Secret 'Mega-Trade' uncovered

The trade: Someone bought 15,000 September 2010 $20 call options on the iShares Telecom ETF (IYZ) for $0.35 per share ($35 per contract). The trade was sore thumb obvious. Before it was placed, there weren't any outstanding September call contracts on IYZ at all... at any strike price.

IYZ closed at $19.37 on Wednesday. If IYZ trades for more than $20.35 when the options expire on September 17, the bet's a winner. The real payoff comes, though, if IYZ spikes. A quick race to $20.50 and the $0.35 options could be trading for $0.80 or more, turning the trader's $525,000 into a cool $1.2 million in a matter of days. Why load up on this fund, and why then? Looking at the fund's holdings and the calendar, we find the answer. AT&T, Sprint, Verizon, American Tower, and Frontier Communications are the top five stocks in IYZ, making up almost 50% of its holdings. AT&T and Verizon alone make up 25%. With that sort of concentration, our trader is betting on a rise in that pair while getting a bit of a hedge from the other members of the fund in case the trade's not exactly right.

Looking closer, this becomes even more obvious. And so does the timing. AT&T would be the first big hurdle. Thursday morning, less than 24 hours after the trader put up the $525,000, AT&T would announce earnings. Verizon will follow Friday morning. By tomorrow afternoon, the story will be told. If our trader is right, the gain will be huge. If he's wrong or the reaction to their announcements is lukewarm, our trader will be able to unwind the position without taking the bath he would take with sole exposure to Verizon and AT&T.

As you would expect, IYZ jumped. After closing at $19.37 yesterday, shares of IYZ were trading for $19.83 by 11:30 a.m. The options were already worth around $0.50. The $525,000 had turned into $750,000 in less than a day. Will our trader take the money today, wait until tomorrow, or ride it even longer? Stay tuned and check out the September options on IYZ this evening to see how the story unfolds...

I'm sure it'll come out that many new taxes were sneaked into the recently passed 2,300-page health care law. One of them will apply to those selling gold coins. The new tax law says every time a business buys anything that costs more than $600, it has to be reported to the government.

If you sell $600 or more in gold to your coin dealer, it'll have to be reported... so it can be taxed. The government hopes to rake in $17 billion over the next 10 years from the new tax.

This will crush small businesses. Dealers often buy gold from one another. Those transactions will all have to be reported and taxed. But it's worse than that...

Customers sell gold to dealers regularly. Pat Heller, a coin dealer in Michigan, says he deals with maybe 1,000 customers a week and will have to fill out anywhere from 10,000 to 20,000 new tax forms a year. Heller says he'll have to hire two full-timers just to track all this crap.

How much do you want to bet Citigroup, Bank of America, Wells Fargo, and JPMorganChase start getting into the gold-coin business in a big way? They already have the personnel to handle the paperwork, and they have more money than God to pay a new tax.

Never mind for a moment this was added to a health care law. This is a pristine example of how the system works. The masses and media clamor for more regulation. The government is happy to oblige. Big businesses get a larger competitive advantage from the new regulation... and small businesses and individuals get screwed.

This doesn't really concern me, since I buy gold and never sell it. But it concerns me that many mom-and-pop coin dealers will be put out of business since they won't be able to deal with the new regulatory burden.

Looking ahead, no matter what the Supreme Court has decided recently, I promise you Komrade Obama is trying to figure out how to get your guns away from you. It's hard to get control of people who have the ability to shoot back.

GM announced this morning it'll buy AmeriCredit Corp, an auto finance company, for $3.5 billion. The acquisition gets GM deeper into two businesses, one of which is leasing. Just 7% of GM sales are leases, versus 21% for the industry as a whole.

The other business GM wants to get deeper into is – I'm not making this up – subprime auto financing, which presently accounts for about 4% of its sales.

I don't know how much of the entire industry is subprime (though I'm willing to bet it's too much). GM Chief Financial Officer Chris Liddell says about 40% of U.S. car customers have below-prime credit scores. If I were GM and I heard that, I'd be saying, "Let's be careful about selling to that 40% and really figure out how to sell to the other 60%. Maybe we can avoid going bankrupt again." GM has other ideas.

I bet Bruce Berkowitz and the folks at Leucadia National are happy. AmeriCredit was up more than 20% today. Berkowitz's Fairholme Capital owns about 25% of AmeriCredit, and Leucadia owns about 23% of it. Berkowitz has made a bunch of big bets on financial companies like MBIA, AIG, and Citigroup.

In a lawsuit filed last month, Minnesota-based outdoor retailer Gander Mountain said its credit card provider, World Financial Network, was turning down customers with credit scores of 800 and higher (the really good ones). World Financial Network says about a quarter of new applicants have these higher scores.

We have finally living a true Orwellian doublethink nightmare. Love is hate. War is peace. And good credit is bad credit.

It's like one credit industry analyst said, "The only true deadbeat customer is someone who has a card and never uses it." If you don't use your card much, pay it off every month, and don't incur any fees, you're not very valuable to the card issuers.

World Financial Network is owned by Alliance Data Systems (ADS). I doubt World Financial is a big enough chunk of Alliance to make a good short. But now you know a little more about Alliance Data as a company. Good item to file away for possible future use.

"The hypocrisy of Obama is that after all the intoning about the plight of those whose unemployment has run out and how the Repubs are mean spirited because they want cuts to offset any increase, BO will not allow one dime of the stimulus money that has not been spent to go to the unemployed. Why? He'll do his best to preserve as much of that money as possible to be spent starting in 2011. Nice to start a run for the Presidency with all that money in your poke. If he used the stim money instead of hanging the debt on our children and grandchildren the unemployed could have had that money a lot sooner. How can any one support those kind of policies." – Paid-up subscriber Johenny

"So show us a website that lists this $42/hr job. I mean seriously, do your professional ambitions include printing teenage rumors? I suppose you are willing to lower your standards if it contributes towards stereotypical Republican spew." – Paid-up subscriber Doug Rush

Ferris comment: I don't know everything, but I know him better than I know you. His father is a well-known homebuilder around town. He's worked for his father and met some of the commercial contractors in the area. If he says someone offered him $42/hour on a government job, I believe him. If you say you "believe" our government works on a bid system, but don't really know, I have even less reason to believe you. I don't have a website for you. All I have is the say-so of a teenager... who also happens to be a decent, hardworking man, one with enough class not to resort to name-calling.

Regards,

Dan Ferris
Medford, Oregon
July 22, 2010Secret 'Mega-Trade' uncovered... Komrade Obama's New Gold Coin Tax...
GM: Subprime is back!... Orwellian credit-card issuers...