Tough Sledding in the Markets and Economy

The jobs report came out this AM and it is not good, even very bad news. Job cuts of 533K were announced for November and October was revised up (down) to 320K from 240K; September was revised up to 403K from 284K. That is a lot of job loss the past 3 months, the worst since Q2 of 1980 when Paul Volcker shocked the economy into submission with 20% interest rates.

But those of us who follow the market daily are not too surprised by this bad employment "print". The stock market has been crashing anticipating very bad economic news, serving its function as oracle of the economy. And some of us (me) have seen job cuts at our own place of employment based on painful forecasts for 2009. So there is a very good chance the lousy numbers are already "baked in the cake" of the stock market. Today's (Friday's) early stock market action certainly suggests that, as the DJI is only off by 90 as I write now, but still well above the lows from mid November.

All of the economic slowness, global recession and the resultant strength of the dollar is just hammering energy, much to the displeasure of my portfolio. But at the same time, the government policy makers around the world appear prepared to "throw the kitchen sink" at the economy to get it going again. This will mean a recovery in 2009, maybe beginning as early as Q2. As soon as the world economies recover, the demand for energy will return and drive oil prices back up, though maybe not to $150 since the hedge funds have been hit hard and leveraged speculation in the near future is unlikely. But I think we could all live with $75-80 oil which more accurately reflected the rising demand and tight supply of early 2007. Prices in that range are economically sustainable and would create a stable environment for the Canroys.

I am swallowing hard and holding on to my energy shares, knowing that there will someday be an economic recovery and when it comes, there will also be some inflation to pay for all the money pumped into the economy. Higher economic demand accompanied by mild inflation will be a good environment for commodities and energy.

Here is more on oil:


$25 Oil Could Happen Before a Return to $100
December 05, 2008
By Matthew Hougan

http://seekingalpha.com/article/109393-25-oil-could-happen-before-a-return-to-100?source=article_lb_articles


Jim Wiandt says that oil will go to $100/barrel before it hits $25/barrel. I'm not so sure.

The reason I'm confident that the Dow Jones industrial average will top 10,000 before it hits 6,000 is that stocks are a leading indicator. They anticipate recoveries, typically turning upward 6-9 months before the economy as a whole. We are already one year into the recession, so I'm guessing we are getting close to the point where stocks will turn the corner. When you add in the fact that valuations and yields are the most attractive I've seen in my adult investing life, the outlook for equities is quite good.

Oil, on the other hand, reflects mostly immediate, near-term supply and demand. If the economy gets worse before it gets better, stocks might see the light at the end of the tunnel, but oil won't. It can't. Prices will keep falling as demand deteriorates in real time and the current supply glut gets worse.
Remember, oil is expensive to store. For the most part, it won't just sit around waiting to be used if there is a lack of demand. (Some can be stored, but not that much). It must be sold and used at whatever the current clearing price is.
And we have yet to see the magnitude of supply cutbacks in the oil market that we've seen in aluminum, copper and other commodities. The world is continuing to pump out millions and millions of barrels of oil.

Here are a few facts to consider:

• Oil has averaged a nominal price above $50/barrel in just three years in the history of the world: 2005 ($50.04/barrel), 2006 ($58.30/barrel) and 2007 ($64.20/barrel).
• On an inflation-adjusted basis, oil has averaged an annual price above $50/barrel for just 12 of the 62 years of the post-war era.
• The average inflation-adjusted price of oil in the post-war era is $33.65/barrel.
• Oil traded below $25/barrel as recently as 2002.
  

As the saying goes, "This time it's different" are the four most-expensive words in investing. So why not $25/barrel oil?

I was amazed during the recent oil price retreat how quick people were to say that $100/barrel was the "right" price for oil. $100/barrel is off the charts historically, and completely neglects both the supply and demand impacts that high oil prices have.

To put it another way, stock prices are now trading where they were in 1997. What's to say oil shouldn't be trading where it was in 2002?
The truth is, I have no idea where oil prices are headed. But I don't think it's a gimme that they're going back to $100/barrel. In fact, if you gave me 2-1 odds, I'd bet they hit $25/barrel first.

P.S.: One more thought about oil. Even if you strongly disagree with me and think crude oil is a screaming buy, please be careful before you buy a crude oil futures ETF like the US Oil Fund (NYSEArca: USO). Oil is in a violent contango. A fund like USO faces a 3% monthly headwind from contango right now, meaning oil prices must rise about 3% each month just to offset the losses from rolling contracts forward. Until that situation is reversed, investing in crude oil futures could be challenging... even if I'm wrong about crude oil prices.

A Floor Under the Price of Oil (and Gas)

This article demonstrates what we have always discussed regarding the floor on the price of oil. As compared to the early 80s when relatively high prices encouraged exploration around the world for easy to develop oil glutting the market, new discoveries are in hard to reach places, like 10,000 to 20,000 feet under the ocean. Even though the discoveries in deep water the past few years add to the known world oil supply, they will not get developed at lower (current) prices. This means we are stuck with the lower cost reserves that are dwindling around the world.

The Alberta oil fields are relatively inexpensive to develop and produce. They are generally profitable at $30-40 / barrel, depending on the formation and the oil quality (the amount of stimulation required to get it out of the ground). The really cheap oil that is profitable at $10 / barrel is just about gone in North America (light sweet crude near the surface, like West Texas crude, or "Jed Clampett" crude as I call it). So, when you hear people talk about oil going back to under $20 / barrel, they really don't know what they are talking about.

Some of the more adventerous or less proven drillers are not a good idea right now. But PWE, PVX and PGH have very good operations that don't have many questions.

Also, see www.mcdep.com for his educated opinions on the status of the oil market.

I have attached an article from Barrons Online titled "The Downturn's Impact on One Oil Driller, Callon Petroleum gets a downgrade after it blames economy for decision to terminate project."

"The Downturn\'s Impact on One Oil Driller";

CALLON PETROLEUM (Ticker: CPE) announced that it has decided to indefinitely suspend development of the Entrada field, located in the deepwater Gulf of Mexico. Management cited the recent collapse in oil and gas prices and higher-than-expected development costs as the reasons for terminating the project.

To date, Callon has successfully drilled two exploration wells at this field. The third well recently reached a total depth of 21,100 feet but needs to be sidetracked.

In March 2007, after owning 20% of Entrada, Callon acquired the remaining 80% interest from BP PLC (BP) for $150 million. Subsequently, in the first quarter of 2008, Callon sold 50% of the field to Japan's ITOCHU Corp. for $155 million, with Callon remaining the operator. At the time of the divestiture, Callon estimated Entrada's development costs to be approximately $300 million.

At year-end 2007, Entrada had an estimated 192 billions of cubic feet equivalent (Bcfe) of proved reserves (a total of 339.6 Bcfe of proved plus probable reserves). After adjusting for the divestiture, Callon's pro forma year-end proved reserves were 168 Bcfe. Therefore, approximately 57% (96 Bcfe) of the company's total proved reserves are now uneconomic in the current commodity price environment.

The field was expected to begin initial production in the first half of 2009. With the project now halted, we are lowering our earnings estimates, and our proved net asset value also decreases accordingly. Entrada was expected to double the company's production rate, and without this new source of cash flow, Callon will likely be forced to make major cuts in its capital budget for 2009.

After two years of planning, the suspension of the development of this large asset is a very negative event for the company. Ultimately, Callon may have the opportunity to divest its remaining interest to a company that has the balance sheet to see the project through to its conclusion, but in the near term, Entrada's economic value has diminished considerably. Based on the potential for a large reserve write-down, the minimal visibility on production growth, and the uncertainty about the company's post-Entrada operating strategy, we are downgrading Callon Petroleum shares from Market Perform to Underperform.

Is there a Rainbow somewhere?

All:

This has been a very tough few weeks. As bad as the market was at the beginning of the year through the middle of March, this is much worse. Now the economy has joined housing in the dumpster. And with a vaccuum in government between the Presidents, the timing could not be worse (I wonder if it is any coincidence that previous major market bottoms in 1932 and 1974 were during Presidential transitions, as well).

I still plan to review some of my small cap favorites and their Q3 reports. There is a lot of good news there that makes me more optimistic after reading the reports. I will try to get to it over the Thanksgiving Holiday, if not sooner. But for a quick overview: the Canroys and the high dividend closed end funds that have just been hammered by hedge fund redemptions and the changing currency situation, continue to have decent earnings and cash flows. None of my high dividend funds has had to cut its dividend yet. That time may come, but there is so much fear built into the prices now, that I am convinced they will weather the storm nicely.

As the high dividend funds / Canroys dip in price, but continue to yield high monthly income, I just reinvest it into the stocks to average down my cost. This way, when the eventual / inevitable rebound comes, my performance versus cost basis will be that much more fantastic. I will have a lower cost but also a lot more shares. And, if worse comes to worse, and they rebound no time soon because the economy goes nowhere, I may have those dividends to help pay my monthly expenses in the event of unemployment! Hope that last one doesn't come true, but we can never know the future....

I continue to think this economic and market situation is most like the mid 1970s. Then as now, we had an unpopular President (Nixon) forced out of office after an unpopular war (Vietnam), which put the country in a generally bad mood. Then as now, we had a massive oil shock that crunched the economy after many years of above average times, making the change in mood that much more dramatic. Then as now, there was a fundamental shift in the manufacturing / auto sector and the creation of new country markets that put pressure on global materials supplies (Japan, Germany, S. Korea, etc). It took us 8 years, till 1982 to recover from the 73/74 crisis. The best investment place to be during that period was in materials and energy stocks, which can withstand and even thrive during a period of weak economic performance, deficit spending and global inflation.

I am copying yesterday's edition of the Prudent Speculator that I receive. First, John Buckingham who runs the newsletter and fund is a common sense kind of guy who keeps his cool. Second, he references quotations from Steve Leuthold, who is a local (Mpls) market forecaster with a very good long term track record. So that is worth reading on its own. Good investing!!


The Prudent Speculator - Wednesday Evening Hotline: November 19, 2008

*** Executive Summary 11/19/08 ***
Near-Term Woes - Retesting the Lows
Long-Term Opportunities - What Does History Say?
Sales - Closed Out ASYT, PLAB & THC
Partial Sale - Sold 50% of ASEI at $71.20 for Certain Accounts
Hotline Special - Buy DAR up to $5.46

Another horrendous day in the equity markets, with the 'modest' 5% decline in the Dow Jones Industrial Average masking the damage done to the overall market as evidenced by a 7.9% plunge in the Russell 2000 small-cap index and the 7.4% drubbing suffered by the S&P MidCap 400. The advance/decline line was ugly as well with preliminary readings showing only 192 winners on the New York Stock Exchange compared to 3,001 losers. The numbers were not quite as bad on the Nasdaq, but a 326/2,524 ratio was dismal as well.

While the catalysts for the giant selloff included renewed concerns about the viability of Citigroup (C - $6.40) and the U.S. auto industry as well as the Commerce Department's report that housing starts fell 4.5% on a sequential basis to a seasonally adjusted 791,000 annual level that is now 38% below the reading a year ago, the Federal Reserve received a lot of the blame as the minutes of the Federal Open Market Committee (FOMC) meeting on October 28-29 were released this morning.

It shouldn't have been a big surprise that the FOMC "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth have increased." This is consistent with the view of many economists, though the participants did lower their collective forecast for growth in 2009 to between negative 0.2% and positive 1.1%. Of course, we would argue that the massive decline seen in equities over the past year might suggest a far worse economic environment than what the FOMC is projecting. Clearly, unemployment will continue to rise into the new year, and the FOMC now predicts that the jobless rate will average 7.1% to 7.5% in 2009, but, again, we believe that the stock markets have priced in a substantial higher number.

Despite our continued optimism for the long-term, we realize that with fear running rampant these days and it unlikely that economic or corporate news will be uplifting in the near term, we have to brace ourselves for more volatility and the likelihood for additional weakness in the short run. Having said that, the technical indicators we look at are about as oversold as they have ever been, suggesting that we are overdue for a significant bounce. For example, the S&P 500 is now 35.5% below its 200-day moving average while the Russell 2000 is 39.0% below its 200-day moving average. Those figures stood at 34.1% and 35.4%, respectively, when stocks began a six-day rally on October 27 which took the S&P 500 up more than 18% from 849 to 1006. During that same time-span, the Russell 2000 rebounded from 448 to 546, or more than 21%. In addition, the Volatility Index (VIX) hit 74 today, not far from the record close of 80 seen on October 27.

We always operate with a long-term, three-to-five year investment time horizon and we continue to think that this period of time will be looked back upon in subsequent years as one of the best buying opportunities in stock market history. As 71-year-old money manager Steve Leuthold said in his latest investor letter, dated October 28:

"If the current U.S. recession (which got underway about a year ago) is about 20 months in duration (our estimate), it would be the longest recession since WWII (average being 11 months). As a leading economic indicator, the stock market would begin to rebound in November 2008, per our historical economic time clock.

"Today's stock market, per our valuation benchmarks (P/E ratios, Price to Sales ratio, Price to Cash Flow ratio, et. al.), is quite undervalued, in the low 15% of our 60 year valuation history. From current valuation levels, the stock market has returned an average of 40% over the subsequent two years and 66% over the subsequent three years, historically.

Obviously, there can never be any guarantee that history will repeat, and we realize that many folks think that this time is different, but we've survived 1987, 1990, 1998 and 2002 by continuing to adhere to the Al Frank strategy of buying and holding broadly diversified portfolio of undervalued stocks. And the market as a whole has persevered through numerous crises with equities seeing long-term returns on the order of 10% to 12%, dating back to the 1920s.

Of course, despite our long-term optimism, we do realize that the companies we own must make it through the near term in order to participate in the eventual recovery. Though we know from experience that the biggest losers going into a bear market are often the biggest winners coming out, we have become more critical of some of the names we hold, opting to sell these stocks a bit quicker than we might have in a more 'normal' market and economic environment. With so many other undervalued stocks available for purchase, we prefer to slowly redeploy these proceeds into other bargains that might offer a little better reward/risk profile.

For example, yesterday we decided to part ways with Asyst Technologies (ASYT - $0.24) and Photronics (PLAB - $0.47), two struggling semiconductor capital equipment companies. With the odds of bankruptcy having risen dramatically, we sold ASYT at $0.23 and PLAB for $0.54. Both companies are presently spilling red ink and with conditions in the tech sector having deteriorated in recent weeks, we are worried that high debt levels may be very problematic.

With the prognosis for hospital owner Tenet Healthcare (THC - $1.46) looking increasingly dire, we decided to finally lay our position to rest this week. In its most recently reported quarter, the company reported that it ailments were becoming more malignant. Bad debt from patients is hovering at 8% of sales, and services are steadily becoming less profitable as a higher percentage of them are to Medicare, Medicade or uninsured patients. Because Tenet depends on more commercially insured patients (admissions of which fell more than 3%), layoffs and the economic downturn have pressured occupancy down to one of the lowest in the industry. With negative tangible book value and debt of $10 per share, we decided to let our THC shares go yesterday at $1.72.

Given the low share prices for the three sales, the value of the holdings at this stage of the game were not enough to move the proverbial needle in terms of performance going forward. Such was not the case for our final sale as Mark Mowrey explains…

In an environment such as this, it's vastly more difficult to justify holding sizable positions in winning stocks with rich valuations, especially when one considers the multitude of inexpensive alternatives into which one can funnel the gains. 'Course it's also tough to move money out of a stock that's been bucking the general trend downward. A smart value investor will put prudence above cupidity, nonetheless, as we did with our holdings of American Science & Engineering (ASEI - $68.04), half of our stake in which we sold yesterday for no less than $71.20 per share for those portfolios where the position was more than 1.3 times the 'normal' size. For Mowrey Portfolio Compiler and Buckingham Portfolio we received $71.25 for the shares sold, while Al received a penny more for TPS Portfolio.

The generally lumpy revenue series took a turn up for American Science in the latest quarter, as the traveler, parcel and cargo inspection systems seller gained further traction in sales of its z-backscatter systems, which produce photo-realistic images of items baddies are carrying or shipping but should not be. Service revenues were higher, too, on account of a higher total number of systems in operation. Margins were on the rise as well.

Meantime, the sales pipeline has continued to grow - backlog is at a record high - as the company targets new markets for products like the z-backscatter vans, intended for use in force protection, counter-drug and anti-terrorism applications. And with intentions here and abroad to further border protection efforts, the long-term outlook is pretty grand.

And, yet, given current market valuation metrics, this stock seems already to have priced in a good portion of that eventual growth, trading at 36 times trailing earnings and more than three times revenue. A price-to-book value measure of 3.6 times is similarly rich, most comparisons considered.

Tempting as it was to hold fast to the shares and hope for greater gains on the whole position, we found it better to sell a chunk of our holdings in ASEI to reduce some of the risk that the rosy picture will fade. The remaining shares we'll hold for a revised-higher target FG price of $78 as the balance sheet is pristine with over $10 per share in cash, net of debt, and fiscal 2009 (ends 3/09) earnings are expected to jump to more than $3.00 per share from the current trailing-12-month tally of $1.87.

Eric Hare pens this evening's Hotline Special on Darling International (DAR - $3.60)…
Darling currently operates in two segments and has been at it since its founding in 1882. Its first segment is the rendering services business, where Darling collects and processes animal by-products, converting them into useable oils and proteins that are needed in the agricultural leather and oleo-chemical industries. Darling collects these by-products from grocery stores, butcher shops and meat/poultry processors. The finished products that Darling delivers via animal parts are pretty impressive. Using meat and bone they can make anything from pet food to fertilizer, using grease they can deliver animal feed and bio-fuels and using tallow Darling can assist in the making of numerous consumer goods.

The second segment, restaurant services, involves the collection of used cooking oils from restaurants and recycling them into high-energy animal feed ingredients and industrial oils. The need for this service is high, as it allows for restaurants to be more productive as it helps streamline the kitchen cleaning process.

A large portion of the by-products from rendering are high growth markets. Demand for new bio-fuels continues to grow and with the new administration starting in January, we’d expect it to at least stay the same. Furthermore, Darling does wonders for the environment. The recycling of fat and protein through the rendering process significantly lowers the amount of green house gas that would have been emitted.

Darling operates all over the world, with the United States providing the majority of its revenue. As a global provider with a proven aptitude in acquiring and synergizing other companies, Darling has an ability to scale the business and offer better prices to customers than any of its regional competitors. The revenue breakout is about 73% rendering and 27% restaurant services.

Operating margins favor the rendering segment as the most recent quarter saw a figure of 19.7% compared with 15.3% for the restaurant services. In addition, margins are improving as the prices at which the by-products can be sold have outpaced the increased manufacturing costs. In the most recent quarter, Darling earned $0.28 per share which compares favorably with the year prior where it earned $0.15. Revenue over the same period jumped to $236 million from $171 million.

A knock on Darling is that its business is capital intensive. The company has to constantly maintain/replace its large fleet of vehicles and heavy equipment for rendering and processing plants. That said, Darling is financially sound, sporting strong free cash flow, a good interest coverage ratio and a net cash position. Management has done a tremendous job of using the strong cash flow to pay down debt and accumulate cash as just last September Darling was showing a long-term debt number that was ten times its cash position.

The valuation for Darling is enticing as it trades for 4.5 times trailing-12-month earnings and for 35% of sales. We recognize that earnings will decline in 2009, but we think that that the nearly 80% decline in the share price since the end of July has been overdone. For those who share our long-term, three-to-five year investment time horizon, we are buyers of DAR up to $5.46 based on an LG/FG pair of $10/$11.

How to Play Commodities

Q: How far can the price of oil go? What are good ways to play the commodities markets over the next 5 years?

A: I don't have any problem with the idea of $200 oil any more than I do $2000 gold. The only question is "When"? That will depend on supply, demand and the dollar. Hard to forecast the exact direction of all the variables for any point in time. But, I think it is safe to say that supply for raw materials / commodities is hard to quickly expand, due to the infrastructure required. So, any increase in demand due to an expanding global economy, will drive prices higher.

The dollar may or may not get much weaker. At some point, the other countries will defend their own currency by either buying dollars, dropping their interest rates, or both. Emerging markets dependent on higher employment rates to keep their citizens happy, cannot allow Americans to take back jobs due to a cheap dollar. So, there is a practical limit to dollar weakness, at least in the short and mid-term (one month to five years).

But we are seeing the beginning of a correction to commodities right now, so I would wait to make a move. The Fed's defense of our banking system and economy are supportive of the dollar. This action will move money from the defensive position of precious metals and oil back to the stock market, which will deflate prices over the next couple months (or however long the rally runs). I would be prepared to move money into commodities gradually, over a long time horizon.

As for vehicles, I have always like FNARX, which is Fidelity's natural resource fund. It has done very well. I am in GGN, but it has been a bit disappointing. DBA is a good way to play the ag market. OIH and IXC are a good way to play the oil market. And, of course, I am in love with VGPMX for precious metals and have been for more than five years. But it is closed now.

November and the Market is Ugly

Brian, Today was wild! Do you think we test the lows on the S & P? Does someone step up and buy a Canroy? Oil to mid 80's, old to 760?. VIX to 37?, Candian dollar down 2.3%. Any thoughts on the future?

My gut is this is just a correction but all fundementals are in place for lower dollar, higher gold, higher oil and another buyout of a Canroy...

Jake, I agree this is a pretty ugly market and another leg down in what began in July. Amazing how all the gains of 3 months (since the recovery in mid-August) can be wiped out in a week. This is not a very confident market. People are looking for any reason to sell and are sure getting out now. There is a lot of fear about the housing and financial markets taking down the economy.

I think this market action is showing a rotation from real estate to consumer durables to finance to retail and now on to tech and commodities, including oil and gold, as fear of a global recession spreads (though not much evidence of that). The good news for our commodity plays is they are all high yield, which makes this whole process easier to deal with. The finance stocks bounced a little today and were up against this lousy market. The home builders are also kind of washed out, though I think there must be another leg down for them and I wouldn't get close to them until there are some bankruptcies, signalling the end of the collapse (as supply is taken off the market).

I definitely think we will test the lows of August in the Dow and S&P, which aren't that far away now. We could break through and fall back to the March lows. But I don't think the environment is nearly bad enough to fall to the 2002 lows (7500 on the Dow and 800 on S&P). The financials will establish the bottom and lead the market back, maybe within the next 3-4 months. They always lead the market back.

The big question is do we go into recession and if so, how big a recession? If the rest of the world continues to grow and doesn't collapse, it will help pull the US stock market out by continuing to purchase our goods keeping our exports strong and helping the industrial base build employment.

I think the bigger banks will end up consuming the weaker banks once most of the trouble is on the table. But we still don't know how bad the trouble is, so all the banks are getting whacked. I have picked Citibank and Bank of America to survive and eventually thrive. But they are both hurting now and I was early on them, so it has hurt me. But their 6% yields make it a little better.

The good news in all of this is that the market P/E never got that high in this cycle (20) and has come down now to around 16. If we hit 11,500 on the Dow and the earnings just stay flat (no growth), we will be back under 14 for the first time since the early 90s. That was a good time to be investing in the market since the Dow was only about 3000 then (1992) and is now 4x higher.

I don't know where all the commodities could go if we get the R word going. There is a lot of fundamental reasons for gold and oil to go higher in the long term (growth of demand in the BRIC economies and ever more expensive to produce or limited supply). But over a period of a year or two, reasons for price are more technical and speculative in nature. I think 760 is the minimum pullback, but 650 is a lot more likely. If you do a chart on gold for seven years, you see that the bottom of the uptrend channel is about 650 right now.

Same thing with Oil, you can look at the channel (http://www.chartsrus.com/chart1.php?image=http://www.sharelynx.com/chartstemp/free/chartindCRUvoi.php?ticker=FUTCL) and see the lower trend line is about 65. Oil stocks, like drillers, could go down 35-40% (I am cutting my exposure to drillers) and the Canroys could go down 15-20%, though the dividend should keep them from falling too far. I am looking at writing (selling) more puts on PWE if the price gets down to $27, which it might the next couple of days. I would try to get a $1.50 premium on the $25s (maybe on the March contract). That offers me protection down to 23.50. I think the chance of the dividend on PWE getting cut is very small, so that price would be super secure since the annual dividend is over 3.00, putting the yield when the price is at $25 a t over 12%.

When VIX hits 37-40, that is the bottom, as it was last time (in August) and almost every correction before. That shows a lot of volatility that can only happen when there is some "sell-off" panic in the market. VIX was at 31 today, so on its way.

If you really want some excitment and have your options account set up, try buying at-the-money calls on your favorite names, especially if they are high volatility. Citibank (C) and BAC would be two good ideas. Cisco is another one. You can buy the March 08 $35 C call for $3 right now. That means the break even is $38 on March 17. If the stock goes back above $41 between now and then, which it definitely could, it will be a double on your bet (and if it got back to $44, it would be a triple $9 divided by $3). But if it ends up less than $35, you lose the investment.