Simon Monger

Simon Monger
Contributor since: 2009
The point of the article was to say that it may be worth it if you can afford it. Generalizing a buy or sell in an all-you-can-eat fashion is unwise, in my opinion. I present the facts and let people decide.
If you're young, have a long time horizon, and can afford losses, then yes, these may be cheap opportunities. If you're old and about to retire, you probably shouldn't take the risk. In my personal opinion.
That's true. Since the Japanese crisis, the tide seems to have turned a bit and the sector was punished. But many emerging markets are going ahead with their plans to introduce nuclear energy, which could make up for the lost demand in some countries.
Mergers & Acquisitions
These are very good points. I was trying to focus more on the recent rally drawing attention to the sector, but the major players are down pretty significantly year-to-date. Whether the rebound is because of that drop, real pent up demand, or simply the M&A (some a combination of all three) will determine how long it lasts and remains to be seen.
You could definitely go with a lower strike price and realize a higher premium. That decision depends on where you want your breakeven point to stand. If you have a $95 strike price, then you'll never make anything above $95 on the position, which could mean a significant loss, if you bought it at $150 or something and have confidence that it will eventually return.
Pfizer may make up a large part of its revenues, but it's also a vote of confidence in its software. If a huge phama company benefits from it, surely the same software can be used by other large companies. One more large contract and Pfizer is only 5% or maybe less.
Yes, this is a lot of margin for some individual investors given the stock's price. Nevertheless, for institutional investors and/or individual investors that have acquired a large dollar value by holding it over time, it is a strategy that might make sense. Moreover, the real risk is lower given the fact that its half a covered call and half covered by the other set of options.
And, as I mentioned in the article, this is for people who believe shares will come back. So, buying puts without any equity position is not really an option for that thesis.
Commissions vary by broker and depend on things like how many contracts are written. The point I was trying to make is that you can make money by writing out-of-the-money covered calls on blue chip stocks. It's not going to be a ton of money (since they aren't volatile by definition and that lowers the premiums), but it can amount to something in some cases.
The only time owning assets priced in dollars would matter is (1) when you sell the position and hold cash (2) or if the currency was ever abandoned in a Zimbabwe-like scenario.
Assuming there is no apocalypse and you simply hold the positions, you make more dollars by holding commodities, shorting treasuries or holding TIPS, that offsets the decline in the dollar's value.
You can even think of it like a pairs trade: You are shorting the dollar's value by loaning it (to buy something else you'll eventually sell to get them back) and going long commodities.
I have also been looking at CSR and other Chinese names that appear to be quite cheap. The problem is that their multiples simply do not want to expand, despite the growth. With CSR, there is also the concern about the commercial real estate slowdown in China, which has a lot left to deflate in my opinion. Still undervalued though. It will be very interesting to see where multiples are at in 5-10 years... if they reach U.S. levels, these stocks could soar.
Interesting commentary and chart.
You're right that euro stocks are rising due to ECB actions and the fact that a $750 billion bailout is set aside to ensure no major problems in the near-term. Meanwhile, a cheaper euro helps products from their countries become more competitive globally.
The euro, however, is likely falling due to structural uncertainty surrounding the euro zone and, perhaps more importantly, the prospect of inflation following a likely increase in spending. Unlike the dollar, the euro isn't a flight-to-safety and therefore it will not be propped up despite a spending package (like what happened in the states), in my opinion.
The dollar is the reserve currency and not gold for one simple reason: Gold and other currencies aren't large enough anymore. The euro is the only viable alternative, but a strong euro isn't exactly in the best interest of exporting nations like Germany.
And there is not likely to be a run on the dollar anytime soon precisely because it is a reserve currency.
I agree, the euro as a concept was never viable in my opinion. Without political unity (like the states in the U.S.) it is impossible to expect northern countries like Germany to continue indefinitely supporting southern economies like Greece. The political situation in Germany since the bailout has already confirmed this... Only a matter of time.
There are a few other important considerations as well.
Most notably, a lot of traders would prefer to be short European sovereign debt or the euro itself in today's environment, but that is impossible because of the potential for ECB interventions and quantitative easing.
Other traders would be long other commodities as an inflation hedge, but that is difficult because the demand picture is drying up. Mostly, because China is experiencing problems and will be able to carry as much weight as many were hoping.
I wrote more about these reasons here:
Jay- Thank you for the insights into FRPT and the differences in delivery schedule. I saw some mention of that in the Q, but didn't read into it enough to realize how substantially it changed and why the estimates were so far off.
bsharvy/Jay - Yes, I was referring moreso to book value when I calculate the net reproduction cost. Also factored in are some subjective calculations, such as brand value and such. I would take a screenshot of my spreadsheet for these articles, but it is too wide and would require a lot of editing...
I have been looking at EUO calls as a potential play on this trend. Parity by November 2010 would pay out more than 200% gain at today's price. But a bit of a gamble with the ECB - who knows if they'd consider interventions or other means to keep it propped up like some other countries (read: BOJ).
Revisited- just for the guy who said these calls were "retarded".
AMZN +64%
VMW + 81%
V +20%
S&P 500 +16%
In 2009, Spain's debt-to-GDP was close to 50% compared to Greece's 108%, according to the CIA's data. Of course, the possibility of default is therefore sharply lower. My point in mentioning Spain here was moreso to demonstrate the size of the bailout package.
However, my main point in this article and others is to highlight the fact that the euro may not be sustainable in general. This is the first major recession that the euro has faced since its inception in 1999 and the inability for individual countries - which vary widely in terms of economic success - to control their monetary policy is causing major riffs.
Once fully out of this recession, it is likely that the TGT/WMT pair trade will reverse, but until then Wal-Mart will likely remain the better trade. However, if you're playing the intrinsic value, I've looked at a long TGT short XRT (retail ETF) trade that has performed very well recently as Target has run-up, while taking out the overall economic risk associated with retail declines.
I would add that some of the volatility is due to the supply of ships versus the demand for them (ie. supply/demand of commodities). I read in a Reuters article recently (sorry, I can't find it at the moment) that a bunch of new builds amounting to around 30-40% of the existing fleet will go online in 2010. Despite anything but a huge jump in demand, this will keep prices under pressure. So, as an economic indicator, it is definitely questionable, I agree.
I'm surprised that nobody is using TIPS as a hedge much instead of gold - at least TIPS are undervalued and less volatile. Gold has had a substantial run-up and remains riskier, IMO.
Also, Einhorn's book about Allied Capital is a great read for anyone interested in checking out exactly how corrupt the system is and how far this great hedge fund goes in uncovering fraud (or border-line fraud at least). I'd definitely recommend it.