Thoughts about the stock market. A fundamentals-based, long-term perspective on money, prices, bull and bear, up and down, in common stocks. A weblog by Richard Gillmann. Reader comments are encouraged.
The United States dollar has served as the world's main reserve currency since it took over from the British pound after World War II. Asian countries in particular hold huge amounts of US treasury debt as backing for their own currency. The Bush administration has cut taxes and increased spending, especially spending on war in the Middle East. As the national debt rises higher and higher, how will it be paid off? The choices are raising taxes, cutting spending or allowing inflation to do the dirty work. The President is famously in favor of tax cuts, and has said that the war in Iraq will continue through the end of his term. If a Republican wins in 2008, he or she is unlikely to end the war quickly, and the leading democrat, Hillary Clinton, voted for the war. So the huge deficit continues into the indefinite future. Those countries that hold all these dollar reserves must be thinking that a little diversification would be prudent, most likely into the euro and the yen, I would think, though Far Eastern politics might make yen reserves unlikely. Such a change, plus the increased amount of debt to finance, would force the US to raise interest rates to attract sufficient funds. And these higher interest rates would be bad for US stocks. So I'm thinking it's time to devote a significant fraction of the portfolio to European stocks and perhaps Japanese ones as well. Even if the stocks go nowhere in their native currency, the currency shifts will turn them into big dollar gainers, and the US stocks by comparison will suffer from the effects of high interest rates.
One mutual fund that looks attractive is Vanguard's Developed Markets Index Fund (VDMIX). It's invested 2/3 in Europe and 1/3 in the Far East. Today's price is $11.38.
Back in the days when I was a follow of stock charts, I used to believe in stop orders. Like if a stock was trading at 50, I wouldn't buy it until it rose to 52. This on the ground that it had at 52 broken out of a formation and now had upward momentum.
Stop orders didn't work well for me. Often I would get bad fills and then my supposed start of an upward movement would be just a little jump and I'd wind up paying the most anyone had paid for the stock in months.
Now I always use limit orders to initiate a position. A chart is still useful to me to see what kind of price range has been usual in recent weeks. Then I pick a price near the bottom of that range and buy only if it gets down there again. I get much better fills and if a stock shoots up so I gon't get in, well that's the breaks.
I also use limit orders to sell a position. Pick a price a little above where it's been lately and wait. I am usually rewarded with a good price for my shares.
Selling covered calls is one (conservative) way to make money off a stock stuck in a trading range. The idea is to sell a call on a stock that you already own. If the stock shoots up, your stock will be called away (sold) and you'll get for your stock the strike price plus the premium you collected when you sold the call. For example, Microsoft closed Friday at $27.17. The July 2006 27.50 call closed at $1. If you sold one and the stock went up you'd get $27.50 + $1 = $28.50 for your stock. If it closes below $27.50 in July, you can just pocket the $1 premium and keep your stock. If it drops, hey bad news, but at least you have $1 per share to cushion the loss somewhat.
What I do is determine a trading range. MSFT in the last year has traded in the $24 to $28 range. When it gets near the top of its range, sell covered calls at a strike price as near as possible to the current price. If the stock drops down to the lower part of the range, buy your call back to take your profit and close the transaction. You can do this over and over if you are lucky.
