MidSouth Week in Review: Feb 23, 2016

Weekly Update from Fund Manager Buzz Heidtke, MidSouth Investment Fund

Feb. 23, 2016 | RedChip Companies

From Buzz

The market was up 2.8% for the holiday shortened week.

When I was a fund manager I told my clients that my goal was to return them 15% a year. I actually thought a 20% annualized return was very possible. In today’s low inflation and low interest rate environment my realistic goal would be 7% to 8% per year. Recently I have been writing covered calls on some of my positions. Normally option premiums are high during inflationary periods; but for some reason premiums today are very high, maybe because of the recent market volatility.

In understanding options, you must know there is a buyer and a seller. The buyer is the speculator and normally loses. Today an option buyer paid 90 cents a share for the right to buy my Staples (SPLS) stock at $10 a share between now and June. The current price is $9.51, so if SPLS is selling above $10 in June, I will have to sell it to him at $10 a share. The option buyer would have to see the stock appreciate 14.6% to $10.90 for him to break even. If it goes to $15 a share in June he will have a nice gain that I will not participate in. However, if he does purchase my stock, I will realize a gross return of 15.9% in only 4 months (49 cent gain + 90 cents for option + 12 cents dividend = $1.51). If the stock closes below 10, I will have reduced my cost basis by $1.02 or 12.1% (12 cents dividend + 90 cents option premium). With bond rates as low as they are today, option writing looks to be a viable alternative. Disclosure: I purchased SPLS in 2014 at $11.61 and have written options on my position several times - Buzz.


  • Wall Street Market Predictions – Business Insider tracked the S & P 500 year-end forecasts from 17 of the top Wall Street firms. None of the firms predict a 2016 year-end close below 2,000, with the forecasts ranging from 2000 to 2350. The S & P closed today at 1918

  • Justice Antonin Scalia - who died last week, was the father of nine. When asked if he and his wife had ever had marital problems. He replied “Yes, but never enough to consider a divorce. She has made it very clear that in the event of a split – I get the kids.”

  • Small Cap Value – has underperformed in almost any time period and category for the past five years, including the past year when small cap value stocks declined 9.4% while large cap growth stocks only declined 1.8%. Over the past 36 years, small cap value stocks have returned 14.1% vs. only 9.9% for large cap growth stocks – David Sims, Seeking Alpha…When compared with large caps on several metrics, the relative valuation of small stocks hasn’t been this low since 2003 – AllianceBernstein

  • How Bad is the Mag Business? – It’s so bad that Motor Trend is offering a 1-year subscription for $6 vs. their cover price at $215.64. The special also includes a car charger

  • Only in the Government – Joaquin Garcia received paychecks for six years as a building supervisor for a local government in Spain, even though he never went to work. It wasn’t until Garcia was due to be recognized for his 20-years of outstanding service that authorities realized his office was sitting empty – BBN

  • Wealth – In the U.S., one-tenth of the top 1 percent own as much wealth as the bottom 90 percent combined. The 20 wealthiest, Buffett, Gates, etc., (worth $732 billion) have more wealth than the bottom 50% of the U.S. population – Institute for Policy Studies

  • Saudi Arabia – has no taxes, free health care and gas priced at around 50 cents a gallon. Eighty percent of the Saudis who work, work for the government, where you should be seen in your office, like at least once every 40 days. Sources of all money comes from Saudi Aramco that is estimated to be worth around $4 trillion. That’s about the size of an Apple, Google, Exxon, Walmart, Citi Bank and GE multiplied by two. There are also 5,000 to 6,000 princes with enormous palaces to feed. Tough Life! – NPR

  • Murphy’s Law in Real Estate – The unleveraged shall rise and the leveraged shall fall – Anon

  • Can’t Get No Respect – After reading the headline, Millennial Women Prefer Sanders, Hillary commented: “Is there no one who can teach me how to connect with young women?”…..”Oh shut up Bill!” - Creators Syndicate

  • Venezuela – raised their gas prices a whopping 6,000% today, citing the need to reduce their deficit which was in the 8% to 9% area last year. The government unsuccessfully tried to raise gas rates 17 years ago, but retreated after their citizens complained. The new gas rate will be $2.85 a gallon for 95-octane, however that converts to only around 8 cents a gallon U.S. Venezuelans have to endure long lines to buy staples and are beset by huge shortages of food, medicines and items such as toilet paper and shampoo. But it’s cheap! – USA TODAY

  • Food Stamps – According to the Rector and Sheffide report, “The U.S. food stamp caseload of adults without dependents, who are able-bodied has more than doubled, swelling from nearly 2 million in 2008 to around 5 million today.” Maybe the U.S. should do what Maine recently did as they dropped their caseload of those with no dependents from 13,372 recipients to 2,678 during the three-month Dec. 2014 – March 2015 period. How did they do it? Their state government established work requirements for food stamps recipients with no dependents who are eligible for work. They must take a job for just 20 hours a week, participating in training or perform community service for a mere 24 hours a week or they are stripped of their food stamp benefits after three months – Investor Business Daily.

Buzz Heidtke

"I work with many of the companies that would be RedChip companies. And we certainly ascribe to the same view that the RedChip Companies do, which is Discovering Tomorrow's Blue Chips Today."

  • Bob McCooey, Senior Vice President, NASDAQ Stock Market