Income Tripler

Stock Market Predictions: “Crazy” About the Dollar

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, August 14, 2008: Issue #838

I’m no stranger to controversial stock market predictions. In fact, a few weeks ago I angered an entire room of investors at the Agora Financial Symposium with my latest trio of “crazy” recommendations…

• “Take profits on your gold, while the getting’s good.” Since uttering those words, the yellow metal’s dropped $108, or roughly 12%.

 

• “Get short oil. It’s going to $100 before it touches $150.”
  And oil obliged by dropping to $113, a move that silenced everyone who was calling for $200 oil just weeks ago.

 

• “And do the unthinkable. Get long the U.S. dollar versus the euro.”
  Last Friday, the euro endured its worst single-day slide in eight years, breaking through a key technical support level at $1.50.

Bullish Dollar Predictions

Now, before you cry “foul,” I’ll confess… I did issue similar bullish dollar predictions here on two occasions (The End of the Weak Dollar and Weak Dollar Rising). And I know they weren’t well received because my inbox immediately filled up with “positive” reinforcement. Such as…

• “I would stick your dollar where the sun don’t shine.”

 

• “I’m still questioning your intelligence.”

 

• “I really am amazed that people who are so well educated could be so ignorant… to send out a newsletter saying how the weak dollar is looking up is very irresponsible.”

And yes, I kept every one of them in hopes of eventually being vindicated. But that’s not why I’m writing today. Gloating doesn’t put money into my portfolio. Only successful investments do.

Instead, I’m writing to make one last appeal for you to consider initiating a long dollar/short euro position, before it’s too late…

4 Great Investors Badmouthing the Dollar…

Recall in March everyone, including four of the greatest investors of all time (with much more experienced than me) - Warren Buffett, Jim Rogers, Bill Gross and George Soros - were publicly badmouthing the dollar. By June, Soros changed his mind, mostly. He went from being a dollar bear to neutral. A sentiment change is afoot…

And after last Friday’s move, the dollar bull officially charged off the endangered species list. Here are a just a few sightings, culled from recent articles in the financial press…

• “The U.S. [dollar] multi-year down trend is over.” - Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

 

• “Since reaching an all-time low against the major currencies in mid-March, the U.S. dollar has climbed 6%… The currency has seen several larger, temporary gains during its 38% slide since 2002, but this one could have legs.”  - Sal Guatieri, economist at BMO Capital Markets.
  
  
• “The dollar’s surge against the euro has prompted Bank of America Corp. to tell its customers to exit trades betting on more gains.” Bloomberg.com, August 14, 2008.

Trust me when I say there are countless others. Instead of listing them all, I think it’s more important to understand the three factors prompting the sudden and massive conversions.

• First, investors finally woke up to the decoupling farce. Just like the United States, the rest of the world (at least this time around) is staring down the double-whammy of slowing growth and rising inflation. That includes Europe and (gasp) China. In fact, going into today, the U.S. markets were performing better than all of the highly touted BRIC-countries, year-to-date. In a truly decoupled world, that wouldn’t be happening.

 

• Second, the latest reading of the Economist’s Big Mac Index confirmed the euro is grossly overvalued, by as much as 50% versus the U.S. dollar. The most it has ever been.

 

• For the skeptics in the bunch, here’s one more point to chew on… It’s a fact the dollar moves in five to seven year cycles. It’s a fact the dollar’s already endured a six-year drubbing. So odds are the latest rally marks a legitimate reversal. And that means the euro is in store for an epic tumble.

So instead of merely daydreaming about the return of an affordable European vacation, I encourage you to do something that will actually help you afford it!

Stock Market Predictions - Get Long The U.S. Dollar

Here’s a stock market prediction - get long the U.S. dollar versus the euro. (See the Investment U Crib Sheet for two ideas.)

And I know. I’ve insisted on the same move twice before. But as one of you put it, my prognosis was just “a bit premature. [The dollar] will get much worse before it gets better.”

It did. The euro hit an all-time high of $1.6038 on July 15. But now it’s at a five-and-a-half-month low… with a long way to go.

Remember, if you’re early, there’s still time to get it right. But if you’re late, there’s only time for regrets. Here’s to investing with no regrets.

Good investing,

Louis Basenese

Today’s Investment U Crib Sheet - 2 Ways to Profit from a Strengthening Dollar

• The Rydex Strengthening Dollar Fund (RYSBX). This fund’s objective is to match 200% of the return of the U.S. Dollar Index. So for every 1% the dollar rallies against the world’s major currencies, the fund aims to move 2%. To make this possible, the fund uses derivative instruments, such as index swaps, futures contracts and options. The risk, of course, is that the fund will fall twice as fast as the dollar, should it move lower.

 

• The EverBank Dollar Bull CD*. FDIC insured and available in 3-, 6-, 9- and 12-month terms, this product allows you to pick the currency to speculate against, including certain emerging markets. Follow this link for more information on the Everbank Dollar Bull CD, or call 800.926.4922. Just be sure to let them know you’re an Investment U subscriber.*The publisher of Investment U maintains a marketing relationship with EverBank, but it’s equally important to note that we’d recommend their products and services anyway.

Louis Basenese 2008 Archives, Interest Rates & The Dollar, Louis Basenese stock market predictions, U.S. dollar

Options Activity: A Market Indicator That Always Delivers Outsized Gains

by Louis Basenese, Advisory Panelist
Associate Investment Director, The Oxford Club
Friday, August 01, 2008: Issue # 831

We all know the adage, “There’s no such thing as a sure thing.” And it’s especially true when it comes to investing. But for me, one indicator comes darn near close…It’s not insider buying. Sure, company executives forking over millions of dollars to purchase their own stock - like Aubrey McClendon of Chesapeake Energy (NYSE: CHK) continues to do - is decidedly bullish. And exhaustive research bears this out.

A recent study by Morgan Stanley found companies with heavy insider buying outperform the S&P 500 by an average of 13.7%. But here’s the rub: Because of strict SEC laws and the fact that insiders tend to be the longest-term investors out there, a considerable lag usually exists between the purchases and meaningful price appreciation.

The indicator I’m referring to is not an announcement about a massive stock buyback plan, either. Here, too, the data favors long-term investors. Companies that announce stock buybacks often outperform the broad market over a four-year period by a margin of 45%, according to studies out of the University of Illinois at Urbana-Champaign.

But again, it can take months or years to recognize the above-average gains.  Blame it on our instant gratification culture, but I prefer an indicator that often delivers outsized gains in a few weeks, days, or even a few hours. So what is it? Why, none other than options activity…

Options Activity - The Holy Grail to Lightning Fast Gains

Abnormal - and lopsided - options activity. Ridiculously lopsided. Like we witnessed Wednesday with EMC Corporation (NYSE: EMC)…

Wednesday, more than 300,000 August $15 options traded hands. That’s 17 times the average daily volume. And the activity was unmistakably lopsided. Call options buyers outnumbered put options buyers by more than three to one.

Investors are certainly banking on a major rally in the next two weeks. And as options expert Jon Najarian put it, “I can’t remember seeing a frenzy like this.”

So let’s dissect these bets to fully understand why this is so bullish…

• For the call buyers to make money, they need the stock to move above $15… in only two weeks. �

• Based on Tuesday’s closing prices, that means EMC would need to rally approximately 12% for these investors just to break even. �

• No small feat given the time constraints… and the fact EMC already reported earnings. You see, it’s not unusual to see increased options activity preceding earnings announcements, as investors try to front-run a strong or weak report.

But there’s no known catalyst looming on the horizon for EMC. So in Vegas terms, these options purchases appear to be sucker’s bets. So why would so many institutional buyers be so foolish?

Large-Scale Options Activity - Not Retail Investors…

By the way, I know retail investors weren’t behind the options activity because the options contracts were being purchased in blocks of 5,000 to 10,000 contracts, equivalent to trade sizes of $200,000 to $400,000 based on the average contract price yesterday.

Put simply, they’re not stupid. They know something…

• Research out of Yale University on abnormal call options volumes strongly suggests they know a takeover is afoot. (If you’re interested in all the findings, the study is titled “Informational Content of Option Volume Prior to Takeovers.”) �

• If so, EMC would rally big time on the announcement. Takeover premiums historically average 22%… and in recent history they’re higher, closer to 40%. �

• No doubt, a 20% to 40% move for EMC’s stock would make the $15 call options much more valuable.

Options Activity Suggest Likey Suitor for EMC

The options activity certainly suggests that EMC is about to get bought out, with networking giant Cisco Systems, Inc. (Nasdaq: CSCO) the most likely suitor.

Here’s another, and in my opinion, more likely outcome. EMC is getting ready to announce a takeover or sale of its 85% stake in VMware, Inc. (NYSE: VMW).

And that could be just as bullish…

Recall, EMC owns 85% of VMware. That was a great thing when VMware went public at $29 and quickly ran up 333% to $125.25. (A move subscribers to my Hot IPO service got a piece of, booking a 40% gain in just 14 days.) It brought EMC right along for the ride.

Then Microsoft and Oracle aggressively entered the virtualization space. And the added competition cut the knees out from under VMware, with shares now languishing around $35. Naturally, EMC’s stock followed the misfortunes of VMware.

But most agree EMC’s been overly punished. And a quick way to remedy the situation would be to sell its 85% stake in VMware to the public… or a cash-heavy competitor. As we know, Microsoft and Oracle don’t exactly lack cash or shy away from acquisitions.

So, when can we expect an announcement?

Options Activity Points To An EMC Announcement

Well, if it’s going to happen, the options activity is betting it will come in the next 15 days. And that’s possible. EMC is set to present at the Pacific Crest Securities technology conference in Vail, CO on August 4. They could make an announcement then. Especially since it’s a Monday and most takeover announcements come on Mondays.

But no matter when an announcement comes, here’s what’s important…

When I see ridiculously lopsided options activity like yesterday with EMC, I get excited. It’s the surest indicator I know of.

As Benjamin Franklin once observed, “Three can keep a secret, if two of them are dead.” And when we see abnormal options activity, we know nobody’s dead… and that the secret is out. Make no mistake, insiders positioned themselves to profit off EMC before this secret is made publicly known.

And we might want to join them.

To be clear, this ranks as a speculative trade. So if you decide to act on the surest indicator I know, you’ll want to ratchet down our recommended position size of 4% to 1% (or less).

And play it one of two ways…

• Option 1: Simply buy the stock, using a 25% trailing stop. And wait for the news to break. �

• Option 2 (more risky): Be like the professionals and buy the $15 call options. If you choose this route, at least increase your odds of success by going with a later expiration date. Say, the October or January 2009 calls. It will cost you a little more, but if the insiders are right about a big development and just wrong about the timing, you still make out like a bandit.

Good investing,

Louis Basenese

P.S. Next week, I’ll share with you my favorite SEC form to consistently uncover double- and triple-digit profits, while the rest of Wall Street remains clueless. Stay tuned.

Editors Note: To get all of Lou’s trades via e-mail, just sign up for his Takeover Trader service. He’ll send you specific recommendations to buy the market’s most appealing takeover targets - companies with rock-solid fundamentals and substantial growth prospects. (Shares of these firms tend to outperform the market even if a takeover is never announced.)

Today’s Investment U Crib Sheet 

• To find out the volume on a particular options contract, you can look at any number of sites that quote stock options prices. Using CNBC’s stock quote site, enter the stock symbol and select “Go.” Then select “Options Chain.”

  You’ll see the contract expiring soonest - divided into calls and puts, and the volume on each.

Louis Basenese 2008 Archives, Louis Basenese, Options Investing insider trading, options activity