Stock Market Q&A

Several colleagues of mine recently asked for my thoughts on several sectors along with a number of option positions. Here are my responses.

I have a great paper profit regarding Rio Tinto's (RTP) spike up due to a takeover offer from BHP. What should my next move be? – I am never comfortable with trying to arbitrage takeover bids. If it was me I’d probably sell all the calls. Trying to time the absolute top is usually a fool’s errand. If you want to be a more aggressive, sell half of the calls. Then you are playing with the house’s money on the chance of a higher bid. For another aggressive play, sell all the calls you have and buy new calls at a higher strike price (option strategy called a “rollup”). That way you protect much of the gain you’ve made and the most you can lose is the cost of the new options with the higher strike. I am currently long FCX.

Is the Dow oversold after last week's downturn? - I agree that the DOW is oversold, but the technicals continue to break down. The faster transparency is achieve regarding write-offs and any other exposure from the credit mess the faster the market will rebound.

Is the Nasdaq oversold after last week's tech plunge? - The Nasdaq sold off hard last week but it is still up more than 15% YTD. That is a good return for any year. All of the high growth big cap techs have run up huge the last couple of months. It is certainly not a surprise to see profit taking and retrenchment. Think of it this way. Google lost $77 a share last week. But it could drop another $50 and still be $121 higher than the August lows. I am optimistic for a strong tech run into year end. I continue to be long GOOG, APPL, CSCO, EMC and RIMM.

Is the correction in the XLF (financial services sector ETF) at a bottom? - It is too early to get into the XLF. There are just too many other things that can make money without getting into the middle of this mess. Just because the financials are done reporting next week doesn’t mean the bad news is all out. These guys still have no idea what they own and what it will ultimately be valued. I do continue to be long GS.

Will the commodities exchanges (CME, NMX, ICE) continue their strong bullish move? - This highly volatile market with strong upward pressure on oil and commodities in general is just printing money for the exchanges. I continue to love this sector. I am long ICE.

Is Newmont Mining still bullish? I haven’t done any work on Newmont so I can’t comment. I do like the sector and continue to be long FCX. The buzz in the sector is one of continued consolidation.

Should I continue to be long Foster Wheeler (FWLR) call options? – I haven’t done any work on Foster Wheeler but continue to believe that we are in a long term bull market in infrastructure. This industry has historically traded at a discount due to its boom and bust nature. I believe that the best of the engineering and construction firms are undervalued despite a huge move up. Backlogs continue to grow every quarter. Wall Street has not fully revalued these firms for a secular bull market verses a boom and bust market. I am long JEC and SGR.

What is your opinion about continuing to hold long Freeport McMoran (FCX) call options? - I continue to believe in the FCX story. I own both the common and some calls. They are achieving tremendous efficiencies from the merger and have already made better than expected progress in reducing the debt load from the merger. The CEO is saying that they will be able to shift from debt reduction to returning money to the shareholders as early as next year.

Are Transocean (RIG) long calls still a good bet? - I have owned RIG in the past and wish I had held onto it. So long as oil stays above, say $60 a barrel, the deepwater exploration companies are going to be in great demand. I like RIG. My one note of caution is regarding your options position. When the merger with SantaFe is finalized, which is soon, there will be a $33 cash dividend paid out to the shareholders. Usually when there is a big cash dividend like this the shares will drop by a corresponding amount afterword. That is not a problem if you are long the common stock because it is a wash. But with calls, you risk the share price dropping without receiving the dividend. I haven’t researched your particular situation, but I strongly advise that you do and make the appropriate move before the merger is finalized. I am long DVN.

Should I continue to be bullish on DRYS long calls? – I haven’t done the work on DRYS but am long QMAR. I like like the sector. It has taken a hit recently but so long as China is having to bring in coal, ore, etc. this sector should do well for the time being. Just be careful to watch as new ships are built. I’m sure at some point this sector will be overbuilt and will move lower.

Should I continue to be long January '08 Slumberger calls (SLB)? – I don’t have any oil servicers right now, but I probably should. Similar to my comments on RIG, so long as oil stays above $60 then the oil servicers will make a ton of money. The stocks should continue to perform well. Halliburton is a better "value" than SLB in my opinion.

What about long Research in Motion (RIMM) calls? - RIMM is a monster. But it got slaughtered with all the big tech last week. However, on a bullish note, late last week one analyst (UBS maybe?) raised his 12 month price target to $180. I think RIMM is going to continue to do great. They have so much upside in their rapidly expanding international operations it should be a long term winner. I am long RIMM.