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Weekly Newsletter, Saturday, 04/02/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays

Leaps Trader Commentary

Commentary

So Close But Yet So Far Away  

Oil prices dipped to $52.40 on Wednesday on higher inventory levels and then immediately spiked back to close at a new all time high at $57.20 on Friday. The oil correction was going so well with a -10% drop off its highs but somebody got nervous and pulled the buy trigger early. This put all our watch list entries for energy stocks well away from the triggers but Q2 is still young.

The dip in oil did trigger our short entry on Continental Airlines so it was not a total loss. I also accelerated the entry on GM after the auto sales data out on Friday showed another month of lackluster sales. GM is ramping up incentives to try and push some SUVs out the door but with the high demand gasoline season just ahead and prices moving well over $2 a gallon I predict those incentives will fail. Gasoline futures hit an all time high on Friday at $1.73 and the worst is still ahead.

I am also adding a new short this weekend on Overstock.com. Recent dealings with them have put serious doubts in my mind about their staying power. I will explain in the play description.

DGX rewarded our patience this week with a breakout over $101 that ran to $106 before it cooled. We are up +$8 on that position and it is showing no signs of a pullback.

Adobe is also holding near its breakout highs and any rebound in the Nasdaq should be beneficial to Adobe so I am continuing to hold it. We are up +$4 in that position.

Unfortunately the spike in oil prices sent Federal Express sharply lower and our April $95 put is now $3 in the money. We will need to make a decision on that position by next weekend to avoid getting too close to our insurance expiration.

Meanwhile we will continue to hope for a real pullback in oil over the next four weeks to give us an entry point for the fall run. If the drop is going to come it should begin this week. Otherwise I will need to rethink my strategy on energy.

RIMM spiked up several dollars on Wednesday and erased some of the losses but selling began again as the week ended. I would like to see RIMM back in the $65 level before considering an entry. However, I also hesitate to add any tech stocks ahead of the summer doldrums.

ADSK was dropped last week for non-performance and it promptly gains +$2 and is approaching its resistance at $30.50 but still in its $28.50-30.50 range. Sometimes you just can't win.

Symantec has found a bid! Celebrations are in order. That $20 support level we had been watching was tested and it has rebounded to nearly $22. Maybe the worst is over. We still have 21 months on that LEAP so time is not a factor. Our insurance is a May put so still time there as well.

EBAY is also starting to show some life but I am still not convinced. The $36 level has turned into real support but like the other tech stocks we have the summer doldrums ahead. I am going to pass on reentering EBAY until a real trend develops.
 


Changes in Portfolio

New Plays
GM
$29.38 General Motors
OSTK $42.61 Overstock.com

Dropped Plays

None


New Watch List Plays Triggered
CAL
$11.62 Continental Airlines

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

GM - $29.35 General Motors ** No Stop **

Another month of car sales is history and GM managed to sell slightly more than February but not quite enough to turn investors bullish on the stock. The mildly positive auto-sales data on Friday failed to push GM back over resistance at $30. This has turned into a serious resistance level and with gasoline prices rising the odds are good GM is not going higher.

My long term view is very bearish on the automakers due to the potential for $100 dollar oil over the next year or so. If $2.50 gas is bad for business $5.00 gas will be a death knell for gas guzzlers.

With earnings approaching there is a good possibility GM will reveal some more negative details about its profits and its pension/healthcare problems.

I am using the 2007 leap puts because I think this will be a long term problem for GM and the other car makers as well. We could easily see prices in the teens before this put expires.

2007 $30 PUT VGN-MF Currently $7.20

Insurance Call
May $30 Call GM-EF Currently $1.50

Entry $29.35 (4/04)

GM Chart - Weekly

GM Chart - 30 min

 

CAL - $11.62 Continental Airlines ** Stop $14.50 **

CAL rallied on the dip in oil and another 2000 layoffs to $12.13 on Thursday and that was enough to trigger our put entry at $12. This is month long resistance and I believe the rebound was artificial given the new higher oil prices.

The airline industry as we know it is doomed. It is only a matter of time before it becomes too expensive to fly due to dwindling oil reserves and the tens of thousands of current routes will be cut in half and possibly half again. There is no substitute for oil to keep the planes in the air and that means costs will continue to skyrocket. Those airlines with defined benefit pension plans will be stuck with shrinking routes, more layoffs, higher costs and lower profits. In the not too distant future air travel for fun will be a fond memory and heading off to grandma's for the weekend or to Vail for skiing will simply be too expensive to justify.

Business travelers will be the majority of the fares and the high cost of those fares will restrict them to only the absolutely necessary trips.

I am very bearish on the future of the airlines and it is only a matter of time until the rest of the world catches on to the coming reality.

2007 $10.00 LEAP Put OVJ-MB @ $3.10

No insurance call due to the low price on the Leap.
A rise to our stop at $14.50 would generate about a
$1 loss in the leap and that is less than a insurance
call would cost today.

Entry $12.00 (03/31)


Play Updates

Existing Plays

FDX - $92.30 Federal Express ** No Stop **

** Exit with a touch of $90 **

Oil better dip quick or we will be out of this FDX play. It appeared support at $94 was going to hold but the oil spike on Friday broke that support. We still have the 200-day at $90 and that would be my signal to exit if we broke that level. Our insurance put is $3 in the money so we do not have any further exposure to risk. We can only gain from here but I would rather not profit from the puts if we don't have to.

Federal Express reported stronger than expected earnings on Thursday with net income up +53% and revenue up +21%. They hit a high near $102 in early March but returned to the bottom of their range at $96 after the earnings announcement. This was the entry we were waiting for.

FDX warned that higher oil prices could crimp earnings in the current quarter. Still according to FDX customer demand was so strong that it was driving new investment in aircraft, facilities and technology.

Comparing the FDX earnings with UPS it appears FDX is the clear winner and taking substantial market share away from UPS. On a broader note Yellow Roadway said on Friday that freight tonnage was at an all time high. They raised rates +4.5% and their fuel surcharge to 11%. FDX is the premium shipper in the sector and they are also having no problems with rates. According to UPS the fuel surcharge is turning into a profit center as the carriers learn how to hedge against oil prices. FDX already hedges but they also warned that rapid rises in crude could negate that hedge. You can bet that the fuel surcharges will continue to climb and earnings will remain at the top end of the spectrum.

Morgan Stanley said the FDX guidance to the top of the range was a positive sign and a couple cents of energy pressure was to be expected.

Target $96.00 for an entry on the next pullback.

2006 $100 LEAP Call WFX-AT @ $6.50

Insurance put:
April $95.00 FDX-PS @ $1.45

Entry $96.00 (03/17)


SMH - $32.08 Semiconductor Holders ** No Stop **  

The SOX held 410 again and the SMH is holding at $32. We have plenty of time and a May insurance put so no change here. Uptrend support is $31 which equates to 400 on the SOX.

The current level is well above any attractive puts for insurance with a -2.50 move on the SMH a big move from this level. However real support could be found at $31 so I am going to recommend a 60 cent May put just in case. I believe we will know if this trade is going to be a winner very quickly.

2006 $35.00 LEAP Call YRH-AG @ $2.75

Insurance put:
May $30 Put SMH-QF @ 45 cents.

Entry $33 (03/15)


DGX - Quest Diagnostic $105.00 ** Stop loss $104.00 **

DGX finally broke out over the $101 resistance and it was a great ride. I raised the stop to $104 in order to capture the most profit if the gains fail. I am not comfortable with the market in general and don't want to give back our profits.

Quest announced a +21% increase in earnings in January and soared from $89.50 to just over $96 in a week. Instead of consolidating those gains it just keeps moving higher. We entered DGX on Jan-21st as it was moving lower and touched support at the 100-day average at $90. Three days later the rocket ride began from $89. The trick now is to stay far enough away from the price to keep from getting stopped but not give back all of our gains.

Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff.

Quest Diagnostics is also the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. (Source DGX)

2006 $95 LEAP Call YFK-AS @ $6.40

Insurance put
Feb-$85 Put DGX-NQ @ 50 cents expired worthless.

Entry $91.00 (01/21)

 

ADBE - Adobe Systems $66.78 ** Stop $65.50 **

** Set a profit stop at $69.00 **

Adobe is holding its gains but I am still nervous. I kept the stop at $65.50 and I am hoping for a Nasdaq rebound off support to hit our profit target. I am maintaining a profit stop at $69.

Adobe is the king of the document and image business and continues to announce new products. The company announced earnings in December that rose +33% and beat estimates. Income for the year rose +69% on a +29% increase in revenue. Adobe affirmed guidance for 2005 and the stock has been beating the Nasdaq in percentage gains. In 2004 the stock rose +60%. Since they have already announced earnings we have very little event risk over the next month.

I recommended the February $55 put as insurance at 80 cents. That gave us six weeks for the Q1 earnings to cycle and for ADBE to pick a direction. If we are not profitable by Feb-18th expiration we will close and take our lumps.

Jan-06 $60 LEAP Call WAE-AL @ $7.50

Put Insurance
Feb-05 $55 Put AEQ-NK @ 80 cents - expired worthless

Added new insurance on Feb-22nd
Mar-05 $60 Put AEQ-OL @ 75 cents - expired worthless

Stop loss $65.00

Entry $58.78 (01/09)

SYMC $21.77 Symantec - Veritas ** no stop **

SYMC finally dipped to support at $20 and a real rebound began. The April put is still in force but a rebound back over $22.50 will let it expire worthless. It will also add value to the Leap so I am not too worried about that potential. SYMC has resistance at 22.50 to it is time for a decision by SYMC buyers.

I believe that the SYMC/VRTS merger is a match made in heaven and analysts will come to that view as more plans are announced. The companies have no overlapping products but all their products are perfect fits for the others. With one company having anti-virus, data security, backup, recovery and storage management it puts the other stand-alone companies in a very difficult position. EMC and QLGC both fell in the storage sector and Mcafee was crushed in the anti-virus sector.

There is no stop on this position. With the 2007 LEAP Call any minor dips will not result in a material drop in the leap. The April $22.50 insurance put will protect us from any potential disaster. For me this is a buy and forget play until April expiration.

2007 $25 LEAP Call OBL-AE @ $6.30

Insurance Put
APR-2005 $22.50 PUT SYQ-PX @ $1.15

Entry $25.37 (12/19)


Leaps Trader Watch List

Oil was moving down so nicely though Wednesday and then all hack broke lose. I am still clinging to the hope that we will get an April demand drop but that hope is fading with every uptick. I am going to maintain the triggers at the 100-day average until we get to mid April then reevaluate. When it comes it may be when we least expect it and it could be sharp.

We entered GM and CAL today and are left with only oil stocks at present. We came within 14 cents of being triggered on JBLU and I am going to leave that trigger open. If oil does drop we should get another pop in transportation.

I raised the targets on the refiners given the Texas explosion and the refinery outage in Venezuela. I also modified a couple entries on the oil stocks to reflect last weeks dip and average creep.

If we do get a big drop in oil and we start to get some entries triggered I want to avoid buying them all. After TWO energy stocks are triggered I want you to lower all the entry points $2 on everything else. If TWO more are triggered then lower the entry points $2 once again. Stop all entries at six energy positions.

I am not adding any new long targets on anything but oil because of the weak markets and the potential for a real failure once earnings break. I will put in some index puts next week on the DJX and QQQ. Somebody bought 20,000 September puts on the SPX at the $750 strike on Friday. That could be part of a spread play, portfolio insurance or maybe just a clue as to where the big money thinks we are going. That was a $3 million bet.

 

Dropped Entries  
None

New Watch List Entries 

None

Current Watch List

COP - Conoco Phillips
OXY - Occidental Petroleum
CVX - Chevron Texaco
UCL - Unocal
XOM - Exxon Mobil
XLE - Energy SPDR
VLO - Valero Energy
PCO - Premcor
JBLU- Jet Blue

The oil stocks are listed for reference because the actual prices are so far away from where I would like to get an entry. I am hoping for a sharp correction when it comes and the spring demand slumps. The targets are above the 100-day averages but with the averages rising it is where I expect them to meet.

*************************

COP - $110.27 Conoco Phillips ** Target $95.00 **

Last weeks -$6 drop was erased and we are right back at $110 resistance. Tough week for discount buyers.

Conoco is my first choice for an oil stock once the current trend eases. I would like to get an entry around the 100-day average now at $95 but rising. This has been a good support level in the past.

BUY 2007 $100 LEAP Call OJP-AT

*************************

OXY - $73.64 Occidental Petroleum ** Target $65.00 **

OXY would be my next choice with the same 100-day average as an entry point. That is currently $62 but I don't see the potential for a drop much under $65.

BUY 2007 $70 LEAP Call VXY-AN

*************************

CVX - $58.29 Chevron Texaco ** Target $55.00 **

Looking for a new entry around the 100-day average currently at $55.

BUY 2007 $60 LEAP Call VCH-AL

*************************

UCL - $64.38 Unocal ** Target $59.00 **

Unocal is a takeover target and any dip would make it more attractive to a buyer. I raised the entry point on UCL given the support over the last month and the constant takeover talk.

BUY 2007 $60 LEAP Call VCL-AL


********************

XOM - $60.53 Exxon Mobil ** Target $55.00 **

XOM has larger reserves and more cash than any other oil company. They have to find something to do with their $28 billion and it will either be returned to the shareholders or used to buy more reserves.

BUY 2007 $60 LEAP Call ODU-AL

********************

XLE - $43.93 Energy SPDR ** Target $38.00 **

The XLE covers all the bases and the options are cheap. We will not get the same move in the XLE as an individual stock but it is much more steady.

BUY 2007 $40 LEAP Call ORJ-AN

********************

PCO - $64.19 Premcor ** Target $56.00 **

Premcor is an independent refiner with higher margins and upside potential from diversification.

BUY 2007 $60 LEAP Call VJE-AL

********************

VLO - $77.72 Valero Energy ** Target $68.00 **

Valero is an independent refiner that has made the switch to the higher profit margins of sour crude.

BUY 2007 $75 LEAP Call VHB-AO

********************

JBLU - $18.43 Jet Blue ** Target $19.50 and $16.50 **

If oil declines JBLU could attempt to rally but the outlook is still bleak.

BUY 2007 $15.00 LEAP Put VYO-MC if $16.50 target is hit
BUY 2007 $20.00 LEAP Put VYO-MD if $19.50 target is hit


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