You Cannot Hide from Your Debt

Of the many lessons my parents tried to teach me growing up, perhaps the one that stuck the most had to do with personal debt.  Unfortunately, through the wrong example, I learned what a slave to debt a person can become.  I also learned that the only true, lasting fix to debt, is to be disciplined in your spending habits.  I further learned in the midst of this, that interest never sleeps.  It works 24/7/365 and you literally are a slave to it until it it gone.

I've been telling my family, friends, co-workers, subscribers, and pretty much anyone who would listen, that the primary reason I do not believe the economy has recovered in the past few years, in spite of all the hype to the contrary, is because of our deficit spending and our debt as a country.  Some nod their heads and seem to agree.  Others argue and regurgitate the talking points from the media about it not being that big a deal.  Others seem to not really care and treat it like many other political lightning rods: they hide from it.  They bury their heads in the sand.

Well, some are finally figuring it out, and that is why I wanted to share this article I read today.  I found it on Foxnews.com and it credits the AP for the article.  I wish I knew who specifically to give credit to, but let me just say "bravo for someone starting to get it".

http://www.foxnews.com/politics/2013/09/17/new-study-warns-us-long-term-debt-problems/

NFLX Adjustment

At Safe Option Strategies we teach trade adjustments.  We believe that any trade you open should be one you could adjust in case the stock moves contrary to what your expectation is.  But, it is a common misconception that any trade can be adjusted to profitability when it goes against you.  While that is an ideal scenario, sometimes what an adjustment will do is simply lessen the loss on a trade.

A great example of this is a trade we opened on NFLX about three weeks ago.  The trade moved as badly against us as possible, and did so in just one day.  By the time we could react and make an adjustment (our secondary exit plan) we were already looking at our max loss in the trade.  By adjusting, we have now created a situation where we will still take a loss, but rather than 100% of our max loss, we are looking at between 35 and 50 % of our max loss.

To see this trade and the adjustment we made to it click here.

No Worms in This Apple

Before I even get into stocks, and more specifically into Apple, I want to tell you about my two favorite times of the year.  See, I’m a big sports fan.  I loved watching Phil Mickelson win the Open yesterday because I love golf.  I like watching baseball, and basketball, and college football, and golf, and tennis, and soccer.  I love to play golf, or throw a baseball with my younger son or daughter.  I love to shoot baskets with my college age kids, or take them to an occasional MLS soccer, or NBA game.  My wife and I play tennis whenever we can.  It’s part of who we are. 

Because I’m such a sports nut, I have two favorite times of the year, March, and October.  March is amazing because it’s the NCAA Men’s Basketball Tournament.  In my opinion, it is the best sporting event of the whole year.  March is also the beginning of baseball season, the push for the playoffs in both hockey and NBA basketball, and The Master’s Golf Tournament is just around the corner.  I love October because of the World Series, College Football back in full swing, and the start of the NBA and the NHL.  I drive my family and friends nuts with my Bracket Challenge (that’s for the NCAA Basketball Tournament for you non-sports fans) in March and with my World Series predictions and NBA pre-season analysis in October.  I sing lines from Christmas songs (“It’s the most wonderful time of the year.”) when December is three months away or three months past.  If you are a sports fan like I am, these two times of the year are just plain exciting.

As an avid trader in the stock markets, I get four months each year that bring me the same kind of excitement: January, April, July, and October…..Earnings Season!  It is that truly magical time we get each quarter when up is down, front it back, and East is West, because nobody really knows what is going to happen to a company's stock price when it reports its quarterly earnings.  Take Apple, Inc. for example.

On the drive into my office this morning I heard that several of the top analysts are split on what to expect when Apple, Inc. reports its quarterly earnings on Tuesday at the close of the markets.  One says the company is going to strongly disappoint.  Another says that new iPhone activations are going to top expectations and the company is going to beat projections and do great.  Yet another is staying as neutral as possible (coward) and saying it all depends on whether or not any new products or significant product announcements come out in the conference call.  And that is the excitement in my opinion: nobody knows. 

There have been a lot of naysayers to Apple since the company stock price hit an all-time high of $705.07 (the intra-day price was a bit higher, but this is the highest closing day price the stock experienced) in mid-September of last year.  At that time, the analysts’ consensus on Apple was that the stock would go to $1000 per share before the end of 2013.  95% of all the analysts at the time were wrong on picking a continued bullish direction on Apple.  It reminded me of the New England Patriots undefeated regular season a few years ago.  All the sports talking heads had them as a lock for the Super Bowl that year.  Well, it was an amazing run, and the team got to the Super Bowl, but got defeated by an upstart young quarterback names Eli Manning (I think he has an older brother who plays too).  The point is no one could predict what would really happen.

Apple’s woes since hitting its high stock price have been blamed on different things: 1) Lack of new products or innovations in the pipeline.  2) The rise of other smart phones to better compete with the iPhone (mostly the Samson Galaxy).  3) A slowdown in Mac sales as more and more people move toward tablets and netbook style computers. 4) Stronger competing products to the iPad.  And let’s not forget my personal favorite, 5) the loss of a far too young Steve Jobs, who has long been identified as Apple.  Apple is Jobs and Jobs is Apple.  I have heard rumor that some guy named Tim Cook has taken over, but I still don’t really know who he is.

I’m not quite ready or willing to make a prediction on what the price of Apple stock will do after its announcement tomorrow, but I am more than willing to tell you why I still think this is a great company.  It’s simple for me really: great products.  Apple products, in my opinion, still hold up strong, and in most cases better, than any competing product out there when put to a head to head test.  Let me offer some evidence to my humble opinion:  Last week Microsoft had an incredibly disappointing earnings report.  A big part of that was $900 million in tablet inventory.  See, Microsoft came out with this great new tablet called Surface, which was going to be the first thing to really challenge the iPad.  Well, there seems to be more of them sitting on Microsoft’s shelves than moving off the shelves in stores.  I’ve seen the Surface.  It’s not a bad tablet.  Its only problem is that it’s not an iPad, and iPad is the best tablet, hands down, on the market.  I own a couple of iPads, and one other brand of tablet (I’ll keep the name of it to myself).  The other brand tablet I have won’t charge anymore (and it is by the way the newest of the three tablets I own).  I got online just last night to see if someone knew a great fix for it.  I was shocked when I found out how many people had the same problem with the device and even more shocked at all the other problems people have had with this device.  And this device is one of the better sellers out there.  This got me thinking a little, so I searched several other devices that have “challenged” the iPad in recent years.  I found the same thing.  Lots more problems than Apple’s tablet. 

I’ll give you another example:  I have friends and family who have every variety of smart phone on the market.  I’ll take my iPhone over any of them, any time.  I know far more people who switch from other smart phones to iPhone than the other way around, despite what you might hear otherwise.  It is just a better product.  I told my wife last night that the next version of iPhone will probably have a wider screen to compete better with the Galaxy and some other smart phones.  She looked at me and said, “Why? This one fits perfect in my hand and in my pocket”.  Great point sweetheart.  It’s a great phone the way it is. 

From here you can go to laptops and desktop computers.  Do you know anyone who owns a Mac, and other brand computers?  You probably do.  And they probably all say the very same thing I say: my Mac is the best of them.  It’s just a better product.

As long as the quality of the products is what it is, I believe the competition still has a way to go to catch up to the quality of Apple products.  Would I like to see some new things come from Apple?  Sure I would.  And I actually disagree just a little with my wife about the screen size on the iPhone.  But, until someone has something better, I’m still putting my money on Apple.

Like I said earlier, I don’t know what will happen to the price of the stock after tomorrow’s earning announcement.  I am not an analyst, I’m just a guy who uses the products and trades the stock.  I do know this though, Apple is still a great company, and at its current price, I believe still a good stock to own.

Here is one last thing to consider:  When I look at stocks I want in my portfolio, I look for companies that enjoy some health financially.  My silly, common sense approach tells me that if I fill my portfolio with healthy companies, I increase my chances of having a healthy portfolio.  Apple, Inc. currently has about 40 billion dollars in cash, and 0 dollars in debt.  If my portfolio is a barrel, there are no rotten apples in it right now.

Closing Another Profitable Trade

We are closing our bull put spread on Facebook this morning.  The trade, in only two days has more than half the profit we could gain as our max ROI.  We like taking money off the table when we can.  Here is what the trade looked like a couple of days ago when we opened it:

We will close it today for about $0.21 per share.  We took in a credit of $0.46 per share against a spread in the strikes of $3.00.  Our max risk getting into the trade was $2.54 per share.  This means our max ROI would have been 18% had the trade expired worthless.  By closing today and capturing $0.25 credit we are getting about a 10% profit on a two day trade.  

We publish all our trades for our subscribers before we open them, so that they can follow us in the trades if they choose.  Check us out at www.safeoptionstrategies.com

What will the FOMC minutes do to the market?