The Single Best Income Strategy Ever Created... And More!
By Jeff Clark
February 26 , 2008
For today's essay I've decided to take a page out of Matt Badiali's playbook.
Matt is our resident commodities guru at Growth Stock Wire. Every Wednesday, he answers three questions submitted by our readers. I like the format so much, I decided to try it today. Of course, I haven't asked any of you to submit questions... so read on for an unusual Q&A session:
Dear Jeff: A few of the other editors at Stansberry & Associates have recommended shares in the PowerShares DB Agriculture ETF (DBA). The chart, however, looks like it's going parabolic, and the uptrend seems unsustainable. What do you think? Sincerely, Jeff Clark
Dear Jeff: That's a remarkably astute observation. You obviously have some experience with technical analysis. The DBA is an exchange-traded fund (ETF) that offers direct exposure to corn, soybeans, wheat, and sugar. Shares of this fund are in a parabolic uptrend, and this chart pattern almost always ends badly.
The long-term argument in favor of investing in commodities is strong, and we'll likely see much higher prices over the next several years. In the very short term, however, I wouldn't buy these shares. Parabolic moves are unsustainable.
While DBA may move a bit higher from here the risk is substantial. Stocks that go straight up have a nasty habit of coming straight back down. I would much rather buy DBA on a pullback – after the shares have worked off the obvious overbought condition – than to chase the current rally. If you're quick on the trigger, you could even make some money shorting this rally.
Dear Jeff: It's an election year. Since the stock market tends to rally during most election years don't you think the current weakness is a buying opportunity? Fondly, Jeff Clark
Dear Jeff: You are correct again. Most of the time, election years are good for the stock market. But have you seen the current crop of presidential candidates? It's hard to be optimistic about the prospect of capitalism when all three of the potential future leaders of our great country are talking about giving away money.
Giving tax rebates to people who've never paid taxes, absorbing the obligations of people who've made bad investment decisions, and penalizing people who save and invest is not capitalism. It's socialism. Stocks don't do well under socialism. I think the market is trying to tell us that.
Dear Jeff: I'm retired and trying to live on a fixed income. My problem is interest rates have come down so fast that my money market funds are paying just a little more than 3%. The local bank is only offering 3.5% on a three-year CD. Treasury bond yields aren't keeping pace with inflation.
I can't handle the risk of the stock market. What is the best income producing strategy for this type of environment? Your No. 1 fan, Jeff Clark
Dear Jeff: The single best income-producing strategy ever created is selling covered calls against low-risk value stocks. Most people think this is a risky strategy... because most people do it wrong. They buy high-risk stocks because the option premiums are expensive and generate the largest current return. But then, the stocks collapse, and investors are stuck with losses.
The secret here is to focus on not losing money by buying low-risk value stocks and then selling the calls. If you do that, then the returns come quite easily.
The objective of my Advanced Income service is to generate 15%-20% income per year by selling covered calls. We're currently on pace to do twice that amount. In a world of 3%-5% yields, this is a fantastic way to earn double-digit income yields. If you'd like to know more then click here.
Best regards and good trading,
Jeff Clark
