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Weekly Newsletter, Saturday, 01/19/2008

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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

Bear Market In Everything

It was one of those weeks where you didn't want to open your charts. Good companies were getting pummeled for no reason other than the market wanted to go down. Fears of a recession were on every airwave and that was the only cause for profit taking.

Crude oil futures closed on Friday at $90.57 after a $10 drop over the last two weeks. It was the same story just a different sector. The broader market was selling off and commodity investors are still market driven. The 8-week string of inventory reductions finally came to an end and you would have thought they struck oil on the lawn of the White House. After seeing draws of 32 million barrels over 8-weeks a sudden gain of 4.3 million barrels was treated like a complete reversal when it barely covered two thirds of the prior week's 6.7 million barrel decline. We knew it eventually had to end and traders were just waiting for the news so they could take profits. The news that refinery utilization fell from 91.3% to 87.1% was lost on the crowd. If you take 4% of refinery capacity offline for a week that would mean 6.16 million barrels did not get refined. (22mbpd x 4% = .88 mbpd * 7 days = 6.16 mb) Since inventories only rose 4.3 mb it still represented a drop of nearly 2 mb in real terms. I know that is confusing but trust me, it will be resolved in next week's inventory report.

Another factor pushing prices lower was the pending expiration of the February crude contract next Tuesday. Traders were forced to take profits on the down market rather than holding for the recovery. The March contract is only trading a few cents behind the expiring February contract so there should not be any material expiration pressure on Tuesday.

We are starting to hear comments out of OPEC regarding the Feb-1st meeting. They appear unanimous that there will be no increase in production if it is not needed and according to them it is not needed. With March a low demand month they do not want to add extra production just as demand is slowing from the end of the northern hemisphere winter. I am sure they are complaining internally that $100 oil did not stick.

Another factor pushing prices down was an estimate cut for 2007 world oil demand to 85.8 mbpd by the IEA. Why cutting estimates for 2007 would have any impact on current prices is beyond me. They also left virtually unchanged the forecast for 2008 demand to be 87.8 mbpd. This "virtually unchanged" number is actually 120,000 bpd below their upward revision just a month ago. Either way the 87.8 mbpd number implies a 2.3% year-over-year growth when many other estimates are only suggesting 1.5% growth. According to the IEA world supply was 87 mbpd in December. FYI - Boone Pickens and several others have said the world will never produce 88 mbpd. That puts us VERY close to decision point unless they are proved wrong.

Natural gas prices continue to hold around $8 due to the waves of cold weather producing strong draws from gas in storage. This is only temporary and we should see a decline back to $7 as we near the spring thaw. Amazing how quickly time flies once the holidays are over.

Schlumberger (SLB) stunk up the place on Thursday when they reported earnings that rose 22% but fell about a nickel short of analyst estimates. The problem was lower margins on land drilling, primarily gas wells, in North America. Gas drilling Canada has fallen off a cliff since they changed the tax rates. This is impacting all the service companies that have operations in Canada. SLB gave an upbeat long term forecast but the stock was hammered.

It was a bad week for the portfolio. We expected selling once into 2008 as traders took profits in a new tax year. Last week was worse than that with the big winners taking even bigger losses. There was no specific reason other than the beginning of bear market sentiment as recession fears grow. SLB added to the decline rate with their earnings miss. I was shocked by some of the declines in what should have been bullet proof stocks. For instance FLR -26, MOS -19, FWLT -11, NOV -10 and PBR -16. Nothing really changed except for market sentiment.

We were stopped out of nearly everything that had a posted stop and I wish I had posted a stop on several others. $26 moves are well outside any semblance of normal.

What this did for us was give us some more profit opportunities. Several of the stocks we play have declined to significant support levels and we will be entering some put spreads to capitalize on these drops. Other plays we will be increasing our positions to take advantage of the cheaper prices and some that were stopped out we will be putting back on the watch list for potential reentry.

Jim Brown


FFebruary 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

None


Dropped Plays

New Watch List Plays Triggered
SGR $53.85 Shaw Group

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.

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

This is going to be the magnificent seven this week after the serious culling we suffered. The entry levels have been adjusted to fit the new levels we are seeing in the sector.

*** Warning *** These are entries that assume the bear market ended. If we are continuing to see broad based selling do not blindly enter new positions based on this table. We want to see some stabilization and signs of buyers coming back into the market. Otherwise STAY OUT!

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

SGR $53.85 - Shaw Group

Shaw declined with the market to trigger our breakdown entry at $55 on Wednesday. There was zero negative news and lots of positive developments. Insider buying, new contract wards and business is booming. Now we just need the market to cooperate.

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.

Breakdown trigger: $55 Hit Jan-16th

Position: 2009 $60 LEAP Call OWA-AL @ 11.50


 


Play Updates

Existing Plays

BHI $71.76 -7.55 - Baker Hughes *** Stopped $77 ***

Blown out on the -$10 drop from last week's highs. No specific news.

Earnings schedule: Jan 30th

Breakdown target: $80 Hit 12/17

2009 $90 LEAP Call VBH-AR @ $8.40, Exit $6.00, -2.40 1/15

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

DNR $24.69 -4.54 - Denbury Resources ** New Stop $24 **

No news but a massive drop accelerated by the implosion in SLB. I added a new stop.

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

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

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

VLO $54.03 -5.59 - Valero Energy *** Stopped $58 ***

The refinery sector was getting tons of bad press early in the week and our stop was hit on Tuesday. By the end of the week the press was turning positive again. VLO will be added to the watch list.

Entry Dec-16th @ $66.65

Position: $70 LEAP Call VHB-AN @ $9.20, $4.60 1/15

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

FLR $117.11 -26.68 - Fluor Corp

That was a real kick in the teeth. There was no clue a nearly $30 drop was coming the prior week or even on Monday when it was trading around $145. There was no news and it appears to be simply market related.

Remediation plan: Bull put credit spread

Buy April $110 Put FLR-PB currently $9.20
Sell Jan $170 LEAP Put XOB-MN currently $58.40

If FLR closes over $170 by January that is an additional $50 profit.

That is not a pure credit spread and for those with smaller accounts or don't have naked put capability replace the April $110 with the Jan $110 LEAP Put XOB-MB currently $19.80. There is a $10 difference in cost but the margin is regular spread margin.

If FLR closes over $170 by January that is an additional $40 profit.

Breakdown trigger: $145 Hit 12/13

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

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

RIG $128.41 -7.98 - Transocean Inc

The two-week decline brought RIG back to our entry point and right on support of the 100-day average. Believe it or not the chart is still in an uptrend. Nothing has changed in the outlook for RIG.

Breakdown trigger: Hit 12/4 @ $130

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

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

JEC $74.21 -14.15 Jacobs Engineering Group

No specific news but JEC was knocked for a monster loss in the market downdraft. It is now back to just under where we entered the play at $80 and right above the 200-day average. I am going to take advantage of the drop and change the option. When we entered the position there were no leaps. Now they are listing leaps. I am changing the option to the Jan-2009 LEAP to get us 10 more months of time.

Close the April 2008 $90 Call, currently $3.10
Buy the Jan-2009 $90 LEAP Call, currently $10.40

Earnings: Jan 22nd

Breakdown target: $80.00 Hit 11/12

Position: APR 2008 $90 Call JEC-DR @ $6.50, exit 1/20 @ $3.10

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

COP $72.89 -10.15 Conoco Phillips *** Stopped $81.00 ***

No news on Conoco other than we were stopped out early in the week when the drop first began and missed out on all the pain.

Breakdown target: $80 hit 11/12

2009 $90 LEAP Call OJP-AR @ $8.60, exit $6.80, -1.80 1/15

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

CNQ $63.77 -7.14 Canadian Natural Res. *** New Stop $61 ***

CNQ declined sharply after Credit Suisse warned that the new tax rates, sharp drop in drilling and strong Canadian currency would make it hard to raise profits. While CNQ is susceptible to those worries it is also expanding outside Canada. I started to close the position but Friday's close was right on long term support. I added a stop instead just in case the decline continues.

Entry 11/29: $66

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

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

CLB $111.49 -7.31 Core Labs

No news, holding at support at the 200-day average.

Remediation plan: Buy shorter call to average down cost

Buy: June $130 Call CLB-FF currently $6.10

A return to anything over $125 will recover our lost premium while retaining the long term position.

Breakdown Trigger: $130 11/12

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

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

PBR $94.37 -16.84 Petrobras *** Stopped $97 ***

Petrobras fell on news that reserves outside Brazil fell -12% mainly as a result of Bolivia nationalizing its gas reserves. Reserves inside Brazil rose +1.2% but that did not include the 5-8 billion find in the Tupi field. PBR has not declared that as commercial reserves yet but is working quickly to prove those numbers. I believe this is more of a market drop than a PBR related event. The chart of PBR is exactly identical to all the other charts of its peers for the week.

We actually exited the play for a profit since we had a favorable entry and PBR had been much higher. The drop stopped us out before the premiums evaporated. I am adding PBR to the watch list for a reentry.

LEAPs Alert Entry 11/12 @ $95

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

Position: 2009 $110 LEAP Call XVQ-AB @ $10.00, 16.80 1/16

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 $129.94 -11.64 - Foster Wheeler

The Foster CEO was on CNBC on Friday and had nothing but positive things to say about the company. He reiterated that although they do a lot of building for oil companies the price of oil has zero to do with FWLT stock. The decline knocked Foster back to our entry point and to strong support at $130. I believe FWLT will come screaming back once the market recovers. The challenge is waiting for the volatility to end. We are only down $4 on the LEAP and there is a 2:1 split on Tuesday. That should rekindle buyer support at the $65 level. Our $150 LEAP will split into (2) $75 LEAPS.

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

Breakdown trigger: $135 hit 11/06

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

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

XOM - $85.08 -5.22 Exxon Mobil

Broke the support of the 200-day average but still holding near the highs. Earnings not until Feb-1st. No specific news of note.

Breakdown trigger: $88 Hit 11/01

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

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

CAM - $45.58 -3.15 Cameron International *** Stopped $44 ***

That really ticked me off. CAM dipped intraday on Friday to tag our stop at $44 before recovering into the close. This was even more amazing since CAM was nominated to join the S&P-500 in place of HET on Thursday. The change will take place on Jan-28th. I will be adding CAM back to the watch list.

Earnings schedule: Jan-31st

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

Post split (2) 2009 $50 LEAP Call OKA-AJ @ $9, exit $6.30, -2.70

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

SLB $79.52 -14.49 - Schlumberger *** Stopped $87 ***

Fortunately we were stopped out early Wednesday at $87 and did not have to suffer the drop to $72 on Friday. SLB missed earnings by a nickel ($1.13) but gave positive guidance for 2008.

Earnings: Jan-18th missed by a nickel

Breakdown target: $95.00 hit Oct-22nd

2009 $100 LEAP Call VWY-AT @ $15.60, exit 1/16 @ 9.00, -6.60

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

CVX $83.46 -7.21 - Chevron *** New Stop $78 ***

No news, ugly chart but still holding over support at $80.

Earning schedule: Feb-1st.

Breakdown trigger: $87 hit Oct-22nd

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

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

NOV $59.55 -10.28 - National Oilwell Varco

No specific news but a casualty of the SLB earnings miss. NOV has declined to support at $60. I was going to add a stop but the option premium is only a buck today so we are better off holding the position.

Earnings schedule: Feb 6th

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

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

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

MDR - $45.05 -8.75 McDermott Intl *** Stopped $45 ***

Good timing. The stop was $45 and the low was $44. No specific news.

Earnings: Nov 8th, +37%

Breakout trigger: $53, hit 9/20

2009 $60 LEAP Call OYZ-AL @ $9.00, exit $6.10, -2.90, 1/17

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

CHK $37.23 -2.29 Chesapeake Energy *** Closed ***

I am afraid the price of gas will begin to decline soon. CHK gave up 10% last week but we are still positive in the position. I am going to close it rather than wait for gas to fall in February.

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, exit $8.00, +0.50

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

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

HP $35.47 -2.48 Helmerich & Payne *** Stop Loss $29.50 ***

No complaints here. A minor loss despite the SLB beating. Still well above our entry and well above strong support at $32.

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

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

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

BHP - $60.72 -6.97 BHP Billiton ** Stopped $65.00 **

BHP sprinted higher on Monday to $71 but collapsed on Tuesday to trigger our stop. We got out $5 above the low for the week.

Breakdown target: $55 hit 8/15/07

2010 $70 LEAP Call LPH-AN @ $9.00, exit 1/16 @ 13.30, +4.30


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

MOS $80.02 -19.19 - Mosaic Co

A $30 move from the Monday high at $110 to the Friday low at $80. The volatility is amazing. The CEO was on CNBC this week and there was ZERO cause for alarm. They are getting progressively higher prices and have more global demand than they can supply. This drop was painful but we are only $5 below our entry point.

The volatility is so high we can't afford to buy a straight insurance put or sell a covered call. Instead we will attempt to milk some extra money out of MOS if we get another breakdown in support to $60.

Bull put credit spread:

If MOS touches $70: Buy Mar $60 Put MOS-OL
If MOS touches $60: Sell 2009 $125 LEAP Put XXY-ME

We want to buy the long put first while it is still relatively cheap and then sell the short put at its maximum price. I chose the strike based on existing open interest to lessen the chance of a quick assignment.

Breakdown trigger: $85 Hit Jan-10th

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

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

MTW $35.60 -4.41 Manitowoc *** Stopped $37 ***

No news, heavy selling and a drop back to support to stop us out.

Breakdown trigger: $45 Hit 01/04

2009 $50 LEAP Call VMT-AJ @ $7.45, exit 1/17, $4.00, -3.45


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

AAPL $161.36 -11.33 Apple Inc *** Covered LEAP Call ***

Apple fell flat after Steve Jobs failed to generate excitement at MacWorld and the bear market did the rest. The stock gapped open on Monday and I had to adjust the prices up about $5 from the initial play description. Now a week later Apple has declined -$16 from that open. We could pickup another $10 bucks in premium by closing the $200 LEAP and selling the $180 instead but I would rather wait until after Apple's earnings on Tuesday befor emaking any changes.

Long: AAPL @ open of $177.52 (Jan-14th open)
Short: 2009 $200 LEAP Call OBR-AT @ $30.00
Breakeven: $147.52

The spread is $22.50 plus the call premium of $30.00 will produce a profit of $52.50 on a $150 investment or roughly 35% if Apple is over $200 by expiration.

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

RIMM $88.58 -5.12 Research in Motion - Covered Call Stop Loss $77

Minor decline in RIMM compared to the market drop and it appears to have found support at $88. Oppenheimer upgraded RIMM to an outperform on Friday with a $115 price target.

See the Jan-13th LEAPs newsletter for the description of the change in the options.

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
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
FLS
Flowserve
VLO Valero
PBR Petrobras
CAM Cameron

Current Watch List

CAM - Cameron

Stopped out on Friday's dip we will reenter CAM on a move back over $47.50.

Company Info:

Cameron International Corp., formerly Cooper Cameron Corporation, is an international manufacturer of oil and gas pressure control and separation equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications and provides oil and gas separation, metering and flow measurement equipment. It is also a manufacturer of centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into three separate business segments: Drilling & Production Systems (DPS), formerly the Cameron segment; Valves & Measurement (V&M), formerly the Cooper Cameron Valves segment, and Compression Systems (CS), formerly the Cooper Compression segment. In January 2006, the Company acquired the assets and liabilities of Caldon Company.

Breakout trigger: $47.50

Buy 2009 $50 LEAP Call OKA-AJ

Breakdown trigger: $42.50

Buy 2009 $50 LEAP Call OKA-AJ

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

PBR - Petrobras

Stopped out on the bear market drop we will reenter PBR on strength or a further decline to support.

Company Info:

Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a wholly owned enterprise of the Brazilian Government, which is responsible for all hydrocarbon activities in Brazil. The Company is engaged in a range of oil and gas activities. Petrobras operates in six segments: exploration and production, supply, distribution, gas and power, international and corporate. In June 2007, Petrobras announced that it completed transfer of all of the shares of Petrobras Bolivia Refinancion S.A. to YPF S.A. In March 2007, the Company, Braskem S.A. and Ultrapar Participacoes S.A. announced the acquisition of Grupo Ipiranga. In September 2006, the Company announced the closing of the acquisition by Petrobras America, Inc. (PAI), its wholly owned subsidiary in the United States Gulf of Mexico, of 50% of Pasadena Refining System Inc. In June of 2006, it completed the acquisition of 66% of Gaseba Uruguay-Grupo Gaz de France S.A. In November 2007, the Company acquired Suzano Petroquimica S.A.

Breakout trigger: $101.50

Buy 2009 $110 LEAP Call XVQ-AB

Breakdown trigger: $80.00

Buy 2009 $110 LEAP Call XVQ-AB

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

VLO - Valero

Valero has strong support at $50 and we could see that level on the normal refinery swoon at the end of February if not before.

Company Info:

Valero Energy Corporation owns and operates 18 refineries located in the United States, Canada and Aruba that produce refined products, such as reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals and other refined products. It 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 approximately 5,800 retail and wholesale branded outlets in the United States, Canada and Aruba. During the year ended December 31, 2006, it sold all of its ownership interest in Valero GP Holdings, LLC. In July 2007, the Company sold its Lima, Ohio refinery to Husky Energy Inc.

Breakdown trigger: $50.00

Buy 2009 $60 LEAP Call VHB-AL

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

FLS - Flowserve

This is a very strong maker of valves and control pumps for the oil industry as well as other sectors. The decline to $80 provided an entry point I would gladly take but I am hoping for one more dip to $75.

Company Info:

Flowserve Corporation (Flowserve) is a manufacturer and aftermarket service provider of flow control systems. The Company develops and manufactures precision-engineered flow control equipment, such as pumps, valves and seals, for critical service applications. It produces engineered and industrial pumps, industrial valves, control valves, nuclear valves, valve actuators and precision mechanical seals, and provides a range of related flow management services worldwide, primarily for the process industries. Flowserve Corporation offers a range of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. The Company operates through three business segments: Flowserve Pump Division (FPD), Flow Control Division (FCD) and Flow Solutions Division (FSD). In June 2006, the Company acquired HydroTechnik Olomouc, s.r.o., a mechanical seal manufacturer based in Olomouc, Czech Republic.

Breakout trigger: $83.50

Buy July $90 Call FLS-GR

Breakdown trigger: $77.50

Buy July $90 Call FLS-GR
 


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