Fed Rescue: Will It Last?

Add CCI and PCLN Puts

“Troubles in the sub-prime sector seem unlikely to seriously spill over to the broader economy or the financial system.”

- Federal Reserve Chairman Ben Bernanke (June 5^th 2007 during a speech from Cape Town, South Africa)

PLAY #1: Buy the CCI April 35 Puts (CCI PG) at or under $4.00, good for the day. Place a protective stop limit at $2.10, and implement our scaled selling technique as your position achieves gains of 50% (and greater).

PLAY #2: Buy the PCLN January 80 Puts (PUZ MP) at or under $9.00, good for the day. Place a protective stop limit at $5.10, and implement our scaled selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

With all of the momentous events that unfolded this week, I just had to share with you the quote from Ben Bernanke (noted above). In my view, this single quote will go down as the most grossly negligent financial assessment in the history of the Federal Reserve.

If you’ll notice, the date of the quote was June 5^th 2007. That means that Ben Bernanke was fielding questions about the sub-prime situation for over 15 months. Perhaps even longer. And through it all, he did absolutely nothing to address it.

As you know, this non-action lead directly into the tremendous events that occurred this week. It’s an absolutely disgusting display of financial irresponsibility, if you ask me. But through it all, Treasury Secretary Hank Paulson has maintained that, “The banking system is safe and sound.” Well, let’s break this down and see for ourselves.

As you know, the FDIC insures individual accounts up to $100,000. Right now, the FDIC fund has about $50 billion in their coffers to “insure” about $1 trillion in assets at the nation’s financial institutions. That means the FDIC is “guaranteeing” the nation $100 while they only have $5.00 in their account. Unless Congress recapitalizes the FDIC, they’re going to run out of money!

So in my view, Americans are completely justified to be worried. After all, we believed Paulson and Bernanke over the last 15 months when they assured us that everything was safe and sound. Well guess what? Things are not safe and sound. We have real problems and real concerns. And that’s why such extraordinary measures had to be taken on Friday.

As you know, the U.S. government introduced a plan to buy back the bad assets from banks, and the Treasury Department simultaneously introduced an insurance program for money market funds. But don’t be fooled. The substantial portion of Friday’s upside move came as a direct result of the Securities and Exchange Commission, which introduced a temporary ban on financial stock short-selling.

This is pure market manipulation, no bones about it.

I suppose you can orchestrate any sort of directional move if you change the rules of the game. This resulted in a market that moved 800 points over two trading sessions, and in my view this upside push was too much too fast. To support this viewpoint, just look at the chart of the Dow. As you can see, this two-day blastoff was only able to push the Dow back up to its 50-day moving average (noted below).

As you know, this has been a level of resistance all year long. Therefore, I personally think that the markets will give back some of these incredible advances next week. As a result, I have two (2) new LEAPS positions to help you profit if the market pulls back over the next few weeks.

Don’t get me wrong. I’m glad to see the markets moving higher. But as you’ll see, the two positions I’m issuing you today look weak no matter if the market is rallying or falling. In other words, I think the two put plays presented today are due for a fall in any market conditions — good or bad.

To isolate these opportunities, I ran a scan for stocks trading on the NASDAQ 100, S&P 500, and Dow that carried a forward P/E greater than or equal to 50. After all, in a market environment like this, no stock can maintain such a sky-high price multiple.

By definition, a forward P/E is the measure of the price-to-earnings ratio (P/E) using forecasted earnings for the P/E calculation. This offers you a good idea of where the stock will be over the next 12 months.

For example, if a company’s earnings are expected to grow in the future, the estimated P/E will be lower than the current P/E. Therefore, as a forward P/E ratio gets larger and larger, this tells you that a particular company is not performing, making them candidates for lower stock prices over the near term time horizon.

So in this spirit, the stocks listed below (in my view) are currently some of the most over-valued large-cap companies on Wall Street. Whether or not to short them, via put options, will come down to the current stock charts. Analysis is below for each:

Sears Holdings Corporation (SHLD – NASDAQ), Forward P/E: 51.59

The struggling retailer operates 1,382 Kmart stores, 860 Sears stores, and 1,150 specialty stores in the United States. The stock chart indicates a breakout above the 200-day moving average, which leads me to shy away from this play.

Weyerhaeuser (WY – NYSE), Forward P/E: 73.79

The timber-growing, harvesting, manufacturing, and distribution company manages 6.4 million acres of growing land for the forest products industry. The failure to hold above the 200-day moving average could support a bearish view, but the next move is a coin-flip at best. Therefore, when the odds are not squarely in our favor, I look for better alternatives.

Lamar Advertising (LAMR – NASDAQ), Forward P/E: 346.20

Lamar owns and operates 151,000 billboard advertising displays in 44 states, Canada, and Puerto Rico. They also operate 100,000 logo advertising displays and 28,500 transit advertising displays. The whopping P/E ratio indicates a slow-down in advertising spending, which makes LAMR a strong put-play candidate. Looking at the chart, today’s sizable market up-move appears unsustainable for LAMR, especially since the stock failed to maintain levels above the 200-day moving average. That makes LAMR a good put candidate, but not great one. We’ll keep looking.

Salesforce.com (CRM – NASDAQ), Forward P/E: 81.66

You’re familiar with these guys. After all, we’ve already profited off CRM puts. As you know, CRM provides on-demand customer relationship management (CRM) services to businesses and industries worldwide, and shares continue to look weak going forward. Look for big-time resistance at the crossing of the 50-day and the 200-day moving averages. This could be a strong put play if the stock rallies another $5.00 higher.

The St. Joe Company (JOE – NYSE), Forward P/E: 88.41

The real estate development company in Florida owned 700,000 acres of land concentrated primarily in northwest Florida and 310,000 acres in the Gulf of Mexico. What exactly they’ll do with this raw land during this housing down-turn is beyond me. Until something happens, it’s dead money, making JOE a strong put-play candidate. Unfortunately, the breakout in the JOE chart doesn’t support this view, so we’ll pass.

Crown Castle International (CCI – NYSE), Forward P/E: 387.88

Another whopping P/E ratio is certainly unsustainable in this market. CCIowns, leases, or manages 23,800 towers for wireless communication companies in the United States and Australia. And as you can see from the chart, the stock has failed to hold the line at both the 50-day and the 200-day moving averages. That means we have an overvalued stock combined with a bearish chart formation. This, my friends, is the play. All things considered, I think CCI offers us the perfect downside play, so let’s go ahead and add CCI puts now!

PLAY #1: Buy the CCI April 35 Puts (CCI PG) at or under $4.00, good for the day. Place a protective stop limit at $2.10, and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

As the second order of business, I also think we have a strong opportunity to play put options on Priceline.com (PCLN – NASDAQ).

Starting with the chart, today’s strong upside move has brought PCLN right back up to its 50-day moving average — which has acted as a very strong level of resistance. In my view, this offers us a prime opportunity to add puts.

After all, PCLN operates as an online travel company in the United States and Europe. They provide airline tickets, hotel rooms, car rentals, vacation packages, cruises, and destination services. Now, their forward P/E multiple of 11.60 is reasonable, but I think the play here is the fact that PCLN (once the industry leader) is quickly losing market share to competing online travel firms.

You see, today’s economic factors are making consumers more price-conscious than ever before. As a result, Online Travel Agencies (OTAs) like PCLN must have a strong online presence so that customers can book through their Web site. Unfortunately for PCLN, they’re losing this battle.

You see, when it comes to the best online travel companies, Expedia (EXPE – NASDAQ) is by far the best. According to Web-traffic statistics, one out of every four online travelers clicks on EXPE’s Web site before any other site. This is a tremendous market share advantage.

After EXPE, Travelocity and Orbitz rank #2 and #3 respectively, which means that Priceline has now moved into the fourth position. This is not good news for PCLN shareholders, and that’s why I feel PCLN is due for a fall. Therefore, let’s once again use Friday’s up-tick as a prime opportunity to add PCLN puts to our LEAPS ledger. Here’s the play…

PLAY #2: Buy the PCLN January 80 Puts (PUZ MP) at or under $9.00, good for the day. Place a protective stop limit at $5.10, and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

General Mills April 70 Calls (GIS DN): Our “Back to Basics” strategy has worked beautifully, as we locked in a 50% gain on half of our position. Continue to hold the second half of the position for more upside. Hold.

Wells Fargo January 2009 30 Puts (WFC MF): As I mentioned above, the SEC has now banned investors from selling 799 financial stocks, including WFC. This offered a momentary upside pop in shares of WFC, but I’m not ready to give up on this position. After all, the short-selling ban currently runs through October 2^nd. If investors are once again allowed to short financials on this day, I think we’ll see a substantial fall. Therefore, maintain your WFC puts. Hold.

Southern Peru Copper January 2010 25 Calls (YPV AE), Barrick Gold January 2010 40 Calls (WRX AH) & United States Natural Gas Fund January 40 Calls (UNG AN): We’ve seen a fantastic come-back on all three of these positions, especially as gold had its single biggest one-day gain in history. As I’ve mentioned, these are three strong plays that we bough on a tremendous dip. I still like all three of them going forward. Hold.

CBOE Volatility Index October 25 Calls (VIX JE): Tremendous market volatility helped us to lock in 42% profits on half of the position. Continue to hold the second half for more upside. Hold.

Valero Energy January 35 Calls (VLO AG): With oil prices settling in at $100.00 per barrel, I continue to like the profit potential of oil refiners. Hold.

America Movil January 2009 70 Calls (AMX AN), Petroleo Brasileiro January 90 Calls (PMJ AR) & Entergy January 140 Calls (ODF AH): It might sound absurd, but these three positions just might begin a strong comeback. At current levels, let’s hold for a miracle recovery. Hold.

Sincerely,