Is it time to short Plum Creek Timber (PCL)?

 Plum Creek timber, a timberland management company is down today, following earnings report and downgrades to sell by analysts. In my opinion, the down grade was well deserved. In yesterday’s earnings report, company lowered its outlook for 2012, sighting weak timber demand. While the street was expecting earnings to be around $1.35, company now estimate the earnings to be between $1 and 1.25 for 2012.

 Does Plum Creek Timber deserve its rich multiple of 34 times earning?

 PCL earned $1.31 per share for 2010 and $1.19 per share for 2011. Like the company said, 2012 earnings could come in lower than 2012 because housing market doesn't seem to be rebounding any time soon.

 Only thing saving the stock price is its dividend. Stock has a current dividend of $1.68 yielding better than 4%. That is pay out of more than $270 million in dividends by a company that expects to earn around $170 million for 2012. PCL assured that dividends will be intact because it plans on selling real estate worth $275 to $325 million in 2012.

  This stock is worth no more than $35 and will test its December lows in the next 4 weeks, in my opinion. I am buying March, 2012 $38 puts, to test my theory. 

Courtesy: Yahoo Finance

“Enjoyed the ride my love, but……”

‘My Dear Love,

   I am always fascinated by your beauty, your wildness and the pleasures you offer. We had great times together and we partied hard several times.  The parties were great but the hangover and after effects were terrible. I am still nursing the injuries sustained from last year’s after party crashing.

  Your manager, Bernanke is trying his best to continue the party by offering free alcohol and free Viagra (low interest rates and more stimulus), and keeping every ones attention away from the smoke, coming from the European block down the road. The music is getting louder and party is getting is wilder. All the alarms, in form of overbought indicators are going off, warning me to exit. I fully understand, the party can go on for extended period, but I enjoyed the ride, had enough fun, and don’t want to crash after the party.

  Please understand that this is only a temporary separation and I can resist your temptation only for so long. I will find my way back as soon as Relative Strength Index drops below 30. Wish you all the best and don’t worry about the house because I am buying insurance with puts.

Your lover in separation …RK’

  

  Oooh! I am glad; I got that off my chestJ. I feel the markets are too hot to stay invested as a trader in short term. I have liquidated most of my positions, to move 85% of portfolio into cash. I plan to buy put spreads or put ratio spreads if the markets continue to stay overbought in near future.

Do the market indicators really work?

  Recently, a friend of mine was questioning, how can a stock not follow the performance of the company and follow a market indicator. I, myself have asked this question at one time.

  Yes, if you are a long term investor in a stock and your company performs well, your stock will perform well, most of the time and yes, market indicators will predict direction for the short term. Any time you open a position, you will be questioning yourself if the entry point is good. If the stock has been on down trend for the last few days, there is good chance you are buying for a bargain and conversely if the stock has been on uptrend for few days you might be paying premium. So, why not use an indicator if one is available to predict this condition.

  Over bought/over sold indicator are tools used by traders to find buying or shorting opportunities or to predict the market direction.

Williams % R and Relative Strength Index  are couple of technical indicators you can find on many stock charts and are very easy to understand. They oscillate between 0 and 100. While 80 to 100 indicate the underlying equity is overbought, 20 to 0 indicate oversold condition. These are based on most recent trading days, usually set for past 14 days and can be changed as you want. Following is a 6 month chart of Caterpillar with Williams % R, courtesy of stock charts:

\                                                 Source: stockcharts.com

  The above picture shows that indicator predicted right most of the times. But you can also see that the indicator hit over bought condition around December 30^th and stayed there for past 17 days, and during that period, stock has appreciated more than 10%. So it simply tells you to be on look out for buying and selling opportunities. It can’t predict exact buy and sell points because markets can stay overbought and oversold for a while.

Conclusion: If you like a stock and want to buy, it’s not a bad idea to buy the stock in phases during oversold conditions and to sell the stock in phases in overbought conditions, if you are thinking of selling your stock. Besides, if millions of traders or programs try to buy and sell the stock using this indicator, it is bound to work even betterJ.

IOC January options Iron condor looks attractive

 InterOil Corporation (IOC) an energy company had an excellent run in the past 20 days gaining more 30% from Dec 19^th low of $45. Stock is currently trading at $58.48 at close of today’s market.

 IOC has crossed both the 50 day and 200 day moving averages in the last few days. 200 day moving average is at $54.23 and might provide support level in the short term. Stock is likely to face resistance around $60 based on trading patterns from July 1^st to September 20^th.

  Iron Condor: This is a combination of credit option spread and credit put spread. Following trade was selling for a credit of $4 towards today’s close.

Buy 1 January,2012 $50 put

Sell 1 January, 2012 $57.50 put

Sell 1 January, 2012 $60 call

Buy 1 January, 2012 $67.50 call

 

If the stock is trading between the inner strikes of $57.50 and $60 on options expiration date, this trade will make a profit of $4. If the stock crosses the outer strikes of $50 and $67.50 maximum loss will be $3.50.  Since 1 contract is 100 shares, max profit is $400 and max loss is $350. Break even for the trade is $64 on high side and $53.50 on low side.

 I do not expect to collect the entire $4, but if the stock trades between the support and resistance levels in the next 7 trading sessions, this trade can be closed for profit on or before January 20^th options expiration.

 The graph below illustrates profit and loss for this trade:

 Source: Yahoo finance.

  Disclosure: I own the above trade.

Alternative investment yielding 10% +

  Real estate investing is some thing that would turn off most people in current times, but there are some opportunities in commercial real estate that every investor should consider. In this article, I will try to explain how any investor can take advantage of investing in triple net properties, possible limitations and dangerous involved.

  If you buy a property for $100,000 and rent it out for $700 a month, it produces income of $8400 per year, returning 8.4% and is called 8.4 cap. If this property is bought with $40000 down payment and borrowed the rest for 6% interest, it would yield 12 % ($8400rent - $3600 interest).

  With one exception, the above statement is deceiving and frankly offensive to anyone even with slightest idea about real estate investing for following reasons and more:

1. There are several expenses like real estate taxes, insurance, repairs and maintenance.
2. If the property is vacant, landlord is not only stuck with mortgage but also expenses.
3. It is not only difficult to find a decent tenant, but a mess to deal with, if the tenant defaults.
4. Since the banks are dealing with real estate losses, it is not quiet easy to get loan for investment properties.

 Exception: In case of absolute triple net lease, the above statement about yield is completely true.

Triple Net lease: Net-Net-Net lease is commercial real estate lease in which, tenant pays for all taxes, insurance and maintenance. So, almost, all of the expenses are passed on to the tenant. The property is already occupied by a tenant with long term lease in place. Tenants can vary from stand alone business like a single unit restaurant to a corporation with few thousand locations.  Several NNN properties, backed by corporate guarantee with 8% cap rate can easily be found in the market.

 These properties are expensive and mostly start around one million dollars and go up to several millions. But the price of the property should not discourage you, because you can partner with a group of friends or find firms that offer Tenants In Common. Following are couple of links where you can find TIC properties:

http://www.tm1031exchange.com/property/tic1-0404a.html#item

http://www.cornerstoneexchange.com/

   If you like greater control in making decisions, you can find your own group of friends interested in investing, form a company such as LLC, find property that every one likes and buy the property.

Where to find triple net properties?

There are several online sites that show the database of NNN properties available for sale. Some of the sites are listed below:

http://www.nnnex.com/

http://nnnpro.com/content/

http://www.nnn-properties.com

http://www.nnnsales.com/

http://www.loopnet.com/NNN-Properties-For-Sale/

Triple net lease vs Absolute triple net lease: While triple net lease covers some maintenance of the property, might exclude some like structure and roof. But absolute triple net lease is true triple net lease, covering all maintenance.

Purchasing the property:

Once you found the right property and have a purchase contract, do your due diligence and apply for the loan. Loan approval requires some patience and hard work as most banks will offer to finance the second loan for your company, but not the first loan and will only finance for a maximum of 65% loan to purchase price. All partners will be required to provide their financial statement and last three years of tax documents. A corporate backed lease, by a corporation with a good credit rating will come in handy for the loan approval.

Drawbacks:

     The value of these properties is mostly based on weight of the lease signed by tenant and is not worth whole lot if tenant defaults. This is why it is extremely important to look for lease backed by corporation with good credit rating. It is also important to diversify your portfolio, if you are going to invest in more than one property.

      This is long term investment and investment in these properties is not as liquid as a CD in the bank. It might take several months for the property to be disposed and if it is only one partner trying to cash out, must convince other partners to buy out their share.

Disclaimer: This article is for information and not an investment advice. It is responsibility of the reader to cross check this information against other sources and take help of an accountant and attorney in the process.

Will 30 year Treasury bond fund, TLT continue its uptrend in 2012?

 Investors chasing performance, tend to push an expensive stock or asset even higher and in fear of even loosing more, tend to push a cheaper stock or asset even lower. It is like mass hysteria.  This mass hysteria coupled with investors trying to find safe haven in dollar from euro mess, global recession and currency devaluations in emerging markets, has pushed TLT to new heights. TLT had a phenomenal run in 2011, returning almost 30% and is trading today at $119.50.

   Past performance of TLT shows that it mostly found the floor at $85 and topped around $95 for several years, with only exception being 2008. It broke the upper range in 2008 and returned almost 25% only to give up all the gains next year.

   If global economy led by china does not go into recession, or euro does not blow up as expected or US economy shows growth, investors will flee this bond fund pushing it back to normal levels. It would hurt loosing more than 15% trying to chase a 3.38% yield.

How to trade?

   For those wanting to bet on the downside of TLT can look into buying put spreads or butterfly for cheaper trade.  Following is an example of TLT butterfly put spread costing today around $1.50.

Buy 1 Jan 2013 105 put

Sell 2 Jan 2013 95 puts

Buy 1 Jan 2013 85 put

  In the above trade, if TLT is trading between $86.50 and $103.50 by options expiration date, trade will be profitable. Maximum possible profit is $10.00 if TLT is trading at $95. Maximum loss on trade is $1.50 if TLT is trading outside the range of $85 and $105 on options expiration date.

Disclaimer: This article is not an individual investment advice, it is only for entertainment.

Source: Yahoo Finance.

Disclosure: I do not own any position in TLT. Do not plan on initiating any position in the next 72 hours