Archive for December, 2012

How I Dodged the Silver Bullet (Symbol SLV)

A while back I was long on Silver (Symbol: SLV) for many reasons. Inflation scares, shaky markets, and diversity to name a few. Then suddenly I took a look at it versus the current market and thought “where can this even go from here?”

Are we going into a massive depression? Are we going back to a metal based pegged currency? I was bull on the market, so how could I continue to be bull on it’s counterpart indefinitely?

Already up a solid 55.0%, I decided it was time to sell. This might have been one of the luckiest sells. Not only did I sell before a downward movement, but I sold literally at the short-term peak.

And sure enough when Silver is falling, its usually because the indices are climbing.

I view silver as a semi-hedge against the market, and I’ll consider getting involved again if the market continues to rally and silver remains relatively stagnant.

Overall though, I’m very happy I got a little of the metal action, but I’m pretty bearish on the whole for gold and silver. I believe we are going through a lot of things with the economy which causes a bubble short-term, but I feel like we are more likely to see $1500 gold than $1900 gold (Currently $1700). One of the major reasons I decided silver over gold in the first place was that silver didn’t quite have the bubble that gold did at the time.

For now I’ll take it off the table and look for better investments.

 

AMD Stock, Why I’m Placing a Small Bet

Despite all the talk that AMD stock is a falling knife, I had to place a bet on it long. I have put $820 on black … er umm I mean AMD stock. As silly as it seems, it is a gamble that I believe warrants taking.

The Good

1. AMD’s revenues are not that terrible.

2. AMD has a decent looking balance sheet.

3. AMD is probably oversold a little.

4. AMD options are very cheap.

I bought into AMD options for Jan 2015 @ 2.50 for a whopping $.82 a contract. That means I picked up a mean 10 contracts. If this stock gets a little bit of life and returns to the $5 range in the next 762 days, we’re talking $2500 on my $820 (204% return)

Now let’s talk about the bad. AMD’s presence in the computer market has simply been getting smaller. I’m actually in the market for a computer and I personally don’t see any real reason to go AMD unless there is an absolute killer deal (which hurts overall margins). This is a giant problem, a potentially brand ending problem, but I have faith that AMD will stick around. I believe if a recovery does come, it’s going to take a while (and hopefully it’s within the next 700 days or so).

But ultimately it comes back to the simply risk vs reward. I think the odds of this stock touch $5 in the next 700 days or so is probably 30-40% (gut feeling off fundamentals). I think there is even a small chance it could higher than $5 a share. Factor that into a quick equation, The option’s value seems worth the gamble.

Interesting enough, if you think it’s 50/50 AMD will recover or go bankrupt.. straddle options are looking amazing on AMD. You can get in for about $.40 on a $1.0 put / $7.0 call straddle. This for people who aren’t familiar with straddles would mean you would capture any gain below $1 and any above $7 from now until Jan 2015.

And if you really think AMD is done in the next two years, then just buy the $.18 ask Jan 2015 @ $1.0 put, if the company does go out of business entirely you can expect a solid 400% return.

Final thoughts:
I would argue that option plays on AMD are the safest play you can make on the highly volatile AMD. Buy 1000 shares at $2390 or pay $820 for virtually all of the upside on the same amount of shares (from now till Jan 2015) and risk 1/3 the money if it completely tanks and defaults.

Option traders are looking for high volatility to make money and just take a look at that chart. This feels like Sprint all over again. This is why I’m $820 in AMD long (but considering adding in that $1.00 put contract for $.20 to make a straddle).

Do We Want the Housing Market to Recover?

There has been a lot talk that the housing market has found it’s bottom and maybe even had some growth in 2012. Which raises a big question with myself, do we want a housing market recovery? Full disclosure I bought a house for $126,000 with the $8,000 government credit. I now owe roughly $117,000 on the house after 3 years of ownership (I also massively rehabbed the house).

I think the answer is no. Before you light up a brown bag of your dog’s waste on my front porch, let me make my case.

We’ve been trained to think that housing is the way to personal wealth, and it has been a fairly effective way of growing personal wealth for many families. This did not come without a corresponding downside, the effective cost of housing has increased.

Imagine a world where the cost of living in a home was half, but there was no expected growth or fluctuations. That $150,000 housing gamble now becomes a $75,000 “fixed asset.” Knowing full well this is not the world we live in, I dream of a world of stability when it comes to fixed expenses (houses, energy, etc.). Also, people who don’t see a home in the current world as a gamble, are kidding themselves. Now I understand it’s likely we will return to business as usual (3-5% yearly growth) in the near future, but housing has ultimately become a way for our country to leverage itself. We create artificial value in our homes, even when our wages are stagnant. Now a days we win by leveraging ourselves and seeing unsustainable growth. By being the guy who bought 10 years ago and has a smaller payment because of doing so. Of course this also promotes the mentality of “you don’t want to miss the boat.” You have to buy your house today to benefit from it years from now.

I’m the first person to understand how important the housing market is to a healthy US economy, but I believe one universal truth.

Truth: “The more available finance for something, the higher the effective price.”

Maybe it’s time we throttle back the housing market, require 20% down as a minimum and stop hoping for a large portion of our GDP to be housing based. I understand this will take the edge off our growth as a country, but I have to believe that long-term it would play out much better for average working class family. With having lower, more fixed housing prices, we can avoid the next bubble and the next collapse. We can have more money in our pockets today and not in 15-30 years from now.

But hey, let’s be honest for a minute. We are far too deep in this housing mess to ever have real reform without a massive depression. Despite my personal feelings it’s most likely back to business as usual. Massive leverage, massive gambling, and bubbles.  (Chart Below credit to Forbes.com)

One final comment: “You shouldn’t view your home as an investment” is a luxury statement. The only way you can say this statement is that you can easily absorb a 100% loss on your home or your credit score (defaulting) and it not effect your life. People should absolutely view their home as an investment. Doing anything to the contrary can potentially ruin your finances.

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