Table of Contents
Leaps Trader Commentary
The market performance this week was not exactly what was expected. Primarily I am talking about the crude futures. After gapping down on Tuesday and forcing stops on several of our energy plays the crude futures took off like a well fire. Crude sure likes support in the $57.50 range and every touch has brought a rebound.
The rebound this week spiked crude back to close at $61 for year-end and I can't help but think this was some kind of tape painting scenario for crude. We had several comments from OPEC about a possible production cut at the end of January but nothing we did not already know from prior sound bites. We also had a drop in gasoline and heating oil supplies on Thursday but the spike was already in progress before the news broke. There was bigger news in the gas storage levels with another -162bcf draw but gas futures barely blinked before falling under $11 and a new four-month low. Something was definitely strange in the crude pits and nobody seems to know why.
The bad news was stops being hit on BTU, PBR and UPL. Petrobras rebounded from the dip to $68 and nearly hit our prior sell target at $72. But, that is the breaks. I discussed last week that I expected energy prices to fall as unseasonably warm weather appeared for the holidays. I had raised the stops in anticipation of an exit so I can't complain.
I am glad I removed the $30 profit target from Overstock as it appears to be in free fall now after their profit warning and several downgrades. That will help soothe the pain of the energy stops.
We also got the best possible entry on the transportation puts with the DJ Transports and EXPD both spiking on Tuesday's open. No complaints there and I am looking forward to a long drop.
We were also triggered on the DJX put play on the watch list and the Dow closed at a six week low on Friday. When/if funds begin dumping stock on Monday we are poised to reap the benefits there.
I am not adding any new plays this weekend. We are positioned to capitalize on any market weakness and all our long plays are protected from any serious drops. I want to see how next week plays out and then make some entries from there. If you are looking for something new I would consider shorts on GM or BMHC. There is also plenty of room on the EXPD put around $67.
Happy New Year
Natural Gas Chart - Daily
Crude Oil futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
DJX -$107.17 Dow Jones Industrial Average
We were triggered on the first entry when the Dow spiked past 10900 on Tuesday but failed to fill at the next 10950 trigger point. Following the plan we added to the position with a touch of 10800 at 1:30 Tuesday afternoon. Other than the Dow spike not making it to 10950 the play went perfectly.
I like the way funds sold the rallies this week ahead of a potentially dangerous week ahead. It suggests to me that we are on the right track and this will be a profitable play.
If we did get a bounce back to 10800 I would consider adding to our position. I seriously doubt it will happen but I would take the entry personally if it happened.
This is probably too early to start talking about an exit point but I would gladly exit at Dow 10300. I believe we will find support in the 10200-10250 range and bottom feeders will probably start anticipating that support should 10300 break.
I am not going to set a stop yet because we could see an opening spike for the New Year before real weakness develops. I doubt it will happen but I don't want to be taken out if it does. Options are cheap so we don't have much at risk.
Original play description.
The Dow has struggled to touch 11000 for the last month and has failed to pass even the 10984 we saw back in March. It has found resistance to be strong and the clock is running out on 2005.
The analysts seem split on which will come first, 9,000 or 12,000. We really don't care because this play is strictly a timing play based on the historical January weakness of late.
We are going to use the DJX because options are cheap and there are plenty of strikes.
This is going to be a short-term play, probably less than 60 days. It will be target driven for both entry and exit. There will be no insurance but we will establish stops once in the position.
We are going to add to the position on any Dow gains through Jan-6th. Add one contract, two, ten or a dozen at each trigger point. It is up to you. Since we cannot know what the Dow will do we want to average cost ourselves into a put position at Dow 11000. If it only reaches 10950 we will only have 2/3 of our target position.
Breakout target: $109.00 (Dow
Breakout target: $109.50 (Dow 10950)
Breakout target: $110.00 (Dow 11000)
If the Dow hits 10900 but does not reach 10950 then add to your position on any breakdown to 10800. ** Added @ $1.90 ** 12/27
Average cost now $1.775
FCX - $53.79 - Freeport McMoran ** No Stop **
FCX encountered some resistance trying to move back over $55 and it appears some profit taking appeared on Friday. We are still naked on the insurance put unless FCX trades down to $53. I have not heard anyone suggesting gold will fall and the current outlook is $600 before $400. I hope they are right.
I am going to suggest the Feb-$50 Put as insurance against another drop in gold but only if FCX trades at $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 @ $53.
Entry $52.00 (12/21)
DTX - $419.54 - Dow Jones Trans Index ** Stop 430 **
This was a nearly perfect entry with an opening spike on Tuesday to over $430. Weakness followed almost immediately and the rebound on Thursday was sold even harder. The target for this play would be something in the $360 range with a speed bump around $405.
Original play description:
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 add EXPD as a put candidate 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!
Feb-$420 Put DTX-NB @ $7.80
Entry $426 (12/27)
EXPD - $67.47 - Expeditors International ** Stop Loss $71 **
EXPD performed almost perfectly for this play. EXPD spiked on the Tuesday morning open to allow a cheap entry and then rolled over almost immediately. The Thursday bounce was sold hard and it closed at the low of the week on Friday. Once we break the support at $67 it should be free fall for quite a few points.
Target $60 as a profit exit.
Original Play Description:
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.
May $65 Put URP-QM @ $2.70
No insurance due to cheap options
Entry $69.54 (12/27)
CSC - $50.61 - Computer Sciences Corp ** No Stop **
That was not funny! After a perfectly calm Friday close last week CSC spiked a buck at the open on Tuesday to increase our costs in the leaps by about 50 cents each. The good news is that it did not give back that spike and held very flat all week. This is not how a stock that is going to crater in January would act. I believe there is still acquisition interest. The spike was in response to the offer for ACS by a private buyout firm. CSC is seen to be a better company in the same space and that offer for ACS suggested that CSC was probably worth more than its current price. CSC also announced it won another $575 million in Federal contracts.
Original Play Description:
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.
2007 $50 LEAP Call OSC-AJ @ $7.00
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)
BTU - $82.39 - Peabody Energy ** Stopped $80.00 **
BTU took a sudden dip on Tuesday when the energy futures crashed and took us out of the position at the $80 stop. It rebounded to near $84 showing volatility that has plagued us for the last two months with most of the energy positions. I still like it but I am expecting some profit taking before our next round of energy plays.
Peabody Energy Corporation (Peabody) is a private-sector coal company in the world. During the year ended December 31, 2004, the Company sold 227.2 million tons of coal. It sells coal to over 300 electricity generating and industrial plants in 16 countries. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns four mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal. In addition to the mining operations, the Company markets, brokers and trades coal.
March $85 Call BTU-CQ @ $5.80, exit $4.40, -1.40 (12/27)
Insurance Put: None, tight stop, puts too expensive
Insurance Call Option: Selling the Feb $90 call against the March $85 call would net you $2.40 in premium and a move to $90 by BTU would send the March $85 call to near $10. Closing both would result in a profit. However, in a decline to $80 the premium drop in the Feb call would offset the drop in the March call taking some of the risk out of the play. I prefer a tight stop instead.
Entry $81.88 (12/19)
PBR - $71.18 - Petroleo Brasilero ** Stopped $68.50 **
Volatility in the energy sector claimed another victim here with a dip to $68.06 on Tuesday and stopping us out by -44 cents. PVR went on to rebound to a new two week high without us and come within 50 cents of our exit target at $72.
Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a wholly owned government enterprise responsible for all hydrocarbon activities in Brazil. The Company also has oil and gas operations in international locations, with the significant international operations being in Latin American countries. Petrobras is engaged in a range of oil and gas activities, which include segments like exploration and production; refining, transportation and marketing; distribution; natural gas and power; international, and corporate. During the year ended December 31, 2004, the Company had estimated proved developed and undeveloped crude oil and natural gas reserves of approximately 11.82 billion barrels of oil equivalent in Brazil and other countries.
April $75 Call PBR-DO @ $3.50, exit $2.05, -1.45 (12/27)
Insurance Put: None
Insurance Call: None
Entry $70.00 (12/15)
TIE $63.31 - Titanium Metals ** Stopped $62.50 **
TIE tumbled on Friday in what may be the leading edge of some further profit taking. We were stopped out by 29 cents with the dip to $62.21. We had a really nice bullish wedge building until this week and Friday's dip broke the pattern. Keep your eyes on this one. If we get a nice Q1 drop I would buy it again. They are the leader in their space and it is a tight space. Unfortunately there is $40 of profit built up since October. Once that consolidates we will try again.
TIMET is the world's largest supplier of high quality titanium metal products. With its unique combination of strength, light weight, corrosion resistance and other metallurgical properties, titanium is used in hundreds of diverse aerospace, industrial and emerging applications where no other metal is as reliable or economical, especially on a lifecycle costing basis.
As a fully-integrated titanium manufacturer and distributor, TIMET's activities span every phase of titanium research, manufacturing and sales. We convert rutile ore into sponge; melt and refine ingot and slab; manufacture mill products; and distribute our products globally. We have the financial strength, capacity and technical solutions to meet the established demands for titanium and, as new uses for titanium accelerate, to lead the industry into the future.
Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 17% of the Company's sales revenue, during the year ended December 31, 2004, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.
March $75 Call TIE-CO @ $5.80, exit $4.10, -1.70, 12/30
Optional Insurance: Canceled no entry
I prefer an early stop instead at $62.50.
Entry $64.95 (12/19)
VLO - $51.57 Valero ** No Stop **
VLO suffered from the same volatility as the rest and managed to trigger our March $45 insurance put when it traded at $51 on Tuesday. The new rules for lower sulfur gasoline take effect on Monday and Valero has already made the switch and upgraded its refineries while several non-Valero refineries have yet to make the change. This should put VLO in the drivers seat for margins over the next several quarters.
VLO should be a strong performer in 2006 with refining margins better than anyone else in the game. VLO has already made its low sulfur conversion in preparation for the new 2006 rules. According to VLO the new rules will remove 500,000 bpd of diesel from the market at a time when diesel usage is increasing. The effective date for Diesel is June-2006. This will make the price for sweet crude rise while VLO is profiting from processing sour crude. We could easily see the price return to the $100 range if oil demand continues to rise.
Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.
2007 $60 LEAP Call VHB-AL @ $6.60
Insurance Put: March $45 Put VLO-OI @ $1.20
Entry $52.30 (12/16)
ESLR $10.57 - Evergreen Solar ** Stop Loss $7.50 **
ESLR finally found a bottom and consolidated in the $10 range before buyers appeared on Wednesday. Unfortunately on Friday those same sellers returned via the sell program that sank the markets. It appears to be holding over $10 as we await the approval in California.
Evergreen Solar is a leader in the struggling solar space with installations all over the world. The key to any solar technology is volume and the California initiative officially announced on Tuesday would install one million solar assisted homes could be the push that makes solar finally affordable.
The California P.U.C. approval is the only roadblock and it is expected to be approved sometime in January after a 30-day comment period. ESLR is a competitor with improving technology and a real business model. They are yet to be profitable but are closing in on that goal. A true volume spurt as they would get from the million home project should assure that profitability through scale. Solar is the way of the future and the million roof project could be the key. The California initiative would also require home builders in CA to offer a solar component to any buyer by 2010. That would cover 150,000 homes a year.
California would subsidize up to $3.2 billion in solar roofing at the rate of $2.80 per watt over the next ten years starting in 2006.
Description of the plan:
There is no guarantee this will be approved but the odds are very good. I believe in solar enough that I am willing to take the risk on ESLR even without the California initiative. Options are cheap and there is a strong upside if this catches on. Unfortunately there are no leaps. We will buy the June calls and move up to a farther date later if the play progresses successfully.
The Dept of Energy also has a million roof program in progress. http://www.millionsolarroofs.org/
Other companies in the sector are GE, Shell Solar, BP Solar, Kyocera Solar, PowerLight and SunPower (SPWR).
Evergreen Solar, Inc. develops, manufactures and markets solar power products enabled by its String Ribbon technology that provides reliable and environmentally clean electric power throughout the world. Its products are targeted at on grid and off-grid applications. The Company is developing technology at the wafer, cell and module stages of manufacturing, and it holds patents and other intellectual property in all three areas. In the String Ribbon technique, strings are pulled vertically through a shallow pool of molten silicon and the silicon solidifies between the strings to form a continuous ribbon of crystalline silicon. The ribbon is then cut and prepared for cell fabrication.
Buy June $12.50 Call QLU-FV @ $2.35
Entry $11.71 (12/12)
OSTK $28.15 - Overstock.com ** Stop Loss $36 **
** Target $20 for a profit exit **
The Overstock chart this week is beautiful! The profit warning and analyst downgrades have put the skids under OSTK and it lost more than $5 for the week. One analyst said it is doubtful that OSTK will ever reach profitability and gave it an avoid rating. Another cautioned that management was not focused on reality and that reality was that profits mattered more than stock price. His rating was a sell.
$27.55 is approximately a two-year low and possible support but a break there on a weakened outlook by the analyst community could see $20 as the next stop. That is where we are going to set our next profit target.
We will tighten the stop ahead of earnings but they are not until late January.
Probably the worst managed retail site on the Internet. The President, Patrick Byrne, blamed the poor performance of his stock on an evil "Sith Lord." (A Star Wars Character) Patrick continually ranks in the top five worst performing executives of a public company as rated by the Motley Fool. His latest claim to poor stock performance is the possible existence of "millions of counterfeit shares of OSTK trading on the Nasdaq." I am not kidding. He blames the SEC with being in collusion with the Nasdaq for refusing to disclose the number of counterfeit shares in the system. He warned "shareholders that their only prophylactic against hedge fund counterfeiting was to obtain the actual certificates from your broker and store them in a safe place." This would of course prohibit your shares from being traded. This was in response to a "Get Shorty" article in the WSJ.
Overstock has filed suit against several research firms claiming a conspiracy to drive its stock price down. Patrick claims research firm Gradient Analytics and Rocker Partners were at the center of a vast conspiracy aligned against Overstock. He warned that the criticism of Overstock.com will not go unpunished.
Patrick was forced to give up his role as Chairman in October with his father John Byrne taking back control. Patrick remains the president but that has not diminished his wild accusations.
The company has a good business model but has failed to execute on so many levels that it should be criminal. They have the worst customer service of any E-Commerce site I have every visited. I have made several purchases in the past from OSTK and all but one were botched terribly. The products come in an unlabeled box with no return address label and no invoice. You can't return them without some serious effort. Consumers will not put up with this when other companies like Amazon.com, NewEgg.com and Ecost.com are models for the industry.
Sales at OSTK have slowed and operating expenses are growing faster than revenue and marketing costs nearly doubled in Q3. Cost of acquisition for new customers rose +30% over the prior quarter. This is a signal that competition is winning the battle and prior customers are not returning. OSTK has a huge debt load and slowing sales will not help. Morningstar gives them a D+ for financial health and an F for profitability. Analysts are dropping estimates for the stock into the high $20 range and well below current prices.
In August, Patrick Byrne held a conference call in which he basically said that everyone from hedge funds to journalists to regulators had all been scheming to destroy his company. He said the plan was being orchestrated by someone he identified only as the "Sith Lord." He really said that. Rob Plaza at Zachs Investment Research said when a CEO is putting the focus on things he can't control like short interest there could be a bigger problem he does not want you to see. He said an even bigger problem is when management blames regulators for stock manipulation you have a real problem.
The last really dumb statement, or was it, came from Patrick on Nov-10th. He said "I don't give stock advice but the average investor should probably steer clear of Overstock." That advice I will follow.
Overstock.com, Inc. is an online closeout retailer, offering discount, brand-name merchandise for sale primarily over the Internet. The Company's merchandise offerings include bed-and-bath goods, home decor, furniture, kitchenware, watches, jewelry, computers and electronics, sporting goods and apparel and designer accessories. It also sells books, magazines, compact discs (CDs), digital versatile discs (DVDs), videocassettes and video games (BMV). The Company also offers limited travel services. Overstock.com offers approximately 50,000 non-BMV products and approximately 500,000 BMV products in eight departments on its main Website, www.overstock.com. Overstock.com has a direct business in which it buys and takes possession of excess inventory for resale. It also has another worldstock Website, www.worldstock.com, through which artisans in the United States and around the world can sell their products.
June $35 Put QKT-RG @ $5.00
Entry $38.51 (12/12)
OSTK Chart - Weekly
KKD $ 5.71 - Krispy Kreme Doughnuts ** Stop Loss $6.25 **
KKD found some buyers after several more KKD stores were closed and another round of franchisees called it quits. KKD recovered the rights to develop stores in Massachusetts, Connecticut and Rhode Island after KKDC and New England Dough LLC agreed on the terms of a breakup of their joint venture. KKD won the round but there is a lot of rounds left to fight.
The NYSE has given them until mid January to file their reports or be booted from the exchange. However, the creditor deadline for financials of Dec-15th was suddenly extended to April 30th. Despite a resignation from the board and an admission on Tuesday that losses were going to be higher than previously expected the stock refuses to fall. Every dip is quickly bought but we are seeing increasing selling pressure as well. On Friday the stock traded in only a one-cent range for nearly all the day. Very strange behavior. This stock could either break or spike very soon and for reasons not readily apparent.
I lowered the stop loss to $6.25 but with a $1.25 option it is not going to matter much other than ending the play. The difference in option price will be negligible.
Trouble is mounting for KKD. They have not filed financials since November 2004 and they are probably going to miss the Dec-15th deadline imposed by creditors. They warned this would happen about 10 days ago. They have to restate financials for several years due to errors in accounting for expenses, loans and franchisee info.
The CEO Scott Livengood and other top executives were ousted earlier this year on allegations of financial misdealing and securities fraud. Suits are mounting from numerous groups, debtors, employees, franchisees and vendors over all types of non payment, fraud and failure to follow through with agreements.
Stephen Cooper, a turnaround specialist, took over the reins when the officers were evicted. So far the news has only gotten worse. Stores are closing rapidly including prior showplace stores and once leading producers. Cooper has worked on prior disasters including Polaroid, TWA, Enron and Boston Chicken. That list should give you a clue what is ahead for KKD.
Cooper said the chain cannot operate 4,000 square foot stores profitably and will try to reinvent itself as a smaller, leaner company. They are closing unproductive stores in a reasonable and rational fashion according to Cooper. He wants to focus on increasing sales of coffee and other beverages.
I have written about the similarity between KKD and Boston Chicken for several years and warned numerous times at much higher levels that KKD would end badly just like Boston Chicken. Now the Boston Chicken CEO is running KKD. Amazing prediction.
Yes, Boston Chicken was turned into a profitable entity once again. However it was done at the expense of shareholders. The common stock was cancelled the ownership of the stores was turned over to the debt holders. Boston Chicken wins, investors lose.
I believe that the NYSE will eventually tire of the endless deadlines for financials and will delist them. If that happens it will be the kiss of death for funds still holding the stock and hoping for a miracle return to the $105 levels of yesteryear.
Options are cheap and the KKD story is just waiting for Cooper to write the last chapter. KKD wins, shareholders lose.
Krispy Kreme Doughnuts, Inc. is a specialty retailer of doughnuts. It owns and franchises Krispy Kreme doughnut stores where the Company makes and sells over 20 varieties of doughnuts, including its Hot Original Glazed variety. Each of its traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Its sales channels consist of on-premises sales and off-premises sales. The Company has two complementary business units: its company and franchised stores, which Krispy Kreme refers to, collectively, as Store Operations and Krispy Kreme Manufacturing and Distribution (KKM&D). At February 1, 2004, there were 357 Krispy Kreme factory stores in operation, of which 338 are located in the United States. During the fiscal year ended February 1, 2004 (fiscal 2003), it acquired the remaining 33% interest in Golden Gate Doughnuts, LLC that it did not already own.
2007 $5.00 LEAP Put OKK-MA @ $1.35
Entry $6.01 (12/12)
HW - $35.43 - Headwaters ** No Stop **
The gains from last week gave way to weakness in the energy sector. HW is moving slower than molasses in January but still respecting the support at $35.
Dec 27th insurance plan:
We currently have no insurance on this play. Looking at the option chain I see that the May $40 call ($2.05) is approximately the same price as the May $35 put ($2.15). I don't believe HW will exceed $40 by May if we get any downdraft in January. By selling the May $40 call against our $40 LEAP and use the proceeds to buy the put we have free insurance at $35 until May. If HW does catch fire we can stop out on the May $40 call for a minor loss that will be offset by our gain in the $40 LEAP. That is my recommendation for Tuesday.
Headwaters (HW) has a compound annual growth rate of more than +120% mainly because it deals with the ash left over from burned coal. Coal generates a lot of ash and it is a problem the electric generating plants have to deal with when these cold fronts really suck up their coal supplies. Headwaters has three separate businesses from that ash. They have a business that buys and sells it for various purposes. Second they have produced a bonding agent to that makes it easy to transport without blowing out of the rail cars. They sell this to others for profit. Third they have a patented process for converting this ash into a synthetic fuel, which is licensed to plants that actually do the conversion.
They also make building materials and a cement substitute that uses this ash to make concrete more durable. Considering the thousands of tons of ash generated each week this appears to be a gold mine for Headwaters. When electric plants fight the tons of daily ash Headwaters is there to help and converts that ash back to dollars. This sounds too good to be true and I think that was the real problem with the decline from $46 in August to the $30 level in October. The ramp from IPO in April from $30 to $46 and decline back to $30 is complete. Those that got in on the good IPO story took their profits as energy prices declined. Now may be the time to jump back on the coal train with Headwaters rather than Peabody.
Headwaters Incorporated is a diversified company providing products, technologies and services to the energy, construction and home improvement industries. Headwaters conduct its business primarily through four business units, including Headwaters Resources, Headwaters Technology Innovation Group (HTI), Headwaters Construction Materials and Headwaters Technology Innovation Group. In September 2004, the Company acquired Tapco Holdings Inc., a manufacturer of building products and professional tools used in residential remodeling and construction. In June 2004, the Company acquired Eldorado Stone, LLC, a manufacturer of architectural manufactured stone based in San Marcos, California. Eldorado Stone is being purchased from Graham Partners, a middle-market private equity firm. Eldorado Stone will be integrated into Headwaters' coal-based construction materials operations.
2007 $40 LEAP Call ZPP-AH @ $4.30
Dec-27th Insurance Combo:
Entry $35.50 (11/22)
CHK - $31.70 Chesapeake Energy ** No Stop **
CHK rallied out of the Monday decline and is back to resistance at $32. A reader alerted me to the insider buying on CHK, (thanks Joe!) and I must say it is amazing. The Chairman and the President made a total of 14 market buys between Dec-14th and Dec-27th totaling over $73 million. That is an obscene amount f confidence and suggests to me that something is going on at CHK and their outlook is extremely positive. With a market cap of $11 billion they could be a takeover candidate made much more possible by being the third largest holder of gas reserved in the U.S. I don't know about you but I am going to add some more CHK to my portfolio next week.
Dec-27th Call Insurance:
The April $35 call is $2.15 today and would offset 50% of the cost of our LEAP. We could then afford to watch the fireworks from the sidelines comfortable in the knowledge that we have downside protection in the form of additional income and from the distant put.
Sell the April $35 Call CHK-DG currently $2.15
That protects us until April against any unforeseen changes.
Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.
2007 $35 LEAP VEC-AG @ $4.00
Entry $29 (11/04)
UPL - $55.80 Ultra Petroleum ** Stopped $55.75 **
UPL disappointed us last week with a breakdown of the uptrend in place for so long. UPL rebounded from the Monday selling but then cratered again on Thursday. Given the profit since the May low at $24 it is only reasonable that some funds are going to want to bail next week. This was only a preliminary sales event hopefully to be followed by a major dumping. I would love to get back in around $45.
Ultra Petroleum Corp. is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. During the year ended December 31, 2004, it owns interests in approximately 166,974 gross (92,997 net) acres in Wyoming covering approximately 260 square miles. The Company owns working interests in approximately 241 gross productive wells in this area and is operator of 41.5% of the 241 gross wells. Through Pendaries Petroleum Ltd., it is active in oil and gas exploration and development in Bohai Bay, China. The Company also owns interests in 15,518 gross (14,652 net) acres in Pennsylvania, as well as interest in approximately 720 gross (320 net) acres and interests in three productive wells in Texas.
MARCH $60 Call UPL-CL @ $5.20
Insurance Put: Dec $45 Put UPL-XI (cancelled not triggered)
Entry $55 (11/02)
UNH - $62.14 Unitedhealth Group ** Stopped $62.50 **
UNH finally cracked the support at $63 as sellers appeared on Friday. Fortunately we made a nice profit of $3.10 even though we were stopped out. This is probably a preview of what is to come next week.
UnitedHealth is the leader in the managed heathcare sector. Earnings are soaring, +31% in Q3 to $2.43 billion and the outlook is only up. With health care costs rising more and more companies will turn to UNH to lessen their benefit expenses. We are also expecting a seasonal bounce now that October is behind us. There were two strong sell cycles in October as funds took profits from a long period of gains. Historically health care companies have done very well over the next three months as funds look for safe havens for year-end cash. UNH gained +37% from the October lows for the same period in 2004. Buyers appear on every dip to the 100-day average currently at $55.
UnitedHealth Group Incorporated is a diversified health and well-being company, serving approximately 55 million Americans. The Company provides individuals with access to healthcare services and resources through more than 460,000 physicians and other care providers, and 4,200 hospitals across the United States. It manages approximately $60 billion in aggregate annual healthcare spending on behalf of more than 250,000 employer-customers and the consumers it serves. The Company conducts its business primarily through four operating divisions: Uniprise, Health Care Services, Specialized Care Services and Ingenix. On July 29, 2004, the Health Care Services business segment acquired Oxford Health Plans, Inc. (Oxford). Oxford provides healthcare and benefit services for individuals and employers, principally in New York City, northern New Jersey and southern Connecticut.
2007 $60 LEAP Call VUH-AL @ $6.40, exit $9.50, +3.10, 12/30
put: CANCELLED NO ENTRY
Entry $56.75 (10/31)
Leaps Trader Watch List
The watch list slate is clean and the market calendar has expired. Next week we will see if our put portfolio will make the grade. The Dow puts were triggered from the watch list last week and I am electing to not add anything this week.
We have longs and shorts in the portfolio and it is time to watch what the market gives us before putting any more money at risk.
Sit tight and lets play the hand we have been dealt.
Happy New Year
Current Watch List
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