Bets Placed

I had both of my orders filled this morning in both Wachovia and Pulte for the PUT options. I ended up going with the shorter term October PUTS for Pulte as I did not want to expose myself to the earnings report on 10-26 and want to be out of the position by that time.

Wachovia, I am taking a bit of a longer term view - buying the January PUTS - as I do expect the yield curve to invert sometime before then which should cause a freefall in the US financial sector. Here is the portfolio snapshot which includes the entry points:


Also, NCTY is back in the 19s - I am watching it like a hawk - but like I said - earnings aren't until late november and in the meantime cheaper prices may still come.

Regards,

BG

PUTS Time

I am ready to make my play on the PUT options. I am looking to buy the January 2006 PUTS on both Pulte and Wachovia. I am not sure if I will purchase both tomorrow, but I am looking at the following contracts:

Pulte:

.PHMMP - Pulte Homes, January 2006 Put Option with $47.50 strike price. Common closed at $42.55 and options was trading around $6.50. That means if held until January expiration the stock would need to be trading below $41 for me to make any money. The leverage is approximately 6-7 times. The cost is around 4%.

Wachovia:

.WBMJ - Wachovia, January 2006 Put Option with $50 strike price. Common closed at $47.84 and option was trading around $3.50. That means that if the contract were held until near expiration - the common would need to be lower than $46.50 for you to make any money on the trade. Considering that this trade generates greater than 10 times leverage for a cost of around 3-4% - I consider this very promising.

These trades are very interesting because they should work somewhat the opposite of the gold position. A rising interest rate environment and inverted yield curve should be very bearish for both Wachovia and Pulte whereas a falling rate environment would be very beneficial for them.

Although gold shares the same characteristics - you have to remember that I am LONG gold and potentially SHORT wachovia and pulte. Hopefully there will be some convergence among the higher quality assets (e.g. those with improving fundamentals ) - and you know which ones I mean there.

The other crucial consideration here is the time horizon. Pulte announces earnings on 10/26 and Wachovia announce on 10/17. That is approaching pretty quickly and I don't know if I want to stick around for the potential risk of positive earnings surprises. Who knows - we'll see what the play is tomorrow and how things are looking.

I am expecting some bigtime close of Q3 window dressing from the mutual fund studs - so we may see a 100+ up day on the Dow. That would give the perfect liquid entry point for the PUTS.

Hasta manana.

Regards,

BG

Give and Take

Commodities prices are still running. As their prices increase and remain at relatively high levels over longer periods of times, the costs of production increase for many companies. Companies are then forced to raise prices. Goods then cost more and employees demand more pay. The inflationary cycle is then underway. This is what the Federal Reserve is afraid of......and I guess there is good reason why if we pull up this chart:

The instant standout for me is Natural Ga . Almost $15.......per BTU. When we chose natural gas as our national heating infrastructure it was around $2... Abundant natural gas is still available in the world, but it is becoming clearer that we need to adopt some of the alternative methods of importing. Liquefied Natural Gas, LNG, is looking to be crucial here and I think we will see some policy iniatives along this line over the coming six to eight months.

My biggest question though - is at what point do slower growth and rising commodities prices balance each other out? I am a firm believer - that we are our own solution to the energy problem at least in the short term. If our economic growth slows so that we do not demand as much energy that should help to slow or stop the price ries and give us some breathig room. The problem here though is we are entering the highest seasonal demand of the year for natural gas (October - April).....

Regards,

BG

Some Bull Is Better Than No Bull

It is a tough to find a bull market right now other than in the metals and energy. The gold trade is already outperforming and I am crossing my fingers that things continue positively over the coming weeks and months.

One of the toughest calls I have had recently is how to evaluate my own positions and plans. My investment ideas during the past 12 months have gone almost full circle. I began the year speculating in oil tankers, gold, and sandisk. As things have progressed I have found myself increasingly bearish, expecting a housing market crash, stock market crash, and collapse of everything as we know it around me.

Obviously this change is probably over exagerratedly negative. The problem is that so far this scenario is playing out before our eyes. Today another negative accounting report was released on Fannie Mae (FNM) causing the market value to drop 11% in one day - it lost over $5 billion dollars of market cap in an afternoon. If this was Google, I would say big friggin deal. The problem is that Fannie Mae and her brother Freddie are the lifeblood and liquidity for our entire economy - i.e. real estate and mortgage debt. If the capital of Fannie is depleted the repercussions in the mortgage market will affect not only interest rates, but probably also lending guidelines.

Most of my earlier calls for Puts - re: Wachovia, Pulte, Best Buy are all capitulating before my eyes. The temptation to buy the Puts is immense, but it is playing with fire as well, because as bearish as I am - everyone around me is mildly bullish to excited about the economys prospects. How can I balance the disconnect moving forward? I think the best call is just to do nothing until more conviction is gained.

The gold trade has been working out - but even there I believe in a fundamental move over the next several years, but have little reason to expect a huge bull run in the immediate term. Hopefully things will continue to clear up going forward......but I doubt it. Anyways here is the portfolio snapshot as of the closing today. Hopefully we can follow through for a while longer:

Regards,

BG

Surprising Day

Was shocked to see gold go up today. I do not have a good reason why or even a good rationale. I am thinking of taking a few steps back and letting the position ride for awhile as I think I may be looking so closely I am imagining things.

NCTY is moving more! Today it had an upgrade from Lehman Brothers. My entry in the teens is looking more and more unlikely.

Regards,

BG

Gold and Oil Looking Down Tomorrow

Sorry everybody, as I did not finish the ADSX report today. An opportunity arose to play 18 holes of golf and I decided to take advantage of it. Hopefully I can get the ADSX report out later this week or next weekend.

As a market preview tomorrow, the spin is pretty heavy and I think the market is going to be running up big time. I would expect tech, financials, homebuilding to all rally solidly this week. I also expect Greenspan's comments at the economist's meeting to reflect something to the extent - of inflation completely undercontrol and he will continue to raise rates at a measured pace.

This should place a decent hit on gold, oil, and many other commodities. I would expect this to continue for a week or maybe more, until the CPI numbers are released. I expect the October number to be a real blockbuster. At that point I think bonds will begin to sell-off some more and gold rally, etc.

I expect significant drawdown in the portfolio this week - with my gold options positions cut in half or possibly even an 80% draw-down. I have not decided yet if I am going to double down (most likely), but I will definitely be keeping an eye on things and do my best not to sugar coat things as it looks like I have bought way too early and at way too high a price.

Regards,

BG

First Research Report - GENTA (GNTA)

By popular demand - a new research report is out today. The first stock research report was on The9 (NCTY). Since it was discussed it has already gone up 10%.........and I have not had an entry yet. Hopefully it will pull back into 16-17 range as I am expecting so that I can grab it.

Now - back to matters at hand. A reader has requested stock reports on both Genta (GNTA) and Applied Digital (ADSX). Today we will look at GNTA and tomorrow ADSX. A quick overview from the Yahoo Profile:

"Genta Incorporated, a biopharmaceutical company, engages in the identification, development, and commercialization of drugs for the treatment of cancer and related diseases in the United States. Its research portfolio comprises two primary areas, DNA/RNA medicines, which include drugs that are based on chemical modifications of oligonucleotides; and small molecules. The company’s lead product from the DNA/RNA medicines program is Genasense, which completed phase 3 trials in combination with chemotherapy in the treatment of malignant melanoma, chronic lymphocytic leukemia, multiple myeloma, nonsmall cell lung cancer, small cell lung cancer, and prostate cancer. Genasense inhibits production of Bcl-2, a protein made by cancer cells that is designed to block chemotherapy-induced apoptosis. Its lead product from small molecule program is Ganite, which is used for treatment of cancer-related hypercalcemia that is resistant to hydration. Genta’s preclinical pipeline includes research programs in antisense, RNA interference, and decoys. In addition, the company is evaluating oral formulations of gallium-containing compounds. Genta was founded in 1988 and is based in Berkeley Heights, New Jersey."

Now that has probably put you completely to sleep - how can we sift through that entire profile to figure what is going on? I went ahead and pulled up a longer term chart and looked for the big volume moves during the past 1-2 years as this stock is currently trading around $1.60 - WAY DOWN from its 2004 trading area of $15-20 per share. Here is the 5-year chart on this one:


Basically, GNTA had a medicine/drug in the bag which it thought would sell well for melanoma - named "Genasense", but at the last minute - it was cancelled by FDA, etc. and they had to drop the plans completely and in addition announce a restructuring and new focus on their "flagship" product - Genasense. But wait - isn't that the same friggin drug? It sure sounds like it. I think they have just changed the purpose. Instead of being used for melanoma - it will be used to help prevent leukemia remission. There is only one problem.........and this is why I think the stock is trading at $1.50 instead of $150 - the company does not appear to have any other significant drugs or medicines in development or clinical trials. Thus they have effectively bet the bank on this one medicine.

Here is an additional excert from the WSJ:

"Genta's development of Genasense has been troubled. Last year, an FDA panel declined to approve Genasense for treatment of people with advanced skin cancer, or melanoma. And the company later said a study of Genasense in patients with advanced multiple myeloma failed to show significant improvement over standard therapy.

Earlier this year, Genta and Sanofi-Aventis terminated their development and commercial collaboration for Genasense. Aventis wanted to end the partnership partly due to the FDA committee's rejection of Genasense for treatment of melanoma."

Their financial condition is quickly deteroriating. They currently have enough cash to keep going and they have some revenue coming to generate cash flow - but without doing another secondary or debt offering I think it is doubtful they will remain solvent for more than one more year. It looks like they are burning through about $12 million in cash per quarter.

So, fundamentally - I don't think there is anything here RIGHT NOW. Technically, I think there is a short-term move here - which may or may not pan out. Here is the 60-day chart:


The bottom line though on this one - is that I don't think it is an investment. I think that it is a spec play on a biotech company with a promising drug that may or may not pan out. I do not know the first thing about science or biotech, so I cannot really tell how promising their medicine is or how much longer it would take until it is available for sale. Here is a graphic regarding the FDA approval process (they are currently in phase 3):


So bottom line..........unless I had the inside track here - either as an employee or someone who knows something - I would not be buying it - because it is outside my risk profile. I am confident the stock could run to $10 on favorable news. However, I also think that it could go to $.50 or bankrupt in the next two years on unfavorable news. I consider myself a speculator to some degree. I believe that everyone needs some spec in their portfolio to juice the returns from time to time. This particular stock/industry is not my cup of tea however, because I do not know enough about the specifics of either to want to commit a lot of capital to it. When I decide to take on a spec play - I like to leverage myself with margin or options into a high quality stock when the sector is either a) extremely weak and beginning to strengthen, b) in the middle of broad secular move. When I do it - I want to buy something with improving fundamentals - and I want to buy the "A+" company in the group. I also don't care if the stock is $10 or $200 - because with options and margin - I will get the leverage that I need and a 25% move in the common - will give me the 200-300% move on my total investment that everyone is looking for - the elusive "ten-bagger," etc.

So the takeaway here I think - is that if you are looking to add some biotech spec to your portfolio and you have a high risk tolerance - sure buy 10,000 shares. However, if you are like me and don't know a friggin thing about the inside track on this one very important medicine which is a key for them - then I would steer clear. I also do not buy into the thing - that the public by reading news releases and reports can properly evaluate the success of the drug/stock prospectively.

My best colleague from lawschool works for a $1 billion dollar biotech company in their licensing department. This guy has a PHD in bio-chemistry and is a certifiable genius. He has basically told me over the years that getting FDA approval for anything is basically a crapshoot and it is very tough to tell how successful any type of medicine (short of the cure for cancer) will perform once in the market, etc. My buddy also told another funny story though. And that is - Viagra was originally developed as a heart-medicine and it went on to give American's great sex for many years and was a blockbuster. Our scientists don't know enough about any medicine to always know where it will fit best. Maybe this medicine is much more usefl for leukemia or as a preventive medicine. Who knows?.........

Basically - unless you know something - I would stay back. And if this thing runs to $10 a week later - I would actually not feel bad - because bottom line - I want to pick and choose my speculations - and have 100% control over matching my investment plan with my stock picks - so that I can imagine the story.

In my mind I can tell and understand the story of NCTY success selling Wacraft in China. I can also understand the promise of gold in an inflationary economy, with a lot of pressure on the dollar's continued strength and with oil at $60 per barrel. What I can't do, right now at least is have any clue how well GNTA's medicine will perform in clinical trials, if it will get final approval to be sold, and finally - of its sucess in the market.

The only real framework I think you can apply to a stock this spec - is that the following things could move it: - a) Any type of substantive/favorable news release - (re: medicine has 90% sucess in phase 3 trial), b) A broad move in the biotech sector which lifts all boats, c) a buy-out.

On the flip-side though - these are things that could move it down and quickly - a) FDA rejection, b) biotech/nasdaq sell-off, c) debt issuance / share issuance to strengthen their capital.

That wraps up this report - please e-mail with any comments/questions.

Thank you,

BG

Rita Not As Bad As Katrina?

It is tough to tell right now, but it looks like the results of Rita are going to be less severe than what happened with Katrina. I think we are going to see a big relief rally early next week - with the following sectors selling off: oil and gold, and the following sectors rallying: tech, financials, homebuilders, etc.

It will be interested to see how things turn out. I will keep an eye on the news this weekend. Also we should see the research reports out by tomorrow on GNTA and ADSX.

Regards,

BG

Gold Positions Filled

I finally got my Newmont (NEM) fill this morning for 10 contracts at $1.50 each. I now have around 30% of my portfolio in the gold options. After the new contribution comes in, about two weeks from now that exposure should be closer to 20%. Although as a % of capital the options only constitute 30% - they have a notional value much larger. There is enough leverage behind them to have exposure on the upside of about 500% of portfolio value - but on the downside - there is only their same 20% loss exposure - which is still substantial. Main point I wanted to emphasize - is that it is a toss up how this Rita thing will turn out. It looks like everything will be OK right now -which could cause a free-fall to begin in oil and gold. I will have more capital ready to commit at that point if necessary, as the eventual outcome - I believe still takes us to the same place - higher gold prices and a lower dollar.

Bottom line - is that if things turn out poorly - I did not want to have such a low exposure in gold to my portfolio. Due to this lack of consideration of the entry point and lack of time for the technical analysis side of things - I likely have exposed myself to approximately 10-15% total portfolio volatility on the downside......and maybe as much as 20%. We will just have to see what happens.

I am still looking for an entry in my Homebuilders PUTS, my Bank PUTS, and also the Chemicals CALLS. That would leave me with precious little cash - so we will have to play it by ear.

Regards,

BG

Poor Execution

I was unable to get the execution I wanted this morning in the Newmont options. I had the bid in for the January 2006 $50 calls. First I had it at $1.30, then at $1.35, then $1.50 - within minutes it was at $1.60 - finally closing the day at $1.80. So I was unable to add to my gold position.

At that point I realized that I do not need to force things. I do have some exposure to gold here. It may be better to let the PUTS come to me a bit more - especially with regards to some of the banks. This may also be the buying opportunity of the lifetime in the chemicals as it looks like they have been forced to shut down production as a huge percentage of their factories are in the hurricane's projected path. Would love to pick up some 2006 or 2007 Dow Chemical (DOW) calls with the common trading in the 32-40 range.

The9 (NCTY) has been going up on talk of this conference about their site. I think it is a bullshit move and they will be pulled down with the rest of the Nasdaq when the big downside move materializes.

I have had some comments from readers - that I am a bit out there right now with my posts. I am taking this to heart as well - as I have been so tired lately - and slightly depressed - taht I know I am not analyzing this completely cleary. I think this weekend after yoga - my mind should be clearer and I can hopefully come up with a better game plan and just execute on it.

Also looking forward to the first stock reports from reader requests. (re: ADSX/ GNTA)

Best Regards,

BG

Speculative Ish

I have been requested to comment on the following symbols in the past two days:

GNTA
ADSX

There will be commentary on both this weekend, but this week is proving too busy so far. That said - I have done a quick perusal of both and I would not want to be long either into this market environment. Both of these companies have operating issues and are highly speculative.

I would hestitate to be buying even the bluest of blue chips here - re: Walmart, Best Buy, etc. So why the hell would I want to buy some speculative tech shit? That said - I will make every attempt to be even-handed this weekend. In the meantime though - a stern warning - DO NOT BUY THIS ISH!!!!!!! I think it will be regretted later........

Regards,

BG

Getting Apocalyptic

I am on the verge here of getting too negative on everything. Hurrican Rita is coming and it is not looking good. Is this a gut overreaction to what happened with Katrina? It sure doesn't look like it tonight - although we won't know until this weekend the extent of the damage.

My gold trade is already running - up 20% from yesterday's buy-in. I was hoping to dollar cost average in at lower prices over next 2 weeks, but that is out of the question now. If hurricane turns out at what its lookin like - the Government is going to have print another $50-200 billion dollars to bailout the south. The Fed will also be under enormous pressure to drop rates.

There is a bigger problem though. The energy inflation going through the economy right now is putting pressure on bond prices and we may see sharply higher interest rates over next two months. I would put the probability of a total stock market crash this fall at around 50%. I would expect a draw-down into the 8,000 area on the DOW and the 1,700 area on the Nasdaq.

I am probably going to be purchasing the Wachovia or some other bank/financials put options tomorrow. I am also going to add to the gold position. I am also thinking of picking up the Pulte (PHM) puts. I have about $11,000 in account right now. $1,800 position in GoldCorp. I am thinking of adding a $2,000 position in shorter term Newmont calls. I am thinking of adding a $1,000 position in Wachovia put options. In Pulte - I am not sure if I will pull the trigger there yet but I wan to.

I want to maintain at least 5K of cash - which will become 7K in next few weeks when I add the final 2K contribution for the year. Assuming there is no significant drawdown that would leave me with 50% cash position so that I can be ready to pick up the Chemicals (DOW) or The9 (NCTY) - on the crash day.

Please tell me if you think I am crazy / losing it.

Regards,

BG

Chemical Brothers

I received my entry point yesterday afternoon in Gold and it appears that was lucky as the metal is already running again. I have enough of a position now that I feel I can be more selective and wait for market to come to me, but it could run quickly now and I may be forced to commit more capital anyways.

One trade that is coming to me - falling in my lap actually (have to be suspicious) is Dow Chemical (DOW). This stock just set a new 52-week low today at $40.40 and is being dumped on because of fears of higher energy prices which will affects its cost structures and hurts its earnings. Current consensus EPS for 2005 is around $4.36 and for 2006 at $5.53. That would put it around a 10 PE for this year and less than 8 for forward PE. The industry multiple is aroudn 13.

Anyways - I like the January or March 2006 calls - with between $40 and $50 strike prices. These look downright cheap to me. I don't know - maybe I am a sucker. But I have a buy in for 100 contracts of the $50 January 2006 call at $.10 per contract - currently trading at $.20. Probably won't get my entry today - but can try anyways.

Regards,

BG

No huge surprise today

Note: This post was supposed to be uploaded last night but the server was having errors. Sorry.


Fed raised again the quarter point. As discussed in here this was expected. Both desired results were obtained as the rate hike happened and gold sold off. I used the opportunity to begin building my gold position as I purchased 5 call contracts on GoldCorp (GG) with January 2006 expiration and $17.50 exercise price. These are slightly in the money as current share price closed at $19.70. These options were purchased for $3.20 - so $1.00 of implied time premium and $1/19.70 - gives approximate 5% time premium for this 6-1 leverage. This is not necessarily a good bargain - but I liked how GoldCorp acted on the pressure today. We will have to see how things progress during the gold selloff that is beginning.

I am keeping rest of the capital on reserve and am hoping to make another $2k contribution to add to more positions. My vision is becoming clearer or at least it seems so - :). I am also contemplating January 2006 call options on Dow Chemical (DOW) which has negative correlation with Gold and inflation - in that its earnings stand to decline in inflationary environment and expand during disinflationary (espeically with regards to energy). As a result it might serve as excellent hedge of position. I also like the company's valuation and earnings prospects as they are around a 9 forward PE and potential EPS going forward of $5-6. I can pick up the January 2006 calls with $50 strike price for around $30 per contract. I am thinking of buying about 50 contracts - but would like to see price fall to $20 per contract potentially. The share price is around $42 now - but it appears that on another oil/energy spike the stock could decline into the $38-40 area which would give the ideal entry point.

Other ideas always in the back of mind - remain buying the PUTS on Pulte (PHM) or Best Buy (BBY). These have already gone down a ton though and I have not been quick enough to grab them. Also if we have the foreseen sell-off in the Nasdaq I am also looking to pick up the NCTY in the $15-17 range - hopefully 500 shares.....fingers crossed.

Things are moving quickly - please e-mail with questions/explanation request.

Regards,

BG

Today is rushed

Quickly - a reader requested a study of Applied Digital (ADSX) - both fundamental and technical as well as predictive survey. We will look at this one by this weekend hopefully. Just a note here to remind myself. All quiet before the fed announcement in less than an hour.

-BG

It's Been Busy

My school schedule has been in full tilt lately. Work has also been pretty busy. Tomorrow is a big day. The Fed announcement will be out by 2:15 PM ET. This is one of the few times in past several years that I can remember a sizeable disparity between consensus expectations for Fed raise or pause on the fed funds rate.

I am expecting a 25 basis point hike tomorrow, but a change in the measured pace language which includes a discussion of potential risks to the economy re: Katrina, etc. Fundamentally I don't personally believe it makes a bit of friggin difference if they raise tomrrow or a month from now as long as they continue to raise and eventually leave fed funds in 4-5% range until the economy cools off. In reality however, the Fed's language and decision should result in a huge move in the markets and a large effect on many important sectors (re: oil, gold, interest rates, etc.) I am not so sure anymore that the sell-off in gold is going to materialize, but I remain optimistic that I may be able to achieve my prayed for sell-off of 2-5% so that I get my entry point.

The sudden run-up in gold has forced me to analyze other sectors in several bearish plays. I am looking again at the homebuilders as potential shorts and have my eyes set firmly on Pulte Homes again (PHM). I am looking to pick up the October 2005 $50 puts potentially for around $6.00. I also would love to buy some puts on Best Buy(BBY) - but I think that it has already run too much. Both of these stocks will move either way I think up to 10-15% over 2-week period based on the Fed decision.

There is a lot of chatter and difference of opinion right now. Several important and intelligent market analysts are bullish while others remain increasingly bearish. I am firmly in the Bears camp, but I am using this argument and quite honestly - reality of a huge imbalance in the US economy to talk my way into entry points in some favorites. NCTY continues to sell-off and I remain optimistic that I may obtain my $15 or less buy-point if all goes well and we experience a broad market sell-off.

So in the meantime - there is not much excitement as I remain positionless. I may enter substantial positions as early as tomorrow afternoon or it may be weeks before I make a move. Nothing is certain. In the meantime - I am open to any topic requests that readers would like to see discussed in more detail and can be contacted at bengreen@gmail.com

Regards,

BG

A Strange Combination of Possibilities

There are several trends at work in the economy right now. When they are mixed together they create an interesting stew. Possibly the most intriguing aspect of the current situation is several of these trends may counterbalance each other making a cut and dry analysis almost impossible. In this kind of environment I like to focus on what I call the "predominant effect."

The application of this type of theory can be quite flawed, however it may also be very useful - while you are operating within a consistent trend. I will try to explain with more depth: at any given time there may be several important factors at work in the economy. These factors may produce diffuse results. Currently we have at a minimum the following factors:

1) Moderately restrictive (trending) monetary policy by the Federal Reserve (note: until further notice)
2) Increasing inflation
3) Deficit spending and catastrophic related additional deficit spending (re: Katrina)
4) High energy prices (see #2)
5) Historically low interest rates
6) Historically high bond prices
7) Historically high home prices
8) Record high trade deficit
9) A foreign war

Several of the abvoe factors may counterbalance each other. The restrictive monetary policy will help to slow the economy and reduce demand for energy prices. This may in turn help to control inflation and maintain lower long term interest rates. Higher energy prices may also help to slow the economy and halt their own rise.

The record trade deficit, deficit spending, the foreign war, catastrophe related spending - are all inflationary and all put pressure on the dollar's strength and purchasing power. However, once again there is a countervailing factor. The Fed's restrictive monetary policy has helped to bolster the dollar over the past several months as short-term interest rates have risen.

Out of all of the above factors I consider the "predominant effect" to be a weak dollar. I think that the factors re: deficit spending, trade deficit, etc. to have a much stronger effect on the dollar than Federal Reserve policy over the course of the coming six months. This analysis is helped in part by considering the inflationary pressures in the economy. If inflation is running at 8% annualized which it appears to be (don't give me the "core" number please.......as I still like to fill my car with gas and eat food and live in a home), even a 4.25% Fed Funds rate (expected by end of year) - is extremely accomodative as it implies an actual real interest rate of -4% (nominal interest rate - inflation=real interest rate).

By applying this type of synthesis I believe again - the predominant effect to be a weak dollar. Thus, I expect the dollar to fall to new lows against the Euro / Gold, etc. over the coming 12 months. Once I have identified what I consider the predominant effect, I can then develop investment ideas to capitalize on that one very simple idea. Then as the weeks unfold, my investment results will concretely confirm or reject my hyphothesis. So far my expectations have been confirmed somewhat. Gold has rallied strongly, however the dollar has strengthened against the Euro. In order for my idea to truly bear fruit, the dollar would have to be in crisis mode and decline against the Euro, during which time gold would likely rise into the $500-600 price range.

I guess an obvious but necessary note about the predominant effect is that it is also what I consider to be the most important contemporaneous guideline that I want to apply to my trading/investing. This is significant because it may change at any time as the combination of economic factors that are considered produce a new and more profitable opportunity.

This change in perception may be driven by concrete fundamentals or it may merely be perceieved to be important by investors temporarily during which time the related share prices become a self-fulfilling prophecy but the actual underlying fundamentals are unchanged. As the fundamentals are reviewed again within due time and recognized to be insignificant, the perception will again shift and a new predominant factor will be identified. This process will continue until a real trend develops which is fueld by both fundamental and speculative aspects. This trend may continue from 1 week to 20 years and may be a mere short-term cycle or secular change.

An obvious change that may become key is the area of interest rates. There has been much discussion of the yield curve and the Federal Reserve in the media and on this blog as of late. If the Fed was to change its plans and drop interest rates instead or merely slow its restrictive policy, the predominant effect may remain an even weaker dollar, however the investment alternatives may broaden to consider other possibilities in the financial sector on the long side as the much anticipated inverted yield curve may never materialize.

That is enough theorizing for tonight, I will try and conduct a more practical survey of the Newmont call options and Wachovia / Financial sector put options tomorrow night as we get geared up ahead of the big Fed Meeting on Tuesday. Just to repeat myself - I need a Fed hike of at least 25 basis points in order to get my portfolio into the desired position the fastest.

Regards,

BG

Unbelievable

We are seeing some outstanding returns in Gold again today! My options which have all been sold already.... :( - are currently trading at $8.30!!!! That could have made for a 350%+ return in only two weeks. Still it is tough to hate yourself for taking profits at 100% and 150% respectively.

The biggest surprise for me has been seeing the amazing strength in gold. The traders have really taken ownership of this group and are running it up on big volume. Considering the fact that I am in all cash and positionless - I am having to make a tough determination of whether to jump back on the train or wait it out.

I firmly believe in the bull case for gold over the coming six months and I am considering making a drastic change of plans in my portfolio. I currently have just over 10K in there. I am thinking of taking up to 50% of my portfolio's value and leveraging the gold play some more. I will not make any move until after the fed meeting. As discussed much previously - I expect the Fed to raise rates on 9/20 (next Tuesday). If all trends as expected Gold will sell off somewhat and the goldminers should sell off somewhat.

I was originally expecting a decline for gold into the $430 range - but that no longer looks like a reasonable expectation. I will play the game again here with the NEM call options. I have not yet decided on the time horizon for this speculation. I am debating carrying a position out into the January or March of 2006 time horizon - but I am thinking that might be too long.

I am also considering purchasing a sizeable chunk of out of the money call options on this one - something that I have traditionally called a no-no. So what is going on here - when Ben is breaking all of his "rules"? Basically - I am getting greedy. Some people say that greed is good. Others say - don't be greedy - the protestant values. All I can say is that the biggest certainty I have had of anything in the past 5 years is as follows: 1) Gold will be higher than $500 an ounce by the end of 2005 and 2) Housing is a bubble waiting to burst, and when it does - it is going to plunge our economy into a debt-driven meltdown. This is going to have huge deflationary implications which I expect the Federal Reserve to attempt to meet with monetary stimulus - the likes of which we have never before seen (scary huh?).

Anyways - item 2 above was just a rant it is item 1 which is of significance here. I will lay out the bull case for gold this weekend as I think all of the ducks are lining up for us here. There are a lot of potentially countervailing factors - but I do think many of the gold miners could make a 20-100% move over the next 6 months and I want to be there when this happens. If things do not pan out as expected - I will have lost some money - a significant amount in fact. If things do turn out as planned ........ the returns could be phenomenal.

If this post has been crafted correctly it should sound like the devil inviting you out for dinner at the finest restaurant in town. There are no sure things in the financial markets as we know all too well. Still, I like the odds on this one too much.

Let's hope that I get the pullback after the Fed meeting that I have been hoping for - otherwise I may be in a very precarious position.

Additional Note: - the remaining allocation of the portfolio will likely be in cash and some short (re: put) positions in the following sectors (homebuilders, mortgage lenders, financials, etc.)

Regards,

BG

What's Working

I don't know what is working today besides the metals. Gold is running again and it is looking like we are going to see 52-week highs here for Newmont and the rest of the sector before you can blink an eye.

Due to my hiatus......I have been thinking first from a fundamental standpoint what I want to be long and short in this type of environment where inflation is ramping and it looks like the Fed is going to be raising rates with more certainty.

I think I want to be short the financials and the homebuilders. I think that I want to be long the metals and maybe some isolated foreign stocks that meet my criteria (hopefully NCTY!).

Specific trades I am looking at? I can buy the January 2006 $55 or $50 PUTS for a very attractive price. Wachovia is one of the biggest sellers of MBS and ABS and you have to imagine that that income stream is going to slow down as the housing market and loan issuance slows.

Jan 2006 may sound like to short of a time horizon - however, if we get the inverted yield curve which I think is coming - most of the banks should sell off at least temporarily until the Fed begins to ease.

The thing I like about Wachovia in addition is that the options are dirt cheap and I can generate 20-1 leverage for an approximately 2% cost. I can generate 8-1 leverage for basically 0% cost. When you can leverage yourself out 6 months at those ratios - you know you are dealing with an asset perceived by most to not be volatile - so will have to be careful on this one.

Regards,

BG

A Profitable Week

It has been a great week so far. I am not sure how to build on the current successes as they have exceeded even my most ridiculous expectations as I have hit my portfolio goal for 2005 only 3/4 through the year. I am not anxious to quickly ratchet up the leverage again - however I do want exposure to the metals again - the question of course is in what time frame.

I am thinking of going out much further this time to maybe December or January. The question is also at what buypoint? At a minimum - I am forcing myself to wait until after the Fed Meeting in order to purchase anything metals related. I have been watching NCTY very closely and am thinking of buying my first 100 shares. Ultimately - I am hoping to build a position in this one of at least 300 shares, but hopefully more. The question again - is at what pricepoint.

Because I am very negative on the broad stock market - including tech over the next few months - it may be wiser to wait for the Nasdaq crash to begin - as it would be expected for NCTY to trend closely with the other internet/tech related stocks. At that point - it may be possible to find a more attractive buy point in the $14-15 area as opposed to the current $18-$19 range.

On the other hand - why does $3 matter when we are discussing a stock that I sincerely believe could be in the $50-60 range by next spring. That is a tougher question to answer - but I basically guess that it has to do with the methodology and mechanics of the trade. I have been focusing a lot on improving my mechanics - re: charting, entry/exit, holding the position and I have only found that I have much, much more to learn.

The good news is that as almost all of trades have a basis in the fundamentals I have often been able to anticipate a bullish trend before it actually materializes. This is a true talent - although in my case it might have been luck as the run has been exceptional as of late. The majority of traders wait until the actual trend is in place and then use superior trade mechanics to make money on the intermediate run. This is because intuition often proves false.

As shown even in the very successful Newmont speculation my investment dropped by 40% the day after I bought it. A smart trader might well have cut his position there, or instead waited until the positive trend had been firmly established re: stock above $40. I have been reasonably pleased with my entry points as of late - however, what I have continuously overlooked is the proper exit. This is something that I truly do not understand and I think that is partly because I have not set clear expectations about each trade - either in dollar terms / % terms / or time horizon.

This weekend I will try and pull out a few of my technical analysis books re: the trade exit so that we can discuss a few of the basic ideas.

During the 6-day trading hiatus leading up the Fed meeting I also hope to post some discussion about my beliefs re: the coming shakeout in the economy and stock market and the optimal way to position your capital during a potentially difficult period. I believe we have a heads you lose / tails they win scenario coming up - regardless of the Fed decision - rates drop, same, or raise.

In the meantime - there's nothing wrong with cash.

Regards,

BG

High on Newmont

We are seeing a hell of a move in gold today. I in fact might have sold the last of my Newmont (NEM) options too soon. However, they were up too much for me to feel comfortable and I felt like locking in the last of the gain.

This trade allowed me to move firmly into the black for the year. I have also reached a point in my portfolio where its current value - $10,700 - is $1,000 greater than my total ROTH IRA contributions over past five years ($9,700). This makes for a compound annual return of less than 3% - meaning I could have made more in a money market than trading my portfolio.

Still - I feel truly outstanding to have recouped the $4K that I lost in PsiNet, which was the beginning of my ROTH IRA investments and my baptism by fire in the stock market.

Here are some summary charts on Newmont - I don't have a lot more comments to make. I think the contract could run more from here, however with the Fed Meeting on the horizon so soon, I plan on taking a breather for a week and try to get my bearings. My head is clouded with greed and emotion right now. In addition to being pretty damn tired.

Here are the charts:

Portfolio Snapshot - 09/14/2005:

Newmont - Aggregate P&L:

Newmont - Entry and Exit:

The Games That We Play

Ok......so let me see if I can get this one right. PPI number comes out. It's high (0.6%), so that if projected out over a 12 month period we get an annualized inflation number around 8%!!! Still.....it's only high enough to increase expectations of Fed continuing rate increases, not high enough to encourage the belief in an inflationary cycle where gold, oil, and the other commodities run some more....... oh yeah - but it is high enough to tank the broad market amid the rate increase fears.

It's probably not even worth trying to connect those dots. Any relationships discussed above - are even too murky for me to make another attempt. Bottom line from the portfolio perspective - my NEM options are selling off and Friday's half-sale is turning out to be a great call as my options prices are now below where they were on Friday. Friday was also my chief most optimistic moment - as I was sure gold was breaking out here and this was the moment. Instead it looks like gold is rolling over and may retest the $430 area - as it is down close to $5 already today.

I am sticking with plan to hold my NEM options for a few more days - there is just too much interesting economic data coming out this week which is just waiting to be spun. Just have to wait long enough for it to get spun my way.

Regards,

BG

Not So Fast

Gold is down this morning and so are my Newmont Mines (NEM) call options. It just goes to show that regardless of where my options end up this coming Friday (re: $10 per contract or $0) -it never hurts to take something off the table. It looks like it was a good call to sell half of the position last Friday. I am still bullish on gold prices for the rest of the week before the Fed meeting - but something funny is happening with the yield curve this morning as bond prices are falling across the board and yields are increasing. The 10-year is now yielding 4.16% ! If the ten-year yield surpasses 5% that should be enough to kill off any short-term gold rally on its own. Let's see what develops however...........for this smoke and mirrors economy.

-BG

Valuing Options

Here is a little overview on valuing options. It is taken verbatim from www.888options.com - with a little bit of commentary:

Basic Rule - The premium of an option has two main components: intrinsic value and time value.

In order to calculate the intrinsic value - you just subtract the strike price of the option you are considering from the current price of the stock.

In order to calculate the time value - you subtract the intrinsic value of the option as defined above from the market price of the option. It will quickly become obvious - that if you are dealing with an option with a strike price above the current market value - that its premium is composed entirely of time value. There is no intrinsic value because if you were to purchase the option and the prices did not change - it would expire worthless.

When I evaluate options I typically purchase only in-the-money options. I look for opportunities to leverage myself at a high ratio but where there is a very small time value component in my options' prices and I am instead purchasing an option with a premium that is based on almost 100% intrinsic value.

We can also do a quick example with some options that I am currently considering purchasing (not for a few more weeks - but these are what I am looking at):

Symbol (.NEMAH) - this is another derivative of Newmont Mines (NEM). This time the January 2006 call option with $40.00 strike price. At the current market price of $4.50 for the option and a market price of $42.44 for the common stock we can quickly apply our formulas.

The intrinsic value of the option is only $2.44 ( market price of stock (42.44) - strike price of option (40)). Then we can calculate the time value of the option by subtracting the instrinsic value (2.44) from the market price (4.50) - to yield a time value of $2.06.

Another useful tool that I like to use is to consider the % cost that I am paying in order to gain the leverage. Here I would gain leverage of approximately 10-1. But my carrying costs are considerable. If I divide the time value of the option by the market price of the stock - I can see that I am paying an additional premium of almost 5% of the stock price in order to generate that leverage. My favorite opportunities are where I can generate 15-1 or even 20-1 leverage at a cost of less than 2%. Obviously these opportunities are not as common.

Given that I am very bullish for Gold's prospects over coming 6 months, I may choose to purchase these options even though I think they have a relatively high cost. I do expect a substantial correction in Gold and Gold Miner's Shares following the 9/20 Federal Reserve meeting where I expect them to announce continuing rate hikes based on inflationary pressures. Obviously this is a bunch of hocus-pocus - nobody knows what is coming for sure other than Alan Greenspan. Still - there have been a ton of calls on both sides of this from very smart people - so we can expect a lot of volatility after the meeting as things become clearer and everyone gets repositioned. As I mentioned earlier - I am going to be in 100% cash until the news has been announced barring a total change of heart.

If my scenario unfolds as expected - I should be able to pick up my NEM options at a much lower cost as the common retests the $40 area and the options go down to $2-$3 each. Given that I expect NEM to be trading north of $50 a share by January 2006 - it could be a great play. The leverage that I am hoping to generate as well may enable to me to commit a relatively small portion of my capital (re: less than 20%) to the gold positions and still produce outsize gains if I correctly anticipate the future course of events.

That is it for this Sunday. We will see how I fare in my final week of the NEM speculation. I am so far really enjoying this blogging journey.

Best Regards,

BG

Feel The Rhythm

Gold is really starting to awaken here and I am selling into strength this morning - unloading half of my options position. I had a desire to hold on longer, but I realized that it is in my interests to become more disciplined in trade management. So this morning I sold 5 of my 10 Newmont calls for a 100% profit. That resulted in recovering my entire cost in the position including commissions. So basically, any further increase in the options from here is pure profit. If the calls falter - I can only lose the gains that I had obtained.

There is one problem with the above analysis and it is a worry that I have become increasingly conscious of with this year's success. It is also an important point from the trading perspective. Basically, at some point - your portfolio consists largely of former profits. It is not healthy for you to think of - oh - I am still above my cost - because you are constantly trying to increase your pot.

Any type of hit that your portfolio takes - 10-15% as a whole - results in volatility to your returns and is a significant drawdown of your available capital. The best traders seek to limit drawdown at a maximum of 8% of capital.

Here are a couple charts and numbers of the first part of the liquidated trade. Options expire next friday and I will let the rest of my position run. Let's hope for another double next week . ;)

Newmont - Daily P&L:


Newmont - 1/2 Position Close:


Newmont - Entry and Exit Chart:



Today is shaping up to be another great one. Let's keep our fingers crossed.

-BG

We Are Rockin This Morning

Not sure what happened yesterday. I guess some Fed Governor came out and said that he was concerned about the inflationary trends in the economy, so finally it is off to the races today with gold up and NEM and my options performing well.

My time horizon is closing in, so I will discuss a difficult choice. Assuming that the position continues to perform well, I will have in the money options on/before September 15 (expiration date). So I will either have to cash out the trade and re-purchase any investment in gold at a later time or I can just roll over my options to October or November expiration - with the problem of course being that there might be a good portion of time and implied volatility premium in the new ones.

I haven't explained the tools yet for valuing options, but hopefully by this weekend I will give a little breakdown on what I look for and what "time" and "implied volatility" premium mean. Right now, I think it is enough to say that if I roll over my options, I am afraid that I am going to overpay for the new ones and be more susceptible to a drop in the stock price.

This is important as there are extraneous events after the options expiration - mainly the Fed Meeting on 9/20. This could be very negative as Fed could announce desire to continue rate increases until inflation is under control. It could also be positive if Fed announces plans to slow rate cuts. Regardless - I consider that there will be significant event risk there and might just sit it out in cash to see how 1) I evaluate the comments and 2) market evaluates comments.

In meantime - here is an update on the NEM position -I am loving it - let's hope this run continues:


Best regards,

BG

What's Going On?

I am sort of baffled right now. The inflation numbers which the Government released today were higher than expected. The government is going to be borrowing a lot more money over coming months for hurricane related reconstruction. There is a wide expectation that the Fed will slow down on rate increases or stop altogether. So why hasn't the dollar crumbled and gold taken off yet?

Besides the typical conspiracy theories - the only logical thing I can think of is that the market prices based on expectations. Perhaps when more and more inflationary data is released, the expectation arises that the Fed will continue to raise rates or raise rates higher. I do not think this is the case currently - but I don't have a lot more to explain what is going on.

On another note - Motorola's new Itunes phone was released today with Cingular. A sub-note - but this phone uses MicroSD memory. That is the format developed by Sandisk that they own a ton of the intellectual property on and thus they are probably going to be getting some great royalties if the phone is widely adopted and production for the MicroSD chips ramps across the board. Time will tell - but I still like Sandisk and am hoping that I can pick it up later this fall or early next year but at a lower price. A price not induced by poor earnings performance, but a price that is lower due to market sentiment.

Regards,

BG

Relief Rally?

Not really sure what is going on this morning. Broad market is up sizeably and I don't know if I understand the logic. Oil is a down a quarter? There is not $100 billion in damage in the South that we are going to have to borrow to rebuild?

I don't know......maybe I am just too negative today. Anyways - I like the big mover of the day - PDLI - which is showing some great action trying to break $30.
Looks like it is ramping on some positive clinical news and an analyst upgrade. I don't really understand biotech stocks/industry - but I do love this chart.

Gold is doing nothing today and my cash is just sitting there. I want to buy some NCTY - but am going to wait until the market sells off sometime over next few weeks. Maybe it won't come - I don't know. There was a big article in Barrons this weekend about the fall rally. I don't buy it - but like I said........I am too negative.

Regards,

BG

Tempered Enthusiasm - Investing In Warcraft

I am very happy this holiday to bring everyone a special report. For well over ten years I have been playing the videogames created by Blizzard Entertainment. I am sure that some of the names will ring a bell even with the non-gamers among you (Starcraft, Warcraft III, Diablo, etc.) Blizzard has been enormously successful, but they are owned by a huge French conglomerate named Vivendi. Vivendi has a market cap of over $36 Billion and over $30 billion in revenues per year. The Vivendi games section of which Blizzard is a part accounts for under $1 billion of Vivendi's total revenues. Previously, the only real way to invest in Blizzard's continued success was an investment in Vivendi - where you would really be buying many other businesses - mainly a Moroccan Telephone company and a French wireless company.

Time are changing however, and there is now a pure play investment in Warcraft available. It has many interesting features - mainly exposure to the Chinese market and an ADR on the Nasdaq. I think the company's valuation is also potentially attractive - but we will need to delve much deeper and I am looking for other reader commentary here as well - as I am pondering putting some big money (for me at least) in this thing later this fall.

Here is a quick profile and chart:


Now some more of the marketing details. What exactly does this company own and why are they a good vehicle to invesmentt in "Warcraft"?

1) First - the company name is "The9 Limited" - symbol (NCTY). They own an exclusive right to operate World of Warcraft (WOW) in China for the four years between 06/07/2005 - 06/07/2009.

2) During this time period they will share revenue with Blizzard as follows... for every $1.00 that they collect from selling software or services they will pay Blizzard $0.22 royalties. In addition there are certain minimum monies committed to Blizzard regardless of The9's operating success. There are also advances made on the royalty payments which may be recouped in the event that the revenue does not materialize (unlikely).

3) At present it looks like The9 is setup to pay Blizzard at a minimum - $54 million dollars over 4 years to operate WOW in China. That breaks down to around $13.5 million per year. If we consider that Blizzard has been promised 22% of all revenues related to game operation and they are being advanced 13.5 million per year - that implies (13.5 million / 0.22 = $61M) that Blizzard and The9 anticipate $61 Million in annual revenus for The9 as a very achievable goal.

4) The due diligence I have read through and reviewed produces most of its estimates by extrapolating the ACU (average concurrent user data) - and then multiplying that times the gross amount per hour - approximately $0.044 USD and then subtracting out the royalty payments and other operating costs. It appears based on some of these assumptions that The9 could do between $25M-$30M in revenues in the Q3 and potentially net around $10-$15M off of those revenues. That would produce some very solid EPS. As follows below I have included a summary of these figures I got off a Yahoo message board:

"I estimated the Q3 revenues and earnings using the numbers available to us. Let me know if any of my assumptions are incorrect.

Revenue = 25.2 Mil
(260,000 * 24 hrs * 92 * .044).
Assumptions: ACU = 260,000 (June level).
ARPU = RMB 0.36 (4.4 cents/hr), same as for Q2.

Total Expenses = 13.7 Mil
(Royalty payments + Operating expenses)

Royalty payments to Blizzard = 6.9 Mil
(260,000 * 24 hrs * 92 * .055 *.22).
Royalties are 22% of the face value (!) of sold WoW pre-paid cards. Prepaid cards sell for 5.5 cents/hr.
Operating expenses = 6.8 M (management sees operating expenses at the same level as for Q2)

Equity Loss = 0.5 M (MU, etc. same loss as for Q2)

Net Profit = 11.0 Mil
(Revenues - Expenses - Equity Loss)

Q3 EPS = 0.45 USD"

I think most of the above assumptions are reasonable. The one thing that I did not see a reflection of here and I have not seen much commentary on - is that The9 does not currently own 100% of C9I, which is the entity that operates and owns the rights to WOW in China. In fact - The9 co-owns C9I with another asian company and their ownership is currently limited to around 68.9%. From an accounting standpoint - I think they will manage to twist the EPS numbers their way as they have been consolidating the C9I revenue/earnings - from IPO, even though they only started with around 54% ownership.

They are expected to purchase the remaining 31% ownership interest in the entity sometime in Q3 for an undisclosed amount - but I think it is safe to assume in the $7-15 million range. Depending on how that purchase is accounted for (re: deducted from operating income or amortized over several years) - may have a major impact on Q3 earnings.

Here are a few different ways to shade the facts re: The9's opportunities:

Negative Scenario: The9 has nothing. They have the "right" to operate WOW for a period of 4 years. They own none of the intellectual property and after the four years is up - even if they were successful - they will have to pay out the eyeballs to get the next Blizzard game or renew the Warcraft license.

Positive Scenario: The9 has everything. They are "exclusive" with WOW in China. This game is hugely popular worldwide and they could potentially garner up to 10M paying customers over the next 2 years on a monthly basis. This would mean huge money for them and an increase in the stock price.

Now, finally - I will get to what I consider to be the biggest risk regarding The9 - which is political. Here are just a few of the regulations adopted by BigBrother (aka Chinese Government) over the past few years regarding internet access. Unforunately this type of regulation appears to be accelerating instead of going away. This is a very troubling trend.

Unfavorable Legislation to Industry and my commentary:

a) Internet Cafe Regulations - much more difficult to open one and many were shut down. Also makes it more difficult for kids under 18 to enter. I see this as a major negative.

b) Limited hours - Big Brother has put limits on how many hours the people can play video games.

c) Classification of games - Big Brother has said that certain games are bad because they have violent content, etc. and for those games - people under a certain age cannot play them and hours are limited, etc. (note: WOW is considered one of these violent games and its playtime is limited accordingly.)

d) Here is a link with more of where Big Brother is headed - http://www.gametab.com/news/352246/

This scares me so much because I am thinking what if one morning I wake up and read a headline that says - Warcraft outlawed in China! When you think about the phenomenon that Starcraft was in Korea, I think you could imagine that it would scare the shit out of the Chinese Authorities that a videogame had that much control over their people and just outlaw it altogether. Or what if they just outlawed all the games that they considered too popular.

I don't know if there are any overlapping requirements here with their 2008 WTO admission - that they will be forced to move closer to an open society instead of closer to a prison, however the developments re: the video games industry over past several years - look headed much more in the prison direction to me. I was shocked to read the political risks that exist - but the more I am seeing them - it is a huge wake up call.

So for the meantime I am not going to buy much of this one. I am thinking of getting my feet wet with 100 shares sometime in next few weeks - but ultimately I would like to own 500-600 shares of this company based on their operating potential.

The problem is that I don't know if I will have the balls to do it based on the political risks. I have not accounted these types of issues much before as I have traditionally purchased companies that operate mainly in the USA, Americas, Europe, etc. - (with the notable exception of the mining companies).

Any comments or feedback is appreciated.

Best Regards and Happy Holiday,

BG

More Reader Mail

Another question I recently received was - "what does 30-1 leverage mean?" I would like to address this by first defining leverage. MW defines leverage as the "ability to use credit to enhance your speculative capacity." I would like to elaborate on that a little bit. Borrowing (re: the use of credit) - is only one way to leverage yourself. However, it is probably the simplest example - because people can understand it through the means of their own home - a leveraged investment that all Americans make whether they are aware of it at the time or not.

Example: Johnny decides to buy a new home in Chula Vista, California for $800,000. He manages to round up down payment money of $80,000 and borrows the rest ($720,000) to purchase his new home. That works out to a ratio of about 10% equity / 90% debt from the get go. He is in effect 10-1 leveraged. In other words - for everyone 1% increase in the price of home, he will make 10% on his investment (remember - he has only "invested" the 80K). How is this possible you may ask? (note: this simple example assumes no transaction costs or maintenace costs (re: pmi, property taxes, commissions, etc.)

Well......let's think about it - and assume that his home price rises 10% to $880,000. At that point he has still only invested $80,000, however his total home equity has increased to $160,000 ( original investment (80K) + home price increase (80K) OR asset price (880K ) - total debt (720K)).

For a 10% increase in the asset price - he has made a 100% return on his money - as he is "leveraged 10-1." Of course this math can work in reverse.

The additional important note to make about leverage is that derivatives - of which there are many types - futures, options, etc. - are another financial instrument which enables you to employ high leverage. When I refer to being "leveraged 30-1" in a particular trade - I am definitely referring to owning options contracts as I do not trade on margin at present. This should raise the red flag to two things - 1) volatility can wipe Ben out if he is that leveraged , 2) Ben can make or lose a lot of money very quickly.

In the current trade that I have on in Newmont Mines - the underlying asset was the stock (NEM), and my investment mechanism is the call option - September $37.50 calls. I purchased these calls at $2.20 (10 contracts - with each contract controlling 100 shares = 100*$2.20*10).

The leverage I obtained was not 30-1 on closer reflection - it is actually approximately - 18-1. How did I get that number? I took the price of the stock when I purchased my options - $39.50 and divided it by my purchase price of the option. There are many other ways to conceptualize the idea. Another one way would be to think of it as - as I currently control $40,000 worth of stock with around a $2200 investment. Just as if I owned that stock outright - if its price increases by 10% to $44,000 - I will capture that $4,000 gain with my investment to have $6,200 - so that in effect I have made a 180% return on my investment with a 10% rise in the stock price.

I have seen opportunities to be leveraged as high as 100 or 200-1 just as I have seen more moderate opportunities of 2 or 3-1. The important point of leverage is not that it is a solution which will make you money. All leverage is telling you depending on how you evaluate risk - is that you could potentially risk a smaller portion of your total capital in order to produce the same return as if you had invested all of your money. In order to achieve that benefit you amplify your margin for error however. Additionally - if your idea for the investment was not good in the first place - you will not make any money just because you have leveraged yourself - in fact - you will lose money faster as the stock price decreases.

That is it for today I think - maybe tonight or tomorrow I will follow up with my special report on how we can invest in Warcraft but now the legal books are calling my name and I have to get to work. Have a fantastic weekend and let's make some money together.

Regards,

BG

Cause and Effect

I will admit that a big part of this blog is self-serving - I want to document all of my trading and investment ideas in order to hone my skills and become a more effective trader/investor.

In order to have the maximum effect however, I need to be able to clearly articulate my investment themes and the logic behind them. I received an e-mail from a reader last night who did not understand how "gold worked." At first glance this may seem like an easy question answer- but it is far from that.

I am going to try and outline a few of the main concepts that should come to mind when we think of gold - why I like it in the current economic environment and some of the risks involved with:

1) First - what is gold? It is a commodity-a precious metal which is traded along with other precious metals on the worlds financial markets. Traditionally gold has been revered as a store of value - some people call it the only true currency. There are cites to facts like an ounce of gold will buy the same today as it did in 1200 AD. I don't know if that is true - but I do agree that gold typically reacts positively when news comes out regarding inflation hitting the economy.

2) What is gold priced in? Dollars, yen, euros, etc. Gold is traded throughout the world in every currency imaginable. The most interesting thing about the whole system - is that Gold may be appreciating in the value of one currency and declining or remaining stable in the value of another. Example: From 2001-2004 during a period when the dollar lost a lot of its value against the Euro - it was also losing value against Gold. However, if you were to value gold in Euros - its value remained relatively level during this period. Here are some charts:



There are different types of exchange rate regimes which are possible - mainly fixed and floating. During the past 30 years we have operated under a floating excanged rate system with a paper currency. In other words - the value of the dollar has value - because people accept it implicitly to be worth something. It is not exchangeable for X ounces of gold or silver the local bank - instead it is only valuable so long as someone will accept it as payment.

Most currencies in the world operate under a floating exchange rate regime and their purchasing power rises or falls along with the demand and supply for that currency. Between 1995 and 2001 - the USA had very strong financial market returns and international investors chasing that performance had to sell their own currencies and purchase dollars in order to pursue those opportunities that resulted in an artificially strong dollar.

As financial market and investment returns have diminished over the past five years- along with the decline in interest rates - investors have had few reasons to hold dollars. Investors have instead chosen to sell dollars and purchase other currencies, commodities, or real estate.

There is a strong case to be made that much of the returns in those areas since 2002 to present can be explained by the huge drop in both nominal and real interest rates in the United States. To keep from getting any more off topic - I thouht the above would be useful to explain that so long as the purchasing power of the dollar is declining as manifested in rising prices of commodities, real estate, inflation, etc. - gold should perform well. (that last thought's logic was a bit circular - but I think it made sense).

Comments please - I really want to see if people are on same page?

Regards,

BG

This Blog Is Its Own Reward

I have to say I did not anticipate the success resulting from this blog would be anywhere near the result so far. Nothing has been closed out so far - but the purity of an idea and expectation which is documented and then comes to bear fruit days later is proving to build a lot of confidence.

It remains to be seen if this move in the gold market is smoke and mirrors or if this is "finally" the break out coming so many have been waiting for. I will quote my post on from Sunday night - 8/28/2005: - "This disaster could cause the Fed to stop tightening and even possibly loosen. This has very bullish implications for gold, equities, commodities.......and even.....gulp.....home prices."

The immediate result on 8/30/2005 was extremely negative as gold retested support and my investment lost 50% in one day. Finally on 9/01/2005 my idea was given fruit as President Bush called Greenspan to an emergency meeting in the Whitehouse - presumably to request him to stop raising interest rates as the system is already extremely weakened. The pop in the gold market was immediate.

This trade has already been successful, however if the official announcement comes that the tightening is done (probably too optimistic) or even that they will take a break in September - the results are extremely bullish for metals. I am trying to keep a lid on the optimism.

I have been swamped at work/school/etc. but finally this weekend I will free up and I will be able to bring you full coverage of possibly the most promising investment opportunity of my young life.

I have finally found a pure play investment concept on Warcraft ........yes that's right Warcraft the videogame that I was previously addicted to and is manufactured by Blizzard Entertainment. I will come with a full analysis and investment report this weekend and discuss buy point and my expectations of price movement and time frame.

Regards,

BG

Today.......Is A Good Day

Well.....it looks like I am 1 for 2 so far today. (FRO) is only down $0.34 today (its ex-dividend day) even though owners of the stock today will receive $2.00 per share dividend. This is the equivalent of the stock being up another $1.60 today!!!!! I may have to re-examine this one later this week, but right now time is at a premium - as in I don't have enough! Btw - props to Ghostdog for calling this one correctly - he made a good call - and thought outside the box, whereas I was foused on historical micro price pattern of ex-dividend day and he was focused on the big picture. So basically - I sold FRO too soon.

Anyways - this update was prompted by a positive development in the gold trade. As originally predicted gold has made a major move to the upside and it appears it may break out. Here is an updated daily p/l reflecting the change in the call option on (NEM) . We said that leverage works both ways.....fortunately it is working in the right direction right now:


It might be prudent to unload some of the options at this point, but I really believe we are at the beginning of a big run in gold here and I don't want to sell too early (re: SNDK, AW, etc.) Comments are always welcome from those in agreement / disagreement.

Regards,

BG