Bet on Reflation & Make Money. HUN update with COTW

Fellow Friends and Traders,

Reflation

The market overshot to the downside in financial and commodity-related stocks has now morphed into a buying stampede to the upside. Billions if not trillions will flow into hard assets such commodities. I'm not sure just how far the banks/financials will rally but as our USD weakens Energy/Materials Industrials, etc. should continue to blowout to the upside. China has fears of a US bond crises and slams our Fed's quantitative easing. No, China will not dump our bonds. They just won't put any new monies in US debt instruments.

What China will do is spent most of their $40B monthly reserves on hard assets and continue to develop their infrastructure.  China will build 50 new airports. Caterpillar (CAT) is back to business levels there not seen since the great bull build-out of '07 and '08. China has already spent $44B to secure oil from Russia, Iran and Venezuela over the next 10 years. China is already the world's largest automobile manufacturer.

Last year, business was so bad Huntsman (HUN) closed a large Chinese plant in late '08. Today, this plant is operating at 90% capacity. This allows us to make a very strong case for higher commodity prices in the not too distant future.
 
Back in 2007, Ben Bernanke signaled that the Fed was going to lower interest rates and started a speculative buying spree into commodities. Now that the end of the recession is within sight, inflation is on the horizon.  Most investors will begin to flee paper money. I can see a commodity bubble happening all over again. The actual consumer demand for commodities doesn't have to pick-up; the speculators will do the job for us. One of my favorite long term trades, Nat Gas, has rallied from the low of $3.50 last year to $4.50 in just 2 days. What glut?? Do you begin to understand? The players are at work big time.
 
Almost all of our energy and industrial recommendations have more than doubled off their post-recommendation levels. Even our financial recommendations are no laggards with their rather high yields and option writing strategies (both put and calls).

In the general market, I continue to look for weakness to add to our "Reflation" longs especially for Nat Gas. Just look what happened to CHK and ERF this past week. Even LINE is approaching the 17.50 strike and that's after a $0.63 dividend a few weeks ago. If these calls are exercised I’d sell puts to replace the position. If not, just roll your calls up on over a few months out. LINE's earnings are already hedged, over $100 for oil and $9.00, for gas for the next two years.

HUN Update

My current favorite HUN gave us a great opportunity Friday to implement the Doubling-up Strategy I outlined in last week’s email. On HUN weakness, I suggested purchasing both 5.00 and 7.50 strike calls for every 100 HUN shares or if you bought deep $2.50 strike ITM calls in lieu of stock. The strategy would serve two purposes. First, the strategy would allow the NET trader to take $$$s off the table and guarantee a profit regardless of what happened to HUN. (Remember no margin). Second, we would double our upside exposure with twice the position without increasing the risk. Not too shabby if I do say so myself. Keep your toes and fingers crossed as HUN poised for take-off.
 
Instead, we started doubling-up a bit backwards as the stock raced to $6.35 Thursday morning. Anything over $5.50 we get beyond fundamental value in this market. HUN fundamental value was the reason for the suggested strategy last week.  Once the stock exceeds fundamental value, any speculative deal failure, could cause the stock’s value to decline materially. We had a great opportunity to sell into massive strength as rumors of deals, settlement, etc. surfaced during the week. By Thursday morning, I was completely out of my longs (calls and stocks) and, on weakness, into a large portion of new higher strike calls. On Friday morning, earnings were expected before the opening and likely to be soft as other chemical industry stocks had already reported sharply lower EPS #'s. The industry’s earnings weakness is the reason the fundamental analysts hated these stocks especially HUN with their $3.50 target.
 
HUN reported rather surprisingly lower EPS than expected. I surmise someone must have known already since HUN closed $0.50-.60 lower Thursday. On Friday, the stock cratered to $4.70 during the first 30 minutes. Much to my surprise at least 20 of you called in and were absolutely delighted and proceeded to jump-in with both feet which surprised me. Frankly, I've never experienced anything like this before. Most of my students/clients in the past would have been extremely upset. I must have done something right. You are learning to really buy weakness and sell strength.
 
Later Friday, we were all greatly rewarded for our efforts as HUN hit $5.83, up over a $1 from the lows and closing over $5.70.  Calls did even better.  The volume of nearly 12M shares was the largest since I first recommended HUN.  I'm hoping this "Flush" is the pause that refreshes.  Now, all the weak hands are gone. HUN was never an earning story but an event or news driven idea. I expect the stock to rally sharply in front of the June 8th trial date. Continue to buy stock dips $0.30-.40 down and sell the next rally. I was able to demonstrate this strategy nearly every day or week in the NET Chat Room for the last 3 months.
 
I originally thought HUN could sell between $7-10.00 with a $1B settlement. Now, the suit has morphed into a $7B+ suit after studying all the legal filings. HUN has a strong case for Texas jury verdict award damages in excess of $5B. However, I believe the best outcome would be a HUN buy-out near $12-15.00 or a $2.5B settlement rather than further appeals. Hey, I can dream can't I!?  I've certainly earned it.