Two Powerful New Trends

Add UNG and IBKR Calls

PLAY: Buy the UNG October 15 Calls (UNE JO) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the IBKR September 15 Calls (QBO IC) at market, good for the day. Place a protective stop limit at $0.80 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

What a week! As you probably know, we witnessed a stunning move in nearly all of our open LEAPS plays, sparked by Wednesday’s Fed announcement that they would buy up to $300 billion in longer-term Treasuries over the next six months. At the same time, in an attempt to get credit flowing in the economy, they said they’d also increase their purchases of mortgage-backed securities and agency debt.

As a result, the U.S. dollar got slaughtered, while commodities (such as gold, silver, copper, and oil) shot aggressively higher. This pushed a number of our LEAPS positions higher. In fact, we were positioned perfectly to capitalize on this week’s events. And best of all, the upside catalyst is just beginning! So today, we’ll continue our successful strategy by adding two more LEAPS plays to our ledger that’ll extend this powerful new trend. So let’s begin!

The first play comes in the form of the United States Natural Gas Fund (UNG – NYSE). Similar to our play on the United States Oil Fund (USO – NYSE), the UNG invests in NYMEX natural gas futures in an effort to replicate the daily price performance of natural gas. As you’ll see below, oil prices have started to recover, but natural gas is still stuck in a downside trend. But I firmly believe that natural gas will help the United States become a self-reliant energy producer. As a result, the use of natural gas is set to rise.

If you look closely, you’ll notice that natural gas has just engaged in an unprecedented fall. It’s down 30% this year alone. It currently trades around $3.90 per million British thermal units (btu), which is way down from the record-high of $13.694/btu set on July 2^nd 2008. That’s a 72% fall! As a result, the number of natural gas exploration rigs in the United States has fallen from 1,606 in September to only 884 right now.

Now here’s the thing: Since many energy companies have idled their rigs, we’re left with severely reduced natural gas production. But if the economy begins to recover, we’ll witness a major supply crunch, which could push prices aggressively higher.

In fact, futures traders are already anticipating a sizable price surge. Case in point, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract. To me, this signals that an upside move could occur at anytime. In fact, I wouldn’t be surprised if natural gas prices double by the end of 2009.

Now, since the cost of drilling and servicing rigs is double what it was just four years ago, and natural gas prices are currently down over 70% from their July peak, it’s easy to understand why companies are idling their rigs. That’s why adding an upside position today is so favorable. You see, this situation will make the snap-back rally in natural gas even more powerful. As a result, our first LEAPS pick this week will be adding longer-dated calls on the United States Natural Gas Fund (UNG – NYSE), which acts as a pure play on higher natural gas prices going forward.

PLAY: Buy the UNG October 15 Calls (UNE JO) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Today’s second LEAPS pick capitalizes on a trend that I feel will gain major traction in 2009 and beyond. This trend focuses on individual investors across the world finally taking charge and managing their own finances. This will spark a major switch from full-service brokerages to self-directed discount brokers.

It’s easy to see that this trend is already gaining major momentum. Brokers like Bear Stearns and Lehman Brothers, for example, have already gone belly up. At the same time, investors have pulled over $194 billion out of mutual funds. That’s quite substantial.

Not only that, but a survey of wealthy Americans (those with at least $1 million in investable assets) showed that over 75% use the Internet to gather financial information. Plus, over 50% use the Internet for stock trading and banking transactions. Add it all up, and this makes a strong case for Interactive Brokers Group (IBKR – NASDAQ).

You see, Interactive Brokers it a low-cost online broker that appeals to high net-worth individuals. Of all the brokers, they have a dominant international position, which means they offer the widest amount of global investing possibilities. Specifically, they’re an automated electronic market-maker that routes orders and executes trades in 80 electronic exchanges worldwide. IBKR provides bid and offer quotations on approximately 577,000 securities and futures products such as stocks, options, futures, foreign exchange, bonds, and mutual funds. And amazingly, they added $100 million in new customer assets in 2008. This is strong proof that investors are ditching their money manages and opening new accounts with IBKR, where they can make their own investing decisions.

If you look at IBKR’s valuation measures, you’ll see why I’m so bullish. They currently have a $603 million market cap and a forward P/E ratio of 6.47. That’s very cheap. And get this: Their income statement shows $1.85 billion in revenues, with quarterly revenue growth of 8%. Break this down, and we’re talking a whopping $45.75 in revenue per share. Considering that IBKR currently trades for only $15.00 per share, this is a very appealing investing opportunity. In other words, you’re currently getting $45 in revenue per share for the current price of only $15.00. Not bad!

What’s more, their balance sheet shows $23.68 billon in cash versus $651 million in debt, which is much more attractive than competitors like Thinkorswim Group (SWIM – NASDAQ) or OptionsXpress Holdings (OXPS – NASDAQ). And since 99.80% of IBKR’s shares are held by institutions, it’s not likely that you’ll see any dramatic selling pressure in the near future. Combine the new do-it-yourself investing trend with IBKR’s remarkable fundamental position, and we have all the makings for a strong upside move. Therefore, let’s add IBKR calls to our LEAPS ledger now!

PLAY: Buy the IBKR September 15 Calls (QBO IC) at market, good for the day. Place a protective stop limit at $0.80 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

SU September 25 Calls (SU IE): Like I mentioned last week, a rise in oil prices will act as a powerful upside trigger for shares of SU. We’re currently up 19% after the first week, so maintain these calls for more upside. Hold.

FAS January 2011 3 Calls (OGF AC): We fully utilized the recent market rebound to lock in half of our FAS profits at the 50% level. Nice trading! Now, we’re left holding the reaming half of the position. The plan here is to add more calls on any forthcoming dips. When it’s time to move, you’ll be the first to know. Hold.

SLW September 5 Calls (SLW IA), AUY January 7.5 Calls (WNZ AU), & GDX September 35 Calls (GBJ II): All I can say is, “Wow!” The Fed’s newest $300 billion investment in longer-term Treasuries blasted gold and silver prices aggressively higher, which is exactly why we got positioned in the three LEAPS plays above. This could be the beginning of a very, very nice upside move. In fact, we already locked in a 50% gain on our SLW calls on Friday, so we’re beginning to see the returns come in. Remain positioned! Also adding fuel to the fire is news from Bloomberg, reporting that gold miners should earn between 6% and 10% more in 2009 than in 2008. Everything looks good here. Hold.

M&T Bank July 30 Puts (MTB SU): I’m not convinced that the financial mess is over. Therefore, I’d like to remain positioned in a select group of banking stocks (like MTB) that still have considerable room to fall. Now, I understand that we’re also playing FAS calls, but FAS includes strong companies such as Goldman Sachs and JP Morgan. MTB is not included in this grouping. Therefore, we have a pseudo long/short position in the financial sector, playing the best of breed against the weaker names.

In terms of specific banking news, I’d like you to maintain this long/short position because the Federal Deposit Insurance Corp.’s bank insurance fund continues to get depleted at an alarming rate. As a result, this has forced the FDIC to charge banks an extra 20 basis points in fees, which will cut into their profitability at a time when they can least afford it. In my view, this signals more trouble ahead. Remember, 42 banks have failed since the beginning of 2008, and 17 banks have already failed in 2009! Considering that 252 banks still find themselves on the “Problem List,” the bearishness is far from over. Therefore, I’d like to use last week’s up-tick in the financial sector to add to our MTB puts. If we see shares dip back under the 50-day moving average, we’ll shoot into the profit zone very quickly. Let’s play this down move by averaging down on our MTB puts now!

PLAY: Buy more M&T Bank July 30 Puts (MTB SU) at market, good for the day.

NYSE Euronext January 2010 15 Calls (YVX AC): A breakout move above $20.00 could set a strong tone for a powerful upside move. Remain positioned to the upside. Hold.

United States Oil Fund January 2010 30 Calls (KWW AD): Oil prices continue to rally, sparked by Wednesday’s comments out of the Fed. It sure looks like we picked a great entry price on these calls, which are now up over 30%. Hold. (I expect to see a similar chart pattern on today’s UNG pick shortly!)

GERN January 2010 7.5 Calls (WNM AU): The powerful upside potential of stem cell leader Geron remains in tact. Hold.

VIX May 60 Calls (VIX EN): I’m not going to lie — the current levels of the VIX really concern me.With volatility readings so low, this indicates a high level of complacency (or even comfort) with the current market. The moment investors get too complacent, the bears come in and spook the markets, which could spark another powerful downside market move. If this occurs, fear will once again come back into the markets which could blast the VIX higher. As a result, I want us all to remain positioned to the upside. Hold.

TEVA January 2010 45 Calls (WTX AI): It looks like Teva wants to re-test the strong support level at $44.00. From a chart perspective, this level should certainly hold. Therefore, maintain your calls for a pending bounce. Hold.

PCU January 2011 15 Calls (XBW AC): Copper and gold prices are tremendous beneficiaries of the Fed’s announcement this week, pushing shares of PCU higher. We’re currently up 22% on this play, so maintain your calls for more upside. Hold.

Yellow Roadway January 2011 2.5 Calls (VYX AZ): If YRCW can establish a support point at the 50-day moving average, then we’ll be in great shape. In fact, if $3.00 proves to be a level of support, we could see shares quickly move up to $6.00. We’ll certainly want to participate in this move! Hold.

Sincerely,