A REALLY, REALLY Terrible Morning

The red ink is stunning, almost breathtaking.

As of 9:05 A.M.(Thanks Marketwatch):

MONDAY MARKETS BY THE NUMBER

Pre-market indications: • Dow industrials: -353 • S&P: -46.2 • Nasdaq: -52

• Crude oil: -$5.15 • Gold: +$14.50 • Dollar vs. yen, -2.4% • Euro vs. dollar: -0.4%

The destruction of paper wealth this morning is incredible. The indexes are off 3%. Oil is down 5%, the first business day after a major hurricane continues to shut down 20% of the nation's production and even more of our refining output. The Yen has spiked due to "safe-haven" buying.

At this point, it seems like we're all in this together. Wall Street leaders put in a 40-hour weekend trying to open their doors this morning. Lehman Brothers has filed for a form of bankruptcy. Merrill Lynch has agreed to be consumed by Bank of America for $29/share; the street doesn't believe it, based on the MER quote of $22 that I'm getting right now.

Ten banks set up a $70 billion fund that they can draw from during times of stress. Some of those banks will be using it this morning.

"Big" companies have fallen. Bigger companies have lost almost everything; AIG's market cap is $20 billion this morning, compared to nearly $200 billion less than one year ago. LEH's $200 million morning market cap is laughable. (I have to believe that there's more value in the company than that, but I chose to buy AIG this morning instead of LEH.)

I'll drown in the sea of red ink this morning along with most investors. My FSLR short and DUG shares will hedge losses, but not offset them. As I mentioned, I bought a little AIG pre-market at $7.50 and TTWO at $15.50 (as they are reeling from ERTS' walkaway, not this general weakness).

Hopefully the VIX will spike, and at the very least, this trauma will create a bottom. With quotes for nearly every company I can think of down 5% before the bell, maybe this is capitulation. Then again, this is probably the third or fourth time that I've hoped for a bottom.

My Economic Stimulus Plan

Later today, President Bush is supposed to discuss his plan to stimulate our "weakening economy."

His plan is likely to give money back to individual taxpayers and ease business liabilities, stimulating both consumers and industry. Bush proposed rebates of up to $800 for individuals or $1600 for families, while lawmakers wanted to lessen that amount and limit who receives it (Yahoo! Finance article).

I think that this plan is stupid.

Maybe it will help the economy a little bit if each family of four goes out and purchases four new iPhones. However, I think that a simple injection of money into the economy through intending to increase consumer spending is short-sided and futile.

Instead, I believe that the government, if they are going to aid anyone, should look at the corporations.

Over the past days, weeks, and months, foreign sovereign funds have injected billions of dollar into US corporations. Most of the major financial companies have received large investments from outside sources. Japan's major investment banks are reportedly pooling billions of dollars for investment in a struggling Wall Street counterpart.

I'm not an isolationist, but why let wealth leave our country when we could easily keep it here?

Instead of dishing out money for people to buy new purses, the government should focus on preserving stock market capital, and thus, the value of millions of individual Americans' investments.

If the government doesn't want to directly purchase equity or bonds like foreign investors have been doing, there are much easier solutions; provide long-term, low-interest loans or simply open the discount window, repercussion-free, at a rock bottom interest rate (say, 2%). However, as long as qualified financial analysts looked it over beforehand, putting $20 billion of Social Security money into Wall Street could end up being an excellent long-term investment.

If the government is still interested in helping individuals, they should help financially-responsible people who were romanced into adjustable-rate mortgages. I'm sorry, if you bought a $500,000 house on $30,000 of annual income, I don't think that you deserve to keep it. However, for someone with a steady job who just can't make the adjusted-up payments, the government could step in to help those individuals.

First, the government could work through the mortgage broker to negotiate a new rate that the borrower can pay and will still provide profit for the lender. That way, everyone wins; shareholders of the big banks (BAC, who will soon own Countrywide, etc) won't unjustly miss out on profit that was already accounted for, while individuals will face a more reasonable repayment rate.

My last article discussed how the US economy is already contracting; if it's not, it's certainly slowing down. Discussing ways to improve economic conditions is the right thing to do, but simply handing consumers a check isn't.

Help out the people that truly need help - from Joe Dirt's adjustable mortgage to Merrill's write downs, there's better ways to fix the economy than to hand me $800.




"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Cover your Calls and Sleep Well.

Trying to make money in this current market is a daunting, confusing task. The S&P 500, the benchmark index representing a broad scope of the market, is down over 10% since October and over 7% since the last two weeks of December.

Are we bottoming? Transitioning to a bear market? Is this a hiccup in the 5-year bull run? I surely don't know.

But I can recommend one strategy that can increase gains, lower cost bases, and minimize losses in a volatile, unpredictable market; write covered calls.

In this market, I like to use it to enter risky positions, in essence, at a lower entry-point. Here's an example of how to do that.

A year a go, Merrill Lynch (MER) was trading at $100; today it sits at $56. You believe that Merrill is a great company, and that it'll eventually get its act together. However, due to write-downs, the continuing housing crisis, and the possibility (or probability) of recession, you don't know if this is the bottom. But you would rather enter now than miss any upside.

A share of stock can be bought for $56. You go ahead and buy a lot of 100 shares for $5600. (We're excluding commission for this exercise; if you trade at a discount broker like Tradeking, commission is negligible anyway).

Cost= $5600

Right now, a contract of January 2009 calls at the $65 strike price is selling for $5. Once you own 100 shares of stock, you can write one contract of those calls that are "covered" by your shares (hence the term "covered calls").

If you go ahead and do that, you'll take in $500 right away. You can look at this money many ways; you can think the trade like you bought the stock for $51/share, or right now, your investment automatically made you 10%.

Here's the great thing about a contract like that; it's a win, win, lose-less situation.

• Win: Say that the economic clouds blow over, and Merrill recovers to $75 next year. Your options will be called away, and your stock will be sold for $65/share, not $75/share. However, you still made a 30% return (20% stock move plus initial $500 credit for calls), only missing out on another 5% of upside.
• Win: Merrill is approximately flat in 12 months. With the stock at $57, your gains would have been negligable just holding the stock, but by selling calls, you made a handsome 10% as the stock price remained stagnant.
• Lose, but less: OK, this isn't the bottom. Merrill is $44 next January. But because you sold calls, taking in $500, your losses were less extreme than if you hadn't done so.

As you can see, the only bad thing about covered calls is that it can limit upside potential. However, as long as you have extra cash (or margin in your account), you can simply buy more shares if you like the company and your shares are going to get called away.

The amount of money you can take in depends on expiration and strike price. Sticking with this MER example, if you think that performance will remain poor, you could write Jan 2010s @ $65 strike and take in $8.30/contract, or take in the same $5/contract for the $75 strike price.

You can, of course, write covered calls on positions you already own, or as I displayed, they can be used to open new positions, too. Since the only shortcoming is the limitation of upside potential, it's a great time to write calls now as the market looks like it may move sideways, if not worse, in the near future.






I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.