Hi. My name is L S Fernando. I just published my first monthly stock newsletter. I also intend to write a newsletter on stock options in the near future. At this time, my focus is on establishing a following as well as being of assistance to others. However in the future, I might decide to charge a fee for my newsletter(s). I am writing this blog to give a brief history of my thoughts on the market and with time readers would be able to compare my writings to what actually took place in the market. If you are interested in subscribing to my newsletter (it is free at this time-as of 4/13/14), please send me an email to prosperitystocks@yahoo.com. I am not a certified financial advisor (I am issuing newsletters and other kinds of publications based on my experience); after reading my blogs, newsletters and other publications, consult your advisors and make a determination on how to make your investments or trades. Despite my recommendations, you must take responsibility for your actions. You must invest or trade with money that you will not need for your daily needs for the next 2 years. Wall Street is not a casino. Whether you are new to the market or whether you are an experienced investor or trader, rest assured that you will be making mistakes and losing money in the future. Every mistake, every loss is a valuable lesson. Make sure you learn the right lesson and use it to your advantage in the future. I heard about a person who lost 80% of his 401K funds during the ‘crash’ of 2008/2009. He lost faith in the market so he withdrew the other 20% to go to Vegas and blow it in the casino. That is the wrong lesson! Most people get burnt so bad they do not return to the market for many years; and they return when the market is near another top. As it happened in 1987 (which I remember well), a few months prior to 2010, the market started climbing again. On 7/10/09, the ETF that tracks the Dow Jones (DIA) was at $81.44. On 4/2/14, DIA closed at $165.37. On the other hand if you purchased Disney (DIS) on 7/10/09, you would have tripled your money by now. If you are going to invest or trade for the first time, I hope you will make a lot of mistakes during the first year. Never be fully invested and never be completely out of the market. More than anything, it is mass psychology that drives the market up and down. If you can avoid the herd mentality and keep emotions in check and act with a balanced state of mind, you will do well in the market. On the other hand, if you are at the mercy of your emotions, then stay away from the market. Even if you lose all your money, if you learn how to have a balance between emotions and money, you will be laying the foundation to build a great future! Everyone should take the time to study how investments work and no one should completely trust another to take care of his or her finances. I suggest everyone read “one up on wall street” by Peter Lynch (one of Wall Street’s greatest). The book is about $10. If others criticize your actions, know (the deep inner knowing that we call intuition) what to accept as a lesson and what to reject without letting that be a detriment to your self-confidence. Don’t let anyone destroy your self-confidence. Now for my ‘expertise’ Over the last 2 days (4/10/14 and 4/11/14) the Dow Jones 30 Index dropped 700 points but during that time, it had only a minor impact on the stocks/ETFs I have been recommending in the past (see below), such as Ford, GE, EEM. Ford dropped from $15.9 to $15.6. GE moved from $26.1 to $25.4. In fact, if these stocks go down further in the days or weeks to come, I will be a buyer! Over the past 12 months, periodically I have been writing emails to my superiors on my thoughts on the market as well as my investments. Here are some excerpts:
Sent: Sunday, July 14, 2013 11:39 AM
Subject: Stock Options
On Friday, the nightly business report had a segment on the Chicago Board Option Exchange was holding classes all over the country and many older folks were getting in to option trading. One of the instructors said that if one has a 60% ‘gains’ rate, it would be concerned a winning portfolio. I have sold 19 items already and I made gains on 16 items with a ‘gain’ rate of 82%. Average time held was 30 days the range was between 6 and 69 days. Average profit was 42.45%. On the 3 I lost money, the dollar amount was small and if I waited long enough I could have made money; but it was in my interest to sell and re-invest. So far, Ford(PE=11) has done wonders(sold 3 but I have 3 more open) and I believe that it would be a good play for the next year(at least). On the other hand, I am waiting Honda (PE =14). Right now I have 25% in cash and 20 open items which I am confident of making money on all of these items. One of my best finds was XLP(ETF for consumer staples) call January 2015, strike price $50 for $0.12 each. Now XLP is at $41 and my option is worth $0.29 each. If the XLP goes to $60 by January 2015(quite probable), I will turn my $250 investment in to $25,000!! As with work, I keep getting amazing ideas. I was looking at ultra-long financial ETFS but the options were too expensive
Sent: Sunday, July 21, 2013 2:38 PM Subject: RE: Stock Options
Europe is in a recession and it might end within the next 12 months. Gold is at a 3-yr low. When Europe gets back on its feet, China and Asia will start to perform on ‘all 6 cyclinders’ again. It is a different story for the bond market. Interest rates might rise a little bit over the next couple of years which will be bad for the bond market. Thereafter Feds might increase interest rates aggressively. Since we have so many bears, it is very good for the bull. With respect to my job or with respect to investments, I keep getting amazing ideas all the time; and it is so rewarding to put them in to practice. Managing a portfolio of options is quite different from managing stocks. Time is of the essence. A very interesting thing happened over the past few weeks. A few weeks ago the volatility index rose so I knew that a correction is close at hand so I sold most of my profitable positions so as to increase my cash position to 30%. When the volatility index shot up in a big way (buy sign), I started purchasing options again and now I am at about 9% cash. Unfortunately the correction was only 6%; or else there could have been better buying opportunities. Prior to the correction, I sold my GE$25 Dec 2013 calls with a profit of 83.91% in 65 days. At the same time I kept increasing my GE$30Calls Jan 2015. After the correction, GE, Home Depot, Disney, XHB (Home Builders) etc. have been more or less ‘dead in the water’. Most probably investors took their gains and re-invested the profits in others stocks. However I have confidence that these stocks will outperform the Dow over the next 18 months. Last Friday (7/19/13) I woke up to a nice surprise. GE had their conference call and they announced that their profit margins are going to increase significantly in Q3 and Q4 -with the decline of GE Capital. On Friday (7/19/13), the stock reached a 4yr high of $25. The stock rose 5% on Friday and all analysts were surprised that such a big cap stock could go up 5% in one day. I bought a little bit of puts to cover profit taking by others. If GE goes down a bit, I would sell my straddle and buy in the money 2015 calls. On Thursday my options were showing as a potential loss of 25% but I broke even on Friday (if I sold-which I didn’t). If GE goes to $35 before Jan 2015(quite feasible), and if I keep my calls till then, I will make a 900% profit! I have been making a lot of money on Ford. Last week Morgan Stanley issued a downgrade for Ford asking investors to sell Ford and buy GM. Explaining their stand, the spokesman stated, “last year Ford was the winner of the super bowl of auto stocks but even though Ford will do well GM will outperform Ford as Ford has more exposure to Europe”. I disagree; Ford has done well due to its position in the US market.
Sent: Wednesday, July 24, 2013 7:49 AM
Subject: FW: Stock Options
This morning Ford CEO had the Wall Street Conference Call. Even with the economic downtrend in China, their sales rose by 45% and having difficulty meeting the demand level. In Europe, there was no loss and expect a gain in 2014. The US market is very strong. They are hiring about 1,000 white collar employees in Michigan. So I guess my prediction is correct. Analysts also say that Ford has excellent financials. This morning Ford stock went up from $16.80 to $17.40.
Sent: Wednesday, November 27, 2013 8:54 AM
Subject: J. C. Penney Company, Inc. (JCP)
This is interesting. Taking a contrarian view, due to the very high level of short interest, I was thinking of buying call options but the premiums were too high for my blood. Over the past 30 days, the share price rose by 50%!
Sent: Monday, December 09, 2013 11:53 AM
Subject: Contrarian opportunity
Most people assume that inflation is dead and we might even face deflation in 2014. In my opinion, major changes in the economy take place when there is a wide gap between ‘reality’ and the ‘herd mentality’. With economic growth accelerating all over the world, combined with all the liquidity pumped in by the central banks of the world, we should not be surprised if we see a rise in the inflation rate over the next 2 to 3 years. Usually the price of gold rises when the financial markets lose confidence in our world’s central banks.
Despite what might happen to the price of gold in 2014, Barron’s is optimistic about Barrick as (1) their management is making some positive changes (2) Activists like Carl Icahn might buy in to the company to drive the share price higher. As you can see from the graph given below, on 1/1/13, the price of Barrick Gold was at $35 and it is currently trading at $16. I am going to purchase January 2016 call options with a strike price of $35 at 65 cents (1 contract of 100 shares at $65). If the price drops in the future, I might add more to my holding.
Analysis on Barrick:
Operating loss of $834 M in 2012 due to a non-recurring item of $6.9B.
Net Tangible Assets of $12.5B.
Total Assets/Total Liabilities : 1.88
Cash: $2B
Inventory (Gold): $2.7B.
Cash flow from Operations (2012): $5.4B.
Sent: Friday, December 20, 2013 12:51 PM
Subject: RE: Contrarian opportunity p/s(Barrick Gold)
When I purchased these 2016 calls, I did not expect to see a gain for 6+ months (at a minimum).
I purchased the calls on 12/9/13 and today (in 11 days), my calls are up by 28.38%.
The interesting point is that during the same time period, the price of gold dropped from $1260 to $1200-due to more confidence in monetary and fiscal authorities.
Barrick Gold has a reputation for having a good management team. In my opinion, all they have to do is to stop mining, cut expenses to a bare minimum and hold on to their ‘inventory’ of gold ($2.7B). With all the liquidity the central banks created combined with the global economic recovery (US economy grew by 4%-see below), inflation is sure to raise its ugly head within the next 3 years.
Sent: Sunday, January 05, 2014 11:41 AM
Subject: Win/Win Opportunity
As I told you on Friday, I have been meaning to send you an email on my thoughts about the market but I could not find the time. As for the market, it is a very interesting time. I put a lot of faith in the contrarian point of view. At this point the put/call ratio in the stock market as well as in the CBOE is at an all-time low. If the trend continues, we could get a big surprise on the downside. On 1/1/14, the trend reversed a little bit. My current strategy is to keep a lot of cash, have some on the long side as well as some puts as hedges. On all items bought and sold, I made a 28% profit in 2013. Now I have to pay income taxes and not capital gains! For a long time, my current open items were at a loss but now I am over the breakeven point with a lot of bright prospects for the future. During 2013, I made money several times over on Home Depot, Ford, Disney, GE and XHB(home builders ETF). I was waiting for 1/2/14 to sell my Disney calls at a profit; which I did. Now I am thinking of buying Disney 2016 calls. At a PE of 22, it is a little more than I like to pay for a company but with the unemployment rate going down in the US and expected economic growth in Europe and Asia, Disney should do very well. Today’s Barrons also had Disney as a buy. Ford has come down from a high of 17.5 to 15.5 due to lowering earning expectations in Europe and Latin America. In my opinion, i a buying opportunity. GE has been creeping up to $30(from a bottom of $10 in 2008 or so). Last week, an analyst downgraded GE from buy to hold and the price fell to $27.5. I disagree with that downgrade. GE is getting rid of their low margin finance sector and focus solely on the high margin industrial sector. Another good company is Delta Airlines. Even though it went from $10 to $30 in 2013, the PE is only 12 and the analysts are very optimistic about the airline as well as the industry. I suggest buying 2016 calls now and buying more during a correction. Now for the win/win opportunity. As I told you previously, on 12/9/13 (the day I sent you that email) I bought calls on Barrick Gold (ABX). As you can see from the screen shot given below, I was able to buy this call when ABX made a new low. Got lucky! Since then my call has gone up by 44%(in 26 days). A few days ago I spotted a great opportunity which might be of interest to you. The current price of ABX is $18.15. The April 2014 put option (strike:$17) is at $1 to $1.20(bid and ask). If you write a naked put option where the broker either freezes $1815 for every contract or allows you to do this due to the total margin allowance available to you, you will make 5.5% in 3 months! If the price of ABX drops below $17 prior to the 3rd week of April, the buyer might execute the option and you will end up buying 100 share of ABX (at $17 or $1700 for 100 shares) for every contract you ‘wrote’. Probability is high that the price ABX will continue to go up and the price of the put will keep on declining and expire by the 3rd week of April. Another option is to sell the put when the price drops-prior to the 3rd week of April. If ABX goes to $20, the put could go down to $0.50(from $1). If I am managing a hedge fund I would like to utilize most of my funds in this manner to maintain a high level cash (for unexpected withdrawals).
Sent: Monday, January 13, 2014 12:47 PM
Subject: FleetCor Technologies, Inc. (FLT)
This is very impressive! 50% to 100% rate of growth coupled with an Operating Margin of 49.8%.
However with a PE of 35, it is too expensive for me. In the future, if they come up with disappointing SEC filings, the share price could easily lose 50% of its value overnight.
I also prefer to invest through call options and on FLT, there are no long term options available (nothing beyond Aug 2014). At this time when I buy options, I prefer ones that expire Jan 2016.
Sent: Sunday, January 26, 2014 4:36 PM
Subject: Market Update
Finally we had a little bit of a correction on Thursday and Friday-2.75% in 2 days. It would be very nice if the trend continues and the Dow goes down by another 1,000 to 2,000 points.
Prior to Thursday, Delta (PE:12) was skyrocketing. My 2016 calls were up as much as 40%. Finally the airlines industry has turned around in to stable profitability. Delta is the front runner as well as the trail blazer. One thing I noticed was that Delta call option prices are relatively expensive. However this is a tool investors could use. There are 2 ways to go about exploiting this circumstance. First of all you could write naked call options. The best way to exploit this option is to buy the underlying stock of Delta and sell(write) covered calls. It is like renting the stock-however if the option is exercised then you have to sell the covered shares at the strike price. Also you can buy back the call you sold and re-write another option and keep the earning stream going. Let me explain; current price of DAL is at $31. The 35 (strike) call for Sept 2014 is at 2.12 while the March 2014 $35(strike) is at 0.48. This means that in a six month period what you initially sold for $212 could be purchased for $48- that 441.67% profit in a six month period! Sell now and buy later! This is while keeping your original underlying stocks of Delta intact. Now assume that after you purchases 100 shares of Delta at $31 for $3100 and wrote(sold) one call option contract with strike price of $35(expiry:Sept 2014) and you received $212 right away. You can do this on Monday if you want to. Whatever happens with the stock or the options that $212 is for yours to keep. Then in 6 months (assuming same market trends), the option you sold should be worth $48. At that time, you might want to purchase 1 contract at $48 and make the 441.67% profit while keeping the underlying 100 shares of Delta. On the other hand, let us say after your $3100 purchase and the $212 you obtain for writing the call, Delta share price to $38; then most probably the buyer of your option will exercise the option and you will have no choice but sell your 100 shares at $35(not $38; the person who purchased the option will make $300). You have already received $212 for writing the option so your total profit will be $612 ($400 from the underlying stock and $212 from the call). After you write the call, if the Delta price drops to $30 till October 2014, the option will expire worthless and you will pocket the $212 and hold the delta shares with a ‘paper loss’ on the stock for $100(Net profit still at $112). I have been watching option prices on and off for the past 20 years and I must say that it is very difficult to find good stocks with such high option prices. Another one of my stocks that was doing well up to Thursday was Barrick Gold. Unexpectedly it did not sky rocket during the severe correction on Friday. Another good opportunity this correction created was GE. It was at $28 around 1/1/14 and now it is at $25. Eventually when the world economy start humming again, GE should reach $40 in a couple of years. The call options are very nicely priced so this offers a very different(than DAL) opportunity. Calls on GE for January 2016 with a strike price of 20 is at $5.50. In other words you can buy 2016 options for a mere premium of $0.50(or $50 for 100 shares). Ford too keeps getting more and more attractive. In 2013 Fall, topped off at $17.50 and now it is at $15.83.All through 2013, I rode the Ford roller-coaster and made money several times on options.
However for the general market, until we have a 10+% correction, it is going to remain a dangerous place. For the past 3 months, the put-call ratio has been extremely low which means that the bullishness is at an all-time high and that is a disaster waiting to happen (contrarian view).
Sent: Friday, February 14, 2014 8:53 AM Subject: Gold
It is interesting that we talked about gold yesterday. This morning several analysts were discussing the future of gold on CNBC.
One analyst stated that if the price of gold goes above $1300 (right now it is at $1317), there could be a s short squeeze and drive the price much higher.
The price has been creeping up. Gold miner’s ETF (GDX) is up 12.76% since 12/23/13-see below.
A few days ago, I sold my Barrick Gold calls at a 45% profit. Over the weekend, I will look in to re-entering the gold market-probably through GDX.
Sent: Tuesday, April 01, 2014 4:09 PM
Subject: RE: Market Update
Oh Yes! As long as I do not lose everything and the overall gain is decent, I am okay with losing some money. I am not worried about missing out on some opportunities as it is better to be disciplined than chase every possible opportunity.
Some hard lessons I had to go through:
Calls on Honda.
Jim used to beg people not to buy ultra-long and ultra-short ETFs. That did not make sense to me so I bought some calls and puts on these ETFs. I lost most of that money as I found that they have a very short life span (like the dealer reshuffling when the cards are in your favor at the blackjack table) and the people behind those ETFs manipulate those funds. Now I use calls and puts on DIA, SPY and QQQ.
Made a lot of money on Home Depot but I also lost some on calls that expired prematurely. This is the problem with options. Timing matters.
Lost money on most of the puts purchased as hedges. That was partly expected. Even now I keep putting some money on puts as hedges. We should have a good correction within the next 12 months or so.
Initially I made good money on XHB (home builders ETF) and then when the Feds reduced their treasury purchases, I lost some money on XHB as one option expired worthless and some I had to sell at a loss.
Losses are not that bad. With each experience I learn something that will help me immensely in the future. As I see it, a loss and a lesson with a tax benefit! More than making money I like experimenting with different ideas. One day, God willing, I will own my own hedge fund! When I start one, I will let you know.
Please stay tuned for future blogs. Thank you for your interest. May you have peace and happiness.
L.S.Fernando Prosperitystocks@yahoo.com
