"Market Monitor"- Bernie Schaeffer, Chairman of Schaeffer's Investment Research
Friday, November 23, 2007PAUL KANGAS: My guest "Market Monitor" this week is Bernie Schaeffer, chairman of Schaeffer's Investment Research based in Cincinnati, Ohio and welcome back to NIGHTLY BUSINESS REPORT Bernie.
BERNIE SCHAEFFER, CHAIRMAN, SCHAEFFER'S INVESTMENT RESEARCH: Great to be here, Paul.
KANGAS: As a professional stock option trader, you must love all the price volatility everyone else seems to be complaining about. Am I right?
SCHAEFFER: Volatility is great for trading options as long as it translates into enough directional movement.
KANGAS: You could buy a straddle (ph) on some of these Chinese stocks and exercise both the call option and the put option on the same day the way they're going.
SCHAEFFER: You have stocks, the Chinese Internet stocks, the solar power names, that are capable these days of making 50, 75, 100 percent moves in a matter of months. You superimpose options trading on them where you get all that leverage and you can get just huge gains trading options off of these volatile stocks.
KANGAS: But presently is all the gloom and doom we're witnessing about Wall Street justified?
SCHAEFFER: Well it's kind of interesting. If somebody would have said at the end of last year we're going to have $00 oil, we're going to have a severe -- a more severe housing slump than anybody would have ever anticipated, the financial names were going to implode and yet we would be at break even at the end of November and actually after today up a little bit on the year. People would have been really shocked. It would have been a recipe, supposedly, for a bear market. So I think the market's action itself, which we look at more than anything else, the technical aspect of the market, the sentiment backdrop of the market has been extremely encouraging in the light of events. And so from a technical perspective, there's some really interesting things going on right here and now.
KANGAS: But the market's future action a lot hinges on whether the Fed cuts rates or not in December. What do you think?
SCHAEFFER: I think the Fed absolutely has to cut rates in December and continue to cut -- market interest rates are already left the Fed behind so to speak. There's a lot of concern about the dollar weakening. I think the dollar is more concerned about U.S. economic growth getting back on track. The interest rate market is already reflected in the price of the dollar. And we've got to get the rates down for those mortgage resets. I think that's extremely important.
KANGAS: In an interview with Susie Gharib last December, you predicted the Dow would reach 14,400 by the end of 2007 and that was not a popular view at the time but it came within about 200 points of it. Congratulations, that was a great call.
SCHAEFFER: Thank you.
KANGAS: Do you have a prediction for the Dow for 2008?
SCHAEFFER: We missed by 200 points for 2007. I think we could put on 10, 15, 20 percent in 2008 which would take us at least to that 14.5 level or more. And from a technical standpoint, we've held at a support level and we've bounced off of it today on the day after Thanksgiving. The 80- week moving average on the S&P contained all pullbacks in this bear - in this bull market excuse me.
KANGAS: OK, almost slipped there.
SCHAEFFER: In 2004, 2005, 2006, August 2007 we might have just touched an extremely significant support level from which we could rally sharply.
KANGAS: Bernie, give our viewers some call or put option recommendations if you will, please.
SCHAEFFER: I've got a couple call options, both on momentum names. Both stocks have done extremely well this year, Priceline.com, PCLN.
KANGAS: There it is.
SCHAEFFER: I'm looking at five month call options on priceline for a premium of about 15 percent.
KANGAS: OK.
SCHAEFFER: Southern Peru Copper, PCU.
KANGAS: Let's have a chart of that one up too. Priceline is in the right direction for a call option ownership. That's for sure.
SCHAEFFER: But it's down a lot from its $990 high. So Peru Southern Copper is - has pulled back sharply along with copper. It is still up about 100 percent for the year. I think the bull market in commodities is going to continue. I'm looking at four month call options on that.
KANGAS: Premium?
SCHAEFFER: About 15 percent and I own both PCE and priceline.
KANGAS: How about a put option? You mentioned you may have one of those.
SCHAEFFER: If the Fed blows it, if you're nervous about the market, I would continue to look at the financial names. We're looking at XLF, the spider fund financial. This is kind of a protective put maybe to protect the portfolio against further weakness in the financial sector. I'm looking at a four-month put option. Now, a put option allows you to profit when a security goes down. I'm looking at a four month put option on that with a premium of about 8 percent.
KANGAS: Do you personally own any of the call or put options you mentioned here or have other disclosure to make?
SCHAEFFER: The calls I do own, the priceline.
KANGAS: But not the puts?
SCHAEFFER: I do not own the puts.
KANGAS: Bernie, I want to thank you for being us once again. It's always a pleasure.
SCHAEFFER: Thank you Paul.
KANGAS: My guest, Bernie Schaeffer, chairman of Schaeffer's Investment Research.
