However, lest you think I am some brilliant stock market technician, all of my other covered writes worked out less well. Here’s the summary:

Note: When I sold the calls on AEM.TO – Agnico-Eagle Mines Ltd. on July 8 the stock the peak price was $59.64, so I could have sold it for that price, or covered it, which I did. Since it’s now at $61.98, I’ve made a profit of $2.34 on the stock, plus a profit of $1.32 on the options, for a total profit of $3.66.

Of course the above analysis ignores commissions. Using K.TO – Kinross Gold Corp. as an example, the sale of 5 contracts (representing 500 shares) cost a commission of $16.24, and the subsequent sale of the shares when called cost another $43. I use TD Waterhouse; different brokers may have cheaper rates. Overall:

• Sell July 22 calls for $0.51 for gross proceeds of $255, less the commission of $16.24, for net proceeds of $238.76
• Sell Stock at $22 for gross proceeds of $11,000, less commission of $43 for net proceeds of $10,957.
• Total Proceeds: $ 11,195.76

My alternative would have been to sell the stock on July 8 for $21, which is about where it was trading when I covered. In that case my proceeds would have been $10,500 less $43 commission or $10,457. I actually generated $11,195.76, so this strategy made me an extra $738.76.

Of course the other alternative would have been to do nothing; simply hold the stocks. Had I done that, I would now own 500 shares of K.TO – Kinross Gold Corp. worth $22.32, which I could sell for net proceeds after commission of $11,117. But, as you can see, that’s less than I generated by pocketing the commission, so my strategy was actually the best strategy, even though I guess wrong about the direction.

For those of you who are still following this discussion (and I assume I’ve lost most of you by this point, but so be it, it’s my blog, you’re not paying anything for it, so stick with me) let me repeat my thought process: I though the markets would fall in the summer. I didn’t want to sell my core gold holdings, because I could be wrong, but I wanted a way to protect against a drop. I could have simply sold the stocks, but then if I was wrong and the market increased, I would lost some profits. I took the middle ground and covered my stocks.

As it turns out, I was wrong. My gold and silver shares are higher now than they were two weeks ago, thanks primarily to a good final week. But, even though I was wrong, I still made more money than I would have made if I was right!

Let me repeat: even though I was wrong, I still made more money than I would have made if I was right!

That, my friends, is the beauty of covered writing in a stagnant market. I milk my stocks for premiums, and I keep the premiums, and in some cases keep my stocks as well.

Of course this strategy makes no sense in a bull market. If Kinross was now trading for $70 I’d look like an idiot, since I would have given up all of that profit. (In practice, if we had a huge up move I probably would have bought back the July options before they expired, and then re-sold the August calls at a higher level, so I would have captured some, but not all, of the profit).

So what do I do from here? I still think we have weakness ahead, so I’m not worried that most of my shares have been sold. However, I like to be in the game, so I plan to put in some stink bids this week, for amounts slightly below where we are trading now, for 20% of the shares I ultimately want to own. Here’s my thinking:

If the market eases I’ll buy back the shares I sold, at less than I sold them for, and then on any subsequent one or two day jump I’ll cover them again. I suspect that August will be the last month I play this game, since by September the rest of the world should realize the dire straits we are in, and I will prefer to be completely long on these stocks.

Crazy? Perhaps, but it worked in July, so we’ll see how it goes in August. Thanks for reading this overly technical posting; feel free to post your thoughts on the Buy High Sell Higher Forum or in the comments section below; see you next week.

Looking back on the Depression of 2008 to 201? ten years from now, what will young people say? Will today’s 20 somethings, just entering the workforce, blame the older generation for the problems we have created? Will they be looking for revenge? Or will they learn the value of hard work to take care of themselves? Ask me in ten years and I’ll let you know.

There’s little doubt that the picture is not pretty now, and it’s getting worse. According to Statistics Canada, full time employment fell in June, self-employment rose (since if there are no jobs available, you have no choice but to create your own), and “Youth aged 15 to 24 were hard hit in June, with losses of 33,000. Their unemployment rate went up a full percentage point to 15.9%, the highest rate in 11 years.”

In the United States the problems is just as bad, if not worse, with the unemployment rate sitting at 9.5%. Green shoots? Signs of recovery? Sorry, not yet. Times are so tough that Sears has already started their Christmas sales! In July!

Consumer and government debt is at record levels, and that is the root of our problem. We have too much debt, and can’t shake it.

I turned 45 years old last week. Being 45 means that I have lived my entire working life with easily available credit. When I started university in 1983 the first person to greet us at the door on orientation day was the person handing out the credit card application form. On it were listed about a dozen different credit cards. Fill in your name, send it off, and you would qualify for a student credit card with a $1,000 limit. That was huge money for a young student who spent his summers working for $6 per hour. Is it any wonder that we get hooked on credit?

I am fortunate to have no credit card debt, or bank loan debt, or any kind of unsecured debt, but most are not so lucky. We have debt, because without debt we would not be able to afford the necessities of life, like a big screen T.V., fancy car, huge house, and so on.

And that’s the problem. Since everyone has a big screen T.V., we believe we must have one too. How else could we watch the most important news event of our time, the four hour funeral for some guy who hasn’t had a hit in 15 years, and is only famous now because of all of his legal troubles?

This is the world we live in, folks. CNN devotes a week’s worth of news coverage to a non-event, while ignoring the real news stories: rising unemployment, massive government debts, and consumers who are simply giving up.  As people realize their lifestyles are not sustainable, the collapse will begin in earnest.

And the young people of today will wonder why their parents could borrow to buy everything, and they can’t.  They may well want revenge on us for the mess we have created.  (I hope they decide to work hard, save their money, and buy only what they can afford, which is the only way we will extricate ourselves from this mess, but that’s just wishful thinking on my part at this point).

Yes, I know you are tired of hearing me beat the same drum, over and over and over. I know you are tired of me being a pessimist, telling you that the worst is yet to come. Unfortunately I have to call them as I see them, and I don’t like the looks of what I see. Tell me honestly: does the chart of the S&P look good to you? It looks to me like the bear market is alive and well, we have hit the fourth “peak” in this market (each lower than the previous) and it’s now time to test the lows again. I would not be at all surprised to see 700 before the end of the summer.

I also expect the market turmoil will drag everything down with it, so I expect the gold and other resource stocks to have a temporary set back as well. So, this week, as I did in June, I sold calls against all of the gold and silver stocks I own. My portfolio is 80% in cash, 20% in gold and silver stocks. It’s those stocks that I sold calls against (covered writing). I assume that with the pull back in progress the options I sold will expire worthless on Friday (the third Friday of the month), and I will keep the premiums, as I did in June. (The calls I sold were around “at the money”). If the market rallies this week, my shares get sold, and I make the profit on that, so either way I win. I’ll buy them back later on the dips.

That’s been the game plan for the last few months, and that will be the game plan for the rest of the summer.

Will I get my revenge on this market, as Inigo Montoya got his revenge against his father’s killer? Who knows, but I will be patient, and I will sit and wait, at least until next week. See you then.

-Rush Limbaugh

Is there anything more fun than a mixed metaphor? Who doesn’t want to circle the wagons around alligators in a swamp? On Wednesday morning I did my usual Wednesday morning elliptical machine workout, and I watched the Squawk Box crew on CNBC make fun of someone, I can’t remember who, mix the “walk in the park” and “piece of cake” metaphors to create “a walk in the cake.” Yup, that’s messy, and that’s mixing your metaphors.

If you want to amuse yourself this week, keep track of how many mixed metaphors you hear or read. Good sources for mixed metaphors are:

• Your boss at work trying to motivate you (‘it’s our turn at bat, so let’s score a touchdown for the company”) (thanks to Grammar Girl for this mixed metaphor);
• Politicians: “This is the moment when we must defeat terror and dry up the well of extremism that supports it.” (Wells don’t support anything).
• The media: “So now what we are dealing with is the rubber meeting the road, and instead of biting the bullet on these issues, we just want to punt.” (Chicago Tribune).

Good luck finding them; it will keep you amused during these dismal economic times. (Post your favourites over on the Buy High Sell Higher Forum; maybe I can write a book about it someday).

The reason for a mixed metaphor, I assume, is because the speaker is mixed up. We try to make sense of two incongruous concepts, and it backfires.

Last week I discussed My Conundrum; how can I reconcile the fact that the S&P 500 is actually up for the year, and yet we have record unemployment, massive levels of personal, corporate and government debt, and a financial system that remains in crisis? For me, there are only two possible explanations:

One explanation is that the recession has ended, and we are now on our way to recovery. The stock market is a leading indicator, so the “smart money” is buying in advance of the upturn that will eventually be obvious to everyone.

The other explanation is that in every depression, in every bear market, there are short term rallies, and that’s what’s happening now. The smart money is driving up prices so that they can liquidate their dogs in advance of the inevitable correction that often happens in the summer.

I have been wrestling with these two competing views for quite some time. Back on April 9 I wrote a long dissertation on cognitive dissonance, which is that uncomfortable feeling caused by attempting to believe and follow two contradictory ideas or cognitions at the same time: the market has rallied huge in the last two months, but over the last two years we are still in a bear market. So which is it: up or down? (You know my thoughts).

Here’s another area where we appear to be out of sync: Here in Canada public companies are moving towards International Financial Reporting Standards (IFRS), as is the rest of the world. The impact: financial statements and disclosure documents will be much longer and more complex. Is this a positive development? In the wake of the Enron scandal and the collapse of our banking system it can be argued that more disclosure and regulation is a necessary development.

But ask yourself this: you own many stocks, so you get many annual and quarterly reports in the mail each year. Do you read them? Cover to cover? Do you read all of the notes to the financial statements? Personally, I have a university degree, an accounting designation, and a bunch of other letters after my name to signify my expertise in all things financial, and I don’t read them. By the time an annual report is issued the information is so outdated that it is virtually worthless.

The conundrum, the cognitive dissonance, the mixed metaphor, comes from the fact that we are piling on the IFRS regulations and increased reporting in a 140 character Twitter world. Do we want more, or do we want our information in quick, immediate, 140 character bursts of information?

I don’t know, but I can only assume that we are entering a period of intense dislocation and change. The forces of more regulation are smashing up against the forces of the 140 character sound bite. The forces of unrestrained free market capitalism are crashing into the power of governments to run a deficit of $2 trillion in a single year to “fix” the economy. We are in the middle of a hurricane, financially and socially speaking.

And being in the middle of a hurricane is not a fun place to be. You may get carried up, or you may get crashed down.

Which is why I have made the decision to remain on the sidelines. On June 4 I covered all of my optionable gold and silver stocks. In the medium term I am a strong believer in gold and silver, so I don’t want to sell everything. But I also know that the summer is a historically poor time for gold and silver stocks, and I fully expect the general stock market to melt down over the next two months as well. So, I covered my bets by selling June calls against the stocks I own.

For example, on June 4 I sold June 21 calls against K.TO – Kinross Gold Corp. I took in a premium of $1.30. If Kinross closes above $21 on June 19 (the third Friday of the month), I will be required to sell my shares for $21, which is roughly what they were trading for on June 4 when I covered. If the shares are worth less than $21 the options expire worthless, and I keep the $1.30, which helps mitigate my loss.

Since June 4 Kinross has fallen over 7%, and closed on Friday at $19.68; if there is no upswing this week, I pocket the premium, and I still own the stock. If it recovers to $22 I sell the stock for $21, but I keep the $1.30, so in effect I sold the stock for $22.30, so I’m still happy. I only “lose” if the stock is over $22.30 on Friday, in which case it was a mistake to cover, since I gave up some profits.

Some may argue that if I was expecting weakness I should have sold the stock outright, and/or purchased some puts. That’s true, but I don’t know for sure that the stock will go down, and it would be silly to be betting against gold in a potentially hyper inflationary environment. Expecting a slight correction over a two week period is a relatively safe bet; going short is an entirely different matter.

I’ll report next week on how it all worked out, but as long as we remain stuck “between a rock and a hard place” I will stay on the sidelines, cover my bets, and hold cash. You can make your own decisions, and of course post your own thoughts and mixed metaphors over on the Buy High Sell Higher Forum. See you next week.