It's a Mad, Mad World
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- Published on Friday, 24 August 2012 13:59
- Written by Sara Nunnally, Editor, Inside Investing Daily
- Hits: 526
It's such a weird day for news. Today we learned that Norwegian mass murderer Anders Breivik was found sane and sentenced to 21 years for killing 77 people.
We also learned that Lance Armstrong has given up his fight against doping charges and that he could be stripped of his titles and banned from racing.
And a shooter killed at least one person and wounded eight in front of the Empire State Building before being shot and killed by police.
And even on the financial side of things, today is odd. Romney says he's going to replace Fed Chairman Ben Bernanke. This announcement comes only days after a top Romney aide said Bernanke should be given every consideration for the position if Romney becomes president.
A former bank exec in Vietnam was arrested today for "allegedly violating state regulations on economic management leading to serious consequences," reported a state-owned news agency.
And North Korea's Kim Jong-un wants a state visit to China to discuss economic issues -- aid and long-term cooperation. At the same time, North Korea will continue its missile testing, and China is also moving ahead with its own missile advances.
It's a mad, mad world, folks.
Not only do we live in a mad world, we live in an expensive one.
Oil is above $98 per barrel, and gold is near $1,670 per ounce. And the forecast for food prices next year will still be 3-4% higher than current prices.
Gasoline prices could reach fresh highs by Labor Day -- just in time for one last beach hurrah -- and markets haven't quite come to grips with the looming fiscal cliff.
From CNBC and Goldman Sachs U.S. equity strategist David Kostin:
Most people have a relatively benign view of the risks involving the fiscal cliff, and the idea that it's going to be addressed in the lame duck session of Congress. Some people have that view, and that's a pretty optimistic view. Experience might suggest that politicians are not in the mood to come to resolutions necessarily.
That means the stocks you're buying today might be expensive, compared with where they will be in just a few short months from now.
And along with that idea comes the risk of losing a significant chunk of your portfolio's value as the market readjusts to the fiscal cliff. If you're long, you need to protect your investments
A simple way to do just that is to buy put options that give you the right to sell your stocks at a specific price, no matter what the market price of that stock is.
For example, if you bought Boeing (BA:NYSE) at $67 a couple of months ago, you're sitting on a 5% gain. But the fiscal cliff could knock everything sideways. Even if Boeing falls only to its 2011 low near $57.50, that's a loss of more than 14%.
And the chances of the fiscal cliff being worse than a 14% drop are huge.
You can easily protect yourself from this drop and even make some money while you're doing it.
The February 2013 70 put options are trading for about $4.85. This put option would give you the right to sell Boeing shares for $70 each, no matter what the market price is.
That means if Boeing drops to $57.50, you can still sell at $70... Even if Boeing drops all the way down to its 2009 lows of $30 per share, you can still sell at $70. You'd be taking home more than 4% (minus the cost of the put option) while everyone else is stuck with a double-digit loss.
The markets certainly haven't priced in the risks of the fiscal cliff, and anyone long in equities had better shore up their portfolios.
Happy Investing,
Sara
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