Mistery Trader

We are reiterating our recommendation to sell April $68 thru $70 Call Options on Lean Hog Futures, and also recommending the trade for the June $82 thru $84 Calls on Lean Hog Commodities.
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We recommend buying June Live Cattle Futures (LCM8) and selling April Live Cattle Futures (LCJ8). Begin by lightly building a position in the trade by next week, with the intent of holding a full position by the end of February. We estimate the upside potential to be approximately $800 per contract on the Live Cattle Spread Trade.

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On the last day of February we recommend buying June Lean Hogs (LHM8) and selling April Lean Hogs (LHJ8). The profit potential is approximately $2000 per contract, with an estimated downside risk of $1500 per contract.

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Selling the Lean Hog market, sell June Lean Hogs (LHM8) at the close today, January 31st, 2008, and Friday, February 1st, 2008 - because of inter-month spreading the June Lean Hog contract is pricier than the April Lean Hog contract.

Another possibility is to sell 68 or 70 April Lean Hog Calls.

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More on Advanta as we get close to the Jan. 30 numbers. Advanta has close to $6b in managed - $1.5 online and $4.5 securitized. The book value of the company with the non-securitized assets adjusted for 8% charge-offs (currently at 3.5% and amongst the lowest in the industry) puts the stock at $11. People obviously worry about the non-balance sheet securitized portfolio - currently the portfolio has a cost of 10%, charge rate of 19% and charge-off rate of 4.5% - which gives a net of 4.5%. If the charge rate doubled and went to 9% - where it was at the end of 2000 and only for a year - there would be no income from securitization but also no losses. You would still be left with your $11 book value plus the income from the online assets - even if you did not make any income online - you are still left with 11 dollars. Now the reality is that charge-offs could go to historic highs if we have a severe downturn but even if the company makes no money or has losses for two years (which requires so pretty serious charge-offs) the book value is likely to stay at around $11-$9. Basically it’s a bet that the company wont go bankrupt with a pretty high probability that it wont (IMHO). BTW, once the credit environment eases, at $100-$140m a year in net income with normal charge-offs - book value starts increasing pretty quickly. Given that the company is well managed and best-in-class. It’s a pretty good bet. If the scenario is not as glum, you could easily see this stock above $15.

Strong buy on advnb (Advanta Class B Shares - non-voting, higher yield) - book value with no future business and write offs at the 1991 recession levels puts the company at 11 dollars a share. Earnings come out next week and anything but devastating news will make the stock go up. The stock has been behaving pretty well during the down moves of the last few weeks and is supported near the 6-7 mark. The stock is also paying a 12% dividend yield. They are only a small business credit card lender and their credit model is supposedly pretty solid.

SELL APRIL LEAN HOGS AT 6500

LHJ8

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SELL APRIL LIVE CATTLE AND BUY JUNE LIVE CATTLE ON THE FIRST OR SECOND DAY OF MARCH.

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SELL THE LEAN HOG JUNE 82 CALL BECAUSE THE CONTRACT IS OVERPRICED.

150 pts upside.

50 pts downside.