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9/21/05
FOMC SCRIPT WRITTEN WEEKS AGO

September 21, 2005

Just after 4:30 a.m. on Monday, while I was enjoying a cup of coffee and preparing for my radio show, I saw a headline so ridiculous that I nearly passed my coffee through my nose! The headline read, and I quote directly, "Economists divided on rate hike outlook." What a crock!

After I finished laughing and wiping the coffee off my shirt, I actually read the article and began laughing even harder. The Fed has been raising rates in quarter-point moves since June 2004, and not one specialist in economics (also known as economists) I know thought the Federal Open Market Committee was not going to move another quarter-point on Sept. 20. NOT ONE!

Mind you, this particular newspaper has frequently quoted me about financial matters, so when I read something so stupid in that periodical, I had to bite my lip -- hard! While I wanted to rip them for this ludicrous story, I thought again and decided that, rather than burning that bridge, I would not directly quote from the story or cite the writers.

How did these reputable writers get this story so wrong? As usual, they didn't ask the right people.

So who's my inside source that's so right about the Fed and interest rates? The Chicago Board of Trade (CBOT). After all, they trade the CBOT 30-Day Federal Funds futures contract -- which is, of course, what the FOMC was meeting about!

In fact, if you go to the CBOT's Web site (www.cbot.com) and click on "interest rates," you will be whisked to the area of their site for all things interest-rate-related, from the 30-year Treasury bond to Fed Funds, among others.

On Friday (Sept. 16), the CBOT 30-Day Federal Funds futures contract for the October 2005 expiration said there was a 94% probability that the FOMC would increase the target rate by at least 25 basis points from 3.5% to 3.75% at yesterday's FOMC meeting. And, as you know, that's exactly what happened.




So, dear reader, let's get this straight.

The reporters did a poll of "economists" and found that 43% thought the Fed would take a pass, while the men and women who put real money on the line were saying there was only a 6% chance of the Fed standing pat.

Next time you're at a cocktail party and someone is trying to impress you with their knowledge of the markets and throws out some worthless comment about what economists expect from the Fed, here's what you do. Just jump on your smartphone's wireless Internet connection, check out the CBOT's Fed Funds and tell them where the real smart money is walking the walk, not just talking the talk.

CATCHING THE CHANGEWAVE -- TRADING 'ALCHEMY'

If you've got a stock that generates or refines energy, you've had a winner. Recent winning trades in Edge Petroleum (EPEX) and Energy Conversion Devices (ENER) are just two examples of stocks that have rocked in the late second and third quarters.

So this week, let's make the third time a charm and get in on the action in KFx Inc. (KFX), a Denver-based energy company that is one of the most highly shorted on Wall Street.

The company's K-Fuel technology is a coal-drying process that it claims improves the energy content of Western coal, reduces levels of harmful pollutants and lowers its weight, thus making coal cheaper to transport.

KFx uses heat and pressure to physically and chemically transform coal with a lower heat value into coal with a higher heat value, and its K-Fuel process also removes certain impurities, including mercury, sulfur dioxide and emissions of oxides of nitrogen.

Shares have fallen to $15 since a mid-August high of $18.50. One month ago, Barron's cited KFx for developing something quite close to alchemy, as the company can transform low-grade Western coal into the equivalent of a superior Eastern variety -- which costs five times as much!

As you might imagine, K-Fuel would indeed be a HUGE DEAL, especially with natural gas prices hitting record highs and trading above $13, but only if it works. That's the rub and also the reason for last month's sell-off.

Our Distant Thunder and Heat Seeker programs picked up on unusual buying of call options yesterday (Sept. 20), when 5,812 calls traded, and also today (Sept. 21), with the number of calls traded exceeding 8,000.

I am also showing that buyers of the KFX Dec 20 Calls are going wild, paying 75 cents for 3,200 contracts -- and all but 361 of those contracts have been purchased on the offer. This is very heavy buying, especially against a backdrop of an average daily call volume of 2,600 contracts in August.






Because of this make-or-break, all-or-nothing technology, our option spread is the only prudent way to invest in the unbelievable upside of KFx with limited risk. Here's how we play for that exciting future:

I recommend buying the KFX March 15 Calls (KFXCC) and selling a like number of KFX March 20 Calls (KFXCD) for a net debit of $1.75. Prices that work are paying $3.10 for the March 15 Calls and selling the March 20 Calls for $1.35.

In paying $1.75 for this $5 bull-call spread, we have a potential profit of $3.25 and, as always, our risk is isolated to that $1.75 debit we paid for this spread.

To make a limited-risk investment in KFx Inc., I recommend buying the KFX March 15-20 bull-call spread for a net debit of $1.75.

TRADE DETAILS
All information is based on prices as of 4 p.m. Eastern on Wednesday, Sept. 21, 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 $1.75 for the KFX March 15-20 bull-call spread through Wednesday, Sept. 28, as long as KFX shares trade for $14.60 or higher.

Here is the information you need to know to buy our KFx Inc. bull-call spread for profits:

Underlying Stock: KFx Inc. (KFX)

Current Stock Price: $15.05

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	KFX March 15 Call	$15	KFXCC	-$3.10
Sell	1	KFX March 20 Call	$20	KFXCD	+$1.35
		Net Cost			-$1.75

*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 $1.75, 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 $1.75, or $175 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the KFX March 15 Calls (KFXCC) for $3.10 while simultaneously selling the KFX March 20 Calls (KFXCD) for $1.35 puts you in the trade with a net debit of $1.75.

Our loss is limited to the $1.75 that we are paying for the spread. If, on the other hand, KFx Inc. rises above $20 on or before March expiration, then we make $3.25 on our $1.75 investment!

SUMMARY

With KFx Inc. trading for $15.05, a 1,000-share position would tie up $15,050. However, with our trade you'll be able to put just $1,750 at risk and have a potential gain of $3,250 if KFX rises to $20 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the KFX March 15 Calls ($3.10) and our credit on the KFX March 20 Calls ($1.35), or a net debit of $175 per contract.

* With KFX trading at $15.05, a 1,000-share position would cost us $15,050.

* Instead, if we buy 10 of the KFX March 15 Calls (KFXCC) for $3.10 ($3.10 each times 100 shares = $310 per contract), or $3,100 and ...

* Against that purchase, we sell 10 of the KFX March 20 Calls (KFXCD) for $1.35 ($1.35 each times 100 shares = $135 per contract), or $1,350.

* Thus, on a 10-contract spread we have only $1,750 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.75 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 $175 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 $1.75 for this spread trade through Wednesday, Sept. 28, as long as KFX shares trade for $14.60 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 KFX shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $16.75 level. Likewise, while the stock is under $16.75, 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, $1.75.

Breakeven: $16.75

The breakeven is $16.75 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.75 in this case) to the strike price of the call you are buying. Again, because we paid $3.10 for the KFX March 15 Calls and took in $1.35 for the sale of the KFX March 20 Calls, our net out-of-pocket is $1.75. You add that net to the strike price we've purchased ($15) and you get your breakeven of $16.75.

Max Profit: $325 per spread ($3.25 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 ($20 – $15 = $5) and subtracting the amount we paid for the spread ($1.75) and is therefore $3.25. Thus, if KFx Inc. is $20 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.75 for the spread, that would leave us with a $3.25 profit, or 185.7%. On a 10-contract spread, that would translate to a profit of $3,250!

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