The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, September 25, 2006
Email – #339
** Turning on a Dime
That would be a good description of the type of market environment that we are in these days. Last week’s hot idea is this week’s loser.
A good example is oil. Just a month ago it was setting new highs, approaching $80 per barrel. Now it is under $60. We made some good money on the way down… we should have held on a bit longer for more profits.
You can bet that OPEC leaders are meeting in a backroom somewhere figuring out how to reduce supply. But will it be enough to stem the tide? I doubt it will in the short run.
There was about $15 to $20 of pure speculative froth built into the price of oil to begin with. Iran, Lebanon, China, another major hurricane, etc. were all “what if” factors contributing to higher prices. We saw this froth and capitalized.
The thing is, these factors are still prevalent today. Hurricane season is now on the tail end of the cycle, Iran is talking to the West, Lebanon is recovering, and China is… well, China.
This, of course, will change on a dime. Nothing has changed in reality, just postponed for another day. But, once the back is broken in a market rally overextended by speculation, look out below.
There are sectors that remain attractive. We are in them, and it is a matter of time before we see an upswing. We are in tech with Advanced Micro Devices (NYSE: AMD), a company that has shown significant momentum in its space, beating Intel at every turn.
We are in natural gas, which had been suffering long before the oil drop, and is much more volatile and dependent on natural forces such as the weather. In the case of our Chesapeake Energy (NYSE: CHK) holdings, we own a company that is selling its production at twice the current price and more because of its well-placed hedges to sell future production at close to $10 per mcf. For Chesapeake, each day that natural gas goes lower, the value of its hedges increase.
For safe, reliable profits we have a position in Teva Pharmaceuticals (Nasdaq: TEVA). I am convinced that Israel-based Teva would be trading $5 higher than it is today were if not for the Lebanese conflict. The pharmaceutical sector has outperformed the market this year… and it is only a matter of time before Teva, which raised guidance, follows the pack.
We also own Microsoft (Nasdaq: MSFT) LEAPs, buying in well before the crowd figured out that it is an undervalued monster cash machine. The company is hugely profitable, predictably so, and buying itself back from public investors. We still have more than a year left on this play, and while we may have been early to the game, and paid a tad higher than we could have for the option, we are in the game and time is on our side.
The most troubling position in the portfolio is Goldcorp (NYSE: GG). Gold prices have fallen off a cliff recently, following all the other commodities. That is not the troubling part. I fully believe that gold prices will rise again as investors focus on value and a declining US dollar.
But gold is fickle: it rises when you think it should fall, and falls when it should rise. Right now gold is trending down, but we own the premier low cost producer, which has a cost per ounce below $200.
What is troubling is the recent merger with Glamis Gold (NYSE: GLG). This merger is dilutive to Goldcorp shareholders and is an extra weight around the share price. The upside is that any move by gold towards $700 will move all gold shares higher, including GG, and we have more than two years for this to happen.
I believe that at some point over the next 28 months, gold prices will rebound on the back of either a major global crisis or a resumption in the decline of the greenback, which may start early next year as economic malaise forces the fed to re-inflate.
In all of our scenarios and holdings, there are two common elements. First, we own the best companies in the respective sectors and second, we have a tremendous amount of time on our side. And, we are doing it with a very low dollars-at-risk strategy.
I am looking at several opportunities that have suffered in the recent sell-off. I will be reporting back to you with a recommendation shortly.
Good Investing,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol: Equity Office Properties (NYSE: EOP)
Option / Symbol: Jan. 09 $30 put (OLH MF)
Date Purchased: 6/22/06
Current Price: $1.55
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $1.62
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.82
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $5.50
Comment: Hold.
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $45 call (VVV AI)
Date Purchased: 6/21/06
Current Price: $3.70
Comment: Hold. Sold call against January 09 $35 call position.
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15.00 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $3.10
Comment: Hold
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $2.15
Comment: Hold. Sold call against Feb. 07 $15 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $4.40
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $2.74
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $2.60
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $1.35
Comment: Hold. Sold call against January 08 $40 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $2.60
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $45 call (WZY AI)
Date Purchased: 4/25/06
Current Price: $.90
Comment: Hold. Sold call against January 08 $35 position.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ MM)
Date Purchased: 3/1/05
Current Price: $0.15
Comment: Hold.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ MK)
Date Sold: 3/30/05
Current Price: $0.25
Comment: Hold. Sold put against January 07 $39 position.
