investing – Page 7 – Dearest Leader

China Biofuel Pull Back

China Integrated Energy appears to be on a decline. The chart shows several technical reasons to be bearish.

The stock is making lower highs and lower lows.
Persons Proprietary Signal has given us a sell indicator along with an impending crossover
MACD is also showing lower highs and lower lows. It is about to crossover.
StochasticSlow has lower highs and lower lows. It is about to crossover.
RSI Wilder has lower highs and lower lows. The past two days are declining.
MoneyFlow has lower highs and lower lows. The past 3 days are declining. This means money is continuing to move out of this stock.

The Linear Regression Channel shows a mean price of 7.87 and a top/bottom of 11.20/4.54. The channel is also down trending. Prices should gravitate toward the mean of the channel. Close to the outer edges means the stock is very expensive or very cheap in relation to the mean.

CBEH doesn’t appear to be available for short selling. One approach is to use options. While it is possible to go buy a FEB 7.50 put the cost of the put can be lowered by selling a Feb 5.00 put against it. This may be a reasonable strategy since the lower regression line is at 4.54. The strategy allows flexibility for legging out of the trade by selling the long FEB 7.50 and holding the FEB 5.00. There is also an opportunity to sell the FEB 7.50 and accept assignment for 5.00/share with the short put if it is barely ITM. There does appear to be some support around the 6.05 low, so getting an options assignment may not be an issue.

Copy & Paste into Think or Swim: BUY +5 VERTICAL CBEH 100 FEB 11 7.5/5 PUT @.60 LMT
Break Even Stock Price: 6.90
Max Profit: 950
Max Loss: 300

Long term CBEH might be a worthwhile stock to hold. The balance sheet shows increasing total assets and decreasing liabilities. The income statement also shows an increase in Total Net Income and EPS. The complete 2009 Annual Report will have even more information to research. At 4.54 this could be worth getting into for a few weeks or months.

Ethanol Protectionism Not A Bad Thing

Harry de Gorter and Jerry Taylor have written a nice piece on the need to let ethanol protectionism expire. There is a current subsidy of 45 cents per gallon and an import tariff of 54 cents per gallon. Even Al Gore admits that ethanol is not what we had hoped for.

The House passed HR 4853 on December 17 and it was signed by President Obama that day.

Section 701 extends $1 per gallon tax credit through 2011 and also add a credit for diesel fuel made from biomass.
Section 704 excludes black liquor ethanol from tax credits
Section 708 extends the subsidies and tariffs on ethanol until 1/1/2012.
Section 711 extends tax credits to alternative fuel vehicle refueling property placed into service after 12/31/2010

We know ethanol producers will be receiving special treatment from the government we can try to use that information for our own purposes. We know that some of these ethanol producers will not be going out of business immediately, but are they a good place to park your money? The ethanol industry has been lobbying for subsidies because they are not operating from a position of strength. On 12/20/2010 these might see a rise in price because of the news. Green Plains Renewable Energy bounced off its lower Bollinger Band has started to hove upwards to the upper band at around 11.50. Green Plains managed to post 19.79M in earnings in FY2009. Green Plains might be worth considering if it breaks out into an upward trend after being in a tight range since dropping off in early November.

Pacific Ethanol Inc on the other hand posted a net income around –300M. The chart also shows us a downward trend after the gap up continuing a downward trend. Pacific Ethanol and the other companies in this space look like good short sell opportunities since they are still in a downward trend.

China Integrated Energy is not in the US and not affected by the subsidies or tariffs. They have a nice balance sheet and a very nice PEG Ratio of 0.28. For some reason the Chinese manage to stay ahead of the US in terms of alternative fuel production.

In an ideal libertarian world there would be no subsidies or tariffs and the people would keep more of their money, rather than have it distributed to other parties. I am not questioning the wisdom behind extending the subsidies for ethanol producers. If we disagree with what the government does with our tax money, we have the option of taking action that makes us whole again.

The clever combatant imposes his will on the enemy, but does not allow the enemy’s will to be imposed on him. – Sun Tzu

Green Plains Renewable Energy Inc

BioFuel Energy Corp

Pacific Ethanol Inc

Earnings: -308.15 M

Rex American Resources Corp

Downward channel. Stay away until it turns up or go for a short sell at the top of the channel.

China Integrated Energy

Broken out of the downward trend. Potential entry point if it holds.

As always do your own research. These examples are educational tools used to teach chart reading. Other evaluations should seriously be considered before buying or selling any investment.

DLP and ERM Sought By Military

In our last set of trade ideas, Trading on Fear with WikiLeaks, we had picked a few equities in the DLP and ERM space that might be interesting plays for the government sector. Currently the military is using something called Host Based Security System for endpoint protection. Apparently HBSS is a McAfee product that may have been slightly customized. The contract for end point protection was awarded in 2006 so it is understandable that they are looking for better solutions. There is a deployment of Bivio Networks appliances for Deep Packet Inspection (DPS) at certain sensitive locations on the network. Clearly the military is moving in the right direction and it is logical that they will eventually purchase some form of host based DLP agent. When the request for bid proposals is released our picks might be a growth opportunity. Other governments will also be seeking to secure themselves against any leaks in the future so this can present itself as a growth opportunity as well. Bivio Networks is privately held; however, they are partially owned by Goldman Sachs(GS). Much like buying Intel to get exposure to McAfee, buying some of the big finance houses is a way to get exposure to the security space while being fairly diversified.

Trading on Fear with WikiLeaks

In a previous post I had discussed how security professionals can benefit from WikiLeaks. Today we we will take a look at how the security industry can benefit from WikiLeaks. Physical security procedures can help prevent sensitive data from leaving a secure facility; however, tracking and auditing your data is equally important. The category of software that can help us out in this case is called Data Loss Prevention (DLP). Most of these solutions involve a discovery component that finds all of your files on servers and workstations/laptops. This is useful provided you know what you have and who should have it. For example, the spreadsheet with employee salaries should probably be in payroll and HR only. If someone in engineering has the complete list, that is probably a bad thing. Government organizations can benefit from this more easily since workers are given security clearances and checking the document contents for a security classification, then matching it against a worker profile can be a quick way of checking for leaks. This does not prevent personnel with access to the data from misusing it. Some DLP products work by monitoring files traveling across the network for content that has been flagged by an administrator. Copying files to removable media or printing can also be flagged for an alert.

Enterprise Rights Management (ERM) software is similar to the Digital Rights Management (DRM) copy protection that was found on MP3 music in the early days of the iTunes store, and what you find on eBooks from Amazon and other retailers. ERM can be applied to Microsoft Office documents and email. It works by encrypting the documents and only decrypting them if an authorized user or computer accesses them. If someone were to steal an ERM protected document it simply would not open on an unauthorized computer. It is also possible to restrict documents by department within a company, but that involves fully understanding the complexities of who should have access to what. ERM can also prevent printing, copy & paste, and print screen if needed. Several reference customers I have talked to simply setup their ERM to prevent opening their files on computers not owned by the company. Employees could carry documents on USB drives, but could only access them from company computers. ERM and DLP might have prevented WikiLeaks from happening. Oracle has a nice video of an ERM product they acquired.

Most of the companies in the DLP and ERM space are privately held and the larger ones have been absorbed by other companies in the security space. Oracle & Microsoft are also companies that make many software products other than just their ERM offerings. Intel acquired McAfee who also had an ERM product. Most of the examples below are from Gartner’s Magic Quadrant research on the DLP space and have and upward trend in the 50 and 100 SMA. Will DLP and ERM become an important market in 2011 and will these companies be able to take advantage of increased data loss awareness caused by WikiLeaks? Traders may want to keep an eye on these companies if DLP or ERM take off. Well diversified companies such as EMC or Oracle may see some additional revenue from their acquisitions of other companies.

EMC

SYMC – Symantec

WBSN – Websense

CHKP-Checkpoint

ORCL – Oracle

INTC – Intel

Irish Bailout Sees Higher Euro Just For A Moment

The first few hours of the Irish bailout do not appear to be going good for the Euro. Short entry was at 1.32882, near a resistance point of a previous day. If things continue it doesn’t appear that EURUSD will be above 1.324 for a while today if the decline continues.

RINO Environmental Remediation Repeat Play

RINO International Corporation is in the business of environmental remediation, or to more simply put it they make technologies to clean up the environment. If you have a green focus then this company might be a good bet. RINO is based in China and caters to the Chinese market. Their two main specialties include industrial water purification and industrial desulphurization focused on China’s steel industry. One good thing about this industry can be taken from one of their SEC filings:

“Our business is driven more by policy, environmental regulations which are mandating steel manufacturers to install these systems – THEY DON’T HAVE A CHOICE AND THE FINES FOR NOT COMPLYING ARE INCREASING

While this sounds nice several ratings agencies have labeled RINO a SELL. Before stepping in we need to look at what is going on. We can start by looking at past history to see if there is a pattern we can use for guidance. By bringing up the 1 yr chart we can look for support and resistance points. Over the past month we can see support at the $12 and $11 levels (the lower yellow lines). Previously in August it bounced off $11 support. Looking back to September 8 we can see that support at $12 held and there was a price bounce. In late September there was a large price move and the stock moved up at a rapid pace. Looking at today’s pattern we can see similar behavior and a bull triangle forming.

Bull Put Spread

Buy Aug 10 10.00 Put @.32
Sell Aug 10 11.00 Put @ .50
Credit (Mid): 0.18
Amount at Risk: 0.83
Potential Return: 0.18
Potential % Return: 21%
Break Even: 10.83

Or if you are feeling more aggressive you can go for a combo. The disadvantage is if the stock drops below $11 by August expiration you agree to buy it for $11 by selling the Put option, no matter how low it goes. But after looking at the charts it seems unlikely that the stock will break down through support at $12 and at $11.

Combo Risk Reversal
Buy Aug 10 14.00 Call @1.05
Sell Aug 10 11.00 Put @ .45
Debit : 0.65
Amount at Risk: 0.65
Delta: 0.55
Potential % Return: Theoretically Unlimited. 85% (for $1 move up in underlying)

Or for something plain and boring you could buy the stock today for about $14 and ride it up to the next resistance point of $15.

RINO’s services are going to be in strong demand in China. Until we see where the economy is going, this is something to trade in and out of, or limit your exposure through the use of options.

February Fun With LDK Solar

We’re revisiting an old favorite today, LDK Solar Co. Ltd (NYSE:LDK). This is a Chinese Green Energy play that we like to throw on occasionally. As much as we love green energy it isn’t something you can put your money into and forget it. Last month the solar sector was among the bottom on Tickerspy. This is one area where you need entry and exit strategies.

We’re seeing some positive technical signs:

Higher highs and higher lows have been happening for four days.
Person’s Proprietary System (PPS) is showing a buy
PPS shows a positive cross over after the buy signal
MACD Histogram progresses back to and above zero
Stochastics have crossed over into positive and have not gone negative
Stock did not break down below pivot point of $6.93

Our short term strategy was to do a covered call. In simple terms you buy some stock and then sell a contract to sell the stock to someone else at a later date. We managed to get in at $6.94 per share and sold a March 7.5 CALL for $.40. We get paid $.40 per share for agreeing to sell the stock to someone else if it reaches $7.50 by March 19. If the stock keeps going up we miss out because we will have to sell it at $7.50.

There’s a 63% chance that it will not get to $7.50 so we can put on another covered call next month if things go our way.

If it stays under $7.50 we get to keep the $.40 which reduces our risk to $6.54 per share. We won’t lose any money unless the stock drops below $6.54. There appears to be some resistance around $7.12, but if that breaks it should be a relatively smooth ride up to $7.50. We have a Sell Stop in place at 6.74 which still nets us $.20 per share if the trade moves against us.

Without the covered call this trade might not be worth the risk. Using covered calls can be a good strategy to reduce your risk if you know that you want out of a stock by a certain date or price.

Green Stocks Set To Recover

Over the past few days Green Energy has taken a beating on the market. There are some signs of a turnaround though it is not certain. Using the PPS, MACD Histogram, and Slow Stochastic it appears a few stocks have started to turn around.

Yingli Green Energy is showing a positive crossover on the Stochastic, the MACD is improving day after day, and the PPS is also having a positive crossover.

Ocean Power Technologies is showing a positive crossover on the Stochastic, the MACD is improving day after day, and the PPS is leaning towards a positive crossover.

First Solar is is showing a positive crossover on the Stochastic. The MACD is improving day after day. The PPS is also having a positive crossover and is signaling a buy indicator.

Battery Maker A123 Systems is showing a positive crossover on the Stochastic. The MACD is improving day after day after a flat decline. The PPS is almost having a positive crossover and the buy indicator has triggered.

Using Bear Call Spreads to Get Paid to Trade

One strategy for growing your portfolio is using Bear Call Spreads to get paid to trade. We can look at a relatively low risk trade using a Bear Call Spread on the Russell 2000 Index. The Russell 2000 Index (^RUT) is a small-cap stock market index of 2000 small companies. In downtimes smaller companies will be harder hit and we can assume that the Russell 2000 Index will have a hard time climbing upward. If we look at a chart of the Russell 2000 Index we see that has encountered resistance or in simple terms it has had a hard time going above 625.

We can make some money by selling the January 10 650 CALL. This is an options contract that we sell to someone else. These options contracts are going for $2.66/share. So we could make $266 per contract sold. We would get to keep this amount as long as the ^RUT stays below 650. If it goes above 650 our losses could seriously add up. To protect against this possibility we also purchase the January 660 CALL contract from someone for $1.26. This brings our initial net profit down to $1.40/share or $140 per call spread. This limits the maximum amount you could lose on making this trade. The advantage is that the January 660 CALL is gaining in value along with the January 650 Call if ^RUT goes up. To get out of this trade if it does go bad you would do the opposite of how you entered. That is you would sell the January 660 CALL you bought and take part of the proceeds to buy the January 650 CALL you sold.

Max Profit occurs when ^RUT below the price of the CALL you sold. I this case as long as ^RUT is below 650 you get to keep 100% of the 1.40/share from making this trade.

Break Even occurs when the price of ^RUT is equal to the price of the call you sold (650) + the premium you received (1.40). In this case you would break even if ^RUT made it to 651.40 and only lose money after it went higher.

Max loss would occur if ^RUT were higher than the CALL you bought (660).

If we were to go and buy 3 contracts (300 shares) using this setup we would see this calculation in our trading software.

Max Profit: $420.00

Max Loss: $2580.00

You collect the $420 immediately if you click send. You only start to lose money if ^RUT makes it above 651.40.

Is this trade worth the risk? We can calculate that to make our own decision before hitting send.

On Dec 21 we used the Analyze Risk tab in Think Desktop to see what the odds were of ^RUT being under 651.40 by the date the options contracts expire in January. Based on this chart the odds were 100% likely that ^RUT not go above our break even point.

Stock-Chart---RUT-RISK-ANALYSIS-2009-12-21 — RUT 100% Chance of Success

We didn’t get filled so we tried again on Dec 22 and raised our price. ^RUT went up 5 points in one day which was a big move and we performed another risk analysis. Now there is 72% chance of ^RUT being under 651.40 by January 15. The odds are greater than 50/50 and much better than winning the lottery. We also set an email alert when ^RUT gets to 645. This gives us an opportunity to bail out of this trade before expiration.

Stock-Chart---RUT-RISK-ANALYSIS-2009-12-22 — RUT 72% Chance of Success

Bear Call Spreads are useful for speculating on a security not rising above a given price. In this case we didn’t have to have any money up front to invest and made a profit of $420. With a more than 70% chance of success this was worth the risk since ^RUT is going to have a hard time breaking above 625. We’ve set email alerts in case things continue to slide in the wrong direction over the next 23 days. Never trade and forget because you could end up with an unpleasant surprise.

LDK Solar Cash Crisis

We tried a play on LDK Solar last month. We tried to go long by selling puts at $7. That would have been a good strategy for about a month as this was not a buy and hold stock. The guys over at Greenstocks Central reported yesterday that the CEO is trying to come up with a new strategy for funding.

the CEO stated in an SEC filing, “If we do not successfully execute our liquidity plan, we face the risk of not being able to continue as a going concern.”

LDK Solar has dropped from over $9 to under $7 in the past two days. This is a perfect example of why managing your sell stops is important. Looking back at the chart some well placed trailing stops would have exited the position on Nov 24. There was also a strong jump up on Dec 4 where setting a stop at $8.50 would have saved some profits. The slow stochastic is showing an uptick in the %K line, but this may continue to sell down.