Unconventional Way to go long Financials

Once-proud financial-service companies have been humbled, and currently trade at lowly prices usually reserved for unknown, unremarkable companies.

Citi (C) ended at $2.31 at Monday's close. American International Group (AIG) closed below a dollar. Both stocks are up roughly 250% off of all-time lows, but the future of the shares (and companies) are hazy at best. Risk-adverse investors don't necessarily want to gamble on such risky companies, especially while daily price fluctuations are so extreme. At the same time, however, bullish investors may want to be exposed to potential upside in shares of such trampled companies.

Rather than owning the shares of stock, investors could gain exposure to upside movement by selling naked put options.

Selling "naked" puts refers to selling puts without actually being short shares of the stock, which would sometimes create a riskier situation for the seller. However, with C shares so close to $0, even the worst-case scenario is very clear.

When puts are sold, the seller's account gets credited with the amount of the sale and an outstanding obligation shows up. If shares do move lower, the size of that obligation increases as the puts increase in value, and the seller essentially loses money. If shares increase in price, the size of the obligation gets smaller, and the seller enjoys some paper gains.

Below is a table of C January 2010 puts (courtesy of Marketwatch.com)

Though there is little to no volume in the far in-the-money puts, the bid and ask spreads remain reasonable and transaction costs do not inhibit using this strategy. Options close to the current share price retain time value, providing a bonus for the seller.

At the $2.50 level, options traded hands yesterday at roughly $1.25 (we'll take the bid), implying that investors expect C shares to be worth no more than $1.25 in January of 2010. If shares close below that level, the put seller will lose money. If shares became completely worthless ($0) before then, the put seller would essentially owe $250 per contract while he was only credited $125 at the time of sale. However, if shares only appreciate 10% (to over the $2.50 strike price) within the next 10 months, the seller will get to keep the entire credit at the time of sale.

Utilizing this strategy with in-the-money options changes the risk and reward involved. If a seller sold $10 puts for $8.05, he has a possibility of making $800 per contract (if shares close above $10 in Jan '10) while only potentially losing $200 (if shares go to $0).

Selling even farther OTM puts exaggerates the risk/return profile further. Selling $40 puts in the bid/ask spread at $38 seems possible, even though its highly unlikely that C shares will see that share price within the foreseeable future. However, the trade can still be made. Again, downside risk is limited to coughing up $200 if shares hit $0 (which means repaying $4000 compared to an initial credit of $3800), while profit potential remains intact (a $10 share price close would net the seller $800 of profit, essentially). And with C, AIG, BAC, and many other companies trading relatively close to $0, this strategy can be employed for an entire portfolio of companies.

Requirements for selling naked puts differs based on broker, and the strategy isn't for everyone. Like owning shares, downside risk is limited (paying the entire difference between strike price and $0) if the shares become worthless, but gains are capped too (at the initial selling price of the contract). But this strategy may offer an interesting way to expose one's portfolio to the possibility of bullish performance without sacrificing too much capital.



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TCLP Follow Up

So clearly my calls expired worthless, as TCLP failed to rally on Friday as I had hoped.

However, the stock is still a conservative yet wonderful (nearly guaranteed 10% yield is looking tastier by the day) choice for an investor in today's increasingly-disappointing market.




Ski Wax
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First Options Trade in a Months: TCLP Calls

I have followed TCLP (Transcontinental Pipelines), a pipeline trust, for a very long time now.

Under normal market conditions it was a very stable stock (as it is in a widows-and-orphans industry), but during the last six months the stock has been effected by increased volitility as the general stock market became more unpredictable.

Below is an approximately six-month chart. As the candles show, there have been numerous days when the stock has risen (or fallen) by greater than $1.



TCLP reports earnings tomorrow morning, and I'm speculating that the stable numbers will reassure antsy investors. Obviously this trade is more lottery-ticket than science, but I was willing to throw down a little money and take a chance.

I was able to pick up at-the-money $25 calls for $.30 per contract this afternoon. If earnings please investors, a $1 or $2 pop will pay off nicely.


(As an aside, I have followed TCLP for a long time because of its very high dividend - the shares currently yield about 11%. The 5 year average dividend payment is only 6.6% [according to Yahoo Finance], which might point to share appreciation in the future. I think that TCLP is a great conservative long-term investment regardless of the outcome of my options trade tomorrow.)




Ski Wax
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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.

Doubling up on CROX; NTRI stock losing weight

Crocs released earnings after the bell, and even though estimates came in largely in-line, the stock tanked after hours. Margins were down (partially due to having to air-mail goods to retailers after the Mammoth sold out during the holiday season), but profits came in right around the street's consensus.

CROX reaffirmed the full-year forecast, which is for $2.70 EPS. After-hours, the stock was trading around $27.

CROX grew revenues 99% in Q407... and will continue to grow (at a slower pace) throughout 2008, especially as they release their clothing line.

It's unfathomable to buy such growth potential at a 10 P/E. When the earnings originally came out, I thought that these might have been the earnings that firmed investor confidence, as BWLD's were last week. That wasn't the case.

Once again, just like BWLD, I got in a little to early (in the mid-30s for CROX). I doubled my position today at $28. But investors are discounting another cheap growth stock too heavily, and CROX should take off soon.

Also, after the bell, Nutrisystem reported earnings and guidance that didn't please the street. The stock has lost about 70% of its value since the summer, when it traded around $70/share. It ended the after hours session at $18, after trading below $17 for a period of time.

The bad NTRI news? 2008's earnings look likely to decrease from 2007's numbers, and negative earnings growth certainly isn't a good thing. Nutrisystem blames this on difficult macroeconomic conditions, which is a convenient albeit reasonable excuse.

It should not be ignored that NTRI's lowered projections of $130 in earnings this year; based on the 35 million outstanding shares, that breaks down to nearly $4 per share. Considering NTRI is now an $18/stock, the P/E is like five.

The downward trend is certainly concerning, but short-term problems and fears about future expansion have punished NTRI too much. I'm going to look into some LEAPS for NTRI - maybe just January 09's, because with such a low multiple, I don't think NTRI can stay depressed for too long.

"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.

A Slew of Stocks - Tech, Banks, Coal, and More.

Well, let's hope I don't, but last time I wrote about the prospects of a strong opening/daily performance, the market didn't perform positively.

However, once again, futures are up after a positive sessions in Europe (on Monday) and in Asia (on Tuesday).

I'm hoping for a couple pops on stocks I personally own; over the weekend, both Microsoft and Crocs received positive writeups in Barron's. (I own MSFT calls and CROX shares). Also, I'm long VIX puts and the VIX price has been falling as the market makes small (1%) positive moves. Also, in another post, someone reported that bank shares were up overseas; I'm hoping that bodes well for my CFC stock.

To substantiate this post with something other than personal investments most of you don't care about, I'll write about a bearish idea I have (and have executed in a paper account).

Coal stocks were sitting at 52-week highs before a downgrade by Goldman on Friday. On Wednesday, I discussed a potential trade in shorting coal with my father (who is a registered investment adviser). He discouraged the idea, so I didn't do anything immediately in any real-money account, but in my paper account at UpDown.com (more on that site later) I shorted both CNX (Consol Energy) and KOL (the new coal ETF).

My reasoning is thus: extraordinary circumstances have caused a temporary bubble in coal demand. Snowstorms in China and floods in Australia caused production to cease from many mines, and a combination of legitimate supply concerns and speculative fears drove the price of coal skyward.

There's one problem with coal getting this expensive this fast - there's so much of it in the ground. Unlike oil, which might have 50-100 years left, or natural gas, with a slightly longer timeframe, it's common knowledge that there are hundreds, if not thousands, of years of coal consumption left in the ground.

According to simple economic theory, what happens when the price of a good increases? Producer surplus increases, and producers become even more motivated to bring goods to market. As they record huge profits (as they may in the coming quarters), coal producers will surely ramp up production.

Then, when the snow melts, the waters retreat, and the coal dust settles, there will be more production capacity than there will be demand.

Big coal companies like CNX are trading at valuations of about 50-70x TTM earnings and 15x forward earnings (which take into account higher prices). But if prices fall (or even stabilize), these valuations will be unjustifiable. Look at big oil/gas companies - Exxon, Chevron, Conoco, Marathon, BP, and most others trade at multiples of less than 10.

So when the coal companies tanked Friday, I made nice 5% one-day returns on my newly-shorted shares. If only I would have done it with real money.

***Note: UpDown.com is a site I recently discovered. I have been using it for less than a month (so have not been eligible for payment), but here's how it works: you beat the S&P or write highly-recommended reviews, and you get paid. If anyone is interested in joining, just message me.

"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."

Four in a Row?!

I'm knocking on wood, crossing my fingers, and picking four-leaf clovers as I write that title... I don't want to do anything to jinx an unbelievable four-day rally that it looks like we'll continue today.

The US markets look set to move after good earnings from here and abroad. Toyko markets moved up 3+%, the most since 2002, after Japan's economy grew much more than expected. The rest of Asia followed upward.

Europe is up more moderately, but that's fine with me... UBS reported a huge, terrible loss because of subprime writedowns. For them to report that and for the market to still be up.... I like that.

US futures are trending higher for all three major indexes. Comcast just released excellent earnings, and the NASDAQ should have some positive reaction after (so-called) good earnings from Baidu.com (BIDU) after the bell yesterday. (On a side note, I think that BIDU is a high-PE "pig" that needs to be slaughtered... but if it's gonna pull up my tech stocks today, i'll be ok with that.)

A nice move today will be very beneficial to my trading account here and my longer-term Ameritrade account... between the two accounts, I have February ATVI and SNDK calls that, as of yesterdays close, were about $.30 away from the strike price.... if the positive market momentum can push them above the strike prices in early trading, then I'll be able to break even (or maybe even sell profitably!) in trades I had written off as losses.

Looking forward, the MSFT options that I wrote a trade note about buying look like they'll work out well (still knocking on wood). MSFT closed a tad under $29 yesterday (the option's strike price) with an entire month left. As I stated before, as clarity increases concerning the Yahoo deal (and just as the market goes up), MSFT has a lot of ground to make up towards its high of $37. I also bought some $30 SNDK calls yesterday as the stock appears to be picking up some momentum.

So, if the market opens up big, I plan on profit taking on a few trades, just because I'm not sure about the sustainability of a weeklong rally. But the market is still dirt cheap, and if economic conditions continue to stabilize/improve, this could prove to be the beginning of the end of the best buying opportunity for years to come.

"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."

Recent Trades and BWLD

Here's a few quick thoughts for any regular readers (if there are any) to keep up with:

Yesterday, I did my first two options trades in a while.

I bought Microsoft March 29 calls (the stock was at $28.20). My thinking behind this is that the Microsoft-Yahoo marraige will begin to clear soon, and as uncertainty leaves the arena, MSFT shareholders will feel more secure. Plus, the stock only has to rally a couple points in over a month for it to be a profitable trade.

Second, I bought March 25 puts on the VIX (S&P 500 volatility). As the awful news is now mostly fully exposed (though there's some hidden stuff trickling out, recently AIG's writedown), the market will start to calm down. Most major banks have already written down most of what they'll have to. Also, earnings have been largely OK, and once that season passes, there probably won't be much for the market to freak out about . I'm hoping to unload this in a week or two.


Lastly, BWLD releases earnings today. I have no idea if they'll beat, meet or miss, but the stock will probably move big in one direction or the other. I'm long, so I obviously have faith in the company, but there's obviously some chance that investors may get blindsided by a bad report. However, I think they'll report in-line with estimates, and reaffirm future growth, which should hopefully help move the stock higher.




"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."

ATVI Followup; More Earnings Next Week

Well, Activision did report a truly outstanding quarter yesterday, firmed guidance for this quarter, and had lots of good forward-looking commentary during the call.

However, the stock didn't move much after hours last night. Interestingly, for having released earnings, very few shares traded after-market; with a daily volume of about 6 million, less than half a million shares traded after hours.

In the pre-market this morning, ATVI shares are changing hands closer to $27, which is good. Hopefully when the market opens, the shares will continue higher. It's nonsense that companies with excellent earnings and guidance like ATVI aren't being rewarded in this tough market.

Next week, I think I'm going to do something with Chiptole's earnings in the latter half of the week. I don't expect them to blow out numbers; however, the stock has fallen from $150 to $105 (while I was unfortunately on the sidelines, after predicting declines in multiple posts on this blog), so it's already coming down to earth. I'm hoping it bounces before earnings so that I can short. Another method may be selling-to-open some out-of-the-money calls; however, that's dangerous, because if they somehow blow away it could be disastrous. However, the implied volatility is through the roof, so options are fetching a premium now that will evaporate the morning after earnings.

Another stock I've lately been turned onto is MadCatz (MCZ). They are a tiny video-game accessory maker. I think that they're going to benefit from the great holiday quarter that every other video company has enjoyed; plus, they recently inked a long-term deal to produce all of the instruments for EA's Rock Band. The downside is that the stock is at 80 cents and volitile; a disappointment and the penny stock could plummet.






"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.

Follow up to COP/OPEC trade

Just to follow up, (and for the sake of full disclosure),

I closed my Strangle trade yesterday. ConocoPhillips (COP) moved up, the calls increased in value, and I sold the calls, netting a 16% gain in three days, including commission costs. I still hold the puts (which are now nearly worthless at 11 cents), which I could have sold to make another 3% gain. (I'm holding just so that, if COP falls, I might milk a little more money out of this trade.)

16% doesn't sound like much, but annualized, it was a 1920% return. (Also, if I would have traded more contracts, commission costs would have been lower per contract and the percentage gain would have been slightly larger).

This was a sort of experiment for me, and my "long strange" worked as planned. If you see the potential for volatility in a stock, this is a good strategy to consider.

Strangle OPEC, Make Money.

The fluctuating, inflated price of oil has held the attention of businessmen and lay people alike. Oil's price run-up has certainly been impressive; from a low near $10/barrel in the late 1990's, oil flirted with $100 just last week. This dramatic increase was only rivaled by the price spikes after the oil embargoes and crises in the 1970's and 80's. Just this year, oil is up 30%.

The cause of this increase is debatable. Sure, the incredible growth in China, India, and other emerging economies will strain the production capabilities of the world. But did it really merit such a dramatic increase?

I'll let professional economists and commodities experts argue over the causes and effects of $100 oil. But I think that the average investor can profit off of the volatility in oil.

Oil has retreated from nearly $100 to about $90 per barrel. But where will oil go from here?

Wednesday may be the day that clearly defines a trend. Two defining events will happen this December 5th. First, the weekly oil inventory report will be released, and this week's numbers could be effected by the pipeline explosion late last week. If inventories significantly declined at Cushing, the delivery point for the Nymex contract, that could be a catalysts for a pop back to $100.

The more significant event will be OPEC's meeting in the United Arab Emirates on the same day, this Wednesday, December 5th. Much of the developed world is looking for OPEC to increase production quotas to ease prices. However, with the recent 10% decline in the price of oil (the steepest and quickest in years), OPEC may not be motivated to hike their output. Unless a major event occurs tomorrow, I see oil staying stationary into the two announcements yesterday.

So two possibilities exist:

• On one extreme, US inventory was steady (or even increased) and OPEC decides to increase production. If those happened together, the price of oil may plummet.
  
• However, if inventories are pinched and OPEC deems current production sufficient, then the price of oil could be back near record territory, considering the market is already pricing in a production increase.
  

I don't know what's going to happen, so I chose to be insulated either way.

I set up a "Strangle" options scheme, using my favorite oil stock, ConocoPhillips. When the stock was trading around $80 today, I bought $75 puts and $85 calls. The calls were about half as expensive as the puts, so I bought twice as much. (Also, I have a tendency to expect upward price movement simply because the oil stocks have declined considerably recently.)

The puts were $63/contract, and the double-strength calls were $78 for two. The at-the-money calls and puts both trade for around $2/contract. So, as long as Conoco moves $5 either way, the transaction will be profitable. (If it moves to the upside, which I made a slight bet on, It'll be a little more lucrative).

Using a "Straddle" (at-the-money calls and puts with the same strike price) or a "Strangle" (out-of-the-money calls and puts at opposing strike prices) can allow a trader to profit off of the volatility of a stock, no matter which way it may move.

Since my crystal ball is out of order, I don't know if oil is going to be up, down, or flat on and after this Wednesday. But as long as something happens and oil moves in one direction, this trade should profit from an unpredictable market.

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.

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.

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.

Types of Posts

I plan to post multiple different types of posts. So far, here are some ideas that I have identified:

• Individual Stock Analysis
• General Market Analysis
• Portfolio Commentary
• Individual Play (i.e. stock or option purchase based on timing) Commentary

This post will probably be edited as this blog grows and evolves. Feel free to comment and submit any ideas!