Yesterday was a perfect day

Small personal aside before I talk shop: yesterday, I went to Pavillon de la Grand Cascade for lunch and had an amazing 8-course meal with my mom and grandparents. The meal was incredible, truly haute cuisine. Then I came home and had a very happy GDP day - all of my stocks were up, and my entire portfolio jumped 23%, again, mostly due to ABK.

Good time for selling covered calls. I sold some SLM October calls with a strike of 20 for $0.45. I am ready for a big upswing, but at the same time, I recognize that another 20% rise by then would be a huge move for SLM. I hope that they will report earnings after my calls expire, but I do not have a problem with buying back if earnings are earlier than I assume.

I also sold some BBX September calls with a strike of 2.5 for $0.1. Free money.

I cannot take credit for this idea, but it is a good one:
MetLife (MET), the insurance giant, is doing a voluntary exchange offer in which holders of MetLife stock can tender in their shares to receive shares in a publicly traded subsidiary called ReInsurance Group of America (RGA). MET is doing this to distribute its 52% interest in Reinsurance Group's B shares (which currently are not listed). You can find official details of this offer at the information agent's website. To encourage participation in the exchange offer, MetLife is going to give holders of MetLife stock the three day volume weighted average price of MetLife stock + 11% of value of the three day volume weighted average price in Reinsurance group class A shares. So just as an example if the VWAP price for both stocks were $50, you would receive 1.11 shares of RGA.B for each MetLife share tendered into the offer. Subject to a limit of 1.3071 shares of RGA.B for every one share of MET.

This offer has an unusual provision for odd-lot holders. If you own less than 100 shares of MET, you will not be prorated should the offer be oversubscribed. It is safe to assume that giving a free 11% premium to rational stockholders will result in oversubscription.

Tata Motors (TTM)

TTM is another ADR that I like a lot. It has been beaten up by rising Indian interest rates, which have been rising because of anti-inflationary policy by the Reserve Bank of India (RBI). I think that this is an indirect rate play - we have seen the price of oil drop from $145 to around $115, which should lower the inflation outlook by the RBI and perhaps even encourage it to lower rates, which are currently at 9%.

TTM also recently announced that they were decreasing the size of their proposed rights offering. I believe that this announcement has yet to be disseminated into the market as the stock is trading on very low volume today and is actually down for the day.

Full disclosure: long TTM (calls).

Shameless earnings play: CEDU

I sold out of FMCN at a 2% loss; I could have booked a 1% gain today but I forgot to put in a limit order. So it goes; I am not abandoning my strategy, I just desperately wanted to buy more CEDU.

I really cannot stress how awesome this company is and how completely invisible it is to the rest of the market. Its online degree segment, which accounts for the vast majority of its revenue, has a gross margin of 79.3%. Its tax rate increased to 25% this year after China passed the new Chinese Enterprise Income Tax Regulation; however, the company should qualify for the status of ''new and high technology enterprise,'' subject to the 15% preferential tax rate. I do not really know how you could ever say that this company is not a ''new and high technology enterprise,'' and when they obtain approval from the Chinese government, that should provide a nice boost to shares. Oh, and did I mention 20%+ YoY growth and the fact that their clients (large Chinese universities) are tied into 20 year contracts?

Earnings came out after the bell and the company beat on EPS, beat on revenue, and beat on guidance. I am absolutely giddy.

Full disclosure: long CEDU.

Intraday momentum

I have noticed a very strange arbitrage opportunity in this market: strong price movements (greater than plus or minus 5%) which occur in the first half of the trading day tend to be extended in the second half of the day. This is different from what I perceive as "normal" market activity; i.e., the market opens at a certain price and then trades around that price for the rest of the day.

In an attempt to try to exploit this arbitrage, I bought into FMCN yesterday. Of course, I also like the advertising business. I would almost never buy a stock whose business I felt was going nowhere. (As an aside - one notable exception to this is VNDA, which is currently trading below cash. The business is going nowhere, but I just cannot justify selling my shares at this level.) Since this is a short-term trade, I am hoping to make 3-5%. After I bought it, the market tanked, and the stock fell with it. Perhaps my observed intraday momentum is affected by the direction of the market. I will keep you updated with my experimentation with this new trading strategy.

Full disclosure: Long FMCN, VNDA.

Trash Cramer? Don't mind if I do

I almost feel bad criticizing Jim Cramer, the host of Mad Money. However, I'm not going to talk about how his picks are awful, even though they have underperformed the market. I'm also not going to talk about his lackluster industry analysis, such as, "Ignore financials, they're terrible."

What I am going to talk about is his recent 5 part series, 'Playing Defense.' This set of 25 investment tips to "keep you from losing your money" range from the obvious to the downright stupid. I thought that I would pick out three of the downright stupid ones and talk about why they're wrong.

Tip #1: Diversify. Cramer says: always be diversified, and never keep more than 20% of your money in a stock or sector.
I say: It depends. Value investor Joel Greenblatt's The Little Book that Beats the Market describes, essentially, that if you have a portfolio of great companies, there's no need to diversify. I prefer to think in terms of valuation. If a stock or industry has an incredibly cheap valuation, there is nothing wrong in being overweight in it.

Tip #16: Don't sell call or put options. Cramer says: selling calls gives up your upside, and selling puts has unlimited downside.
I say: This is exactly what I thought when a friend of mine first told me about selling calls. Why would I want to sell my upside to someone? Then, after actually doing some research on options, I realized that options, like stocks, come in expensive and cheap varieties. Since then, I've focused on selling the expensive ones and buying the cheap ones. Call options are amazing. Sure, if a stock goes above the strike, you're not making that profit. Nevertheless, you're not losing anything, either, and you still get to keep the options premium. Moreover, selling calls decreases your cost basis and acts as a hedge against downside risk. Cramer's advice is just foolish.

Tip #17: Never use margin. Cramer says: if the price of a stock drops, you will get a margin call and it will be painful.
I say: This is basic financial accounting. If your return on equity (the return of your portfolio) is greater than the rate that you pay to borrow money from your broker (the margin rate), margin yourself up and watch your portfolio grow. That being said, don't ever margin yourself to a point where you could receive a margin call that you won't be able to meet.

A note on analysts

I'm sorry that I have not been posting for a while. My investments were losing money at a very rapid pace and although I continued to invest, I felt like my advice had lost a great of credibility and, perhaps, verity. However, with my recent success, completely attributed to Ambac (thanks, Michael Callen!), I feel invigorated enough to start posting again.

No stock tips in this post - just a short rant. I find Fortune's recent article on Oppenheimer & Co.'s Meredith Whitney to be borderline hilarious. For some reason, Fortune loves Whitney, naming her their #2 stock analyst of 2007 (whatever that means). My question is, why does Whitney get so much praise? We are currently in a bear market. She has been making bearish calls. It should be no surprise that at least one analyst that gets it right, because there are predictions across the board. Forbes notes that her stock picking record has been average.

There is a great Russian joke on this subject:
Reagan has 100 bodyguards, and one of them is a terrorist, but he doesn't know which one.
Mitterrand has 100 lovers, and one of them has HIV, but he doesn't know which one.
Gorbachev has 100 economic advisers, and one of them is right, but he doesn't know which one.