Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, November 1st, 2009 at 1:00PM.

Location: Blue Mesa Grill (5100 Beltline Road, Addison, TX)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ

Lessons from Jesse Livermore - One of the Greatest Speculators of all Time

(The following excerpts were taken from Edwin Lefevre's Reminiscences of a Stock Operator)

On the importance of selective speculation: There is a time for all things, but I didn't know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is a plain fool, who does all the wrong things everywhere, but there is the Wall Street fool, who thinks that he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play. (p.21)

On markets and their participants: But the one thing a Stock Exchange firm will not do is to split commissions. The governors would rather a member committed murder, arson, and bigamy than do business with outsiders for less than a kosher eighth. The very life of the Stock Exchange depends upon their not violating that one rule. (p. 47)

On mistakes and wisdom: If a man didn't make mistakes he'd own the world in a month. But if he didn't profit by his mistakes he wouldn't own a blessed thing. (p. 97)

Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line. (p. 119)

A man can excuse his mistakes only by capitalizing on them to subsequent profit. (p. 147)

On the speculator and his emotions: I sometimes think that specultion must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation - usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in stocks or commodities.

The speculators' chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when a the market goes against you, you hope that every day will be the last day. It is absolutely wrong to gamble in stocks the way the average man does. (p. 130-131)

Meeting Minutes

We had a great time at our meeting today! I want as always to thank everyone for coming and making for a conversation that was to be remarkable. There were many potential market plays so I have decided to devote an adequate section to each play below with a corresponding chart. We had a total of 7 attendees: (from left to right) Kay Olds, Phil Garcia, Earl Landry, Tommy Schultz (who came later one), VJ Arjan, Jeff Harrington, and Kevin Day.

The following market plays were given by Kevin Day, Jeff Harrington, and Phil Garcia:

CIT Group Inc. (CIT)

Kevin Day and Jeff Harrington were expressing their belief that this company is “too involved” to fail. We will find out this week whether this company will live or die depending on the agreement that is reached with the bondholders. As this company provides short-term lending for 60% of retailers, one can make a plausible argument for its survival. Jeff Harrington is wary of its survival, however, as the agreement with the bondholders is for them to hold equity stakes in the company. An enormous dilution of shares would result and the hypothetical ceiling, Jeff thinks, for this stock should be its historical high adjusted for shares outstanding.

Gold – Yamana Gold Corp. (AUY), SPDR Gold Trust (GLD)

Phil thinks that gold could make a breakout of the $1,000 an ounce level. He thinks the chart has been in the consolidation phase for a while is ready for a upward break. He and VJ Arjan both have owned AUY and may expect to profit more should this occur.

Santa Fe Gold Corporation (SFEG)

As can be seen in the chart, this stock has exploded in share price and volume in the past week, climbing 30% in the last week alone. Kevin Day was expressing the incredible growth potential for this stock. There are 80 million shares outstanding. He knows at least 20 owners of this firm who hold at least 1 million shares. The CEO, Pierce Carson, owns some more millions of shares. The exits, therefore, are blocked. This company has been waiting for a water permit to be secured for production and it is a likely buy-out candidate, perhaps Barrick Gold Corporation or Neumont Mining, etc.

Novovax (NVAX), Vical Corporation (VICL), Cel-Sci Corporation (CVM)

Jeff Harrington was expounding his idea of how to play the swine flu phenomenon. Novovax had been trading in the $3s before he picked some up and it proceeded to $6.50. Recently, the company announced more shares to be issued and this stock has fallen 50% to $3.43 as of Friday’s close. Jeff thinks that this is share issuance has led many investors to believe that the share price is too high, leading to a sell-off, in other words, a market over-reaction. The health minister of Spain and India, both of whom have been affected by the swine flu, have backed Novovax for the production of the swine flu vaccine. There is currently, 11 million shares of short interest, and these will have to cover. The prospects and profits for NVAX, VICL and CVM look bright.

Utility Stocks (Duke Energy, etc.)

Jeff Harrington spoke about how he thought dividend-paying stocks have lagged non-dividend paying stocks in this rally and as a correction may be in the near-future, the enormous $4 trillion of money that is on the side lines may proceed to enter into these dividend-paying stocks. He especially likes Duke Energy which currently yields 6.25% (5 times as much as mutual funds are able to get in the money market). Add to this a book value of less than 1, and there is a possibility of great potential here.

Genworth Financial (GNW)

Kevin Day had picked up this stock when it was trading in the pennies. Currently it is at $11.32 per share and he believes, with a book value of $23, there is still potential to the upside.

Banks - Bank of America (BAC), Wells Fargo (WFC)

Jeff Harrington especially likes bank stocks as they are considered undervalued according to the business cycle theory (sell banks during booms and buy banks during recessions). BAC, he believes, will be a financial powerhouse in the years to come with its acquisition of Countrywide Home Loans and Merrill-Lynch. Wells Fargo will be the number 2 servicer, albeit the bad PR it received recently with the executive throwing lavish parties in foreclosed properties. Jeff is specifically looking for a breakout from the $30 a share range.

Interest Rates

“When interest rates are low, stocks will grow; when interest rates are high, stocks will die.” – Phil Garcia

The probability is that interest rates will increase in the near-future as we climb out of this recessionary period and proceed to the expansionary phase. Jeff Harrington believes that interest rates are follow a 40-year cycle and that currently they are at the lows, or a new cycle is beginning. He is also expecting the next pullback on the DJI to be about 500 points, but still a bull market. He is noticing that companies are building up substantial cash positions as they continue to lay off employees. There is also an increase of merger and acquisitions that are leading to more money for company coffers. It may be recalled that in the last month, Dell acquired Perot Systems and Xerox acquired Affiliated Computer Services. There will be, therefore, a “jobless recovery” due to companies focusing on core businesses and mergers and acquisitions.

What Moves the Market?

We listened into a debate today between Jeff Harrington and Phil Garcia about how to best profit from the market. Jeff Harrington explained that principally the competitiveness of a company’s position in the market, the market environment, and the analysis of its cash flow and balance sheet position should determine one’s interest. On the other hand, Phil Garcia, who made his money of Yahoo and Dell believes that it is good to look at price levels and not to analyze too much before making an investment decision so as not to fall prey to ‘analysis paralysis’.

Both sides made very compelling arguments and the conclusion we came to as a group was that each person may have a different and personalized investing style and each one may be successful. Of course, both Phil and Jeff are enormously successful investors and traders, so suffice it to say that each one’s style has definitely worked for them. If one is curious to follow the dialogue of this interesting debate, it will be located between minutes 47-55 in the audio recording of the meeting, the link to which is given below.

The Stock Recommendation

Oftentimes we hear an “expert” on Bloomberg state that he or she thinks a certain stock or commodity may be going up or down. Some may make money by following such advice, some may lose. But the key, according to Phil Garcia, is how long is the timeframe for the recommendation. In other words, one may be long or short the market, but it can mean a world of difference if it pertains to the long or short-term. Phil, it may be recalled, made his money riding the tech bubble and selling close to the top. He made, in truth, more money in a few years that may have taken someone else decades to make. At this point, Jeff Harrington brought up Joe Kennedy’s quote that when he hears the shoeshine boy advising him of stock recommendations, one needs to sell immediately.

Protective Measures

Phil Garcia was explaining how he has seen many persons lose fortunes due to their lack of protective measures to retain their profits. Phil, therefore, does not forecast the direction of certain stocks or even give recommendations for certain situations for he feels them to be personalized and suitable to himself alone. One must, however, learn to protect ones profits as the market has the reputation for giving many a man a good lesson for relying upon its arrogance.

Danger in the Middle East

We brought up briefly whether it was of danger that Iran was possibly developing the capability of nuclear weapons. Kevin Day explained that this was certainly not an idle threat and it was very possible that Iran would decide to take matters into its own hands in reference to Israel. This, should it happen, would mean the literal wiping off of Iran from the map of the world for minutes after the attack, they would be showered by atomic bombs in the hundreds. It is a precarious position no doubt for Iran to be in, and it should be of great concern to the world powers that this capability be eliminated due to the radical fundamentalism of Iran’s leaders.

Simulated Portfolio

Date	Security	Entry	Current Price	Profit/Loss
October 4th, 2009	FXI (iShares FTSE/Xinhua China 25 Index	$25.16	$40.10	$1,493
October 4th, 2009	ILF(iShares S&P Latin America 40 Index)	$26.60	$42.45	$1,603
October 4th,2009	EWZ(iShares MSCI Brazil Index)	$37.69	$67.61	$2,999
October 4th, 2009	PBJ(PowerShares Dynamic Food & Beverage)	$13.27	$13.71	$44
July 12, 2009	GUR (SPDR S&P Emerging Europe)	$29.74	$38.94	$920
October 4th, 2009	FCX (Freeport-McMoRan Copper & Gold Inc.)	$29.06	$66.34	$3,688
October 4th, 2009	WLT (Walter Industries – metallurgical coal)	$38.75	$55.92	$1,644
October 4th, 2009	RIO (Companhia Vale do Rio Doce – gold mining)	$13.12	$23.19	$1,000
October 4th, 2009	GVA (Granite Construction Inc.)	$35.67	$29.74	-$606
October 4th, 2009	MT (Arcelor-Mittal ADR)	$26.25	$35.01	$920

The next meeting will be on Sunday, November 1^st, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com

Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, October 4th, 2009 at 1:00PM.

Location: Romano's Macaroni Grill (4535 Beltline Road, Addison, TX)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ

Meeting Minutes

We had a wonderful time at our meeting today! I want to thank everyone for coming and making for an excellent conversation the delight of the afternoon. I really feel that we are all developing as traders and investors and each meeting makes us better at our art. We had a total of 7 attendees: (from left to right) Kevin Day, Jeff Harrington, Hien Nguyen, Tommy Schultz, VJ Arjan, Earl Landry, and Larry Rosenfield (who came later on in the meeting).

The Rise of the Bad Apples

Kevin Day commented on the amazing rise of the following stocks, AIG, Bank of America, Citicorp, Fannie Mae, and Freddie Mac (AIG, BAC, C, FRE, FNM). These 5 stocks have accounted for 40% of the entire trading volume for the NYSE exchange. Perhaps this is the greatest short squeeze in history? There is no fundamental evidence for this rise. In fact, it is no secret that AIG, FRE, FNM have billions of dollars of bad assets on their books. Kevin was commenting that it often happens that there is no fundamental reason for a stock to rise or fall in the market. It, therefore, will benefit one to follow the trend. As an old market adage goes, the trend is your friend. Earl Landry bought into Fannie Mae and is up several hundred percent since his buy.

Three Bullish Reason

Kevin also went ahead to comment on the market conditions for the next 9 months:

1. Cash is returning to the market from the large institutions and banks who have been waiting on the sidelines (The days after Labour Day have historically been such days)
2. Easy year-over-year comparison of economic news and earnings environment
3. Flight to quality due to excessive valuations for many low-quality stocks
4. Overall, we should see large blue chip stocks with relatively low P/Es start to rise with large volume surges. Eastman Kodak (EK) is such an example; this stock is up 72% in the last month alone! (Kevin Day with his incredible “nose for the market” saw this very situation coming nearly 2 months ago at a previous meeting)

Gold Plays

Hien is a gold and currency trader and has predicted very specific price levels for gold in the near term. She feels that the price will go to 1032, and then retrace to 964. She has determined these price levels with trend and Fibonacci lines. She told us that it is unlikely that gold will pass much past $1,000. Below is a graph:

Jeff Harrington’s Oil Plays

Jeff Harrington, whose sheer brilliance I continue to admire time and time again, has a few oil plays that ought to be considered by any serious oil investor. Schlumberger Limited (SLB), National-Oilwell Varco (NOV), McDermott International (MDR). He also explained the favourable discovery for British Petroleum of the "Giant" oil find in the Gulf of Mexico and how this find fairs well for the above mentioned companies.

MDR and RIG build the offshore oil platforms. Deep water drilling is the final frontier of oil exploration.

Below is an email personally written by Jeff Harrington explaining in great detail his opinion on this matter:

Depths in the Gulf are now in deeper than 1 mile of water and some are in 2 miles of water. Drilling in the Gulf is going into what is called the Lower Tertiary geological formation, which formed between 23 and 65 million years ago. Note that the massive Cantarell field off the Yucatan (partially in the gulf) was formed from the asteroid impact that wiped out the dinosaurs some 65 million years ago. This is an extremely deep rock formation, more than 5 miles below the sea floor! In fact, the BP find this week is considered the worlds deepest oil well at just over 35,000 feet. This rock structure is considered to be 'over stressed' and is incredibly hot. Heat, of course, is a necessary ingredient in the formation of oil and is the reason why oil sands in Canada and oil shale in the Rockies are literally locked in the rock and not pumpable, but must be 'mined'. The tolerances of deep water drilling are approaching that of the aerospace industry and is incredibly expensive. One oil well costs $100 million (domestic on-shore wells can be as cheap as $10-100k by contrast), and usually requires multiple wells to be drilled before oil is found. With construction of a rig and all the other costs, a well can run $1 billion+. But, with $70 oil and 3 billion barrels, the BP find is worth $21 billion. Oil of $70+ a barrel is required to make these ventures profitable.

Anyways, the same can be said of the San Juan basin off the coast of Brazil. It is in waters of 2 miles deep plus another 5 miles of rock. The San Juan and Gulf of Mexico are the last frontiers of oil exploration that is open to the oil majors. I fathom that we will eventually drill in the deep oceans, but am unaware of what the oil prospects are in 2-3 miles of water. But it makes sense, when organisms in the water die, they sink to the bottom of the ocean. With so much bio-mass contained in the oceans, it seems certain that there are pools of oil locked in the oceanic crusts. In fact, the massive Middle East oil fields originated from an ancient sea called the Tethy's sea (Ocean), which closed when Africa slid into Europe and Asia. (http://en.wikipedia.org/wiki/Tethys_Ocean).

For more information on the formation of oil in both the Tethy's Sea and the Gulf of Mexico, Google search 'anoxic events'. It is now widely believed that most of today's fossil oil reserves formed in several distinct anoxic events in earth's geologic history. The Gulf of Mexico house the worlds second largest anoxic areas that forms when rainwater run off from farms flows down the Mississippi and feeds massive algae blooms in the Gulf that basically kills all marine life because it saps oxygen out of the water (hypoxia). This algea eventually dies and sinks to the bottom of the Gulf and forms a dense soup that will become oil.

MDR and RIG will be beneficiaries of the offshore oil boom as they are the only companies that I am aware of that have the technological expertise to put these rigs together.

SLB and NOV are the guys who help service the drillers by providing the mud and pipes. Their stocks are more volatile b/c the servicers are the first to be impacted by pull backs in oil prices. My outlook on oil long term is incredibly bullish and is the reason why I have maintained my positions in COP and RIG. COP is a more risky company and thus has a lower stock price, but has a higher yield. Plus, their 10% stake in LUKOIL is helping them out b/c it allows them to play in Russia, which is currently a lockout country.

Another company that I will get back into soon is CHK, natural gas prices have remained in the toilet due to over supply from the Barnett, Marcellus, Haynesworth, and other domestic shale plays. But, NG will be a part of this nations, and the worlds, energy plans We are in a period of 'cheap natural gas' due to so much supply but it too will end.

VJ Arjan’s Trading System

VJ Arjan was discussing his trading system to Hian and Jeff who were inquiring about what strategies to use. He sets Sundays up for the days he lays down his strategy in the currency markets. He finds key entry levels based on support levels, trendlines, Fibonacci levels, and momentum indicators. He will then set up entry orders among the major currency, most of which are likely not to be executed. The first portion of his trade is very small and he pyramids the positions which are consecutively larger and larger until the price level reaches half of the profit target. Subsequently, his goal is to start exiting positions for the last half of the trade. While in the trade, he wakes at 4AM (CST) which is when the London markets trade and simply moves his stops.

Santa Fe Gold Corporation (SFEG)

The name says it all. This play is probably going to yield fruits very soon. According to the figures published by the company the average grams of gold per ton, there is very little question that the riches are there. Jeff Harrington was stating that traditionally large companies like Freeport-McMoran (FCX) or Newmont Mining (NEM) have an average of 1-2 grams of gold per ton. In the mine owned by SFEG, there is estimated to be 20-60 grams of gold in each ton! It is a matter of time before the needed permits are procured and the mining will begin (as well as the riches).

The Coming China Wars

VJ Arjan and Tommy Schultz were discussing the upcoming problem of China. Here is a list of things that need to be addressed for starts:

1. Low wage, high quality work by highly disciplined, uneducated, and non-union work force – when 5% of the population wax rich on the effort, the sweat-equity effort, of 95% of the population which remains impoverished, tensions are sure to brew

2. Minimal worker health and safety regulation – It is customary for at least 10 persons to be admitted to a hospital for poisoning in major cities and towns on a DAILY basis. The pollution in their rivers are so grave that it may soon become necessary for China to import water from other countries. Tommy Schultz stated that even importing water may not be necessary; China has the reputation for piracy and counterfeiting. They may just steal filter technology to filter polluted water.

3. Government-sanctioned system of counterfeiting and piracy – Currently the world black market accounts for 7% of the world’s GDP. Of this percentage, 5% comes from China. Currently 12% of the world’s GDP comes from China. The government knows that cracking down on piracy would lead to massive unemployment among Chinese workers. So to appease the world, they crack down on some counterfeiting operations from time to time, but know that they must sustain these “industries” if they are to keep appreciating at 10% per annum.

4. Racism – The “Hanification” of the Urumqi – The Chinese government has been systematically flooding the western region of China that is home to ethnic Muslim Urumqi. This area also happens to be incredibly rich in resources. The Urumqi have been retaliating and this is being reported in the press as a terrorist activity.

Obamacare

Larry Rosenfield, who is himself a physician from Tyler, TX, commented on the national health-care debate. The government, not just the American government but most governments, do things without thinking of the full ramifications of its actions. In the current bill, there is definitely a lot of pork and many political motives involved. However, the health-care system is inherently corrupt.

• It is true that insurance companies raise premiums when you get sick
• It is true that the medical system favours dollars over doing the right thing
• It is true that the reason for the high cost of health care is because the system oftentimes has the patient pay multiple times for one service, even though it only needs this service once

He thinks that the fair option would be for everyone to buy into Medicare and Medicaid. Most Medicare/Medcaid patients, however, are very eager to take advantage of this system. They take free government checks by qualifying (they do not work) and they do not pay taxes to fund the system. In Larry’s words, these patients “game the system.” This must be stopped, however, if Medicare/Medicaid wants to avoid bankruptcy in the very near future.

The next meeting will be on Sunday, October 4th, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com

Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, September 6th, 2009 at 1:00PM.

Location: Chile's (4500 Beltline Road, Addison, TX)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ