Playing A Global Recession

Plus a Speculative Play on UYG

PLAY: Buy the WYNN January 35 Puts (UWY MG) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the UYG June 8 Calls (UUF FH) at market, good for the day. Place a protective stop limit at $1.00 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

In last week’s alert, we continued to play the downside market bias by adding puts on AutoZone (AZO – NYSE). At the same time, we also took advantage of some ridiculously low price multiples by adding January 2010 calls on oil refiner Tesoro (TSO – NYSE).

Taken together, these two positions allow you to capitalize on the current market downside — while also using some of today’s bludgeoned stock premiums to establish longer-term positions on companies that will eventually recover (and recover quite strongly, I might add).

In the end, this tactical strategy puts you in a position to lock in profits on both near-term and the long-term directional moves. In this market environment, I think this near-term put/long-term call tactic is the safest and most well-structured strategy we can deploy. Therefore, we’ll continue this put/call attack in today’s newest LEAPS alert. So let’s get started!

Starting on the put side, I think we can expect much more downside selling pressure on shares of Wynn Resorts (WYNN – NASDAQ). Back in October of 2007, both WYNN and Las Vegas Sands (LVS – NYSE) were hitting on all cylinders. Both stocks traded around $150.00 per share, and since both had significant operations in Las Vegas and Macau, they pretty much traded in tandem with one another. If LVS was up $5.00, for example, WYNN was up $5.00. And so forth. But those were the good old days. Right now, both stocks face major obstacles. And as you’ll see, this should lead to continued downside for WYNN.

Two of the biggest obstacles facing Macau-based casino stocks are the credit crisis and the deepening global recession. The old adage is that casinos can withstand recessions, but the numbers don’t support this saying. For example, gross casino gaming revenue in China fell 0.8% last month, the first year-over-year drop since January 2006. This is a troubling trend that could get even worse. You see, the bigger problem stems from new travel restrictions that Beijing just implemented on visitors from the Chinese mainland. It’s now a lot more difficult to get into Macau. And as you can imagine, if potential gamblers cannot get into Macau, this poses a serious threat to Macau’s growth. As a result, any price premiums that were once factored into Macau-based casino stocks are quickly evaporating.

Now here’s what I find interesting…

If you look at a comparison chart of LVS and WYNN (noted below), you’ll see that the premium evaporation has severely reduced shares of LVS. But for whatever reason, WYNN has not moved down in the same manner. LVS currently trades for $7.00 per share while WYNN trades for $39.00 per share. I think that WYNN will soon follow the path of LVS and trade in the mid-teens.

To my eye, shares of WYNN could move down to $20.00 a share, especially when the company reports earnings on October 30^th. Therefore, let’s get positioned to profit off this downside using January 35 puts. Here’s the play…

PLAY: Buy the WYNN January 35 Puts (UWY MG) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

On the flipside of the coin, I think we have a remarkable (and super cheap) opportunity to add June 2009 calls on Ultra Financials ProShares (UYG – AMEX).

The UYG is a basket of financial companies that moves at a rate of twice the daily performance of the Dow Jones Financial Index, and includes names like American Express, Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, US Bankcorp, and Wells Fargo. Therefore, if this group collectively moves up 3%, the UYG moves up 6%. And if this group moves down 3%, the UYG moves down 6%.

Before you say I’m nuts for taking an upside position on the financial sector, consider the current level of the UYG index and the current price of the UYG January 2010 calls.

As you can see from the 1-year UYG chart below, this basket of financial companies has moved from $70.00 in October of 2007 down to current levels around $8.00. No matter how you look at it, this is a historic and unprecedented downside move — most of which was driven by fear, panic, and uncertainty.

Now I admit, the financial crisis has crippled the global marketplace in ways we’ve never seen before. But the entire world has not only recognized that the system is broken, but dramatic measures are now being put in place to fix it. Therefore, if we witness any sort of recovery over the next 6 to 8 months, buying call options on UYG at these super-low values could pay off handsomely. At these levels, I think you’ll agree that this play makes a lot of sense. The risk versus reward is now squarely in your favor, so let’s establish a small position now!

PLAY: Buy the UYG June 8 Calls (UUF FH) at market, good for the day. Place a protective stop limit at $1.00 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

FUTURE PLAY CANDIDATES

Biotech HOLDRs (BBH – AMEX): Very quietly, some of the best biotech stocks have been moving higher, and the BBH is a nice way to play the entire group. The top ten holdings in the BBH include Affymetrix, Biogen Idec, Genentech, Genzyme, Gilead Sciences, and Sepracor. As you can see below, this sector group appears to have bottomed out.

Additional Biotech Picks: Three stocks that are NOT included in the BBH basket are Amgen (AMGN – NASDAQ), Celgene (CELG – NASDAQ), and Abbott Laboratories (ABT – NYSE). In my view, all of them represent strong upside call play candidates. Both Amgen and Celgene, for example, reported powerful earnings this past week. Abbott Labs has a strong HIV division, and management is aggressively buying back shares at current levels. All of them look like powerful upside call candidates.

Teva Pharmaceutical (TEVA – NYSE): Sticking with the healthcare theme, generic drug maker TEVA also looks good. Very good. In fact, TEVA could be the best healthcare play available right now. Think about it. People need drugs no matter if we’re in a recession or not. But, to cut the cost of getting those drugs, you could see a dramatic move over to generics. TEVA is in prime position to benefit off this trend.

Leap Wireless (LEAP – NASDAQ): Over on the put side, shares of LEAP could be on the verge of setting new lows. The company provides digital wireless services in the United States under the “Cricket” and “Jump” brand names. From a chart perspective, LEAP could easily set new 52-week lows soon.

UPDATES

AutoZone January 100 Puts (AZO MT): Our AZO puts have traded as high as $11.00 this week, good for a quick 22.22% gainer. I continue to feel that AZO will follow the same path as Sears, and that means shares are headed to $60.00. Hold your puts for more gains. Hold.

Tesoro January 2011 5 Calls (ZGC AA): Our super-long dated calls traded as high as $8.10 this week, good for a modest 8% gainer. This is a great position to have in our back pockets. Over a 24-month time horizon, this could be an explosive winner. Hold.

Zale February 20 Puts (ZLC ND): Amazon.com reported earnings this week, and the numbers were a disappointment. In response, shares of AMZN sold off hard, and it made me think to myself, “if Amazon.com can’t make it in this retail environment, then nobody can.” Our ZLC puts are approaching the 50% profit level, so be sure to sell half once they achieve the $8.10 price target. Sell half at 50%.

Toyota Motors January 65 Puts (TM MM): I’m hearing reports that Toyota’s show-rooms are absolutely vacant. No buyers in sight. This cannot paint a strong picture going into January. Maintain your downside bias. Hold.

American Capital May 25 Calls (DQS EE): This position is now a mid-2009 recovery play. They’ll be a major beneficiary of any improvements in the credit markets. Although the calls are now trading at less than $1.00, I will continue to monitor this position. As I’ve said, I feel that ACAS will come out of the credit mess a winner. Hold.

Excel Maritime March 15 Calls (EKN CC): Here’s another mid-2009 recovery play. We locked in half of our profits, which leaves us holding the remaining half for a recovery in the global shipping market. Hold.

Apex Silver Mines January 2010 2.5 Calls (YSB AZ): Here’s another longer-dated position with major upside potential. With time on our side, we can play any strength in the under-valued silver market. 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): Shares of metals remain volatile. In a rather strange move, shares of ABX hit a new 52-week low despite a market sell-off. In past 2008 sell-offs, investors flocked into gold and gold stocks (like ABX) as a safe haven. But for whatever reason, this hasn’t happened here in October. I feel this situation will correct itself very soon. We have January 2010 expirations on both PCU and ABX, so hold each position. As for UNG, we only have until January of 2008. Since time is running out, let’s go ahead and close off this position now. Hold ABX and PCU. Sell UNG.

America Movil January 2009 70 Calls (AMX AN), Petroleo Brasileiro January 90 Calls (PMJ AR), & Entergy January 140 Calls (ODF AH): Still no signs of life for these three. Since they’re at such nominal values, we might as well hold for a miracle. Hold.

Sincerely,