Slow PC demand trips up the tech market...

Slow PC demand trips up the tech market... A spike in fear is nigh... Trading opportunities abound... Record earnings on the railroad...

 Last week was rough on the big technology companies... thanks in large part to slowing sales of personal computers as people rely on iPad-like tablets and smartphones for more traditional computer uses.

The Dow Jones Industrial Average fell 205.43 points (1.5%) on Friday – the biggest one-day drop in four months. Tech stocks were hit particularly hard... The Nasdaq fell more than 2%.

 Intel (INTC) closed last Friday at a new 52-week low. The company announced a 14% drop in quarterly earnings. In its earnings announcement, the semiconductor giant reported quarterly sales of PCs slowed to half the normal seasonal rate.

To fight the trend, CEO Paul Otellini said Intel's new Atom chip will be in 20 tablet models this quarter. But the company will lose earnings as it shifts to these less-expensive chips.

The stock currently trades at nine times next year's earnings estimates. And the dividend is more than 4%.

 Last week, software giant Microsoft (MSFT) announced quarterly revenue fell 8% to $16 billion. The company said revenue in its Windows division fell 9% (that includes deferred revenue due to the launch of its new operating software, Windows 8). Without the adjustment, Windows revenue fell 33%.

The disappointing numbers came one week before Microsoft is set to unveil Windows 8 this Friday. In addition, Microsoft is releasing a version of Windows that uses less power (aimed at the mobile device market). And it's about to launch its own tablet device, called Surface.

Shares of Microsoft are down nearly 5% from last Thursday.

 On Thursday, third-quarter earnings for search-engine colossus Google leaked hours before their scheduled release. The big miss for Google was a 15% decline in "cost per click," the money it makes from search ads. Again, this lower number is a function of higher tablet and smartphone use – allowing web surfers to bypass Google's PC-based space ads.

Google plunged 8% on Thursday from its 52-week high. Shares fell another 2% on Friday.

 Intel and Microsoft are both mainstays on Dan Ferris' esteemed list of World Dominators in Extreme Value. These are stocks you buy on dips and hold forever. And despite the recent drops… Microsoft is up 26% since Dan recommended it in September 2006. Intel is up 56% since its April 2009 recommendation.

Holding these big, dominant, blue-chip computing brands is a smart, safe way to compound your wealth over time. And the recent dip in share price may create a bargain price for investors to jump in.

 But in the short term… nothing is keeping these stocks from falling farther. The recent action shows the market is skittish about technology right now. So if you like the idea of owning these stellar enterprises… but are worried about what the stock prices may do over the next couple months… you have an alternative to buying them outright. In fact, you have the perfect opportunity to try selling put options.

Remember… when you sell a put, you accept the obligation to buy a stock at a specific price by an agreed-upon deadline in the future. If you end up having to buy shares… the income you receive upfront (called the "premium") combined with the predetermined sale price gives you the opportunity to buy the stock for less than the current market price.

(For a fuller description of how put-selling works… reread these essays on the strategy.)

 One key to the strategy is we only sell puts on stocks we want to own... That way, if the stock falls below the strike price by the expiration date – and we have to buy the stock – we're happy...

We bought shares of an enduring franchise (that won't stay down forever) at a price we think is a bargain… And we still kept the income we received when we opened the trade. (Of course, if the stock stays above the strike price at the expiration date, we simply pocket the premium.)

It's best to sell puts after a rout, like the one we saw last week. Let's look at Microsoft for an example. The stock fell from more than $31 a share in late September to $28 a share today – an 11% drop.

You could sell the MSFT January $27 puts (meaning the strike price is $27 and the expiration date is January 19 – option-expiration day in that month) for $0.87 a contract. If you sell one contract, you would pocket $87 today. And as long as MSFT is trading for more than $27 come January 19, you pocket that cash.

If you do have to buy the stock, you'll own one of the world's best technology companies at a double-digit discount to its 52-week high.

 It's a great opportunity… And our put-selling expert Dr. David "Doc" Eifrig recently told his subscribers to expect even better opportunities in the near future.

Options prices are based on what's known as "implied volatility." Without belaboring the technicalities… when investors worry about the direction the stock market may go, they'll pay more for options that protect them in a falling market.

The Volatility Index (the "VIX") reflects the premiums available on options. That's why it's often referred to as the market's "fear gauge." Today, the VIX is above 17. It's far from its highs of 80 during the 2008 crisis. But it's been spiking higher recently. And as the VIX increases, so do option premiums.

 In his latest Retirement Trader, Doc said he believes we'll soon see a bigger spike in the VIX. And when that comes, put-selling opportunities abound. From the October 12 Retirement Trader…

 Doc is currently scouring the market for put-selling opportunities when the VIX spikes. And considering his streak of 93 positions closed for a gain… readers who follow his recommendations will likely do very, very well...

 Not every stock announced bad earnings last week. The Union Pacific railroad just reported its highest quarterly profit in its history.

Net income was up 15% from the same quarter last year to $1.04 billion. The Financial Times reports that Union Pacific's petroleum traffic grew 95% year-on-year, lifting the company's chemical segments revenues 17%.

After the company announced its results, CEO Jack Koraleski said on a telephone interview with Bloomberg, "We have some real strength in our chemical business, in particular our crude-by-rail business."

 Last week, we told you how North Dakota's production hit all-time highs in August. It's churning out more than 700,000 barrels per day (bpd). The huge Bakken shale that longtime readers are familiar with produced 635,000 bpd of that total – up from 379,000 bpd a year earlier.

What a lot of people don't realize is that right now… with production skyrocketing, there's a shortage of pipelines available to transport oil from the well to the refineries. Porter spoke about this in his September issue.

As he told readers... pipelines are the most efficient way to transport oil around the country. But at the moment, due to the massive volume, pipeline capacity is lacking. So Bakken producers have to use rail to get their product to market.

In 2010, rail transportation in the Bakken was used to ship out 8% of production. So far this year, that's increased to 28% of production. Porter recommended Union Pacific in January this year. His readers are up 12%.

 New 52-week highs (as of 10/19/12): Advent Claymore Convertible Securities & Income Fund (AVK).

 In today's mailbag... readers respond to Porter's comments on higher education and his advice to young people. Send your e-mail to feedback@stansberryresearch.com.

 "Your cutting and unkind response to the Dad who shared his son's letter with you reeks of your smugness and money-addicted personality. I'm glad most people are not so obsessed with money to make their personal goal to be independently wealthy by the time they are 40. There is much more to life than that.

"I didn't reach the millionaire stage till 60-something, and that was soon enough. I have had time to create wonderful new things in my scientific arena to share with humanity, ideas that will endure, not just a transient sale that benefits me – and raise a family. You are too self-centered and narrow minded to be giving advice of this kind to people.

"I wish to congratulate the Dad for raising a son who expressed a very nice balanced attitude about life – no person should have to sacrifice everything for the accumulation of capital – balance is important for a healthy mind and body. The son is a hardworking kid, with a good sense of saving for the future and he avoids most wastefulness that dooms many a young person.

"Today's times are different than when you or I grew up. The purchasing power of the dollar has steadily eroded and wages have not kept up. Thus it is harder for young people to attain a certain standard of living now than before. The young man whose letter we all read has a fine Dad who taught him well. The Dad's mistake was to share the letter with a person like you. I dare you to print this, for the sake of the Dad and Son." – Paid-up subscriber Sergio Aragon, Ph.D.

 "I can confirm your remarks about professionals. I am a 68 year old practicing dentist. The only difference between me and a laborer on a shovel is my hourly rate. I have 11 years of full time post-high school education. Fortunately, back in my day, the cost was much less even on a relative basis. At age 40, I didn't have much saved at all. Since then, I have taken on the project of building net worth. I have worked very hard and became totally debt free about 12 years ago. I have a low seven figure portfolio, but still feel I have to keep working.

"A young person today who would follow my path would never make it. I spoke with a young newly minted dentist recently who has over $300,000 in school loans. Unbelievable!

"You might consider writing a piece about the nasty alliance between the Universities and the various school loan providers. It is the ability of the students to access nearly unlimited funds that has allowed the tuitions to skyrocket. The whole system is out of control." – Paid-up subscriber William D. Holbrook, DMD

 "Bill Bonner's report on Bad Debt should be mandatory reading for all of us, especially those of us that are self-employed. Living here on the coast of Maine, I have some knowledge of the affairs at Hinckley. There is still a strong demand for their products but due to debt their profits have shrunk. They are in serious danger of closing down an incredible yacht company. I control the debt in my business closely as Mr. Bernanke doesn't seem to feel, I am too large to fail. You have an amazing mentor in Bill Bonner. Keep up the great work." – Paid-up subscriber KM Kelly

Goldsmith comment: KM is referring to Bill Bonner's classic essay we ran in our Sunday Digest Masters Series. Starting this year, every weekend, we choose timeless essays on money, government, and society by our favorite authors (from both S&A and other publishers). You can read Bill's essay here. And you can find all of our Masters essays here.

Regards,

Sean Goldsmith

New York, New York,

October 22, 2012