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There are people in the investing world right now that are so down on the market that they are hedging against an absolute market collapse.As an example of this view I just sold naked puts in General Electric (NYSE: GE), the only original Dow Jones Industrial Average stock for January 2011 at a strike price of $2.50, and collected $0.52, per share. My break even therefore is $1.98, not counting the interest over what is almost a two-year term. Or looking at it another way, I got paid 20% on my money.
From my perspective I am simply making a bet that GE will still be in business in two years. Even losing it's AAA rating and cutting it's dividend does not portend this kind of dour outlook.
Although I made the trade, it does cause me to take pause and ask myself if is it possible that the economy will not only 'not recover', but might be worse three years out? That is a scary thought! If things get that bad I am wondering out loud today -- Will we be eating out of trash cans?
We have already witnessed many pedigreed companies collapse in the last twelve months. Who would have imagined two years ago that the largest insurance company in the world American International Group (NYSE: AIG), the largest bank in the world Citigroup Inc. (NYSE: C) and the largest automobile company in the world General Motors (NYSE: GM) would all be facing bankruptcy today?
In a recent poll, see: Should Buffett & Roubini "Face the Nation"? slightly over 50% of the respondents answered they thought the economy would be improved by December 31, 2010.
Today I push the question out further.
| Yes | |
|---|---|
| No | |
| Clueless |
| Yes, you found money in the street | |
|---|---|
| No, we may be eating out of trash cans |
Other options trades I have made recently: Investor fear puts me 'naked' on Wall Street and Chasing Value: Has BNI become 'Berkshire' Northern Santa Fe
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GE and have open options as well.
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Reader Comments (Page 1 of 1)
2-24-2009 @ 4:31AM
steve bourg said...
Sheldon,
I think that we have to wonder how many damaging, socialist policies Obama/Pelosi will adopt. If they continue with spending to only enrich government (federal -- & they're spilling it to state & local), and other policies to slam the private sector (national health-care would be another nail in the coffin for the private sector) and raise tax rates for capital-producers, then I think your question begins to answer itself. We are toast. ps: anyone with a job in the private sector was committing economic suicide to vote for Obama. Period.
2-24-2009 @ 10:18AM
Beltway Greg said...
Considering that trash cans are filled with post-consumer waste they may not even be full a couple of years from now. Living in Washington, DC affords me the excellent opportunity to hunt in Rock Creek Park. The place is literally lousy with deer and squirrels. As Hank Jr. sang, "I can skin a buck and run a trout line, a country boy can survive." Your puts may be safe but GE is one sick pig. This a.m. the market is up and GE cannot manage to hold a bid for a minute. A new acronym, "WWWT?," for the ages translates to "What Was Warren Thinking?" Warrants convertible at $22 and change?
Obama and "Timmy the G" take me back to the exhortation that Angelo Dundee gave to Sugar Ray Leonard during his first fight with with "The Motor City Cobra" Tommy "The Hitman" Hearns. At about the 13th round Leonard returned to his corner and Dundee told him, "You're blowing it kid, you're blowing it." Leonard then proceeded to knock Hearns out. By giving speeches and effectively announcing nothing Obama is causing more trouble. A stress test? They're joking, yes? The market has been conducting its own test for the past year and most of the banks have effectively failed. If you remember back in August of 2007 writing from a small cafe in Jackson Hole, Wyoming, I advocated having Gentle Ben Bernake call a summit of all the major banking leaders and reviewing all of the SIVs and whatever else was lurking on the balance sheets. Fast forward to today, we have all of the "Propeller heads" led by Larry "I know that" Summers and no one appears to be in charge of the situation. Obama has a chance tonight. If his speech is one of those "Mission Accomplished" populist bull dung speeches look for more carnage and your puts may be in danger of finding some clothes. Either way we're in the middle of a dirt sandwich and we're all going to have and eat our way out.
Or, can somebody please get Angelo on speed dial?
2-25-2009 @ 10:07PM
Beltway Greg said...
Jeff Macke references Angelo Dundee on the Miyanville blog the day after I use him here. Coincidence?
And, the famous, "You're blowing it kid, you're blowing it," was after the 11th round in the first fight. Though the judges didn't see it that way Hearns won the second fight.