Sunday, February 15, 2009

2/15/09 Bottom Fishing Portfolio - No Geithner Magic this Time

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). I am currently short one option for Energy Conversion Devices.

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. Since the automaker bailout did not cause a large bounce for Ford, all the calls have expired worthless.

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. However, after companies started cutting dividends, I've decided to not to use this strategy. For example, 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. Pfizer, also a top 5 2009 Dog, also cut its dividend in half.

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 83.9%. I now believe there is a high probability Bank of America will not survive the financial crisis and economic downturn.

My new strategy with financial stocks is to purchase 4 - 12 month out of the money call options. If financial stocks should recover significantly in the next year, I could make several hundred dollars. If there is no recovery, my losses are limited to the call purchase, which will be less than $200. For now, this strategy has worked well in limiting losses while allowing the portfolio to participate in the financial rallies.

The portfolio was down 10.1% in the past week, versus a market fall of 10.1% in the Dow. Financial stocks fell due to the poor showing by the new Treasury Secretary, Tim Geithner, which gave the markets zero confidence. Unfortunately, Mr Geithner learned that just showing up would not have a positive impact. The overall portfolio is down 44.41%, very near its low of -45.30% in December, 2008.

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

Price on 2/13/09

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



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



Wells Fargo (WFC) [10/3/08]100



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

PNC May 45 call (PNCEI) [1/20/09]100



PNC Jan 55 call (WYLAK) [1/20/09]100



Currently, I have profited from all four put contracts which have been closed or allowed to expired. In January, 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 2/13/09

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



It appears there may be a bear market rally in the next week. 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. I am short an Energy Conversion Devices put contract and long PNC call contracts in our trading account. Alcoa and Pfizer shares are owned in our managed accounts.

For more on New Beginnings, check back every Sunday for a new segment.

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

Copyright © 2009 Achievement Catalyst, LLC

1 comment:

irishred said...

I hear you... bank of America was a shame. Glad you've still been able to find the silver lining and limit your losses.