FCX - $55.12 - Freeport McMoran ** No Stop **
FCX dropped on the drop in gold to hit our trigger point at $52 on Wednesday. The touch of support at $52 was all it needed to spark renewed buying and a sprint back above $55 and very close to a new high. The $10.4 billion acquisition of Placer Dome by Barrick Gold on Thursday just helped to fan the flames. Gold dipped to $492 to complete a -$50 drop from its highs. $500 should be interim support and a falling stock market in January should help to push gold higher as fears of a recession grow.
I am going to suggest the Feb-$50 Put as insurance against another drop in gold but only if FCX trades below $53 again. I believe any material drop in gold prices will be over the next two weeks and 2006 will see a return to the highs.
Freeport-McMoran Copper & Gold Inc. is a copper and gold mining and production company. The Company's principal asset is the Grasberg mine. Grasberg contains gold reserve and copper reserves. Its principal operating subsidiary is PT Freeport Indonesia. The Company owns approximately 90.64% of PT Freeport Indonesia, and the Government of Indonesia owns the remaining approximate 9.36%. PT Freeport Indonesia mines, processes and explores for ore containing copper, gold and silver. It operates in the remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea. PT Freeport Indonesia markets its concentrates containing copper, gold and silver worldwide. The Company also smelts and refines copper concentrates in Spain, and markets the refined copper products through Atlantic Copper, S.A., the wholly owned subsidiary of the Company among others, such as PT Irja Eastern Minerals and FM Services Company
2007 $55 LEAP Call OMT-AK @ $6.00
Insurance put: Feb $50 FCX-MK if FCX trades below $53.
Entry $52.00 (12/21)
DTX - $426.68 - Dow Jones Transportation Index
The Dow Transports have been in vertical mode since the October lows. The decline in oil/gas/diesel prices has given them wings and the strong growth in Q4 shipping sent them to new highs.
January has not been kind to the transports for the last five years. In 2005 the first three weeks of January saw a drop of nearly -400 points in the transportation average. In 2004 the decline did not begin until the 3rd week of January but continued for nearly -400 points. The decline in 2003 begin with the opening of trading for 2003 and continued for nearly -500 points to bottom on the week of March 9th. 2002 losses were somewhat moderate compared to 2003-2005 with only a decline of around -250 points but it did start with the opening of trading for 2002. 2001 was ugly with more than -575 points lost from the end of December high at 3157 to the March low at 2578. In 2000 the index fell from 3017 to 2260 for a whopping -757 point drop.
While nobody can forecast a repeat the combination of a new all time high just before a potentially weak January seems to be a match made in heaven.
The only fly in this ointment is the thin trading in the options. There are no leaps and future months don't even have put strikes near the current index level.
I am going to take the trade anyway and hope that new strikes are added before we get an entry. If not we will play what the dealer gives us.
I am also adding EXPD as a put candidate tonight for those who don't want to play in the thin DTX market.
I am not going to use insurance on this play as options are expensive. We are going to roll the dice and take our chances. If this is too risky for you please take the EXPD play instead. The difference between the two is a potentially large index move of 40+ points compared to a 10-point move in EXPD. Both could be very profitable.
We could have a new transport high next week but anyone that can do basic math should be very afraid of buying at the top ahead of January given the history for the last five years. I toyed with putting in a breakout/breakdown entry scheme but with the spike last week I was afraid it would collapse before we could get a decent entry. Option premiums could accelerate quickly.
This will be a hard entry for record keeping purposes at $426 but I strongly advise everyone to wait for weakness if we open with a spike on Tuesday. I would love to see a continued run to $450 on short covering into year-end.
We could easily see a dip to $370 over the next 90 days so buying a March put option at $400 is not unreasonable despite the index trading at $426 today. Since the $400 strike is the highest put strike listed for March and June that would be your best entry if none show up on Tuesday. Hopefully the market maker will add some on Tuesday with a new spike on the Transports.
The alternate strike would be the Feb $420 put just out of the money. A -40 point drop in the index would be a fat premium if it occurred before expiration in February. It is definitely possible.
Personally I am probably going to trade both strikes and roll out to a higher March strike when/if they become available.
Pick One but wait for weakness if we get an opening spike on Tuesday.
REPEAT - DON'T BUY UNTIL YOU SEE WEAKNESS or 12/30, whichever comes first!
Buy Feb-$420 Put DTX-NB currently $7.80
Entry $426 (12/27)
EXPD - $69.50 - Expeditors International ** Stop Loss $75 **
EXPD is another way to play the anticipated roll over of the transportation sector. Unlike the DTX the options are liquid and cheap. EXPD spiked higher with the sector from $55 to over $72 on very little change in fundamentals. As you can see on the chart the spike is very unsupported. On a shorter term chart EXPD failed to near its highs on last weeks transport bounce and looks very likely to give back a majority of its gains should the transports in general suffer another January disaster.
This is not a negative indication of EXPD in general rather than just another way to play the potential transport weakness.
Expeditors International of Washington, Inc. (Expeditors International) is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. Its services include the consolidation or forwarding of air and ocean freight. In each United States office and in many overseas offices, the Company acts as a customs broker. It also provides additional services, including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information.
Buy May $65 Put URP-QM currently $2.70
No insurance due to cheap options
Entry $69.54 (12.27)
CSC - $49.58 - Computer Sciences Corp ** No Stop **
Computer Sciences was the target of a takeover back in October and the takeover failed because CSC wanted $65 and while the acquirers agreed in principle to that amount they could not structure a deal that made everyone happy. The parties agreed to disagree and discontinued talks. All parties said they could begin again at any time.
CSC spiked from $46 to $60 on the initial news but quickly fell back again as no further news was forthcoming.
I heard Crammer talking about it on Friday and his presentation made perfect sense. Since the acquisition talks CSC has signed several more contracts for nearly $5 billion dollars and more are in the wings. CSC is more valuable today than they were back in October. If you look at the news for CSC they are signing monster deals almost every day.
Since the talks were dropped General Dynamics paid $2.1 billion for Anteon, which valued them at 13 times earnings. At the $12 billion number discussed for CSC it values them at something less than 17 times forward earnings. CSC says they have more than $30 billion of projected deals in their defense Dept pipeline along with another $10 billion in non-defense bids.
The stock has been dormant at just under $50 since the talks ceased and the opportunity for the same buyout team or someone else to appear over the next year is very strong. As Cramer was saying on Friday there is little or no downside and only upside for CSC. After doing the research I believe him on this one.
Computer Sciences Corporation (CSC) is a provider of information technology (I/T) and professional services. Outsourcing activities include operating all or a portion of a customer's technology infrastructure and applications, and business process outsourcing. I/T and professional services include systems integration, consulting and other professional services and software systems sales and related services. CSC provides these services to customers in the Global Commercial and United States federal government markets. On a geographic basis, CSC provides services to Global Commercial customers in the United States, Europe and other international locations. Operations in Australia, Asia and Canada generate all revenue within Other International.
Buy 2007 $50 LEAP Call OSC-AJ currently $6.40 *preference*
I chose the $50 call instead of a higher call because any buyout offer caps the upside and time premium will evaporate instantly. We want to be as close as possible to the money on this one. A new $65 buyout number would turn the $50 LEAP into $15 overnight. The cheaper $55 LEAP would go from $4 to $10 so it is not a loser just a different way of looking at it. Both would represent about a +130% to +150% return. The difference would be in the buyout offer. Say they decided to take a $62 offer instead of $65. The lower strike would benefit most.
Insurance Put: June $45 Put CSC-OI only if CSC trades at $47.75.
Entry $49.62 (12/27)