Sunday, January 18, 2009

1/18/09 Bottom Fishing Portfolio - Financials Have a very Foul Stench

On Friday, October 3, 2008, I couldn't resist the temptation of buying some stocks before the bailout vote. I bought shares of Bank of America (BAC), J.P. Morgan (JPM), Wells Fargo (WFC) and Monsanto (MON). I believed that these three banks will not only survive this financial crisis, but will be one the four major banking powers in the next year. Monsanto was down over 50% from its high and its seed and agricultural businesses are still very strong.

As part of this portfolio, I have also been selling put contracts to open on specific stocks. I have been selling put contracts at one to two months from expiration on Monsanto and Energy Conversion Devices (ENER). With the drop in the market of the last two weeks, I have started selling put options on these stocks again.

In December, 2008, I decided to buy some Ford (F) call options, to capitalize on a possibility of a rebound if Congress supports an auto industry bailout. On December 2, 2008, I bought the December 5 call and on December 3, 2008, I bought the January 7.5 call. Since the automaker bailout did not cause a large bounce for Ford, all the calls have expired worthless.

This week, I began thinking about buying some high dividend paying stocks, such as DuPont (DD), Pfizer (PFE) and Alcoa (AA), which are paying 6-7% dividends and are picks in the Dogs of the Dow system. These are pretty high dividends, and I need to evaluate if the companies will be able to maintain them during this recession. For reference, Bank of America, which was the top percentage dividend payer in the 2009 Dogs of the Dow selections, cut its dividend from $1.28 per year to $0.01 per year.

In hindsight, I bought the financial stocks way too early. I've learned my lesson. I will not purchase any more financial company stocks, until there is a more clear turnaround in the financial crisis of 2008. Of the three financial stocks, Bank of America has been the worst pick, being down 81.1%. I now believe there is a high probability Bank of America will not survive the financial crisis and economic downturn.

It also appears that I had been overly optimistic about the market impact of the automaker bailout.

The portfolio was down 15.1% in the past week, vs a market decline of about 3-5.5% due to the selling pressure on financial stocks. The overall portfolio is still down 43.89%, very near its low of -45.30% four weeks ago.

Bottom Fishing Portfolio
Stock or Option [purchase date]SharesPurchase Price

Price on 1/16/09

Bank of America(BAC) [10/3/08]100



J.P. Morgan (JPM) [10/3/08]100



Wells Fargo (WFC) [10/3/08]50



Monsanto (MON) [10/3/08]50



Ford Dec 5 call (FLA) [12/2/08]1000


expired 12/20/08 at $0

Ford Jan 7.5 call (FAU) [12/3/08]1000


expired 1/16/09 at $0

Currently, I have profited from all four put contracts which have been closed or allowed to expired. Last week, I sold a February put contract short for Energy Conversion Devices and will consider doing the same for Monsanto if the market continues to decline.

Put Contracts Sold Short to Open
Option [short date]SharesShort Price

Price on 1/16/09

Monsanto Nov 60 put (MONWL) [10/3/08]100


closed on 10/29/08 for $0.91

Energy Conversion Nov 20 put (EQIWD) [11/12/08]100


expired 11/21/08 at $0

Monsanto Dec 40 put (MONXI) [11/20/08]100


expired 12/20/08 at $0

Energy Conversion Dec 17.5 put (EQIXW) [11/25/08]100


expired 12/20/08 at $0

Energy Conversion Feb 15 put (EQINC) [1/14/09]100



Perhaps, these stocks may still participate in a January effect rally which some experts predict is very likely this year. If these stocks should rally significantly, I will look to close out the long positions in the financial stocks.

Disclosure: At time of publication, I own shares of Bank of America, J.P. Morgan, Wells Fargo and Monsanto shares and am short a put contract on Energy Conversion Devices in our trading account. Alcoa and Pfizer shares are owned in our managed accounts.

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This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC


Manshu said...

This is very intersting...any specific reason for selling puts insteading of buying calls? Or am i reading it wrong, and you really are writing a Put?

Super Saver said...

@ Manshu,

What I call selling puts to open (or short) is the same thing as writing a put.

I usually write out of the money puts on stocks that I think are good to own. Since the puts are out of the money, I either buy the stock at a much lower price, or I get the premium when the option expires. Of course, if the stock rises significantly, I miss out on the big gains. However, that hasn't been a problem yet during this bear market:-)