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Weekly Newsletter, Saturday, 04/09/2005

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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

Excitement Just Ahead

Oil prices flip-flopped once again and we are right back to the lows from late March. Unfortunately the oil stocks themselves have failed to give us the same retracement. With regular equities duller than a $2 knife it seems everyone wants to hold their oil stocks for the next bounce.

We were triggered on the Unocal play when it dropped on the announcement it was being bought by Chevron. Since any Unocal leap will end up being a Chevron leap I am going to activate that play as well and it will be the one we follow.

Falling oil prices sent the airlines higher and we were also triggered on the Jet Blue put. Now we are in caught in a dilemma. We want oil prices to continue to fall to get entries in oil positions but we also want oil prices to rise to tank the airlines. Personally I would gladly stop out of the airline puts to see oil take a serious tumble. We will be well rewarded in the future by good oil entries.

The drop in oil prices did not help the FedEx play and Friday's -3% drop in the transports sent it to a new low. We are down less than $1 thanks to the insurance put but it expires next Friday. I am going to close it today but I would suggest holding the put as long as FDX continues lower. One more day could break us even on the play.

I am also adding a new put play, TOO Inc. The setup was TOO good to pass up as we head into the summer doldrums.

DGX dipped back to tag our profit stop at $104 before continuing higher to $106 but we can't complain about an $8 profit.

RIMM was all over the map last week as earnings surprised in both directions. A new 4-week low was hit at $71 but that produced an instant rebound to $77.50. The option prices are so inflated now I would hesitate an entry even if we got back to that $65 I was targeting. Post earnings that target looks more like $70 but I think we are better off looking elsewhere.

Remember ADSK? The company just completed two straight weeks of strong gains that began the day after I dropped it. Now at three month high. Sheesh!

I mentioned EBAY last week as finding support at $36 but not wanting to make an entry with the summer doldrums ahead. EBAY rebounded to near $39 intra week but slid back to $35 on Friday. I am very tempted to jump in again but the sudden weakness just confirms my suspicions from last week that there is trouble ahead.

This should be a pivotal week in the markets with Friday, April 15th, my target for a turning point.


Changes in Portfolio

New Plays
TOO
$24.10 TOO Inc

Dropped Plays
DGX
Quest Diagnostic
$105.41 ** Profit Stop @ $104 **
FDX Federal Express $91.10 ** Dropped **

New Watch List Plays Triggered
CVX
Chevron Texaco (Unocal) $56.67
JBLU Jet Blue $18.43

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

CVX - $56.67 Chevron Texaco ** No stop **

Chevron announced this week that it was purchasing Unocal for $18 billion in cash and stock and both CVX and UCL dropped sharply. This was not a surprise for Chevron to make the purchase but the timing caught everyone off guard.

In theory everyone was waiting for oil to drop in Q2 and allow the next round of acquisitions to be made at a more reasonable value. Instead Chevron did a take under on Unocal by offering less than the current share price. It is a good deal if you can pull it off.

Chevron beat out several other firms including China's CNOOC who had been a hot pursuer but had to drop out at the last minute after it could not complete the final terms in time.

Chevron will likely sell off about $3 billion in non-core assets once the deal is consummated. The main asset Chevron wanted was the 1.7 billion barrels of proven reserves and tens of thousands of acres of additional leases still to be explored. Chevrons current average cost of produced crude is $27. After selling the non-core assets they will end up with the Unocal proven reserves at about $9 a bbl plus billions in other assets like gas fields, power plants and joint ventures around the world. This was a very sweet deal for Chevron.

It may take some time for the cloud to lift from the stock price but the next jump in oil prices should do wonders. Chevron dropped back to its 100-day average at $55.50 on the news and this should be very strong support. There is not expected to be any hurdles to getting the deal approved as most of the assets are either out of the country or will be divested as part of the deal.

The Unocal leap was actually triggered when the price hit $59 on the announcement. With UCL trading at $58.74 at Friday's close there would not have been any material movement. Because any Unocal leap will eventually end up being a Chevron leap I am electing to use the previously recommended Chevron leap as the actual position. I am using Friday's close for the entry price.


BUY 2007 $60.00 LEAP Call VCH-AL currently $5.60
BUY 2007 $57.50 LEAP Call VCH-AY currently $6.70
Reference: UCL 2007 $60 LEAP Call VCL-AL @$6.60

Insurance Put: June $55 Put CVX-RK currently $1.65
I thought about not having the put but there is still a remote possibility somebody could appear and bid higher. This would be detrimental to Chevron as they would either have to bid higher or lose the reserves. Better safe than sorry.

Entry $56.67 (04/07)

JBLU - $20.32 Jet Blue ** No Stop **

The drop in oil sent JBLU +2.00 higher on the news and triggered our put entry at $19.50. JBLU spiked to $20.65 and just shy of the 100-day average resistance at 20.77. This would be a good place for a roll over but we could still see an attempt to move higher with 21.75 as the next major resistance.

This is a long-term play as airlines will eventually be hit hardest by rising oil prices. It is strictly a play on oil and the change in environment for the airlines. The Q2 demand drop was expected to provide a drop in oil and a rise in airline prices. It happened almost exactly as expected. Now we sit and wait for the reversal.

2007 $20.00 LEAP Put VYO-MD @ 4.60

Insurance Call: June $22.50 JCQ-FX @ .85

Entry $19.50 (4/05)

TOO - $24.22 TOO Inc ** Stop Loss $26.50 **

Too, Inc. is a specialty retailer that sells apparel, underwear, sleepwear, swimwear, lifestyle and personal care products for young girls. Recently some negative news has begun to surface from brokers and analysts. It appears TOO maybe having some problems and is losing market share. In order to reclaim that share it is offering what some brokers describe as absurd incentives to attract buyers.

Merrill lynch analyst Mark Friedman said last week that weak sales were a growing concern and we could see an earnings miss for Q1. He lowered same store sales growth estimates to an anemic +3%. He also cautioned that their current sales promotion may be TOO much of a good thing. They call it the TOO Bucks promotion. If you buy $50 of merchandise they will give you TWO $25 coupons to use at a later date. Previously they had offered the same promotion with only one $25 certificate. Friedman feels that giving away $50 in certificates for every $50 sale could be an act of desperation and definitely one that will impact profits. If the promotion catches fire and becomes a strong success then Q2 should suffer greatly as all those certificates come back to haunt them.

The chart clearly shows a loss of momentum and a potential for a sharp drop if an earnings miss occurs. With gas prices putting the squeeze on consumers the retail sector is not a promising place to be long.

TOO does not have LEAPs so I am recommending the November options.

BUY NOV $22.50 PUT TOO-WX currently $2.05

No insurance call.

Entry $24.22 (4/10)


Play Updates

Existing Plays

GM - $29.54 General Motors ** No Stop **

Lower oil prices provided a bounce for GM but news after the bell on Friday could be negative for next week. Ford warned that full year earnings would be -25% less than previously expected and blamed the same things that are putting pressure on GM. It is only a matter of time before oil starts higher again and GM will return to weakness. A break under $28 will be the sign of real trouble.

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)

CAL - $12.78 Continental Airlines ** Stop $14.50 **

CAL continued to rally on lower oil but there is strong resistance just ahead at $14.50. If oil continues lower we may be stopped out but it would mean a better entry for our next oil positions.

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)

OSTK $43.25 Overstock.com ** Stop loss $48.00 **

OSTK tried twice to rally last week and failed both times. Once support at $42 fails it could be a long drop.

Overstock.com is poised to repeat the Amazon story. They rallied to the excess peaks on the story and promise of the future and are now finding it difficult to follow through on that promise.

For a complete and lengthy explanation of this play please refer back to the April 3rd edition of the LEAP newsletter.

I believe Overstock.com will return to its $20 roots and with earnings just ahead we could easily have some negative surprises. Unfortunately they don't have leaps but we can still play with September puts. I realize many readers may not have the same incentive to short OSTK that I do and I understand. However, looking at a chart should suggest to you that others have found them lacking as well.

September $40 Put QKT-UH @ $5.70

No insurance call due to prices out of range.
Use a stop at $48 instead.

Entry $42.60 (04/04)

FDX - $91.10 Federal Express ** Dropped **

FDX was clinging to support at $92 but the USFC warning tanked the sector with a -3% loss in the transports. We were targeting $90 for a breakeven exit in this busted play but with April options expiring next Friday I elected to close it today. The LEAP is down -3.40 and the call is up +2.45 for a net -95 cent loss. If it appears transports are going to be down again on Monday I would hold the put another day in hopes of a breakeven. With the $95 put already $4 in the money any negative movement on FDX would be immediately recognized in the put.

Support should be at $90 both from the 200-day average and the January dip low at $90. However, with fears of shipping volume slowing it is not worth the risk to hold it.

2006 $100 LEAP Call WFX-AT @ $7.50, exit 4.10, -3.40

Insurance put:
April $95.00 FDX-PS @ $1.45, exit 3.90 +2.45, net loss -95 cents

Entry $96.00 (03/17)

SMH - $32.49 Semiconductor Holders ** No Stop **

The SOX held 410 again but failed at 420 and the SMH is holding just above $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.

Semiconductors have been the only strength sector for techs and we are rapidly running out of time for any real rebound. If techs do not rebound over the next two weeks I plan on closing this play for non-performance. I don't want to hold it into the summer doldrums.

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 $105.41 ** Stopped @ $104.00 **

DGX dipped on Monday to our stop loss at $104 and took us out of the play for a nice +$8 profit. It is nice to have a big winner when the market is doing everything it can to punish investors.

2006 $95 LEAP Call YFK-AS @ $6.40, exit $14.50, +8.10

Insurance put
Feb-$85 Put DGX-NQ @ 50 cents expired worthless. (Net +7.60)

Entry $91.00 (01/21)

ADBE - Adobe Systems $67.18 ** Stop $66.50 **

** Set a profit stop at $69.00 **

Adobe is still holding its gains but I am getting even more nervous. I raised the stop to $66.50 and I am hoping for a Nasdaq rebound to hit our profit target at $69. We came within 11 cents on Wednesday. I am maintaining that 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 $20.57 Symantec - Veritas ** no stop - CHANGE PUT!! **

SYMC rolled over with the rest of the software sector and is headed right back for another retest of support at $20. I do not want to close this play but I have to make a change with the April insurance put expiring.

On Monday sell the April $22.50 put, currently $1.95, and roll out to a July $22.50 put SYQ-SX, currently 2.75. It will cost us about 80 cents but will protect our in-the-money position for three more months. If SYMC does breakdown below $20 we are protected on a dollar for dollar basis with that in-the-money put. If SYMC rebounds we will recover the loss in the put with an increase in the LEAP.

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.


2007 $25 LEAP Call OBL-AE @ $6.30

Insurance Put
APR-2005 $22.50 PUT SYQ-PX @ $1.15, closed 4/11 $1.95
JUL-2005 $22.50 PUT SYQ-SX @ $2.75, opened 4/11

Entry $25.37 (12/19)


Leaps Trader Watch List

Maybe we will get lucky this time around. The first oil correction rebounded sharply from the -10% level and it appeared we were going to be left at the station. Our patience was rewarded and we are right back testing those lows again around $53. I was targeting the $50 area for the current contract as an entry level in the past but with September (CL05U) showing strong support in the $54 range, currently $55.45, I am no longer hoping for a dip all the way to $50.

Secondly the oil stocks are not dropping. We were hit on our Unocal trigger last week and got Chevron by default. Those are the only two oils that showed any material decline. Therefore, I am putting in breakout triggers on all the oil stocks on the watch list. I do not want to be sitting here empty handed if oil suddenly decides it is done correcting once again. Just like $58 can be seen as a double top it would be easy for traders to decide $53 is a double bottom.

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 added the DJX puts, albeit a week late as my potential entry target of 10550 was hit a week early. Hopefully it will come back to us.

Dropped Entries
None

New Watch List Entries
DJX
Dow Jones - Index Puts
$104.61

Current Watch List

DJX - Dow Jones
COP - Conoco Phillips
OXY - Occidental Petroleum
XOM - Exxon Mobil
XLE - Energy SPDR
VLO - Valero Energy
PCO - Premcor

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

COP - $109.10 Conoco Phillips

** Breakdown Target $96.00 **
** Breakout Target $113.00 **

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 $96 but rising. This has been a good support level in the past.

Breakdown entry: BUY 2007 $100 LEAP Call OJP-AT
Breakout entry: BUY 2007 $115 LEAP Call OJP-AD

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

OXY - $72.21 Occidental Petroleum

** Breakdown Target $65.00 **
** Breakout Target $76.00 **

OXY would be my next choice with the same 100-day average as an entry point. That is currently $63 but I don't see the potential for a drop much under $65.

Breakdown target: BUY 2007 $70 LEAP Call VXY-AN
Breakout target: BUY 2007 $80 LEAP Call VXY-AP

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

XOM - $60.01 Exxon Mobil

** Breakdown Target $55.00 **
** Breakout Target $63.50 **

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.

Breakdown target: BUY 2007 $60 LEAP Call ODU-AL
Breakout target: BUY 2007 $65 LEAP Call ODU-AM

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

XLE - $42.74 Energy SPDR

** Breakdown Target $38.00 **
** Breakout Target $44.50 **

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.

Breakdown target: BUY 2007 $40 LEAP Call ORJ-AN
Breakout target: BUY 2007 $45 LEAP Call OJW-AS

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

PCO - $62.74 Premcor

** Breakdown Target $56.00 **
** Breakout Target $66.00 **

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

Breakdown target: BUY 2007 $60 LEAP Call VJE-AL
Breakout target: BUY 2007 $65 LEAP Call VJE-AM

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

VLO - $77.20 Valero Energy

** Breakdown Target $68.00 **
** Breakout Target $82.50 **

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

Breakdown target: BUY 2007 $75 LEAP Call VHB-AO
Breakout target: BUY 2007 $85 LEAP Call VHB-AQ

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

DJX - $104.61 Dow Index

** Upside target 105.50 **

I almost posted this last week but postponed the entry thinking we would have plenty of time. Unfortunately the markets rebounded and hit my target before I was ready. Hopefully we will see another earnings bounce to resistance once again.

BUY 2007 $104 LEAP Puts YDK-XZ


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