Friday, November 30, 2007

Build a Fortune with this Homebuilder

To risk, or not to risk: That is the question.
-Stephen Frankola, author Student Stocks blog.

The debate of risk versus reward is at the core of investment philosophy. Every investment, (even in something as seemingly-safe as a money market fund, as some investors may soon find out) is not without risk; determining the amount of risk versus potential profit determines whether investments are worth making.

I feel as though my following idea has unbelievable upside potential with little limited downside risk.

My company is Hovnanian, one of the troubled homebuilders, and my method is long-term options.

Today I purchased the super-long-term January 2010 calls at the $10 strike price. I picked up a contract at $3.60.

The stock is trading around $7.50 currently.

Here's the reasons why the options are such a great buy:

  • I acknowledge that there is some chance that Hovnanian, (or any other homebuilder) could go bankrupt if the housing and credit markets crumble and the US economy enters into an extended recession. Therefore, the stock (and consequently, options) COULD go to $0. I think that the possibility of that is very slim, but if it does, you'll lose $350 with 1 options contract versus $750 with 100 shares of stock.
  • The options don't expire for 25 months; by then, if the company is going to recover, it will have recovered. Theoretically, for an investor to break even, it just has to go back to $13.50 by January 22, 2010.
  • The upside potential here is enormous. Hovnanian was a $70 stock at the peak of the housing bubble, at $40 within the past year, and at $13 less than a month ago. If the company doesn't go bankrupt (which, I'm betting it doesn't), this thing could easily be $20, 30, or even $40 depending on the size and pace of recovery.
Chart of Hovnanian 5-year stock price; courtesy of Yahoo! Finance

Homebuilding stocks will recover before the entire housing market does; someone who purchased his house within the past few years won't sell it next year for less than he payed. However, Hovnanian, which will be able to buy up cheapened land, can build new houses, sell cheaply, and turn a profit.

During the past quarter, Hovnanian took a huge loss writing down land, homes, and land options. I think that their books are already pretty sterilized; people already know how badly the housing market and homebuilders are doing.

So if Hovnanian's back to profitability in a year, you'll have a $15-25 stock with a year of time value left in your options. If it does bankrupt, you'll have lost less money than if you had purchased equity.

The prospect of making 200% or maybe 500% in two years while sacrificing little is an opportunity that should be seized. The worst may not yet be over for homebuilders, but I'm comfortable with the current risk-to-reward ratio.

Especially since there's a FOMC (Federal Open Market Committee) meeting on December 11th, there's a definite possibility for a quick pop. But my money says, in two years, homebuilders will have recovered significantly. If I'm right, the reward will be incredible.

Thursday, November 29, 2007

Oil Update

Just minutes after my last post, oil is now up almost $5/barrel. Once again, this is "after-hours" trading, not even the usual floor trading on NYMEX.

The explosion in the Minnesota pipeline system that exploded carries 1.5 million barrels per day into the US; that's very significant.

It's hard to tell how extreme of a reaction is going to occur, but I can't see it having a positive effect on the overall stock market. After two huge-gaining days, I think that this news may halt the rally very quickly.

Oil and Video Games

Two quick, unrelated thoughts:

Normal people would be asleep at this hour, but I was finishing up an assignment, when I got an email news alert about an oil pipeline explosion in the USA. Crude future bounced up $3 immediately after declining significantly over the past two days, and regular trading on the NYMEX tomorrow, once all details are out, could have an even more severe result.

Right now I still own some Marathon Oil shares, but no longer have any options positions in Conoco. I was actually thinking about buying both calls and puts as a play on volatility, but the money hadn't transferred into the account as of yesterday, and I'm sure oil companies are going to move a couple percent in either direction tomorrow based on this news.

If things ARE flat, I was going to buy Conoco 80 calls and 75 puts (stock is around 77). With inventory news and a big OPEC meeting coming up, I think it's going to be a volitile couple weeks for oil. (Plus, it's forecasted that the eastern US is going to get its first taste of winter, which may boost the price of heating oil and natural gas).

By the way, not to toot my own horn, but even without a significant drop in the price of oil, the major oil companies have pulled back around the levels seen during the previous price correction. Conoco fell from almost 90 to 75; Chevron and Exxon have not declined quite as significantly, but they have corrected. If oil goes down to $75/barrel... I don't know what's going to happen to the stock price. (Expensive oil isn't great for the big oil companies, but sometimes they trade as if it is).

Second thought:

Right now I own Electronic Arts stock in one portfolio and some Activision options in my smaller, riskier portfolio. I actually purchased the ATVI options before their earnings release, after which the stock dropped from around $23 to as low as 19. However, they revised their numbers upward (after guiding low in the conference call - go figure) due to strong sales of Guitar Hero 3. I own the December $25 calls, so the stock still has to move about 10% to be ATM, but with two hot games (Guitar Hero 3 and Medal of Honor: Modern Warfare) I think it's going to be a fantastic holiday season for Activision.

EA is the 800-pound gorilla of video games, but they don't have a clear-cut winner this holiday season. They did release Rock Band, a competitor to Guitar Hero, but its success cannot be predicted. However, I think that this Christmas season is going to be better than expected, so I plan to ride the (predicted) wave of good news and higher share prices through the holiday season.

So in conclusion:

  • Watch the price of oil and oil stocks
  • Activation will be GREAT this holiday season
  • EA, Take-Two might tag along for the ride
    • if Rock Band is a hit, EA could have a very nice pop, while ATVI would suffer.

That's all for now, but I'll update again this week.

Monday, November 26, 2007

iTunes 7 Issues = Apple's Demise?

Ok, the title is a little extreme, but I have had some major problems with the newer updates of iTunes that really aggravated me.

(By the way, after reading about the problem online to find a solution, I have found that the problem is affecting many users, running both Windows and Mac operating systems).

I use iTunes to listen to music files that are permanently downloaded on my computer (now, at college, I also use a program called Ruckus that lets you listen to unlimited music but not keep it). So I don't even do anything really complicated with iTunes; I just open it and listen. I don't own an iPod, so I don't even have to use it to transfer music to a portable device.

I had been happily using iTunes for years, prefering it to Windows Media Player, WinAmp or any alternative service. However, if I was a little less tech-savvy, I would have never touched iTunes again after this recent ordeal.

I had updated to a version of iTunes in the low 7's (not the most recent 7.5) before I went to school, and after the updated, I noticed that my music would skip during playback, a few times per song, even if there were no other programs running and my computer displayed lots of extra ram and processor capability. However, I dealt with that problem for a few months without thinking much of it.

More recently, Apple tricked me into updating to the newest version, 7.5 (iTunes displays a pop-up box every time the program opens, so I must have absentmindedly clicked "Yes" to update one time).

iT 7.5 is probably the worst piece of software I had ever encountered. The very first time after it downloaded, my computer crashed attempting to open it. Each subsequent time, even with no other programs running and extra computing capacity, simply opening the program would freeze the computer.

Apple also makes it difficult to correct the problem; they do not bundle un-installation software with iTunes, so I had to troubleshoot at their website to find out that it's best to use Windows to uninstall the Apple software.

Luckily, i found this site, which provides a previous version (in the 6 family, which works fine) and also walks the reader through the other steps necessary (which include temporarily copying and deleting a specific file).

Anyway, I'm happily running version 6 now, but pissed at Apple for wasting a couple hours of my life trying to make the new versions work, and ultimately, downgrading back to an early version.

(Interestingly, Apple has recently attacked Microsoft in ads, claiming many Vista users are reverting to XP because of issues with the new software. Go figure...)

So how is this relevant to the stock market?

Well, for many Windows users, like myself, iTunes (in conjunction with the iPod) is the only interaction they have with Apple products. If a Windows user has issues with the only piece of Apple technology on their system, how likely will they be to buy more Apple products?

Like I said, I don't even have an iPod, so this didn't my daily routine too badly. However, for the millions of iPod users that religiously update their iPods, how will it feel to update to new, supposedly-better software, only to have it freeze their computers?

Apple has experienced recent growth in their personal computing problems because Apple software HAD been significantly prettier, smoother, and better than Windows alternatives. But if this problem is not corrected shortly, I fear that many wishy-washy Windows-running Apple-users may be turned off forever.

(I am possibly looking for an entry point into Apple stock after its recent correction... But I truly feel as if this is a serious issue, and want to see it corrected first).

Sunday, November 25, 2007

Sorry for the wait...

I apologize for the lack of updates; I have been very busy with school, work, and enjoying the Thanksgiving holiday.

During the coming week I'll post a few new things. I'll feature:

  • Discussion about a bottom in financial
  • General market movement
  • Hot stocks for the holiday season
Check back soon for at least one writeup. Historically, the market performs very well during the end of the year; don't miss out!

Sunday, November 11, 2007

A Weak Week?

Note: This is published before the markets open for the week of 11/12.

The performance of the major indexes over the past week can be viewed two different ways.

As I have said before, predicting the market is nearly impossible and (overall, for a long term investor) generally fruitless. However, when writing a blog about the stock market, it's necessary and fun.

This past week, the Dow and S&P 500 both shed about 4%, while the NASDAQ endured an 8% haircut. (The majority of these losses came on Thursday and Friday, with some of the indexes and many individual stocks actually posting gains between Monday and Wednesday).

Many of the high-flying tech stocks (that I shorted in my fantasy portfolio; read my previous post) led the market downward.
  • Google lost over 10%
  • Research in Motion dropped over 20%
  • dropped nearly $100 from its all-time high around $430 early in the week to $340 on Friday
  • Chipotle Mexican Grill, on which I stated I had a bearish outlook, lost about $20 from $140 to $120
  • Even the blue-chip Cisco lost 10% after reporting good (but not spectacular) earnings

Both the S&P 500 and Dow are both within a few percent of their mid-summer lows, with the NASDAQ a little farther away due to a bigger run-up in recent months.

Many professional analysts cite those summer lows as an important level of support. If indexes crash through those lows, look for new, much lower bottoms. But if the markets tap the barrier and bounce back, the bull market may be revitalized.

However, looking at it simply instead of technically, I see reason for weakness to persist in the markets.

Oil, though now off of its highs, is still in the mid-nineties per barrel. Gasoline and other distillate prices are now only starting to catch up to the rise of the price of oil, so watch for consumers to now finally be effected by $90+ oil.

The dollar is crashing. Though such terms haven't been used yet, and though I'm not an international monetary policy specialist, I'm comfortable using that term. After reaching parity with the dollar within just the past month or two, the Canadian dollar now trades around $1.05. When currencies are appreciating faster than markets (with 5% monthly changes of 10+% yearly changes), I think that the depreciation is becoming dire. The dollar is hitting new lows against the Euro on a daily basis. As the Fed continues to weaken the dollar through cutting rates, it's making the problem even worse.

Lastly, the subprime problem is far from resolved. Major banks and investment houses continue to write down their books for losses in securities. Major corporations like Bank of America, AIG, and Morgan Stanley are plummeting in value. Homebuilders, though recently pushed out of the spotlight, may still be in danger of going bankrupt. As the cost of imported goods starts and continues to rise, Americans won't have money to buy houses.

There are just too many logical reasons why the market could continue to go down, while there is little logic for an upside bounce. I own some puts in an ETF that tracks the S&P 500, and when they expire this week, I may buy an Ultrashort ETF. I could easily be proven wrong in the short or long term, as political, economic, corporate, and emotional conditions change, but I see no reason for the markets to immediately rebound in the context of today's environment.

Wednesday, November 7, 2007


I want capitalize on the current volatility.

Right now, my real-money portfolio is nearly 90% invested; I have some SPY puts, and then about 8 different stocks. I'm happy with all my positions right now, so I'm not really looking to actively trade that portfolio soon.

However, I just entered a trading competition sponsored by my university. Finally, I get to employ lots of risky strategies that I wouldn't do with my real money.

The competition opened today, and my first move was to short, short, short.

I shorted:

If the market continues to be sour (after the 3% loss on Nov. 7), the returns will be lucrative. All of the above stocks (except for the exchanges, F, and AIG) are high-growth momentum plays. If momentum stops, there's no telling where the floor will be.

Of course, I'm long stocks too (I'm about 1m more short than long in a $5m portfolio). I own:

and a few others that I'll update later.

Literally every stock, both long and short positions, fell today, but the shorted ones fell more, so I'm currently in the lead.... after the first day of trading.

As for my general take on the market:

It seems like there's a lot of reasons why there could be a correction now. The dollar is crashing, oil is still high, Morgan Stanley just wrote down $4B, WMU, Freddie Mac and Fannie Mae are under review for lending policies, and the market has just been strong lately.

Could the market rebound nicely tomorrow? Sure.
Could it fall 10% over the next two weeks? Believe it.

Predicting the market movement on a day-to-day basis is impossible and fruitless, so I cannot and will not say if the market will be up, down, or flat tomorrow.

But keep in mind that stocks like Apple, Google, and Baidu have P/Es that are 2 or more times higher than there rest of the market. When momentum runs out, it's a recipe for disaster stocks like those above. Google is itself a big enough entity to drag down the entire market; just keep an eye out for the potentially-dangerous situation that this can create.

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