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Weekly Newsletter, Saturday, 01/26/2008

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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

Not Having Fun

A lot happened since last week and none of it was fun. The global implosion in equities of more than 10% on many exchanges cast a dark spell over the market. Strong stocks as well as weak ones were slammed hard and on no material change in fundamentals. If you read my Option Investor commentary this weekend you know that much of the decline was related to the Societe Generale $100 billion futures fraud. That flush of 1.5 million Eurostoxx 50 and DAX futures contracts sank not only Europe but indexes around the world.

When a global meltdown of 10% occurs overnight the fundamentals go out the window. Panic sets in and anything with profit is sold to protect that profit and anything with a trailing stop is taken out as well.

This knocked oil prices back to $85 despite no material change in the outlook. It was simply panic selling at the time on what was called recession fears. Now that we know the real reason it does not help ease the pain of losses.

We only lost three positions due to stops last week, CNQ, CVX and DNR. The Tuesday dip allowed us to get back in to VLO, CAM, PBR and a new position in FLS.

On the energy front OPEC meets on Feb-1st to discuss production levels but the outcome has already been decided. The dip to $85 and two weeks of inventory gains in the U.S. is all OPEC needs to justify not raising production ahead of the normal demand decline in Feb/Mar. Adding to their reluctance to boost production was news out of Iraq that production had risen +400,000 bpd to 2.3 mbpd and the highest level since the war began. They expect another 400,000 bpd increase in 2008. Iraq is an OPEC member but currently does not have any production quota. Offsetting the Iraq gains is a continued drop in Nigerian production. March output is expected to fall -420,000 bpd due to continued problems.

Next week is energy earnings week with XOM, CVX, OXY and dozens of smaller companies reporting. Conoco reported last Tuesday with a 37% boost in profits despite lower production levels. Conoco earned $4.37 billion or $2.71 per share compared to $1.91 in the comparison quarter. Conoco is rapidly going private having bought back $7 billion in shares in 2007 and approving a $15 billion buyback for 2008. The major oil companies have to buy back millions of shares to keep their numbers positive as production levels fall. If it were not for the much higher prices for oil the earnings per share would be lower. You can't produce less every year and continue to increase earnings per share without the buybacks and benefit of record prices.

Coal was back in the news last week as rolling blackouts made the news in South Africa. Coal had been depressed on the bad rap for greenhouse emissions but the news of power shortages in Africa, India and China produced a sudden interest in owning coal companies. BTU, FDG and CNX spiked sharply off multi week lows to set new highs in the case of FDG and CNX. There is no use chasing them today and I believe the bounce will fade as winter ends. A normal winter returned this year with significant cold spells in the northern hemisphere. Cold weather set new energy consumption records in France and Spain and December was the coldest month since 2000. China reported the coldest, snowiest winter in decades and halted coal exports as the country struggled to meet power needs. The government ordered the railroads to make coal a priority. Ocean shippers were told to stop loading coal for export and divert other shipments to China. State officials said last week there is only enough coal for eight days of power. 70% of coal deliveries in China are made by road and severe snowfalls and icy roads are hampering delivery. In January it snowed in Iraq and Saudi Arabia, something that has not happened in more than 20 years.

China's oil demand soared in December to the highest growth rate in seven months. For all of 2007 China's consumption rose by 3.5% with December consumption at 7.2 mbpd. They are the second largest consumer behind the U.S. at 22 mbpd.

Natural gas drilling in the U.S. broke records in 2007 with an estimated 52,731 total oil/gas wells drilled. Gas wells were estimated to be 30,625. There was a 20-year high on completions in Q4 of 13,737 wells. Unfortunately, total North American gas production continues to fall.

Shell Oil issued a memo to its employees saying the energy outlook was changing rapidly. The memo said by 2015 there would not be enough oil supply to keep up with demand. Shell offered several scenarios as possibilities as we approach the peak in production. In their "scramble" scenario nations rush to secure energy resources for themselves, fearing that energy security is a zero-sum game with clear winners and losers. I have been preaching this scenario for three years. Their second scenario called "blueprints" suggested there would be numerous broad coalitions joining together for the common good. I wrote about this recently and the potential for countries to barter with each other for things like minerals, defense and technology in exchange for oil supplies. Regardless of what scenario or combination of scenarios appear the world after 2010 is going to be a much different place. Shell as well as the other oil majors are slowly moving their dates for peak production closer to reality. They do not want to alarm everyone by saying the end is near but like the frog in a pot of warm water they keep turning up the heat slowly.

The crash in prices last week may have altered the normal Feb/Mar price drop as winter demand slows and summer demand has not yet started. In theory we want to enter new energy positions in Feb/Mar to capitalize on the lower price but it remains to be seen if that normal cycle was altered by the high volume of early sellers last week. Support is still in the $86-$88 range and we will need to monitor it to see if the pattern has been broken.

Jim Brown


March 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
CAM $43.99 Cameron *** Stop Loss $39 ***
PBR $104.62 Petrobras *** Stop Loss $88 ***
VLO $54.59 Valero *** Stop Loss $47 ***
FLS $82.23 Flowserve *** Stop Loss $74 ***

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.

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

Back to ten favorites in the top ten list. 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

CAM $43.99 - Cameron *** Stop Loss $39 ***

Nice dip to support at $40 triggered our reentry into CAM at $42.50. No news.

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.

Breakdown trigger: $42.50, hit 1/22

Position: 2009 $50 LEAP Call OKA-AJ @ $5.50

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

PBR $104.62 - Petrobras *** Stop Loss $88 ***

Petrobras did not decline in the global meltdown as severely as the other stocks. Strong support at $90 kept us from being triggered on the dip but we did take a breakout entry on the rebound. Petrobras is in a very strong position among the global giants and should continue higher assuming there are no more SocGen disasters.

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, hit 1/24

Position: 2009 $110 LEAP Call XVQ-AB @ $12.70

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

VLO $54.59 - Valero *** Stop Loss $47 ***

Nice dip to support at $50 for our reentry. VLO had a refinery fire in Aruba last week with some drop in production. Zacks reiterated a buy rating on VLO saying the recent weakness has made VLO particularly attractive ahead of the summer demand cycle. Their target price is $75.

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, hit 1/23

Position: 2009 $60 LEAP Call VHB-AL @ $5.00

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

FLS $82.23 - Flowservev *** Stop loss $74 ***

Excellent entry on the dip. FLS just reported record bookings for Q4 up +19% to $1.1 billion. They also reported a record 19% increase for all of 2007.

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.

Breakdown trigger: $77.50, hit 1/22

Position: July $90 Call FLS-GR @ $6.00


 


Play Updates

Existing Plays

DNR $24.95 +.26 - Denbury Resources ** Stopped $24 **

Broke even for the week but the market drop took us out at $24.

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

Position: June $30 Call DNR-FF @ $2.25, exit 1.15, -1.10

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

FLR $120.95 +3.84 - Fluor Corp

That was much better than the prior week. Friedman Billings upgraded FLR to an outperform and support held at $110. No other specific news.

Breakdown trigger: $145 Hit 12/13

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

Remediation plan: 1/20
LONG: April $110 Put FLR-PB @ $9.20
SHORT: Jan $170 LEAP Put XOB-MN @ $58.40

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

RIG $127.11 -1.30 - Transocean Inc

Fortunately we did not have a stop on RIG as it fell to $111 on Wednesday and then rebounded to $133 on Friday. News that Allis Chalmers (ALY) was paying $438 million for Bronco Drilling (BRNC) pushed all the drillers higher.

Earnings schedule: Feb 20th

Breakdown trigger: Hit 12/4 @ $130

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

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

JEC $77.18 +2.97 Jacobs Engineering Group *** Stop $70 ***

JEC held up very well last week and the Tuesday morning dip was instantly bought in high volume. That is a good sign for the future of JEC. JEC reported earnings that rose +61% and bookings increased to $15 billion from $10.4 billion. JEC raised its full year 2008 outlook to $2.95-$3.25 from $2.70-$3.10 saying business trends were very positive.

Earnings: Jan 22nd, +61%

Breakdown target: $80.00 Hit 11/12

Position: Jan-2009 $90 LEAP Call VJE-AR @ $10.40

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

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

CNQ $63.00 -0.77 Canadian Natural Res. *** Stopped $61 ***

Blown out in the market drop. CIBC and Friedman Billings both upgraded to an outperform.

Entry 11/29: $66

Position 11/29: 2009 $90 LEAP Call OKR-AR @ $6.50, exit 1.90

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

CLB $112.65 +1.16 Core Labs

No news, big +18 rebound from the weeks lows. Still holding at support at the 200-day average.

Earnings schedule: Feb 14th

Breakdown Trigger: $130 hit 11/12

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

Remediation addition:
Position: June $130 Call CLB-FF @ $6.10

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

FWLT $65.57 +.60 - Foster Wheeler

Foster split 2:1 on Jan-23rd and our $150 LEAPS became (2) $75 LEAPS. DA Davidson upgraded FWLT to a buy on Jan-24th. No other news.

Earnings schedule: Feb-26th

2:1 split on Jan-22nd.

Breakdown trigger: $67.50 hit 11/06 (post split)

Position: (2) 2009 $75 LEAP Call ZHF-AO @ $14.55

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

XOM - $83.94 -1.14 Exxon Mobil

Very thankful there was no stop on XOM. The Wednesday dip knocked it back to $77 and the Friday high was $87. Earnings are Friday.

Breakdown trigger: $88 Hit 11/01

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

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

CVX $81.82 -1.64 - Chevron *** Stopped $78 ***

Support broke at $80 and we were stopped on the dip.

Earning schedule: Feb-1st.

Breakdown trigger: $87 hit Oct-22nd

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

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

NOV $63.57 +4.02 - National Oilwell Varco

Another position I am glad there was no stop. The dip to $53 on Tuesday was followed by a rebound to $68 on Friday on the Bronco Drilling acquisition. That is a $15 bounce we would have missed with a stop.

Earnings schedule: Feb 6th

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

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

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

HP $35.77 +0.30 Helmerich & Payne *** Stop Loss $29.50 ***

Not near the volatility as NOV and RIG and still well above our stop and our insurance put. Earnings are Thursday.

Earnings schedule: Jan-31st

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

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

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

SGR $53.50 -1.50 Shaw Group

A $12 range on Shaw and they closed very close to the top. The news is full of new contract awards and all we need is for the market to cooperate.

Breakdown trigger: $55 Hit Jan-16th

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

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

MOS $91.40 +11.38 - Mosaic Co

Biggest winner of the week with a $27 range from the Tuesday low to the $98 high on Friday. MOS did not hit our $70 target to add the put spread so that plan is now off the table. The volatility here is huge and I could not justify adding a simple insurance put for $3 at $20 out of the money. We just need to fasten our seatbelts and hold on. The strong Potash profits and guidance provided rocket fuel to Mosaic and let's hope that trend continues.

Breakdown trigger: $85 Hit Jan-10th

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

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

AAPL $130.01 -31.33 Apple Inc *** Covered LEAP Call ***

Of all the plays in the portfolio I am most disgusted with myself for picking Apple. I really did not expect them to screw up so bad or for the market to cut them off at the knees. Now we are faced with a position we can't afford to exit without first recovering some money.

Close the short 2009 $200 LEAP currently $9.40
Short the 2009 $150 LEAP Call currently $20.80

That will reduce our cost in AAPL as follows:

LONG AAPL @ $177.52 (Jan-14th open)
Closed $200 LEAP Short ($30.00 - 9.40 = gain +20.60)
Short $150 LEAP @ $20.80
AAPL cost basis $177.52 - $41.40 (20.60 + 20.80) = 136.12

When Apple starts to post a new positive trend we will do a put spread to recover some more money. First we wait for the trend.

Position:
Long: AAPL @ open of $177.52 (Jan-14th open)
Short: 2009 $200 LEAP Call OBR-AT @ $30.00
Breakeven: AAPL @ $136.12

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

RIMM $91.05 +2.47 Research in Motion - Covered Call Stop Loss $80

RIMM saw a nice rebound from its $80 lows after the CEO said they expected little impact from any potential recession. RIMM actually came close to touching the $100 level on Friday before the afternoon sell off knocked them back to $91. The high was $99.49. There is life left in this stock if the market decides to move higher.

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 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

Closed:
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 1/14
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries

None - We don't know which way the market is going and until we do we need to keep a low profile. We still have 18 positions and nothing I saw this weekend was exciting enough to add to the watch list. Let's be patient here.

Current Watch List

None
 


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