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Weekly Newsletter, Saturday, 02/04/2006

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Table of Contents

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

Leaps Trader Commentary

About Dang Time!

Thank you, thank you, thank you. Whoever dumped oil contracts on Friday I thank you and I hope you have plenty more to unload. The price of oil cratered -$5 between Wednesday's high of $69 and Friday's low of 63.90. I actually got some of that drop with a QM short entered on Wednesday. When the spike came within 20 cents of the January 20th high I took a shot and it worked out well. I don't recommend everyone dabble in the energy future because fast moves do occur and not always in your favor.

When oil hit $64 on Friday I nibbled on some new positions but only cautiously. $64 should be decent support but as we have seen in the past these corrections can take on a life of their own and develop momentum well past initial support. However, I went back and reviewed the charts for the last year and the initial dips were normally limited to something in the $5 range. Once the dips were bought we saw a second or third wave of selling about 50% of the time but only the Sept/Oct decline developed any momentum to the downside.

The $64 level should be a buy point for a trading buy. If no further drop appears we can add to positions as time passes. Personally I would love to see another wave down to the $58-$60 level to really clear the stops and provide a setup for a summer trade. However, if wishes always came true I would already be a Powerball winner.

Energy earnings have been very strong once again and they will be instrumental in keeping the S&P earnings growth in double digits for one more quarter. Unfortunately these earnings continue to attract supporters of windfall profits taxes. I doubt they will succeed in passing anything material but there is always a chance. Ironically the passage of a new tax could reduce funds available for exploration and indirectly cause oil prices to rise even further. Long term investors should continue to benefit either way but it does produce one more thing to worry about.

Current play Valero posted record earnings of $1.35 billion and CEO Bill Greehey said 2006 will be the best year ever for the refining industry. Fortunately for those not already in the play the post earnings depression and drop in oil prices produced a new entry point at support at $58.

The natural gas sector rallied on the arrival of cold weather but imploded when gas prices collapsed again on Wednesday afternoon. Accu Weather is predicting below normal cold for the Midwest through the North East for the next two weeks. It should not matter to gas prices since current supplies are running more than 500 bcf over the five-year average. January was the warmest on record in many areas and it would take a monster cold front with prolonged sub zero temperatures to impact gas supplies substantially. The winter run is over and warmer weather is just ahead even though the ground hog saw his shadow on Tuesday. This may be the last real cold front of the season and prices could retreat under $8 once it passes. The retreat should be short lived once the summer cooling season arrives but that is still several months away.

I have mentioned numerous times that I felt the oil prices over $60 were doomed to fail because fundamentals simply did not match the price. There was a $10 risk premium attached to every barrel and the closer we got to the spring demand slump the harder it was going to be to maintain it. It was tough repeating that mantra every week and not jumping on the energy train but I knew that prices would eventually break as long as shots were not fired in Iran.

The problem now is deciding what to buy and more importantly WHEN to buy. $64 is the first threshold with $58 the likely bottom. OPEC should support prices in the $55-$58 range. Only about half of the energy stocks in my screen saw a bounce on Friday suggesting that there is still some sector rotation ahead. That is fine with me. Knock the heck out of them and we will buy the dip. However, I am not going to get caught watching and waiting for a dip that never comes. We are going to aggressively add to the watch list with some triggers that bracket the current price. We may not get the bottom but we will not be standing on the sidelines either. It is time to start spending some of that cash we have been hoarding.

Overstock.com announced last week that they were going to release earnings next week. This produced more than a $1 bounce despite the fact they have already warned. There are simply too many people buried in this stock and believing the spin. The CEO Patrick Byrne will find someway to spin his bad results and produce a bounce or at least I fear that will happen. We entered that short at $38 and OSTK is $23.86 today. Pigs get fat and hogs get slaughtered. I am recommending an exit on Monday and let's take that +150% gain and buy energy. Patrick can continue his fight with the Sith Lord without us.

Looks like we made the right decision last week to exit KKD. The new 90-day deadline for filing financials produced a lot of buying and a new five-month high.

Headwaters made us proud this week and removed a lot of the false anxiety I had been feeling as the stock declined. Nearly a $4 gain for the week put us right back near a new four-month high.


Natural Gas Chart - Daily

Crude Oil futures Chart - 60 min

 


Changes in Portfolio

New Plays
See the Watch List

Dropped Plays
LEND $52.32 Accredited Home Lenders  ** Stopped $52 **
OSTK $23.88 Overstock.com  ** Closed **

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None today


Play Updates

Existing Plays

MTG - $64.32 - M.G.I.C. Investment Corp ** Stop $68.00 **

Post earnings depression has hit MTG and we saw a new three-month low on Friday at $63.94. Nothing has changed with MTG and once under the 100 and 200-day averages at $63.80 we could see a significant drop. The key words here are "once under." This could be material support and provide a bounce. Maintain the stop and let's see if we get lucky.


Original play description:

MGIC provides mortgage insurance to lenders for borrowers with high loan to value ratios. The borrower pays the mortgage protection insurance premiums with their monthly payment. With the very high loan to value mortgages of the last couple years MGIC has a rising risk of default. Earnings were on Thursday and revenue fell -8% along with a net decrease in premiums received of -8.2%. New insurance written also fell. The percentage of delinquent loans at year-end rose to 4.52% from 3.99%.

I know several homeowners, three in the same block, that are only days/weeks away from foreclosure and everyone had taken advantage of the accelerating home values to refi, some more than once. Home values have fallen nearly -20% in this Colorado area despite what you read in the papers. The foreclosure boom is coming and MGIC will suffer.


Company Info:

MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), provides private mortgage insurance in the United States to the home mortgage lending industry. Its principal products are primary mortgage insurance and pool mortgage insurance. Primary mortgage insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which a portfolio of loans is individually insured in a single, bulk transaction. It is licensed in all 50 states of the United States, the District of Columbia and Puerto Rico. In addition to mortgage insurance on first liens, the Company provides lenders with various underwriting and other services and products related to home mortgage lending through other subsidiaries.

Buy 2008 $65 LEAP Put YHM-MM currently $6.50
(No 2007 $65 put exists)

Insurance Call: None

Entry $67.22 (01/15)

LEND - $52.32 - Accredited Home Lenders ** Stopped $52 **

That was not fun. LEND spiked nearly +$5 on Monday and took us out of the play at the $52 stop. Unfortunately I believe LEND is vulnerable at that $52 level and would like to keep playing it but we have a good position in MTG using the same logic. Let this one go and keep MTG.


Original play description:

LEND is a sub-prime mortgage lender. Another way to put that would be to say they lend money to those with weak credit. If the housing market is really slowing and housing values declining then sub-prime lenders could be in trouble.

We have already seen mortgage application rates sink to levels not seen since 2004. The Mortgage Application Index decreased to 545.9 last week, -17% below the level from just four weeks ago and more than 10% below the same period in 2004. Refinancing has fallen to levels -20% below 2004 levels.

The days of the mortgage-refi to get out of debt are gone. Tighter loan restrictions and higher default rates are commonplace across the country. I have a son in the mortgage business and he claims applications have fallen through the floor and restrictions are rising. Borrowers who refied a year ago can't get an approval today despite substantial equity left in their homes.

Option loans, where the lender gives the borrower a smaller payment for the first 2-3 years have evaporated. Even ARM loans are falling, down -4% in the latest numbers.

Ironically Fannie Mae and Freddie Mac raised the limits for conforming loans by +16% as of Jan-1st. This means the conforming loan limit for a single-family property rose from $359,650 in 2005 to $417,000 as of Jan-1st. This should increase the level of loans except that property values are slowing and credit criteria is rising.

The Mortgage Bankers Association expects loan originations to fall by -18.6% in 2006.

In October National City said loan profits fell -91% over the same period a year earlier. H&R Block blamed a $86 million loss on a drop in income from its mortgage unit.

If this trend continues sub-prime lenders may have to set aside more money as reserves to cover defaults at a time when loan initiation profits are also shrinking. The smaller pie available to all lenders is making competition for loans even more cutthroat. Many lenders MUST do loans to survive and they will be forced to take lesser credits, greater risks and receive less income for those risks.

Lenders are already slashing staff in an effort to maintain profitability.

LEND published an earnings outlook on Dec-19th for Q4. They said they expected to earn $7.70 to $8 per share compared to analysts estimates of $7.74. HOWEVER, Accredited Chairman and Chief Executive James Konrath said that the projected earnings target depends largely on pricing in the nonprime mortgage market and assumes growth in loan originations but lower costs of origination. That is a very big IF. I could make a million dollars next month if I could pick the exact top in January and then short 1000 SPX futures contracts. That is not going to happen. LEND may reach its targets but there is still trouble ahead.

I am only using a June Put option on this play despite LEAPS being available. All lenders will see a spike in loans in April/May as the summer selling season arrives. I would like to be out by then.


Company Info:

Accredited Home Lenders Holding Co. (Accredited) engages in the business of originating, financing, securitizing, selling and servicing non-prime mortgage loans secured by residential real estate in the United States. Accredited focuses on borrowers who may not meet conforming underwriting guidelines because of higher loan-to-value ratios, the nature or absence of income documentation, limited credit histories, high levels of consumer debt, or past credit difficulties. The Company originates loans primarily based upon the borrower's willingness and ability to repay the loan and the adequacy of the collateral. Accredited originates its loans primarily through independent mortgage brokers across the United States and, to a lesser extent, through its direct sales force in its retail offices.

Buy June $45 Put QFW-RI currently $4.70, exit $3.00, 01/30

No Insurance:

Entry $47.45 (01/08)

FCX - $61.71 - Freeport McMoran ** Stop Loss $58 **

FCX hit a new high on Wednesday before pulling back nearly -$4. I considered closing it but a weak market, rising inflation and instability over Iran's future should continue to put upward pressure on gold prices. Should oil fall off a cliff there would be fewer petrodollars going into gold but I believe it would be short lived. I am going to keep the faith here until gold stumbles. I did raise the stop loss.

Company Info:

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: Cancelled - not triggered 1/29
(Feb $50 FCX-MK if FCX trades @ $53)

Entry $52.00 (12/21)

VLO - $58.70 Valero ** No Stop **

VLO reported record earnings of $1.35 billion for the quarter and predicted 2006 would be the best year ever. The CEO said Valero was open to another acquisition but the offerings were slim. A quick search suggested SUN, HOC and GI could be in their sights. All were added to the watch list today.

VLO spiked to $63.70 on the earnings news and a new all time high. The drop in oil prices and the post earnings depression sent it plunging back to $58. The insurance scenario worked out very well. We are now covered by a March put with a very good chance of a nearly free trade if our profit target on the put is hit.

The insurance I recommended last week end worked perfectly. The gap open on Monday allowed us to sell the March $65 call for $2.70 assuming you waited for the initial gap open to slow or as much as $3.30 is you waited for the spike to cool. The same gap open pushed the protective put lower to a range of $1.45 to $1.90. Using an average price of $2.50 on the call and $1.60 on the put we ended up with a net gain of +0.90 cents and now have insurance of a March $57.50 put. That put is now worth $2.75 and the call $1.40. I am recommending we buy back the call on Monday at $1.40 and after our net gain of +90 cents on the initiation of the insurance position we now have a cost in the put of 50 cents. Should VLO continue lower we can sell the put for a profit to further reduce our cost in the LEAP. Target VLO at $54 to exit the put. Otherwise it will remain insurance until it expires.


Company Info:

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
Put entered on 12/27 when VLO traded at $51

Monday Feb-6th:

Close the March $65 Call VLO-CM currently $1.40
Set a profit target on the March $57 put at $54

Monday Jan-30th:

Sell March $65 Call VLO-CM currently $1.75 bid
Buy March $57.50 Put VLO-OY currently $2.40 ask
Set a stop loss on the call at $64. Profit stop at $54
Set a profit stop on the put at $52.

Entry $52.30 (12/16)

OSTK $23.88 - Overstock.com ** Closed **

Overstock finally announced a date for their earnings of Feb-7th. While I think it is an opportunity for a real implosion I am leery of the sudden price spikes whenever OSTK releases a press release. They are constantly trying to spin the news away from their problems in towards the naked shorting they claim is hurting their stock price.

According to their last filing with the SEC they lost -$18.41 million for the 12 months ended on Sept 30th. They have already warned that they had a bad Q4 and software problems have prevented them from uploading new merchandise to the website for the last five weeks. They are burning cash at a horrendous rate of -$28.15 million over the last period reported compared to only -$9.53 million in the same period a year earlier.

While I believe Overstock will eventually implode or be taken over by somebody like Amazon or Yahoo I do not want to risk our gains over an earnings report. The stock is so depressed even a whiff of fresh air could send it soaring.

Hold over earnings if you must but I am closing the play today and pocketing the gains. We entered the short at $38 and rode it to $23. No complaints here.


Play Description:

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.

Company Info:

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.

No LEAPS

June $35 Put QKT-RG @ $5.00, exit $12.50, +7.50, +150% 2/05

No insurance.

Entry $38.51 (12/12)

HW - $37.50 - Headwaters ** No Stop **

HW rebounded from the depths of obscurity at $31.50 over the last two weeks and closed Friday at $37.50. This remarkable recovery put it right back near the highs set in January at $38.34. While we are at risk for the covered call insurance I am not going to complain if a breakout occurs. The small loss on the call will be more than offset by the LEAP.

********

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.

Company Info:

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:
Sell May $40 Call HW-EH currently $2.05, set stop at $39.95
Buy May $35 Put HW-QG currently $2.15

Entry $35.50 (11/22)

CHK - $33.60 Chesapeake Energy ** No Stop **

CHK rallied to break the $35 level by +50 cents and stop us out of the covered call we added on 12/27. We lost -55 cents on the call but more importantly gave back the $2.15 in premium we had gained with the sale of the call. With gas prices likely to head south in about two weeks we will resell another call around the end of February to offset the cost of the leap while we wait for the summer surge.

There was no insider trading over the last week. Evidently the spike in price from $31 to $35 made them patient buyers. They realize gas prices are going to fall in March and they can afford to be patient.

The CEO said on Wednesday that CHK is more likely a buyer of other companies and assets than a target of a takeover itself. He said there were many potential targets smaller than Chesapeake and the drop in gas prices made them attractive. He said gas prices should remain in the $7.50-$10.50 range the rest of the year. He did not expect any major to make a big play like Conoco did when it purchased Burlington late last year for $35 billion. He also said CHK's $2.2 billion acquisition of Columbia Natural Resources was going better than planned and the opportunity appears to be bigger than originally thought. McClendon said CHK had actively hedged its output when prices were higher and were profiting from the swings in prices. He said the plunge in gas prices was "fantastic" because it made acquisitions cheaper, stemmed demand destruction and gave consumers a break on their utility bills. CHK also announced the private placement of $500 million in 6.5% notes due in 2017. The proceeds would be used to pay off bank debt. What a deal! Gas will be $30 by then and the $500 million plus interest will be chump change.

Insider Trading:

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 18 market buys between Dec-14th and Jan-25th totaling over $82 million. That is an obscene amount of 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.

Company Info:

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

Insurance Put:
April $25 CHK-PE when CHK traded at $28 on 11/07 @ $2.30

Covered Call 12/27:
Sold the April $35 Call CHK-DG currently $2.15
Set a stop loss on the call at $34.95, exit @ $2.70, -55, 1/30


Entry $29 (11/04)

 


Leaps Trader Watch List

Back Up The Truck

Well, maybe fill it with gas and sweep out the truck because we are not quite ready to fill it up. The drop in oil prices produced some appealing opportunities at $64 but I am still expecting a further drop to something in the $60 or very high $50 range. Since I am not psychic I don't want to bet the farm on the possibility of a continued drop and be 100% wrong. To prevent this I am going to load up the watch list with opportunities and put breakout triggers on some and breakdown triggers on all.

I watch about 100 energy stocks on a daily basis and about half of that list failed to show any life at Friday's close when oil rallied from $64 to $65.37 in the last hour. That was a substantial bounce and only a few energy stocks followed it higher.

I believe this means there is still some profit taking ahead and I love bargain shopping.

I am adding several refiners, HOC, GI and SUN due to the Valero comment that they could make another acquisition. One of them could be that acquisition. I was going to add Tesoro but further research showed that they bought refinery assets and retail locations from Valero as late as 2002 so they are probably not a target. The TSO CEO said last week that Tesoro was in acquisition mode itself but that targets were pricey and scarce.

I am raising the targets on the drillers after an upgrade on Friday and a new South American deal sent DO and RIG flying higher after being right on the edge of the hoped for breakdown.

Don't be alarmed about the number of entries on the watch list because we will not hit them all. As time passes I will prune it but I want to get all the major targets lined up in case we do get that sub $60 dip on oil.

ACS did not budge all week and remains over $62. Because of the crack in oil prices I am removing it from the list.
 

Dropped Entries
ACS $63.27 Computer Services

New Watch List Entries

Current Watch List

DO - $82.17 - Diamond Offshore Drilling

Diamond Offshore Drilling Inc. engages principally in the contract drilling of offshore oil and gas wells. As of December 31, 2004, the Company had a fleet of 45 offshore rigs consisting of 30 semisubmersibles, 14 jack-ups and one drillship. Diamond offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and the jack-up market. Its principal markets for its offshore contract drilling services are the Gulf of Mexico, including the United States and offshore Mexico, Europe, principally the United Kingdom and Norway, South America, Africa and Australia/Southeast Asia. From time to time, its fleet operates in various other markets worldwide. Diamond provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.

Breakdown target $75.00
Buy 2007 $80 LEAP VCT-AP

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

RIG - $80.65 - Transocean Inc

Transocean Inc., formerly known as Sonat Offshore Drilling Inc., is an international provider of offshore contract drilling services for oil and gas wells, related equipment and work crews, primarily on a dayrate basis, to drill oil and gas wells. The Company operates with a particular focus on deepwater and harsh environment drilling services. The Company also provides additional services, including management of third-party well service activities. The Company's Transocean drilling segment consists of drillships, semisubmersibles, jackups and other drilling rigs.

Breakdown target $75.00
Buy 2007 $80 LEAP VOI-AP

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

COP - $62.48 - Conoco Phillips

ConocoPhillips is an integrated energy company. The Company's business is organized into six operating segments. The Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. The Midstream segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids. The Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of the Company's equity investment in LUKOIL, an international, integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation and emerging technologies.

Breakdown target $60.00
Buy 2007 $65 LEAP OJP-AM

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

SU - $78.31 - Suncor Energy

Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing, United States of America.

Breakdown target $72.00
Buy 2007 $80 LEAP OYX-AP

Breakout target $80.50
But 2007 $85 LEAP OYX-AQ

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

CCJ - $69.97 - Cameco

This is my best single play in the list. Cameco just announced record earnings and raised their forecast for 2006 and beyond. They projected a +40% rise in revenue and a rise in margin from 23% to 28% for 2006. At the same time they announced a 2:1 split for Feb-23rd on the NYSE. They also raised the dividend to 32 cents from 24 cents payable on April 13th.

They also announced they were buying Zircatec for $108 million. Zircatec is a maker of nuclear fuel bundles for Canadian designed heavy water reactors. They said the acquisition would moderately boost 2006 earnings assuming no material changes in operations.

The combination of events including the purchase of Zircatec caused the stock to plunge from its all time high of $82.15 on Feb-1st to close at $69.97 on Friday Feb-3rd.

This is an extraordinary buying opportunity and I would be all over it except for the lack of any bounce from that $70 level. I am desperately hoping there is more selling to come. Ideally we could just wait for the split to enter the position but with all the talk about nuclear plants we could see a sharp jump at any time. CCJ has been very volatile recently with big intraday moves.

DO NOT LET THIS ONE GET AWAY. Be willing to pay more to get it if you have to! I would double up if we get a dip to support at $60.

Company Info:

Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.

Breakout target $72.50
Buy 2007 $80 LEAP ZBK-AP 1/2 position

Breakdown target $67.00
Buy 2007 $80 LEAP ZBK-AP 1/2 position

Breakdown target $60.00
Buy 2007 $80 LEAP ZBK-AP ADD another full position


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TS - $151.72 - Tenaris

Tenaris S.A. is a global manufacturer of seamless steel pipes for the oil and gas industry and a global supplier of seamless steel pipes for process and power plants and for industrial and automotive applications. It is also a regional supplier of welded steel pipes for oil and gas pipelines in South America. Tenaris focus on providing end-user customers a service that integrates manufacturing, procurement, distribution and on-time delivery of products throughout the world. Incorporated in Luxembourg, the Company has manufacturing facilities in Argentina, Brazil, Canada, Italy, Japan, Mexico, Romania and Venezuela. It also has a proprietary global service and distribution network in over 20 countries. Tenaris' customers include many of the world's major oil and gas companies, as well as a large number of engineering and industrial companies.


Breakdown target $135.00
Buy Sept $150 Call TSW-IJ 1/2 position

This is a wild card shot. If we do get the drop I would love to buy the option but the options are expensive!

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PBR - $88.63 - Petro Brasileiro

Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a mixed-capital enterprise of which a majority of voting capital must be owned by the Brazilian Government. The Company is engaged in a range of oil and gas activities, which include segments such as exploration and production, refining, transportation and marketing, distribution, natural gas and power, international, and corporate. Besides the dominant market position in Brazil, Petrobras has oil and gas activities in international locations, with significant international operations in Latin America, the Gulf of Mexico and West of Africa. 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.

Breakdown target $80.00
Buy 2007 $90 LEAP Call VDW-AR

Breakout target $93.50
Buy 2007 $100 LEAP Call VDW-AT

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HAL - $77.37 - Halliburton

Halliburton is planning on spinning off KBR, its construction and engineering unit. This should produce a significant bounce in HAL stock. (KBR stands foe Kellogg, Brown and Root)

Halliburton Company is an oilfield services company, and a provider of engineering and construction services. The Company provides services, products, maintenance, engineering and construction to energy, industrial and governmental customers. Its six business segments are Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, collectively the Energy Services Group, and Government and Infrastructure, and Energy and Chemicals, collectively known as KBR. In August 2004, the Company sold its surface well testing and sub-sea test tree operations to Power Well Service Holdings, LLC. In January 2005, the Company emerged out of the chapter 11 proceedings and can operate the businesses without Bankruptcy Court supervision.

Breakdown target $72.00
Buy 2007 $80 LEAP Call VHW-AP

Breakout target $79.00
Buy 2007 $85 LEAP Call VHW-AQ

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KMG - $104.39 - Kerr Mcgee

Kerr-McGee Corporation (Kerr-McGee) is an energy and inorganic chemical holding company whose consolidated subsidiaries, joint ventures and other affiliates (together, affiliates) have operations throughout the world. The Company's core businesses include exploration and production, and chemicals. Kerr-McGee's oil and gas exploration and production areas are onshore in the United States, in the Gulf of Mexico, the United Kingdom sector of the North Sea and China. In addition, the Company has exploration programs in Alaska, Brazil, Morocco, Bahamas and Benin. Kerr-McGee affiliates engaged in chemical businesses produce and market inorganic industrial chemicals, lithium-metal-polymer batteries and heavy minerals. On June 25, 2004, the Company completed a merger with Westport Resources Corporation. On March 8, 2005, the Company annonced its decision to proceed with the proposal to pursue alternatives for the separation of the chemical business, including a spinoff or sale.


Breakdown target $96.00
Buy 2007 $110 LEAP Call OGM-AB

Breakout target $107.00
Buy 2007 $115 LEAP Call OGM-AC

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UPL - $66.50 - Ultra Petroleum

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.


Breakdown target $62.00
Buy 2007 $70 LEAP Call OZH-AN

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HOC - $68.90 - Holly Corp

Holly Corporation (Holly) is an independent petroleum refiner that produces and distributes high-value light products, such as gasoline, diesel fuel and jet fuel. As of December 31, 2004, the Company, through its principal subsidiaries, operated and managed three refineries located in Artesia and Lovington, New Mexico (operated as one refinery); Woods Cross, Utah (Woods Cross refinery), and Great Falls, Montana (Montana Refinery). Holly also holds ownership interests in Holly Energy Partners, L.P. (HEP), a limited-liability company that owns and operates pipeline and terminally ailing assets, as well as 70% interest in the Rio Grande Pipeline Company (Rio Grande). Rio Grande owns a 249-mile pipeline that transports liquid petroleum gases (LPGs) from West Texas to the Texas/Mexico border. During the year ended December 31, 2004, gasoline, diesel fuel and jet fuel (excluding volumes purchased for resale) represented 59%, 26% and 5%, respectively, of the refinery's sales volumes.

Breakdown target $64.00
Buy Sept $70 Call HOC-IN

Breakout target $71.00
Buy Sept $75 Call HOC-IO

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GI - $67.03 - Giant Industries

Giant Industries, Inc., through its subsidiary Giant Industries Arizona, Inc. and other subsidiaries, refines and sells petroleum products on the East Coast primarily in Virginia, Maryland, and North Carolina and in the Southwest primarily in New Mexico, Arizona, and Colorado, with a concentration in the Four Corners area where these states meet. Phoenix Fuel Co., Inc., another subsidiary, distributes commercial wholesale petroleum products primarily in Arizona. The Company has three business units: retail group, which operates service stations including convenience stores or kiosks; Phoenix Fuel, a commercial wholesale petroleum products distributor selling diesel fuel, gasoline, jet fuel, kerosene, motor oil, hydraulic oil, gear oil, cutting oil, grease and various chemicals and solvents, and refining group, which operates the Company's Ciniza and Bloomfield refineries in the Four Corners area of New Mexico and the Yorktown refinery in Virginia.

Breakdown target $60.00
Buy Sept $65 Call GI-IM

Breakout target $71.50
Buy Sept $75 Call GI-IO
 


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