Closing Out 2008

And Looking to 2009

Dear Bottarelli Research Member,

Good morning. I hope you had a nice holiday.

As we enter into the final trading week of 2008, I’m sure you’re more than ready to close the books on this volatile and unprecedented trading year.

As I mentioned last week, I’d like to keep our trading ledger super-light this week. After all, we have another week interrupted by a market holiday, and this means light trading will be prevalent for most of the week. Wednesday, for example, is a half day. The markets close at 1:00 PM EST. The markets are closed all day on Thursday in observance of New Year’s Day, and then they re-open for a full day of trading on Friday (although I can’t image anyone will initiate any major trading action).

At the same time, the markets continue to digest the fallout from the Madoff scandal, which could spark even more hedge fund redemptions (based entirely on fear). On the other hand, rumors are also swirling about a trillion-dollar bailout package in the works by the Obama team.

So as it stands, we’re faced with a major bullish catalyst and a major bearish catalyst — all during a market holiday week of low-volume trading. As a result, I do not plan to issue any new trades this week. Rather, we’ll focus on closing out our 2008 trading ledger and starting fresh in 2009 on Monday, January 5^th. Here’s a look at today’s Dow chart, which continues to tread water under the 50-day moving average.

Looking at our current positions, I’m quite surprised that the major tension in the Middle East (sparked by Israel’s raid on the Gaza Strip) has not pushed oil prices aggressively higher. As you know, we’re holding the DUG January 31 Calls (TYZ AE), and we were about to lock in a profit on these calls when ProShares issued a cash distribution which effectively halted trading for three straight days. As you can see from the DUG chart below, the ultra-short play was about to shoot past the 200-day moving average and break the $30.00 level, but then a $6.00 per share cash disbursement was allocated. This caused the options string to get disrupted — and it took the exchange three days to assign new symbols, adjust the prices, and get the options trading once again. Personally, I think we got saddle-whacked on this one. In fact, ProShares Chairman Michael Sapir says he’s completely open to policy changes on how the capital gains are distributed (which to me, is an admission of a flawed system). But at any rate, we have our DUG January 31 calls, which are recovering nicely even after the news out of the Middle East that would have sent oil prices soaring six months ago. Let’s hold this position for a day or two longer and see what happens. Hold.

At the same time, let’s continue to hold our JCP January 20 Puts (JCP MS), which we entered on 12/22/2008 for $2.29. If these puts tick up to $2.80 anytime between now and the end of the week, lock in your profits.

In terms of new trading opportunities for 2009, I think we have a boat-load of profitable themes to play. First up is the fact that consumers will be tightening the boot-straps more than ever before. That means cutting up credit cards, reducing the “swipes” that are processed on a daily basis, and moving back over to cash. This is all bad news for a company like Visa (V – NYSE). If the stock dips under the 50-day moving average, it has A LOT of room to fall. Therefore, we could enter into Visa puts as a new trade opportunity in early 2009.

SIDENOTE: I personally believe that U.S. consumers have reached a point of gluttony. In other words, we’ve over-consumed for the last three years (possibly even longer), buying junk we don’t need with money we don’t have. And now, the bill is finally coming due. As a result, 2009 will witness a period of extreme frugality, which will continue to harm retail plays across the board. This point is driven home even stronger on a day like today, where Obama’s two top advisors warned of a possible 10% unemployment rate in early 2009. Just imagine the spending halt we’ll see if 1 in 10 people in the United States are unemployed! Companies like Costco, Kohl’s, JC Penny, and Visa are some names that could be in trouble, while names like McDonalds and YUM Brands could be beneficiaries. More to come on this thesis.

Another possible play could come in the form of iShares Lehman 20+ Year Treasury Bond (TLT – NYSE).The TLT is an investment vehicle that mirrors the price and performance of the long-term sector of the United States Treasury market, defined by the Lehman Brothers 20+ Year U.S. Treasury index. Now, I understand that investors around the globe are selling equities and flowing into Treasuries, but this chart of the TLT is way too over-bought. If we see cash get re-positioned into stock in early 2009, the TLT will drift lower. That means a put play could be in order.

Another strong upside play could come in the form of my favorite deep-water oil driller,

Transocean (RIG — NYSE). The fall in oil prices has clobbered RIG, a provider of offshore contract drilling services for global oil and gas wells. If the oil service sector bottoms out (which it might have done already), RIG calls could be a powerful play.

Following up on another powerful theme, I continue to like metals plays — especially gold and silver. And when it comes to the best gold company, it doesn’t get any better than Barrick Gold Corporation (ABX – NYSE). ABX explores for gold, copper, silver, and zinc, and today’s pop above the 200-day moving average is very, very strong. Gold and biotech are my two top sector plays going into 2009, which means we could enter calls on any forthcoming dips.

Also looking strong are the oil refiners like Valero Energy (VLO – NYSE). Valero is a crude oil refining and marketing company, which means they buy oil on the open market, turn it into gasoline, and profit by collecting the price spread. With oil prices down so sharply, their spread is much more attractive, which could help refiners like VLO and TSO make strong comebacks.

XTO Energy (XTO – NYSE) is another powerful potential upside call play. They develop oil and gas properties in the United States, with a focus on properties concentrated in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana, Mississippi, Montana, North Dakota, Pennsylvania, and West Virginia. They currently have estimated proved reserves of 6.94 trillion cubic feet of natural gas, 67 million barrels of natural gas liquids, and 214 million barrels of oil. They also own interests in 13,403 net producing wells. But the big opportunity with XTO comes in the form of their Marcelles Shale project.

You see, XTO has invested $700 million in the Marcelles Shale formation in Pennsylvania, which could hold enough gas to meet the entire nation’s energy needs for 12 to 14 years. Prices for leases in this region jumped from $300 per acre to $2,100 per acre in just one year, which gives XTO a huge competitive advantage. Support at the 50-day moving average could be a great entry price.

And finally, I think engineering plays like Fluor Corporation (FLR – NYSE) will be “in play” for all of 2009. With Obama’s aggressive infrastructure projects, FLR’s engineering, procurement, and construction management services look to be a major beneficiary. Once again, support at the 50-day moving average could be a prime entry point. More to come.

Like I mentioned above, these could all be possible trading themes to play in early 2009. But for today and tomorrow, we’ll play it light. That means I’ll issue update alerts (like this one) with trade possibilities — and possibly any selling on our two open positions. On Friday, our offices will be closed. But come next Monday, we’ll enter into another new and exciting year of Bottarelli Research trading. I truly believe that we have some remarkable money-making opportunities ahead of us in 2009, and you better believe I’ll capitalize on every single one of them. And of course, you’ll be right alongside me for the ride. In that spirit, I’m glad you’re part of the group. Expect good times ahead! And as always…

Lock and load!

Sincerely,