2006 Year in Review

January 1, 2007

147

I'm just going to go over some of the things that happened in the year briefly (although this will end up a very long post!).

I'm going to quote a lot and you can go back for yourself and I apologize in advance for the poor condition of the old Blogspot blog – at some point in January we will clean up the posts and bring them into this site!

1/1: "If oil remains above $60 next week, there may be another good energy play coming up as many oil companies are 10-20% off their 2005 highs. Gold is not "peaking." It was at $426 at the end of '03, $440 at the end of '04 and it is finishing '05 at $517.

"This is a fairly strong price pattern and commodity cycles usually last 20 years so think about that when you listen to the pundits. The 2nd biggest gold company in the world just bought the 4th biggest company for a 40% premium and they were rewarded by the markets – what does that tell you? "

"Best case scenario for 2006 would be:

An end to Fed tightening (not as likely as everyone thinks with Bernanke in charge)
Housing slowing but not stopping, sending investment dollars into stocks
A light at the end of the Iraqi tunnel.
Democratic control of just one of the house or senate (markets love it when laws can't be changed)
A Nasdaq charge led by Microsoft (not looking good atm)
GM recovery (if they can work it out, the Dow will fly).
I'm not going to talk about worst case but any three of the above not happening will do the trick! "

That's right, I started 2006 bullish on both oil and gold! I know many of my new readers think of me as a perma-bear on commodities but that is very untrue – I'm only bearish when they're overpriced!

As we noted at other points during the year, we got all of our wishes except Iraq although it took a while for MSFT to wake up…

I'm summarizing trades I liked this year that have something to teach us for the year ahead, I'm not focusing on losers (as we are unlikely to go back to them), just trades that can give us a little perspective on where we are going in '07. I'm hoping this helps give new members a better feel for what we do here too!

For simplicity's sake, I'm not going to get into whether we doubled down or halved out or sold against, it's just a review – not an audit!

Good calls in Jan:

Little oil service provider OMNI is buying a private company that will add $5M to the bottom line for net $19M so I really like this one at $3.60 and a p/e that should combine below 15 – Tripled before I turned bearish on oil.
BOOM continues to rocket since our early December pick, now I am sure it was just consolidating for a move up. ATI should have a good year, watch for TIE as a leading indicator – All good picks early in the year!
CY – Look for the stock to retest $17 in the very near future, tempered by the Nasdaq and the performance of SPWR from which it derives half its value – we had a good year with these guys!
1/11 – YHOO got a downgrade from MER so the question is, will someone have the nerve to downgrade Google?" – I week before the drop!
ATYT is doing the option expiration shuffle around $17.50. I like offering $1.80 for the Aug $17.50s and waiting for an up oscillation and selling the Feb $17.50s for .90 – August was hitting the nail on the head!
HD is too dangerous to own in a down market. The hint of scandal will not go away because it makes very good news (everyone shops there). We can hope this really does drop back down to the 200 dma of $40 so we can buy buy buy! – This went very well and we got out at the top!
1/20 TOTD (trade of the day) BUD: "In troubled times Americans have always been able to turn to beer as a cheap way to while away the hours and Bud is still America's favorite cheap beer… Jan '08 $45s for $3.70" Also called a top on HBs that day!
Google is very unlikely to beat earnings since the mean estimate is for $1.76/share and the whisper # is $2. How they can possibly do this when the projections for revenues are less than last quarter is beyond me anyway since they "only" earned $1.35 last quarter, and that was a blow-out number – Big call!

Posts of note:

February:

2/1 (GOOG holding $400): "Google may be moving into what Cramer calls "a house of pain" for the near future, after which it will be a great buying opportunity. Google is not in the S&P 500 which means a lot of funds may feel free (or find it necessary) to dump big stakes in the stock if it slips below key thresholds ($370ish) so there is a possibility of a cascading drop in price down to $330 or lower if the worst case plays out." – this led to us buying in March, right at the bottom!
Also on 2/1 – SUN $90 puts for $1.30 (my first bear call on oil – well timed!)
I took a position in a new copper stock today – TGB. They are a Canadian miner with a tiny little $185M market cap and they are just ramping up production to the tune of $30M per quarter on which they are earning close to .20 per share – a nice double there!
2/10 – I am always disgusted by the extortionist price of RIMM options but I think their suffering may be over, if they break the 50 dma of $70 today on volume then they have a lot of room to fly… Jan $70 for $15 – it took a while but VOOM!
2/13 – Jan '08 $30s are being given away on this stock for $5.90 and, if we get a pop over $34, we can make a very nice living selling $35 calls– that went very well!
Also 2/13 – HPQ is looking good into Wednesday earnings. I am fairly positive we will see a revenue beat and even if earnings miss they will be up 30% from last year. Guidance should be positive as well so I'm going to take advantage of today's sell-off to ease into Jan $30s for $4.60 – took a while but we sold calls.
For some reason, 40% of the float of FMD is shorted, possibly in anticipation of a bad quarter that certainly never came and concerns that the company would be hit with defaults due to the change in the bankruptcy law (they weren't). The student loan company had a 50% increase in Q2 revenue and a 40% increase in profits and are on pace for a huge year – they did!
2/21 – Any time BOOM (2/28) goes on sale it gets my attention, it's down $8 from its high but coming back fast. No options but a stock that has doubled y/y earnings in the past 3 quarters is only expected to increase Q4 by 20% so I smell a beat – they did!
2/23 (CME $400) – On a related note, there is no one out there writing CME $600 on their knuckles but it's going to happen before Google! The Apr $430s for $17 are a great deal compared to Googles Apr $370s (about the same out of the money) at $24 – where do I come up with these things?
Also 2/23 – AAPL almost had a huge day. It was rejected harshly off the 50 dma of $73 so it's time to put those Jan $65s to work and sell the $70s for $4, locking in 10% as long as we don't dip below $68 – saved us from having to sell!
2/27 – CMCSA may have suffered long enough, down 1/3 from last year's open on flat earnings, I see it as more of an investing year and I like them going forward. No one else seems to think so and you can get the Jan $27.50s for $2.60 and take the loss if it goes below $26 but I think it's going the other way – never broke $26, those calls are now worth $15!

Posts of note:

Fear Factor – Expecting a market rally once these "issues" play out.
Oil's Well that Ends Well – predicted no Iran oil cut-off.
How Low Can Google Go?
GOOG – Incredible call on puts!

March

3/2 – getting bullish on oil again
3/3 – I want to stake my claim as being the first to use the phrase: "When I hear ABC News, I think ABC/Disney/Apple and I start thinking about the inevitable IPhone …"
3/7 – made money on calls, flipped on oil
3/12 – PD split today which will give shareholders a good opportunity to lighten up their positions after taking a beating since early February. Watch PCU for genuine sector direction but I like the Apr $65 puts for $2 – dead bottom!
3/13 – Google Spreads
3/20 – I mainly follow Boeing to keep my eye on who this $62Bn company is buying from and today they renewed their contract with little LMIA, a supplier of aluminum who have done a great job of controlling costs and improving profits quarter after quarter for three straight years. If I were Warren Buffet I'd start accumulating right now at $17.50. They have just had a huge run and they might pull back a bit so I have no patience for that but, if they come back to $15ish, I would be willing to tie up a little cash in this one. – They are down here again!
3/22 – GOOG: "With earnings probably coming after expiration I think the May $310 puts for $10 coupled with the Apr $370s for $6.70" – ca-ching!
3/29 – Remember BIDU? Someone is bound to notice them again if Google keeps flying up and they've traded all the way down to $51 at a mere p/e of 276 (not a typo). Analysts are 100% sour on it to the point where 30% growth will give them a beat (was 100% last year). The only bad thing is you have to go way out to catch earnings so I like the Sept $50s for $7.60 and sell the $55s for $1.30 – $32 profit!

Posts of Note:

April

4/4 – very wrong on oil puts that day, but we made it out ok!
4/5 – DJ took a nasty downgrade by Merrill to sell. This is one of those situations where it may not go down but I would be shocked if it went up so I'll take the $40 puts for $1.05 and see how it goes for a couple of days. – finished at $36.
4/12 – ABX May $30s for .80 – hit $36 in 30 days!
4/14 – MRB @ $3.11, NAK @ $6.50 (I was starting to worry about the market).
4/18 – KO Jan '08 $40s for $4.90 – we sold calls against, should have kept them!
Also 4/18 – BAY got whacked when it made a big offer for SHR last month but now SHR is reporting a 21% rise in profits which is making Bayer look smarter. I like the Sep $40s for $2.55 – Sept. was just right!
4/20 – GOOG: "I expect this thing to go at least $450 in the morning but $490 and $500 is still a ways away so I will be glad to move to cash on most of my calls." – perfect selling on the initial excitement (high $450.72). Also, lots of good bull calls on oil!
4/27 – Abandon ship! …Bernanke speaks this morning and may say something to reassure the markets but, if he doesn't, we may see greater than 1% drops today across the board. As I said earlier in the week, it's a very bad sign when good earnings go unrewarded and now some poor reports from XOM, BAY, DCX and CBS are going to incur the wrath of the bears.

Posts of Note:

Google Update

May

5/2 – ATI is back on the move and the $75s have dropped to $1.15 – topped out at $83.
5/5 – GRP also looks double toppy after making an impressive recovery from a huge drop last week, a repeat would be amazing for the $50 puts at .65 – much better than expected!
Also 5/5 – Wowie! 5 straight weeks of gains!!! We are at 6 year highs across the board (except the Nasdaq, of course). The NYSE and the Russell 2000 are at all-time highs and that is a lot more significant than where the Dow is! $70 oil – no problem! $700 gold – no worries! Dollar down – charge it! Interest up – refinance! We've got war, we have disease, we have a deficit that equals the entire rest of the planet combined… We are gonna party like it's 1999!
Also 5/5 – PBR has a lot of production in Bolivia but the stock has been ignoring this problem and the $95 puts are far away but only .85 – even better!
5/10 – If the Nasdaq does not go up today I will be moving into an almost all cash position as it is likely to take the other indices down with the ship so let's be careful out there! – that was it for a while, really ugly downturn!
Also, 5/10 – PBR has earnings tomorrow and they will have a very tough time justifying the 300% rise in price since last year. I'm already crying over the $100 puts I bought for .80 (now .60) so I can't wholeheartedly recommend them but I will be adding to my position at this price – finished at $90!
5/11 – CAM $55 puts at $1.10 – very nice!
5/15 – FDX is right at the 50 dma of $115 after a big move down and if it doesn't consolidate here, we may see a big drop and the $115 puts are relatively cheap at $1.05 – nice 00% gain (you've got to be nimble in bad markets!).
5/22 – PBR (again) June $80s for $1.80 – 3rd time's still a charm!
5/25 – None of these trades should be taken seriously unless we finish above 1,260 on the SPX (not much to ask for) and over 2,180 on the Nasdaq (I could care less what the Dow does). Anything less than this is a very sad bounce so unless the markets look strong all day, I will be taking very few positions
5/30 – If that was a test we just failed! The Dow did break it's technical, it crossed 11,100 on the way down to 11,094. That puts us very close to a very terrible ten thousand level… The Nasdaq retreated right back to 2,164, 30 points above last week's low spike but just barely above the low settle of 2,160 below which we are sure to test 2,025, which is where I now want it as THAT may finally be enough to consolidate for a real rally.

June

6/1 – PD should have a down day as copper usually follows gold down. It has been rising along the 50 dma for the past week but could use a nice drop in order to consolidate for the next run. I like the $80 puts for $1.50 – bottomed at $72!
6/6 – Today is 6/6/06 for all you number people, maybe not the best omen! We can expect a bounce of sorts but it will be tough to pull out of the dive track the markets are currently on. I've been saying we will probably end up with a 10% correction and this is the ugly face of it while you're in the middle.
6/9 – Yet another week we will be glad to be getting out of. At best, we are establishing a lower range of trading for the majors with a 5 day slide in the Dow that took us from the 50 dma of 11,250 to the 200 dma of 10,870. This is essentially the same channel we were in during the 2nd and 3rd quarters of 2004 and 2005, although in both of those years we broke down below the 200 dma before establishing our range. So it would be a real bull victory if we could turn up here and head back to 11,200. It will also mean that global rotation is in play and money is moving back to the US markets but let's not get too excited yet!
6/15 – Wow, we avoided an end of day sell-off! Other than that, I'm not too excited yet – it will depend on whether or not we get serious follow through tomorrow and, even then, there is the danger that this is just an option expiration move and not a real rally. However, with the end of the quarter rapidly approaching, it is easy to construct a bull scenario where big money starts pouring in to dress up virtual portfolios in time to report profits in which case we may be in for a nice rally. I know it hurts not to jump right in but we still have 800 points of Dow upside in a "recovery" so missing the first 100 never going to hurt if the rally is real.
6/15 – PEP took a nice bounce off the 50 dma yesterday and I'm going to take a very small portion of Jul $60s at .70 as they should be able to ride up along a market recovery – finally calls start working again.
Also 6/15 – In a big market rally somebody's going to buy GM so I might pick up some $25s for .65 (a .25 premium) just looking for a very quick profit. – LOL, I can't believe I bought GM!
6/21 – OK so I called the top of the Nasdaq 15 minutes early in comments – other than that it was a pretty good day… The fact that I bought $39 QQQQ puts for .80 and again at .70 should tell you what I thought of today's action. The S&P did not make 1,260, pulling back 50% of today's gain by the close. The Dow could not hold 11,100 and the Nasdaq picked up "just" 30 points after a 10 point drop in the last hour.
6/26 – XOM $57.50s for $1.50 – very nice bottom call!
6/27 – Trader Mike pointed out yesterday that the Nasdaq has made what he calls a "Death Cross" ie. the 50 dma has fallen below the 200 dma. I have to agree that this is a very powerful signal from which few stocks recover. I'm just not positive that indices follow the same rule as an individual stock but you could easily make the argument that it is more so.
6/28 – MON had a down day but the $80s were down just a nickel to $1.60. The drop was caused by a morning announcement that they are spending $77M for 5 firms but I think the timing indicates management has a good plan in place – good stock in a bard market.
6/29 – So of course people are buying today. I was so surprised at the strength of the buying that I took a short position on the Dow though (sorry) right at the close because this seems like an overreaction to me and also because it partially covers the longs I let ride into the close.

Posts of Note:

Well, that's it for the first half of the year and that took a very long time to go over so, for now at least, I will refer you to the "Performance" section of the web-site where most of the significant posts from June one are already summarized.

I would like to fill it in with picks so we have a nice reference, perhaps next weekend though as I am booked up tomorrow and still need to get some plays ready for the new year!