Playing the Fed’s Ripple-Effect

Add UDN and FXI Calls

“If you spent a million dollars a day, every single day since Jesus was born, you would still be several hundred billion dollars short of having spent one trillion.”

- American Issues Project

PLAY: Buy the UDN September 25 Calls (UDN IE) at market, good for the day. Place a protective stop limit at $0.70 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the FXI January 30 Calls (YOF AD) at market, good for the day. Place a protective stop limit at $2.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

With our federal government pumping unprecedented amounts of money into Treasuries, stimulus packages, and bailouts, I feel that we’re becoming numb to the vast sums of money that we’re hearing about on a daily basis.

So, in an effort to put things into proper perspective, I hope that you find the above quote as shocking as I did. But more importantly, I hope that it helps to explain just how much money we’re now talking about. When you consider that we owe the rest of the world around $2.7 trillion (and growing!), I feel that the point becomes crystal clear.

Last week, for example, the Federal Reserve declared that it would buy $300 billion worth of long-term U.S. Treasuries — plus $1.25 trillion of government agency debt (such as Fannie Mae and Freddie Mac). This might be last week’s news, but don’t kid yourself. The ripple-effects of these actions now offer us a number of powerful longer-term investing plays, two of which we’ll explore today. So let’s get started.

First and foremost, it’s now clear that Ben Bernanke is actively trying to drive the value of the U.S. dollar down. After all, as the Fed prints trillions of new dollars, the value of China and Japan’s debt holdings goes down. As a prime example, the Federal Reserve purposely knocked the value of the dollar down 5% last week — which basically eliminated 24 months worth of interest income in one fell swoop.

When you think about it, the Federal Reserve probably has more power and influence over the global markets right now than anytime before in history. And if they want the U.S. dollar to move down, then who are we to fight against them? This downside move on the U.S. dollar will be the catalyst for today’s first new LEAPS play. Specifically, our first new pick will be upside calls on the PowerShares DB US Dollar Index Bearish (UDN – NYSE).

The UDN allows non-currency traders the ability to easily profit from the inevitable decline in the U.S. dollar. It’s an index comprised solely of short futures contracts, designed to replicate the performance of being short the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. For example, if the U.S. dollar loses value compared to these other currencies, then the UDN moves up in value.

You can clearly see this pattern reflected in the explosive upside move that occurred last week. But ever since shooting aggressively above the 50-day moving average, the UDN has been drifting back down. I think this offers us an ideal opportunity to buy into the dip in advance of the next powerful up-move. With the Fed pretty transparent about their intentions to push the U.S. dollar lower, let’s use UDN calls to profit off this trend. Here’s the play…

PLAY: Buy the UDN September 25 Calls (UDN IE) at market, good for the day. Place a protective stop limit at $0.70 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

The second play revolves around the consequences of the Fed’s desire to push the U.S. dollar lower.

You see, China holds more U.S. debt than anyone else on the globe — and they’re fully aware of the recent U.S. efforts to devalue our way out of our financial mess. In response, China is getting smart. They’ve now ear-marked $500 billion to get themselves positioned in some of the best oil, commodity, and metals companies in the world. In other words, China is now buying up natural resources and commodities throughout the world. In my view, this forward-thinking approach will put their country in a much better position (and help their economy recover) far quicker than what we experience here in the United States. Case in point, the Washington Post just outlined some of China’s recent dealings. Take one glance at the list below, and you’ll see what I mean:

• On February 12^th, China’s state-owned metals giant Chinalco signed a $19.5 billion deal with Australia’s Rio Tinto that could double its stake in the world’s second largest mining company.
• On February 17^th and 18^th, China National Petroleum signed separate agreements with Russia and Venezuela, where China would provide $25 billion and in loans in exchange for long-term commitments to supply oil.
• On February 19^th, China Development Bank struck a deal with Brazilian oil giant Petrobras, where they’d loan PBR $10 billion in exchange for future oil supply.

In just the month of February, China has locked up major deals within the metals and oil sectors. What’s more, Iran recently announced that they signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed which is believed to hold 8% of the world’s natural gas reserves.

Throw it all together, and China is tightening their grip on commodities around the world — all while the U.S. is going deeper and deeper into debt. Therefore, as a way to get positioned in a country that’s making all the right moves, I’d like to add longer-dated calls on iShares FTSE/Xinhua China 25 Index (FXI – NYSE).

The FXI invests 90% of its assets in 25 of the largest and most liquid Chinese companies, including companies like the Bank of China, China Life Insurance, China Mobile, China Shenhua Energy, China Telecom, and Petrochina.

If you look at the daily FXI chart (shown above), you’ll see that the index has recently had a nice upside run. But if you compare this chart with the weekly FXI chart (shown below), you’ll see that the upside potential is far from over. That’s why I’m expecting the FXI to break out above the crossing of the 50-day and the 200-day moving averages, which occurs around the $35.00 level. Let’s get positioned to profit off this breakout move now.

PLAY: Buy the FXI January 30 Calls (YOF AD) at market, good for the day. Place a protective stop limit at $2.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

UNG October 15 Calls (UNE JO): A pullback in the commodity sector has pushed the UNG to a new 52-week low. I think this is a rock-bottom price for natural gas. If prices remain this low, I plan to add to this position. Until then, maintain your calls. Hold.

IBKR September 15 Calls (QBO IC): The amount of money outflow from mutual funds continues at alarming rates. Last year, $245 billion flowed out. In the two weeks ending March 9^th, $55 billion more was taken out. Where is this money going? In my view, a portion of it is being deposited into new accounts at Interactive Brokers, allowing investors to make their own decisions. This is a very powerful trend that should continue all year long. Case in point, we’re currently up 37% on the IBKR calls we entered last week. Be sure to lock in half of your profits at the 50% level. Sell half at 50%.

SU September 25 Calls (SU IE): On Monday, Suncor Energy announced that they’ll acquire Petro-Canada for $19.12 billion Canadian dollars (USD $15.5 billion). This move unites two of Canada’s biggest oil companies. In a note to clients on Tuesday, Raymond James noted that Suncor could emerge as an oil-sands superpower if it divests non-core assets after this acquisition. Considering President Obama’s plan to work more heavily with Canada, I feel this move sets SU up to meet the upcoming demand head-on. I continue to like this position. Hold.

FAS January 2011 3 Calls (OGF AC): This 3x financial play offers us the very best way to play the recent market bounce. We entered these calls for $4.00 and we sold half of our position at $6.00, locking in a nice 50% gainer. This leaves us holding the remaining half of the position, which is currently showing a 32% return. Since prices have moved off the recent highs, let’s go ahead and lock in the remainder of our profits now. We can always re-enter these calls on a pullback. Considering that the FAS is hitting resistance at the 50-day moving average, the safe play here is locking in the remainder of our profits now. Lock in remaining profits. Sell!

SLW September 5 Calls (SLW IA), AUY January 7.5 Calls (WNZ AU), & GDX September 35 Calls (GBJ II): While gold prices dipped, all three of our metals-related calls maintained their value. This sets a really nice tone going forward, especially if gold and silver can establish a support level and move higher. By the end of April, I expect to see gold prices above $1,000. Barron’s editor Alan Abelson summed it up this week, when he wrote, “political tension and economic misery are also great stimulants for gold and, said to relate, there’s no shortage of either just about anywhere on the globe.” If you look at the gold chart below, you’ll see that we’re currently hitting a very strong support point. Hold.

M&T Bank July 30 Puts (MTB SU): If the financial sector does pull back, as I expect, then MTB is in for a world of hurt. In fact, a quick look at the value of MTB puts shows you that they’re all very expensive. This tells me that specialists at the MTB options pit are purposely pricing these puts very high in anticipation of a coming pullback. If the major market averages move lower, I expect MTB to fall precipitously. Hold.

NYSE Euronext January 2010 15 Calls (YVX AC): If NYX can hold these levels above the 50-day moving average, we’ll be in prime position for a powerful winner. Hold.

USO January 2010 30 Calls (KWW AD): Oil prices continue to move higher each day, which is nothing but good news for our calls. I continue to feel like we pegged an ideal entry point, which means we have plenty more upside ahead. Hold.

GERN January 2010 7.5 Calls (WNM AU): A nice up-tick late in the week could spark another breakout move about the 200-day moving average. I continue to believe that this speculative yet powerful stem-cell play could trade up to $10.00. Hold.

VIX May 60 Calls (VIX EN): If the markets move lower, the VIX will absolutely blast off. Over the last two weeks, the level of market fear has gotten very depressed, which has pushed the VIX lower. All that can change very quickly. Make sure you’re prepared. Hold.

TEVA January 2010 45 Calls (WTX AI): Not too much news from TEVA this week, which has basically kept shares at their current levels. With the stock above both its 50-day and 200-day moving averages, I would expect a breakout move above $46.00 soon. Hold.

PCU January 2011 15 Calls (XBW AC): With copper prices at high levels that we haven’t seen since last November, shares of PCU continue to move higher. Hold.

YRCW January 2011 2.5 Calls (VYX AZ): A major rebound in the transportation sector has pushed these calls up to $3.60, good for a 13.56% gainer. Considering where they were trading two weeks ago, this is quite a recovery! If YRCW can hold at these levels, we’ll be in great shape. After all, of all the transport stocks, YRCW has gotten clobbered the most. Therefore, when it comes to a snap-back rally, they have the ability to pop back in a very aggressive manner. Hold.

Sincerely,