______________________________________________________________________________
Issue No. 15 – February 28, 2005 Prescott, Arizona Systems@WiserTrader.com
______________________________________________________________________________
Newsletter watchlist data may precede web site data by up to one week until further notice
Option Alert No. 6 sent on 2/23/05 was for Valero Energy Corporation (NYSE: VLO) September $70.00 Call with the symbol VLO IN. The stock’s price went from $67.15 to a Friday close of $72.90. This activity took the option from its maximum recommended entry price of $7.00 to a Friday close of $10.70. The option’s theoretical (Black-Scholes) fair value went from $8.49 to $11.61, making it still undervalued. The position remains open.
Valero Energy Corporation is an independent refining and marketing company that owns and operates 15 refineries with a capacity of approximately 2.4 million barrels per day. About 82 million barrels of oil are consumed world wide daily. Valero produces reformulated gasoline and diesel fuel meeting California Air Resources Board specifications, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). Valero also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through bulk marketing and through a network of more than 4,500 retail and wholesale branded outlets in the United States, Canada and Aruba.
For the fiscal year ended 12/31/04, revenues increased 44% to $54.62 billion. Net income applicable to Common totaled $1.79 billion, up from $617.2 million, an increase of 190%. Revenues reflect additional volume from refinery operations acquired. Earnings also reflect higher equity in earnings. The price to sales ratio for this stock is 0.36 even though the stock price has increased 133% in the past 52 weeks.
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent trades made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser
Valero is not the only energy stock going wild. The entire sector is in a sprint along with the Basic Materials Sector. One company that will benefit from increasing orders from Asia is BHP Billiton (NYSE: BHP) that operates out of Australia. BHP Billiton Limited is diversified exporter of metallurgical coal for the steel industry; an exporter of energy coal; a producer of iron ore, copper, nickel metal, manganese ore, aluminum, manganese and chrome ferroalloys. It also has substantial interests in oil, gas, liquefied natural gas, diamonds, silver and titanium minerals.
For the six months ended 12/31/04, revenues increased 41% to $14.47 billion. Net income increased 89% to $2.64 billion. Revenues reflect increased product prices. Higher income also reflects higher operating margins and lower borrowing costs. The stock has been on the rise for some time with its price increasing 53% in the past 52 weeks. It has a trailing PE of 20 and a forward PE of 13 with a 5 year PEG ratio of 0.73 which makes it interesting, although it does not fit into any of the watch lists. As inflation picks up, it will be seen first in energy and materials prices.
Plans are being scraped to obtain a group discount for a trading system development seminar given by Rockwell Trading. The level of response was very low. Anyone interested in learning to develop his personal trading system should contact Rockwell directly using the Investment Links page on the web site. Rockwell is listed under the Education category.
______________________________________________________________________________
A number of tools are available for entering option trades. Equally important is having a plan for when to sell. Briefly, there are a number of major schools of thought on the subject that either involve the use of technical indicators or fit into a scheme of overall money management. These exit strategies all address the same basic problems of protecting profits, avoiding a profitable trade turning into a losing trade and avoiding large draw downs in capital.
The first and most difficult strategy to master involves monitoring the stock price and volume while in an option trade. Volume is a confirming indictor. Upward price movement on higher than average volume is a hold signal. Downward price movement on higher than average volume is a potential sell signal. One needs to be ever mindful of resistance and support levels defined by any recent clustering of prices that have occurred, respectively, above and below the current stock price. When a stock’s price rises toward resistance, watch for the sell signal that price bounces off resistance. It can fall substantially lower. If price rises through resistance one should hold. When a stock’s price falls toward support and bounces upward, it is a hold signal. If price falls through support it is time to sell. When clusters of prices that define support are substantially below the current price, the 7 day simple moving average is a good price support level to use. This is especially true for stocks at their 52 week highs. These are just a small sample of many potential signals that can be gleaned from technical indicators.
Money management sell indictors involve the use of trailing stops. First, in the case when no more than 4% of the total capital is used in a single trade, a -25% trailing stop prevents no more than 1% of total capital being lost in a single trade. Second, when capital is divided into 90% long term investment and 10% risk capital, and no more than 25% of one’s risk capital is involved in a single options trade, a trailing stop loss of 35% to 50% is considered acceptable. This prevents no more than 0.875% to 1.25% of one’s total capital being lost in a single trade. Third, when a trading system is used, the trailing stop loss FL is set based on the average profit per trade FP, the fraction of trades in the correct direction FC and the average fractional gain per winning trade FG, according to the profit-loss model FL = FP – FC FG / (1 – FC) that has been discussed over the past couple of weeks.
______________________________________________________________________________
______________________________________________________________________________
THE ALCHEMIST by AL THOMAS
HOLY GRAIL INVESTMENTS
Every year I go to the Money Show in Orlando, Florida. Thousands attend. It is mostly an older crowd with the youngsters about 40 years of age. I have been saying for years that until you have lost enough money trying to make a fortune you will not become serious about investing. The under 40’s are shooting for the moon and it has finally dawned on the over 40’s (maybe it’s the over 50’s) that they must find a better way to get rich.
The Money Show presents a forum of recognized experts in their field. It may be long-term or short term trading. It could be in stocks, bonds, mutual fund, ETFs (Exchange Traded Funds), oil and gas properties, options, commodity futures, managed accounts and other more esoteric venues.
Each one of the “experts” allows you to listen to him speak (at no charge) to tell you how he has found the secret to stock market success and why you should buy his Holy Grail service. You will receive his (daily, weekly, monthly) market letter for the ridiculously low price of from $250 to $5,000 or more. You may not have found the Holy Grail, but he has.
Almost all of them have a “when to buy” method, but very few have a “when to cash in your chips” method and fewer than that will have any way to protect yourself from losing it all should their Holy Grail method turn into Holy Cow.
The Orlando show occurs in February so every expert has his predictions for the coming year. The only bear I found was Martin Weiss, but he wasn’t a bull in 1999 either. No one wants to hear dire consequences of a bad year for their stocks so the audience is fed the kind of food they like. Everything is going to be even better this year and with my super software (or newsletter) you will make a better return than ever before.
During the three day show there were 396 individual presentations most of which ran about an hour more or less and then there were the extra charges for having breakfast, lunch, tea, whatever with one of the speakers. And these weren’t cheap. You could also sign up for all day seminars. In the Exhibit Hall there was always an expert giving a lecture with a great slide show on how his Grail (I am getting hesitant about calling it Holy) will increase your portfolio.
Many investors came to see the guru whose market letter they were receiving. Very few of these mavens are making anyone rich, but there are some. My question to them is are they putting their own money on the line or are these results hypothetical?
After attending several of these seminars each day with each presenter showing his magic get-rich formula it would seem these folks would go home more confused than when they came. There is no Holy Grail of investing. At least I have not found it nor do I know anyone who has. Do not rely on someone else to make you rich.’ You have to do it yourself.
The real Holy Grail translates into two words – Hard Work.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Energy and Basic Materials remain the leading sectors. Industry leadership in Table 1 below continues to take a short term view.
Table 1
Market Summary
Week ending 02/26/05:
Major Indices:
Dow Jones +0.5%
NASDAQ +0.3%
S&P500 Index +0.8%
Russell 2000 +1.2%
30 Year Bond 4.64%
10 Year Note 4.27%
Industry Leaders
For the Past Week
Home Construction
Marine Transportation
Exploration & Production
Steel
Coal
Oil & Gas Producers
Integrated Oil & Gas
Oil & Gas
Nonferrous Metals
Mining
Industry Leaders
For the Past Month
Coal
Exploration & Production
Oil & Gas Producers
Integrated Oil & Gas
Oil & Gas
Steel
Marine Transportation
Heavy Construction
Commodity Chemicals
Pipelines
Gold for the past 30 days:
USD +1.85%
CAD +2.64%
CHF +0.45%
GBP +0.12%
EUR +0.85%
JPY +4.16%
On Friday, the CRB commodity index hit its highest level in over 5 years. The S&P index is now almost exactly unchanged for the year. There is a tug of war between the positives of strong economic and earnings growth with increased acquisitions, and the negatives of rising interest rates and firming inflation. On Friday, the fourth quarter GDP gain was revised upward from 3.1% to a 3.8% annual rate of increase. Expectations are that real GDP will rise about 3 1/2% to 4% in the first half of this year. That is above long-term trends. Steel, materials, and energy stocks had yet another good week. Banks, pharmaceuticals, and technology stocks are putting in mixed performances. High valuation stocks have been losers this year, as reflected in the underperformance in the NASDAQ and the Russell 2000.
The market enters March facing a warnings season period ahead of first quarter earnings reports. The biggest question marks are on inflation and interest rates. Next week, the earnings calendar is very light, with Costco on Wednesday the only report worth noting. The economic calendar is dominated by the March employment release on Friday.
The 5 day RSI for the DOW, S&P500 and the NASDAQ are all neutral as are the 5 day RSI for the S&P500 and the NASDAQ. The 5 week RSI for the DOW is overbought. Other sentiment indicators are given in Table 2.
Table 2
Sentiment Indicators 02/26/05
|
Sentiment Indicator |
Value |
Last Week |
2 Weeks Ago |
Complacent |
Cautious |
|
VIX |
11.49 |
11.18 |
11.43 |
< 20 |
> 50 |
|
VXN |
17.34 |
17.87 |
17.19 |
< 30 |
> 80 |
|
Put/Call Ratio |
0.573 |
0.594 |
0.660 |
< 0.6 |
> 0.7 |
|
%Bulls - %Bears |
32.7 |
35.4 |
31.4% |
> 29% |
< 25% |
The following stock screens were generated with tools from AAII. A new pair of columns was added to indicate how long an entry has been in a watch list and how the stock has performed since. The short term trading filter used for Table 3a looks for optionable stocks whose percentage relative strength over the past 6 months is greater than 90%, EPS Growth over the past 12 months is greater than 80% and are within 5% of their 52 week high with a minimum price of $50. One exception is BHP, added just recently, that does not really fit the filter but is a promising basic materials play. When a trigger, price gap up or unusually high up volume occurs, call options are supplied.
Key
|
Open Trade |
|
Passed Recent Filter |
|
"0" = No discernable trend |
|
"GAP" = Price gap |
|
"V" = Higher than average volume |
|
"+T" = Positive trend |
|
"-T" = Negative trend |
|
"TT" = Trigger received |
|
"TTC" = Confirmation received |
Table 3a
Short Term Options (Original Stock Candidate Filter) as of 02/26/05
|
Stock |
Added |
% Chg |
Company |
Sector |
Industry |
OPTION |
Key |
|
AAPL |
01/10/05 |
29.0% |
Apple Computer, Inc. |
Technology |
Computer Hardware |
QAA GT JUL 100.00 CALL |
+TV |
|
AEOS |
02/07/05 |
0.2% |
American Eagle Outfitters |
Services |
Retail (Apparel) |
AQU HK AUG 55.00 CALL |
+TTC |
|
AET |
01/03/05 |
18.5% |
Aetna Inc. |
Financial |
Insurance (Accident & Health) |
- |
+T |
|
ATW |
02/07/05 |
12.0% |
Atwood Oceanics, Inc. |
Energy |
Oil Well Services & Equipment |
- |
+T |
|
BHP |
02/24/05 |
3.0% |
BHP Billiton Limited (ADR) |
Basic Materials |
Metal Mining |
BHP HF AUG 30.00 CALL |
+GAPV |
|
BTU |
11/22/04 |
24.1% |
Peabody Energy Corporation |
Energy |
Coal |
BTU IT SEP 100.00 CALL |
+TV |
|
BYD |
02/21/05 |
-0.7% |
Boyd Gaming Corporation |
Services |
Casinos & Gaming |
- |
+T |
|
CLF |
12/20/04 |
50.3% |
Cleveland-Cliffs Inc. |
Basic Materials |
Metal Mining |
CLF GN JUL 70.00 CALL |
+TV |
|
CME |
02/14/05 |
0.0% |
Chicago Mercantile Exchange Holdings |
Financial |
Investment Services |
- |
0 |
|
CRS |
02/14/05 |
4.8% |
Carpenter Technology Corp |
Basic Materials |
Iron & Steel |
CRS IN SEPT 70.00 CALL |
+TV |
|
FFIV |
02/14/05 |
0.6% |
F5 Networks Inc. |
Technology |
Computer Networks |
- |
+T |
|
GGC |
02/21/05 |
5.0% |
Georgia Gulf Corporation |
Basic Materials |
Chemicals - Plastics and Rubbers |
- |
0 |
|
GMR |
02/25/05 |
0.0% |
General Maritime Corp. |
Transportation |
Water Transportation |
GMR HK AUG 55.00 CALL |
+TTC |
|
KMRT |
11/29/04 |
-5.2% |
Kmart Holding Corporation |
Services |
Retail (Department & Discount) |
- |
0 |
|
MDC |
02/14/05 |
4.8% |
M.D.C. Holdings, Inc. |
Capital Goods |
Construction Services |
MDC IQ SEP 80.00 CALL |
+TTC |
|
MGG |
12/27/04 |
6.8% |
MGM MIRAGE |
Services |
Casinos & Gaming |
|
0 |
|
MON |
12/20/04 |
12.7% |
Monsanto Company |
Basic Materials |
Chemical Manufacturing |
- |
0 |
|
PCO |
02/14/05 |
6.0% |
Premcor Inc. |
Energy |
Oil & Gas Operations |
- |
+T |
|
POT |
12/20/04 |
11.2% |
Potash Corp./Saskatchewan (USA) |
Basic Materials |
Non-Metallic Mining |
- |
+T |
|
SIE |
02/14/05 |
6.4% |
Sierra Health Services, Inc. |
Financial |
Insurance (Accident & Health) |
- |
+T |
|
SWN |
11/22/04 |
22.5% |
Southwestern Energy Company |
Energy |
Oil & Gas Operations |
- |
+T |
|
TXI |
12/20/04 |
9.7% |
Texas Industries, Inc. |
Capital Goods |
Construction - Raw Materials |
TXI DN APR 70.00 CALL |
+TV |
|
TXU |
11/22/04 |
21.1% |
TXU Corporation |
Utilities |
Electric Utilities |
TXU GP JUL 80.00 CALL |
+TTC |
|
VLO |
02/07/05 |
25.0% |
Valero Energy Corp. |
Energy |
Oil & Gas Operations |
VLO IN SEP 70.00 CALL |
+TV |
|
X |
12/20/04 |
21.4% |
United States Steel Corp. |
Basic Materials |
Iron & Steel |
X JM OCT 65.00 CALL |
+TV |
The stock filter resulting in Table 3b is for the potential to write covered call options. The only difference between filters for Tables 3a and 3b is that in 3b the maximum stock price is $20. The percent relative strength for PNK is falling slightly below 80% and it was removed.
Table 3b
Short Term Covered Call Writing Screen as of 02/26/05
|
Stock |
Added |
% Chg |
Company |
Sector |
Industry |
Covered Calls |
Key |
|
AES |
02/24/05 |
2.0% |
The AES Corporation |
Utilities |
Electric Utilities |
- |
+TV |
|
AKS |
12/20/04 |
19.6% |
AK Steel Holding Corporation |
Basic Materials |
Iron & Steel |
- |
+T |
|
BEV |
02/14/05 |
0.0% |
Beverly Enterprises |
Health Care |
Healthcare Facilities |
BEV CV MAR 12.50 CALL |
+TTC |
|
GLBL |
02/24/05 |
3.4% |
Global Industries, Ltd. |
Energy |
Oil Well Services & Equipment |
|
+TV |
|
MDRX |
02/07/05 |
22.0% |
Allscripts Healthcare Solutions, Inc. |
Technology |
Software & Programming |
MXQ CC MAR 15.00 CALL |
+TTC |