Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Monday, November 17, 2008

Monday Morning

Add to Technorati Favorites

Last week, the markets continued its volatile decline.  The DJIA and the S&P 500 indices tested their October 10 lows, Thursday, but rebounded, to close up 552.59 and 58.99, respectively, for the day.  For the week, however,  they were both down following an about face by Treasury Secretary Hank Paulsen on buying toxic mortgages from troubled banks; deteriorating economic and housing data; and the impending showdown between congress and the auto industry.  At stake, another taxpayer bailout for the challenged carmakers versus bankruptcy for General Motors and the loss, of perhaps, millions of auto and auto-related jobs.

For income investors, fear is currently keeping treasury yields low prices high.  The public is piling into municipal bonds as the last safe haven for cash, too.  In 2009, headwinds will appear that will disturb all fixed income markets.  The US, next year, will issue two trillion dollars in new treasury obligations.  Markets will not be able to absorb this much debt without raising yields.  The Chinese domestic stimulus package of 500 billion dollars will inhibit one of our largest buyers of treasuries.  The collapse in oil prices will take petrodollars away from Middle Eastern oil producing countries that deposit those dollars into US banks and purchased treasuries.  At some point, our issuance of debt will also weaken the dollar.

I wish that there were more positive news items to report.

This morning in Barron’s, Jacqueline Doherty wrote a story on which defensive stocks to own in a severe recession.  Colgate Palmolive (CL), Clorox (CLX), Procter & Gamble (PG), and Kimberly-Clark (KMB), sell products people use in good times and bad.  I know stock investors are salivating current prices and yields, but I believe the stocks will go much lower over the next six months.  Still, we can improve on her strategy by using long-term options (LEAPS).  Look at the chart below:

Stocks versus LEAPS

Stocks

Friday Closing Price

500 Shares

LEAP Call

Jan. 2010

Strike Price

Friday Closing Ask Price

5 Contacts

Difference

 

 

 

 

 

 

 

Colgate Palmolive

62.06

$31,030

WTPAM - 65

8.80

$4,400

 

Clorox

59.30

$29,650

WUTAL - 60

10.00

$5,000

 

Procter & Gamble

63.11

$31,555

WPGAM - 65

8.70

$4,350

 

Kimberly-Clark

57.37

$28,685

WKLAL- 60

7.10

$3,550

 

Total Cost

 

$120,920

 

 

$17,300

$103,620

 

By using LEAPS, you are risking $17,300 to control two thousand shares of high quality stocks until January 2010.  In addition, the difference of $103,620 is available to invest in deeply discounted closed-end equity income funds such as Nuveen’s non-leveraged JPZ, JSN, JLA, or JPG, yielding 13.84%, 15.56%, 16.07%, and 14.01%, respectively, as of Friday’s price.

The Dow futures are lower this morning, and its Monday.  Buckle up; this morning could be a bumpy ride in the markets.

1 comment:

Mark said...

LEAPS appear to be a smart play in this market. The market will probably remain volatile over the near term.