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Weekly Newsletter, Saturday, 05/19/2007

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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

Short Covering

I told everyone last week it might be their last chance to buy the dip and sellers finally evaporated on Wednesday. A failure to fall any further and several news events triggered a very strong short covering rally on Thursday and those gains held on Friday. When you consider the June contract expires on Tuesday it is surprising we did not get more profit taking from the dip buyers on Friday.

Gasoline futures continued to rise hitting $2.44 on Friday and were credited with supporting the price of oil. The average price for the week on the futures was $2.36 and Friday's AAA national average at retail was $3.13. The market could be primed for another move higher as we approach month end. Nigerian workers are preparing for a countrywide strike on May 28/29th and there is sure to be violence and attacks on oil facilities. Shell has restarted production from the Bonny field but has not yet lifted the force majeure on deliveries. Nigeria can produce 2.5 mbpd of light crude but 815,000 bpd of that production is currently offline and has been offline for many months.

The challenge to gasoline prices in the US has been a continued slate of refinery problems. At one time last week there were seven U.S. refineries with unplanned outages. As of the weekend only four remained down with the BP Texas City plant likely to be offline for another 11 days. Daily gasoline production is running 750,000 bpd below normal and current inventory levels are -7% below five-year average. AAA expects a +1.7% increase in the number of drivers planning to travel over 50 miles or more during the Memorial Day holiday. The EIA claims gasoline demand had been rising by 2.2% through the first four months of 2007 but when prices topped $3 in some areas in late April that growth slowed to only +1%. The slowdown in demand growth appears to have started in late April. In the four weeks ended April 20, demand averaged 9.34 million barrels a day, up 2.3% for the year, before the rate of growth slowed down to 1.6% the next week and to 1% the following two weeks.

Last week the IEA warned of trouble ahead for global oil supplies if OPEC did not increase production this summer. The IEA said it was concerned by the sharpest draw in 11 years on OECD inventories with supplies dropping -17 million bbls in March. The IEA said that May production had already been cut by another 220,000 bpd in Nigeria and another 60,000 bpd by a platform fire in the Congo. Total declared force majeure on the Congo production. OPEC continues to claim the market is "well supplied" and they have no intention of meeting again to discuss quotas until September 11th. Meanwhile a Platt survey said OPEC shipments were 770,000 bpd above their current targets. This suggests several countries are already cheating on quotas. The IEA says global production will have to increase by nearly 2% in 2007 to 85.7 mbpd to keep ahead of demand. Many believe an increase of this size will be impossible due to depletion at several large fields including the Canatrell field in Mexico, the continued problem in Nigeria and declining production rates in Russia and Venezuela due to financial and political reasons. A recent study by PFC Energy showed political factors were limiting capacity in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia.

Next Tuesday we will get another hurricane update from one source but Professor William Gray from Colorado State University and a 20-year pioneer of seasonal hurricane prediction methods reiterated his own warnings on Friday. Speaking at the Governors Hurricane Conference in Fort Lauderdale with more than 4,000 attendees, Gray stuck to his April prediction. He expects 17 named storms, nine hurricanes, including 5 with winds greater than 110 mph. He said the probability of a category 3 storm or greater hitting the coast is 74% compared to an average of 52% over the last century. His group will update their predictions again on May 31st and August 3rd. We have already had one named storm this year called Andrea. The season begins officially on June 1st.

Iran will begin rationing gasoline on May 22nd. They hope to curb imports, usage and increase fuel efficiency. This is bound to create some serious civilian unrest and will be a challenge to Ahmadinejad's popularity. He has his own website and even has an English version. http://www.president.ir/eng/ President Bush told reporters at a joint conference with Tony Blair on Thursday that the US and Britain would work together to implement new sanctions through the UN if Iran continued to work on their nuclear projects. Shortly after Bush spoke a senior Iranian official told the official new agency Mehr that Iran was installing 3,000 centrifuges at Natanz, which would allow it to process enough material to build one bomb per year. I am not kidding, they actually said that. Since France, Britain and Germany officially reject military action against Iran and Russia and China emphatically oppose such a move it will fall on Washington to take action if Iran refuses to comply with the UN resolutions.

The dumb move of the week award goes to Credit Suisse. With DO at $88 they upgraded the price target from $106 to $107 and kept an outperform rating. $106 to $107 are you kidding?

We had a good week for the portfolio but it is becoming increasingly harder to find new entries. With many energy stocks at their highs and desirable non-energy stocks also overbought it is simply not the right time to continue adding plays. We need to let the ones we have mature rather than continually adding more. I seriously considered adding USU this weekend but could not force myself to take the plunge. It is a uranium company that converts Russian warheads into fuel for nuclear plants. They just received approval for another nuclear facility in Ohio and the stock is moving sharply higher. We already have a uranium play in CCJ so I passed. If you have a favorite stock that you think would make a good play you can email it to me and I will consider it. Having extra eyes on the market never hurts.

Jim Brown


June Crude Futures Chart - Daily

July Crude Futures Chart - Daily

June Gas Futures Chart - Daily

June Gasoline Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

With most energy stocks up strongly over the last few weeks I really don't want to add any at these levels. We have a full portfolio and time is on our side.


New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None this week.
 


Play Updates

Existing Plays

TSO - $118.98 -.32 - Tesoro

TSO dipped to $112 on Tue/Wed after the record date on Monday for the coming 2:1 split. TSO and VLO were also downgraded by Bank America on a lack of exposure to exploration and the ability to benefit from higher oil prices. Duh! They are refiners not explorers. Get a life.

For initial commentary see April 29th newsletter.

2:1 Split: Record date May-14th, Pay date May 29th.

Earnings: May 3rd, $1.67 vs 61 cents in comparison qtr

Breakout target: $110 hit 10:AM on 4/23/07
Position: 2009 $120 LEAP Call ZGC-AD @ $16.68

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

ATW $63.11 +1.28 - Atwood Oceanics

Atwood finally found a bottom and began its climb to return to prior levels. No news and no change in play.

Interesting article in Investors Business Daily regarding Atwood.

For initial commentary see April 29th newsletter.

Earnings: May 8th est $1.08, actual $1.01

Breakout trigger $60.50 hit 4/23/07
Position: 2009 $70 LEAP Call ZFJ-AN @ $6.50

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

BHP - $51.10 -1.24 - BHP Billiton

BHP suffered from weak European indexes all week and was hit on Friday with another rejection of its offshore LNG project in California. This was the second rejection and probably an end of the project in its current form. The floating LNG terminal was to be built 20 miles offshore and pipe gas to there coast where Southern California Gas would deliver it to customers. Governor Schwarzenegger officially rejected the application as not meeting environmental standards. Unofficially residents had complained that it would be an eyesore. How much of an eyesore could it be 20 miles off the coast?

No earnings date announced.

For initial commentary see March 17th newsletter.

Earnings schedule: No date announced.

Breakout target $43.50 hit March 12th

Position: JAN-09 $50 LEAP Call ZPK-AJ @ $6.00

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

CCJ - $50.05 -.43 - Cameco

CCJ continues to hold the high ground at $50 despite market volatility. We know from past experience CCJ can consolidate for a long time before making a move. Uranium is not getting any cheaper while we wait so patience is the key.

Worldwide there are 28 new reactors being built, 64 on the drawing boards and 158 in the proposal stages. If all were built it would be a 57% increase from the 435 reactors now in operation. In 2006 the world consumed 180 million pounds of uranium but produced only 100 million pounds. The rest came from Russian nuclear warheads being decommissioned. The supply from those warheads is dwindling and will be completely gone by 2015.

For initial commentary see March 10th newsletter.

Earnings: Apr-27th, -47% due to revenue timing

Breakout trigger: $37.50 Hit March 7th

Position: JAN-09 $40 LEAP Call ZBK-AH @ $7.80

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

PTR - $131.15 +1.92 - Petrochina

PTR continued to move higher last week and more importantly held its whopping gains from the week before. Fidelity announced on Wednesday that it had sold 91% of its stake in PTR or more than 4 million shares. It did not say if it was in response to the Darfur activists or simply decided to take some rather sizeable profits. Fidelity had been a long term holder of both PTR and SNP. No other news and no change in play.

For initial commentary see March 10th newsletter.

Breakdown target:
$110 1/2 position - hit Mar-5th

Position: JAN-09 $120 LEAP Call ZJK-AD @ $10.70
Cost reduction 4/19 $10.70 -2.25 = $8.45

Cost reduction play:
Position: stopped @ $114 4/19
Short June $105 Put PTR-RA @ $3.40, exit $1.15. +2.25

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

SNP - $103.50 +3.50 - Sinopec *** Stop Loss $101 ***

Sinopec continued to climb after the change in China Banks investment rules the prior week. I am putting a stop on this play with nearly a 200% gain. It is an October call and not a LEAP.

For initial commentary see March 3rd newsletter.

Breakdown target $82.50 hit on 2/27

Position: OCT $85 Call SNP-JQ @ $7.00

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

CHK $35.26 +.96 - Chesapeake Energy ** Stop loss $32.00 **

CHK got a boost this week when it announced it had cancelled the purchase of Gastars eastern Texas leaseholds announced in late April. Another party exercised its right of first refusal in the properties. CHK cancelled the 10 million shares it planed to issue on the purchase. Maintain the stop at $32.

For initial commentary see Dec-9th newsletter.

Earnings: May 4th, 87 cents vs est of 78 cents

Current recommendation: Hold

Position: 2009 $35 LEAP VEC-AG @ $5.30

Insurance put:
Oct $30 Put CHK-VF @ 90 cents. Profit stop $28

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

MRO $114.52 +7.13 - Marathon Oil

MRO exploded for another $7 gain after Bank America upgraded them to a buy on a stronger production outlook and exploration success. This is the same analyst that downgraded TSO and VLO because they had no exploration assets. No change in play.

For initial commentary see Nov-18th newsletter.

Earnings: May 1st, $2.04 vs est $1.93

2:1 Stock Split June 18th, record date May 23rd

Current recommendation: Buy at $85

Position 2009 $100 LEAP Call VXM-AT @ $12.60
Cost update: Expired March put +65 cents to $13.25

Insurance put: 2/18/07
Position: March $85 PUT MRO-OQ @ 65 cents. expired

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

HES - $59.68 +1.20 - Hess Corporation
(Formerly (AHC))

Finally a move! Fortunately it was higher with Hess closing at a new 52-week high on Friday. We needed it because our May puts expired on Friday. No news and no change in play.

For initial commentary see Nov-4th newsletter.

Earnings: Apr-25th, $1.17 vs $2.22

Current recommendation: Buy at $47

Position:
11/05/06 2009 $50 LEAP Call VHS-AJ @ $6.80
Cost adjustment put exit +1.60, cost = $8.40
Cost adjustment May puts +2.15, cost = $10.55

Insurance Put: Triggered Jan-3rd @ $49
01/03/07 May $45 put HES-QI @ $2.60, exit 1/26 $1.00

Insurance Put: 2/26/07
MAY $50 PUT IGG-QJ @ $1.35 expired
May $55 Put IGG-QK @ $.80 expired

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

BTU - $53.51 +2.98 - Peabody Energy

BTU blasted to a new high on Friday on news it was spinning off its Appalachia mines in order to concentrate on faster growing areas like Asia, Australia and the western United States. The new company will be named Patriot Coal Company and will be spun off to existing BTU shareholders at 1 share for every BTU share owned. By freeing itself from the thinner, harder to mine coal seams in West Virginia and Kentucky it frees up resources to focus on higher volume coal fields. Patriot will have 19 mines and 8 preparation plants and a 30% stake in a coal export terminal in Virginia. No change in play.

For initial commentary see Oct-22nd newsletter.

Earnings schedule: April 19th, -32% on special items

Current recommendation: Buy at $46.50

Position:
10/22/06 Jan-2009 $50 LEAP Call ZZT-AJ @ $8.70
02/05/07 March put stopped -$1.00, cost = $9.70

Insurance put: Triggered with drop through $39
01/03/07 March $35 Put BTU-OG at $1.15, stopped @ $42.50

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

SLB $79.40 +5.02 Schlumberger

Oil service stocks exploded last week on no specific news but several positive comments about the sector in general. No news and no change in play.

For initial commentary see Oct-14th newsletter

Earnings: April 20th, 96 cents vs est of 91 cents

Current recommendation: Buy at $60, stop at $55

LEAP Position:
1/2 9/11/06 @ $8.60
1/2 9/12/06 @ $8.00
Position: 2009 $70 LEAP Call VWY-AN @ $8.30
Cost update for expired Jan put +2.00 = $10.30

Insurance Put: 9/18
Position: Jan $50 Put SLB-MJ @ $2.00, expired

Insurance put:
Position: June $70 PUT SLB-RN @ $1.15

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

SUN $76.02 +1.57 - Sunoco

SUN found a bottom at the 50-day average and rebounded +$4 from the lows to close at the high for the week. No news and no change in play.

For initial commentary see Oct-14th newsletter

Earnings: May 3rd, 70 cents vs 59 cents in comparison qtr

Current recommendation: Buy at $60, stop at $54

LEAP Position:
9/12/06 Position: 2009 $70 LEAP Call VUN-AN @ $13.50
Cost update expired Jan put +2.40 = $15.90

Insurance Put:
Position: Jan $55 Put SUN-MK @ $2.40, expired

Insurance put:
Position: June $70 PUT SUN-RN @ 85 cents.

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

VLO $73.97 +0.14 - Valero Energy *** Stop Loss $70.00 ***

We saw a $4 drop in Valero from Monday's high to Wednesday's low but the refiner came back from the dead by Friday erasing all of the drop and posting a minor gain. VLO was downgraded by Bank America and had a minor problem at a Texas refinery. All of that is history now but I am concerned that refining margins may have peaked. It depends on what gas prices do over the next couple weeks. If inventories begin to rise we may need to take a strategic exit and look for another entry later. I hate to do that ahead of hurricane season when profits could soar again so I will wait another week or two before making a decision. I am adding a stop loss just in case.

Insurance put:
Buy June $70 PUT ZPY-RN currently $1.20 cents if VLO touches $72.

For initial commentary see Oct-14th newsletter

Earnings: April 24th $1.86 vs $1.32

Current recommendation: Buy at $65, stop at $57

LEAP Position:
9/24/06 Position: 2009 $60 LEAP Call VHB-AL @ $7.70
Cost update expired Jan put +2.25 = $9.95

Insurance Put:
Position: 9/25 Jan $45 Put VLO-MI @ $2.25, expired

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

DO - $92.90 +5.51 - Diamond Offshore ** Stop $84.00 **

DO blasted off on the positive sector comments from various analysts. It was definitely not on the price target rise from $106 to $107 by Credit Suisse. Seriously, $106 to $107. No news.

For initial commentary see Oct-14th newsletter

Earnings: Apr 26th, $1.64 vs $1.06

Current recommendation: Buy at $75, stop at $69

LEAP Position:
8/29/06 Position: 2009 $80 LEAP Call VCT-AP @ 14.20
Cost reduction: Oct $70 Put profit -3.15, cost now $11.05
Cost increase: Dec $60 put expired -2.40, cost now $13.45

Insurance Put:
10/08 Dec $60 Put DO-XL @ $2.40, expired

Position closed:
10/03 October $70 put DO-VN @ $1.65, exit @ $4.80, +3.15


****************************
Non-Energy Positions
****************************

TEX - $77.72 -4.62 Terex Corp *** Stop Loss $75.00 ***

This may be a quick play. TEX made a new historic high on Monday at $84.36 and then nose dived straight to Friday's close at $77.72 on no news. Backlogs soared +56% in the last report. No change in play but maintain the stop at $75.

For initial commentary see May-13th newsletter

Breakout target $81.00 Hit 5/07

Position: Jan-09 $90 LEAP Call VXQ-AR @ $16.40

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

AAPL - $110.02 +1.28 Apple, Inc

Apple fell from the tree on Wednesday as rumors surfaced that the iPhone would not deliver in June. Apple squashed those rumors and announced the FCC had given its approval for the phone. Apple rebounded to close at a new historic high on Friday. No change in play.

For initial commentary see May-13th newsletter.

Breakout target: $102.00 Hit 05/07

Position: Jan 2009 $110 LEAP Call VAA-AB @ $17.50

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

DB - $157.89 -1.70 - Deutsche Bank *** Stop Loss $152 ***

Volatility reigns in DB over the last two weeks. This stock has been moving faster than an ADD kid on speed. No specific news.

For initial commentary see May-13th newsletter.

Breakout target: $156.50 Hit 05/-7

Positon: Oct $160 Call DB-JL @ $7.00
(No LEAPS)

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

ATI - $114.28 -.90 - Allegheny Tech

ATI tread water all week after that $6 gain the week before. There was no specific news and I believe it was simply consolidating gains. No change in play.

For initial commentary see May-5th newsletter

Breakdown target $110.00 hit 04/30

Call spread:
LONG JAN-09 $110 LEAP Call OYG-AX @ $21.50
SHORT JAN-09 $140 LEAP Call ZKG-AH @ $9.50

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

TOL - $28.55 +.38 - Toll Brothers

Toll continued its lackluster performance with no SEC problems and Beazer rebounded strongly. Something is wrong with this picture. Toll did say when it pre-released their earnings that the subprime problem was impacting the entire food chain making it tougher for buyers of luxury Toll homes to sell their existing homes first. I believe this problem will eventually be rectified and Toll will return to its lofty levels early next year. Strong support at $27. No change in play

For initial commentary see Apr-21st newsletter

Earnings schedule: May 24th

Breakout target: $28.50 hit 4/16
Position: 2009 $35 LEAP OTY-AG @ $3.50

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

BZH - $34.46 +1.67 - Beazer Homes ** LEAP PUT **

Unbelievable! BZH rebounded +2.50 off its lows just when it appeared to finally be breaking down below support at $32. I can't help but believe retail investors don't understand the seriousness of the Beazer problems. To add insult to injury clas action law firm Milberg Weiss announced a suit against Beazer and all the officers on the behalf of anyone who ever owned BZH stock. This should be no surprise with Milberg Weiss the equivalent of an ambulance chaser in the corporate world. Just one more thing for BZH to worry about.

Beazer is being flooded with suits, some seeking class action status on charges it practiced predatory lending, filed illegal loan documents and manipulated its stock price. These types of suits appear whenever bad news appears about a company but in this case it looks grim.

For initial commentary see March-31st newsletter

Earnings: April 26th, -1.12 vs +2.35 in the comparison quarter.

Position: Jan-08 $25 PUT WZF-ME @ $3.10

No stop loss
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries

None

Current Watch List

I continue to believe that we will see a correction soon that will offer us some better entry points for a variety of energy stocks. Rather than list a handful here I would rather wait until the event occurs and pick the best performing candidates for new entries. We have a full portfolio and there is no need to add additional plays just to be adding plays. After all, don't we want to add only profitable positions? Be patient and let's see how the next couple of weeks play out.


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