Two Week Warning

October 22, 2012

Dear Big Money Options Member,

Two weeks from Tuesday, we will know the winner of the presidential election.  As importantly, we will know which party controls the House and the Senate.  We will have a better sense of what will become of Obamacare, the fiscal cliff and taxes. 

Congress and the White House have been locked in a partisan stalemate for the past two years since the debt ceiling negotiation collapse of 2010.  Deficits continue to run in excess of a trillion dollars per year and no meaningful debt reduction or entitlement reform programs have been enacted.  The Federal Reserve has propped up our economic system with unprecedented capital infusions while pleading with Congress to help out with serious reform. 

For the next two weeks, this situation will not change.  It is also unlikely that generally disappointing earnings reports will change.  Last week, Microsoft (MSFT), Intel (INTC), General Electric (GE), McDonald’s (MCD) and IBM (IBM) all either missed their EPS or revenue expectations.  This morning, Caterpillar (CAT) lowered its earnings and revenue guidance through FY2013.  With 20% of the S&P 500 having reported, only 42% of the reporting companies have seen third-quarter revenue surpass analyst estimates.  This is well below the recent average of 59% and the worse since early 2009 when the economy was in recession. 

On Friday, the preliminary third quarter GDP report will be issued.  This statistic will immediately be loaded into the Romney and Obama attack campaigns and used to sway the results on November 6.  For traders, we are just going to have to tough out the next two weeks.  There is no way to speed the process and no way to be sure of the outcome.  Positions should be added sparingly.  Profits should be harvested.  The market is likely to be volatile as investor expectations swing between various election result scenarios. 

REVIEW OF TRADES/POSITIONS

New Positions

Alcatel Lucent (ALU) – On Oct. 17, we recommended to buy to open the ALU Jan 1 calls (ALU120119C00001000) for $0.25 or less.  The stock climbed over the next two days from $1.07 to $1.155.  As of Friday’s close, this position was trading at $0.25. We continue to like this trade.

Closed Positions

DexCom (DXCM) – On Sep. 24, we recommended to buy to open the DXCM Oct. 15 Calls for $0.75 or less. This position expired worthless on Friday with the stock at $13.37.

Office Depot (ODP) – On March 20, we recommended to buy to open the ODP Oct 4 Calls (ODP121020C00004000) for $0.50 cents or less. This position expired worthless on Friday with the stock at $2.41.

Open Positions

Our Top Trades — the trades that we recommend you enter now if you haven’t already — are marked below with an asterisk.

*Alcatel Lucent (ALU) – see New Positions above 

Arch Coal International (ACI– On Aug. 9, we recommended to buy to open the ACI Jan (2013) 8 calls (ACI130119C00008000) for $1.38 or less (our entry price was $1.21).  As of Friday’s close, this position was trading at $1.06. The stock was up 4% last week on top of 21% from the previous week. We like it then and we continue to like this trade.

Atmel (ATML) – On Sep. 27, we recommended to buy to open the ATML Nov 6 calls (ATML121117C00006000) for $0.30.  As of Friday’s close, this position was trading at $0.05. The stock looked like it was turning, only to finish the week at its lows.  Look for other ideas for new money.

Delphi Automotive (DLPH) – On Sept. 11, we recommended to buy to open the DLPH Nov 32.50 Calls (DLPH121117C000325000) for $1.10 or less.  As of Friday’s close, this position is trading at $0.88.  With front month options, we are looking to close on further strength.

Delta Airlines (DAL) – On Oct. 1, we recommended to buy to open the DAL Dec 10 calls (DAL121222C000010000) for $0.65 or better. As of Friday’s close, this position was trading at $0.75. We continue to like this trade below our limit price.

*Iamgold (IAG) – On Sep. 19, we recommended to buy to open the IAG Dec 17 calls (IAG121222C00017000) for $1.10 or less. As of Friday’s close, this position was trading at $0.50. We continue to like this trade.

Opko Health (OPK) – On Oct. 4, we recommended to buy to open the OPK Nov 4 calls (OPK121117C000040000) for $0.60 or better. As of Friday’s close, this position was trading at $0.50. With front month options, we would look to other longer dated ideas for new money.

Patterson-UTI Energy (PTEN) – On Sept. 13, we recommended to buy to open the PTEN Nov 17 Calls (PTEN121117C000170000) for $0.85 or less. The stock advanced 10% on the week and the option 171%. As of Friday’s close, this position is trading at $1.05.  A big portion of the positive net deltas dropped on the October expiration, but remain bullish. We recommend holding this position. Again, with front month options, we would look to other longer dated ideas for new money.

QLogic (QLGC) – On August 21, we recommended you buy to open the QLGC Jan (2013) 12.50 Calls (QLGC130119C0001250) for $1.25 or less.  The stock has been hit hard along with the tech sector. This position closed at $0.05 on Friday. At $0.05, we recommend holding this position.

Rubicon Minerals (RBY) – On June 13, we recommended buying to open the RBY Dec 5 (RBY121222C00005000) calls for $0.25 or less. The stock has been range bound and as of Friday’s close, this position was trading at $0.05.  Cumulative net deltas are still bullish.  We recommend holding this position. 

Parting Shot: Technology Paradigm Shift 

The invention of the PC and its mass adoption was big.  So was the creation of cell phones and world-wide cell phone networks.  Bigger yet is the mass adoption of the Internet and the rewiring of much of the developed world for high speed communications.  In fact, these advances are so far-reaching it is unlikely we have any real idea how transformational these developments will eventually be. 

But maybe the biggest technology development of all is horizontal drilling and hydraulic fracturing (fracking).  After the energy shortages of the 1970s, the scientific world had become certain that the world would effectively run out of oil by the year 2000.  In the year 2012, the world has more oil production capability than ever before and it is possible theUnited Statescould be energy independent over the next eight years.

What changed is the ability for oil companies to drill laterally through oil sands deposits for miles.  Oil sands are oil deposits that do not flow freely unless stimulated with hydraulic fracturing. North America is filled with oil sands.  According to the Department of Energy, the U.S. has 60 to 80 billion barrels of oil sand reserves which could sustain 500 million barrels per day of production. U.S. oil consumption is running at about 19 billion barrels per day. Canada is the Saudi Arabia of oil sands with over 70% of the world’s oil sand deposits.  We are now technologically able to pull huge amounts of oil out of these deposits.

North American energy independence could mean:

  • A rebirth of growth in the energy industry in the United States that creates a meaningful number of new, good-paying jobs. 
  • A reduction of energy costs in North America that should make domestic manufacturing more competitive and could reverse the trend of manufacturing jobs moving overseas.  Studies show that many of the electronic products built today in China can be built here already for the same costs because of manufacturing efficiencies and lower transportation costs. 
  • A move away from America buying billions of dollars worth of oil per year from countries that sponsor terrorism.  If oil becomes less of a key asset in the Middle East, the United States may harvest a “peace dividend” bigger than what was realized after the end of the cold war during the Clinton administration (balanced budget).

Energy independence could go a long a ways towards accelerating economic growth in the U.S.   While there is no question the current challenges facing our economic progress and higher asset prices are daunting, it is encouraging that a path to prosperity appears to be opening up.  As Warren Buffett has said throughout his investment career with Berkshire Hathaway that began in the early 1960s, the U.S. is a good long-term bet.

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