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.

Rubbing my Crystal Ball

There's some major (and minor) events in the next few days that I'm going to try to predict here.

First, since I've been following the stock (with no position) lately, I'll comment on Chipotle Mexican Grill (CMG), releasing earnings after the bell today:

I think they're going to meet current estimates, and possibly revise downward for the future. But even if they meet or slightly exceed, watch out for a negative reaction, as the stock has a 80 trailing and 50 forward P/E.



Oil was down over 3% today, a huge deal as it's been hitting new highs lately. Tomorrow's going to be a big day. Inventory reports come out in the morning, and the Fed will release the new funds rate at 2:15. If inventory shrinks and the Fed cuts, watch for today's losses to be wiped away. If inventory increases and the Fed keeps rates steady, watch out for further price declines. Read my previous article about the bubble in the current price of oil; the second scenario I outlined could be the catalyst for a major price correction. I'm looking to get out of my Conoco calls, and get into some Exxon or Chevron puts....

...because both Exxon and Chevron report earnings later this week, and they will probably disappoint, as Conoco, BP, and other companies have done thus far. Refining margins were terrible during the 3rd quarter, squeezing profits. A bad quarter and falling profits could mean a major drop in oil stocks, which have enjoyed 20+% price increases this year.

So, concerning oil, I think that the Fed cuts .25%, oil is flat after a flat inventory report, but begins to weaken during the winter season.. I think I'm going to get some long-term puts, and see how that works out for me.

Disclosure: Long Marathon Oil stock, Conoco Calls. Could become long puts at some time soon.

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.

If I had to guess: BIDU, MSFT

I don't closely follow Baidu.com simply because it's valuation is too high for me, but...

If i had to say, based on Amazon's earnings, there's a bigger chance of a decline than a big pop after tonight's earnings.

There's so much speculation already priced into BIDU that a on-target or modest positive surprise probably won't do much to prop up the stock's lofty price. However, a miss could be devastating.

I'm going to start trying to predict earnings on stocks I actually know about; Baidu is not one of those. However, I'll try to predict some movement. If it absolutely blows out results and raises estimates, I don't see more than a 10% increase within the next week. However, if it is on-par or disappoints, a 30% haircut isn't unfathomable.


One prediction: Microsoft will come in well today, because of Halo 3, Xbox 360 sales, and favorable exchange rates.

Two quick thoughts: Electronic Arts and Oil

I'll post full writeups on both of these topics within the coming days, but I wanted to publicize some thoughts now.

First:

Electronic Arts is one of the best video game stocks to own this year going into the holidays.

• Madden and NCAA are still selling well
• SKATE displaced Tony Hawk as the best/most popular skateboarding video game
• "Orange Box" is being heavily advertised; apparently, it's one of the best games of the year
• Rock Band, a competitor to/improvement on Guitar Hero, goes on sale for christmas
• Halo 3 has put more consoles in homes, Wii still selling well, PS3 price going to be cut

Sure, based on P/E, ERTS is richly valued, and as a value investor, that's always something to be cautious about. I don't think this is a buy-and-hold-forever situation, but I think EA is going to perform well through the christmas season. Stop back for a full writeup within a few days.



Secondly, oil prices are unbelievable.

I originally wrote about oil needing to correct when it was at 82 (and it did - I held CVX and then COP puts, and ended up not selling soon enough and approximately breaking even).
Now, after little significant news, it's at 90. It touched 90 during aftermarket/electronic trading just a few hours ago. Unless this passing of this psychological barrier encourages buying (which, at this point, I would not be surprised at), I think oil simply has to fall. The price of oil, as well as the price of oil stocks, SHOULD fall soon. Here are a few reasons why:

• Chance of a production-disrupting hurricane now is slim to none
• Driving season ending
• Warm winter predicted
• Refining margins evaporating.
  

Since $80, most professionals have been saying there is really no significant supply issues or current events to support this price. Just tonight, this article posted at Bloomberg.com states that 20 out of 29 professional analysts polled believe that oil will fall within the next week. The article asserts that futures demand (aka, demand by traders who do not actually buy oil) is increasing, while actual worldwide demand for physical oil really isn't.

So rationally, I think, we should see sub-$80 (maybe sub $70) oil this winter. Does that mean it WILL happen? No. As I stated, paper demand, not physical demand, is responsible for these current inflated prices.

As long as the dollar doesn't collapse, or there is no World War III, there is no reason for oil to remain at these current levels.

Heelys Revisited - Analysis

I published an analysis of Heelys (HLYS) as my blog was in its infancy... about one month ago now.

Over the past month, Heelys' shares did little of anyting - they teetered around in the low $8's, trading up or down a dime every day.

However, on Friday, Heely's shares jumped after they released their Spring 2008 lineup of shoes.

The stock was up 16%, a huge jump compared to the basically-flat performance over the past two months. I don't expect the stock to hold all of it's gains from Friday simply because it was such a dramatic pop on non-major news.

However, I still find Heely's as attractive as I did a month ago. Heres are some data (provided by Yahoo! finance) that demonstrates some of the reasons why I still love Heelys:

Share Statistics
Average Volume (3 month)3:	606,689
Average Volume (10 day)3:	496,433
Shares Outstanding6:	27.06M
Float:	17.31M
% Held by Insiders4:	33.52%
% Held by Institutions4:	43.70%
Shares Short (as of 25-Sep-07)3:	2.35M
Short Ratio (as of 25-Sep-07)3:	9.6
Short % of Float (as of 25-Sep-07)3:	28.90%
Shares Short (prior month)3:	2.43M

The statistic that really screams "POSSIBLE BIG GAIN" to me is the percentage of short shares - a whopping 29% of the float. It would take 5 full trading days to completely cover the short positions.

That, in a nutshell, is why Heelys could be an explosive pick. It could very well do nothing for a long, long time, but when there is substantial positive news about Heelys, a major short squeeze will occur and the price will skyrocket.

After the terrible earnings in the summer that sent the stock plummeting, I think that virtually all bad news has been priced in. Lower orders and estimates are already incorporated into the share price; I think that the current quarter could turn out well since the estimates were revised lower.

All it will take to sent Heelys to $15 is good news and the subsequent short squeeze - say that they beat earnings, or Journeys doubles their order - a natural rise to $11 or $12 may occur, and at that point, many investors who shorted the stock on the way down may scramble to cover positions, increasing the price even further.

Will this happen tomorrow, next week, or next month? Don't count on it. I bought my Heelys position around $8.7, and I wouldn't be surprised if it stays priced between $8-$10 for a substantial period of time. However, since Heelys has virtually no long-term debt or obligations, I think the company will regain footing after the retailer's current inventory clears out, and then it will be all good things for the company.

Lastly, another thing to always consider is the possibility of a buyout. Heely's current market cap is about $250 million, which is very doable for Nike (market cap - $31 billion), Adidas, or even Crocs ($5+ billion). I'm not necessarily predicting a buyout, but for a big apparel company, acquiring a growing, popular niche brand like Heelys could be a very attractive investment.

Cramer's hype and two lessons on 10/11

I am not a fan of Jim Cramer's mad money show. I have to credit him for being a great investor during his hedge fund days, but he has been reduced to a cheerleader on his television show.

Take, for example, what he said on his show just yesterday. Here is a direct excerpt from the TheStreet.com writeup about the October 10th show:


"At this point you have a duty to yourself and a duty to your wealth," Cramer said, "never to take financial advice from anyone who doesn't recommend Google." Analysts that knock Google can only be so wrong about a stock for so long before admitting they're wrong, he said, and it's time for investors to stop paying attention to the bears.

Cramer said his price target for Google has always been lower than where he actually thinks it's going to go.

Cramer then raised his price target to $750. "This is a total and unequivocal lowball estimate," Cramer said.

This estimate might seem overly exuberant, but Cramer believes it's based on genuine arithmetic. If Google earns $20 a share next year and continues its trend of 30% growth, it should hit $750. He then said that a nonconservative but rational price estimate would be $900.

It's truly irresponsible and unprofessional for a man of Cramer's reputation to pump up a stock like that. Calling analysts that do not recommend Google sissies or idiots is disrespectful and uncalled for.

Let's see how well Cramer's "four horsemen" did today:

Google, -.5%
Research in Motion, -8%
Apple, -3%
Amazon.com. -6%.

Those numbers don't necessarily show how bad a Cramer-follower could have done; all but Amazon rebounded from intraday lows. At one point:

Google traded at prices as low as $609, after an intraday high of over $640. An ameture trader could have really gotten burnt.
Research in motion spent much of the last two hours of the day down over 10%.
Apple also fell almost 10% before recovering some ground.

It's also worth mentioning that Baidu.com, another stock Cramer pumps, lost over 10% of its value today.

My point is that Cramer's constant pumping reminiscent of the market sentiment in 1999 will only hurt his beloved viewers. As his four horsement hit daily highs, Cramer hit "Buy, Buy, Buy." If these stocks correct to appropriate levels, average, ignorant investors that fell victim to Cramer's antics will be left holding the bag.

So my two lessons:

Don't by into hype; do your own independent research. Are Google and Apple good companies? In my opinion, yes. Are they good investment ideas right now? Maybe not.

Secondly,
Don't be as yellow-bellied as I am; have a little courage.

I bought an Apple October 160 put contract for $1.60 on Octover 9th, looking for a pullback that I believe is due. I sold them early today for no gain, because I was worried about a continued rally.

The options closed at $3.60 today, after a few trades above $6. If i had followed my CORRECT investment instincts, I would have made out handsomely while the market got punished. However, I bought into the hype myself and it cost me a couple hundred dollars.

And, because I love being kicked while I'm down, I decided to personally add some insult to my injury.

After I sold the Apple puts, I bought Google's October 560 Puts for $.90. I sold them for a modest gain after the stock dipped for $1.20.

Once again, I should have followed my instincts; the options closed at $2.25 today after trading above $3. I would have realized returns of hundreds of percent today if I would have just believed in my ideas.


So enough rambling. My point is, I made to very, very stupid trades, influenced by the sentiment that I was trying to play against - the overhyped, artifically-inflated hysteria that had been sweeping the market.

Just to clarify, Those two trades represented less than 2% of the money that I manage; my equities were actually up today. So, I didn't lose money, but stupid, sheepish trading prevented me from making a couple hundred dollars today.

My message to you is this: be braver than I am. Do your own research, and when you come to factual conclusions and believe in your idea, stick with it.

Don't be influenced by Cramer, any talking head on TV, or even myself. I encourage independent, smart investing.

I'll admit my mistakes, and chock this one up to a powerful, yet unfortunate, learning experience.

Recent Happenings

As I stated in my last post, I currently have carpal tunnel (or some similar injury) so I can't type at length right now. But I wanted to update on some of my recent happenings:

I bought some Vonage (VN) at $1.00. It was up $.12 today, to $1.15. I think it's both a decent long term prospect, and i'm playing the bounce. If it continues upward quickly, I may dump and profit-take.

Our old friend Syntax-Brillian (BRLC) was interestingly up 25% out of nowhere today. Though I'm long, I suspect today's gain was due to a short squeeze, and may be short lived. But I hope I'm wrong.

I also purchased some Pantry (PTRY). Its stock has been up like an unbelievable 1000% or something over the last few years; I read lots of articles about it maybe six months ago. Now, it's down off of its 52-week high of 60, and only a couple bucks off of its low, and at a P/E of 13, this growth stock is now looking cheap.

I also picked up just once contract of November Calls for Nutrisystem (NTRI). They're the company that runs ads with Dan Marino and other jocks, with the pre-made food. They missed earnings and revised downward a little bit, and the stock fell 33%. It is an overreaction, to a growing brand, and I'm looking for both a bounce and a long-term gain.

Lastly, I'm currently long some ConocoPhillips (COP) puts. The company has already moved significantly, and the options are in the money. If the price of oil eases a little, it could drop like a rock. If oil keeps facing resistance at $80, I'm going to profit-take soon... I don't want to be blindsided by a hurricane or Iranian air strike that causes oil to go to $100/barrel.

That's all for now,
Stephen

P.S> bookmark this site!

Oil Bubble about to Burst

Other than the huge rate cut, what else has been in the investment news every day lately? The answer is the increasing price of oil. Even as the stock market rallied through the end of the week, the price of oil kept rising, hitting a all-time actual dollar (non-inflation-adjusted) high, before losing a little ground in the little of the week.

There's a few things causing this high price; MidEast instability, hurricanes in the Atlantic, and some supply/demand issues in the United States. However, I feel as though oil (and oil stocks) are currently overpriced, and are set to correct as soon as the price of oil does.

Sure, predicting a peak is difficult, but I think that you don't have to be exactly right to profit off of this current oil bubble. As the chart below (of Exxon [XOM]) demonstrates, the stock's price is quite volitile and moves quickly and significantly as the price of oil changes.


Now here's a chart of the price of oil, over approximately the same period:

The correlation is obvious, and consistent. Also, on the chart of the price of oil, you can see how the current price run-up has increased volume, and therefore, speculation.


On Exxon's chart, you can see how as the price of oil declined earlier in the summer, the stock lost about 15% of its value in a rather quick period. That's exactly the decline that I foresee happening soon, and that I aim to profit from.

In the next week, I think the price of oil may stay steady; there's a few areas in the tropics that may turn into storms, which always cause jitters and cause the price of energy to rise. However, summer driving season is now over, and as gasoline prices rise to reflect the current price of oil, people will be further discouraged from driving, decreasing demand.

So, as I feel as though the price of oil is going to flatten and drop (it may already be happening now, as the price was down marginally on Friday the 21st), I'm going to try to initiate a short position in a big oil producer, or just buy some put options. There's lots of companies that I could see this working for: Exxon (XOM), Chevron (CVX), and ConocoPhillips (COP) are some names that come to mind. Also, iShares has an ETF made up of lots of oil companies with the symbol IXC - it may be an option to get into the general market without the risk associated with a specific company.

Overall, I think that the price of oil is going to continue to rise in the long term, until alternative energies become a reality. I'm currently long in Marathon Oil (MRO), because much of their business is refining, not production, and they are less effected by the daily price of oil.

After trying to profit from the short-term downturn, I plan to go long in oil, whether in the ETF (IXC) or an individual company. After correcting in the near term, black gold will shine in the future.