Archive for the ‘Investment Talking’ Category

Trading On Secrets

By: ispeculatornew | Date posted: 05.15.2014 (3:00 am)

secretAs much as I love technology and in many ways it makes my life easier, there are also some challenges and grey zones that comes with it. One of my favorite podcasts these days is the Stratechery podcast which discusses tech news. In last week’s edition, they talked about Secret, one of the more hyped apps these days. Basically, this app makes it possible for users to write secrets which their friends will be able to see, share, etc. It is done in an anonymous way which in theory (and in practice) means users are willing to say things they wouldn’t on sites such as Twitter and Facebook.

The app is growing in popularity, especially in places such as Silicon Valley. As you would expect a lot of noise/crap has come out including rumors about new Apple heaphones, etc. It’s easy to get away with stuff like that when it’s unlikely to ever be traced back to the user. However, there has been a lot of “useful” information to come out as well.

For example, a couple of weeks ago when Nike announced it was laying off its Fuelband staff, the news had been shared on secret before being announced.

Future Of News?

If news is now more than ever coming out “new media” such as Twitter and Secret and you often have no way to know if a story is just a rumor, fake or actually true, then how would you ever know if you were trading on “material non-public” information? It’s increasingly challenging to determine what “insider trading” is and I personally think it will only get harder.

A few years back, having material non-public info required talking to a highly ranked executive. These days, thanks to social media, a very large number of employees with sufficient information are able to get the story out anonymously. One of many challenges for potential traders of course is figuring out the value in such stories and the odds that they are accurate.

Do you agree with me that these anonymous apps will make life very difficult for investors, corporations, regulators, etc?

Stock Buybacks Should Get More Credit

By: ispeculatornew | Date posted: 04.30.2014 (3:00 am)

stock exchange investmentWe often hear about companies that have a solid record of paying back their shareholders but mostly those that choose to do so through dividend payments. I get it, I’m a big fan of dividend stocks and manage a decent part of my investments by targeting solid dividend stocks in my USDP portfolio. That being said, I also feel like companies that are sung their cash to do buyback programs (where a company buys back its own stock) don’t get nearly enough credit.

It’s not always the case but it’s often much better for most shareholders to have money “returned” to them in such a way. Why?

-Postponing taxes: As many of you know, I hold a decent stake in Apple and intend to keep it in the very long term. When the company pays out a dividend, I’m thrilled to have money come in my account and it makes the payment more “real”. However, when Apple takes that same amount to buy back some shares, there are also benefits:

  • This (all things being equal) increases the value of other outstanding shares which increases the value of my stake. However, I will not pay any taxes on them until I sell my stake (which could be 10-20 years down the line). Not only do I avoid those taxes now but I get to “keep that money invested” while that happens. It’s very likely that I’ll be paying a lower tax bracket by the time I’ll sell my shares and have to pay. Yes, I’ll be paying capital gains instead of income but I’ll have avoided paying taxes for over a decade.

-It can be beneficial for the company: one of the issues that Apple and many companies face is having much of their cash reserves stuck abroad and being unable to bring them back. By using innovative methods, companies like Apple are able to buy back shares using foreign cash and thus avoid paying taxes.

-Usually a good sign: Stock buybacks generally also send a signal to the market that the company’s executives (which should know) think the stock is undervalued and buying back is a good use of cash reserves. While it’s not always the case, it’s been a fairly good indicator.

Why Do These Moves Get So Little Credit?

I personally believe the biggest reason is it’s just harder to evaluate. It’s very easy to determine which stocks pay dividends, for how long, etc. That makes it easy for indexes to track things like dividend aristocrats, sustainable dividend payers, etc. It’d be very tricky to calculate such metrics for stock buybacks because the information is not as easy to get, to compare, etc.  Does that make it any less valuable? Where would I even go to find the “best” stocks in terms of historical buybacks, etc?

hlf

The Biggest Battle Yet For Ecosystems ($AAPL, $GOOG, $FB, $MSFT, $AMZN)

By: ispeculatornew | Date posted: 04.16.2014 (3:00 am)

threescreensAs i continue to be fascinated by the ecosystem battle that is raging on, it is becoming very clear that there will not be one winner that will take the whole market. Instead, we will have a few strong players that have dominant ecosystems and specific apps will be dominated by players no matter what the ecosystem is. Some of those battles already have clear winners:

-Social: Facebook (FB)
-Search: Google (GOOG)
-Mobile O/S: Apple (AAPL) and Google (GOOG)
-App stores: Apple (AAPL) and Google (GOOG)
-Maps: Google (GOOG)
-Online Commerce: Amazon (AMZN)
-Physical Shipping: Amazon (AMZN)
-Online music: Apple (AAPL)
-Digital books: Amazon (AMZN)
-“Work” Software: Microsoft (MSFT)
-Gaming consoles: Microsoft (MSFT)

You get the idea. Each of those products face serious competition and could eventually lose their lead but at this point, they are dominant.

The Biggest Battle Has Yet To Begin

When we think about financial services, it’s easy to get an idea of the incredible potential. Just think of companies that are actually generating billions through payments:

-Credit cards (Mastercard, Visa, Amex, etc)
-Credit card processors
-Online payment solutions (eBay’s Paypal, Square, etc)

MA Revenue (Quarterly) Chart

MA Revenue (Quarterly) data by YCharts

We do not know how this will play out but it does seem clear that over time, an increasing part of our online and offline payments will be made through our phone. This could be done directly from the O/S, from an app, from the web, etc. It’s also unclear if there will be more than one dominant players in this arena. Already, all of the existing players have been gaining significant ground here in transforming themselves for this new era and it would be crazy to think they don’t have a shot. However, I’d argue that the 5-10 years from now, several of these players will be dominant in the payments arena. They will be able to leverage their existing ecosystems to gain a solid advtange over competitors. Users have already entered personal information and have established connections either through their contacts, messaging apps, etc.

$FBLet’s take a look at how each player is doing:

Apple (AAPL): Apple is rumored to be making a big push into payments in its upcoming iOS version and with its fingerprint ID technology, making offline payments could become very easy. Apple has a strong market share in the US which would be ideal to take the lead.

Google (GOOG): While the company has made some progress through the creation of Google Wallets and the gradual implementation of payments by Gmail, it does not seem as advanced so it’s not shocking to hear that it has looked into acquiring Square, one of the leading payments technologies.

Amazon (AMZN): With hundreds of millions of customers having stored credit card information, the potential is clearly there. Amazon is also working on a smartphone which will reportedly launch later this year which could help and is also looking at payments as a major new segment.

Facebook (FB): As the world’s most “social” company, Facebook does have an edge here and could clearly leverage its messaging apps (Facebook+WhatsApp) in order to get it started. The company has been working on getting licenses and I personally think that is the exact move that Facebook needs to do. Every time I make a bullish case for Facebook, I express my opinion that user growth is not a big factor in its long term growth. Rather, I think Facebook can leverage its platform in other ways than advertising. It makes little sense to value Facebook exclusively in terms of advertising revenues when it has a billion users and millions of small companies that could be leveraged in other ways.

Microsoft (MSFT): At this point, Microsoft does not seem ready to make a move here. It’s trying to catch up in a multitude of areas (mobile, cloud, etc) and while the new CEO has looked promising, payments is probably not near the priority.

Netflix (NFLX) – not a factor here

The Potential Is Significant

When you consider revenues of a few of these players, it’s easy to see how attractive of a business this could become. Yes, it is technically difficult and the margins might not be as great as what they’re used to (apart from Amazon), but it creates a bigger lock-in effect to their ecosystem.

Far From A Done Deal

Though unlikely, alternative digital currencies such as Bitcoin could become the way payments are made in the future. It’s also possible that the ecosystem will not be enough to become significant players in the space although I personally doubt it.

Disclaimer: Long Facebook (FB), Apple (AAPL) and Microsoft (MSFT)

Ultimate Guide To Building A High Yield Dividend Portfolio

By: ispeculatornew | Date posted: 02.13.2014 (3:00 am)

rom2Whoa…! Several months ago, I sent an email to the readers of my newsletter asking 2 simple questions:

-Would you be interested in a post about building a high yield portfolio?
-If so, what are some stocks or other assets that you’d possibly include?

By the way, if you’re not on the list, what are you waiting for? It’s free:)

I ended up being completely overwhelmed. I received hundreds of answers. All of you were extremely interested and had tons of suggestions. I started looking at the ideas, at all of these stocks and replied to almost everyone as well. I had initially expected to publish that post a couple of weeks later but ended up doing research for several months (on and off) and feeling like I’d never be able to publish anything. But here I am, ready to go ahead. A few disclaimers:

-There is no perfect portfolio, especially not a universal one. Each one of you would probably aim for something slightly different that would depend on your personal profile (risk appetite, age, means, etc).
-This is a starting point and I plan on updating it over time, and appreciate any feedback, ideas, etc.
-This portfolio is built with $USD stocks as I’ll explain later (most visitors here are US based)

Also, while this is an in-depth article, we have even more info on our membership website, DividendStocksRock, be sure to check it out if you haven’t done so yet!

Why A High Yield Dividend Portfolio?

High yield investments are “in” more than ever before. Why? Partially it’s because dividend investing is a proven method to generate good returns but also because in this era of very low interest rates, the traditional retirement investment doesn’t work so well. If you were planning on investing in stocks over your working years and eventually moving to a fixed income portfolio only in order to live off of it, I’ve got some bad news. You’ll need millions in order to survive off of 1% interest rates.

So yes, dividend stocks are very popular not only by individuals but also by pension funds, institutional investors, etc. The problem is that typical blue chip dividend stocks pay a very low dividend yield making it a challenge for most to generate significant income. So several investors have moved towards a higher yield portfolio. The main challenge of course is having limited risk in such a portfolio. There is a reason why some stocks offer higher dividend yields. I’ve mentioned FTR on this portfolio and I can tell you that even with a 10% or so dividend yield, it would never make my portfolio.

Main Objectives For My High Yield Portfolio

I’m looking to build a portfolio that will:

generate around 5% dividend yield
have relatively stable income from year to year
will generate decent total returns (yes income/yield is important but capital preservation is also critical)
will be highly diversified (in terms of sectors, asset classes, geographic exposure, etc)
hold sustainable companies (I’m not interested in holding a stock that is hanging on for its life, no matter what the yield is. Distressed stocks is an interesting investing method but I wouldn’t base my retirement on it)
limit the time required to maintain the portfolio (both in looking for stocks but also in managing taxes, international stocks, etc)

Main Asset Classes

Domestic Stocks:  Straight forward right? These are stocks trading on most stock exchanges. I’m personally going to stay away from penny stocks because they are too risky, pink sheet stocks because I’d like to have confidence in the financial filings being consistent, etc.

International Stocks:  Ignoring international stocks would be a big mistake. The world is more correlated than it was 20 years ago but those stocks do still provide great opportunities, add diversification to the portfolio, etc.

Fixed Income (government and corporate both domestic and abroad):  This is obviously a must as these assets will generally react very differently from others when markets decline providing critical diversification.

Other Fixed Income (bank loans, mortgages, etc): As you can imagine, most of us would not invest in these directly but their is significant income in these products

REIT’s (real estate income trusts): No brainer here, real estate can be a very significant part of any income portfolio and if you’re not considering buying physical buildings, considering REIT’s is a must as they provide high levels of income at historically low risk

MLP’s (Master Limited Partnerships): These more complex instruments that I’ve discussed provide extremely interesting levels of income from energy companies that are able to pass off their income but they do come with rather complex tax implications.

Annuities: These financial products can range from very simple to incredibly complex but the general concept is paying a lump sum in exchange for income that will be paid as long as the buyer is alive.

BDC’s (Business Development Companies): These companies operate in a similar way to venture funds

Preferred Shares: These assets provide a good mix between fixed income and stocks and have provided great income in recent years

Selling Options: The most popular strategy here would be selling call options on stocks that are held (covered calls) which can add to the income but limit the upside (in terms of capital appreciation)

Whole Life Policies: Some of these policies do pay dividends/income

CEF’s (Closed End Funds): Ah, these funds are very difficult to judge as a whole because there are good and bad ones but some certainly provide interesting opportunities

Am I missing anything here?

What I’ll Stay Away From For Now

Annuities: I don’t think I’d consider buying an annuity at this point because I do consider that these investments will provide a higher income at a much lower cost, that is really the whole point of building this portfolio.

BDC’s: I will continue to do research on these but at this point I’m simply not comfortable enough

Selling Options:  I’m sure some of you would argue with me on this but I personally think the cost (in terms of bid-ask spread, commissions) and time involved in selling calls. Also, to execute this strategy, a lot more is involved and I can’t imagine trading options without carefully looking at the implied volatility, etc. So not for me, at this point.

Whole Life Policies: Certain whole life insurance policies do pay out cash but I’ve said it before, these products become so complex that it’s nearly impossible to know if you’re paying too much for it. Companies make much higher margins on such complex products so it’s usually not a good deal to buy them:)

CEF’s: There are some good ones and I could see myself buying some but the problem is that these do not necessarily have good liquidity so I’d much prefer going for high quality dividend stocks at this point.

What I’d Invest In Through ETF’s or ETN’s

International Stocks: Any good income portfolio would hold international stocks. They provide great opportunities and some big companies such as Samsung, Nestle and dozens of others are not listed in the US so missing out on them would be a big issue. However, I personally have no interest in exchanging currency into all of those currencies, dealing with taxes, stamp fees, etc. So I prefer dealing with international ETF’s that will do the work for me.

TickerNameMarket CapPriceFees1Y ReturnDividend Yield
PIDPowerShares International Dividend Achievers Portfolio$1,075,402,343.75$17.840.5610.282.23
IDViShares International Select Dividend ETF$3,273,594,482.42$37.360.513.354.55
DVYEiShares Emerging Markets Dividend ETF$180,712,112.43$45.750.49-13.594.89
DWXSPDR S&P International Dividend ETF$1,308,791,137.70$46.570.452.976.98
SDIVGlobal X SuperDividend ETF$819,529,296.88$23.320.587.786.82
LVLGuggenheim S&P Global Dividend Opportunities Index ETF$88,325,202.94$12.990.653.186.66

Fixed Income: ETF’s are great for many different reasons but I’d argue that fixed income is the #1 use. Big funds are able to get much better pricing for their trades than individual investors making it a no-brainer. I strongly believe that only holding equities in an income portfolio is a mistake. Having both bonds and fixed income makes a lot of sense because bonds will perform better when the equity market declines and vice-versa.

TickerNameMarket CapPriceFees1Y ReturnDividend Yield
BNDVanguard Total Bond Market ETF$19,441,476,562.50$80.830.1-0.282.76
LQDiShares iBoxx $ Investment Grade Corporate Bond ETF$16,489,384,765.63$115.550.150.543.77
HYGiShares iBoxx $ High Yield Corporate Bond ETF$13,442,157,226.56$93.540.56.526.02
JNKSPDR Barclays High Yield Bond ETF$10,062,708,007.81$40.820.46.775.98
EMBiShares JP Morgan USD Emerging Markets Bond ETF$3,474,560,058.59$108.580.6-5.174.72
BONDPimco Total Return ETF$3,487,852,539.06$106.240.55-0.142.71
BWXSPDR Barclays International Treasury Bond ETF$2,038,258,056.64$58.080.5-0.761.72
PCYPowerShares Emerging Markets Sovereign Debt Portfolio$1,816,334,960.94$27.140.5-7.314.62
ELDWisdomTree Emerging Markets Local Debt Fund$1,007,847,045.90$44.600.55-13.63.94

Other Fixed Income: Less common types of fixed income products such as bank loans or mortgages can provide interesting levels of income and provide good value. Those are not possible to get without ETF’s though unless you’re in the 1%!

TickerNameMarket CapPriceFees1Y ReturnDividend Yield
BKLNPowerShares Senior Loan Portfolio$6,830,297,363.28$24.910.663.934.31
FTSLFirst Trust Senior Loan ETF$159,294,494.63$49.780.85N/A2.94
VMBSVanguard Mortgage-Backed Securities ETF$388,066,558.84$51.730.120.661.09

MLP’s:  I’ve written about MLP’s before and while they do provide terrific yield and a different kind of exposure, I’d hesitate to buy them directly because of all of the taxes issues that are involved. Paying an ETF is the only option for me on MLP’s

TickerNameMarket CapPriceFees1Y ReturnDividend Yield
AMLPAlerian MLP ETF$7,630,753,417.97$17.650.859.696.15
AMJJPMorgan Alerian MLP Index ETN$5,968,270,019.53$47.180.8513.864.64
MLPNCredit Suisse MLP Equal Weight Index ETN$702,647,827.15$31.800.8520.494.28
MLPIETRACS Alerian MLP Infrastructure Index ETN$1,687,535,034.18$39.840.8514.54.54

Preferred Shares: The preferred shares market is highly illiquid and makes it very difficult for small investors like you and I to determine which ones are the better values. I’d much prefer paying a small fee in order to get a better execution and more diversification on these preferred shares

TickerNameMarket CapPriceFees1Y ReturnDividend Yield
PFFiShares US Preferred Stock ETF$8,573,138,671.88$38.070.481.176.41
PGXPowerShares Preferred Portfolio$1,984,785,766.60$13.950.50.316.5
FPEFirst Trust Preferred Securities and Income ETF$56,359,252.93$18.450.85-3.554.88

Stocks & REIT’s To Be Considered For Such A Portfolio

I did a few filters when trying to find quality and sustainable high paying stocks. I started off by looking for stocks that

-have a dvd yield of 4.50% or more
-tried excluding companies that had a special ex-dvd that does not seem recurring
-removed stocks with a payout ratio over 80%
-removed stocks with a mkt cap under $500M
-removed stocks with a debt/mkt cap ratio over 1

This gave me approx 30 names which I could potentially use in my portfolio:

TickerNamePriceDividend YieldPayout Ratio
PRKPark National Corp75.454.9875.04
TICCTICC Capital Corp10.1411.4462.26
EDConsolidated Edison Inc53.564.7162.3
NENoble Corp plc30.764.8924.31
IEPIcahn Enterprises LP108.65994.610.82
RIGTransocean Ltd42.3555.2934.81
VZVerizon Communications Inc46.894.5251.73
GMLPGolar LNG Partners LP30.296.9157.03
ARCCAres Capital Corp18.0458.4274.28
TAT&T Inc32.385.6953.24
SIXSix Flags Entertainment Corp35.51015.2941.93
ESVEnsco PLC50.535.9328.61
MAINMain Street Capital Corp33.445.9349.02
ARLPAlliance Resource Partners LP80.85.9361.99
PDLIPDL BioPharma Inc8.3757.1739.6
SEPSpectra Energy Partners LP45.474.825.93
AHGPAlliance Holdings GP LP615.4379.22
HCLPHi-Crush Partners LP37.595.43N/A
PDHPetroLogistics LP11.7510.21N/A
PMPhilip Morris International Inc78.974.7667.71
CVICVR Energy Inc36.18.3N/A
SXCPSunCoke Energy Partners LP29.166.4462.27
OBOneBeacon Insurance Group Ltd14.765.6954.37
DKLDelek Logistics Partners LP33.474.92N/A
ORIOld Republic International Corp15.044.7941.39
NTINorthern Tier Energy LP24.386.7N/A
KKRKKR & Co LP24.547.855.68
EMESEmerge Energy Services LP46.1058.69N/A
NMFCNew Mountain Finance Corp14.679.2779.95
WPTWorld Point Terminals LP20.165.95N/A

And a few REIT’s:

TickerNamePriceDividend YieldPayout Ratio
NRZNew Residential Investment Corp6.111.48N/A
DLRDigital Realty Trust Inc52.495.95196.84
FURWinthrop Realty Trust11.165.82139.4
NHINational Health Investors Inc61.734.9998.56
EARNEllington Residential Mortgage REIT16.4512.16N/A
PMTPennyMac Mortgage Investment Trust23.5610.0270.67
CMOCapstead Mortgage Corp12.5659.88132.56
STWDStarwood Property Trust Inc24.047.65109.46
ACREAres Commercial Real Estate Corp13.37.522353.23
NCTNewcastle Investment Corp5.7057.0128.25
BXMTBlackstone Mortgage Trust Inc28.2356.380
SIRSelect Income REIT27.326.7354.76

My High Yield Portfolio

As I’ve mentioned, this is my first run at building a high yield sustainable portfolio so I’ll certainly make adjustments over time. Here are the asset allocations I was looking for:

International Stocks 15%
Fixed Income 20%
Other Fixed Income 5%
MLP’s: 5%
Preferred Shares: 5%
Domestic Stocks: 45%
REIT’s: 5%

This portfolio actually yields 5,09%! Not bad right?

TickerNamePriceDividend Yield
VZVerizon Communications Inc46.894.52
TAT&T Inc32.385.69
SIXSix Flags Entertainment Corp35.51015.29
ESVEnsco PLC50.535.93
MAINMain Street Capital Corp33.445.93
ARLPAlliance Resource Partners LP80.85.93
SEPSpectra Energy Partners LP45.474.8
PMPhilip Morris International Inc78.974.76
NHINational Health Investors Inc61.734.99
PMTPennyMac Mortgage Investment Trust23.5610.02
SIRSelect Income REIT27.326.73
PFFiShares US Preferred Stock ETF$38.076.41
AMJJPMorgan Alerian MLP Index ETN$47.184.64
BKLNPowerShares Senior Loan Portfolio$24.914.31
JNKSPDR Barclays High Yield Bond ETF$40.825.98
BONDPimco Total Return ETF$106.242.71
ELDWisdomTree Emerging Markets Local Debt Fund$44.603.94
IDViShares International Select Dividend ETF$37.364.55
DVYEiShares Emerging Markets Dividend ETF$45.754.89

I’d love to get your thoughts on the portfolio but also on the process of high yield portfolio construction

Buying In An Overvalued Real Estate Market?

By: ispeculatornew | Date posted: 12.17.2013 (3:00 am)

It’s not the first time that I hear about the Canadian housing market being overvalued. Deutsche Bank came up with a simple yet powerful way to determine if prices were overvalued or not. How?

They use 2 key metrics:

Home price/rent (vs historical average): In theory, the ratio between buying and renting price. Why? Because it does not make sense for prices to increase much more rapidly than rent, that has proven to be unsustainable.
Home price/income (vs historical average): If income is rising by X%, real estate prices should increase by more or less that % as well. If not, it would generally mean that the population is using more debt to afford the expense which is obviously not sustainable.

So the economists looked at metrics for the 2 by country and used the average between the 2. The result?

real

Canada which is very frequently in the discussions of the most overpriced real estate (with Australia) is on the very top of this list.

canada

That is more source of concern for me as I continue to look into buying real estate. Does this mean I should postpone my plans? It’s certainly tempting. I could even look into buying in a country where prices are too low. I doubt buying in Japan or Korea would make sense but seeing that US prices are below historical prices makes it tempting.

Would you still be willing to buy real estate in a market like Canada? Or you’d try to get into an undervalued market even though it would be more complex and costly to do?

MLP’s In A Dividend Portfolio? What Is Their Future?

By: ispeculatornew | Date posted: 11.27.2013 (3:00 am)
I’ve been working on a high dividend yield portfolio for some time now (it is coming, don’t lose hope!) and one of the recurring themes from the hundreds of investors who have been working on their own solution is the presence of MLP’s (master limited partnerships) in their portfolio. I did send out an email to newsletter subscribers with more info about MLP’s which you might want to check out:
Basically, it is a trending form of company that allows for small/zero corporate taxes to be charged as long as earnings are passed through to investors. The same type of capital structure named “income trusts” started gaining traction a few years ago in Canada. Over thew years, more and more companies started moving to that structure which was great for investors of course.

What Happened? BCE inc.

When BCE inc, one of the largest telecom corporations in Canada announced it would be converting to become an income trust, the Canadian Government felt compelled to act. It could not stand still while all corporations moved to a non-taxable corporate structure so it ended up basically eliminating the fiscal benefits of income trusts (not surprisingly, there are now very few income trusts left in Canada).

Will the Same Happen In The US?

It’s certainly possible but I wouldn’t call it likely. Corporate tax “avoidance” is not exactly a big problem when you look at big corporations such as Google, Facebook and others that barely pay any taxes at all. Assuming that it’s not, what are the consequences for investors such as you and I?

MLP’s Bring Tax Complexity

There are many differences between investing in an MLP and a typical dividend stock. Not only do taxes depend on the investor’s income and what type of account holds the assets but also where that investor is. Depending on the state where you live and where the MLP is located, the taxes will be treated differently. I’m not a fan of complex taxes. Why? Because as a small investor that does not have the time to study all of these rules, I can’t optimize those investments correctly.  That is the biggest reason why I personally try to invest in MLP’s through funds such as ETF’s. Yes, it can still fit into a dividend/passive income portfolio but is it pure dividend investing? No. So if MLP’s continue to grow in size and importance, I will end up having less pure dividend stocks.

Do you agree? Or Do You Hold MLP’s Directly?

Shorting stocks through options

By: ispeculatornew | Date posted: 11.13.2013 (5:00 am)

Through my long and short technology stocks, I very frequently end up shorting tech stocks. For various reasons, many investors cannot or prefer to not short the stocks. Why? There are several possible reasons:

Account Type Does Not Permit it: If you have a retirement account a cash account, you are likely unable to short stocks.

Avoiding Excessive Risk: If you have ever considered shorting stocks, you would probably know that the potential loss on such a trade is basically unlimited. In reality, no stock will go to infinity overnight but it still gives you a good idea that such a trade can end up going awfully wrong.

Expensive or Impossible Borrow: A reader had emailed me a few weeks ago saying that some of the stocks that I was shorting were basically impossible to borrow with his broker. In some cases, while the borrow is possible, the costs are so excessive that it’s not something you’d really consider doing.

What Can Be Done?

If someone is trying to do a trade such as Long Apple (AAPL) and short Microsoft (MSFT) but cannot or will not short Microsoft, one alternative would be to trade the options. There are two different bets that will give you a positive return if Microsoft does not increase as much.

Short Call: If you sell calls on Microsoft, you will end up making money if the stock price does not increase much. Here is the chart of profits and loss on selling calls:

payoff-short-call-option-microsoft

However, shorting a call will help on the borrowing side of the equation but not so much with the unlimited loss… depending on the reason why you’re looking to trade options, this might or might not work.

Long Put: If you buy a put option, you are basically buying the to sell the stock at some later date. The return chart is much more similar to shorting the stock as you can see here:

long-put

The main disadvantage here is that since you are buying the stock (Google) and the put option, this trade requires more capital. When you a do buy and sell, the trade does not require much if any capital at the start.

The Dangers

1-One of the dangers of using options instead of stocks is that options do not always react in the same way as stocks. They have a different “delta”. For different reasons, options will end up moving differently. The best way to ensure that the options does move in the same or very similar way is to trade options that have a delta of 1 or so.

What is an option that has a delta of 1?

An option that is well in the money which means that it is almost certain to be exercised at expiry will have a delta of nearly 1 which means that it will move like the underlying stock.

2-A second danger is buying illiquid options and get a poor execution price. The best way to avoid this is to only buy stocks that have a very tight bid-ask spread, ideally of $0.10 or less.

Have You Ever Tried It?

Have you ever shorted a stock through options instead of stocks?

Trading Or Investing?

By: ispeculatornew | Date posted: 10.14.2013 (3:00 am)

stockWhat’s the difference between a trader and an investor? I personally find the debate fascinating and it’s interesting because there is no “right” answer. I personally consider myself a bit of both but I wouldn’t mind being called one or the other. It’s not a big thing. I know of many individuals that get very annoyed when being called these names, especially those that consider themselves investors are end up being called traders.

What Is An Investor?

Here is how I view the difference. To me, an investor is someone who tries to establish the value or future value of an asset and trades accordingly. Investors generally have a longer term perspective. Traders on the other hand are generally very short sighted. They will trade on news, on stock movements, etc. Most traders will hold stocks for a days, a few hours and sometimes dramatically less (most HFT firms hold stocks for a few seconds only). Clearly, traders don’t care much about what something is worth. They care about direction and making a short term profit.

Which Is More Important, Traders Or Investors?

Recently, there’s been a lot of backlash against traders, especially HFT’s. One newsletter that I read, by Jeffrey Dow Jones recently did a very popular interview with an HFT trader which I recommend. I am generally a believer in what they do and think they bring more benefits than downsides to the markets. Are they perfect? No. But they are an important part of how markets currently work. On the other hand, it’s important for the well being of our economy to have capital allocated as efficiently as possible and from that perspective, longer term investors have a critical role. Yes, they need a liquid market where they can buy and sell (which traders facilitate) but in the end, the market’s role is longer term investing.

Which Am I?

I guess in some ways, I’m a chameleon. Most of my assets are invested for longer periods of time, such as my:

-ETF index funds
Ultimate Sustainable Dividend
Long term speculative tech stock picks 

But I also make shorter term picks that while based on valuations, are very short term. It’s not exactly HFT trading but I would still consider it to be much closer to trading than everything else that I do.

I do think most of you are investors but I’d love to hear your thoughts. What’s the difference between an investor and a trader and which one are you?

South Korea In The Middle Of A War?

By: ispeculatornew | Date posted: 10.08.2013 (3:00 am)

ks-lgflagOne of the best aspects of trading ETF’s is how simple things become. Want to buy a bond index? You don’t need to find a dozen bonds that have a strong correlation with the index. Instead, you can simply look for an ETF that tracks the index.

Sometimes though, knowing what index an ETF tracks is not enough. One of the bigger and more known ETF’s is the iShares Emerging Markets ETF (EEM) which tracks the MSCI Emerging Markets Index. Its biggest competitor had been Vanguard’s own Emerging markets ETF, VWO. Then, a few months ago, Vanguard announced it would be switching the index that its ETF was tracking. Instead of tracking the MSCI Emerging Markets index, it would switch to the comparable index offered by FTSE (a MSCI competitor). On the surface, this did not mean much. VWO’s name would change from:

Vanguard MSCI Emerging Markets

To:

Vanguard FTSE Emerging Markets

The main assumption was that it would be cheaper for Vanguard which could then reduce its annual fees. One big difference that attracted some attention at the time was South Korea. Specifically, MSCI considers it an emerging economy while FTSE does not. That is a huge difference. South Korea is over 15% of the MSCI index and is missing from the FTSE one which has been a big problem for Vanguard in the past few months as South Korea continues to do well. That has translated into underperformance by the Vanguard ETF and it very well could continue to be the case.

vwoeem

EEM, which had lost ground in terms of assets under management because of its higher fees has now regained its momentum as more and more investors try to move to what they perceive as the “stronger ETF”. This is a great example where it’s not only about fees but also about understanding the differences between 2 similar indexes.

Is South Korea An Emerging Or Developed Economy?

It’s a very debatable point and you can read more about it here:

http://qz.com/124190/investors-fleeing-emerging-markets-are-still-showing-the-love-to-south-korea/

If you’d like to invest directly into South Korea, you can trade the iShares South Korea Capped ETF directly here:

EWY

What To Do With Facebook ($FB) Now…. ?

By: ispeculatornew | Date posted: 09.30.2013 (3:00 am)

homerI’m hoping that this also happens to you once in a while. You lie down to relax but then two voices start arguing. Sometimes about useless stuff but other times about trades or positions. This isn’t just me right? It seems like at least Homer Simpson has had the same experience although I’m not sure that makes me feel any better.  Anyway, moving on… not sure I want (or should) spend more time on this.

So what am I struggling with? What in the world should I do with Facebook (FB)?

If you remember, I was bullish on Facebook from the very start. Even at its IPO price, I thought it was a great buy. I try to stay away from IPO’sin the first few weeks which I did and helped me buy the stock well below that price (at 19.99 to be specific). I thought it was a steal. I bought the trade in what I classify as a long term speculative pick. As you can guess from the name, I usually hang on to such positions for some time. I don’t really have an exit point because it’s so far out in time (which you could argue is a mistake). Those stock picks have done well over time but this one is doing exceptional (by my standards at least) and is now over 150% in a year or so. As I’ve said before, these picks are bigger bets for me so I’m very happy with the return. I’m obviously a big believer and recently told my tech newsletter subscribers that I was closer to buying than selling my position. The issue? The stock keeps going up:

FB

Why is the stock rising so fast? Because it’s no longer a joke. It’s seen as a must hold, a stock that belongs to te Nasdaq-100 Index, a stock that has beaten earnings and for which broker after broker is now issuing a “buy” recommendation with target prices going higher and higher (I’ve seen targets in the 70s already)… It’s a “hot” stock to hold.  That seems to me like exactly the time you’d want to get out right? When everyone is buying, the right move is to get out?

Sky Is The Limit

My big issue is that I think Facebook can do so much more with its holdings. It has not even scratched the possibilities and while advertising (and mobile advertising) are being seen as successes, I continue to think that Facebook will get involved into much higher added value activities. So this seems very early to sell.

Take Your Gains Or Hope For The Next Apple/Microsoft?

One the one hand, having too much ego interfer with my trading is not a good thing. But I continue to believe that Facebook has just scratched the surface. I can’t really say I’m looking into buying more at these prices but it does not feel right to sell either. It might not be the next Apple or the next Microsoft that goes 10-20x higher (especially given where it started) but I’d feel a lot worse regretting having sold it off early than taking the risk of seeing Facebook become what it should; the next internet leader.

Disclaimer: Long Facebook (FB), Apple (AAPL), Microsoft (MSFT)