The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, December 19, 2005
#292
** All That Glitters
We are in a very profitable position with our Placer Dome pick. Gold, silver, platinum and just about every other commodity of note is higher in price today than it was one year ago.
This move in metals prices, though, does have a downside – one that will affect a specific segment of the industry in 2006 and beyond. This segment will also suffer from two more hits. The first is a margin squeeze from Internet retailers that have a lower cost structure. The second hit is a slowdown by consumers, especially in the U.S., as interest rates rise and home prices flatten or decline.
Serving the middle class and upper class is a good thing. But, it does not mean a “sure thing.” Smart shopping is not relegated only to those who are of lesser means. And when you are making a big purchase, you do some shopping.
I remember a long, long time ago when I was looking for a wedding ring for my fiancée. I checked out all the top stores – Tiffany, Harry Winston, Van Cleef… you name it. I did not want to buy a ring at any of those stores, but I liked their designs. Instead, I bought the ring in the diamond district in New York – identical stones, almost identical design, just a different box. It cost 50% less. And I am sure I could have done better if I tried harder.
Today, the choices are even broader. Online jewelers undercut the box stores with ease. They have excellent supply, low overhead… you know the story. But in the jewelry biz, you must have credibility as well. Fortunately, there are standardized grading systems that allow consumers who buy from trusted retailers to compare quality and price. The only issue is the box!
A couple of months ago, jeweler and luxury goods retailer Tiffany’s reported worse than expected numbers. The stock sold off, but only a little bit. At the time, the cracks in the housing sector were just forming in the public eye and the holiday shopping season was not supposed to be “hot.” As we have seen by the performance of our short pick on Target, retailers are going to have a tough season, and most likely a tougher 2006.
A few years ago, we shorted shares of Tiffany, and made about 40% in a couple of months. It was right after 9/11 and shoppers were “not in the mood.” I think that in 2006, shoppers will once again not be in the mood for high-end shopping. It will be a sobering year for homeowners, borrowers and, ultimately, all consumers.
Higher rates on credit cards, adjustable mortgages and less home equity to tap may not spell an end to three years of binging consumerism, but it will have a dent in my opinion – enough of one to make high-end retailers feel the pinch. Add to this industry specific increases in resource prices and increased competition, and 2006 and beyond could be a rough year for box companies with high overhead. Tiffany’s meets that description.
Buy the Tiffany January 2008 $35 put options (WTF MG). These puts are trading for $3.50 on the offer and sport a healthy spread. But, they are liquid. You should be able to get filled at this price. Use $3.60 as your upper limit. I am looking for Tiffany’s to move toward $35 to $33 next year (the 52-week low is $28.60.) Such a move would give us a hefty return of 50% plus.
Regards,
Karim Rahemtulla
Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club. The editor of The Smart Options E-Report, The Income Trader – A Covered Call Strategy and The LEAPS Option Trader, Karim is also a regular contributor to The Oxford Club Communiqué. His highly successful trading systems use covered calls and LEAPS to boost returns on blue chip stocks, and during the bear markets of 2000 and 2001, his picks outperformed the major market averages. Educated in England, Canada and the U.S. and fluent in several languages, Karim travels the world to find the best investment opportunities for our members.
Copyright – 2005 Mt Vernon Options Club. Mt Vernon Options Club does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mt Vernon Options Club expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mt Vernon Options Club provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mt Vernon Options Club has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mt Vernon Options Club, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
