Tuesday morning two very strong pieces of data indicated — no, screamed — that American consumers who own homes or own stocks or have a job that is not in danger are feeling pretty good.
And that is a large majority of American consumers.
The market responded, taking back the losses of last week and pushing to new highs. Will this last? Yes — for quite a while — even if we have a correction in the interim. Why? Houses are not in a bubble — they are still on average 28% below where they were at peak and home prices are at 2003 levels. There is a lot more room for home prices to rise and confidence to build. The stock market, adjusted for inflation, is nowhere near past highs and based on valuation is fairly valued — I think cheap, I am speaking of the consensus of overpaid geniuses on Wall Street. And layoffs are at a nineteen-year low according to one estimate.
Of course, not everyone has been invited to this confidence party. We are the land of the free, the home of the brave — and the home of the hungry as more than 47 million Americans are on food stamps — 15% of the population. Not too many farmers are participating; they continue to sell corn at astonishing prices so we can burn it in our cars. Makes sense to me. After all, I live in Washington — ain’t nothin’ like securing that farm state vote.
So what to do?
Think high end retail — and low end retail. Tiffany’s (TIF) just announced earnings — they were up — and given the fall in the price of gold and silver their margins should be improving for the next 2-3 quarters. If you sold a $77.50 May Week Five put that expires on Friday, you would generate an annualized return (assuming you did this fifty times a year) of around 16%.
I also like Costco (COST) right here and right now, and if you are willing to sell a put very close to the strike price, increasing the risk of having to roll the position or being put the stock (there is always that risk), you can sell the May Week Five $115 put and generate $135 a contract — that is a return of 1.1% in a few days, an annualized return of 59%.
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