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Weekly Newsletter, Saturday, 01/12/2008

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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

Hole In the Bucket

This was the 8th consecutive week of declines in oil inventories with a monster 6.7 million barrel drop to 282.8 million barrels. The total loss for the last eight weeks comes to 32 million barrels and puts us 9.8% below last years levels. Is there a hole in that inventory bucket? You would have thought this would have propelled crude back to $100 but traders have a bear market mentality. Profits are being taken regardless of the sector and that includes oil.

The price of crude fell back below $93 on Friday as recession fears created worries of a demand slump. Gasoline inventories spiked +5.2 million barrels and the market reporters were all jabbering about the drop in gasoline demand. Unfortunately the facts don't bear that out. According to the EIA gasoline demand for the week ended 1/04/08 was 9.304 million barrels per day. That was up over 100,000 bpd from the same period in 2007 at 9.201 mbpd. Granted that is not a big growth spurt but it is still growth. We have seen demand decline due to the higher prices but it is still higher than 2007. The following chart from the EIA shows the demand patterns for 2006, 2007 and current. From my viewpoint they all look the same with a slight gain over the last three months.

The chart below shows the comparison in current crude inventories in red to the 5-year average in blue. You can clearly see we are approaching the bottom of the 5-year range at a nearly vertical drop. Crude prices will NOT continue to move lower if crude inventories continue to fall.

The EIA released their Short Term Energy Outlook (STEO) last week with forecasts through 2009. It was a laugh per page with their predictions of growth in supplies and declining prices. I won't bore you with all the details but you can go here for the particulars.

Basically they expect consumption to rise by 1.6 mbpd in both 2008 and 2009 compared to only a 1.0 mbpd increase in 2007. They expect "surplus" production capacity to grow from its current 2 mbpd to over 4 mbpd by the end of 2009. (Strange that nobody can find that 2 mbpd of surplus capacity today.) That excess capacity is kind of like Jimmy Stewarts invisible rabbit Harvey. Jimmy believed in him but the rest of the world thought he was crazy. The EIA believes in the excess capacity fable but the rest of the world thinks they are crazy.

After going to great lengths to explain where the additional production will come from they have a several sentence disclaimer about the pace and timing of supply growth being dependent on a myriad of factors. In the end they suggest "OPEC crude capacity could increase by 1.4 mbpd in 2008 and 1.0 mbpd in 2009." Without boring you I will leave you with four charts from the report.

I am going to contrast the EIA outlook with a view from a major market participant. Jeff Rubin is the Chief Economist for CIBC World Markets. CIBC and specifically Jeff is widely recognized for the breadth and quality of their economic research. CIBC views demand growth from Asia to be unstoppable and will have to expand by several magnitudes just to equal per capita consumption of South Korea.

Jeff was interviewed on CNBC on Thursday morning on Squawk Box and he probably felt like he was talking to second graders. I love Erin Burnett as a reporter but both she and Mark clearly had no grasp of the situation, as you will be able to tell from their questions. Jeff made a clear case for the coming oil problem and exactly as I have been detailing in my oil crisis reports. I think Jeff was trying to low key the headline for the segment of $150 oil within 5 years. If the scenario he lays out comes true the price will be a lot higher. He specifically says, "demand growth will be held to 1% for the next several years" by various factors. How will demand he constricted, by price of course because there will not be enough oil to go around. Prices will rise as countries compete for supplies and as the biggest consumer in the world the U.S. is going to pay the price. Just two years ago Jeff was predicting $100 oil and now he has raised that level to $150 but I believe he was downplaying to avoid being seen as even more of a lunatic than the reporters were portraying him. I am sure he has found that it is easier to lead people in $10-$20 increments to $200 oil over the next five years than make that leap all in one jump. As each increment is reached he simply raises the bar and adds another year.

Here is the interview from CNBC's Squawk Box from Jan-10th. It is available on the CNBC site as a streaming video as well.

Jeff Rubin, CIBC World Markets Chief Economist on $150 oil

We saw some major drops in some of our positions this week as the expected post 2007 profit taking finally took hold. Hopefully it is over but should we swing into a real bear market we will be closing some of the positions. I warned everyone going into year-end that I expected some profit taking and tax selling in early January and we would need to wait out these dips. So far it has been painful but not unbearable.

We got a real gift on Wednesday when Mosaic plunged from $100 to $80 and triggered our entry at $85. Before Friday's close it was back at $100. No complaints there!


Jim Brown


February Crude Futures Chart - Daily

February Natural Gas Futures Chart - Daily

February Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays
None

New Non-Energy Plays
AAPL Apple Inc *** Covered LEAP Call ***

Dropped Plays
ETFC E*Trade Financial *** CLOSE Covered Call ***

New Watch List Plays Triggered
MOS $99.21 Mosaic Co

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.

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

I removed MDR and replaced it with SLB.

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

MOS $99.21 - Mosaic Co

Outstanding! Mosaic took a three-day plunge from $100 on profit taking and triggered our entry at $85. Strong comments in the media from Monsanto, Dupont, TNH and Mosaic combined to push it right back to $100 by Friday. If only all our entries could be this good!

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: $85 Hit Jan-10th

Position: 2010 $100 LEAP Call LXW-AT @ $24.20


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New Non-Energy Plays
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AAPL - Apple Inc *** Covered LEAP Call ***

Apple has declined more than $30 off its highs and appears to have found support ahead of MacWorld next week at $170. Odds are good Steve Jobs will pull another rabbit out of his hat on Tuesday when he makes all the new product announcements.

I am replacing the ETFC covered call with Apple. The potential for Apple to rebound is very strong and additional support is just below at $160.

Company Info:

Apple Inc.designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores. The Company sells to education, consumer, creative professional, business and government customers.

Long: Buy AAPL now at ask on Monday currently $172.69
Short: Sell 2009 $200 LEAP Call OBR-AT at bid currently $28.20

The spread is $27.31 plus the call premium of $28.20 will produce a profit of $55.51 on a $150 investment or roughly 35% if Apple is over $200 by expiration.


 


Play Updates

Existing Plays

BHI $79.31 -0.30 - Baker Hughes *** New Stop Loss $77 ***

Still holding at support despite an upgrade by Wachovia to an outperform. No change.

01/04 North American active rig count rose despite a drop of -30 in the U.S. but Canada rebounded by +196 to push the total 2,093

Earnings schedule: Jan 30th

Breakdown target: $80 Hit 12/17

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

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

DNR $29.23 -1.93 - Denbury Resources

DNR eased off its highs and is approaching support on no news. No change in play.

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

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

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VLO $59.62 -4.52 - Valero Energy *** Stop Loss $58 ***

Valero continued to fall despite some strengthening in refining margins. This is just a factor of rotation out of the oil sector by investors afraid of a bear market. The whining over narrow refining margins over the prior week did not help. In eight days Valero fell $12 on no change in the fundamentals. I hate to put a stop on it after such a big drop but long-term support at $60 is in danger of breaking.

Entry Dec-16th @ $66.65

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

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

FLR $143.79 -3.47 - Fluor Corp

A sharp drop at the beginning of the week was overcome to bring Fluor back to resistance at $145. Several new contract awarded and we are just waiting for the bear market to go away.

Breakdown trigger: $145 Hit 12/13

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

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

RIG $136.39 -6.07 - Transocean Inc

The profit taking finally arrives but we are still well above support at $130. RIG topped the list of stocks being bought on weakness on Thursday.

Breakdown trigger: Hit 12/4 @ $130

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

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

JEC $88.71 -7.90 Jacobs Engineering Group

No specific news but profit taking knocked nearly $20 off JEC over the last two weeks. Much of that has been recovered when traders bought the dip to support at the 100-day average at $82.

No LEAPS

Breakdown target: $80.00 Hit 11/12

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

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

COP $83.04 -3.52 Conoco Phillips *** Stop Loss $81.00 ***

Conoco's appears to be in the lead to develop a multibillion-gas project in the UAE. That is good since Alaska slammed their proposal to develop the North Slope gas field as grossly inadequate. Holding just over support and the stop. Support is $82, stop $81.

Breakdown target: $80 hit 11/12

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

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CNQ $70.91 -3.33 Canadian Natural Resources

No news and CNQ eased off its 2-month high to just above support of $69. No complaints.

Entry 11/29: $66

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

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CLB $125.09 -6.29 Core Labs

No news, lost last week's gains and holding back at support.

Breakdown Trigger: $130 11/12

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

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PBR $111.21 +1.32 Petrobras *** Stop Loss $97 ***

Petrobras was the best performer for the week other than the rebound in Mosaic. Now only about $7 off its historic highs so no real loss here. No specific news.

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.

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FWLT $141.58 -18.11 - Foster Wheeler

Foster has been beaten severely by profit taking and has been driven back to strong support at the 100-day average. With the 2:1 split approved by the shareholders for the 22nd we could see some fireworks begin to develop next week assuming the market cooperates.

Shareholders approved 2:1 split for Jan-22nd.

Breakdown trigger: $135 hit 11/06

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

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XOM - $90.30 -1.78 Exxon Mobil

Back to the 100-day average and support but only about $5 off its highs. No specific news of note.

Breakdown trigger: $88 Hit 11/01

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

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CAM - $48.73 -1.64 Cameron International *** Stop Loss $44 ***

Still holding at resistance at $50 after the 2:1 split the prior week. No news.

Earnings schedule: Jan-31st

Breakdown target: $95 Hit 10/30 (47.50 post split)

Position: Post split (2) 2009 $50 LEAP Call OKA-AJ @ $9

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SLB $94.01 -3.99 - Schlumberger *** Stop Loss $87 ***

No specific news but SLB held its gains until Friday when the drop in oil and the markets knocked $3 off the price. Still well above support at $90.

Earnings schedule: Jan-18th

Breakdown target: $95.00 hit Oct-22nd

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

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CVX $90.67 -2.68 - Chevron

Chevron did better than Conoco and pre-warned of higher than expected profits primarily from their exploration and production business. Still refining margins were less than expected. Despite the stronger than expected guidance upgrade Chevron declined a couple bucks but remains above the 100-day at $90.

Earning schedule: Feb-1st.

Breakdown trigger: $87 hit Oct-22nd

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

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

NOV $69.83 -4.48 - National Oilwell Varco

Same story as the first dozen positions. Profit taking on falling oil prices and a decline back to the 100-day average as support. No specific news.

Earnings schedule: Feb 6th

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

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

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MDR - $53.80 -4.20 McDermott Intl *** Stop Loss $45 ***

Support at $58 finally cracked for a $7 intraweek drop but the 100-day returned as support. No specific news.

Earnings: Nov 8th, +37%

Breakout trigger: $53, hit 9/20

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

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CHK $39.52 +.20 Chesapeake Energy

CHK is stuck in neutral and given the market last week that is not a bad place to be. The prior week CHK lost 21 cents and gained it back this week. That is actually very positive in light of the big losses elsewhere in the energy sector. CHK said it bought 8,600 more acres in the Barnett Shale gas field.

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 $37.95 -2.16 Helmerich & Payne *** Stop Loss $29.50 ***

Continued low volatility and positive on Friday. Still holding the high ground on no news and no tax selling. I am still surprised.

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

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

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

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

BHP - $67.69 -1.60 BHP Billiton ** Stop Loss $65.00 **

BHP continues to move sideways as we await some resolution of the Rio Tinto offer. Still no news on Rio Tinto but time is running short.

Breakdown target: $55 hit 8/15/07

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


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Non-Energy Positions
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MTW $40.01 -4.44 Manitowoc *** Stop Loss $37 ***

The pullback the prior week to give us our entry at $45 continued to fall with support appearing at $40 and the 200-day average. I am adding a stop just in case the slide continues.

Breakdown trigger: $45 Hit 01/04

Position: 2009 $50 LEAP Call VMT-AJ @ $7.45


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Covered LEAP Calls
****************************

RIMM $93.70 -9.65 Research in Motion - Covered Call Stop Loss $77

Major pain and major change in this play. RIMM has declined below the $100 support and could decline further if the profit taking and market weakness continues.

Buy back the short 2009 $150 LEAP XTB-AJ at ask $9.40 on Monday.
Sell the 2009 $110 LEAP VHO-AB at bid of $18.30 on Monday.

That will produce a profit of $9.10 on the $150 LEAP and offset the $8.90 drop in the stock price from when we entered the play.

By selling the $110 LEAP @ $18.30 we reduce our cost in RIMM to $84.30. If RIMM rebounds back over $110 then we have a $25.70 profit at expiration. If RIMM continues to fall I am going to set a stop loss at $77 to close the play.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

LONG RIMM @ $102.60
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 1/14
SHORT 2009 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

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

ETFC $3.08 -0.15 E*Trade Financial *** CLOSE Covered Call ***

Rumors of cash drains at E*Trade have soured my outlook on this position. There are rumors of serious problems caused by this drain and we could be looking at a take under much like the Countrywide deal where there is little premium on any takeout. There is not enough profit potential here and the risks are mounting.

LONG: ETFC @ $4.13, exit $3.10, -1.03
SHORT: Jan-2009 $5 LEAP Call OYN-AA @ $1.45, exit $0.75, +.70
Net on trade -.33 cents.

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
None

New Watch List Entries
SGR
Shaw Group

I really don't want to add any more energy plays heading into February. We will want to pick up on new energy plays in late March.

Current Watch List

SGR - Shaw Group

We were stopped out of Shaw several weeks ago and it appears to have found a bottom and possibly put in a higher low last week at $56.

Company Info:

The Shaw Group Inc. (Shaw) is a diverse engineering, technology, construction, fabrication, environmental and industrial services company. Shaw provides its services to a diverse customer base that includes multinational oil companies and industrial corporations, regulated utilities, independent and merchant power producers, government agencies and other equipment manufacturers. The Company delivers its services from more than 150 locations, including 22 international locations. On January 31, 2007, Shaw acquired all of the stock of Mid-States Pipe Fabrication, Inc. (MSPF). On June 29, 2007, the Company acquired all of the stock of EzeFlow (NJ) Inc., a manufacturer of pipe fittings for the power and process industries. The Company has six business segments: Fossil & Nuclear; Energy and Chemicals (E&C); Environmental and Infrastructure (E&I); Maintenance; Fabrication and Manufacturing (F&M), and Investment in Westinghouse.

Breakout trigger: $64

Buy 2009 $70 LEAP Call OWA-AN

Breakdown trigger: $55

Buy 2009 $60 LEAP Call OWA-AL
 


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