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Gift Cards, Hemlines & Harvard Business School

December 06, 2006

Dear Fellow Options Trader,

We can't go into the holidays without another news story about gift cards, and who am I to disrupt a metaphysical law? I'm not even certain who enforces such laws, but I suspect if you mess with them, you end up with coal -- or worse -- in your stocking!
The Tower Group, a research and consultancy firm, says it expects gift cards to be a major hit this holiday season, with combined gift card sales in the United States predicted to exceed $80 billion, up more than 20% from 2005.

Segments to benefit from prepaid sales include:

* Retail: $29 billion
* Restaurants/fast food: $18 billion
* Miscellaneous (gas, services, etc.): $12 billion
* Universally accepted (i.e., bank-issued): $23 billion

When you think about it, a gift card is pretty close to a no-recourse, interest-free loan that you make to a retailer. In fact, one large retailer recently showed a $42 million income benefit for unused gift cards more than two years old!

The unused value on these cards has a bigger impact on consumers than the combined total of debit- and credit-card fraud, estimated at $3.5 billion annually in the United States. Published estimates state that nearly $8 billion is forfeited to unredeemed gift-card value, expiration or loss.

GIFT CARDS VS. CASH

If you're looking to choose between the two, I present to you three reasons why you should consider your decision very carefully this holiday season.

1. What is the advantage of giving the gift card instead of cash? There probably isn't any. Cash is more versatile, can be used anywhere, and is universally appreciated. ADVANTAGE: CASH

2. Other than here in Illinois, where it's against the law, gift cards and certificates often expire if not used by a certain date. Cash never expires. Gift cards and certificates are frequently misplaced. Cash is rarely misplaced. ADVANTAGE: CASH

3. Gift cards frequently impose transaction fees -- a fee over and above the actual price of each item you buy. In addition, some have "inactivity charges," where the sellers begin taking value off of the card every month, after a certain number of months of non-use. ADVANTAGE: CASH

Cash is still king, but even a gift-card Scrooge like me knows there are times that gift cards do make sense, such as when you are mailing a gift to a friend or relative. But since cash is legal tender, good for all debts, public and private, why trade that for something full of restrictions, rules and gimmicks designed to take your money away from you?

'TIS THE SEASON TO BE … BEARISH?

Recently, I came across a gentleman by the name of Ray Soifer of Soifer Consulting in Green Valley, Ariz., who runs a consultancy focused on global financial services. The company's areas of expertise range from management, mergers and targeted studies to research.

Recently Mr. Soifer published his 2006 Harvard MBA Indicator, and the bears should take some solace in the fact that he sees this indicator providing a strong sell signal!

The indicator works like this: If 10% or fewer of the Harvard Business School (HBS) grads take jobs in investment banking, investment management, sales and trading, venture capital, private equity or leveraged buyouts, he views that as a bullish signal. If the class percentage that takes such jobs tops 30%, then Soifer sees this as a bearish signal.

And, since 37% of this year's class chose market-sensitive careers, this indicator is calling for a market top. The last time the HBS indicator screamed "sell" was in 2000, and prior to that, you'd have to go back to 1987. And we all know what happened back then!

So does this mean you dump everything and dive into cash? No, because just like how the "sell in May and go away" adage works, the key was to get back in prior to when that adage would have had you still on the sidelines. After all, if you sold in May when the Dow was trading at 11,300 and got back in six months later at the end of October (with the Dow trading at 12,150), you'd have missed the bulk of the gains!

As for Mr. Soifer's HBS indicator, I like it in principle and it could indeed call a top, but when do you get back in? (Keep in mind that this study can only be done once per year!) Like the Hemline Indicator (i.e., the higher the hemlines, the more bullish the sentiment; lower hemlines mean vulnerability in the markets) and the Super Bowl Indicator (i.e., if the winner is from an AFC division, the markets will fall, but NFC winners indicate an uptick for the year), investors and traders need to time their entry and exit, and these indicators make that difficult task almost impossible.

Oh well -- I guess we'll just have to follow our fabulous ChangeWave Alliance research and the unusual trading activity that shows up on our proprietary HeatSeeker technology. But for good measure, I'll throw in a sprinkle of Super Bowls, hemlines and HBS commitments!

PORTFOLIO UPDATE

A couple of our trades hit their sell stops recently, in particular the Sprint Jan 20 Calls (SAD) and the Micron Dec 14 Calls (MULP), which dropped to half their value on Nov. 28 and Dec. 1, respectively. As per our selling discipline (i.e., to exit the trade when it goes down 50%), we've moved them over to the Sold List. But for those of you who didn't set a stop-loss or who are paper-trading, I wanted to provide an update.

The Sprint calls, which we recommended on Nov. 10 at $1.45 on strong institutional buying activity, dropped through their 70-cent stop after the Thanksgiving holiday and have been trading between 45 cents and 75 cents throughout the past few days, with a number of the trades going off at 55 cents. There might be some upside left in these, as they are January options, but you may want to jump out now while they still have some value.

The Micron calls are a little more frustrating, because they hit their sell stop and used it as a springboard to come back to life. Our sell stop was 55 cents on this $1.10 investment, and 55 cents is the lowest these options have traded, as they found a range between 90 cents and $1 today. As these are December expirations, they've only got another seven trading days' worth of life. For those of you still hanging on to your position, you can close it at market or let it ride for the next week and see where it can go, but for our purposes, we will consider both trades to be stopped out.

Good luck trading and remember, pigs get fat but hogs get slaughtered!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader


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