INVESTMENT SURVIVAL GUIDE
For
THE ‘NEW’ MILLENNIUM
A Review of What You Could Have Done To:
Hedge Your Portfolio!
Request Your 'Updated' Version.
Equity investors around the world got a ‘wake-up’ call recently when prices ‘corrected’, reminding them that markets can and do retrace for any number of reasons.
Geo-political events around the world in countries like Iran, Iraq, North Korea, China, Israel and others have elevated the risk premium associated with most financial markets. We all recall the events of September 11,2001 and how we were effected individually and nationally. Some of us were effected ‘financially’ more than others.
As the equity markets are rising to new all-time levels, many investors are waiting for the next ‘correction’. Ask yourself this question:
Is my Investment Portfolio ‘Prepared’ for the following scenarios?
Another Terrorist Attack in the U.S.?
Plot to Attack Fort Dix foiled.
JFK Airport Attack Uncovered.
$100.00 / bbl Oil!
$8.00 / gal. Gasoline!
Terrorists have recently targeted Mid-East Oil Fields.
IRAN MAKING A 'NUCLEAR' WEAPON?
Default of Sub-Prime & Other Mortgage Lenders.
Falling Real Estate Values.
Increasing Foreclosures.
Recession?
Collapse of U.S. equity markets?
Is it likely that any one of these scenarios could cause a domino effect that could ultimately cause a change in your financial future? I believe it will, based on the fact that part of it already has occurred. We all know that the U.S. equity markets ‘retraced’ almost 20% after 9/11/01 and took over three months to recover. Unfortunately, liquidity becomes a problem with investors who might need ‘cash’ while the markets are down. Between 1-15-00 and 10-9-02, the Dow Jones retraced 37%. Can it happen again? When? Are you prepared or do you know how to be prepared? It was recently revealed that a plot to target the New York subway system was aborted by al Qaeda, in favor of a larger and increasingly devastating target. On Tuesday, May 8, 2007, at least five people were arrested on charges they plotted to ‘attack’ the Fort Dix Army base and ‘kill’as many soldiers as possible, federal authorities said. The suspects were described as ‘Islamic radicals’ by Greg Reinert, a spokesman for the United States Attorney’s Office.
With Oil prices hitting $80.90/bbl on the New York Mercantile in August 06,’ is $100.00/bbl a possibility? Let’s take it a step further. Remember the Oil Embargo of 1973? Gasoline prices quadrupled from approximately $.25/gal to $1.00/gal. The NYSE retraced from 1051 on1-11-73 to 577 on 12-6-74, a ‘collapse’ of 45%. Higher energy prices did not help equity investors. With prices approaching $4.00/gal today, could we see $8.00/gal? With Iran as the second largest Oil producing nation in OPEC, would they benefit from from higher prices? On April 27,2007, Saudi Arabia arrested 170 suspected al Qaeda-linked militants, some of whom were training as pilots to carry out ‘suicide attacks on Saudi oil facilities! What do you believe would happen to oil/gasoline prices if/when an attack occurred? If you look at the previous history, prices went higher. Was this favorable for equity prices? Could you have either reduced your risk of falling stock prices or benefited by the rising price in oil and gasoline? Yes, provided you had properly positioned your portfolio for this type of scenario. I will show you how to customize your portfolio, based on risk aversion and profit potential strategies based on your own capital base and comfort levels.
With the recent correction in the ‘equity’ markets from June 1- June 8, let’s take a look at one way to ‘off-set’ or be better prepared for the next market correction.
NOTE: You can ‘hedge’ or ‘reduce the exposure’ to a Market Crash within your IRA, 401k or Pension Plan ! You can also ‘speculate’ using the same leverage and keep all gains within your ‘tax-advantaged’ plan. I can show you how.
Let’s take a look at an example of an investor looking to ‘protect’ or ‘hedge’ their stock portfolio, valued at $ 500,000, from a 20% ‘market crash’.
If you ‘knew’ a ‘market crash’ was imminent, you could ‘sell’ all or a portion of your stocks and avoid the risk of loss. Probably not what most ‘investors’ would choose to do.
What about ‘protecting’ your portfolio by taking advantage of ‘leverage’ available in the Commodity Futures Market? You don’t have to be a Hedge Fund Portfolio Manager to do this. Wise investors take advantage of this on a daily basis. Why? The Power of Leverage!
While most individual investors purchase their stocks for cash, some will take advantage of buying on ‘margin’, where your brokerage firm will allow you to ‘borrow’ up to 50% of the purchase price of your stock. Let’s take a look at a single stock purchase for cash vs margin, before we move on to an example of a larger portfolio.
Example:
Buy 100 shares of XYZ Corp. @ $ 50.00/ share. Cash purchase = $ 5000.00
Margin (50%) = $ 2500.00
If XYZ Corp. shares rise $10.00/ share your 100-share Cash purchase has appreciated from $ 5000.00 to $ 6000.00, an increase of 20 %.
Your purchase on Margin increased from $ 2500.00 to $ 6000.00, an increase of
$ 3500.00, or 140 %!!
As you can see by this example, ‘Leverage’ can be a valuable investment tool to use for either hedging or speculating. Be aware that it is a ‘double-edge’ sword and should be used prudently.
Unlike traditional ‘brokerage’ firms, commodity firms can offer leverage in excess of 90%, which can greatly reduce the amount of money needed to ‘hedge’ a portfolio.
Example: Protect or Hedge our $ 500,000.00 equity portfolio against a 20% stock market ‘crash’, resulting in a potential $ 100, 000.00 loss of value.
With the June S&P 500 Index currently at 1540.00, (June 1st ) let’s take a look at alternative solutions that we could use to Protect or Hedge our equity portfolio against a 20% Stock Market ‘Crash’.
Alternative #1: Sell (short) 1 S&P 500 index at 1540.
The Value of the S&P 500 futures index is $ 250.00/pt. X Index (1540) = $ 385,000.
Margin (Performance Bond) is $17,500, or 4.6%. (95.4% leverage)
A ‘Crash’ or Rapid Retracement in the Stock Market of 20%, should see a similar reaction in the S&P 500 futures index, resulting in a loss of approximately 308 points
@ $250.00/pt. = $77,000/ contract, which is an increase in value of your ‘short’ position.
To fully hedge your potential loss of $100,000, would require an additional e-mini contract, which would have added another $15,400 gain, covering $92,400 of potential losses.
Alternative # 2: Purchase ‘Put’ options or spreads on the S&P 500 index.
Put options give holders the right, but not the obligation, to sell securities at a given price on a predetermined date. Investors often ‘buy’ put options when they think the underlying prices of a security may fall.
In a recent article on Bloomberg.com, dated June 8, 2007; ‘Put’ Options Surge in Europe as Stocks Extend Rout, Karim Bertoni, who helps manage $21.7 Billion at Banque Syz & Co. in Geneva said, put options “give you a good way to protect your portfolio at a low premium”.
When you purchase an option, the most you can lose is the ‘purchase price’+ fees.
If you had the foresight or luxury of knowing when a ‘market crash’ were to happen, you could purchase your Puts the day before, but without that knowledge you need to purchase an option to cover the time you are in the stock market.
A June 1530 Put, which expires on June 15, 2007 could have been purchased for 11.00 pts x $250./pt.= $2750.
A 20% ‘crash’ could send the S&P 500 index down 308 points to 1232.
Your 1530 Put would be ‘in the money’ by 298 points x $ 250.00/ pt. = $74,500.
You can buy additional e-mini 1530 puts to ‘off-set’ the full $ 100,000.
A September 1450 Put, which expires on September 20, 2007 can be purchased for 24.00 pts. X $250./ pt. = $ 6000.
A 20% ‘crash’ could send the September S&P 500 index from 1555, down to 1244.
Your 1450 Put would be ‘in the money’ by 206 points x $250./pt. = $ 51,500.
Purchase 2 1450 Puts for $12,000 to double your protection to $ 103,000.
Note: Investors looking to hedge less can avail themselves of the e-mini SP contract or e-mini option contract. Whereas each point in the S&P had a $250.value, the e-mini has a value of $ 50.00 per point.
RELATED MARKET REACTIONS
As we are all well aware: “Markets may change, but Human Nature remains the same”. “You can see the future by looking at the past”. Sound familiar? Previous ‘market corrections’, ‘sell-offs’or ‘crashes’ have set off a chain reaction in many other markets where money liquidated from equities moves to different investments, to reduce risk or diversify in other markets. Money managers may seek a ‘save-haven’ position for a portion of their assets in U.S. Government guaranteed securities; Bills, Notes, Bonds, and adjust their portfolios based on risk/reward of other markets. A terrorist attack on ‘oil fields’ in the Mid-East would possibly lead to a ‘spike’ in energy prices, crude oil and gasoline. If energy prices were to ‘gap’ higher, Gold and Silver prices would likely follow. If the U.S. infrastructure was effected, the U.S. Dollar could lose value against other major world currency markets, as traders would sell Dollars and possibly buy currencies of less threatened countries.
If you would like to explore the possibilities of ‘hedging’, ‘off-setting’ or possibly speculating, to capitalize for any or all of the above scenarios, give me a call at 561-826-7133
If you would like to receive a ‘free’ SURVIVAL GUIDE OUTLINE for any particular market or scenario:
Fax Back To (561)-826-7143
Name ____________________
Phone _____________________
Interested in ___________________
E-mail address _____________________
Best regards,
Bob Kozak
Trading in commodities involves a high degree of risk. The information above does not guarantee positive results, but can be used for informational purposes. Past performance is not indicative of future results. Only risk capital should be used to trade commodities.
REQUIRED FUTURES TRADING DISCLAIMER:
If you purchase or sell a commodity future or sell a commodity option, you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the requested funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.
