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9/7/05
POST-KATRINA KARMA

September 07, 2005

Even as we are rocked by catastrophes and their subsequent losses like we've seen with Hurricane Katrina, we also get to see the best come out in all of us. Well, make that the vast majority of us -- unfortunately, there were a small number of very bad people who took advantage of the situation.

The law of karma in Buddhist teachings says that every event that occurs will cause another event to follow. The second event will be either pleasant or unpleasant, depending on the action of that first event. If that is true, then the very small group of persons who robbed and assaulted their fellow citizens of New Orleans have some very heavy dues to pay!

The blame game is always an interesting and pathetic response to big disasters like Katrina, but I'm glad to see that not all Americans are the sheep the media often thinks we are. In the latest CNN/USA Today poll, only 13% of Americans blame President Bush for the failures in our relief efforts for the Katrina victims. To those who thought they could tar the president with the same brush as New Orleans Mayor Ray Nagin or Louisiana Gov. Kathleen Blanco, I say nice try.

Despite what some members of the media and even some of our elected officials have said about preparedness and efficacy of our response, it is our state and local governments that have primary responsibility in dealing with local disasters. Every state in the union has a National Guard. State National Guards answer first to the governor of each state, not to the president.

Ms. Blanco did not effectively deploy Louisiana's National Guard, nor did she have food stockpiled in the Superdome. For that matter, medical supplies and even reserves of toilet paper were lacking, and this was supposed to serve as their primary emergency housing facility?

You need look no further than the hundreds of flooded school buses, which were lined up and ready to transport people out of the city yet weren't used for that or any purpose, to see where the failures began as the result of gross incompetence.

CATCHING THE CHANGEWAVE -- STRENGTH OF STEEL

Before I detail our trade, I must state that we are not profiteering from the pain of those who lost everything after Hurricane Katrina. My heart and my money have gone out to the victims of this disaster, and I encourage you to do what you can by donating to reputable charities such as the American Red Cross that are providing aid and relief to hurricane survivors.

Let's invest in the rebuilding of New Orleans and the Gulf Coast, one of the largest public works projects in our time. When Toby Smith, Bryan Perry, Scott Bleier and I got on our weekly analysts' conference call with ChangeWave Alliance guru Paul Carton to examine recent Alliance survey results, we came up with a host of great companies that are centering on the rebuilding efforts in the South. The stock that I love and am focusing on is Steel Dynamics (STLD), and here's why:

Steel Dynamics manufactures and sells steel products in the U.S., including hot-rolled, cold-rolled and coated steel products, as well as structural steel beams, pilings and other steel components. The company also fabricates trusses, girders, steel joists and steel decking for the nonresidential construction industry.

And unlike its huge competitors such as Nucor and U.S. Steel, Steel Dynamics primarily uses steel scrap to produce its products, and I think that a great deal of this material will come out of the Gulf region during the cleanup efforts. It's a good effort when we recycle and return the debris from Katrina to the people who will need the new structures.






Here's how we invest in Steel Dynamics:

With Steel Dynamics $14 below its February 2005 highs and trading at just $32.55 at the time of this writing, I recommend buying the STLD Jan 35 Calls (RQLAG) for $2.50 and selling the STLD Jan 40 Calls (RQLAH) for $1, for a net debit of $1.50.

In so doing, the breakeven will be the long $35 strike plus that $1.50 debit, or $36.50. Our maximum profit will be achieved when (that's right -- when!) STLD trades above $40 on that third Friday in January, if not sooner. That's when the spread goes to $5, leaving us with a profit of $3.50. As always, our risk is that $1.50 we paid for the spread.

To make a limited-risk investment in Steel Dynamics, I recommend buying the STLD Jan 35-40 bull-call spread for a net debit of $1.50.

TRADE DETAILS
All information is based on prices as of 2:15 p.m. Eastern on Wednesday, Sept. 7, 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 $1.50 for the STLD Jan 35-40 bull-call spread through Wednesday, Sept. 14, as long as STLD shares trade for $32.25 or higher.

Here is the information you need to know to buy our Steel Dynamics bull-call spread for profits:

Underlying Stock: Steel Dynamics (STLD)

Current Stock Price: $32.55

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	STLD Jan 35 Call	$35	RQLAG	-$2.50
Sell	1	STLD Jan 40 Call	$40	RQLAH	+$1.00
		Net Cost			-$1.50

*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 $1.50, 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 $1.50, or $150 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the STLD Jan 35 Calls (RQLAG) for $2.50 while simultaneously selling the STLD Jan 40 Calls (RQLAH) for $1 puts you in the trade with a net debit of $1.50.
Our loss is limited to the $1.50 that we are paying for the spread. If, on the other hand, Steel Dynamics rises above $40 on or before January expiration, then we make $3.50 on our $1.50 investment!

SUMMARY

With Steel Dynamics trading for $32.55, a 1,000-share position would tie up $32,550. However, with our trade you'll be able to put just $1,500 at risk and have a potential gain of $3,500 if STLD rises to $40 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the STLD Jan 35 Calls ($2.50) and our credit on the STLD Jan 40 Calls ($1), or a net debit of $150 per contract.

* With STLD trading at $32.55, a 1,000-share position would cost us $32,550.

* Instead, if we buy 10 of the STLD Jan 35 Calls (RQLAG) for $2.50 ($2.50 each times 100 shares = $250 per contract), or $2,500 and ...

* Against that purchase, we sell 10 of the STLD Jan 40 Calls (RQLAH) for $1 ($1 each times 100 shares = $100 per contract), or $1,000.

* Thus, on a 10-contract spread we have only $1,500 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.50 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 $150 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 $1.50 for this spread trade through Wednesday, Sept. 14, as long as STLD shares trade for $32.25 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 STLD shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $36.50 level. Likewise, while the stock is under $36.50, 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, $1.50.

Breakeven: $36.50

The breakeven is $36.50 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.50 in this case) to the strike price of the call you are buying. Again, because we paid $2.50 for the STLD Jan 35 Calls and took in $1 for the sale of the STLD Jan 40 Calls, our net out-of-pocket is $1.50. You add that net to the strike price we've purchased ($35) and you get your breakeven of $36.50.

Max Profit: $350 per spread ($3.50 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 ($40 – $35 = $5) and subtracting the amount we paid for the spread ($1.50) and is therefore $3.50. Thus, if Steel Dynamics is $40 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.50 for the spread, that would leave us with a $3.50 profit, or 233.33%. On a 10-contract spread, that would translate to a profit of $3,500!

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

BUY LIST UPDATE -- SEPTEMBER EXPIRATIONS

ENERGY CONVERSION DEVICES (ENER)

We recommended the ENER Sept 22.50-25 bull-call spread in April, and we locked in that $2.50 spread by our purchase of the ENER Sept 25-22.50 put spread for 30 cents on Aug. 10.

With shares currently trading for $33.40, it's our call spread that will be exercised for that $2.50, as our in-the-money ENER Sept 22.50 Calls (EQIIX) will turn into stock on Friday, Sept. 16. However, that stock will immediately be "called away" by the exercise of our short ENER Sept 25 Calls (EQIIE).

We bought into the call spread for $1.20 and paid 30 cents to lock in the put spread, so our total profit is $1 on that $1.50 investment. Winner!

EDGE PETROLEUM (EPEX)

Edge Petroleum is trading at $20.78, so our EPEX Sept 15-17.50 bull-call spread is likely to cash out for $2.50, as both legs are considerably in-the-money. In other words, just as with Energy Conversion Devices, our in-the-money EPEX Sept 15 Calls (EBQIC) will turn into stock and will be called away by our short EPEX Sept 17.50 Calls (EBQIW), leaving our spread at $2.50. That's another winner!

TOP TANKERS (TOPT)

Our TOPT Sept 15-17.50 bull-call spread is still in the driver's seat, and with the stock currently trading for $16.01, we will have to wait until next week to celebrate.

OVERSTOCK (OSTK)

Our OSTK Sept 40-45 bull-call spread is in-the-money. The retailer is in the right spot, but we will have to wait until next week to give you more of an update on this one.

BEA SYSTEMS (BEAS)

Our BEAS Sept 7.50-10 bull-call spread is still expanding, and with another week to go, we'll have to expand on this one next week as well, as the stock is currently trading at $9.08.

BE MY GUEST AT THE MONEY SHOW IN SAN FRANCISCO

Join me on Oct. 14-16, 2005, at the San Francisco Marriott for an exciting and informative Money Show.

Click below for FREE admission for you and a companion:

www.sanfranciscomoneyshow.com/changewave

Or, call 800-970-4355 and mention priority code 004074.

The ChangeWave gang will be on hand, including Tobin Smith, Michael Shulman, Bryan Perry and myself to talk stocks with you throughout the show.

Our mission is to help you grow your wealth.

In today's market, it's hard to tell the difference between the winners and losers. So we’re ready to assist you in clearing away the fog and figuring out which companies are ripe for solid profits and would be good additions to your portfolio.

In my seminar, "How Insider Action Can Help Make You Rich," I’ll show you how you can use options to leverage your money for profits and wealth-building. A few of the other ChangeWave seminars include "Top 5 Wealth Waves 2006" and "Retire on Double-Digit Income."

Don't miss this opportunity to hear the ChangeWave crew and get information that will help you become more skillful, knowledgeable and profitable in your trading.

Check out the ChangeWave adviser schedule below:

SATURDAY, OCT. 15, 2005

8 a.m.-8:45 a.m.: Jon Najarian -- How Insider Action Can Help Make You Rich

10:40 a.m.-11:25 a.m.: Jon Najarian -- How Insider Action Can Help Make You Rich

5:15 p.m.-6 p.m.: Tobin Smith -- Top 5 Wealth Waves 2006

6:10 p.m.-6:55 p.m.: Bryan Perry -- Shorting Stocks 101

6:10 p.m.-6:55 p.m.: Michael Shulman -- Eliminating Scientific Risk in Biotech Stocks

SUNDAY, OCT. 16, 2005

8 a.m.-8:45 a.m.: Tobin Smith -- Riding the Great Energy Wealth Waves 2005-2006

10:40 a.m.-11:25 a.m.: Michael Shulman -- Biotech: New Winners, Old Losers

2:10 p.m.-2:55 p.m.: Bryan Perry -- Retire On Diversified Double-Digit Income

2:10 p.m.-2:55 p.m.: Tobin Smith -- The Top 5 Technology Wealth Waves 2006

While at the show, I also encourage you to visit us in the Phillips InvestorPlace booth.

The San Francisco Money Show will book up quickly, so call 800-970-4355 now and don't forget to mention priority code 004074.

Or visit the Web page below to make your reservations online today:

www.sanfranciscomoneyshow.com/changewave

I look forward to seeing you there.