ARTICLES

An Alternative To Money Market Funds

June 2014

Earlier this month, US Federal Reserve Chairwoman Janet Yellen made clear that the low interest rate environment will remain longer than she originally anticipated. Her comments at the June 18, 2014 press conference, upon the conclusion of the Fed’s FOMC meeting, helped trigger a rally in stocks to record highs for both the S&P 500 and the Dow Jones Industrial Average. In an article written by Alexandra Scaggs (Wall Street Journal June 18, 2014) she wrote “The Fed’s downward revision of the U.S. expansion this year, to 2.2% from the projected growth rate of 3% forecasted in March, was widely expected as it reflected the economy’s contraction in the first quarter.”

For many investors holding large sums of money in money market funds and CDs, this is not good news. This news again highlights the need for investors to consider alternatives to money market funds. Ames Capital Management Inc. has aided investors seeking higher yields with limited risk utilizing strategies known as Dividend Captures and Covered Call Writing. Just recently, our clients were rewarded with an investment that provided a 21% annualized return in a three week holding period.

On Monday June 2, our clients purchased shares of DIRECTV “DTV” and sold the June $82.50 calls and collected a premium which reduced the cost of DTV shares to $81.50 per share. Then DTV closed @ $84.77 per share on Friday June 20, well above the $82.50 strike price. This sale was automatic as per the regulations of US options exchanges. Exercise is automatic since the shares closed above the strike price of the options on the expiration date of the options. The expiration date in this case was June 20.

On May 18, DTV and AT&T “T” jointly announced that AT&T would acquire DTV in a $67.1 billion deal that includes the assumption of DTV’s debt. This cash and stock transaction will pay DTV shareholders $95 per share upon the deal’s completion. The companies believe completion is expected to occur in May 2015. Even though DTV shareholders will receive $95 per share in cash and stock upon the deal’s completion, DTV shares traded down to a low of $82 per share on Friday May 30. This spread of $13 per share, the difference between the takeover price and the then current trading price, created an attractive opportunity with low risk.

Covered Call Writing and Dividend Captures provide investors with current income in what is typically a brief holding period. Quite often, Ames Capital Management will combine these two strategies on behalf of its clients thus enabling the clients to potentially profit in three different ways: 1. The appreciation of the share price; 2. The premium collected when writing the Covered Call; and 3. The dividend collected.

Note that DTV does not currently pay a dividend so we were unable in this case to combine the Covered Call and Dividend Capture strategies. Nevertheless, our clients received a 21% annualized return in a three week holding period.

Disclaimer

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