Archive for January, 2007

Buy-Write Strategy Increases Risk-Adjusted Performance

Wednesday, January 31st, 2007

Buy-write describes a hedging strategy in which a security is simultaneously bought and call options are written for the same security. Options are considered to be extremely risky, and used with caution and professional advice.
A recent study at the Center for International Securities and Derivatives Markets at the University of Massachusetts’ Isenberg School of Management determined that a buy-write strategy consistently improved risk-adjusted performance over a ten-year period (Jan. 18, 1996 to Nov. 16, 2006).

The study compared the Russell 2000 Index with one-month on-the-money buy-write strategy as well as a 2% out-of-the-money strategy and a 2% in-the money strategy.

The index overall performed better than the buy-write strategies over the ten-year period, returning 10.67% annualized, while the buy-write strategies performed similarly on a risk-adjusted basis, particularly the on-the money strategy, ranging from 9.21% (ATM) to 10.60% annualized (OTM).

During the unfavorable market conditions (January 1996-Febryary 2003), however, the buy-write strategies handily outperformed the index.

Significantly, the buy-write strategy lowered volatility enough to show that the strategy can outperform the index by neutralizing the effects of market fluctuations, while not sacrificing the gains of an up market.

The study does, however note that returns for the buy-write strategy are less normalized than those of the index, and, therefore, risk measures other than volatility may be more appropriate. Further, the study suggests that a more active approach, based on valuations and call selection, may significantly boost returns, both absolute and risk-adjusted.

The complete study can be found at the center for Institutional investors at the Options Industry Council.

Oil Mounts a Comeback; Fed Forward

Tuesday, January 30th, 2007

Crude oil rose over 5% and Natural Gas was up as high as 12% on news that the winter in the United States is about to get colder, and talk that Saudi Arabia may curb oil production. It is likely that this surge is not over, and many economists feel it may develop into a long-term trend toward $60-plus per barrel, considering not only consumer demand during the summer, but also investor demand during the hurricane season.

The Federal Reserve began its policy meeting today and is expected to keep interest rates stable. Numerous statements have indicated that core inflation is at an acceptable level and a recession is not likely. Fed officials have recently stated that rates are “well-positioned” for any unexpected events in the near future.

Census Bureau: Vacant Homes at 2.1 Million

Monday, January 29th, 2007

The Census Bureau released a report today that 2.1 million homes were vacant at the end of 2006, representing 2.7% of all owned units. That is the highest vacancy rate in over 50 years.

2006 will not be remembered the year of the bust, as the median home price came in well above $150,000 for the first time ever.

Rental prices also had a record year, topping $700 per month on average across the United States for the first time ever in the fourth quarter.

The report is further evidence that the housing bubble has not yet reached its trough, as supply is clearly outstripping demand. It is highly likely that this kind of vacancy rate will lead to fewer housing starts and lower bottom lines for homebuilders nationwide, as a buyers market opens regionally.

Details of the report can be found at census.gov.

Start Investing With Just $100

Sunday, January 28th, 2007

While there really is no comparison to a professional investment adviser to help make investing decisions, for most people it’s just too expensive to get that advice. Further, most advice centers on investing with $1,000 or $10,000, and most just don’t have that to risk in the stock market.

We’re going to tell you how to do it with as little as $100.

Ultimately, whether you have $100 or $1,000,000, the story is the same: create a diverse portfolio of stocks and bonds that will withstand stock market dips while increasing in value over the long term.

Here are three simple steps to achieve this with $100:

  1. Open a brokerage account with a discount broker that has no investment minimums and low transaction fees. We recommend Zecco, which offers 40 free trades per month and no hidden fees or account minimums.
  2. Fund the account. This is where you send money to the account by check, wire transfer, or automated clearing house (ACH). ACH is preferred because it is faster than a check and wire transfers are relatively expensive.
  3. Make your first investment.

You’re going to want, as mentioned earlier, a widely diverse portfolio that covers all sectors and countries. You can’t exactly do that with $100 if you’re going to invest in stocks. Also, corporate bonds and mutual funds are out, since they require more capital than $100.

ETFs (Exchange Traded Funds), however, are like mutual funds that trade on the stock market, and you can purchase partial shares. Many ETFs track widely diverse indices, such as the S&P 500 or the MSCI-EAFE global index, or the Lehman Brother Aggregate Bond Index.

If you were to invest $100 in a different ETF every month for three months, you could have a well-diversified portfolio of stocks and bonds that would withstand most market volatility while steadily growing as the market does over time.

Of course, you would want to add to your investment on a regular basis, and I would invest no less than $100 at a time to keep transaction fees from limiting your growth. And when your account reaches $10,000 you’ll want to seek professional advice or at least move your funds over to traditional mutual funds, which typically have lower cost structures and are easier to manage.

But this is a pretty simple, inexpensive way to start investing.

The Week Ahead

Saturday, January 27th, 2007

Tuesday, Proctor and Gamble (PG) is expected to report a  15% increase in profits.
Wednesday, Google (GOOG) is expected to post an 88% increase in quarterly revenues.

Thursday, Exxon Mobil (XOM)  is expected to report decreased earnings on lower oil prices and increased exploration costs.

Friday, Chevron (CVX) is also expected to post decreased earnings as the sector braces itself for volatile prices.

Also on Friday, the Labor Department will report its December nonfarm payrolls. The report is expected to be a key indicator of the effect the weakening housing market will have on the larger economy, since an excess decrease in payrolls is likely to be due to decreased home building.

Wednesday, the Fed will end its policy meeting, and most economists are expecting rates to remain unchanged at 5.25%. Though the economy seems to be growing at an acceptable rate, inflation pressures are likely to be a major discussion, and possibly cause for a rate increase.

Inflation, Interest Rates and Oil Prices Weigh Down Stocks

Friday, January 26th, 2007

Firday’s markets ended mixed, with heavy downward pressure over macroeconomic trends,
such as the housing market and the spectre of oil at $70/barrel. The Nasdaq ended up 0.1% while the S&P 500 and the Dow dropped by 0.1%.
During trading, 10-year US Treasury bond yields rose above 4.9% for the first time since mid-August. At the close of trading the 10-year bonds were at 98 1/32, with a yield of 4.879%, up from yesterday’s close at 4.867%.

Volatility in the bond market has led to uncertainty on the Street,  particularly financials, consumer goods and housing stocks, which are heavily affected by rate fluctuations.

Housing, Bond Rates Attack the Stock Market

Thursday, January 25th, 2007

The National Association of Realtors announced a sharp drop in existing home sales in December 2006. According to the report, existing home sales fell by over eight percent in 2006. Also, a number of homebuilders released sobering forecasts for 2007.

Heavy selling in the bond market led to the highest yields in five months. The 10-year Treasury finished the day at 98 3/32, with its yield at a lofty 4.867%.

Turbulence in the housing and bond markets seeped into the broader market, sending the Dow down 1%, while the S&P 500 and the Nasdaq slipped by 1.1% and 1.3%, respectively.

The day’s winners were eBay and Nokia, up 8.2% and 4.5%, respectively. eBay posted sales growth of 29% while Nokia announced a 19% increase in profits.

Are OTC Stocks Regulated By the SEC?

Thursday, January 25th, 2007

In a word, no.

The OTCBB is an unregulated system by which broker/dealers and market makers can quote current prices for securities (ticker suffix .ob) which are not listed on one of the major exchanges.

The National Association of Securities Dealers oversees the OTCBB, but it is not a part of the Nasdaq exchange, as penny stock scams sometimes imply.

The OTCBB does require its listed companies to file updated financial reports with the SEC. Many people confuse this with SEC regulation: they figure that since they have to file with the SEC, then they must be regulated. But simply filing something with the SEC does not mean the SEC will do anything with it. Rather, it is the OTCBB itself that requires this of its companies. Any OTCBB traded company that fails to comply with this will be de-listed from the service, and will then likely trade on another exchange, such as the pink sheets.
Companies listed on the pink sheets (ticker suffix .pk) are not required to file current reports, so finding reliable information on them is very difficult.

While it is true that some of the best performing stocks are OTC and pink sheets, they are very risky, since it is so difficult to adequately research their financial health.

YHOO up 7%: Will Yahoo Hold its Gains?

Wednesday, January 24th, 2007

Shares of Yahoo stock jumped 7.57% on Wednesday to close at $29.00 on news that Panama, its new advertising filter, will be rolling out February 5.search.jpg

The news is good for Y!, in that it will increase the number of ad-clicks per search (therefore increasing revenue), but it seems a bit early to be declaring victory for Yahoo.

Google, by all accounts is the market leader in search, reportedly claiming nearly 50% of all online searches (source: Comscore). While an increase in Yahoo’s bottom line would help, it’s not likely to change the dynamics of search for the next year. Indeed, it will likely take six to nine months for advertisers to get used to and adequately optimize their advertisements for the new system.
Over that time, the search wars are likely to heat up, as Microsoft increases its efforts and Wikipedia founders launch and develop Wikiseek.

Indeed, Panama will be good news for Yahoo shareholders. But 7% in one day is a bit much for number two. While it may rise again tomorrow due to momentum trading, I would expect it to lower before the end of the week, giving back about half of today’s gains.

Markets, Oil Move Green at Close

Tuesday, January 23rd, 2007

Better-than-expected results from Texas Instruments helped boot techs for an end of day rally Tuesday, with investors showing signs of easing tensions regarding the sector’s recent performance.

United Technologies performed well, as did Boeing and Caterpillar, which both sold off yesterday, showing a strong support for Blue Chips.