NEWSLETTERS & RECOMMENDATIONS - October 17, 2010

Dear Friends and Fellow Traders,

As I expected in my last note the market reached the 1175 target and traded as high as 1181 before retreating. Even though QE2 won't officially start until November 3rd, I believe the expectations for QE2 and the elections are mostly responsible for the Sep/Oct rally. The market should consolidate for awhile and focus on the rest of 3QTR earnings and comments.

Tech is off to a good start with an earnings beat from GOOG and a nice $60 up move. Growth is once again the key take away from the GOOG's conference call. AAPL is up over $20 with great numbers expected Monday. Just how far can even good numbers take the market when U.S. banks slid for the fourth day is a good question. Currently, there are more unknowns than knowns. Investors won't tolerate this for long before taking negative actions.

What we have here as mortgage damage spreads is a clash between modern finance and the legal system rooted in all that required paperwork trail. I know one thing for sure - lawyers will have jobs as far as the eyes can see into the future and I always thought 3,000 lawyers at the bottom of the ocean was a good thing.

"If we are talking three to four weeks, it will be a blip in the housing market", says Dimon, JPM's Chairman, told investors. He continues, "If it went on for a long period of time, it will have lots of consequences, most of which will be adverse on everybody." I noted JPM repurchased over $500 million mortgages in this last quarter. $500M is not chump change. If Foreclosuregate encourages substantial principal reductions we could be looking at huge multi-hundred billions in loses for the banks. At best, I'm thinking a $5-$7 billion hit to the banks profit and loss statement. At worst, the taxpayers take these  hundreds of billions more in losses as FRE and FNM are not able to put back bad securitized loans they purchased from the banks. In any case, I cannot see owning the shares of a single financial institutional now. This is not good for the stock market as they are a major component of the indexes.

I'll close my opening thoughts with a bit of good news for markets. Bill Gross, one of the smartest and best Bond Managers on the Planet, telegraphs a QE2 green light and tells us he is buying Mortgage Backed Securities (MBS) on margin. PIMCO, has just increased its MBS holdings to the highest July 2009 levels, when Gross started dumping MBS holdings on the tail end of QE1.

I'll summarize by saying this, barring a big unknown out there the market should remain in an up mode through year end. I would think with any luck we have a shot at 1250.

Review of Previous Recommendations:
I'll start with BTIM (and its options) will soon to become BTX on November 2. Watching BTIM's price action these last two weeks told me the stock was poised to breakout up soon. You didn't need inside information to know that. But there is always someone somewhere that knows the deal. We can only learn by reading price action, something I've learned to do well over the years. We all know the news by now that BTIM has inked the first Big Pharma deal in the stem cell space. Congrats BTIM!

Monday right at the opening, BTIM popped into the $5.40 area on nice volume, pulled back to $5.11 and never saw that level again. There were, I'm sure, a few short squeezes into this rally and especially into Friday as BTIM hit $6.41 at the opening only to drift lower to a $5.70.close. I did say there would be a quick $0.40-$.50 in the trade.

What I want my students to take away from this rally is we must always sell into these announcements and book some profits. I was selling the next higher BTIM strike calls against my long options. I even covered some shorts puts into strength. Hell, I'd have been much more aggressive if I thought I could buy BTIM back $0.40 or more lower that same day. Anyway, there's always tomorrow with another deal. I expect we'll see many more deals with Big Pharma over the next 2 years now that the first one has been done. Go BTX.

My second favorite stock has been Huntsman (HUN). About 6 months ago I recommended buying say 1000 shares near $8.00+. HUN pays a $0.40 dividend which gives us a nearly 5% return. Next, I recommended selling the Jan 2012 15 strike calls for $0.75 and at the same time selling an equal number of Jan 2012 12.50 strike puts near $5.00. If held until Jan 2012 an investor would have collected 7 $0.10 dividends or $0.70. I wrote that I believed the stock would be sold near $20 sometime before or after early 2012. I still believe that. In addition I have been selling naked 10 strike puts these last 6 months but that's over for now as the stock has recently moved up 25%.

There have been a number of attempted other naked put sale recommendations but that ship has sailed given an under 20 VIX. The risk/reward is not there in today's market.

This last recommendation, about 6 months old and still on the books, is Yahoo (YHOO). I recommended selling an ITM put with an OTM call. I mentioned that we sell the 25 strike Jan 2012 put for $11.50 and sell the $22.50 strike calls for $1.75. I thought the stock with about $8.00 of miscellaneous assets was a very cheap takeover in the next 16 months at $20.00. The shareholders were pissed when management turned down a $31 buyout offer from MSFT. There is new management there now with buyers sniffing around again. Yahoo hit $18.00 last week. I love doing buy-writes using options were the owner puts up no $s just assets in the account yet receives almost $13 a share in cash into his/her account. Buying stocks at $14.00 and selling nearly a 2-year call for $1.75 is not a big enough return for me. But if the above strategy works and YHOO is bought for $20 the put is worth only $5.00, we earn $6.50 plus the $1.75 call expires worthless. Nice work if you don't put up any money. The call is currently trading near $0.75 while the put trades near $9.00. I'm recommending exit the trade if Yahoo trades near $18-$19.

Trade of the Week in Review:
There was an Alert Email early Thursday morning to buy the 530 calls $2.00 and scale-in. They hit a low of $1.50. There were numerous very profitable hedging trades that more than paid for the calls and included a nice overall profit. The market seemed range bound so I recommended in a 1:30 Alert Email to sell any calls into the rally. The calls hit $2.00 - I was gone. Needless to say during a selloff into the lows at 3:00 could have allowed us to reenter the same 530 calls near $1.00. The market rallied sharply into the close in front of a great GOOG beat. The calls opened Friday morning near $5.00 where profits were taken.

After an early hard selloff given the harsh financial stocks beat down the market drifted into a small trading range. After 2:00 I recommended in the Chat Room we try buying the same 530 calls now trading about $0.30. They hit a low of $0.20 shortly later. I recommended we do some hedging but to sell the calls into late strength. Later the 530s hit $1.00, we were gone and they closed at $0.80. Again nice work if you can get it and it's there almost every week. See NET Weekly Money Chart 2010-10-15, Friday C chart.

Again thank you for all those cards and letters. Keep up the good work. I'm happy to hear how well you are doing. Welcome we have 3 new students in the Chat Room.

Good trading all,

Stan Moore
702.267.0396