Option Investor

Weekly Newsletter, Saturday, 12/29/2007

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Table of Contents

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

Leaps Trader Commentary

Six Weeks

Crude inventory levels fell for the sixth consecutive week with another major drop of 3.3 million barrels. That brings the streak to -21.1 million barrels lost in six weeks. Extending out to 10 weeks only has one positive weekly gain and a loss of -28.3 million barrels. Since we are in the heavy use winter period and cold weather in the northeast has increased usage of heating oil and natural gas is this only the result of increased usage? Not hardly! It is the result of tighter global inventories and refiners not wanting expensive oil on their books on Dec-31st. That is tax day for refiners and paying taxes on a few million barrels of $95 oil is not high on their list of things they want to do. Every million barrels is $95 million worth of taxable commodity. Oil last week was the hot potato that nobody wanted to be holding when the band starts playing Auld Lang Syne on New Years Eve. (Want to impress your friends? Here are the lyrics: http://www.youtube.com/watch?v=eG3afAIi6IQ )

For whatever the reason inventory levels are dropping fast. In this chart contrasting prior year inventory levels you can see our current line (solid black) is dropping like a rock from all time highs back in July to the bottom of the historical channel last week.

DOE Inventories

The next 3-weeks will be the key to the puzzle. If inventories suddenly shoot higher we know it was the tax deadline causing the drop. If they continue lower then we know something else is wrong and bigger trouble lies ahead. I literally just finished about 500 hours of research for the end of year article and put the finishing touches on it on Thursday. I have never been more convinced that our days are numbered in America. Trouble is brewing and should these inventories continue to fall it could be part of the bigger picture leading up to peak oil.

In stock news for the week it was as quiet as a church mouse. You would have thought the energy sector took the week off. Crude pries made it back to $97 on inventories, troubles in Iraq and the Bhutto murder. Other than watching oil creep higher and funds marking up the leaders for year end there was nothing worth watching.

In one amazing news article China promised to "play fair" as it tried to corner all the oil reserves around the globe. China pledged its search for oil and gas to power its booming economy will be carried out in a spirit of fair play and international cooperation so as not to disrupt sensitive international markets. "China did not, does not and will not pose any threat to the world's energy security," the announcement read. I was shocked they made this public statement because I have been saying for years they are locking up all available reserves to hoard for themselves rather than allow normal commerce from those reserves to continue. For them to make this statement out of the blue is the same admission of guilt as a murderer walking into a police station to say he did NOT kill someone the police did not even know was dead.

To me this is a direct admission of guilt for them to make the claim without anybody but me accusing them of doing it. China has locked up millions of barrels of reserves around the globe because they know peak oil is coming and they know their country will remained locked in their mostly 20th century state if they do not have oil to fuel their expansion and industrialization. They are the only country actually planning ahead to protect future oil supplies by actually buying the reserves ahead of time as quietly as they can. This admission by China is simply one more smoking gun clue that trouble is headed our way. They also said they were committed to clean energy but we know they are completing one new coal fired electric plant a week with zero emissions controls. A word to the wise, if their official press corps lips are moving they are lying.

I am going to cut this short this weekend and finish up on the end of year project materials and spend some time out of my chair for a change.

For the end of year renewal effort I have written a 120-page update to my ongoing peak oil view. In addition to that effort we located a professionally produced video explaining the peak oil problem and we are giving that away free with a renewal. I strongly recommend you get this video and pass it around to all your friends. View trailer here.

Jim Brown

February Crude Futures Chart - Daily

February Natural Gas Futures Chart - Daily

January Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays


New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered


Portfolio Listing & Top Picks

Top Ten List

If you are looking to add another position this is my top ten list for this week. The target prices listed would be the ideal entry points for these stocks today. There is no assurance any stock will ever return to these support levels and you will need to make your own decision about an entry point above these levels. I believe these stocks have the best potential this week. The list will change from week to week based on technicals, fundamentals, crude prices and market action. The list is not sorted in any particular order.


No change to the stocks but I die change a couple targets.

The yellow means they are very close to those entry levels and green means they are at the target level.

New Plays

Most Recent Plays

None this week.

Play Updates

Existing Plays

BHI $82.60 +0.40 - Baker Hughes

The bounce stalled as we await the year end and new year portfolio adjustments. The current support at $80 should be reasonably strong.

North American active rig count fell -139 to 2,052

Earnings schedule: Jan 30th

Breakdown target: $80 Hit 12/17

Position: 2009 $90 LEAP Call VBH-AR @ $8.40


DNR $30.11 +1.35 - Denbury Resources

Back to historic highs post split on no news. No complaints here.

Breakdown trigger: $53, post split $26.50 hit 12/17

Position: June $30 Call DNR-FF @ $2.25


VLO $70.55 -.17 - Valero Energy

Holding its gains from the prior week on no news.

Position: $70 LEAP Call VHB-AN @ $9.20


FLR $146.26 +1.46 - Fluor Corp

No news holding the rebound. I expect some tax selling on FLR next week. $135 support should hold.

Breakdown trigger: $145 Hit 12/13

Position: 2009 $160 LEAP Call XOB-AL @ $22.30


RIG $146.02 +2.10 - Transocean Inc

BAC hit Transocean with an upgrade to a buy last week with a price target of $175. That implies a 33% move higher from here. Analysts think the new Petrobras discovery will keep 10 rigs working round the clock for the next 3-5 years each just to build out the initial discovery. A Bear Stearns analyst also went bullish on RIG saying they were still undervalued and would reap rewards from 2008-2010 on the upward pricing momentum and demand in the offshore drilling market.

Breakdown trigger: Hit 12/4 @ $130

Position: 2009 $140 LEAP Call VOI-AH @ $15.80


JEC $98.08 +1.75 Jacobs Engineering Group

Still holding the high ground at a new high. I expect some tax selling in JEC next week. Hopefully support at $90 will hold. No news.


Breakdown target: $80.00 Hit 11/12

Position: APR 2008 $90 Call JEC-DR @ $6.50


COP $89.13 +2.42 Conoco Phillips *** Stop Loss $81.00 ***

Conoco moved up to resistance at 3-month highs at $90 on no news. I believe this was window dressing markups and we could see some selling in early 2008. I raised the stop to $81.

Breakdown target: $80 hit 11/12

Position: 2009 $90 LEAP Call OJP-AR @ $8.60


CNQ $74.07 +3.18 Canadian Natural Resources

No news but another 4-week high. No complaints.

Entry 11/29: $66

Position 11/29: 2009 $90 LEAP Call OKR-AR @ $6.50


CLB $123.95 +.90 Core Labs

No news, holding at two week highs.

Breakdown Trigger: $130 11/12

Position: 2009 $140 LEAP Call ZYM-AH @ $21.30


PBR $117.62 +4.42 Petrobras *** Stop Loss $97 ***

Petrobras continues on a role garnering upgrades and positive comments from nearly every energy watcher. Holding right at historic higher at $120.

LEAPs Alert Entry 11/12 @ $95

Position: 2009 $90 LEAP Call VDW-AR @ $17.10

Position: 2009 $110 LEAP Call XVQ-AB @ $10.00

Alert on 11/2 recommending an immediate entry into the $110 LEAP. The prior recommendation had been calling for an entry into the $90 LEAP on a dip to $80. The correct LEAP for the current position is the $110 LEAP.


FWLT $156.27 -8.88 - Foster Wheeler

Another bounce off the historic highs led to profit taking late in the week. I believe this was tax selling and we could see some more next week. Nothing changed, just a cycle we have to endure. No news.

The board approved a 2:1 split subject to shareholder approval around January 8th.

Breakdown trigger: $135 hit 11/06

Position: 2009 $150 LEAP Call ZHF-AW @ $29.10


PTR $175.90 -3.50 - PetroChina *** Stop Loss $170 ***

Still no momentum in PTR and no news. We need the Asian markets to recover soon. These stocks could see some end of year selling and I believe that, along with the Asian correction, is what has caused the pain.

Breakdown trigger $194.32 Entered on rebound from $190 on 11/08

Position: 2009 $220 LEAP Call ZJK-AZ @ $32.20


XOM - $95.00 +1.57 Exxon Mobil

No material news but Exxon continues to push higher. I believe this is end of year window dressing and we could see some selling next week.

Breakdown trigger: $88 Hit 11/01

Position: 2009 $100 LEAP Call ODU-AT @ $7.90


CAM - $98.33 +3.33 Cameron International *** Stop Loss $88 ***

Stock split 2:1 after the close and will trade at $49.17 when it opens on Monday. Our $100 LEAP will become (2) $50 LEAPS.

2:1 Stock split 12/28 to holders of record on 12/17

Earnings schedule: Jan-31st

Breakdown target: $95 Hit 10/30

Position: 2009 $100 LEAP Call OKA-AT @ $18


SLB $98.80 +4.16 - Schlumberger *** Stop Loss $87 ***

No specific news but a +$9 rebound off the 12/21 lows.

Earnings schedule: Jan-18th

Breakdown target: $95.00 hit Oct-22nd

Position: 2009 $100 LEAP Call VWY-AT @ $15.60


CVX $94.86 +.82 - Chevron

No specific news but Chevron holding at historic resistance highs. Probably end of year window dressing. Expect a decline next week.

Breakdown trigger: $87 hit Oct-22nd

Position: 2009 $100 LEAP Call VCH-AT @ $6.40


NOV $74.37 +1.59 - National Oilwell Varco

Still holding the post merger announcement gains but appears to have lost momentum. NOV was labeled one of Barron's best managed companies last week and they spoke highly of the merger.

Breakout Trigger: $80, hit 10/11/07

Position: 2008 May $90 Call NON-ER @ $7.20


MDR - $59.44 +0.06 McDermott Intl *** Stop Loss $45 ***

No news for McDermott but it continues to hold at resistance at $60. A move higher here could trigger additional buying.

Earnings: Nov 8th, +37%

Breakout trigger: $53, hit 9/20

Position: 2009 $60 LEAP Call OYZ-AL @ $9.00


CHK $39.09 +.44 Chesapeake Energy

A new two-month high on no news and cheap gas. Imagine what would happen if a cold winter appeared.

Earnings: Nov 7th -34%, beat by 3 cents.

Position: 2010 $35 LEAP Call WZY-AG @ $6.60
10/28 Price update: Expired Oct Put +90 cents, $7.50

Insurance put:
Oct $30 Put CHK-VF @ 90 cents. Expired


HP $39.01 +1.27 Helmerich & Payne *** Stop Loss $29.50 ***

Not much of a gain for the week but another new high on no news. This article is about companies using HP rigs to drill 20 wells per pad to cut down on costs.

Earnings: Nov-15th, +18%, beat by +6 cents at 93 centss

Position: Jan 2009 $35 LEAP Call ZQA-AG @ $4.50

Insurance put:
Position: Nov $30 HP-WF. @ .50, Stop $28.50


BHP - $71.36 +.67 BHP Billiton ** Stop Loss $65.00 **

Rio Tinto again rejected the BHP offer and this time Britain's takeover regulator gave BHP only until Feb-6th to either formalize the offer so shareholders could vote or drop the attack. If it does not make the deadline it must wait another 6-months to make another offer.

Breakdown target: $55 hit 8/15/07

Position: 2010 $70 LEAP Call LPH-AN @ $9.00

Non-Energy Positions

CSR $22.49 +0.33 - China Security & Surveillance Technology

No movement on CSR but it is still wedging up to resistance at $23. A breakout could be strong IF it ever comes.

Breakdown trigger: $21.00 hit 12/20

Position: Jun-08 $25.00 Call CSR-FE @ $3.00 (no leaps)

Covered LEAP Calls

RIMM $116.94 -1.69 Research in Motion *** Covered Call ***

Still holding its post earnings gains but I expect some selling next week as tax holdouts change positions in 2008.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

LONG RIMM @ $102.60
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50


ETFC $3.54 -0.06 E*Trade Financial *** Covered Call ***

No news, no change.

LONG: ETFC @ $4.13
SHORT: Jan-2009 $5 LEAP Call OYN-AA @ $1.45

Profit if called: Premium 1.45 + appreciation .87 = $2.32
Cost of entry: $4.13 - 1.45 or $2.68
Profit = $2.32 / $2.68 or 86%

Leaps Trader Watch List

Dropped Entries


New Watch List Entries


Current Watch List

MTW - Manitowoc

MTW continues to raise estimates saying its crane division could see 20% growth in 2008. Nice rally already so we want to buy on a pullback.

Company info:

The Manitowoc Company, Inc. is a diversified industrial manufacturer in three principal markets: Cranes and Related Products, Foodservice Equipment and Marine. The Crane business designs, manufactures and markets a line of crawler cranes, mobile telescopic cranes, tower cranes and boom trucks. Foodservice business is a manufacturer of cold side commercial foodservice products. It designs, manufactures and markets product lines of ice making machines, walk-in and reach-in refrigerators and freezers, fountain beverage delivery systems and other foodservice refrigeration products. Marine segment provides new construction, shiprepair and maintenance services for freshwater and saltwater vessels from four shipyards. On January 3, 2006, The Manitowoc Company, Inc. acquired ExacTech, Inc. On May 26, 2006, it acquired McCanns Engineering & Mfg. Co. and McCanns de Mexico, S.A. de C.V. In July 2007, it acquired Shirke Construction Equipments Pvt. Ltd.

Breakdown trigger: $45 *** New trigger 12/30 ***

Buy 2009 $50 LEAP Call VMT-AJ


MOS - Mosiac Co

Strong rally and I am hoping we see some tax selling once 2008 arrives. Not an energy company but a fertilizer company that could reap a major boost in profits from the new Energy bill and the rise in ethanol production.

Company Info:

The Mosaic Company (Mosaic) is a producer of phosphate and potash combined, as well as nitrogen and animal feed ingredients. The Company operates its business through four business segments: phosphates, potash, offshore and nitrogen. The Phosphates segment operates mines and concentrates plants in Florida that produce phosphate fertilizer and feed phosphate, and concentrates plants in Louisiana that produce phosphate fertilizer. The Potash segment mines ad processes potash in Canada and the United States and sells potash in North America and internationally. The Offshore segment produces and markets fertilizer products and provides other ancillary services to wholesalers, cooperatives, independent retailers, and farmers in South America and the Asia-Pacific regions. The Nitrogen segment consists of its equity investment in Saskferco and Mosaics nitrogen sales and distribution activities.

Breakdown trigger: $80 *** New trigger 12/30 ***

Buy 2010 $90 LEAP Call LXW-AR


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