Option Investor

Daily Newsletter, Tuesday, 12/21/2004

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The Option Investor Newsletter                 Tuesday 12-21-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Glad Tidings
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Checking His List

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      12-21-2004           High     Low     Volume   Adv/Dcl
DJIA    10759.43 + 97.80 10765.27 10661.89 1.86 bln 2324/ 920
NASDAQ   2150.91 + 23.10  2151.71  2133.34 2.02 bln 2037/1120
S&P 100   573.36 +  5.56   573.46   567.80   Totals 4361/3040
S&P 500  1205.45 + 10.80  1205.93  1194.65 
SOX       424.40 +  5.00   424.91   418.42
RUS 2000  646.20 +  8.15   646.20   638.05
DJ TRANS 3792.09 + 61.20  3798.54  3730.04
VIX        11.55 -  0.28    12.00    11.37
VXO (VIX-O)11.52 -  2.09    12.23    11.35
VXN        16.94 -  1.27    18.35    16.58  
Total Volume 4,080M
Total UpVol  3,087M
Total DnVol    923M
Total Adv  4958
Total Dcl  2360
52wk Highs  460
52wk Lows    41
TRIN       0.68
NAZTRIN    0.63
PUT/CALL   0.79

Glad Tidings
by Jim Brown

While there is a new high celebration in progress on most 
of the indexes there were a couple not yet feeling the 
holiday cheer. The SOX continues to hold below resistance
at 425 and well off the December highs at 453. The Nasdaq
is still struggling with the 2153 level and is also under
last weeks high of 2171. 

Dow Chart

Nasdaq Chart

SPX Chart

Wilshire 5000 Chart


The markets had a lot to celebrate with Chain Store Sales
rising for the second consecutive week with a +1.6% gain. 
The holiday shopping season is alive and well and with only
two shopping days remaining until Christmas those gift cards
are flying off the counter. Ironically stores cannot count
them as sales until redeemed. It is unknown if you will buy
an item with a 50% margin or a 5% margin so the money goes 
into limbo status until spent. I have not heard any complaints
from retailers being forced to hold off accounting for the
cash. The ICSC reiterated its estimate for holiday spending
at only +2.5% to +3.0%. This is down from the +4.0% level 
last year but up from this November's level at +1.8%. 

An economic negative the market brushed off today was the
Chicago Fed National Activity Index at only +0.12. The index
rallied in October to +0.49 from -0.23 in September but that
rally appeared short lived. The three-month average is holding
at +0.13. This index hit its highs back in early 2004 in the
high 70s, low 80s and has been declining ever since. With the
average holding at +0.13 we may be trying to put in a bottom
and 2005 could see a rebound in activity. The pressure from
high energy prices is creating a drag on the economy and 
this national index is proof. The real decline in the CFNAI
did not begin until after July and the real escalation in 
oil prices began.

RIMM announced earnings after the close and beat the street
by +3 cents at $0.58 per share. Despite this +450% jump in
earnings and raised earnings guidance the stock was crushed
in after hours trading. They raised earnings guidance to a
range of 60 to 67 cents per share and analysts were expecting
62 cents. There were two problems impacting the stock price.
Their revenue guidance for Q4 at $390-$410 million was below
the analysts estimates of $412.5 million. New BlackBerry 
subscribers rose +387,000 for the quarter to over two million
but analysts were hoping to see stronger growth. The stock
was very active in after hours and was holding at $83 and
dip support from last week. 

The shell game in Russia over the new owner of the Yukos 
oil assets is continuing. There are so many players you
can't tell who will be in the drivers seat from day to day.
The Yukos asset, Yuganskneftegaz, was sold to a mystery
bidder on Sunday for $9 billion with a true value of closer
to $20 billion. This phony sale was done to legalize the 
eventual transfer back into Russian control. According to
Russian investigators the mystery company, Baikal Finance,
whose reported registration address turned out to be a 
café in a small town 125 miles from Moscow, may have been
a front for Kremlin-backed oil company, Surgutneftegaz. 

Surgutneftegaz chief Vladimir Bogdanov is perceived as 
Kremlin-loyal and could have obeyed government instructions
to use his company's reported $8 billion in cash reserves
to acquire Yuganskneftegaz — and ultimately transfer it
back to Gazprom. Putin said today that the buyers of the 
Yukos asset would likely partner with another Russian
energy company with interest in the oil. Analysts said this
confirmed to them that it would eventually end up as part
of the state controlled gas giant Gazprom. This is exactly
where Putin wanted it, right back under Russian control
with oil headed back over $50 again soon. I believe strongly
that this is the first shot in the coming oil wars and has
guaranteed a stable oil supply for Russia regardless of what
happens on a global scale. They can now be independent of
outside supply concerns and insulated from future high 
prices. I believe we will see further positioning in the
oil sector very soon. With the permanent decline of global
oil production looming in our near future we can expect 
further subtle changes in the playing field as 2005 unfolds.
Make no mistake, this was a key move in setting up the 
global chess board for the crucial game ahead. 

While Santa may be trying to tiptoe into town this week the
bulls are stampeding. The Dow broke out to a new 52-week 
high and a new three year high at 10758. While the Dow had
been lagging the other indexes for months the big caps have
finally attracted the attention of the bulls. Only one Dow
component finished the day in negative territory and that
was JNJ at -0.12. Hardly a serious loss but just enough to
keep it from being a shutout for the bears. For two weeks
the Dow has been resting on support at 10650 and the final
breakout today comes in advance of the normal Santa Claus
rally period. That period is typically the last four days
of the year and the first two days of the new year. I
speculated last week we would see traders try to move into
the market by midweek in anticipation of that year end 
liquidity rally. I was surprised by the strength of the 
big caps today given the weakness in chips and a lagging

The Nasdaq has tried for a week to get back over its prior
resistance high at 2153 with no success. We have traded 
over that level for extended periods twice in December but
we just can't seem to maintain traction at the new highs. 
Part of this problem is directly related to the continued
weakness in chips with the SOX stuck at 425. Even the 
bullish outlook by SG Cowen today on Dell could only 
provide a minor SOX bounce. SGC said there was unusually
strong demand for PCs from the corporate sector with an 
sharp upgrade cycle in progress. I have mentioned before
that the accelerated depreciation tax benefit that expires
on 12/31 was going to have an impact on year end PC sales
and it appears to be working. Still the Nasdaq closed at
2150, under the psychological 2153 level but poised for
a takeoff if conditions warrant. 

According to a report out from TrimTabs.com today the
conditions are ripe for a major move. According to them
money flows are stronger now than any time in the last
ten years. The firm turned "leveraged bullish" or 200%
long from "cautiously bearish" and 50% short. They were
long since the end of October and turned short just last
week. They said the market digested the three-year high
in IPOs over the last two weeks with barely a pause and
conditions going into the year end were very strong. They
said new offerings would slack off until late January and
stock buybacks were adding about $1.8 billion in cash
daily. There were $20 billion in buybacks announced last
week. TrimTabs also said insider selling typically slows
in late December as blackout periods apply before the
January earnings cycle. They expect fund flows in January
to possibly surpass the $31 billion they took in last
January. SPX 1300 was mentioned as a potential January

After that paragraph above it would seem as if Wall Street
was about to be overrun with stampeding bulls reminiscent
of the cattle stampedes in western movies. Helping provide
confirmation is the VXO (old VIX) which closed today at 
11.52 and a level not seen since 1995. Yes, 1995. For 
nearly ten years the 18-20 level has been a reliable sell
signal with the last prolonged stint around 15 back in 
1996. For nearly all of 2004 that 14-15 level has been
the base but a complete lack of volatility over the last
quarter has caused a collapse to today's low. While it
would be a historical sell signal on the surface you have
to take other factors into consideration. The TrimTabs
numbers above expecting an extreme liquidity boost over
the next four weeks is removing the fear from the market.
We still have that Microsoft cash sloshing around the 
market plus cash from a strong flurry of takeovers. The
Dow is at three-year highs and life is good on the surface
for the bullish case. It is also the time when bulls should
be the most concerned. Disaster always strikes the hardest
when you least expect it. When everyone lines up on the 
same side of the boat it usually capsizes. I do believe
we are going higher over the next two weeks. Fund managers
are painting the tape as hard as they can to dress up 
those statements and earn those bonuses. This suggests
the VXO/VIX can move even lower and every tick down is
another warning signal that there will eventually be a
reversal. Today's close at 16.94 on the VXN (Nasdaq VIX)
is an all time historical low.  

VXO Chart

VXN Chart


One factor that gives technicians cause for concern is
volume indicator. For the three days prior to today the
volume was very high, even extreme on Thr/Fri with Thr
at 5.9B and Friday 5.985B and it was strongly weighted
to the downside. While I believe this was due to the 
various index reweighting games it is still a caution.
We really need a strong volume day to the upside to 
bring conviction to the market. I heard several analysts
claiming today was lackluster but based on the internals
it looked pretty strong. The A/D line was better than 2:1
in favor of advancers and volume was better than 3:1 in
favor of up volume. Were it not for the drag from the
SOX I suspect it would have been much stronger. 

For the rest of the week the volume is expected to slow
but all indications are the markets will move higher from
here. With the SPX bouncing at our 1195 level we were 
using as a long/short indicator on Sunday everyone should
be long tonight and hoping for a that TrimTab 1300 target
to come true. The market is closed on Friday and we will
be putting out the Sunday newsletter on Thursday night.
While I doubt anybody will be reading it until Sunday it
will be there and waiting for your viewing pleasure.
I would like to take this opportunity to wish everyone
happy holidays and a joyous time with your friends and
When boredom sets in over the weekend and your family
has charged off to the mall to return all those thoughtful
gifts you personally selected you can always spend the
time registering for the End of Year Renewal Special. 

Buy the dips until the trend changes. 

Jim Brown

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Futures wrap is not emailed due to the excessive number of charts.
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Checking His List
- J. Brown

Santa has been making his list and checking it twice.  It looks 
like the bulls came up on the nice side and the seasonal "Santa 
Claus" rally may have begun.  According to the Stock Trader's 
Almanac the January effect actually tends to begin around mid-
December which then leads into the real Santa Claus rally which 
is typically the last five days of December and the first two 
trading days in January.  Altogether it adds up to a very bullish 
time of year for equities and the new 3 1/2 year highs for the 
Dow Industrials really helps set the holiday mood.  

Overall market internals were pretty good.  The number of 
advancing stocks out weighed decliners by almost 3-to-1 on the 
NYSE and about 2-to-1 on the NASDAQ.  Up volume was about three 
times stronger than down volume on both exchanges.  Speaking of 
volume the overall volume totals were pretty good considering 
there are just two trading days left to Christmas.

There were some pretty big declines in the volatility indices.  
The VIX slipped 2.3 percent to hit 11.55.  The VXO (or old VIX) 
fell about 15 percent to 11.52.  The VXN fell almost 7 percent to 
close at 16.95.  That is a new all-time low for the VXN and the 
VIX is nearing new ten-year lows.  What does this mean?  It means 
bullish sentiment is hitting extremes.  Normally at these levels 
we'd be talking about a potential top but we suspect that the 
volatility indices will continue to drop as stocks climb towards 
New Year's Eve. 


Market Averages


52-week High: 10765
52-week Low :  9708
Current     : 10759

Moving Averages:

 10-dma: 10637
 50-dma: 10334 
200-dma: 10240 

S&P 500 ($SPX)

52-week High: 1207
52-week Low : 1060
Current     : 1205

Moving Averages:

 10-dma: 1193
 50-dma: 1157
200-dma: 1125

Nasdaq-100 ($NDX)

52-week High: 1635
52-week Low : 1301
Current     : 1609

Moving Averages:

 10-dma: 1609
 50-dma: 1538
200-dma: 1452


CBOE Market Volatility Index (VIX) = 11.55 -0.28 
CBOE Mkt Volatility old VIX  (VXO) = 11.52 -2.09
Nasdaq Volatility Index (VXN)      = 16.94 -1.27 


          Put/Call Ratio  Call Volume   Put Volume

Total          0.79        783,169       620,054
Equity Only    0.51        141,297       289,787
OEX            1.07         16,019        17,237
QQQQ           2.57         17,456        44,883


Bullish Percent Data

           Current   Change   Status
NYSE          76.0    - 0.3   Bear Correction
NASDAQ-100    78.0    + 1     Bull Confirmed
Dow Indust.   70.0    + 0     Bull Confirmed
S&P 500       77.0    + 0.4   Bull Confirmed
S&P 100       77.0    + 0     Bull Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


 5-dma: 1.04
10-dma: 1.02 
21-dma: 0.98
55-dma: 1.07

Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning


Market Internals

            -NYSE-   -NASDAQ-
Advancers    2104      1984
Decliners     746      1058

New Highs     279       142
New Lows        8        12

Up Volume   1444M     1467M
Down Vol.    390M      478M

Total Vol.  1857M     1982M
M = millions


Commitments Of Traders Report: 12/14/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercial traders upped their positions in both longs and 
shorts with the net result as a decrease in their bearish
bias.  Small traders did the same but with a net result in
a decrease in their bullish bias.

Commercials   Long      Short      Net     % Of OI
11/23/04      462,408   491,384   (28,976)   (3.0%)
11/30/04      462,394   491,813   (29,419)   (3.0%)
12/07/04      450,072   498,057   (47,985)   (5.0%)
12/14/04      502,471   540,494   (38,023)   (3.6%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
11/23/04      171,192   150,606    20,586     6.4%
11/30/04      176,031   148,876    27,155     8.3%
12/07/04      187,707   135,776    51,931    16.0%
12/14/04      201,428   164,111    37,371    10.2%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

Hmm.. we have some interesting movement here.  Commercials upped
both their longs and shorts but their bearish bias has been slowly
decreasing for weeks.  Meanwhile the small traders more than 
doubled their short positions putting a serious dent in the 
overall bullish bias.

Commercials   Long      Short      Net     % Of OI 
11/23/04      412,724   849,091   (436,367)  (34.6%)
11/30/04      439,074   855,440   (416,366)  (32.2%)
12/07/04      470,553   805,234   (334,681)  (26.2%)
12/14/04      556,980   899,616   (342,636)  (23.5%)

Most bearish reading of the year: (436,367)  - 11/23/04
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
11/16/04      445,737     70,169   375,568    72.8%
11/23/04      400,995     62,080   338,915    73.1%
11/30/04      386,665     67,926   318,739    70.1%
12/07/04      311,838     66,496   245,342    64.8%
12/14/04      398,915    137,598   261,317    48.7%

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


We are seeing some interesting movement here too.  Commercial
traders significantly raised their positions in both longs
and shorts with a serious drop in their bullish bias as 
the net effect.  Meanwhile small traders added a huge chunk 
of new longs compared to a significant jump in shorts with
the net effect being a sharp drop in their bearish bias.

Commercials   Long      Short      Net     % of OI 
11/23/04       58,159     34,104    24,055   26.0%
11/30/04       56,629     30,571    26,058   29.8%
12/07/04       57,621     34,313    23,308   25.4%
12/14/04       73,554     50,286    23,268   18.7%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  26,058   - 11/30/04

Small Traders  Long     Short      Net     % of OI
11/23/04       11,153    39,712   (28,559)  (56.1%)
11/30/04        9,902    44,779   (34,877)  (63.7%)
12/07/04       15,489    49,064   (33,575)  (52.0%)
12/14/04       26,781    58,159   (31,378)  (36.9%)

Most bearish reading of the year: (34,877) - 11/30/04
Most bullish reading of the year:  19,088  - 01/21/02


Commercial traders added significant amounts to both their long
and short positions with a net decrease in their bearish bias.
Small traders also poured a lot of new money into both their
long and short positions with the net effect as a decrease
in their bearishness.

Commercials   Long      Short      Net     % of OI
11/23/04       22,527    25,537   (3,010)     (6.2%)
11/30/04       22,622    25,411   (2,789)     (5.8%)
12/07/04       25,523    27,351   (1,828)     (3.4%)
12/14/04       36,960    38,566   (1,606)     (2.1%)
Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
11/23/04        5,833     8,299   (2,466)   (17.4%)
11/30/04        5,739     8,536   (2,797)   (19.6%)
12/07/04        5,274     9,507   (4,233)   (28.6%)
12/14/04       13,445    19,089   (5,644)   (17.3%)

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03


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The Option Investor Newsletter                  Tuesday 12-21-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None 
Dropped Puts: None
Call Play Updates: ABK, BDK, BIIB, COF, GOOG, IBM, MDC, MHK, SWN,
                   UTX, ZBRA 
New Calls Plays: ETR, FRE, FSH, RAI
Put Play Updates: GCI
New Put Plays: None


When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.





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Ambac Fincl Group - ABK - cls: 82.64 chg: +0.35 stop: 79.89     

ABK did manage a bounce on Tuesday but shares under performed its 
peers in the IUX insurance index and the broader market as well.  
If we don't see ABK begin to climb soon we may look for an early 
exit.  The IUX index bounced from its simple 200-dma today but 
its fading momentum still concerns us.  We would be cautious when 
it comes to new positions. 

Picked on December 01 at $82.26
Change since picked:     + 0.38
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      490 thousand
Chart =


Black & Decker - BDK - close: 86.16 chg: +0.15 stop: 83.49

We are still stuck on the sidelines with BDK.  Shares have been 
consolidating sideways in a tight $1.50 trading range the last 
four sessions.  While the momentum indicators suggest BDK wants 
to breakout higher the lack of participation in today's rally 
could be a concern.  Our entry point to go long/buy calls is at 

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       656 thousand 
Chart =


Biogen Idec - BIIB - close: 65.92 change: +0.08 stop: 60.99

We are a little surprised at BIIB's lack of participation in 
today's market rally.  We suspect that the bounce in the BTK 
biotech index wasn't enough to spark new interest in BIIB.  We 
remain bullish on BIIB as it consolidates sideways following its 
early December breakout but we would look for a new relative high 
over $66.75 before considering new positions.  In the news BIIB 
and Elan (ELN) announced a new study comparing the safety and 
effectiveness of TYSABRI to Rebif as a treatment for multiple 

Picked on December 9 at $ 65.25
Change since picked:     + 0.67
Earnings Date          01/26/05 (unconfirmed)
Average Daily Volume =      3.5 million  
Chart =


Capital One Financial - COF - cls: 82.75 chg: +0.82 stop: 76.99

JPMorgan started coverage on COF with an "over weight" rating 
this morning, which helped shares of COF bounce from the $82 
level to close at a new high.  After several days of 
consolidating sideways following its December 10th breakout we 
suspect that COF is ready and willing to march higher.  The 
company confirmed its Q4 earnings announcement date at Jan. 19th.

Picked on December 12 at $ 81.12
Change since picked:      + 1.63
Earnings Date           01/19/05 (confirmed)
Average Daily Volume =       1.4 million  
Chart =


Google Inc - GOOG - close: 183.75 change: -1.27 stop: 174.99

GOOG suffered a little bit of profit taking today.  We were 
triggered in this speculative play on Monday after GOOG gapped 
over resistance at $180 and charged to $188 before paring its 
early Monday morning gains.  Our trigger or entry point to go 
long was $183.01.  The Monday move was initially attributed to 
stock split rumors but those appeared to fade by afternoon.  
Technical traders will note that yesterday's rally produced a new 
buy signal in GOOG's MACD indicator. We would look for a bounce 
from the $180 level as GOOG fills the gap. Remember, this is a 
high-risk play!

Picked on December 20 at $183.01
Change since picked:      + 0.74
Earnings Date           01/20/05 (unconfirmed)
Average Daily Volume =        10 million  
Chart =


Intl Business Mach. - IBM - close: 97.02 chg: +0.47 stop: 95.49     

We suspect that odds of a breakout for IBM are growing.  The 
current trading range between $96 and $98 has narrowed 
considerably.  IBM spent the majority of today's session in a 30-
cent range and we wouldn't be surprised to see Big Blue breakout 
tomorrow or Thursday.  We're still not suggesting new plays but 
readers can prepare to exit for a move into our target range at 

Picked on October 27 at $90.00
Change since picked:    + 7.02
Earnings Date         10/18/04 (confirmed)
Average Daily Volume =     4.7 million 
Chart =


M D C Holdings - MDC - close: 84.10 change: -0.73 stop: 82.00

JPMorgan started coverage on MDC with an "under weight" rating 
this morning.  Considering MDC's short-term overbought status it 
wasn't a surprise to see some profit taking.  Fortunately, MDC 
bounced from its simple 10-dma near $82.00 to significantly 
reduce Tuesday's losses.  This may end up being a new bullish 
entry point and we continue to target a move toward $88.50 as our 
secondary target.

Picked on December 12 at $ 81.01
Change since picked:      + 3.09
Earnings Date           01/11/05 (unconfirmed)
Average Daily Volume =       435 thousand
Chart =


Mohawk Industries - MHK - close: 89.30 chg: +0.49 stop: 86.99

There is not much new to say on MHK but we believe the recent 
pull back may be over.  Shares of MHK are beginning to bounce, 
which is consistent with its trend of higher lows.  This may be a 
new bullish entry point but we would look for the stock to trade 
back above the $90.00 or $90.50 levels before committing capital.

Picked on December 14 at $ 91.00
Change since picked:      - 1.70
Earnings Date           02/05/05 (unconfirmed)
Average Daily Volume =       319 thousand   
Chart =


Southwestern Energy - SWN - close: 52.36 chg: +1.21 stop: 49.50     

After four days of testing its simple 10-dma as support it looks 
like the consolidation may be ending.  SWN added 2.36 percent to 
out perform its peers in the OIX and OSX oil-related indices.  We 
would consider today's strength a new bullish entry point but 
more conservative traders may want to wait for SWN to trade above 
$52.65 or even $53.00 before opening new positions. 

Picked on December 14 at $ 51.05
Change since picked:      + 1.31
Earnings Date           00/00/04 (confirmed)
Average Daily Volume =       557 thousand   
Chart =


United Tech. - UTX - close: 103.85 change: +0.21 stop: 98.95     

Dow-component UTX has been out performing its peers in recent 
sessions so it took a back seat today when its peers decided to 
catch up.  We remain bullish but if a dip appears look for a 
bounce near the $102 level.  No change in strategy or stop.

Picked on December 1 at $100.15
Change since picked:     + 3.70
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      1.8 million  
Chart =


Zebra Technologies - ZBRA - close: 55.46 chg: +1.01 stop: 51.99

Yesterday ZBRA dipped to test support near $53.50 at its simple 
10, 40 and 200-dma's.  Fortunately, traders quickly jumped in to 
buy the dip.  Today's continuation of the bounce looks like a new 
bullish entry point although more conservative types may still 
want to wait for ZBRA to clear the $56 region.  

Picked on December 15 at $ 55.21
Change since picked:      + 0.25
Earnings Date           02/09/05 (unconfirmed)
Average Daily Volume =       709 thousand 
Chart =


Entergy Corp - ETR - close: 67.62 chg: +1.10 stop: 64.50

Company Description:
Entergy Corporation is an integrated energy company engaged 
primarily in electric power production, retail distribution 
operations, and gas transportation. Entergy owns and operates 
power plants with about 30,000 megawatts of electric generating 
capacity, and it is the second-largest nuclear generator in the 
United States. Entergy delivers electricity to 2.6 million 
utility customers in Arkansas, Louisiana, Mississippi, and Texas. 
Entergy has annual revenues of over $9 billion and approximately 
14,000 employees. (source: company press release)

Why We Like It:
We like ETR as a momentum/relative strength play.  The stock has 
been a consistent climber with investors buying dips at its 40 
and 50-dma's since mid-summer.  The UTY utility index has a 
similar pattern and just broke out to new three-year highs.  We 
think ETR will follow suit by breaking out over resistance at $68 
and continue to climb into the new year.  Dividend investors will 
be drawn to it for its 3.2 percent yield, which is an area 
(dividend-yielding) that many money managers said they plan on 
focusing more money in 2005.  We are going to suggest longs at 
current levels following its recent bounce from the 50-dma but 
more conservative traders may feel better waiting for ETR to 
breakout and trade over $68.15 to hit a new all-time high.  The 
bullish P&F chart points to a $103 target.  We are a little more 
conservative and plan to target the $75 region by the end of 
February.  Take note that the risks to going long ETR include 
more potential downgrades.  The average price target from most 
brokers is about $67.  ETR has already been downgraded twice in 
the last month on valuation concerns, which the stock has 

Suggested Options:
We are going to suggest the February and March calls.  
Unfortunately the February calls look new so there's no volume
or open interest yet.

BUY CALL FEB 65 ETR-BM OI= 0 current ask $3.70
BUY CALL FEB 70 ETR-BN OI= 0 current ask $0.80

BUY CALL MAR 65 ETR-CM OI=196 current ask $3.90
BUY CALL MAR 70 ETR-CN OI= 95 current ask $1.15

Annotated chart:


Picked on December 21 at $ 67.62
Change since picked:      + 0.00
Earnings Date           01/31/05 (unconfirmed)
Average Daily Volume =       1.1 million  
Chart =


Freddie Mac - FRE - close: 71.80 chg: +1.31 close: 66.99

Company Description:
Freddie Mac is a stockholder-owned company established by 
Congress in 1970 to support homeownership and rental housing. 
Freddie Mac fulfills its mission by purchasing residential 
mortgages and mortgage-related securities, which it finances 
primarily by issuing mortgage-related securities and debt 
instruments in the capital markets. Over the years, Freddie Mac 
has made home possible for one in six homebuyers in America.
(source: company press release)

Why We Like It:
We like FRE as a technical breakout play.  The lender has broken 
through major, long-term resistance in the $70-71 region to hit 
new all-time highs.  This has produced a new triple-top breakout 
buy signal on its P&F chart with an $85 price target.  Investors 
are drawn to the stock now that the company seems to have its 
problems behind it, unlike its sister Fannie Mae (FNM).  Speaking 
of FNM the latest reports show that FRE is taking back market 
share from its rival.  Volume has been exceptionally strong the 
last couple of sessions suggesting possible short covering and 
new buyers as FRE breaks out over long-time resistance.  We want 
to be long above $70.00 with a two-month target in the $77-$80 

Suggested Options:
We are going to suggest the April calls.  

BUY CALL APR 65 FRE-DM OI=12697 current ask $8.10
BUY CALL APR 70 FRE-DN OI= 3105 current ask $4.30
BUY CALL APR 75 FRE-DO OI=15364 current ask $1.60

Annotated chart:


Picked on December 21 at $ 71.80
Change since picked:      + 0.00
Earnings Date           00/00/05 (unconfirmed)
Average Daily Volume =       2.8 million  
Chart =


Fisher Scientific - FSH - cls: 61.70 chg: +0.68 stop: 56.95

Company Description:
Founded in 1902, Fisher Scientific International Inc. is a 
leading provider of equipment, supplies, and services for the 
clinical laboratory and global scientific research markets. 
Through our broad product offering, electronic-commerce 
capabilities, integrated global logistics network, and 
manufacturing facilities, we provide more than 600,000 products 
to over 350,000 customers in 145 countries.
(source: company press release)

Why We Like It:
We like FSH as a technical breakout play.  The stock had been 
stuck in a trading range between $52.50 and $61.00 since last 
April.  Shares broke through the top of this channel a couple of 
days ago and just retested the $60.00 level as support with 
yesterday's bounce.  This morning UBS started coverage on the 
stock with a "buy" and a $74 price target.  This echoes comments 
from LM who several days ago also started coverage on FSH with a 
"buy".  The P&F chart is bullish with a $79 target.  We want to 
be long over $60.00 with a six to eight week target in the $68-70 
range.  Short-term technicals may look a little extended but its 
weekly chart's MACD just produced a new buy signal.  If FSH sees 
another dip we'd buy a bounce above $60.00. 

Suggested Options:
We are going to suggest the March calls.

BUY CALL MAR 55 FSH-CK OI= 264 current ask $8.00
BUY CALL MAR 60 FSH-CL OI=1928 current ask $4.10
BUY CALL MAR 65 FSH-CM OI=1067 current ask $1.60

Annotated chart:


Picked on December 21 at $ 61.70
Change since picked:      + 0.00
Earnings Date           02/02/05 (unconfirmed)
Average Daily Volume =       1.3 million  
Chart =


Reynolds American - RAI - close: 79.29 change: +0.77 stop: 75.99

Company Description:
R.J. Reynolds Tobacco Company (R.J. Reynolds) is an indirect 
wholly owned subsidiary of Reynolds American Inc. R.J. Reynolds 
is the second-largest tobacco company in the United States, 
manufacturing about one of every three cigarettes sold in the 
United States. R.J. Reynolds' product line includes five of the 
nation's 10 best-selling cigarette brands: Camel, Winston, Kool, 
Salem and Doral. (source: company press release)

Why We Like It:
We like RAI as more of a momentum-relative strength play than 
anything specific to the company.  However, it's worth noting 
that the tobacco industry has seen stocks soar over the last 
couple of months with Altria Group (MO), RAI and UST all breaking 
out to new all-time highs in the last few sessions.  We like RAI 
because shares just broke through the top of its four-week 
trading range and it doesn't look quite so overextended as its 
peers do.  A good portion of the rally in tobacco may be 
attributed to news that a federal appeals court is questioning 
the legality in the government's $289 billion racketeering suit 
to force the industry into coughing up past profits.  Should this 
be thrown out of the case these stocks could really run.  Of 
course if the appeals court give government prosecutors the okay 
then shares of all the tobacco stocks could tumble quickly.  We 
also like RAI because dividend investors are drawn to it for the 
4.8 percent yield.  A recent survey showed that money managers 
plan to focus more money into dividend stocks in 2005.  Currently 
RAI's Point & Figure chart shows a triple-top breakout buy signal 
with a $90 target.  Our plan is to use a TRIGGER over $80.00 and 
target a run into the $87-88 range.  Our entry point will be 
$80.11.  Until then we'll sit on the sidelines. 

Suggested Options:
We are going to suggest the February calls.  Currently we don't
see an $85 strike price but suspect one will be added soon.

BUY CALL FEB 75 RAI-BO OI= 7413 current ask $6.50
BUY CALL FEB 80 RAI-BP OI= 2686 current ask $3.40

Annotated chart:


Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =



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reveals his most recently disclosed, ACTUAL stock picks, Click HERE!




Gannett Co Inc - GCI - close: 80.00 chg: +1.01 stop: 82.51

Danger! Danger!  Bears need to be careful here.  The Santa Claus 
rally may have begun with Tuesday's gain in the broader indices.  
The rally back to $80.00 and close right at the $80 level is a 
major warning sign for shorts.  GCI actually traded to $80.34 but 
failed at its 10-dma.  We would feel more confident that this was 
another failed rally if GCI had closed under the $80.00 mark.  We 
would not suggest new bearish plays until GCI traded back under 
$79.00.  Aggressive traders can watch for a failed rally under 
its descending trendline of resistance near $82.00.

Picked on December 16 at $ 79.39
Change since picked:      + 0.61
Earnings Date           01/31/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =



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The Option Investor Newsletter                  Tuesday 12-21-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Grocers, Transportation, Healthcare and more
Spreads & Straddles: See note
Combos/Straddles: Guts, Glory & Profit -- A Great Combination


Grocers, Transportation, Healthcare and more


How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.

Whole Foods Market - WFMI - close: 94.62 change: +2.19

WHAT TO WATCH: Today's bounce in WFMI suggest that the 
consolidation is almost over.  Shares had been churning sideways 
between $89 and $96 but that trading range has narrows to $92-95.  
Now that the year-end rally may have begun we are watching for a 
breakout over resistance in the $96.00-96.75 range.  Such a move 
could be used as a bullish entry point for a run towards its P&F 
target at $106.  



QUALCOMM - QCOM - close: 43.98 change: +1.04

WHAT TO WATCH: We strongly considered adding QCOM to the play 
list tonight as a bullish candidate with a trigger to go long 
above resistance at $45.00.  We chose to wait because some of the 
momentum indicators don't look that healthy.  Currently the P&F 
chart is bullish having recently reversed a sell signal.  The new 
P&F target is $57.  A breakout over $45.00 could be an entry 
point for a run towards round-number, psychological resistance at 



C.H.Robinson Worldwide - CHRW - close: 55.23 change: +0.58

WHAT TO WATCH: We strongly considered adding CHRW to the play 
list as a new bullish candidate.  The stock has been 
consolidating in a bullish pattern of higher lows for weeks and 
just broke out over the $55.50 level this morning.  With the Dow 
Transportation index hitting new all-time highs today it was 
tempting but CHRW didn't hold its gains and the stock is nearing 
its P&F target at $57.  That doesn't mean bulls can't play it 
just be aware that the stock would be overbought on a P&F basis.



Cardinal Health - CAH - close: 58.50 change: +0.43

WHAT TO WATCH: Healthcare stocks continue to climb and CAH has 
now broken through its simple 200-dma.  The stock is approaching 
major resistance at $59.26, which is the bottom of its gap down 
from July.  We might as well lump round-number, psychological 
resistance at $60.00 in there too.  The overhead resistance looks 
challenging but the P&F chart is very bullish with a $101 (long-
term) target.  We would watch CAH for a breakout over $60.00


RADAR SCREEN - more stocks to watch

SBUX $58.96 +0.21 - Believe it or not but SBUX appears to be 
coiling for another bullish breakout - this time over the $59.00 
level.  Unfortunately shares look so overbought we didn't feel 
like chasing it. 

WWY $69.64 +0.84 - WWY has been consolidating sideways between 
$67 and $70 the last few weeks.  A breakout over $70 could be an 
entry point.

CMI $83.12 +0.77 - CMI continues to look like a relative strength 
play we just worry about that trendline of higher highs.

Insiders are Buying these 6 Rocket Stocks.
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buying and why you should too. 


"Schedule Change: Due to the holiday-shortened trading week, the
Spreads/Combos and Premium-Selling sections will be published on Wednesday,
December 22."


Guts, Glory & Profit -- A Great Combination

By Mike Parnos

With the year winding down, let's see if we can sneak in a new 
strategy.  It's interesting and has substantial profit potential.  
It's consistent with the even more conservative approach we've 
adopted recently.  It may not seem like it initially, but, as you 
get further along, you'll see the benefits.

I recently read about a strategy that has piqued my interest.  It 
is called the "Short Guts" strategy.  As is our preference, it's a 
non-directional strategy that is best used in a non-trending 
market.  Some of you will be able to use this strategy, but others 
may not.  It requires "uncovered" trading approval level.  However, 
if you have that problem, we may have a solution.  Read on.

Introducing "Short Guts" 
At this writing, XEO is trading at about 570 and about four weeks 
to go until January expiration.  

Month      Index     Strike      P/C     Bid        Ask
January     XEO       560       Call    13.00      13.90
January     XEO       565       Call     9.50      10.30
January     XEO       570       Call     4.40       4.80

January     XEO       570        Put     9.80      10.70
January     XEO       580        Put    13.10      14.10

We're basically going to sell in-the-money calls and a similar 
number of in-the-money puts for the front month.  For our example, 
we'll use a 10-contract position.   We'll also include a slight 
negotiation between the bid/ask spread in our figures.

The Position
Sell 10 XEO January 560 calls @  $13.30 ($13.00 + .30) = $13,300
Sell 10 XEO January 580 puts @ $13.30 ($13.00 + .30) = $13,300
Total net premium taken in:  $26,600

Well, don't get too excited.  It's a bit of an illusion.  Our 
pockets may be flush with cash, but we don't get to keep most of 
it, although our potential profit is $6,600 -- which isn't too 
shabby.   We calculate the potential profit by subtracting our 560 
(short call) from our 580 (short put) = $20.00.  We get to keep 
anything over and above the $20.   You'll notice that, wherever the 
XEO finishes, we're going to have to give back $20.  It felt good 
when it was in our pocket though, didn't it?

Profit Range
We have established a profit range of 553.40 (560 - 6.60) to 586.60 
(580 + 6.60).  That's a 33.20 point range.  If the XEO finishes 
anywhere within that range, we will make SOME profit.  The MAXIMUM 
profit of $6.60 ($6,600) occurs if the XEO closes between 560 and 

What If . . .
To get a clearer understanding of the strategy, let's do a few 
"what if" exercises.  What if . . .
a) . . . XEO is at 572.20 at expiration?  The 560 call is worth 
$12.20 and the 580 put is worth $7.80.  The total of the two 
($20.00) will be deducted from our account. Oour profit is $6.60 
b) . . . XEO is at 558.80 at expiration?  The 560 call will expire 
worthless, but the 580 put has a value of $21.20.   This $21.20 
($2,120) will be deducted from our account on Monday.  But, you 
took in $6,600 -- so, our profit is $4,480 ($6,600 - $2,120).

Exit Points or When To GTFO
One of the major benefits of the Short Guts strategy is the fact 
that, if the trade moves against us, the amount at risk is 
substantially less than our regular Iron Condor.  Plus, the exit 
points are more easily defined.   The exit parameters are the same 
as the profit range -- 586.60 on the upside and 553.40 on the 
downside.  If we (you) have the appropriate self-discipline and get 
out at these levels, we will limit our loss to a very manageable 

Remember, the further an option is ITM (in-the-money), the less 
time value there is in the option.  So, when XEO reaches the 586.60 
exit point, we will have to give back the entire $26.60 of 
intrinsic value, but there should only be less than $1.50 of time 
value on top of the intrinsic value.  It's only the time value 
that's at risk.  The later the move happens in the option cycle, 
the less time value we'll have to deal with.

Why The XEO?
As an extra measure of caution, we chose the XEO because it's a 
European style cash settled option.  There is no concern about 
early exercise.  Early exercise of the OEX is rare, but the 
difference in premiums between the XEO and OEX is not that 
dramatic.  It's better to be safe than sorry.

The reason that many traders will not be able to use this strategy 
is that both the put and the call are "uncovered."  As a result, 
your broker will want to hold a lot of maintenance because, 
technically, the risk is unlimited.  I know that we all have the 
self-discipline to exit our trade when the exit points are reached, 
but the brokers aren't that gullible.  The maintenance on the 
"Short Guts" strategy is calculated as follows:

15% of the underlying index (XEO):  570 x 15% = $8,550/contract
Plus, total premium received:  $26.60 x 100 = $2,660.
Total maintenance/contract = $11,210 per contract.

Gettin' Around The Maintenance & Uncovered Obstacles
Wow!  Over $11,000 per contract sure seems excessive.  And the 
"uncovered" issue is also rather limiting.  So, here's the plan. We 
turn the damn thing into an Iron Condor.  We simply need to cover 
our two short positions.  If we buy the Jan. XEO 600 call (@ $.40) 
and buy the Jan. XEO 540 put (@ $.80), we have now covered our 
short options.  We've also created 40-point credit spreads.  The 
result is that our broker will only require about $4,000 per 
contract.  All we have sacrificed is the $1.20 ($1,200) we paid for 
the long options.  That reduces our maximum potential profit to 
$5.40 ($5,400) and slightly reduces our profit range.

The Return
If, with the revised Iron Condor position, things go as planned and 
the XEO finishes in our maximum profit range of 560 to 580, we will 
keep the full $5,400 on an exposure of $40,000 or on an actual risk 
of $34,600.  That's a return on risk of 15.6%.

What's The Appeal?
Compared to some of our other strategies, 15% may not seem all that 
exciting.  The beauty of selling the puts so far in the money is 
if/when the trade goes bad, the exit points are clearly defined and 
the risk (if you exit as indicated) is relatively small.  

January CPTI Position #1 - SPX Iron Condor (Part 1) - 1205.45
We sold 20 January SPX 1125 puts and bought 20 January SPX 1110 
puts for a credit of about $.50 ($1,000).  Profit potential $1,000.  
Maintenance: $30,000.  I know I said I prefer not to use anything 
larger than five or ten-point spreads, but this is almost 80 points 
out of the money that I'm going to make an exception.  This seems 
incredibly safe, but then we thought that before, didn't we?

January CPTI Position #2 - SPX Sure Thing Credit Spread - 1205.45
We're still in an up-trend and we might as well try to take 
advantage of it.  Our "sure thing" spread worked to perfection for 
the December cycle.  So, until the market tells us otherwise, we're 
going to continue with the strategy.  Again, remember that this 
strategy is for only those who have a lot of maintenance dollars 
available, because you may need them.  Eventually, we'll be right, 
but you may need that staying power (money, financial Viagara). You 
have to be able to withstand being whipsawed back and forth.

In last Thursday's column I suggested initiating the "hypothetical" 
position by placing the January 1195/1170 bull put spread for a 
credit of $6.30.  However, on Friday, the SPX headed down in the 
morning.   When it leveled out, we put on a two contract SPX 
1190/1165 bull put spread instead and we were able to take in 
$$6.80 ($1,360).

We are still mildly bullish for the next month, but we couldn't 
pass up an opportunity to lower our short strike to 1090 -- plus 
get a little more premium.  Maintenance (initially): $5,000.

January CPTI Position #3 - MSH Iron Condor (Part 1) - 501.26
This is the Morgan Stanley High Tech Index.  We haven't traded it 
before, so now is as good a time as any.  Maybe it will turn out to 
be a usable replacement for the RUT.  We're going to continue to be 

We sold 15 MSH January 550 puts and bought 15 MSH January 540 puts 
for a credit and potential profit of about $.55 ($825). 
Maintenance: $15,000.

January CPTI Position #4 -- SPX Iron Condor  (Part 1) - 1205.45
Put on two weeks ago -- and a wise choice it was (so far).  I've 
become very conservative -- even more so after our unpleasant 
experience in the November cycle.  I saw an opportunity to put some 
serious distance between a bull put spread and where the SPX was 
trading.   With the SPX at 1179, I noticed the January 1100/1090 
bull put spread would yield about $.70.  Being still somewhat 
bullish for the next few months, I was willing to go out to 
January.  I like that almost 80-point (now over 100 points) cushion 
and I'm willing to wait the eight weeks.  When the opportunity 
presents itself, we can always add the other side of the condor.

We sold 15 SPX January 1100 puts and bought 15 SPX January 1090 
puts for a credit of about $.70 ($1,050).  Maintenance: $15,000
QQQ ITM Strangle - Ongoing Long Term -- $39.68
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of 
the 2005 QQQ $29 calls for a total debit of $14,300. We make money 
by selling near term puts and calls every month. Here's what we've 
done so far: Oct. $33 puts and Oct. $34 calls - credit of $1,900. 
Nov. $34 puts and calls - credit of $1,150. Dec. $34 puts and calls 
- credit of $1,500. Jan. $34 puts and calls - credit of $850. Feb. 
$34 calls and $36 puts - credit of $750. Mar. $34 calls and $37 
puts - credit of $1,150. Apr. $34 calls and $37 puts - credit of 
$750. May $34 calls and $37 puts - credit of $800. June $34 calls 
and $37 puts -- total net credit of $750. We rolled out to the July 
$34 calls ($.20 credit) and $37 puts ($.60 credit) and took in a 
credit of $.80 ($800). We rolled to the August $34 calls and $37 
puts, taking in a credit of $900. We rolled to the Sept. $34 calls 
and $37 puts, yielding $.45 or $450 for the cycle. For October we 
took in $.45 ($450) rollout. We rolled to the November. $34 calls 
and $37 puts for $.70 ($700).  Last week we rolled in the December 
$34 calls and $37 puts for a total of $.50 ($500).  New total: 
We rolled out the Dec. $34 calls at break even and then sold the 
January $40 puts for $.80 ($800).  Our new total premium is about 
Note: We haven't included the proceeds from this long term QQQ ITM 
Strangle in our profit calculations. It's a bonus! And it's a good 
conservative cash flow generating strategy. 
ZERO-PLUS Strategy. OEX - 573.36
In my Feb. 8th column, I outlined a strategy based on an initial 
investment of $100,000. $74,000 was spent on zero coupon bonds 
maturing in about seven years at a value of $100,000. The principal 
$100,000 investment is guaranteed. We're trading the remaining 
$26,000 to generate a "risk free" return on the original 
investment. We own 3 OEX December 2006 540 calls @ $81 (x 300 = 
$24,300). Our cash position as of August expiration was $8,390. In 
September we added another $975 for a total of $9,365. In October 
we added $650 for a new total of $10,675. 
Zero-Plus Position Adjustment
Prior to expiration, we bought back our Nov. 555 calls and rolled 
it to six contracts of the January 580 calls for a credit of about 
$100.  We also put on five contracts of a December 540/530 bull-put 
spread for an $.80 credit ($400).  New cash total: $11,175.
The December bull put spread expired worthless.  We put on a five 
contract OEX 545/535 bull put spread for a credit of $.70.  If all 
goes well, we can, at January expiration, add another $350 to our 
cash total.
Happy Trading! 
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In 
trading, as in life, it's not the cards we're dealt. It's how we 
play them. 
Mike Parnos, Your Options Therapist and CPTI Master Strategist 
Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the 
numbers represented here may have been achieved or beaten by our 
readers, we make no representation that any individual investor 
achieved these exact results. The tracking for the plays listed in 
this section uses closing prices for the day the newsletter is 
published and it is not meant to imply that any reader actually 
received those prices or participated in these recommendations. The 
portfolio represented here is hypothetical and for investment 
education purposes only. It is only an illustration of what type of 
gains a knowledgeable investor might receive utilizing these 


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