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Weekly Newsletter, Saturday, 07/22/2006

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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

Where's the Bull?

The week before the majority of energy earnings is normally expected to be filled with excitement and expectations of strong profits. Instead energy stocks were sold again and again and again. There was no specific reason just more sellers than buyers.

Oil prices fell from their $78.40 high the previous Friday to trade as low as $71.60 before rebounding to close at $74.40 on Friday. That sentence is somewhat misleading since a contract change from August to September occurred on Friday. Much of the decline from the highs was due to the expiring August contract and a reduction of tensions regarding Iran and the Israel/Lebanon conflict.

The Friday contract change and Israel's planed invasion of Lebanon over the weekend should be fertile ground for a future retest of the highs except for the supply issue. Oil inventory levels continue to be robust and summer driving demand is due to decline as summer draws to a close. We did not see that decline last week as demand rose +1.6% year over year with the 4-week average up +1.9% YOY. It will decline with prices comfortably over $3.00 in most areas.

Valero took 65,000 bpd of gasoline production offline for 20 days in St Charles, LA, for repairs. Conoco lost 360,000 bpd of production at its Wood River refinery after a power outage due to a local storm. Neither loss will impact prices or inventories substantially but will provide support for current gasoline prices.

Oil inventories were unchanged for the week but gasoline supplies rose +1.5mb due mostly to timing of imports. Refinery utilization rose to 92.9% fro 90.5% the prior week due to the ship channel refineries getting back to full production. Utilization will dip again next week due to the outages listed above.

The selling in the energy sector has been way overdone. I expected some selling once profit taking began in crude oil when the highs began to fade. It is simple logic that a new historic high just before a drop off in demand should produce some profit taking. I had hoped that the appearance of a hurricane, Iran going back to the UN Security Council or North Korea receiving sanctions from the UN would have been enough to support prices. Alas, tropical storm Beryl was nowhere close to the oil fields, the UN was strangely silent on Iran and North Korea's response to the sanctions was completely ignored.

I was planning on some further cost reduction strategies once energy earnings were mostly behind us after next week. Nothing ruins a covered call strategy more than a huge spike on an earnings surprise. Now that stock prices have rolled over on profit taking ahead of the earnings events it could make it more difficult to enter a successful covered call. However, oil is still hovering around $75 and odds are good a hurricane will eventually appear. That could push prices back towards $80 and give us one last chance before the August demand slump.

On the bright side several stocks have taken a pounding and any further declines in August could present some really good buying opportunities. I am going to continue to add potential targets to the watch list without entry points. We need to be ready but not trigger happy.

Natural gas has been extremely volatile given the very hot temperatures and a slowdown in injection into storage. The decline in price has made it more attractive for power companies with dual fuel capability to burn gas and that increased consumption is producing spikes back over $6. Unfortunately the cheap gas means coal is no longer king. Coal stocks were hammered last week after BTU warned that Q3 earnings would be below expectations due to pricing patterns for Q3. Cheap gas is prompting the dual use facilities to burn gas not coal. They did raise their guidance for the full year saying some new contracts were signed for more than double the price received per ton in 2005. Coal shipments continue to be constrained by railroad capacity. Peabody said US railroads have announced plans to invest more than $200 million by 2008 to expand Powder River Basin capacity and allow increased deliveries by Peabody. There were numerous positive comments in the Peabody press release. Check the play description for more info.

I know it is tough to watch our positions erode for no apparent reason but this is a long-term portfolio newsletter. I have no problem with anyone trading the recommendations but I am not going to do it in the newsletter. The long-term growth potential for the energy sector is better than any other investment you can make. It is also one of the most volatile investments you can make. Be sure to do your own research on each position you enter and know where you are comfortable adding to those positions or exiting when they go against us. Keep the faith and think long term.

With the rise in oil prices the devastation from May/June had almost been reversed with eight positions back in the profit column. Last week eliminated four of those with a big part of the blame going to BTU. The BTU warning crippled Walter, Arch Coal and cut our BTU LEAPS in half.

We had been planning on exiting many positions on an expected decline in August and I had raised some stops over the last couple weeks. Last weeks selling took us out of several and we are close on some others. Some of that broad weakness could also have been option expiration activity further stimulated by the expiring August crude contract. I am going to continue slimming the portfolio in anticipation of a buying opportunity in late August. We will reenter some of the exited positions using 2008 LEAPS.


September Crude Futures - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Plays

None


Dropped Plays

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None today
 


Play Updates

Existing Plays

OIX - $609.74 - Oil Index Portfolio Hedge

No Change in play. We finally got some movement in the right direction for the OIX hedge but unfortunately that means our other long energy positions are suffering. That is what this play is all about. This is a hedge against falling oil prices. My target price of $500 may seem a long way off but without any hurricanes we could see a strong drop. If we only saw a return to the June lows at 540 it would be a profitable hedge.

Current recommendation: Buy above $600

Play description:

The CBOE Oil Index consists of 11 energy stocks of primarily integrated oils. The index reacts sharply to changes in the price of oil and gas.

The focus of this play is to hedge our current energy positions against a decline in oil prices as the summer draws to a close. Each reader will have to decide how many contracts needed to hedge their current positions. You do not want to be moving in and out of the OIX position given the relatively wide bid/ask spread.

A drop to $540 should double the premium paid and a drop to $500 should produce a $50 premium or $5000 per contract. At our entry price of $12.00 or $1200 that represents $3800 profit per contract. That would hedge several of our current positions very easily.

Index Components:

Position:

Sept $550 Put OIX-UJ @ $12.00, no stop.

WLT - $48.46 - Walter Industries ** Stopped $49.50 **

The coal dip last week stopped us out of WLT at $49.50 on Friday. I believe Walter is a great company and will do well but we have to get past the Q3 coal/gas pricing problem first. I plan on entering WLT again if it touches reaches strong support at $45 and appears to have put in a bottom.

Current recommendation: Watch for new entry around $45

Earnings schedule: August 2nd

Prior commentary:

Walter Industries is a diversified holding company that owns among other things 700 million tons of high quality low sulphur metallurgical coal. The company has a market cap of $2.1 billion, which includes $1.2 billion in stock of MWA a recent spinoff of their water products company. That values the rest of WLT at barely $900 million or less than half of the value of the rest of their enterprises not counting their coal asset. I heard an analyst preaching the merits of WLT in June and after doing some research I have to agree. The company posted a +84% increase in earnings in Q1 and a jump in revenue from $366 million to $753 million. Very few companies can boast of those numbers. They expect to post earnings of $5.65 for the year in 2006. Walter coal is one of the highest quality, low-vol coking coals in the world. It is sold to major buyers in Europe and South America for about $115 per ton FOB Mobile Alabama. Do the math, 700 million tons x $115 = $80 billion. That is very nice insurance of strong income potential for a long time to come.

WLT was hammered by the recent sell off and by a drop caused when Muller Water (MWA) IPOed on May 30th. The spinoff of a business segment always devalues the parent company but coupled with the May correction this dip is overdone. Decent support just below at $45 and very string support at $40.

Company Info:

Walter Industries, Inc. (Walter) is a diversified company with seven operating segments: Mueller, Anvil, Industrial Products, Natural Resources, Homebuilding, Financing and Other. The Company's seven segments are further grouped into Water Products, Natural Resources, Homebuilding and Financing, and Other. The Water Products group, which consists of Mueller (WMA), Anvil and Industrial Products segments, manufactures water infrastructure and flow control products. The Natural Resources segment consists of coal mining and methane gas operations. Walter markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. The Other segment includes the manufacturing of foundry and furnace coke, slag fiber and specialty chemicals, as well as the Company's land division.

Position:

2008 $60 LEAP Call YZG-AL @ $7.30, exit 7/21 $6.70, -0.60

Entry $48.39 (6/26)

BHI - $75.71 - Baker Hughes Intl ** stop loss $73 **

That was really painful. BHI lost -$8 for the week and returned to strong support at $75. This is the level where I would add to your position with a stop at $73. The 100-day average at $76.64 was broken on Friday but is still in range. Earnings are next Friday.

With our cost now at $2.60 we will not add any new insurance puts. We could end up doubling our cost without any real benefit. We will take the stop at $73 it touched.

Current recommendation: Hold, Buy under $76

Earnings schedule: July 28th

Company info:

Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. The Company supplies wellbore-related products and technology services and systems to the oil and natural gas industry on a worldwide basis, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. Baker Hughes operates through subsidiaries, affiliates, ventures and alliances. It operates in three business segments: Drilling and Evaluation, Completion and Production, and WesternGeco. The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids, Hughes Christensen, INTEQ and Baker Atlas divisions. The Completion and Production segment consists of the Baker Oil Tools, Baker Petrolite and Centrilift divisions. The WesternGeco segment consists of the Company's 30% equity interest in WesternGeco, a seismic venture with Schlumberger Limited. WesternGeco provides reservoir imaging, monitoring and development services.


Position: Jan $95 Call BHI-AS @ $6.20
Cost update: Closed short $100 Call, +0.90, cost = $5.30
Cost update: Closed long $80 Put, +2.70, cost = $2.60

Additions 6/08 (closed 6/13)
Short: Jan $100 Call BHI-AT, entry $3.20, exit $2.30, +0.90
Long: Jul $80 Put BHI-SP, entry $4.30, exit $7.00, +2.70

Entry $85.24 (6/6)

SLB - $61.45 - Schlumberger Ltd ** Stopped $62.00 **

Another one bites the dust. SLB announced a +79% jump in Q2 profits and beat the street by +6 cents. They said profits were slowed by a prolonged spring thaw in Canada making roads impassible. However, strong operations around the world were running "flat out" in the words of the CEO.

This was another example of selling the news even if the news was good. SLB will be back as a play when we buy the late August dip.

Current recommendation: Hold

Earnings schedule: July 21st, 6:AM, conference call 9:AM

Company Info:

Schlumberger Limited (Schlumberger) is an oilfield services company, supplying technology, project management and information solutions. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, 70% owned by Schlumberger and 30% owned by Baker Hughes, is an advanced surface seismic company.

Statoil awarded contracts to SLB and HAL on June-30th worth more than $1.12 billion. Halliburton was the biggest winner but SLB garnered its share.

Position: Jan $70 Call VWY-AN (SLB-AN) currently $6.10
Cost reduction: July $60 put closed 6/8, -1.95 = $4.15
Cost update: Insurance put closed 6/27, +1.20 = $5.35

Insurance put: Entry 6/12
July $55 Put SLB-SK @ $1.85, stopped 6/27 @ .65, -1.20

Insurance put: (Closed 6/8)
Jul $60 Put SLB-SL @ $1.65 6/6 @ $63, exit $3.60, 6/8, +1.95

Entry $66.25 (6/04)

ACI - $32.05 - Arch Coal Inc ** No Stop **

Unbelievable! Arch posted profits, which jumped from $1.7 million in Q2-2005 to $69.6 million in Q2-2006. They predicted strong sales at higher prices going forward and had nothing but good things to say about their business and the coal business in general. They lost -2.23 on the news to close nearly -$6 below the Wednesday high.

This is another causality of the lowered Q3 guidance from Peabody and the weak natural gas prices. Arch is setting the world on fire but funds are selling the stock.

We did not have a stop loss on the 2008 LEAP and I am not adding one today. Let's see what impact options expiration had on this selling before making any further moves. The next support level is just over $30.

Current Recommendation: Buy under $35

Earnings schedule: July 21st AM

Prior Commentary:

The CEO said in an interview on June 28th that a lot of legacy contracts were expiring soon and that had great implications for their bottom line. Arch saw profits jump 10-fold in the first quarter as new contracts took effect. He said coal would be so short that users would want to secure future contracts to guarantee supply. Coal prices have risen sharply since 2004 doubling in most US basins and tripling in some. Because Arch sells its coal under long-term contracts it has yet to see these prices. Customers of Arch had been locked in at 2003 prices. He said over the next three years the vast majority of their contracts would expire. He said Arch would be selective on which they would renew at current prices. With a strong balance sheet they can take a different view of sales. He said it was the best environment seen in over 20 years for coal. The US currently has 310 gigawatts of electric power and 50% is fired by coal. The US is adding 90 gigawatts with 20 GW being completed by 2010. This will consume another 65 million tons of coal or an increase of roughly 6.5% over current production not counting increases in other areas.

Company Info:

Arch Coal, Inc. operates as a coal producer in the United States. The Company's primary business is the production of steam and metallurgical coal from surface and underground mines throughout the United States, for sale to utility, industrial and export markets. Its mines are located in southern West Virginia, eastern Kentucky, Virginia, southern Wyoming, Colorado and Utah. As of December 31, 2005, it operated 21 mines, and controlled approximately 3.1 billion tons of proven and probable coal reserves. During the year ended December 31, 2005, the Company sold approximately 140.2 million tons of coal. The Company has three business segments, which are based on the low-sulfur coal producing regions in the United States, in which the Company has operations. These segments are the Central Appalachia region, the Powder River Basin and the Western Bituminous region. On December 31, 2005, the Company sold its 100% interest in Hobet Mining, Inc., Apogee Coal Company and Catenary Coal Company.


New position: (July-14th)
Position Jan 2008 $50 LEAP Call YEP-AJ @ $4.20


Entry $48.36 (5/31)

FTI - $63.27 - FMC Technologies ** Stopped $66 **

FTI rolled over with the market and our raised stop took us out for a near breakeven. Like Arch, Walter and SLB I still believe in FMC but we need to let the August weakness pass.


Earnings schedule: July 25th after the close.

Company info:

FMC Technologies, Inc. provides mission-critical solutions for the energy, food processing and air transportation industries. The Company designs, manufactures and services machinery and systems for its customers through four business segments: Energy Production Systems, Energy Processing Systems, FoodTech and Airport Systems. Energy Production Systems segment designs and manufactures systems, and provides services used by oil and gas companies involved in land and offshore, including deepwater, exploration and production of crude oil and gas. Energy Processing Systems segment designs, manufactures and supplies high-pressure valves and fittings for oilfield service customers. FoodTech segment designs, manufactures and services food processing and handling systems to the food industry. Airport Systems segment is a global supplier of passenger boarding bridges, cargo loaders, and other ground support products and services.

FTI announced on June-20th a $130 million contract from Chevron for undersea pipeline equipment and production systems.

RBC Capital Markets issued a report on FTI in early July saying it should be a core holding through 2010. They suggested FTI would be insulated from the price of oil due to the strong deepwater drilling program over the next 3-5 years. RBC raised estimates between 8% to 16% over consensus.

Breakout trigger $63.50 Hit 5/23
Position: Oct $65 Call FTI-JM @ $5.80, exit 7/20, $7.15, -.15
Cost update: Closed June $60 put, +0.10, cost = $5.90
Cost update: Expired July $55 put, +1.40, cost = $7.30

Insurance put:
July $55 Put FTI-SK @ $1.40, 6/13, expired worthless, -1.40
Stop loss FTI @ $64, cancelled

Insurance put: (closed 6/8)
June $60 PUT FTI-RL @ $1.10, closed 6/8 $1.00, -0.10

Entry $63.50 (5/23)

TIE - $24.77 - Titanium Metals

TIE continued to move lower but not at the same rate of speed as the rest of the market. We will continue to hold our position until after earnings. Billionaire Harold Simmons, Chairman of TIE, bought 275,000 shares last week at an average price of just over $26. He has bought $53.6 million in TIE stock over the last 18 months. His last purchase was May 18th for 200,000 shares at $34.88. He now owns 59.8% of TIE stock. If he is buying at $26 maybe we need to double down here. I ma trying to contact the company about an earnings date before making another move.


Current Recommendation: Hold

Earnings Schedule: Early August, no date set

Prior commentary:

Analyst Chris Olin of FTN Midwest Securities said this week that demand for TIE products will continue to surge through 2012. TIE is already at 88% capacity and has a backlog of $860 million in orders. Despite additional capacity plans by both TIE and ATI the market is expected to be undersupplied through at least 2010. Chairman Harold Simmons personally owned 2.6% of TIE shares as of March 31st but a holding company he controls owns 37.1% and SEC documents show that he and the company are aggressively increasing their positions. Boeing has orders for 393 of its 787 jumbo jet, which contains a high percentage of titanium components to keep the weight under control. Flight tests of the 7E7 Dreamliner showed it was still too heavy and suggests even more components will be switched over to titanium in the production fleet.

Company info:

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 15% of the Company's sales revenue, during the year ended December 31, 2005, 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.

Position:
December $45 Call TIE-LI @ $5.70
Cost reduction: July $30 Put, -1.40, cost = 4.30

Insurance put: (closed 7/13)
July $30 PUT TIE-SF, 6/8 @ $2.00, exit 7/13 @ $3.40, +1.40


Entry $38.22 (5/28)

BHP - $41.56 - BHP Billiton Limited ** No Stop **

No change in play. Finally a stock that has not declined. BHP recovered from an early week drop to close flat for the week. No complaints here!

Current recommendation: Hold, Buy @ $40

Maintain a profit stop on the long $35 Put BHP-TG @ $31.

Earnings schedule: Aug 23rd

Company Info:

BHP Billiton Limited is a diversified resources group. The Company is an exporter of metallurgical coal for the steel industry; an exporter of energy coal; a producer of iron ore, copper, nickel metal, manganese ore, primary aluminium and manganese and chrome ferroalloys. It also has substantial interests in oil, gas, liquefied natural gas (LNG), diamonds, silver and titanium minerals. BHP Billiton operates in seven segments: Petroleum (oil, natural gas and LNG), Aluminium (aluminium and alumina), Base Metals (copper, silver, zinc and lead), Carbon Steel Materials (metallurgical coal, iron ore and manganese), Diamonds and Specialty Products (diamonds, titanium minerals and metals distribution), Energy Coal (energy coal) and Stainless Steel Materials (nickel metal, and chrome and nickel ferroalloys).

BHP is the second largest global producer of copper, 3rd largest producer of nickel, 4th in uranium, 5th in aluminum and zinc. BHP is also the number one sea borne supplier of coking coal and manganese. BHP also produces oil and gas.

Breakdown trigger $46.75 hit 5/15
Position: 2008 $50 LEAP Call LPH-AJ @ $7.50
Cost update: Closed June $40 Put 6/12, -1.10, cost = $6.40

Insurance put:
Closed: JUNE $40 Put BHP-RH @ $1.50 (5/22), exit $2.60, 6/8
Position: Aug $35 Put BHP-TG @ $1.30 (6/12)

Entry $46.75 (5/15)

MDR - $41.07 - McDermott ** Stop loss $38 **

MDR sprinted to $46 on Wednesday but fell back to a low of $41.02 on Friday. This was only two cents above our stop at $41. MDR was awarded new contracts almost daily according to the news wires. We have a 2008 LEAP so I changed the stop to $38.

Current recommendation: Buy @ $40

Earnings schedule: Early August, no date set

Company Info:

J. Ray McDermott is a leading provider of engineering, procurement, construction, and installation services for offshore oil and gas field developments worldwide. McDermott International, Inc. is a leading worldwide energy services company. McDermott's subsidiaries provide engineering, construction, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy.

3:2 split on June 1st reduced the strike price by 1/3 and increased the contract size to 150 shares.

Position 2007 $70 LEAP Call OYZ-AN @ $8.50
Split into 2007 $46.66 LEAP OYZ-AX @ $5.66
or
Position 2008 $75 LEAP Call YAE-AO @ $12.50
Split into 2008 $50.00 LEAP YAB-AJ @ $8.33
Cost increase put close 6/26 +1.40, cost = $9.73


Insurance put:
Position: August $36.625 Put MHH-TV @ $2.00, 6/13,
closed .60 6/26, -1.40


Position: June $60 Put MDR-RL @ $1.25 (5/22)
Split into June $40 Put MHH-RH @ $0.83, expired worthless 6/16


Entry $44.02 (5/18)

PTR - $108.35 - Petrochina ** No Stop **

No change in play. Despite the market weakness PTR continues to hold near its highs. News that China grew +11.3% last quarter was a factor in PTR success. PTR owns 14,000 service stations in China and growth is great for consumption!

We have a 2008 LEAP and PTR could be $200 before expiration. As long as we maintain the positive trend the long-term price of oil should be our salvation.

Current recommendation: Hold

Earnings schedule: August 24th according to Ameritrade

Prior commentary:

Petrochina is the fourth largest energy company in the world. It is a government monopoly but it acts like an independent. PTR is aggressively acquiring leases and rapidly expanding its drilling program. It currently has over 10.9 billion bbls of proven reserves and more than 44 TCF of gas. Warren Buffet owns $2.3 billion of PTR stock. It trades at less than $12 per BOE and has a 3.5% dividend yield. PTR owns 14,000 service stations and has 2,900 franchised stations. It is majority owned by China and has unlimited capital for expansion if China likes the deal. I expect several acquisitions by PTR over the next couple years but with a $208 billion market cap and China as the owner it will not be a target itself. China would never give up control of those oil assets. PTR saw its output rise +6.3% in Q1 to 267.7 million bbls when most companies were posting declines in reserves and production. Gas output rose +35.6%. PTR owns 75% of the oil and gas reserves in China and supplies 40% of its needs. This is as close to a permanent lock on a profit as we can get given the rapid growth of China's economy.

Cramer has been pounding the table on PTR saying it was not afraid to drill in communist countries, places torn apart by strife or run by two-bit dictators like Chavez or Morales. With the Chinese government and military behind it there is little chance of somebody trying to confiscate PTR assets.

Company info:

PetroChina Company Limited operates a range of petroleum and related activities through four primary business segments: Exploration and Production Segment, Refining and Marketing Segment, Chemicals and Marketing Segment, and Natural Gas and Pipeline Segment. The activities include the exploration, development, production and sales of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sales of basic petrochemical products, derivative chemical products and other chemical products, and the transmission of natural gas, crude oil and refined products, and the sales of natural gas.

Position: 2008 $120 LEAP Call LJC-AD @ $16.20
Cost adjustment: Close short Dec $115 call +1.30 = $17.50
Cost adjustment: Close long July $90 puts +3.00 = $20.50

Insurance combo: Closed
Short: Dec $115 Call PTR-LC @ $3.20, 6/13, exit $4.50, -1.30
Long: (2) July $90 Puts PTR-SR @ $3.70, 6/13, exit $0.70, -3.00


Insurance puts: (Closed 6/7)
Closed: June $105 PUT PTR-RA, @ $4.20 (5/22), exit 6/7 @ $4.30

Entry 5/14 $116.20

GG $26.85 - Goldcorp ** Closed **

Goldcorp continues to fight resistance at $31.50 and resistance won. The July insurance put closed at 50 cents and left us naked. Given the performance of gold and the market I am bailing on Goldcorp at the present time. We will review it again if the chart on gold changes.


Earnings schedule: August 10th, PM

Company Info:

Goldcorp Inc. (Goldcorp) is a North American-based gold producer engaged in exploration, extraction and processing of gold. The Company's primary asset is its Red Lake Mine, a gold mine in Canada. It's other operations include the Bajo de la Alumbrera gold-copper mine (the Alumbrera Mine) in Argentina; a 100% interest in each of the San Dimas gold-silver mine (the San Dimas Mine); the San Martin gold-silver mine (the San Martin Mine); the Nukay gold-silver mine (the Nukay Mine) in Mexico, and a 100% interest in the Peak gold mine (the Peak Mine) in Australia. Goldcorp also has 100% interests in the Los Filos gold development stage project (the Los Filos Project) in Mexico and the Amapari gold project (the Amapari Project) in Brazil. Goldcorp also owns approximately 59% of Silver Wheaton Corp. (Silver Wheaton), a mining company with 100% of its revenue from silver production.

Goldcorp expects to produce 2 million ounces of gold in 2006 at an average cost of $125 an ounce. Goldcorp does not hedge its gold production. This will represent nearly $1 billion in profits at the current price of gold.

Breakout trigger $36.00 hit on 5/01
Position: 2008 $35 LEAP Call LGX-AG @ $10.00 5/01
Cost update: Closed July $27.50 put, -1.45, cost $11.45

Insurance put:
Position: July $27.50 PUT GG-SY @ $1.95, closed @ .50, -1.45


Entry $36.00 (5/01)

CSX - $61.94 - CSX Corp ** No Stop **

CSX suffered from the sell the news syndrome on earnings despite very strong earnings and guidance. Support remains $60 and we still have an August $65 put. I am hoping part of the selling was options expiration related and next week will see somce reason return to the markets.

CSX Corp, posted earnings that beat the street by 51 cents and was +127% over the same quarter in 2005. They also announced a 2:1 stock split, a 10 cent post split dividend (+54%) and a $500 million buyback program over the next 12 months. They said business was so strong they expected to raise prices up by +6% this year and again in 2007. They did receive some insurance payments related to hurricane losses that inflated earnings slightly but were roughly equivalent to the profits they would have made without the hurricanes. The company said business was booming for as far out as they could see. CSX lost -5.34 from the post earnings spike to Friday's close at $62.

The insurance put is out of range but we will leave the profit stop on it just in case the market rolls over.

Current recommendation: Buy above $60

Maintain a profit stop on the Aug $55 Put CSX-TK @ CSX $52

Earnings schedule: July 18th


Company Info:

CSX Corporation (CSX) based in Jacksonville, Florida, owns companies providing rail, intermodal and rail-to-truck transload services that combine to form transportation companies, connecting more than 70 ocean, river and lake ports. CSX's principal operating company, CSX Transportation Inc. (CSXT), operates the railroad in the eastern United States with approximately 21,000-mile rail network linking commercial markets in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc. (Intermodal) is a coast-to-coast intermodal transportation provider, an integrated intermodal company serving customers from origin to destination with its own truck and terminal operations, plus a dedicated domestic container fleet. Containers and trailers are loaded and unloaded from trains, with trucks providing the link between intermodal terminals and the customer.


Breakout trigger $60.50 hit Apr-3rd
Position: 2008 $65 LEAP Call YYD-AM @ $8.30
Cost update: Closed June $65 put, +3.05, cost = $5.25

Insurance Put:
Position: August $55 Put CSX-TK @ .95 cents. 6/12
Maintain profit stop at CSX $52.

Insurance Put: (closed 6/08)
Closed: June $65 PUT CSX-RM @ $1.20, exit 6/08, $4.25, +3.05

Entry $60.50 (4/03)

BTU - $44.60 - Peabody Energy ** No Stop **

Can I take back my recommendation from last week when BTU was trading at $54? Dang, you might know BTU would be the company to stink up the coal sector. BTU warned that Q3 earnings would be less than expected but raised estimates for the full year. All traders heard was "warned" and BTU was knocked for a -$10 loss for the week. When the generals trip the entire army stumbles. BTU tripped everyone and the BTU weakness may not be just temporary. We have a 2008 LEAP so time is on our side but it may be a fight for the next couple months. I want to wait until options are settled next week before trying to reduce our costs again. Strong support in the $40-$42 range is our hope for a recovery.

Prior commentary:

BTU announced the acquisition of Australia's Excel Coal for $1.4 billion. The market liked the deal and BTU rose on the announcement. Excel is expected to boost its production from 5.6 million tons in 2005 to 15 million tons in 2007. BTU already produces about 60 million tons per quarter so at 2007 levels Excel will amount to about 6% of the 255 million ton total. The key to the equation is the distance from Australia to the high-demand markets like India and China as well as the volume of metallurgical coal Excel produces. If BTU is on the acquisition path James River (JRCC) and Foundation (FCL) have been rumored as targets as well as Massey Energy (MEE) and Consol Energy (CNX). Those would require a much stronger investment and face some regulatory hurdles.

We have been unbelievably unlucky on our insurance puts on BTU. Every one was filled near the highs for the day, low for BTU, and was followed promptly by a strong jump in BTU rendering our put worthless. I am hesitant to buy another one and I plan on selling an in the money calls when gas prices roll over. That collapse could last more than a month so we should be safe. I just want to get past the earnings before making any new moves.

Current recommendation: Buy under $40

Earnings schedule: July 20th

Company Info:

Peabody Energy Corporation (Peabody) is the largest 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.

Position: 2008 $55 LEAP Call LLW-AK @ $9.50
Cost increased 4/19 by +1.30 to $10.80
Cost increased 5/01 by +1.70 to $12.50
Cost increased 6/30 by +2.15 to $14.65

Insurance Put: (closed 6/30)
July $45 Put BTU-SI @ $2.40, 6/13, exit 6/30 @ .25, -2.15

Insurance put: (closed 6/9)
Closed: JUNE $52.50 PUT BTU-RT, @ $2.70 (5/22), exit $2.65, 6/8

April 8th covered call:
Sell June $60 Call BTU-FL @ $2.20, stopped $3.50, 4/19, -1.30

April 24th covered call:
Sell Sept $70 Call BTU-IN @ $4.20, exit $5.90 5/01 -1.70
Set stop loss at $67.50, hit 5/01
Set profit stop at $58.00, changed to 58.50 4/30

Entry $48.00 (3/07)

CCJ - $37.00 - Cameco ** No stop **

No change in play. Earnings are next Thursday and there is no uranium glut. I am hoping positive earnings will spark a new upward trend.

I am not going to buy another insurance put yet. Strong support at $35 should last unless the market implodes again. Hopefully the correction is past and only aftershocks remain.

Current recommendation: Hold

Earnings Schedule: July 27th

Original Play Description:

We were triggered on the breakout at $72.50 on Monday and again on the $67 breakdown target on Wednesday. Each trigger was for a 1/2 position giving us a full position with an average cost of $9.80 each. That turned out to be the closing price on Friday so if you missed either opportunity you did not miss anything. We are going to add another full position after CCJ splits on Feb-23rd.

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. That level remained support for the entire week through Feb-10th.

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.

Pre-split entries:
Breakout target $72.50 hit
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $10.60 (2/06)

Breakdown target $67.00 hit
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $9.00 (2/08)

Pre-split average cost: $9.80
Post split position: (4) 2007 $40 LEAP ZBK-AH @ $4.90
Cost reduction: -.75 on 3/21, cost now $4.15

Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Added after the 2:1 split on 2/24

Put insurance: (expired 6/18)
Position: June $35 PUT CCJ-RG @ 1.20 (5/22), expired -1.20

Monday Mar-20TH cost reduction strategy:
Sell the June $40 call CCJ-FH @ $1.75
Set a profit stop at $33.50, hit 3/21, exit $1.00, +0.75
Set a stop loss at $39.95

HAL - $30.01 - Halliburton ** Stop Loss $25 **

HAL imploded after the split on news that they were backing away from the KBR IPO. Earnings for HAL were strong beating the street by +6 cents but that included some one-time gains. HAL now says they will consider a tax-free spinoff of KBR to current HAL stockholders in addition to or in place of an IPO. Investors waiting over the last several months for an IPO date fled in droves when the news was announced. I still believe in HAL and I think it is a buy at this level. $30 and $27.50 are both support levels. Under $25.00 I would bail.

The July $32.50 puts closed at $2.55, less our cost of $1 for a +1.55 profit. The split gave us two contracts instead of the one contract of the July $65 put we started with. This reduced our cost in the LEAP. I am recommending we add another put just in case the damage is not over.

New insurance put:
Buy August $27.50 Put HAL-TR currently $.45

Current recommendation: Buy under $30


Earnings schedule: July 21st


Company Info:

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.

Halliburton was awarded a two-year contract with Statoil worth $193 million for cementing, drilling and completion fluid. Statoil said they were the largest contracts of their type awarded in 2006. In addition to the initial term there are three two-year extensions, which should bring the final value to somewhere in the $1 billion range allowing for adjustments.

Current position:
2007 (2) $40 LEAP Call HAL-AH @ 5.63
Cost adjustment:
Closed July $32.50 Puts, -1.55, new cost = $4.08

Original Position: 2007 $85 LEAP Call VHW-AQ @ $9.80
Monday March 20th: Position change
Sold the 2007 $85 LEAP VHW-AQ, exit $4.25.
Bought the 2007 $80 LEAP VHW-AP, entry $5.70.

Our adjusted cost in the 2007 $80 LEAPS is now $11.25
The strike is lower and will split into (2) $40 LEAPS @ $5.63

Insurance Put: (5/22) Contracts doubled by 2:1 split (HAL-SS)
Position: July $65 Put HAL-SM @ $1.00, exit $2.55 7/21

Insurance Put: (7/23)
Buy August $27.50 Put HAL-TR currently $.45

Entry $39.50 (2/06)

VLO - $62.01 Valero ** No Stop **

VLO rolled over with the rest of the energy sector despite rising crack spreads. Earnings are still a week away and I am going to recommend another insurance put just in case.

Insurance put: Buy August $60 Put VLO-UL currently $1.70

Current recommendation: Hold

Earnings Schedule: August 1st

Commentary from 6/18

Petrie Parkman analyst Chi Chow produced a 20-page report on Valero explaining why VLO trades at a discount to its peers. He blames it on the Valero spending spree that put Valero on the top in the United States. Despite very strong profits it left little cash to return to shareholders in the form of stock buybacks so prevalent recently. Valero also had a change in management with founding CEO Bill Greehey passing the baton to Bill Klesse. Chow thinks this is a very positive shareholder development. Chow suggested Valero sell five refineries currently processing the expensive light sweet crude and running on tight margins. Chow said Valero could get up to $5.8 billion in after tax proceeds. He also said Valero could generate $550 million from selling its retail gas stations and focus only on the refining business. He said Klesse is a shareholder friendly CEO and total share repurchases as a result of those actions above could amount to as much as $11 billion or up to 22% of outstanding shares.

This would be huge news and rumor has it that Valero is considering dumping some refinery assets in order to concentrate on the more profitable sour crude operations. This would be a windfall for shareholders and I hope it comes soon!


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.

Valero posted a company update on their website in late June. As part of the presentation they project higher earnings than the First Call consensus. Gasoline margins ytd in 2006 are up significantly over 2005. They expect strong year over year comparisons for Q2. According to Valero the US supply of on-road diesel is shrinking and Valero's margins are expanding. Valero estimates crude supplies will have to grow by +1.3 mbpd annually through 2010 just to stay even with demand. They see increased demand for light sweet crude and limited supply. Because Valero refines mostly sour crude their margins are significantly higher than other refiners.

The complete presentation can be viewed here: Presentation

Merrill upped VLO to a buy on June 29th.

Position: 2007 $60 LEAP Call VHB-AL @ $6.60
1/30 Cost reduced by spread on put/call -0.90, now $5.70
2/06 Cost reduced by -1.00 on closed call, now $4.70
2/09 Cost reduced by -3.10 on closed $57 put, now $1.60
2/14 Cost increased by +0.15 on exited Mar-$45 put, now $1.75
4/11 Cost increased by +1.20 on CC stop loss, now $2.95
6/18 Cost increased by +1.50 on expired $55 put, now $4.45

Insurance put:
Position: June $55 PUT VLO-RK @ $1.50 (5/22), expired worthless

Monday Mar-20TH cost reduction strategy:
Sell the June $67.50 call ZPY-FR @ $1.25, exit 2.45, 4/11, -1.20
Set a profit stop at $53.75
Set a stop loss at $64.50

Monday Feb-13th
Set profit stop on March $45 put at $48 on VLO, exit $1.05 2/14
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 @ $1.50, +1.00
Set a profit target on the March $57 put at $54, exit $4.70 (2/9)

Monday Jan-30th:
Sell March $65 Call VLO-CM @ $2.50 bid
Buy March $57.50 Put VLO-OY @ $1.60 ask
Set a stop loss on the call at $64. Profit stop at $54
Set a profit stop on the put at $52.

Monday July 24th:
Buy August $60 Put VLO-UL currently $1.70


Entry $52.30 (12/16)

 


Leaps Trader Watch List

Sector Reset

The drop last week in energy stocks with oil still hovering around $75 is only a preview of the carnage we could see if oil prices ever reset to fair value. The current political tensions surrounding Iran, Iraq, Israel and Syria, problems in Nigeria and production still offline in the gulf will eventually fade. The $15-$20 of risk premium will evaporate and the entire sector will reset to fair value.

Our challenge is going to be the urge to buy the dip well before the dip is over. In order to avoid being triggered on new entries on the way down I am going to refrain from posting entry levels on watch list plays. We will wait, patiently I hope, until it appears a bottom is in place. I know it will be tough to watch all those "bargains" and not take the plunge but patience is the key.

This week I am adding several to the watch list for future planning only. The BTU warning blew us out of the Walter position but I still think it is a company we must own long term. Schlumberger is another company that has to be on our must own list but was eliminated as an active position last week.

I am also adding Ultra Petroleum (UPL), Suncor (SU) and Diamond Offshore (DO). Take a few minutes each week and study the charts of each watch list entry so you can follow my thinking once the decline begins.

Of course we always have the hurricane wild card to deal us a potential blow. If a cat-5 storm blows through the oil fields like Katrina our best-laid plans could evaporate. That is a chance we take and we will try to manage the problem if it comes to pass.


Jim Brown
 

Dropped Entries

None


New Watch List Entries

Current Watch List

CEO - CNOOC Limited

CNOOC Limited is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. It mainly engages in oil and natural gas exploration, development, production and sales. The Company has four major oil production areas offshore China, which are Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It is an offshore oil producer in Indonesia. The Company also has certain upstream assets in regions, such as Africa and Australia. As of December 31, 2005, it owned net proved reserves of approximately 2.36 billion barrels-of-oil equivalent (BOE) and its annual average net production was 424,108 barrels-of-oil equivalent per day (BOEPD).

CEO has been rather volatile over the last year but the 50-week moving average currently at $75 has been decent support. The June drop in oil prices saw CEO trade as low as $70. I want to target the $70 level on any future dip.

CEO does not have LEAPS so I am going to email everyone the play particulars depending on when that $70 level is hit. Currently December is the longest option series available. I am hoping before $70 is hit a new series in 2007 will be added.

I repeat, we will buy the dip sometime in August. Details to follow at that time.

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

UPL - Ultra Petroleum

Ultra Petroleum Corp. (Ultra) 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 primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. As of December 31, 2005, Ultra owned interests in approximately 148,007 gross acres in Wyoming covering approximately 230 square miles. The Company owns working interests in approximately 330 gross productive wells in this area and is operator of 53% of the 330 gross wells. Its domestic operations are focused on developing and expanding a tight gas sand project located in the Green River Basin in southwest Wyoming. During the year ended December 31, 2005, the Company's Wyoming production was approximately 87.4% of total oil and natural gas production on a thousand cubic feet of natural gas equivalent (MCFE) basis and 98.5% of the Company's estimated net proved reserves were in Wyoming on an MCFE basis.

Ultra has been extremely volatile for the last six months with the price of natural gas falling more than -50%. Ultra has current support at $50 but I would like to target something even lower if gas supplies hit a new record late in the summer. $40 would be my initial target depending on the price of oil and gas in September.

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

SU - Suncor

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. During the year ended December 31, 2005, the Company produced approximately 206,100 barrels of oil equivalent (BOE) per day, comprised of 174,500 barrels per day (bpd) of crude oil and natural gas liquids and 190 million cubic feet per day (mmcf/d) of natural gas.

Suncor has performed better than the sector over the last month and appears to be holding above $75. I would normally like to target the 200-day average in the $71 range but June's low of $68 is slightly below that average. That makes $60-65 a more likely target as a retest of that June low.


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

DO - Diamond Offshore

Diamond Offshore Drilling Inc. (Diamond Offshore) provides contract drilling services to the energy industry worldwide and is also engaged in deepwater drilling with a fleet of 44 offshore drilling rigs. The Company's fleet consists of 30 semisubmersibles, 13 jack-ups and one drillship. The Company's offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and jack-up markets. The Company provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.

Diamond Offshore appears to have fallen out of favor with investors and has been on a steady decline since hitting $86 in early July. It has decent support in the $55-$60 range but we need to see a rebound appear before taking a position.

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

SLB - Schlumberger

Schlumberger Limited (Schlumberger) is an oilfield services company, supplying technology, project management and information solutions. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, 70% owned by Schlumberger and 30% owned by Baker Hughes, is an advanced surface seismic company.

SLB has decent support at $55 and again at $50. SLB said business was booming in its July earnings release and yet it still sold off. I would initially target $55 but would want to see some buyers appear before making an entry.

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

WLT - Walter Industries

Walter Industries, Inc. (Walter) is a diversified company with seven operating segments: Mueller, Anvil, Industrial Products, Natural Resources, Homebuilding, Financing and Other. The Company's seven segments are further grouped into Water Products, Natural Resources, Homebuilding and Financing, and Other. The Water Products group, which consists of Mueller, Anvil and Industrial Products segments, manufactures water infrastructure and flow control products. The Natural Resources segment consists of coal mining and methane gas operations. Walter markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. The Other segment includes the manufacturing of foundry and furnace coke, slag fiber and specialty chemicals, as well as the Company's land division.

We are looking at Walter primarily for its coal and gas operations but water products is also doing well. Dragging WLT lower was the BTU warning and worries over its housing division. Strong support is $40 but like the others we want to see some buyers appear before we make an entry.
 


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