Another suckers rally in oil stocks?


Over the past year there has been a lot of talk regarding the possibility of OPEC either freezing or cutting production. The Organization of the Petroleum Exporting Countries (OPEC) on Wednesday agreed to its first oil production limits in eight years, triggering an oil rally. The new norm for crude prices could be between $50 and $60 going forward.

OPEC has said it is seeking to secure 600,000 barrels per day of cuts from non-OPEC producers, and that Russia has committed to temporarily cut production by about 300,000 barrels per day in the first half of 2017. Russia and other non-OPEC producers are set to meet with OPEC on Dec. 9.

The key to all of this is whether these cuts will be implemented. Plus market watchers are also questioning whether the oil group will cheat. The sharp oil-price rally may well be short-lived, as oil production has been turning the corner in the U.S., with the rig count up 50 percent from lows in May.

Extracting oil from the Permian Basin, which spans west Texas and southeast New Mexico, is less expensive than it is in many major fields.

“Basically, $50 is good for Permian Basin stocks,” said Paul Sankey, senior oil and gas analyst at Wolfe Research. Pioneer Natural Resources and EOG Resources expanded their presence in the region in the last few months, and Sankey said the two companies would also benefit from $50 oil.”

In Conoco Phillips’ third-quarter conference call, management said the company was adding three rigs to its operations in the North Dakota Bakken oil fields for a total of four rigs in the region.

“The Trump Wild Card”

Cutting corporate income taxes will make U.S. shale producers more profitable and they could have extra cash to produce more oil. Less banking regulations could also allow more bank loans to the energy industry. Could Trump impose tariffs on imported oil? He is after all unpredictable!

The oil futures market has quotes for monthly contracts that are being offered at $53.00 for the first quarter of 2017 and $55 for the rest of the year. The trading volumes of contracts changing hands is very low which could be a bullish sign that oil producers believe that higher prices are coming.

Now over the last two years, I have avoided investing in oil stocks and posted many articles regarding the oversupply problem. I am currently doing research on some U.S. shale oil producers. Unfortunately, the fundamentals haven’t changed and most companies are still losing money at current oil prices.

What do you think?

Is this another suckers rally because hedge funds are rushing in to cover their short positions or is this the start of a bull market in the oil patch?






Rolling options can turn a profitable option trade into a loss


One of the hardest things to do as an investor is to control your emotions when making investment decisions. It is even more difficult for option traders because all options have an expiry date. Plus option prices are very volatile which can be difficult to ignore.

My dollar cost average using an option strategy for buying 200 shares of Royal Caribbean has been an emotional roller coaster ride. I took a position on Oct 11 with the intention of either making 11.2% return in 38 days or owning 200 shares at an average price of $68.84 per share. The chart below illustrates the price movement over the past 16 days.


I get nervous when a stock price falls 3.5 % two days before earnings are released. I seriously thought about buying back the call & put options and selling my shares for a loss. However, the whole point of this strategy was to own 200 shares of Royal Caribbean. Nothing really has changed, under normal conditions I would have bought 100 shares at $72.22 on Oct 11 and bought another 100 shares at $68.00 for an average price of $70.11 per share.

My option strategy, up until Oct 27 has reduced my paper loss to $68.84 – $68.00 = $0.84 divided by $68.84 or 1.2% compared to $70.11 – $68.00 = $2.11 divide by $70.11 or 3%. The next day, RCL released their earnings that surprised on the upside. See the chart below: 


Now I am faced with more challenging set of opportunities.

  1. Do I buy back the Nov 18 call & put options which brings my cost base down to $69.92 and I hopefully sell my 100 shares on Monday for $74.40 ( 6.4% return)
  2. Do nothing for the next 22 days and hope that the shares don’t fall back below $72.50 and make 11.2%
  3. Do I roll my options forward by buying back the Nov 18 options and sell the Dec 16 $72.50 call for $4.10 and Dec 16 $72.50 put for $2.20?
  4. Do I get greedy? Buy back the Nov 18 options and sell the Dec 16 $75 calls for $2.64 and the puts for $3.30?

Analysing the risk / reward of rolling my options to Dec.

Scenario (1): What happens if the shares of Royal Caribbean are trading below $72.50 on Dec 16?

Under choice # 3, call option expires and I buy 100 shares at $72.50 bring down my purchase price per share to $66.20 for the 100 addition shares plus 69.92

Under choice # 4, I still buy 100 shares at $72.50 bring down the purchase price per share to $66.56

Scenario (2): What happens if the shares of Royal Caribbean are trading above $72.50 but below $75.00 on Dec 16?

Under choice # 3, I sell my 200 shares for $$14,500 – $6,620.00 – $6,992.00 = profit of $888.00 or 6.72%

Under choice # 4, I will own 100 shares at $69.06 plus my 100 shares at $69.92

Scenario (3): What happens if the shares of Royal Caribbean are trading above $75.00 on Dec 16?

Under choice # 3, nothing changes, I still make $888.00 or 6.72%

Under choice # 4,  buying back the Nov 18 options, I reduced my cost base on the 100 shares to $69.92 – the Dec 16 put option of $3.30 – call option for $2.64 = $63.98 per share. I will be force to sell at $75.00 for a profit of $11.02 or 17.2% 

Two factors that I am weighting are the Fed is considering raising interest rates in December combine with tax loss selling could spark a market correction. Now, Choice # 3 is out of the question, less change of being profitable than choice # 2, 6.72% in 48 days compared to 11.2% in 20 days.

Now, I still have until Nov 18 to decide if I want to change the perimeters of my original trade. However, I do run the risk that the purchaser of the Nov 72.50 call option will force me to sell my 100 shares before Nov 18th if the stock price continues to the upside.

What choice would you make if you were in my shoes?

Remember this old saying “Bulls & Bears make money and Pigs get slaughtered.”

Is it time to look at alternative investments?

'I have mostly conservative investments in my retirement portfolio, plus a few riskier, short-term performers tossed in as a hedge against inflation.'

Hedged funds are usually reserved for institutional investors and for the very wealthy. Alternative strategies are now available to ordinary investors. These funds must adhere to a higher level of transparency and liquidity than hedge funds or limited partnerships.

Ever since the crisis of 2008–2009, financial advisors and their clients have looked for ways to shield portfolios from potentially devastating losses. Many set their sights on liquid alternatives funds, an emerging investing category that’s sold as both mutual funds and exchange-traded funds.

In 2008, just $44 billion was invested in alternatives through mutual funds and ETFs, according to research firm Morningstar. At the end of 2015, however, assets had exploded to $300 billion, with close to 600 funds.

There are a large selection of alternative strategies available. When the market faltered in 2008, managed futures and interest–rate swaps funds were up in value while stock holdings were down. Other categories include strategies, such as market neutral, commodities, multi-asset, multi-currency and long/short equity.

Some advisors use liquid alternative funds as a way to deal with the current low-interest-rate environment. Bonds are dead money right now and stocks themselves aren’t cheap. Advisors are essentially eliminating bonds and replacing them with something that will serve the same purpose, but also offer some potential return. A very popular choice to protect your equity exposure is a long/short strategy. These fund managers buy stocks that they expect will rise in value (long), while shorting those they expect will fall.

Most advisors use alternative funds as ballast during falling markets because they invest in non-traditional assets that aren’t correlated with stocks or bonds. Investment experts recommend a meaningful allocation of 15 percent to 20 percent; otherwise, the impact won’t be felt. Trying to predict when markets are likely to fall and inserting an alternative fund is very hard to do.

While alternatives might fare better than a mainstream stock/bond portfolio in a downturn, they’ve got their own drawbacks. The big one is fees.

According to Morningstar, the average expense ratio of alternative funds is 1.7 percent, many times that of either equity or bond funds. “The high fees have eaten into returns, which is a concern when it’s generally a lower-return environment,” said Josh Charlson of Morningstar.

However, compared to the fees that such strategies charge in the hedge fund structure, they’re a bargain. Investors in hedge funds normally pay 2 and 20 — a 2 percent fee on assets under management, plus 20 percent of profits.

Now I believe that this low-interest rate environment may continue for another decade so investing in fix income products doesn’t make sense. Sitting on cash that yields nothing or being 100% invested in stocks is overly risky.

I recommend checking the fees that your company’s pension plan provider charges. Switching from fix income to an alternative fund may be more economical than you think.  A word of caution, before you invest in any alternative fund, make sure you understand the strategy, the risk and the fees.

What are your thoughts on alternative funds and ETFs? Are they suitable for your retirement fund?


Do you have what it takes to be a DIY investor


Having worked as a financial advisor, I have encountered people who just don’t understand basic money management. So paying for financial advice makes a lot of sense. However, there are more tools available for the do-it-yourself investor than ever before. All of the online trading firms offer an array of charts, quotes, research and educational materials.

So, is there anything wrong with do-it-yourself investing? No, of course there isn’t. I don’t knock anyone who invests without the guidance and expertise of an experienced professional. Here are just a few of the reasons why:

  1. There are more “age-based” portfolio products also known as target-date mutual funds and index funds. These funds of funds can plot out an investment course over a lifetime which is close to having your portfolio on autopilot.
  2. We also have the rise of the robo-advisors. These highly advanced computer programs armed with algorithms, data, and speedy processing power can offer you advice on investments and planning. Major financial services firms that have built reputations to help do-it-yourself investors have invested great sums of money into these.
  3. The majority of financial advisors are commissioned based. It is difficult to find good advisers willing to look after small investment accounts. Plus investment products that they sell you can have hidden fees that you make or may not be aware of.

Now, before you quit your day job, do you have what it takes to be a DIY investor? Here are some of the factors you may want to consider when deciding whether or not to employ the help of a financial services professional or go it alone. This is by no means an exhaustive list, but I’ve identified 7 factors I think should rise to the top before making the decision.

1.    Investing takes time

  • Will you make time to reassess your personal financial situation , after your honeymoon, after the birth of a child, upon your retirement, upon a divorce or even after the death of a loved one?
  • Will you make time to take steps to start adjusting your investment portfolio ahead of major life changing events the way you’re supposed to?
  • Will you make time to follow-up on each individual investment in your portfolio? To check recent news? To rebalance your account?

2. Discipline

  • Do you have the discipline to do the research to pick and choose, buy and sell and follow?
  • Were you one of the ones who didn’t open your brokerage or 401(k) statement in 2001 or in 2008?
  • Did you bail out of every investment and convert to cash at the market bottom in 2009?
  • Did you forget how to be a long-term investor?

3. Confidence

  • Do you tend to overreact to stressful situations?
  • Did you buy that stock when it came down in price, just like you said you would the last time you checked out the quote?
  • Are you afraid of making a mistake and unwilling to take a lost?

4.  Risk management

  • Do you have a strategy, or do you kind of go with whatever is working or being touted on TV or in a newsletter?
  • Mistakes happen. Every investor, including Warren Buffett, makes investment mistakes along the way. But how you handle them and what you learn from them are much more important. Mistakes are unavoidable when it comes to investing.
  • Have you taken proper steps like diversification to help mitigate costly mistakes, which is what risk management is all about?

5. Experience

  • We all start out as novices so are you willing to learn by taking courses, reading investment books, financial newspapers ….?
  • Do you have any peers or a mentor that will share investment mistakes with you.?
  • Have you worked with people who have lived through various markets and economic downturns? Can you learn  which strategies they used to get them through the tough times?

6. Staying current

  • Are you a news junkie?
  • Do you follow economic stats?
  • Are you up to date on Federal Reserve policy?
  • Do you follow politics?
  • Do you keep up with foreign events?

7. Sweating the details or thriving on them

  • Has your portfolio grown in value? Would a mistake be more costly as a result?
  • Are you aware of holding periods regarding capital gains treatment?
  • Are you taking undue risk in trying to juice your passive income in this low-interest-rate environment?
  • Do you know which assets are best in a retirement account and which are best in a regular taxable account?

After you think deeply about the seven factors above, you may conclude you are strictly a do-it-yourself investor or find you need the help of a professional or decide that you are somewhere in between. That’s okay, we are in an era of choices and that’s the way it should be.

Here’s the key. Investing is not an easy thing to do successfully. Bear markets make all of us look like unsuccessful investors while they last. This is often when investors walk away from the market. Make sure you have a strategy that includes the possibility of losing money, the certainty of corrections and bear markets.



An Option Trader who doesn’t blog about options


I recently had the opportunity to visit with my godson who flew in from Calgary. He is a follower of my blog and shares my posts on his LinkedIn account. He believes that I should write about option trading. I argued that very few viewers on word press would be interested in reading about options. Why write about a complex topic like options if no one will read it.

I been trading options for over 25 years ago. During those years, I have found only one other person who shares the same passion. Even the financial advisors from my former office didn’t fully understand options. In fact, the reason we started our investment club back in 2001 was to get more practical experience with options. It took me three years’ worth of quarterly meetings to get my investment club members up to speed with my option strategies.

Keep in mind, the financial industry measures risk by potential loss and options are at the highest level in the risk pyramid. Unlike a stock, an option has an expiry date which means you can potential lose 100% of your investment. However, the reward  could easily be 100% to as high as 500% return on investment.

For years, I have made the argument that percent risk should be balanced off with the amount of dollars that you have invested. For example: Buying 500 Microsoft shares for $25,000 could generate a potential dollar lost greater than buying 5 call options for only $1,500. A 15% correction in the price Microsoft stock would cause a loss of $3,700 and the option would expire worthless (-$1,500).

The option loss is immediate! One could argue that you don’t have to sell the stock for a loss, you could continue to hold hoping for a recovery in price. I believe that a buy and hope investment strategy isn’t very successful over the long-term.

Another reason why I don’t write about options is the risk management department within the financial industry will not approve the average investor for option trading. An investor would be lucky to get basic level one option trading. It only allows an investor to buy a call or put and the writing of a covered call position. Even with my extensive option experience, my accounts have restrictions on the types of option trades that I am allowed. I have even tried moving my option accounts to other discount brokers but they all fall short.

Here are some option strategies that are difficult to get approved:

  1. Uncovered Call or Put
  2. Bull Call Spread
  3. Bear Put Spread
  4. Protective Collar
  5. Long Straddle
  6. Long Strangle
  7. Butterfly Spread
  8. Iron Condor
  9. Iron Butterfly

Knowing what they are is only half the battle, knowing how & when to use them is the other half.

One trader recently sold 17,000 puts on Facebook betting that earnings would beat and  the options would expired worthless. He only made $1,700,000 in just over a month.



Hedge fund managers making an obscene about of money

Ken Griffin at Citadel and James Simons at Renaissance Technologies

Two actors portraying hedge fund managers in the movie “The Big Short” were nominated for a golden globe. Best performance by an actor in a motion picture – Comedy or Musical. Spoiler alert: nothing funny or musical about this movie.

Call me old fashion but I failed to see the humor in millions of Americans losing their homes and millions more losing their jobs because of Wall Street fraud. I found it despicable that some hedge fund managers made billions on this tragedy.

Fast forward to present day and nearly 3 trillion dollars are invested in the hedge fund industry. Computerized trading strategies has helped reap the biggest profits for some the industry’s largest players. Fully six of the top eight money makers for 2015 use quantitative analysis approaches to generate profits.

Quantitative trading consists of strategies which rely on mathematical computations and number crunching to identify trading opportunities. Price, trading volume, price to earnings ratio and discounted cash flow are just some of the more common data inputs used in quantitative analysis. The transactions are usually large in size and may involve the purchase or sale of hundreds of thousands of shares and other securities.

Tops among the hedge fund managers were Ken Griffin at Citadel and James Simons at Renaissance Technologies, both of whom reeled in $1.7 billion according to the year’s Institutional Investor‘s Alpha Rich List of the top hedge fund managers.

Nearly half of hedge funds lost money, according to Institutional Investor, and some familiar names on the Rich Lists of years past were missing, including John Paulson of Paulson and Co., Leon Cooperman of Omega Advisors, and Daniel Loeb at Third Point.

These industry leaders, however, did make the list, and qualified for the top 10:

Hedge funds hot hands

Manager Firm Income
1. Ken Griffin Citadel $1.7 billion
1. James Simons Renaissance $1.7 billion
3. Ray Dalio Bridgewater $1.4 billion
3. David Tepper Appaloosa $1.4 billion
5. Israel Englander Millennium Mgmt $1.15 billion
6. David Shaw D.E. Shaw $750 million
7. John Overdeck Two Sigma $500 million
7. David Siegel Two Sigma $500 million
9. O. Andreas Halvorsen Viking Global $370 million
10. Joseph Edelman Perceptive Advisors $300 million

Source: Institutional Investor’s Alpha

Now add the fact that the world’s wealthiest investors are benefiting from a broken U.S. tax code. Hedge fund managers’ profits are treated as long-term capital gains, which means they’re taxed at no more than 15 per cent. Any wonder why the 1% are getting richer and the American middle class is disappearing.

Americans are so angry that this man could be the next President.