they should be. Seriously, that was about the level of insight delivered.
We don’t even want to show a picture of Yellen and make a snarky comment, as is our wont. Much better to show their surroundings. Really, why do these clowns have to befoul such a beautiful spot every August? (Your editor missed them by only a few days one year when I attended the Grand Teton Music Festival. Close call…)
Far better to contemplate than a Fed chair’s mug…
Back to the speech: When might the Fed start raising interest rates after keeping them at or near zero since December 2008? Sorry, Janet doesn’t want to be tied down. Policy has to remain flexible, dontcha know. Which is another way of saying they have no idea what they’re doing. But you already knew that, right?
It’s at moments like this that our friend Jim Rickards delivers so much clarity in only 140 characters…
Well, at least until the entire chewing-gum-and-baling-wire contraption that goes by the name “monetary policy” flies apart…
Gold manifested no more reaction to Yellen’s speech than the stock market. At last check, the bid was $1,281.
The return of the Platinum Eagle has been met with a collective yawn.
Back in March, the U.S. Mint started shipping the 1-ounce coins again, after a five-year hiatus. Demand has been whelming: Only 13,600 ounces have sold — most of it in the first month. That compares with 313,500 ounces of Gold Eagles year to date and 27.7 million Silver Eagles.
Bloomberg dug up a fellow in California who spends about $2,000 a month on coins. “It’s not considered a currency,” he says of platinum. “I would think of it more as an industrial metal,” adds metals historian Timothy Green.
“We did not expect the response to be so weak,” says a Mint spokesman. Under the law, the Mint must at least break even on its collectible products. Hmmm…
Platinum coin demand is no reflection on demand for the metal itself: Holdings in platinum ETFs are up 13% this year. Volume has doubled in platinum futures and options contracts.
At $1,420 this morning, an ounce of platinum is up 2.5% so far this year.
“Please read this article,” a reader urges us.
It’s an Op-Ed from the Gulf Coast Business Review, written by a Florida real estate lawyer. It’s all about an unintended consequence in the Dodd-Frank Act — the “other” legislative monstrosity of 2010, along with Obamacare.
“A clause in the law,” our reader goes on, “apparently eliminates the ability of private real estate owners from self-financing their property to a buyer. Inevitably, this will force everyone to do business with the too big to jail banksters who caused the real estate debacle to begin with.
“Question: How does this benefit the middle class? How does this protect us from crooked bankers? Seems like this is a pure shakedown and directly in conflict with the stated purpose of Dodd-Frank, which was supposed to protect the consumer.
“I’d like to know the 5’s take on this and if you are aware of any organizations attempting to get this repealed. Please spread the word to your readership, and keep up the great work.”
The 5: Your suspicions are spot on. We put the matter to our recovering banker Chris Mayer: “I think it is exactly what it appears to be,” he replied — “a gift for the banks and a shakedown of the middle class.”
We’re unaware of any repeal attempts. Upon further review, it appears the good news — if that’s what you can call it — is that if you do only one seller-financed deal in a year, the law does not apply. But as always with these matters, consult a qualified professional…
“We left California in 1997 to buy a farm in Arkansas,” a reader adds to our relative cost of living thread. “We purchased 660 acres for the cost of two acres in Santa Cruz, California.
“Our farm could produce enough food each year to keep 1,000 people fat on a sustainable basis. I say ‘could’ because we have the EPA here in the form of the Department of Environmental Quality. Wherever a rain drop falls on the state, one person ends up with more say over the state that any other person or institution. With a budget of $108,000,000 and eight attorneys at the top of that department.
“At the same time, jobs here pay nothing. Not even subsistence. I know of two brothers. They moved here from Louisiana. Both are married. They each have a working wife and two or three children. Both sets of parents together work more than 80 hours a weeks. Both families qualify and collect food stamps. It is much less expensive to live here, that is sure. Still, there is no easy rides. I am sure life expectancy is lower here than in more economically advanced places. It is much less expensive to live here, for whatever that is worth.
“The current situation in America is beyond repair. I believe the Navy term is FUBAR. There are problems coming to this country, big problems. The poor always take it on the chin.
“Maybe you could point out times in history when the rich have taken it in the neck? Does that ever happen? Besides the French Revolution! And I am not sure the right guys lost their heads in that turn of events.
[They didn’t…]
“I am personally outraged, have seen it coming since 1978, and still can do little or nothing to change events even in my own family.”
“My great-grandparents were farmers prior to and during the Great Depression,” a reader writes after yesterday’s episode, “and while none of them were rich, they lived the life Bill Bonner described.
“They raised cows and chickens, and, of course, grew all the vegetables and fruit they would eat for the year, canning the majority of it. I’m sure the Depression had its effect on them, but the people of that era were a much more independent group than what we are today. The farm families of that era understood the planning and physical labor necessary to live, and while the luxuries were just dreams, they did survive.
“I look at the world around us today and wonder how we could possibly survive the conditions they endured 80 years ago with such a large percentage of the population totally dependent on the state for survival while the rest of us only know an economy that depends on deficit spending.
“The dollar is slowly losing its status as the major reserve currency in the world, and one day we’ll lose the ability to print so much of it. What will happen then? Maybe farming might be a valuable trade to learn.”
The 5: Or you could follow Jim Rogers’ advice from 2009 about “marrying a farmer”. Heh…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. Last chance: Discounted access to Neil George’s options selling advisory expires tonight at midnight. Grab it while you can.