EOT Position Update – June 4, 2008

| June 4, 2008

June 4, 2008

Market Snapshot

The Dow Jones Industrial Average just closed at 12,390.  Today marks our fourth down day in a row.  The 200 day and 50 day moving averages are still well above our current position.  This market is clearly range bound.

The biggest news has been Federal Reserve Chairman Ben Bernanke’s statements.  This week he and Treasury Secretary Paulson started talking tough about the weak dollar.

Paulson is trying to convince other countries not to unwind a US Dollar peg on their currencies.  The concern here is that countries who remove the peg expose themselves to increased economic instability.

Bernanke mentioned the weak dollar contributing to inflation.  This had a two-fold impact.  His comments gave life to the US Dollar which had tentatively been finding a level of support.  The news of the comments created a nice rally.  The mention of inflation also revived thoughts that interest rate cuts were done and rate increases might be in our future.  Good news for the US Dollar.

Now, news on coal.  Santa Claus must be stocking up for Christmas early.

Today investment bank FBR upgraded a number of coal providers and increased their price targets substantially.  Companies throughout the coal industry continue to reach new highs with coal prices also trending upward.  A good trend for our AHGP call options.

FBR’s research team determined that high coal prices are here to stay.  They highlighted growing demand for coal around the world from electric power providers and steel producers.  Despite the favorable news coal companies gave up 2-4% in trading today.

More commodity talk.

Billionaire trader George Soros recently testified before the US Senate on the state of the commodities market.  He commented that increasing demand has been seen in the market, and that institutional money managers have “superimposed” a bubble.

In an effort to curb speculation the Commodity Futures Trading Commission (CFTC) announced plans to examine price volatility.  One of their targets is adjusting speculative limits for traders.  I expect commodities to trade lower on this news for some time.

Despite the shakeup in the commodities markets – and comments from Soros – Monsanto (MON) hit a new 52-week high.

June options expire in 12 days.  Exit any June options you still hold.

Now for the trade updates.

Position Updates

  AHGP October 2008 $30 Calls (AQPJF)
We had a new trade alert this week.  Everyone should have been able to get their position established.  Resistance is 32.25, and 35.  Support levels are 26 and 25.

  NGS July 2008 $30 Calls (NGSGF)
NGS traded as high as 29 in the last few days . . . then closed today at just over 27. Resistance is 35.  Support is 25 and 23.

  DSX June 2008 $35 Calls (DSXFG)
DSX traded as high as 36 last week, then pulled back.  Resistance is 42.  Support is 27.50 and 24.
Parting Shots…

Is Lehman Brothers going the way of Bear Stearns?

Take a look at this chart of the trading activity in Lehman Brothers (LEH) over the last 30 days.  Amazing isn’t it?  This substantial investment bank has lost more than 20% of its value in the last few weeks.

LEH 060408

But that 20% loss is nothing . . . considering the stock traded over $84 per share less than 18 months ago.

Investors who bought Lehman Brothers at the high are sitting on losses of more than 60%.  The big concern, do they have enough capital to continue operating?  This is the same issue that Bear Stearns faced and it’s not inconsequential.

Every effort has been made by Lehman management to address these issues . . . yet rumors of a failure are still floating about.

Given all of the uncertainty for Lehman Brothers, there’s one thing I do know.  The market makers love every minute of it.  Just take a look at the premiums built into the options.  With less than 12 trading days left before option expiration, LEH June options trading more than 2 points out of the money have a premium over $2 per contract.  In contrast, a less volatile stock like Microsoft (MSFT), has June options 2 points out of the money that you can buy for just $0.15 per contract.

This is a perfect example of how added volatility impacts option prices.

Category: EOT Update

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