NEWSLETTERS & RECOMMENDATIONS - November 12, 2010

Dear Friends and Fellow Traders,

This week we had the largest weekly decline in equity prices in months. Commodities were rocked hard after hitting, in some cases like gold, cotton and copper, all time highs. So, is this the beginning of the pause that refreshes or the start of something bigger?

Possible Bear Case:
As I write this the world economy seems to have taken a turn for the worst. Obama's and Bernanke’s economic views were soundly rejected on the world stage in Korea. We have rising inflation in China coupled with the threat of higher interest rates, Germany's growth is slowing and the European debt crisis intensified. There is a concern for the "PIIGS" countries. The ITraxx SovX Western Europe Index, an unweighted average of the credit default swap (CDS) spreads of 15 Western European governments, Friday moved to new highs since its launch in September. The CDS spreads for Ireland, Portugal and Spain all hit record highs. The Euro fell back hard and needs to come down versus the USD. Can a rising USD be good for stocks?

There is a sense of "toppiness" coupled with this risk on/risk off market. The really bad news begins for the hedge funds tomorrow. That's the last day investors can call for redemption of their funds by year end. I'm sure there are more than a few large withdrawals pending in hedge fund hands already. Can someone say sell here? While investors have pretty much ignored the negative fundamental news, they still seem to believe in the technicals. Believe it or not the S&Ps last week returned to retest the April 2010 highs at the Fib 62% sell retracement of the October 5th 2007 highs near 1229-30 cash market. Can we say double top anyone?

Back in the old days when I worked on Wall Street some 25 years ago, there was one particular portfolio manager (PM), Ken Heebner (KH) who became known as the "Mad Bomber" for his willingness to blowout his rather large concentrated long positions at the market regardless of price. I remember once getting caught in a sector he blew out and it costs my associates millions. Well, on Friday KH sold 1M AAPL shares driving the price down over $9.00 a share. He still owns 100,000 AAPL shares I’m are told. KH was one of the more bullish PMs out there this year. Has he turned bearish or bearish on tech only? Inquiring minds want to know because KH is one of the best long-only equity PMs I've ever known.

Possible Bull Case:
The best bullish case for rising equity prices has been made in the option pits. The collective wisdom of the smartest traders in the world is very often more right than not on the movement of stocks. These traders believe QE2 is like a massive "Put" option supporting equity prices. Remember last week’s note renaming B.B. to "Super Put"? In this week’s Barron's "The Striking Price" article writes, "The Federal Reserve has greatly reduced, and perhaps even eliminated the risk of owning stocks during the next six to nine months." The article further states,"Prior to November 3, OTM puts on the S&P 500 that expire in 2 months were about 9% more expensive than similarly situated calls. Now, the 2 month SPX skew is 5.8%. These percentages, though seemingly small, represent a big change in how investors view risk." Furthermore, "The new pricing dynamic indicates that investors now are overlooking economic problems obsessed about since before Lehman collapsed. The new focus is on making money as quickly as possible by trading stocks."

To better illustrate my point, B.B. (AKA the Fed) as the single largest buyer of bonds begins to crowd out the normal T Bond buyers. These buyers get forced into corporate debt and the corporate buyer is pushed into preferreds or equities and so on and so on. Hell, $1T has to go somewhere and equities are as good as any. If this works great if not look for QE3-4 and even 5.

My personal, favorite reason the market can go higher is simply that low interest rates will increase the likely hood that the current corporate earnings stream will get a higher multiple in the private market causing large increases in going private deals and a major shrink in outstanding shares of all sizes of companies. Corporations can now borrow at obscenely low rates, reduce their outstanding shares, increase earning or dividends and even make cash acquisitions accretive to earnings immediately. Stocks can go higher which in turn holds up the S&Ps and limits the downside. Furthermore, speculators will bid up many of the shares of companies that seem ripe for takeovers and don't forget corporations have almost $2T in cash on their balance sheets. Lower taxes will bring a large portion home sometime next year after the GOP takes the House over.

In summary, I can see the market going lower, even next week for that matter. I believe the downside risk is small, maybe 2-3%. Then, I believe investors will want to be long going into year end and early next year. Fundamentals only tell us so much. Looking ahead based on a $90 S&P 2011 earnings outlook the market can be considered fully priced at 1225-1250. However, I believe oil projected energy earnings are too low. I expect to see continued gains in all companies selling goods into emerging markets especially industrials and materials. All that money we're printing has to go somewhere. My primary long tell is Freeport (FCX). As long as FCX trades above $90 all's well with China and the world.

Finally, I believe Obama has given in on extending all tax cuts, this coupled with my belief that the US's desire to grow the economy by printing money will be greater than China's appetite to tighten their momentary policy. This means higher stock prices ahead. Therefore, with little bit of luck, I believe the S&Ps can trade over 1300 sometime in the next 3 months.

Biotime Update (Now BTX):
Long live the 3.5 million share short position in BTX. NET Traders who own BTX got lucky this week. Geron, the largest stem cell company in the universe, released two papers that popped all stem cell companies. (I sent paid subscribers the release on Thursday during market hours.) We couldn't sell BTX shares fast enough or high enough as the shorts scrambled to cover. I even sent an Alert Email Thursday afternoon suggested selling some BTX and replacing some with the $7.50 strike Mar-Jun options. The shorts will be back to try to knock the price down - don't you forget that.

The more good news we get each time about possible stem cell benefits, we know the BTX risk gets smaller and the rewards grow bigger. In the future, we’ll get more good news and higher prices and so on and so on.

My current thinking is simple: as before, we sell rips and buy dips. Just a few months ago when BTX joined the Russell 3000 I suggested selling BTX into that strength near $7.00. Yes, we started buying back too soon as the shorts came after BTX rather hard and forced the stock into the low to mid $4s but I wrote that I don't get sore I buy more. At the mid-4s I loaded the cart with naked puts, long calls and more common.

I'm now recommending buying 7.50 calls for Mar and Jun 2011 to replace about 40% of the common we sold. If BTX continues to rally I'm selling the 10 strike above. For example, I bought some June 7.50 strikes for $0.90 Thursday. On Friday I started to scale-in sell the June 10 strike for $0.60 and I’m selling more in higher. I now have $0.30 at risk with a $2.20 possible profit over $10. These are the trades I'd do every day and twice on Sunday if they’d let me. If BTX comes back I'll buy more calls lower and repeat sales of the 10s again on rallies. If the stock drops under $5.75 I'll look at the 5.00 strike and/or common again. Go BTX! Remember 2011 starts the BTX era per Dr. West.

Trade of the Week in Review:
Early Friday morning as the S&Ps rallied into the 1210 resistance, I sent an Alert Email before 10:00 AM EST to buy the 545W puts near $1.25. The puts reached $1.10 and could have been sold as high as $7.50 when the S&Ps settled in near the 20 DMA on the Daily chart. The S&P E-mini hedging was nice for even more profits but the puts more than did the work for us. This is truly great work if you can get it. See the Friday C Chart, NET Weekly Money Chart 2010-11-12.

After 11:00 I sent an Alert Email call buy on the 540W calls near 1193 but noted that you must hedge. The hedges again tonned $s while the call closed worth only $0.25.

These option trades continue to be very profitable but to take full advantage you must hedge. The first hedge (of many) nearly pays for the option giving you the $s to buy more options and hedge again for increased profits while the trading range continues. A number of times after we close the last hedge the option then trades in the direction expected and make even more money.

Congrats! I hear quite a few NET traders made some great $s this past week. As always keep those cards and letters coming I read them all. If I select one, it gets posted on the site and that Net Trader will get another free month in the Chat Room.

Good trading,

Stan Moore
702.558.1814