The Economy

I think it is true that the economy is bad, however I think it is getting better. Housing seems to be improving. Europe seems to be improving. I am not a fan of QE, but it is effective at keeping interest rates down. Normally that should spur inflation, but so far inflation seems limited. Even metals are going down as you indicate.

Also I think we are in for an economic boom fueled by cheap energy. The price of natural gas has already collapsed and I think oil is next. The reason is the technology of fracking which is a new way to extract oil and gas. It appears that soon the US will be energy independent and even an energy exporter, something that a few years ago no one thought possible. Get ready for low prices at the gas pump again, or even a car fueled by natural gas. Many buses and trucks are already using natural gas. Cheap and clean.

Our debt levels are oppressive and not sustainable (which also should be inflationary), however I think, if we play our cards right, we have a chance to grow our way out of the current problem, with the economy improving fueled by low energy prices. It is a chance, but I think we will still need smart leadership in Washington not to mess it up, so we will see. The first test is this fiscal cliff issue. The good news is that the fiscal cliff issue should all be over one way or another in the next 10 days or so. Big economic things happen starting Jan 1st, such as automatic tax hikes and spending cuts.

Options are kind of like stocks except that the have a time element. With a stock you just have to pick the right stock. With options you have to pick the right stock and you also have to pick when price movement happens.

Some people mitigate the risk by only committing small percentage of their cash to a certain position. For example, the Apple April 600 call was selling at the close $14.45/share. Options lots are sold by the 100, so a lot would cost you $1445.00. So lets say you have $10K to invest, you could risk 1445.00 for one contract of Apple April 600. The most you could lose is $1445 (the price you paid) and you would still have $8555 ($10K-$1445) for further trading.

Apple would need to reach $614.45 at or before April 20th, 2013 (the strike price $600 plus the price you paid $14.45). If it is below $600 you lose all $1445. In between you would get some percentage back of your original investment. The nice thing with options is that you capture all of the upside. So for example, if Apple reports record sales in January and the stock comes roaring back to $700 by April 20th, the profit from your option contract would be $700 - $600 - $14.45 = $85.85 per share * 100 = $8585. 592% profit in 3 months. And, of course, since you are capturing all of the upside, if it goes even higher than that it gets even better.

So options are high risk (you could easily lose all of the money you paid), but also high reward (you capture all of the upside).

Another way to minimize risk is to try to make sure that the company is performing in the way that you expect. For example, how are Apple sales doing this holiday season?

http://tech.fortune.cnn.com/2012/12/21/iphone-vs-android-shares-kantar/

"the iPhone registered its highest-ever share of the U.S. smartphone sales: 53.3%, up from 35.8% a year earlier"

Apple had a monster quarter a year ago after the holiday season and so far, from what I can tell, sales are even better this year, so I think the odds are the stock price will bounce back and I think the holiday sales earnings announcement in January will be the catalyst, so I felt comfortable not only with the stock (Apple) but also with the time element inherent in options.

I could get lucky and other things could also act as a catalyst, such as an Apple TV announcement, or they decide to split the stock or raise the dividend, but I have no insight into when those might occur.

Of course nothing has happened yet, so we shall see. You pay your money and you take your chances.

All the best,
Max

The Case for Apple's Stock Price Falling to $270 is not very good:

1. Competition from Microsoft - "Microsoft’s strategy is to extend its dominance in enterprise, desktop, and notebook computing to tablets and phones." - I am sure that it is, but they have not shown any ability to execute that strategy, yet.

2. Competition from Samsung - They sell more units, but the profits are not there and that is the bottom line.

3. Web Apps vs. the App Store - No one has figure out how to make money with mobile web apps. It is a major problem. The screens are too small for ads. The App Store on the other hand is highly profitable.

4. Leadership - Nothing new here. Sure Steve Jobs is a hard act to follow, but Tim Cook is doing fine. Most people now view the the maps issue as a strategic win for Apple.

Update: (12/19/2012) Tim Cook selected as runner up for Time Man of the Year.

"Refiners and airline stocks continue to shine as crude oil is parked at 5-month lows. Let’s see how long this continues." - It is not a fad. Fracking has changed everything. Get ready for low oil prices again, believe it or not.

A retina display on an iPad mini is too hard because it is so small? But don't the smaller iPhone and iPod touch already have them?

"The lower-priced iPad Mini looks to be cannibalizing sales of the larger and more expensive iPad." - Wait a minute! I thought the iPad mini was priced too high?!? These both can't be right! Which one is wrong?

Tablets are killing e-readers! Surprise! NOT! It is called convergence. Over time general purpose computers tend to replace single purpose devices. Typewriters, cameras, etc. All history. Your iPhone is not a phone. It is a hand held computer that has a phone function.