2008: The Flip Side of 2006

Stocks are set to start the new year moderately higher, but all of the same themes are still in place. The biggest negative -- and threat -- continues to be the fallout from the mortgage-related credit crunch.

This morning's high-profile casualty of the seizing up of lending is that PHH Corp (PHH - commentary - Cramer's Take) has cancelled its plans to be acquired by GE Capital because the deal was contingent on the Blackstone Group (BX - commentary - Cramer's Take) buying PHH's mortgage business. But Blackstone has failed to come up with financing for the purchase, which killed the whole deal.

The inability to borrow money has many companies turning toward shedding assets as a means of raising money and shoring up balance sheets. For option traders, 2008 could be the flip side of 2006, where instead of everyone betting on which companies would be the next takeover target, they might start trying to game which companies enact spinoffs or sell non-core business units.

You won't see the same type of 30%-50% one-day gains, but such moves would likely provide a pop to the stock for any company that can successfully raise money. So, I expect there might be a renewed, though greatly trimmed-down version, of buying call options on a host of names on any given day simply based on rumors or expectations of a spinoff or asset sale.

As the start of trading in 2008 kicks off, let me indulge bit of self-marketing. On Monday, a colleague brought to my attention this article on "Hulbert's Financial Digest" report which ranks the best and worst newsletters based on the performance of their model portfolios. Based on that list, the Option Alert model portfolio, which gained 79.47%, would have been the best-performing newsletter of the year. Unfortunately TheStreet.com newsletters products are not included in Hulbert's survey.

The official best-performing newsletters were focused on investments in China and basically achieved most of their gains by catching one or two stocks that rocketed to huge gains. By contrast, the Option Alert model portfolio engaged on over 100 distinct trades with none exceeding either a gain or loss that represented more than 10% of the portfolio.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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