Monday Morning Observations

OSTK, BBH, WYE

Dear Bottarelli Research Member,

On the eve of the mid-term elections, Democratic control of the House is looking more and more inevitable. This political shift could have some important market implications that I’d like to share with you — as they could translate into some coming trading positions.

Most notably, Democratic control could lead to renewed buying interest in the Biotech HOLDRs (BBH – AMEX), as the market perception is that Democratic leadership would directly lead to further biotech advancement, especially in the stem cell arena. The BBH is a collection of the top biotech companies, highlighted by Amgen, Genentech, and Sepracor (the maker of the Lunesta sleep aid you’re constantly seeing commercials for), so this group offers you well diversified exposure to the whole sector.

Looking at the chart, the BBH just experienced a nice upside run but has since fallen back a little. Democratic control could be the catalyst that pushed the index past the $200 level.

On the same hand, a Democratic house could be considered a negative to the Big Pharma sector, as they would push for lowered drug prices across the board. In my due diligence of the Big Pharma stocks, I found it interesting that recent insider transaction filings show that 11 insiders just sold 1,130,824 shares of Wyeth (WYE – NYSE) for a total dollar value of $58,400,049. While it’s not uncommon to see insider sale transactions to raise capital, to see eleven insiders all selling certainly raises a warning flag.

Formerly known as American Home Products, Wyeth is known for their popular Advil® franchise, which is a stable revenue producer. But something could be lurking on the horizon that serves as a negative catalyst for WYE, so let’s certainly keep an eye on the shares for a potential put buying opportunity.

Democratic control could also lead to big cuts in defense spending, which could correlate into selling pressure in names like Boeing, General Dynamics, United Technologies, Alliant Techsystems, and Lockheed Martin, among others. I’ll be monitoring this group for any potential downside opportunities as well.

And speaking of downside opportunities, Overstock.com (OSTK – NASDAQ) is down $2.80 today, a -15.7% loss, when they reported a third-quarter loss of $24.5 million versus a loss of $12.4 million one year ago.

As you know, Overstock has been a stock I’ve been bearish on for quite a while, which is why I recommended the OSTK November 20 Puts (QKT WD) in late September. Unfortunately we closed out the position because OSTK wasn’t moving down as quickly as I wanted, but that’s all changed today. The company is expecting an inventory balance around $50 million, which means that they may need to raise cash in 2007. This is certainly not a good sign, which is why the company is getting slammed today. If you are still holding your Overstock position, you’re now showing a gain in access of 40%. Take your profits!

In terms of our current trades, the WFMI January 45 Calls (FMQ AI) are looking good today, as WFMI is finding a little buying support after its massive sell-off. On the flipside, our speculative play on the LVS November 75 Puts (LVS WO) hit our tight $2.30 stop. I still feel that LVS could fall further, as the stock is barely up $1.00 on today’s 90-point Dow rally. But for now, let’s take the safe route and close it out. Mildly frustrating is the fact that CAT is down on today’s upswing, but that’s the reason we played an extended time horizon with the CAT January 65 Calls (CAT AM). And lastly, maintain your DIA November 120 Put Hedges (DAW WP) for any sudden pullbacks.

Lock and load!

Sincerely,