Tuesday, November 02, 2010

2 November 2010 Survey says!


2 November 2010 Survey says!

Ok it seems appropriate that I wrap up the survey we asked you to complete about a week ago. I will have those results for you tomorrow and make any relevant changes to the blog from that point forward. We got 16 replies out of 38 and even a few non replies that explained why they did not reply, and I appreciate that. It seems appropriate as the initial results of the election are just starting to happen now. Devin and I were invited to several celebratory election parties (even though a few were not going to be happy endings). Here are few of the interesting race results that might have an impact on the economy and the market.  As I wrap this up, the republicans have control of the house. No surprise there is a small chance we will have a senate composed of 49 dems, 49 republicans, and 2 indies.  More likely we will have 50 dems, 48 republicans, and two indies.  Pelosi goes down as the first woman speaker of the house, and Harry Reid get to keep  his Senate Majority leadership.  So now the President will be forced to be more moderate just to keep the initiatives he put in place.  Look for the disctinct possibility of a two year extension of all of the Bush Tax cuts even to those big greedy multi-millionaires.  The bad news is, with the girdlock described, there will be no movement towards the reduction in entitlement programs and no significant improvement is the tax structure in the US.  Not much gets done for the enxt two years.  That is normally not a bad thing, however we have big bag of debt that we need to address now. 

The pin action in the Salve Lucrum Portfolio

Yesterday on the market dip in the afternoon, we tool a nice profit on some April INTC (Intel Calls). We also sold out of our sizaeble C Citigroup Inc position with a teeny tiny itty bitty gain. It was just enough to cover the trading fees and a nice bottle of George Duboeuf Nouveau Beaujolais Village. (OK, busted its only about a 15 dollar bottle of wine, but still agood pour.)We did use the dip to add to RINO, CVX, AMZN, ESLT, FLS, ZION, BOH, SNTS and KO. Last night we sold out of our NAK options with a very nice gain and still hold a few shares long.

A Steal for Steel

Yesterday we gave you a few stocks with a decent margin of safety and we really liked a coal oil play called CONSOL Energy CNX. We went to the SEC website and picked though the recent 10Q filing. I like it. Don’t get me wrong not everything in there was beautiful, but I liked it.

I encourage you to read the managements discussion if you are in the market for an energy play. In that document the company does a very balanced job of explaining why the company should see improved earnings but also explained why they won’t. From reading it I learned there is a significant difference between metallurgical coal and thermal coal; the first being used to burn in ore furnaces and the later to be used by utility companies. The facts and figures for the world demand for both are pretty straight forward. They announce the languishing gas market. (It nudge up a bit today.) Then they spent a lot of time describing the more stringent OSHO and MSHA standards the mining industry must now face as a result of recent tragedies. (Pay attention Ben more business for you and people holding GWW.) But at the end of the day, the fundamentals of the company along with a steady growth curve make me feel this equity worthy of addition to the SL portfolio. This is how we will play it.

We are going to buy some call options a little out of the money. That means we will have the right but not the obligation to buy shares of CNX are a future date (expiration) at a future price (strike price). Out of the money means we are buying a call option with a strike price above the current price. In other words we are betting that the price of CNX will rise between the time we buy the call option and the expiration date.

So I don’t disclose our holdings, let say you had a stock selling for 35 dollars a share today. You thought that the stock was going to go to 40 by the middle of February 2011. You might look for a February 2011 call with a strike price of $40. That option might cost you $2.50 a contract. (one contract controls 100 shares of the underlying stock so the contract actually cost you the price of the call times 100.) So you buy the February call for $2.50 ($250.00) and you now control $3,500 dollars of the underlying stock for $250.00. If you assumption is correct and the stock goes from 35 to 36. You could see your call go from $2.50 to $2.75. DO THE MATH. A 2.8% increase in the stock, just got you a 10% gain on the call options. Of course the opposite is true. You have to get used to seeing large red numbers in your portfolio when you spin the options wheel. OK back to CNX.

We are going to buy some April 15, 2011 40 dollar call options at about 2.50 a call. I will be looking for the stock to go to $40 by years end or at the very latest the end of January. That should lift the call price to $3.35-$3.50 generating a nice gain. We will put a stop on the call at 2.00 to protect our downside. This should be fun.

So what happens tomorrow after the Fed tells us how much new money they are going to generate:

We have to start making the money.
Salve Lucrum


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