Today, the much anticipated S&P/Case-Shiller home price index was released, showing a 2.2% decline in October and an 18% decline from the year ago period. The S&P/Case-Shiller index is essentially the most widely utilized arbiter of the broad US housing climate, as it utilizes home price data from 20 major markets throughout the U.S.

Here's how the index cities stacked up, in order of maximum pain:

Phoenix, down 32.7%

Las Vegas, down 31.7%;

San Francisco, down 31%

Miami, down 29%

Los Angeles, down 27.9%

San Diego, down 26.7%

Detroit, down 20.4%

Tampa, down 19.8%

Washington, down 18.7%

Minneapolis, down 16.3%

Chicago, down 10.8%

Atlanta, down 10.5%

Seattle, down 10.2%

Portland, down 10.1%

New York, down 7.5%

Cleveland, down 6.2%

Boston, down 6%

Denver, down 5.2%

Charlotte, down 4.4%

Dallas, down 3%

How Do I Invest in the Case-Shiller Index?

Well, a few months ago, I had contacted a futures broker through the macromarkets website and didn't have much luck. He wasn't very helpful and I think he viewed me as unsophisticated" (not rich) or something along those lines, so we never got anywhere. All I really wanted to do was to start selling futures out of the money increases in the index since I knew we had a long way down to go.

Today, I went back to the source and was encouraged to see that macromarkets has registered for two new exchange traded securities (presumably, similar to a "Case-Shiller ETF"), with tickers UMM for up and DMM for down. Here's how they'll work:

• Track twice the percentage change in the 10-city S&P/Case-Shiller Home Price Index.


• No minimum investment


• Marginable


• Backed by Treasuries and cash


• Over ten years, virtually no correlation with stocks or bonds (both close to zero)


• The Up and Down securities trade in pairs, so that's how they balance the values diverging and still hold their value.

Below, a snapshot of the market weightings in the securities:

No word yet on when these will be approved and tradeable. As of now, the tickers are still not trading. Make sure to sign up for email updates (to the right) or a reader for an update on when you can trade these.

Source:

UMM Fact Sheet

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Given the announcement today of the cancellation of a $17 billion joint venture between Dow Chemical and Kuwait, it is widely expected that shares of Dow will plummet during Monday's trading. As highlighted in this recent article, Dow's dividend, currently over 8%, is among the safest 8% yields in recent history given recent cost-cutting initiatives announced, pricing power, earnings projections and its storied history of sustained dividends for decades through prior tough periods.

With this likely drop in shares Monday, you may start to see a legitimate yield at over 9% by trading on Monday.

Disclosure: At the time of publication, the author had no position in DOW.


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This method is an incredibly efficient way of keeping track of all your favorite blogs and scanning several in a sitting as opposed to having to bookmark and click through eacy of your favorite sites (not that I mind visitors, but getting this content out to spread the word has its long term benefits).If you prefer to have free daily updates emailed directly to you, simply enter your address below in the Email window to the right.

Now, for the Best of December 2008:

INVESTING

A Legitimate High Yield Stock you can Take to the Bank

How 2007's Hottest ETFs Stack up

Generating Income and Hedging by Selling Puts on Oil

Congress Should Allow GM to Fail: Here's Why

Fund Manager that Beat Market for 15 Years is Beaten Himself

Highest Yielding CDs and Money Markets December 2008

Google Credit Spread Expired for easy $750...Next?

PERSONAL FINANCE/OTHER

Company Stock: Should You Even Own Any?

Beware the Verizon FIOS Exploding Offer at the Door

Stepping Outside Your Comfort Zone to Save Money Daily

iPod Tax is Coming...And More!

How I Saved $250/Year for Life with Comcast

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Following my experience with an "exploding offer" by Verizon pitching their FIOS and bundled services, I not only called Verizon customer service to see if I could beat them at their own game (and a week later, I got this offer in the mail!), but I then called Comcast and figured that with Comcast hemorrhaging customers the way they are, they are probably now in a position to drop prices for existing customers in order to retain them. Acquisition costs are high and incremental variable costs of servicing an individual customer like me are extremely low.



Phone Call Step-by-Step



1) So, I called Comcast and got the typical entry level "barrier" rep initially, after an extended wait of course. I explained that I was considering switching to Verizon and wanted to know what Comcast was willing to do in order to retain me. I was surprised to see how combative and informed the front-line guy was. He started challenging me by saying things like, "You know in the long run, you're going to end up paying more with FIOS. They charge you for each box, they up your price after the first year trial period, etc..." It was borderline unprofessional to bash a competitor like that, but what he was saying was pretty much factually correct.



2) I badgered him a bit more and said I'd heard better things about the HD picture, the customer service, etc. He countered on the customer service with, "Well, Comcast delivers 24/7 coverage whereas they only go until 7PM. I bet you didn't even know that". I didn't. But I was quick on my feet and replied, "That's nice to offer 24/7 coverage when someone actually picks up the phone. I sat on hold for over 15 minutes and after my first attempt, your system simply hung up on me. At least with Verizon, I talked to a person in a reasonable period of time". He seemed exasperated and simply said, "Well, what do you want? What are you looking for from us?" I said that I wanted to see if Comcast was committed to retaining me as a customer and whether they would drop their price in order to entice me to stay.

3) He relented (seemingly) and said to hang on for his supervisor. After 10 minutes on hold, the system hung up on me. This experience is not foreign to me with Comcast, and sometimes I wonder why I don't switch to Verizon just on principal, but in reality, it's rare that I actually need them for anything and the hassles of switching and marginal benefits didn't outweigh the lower price I garnered...

4) Upon redialing, I demanded that I speak with a supervisor immediately and told them a customer service rep had already agreed to drop my price (sort of...) and asked if they possessed the authority to enact this change for me. They did. This next person was much more personable and seemed genuinely interested in retaining me.

5) She wasn't able to just "drop my price", but rather, worked around a few ways to get the total cost down to match what Verizon was offering. A few bucks off internet, a few bucks off the premium services, etc. and it added up to about $21 per month off.

While $21/month may not seem like a windfall, viewing it as $250 per year over ten years or so starts to look quite attractive, especially since I tend to invest excess cash and the market sure is looking ripe for a higher price 10 years out than lower given the recent precipitous declines.

Now that they've agreed to this reduction and I have another viable option (stinks losing your monopoly doesn't it!), I can clearly threaten to switch if they seek to raise my price back again. Heck, even if I move within the Northeast again, I could probably demand the same rate in my new home just for signing up again.

Tips

• Be polite. While the hangups and occasional rude reps can be frustrating, there's no value to be added by being rude. While being rude may get you at least transitioned to the supervisor, treating the supervisor with dignity and explaining a rationale case tends to go a long way. I've found this with both consumer topics and in dealing with the ridiculous health insurance maze.
• Demand to speak to someone with authority. As I postulated earlier, the front line customer service reps tend to be blockers and in my opinion are most valued for getting customers to give up. If the system doesn't hang up on you, they'll make you want to give up. If you don't feel like playing this game out as long as I did, just demand to speak to a supervisor right away. Make something up. It will save you time.
• Be persistent. I stayed with the plan and was rewarded with a decent annual return for my efforts. Less than 30 minutes on the phone for $250/year.
• Step outside your comfort zone. This isn't comfortable for Americans; we generally just take what's presented to us from the corporate machine. Conversations like this start to co easier with experience, as I just highlighted on my recent purchase in a store with a face to face request for a discount.

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After my post on entering into a credit spread on Google in November with December options expiry (see How Stock Options Work: Puts and Calls), some readers asked me to comment along the way and provide an update upon close of the position. Well, as I had anticipated, Google did not close in Dec. below $250 per share, so I got to capture the full spread of close to $800 for 1.5 months of protected downside risk. See this article for full background of the transaction.

Credit spreads are actually quite easy and you can limit your risk as opposed to entering into naked options positions, which is wrought with much higher risk.

If I wanted to duplicate the same type of position today, I could assume that between now and March expiry, Google won't drop another 20% from its current depressed valuation and walk away with another $800 with a maximum downside risk of $5000 if Google dropped all the way to $190 per share, as unlikely as it is:

Sell the March $240 Put for 12.50

Buy the March $190 Put for 4.20

Total Profit = ~$820 net of fees.
Total Risk = $5000 in catastrophic scenario

While volatility has dropped a bit since its peak when I entered into various options-selling strategies, by simply taking on an extra month of expiry and maintaining the same risk, I can roughly mimic the same play time after time.

Note of course, that the market is pricing in some probability that this target price will be reached or else nobody would be buying the option from you. Know your risks before engaging in this type of options play!


Related Articles:

Apple Covered Call Position
Hedging Your Energy Exposure by Selling Puts on Oil
Leveraged ETF/Volatility Plays

Disclosure: The author is currently long GOOG shares and has no active options positions.

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Legitimate High Yield Stocks are hard to come by as evidenced by the raft of dividend cuts this year, in addition to the stocks that have clearly seen the market price in a future cut when yields swell high into the double digits. Many of these stocks seemed too tempting to pass up and investors were shocked when they didn't hold up in this recession and actually lost as much or more value than those of their highly volatile brethren. For instance, consider American Capital, LTD. (ACAS) which was showing a hefty yield of close to 20% with a share price in the 20's a few months ago, but as predicted in "Hard Lessons chasing High Yields", the market was pricing in significant dividend cuts and it now trades at closer to $3 per share. The market was saying that this was not a legitimate yield assumption.



Well, market conditions have evolved such that there is a legitimate high yield stock presenting investors with an 8.4% yield. Dow Chemical (DOW) has such a prominent position in the entire supply chain of so many industries that when the going gets tough on raw material inputs, such as oil prices, they simply increase their prices and industry is generally forced to accept such price hikes (while competing firms follow in lock-step due to this leading/lagging company pricing phenomena). In fact, they have done so rapidly since 2005 when oil prices became more volatile. I've seen it first hand when I did commercial contracts for incoming materials and contract manufacturing in biopharma. Dow virtually dictates major inputs to downstream material costs and overall PPI.



Most importantly on the dividend prospects though, during the most recent earnings release in October, Chairman Andrew Liveris essentially promised investors that the dividend will not be touched. In December, he reiterated this by citing a long storied history of increasing dividends through the years and despite the tough global climate, he stated

"Dow is the only company in the Fortune 200 to have paid its
regularly quarterly cash dividend without reduction or interruption since
1912...That’s 388 consecutive quarters. I’ve said it before, but I want to say
it again, we will not break that streak.” [1]

As a general rule of thumb, income investors like to see that a company's earnings are roughly double its dividend payout rate to ensure the company can withstand a downturn and still maintain its dividend. In the case of Dow, the analyst consensus for earnings for 2008 is $2.64, while 2009 shows $1.98, factoring in a continued global recession into 2009. With a $1.68 dividend rate, the stock doesn't meet this "rule of thumb". However, given the strong pricing power and a record of close to 100 years of sustained dividend payouts and a leader touting this past and future performance, I view it as highly unlikely that this dividend will be cut. Such strong statements from a CEO could have significant consequences if he did otherwise. The earnings from 2008 and 2009 will show as a blip during the long-term, and as you can see from this 10 year chart, over long periods of time, DOW has ended up roughly on part with the overall performance of the S&P500, but with an enormous yield exceeding that of the index to boot!









Disclosure: As of the time of publication, the author had no position in DOW.

Related Articles:

GE 8% Yield Too Attractive to Pass

Highest Yield CDs and Money Markets Dec 2008

Former High Yielder Losing its Luster

Sources:

[1] FoxBusiness


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Following the recent news on the Bernie Madoff scandal and how investors have potentially lost of up $50 Billion in assets, while it's too late for these unfortunately individuals who were duped by a seemingly legitimate investment that was performing well, it's not too late for routine workers and retirees with company holdings. Recently, I provided a snapshot of how 401K assets are distributed in the US and it revealed a disturbingly high concentration of assets in company stock. Subsequently, I shared my own personal 401K asset allocation.

While my 4% company stock allocation is relatively low, I'm thinking perhaps it should be ZERO.

Why? Consider that:

• My company is my primary source of income. If something catastrophic happens to the company, our income is completely cut off.
• I routinely receive stock option grants. If the stock performs well, these options end up in the money and I can benefit from a rising share price in that manner.
• If I'm holding shares in my 401K, I'm now subjected to triple jeopardy. If the shares go to zero or something close to it, my options are worthless, my 401K allocation has dropped to zero and I'm likely to be out a job. 0 for 3!

Why subject yourself to undue risk for no discernible benefit?

Employees like to think they know a thing or two about their company (note that it's illegal to trade on it if you actually do and the public doesn't!). Employees also have a tendency to become emotionally attached to their company's prospects and make irrational assumptions about future performance compared to peer investments. Statistically speaking, why would your company outperform the general market over any other company during any particular time period? While there are some lucky souls who owned their Microsoft stock through the 80s and Google post-launch, conversely, there are employees who lost everything with Enron, or nearly everything with the likes of Lucent. You're probably just better off just having your money invested in a diversified sector fund or ETF if you have this much vested in your company. And that means I should get my company allocation down to zero for the new year!




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According to this statement from NY Governor Patterson, the state will be looking to recoup taxes from downloaded music and entertainment services to help his state close a $15.4 billion budget deficit. He has blamed the decrease in revenues from Wall Street given the recent financial meltdown.

This is just one state and a harbinger of things to come. Politicians will be scrambling in the coming months to bridge shortfalls and you'll be trading one giveaway or tax cut for another. While Obama promises tax cuts to everyone but those rich folks making $250K per year, the rest of us will be paying higher taxes on things we weren't taxed on in the past.





While the Fed continues to slash rates, print money and promise money from helicopters and our dollar continues its recent downward trend, our debtor nation status will continue to weaken the leverage we have abroad (recall when China threatened to sell all the Treasuries it was holding if we didn't back off on our agenda for allowing their currency to float?).





The point is that for each step forward, we're taking at least one back. Nothing's free, not even a tax cut. You may see more taxes on internet transactions, more taxes, "surcharges" and whatever other moniker companies and municipalities can come up with to milk you of more money to cover their shortfalls of which they were ill prepared.







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After perusing the web, magazines and newspapers this weekend, I've highlighted the highest yield investment options that exist at this time, some of which are yielding much higher than average. You may want to get while the gettin's good with the Fed approaching a 0% target rate.

Highest 5 Year CD Yields:

Intervest National Bank 5.25%

Advanta 5.25%

Highest 1 Year CD Yields:

Corus Bank 4.65%

GMAC Bank * 4.35%

Highest 6 month CD Yields:

Corus Bank 4.25%

Imperial Capital Bank 4.10%

Highest Money Market Account Yields:

Calvert Social Investment 4.86%

USAA Money Market Fund 4.06%

Even in this low rate environment, these yields aren't noticeably different than my top yielders article from September.

As for recent High Yield Stocks with "safe" dividends I've purchased recently, here was my last purchase with an 8% yielder.

Finally, you can always consider selling options for income to generate some cash flow, especially on underlying stocks with dividends.

Of course, beware the allure of abnormally high yields from stocks likely to reduce because their earnings prospects don't support the assumed yield based on historical payouts. This one that I flagged months ago is now showing a great yield on paper, but lost most of its value during the financial meltdown.

Happy Hunting!

*While anything under $250,000 is FDIC insured, consider that GMAC has been having liquidity issues of late and you may have to undergo some paperwork/FDIC hassles if things go south.

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This is just a small victory here, but the concept is poignant nonetheless. I had to buy a grab bag gift for an office holiday party coming up so I stopped at the mall to get something related to alcohol since that's a typical theme. I stopped in a "Things Remembered" shop which various items that fit the bill.

There were a few stainless steel flasks, some with sayings and engravings, etc. The one I like was $25. Not only was I looking to stick to the $20 limit imposed on gifts (not that the recipient would know what I paid), but I wanted to try out a new tactic, emboldened by my recent Verizon/Comcast negotiations, car deal negotiations and prior furniture negotiations.

I Will No Longer Pay Sticker Price

Look, we're in a severe recession and we all know the retail markup is generally 100-500% on items, so if they're discounting something a few bucks, they'd rather unload the inventory than stand their ground.

So, I approached the clerk and asked,

"How much below the listed price can you sell this for? I'm
not willing to pay $25 for it."

My question was met with a recoil and look of confusion until I reiterated that I was serious and reminded her that we're in the midst of a recession. In order to save face I presume, another employee, presumably with more authority (or initiative) said, "You know, some of these flasks are on sale. Let me look this one up and see if it's on sale." She looked in a book and replied that she could sell it for $19. I could have continued to haggle over dollars, but my mission was complete. This was only a savings of $6, but...

Once again, I stepped outside my comfort zone, stated my intention, utilized my leverage and my ability to walk away and I saved myself 24% off the listed price which I probably would have paid in the past.

I'll be posting soon on how this tactic pans out for the TV console we're checking out for the new TV I just bought (I'm not on a spending spree, this was the gift I promised myself upon completion of my MBA which took way longer than I had planned on). Anyway, I intend on saving hundreds from pitting two furniture stores against each other, one of which is in the midst of liquidation. Should be a good study in negotiations!

Related Articles:

Stop Paying for Convenience

Make Them an Offer They Don't want to Refuse

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So, about a week after my ordeal with the agent trying to sell my Verizon FIOS at the door with the "exploding offer", and after I called them myself to see if I could have just gotten a better deal through them (see full story here), I got a new notice in the mail with a sweetened offer. I don't know if their information management is this good that they tried to sweeten the deal specifically or if, coincidentally, their program changed, but now they're throwing in a free multi-room HD DVR AND 2 boxes for free for the first 90 days.

This is an improvement over their prior offer of the DVR for the price of a standard DVR. At $6 per box and a spread of only $4 between the two boxes initially, but now with the extra $15 off, over 3 months, the refined offer adds up extra 3*(15+6+6) = $81 in savings. However, this still pales in comparison to what I saved in my Comcast counteroffer. Be sure to tune in for my post on how I'm saving hundreds per year following those negotiations and how you can too!


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A hotly contested theory of actively managed fund performance versus random pertubations in large numbers seems to reared its head again. For 15 years in a row, media-designated fund guru Bill Miller, who runs Legg Mason's Value Trust Fund, has been the S&P500.

This is an incredible outcome. Or is it?

At the expense of oversimplification, this 15 year run could also be the result of being Fooled by Randomness, correct? If you simply look at the thousands of mutual funds out there and consider the following parallel, you'd see this isn't all that unexpected: If you take thousands of people and ask them to flip a coin, roughly 50% will land a head. If you ask the "tails" to step aside and then ask these "winning fund managers" to do the same, you'll have 50% of the new population progress to the next round...etc. In the end, there will be 1 or 2 people left standing. To the routine observer fooled by randomness, these remaining fund managers will be lionized in the media and investment community alike as having the skill to beat the market year after year. But was it luck?

I bring this notion of being fooled by randomness to you by way of a brilliant book named as such by Nasim Taleb, who also wrote the recently acclaimed Black Swan (incredible read, which has forced me to hedge/rethink risk in a different light):





Well, after beating the market for 15 straight years, not only did the fund tie or slightly underperform the major indices, but fund is down 58% over the past year. Evidently, Bill Miller started investing heavily in Financials during the recent downturn, seeing the "value", but he wasn't able to foresee the demise of any industry in this credit crisis.

One needs to question if this fund attained messianic status by way of incredible fund management or was it just the beneficiary of randomness?

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It's been a while since I've done any posts on trades, so here's the latest. As I posted in my twitter a few days ago "day of" (so you can track what I'm doing in real time), I bought into the leveraged 3X negative ETF BGZ tracking the Russell 3000, which roughly tracks the general market. I followed through on my assessment of "selling the rallies" which in my opinion, shows that the market has seen very predictable patterns of late. This appears to be paying off nicely, quickly, as the market was down over 2% today and another 2% in after hours. Therefore, the ETF was up 8% today and I'm looking at another 7% or so in after hours.

Conversely, I'm kicking myself for not jumping on the 3X long Energy ETF given the current oil contango. Long story short, spot prices for oil in future months is much more expensive than carry cost, which is unusual. Efficient markets would mandate that traders simply bid up the cost of oil by buying it now, storing it in tankers and unloading it in future months. However, since there's no credit out there right now to secure the leverage required, this contango has surfaced. Well, it looks like the market's catching up with an 8% move in oil today. If there's more to go in your opinion, these 3X ETFs are the way to maximize your return (and your risk!).

The last high yield dividend stock I bought was GE when the yield hit 8%; I have some other thoughts on blue chips with legitimate high yields that I'll be posting on soon.

Disclosure: Long BGZ and SDS (negative return ETFs)

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The Detroit automakers should be allowed to fail and here's why. This obviously isn't going to be a very popular post for people tied to the industry, but in the interest of sanity and the common good, here's my perspective, with GM's case being imminent.

The government should should not provide GM with the financing it is seeking at this time since it would be akin to throwing money down a rat hole. Mark my words, Congress will pass this bailout, but they shouldn't. By next summer, GM will be back with their hands out for money again. This "bridge loan" is a bridge to another handout.

Bankruptcy is not the end

When people hear "bankruptcy", they assume this is the total demise of an industry. The company's products and employees will disappear into the void. Quite the contrary. We felt comfortable enough putting ourselves and our families on airlines in bankruptcy, right? Just this decade, US Air entered bankruptcy twice and emerged successfully. United was in the same boat; the list is quite long. I just flew US Air. Here's how this could work for GM

Debtor in Possession Status

Wikipedia: A debtor in possession, in United States bankruptcy law, is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. A corporation which continues to operate its business under Chapter 11 bankruptcy proceedings is a debtor in possession.

• What is going on now is that the government is being asked to hand over $15 Billion in what will turn out to be a band-aid loan. This will not ensure the long term viability of GM.


• There is also NO Downside Protection for taxpayers under this scenario.


• Debtor in possession would put the government at the front of the line with respect to other debtors and the taxpayers would be assured a higher level of protection via the automaker assets than what is being floated now.


• With debtor in possession route after GM declares bankruptcy, the government would have oversight over the new entity, allowing for more leverage over unions, suppliers and other factors influencing the slow death of the domestic carmakers.

According to Professor Edward Altman, famous for his Altman z-score company solvency model, he has calculated that with the recent bailout proposal whereby GM was seeking $18 Billion, even with the temporary infusion of cash, GM will be bankrupt within a year unless they continued to receive new funding. This is not a sustainable model and we should not beguile ourselves into this illusion.

Arguments For Bailout:

#1) People will be hesitant to buy a car without assurances that the
company is a going concern.

Well, wouldn't you be more comfortable buying a car from a company that you know is backed by the US government with skin in the game and a more sustainable model? Under the current proposal, we may very well have to eventually cut bait and consumers know this. GM may never start selling cars at a sustainable rate again under the current proposal.

#2) We'll fire all those guys who got us into this mess and the "Car Czar" will do things the right way!

Right, someone from the government is going to come in and save the auto industry. Since when has a government entity run anything better than private industry. Under the current constraints, these automakers simply cannot be competitive, no matter who's running things. We are in the midst of an unprecedented global financial meltdown. People are not buying new cars, especially in the face of questionable future warranties and support from the supplier.

Weak companies failing and newer, more competitive and innovative companies prospering is what made this country great. When we start intervening in the natural business cycle, we just prolong the inevitable and hinder our competitiveness within our borders. We all know, next comes the airlines, retailers, hotels/casinos looking for their handout. Where does it end? Clearly, GM should be allowed to fail and reinvent itself under more advantageous conditions.

If you feel that the likes of GM and Ford are viable and will survive this, incredible money can be made from their corporate bonds as highlighted here. Caveat emptor.

Sources:

Wikipedia

Bloomberg Radio

Professor Edward Altman

Disclosure: No position in GM or Ford equity or bonds

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Oil and hence, gasoline prices have finally returned to what we're somewhat used to. Gasoline prices below $2 allowed for the SUV craze and low inflation that US consumers so enjoyed for the past decade. This is not to say prices won't go lower. We're looking at a worsening global financial crisis and with what we've seen from OPEC, while they claim to have the ability to act in lockstep in cutting prices as a cartel, is that individual countries are often inclined to cheat, especially in the face of drastically declining income for their country, thus defeating the purpose of the proclaimed reductions in output.

But the question is how low can prices go? And, how can you benefit personally from a move in oil prices either up or down during next year?

The answer is hedging.

I'm going to present a very simplistic case; one that I have to refine a bit further before executing next week, but this illustrates the concept:

In looking at some recent credit card bills and doing some quick numbers on the mileage our cars get, I came up with the following estimate for our gasoline expenditures for the coming year.

• Putting 12,000 miles/year on a car is typical. We have 2 cars.
• With the mix between our cars and a mix of city/highway driving, I'll assume 20 miles/gallon.
• I'll use $2 gas as my starting assumption.

With these high level assumptions,

2 cars x 12,000 miles x 1/20 gallons/mile x $2/gallon =

$2400 on gas in 2009

With this in mind, I now start thinking about how I can benefit from a move in oil either up or down knowing that if oil prices move up, I'm at the mercy of the market pricing, but I can hedge this quite easily.

Based on the USO options chain, some Put options (see How Stock Options Work: Puts and Calls) to consider selling would be the Jan 2010 Strike for a simple 1 year analysis. With the ETF ticker USO currently trading at $34.25 (This ETF tracks oil prices, but doesn't "equal" the price of oil in dollars exactly since that would be too easy; oil is now at $40.81), the January 2010 expiry options at the following strike yield the following income per option contract:

25's = 4.00 each

20'2 = 2.10 each

15's = .95 each

Let's say you wanted to target the Jan 2010 25's, which represent a 29% drop in oil prices. With oil trading at $40.81, that would be equivalent to $29 oil.

With the Jan 2010 20's, that is a 43% drop in oil prices, which would represent $23 oil.

While not totally out of the realm of possibilities, the prospect of $23 oil would represent a significant drop in gasoline prices, with the indirect effect of substantially reducing the prices for everything from food (distribution, energy costs) to toys (lower plastics hydrocarbon input costs) and more*.

Trading Scenarios

1. If I want to capture what I consider to be decent income from selling USO puts, I could sell say, 3 of the Jan 2010 25 strike options for $400 each, garnering $1200 in income.

-This scenario has significant downside down to $1 oil hypothetically, in which case, you could lose say, $2400 for each contract totally $7200 in this case. Given that fact that the most you spend on gasoline in a given year is $2400 and you'd still be paying at least the tax, the most you'd get back there might be $2000* in a $1 oil scenario totalling a $5200 loss.

-Reality: If oil trades at $1, we've obviously just undergone some sort of nuclear holocaust or worse and a $5200 loss in your portfolio would be rather inconsequential.

2. If I want downside protection, I could generate a credit spread, which I've done on other occasions. In this case, you sell the 25 for $400 each and buy the 15 for $95 to cap your losses to a difference of $10 share prices difference (or $1000 for each contract).

-In this scenario, your maximum loss is now much diminished, while your income is slightly diminished. In the 3 contract scenario, you capture 3x($400-$95) = $915 less trading costs. However, your max loss is $3000.

-An additional benefit here is that you are much likely to incur a margin call (which can occur even if you have some cash in your account). If USO goes to $2, it doesn't matter, since you bought an equal number of contracts that you sold, so your downside liability remains the same no matter what. An unfortunate side effect of selling "naked" options like in scenario 1 is that sometimes, you're forced to either liquidate or infuse more cash into your account to cover the potential loss you're facing from a massive downside.

Infinite Options

The scenarios are infinite. If you're a mid-size landscaper and you burn through 10 times the gas our family does, maybe you want to do this with 30 contracts instead of 3 and pick up an extra $9000-$12,000 every year. You could also use strikes from different months or the 20/15 spread.

In a prior article, I highlighted how you can easily trade binary options on gasoline prices to more directly hedge your personal gas expenditures as well. Additionally, if you want to supersize your return but take on more risk with downside, you can simply execute a synthetic options on USO like I did here.

The bottom line is that you must understand a) why you're doing this, b) what your maximum downside is and c) that you can sustain a worst case downside event. Note that trading options is not for novice investors and you should certainly fully consider all the risks involved. I personally map outcomes in an excel spreadsheet and ensure I could sustain a worst case situation in the market (which has happened to me!) and what it would do to my portfolio.

*What I didn't account for is that our heating bill which utilizes natural gas would be expected to decline as well in the face of declining oil prices since there is a decent correlation in the whole energy complex. Granted, natural gas has its own set of supply/demand issues domestically which differ from the global oil market, but the correlation isn't zero. Therefore, if oil prices decline substantially and I do have to take a paper loss on the sold puts, there is probably some additional benefit in my model due to lower home heating costs that serve as a bonus to the model.

Related Articles of Interest

Green Energy: Pay More? NO THANKS

Blame OPEC?

Prior USO Options Plays

Disclosure: At the time of publication, no active positions in USO or any energy ETF.

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Now, for the Best of November 2008:

Investing:

Selling High Priced Options in a Volatile Market

Rude Awakening in Store for Mutual Fund Holders This Year

Time to Make a Killing in GM, Ford Bonds?

3X Return ETFs are Here! The Long and Short of It

Strong Dollar...Multinationals Gear Up to Feel the Pain

Personal Finance/Other:

Gift Card Bankruptcy Settlement Ouctome

Repricing Employee Stock Options: Ridiculous

Supermodels and Currency Predictions Don't Mix...Surprise!

Perspective on Obama's Win while Traveling Abroad

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What a difference a year makes! Earlier this year, I highlighted the 2007 returns for various stock markets, including emerging markets, as well as sector ETFs. Some of these obscure ETFs spanned the realm of imaginative sectors from the "Emerging Cancer" ETF to hot button items like "Alternative Energy" ETFs. It is therefore instructive to review how some of these hot ETFs performed year to date in 2008 and what 2009 has in store.

2007 vs. (2008) US Returns (major indices):

S&P500 SPY 5% (-44%)

Powershares QQQ Trust QQQQ 18% (-44%)

iShares Russell 3000 IWV 4% (-41%)

Dow Diamonds DIA 9% (-35%)

2007 vs. (2008) (select) International Markets:

iShares Latin America 40 ILF 40% (-54%)

iShares Emerging Markets EEM 33% (-55%)

iShares South Africa EZA 22% (-49%)

Powershares China PGJ 57% (-60%)

Remember all that talk about "decoupling" and how owning international (especially the fast-growing emerging markets) ETFs would provide you with a low correlation asset? Out the window. Well, OK, they didn't perform the same, they did much worse than the US indices. Now, for a few select imaginative sector ETFs...

2007 vs. (2008) (select) Sector ETFs:

*HealthShares (HS) Cancer HHK 15% (-29%)

*HS Emerging Cancer HHJ -35% !!Closed!!

*HS Diagnostics HHD 26% (-39%)

* Note, these HealthShares are only as of March 2007

iShares Energy IYE 42% (-40%)

iShares Financial IYF -21% (-55%)

Market Vectors Gold Miners GDX 21% (48%)

**Market Vectors Global Alt Energy GEX 47% (-67%)

**since launch in May 2007

***Market Vectors Agribusiness MOO 40% (-59%)

***Since launch in Sep 2007

The takeaway from the selected sector ETF review is that for investors that jumped in to the hot sectors of 2007 like Agristocks and Alternative Energy, they were hit especially hard. This is further evidence of the herding that occurs during bull markets and the subsequent fallout for those left holding the remnants.

Disclosure: The author trades SPY, QQQQ, UYG and engages in pairs/hedged positions with combinations of each.

For a full snapshot of all the ETFs reviewed for 2007, visit this article.

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This weekend, a sales rep for Verizon showed up pitching the Verizon FIOS/bundled services and I wanted to pass on my impressions on their tactics and what you should consider in advance of the hard sell I got at the doorstep. While I'm aware that customers switching from Comcast, the worst customer service company I've ever encountered, to Verizon, are quite happy, there are some considerations here that you may find interesting.



Initially, a Seemingly Attractive Offer


At first glance, he seemed to be offering a signup package that was more lucrative than the ad I had just been mulling over from the mail that day. By now, several of my neighbors have switched from Comcast to Verizon FIOS/bundled phone/internet packages and I'm one of the few holdouts in the neighborhood. I assumed that I had some leverage to see if I could push for a more beneficial offering to entice me to switch over since the acquisition costs in this business are high and the incremental service costs are quite low (they're not actually selling me a hard good or providing expensive human capital, it's simply bandwidth and an occasional customer service call so they should be able to afford a cut to acquire a new customer and still turn a handsome profit). Here was what he offered up vs. the best offer in the previous Verizon advertisements.

Salesman Offer vs. Advertised Signup Deal:

• Starting base of $100/month for the phone/internet/TV base package. Same as ad ($99).


• He offered an HD Multi-room DVR free for 3 months upon signup. Verizon ad said "get HD multi-room DVR for the price of a standard DVR" - slight edge to salesman.


• $6/box for each additional TV for non-HD boxes. Ad made no mention of this.


• Since we watch series (what is the plural of series? I digress) on HBO and Showtime, I asked what it would cost for those packages. He handed me a sheet outlining various packages. Each actual channel had an additional fee, so the HBO set was $16, the Showtime set was $15, the Starz package, MAX, etc., each had their own fees. Since we primarily watch HBO and Show, this would be $31. Ad made no mention of those prices (see what I got over the phone below).


• He made no mention of any activation fees. I didn't have the ad in front of me, but later on I noticed the fine print: $29.99.


• He made no mention of an early termination fee. The ad cited: $179. I'm sure for this and the prior item, they would have been in the small print on the contract he wanted me to sign.


• He could not quote any taxes or fees. These weren't noted in the ad either. They like for you to realize this after you get your first bill.

Sounds Pretty Good so Far, Right?

This all sounded reasonable and I was considering switching
except for...

Very Aggressive with an Exploding Offer

In the Negotiations lexicon, an exploding offer is one in which the opposing party presents you with an ultimatum whereby it inhibits your ability to assess your other options, perform your own research, talk over a decision with your wife, etc. This is a common tactic you'll encounter when negotiating a new car deal and services such as DirectBuy (i.e. "If you don't sign up today, you can't enter this store again or sign up for x years [as impractical to track as it sounds, I know people who bought into it and signed up that day for a few thousand dollars only to find later that they regretted it due to the high shipping charges and other factors]). An exploding offer is generally one made from a position of weakness and as a consumer, you should ALWAYS be suspicious of an exploding offer. If a merchant is truly offering you a fair deal, there should be nothing to hide, right? Once you research further and assess your options, you'd come back and take them up on the deal, no?

The exploding offer I got was that I had to sign up for the service on the spot or else there was no other way to attain the same deal he just offered. Here's how the conversation went and how I tried to counter his exploding offer to maintain an advantage.

Sales: So, all you have to do is sign up now to take advantage of this great deal.

Me: Well, I need to research this a bit further; I don't just make decisions like this on the spot. Do you want to take my number and check back in in a day or two?

Sales: No, I'm not allowed to take numbers down, you have to sign up now.

Me: OK?...Well, how about you give me your contact information and if I want to go with it, I'll give you a ring and we can finalize the same deal we just discussed?

Sales: I can't do that either, I can't give out my number, the sales have to be completed while I'm out here.

Me: Look, I don't even know if you can port my number. That was a huge headache with my wife last time we moved. How am I supposed to confirm that prior to signing up?

Sales: I can check that once you sign up and you could always cancel.

Me: Really, this is quite an operation you're running here. Where are you headed to next, are you able to come back later?

Sales: I have some other houses in the neighborhood I have to visit.

Me: OK then, why don't you just pop back in later then. I can do some preliminary research and then you can come back [**my thinking was that I was going to call Verizon directly and see if this was actually a better deal than they were offering or if I could do better through them...I also needed to see what the implications of cancelling Comcast would be prior to signing up].

Sales: No, I can't do that because I'm not affording other people the same opportunity to sign up for this deal that way. Look, you're obviously getting a better deal through me since when you sign up with Verizon, they know you're coming to them so you want the service. With me, I'm coming to you; this is a one-time deal which is very good for you.

[It was clearly evident that he DID NOT want me to research his proposal versus my other options and was attempting to push me into signing up via an exploding offer]

Me: You know, I don't know what kind of operation you guys are running, but I'm not interested. Take it easy. [Slam].

Downsides of Accepting This Exploding Offer:

Termination Fees from Existing Service: Many people are currently locked into 1 or 2 year service contracts with their current service provider and they don't even know it. This is very common for both cell phone companies and cable/TV/phone companies. If you cancel within the initial lockin period, you could incur charges of up to $400 in some cases just for cancelling! In this case, I was not even given the opportunity to call Comcast and see if I was currently under contract for a particular period or if I could cancel at any time. If I was under contract, any savings he could offer with his exploding offer would be trivial.

Able to Get a Better Deal Elsewhere: This is often the case with exploding offers. What I found out upon calling Verizon myself and seeing what they could do for me above and beyond the advertisement was that if you ask for it, you'd be surprised at what you get (see Savings Tip on Making an Offer they Can't Refuse).

Actual Call to Verizon Offered Just as Good a Deal

So, check this out. After he left, I called Verizon and was able to obtain the following benefits over what their ad deal. I started the conversation like this:

Me: Hi, can I speak with a supervisor please?

Verizon: May I ask why?

Me: I'm one of the last holdouts in my neighborhood to signup and I need to have some better terms than what you're currently offering in order to leave Comcast. I need to speak with someone with the authority to grant a change to your stated offer; do you have that authority?

Verizon: Hold on, I'll connect you with my supervisor.

After that, I was able to negotiate the following improved terms:

• For $30, they were able to offer all the premium channels HBO, Show, MAX, Starz, etc. for $30 vs. the a la carte the salesman had at $15-$16 for each station type. I didn't need all these, but for the same price, I would have gotten many more channels for the money through calling in.


• While I'd pay $15.99 for the HD-DVR initially, they were giving me free HD boxes for the other rooms, which he was not. Roughly, a wash, but something he couldn't offer nonetheless.


• They DID confirm that they could port my number, which was important to me. He couldn't.

If I pushed them, I probably could have won out with some additional concessions, but at the initial inquiry phase, the Verizon rep over the phone had already been able to offer roughly the same net pricing that I would have paid to the salesman at the door, but on my terms, my timeline, with my comfort level.

The bottom line is: I could have signed up for something I regretted and worst of all, missed out on the excellent opportunity that followed via my negotiations with Comcast the next day. Make sure to tune in to see how much I'm saving now with Comcast by pitting them against Verizon and how I did it!

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As I had highlighted last week in my "Selling the Rallies" post, the market has been following a somewhat predictable pattern of maniacal upswings of 10% or greater in a quick run, followed by severe downturns to the tune of 5%+ in a single day, usually culminating in peak to trough patterns of 12-20%. Today's fall was in line with what we've seen since December and should come as no surprise to investors who have been active during that time. During last week's upswing, I took a 2X short position in the S&P500 using the ETF SDS, which is now nicely in the money.

What I missed was that the new 3X ETFs are finally out! So, as I wait out a bottom here and sell off SDS later in the week and wait for the next bounce, I will utilize the 3X Short ETF for the next swing. As outlined in my rally-selling post, I'm net long, but while the markets gyrate up and down like this, why not capitalize on the volatility. If I'm wrong on the next downturn and my 3X position gets wiped out, I'm more than OK with that, as I'll see my higher Beta positions in the other 90% of my trading account recover, as well as the order of magnitude greater that I hold in retirement accounts.

I'm also considering the 3X Long Energy ETF given the current oil contango (without doing a whole post on this, the forward futures are at a huge premium to current spot prices, even over carrying costs...so much so that investors should be renting tankers and storing the stuff, but there's no more credit out there to do so!) but I think there might be a bit more downward pressure given global slowdown and the inability of OPEC countries to actually hold to their agreed quotas (a cartel that cheats isn't much of a cartel!).

Until then, it's reversion to the mean hedging time!

I also recommend checking out these videos on profiting from volatility; very good stuff, I've been watching these, just put your email in for updates!

Disclosure: Currently Long SDS (which is a short ETF of course!)

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