A Modern-Day Depression

Add GDX Calls, RTN Puts

PLAY: Buy the GDX September 35 Calls (GBJ II) at market, good for the day. Place a protective stop limit at $2.25 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the RTN August 40 Puts (RTN TH) at market, good for the day. Place a protective stop limit at $0.95 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

The more I think about it, the more I’m convinced that we’re in the midst of a “modern-day depression.”

Nobody is prepared to admit as much, but when we look back 3-5 years from now, we’ll all agree that this is the closest we’ve ever been to a full-blown depression since the market of 1929 to 1932 (the Great Depression).

In fact, if you compare the depth and duration of the bear market of 1929 to ’32 to the current market environment (which I’m counting as 2007 to present), you’ll see that the similarities are quite striking. So, for the purposes of today’s LEAPS alert, we’re going to assume that we’re operating in a depression. Using this mindset, we’ll use historical data from the early 1930s to guide our trading strategies. This will be the basis for today’s two new LEAPS picks.

First off, it’s important to realize that not every business was clobbered from 1929 to 1932. Gold miners, for example, hit new highs during these troubled times. Cigar and tobacco companies averaged 33.4% during the Great Depression as well. That’s why companies like Reynolds American (RAI – NYSE) and Philip Morris International (PM – NYSE) could be viable LEAPS plays right now.

Reynolds American manufactures cigarettes in the United States, including brands such Camel, Kool, Pall Mall, Doral, Winston, Salen, Capri, Dunhill, and Natural American Spirit. They also carry an impressive forward annual dividend yield of 9.90%.

Philip Morris carries an equally impressive forward annual dividend yield of 6.20%, and I happen to like them better than RAI because they deal in markets both in and outside the United States. They market brands such as Philip Morris, Chesterfield, Parliament, Lark, and Virginia Slims in the U.S., the European Union, the Middle East, Africa, Asia, and Latin America. They also offer local brands that cater to the unique tastes of specific markets (including niche brands in Central Europe, Italy, Russia, Pakistan, Serbia, Mexico, the Czech Republic, and Slovakia).

Now, as you can see from the RAI and PM charts below, both stocks have moved noticeably lower in recent action. This performance derails the argument that these tobacco companies offer safety in times of a recession or depression. Therefore, we won’t offer a new LEAPS plays on either tobacco company just yet. I’ll keep a close eye on them going forward, and if I see any signs of price stabilization, we’ll jump into a longer-dated call play. But for now, hold off.

In the meantime, I do think that we have an immediate opportunity to play LEAPS calls on the best basket of gold companies your money can buy, which comes in the form of the Market Vectors Gold Miners ETF (GDX).

The GDX takes the top gold mining companies and puts them together in one simple-to-follow and liquid basket. Taken collectively, this group replicates the price and yield performance of the AMEX Gold Miners index, which is a non-diversified fund that is comprised of the following companies (ranked in order of their allocations):

Now, when it comes to this list of gold companies, here is what I find interesting…

Since the beginning of 2009, gold prices have moved from $850 up to $1,000, good for a 17% gain. See below:

But at the same time, the GDX has remained flat. As you can see from the GDX chart, this basket of gold stocks began the year at $32.50, which is where it currently trades for right now. As a result, I think we have an opportunity to take advantage of a “skew” in the prices of gold versus the prices of gold stocks.

Just to get back on par with gold prices, the GDX needs to gain 17%. But if the recession/depression lingers on for most of 2009 (which I think is a certainty), gold prices will re-test the $1,000 level before moving up to $1,300 — perhaps even more! If we get such a move, you better believe that investors will rush into gold stocks. And in turn, you’ll quickly see a “catch-up” effect take place as all the gold companies in the GDX match the performance of the benchmark metal. All things considered, I feel that the GDX will be a strong position for all of 2009. Therefore, as LEAPS play #1, let’s add GDX calls now!

PLAY: Buy the GDX September 35 Calls (GBJ II) at market, good for the day. Place a protective stop limit at $2.25 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

On the flipside, I think that a company like Raytheon (RTN – NYSE) is facing some serious trouble. As a major aerospace/defense company, RTH designs and manufacturers technology such as integrated defense systems, missile systems, and space and airborne systems. If you’ve followed any of President Obama’s latest speeches, then you’ll understand why large defense companies are due for some dramatic pullbacks in 2009.

This past Wednesday, for example, President Obama called for change at the Pentagon. Specifically, he wants to “eliminate waste.” If you read between the lines, that means no more billion-dollar contracts for high-tech warfare devices (most of which will probably never get used). This has spooked Wall Street, which has pushed the top defense/aerospace companies down to new 52-week lows. I expect this trend to continue for all of 2009. Therefore, let’s add RTN puts to capitalize on this downside move.

PLAY: Buy the RTN August 40 Puts (RTN TH) at market, good for the day. Place a protective stop limit at $0.95 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

M&T Bank July 30 Puts (MTB SU): After a momentary pop in the financial sector, this group is once again experiencing selling pressure. Therefore, it won’t be long before MTB hits new 52-week lows. Hold.

NYSE Euronext January 2010 15 Calls (YVX AC): A better-than-expected operating profit from fellow exchange company NASDAQ OMX (NDAQ – NASDAQ) pushed shares higher on Thursday. This bodes well for NYX moving forward. Hold.

FCX August 35 Calls (FCX HG): FCX continues to offer investors a strong investment in times of fear and uncertainty. As gold and copper prices continue moving up, FCX will rise as well. Hold.

AET July 30 Puts (AET SF): We locked in a powerful 119% gainer earlier this week, and the profits are not showing any signs of slowing down. The words “health care reform” directly translate into “lower profits for AET.” This doesn’t paint a strong picture for current AET shareholders. More pain ahead. Hold.

United States Oil Fund January 2010 30 Calls (KWW AD): Our decision to add to this position last week was well-timed, as the USO bounced nearly $5.00 off their lows. Was that the bottom? If yes, we’ll be in great shape. Hold.

DIA April 70 Puts (DIJ PR) & VIX May 60 Calls (VIX EN): Remain protected! The major market averages once again hit new 52-week lows, which indicates further weakness is ahead. By this time next week, the Dow could be in the 6,000 level. Therefore, make sure you own these two protective positions. Hold.

CELG July 55 Calls (LQH GK), TEVA January 2010 45 Calls (WTX AI), GERN January 2010 7.5 Calls (WNM AU), & DNA March 80 Calls (DWN CP): Over the last week, fear has found its way into the biotech sector, fueled by the threat of lower drug prices. As a result, we’ve seen a sizeable down-move in shares of CELG (noted below):

I personally think this down-move is completely over-blown, especially considering CELG’s cash position ($2.22 billion), lucrative products, and stacked pipeline. Nevertheless, we can’t fight against the markets, especially when our CELG calls triggered our stop loss. As a result, close out this position now — but be prepared to re-enter once CELG finds support. In terms of DNA and TEVA, they’re holding up a lot better. GERN needs to recover, but we have plenty of time to see that happen. Close CELG. Hold DNA, TEVA, and GERN.

Verizon April 30 Puts (VZ PF): VZ continues to languish below the 50-day and the 200-day moving averages. Maintain your puts for more selling pressure. Hold.

ADM January 2010 20 Calls (WRA AD): We have an interesting situation here. As you know, we originally entered these calls on November 10^th for $7.80. Then, we sold half of the position when they hit $11.80, which leaves us holding the remaining half. Now, as you can see below, if ADM finds support at the crossing of the 50-day and 200-day moving averages, we could see a powerful upside move. But on the same hand, if ADM fails at this level, shares could be in for a dramatic fall. As I write you today, these calls have traded as high as $10.20, which is still a nice 30.76% gain from our entry price. Given the risk/reward scenario, I’d like to lock in our remaining profits now. We can always re-enter calls on any forthcoming dips, but right now, let’s take our money and run.

PLAY: Sell your ADM January 2010 20 Calls (WRA AD) at market, good for the day.

Yellow Roadway January 2011 2.5 Calls (VYX AZ), AK Steel January 2010 15 Calls (YDF AC), & Southern Peru Copper January 2010 25 Calls (YPV AE): Our longer-term recovery plays have continued to move lower. But once again, that’s why we bought plenty of time. It might behoove us to “roll” our AKS and PCU positions from 2010 to 2011, just to give us one additional year of time to account for a recovery. If the time comes to make this move, you’ll be the first to know. Until then, maintain these plays. Hold.

Sincerely,