Chipotle in a Stall

In 51 trading days, starting on December 6, 2016 and ending on February 21, 2017, Chipotle (CMG) went from $366.37 to $432.36. That's an 18% increase in relatively short order.

Using multiple moving averages on both price and volume to indicate changes in momentum as they occur, there's good evidence that volume has been exhausted on this up-move and the stock has a good chance of falling back below $400 per share.

Using eight moving averages that gives 28 relationships between each pairing of the averages, the price momentum was very weak on December 6th with only 4 of the relationships showing a shorter moving average exceeding a longer moving average. That 4 of 28 increased to 21 of 28 by February 21st, and since then has fallen to 20 of 28 on this first week of March. The price has subsequently fallen from $432.36 to $416.09. At the same time the volume momentum was very strong in December showing the selloff was happening on strong volume with 20 of 28 shorter moving averages exceeding their longer term pairings. However as the price increased into February the volume relationships fell to 8 of 28. Into the first week of March there are now only 5 positive pairings of the volume moving averages. 

This indicates that buying enthusiasm has run its course and the price has started showing weakness amidst a very strong market rally; however the relative weakness is just an anecdotal observation.

Short positions that could be constructed at this point range from shorting the stock directly, or selling an option pair strangle with a 420-Call and a 390-Put that will net $16.55. The near-the-money call would contribute $12 of the $16.55, and gives a generous break-even to the downside of $375.

Dow - Geometrically Speaking

How long does it take to double your money in the market? The number of ways to calculate that answer is dependent on the complexity involved. Which index is valid? Do you add dividend yield? Do you discount it by relevant risk-free rates to calculate a real return?

The numbers are revealing enough without any complexity factored in, so this analysis is going to use the nominal values of a market index. In this case the venerable Dow Jones Industrial Average (DJIA) will be used and it doesn't take long to do some spreadsheet analysis and determine the answer to the "how long does it take to double your money" question is an average of 10 years. That's a Compounded Annual Growth Rate (CAGR) of 7.2%.

It's the segmentation over history that makes this analysis interesting, and it's also a great way to come to an opinion of where we are today.

Working strictly with milestones of even 1,000's on the DJIA index, it will become apparent that the doubling effect every 10 years is an average that has had significant variance.

First segment of interest was the time it took for the DJIA to travel from 500 to 1000.

500-1000) Mar 1956 to Nov 1972, or 16.7 years. CAGR = 4.2%

This first segment spanned Eisenhower's first term with the re-elected Nixon. This analysis is not assigning performance to presidents, but it's a convenient way to think of eras.

The poor performance could be attributed to the market crest in 1966. The market hit 989 in February of 1966, but it took another 6-plus years to see a week close over 1000 on the DJIA. Had the market reached that milestone in February 1966, then the average of doubling every ten years would have been achieved, almost exactly.

Next doubling:

1000-2000) Nov 1972 to Jan 1987, or 14.2 years. CAGR = 5.0%

This segment ran from Nixon to Reagan. The 1966-1982 bear market played a major role in each of these first two segments, but together they represent a lot of time where investors were suffering over long ranges of time. Recall that we could have nearly had a Dow 1000 in 1966, which would have made this period 21 years, instead of 14.

Next doubling:

2000-4000) Jan 1987 to Feb 1995, or 8.1 years. CAGR = 8.9%

This segment ran from Reagan to Clinton and the investor would had to endure the crash of 1987, but eventually they would have been rewarded with an above average return.

Next doubling:

4000-8000) Feb 1995 to Jul 1997, or 2.4 years. CAGR = 33.6%

This segment was one for the history books. This Clinton era bull market was similar to Barry Bonds hitting 73 home runs. It's not likely going to happen again. Apply your own analogy to the Greenspan-put and steroids.

Next doubling:

8000-16000) Jul 1997 to Nov 2013, or 16.4 years. CAGR = 4.3%

This segment has come full circle to the 1956-1972 period. From Clinton to Obama this period saw the end of the Tech Boom, then the recession of 2001-2002, and the near depression of 2008-2009; with each pause followed by a strong recovery. To return to a sports analogy, this was a Barry Sanders run where he got tackled eventually near the line of scrimmage - after darting sideline to sideline.

So does 2013 look like 1972 after taking its sweet time to produce a double? Another, more recent segmentation would make it appear that we aren't past the molasses stage yet.

9000-18000) Apr 1998 to Dec 2014, or 16.7 years. CAGR = 4.2%

Now the comparison to 1972 is spot-on arriving at the same duration and CAGR. That takes us through 2014 - what about now? The Dow got within a whisker of 20000 on the President-elect Trump rally at the end of 2016.

10000-19934) Apr 1999 to Dec 2016, or 17.7 years. CAGR = 3.9%

Now to those that believe we are in another extended market, one could respond that they just waited for their 1999 investments to double, do they have to wait even longer in the near-future? It is possible since the sluggish period of 1956-1972 was followed by another similar sluggish period from 1972-1987. That was 31 years in duration to achieve a quadruple, or a 4.5% CAGR performance.

 The post-Tech Boom period has every good reason to be followed with a long period of under-performance. That boom was a massive bubble that rivaled the great bubbles in history. That was a boom in the stock market and it cannot be ignored that a bigger bubble in the housing market popped in 2008. Along with that came a bubble and popping in the commodity and energy markets. The Housing and Commodity bubble do not necessarily depress stocks but they both robbed the investor of liquidity to reinvest in stocks.

A future segmentation could look like this:

8000-32000) Jul 1997 to June 2028, or 31 years. CAGR = 4.6%

It has been demonstrated that long periods of 4.5% returns have their own intra-period variance (Barry Sanders runs). Yields and discounting were left out of the analysis - but in a broad-stroke analysis they would have made the variances even greater. The low returns of the 1970s and early 1980s were compounded by high interest rates. The investor broke even from 1966 to 1981 nominally, but lost purchasing power to inflation and missed a risk-free alternative of double digit returns. The high-return period in the Clinton area were even better, considering a low interest-rate environment.

The bad news is that "Dow 32000" could be in the face of risk-free returns that double the market returns. What could provide a quicker double looking forward?

Short Bond positions (TLT is an ETF that tracks with long-dated treasuries).

When a Favorite Falls from Grace

One may think of Apple (AAPL) and Chipotle (CMG) as stocks, and companies, that have little in common.     But the one major theme that binds them is that they were favorites.  In 2012 their respective stocks were favored at times showing considerable relative strength to the general market.  Chipotle was propelled to $440 per share in April 2012, a 57% gain over the year earlier.  Apple saw its high-water mark five months later when it closed at $702 per share; that represented a 71% gain in a year's time.

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Setting each stock on a 100-point index, at their highest point makes for an interesting comparison.

There have been 96 trading days since Apple crested at $702, as it closed today (Feb. 7, 2013) at $468, that puts the Apple Index at 66.69.  That compares incredibly similar to Chipotle's 96th trading day when it measured 66.77 on its 100-point scale.

Their methods to sell of one-third of their valuation have not been alike.  The graph above shows the Apple decline much more linear while Chipotle has had more volatility.

Given the five month head start Chipotle has on its meltdown, it now can provide a five month forward-looking rebound for Apple shareholders.  Chipotle incurred a wide range of prices after its first 96 days of correction.  It would imply of range for Apple of $380-$555 if Apple experienced the same type of volatility.  If Apple skips the drama and find a bottom in the next 40 trading days, then it could be expected to start trending its way about 70 on the index.  That would mean a price near $500 in July 2013; not significantly higher than it is today, but when and where the bottom is put in will be the interesting story.

The similar nature in the way the companies delight their customers, have executed well and are on solid financial footing seems to lend credence in watching Chipotle to predict what Apple might encounter.

Speaking Volumes

Chipotle has been hot - and that is no reference to the sauce - the stock (CMG) has been on fire. Over the last year the stock has increased 62% (from 241 to 390).

But if you are the least bit "technically" inclined, you've probably mastered a simple concept of what it means when volumes expand or contract. Simply, expanding volumes favor the existing trend, and contracting volumes are signs of a reversal. The latter condition is playing out in remarkable fashion.

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As February 2012 ends - here are some volume statistics on Chipotle (CMG):

Since 3/1/2011 (1 year) the daily volume has averaged 829,000 shares
The first half of February 2012, as the stock rose from 367 to 378, daily volume averaged 600,000
The second half of February 2012, the stock rose from 378 to 390, daily volume averaged 400,000; with the last five days of the month all being less than 400,000 shares.

The above graph is the Golden-125 charted for Price and Volume. The Golden-125 employs eight moving averages that have 28 relationships with each other. As the shorter term averages exceed the longer term averages it calculates a progressive point system; longer averages garner more points than shorter averages. The point system results in a score from zero to 125. Zero means every shorter moving average is less than every average of longer duration. Conversely, 125 points means that every shorter moving average exceeds the longer moving averages.

It is clear that in December 2008 that the dropping prices ended when volumes hit zero. Everyone had rushed to the exits, and there were no more sellers to be found. Now the contrasting condition is in effect; the buyers are "in". Volumes are drying up, predicting a price reversal.

The last such sell-off is evidenced on 11/11/2011. Volume hit zero with the CMG price at 332. Two weeks later on 11/25/2011, with volumes spiking, the price dropped 10% to 301.

Watch for heavy volumes starting to occur on down days. Get your bets placed if this makes sense to you; I have established a long put on the January 2013 options with a strike price of 375.

Junior has been misbehaving

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All measurements are set as an index = 43.80 at 12/31/2004 (GLD price)

When investing in gold, one has several options. Everything from collectible coins, bullion, stocks, and ETF's are on the menu.

I track, and own, three dinstinct categories.

GLD is an ETF that holds gold bullion. For me, it is the best way to own gold without having to figure out how to handle and store it. It also tracks well to the price of gold. There are a few indices that track gold stocks; I prefer the GOX index. It is comprised of the major gold producers, like Newmont and Barrick. The Juniors - the explorers and developers - are the most difficult to track, so I made my own index. I use 10 junior stocks, then advance an index based on the median price change each month. My results mirror everything I have read lately, in that junior gold miners are lagging.

I started my comparison at the end of 2004 when gold was in the $430 range. Since then staying as close to bullion has been the best way to go; a CAGR of 21.6%. Major gold producers have been challenged by high energy costs, political risk and their own price hedging stumbles. Despite those drags, one would think the price of the base commodity could not be any more favorable and these majors should be well leveraged to the price of gold. If your costs are $700 per ounce and gold travels from $1200 to $1400 - it's not just a 17% (2/12) gain for them - it is a 40% gain to the bottom line ($700, versus $500).

The juniors, who are very important for the major producers to expand their finite capacity, just have not delivered. One of the most frustrating aspects to owning the juniors is the way their management always hypes their opportunities and never acknowledges risks until they experience them. The management all speak effortlessly in terms of probable reserves, but usually contradict themselves when they project their long term cash needs - as they continually issue more shares to advance exploration and production. Those "probables" always seem to undeliver in the present, but always look so good in the future. Meanwhile machinery failure, environmentalists, nationalists, you name it, detracts from current results.

Despite their lagging performance, juniors are returning an average 6.2% over the six-plus years I have tracked them. That compares very favorably to the 1.8% CAGR on the Dow Jones in that same time frame.

Some of the underperformance can be laid at the feet of the majors. Eventually these giants will buy the juniors to expand capacity - but they always wait until they get expensive before they start buying. It is as if they don't like a bargain. Most likely they just move in herds and only start buying when inflation in the price points to the fact that if they don't buy now, it's going to cost them more in the near term future.

The juniors are the only group here that have not come back to their pre-credit-crisis high. For that reason alone, I like them here - I just try not to listen to their management.

It's a Horse Race

Here is the 12-year battle between the DJIA 1982 bull and the Jim Rogers Commodity Index of 1999. The DJIA was at 4,000 in February 1995 which is the equivalent time on the DOW to June 2011 on the Commodity Bull.

A Quick Statistical Analysis

Today the market was up and the VIX was down - a normal occurance. The VIX, a measure of market volatility, is typically inversely correlated to market direction. Periods of high volatility occur in declining markets - markets don't melt-up.

Today was the fifth day in a row, or every day this week, that the market increased. The DOW ended last week at 11955 and finished today at 12583. Conversely, the VIX fell each day this week, ending last week at 21.10 and closing today at 15.87.

While observing this toward the end of close, with the VIX at 15.39, I was inclined to buy some call options on the VIX. But having a rule that I don't invest in options unless I can calculate an edge, I pulled up my spreadsheet on closing VIX prices since 1990 to do some statistical analysis.

With a check of the option tables, I saw that I could buy a November 17 option for $5.20.

That means that sometime between now and November, the VIX must hit 22.20 for me to break even on that option. There are 94 trading days remaining until the November 15, 2011 expiry date.

I took my spreadsheet of daily closing prices and wrote the formula, where "B" is the column of prices:

=max(b2..b94)/ b1 -1

For every price point I looked forward across the range of 93 days-forward and found an average expected maximum price. Over 20-plus years that figure averages 42.8%.

Using my current price of 15.39, that resulted in a max price of 21.98. That would make the November 17 option worth 4.98 intrinsically - so paying $5.20 looked like a bad tradeoff.

However, since I'm buying the option for the reason that the VIX has fallen five successive days, I put that logic in the spreadsheet; only calculating the max value if the price had fallen five consecutive days. Interestingly, there were 70 times that occured in 20 years.

The result was 48.0%. That increased my max price expected from 21.98 to 22.77. That made the option's intrinsic value go from 4.98 to 5.77. Now a $5.20 entry price is looking at a 10% return; more if you consider that if it happens before expiry date, there will still be some time premium in the price of the option.

And with that analysis, I clicked a few keys in my Optionsxpress account and became the owner of 10 contracts.

There was still another hour left in the trading day, so I was anxious that my price may not be favorable. Recall that all my analysis was done on closing prices and I extended the price at 2:41 p.m. when it was 15.39. I was then lucky to have the VIX strengthen to 15.87 at the close. That means my analysis of 48% increase on closing price after 5 days of decline now calculated to 23.35, or an intrinsic option value of $6.35.

All of this analysis, with spreadsheets ready-to-go, takes less than 15 minutes. But it gives a nice documentated case as to why one should or should not take a position.

Yield on the 10-Year Treasury

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The graph above is the 10-Year U.S. Treasury Bond Yield from 1965 to 2000.

On the left Y-axis is the percent-change of the current yield from the 144-week moving average of the yield. It is a technical measure that I watch closely.

The right Y-axis is the yield. It clearly shows that interest rates are exceedingly low with a perspective of a 45-year history.

Fundamentals

The easy-money environment that has existed since the 1980's has changed in one basic regard; the money from the Federal Reserve to Banks is still easy while money from the banks to business and consumers is anything but easy. However while individuals and small business are learning to live within their means - the U.S. Government and Investment Banks are on a spending spree. Banks are demonstrating they can make money as long as it starts as risk-free money (no, or little cost). The Government cannot stand the thought of assets, like homes, reaching fair market value, so stimulus money is a favorite means to prime the money pump into the general economy.

Ultimately, the long-date Treasuries are the means which cash flow runs through the Goevernment. If buyers line-up and bid these securities prices up, then the rates remain low. Once buyers demand a higher return, sensing risk on these securities, then the ask price stumbles until buyers can be encouraged to find their risk-reward tradeoff.

Technical

For the last twenty years the yield has been dropping with the yield in a boundary of +/- 20% of its long-term moving average. The downside has taken a few trips below -20%, but the upside has been regularly capped at +20%.

With this latest bounce off lows, again, the yield is coming from near -20% - however this time I believe the boundary will be violated on the upside. I foresee several run-ups in yield (generated by a buyer's strike on Treasuries) with a quick ride to 4,5 and then 6+ percent yields.

Profiting directly from yields (drop in price) is not easy. It is possible to short Treasuries. ETF's like IEF, TLT and TLH are easier to short. TNX is the symbol for yield, and it has traded options - but they seem to always be pricey, with an unattractive bid-ask spread.

As treasuries become cheap - hard assets will become expensive. The indirect way to profit is to own commodities like gold and silver.

A contrary opinion to rates rising is another credit-related crisis with massive deflation ensuing. While possible, rejection of the expensive U.S. Treasury seems more likely at this point.

The Second Half of the Commodity Bull

This is a frequent post topic, but it is intended to correlate with the importance of the topic.

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Here, once again, is the comparison of the current Commodity Bull with the last great Equity Bull, measured by the Dow Jones Industrial Average (DJIA). Jim Rogers started an index to track Commodity prices starting in July 1998. His call about that being the next great bull market has been "right on". The two indices start on this graph the last time they were at 1,000 but did not retrace below that mark. That occured in March 1999 on the Commodity Index and November 1982 on the DJIA.

The "X axis" is shown in current Commodity Index dates with the DJIA occuring 16 years and 3 months earlier. The end points are March 2010 for the Commodity Index and November 1993 for the DJIA. It's important to recognize that November 1993 is one year into Clinton's first term and one year past the 1992 recession that caused Bush I to lose the election. Currently we sit about one year past the great Credit Crisis of 2008-2009. Regardless of the economic recovery path in the U.S., the Commodity Index is much more likely to be influenced by continuing development of the emerging economies of China, India and Brazil.

The November 1993 DJIA sits at 3,700 with a quick trip to 10,000 in store during the next six years. It is very conceivable that the Commodity Index will not fall behind this pace, and may even exceed that pace. At the current end points the DJIA has compounded at 12.6% from its origin, while the Commodity Index is running at a rate of return of 11.2%.

The one important difference is the volatility one will experience by being a Commodity investor. Note the difference in the 1987 crash on the DJIA and the 2009 Credit Crisis impact on the Commodity Index (and they are scaled correctly on this log-graph).

Here is another look at annual returns, plotted every month on a rolling basis for the Commodity Index. It is the right place to be, but not for the faint of heart investor.

Annual returns can regularly exceed 40%, but correspondingly, the falls can be equally as breathtaking.

Relative Value - on which side of the equation?

Gold and Oil have a long-term relationship. It is marked by volatility, but it lives within a range. Gold's per-ounce price runs from a 10 to 30 mulitple of Oil's per-barrell price.

This chart from IncredibleCharts.com shows the thirty-plus year history of the gold-to-oil ratio.

As this chart ends in 2005, the next chart uses the ETF's for each commodity.

Since the gold ETF, GLD, has a 1:10 ratio to the per-ounce price, that makes the relevant range of 10:30 reduced to 1:3.

That's exactly what the range has traveled in a New-York-minute. While almost all commodities have fallen like a stone, gold has held up.

Commodities have been giving an indication of deflation during the financial crisis unwinding of massive leverage. Common sense tells a different story, seeing the Fed and US Government ready to move trillions in place to prevent a financial collapse. Caught in-between is the once weak dollar which rallied in the face of the unwinding. Now as the dollar is weakening again, that leaves the question whether gold will resume its role as a hedge to the dollar and inflation.

Regardless, the gold-to-oil ratio is historically high. Will oil or gold be the stronger relative mover to shrink the ratio. Not knowing the answer, I think buying GLL, the ultrashort gold ETF, and long USO is the best combination.

Commodities - Shocked Back to Reality

The graph shows the 1982 Dow Jones Index (blue) and the 1999 Rogers Raw Materials Index (orange).

Jim Rogers identified the impending bull market shift from equities to commodities back in 1998. He set up his own index beginning then, set to 1,000.

The indices are plotted along the current time line of the Rogers Index. The Dow Jones index is 16 years and 3 months behind the Current Time Line. The October 2008 Rogers Index aligns with June 1992 on the Dow Jones Index.

The Rogers Index fell from 5,718 to 3,138 from June 2008 to October 2008. In June 2008 the Rogers Index was advancing at a Compounded Annual Growth Rate (CAGR) of 20.5%. The dramatic 45% sell-off reduced the CAGR to 12.5%. The Dow Jones Index had a CAGR of 15.3% from 1982-2000.

So while the Commodity sell-off was dramatic enough to erase three years of gains, it is still not far off the two-decade return that equities produced. Commodities are known for volatility - and the second-half of their bull market should have some more twists and turns in the road.

Today's Market Falls in Line

Looking at this post back in July, the May 2007 to May 2008 projection was a very good outlook.

http://marketrhymes.blogspot.com/2007/07/caught-speeding.html

The post looked at the decade of returns following a record setting decade. The mother of all decades was the May 1988 to May 1998 period, cruising at a Compounded Annual Growth Rate (CAGR) of 16.7%. The post compared the three prior record-setting decades and subsequent decade returns. They all showed a dramatic drop off at the end of the subsequent decade.

Using the 1968-1969 returns, the last year of the subsequent decade returns, I placed a projected DOW to predict how the last year of the current subsequent decade would look. Placing this morning's low in the current week, one can see that the projection has been a great guidepost.


One can only conclude from this point some sideways consolidation and then a nice burst back to 13,000+; only to find a spring sell-off waiting after that rebound.

Steak n Shake - Situational Analysis

Recently I was accumulating Gander Mountain (GMTN), a retail play that caters to the outdoorsmen. This was violating the "invest in what you know" rule, since I'm an avid indoorsman. Somehow I was ahead a few dollars on GMTN, and when a weekend edition of the Economist had an article on how the number of hunters are rapidly declining in the U.S., I had sell tickets entered that next Monday morning.

Realizing that I was lucky, rather than good, I made a conscious decision to get back to familiar ground. I have a Yahoo portfolio of twenty-five restaurant stocks that I like to keep an eye on. No sooner had I scanned the news headlines when I saw the name of Sadar Biglari next to an old favorite stock of mine, Steak n Shake (SNS).

I had owned Steak n Shake soon after they brought Peter Dunn aboard as CEO in 2003. He had good credentials as a large company food executive and he immediately put together a multi-point operational plan to address SNS shortcomings. Some of the points of attack were:

* Get consistent products at each of the stores (there were stories of the curly fries being made differently at many of the sites)

* Reduce employee turnover, which was exceedingly high

* Develop bench strength at the store management level to prepare for the next round of expansion

* Keep innovating new menu selections to drive traffic (the new product when I visited Indiana in 2004 was side-by-side shakes, featuring two flavors of ice cream sitting side by side)

The company performance and stock price started improving very nicely. I think I bought around $9 and took profits around $14, missing some of the double that occurred in 2004 from the 2003 prices.

I made another round trip in equity in 2005, but I basically broke even when my motivation for selling came on the news of weak same-store-sales.

Meanwhile I had invested in the northeast low-end restaurant chain, Friendlys. First, I bought their bonds at $.60 on the dollar and when I started seeing some gains on that position, I hedged by shorting the stock. Then along came Sadar Biglari. Someone I never heard of until he filed a 13D (disclosing a position of greater than 5% ownership). He killed my short and made me a bunch of money on my bonds. Biglari was a young gun who made his name by taking a position in Western Sizzler restaurants and pitching a campaign that the board room had fallen asleep allowing the company to underperform for too long. He fought for board seats (2) and basically won the war he waged which included billboards to state his case. He is now the CEO.

Some of his investment firepower comes from a hedge fund that he runs, and he now has the cash flow of Western Sizzler to direct, much like a Buffett or Lampert. Biglari is smaller scale; but the guy is barely 30 years old. It seems he made his initial wad by starting an ISP while still in college.

He used many of the same tactics from Sizzler's experience at Friendlys, though he never won his way on the board. He did remain active as the company reviewed its options and he ultimately agreed with the company's steps to be taken out by private equity.

He now had two notches in his gun belt, and when I saw a filing of a 13D for his position in SNS, I was quick to get on board. I didn't even realize that Dunn was gone as I took my new position. True to his pattern, billboards are up around Indianapolis (SNS headquarters) and letters are being written demanding seats on the board.

My shares purchased on November 6 @ $13.69 were not treated kindly and soon were under $11. At the beginning of December it was announced that Biglari upped his ownership to just under 10%, or 2.7 million shares, of SNS. I wanted to buy more but the weakness of the stock froze me into a "wait and see" mode. I remained that way for the entire month and only over the New Year's Holiday did I look at the internet for some new information on SNS.
The new information came in the form of a Motley Fool interview: http://www.fool.com/investing/general/2007/12/27/a-special-situation-at-steak-n-shake.aspx

Here a value fund manager gives Biglari credit for being a catalyst for him to purchase SNS stock. Read the link and make your own assessment and read my summarization of the key points that I take away:

Opportunities: Company-owned assets could recapitalize SNS by selling franchises; Biglari has the board in the "review options and take action" mode. Biglari is two-for-two in extracting a value-premium from a restaurant stock. Lower-end dining may be the last segment impacted from the stretched consumer pocketbook.

Risks: Steak n Shake has always been at an awkward price point with higher prices than fast food, but the quality of the food is inconsistent with wait-staffed dining. Management can't explain their poor same-store results. This is not where a health-conscious consumer eats; this risk is mitigated by the chain's 400 stores being in the Midwest and Southeast where obesity is the highest in the country. Food inflation likely to get worse, with an unknown capacity for passing cost increases through prices.

Finally, it is interesting to note that Biglari's 2.7 million share ownership is less than the short-interest in the stock by about 1 million shares - establishing an interesting tug-of-war on the future stock price.

I'm surprised that the December 27 Motley Fool article did not generate any additional volume or price action to the stock. That may be a statement to the Fool's declining influence on investing, but never-the-less tread careful with this situation.

An Inconvenient Divergence

Above is the three month comparison of the QQQQ's and the SOXX ****click image for full screen view ****

In the last three months the Semiconductor Index (SOXX) has been hammered while the Nasdaq-100 was flat. That is an unusual correlation. Sure, the SOXX is no longer the growth engine that it once was, but is it now the perfect hedge to Nasdaq-100?

The two major drags on the SOXX were Micron (MU) and Advanced Micro Devices (AMD). Micron is usually a story of dRAM prices and inventories; I don't claim to have a good perspective on either, except buying memory is always getting cheaper. AMD was just flying high two short years ago, with the stock over 40, and Ruiz seemed to have delivered the company out of the shadows of Intel. Finally, faster AMD chips were being accepted by Dell. Then Intel did what they always do to AMD, they dropped their prices and upped their R&D to beat them to the next generation chips.

A questionable acquisition of ATI by AMD also contributed to the valuation collapse. Three months ago AMD was at $13, but recently has been hovering around $7.

Is the whole index, including giants Intel and Applied Materials, destined to be a commoditized set of products which take the sizzle out of the steak? Even maturing companies have a few good moves left in them, like an aging athlete who still shows their stuff periodically.

Early in 2008 I plan to establish a ratio spread with long options on SOXX and relatively fewer short positions on QQQQ.

Oil Services

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With the soaring price of oil, Oil Services remain an interesting place to be in 2008.

The graph above shows the price of the Oil Services Index (OSX) for the last nine-plus years. The price, in green, shows a six-bagger return for those that took the long ride. Even if one would've waited until the late summer of 2004 to catch the wave, a triple-bagger was in store.

The blue line shows the price in relation to the price's 34-day moving average. The wider the range, the more volatility is in the stock price. The volatility has been declining, with the range of the price move remaining within +/- 10% of its moving average.

Combining the fundamental and technical point of view, I would expect the former high prices in the OSX to be revisited as the price of oil breaks the $100 per barrell mark early in 2008. From there, I would expect another price correction, perhaps disconnected to increasing oil prices, and then another long bull run.

I will be building an Option Vertical Spread, selling Out-of-the-Money calls into the next leg up and then buying more At-the-Money calls as the price corrects.

Commodities Can NOT Be Ignored

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The Jim Rogers Commodity Index, started in 1998 at 1000, cracked the 4000-mark at the end of September. The graph shows the new Commodity Bull compared to the 1982 Dow Bull. The Dow cracked 1000 in the fall of 1982. Nine years later, in May 1991, the Dow was just breaking 3000.

The Rogers Commodity Index has an eight year CAGR of 16.2%

Paying for a Bad Call (or Put)

**** CLICK on IMAGE for FULL SCREEN VIEW ****

I took the gamble of getting out of the hedged position on the gold index, GOX, and it went parabolic on me. Today (Friday) it lost a few cents. I believe that it will come under some profit-taking; when I say "it" , I really mean the gold shares that the index represent.

I still show a profit of $1700. The one thing that does concern me is the weak dollar, as the US Dollar index fell below 80 today. Technically there's no support below 80. A weak dollar is generally bullish for gold.

You have to RECOGNIZE a profit

Feeling that the GOX has recovered too far and too fast, I covered my sold puts today, taking a $6,030 profit.

This leaves me with 5 Dec 160 Puts, meaning I'm no longer hedged, and will lose my profits if the GOX continues to rise.

Many option traders would buy and sell their hedged positions simaltaneously. That's just not the way I'm wired. My trading models suggest an 8-day bearish indicator, and I feel the index is tired after its run.

Changing a Profit Curve

I'm making some good paper profits on my GOX spread. I sold the Dec 140 Puts at an opportune time (see prior post).
As the price showed me a profit, instead of recognizing the profit by selling, I started to build a spread; which is a hedged position. Today I increased the short side of the hedge by buying more puts (see ticket to the left). After several years of spread building, I can usually visualize the profit curve that it generates, pretty well. But it always worthwhile to graph it, to quantify the exact tradeoffs.

Below is the profit curve before and after today's trade (click on images for full screen view):




Before the trade I clearly favored a bullish GOX index and after the trade I now favor a bearish one. The reasoning is that the GOX index has climbed from 126 to 141 in quick order, and I anticipate some "back and filling' in the price. At that time I will do some more selling of the Dec 140 put.

The macro factors to keep in mind are that Bernanke will probably have to cut interest rates to save the financial markets. That will put the Fed back on track to do what they do well; that is to destroy the dollar. That makes the case for long-term bullish positions in gold. However these are the December options, so I don't see the need to project that far.

Using an Up Day to Get Short

Today's 200 point up-move (DJIA) is providing a good opportunity to establish some short positions. I believe further deteriation of the financials and mortgage mess, will seize the consumer spending habits. Therefore, I'm shorting the financial ETF, XLF and the retailer JC Penny.



Looking at the JCP one-year chart, all you have to do is imagine that the chart is inverted. If the stock had sold off, then rallied back, there would be many a technician ready to believe the stock has consolidated and is ready for new highs. I'm in the opposite camp looking at a rise and sell-off, now expecting new lows.