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They Really Can't Spare a Square

May 03, 2006

Dear Fellow Options Trader,

"Every anarchist is a baffled dictator." -- Benito Mussolini

When we see something like the nationalization of Bolivian gas fields, some among us might initially think, "That's a good idea. Perhaps the U.S. should follow suit and take back the oil and gas that ExxonMobil is pulling out of the Gulf of Mexico or the North Slope of Alaska." But then we'd come to our senses.

Unfortunately, I guarantee that some dimwit congressman or senator is pondering that same initial thought -- just without reconsidering. And that, my friend, is a recipe for disaster.

I've got a friend who owns a firm that sells trucks in Harare, Zimbabwe. He is an Iraqi Jew and as shrewd a businessman as you will ever meet. He has to be -- since Zimbabwe President Robert Mugabe began nationalizing his country's assets, inflation has run to 900%.

Do you have any idea what 900% inflation is like? Of course you don't, and thankfully, neither do I. But according to a report in The New York Times on Tuesday, toilet paper now costs 417 Zimbabwean dollars, but that's not for the whole roll -- that's just for one sheet! A complete roll costs $145,750, or 69 cents (U.S.) at the official exchange rate.

There's another example just south of our border in Mexico. I did business in Mexico and Latin America for nearly a decade, from 1990-2000. I courted currency-hedging businesses for a brokerage firm that I own here in Chicago, and during my trips it became painfully clear that those with money in Mexico feared two things: 1) nationalization and 2) devaluation of the peso.

Unfortunately, the two go hand-in-hand. Businesses that feared nationalization didn't upgrade their facilities, and they were forced to become the ultimate "just-in-time" producers as the nationalization they'd feared ended up preventing them from keeping more than a few days' production materials on site. I was told Coca-Cola would only keep three days' worth of syrup to make Coke so that when the army took control of its facility, they could only steal for three days before the product ran out and, thus, the army would then leave.

Likewise, our wealthy clients wouldn't leave any money overnight in Mexican banks. This forced the banks to pay interest rates of 40%, 50% or higher for deposits to attract money. Our clients would simply keep their money safe in Bermuda, Switzerland or Miami and wait for the inevitable devaluation and then swoop in and buy assets for pennies on the dollar -- er, peso!

My point is that nationalization, or stealing from those who made investments in your country, might get you elected, but it won't keep you in power. Just like a hangover after a night of overindulgence, you might have fun while the party's raging, but the aftermath can lead to a lot of pain.

CATCHING THE CHANGEWAVE -- AGCO SHARES DOWN, BUT ITS OPTIONS HEAT UP

AGCO Corp. (AG) is a manufacturer and distributor of agricultural equipment and related replacement parts worldwide. Shares went down 61 cents today to $26.95, so why, pray tell, are the institutional players buying 8,600 out-of-the-money AG June 30 Calls (AGFF) for 55 cents?

To quote my pal Ben Stein from his role in "Ferris Bueller's Day Off," "Anyone? Anyone? Anyone?"

I wish I had the answer, but the simple fact is that these institutional buyers want in so badly that they've bought more than the open interest of every call at every strike across the board. That's correct -- the total open interest today was 7,281, or 1,300 contracts fewer than the trades made at this single strike price. A quick check shows me that in the entire month of April, a total of 3,872 calls traded in AG. So, what are we waiting for?

Tell your broker to buy the AG June 30 Calls (AGFF) for up to 55 cents with AG trading $26.85 or higher.

Good luck trading and remember -- pigs get fat, but hogs get slaughtered, so don't be a hog!


Jon "Dr. J." Najarian
Editor, ChangeWave Options Trader

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