With such a global sea change, it's difficult to see how China can persist with policies of censorship and repression of human rights. If the present is any guide to the future, then soon these policies will backfire on China's rulers.
The Euro. One of the anomalies of the 2011 FX market was the strength of the Euro. With the turmoil over Greece, Portugal, Spain, and even Italy, the Euro should have crashed. But to me, the market is saying that there will inevitably be an exit by Greece, which may snowball into exits by Portugal, Ireland, and maybe Spain. In the end, that would leave a core of stronger economies in the Euro, which is a bullish scenario. So for now, think that bad news for Greece is good news for the Euro.
Outlook for Stocks. The recent rally in stocks is good news, and it makes sense for the reasons I stated in my last blog. In sum, there's good value in many stocks right now.
I suspect that the cause of the January rally is that investors who have cash to put to work are buying stocks. I also suspect that they are almost finished. Notice in the above chart that the spx is meeting resistance at 1350. This indicates that investors are not yet brave enough to push the market into new territory.
I don't like to make predictions, but my hunch is that after January stocks will settle into a range. Looking into 2012, there's too much uncertainty for stocks to begin a new bull market.
The uncertainty is as we know it: the Euro crisis, which will drag on for at least the next quarter or two, and then the forthcoming US election. Investors are generally cautious in the run-up to an election, and unless one candidate is seen as a shoe-in, then expect this market to go sideways for most of 2012.
The Trade. So if stocks become range-bound but still worth owning, then the trade of choice is the options covered write.
With this trade you own or wish to buy a stock for the long term. Currently, however, the stock is not making headway. So you write, or sell, a near term call (say, 60-day) that is 10%-20% out-of -the-money. You write calls only on the number of shares that you own. At the CBOE, for example, 100 shares cover one call.
Your stock ranges until the call expires, at which time you collect the option's premium. If your stock declines, then you collect your premium as a cushion. If your stock makes an unexpected rally then your profit is capped at 10%, but then you have a nice little earner.
This trade becomes even more profitable when the stock is paying a favorable dividend. I may be sticking my neck out, but once stocks level off, the covered write could be the trade of the year.
I'll have more to say about the covered write during the coming weeks, and I'm preparing a special slide lecture on it, which will be available for a reasonable fee. In the meantime you can get a head start by reading pp151-157 of my book, The FT Guide to Options. If you then have any questions, send me an email at lenny@lennyjordan.com
But as always, before you risk your money, please consult your financial advisor.
The Wildcard. Of course, if we go to war with Iran, then all bets are off, but then the covered write would be an even better play for stocks that decline to improved value levels while maintaining their dividends.
In Other News
2011 Fund Award. The award for the Most Profitable and Ethical Fund of 2011 goes to ... (drum roll) ... the Wellcome Trust. This UK charity earned 2% while the markets fell 3%. So with £13.9bn under management (that's thirteen point nine billion pounds) they earned appx £270m. During their last fiscal year they gave £602m to charity. (City A.M. 22Dec11). And their fund manager is ... (drum roll) ... themselves!
Serious Transparency. This past week, in an unprecedented change of policy for a central bank, the FOMC published the economic forecasts upon which it makes its rate-setting decisions. The FOMC stated that its economic outlook through 2014 called for its base rate, now effectively zero, to remain unchanged until that time.
Mortgages. So whatever you do, don't take out a UK fixed rate mortgage, says the Evening Standard's Nick Goodway (26Jan12). I agree. UK variable rates are currently at a substantial discount to fixed. With Mervyn King saying that UK inflation is coming down, and that growth will remain flat for the foreseeable future, and with the Fed's rate-setting power on hold, the best advice is 'don't fix it'.
'Til next time,
LJ
