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11/2/05
HOW WILL THIS CANDIDATE 'RATE'?

November 02, 2005

The Federal Open Market Committee did precisely what we thought it would do at its recent meeting -- it increased the Fed Funds lending rate to 4%.

Prior to this move, the Chicago Board of Trade (which trades Fed Funds futures) priced those futures based on a 98% chance that the FOMC would make its 12th consecutive increase in the lending rate to 4%. And, once again, the CBOT was right!

The chances of anything other than this latest increase happening were about the same as the Chicago Cubs winning the World Series. When you break it down that way, you see what a sure thing this latest move by the FOMC was.

As to whether this is Alan Greenspan's last hurrah, he will also preside over the Dec. 13 FOMC meeting and, by then, Ben S. Bernanke should be approved as the next Fed chairman. This appointment could push the Fed to finish its cycle of increases at the December meeting, as some members of the FOMC seem to believe Dr. Bernanke will be an "inflation dove."

Those who hold this opinion of Dr. B are inferring that his hawkish talk on deflation means he will go light on inflation. They base that opinion on a talk he gave to the National Economists Club in Washington, D.C., in 2002.

In short, Dr. B said sustained deflation can be highly destructive and should be strongly resisted. He's hawkish on deflation, yes, but there was nothing in that speech, or more recent ones, that tells me Dr. B will not address inflation head-on.

I look for him to take on the mantle of leadership at the Fed with determination and enthusiasm. The stock market's reaction seems to echo that outlook.

CATCHING THE CHANGEWAVE -- TIME TO PLAY VEGAS FROM HOME

Our Heat Seeker program, which picks up on unusual option-buying activity in both calls and puts, has been ringing like a pinball machine (or a video game, if you are of the Game Boy generation) for the past week. The stock we are about to target is preparing to announce Q3 results tomorrow, and we'd like to get in on the action ahead of the game.

This week's pick is a standout in its sector, with $11.2 billion in market capitalization, revenue of $5.22 billion (which translates to $45.50 revenue per share) and quarterly revenue growth (year-over-year) at a whopping 42%!

You might think I wouldn't want to chase a hot stock like this, but show me something that represents a value, Doc, and count me in! Ladies and gents, Harrah's Entertainment (HET) isn't trading at 52-week highs -- rather, it's trading just $2 above its 52-week lows. Talk about a prime entry point!

As of June 30, 2005, Harrah's operated 40 casinos in three countries under the Harrah's, Caesars and Horseshoe brand names, which includes 20 land-based casinos, 14 riverboat or dockside casinos, one combination thoroughbred racetrack and casino, one combination greyhound racetrack and casino, and four managed casinos on Native American lands.

The 14 riverboat casinos are the reason for the recent weakness, because MGM Mirage (which just announced its earnings last week) reported that this year's hurricane season hurt its earnings -- and, yes, that's why we're able to get in at these levels!

Its been nearly six months since Harrah's closed on its $6.8 billion acquisition of rival Caesars Entertainment, and with one of the best loyalty systems in the business (roughly 80% of the 250,000 customers who visit Harrah's properties EACH DAY are members of its Total Rewards program), I think they are well-positioned to integrate those Caesars customers and to start reaping the rewards of that integration in tomorrow's earnings report.

The Street is looking for 99 cents per share tomorrow, but my outlook is for $1.04 due to the integration and conversion of those Caesars players. For the record, the Caesars rewards program had failed to attract even 40% of its loyal players, but I believe the superior program offered by Harrah's will woo them in big numbers. I also expect that this outlook will be strong enough to offset what we know will be weakness in those 14 riverboats.




In preparation of the Las Vegas Traders Expo in December (see the end of this newsletter for more information), let's get a head start on the fun by investing in Vegas-based Harrah's.

I recommend buying the HET Feb 60 Calls (HETBL) and selling a like number of HET Feb 65 Calls (HETBM) for a net debit of $2.25. Do-it-yourselfers can pay $5 for those Feb 60 Calls and sell the Feb 65 Calls for $2.75.

Let's pay a net debit of up to $2.25 ahead of tomorrow's earnings announcement. However, we may decide to revisit our recommended prices after the earnings report, and we'll send you an alert if our outlook changes.

To make a limited-risk investment in Harrah's, I recommend buying the HET Feb 60-65 bull-call spread for a net debit of $2.25.

TRADE DETAILS
All information is based on prices as of 2:15 p.m. Eastern on Wednesday, Nov. 2, 2005.

* NOTE: This example follows the most current prices available to us at the time of publication. You can still enter the trade for up to $2.25 for the HET Feb 60-65 bull-call spread through Wednesday, Nov. 9, as long as HET shares trade for $61 or higher.

Here is the information you need to know to buy our Harrah's bull-call spread for profits:

Underlying Stock: Harrah's Entertainment (HET)

Current Stock Price: $61.26

Trade Type: Bull-call spread

Options to Trade: The specific trades to make are in the table below...

Action	Quantity	Option	Strike Price	Ticker	Investment
Buy	1	HET Feb 60 Call	$60	HETBL	-$5.00
Sell	1	HET Feb 65 Call	$65	HETBM	+$2.75
		Net Cost			-$2.25

*A minus sign (-) indicates an amount you pay; a plus sign (+) indicates an amount you receive.

Making The Trade:

If you give this trade to your broker at a net debit of $2.25, then it doesn't matter which prices your broker pays for the individual parts of the bull-call spread. Thus, our net debit would be $2.25, or $225 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the HET Feb 60 Calls (HETBL) for $5 while simultaneously selling the HET Feb 65 Calls (HETBM) for $2.75 puts you in the trade with a net debit of $2.25.

Our loss is limited to the $2.25 that we are paying for the spread. If, on the other hand, Harrah's rises above $65 on or before February expiration, then we make $2.75 on our $2.25 investment!

SUMMARY

With Harrah's trading for $61.26, a 1,000-share position would tie up $61,260. However, with our trade you'll be able to put just $2,250 at risk and have a potential gain of $2,750 if HET rises to $65 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the HET Feb 60 Calls ($5) and our credit on the HET Feb 65 Calls ($2.75), or a net debit of $225 per contract.

* With HET trading at $61.26, a 1,000-share position would cost us $61,260.

* Instead, if we buy 10 of the HET Feb 60 Calls (HETBL) for $5 ($5 each times 100 shares = $500 per contract), or $5,000 and ...

* Against that purchase, we sell 10 of the HET Feb 65 Calls (HETBM) for $2.75 ($2.75 each times 100 shares = $275 per contract), or $2,750.

* Thus, on a 10-contract spread we have only $2,250 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $2.25 and you avoid the risk of "legging the spread" -- that is, buying one side and waiting to sell the other.

* NOTE: Keep in mind that nobody knows your risk tolerance or financial situation better than you. A single bull-call spread in this example will cost you $225 plus commissions. As long as you maintain the ratio of one contract purchased against one contract sold, you can ramp up this strategy as big, or make it as small, as you'd like.

* Remember, you can pay up to $2.25 for this spread trade through Wednesday, Nov. 9, as long as HET shares trade for $61 or higher.

TRADE PROFITABILITY ANALYSIS

To illustrate how and where you will make money on this trade, I have included a payoff diagram at the start of this section. You can use this chart to follow along with my explanation below:



If you look at the shaded areas as they compare to the horizontal axis that tracks the price of HET shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $62.25 level. Likewise, while the stock is under $62.25, we are below the axis (red area) where the bull-call spread registers a profit.

As with any 1-to-1 bull-call spread, our risk is limited to what we pay for the spread -- in this case, $2.25.

Breakeven: $62.25

The breakeven is $62.25 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($2.25 in this case) to the strike price of the call you are buying. Again, because we paid $5 for the HET Feb 60 Calls and took in $2.75 for the sale of the HET Feb 65 Calls, our net out-of-pocket is $2.25. You add that net to the strike price we've purchased ($60) and you get your breakeven of $62.25.

Max Profit: $275 per spread ($2.75 x 100 shares)

The max profit is determined by taking the difference between the two strikes of the bull-call spread, which in this case is $5 ($65 – $60 = $5) and subtracting the amount we paid for the spread ($2.25) and is therefore $2.75. Thus, if Harrah's is $65 or higher on expiration, then the spread will achieve that $5 max and, because we paid $2.25 for the spread, that would leave us with a $2.75 profit, or 122.2%. On a 10-contract spread, that would translate to a profit of $2,750!

*This analysis does NOT include the cost of commissions while executing your trades.

JOIN ME AT THE VEGAS TRADERS EXPO

Every year, more than 37 million people visit Las Vegas, and Dec. 13-16, 2005, the ChangeWave crew will be in town for the Traders Expo.

When you join me at the Paris Resort on the famous Las Vegas Strip, Toby Smith, Bryan Perry and I will give you ways to improve your trading. Don't miss this opportunity -- sign up for your FREE tickets today.

Click below for more information:

http://www.tradersexpo.com/tradersexpo/lasvegas/main.asp?scode=004074