By
Tom Dyson, publisher, The Palm Beach Letter
Wednesday, November 26, 2008
So far, we've only experienced the problems that come from falling prices in one section of the economy: single-family housing. It's wrecked Wall Street, and destroyed stock markets around the world.
As I look around, I see more debt that needs marking down... What about the loans made to consumers to buy cars, go to college, or use credit cards? Or the loans made to corporations to finance the takeover spree of 2006 and 2007? International loans will be another big problem. And then there's commercial property. What will happen when all the loans made against office buildings and retail parks across the country start defaulting?
For a good example, look at Citigroup's balance sheet. Residential mortgages make up less than 10%. The rest of its capital is invested in consumer loans, corporate loans, and commercial real estate loans. How many of these loans were written in the bull market and priced for perfection? I dread to think.
It's like we've been hit by a tidal wave. We've capsized. Now, several more tidal waves are speeding toward us...
The situation is particularly acute for income investors. Not only will companies cut dividends, investors will demand higher dividend yields to make investments. What's the use in buying a stock for its 10% dividend when its price could fall 50%?
In light of the situation, today I'm going to show you the ONLY safe way to generate income in bear markets like we're in now. By following this system, you'll put America's strongest stocks in your portfolio and use them to generate 20% annual income yields.
Here's how it works:
Step one in our strategy is to buy the absolute safest stocks.
As I've said many times before, the safest stocks are the ones that generate strong cash flows and have long histories of paying rising dividends… These dividend growers hold huge power over their competition through strong brand names, access to capital, the best management, and sheer size. These are the best companies in the world. Over time, they'll retain their value better than any other stocks.
Step two is to sell call options against these stocks.
DailyWealth's editor in chief, Brian Hunt, calls this the golden age for selling options. Brian's referring to the volatility in the market these days...
Volatility increases the price of options. That's because volatility makes it more likely option buyers will have the chance to profit. So when volatility rises, option sellers increase their prices.
Due to the incredible volatility, options have never been more expensive than they are right now. Today, options sell for five or six times more than similar options did in the calm markets of 2005 and 2006.
The textbooks call this a "covered call" strategy. In a covered call strategy, you buy a stock and sell call options against it. Essentially, you sell most of your upside potential to another investor in return for guaranteed income now.
Take Chevron Corp (CVX) for example. It pays a 3.7% dividend and buys back $7.5 billion in stock each year. No matter where the oil price goes, Chevron will still make money. In 2001, with oil prices around $25 a barrel, Chevron was able to crank out $11.5 billion in annual cash flow. In the last 12 months, Chevron has generated $31 billion in cash flow.
On Monday, Chevron's stock closed at $74.30. You could sell the June 2009 $80 call for $9.50. By selling this option, you sell any upside in the stock above $80. No matter what happens, you cannot make more than $5.70 in stock price gains (that's $80 - $74.30) between now and June.
If Chevron's stock falls, you take all the losses. But by buying Chevron after a 30% decline in its stock price, at less than seven times earnings, you've limited most of your downside risk.
In return for selling seven months' worth of upside potential, you'll receive $9.50 per share. If Chevron sells for less than $80 in June, you can sell another call option. I can't say how much the market will pay you for that option, but let's assume you get at least another $5 per share. Here's what that'll look like:
June 2009 option premium:
$9.50 per share
December 2009 option premium:
$5.00 per share (guess)
12 months of dividend payments:
$2.60 per share
Total income:
$17.10 per share
If Chevron trades for $74.30, that's a 21% income yield over the next 12 months, not counting any movement in Chevron's stock price.
I suggest you talk to your broker about the strategy, find four or five of your favorite blue-chip stocks, and sell options against them. You're buying the strongest, most profitable companies in the world at the best values in a generation.
Then you take advantage of the highest option premiums in history to generate safe 20% income streams. There's no better income strategy in bear markets...
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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Most folks believe gold has performed terribly this year. Gold's "underperformance" is unexpected, considering it normally soars when a big pile of you-know-what hits the fan.
As we covered yesterday, most folks look at gold in terms of U.S. dollars. But that doesn't give you the whole picture. Today, let's look at gold in terms of how much gasoline, cereal, bread, heating oil, hamburger, coffee, and construction materials it will buy you. Let's look at gold versus the "CRB."
The CRB Index is like the "Dow Industrials" of commodity prices. It's the world's most widely followed gauge of raw materials like oil, copper, and corn. As you can see from today's chart, when you look at gold in terms of things you actually eat, burn as fuel, or live in, gold is soaring. We stand by our claim: The bull market in gold is alive and well!
If You Want Cheap Gold Coins, Canada Has Them By Tom DysonTuesday, November 25, 2008
Coins are the best way for individuals to buy gold. They come in small denominations, they're portable, and you can exchange them for cash anywhere in the world at gold's international spot price.
Here's the thing: Right now, gold coins are hard to find. Even if you can find them, they're more expensive than usual.
Buy Your Ticket for a Religious Experience Here By Tom DysonMonday, November 24, 2008
Just last week, the Treasury market moved to a new all-time high. Then it accelerated even higher. Thursday's move in bond prices was, I'm guessing, the largest "up day" in the history of Treasury bonds.
The rise of the Treasury bond market is probably the strongest trend in finance today. You can short it if you like, but in my mind, you'll end up like the swimmer who played chicken with the oil tanker.
The Indicator That Nobody Believes, But It Works! By Dr. Steve SjuggerudFriday, November 21, 2008
When this indicator says "buy," stocks significantly outperform their long-term average... earning double-digit annual returns. And when this indicator says "sell," stocks lose money.
If You Think You're Safe Holding Cash, Read This Immediately By Dan FerrisThursday, November 20, 2008
At times like this, you must focus on value available per dollar invested. Right now, there's more value available per investment dollar than at any time since I was born. There are literally dozens of choices ranging from very good to superior. Never be afraid to buy when the odds are in your favor, no matter what your past performance has been.
