I'm Back, after a Very Bleak October

It's been over a month since my last post, and i have been very busy. School has been hectic and I have had many (thus far fruitless) internship/co-op interviews, so blogging had to take a back seat to more important matters.

I've missed out on commenting on a very noteworthy month of market activity. Taken from Marketwatch.com:

The Dow rallied a whopping 11.3% for the week, even as it plunged 14.1% for the month, its worst October since the stock market crash of 1987. See The Month that Was.

The S&P posted a monthly decline of 16.9% -- its worst month since 1987, but a weekly gain of 10.5%. The Nasdaq slumped 17.7% in October, its worst month since 2001, but it rose 10.9% from last Friday's close.

If not for the rally this week, the final statistics would have been much bleaker. Still, October had many spooky moments (note: obligatory Halloween joke is now complete). The VIX (an options volatility index) still sits in previously-uncharted territory; after hitting highs above 80, the index closed at 60 on Friday. Prior to this month, peaks had been made around 40 with a normal range between 10 and 25. The VIX measures options premiums (which can represent sentiment or "fear") - readings this high show that traders expect big moves, and are either trying to capitalize on swings directly or are hedging longer-term bets with options.

Because of a busy schedule (or at least I'll use that as an excuse) I have largely ignored the market over the past month. I have generally held all of my long-term positions (though I did need to meet a margin call due to declining prices) as I was comfortable with long-term valuations and prospects. This past week, I did well with buying and selling some MRO and VLO calls (I sold Friday fearing a Monday selloff and a decline in options premiums), but energy companies are grossly undervalued right now.

Valero, a refiner, made $1.86 per share during this past quarter (after backing out one-time items and other extras). The stock was trading at $16 earlier in the week ahead of earnings and ended around $20.50 on Friday. It had traded below $15 earlier this month. As a refiner, Valero actually does better in an energy environment like the one we have now - crude oil prices are falling faster than gasoline (and other distillate) prices are. With oil at $60-70, Valero makes a very desirable margin on the difference between input costs and output prices.

Marathon Oil (MRO) has equally bright prospects. MRO has both upstream (finding/drilling oil) and downstream (refining, gasoline retailing) operations, which helps buffer the impact of a fluctuating price of oil. Marathon reported adjusted net income of $2.76 per share for this quarter - once again, before the announcement, shares were trading at less than 10x QUARTERLY earnings. Marathon is expected to make about $6/share this year - a reasonable 8-10x earnings valuation would put MRO shares around $48-60, where they were trading before this market mayhem. Additionally, Marathon is moving to possibly break up the companies upstream and downstream components into two different publicly traded companies. Jim Cramer estimates that the market values of the two companies would value current shares between about $70-$100, though trusting that pundit is always risky.

I will happily reenter calls for either company if there is market weakness early this week. Long-term valuations are wonderful - Price to Cash Flow for the trailing twelve months is just 2.8 compared to a 10-year average of 4.6. MRO is currently trading at book value, while the 10-year average for that metric is a price-to-book of 1.7. There isn't much money available to flow into the market and buy great stocks like these, but shares should clearly appreciate over time.

That's all for now, but a lightening schedule should lead to frequent posting once again. There's certainly a lot to write about, so I hope to continue to commentate during this wild market.

It's a Wonderful Day

...When you're almost irresponsibly long AIG, ETFC, and energy.

I've never listed my full portfolio here and I don't plan to, but here are some things that I have been doing lately:

• I sold more of my once-huge BWLD position today as the stock notched a new 52-week high. I still hold some BWLD, but the stock is definitely fairly valued here, so there are better opportunities for this money elsewhere.
• I sold COP $75 calls this morning that I had purchased during the oil panic of last week. I bought the contracts for $.40 and sold for $1.70 - having a nice win after losing on my TTWO position definitely helped.
• Speaking of TTWO, I bought equity earlier this week at $15.50, but my big options position will expire worthless this afternoon. Long-term prospects are great and share valuation is ridiculously low, but I don't expect a near-term catalyst (or at least I'm not willing to bet on one via options after getting burned).
• I progressively backed up the truck with AIG this week, buying different lots at different times. My first purchase was at $7.50 - ouch. But thanks to averaging down, my average cost is now $3.25/share. In addition to the temporary end of short selling and general euphoria, shares are rallying today as some investors are attempting to block the government's dilution of the company. I see it as a win-win; even if the company is diluted and liquidates, the sum of parts is much greater than the current valuation (I have seen $10 cited as a reasonable estimate). If the government agrees to less or no dilution (considering that the 11% interest on the $80 billion loan should provide them with some nice income anyway), shares will obviously be worth even more.
• I added to my CIT position today (increased it by 75%, it's still a small portion of my portfolio) when the stock was down earlier in the day. Wells Fargo provided CIT with a $500 million line of credit yesterday; I see that as a sign of confidence and relatively-clean books. Also, CIT has asket to be added to the list of companies that can't be shorted (I don't understand why it was left off in the first place). If their request is granted, the near-term floor should be right here at 10.
• I added to my ETFC position earlier this week; my average cost is now just above $3. Like CIT, ETFC has done a better-than-average job of selling assets to create a capital cushion, and their retail business is thriving. Continued writedowns on mortgage-based assets they still hold may be a short-term issue, but I see no bankruptcy risk anymore, which the market still seems to imply.
• Other energy: At the end of last week, I held COP, MRO, and CEO shares. I sold the COP earlier this week to avoid a margin call, but still hold MRO and CEO, with costs of about $40 and $118. $100 oil seems to be the sweet spot for integrated companies (MRO), and CEO (CNOOC, a Chinese oil company) doesn't have to deal with as many government controls as PetroChina does. It also pays a nice 5% dividend.

I have a few other positions, but that covers my major actions of the past two weeks. With all of the aforementioned purchases, I have fairly long-term timeframe; with a predator-free trading environment for the next few weeks and ample government-provided liquidity, financials may finally get their act together.

Interesting Week for Oil...This Time, I'm Playing for Real

Oil prices snuck higher today, but the real action should be forthcoming.

OPEC begins meeting tomorrow, and the usual troublemakers (Venezuela, Iran) are looking to milk some more money from their barrels. The cool, calm, and in-control Saudis will be expected to propose holding production steady. As oil rose exponentially earlier this summer, Saudi economists and oil ministers affirmed that they believed that $80-100 was a good price for oil, but as barrels begin to approach that range, they too may step up the rhetoric a little bit. Countries like Venezuela and Iran have called oil too cheap, but the Saudis control enough of OPEC production to really be the deciding party.

Though any big change in production is unlikely to occur, the degree of rhetoric may have some influence on market movements going forward starting tomorrow.

And as news outlets have informed you, there's another hurricane brewing in the Atlantic - Ike. Ike just crossed Cuba and weakened, and it will cross again, but at some point it will enter the gulf and (supposedly) begin to strengthen. Right now, the track takes Ike into the middle of Texas, a little south of Houston. If this forecast proves accurate, then oil and gas production will be disrupted.

Wednesday is the weekly inventory report, and the numbers will be a little funny due to our ol' pal Gustav. However, Gustav didn't affect production or refining to the extent that was originally expected (hence the big drop in energy prices after my post about it), so the numbers may be bearish.

With my funds, I took a long position via my favorite vehicle - Conoco Calls. Unfortunately for me, Conoco announced a big, expensive parternership dealing with Liquified Natural Gas in Australia last night, so COP shares fell while those of other oil companies rose today.

Last time I was dead wrong; Gustav was a dud (relatively speaking - unfortunately, peoples in ocean countries beared the brunt of the once-powerful storm). This time, multiple events will be in play. I'm taking the contrarian stance - it's in my nature, for better or worse - after energy prices and related shares have fallen dramatically over the past two months. A quick pop tomorrow, Wednesday, or anytime soon, and I'm out - I'm still not convinced that oil's true value is $108/barrel.



To follow up:

As oil shares crashed on Tuesday, I bought shares of COP around $70 and Marathon Oil (MRO) Around $41 as long-term purchases. It looks like crude and oil equities will open lower today, but oil companies are looking dirty cheap.

Out with the Old, in with the New

I closed FRE around $12.50 and closed CIT around $7.80, both for ~$1/share gain over my entry points. If I would have held until the end of the day, I would have made about twice as much... but if I was still holding now, I'd be in bad shape.

I bought NTRI $12.5 July call and $7.50 July ODP call (shares had been crushed after advising that sales were very, very sluggish).

I’m playing the dead cat bounce with ODP while NTRI seems to be drunkenly staggering out of oversold territory. USO puts still open, and those have bled a little today.

Also bought CSCO Aug $22 call for $.90 when stock was at $21.60 yesterday, dropping 6% on the day. I figured it was oversold.

Why not try to take advantage of some market volatility?

Earnings Season: Like Goin' to Vegas

As earnings season was in full force over the past week, investors were taken for a ride on a bucking bull.

I had a lot of fun and made a little money at the craps table, er, I mean, playing options of companies releasing earnings.

Early in the week, I took a bullish stance on Intel; they pleased the street and I came out ahead. Later, I also placed a bullish bet on eBay, but their earnings were not lauded by analysts (though I liked the release; more on that in another post). Thankfully, a 15% OTM put on SunPower (SPWR) just touched the moneyline, making my options worth something. (Side note: I'm very short-term bearish on solar stocks; I'll post about that later too.) On Thursday, I made two bets, on E*Trade and Citi, which both ended up being slightly profitable; however, I passed on the biggest surprise of the week, the company that owns the internet, Google.

I was looking at Google options but ultimately decided it would probably be like throwing money away. After all, the level I was looking at $490 or $500 calls) were $50 out of the money - I thought that they would surely expire worthless, even if the report was good.

I was wrong, and it hurt. The $60 contract of $500 April calls sold for between $2,500 and $4,700 on Friday. Lots of wealth changed hands in the way-out-of-the-money contracts; what was selling for dollars or pennies on Thursday was worth 50-100x as much Friday. However, as a (self-proclaimed) long-term investor, I have to look past such fanciful missed opportunities and focus on the future.

Lots of companies still have to report their quarters over the coming weeks. I will post individual thoughts, analysis, and predictions concerning the coming days, or even specific companies.

What did I promise again? A bearish writeup about solar stocks, individual earnings predictions... I'll also tease and say I'm going to write about the attractive value of PetroChina - keep checking back all week for the frequent updates.

Companies reporting that I'm eyeing up this week:

Monday: BAC, NFLX
Tuesday: MHP, OXPS, YHOO, VMW
Wednesday: UPS, AMZN, AAPL, CMG, NTRI
Thursday: POT, PEP, OXY, COP, MSFT, WDC, DECK
Friday: HMC

I'm expecting good news from some, and bad from others. Let's crank up the guessing machine.
"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Cover your Calls and Sleep Well.

Trying to make money in this current market is a daunting, confusing task. The S&P 500, the benchmark index representing a broad scope of the market, is down over 10% since October and over 7% since the last two weeks of December.

Are we bottoming? Transitioning to a bear market? Is this a hiccup in the 5-year bull run? I surely don't know.

But I can recommend one strategy that can increase gains, lower cost bases, and minimize losses in a volatile, unpredictable market; write covered calls.

In this market, I like to use it to enter risky positions, in essence, at a lower entry-point. Here's an example of how to do that.

A year a go, Merrill Lynch (MER) was trading at $100; today it sits at $56. You believe that Merrill is a great company, and that it'll eventually get its act together. However, due to write-downs, the continuing housing crisis, and the possibility (or probability) of recession, you don't know if this is the bottom. But you would rather enter now than miss any upside.

A share of stock can be bought for $56. You go ahead and buy a lot of 100 shares for $5600. (We're excluding commission for this exercise; if you trade at a discount broker like Tradeking, commission is negligible anyway).

Cost= $5600

Right now, a contract of January 2009 calls at the $65 strike price is selling for $5. Once you own 100 shares of stock, you can write one contract of those calls that are "covered" by your shares (hence the term "covered calls").

If you go ahead and do that, you'll take in $500 right away. You can look at this money many ways; you can think the trade like you bought the stock for $51/share, or right now, your investment automatically made you 10%.

Here's the great thing about a contract like that; it's a win, win, lose-less situation.

• Win: Say that the economic clouds blow over, and Merrill recovers to $75 next year. Your options will be called away, and your stock will be sold for $65/share, not $75/share. However, you still made a 30% return (20% stock move plus initial $500 credit for calls), only missing out on another 5% of upside.
• Win: Merrill is approximately flat in 12 months. With the stock at $57, your gains would have been negligable just holding the stock, but by selling calls, you made a handsome 10% as the stock price remained stagnant.
• Lose, but less: OK, this isn't the bottom. Merrill is $44 next January. But because you sold calls, taking in $500, your losses were less extreme than if you hadn't done so.

As you can see, the only bad thing about covered calls is that it can limit upside potential. However, as long as you have extra cash (or margin in your account), you can simply buy more shares if you like the company and your shares are going to get called away.

The amount of money you can take in depends on expiration and strike price. Sticking with this MER example, if you think that performance will remain poor, you could write Jan 2010s @ $65 strike and take in $8.30/contract, or take in the same $5/contract for the $75 strike price.

You can, of course, write covered calls on positions you already own, or as I displayed, they can be used to open new positions, too. Since the only shortcoming is the limitation of upside potential, it's a great time to write calls now as the market looks like it may move sideways, if not worse, in the near future.






I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Is Crocs biting back?

I loathed Crocs (CROX) during this summer and fall, as trendy investors engaged in a feedeing frenzy, inflating the price of the quirky shoemaker. I did not take joy in the stock's plunge, but I felt as if it was justified.

However, CROX is now an attractive prospect. After a massive, painful decline from $75 to $35, CROX had returned to earth from it's lofty orbit. At that point, it was trading at a forward P/E of about 15 - cheap for such a high-growth stock.

Investing in high-growth niche stocks like CROX can be tricky, or even disastrous. (I briefly owned Heely's, a similar, trendy shoemaker, selling eventually for a small loss.) Once a former high-flyer like CROX falls, it's often hard to establish a floor.

But, I decided to take a risk. I liked CROX at $35; I thought it was significantly oversold.






So when it was in the high $30's, I bought December 42.5 calls. I just closed the position today.

11/30/07

Bought

CQJ LV Call Crocs Inc $42.50 Exp 12/22/07

$1.10

12/07/07

Sold

CQJ LV Call Crocs Inc $42.50 Exp 12/22/07

$4.20

The stock certainly recovered nicely, bouncing up about $4, or 10% in one week.

After selling my $42.5 calls, I deciced to reinitiate an options position, and purchased December $47.5 calls for $1.40/contract.

This investment, in my opinion, is attractive for two reasons; fundimentals, and momentum.

As I previously discussed, CROX was ridiculously overvalued at $75. When they announced earnings, which weren't even bad, the expectations of speculators were crushed, and as Jim Cramer shouted "SELL" on Mad Money, investors dumped the stock. (That wasn't a direct shot at Jim - though he had been pumping up the stock on its way up, a panicked investor that sold on his advice would have not endured the full losses). CROX fell over $25 the first day after earnings, and continued its downward slide for another two weeks before stabalizing.

Now, CROX has an attractive long-term vaulation. The shoes are still selling well, as consumers snatch up the trendy, colorful, albeit unusual clogs. During the last conference call, the company still called for strong growth, just not strong enough to justify a 40 forward P/E. CROX is also releasing clothing to compliment their product line, using lightweight material; if the clothing is as revolutionary (or intreuging) as the shoes, sales could become supercharged.

I usually wouldn't touch a stock if I didn't believe its long term prospects were respectable, so CROX passes that test. However, the real reason why I'm playing with some options is because CROX is (or was) a hot momentum stock. Now that CROX is well off its low (and up in 4 out of the last 5 sessions), individual investors who had sworn off CROX might be attempted to jump back in.

I don't think a valuation of $75/share is reasonable, but CROX still definitely has room to run. The average prediction of next year's earnings is $2.69/share. The current forward P/E is just 17, which I'd consider pretty low for a company expected to grow 40% next year and at 26% over the next 5 years.

I'd start to find CROX a little overpriced with a forward P/E in the mid-20's. However, the stock still has lots of ground to cover before then. With a forward P/E of 20, CROX would trade around $54/share. Assuming a forward multiple of 22.5, that would make CROX a $60 stock.

My December options will expire too soon to enjoy all of CROX's potential price increase. But, even as a value-oriented longer-term investor, I think CROX is an attractive buy-and-hold at this current valuation. CROX may be cold-blooded now, but I think it's going to bask in the sun.

Oil is Bubbling

As I alluded to in my longer posts about oil, I stated that there was some potential for some short-term upside, due to today's inventory report and pending Fed rate-cut decision.

I pointed out that when inventory reports were negative, they were dismissed as irrelevant, but when bullish, they were said to be the most important data ever. That was supported today; a slight decline in inventory popped oil up to a new record high.

Thankfully, I'm still holding my COP calls.

If the Fed cuts this afternoon, oil could go even higher.

It's a matter of momentum vs. fundamentals. As an investor that tries to trade on fundamentals, oil shouldn't be $94. However, just like in a stock like BIDU or CMG, momentum can, and will, push the price higher even when its illogical.

I think I'm going to hang tight in my COP calls position until after the Fed reports. I don't know when to exit... it's so hard to predict when people will realize that this price is ludicrous. Oil may very well hit $100 within a week, but I want to keep reaffirming that in 3 months, I think it'll be closer to $70.

Oil Price: A Real Gusher

I'm actually taking a class on the history of oil right now; it's quite interesting.

But anyway, to the point:

In overnight electronic trading, oil is now putting up new record highs. As of the most recent quite while I'm writing this, it's over $93/barrel, up over $1 from its previous high.

(In the short term, this could be good for me... I currently own some ConocoPhillips calls, and on most otherwise-newsless days, the price of oil stocks will track the price of oil).

However, as I published earlier, I that there is no merit to these inflated prices. Just this weekend, Barrons published their own articles about how the price of oil is looking quite high. There are some tensions in the Middle East right now, but there's really no tangible reason for oil to be setting new daily highs.

One of the dumbest price-triggers of the previous week's run-up was the midweek inventory report that propped up the price 3%.

During the previous weeks, the reports had been bearish, as inventories grew. The bulls that spin the media wrote off the reports as unimportant, when considering the big picture.

Then, the first report that shows a decline in inventory sends the price skyrocking. It's really illogical and dumb.

That's why I'm trying to milk this bubble for all it is worth. I owned some Conoco puts going into earnings, and about $5 of negative price movement nearly tripled my options. As the stock appeared to be bottoming out (I did a good job predicting the bottom, within about $1) I switched to some calls, as the price of oil is now trending upwards.

So, as I said when oil was $10 cheaper, there's really no fundimental reason for oil to be this expensive. If you're an experienced trader/investor, maybe think about playing the swings, like I am. If you're a long term-oriented investor, I'd suggest getting into one of the oil companies with lower P/Es - like Conoco - or just sitting on the sidelines for a while. I truly believe that oil is quite overvalued, but there's no telling if, or when, people will come to their senses.

Barrons recommended avoiding Petrochina; It's P/E is in the 20s, versus about 8-11 for the big American companies. It's tempting to get into a hot, well-performing Chinese stock, but I'd recommend staying on the sidelines, too.