Option Investor
Newsletter

Weekly Newsletter, Saturday, 03/08/2008

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Leaps Trader Commentary

Another Week, Another Record

OPEC met and decided not to increase production or cut production as some members had wanted. Crude weakened slightly only to blast off again when inventories declined slightly in Wednesday's report. After seven consecutive weeks of inventory builds totaling 25.8 million barrels we get one week of declines and the price exploded to $106.50. Obviously there was more to the story than that but you get the picture.

Weekly Inventory Table

Helping to fuel the run to a new record was comments from Hugo Chavez and some interesting information found in that raid of a FARC camp in Ecuador. Reportedly the Columbian troops recovered computers that had files detailing an offer by Chavez to pay $300 million in oil profits to FARC in return for stirring up trouble in Columbia. Chavez is supposed to have offered them a portion of the Venezuelan oil they could sell for a nice profit.

When news of the find was reported Chavez immediately called it a bunch of lies and broke off relations with Columbia. As the firestorm grew he warned that an attack on Venezuela by Columbia or anyone else (America) could send oil prices to $200 overnight.

There is nothing a skittish oil buyer hates more than the thought of conflict in an oil-producing nation. Even though Chavez is thought to be more bark than bite the price of oil climbed sharply.

The problem is the state sponsored terrorism by Venezuela if these charges turn out to be true. Reportedly $50 million had already changed hands. Chavez has already been caught trying to buy 50-kilograms of enriched uranium in order to make a dirty bomb. By funding FARC, a terror group that already rivals al-Qaeda in depravity and is on every international list of terror groups to be taken out, Chavez set himself up to be taken out by the U.S. or the U.N. As a state sponsor of terror he is actionable on almost any legal front. With Chavez in the crosshairs now his ranting and threats to cause an oil shock will only get worse. I am sure he lost more ground in the Exxon battle now that his credibility has been damaged even worse.

The U.S. imports 1.3 mbpd of oil from Venezuela. There are calls from various groups this week to halt those imports for as long as Chavez is in power. Since this is heavy oil and cannot be refined easily anywhere else on this side of the world this would put Chavez in an immediate cash bind as he raced to develop new outlets for his oil half a world away and at a substantially lower price. The price of crude would go up initially but it has been going up daily anyway. The U.S. could release 1.3 mbpd from the strategic petroleum reserve until other sources could be acquired to replace the Venezuelan oil. It would be an easy way to get rid of Chavez

I heard an interesting theory on why oil prices keep going up. We keep hearing about these sovereign funds from places like Saudi Arabia, Dubai, China, etc. They have hundreds of billions of dollars to invest. For Saudi and Dubai they also have oil to sell and some ability to directly impact the price by production but more importantly by the comments of OPEC where they are major players. This makes oil futures the ideal investment vehicle. If they start going down they just fire off a few comments as OPEC members and watch it shoot back up again. With their billions to spend they can also juice the daily trading patterns with perfectly timed buys and then sell into the rallies. The system was never expected to be gamed by players with hundreds of billions on the table.

In the case of countries like China and their investment entity they could be simply riding the wave and accumulating those futures contracts to offset future crude needs. If you know you will need 5 mbpd in Q4 and prices are rising then buying futures now hedges against any future price increases. Russia would also not be immune to the challenge of gaming the futures to juice prices for their oil. As long as oil is plentiful the game would not work. With spare capacity growing slim and fear in the markets it provides a fertile playground for the filthy rich. Lastly with stocks and bonds dropping every day the U.S. hedge funds have joined the commodity party to play in the only market that is booming.

I reported in the Option Investor commentary this weekend that Goldman Sachs had raised their projections for oil for the next three years. Goldman Sachs raised its average expected price to $95 for all of 2008, $105 in 2009 and $110 in 2010. Those are averages for the full year but their high end of the range is now expected to be $135 with possible spikes to $150-$200 if additional supplies do not come to market or we suffered a major disruption in some producing country. You may remember that Goldman shocked everyone two years ago with their $105 super spike projection. Looks like they were dead on with that projection and odds are good they are going to be dead on with their new projections. UBS said on Wednesday they could see oil prices over $150 by 2010 due to rising decline rates in older fields offsetting oncoming new production. Matthew Simmons, the investment banker from Houston who wrote Twilight in the Desert, was on CNBC on Friday saying oil prices could climb to $300 over the next few years. He did not put a date on it and it was obviously a tag line the anchor could use as a teaser. He repeated his comments about slowing discoveries, declining production and rising demand and warned of coming short falls and the crew on the set acted like he was an alien from another planet. They did not know what questions to ask or how to react to his predictions. I kept thinking, go ahead and laugh now because Simmons will have the last laugh sooner than you think.

This was not a good week for the portfolio. It is a bear market and the major indexes lost from 3%-6% for the week. I am tightening up the stops on the rest in case the January lows don't hold. If we suddenly saw some selling in crude along with the broader market it could get ugly. All of the positions now have stop losses.

Letters to the editor:

Hi Jim - I'm a subscriber of your Leaps Trader Newsletter and I wanted to write you about your latest issue. (March 2nd)

I'm seriously thinking about quitting the newsletter because of the unbearably negative rhetoric in your commentary. Without exaggeration, sensationalist comments like the ones below are making me lose sleep, and make me want to pull all my money out of the market and put it into CDs... (Reference to James Kuntsler and Mexico)

I find that rather than looking forward to the issue coming out every weekend, I'm now almost loathe to open the email due to the negativity. I think we all agree with and clearly understand your position that we're nearing or have reached peak oil, and I fail to see why comments like the above are necessary to make your point, especially in a market where the price of oil is rising steadily.

I just wanted to pass along these comments - I'm going to give it another week or two before I make my decision whether to stay with the newsletter, but I thought it would be appropriate to pass along a bit of feedback in case others are sharing my viewpoint. (Name removed)


Response:

First, thank you for writing and expressing your comments. I am sorry if I have offended you. I certainly hope everyone does not feel this way. I am very passionate about the coming disaster and when I start writing I get excited and quite often become too long winded. I believe most people who have heard the Peak Oil story accept it with a wink and a nod and think, "Sure, it may happen when I am old and gray." Even with $106 oil the realization may still be a long way off and reality has not yet struck home.

I firmly believe everything I write and feel it is my mission to educate everyone that will listen to me about the coming challenges to everyday life. We are talking about a life-changing event. I could ignore it or not write about it but I believe that would allow readers to put it in the back of their mind until one day at $150 oil, with high unemployment and a global recession and civil strife at home some readers would suddenly wake up and realize they missed the greatest investment opportunity of their lifetime. Even worse they will have failed to plan for their families future and be caught up in the maelstrom rather than watching it from a place of security.

I am going to open the question to the readership. If you want me to quit writing about the challenges ahead I will do it. If you are comfortable with my style and mix of current and future events then I would like to know that as well. Please email your comments to Jim (at) OptionInvestor.com. I have to write it that way to avoid the spam robots. Let me know, your feelings are important to me.

Jim Brown


April Crude Futures Chart - Daily

April Natural Gas Futures Chart - Daily

April Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays
C $20.88 Citigroup

Dropped Plays
FWLT Foster Wheeler *** Stopped $62 ***
NOV National Oilwell *** Stopped $59 ***
OII Oceaneering Intl *** Stopped $58 ***
VLO Valero *** Stopped $54 ***

New Watch List Plays Triggered
USO $83.73 Oil Fund - Short ** Stop Loss $85.00 **

Portfolio Listing & Top Picks

***********
Top Picks
***********

If you are looking to add another position this is my top picks 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.

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

Tough to pick even five this week after the markets dipped to new 52-week lows. I am still positive on these and they are holding their prior gains.

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

******************************
New Watch List Plays Triggered
******************************

USO $83.73 - Oil Fund - Short ** Stop Loss $85.00 **

That was about as much fun as a root canal. The dip on Tuesday triggered our short just before the Wednesday inventory numbers and Venezuelan terror news. Holding this short may be a challenge in the current environment. We have a clear breakout in progress, although news driven. I put a stop on it and we could end up taking some more lumps here.

Breakdown trigger: $79.00 hit Mar-4th

Position: April $77 PUT UNA-PY @ $2.70


********************
New Non-Energy Plays
********************

C $20.88 - Citigroup

Punk Ziegel's five-star banking analyst Dick Bove called Citigroup a trade of a lifetime on Friday. He said Citigroup was at levels not seen since 1999. It is trading at 8% below book value an historically wide margin. Bove thinks future write-downs will be less than expected. It has $2.2 trillion in assets, $5 billion a quarter in free cash flow, one of only six companies in the world that can make that claim and 200 million customers. It has the best franchise in the entire world, falling costs, new management and a market cap roughly equal to its revenues. They have written off $19 billion in assets over the last year and received investments from overseas investors of $20 billion to shore up their balance sheet. They are planning on reducing their mortgage portfolio by $45 billion in 2008. That is $45 billion in cash going right back into the bank. The write-downs are non-cash charges and a write down is not a write off. As the economy recovers those assets will recover to some number higher than they are today. Comparables in Q3/Q4 are going to be extremely low and Citi will probably post huge earnings. When rumors were circulating last week about the potential need for additional capital the new Citi CEO responded quickly and aggressively that there was NO ANTICIPATED NEED for additional capital. They have had plenty of time now to shuffle assets and build up cash. They are in the perfect position to profit from the eventual rebound in the financial sector.

I originally thought the calls to buy Citi were too early. We may still be early but $20 is good round number support. Their earnings are scheduled for April-18th more than a month from now. If we buy them now the call options are cheap. If we wait for a positive trend they will become expensive.

Company Info:

Citigroup Inc. (Citigroup) is a diversified global financial services holding company whose businesses provide a range of financial services to consumer and corporate customers. The Company is a bank holding company. Its activities are conducted through the Global Consumer, Markets and Banking, Global Wealth Management, and Alternative Investments business segments. Citigroup has more than 200 million customer accounts and does business in more than 100 countries. In July 2007, the Company merged with Citigroup Japan Investments LLC, a 100% subsidiary of the Company. In July 2007, Citigroup completed the acquisition of Old Lane Partners, L.P. and Old Lane Partners, GP, LLC. Old Lane will operate as part of Citi Alternative Investments (CAI), the Companys integrated alternative investments platform. Citigroup acquired Grupo Cuscatlan's banking operations, some of its insurance operations and other financial activities. In August 2007, Citigroup acquired The BISYS Group, Inc.

Buy 2010 $25 LEAP Call WRV-AE currently $4.00

Insurance:
Buy June $17.50 Put C-RR currently $1.25

Buying the insurance covers you against a catastrophic loss through mid June.


 


Play Updates

Existing Plays

MDR $53.31 +1.09 McDermott Intl *** Stop $49.00 ***

McDermott was the strongest stock in the portfolio last week and actually set a new two-month high on Thursday. Friday's decline knocked some off but the uptrend continued.

Position: Jan-09 $60 LEAP call OYZ-AL @ $6.90

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

OII $58.69 -1.31 - Oceaneering Intl *** Stopped $58 ***

OII declined on no news to hit our stop on Friday.

Breakout trigger: $65.50 (2/19)

Position: Short July $75 PUT OII-SO @ $12.80, exit 17.50, -4.70

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

UNT $54.88 -.27 Unit Corp *** Stop Loss $53 ***

No news, no change.

Breakout trigger: $52.00 hit 02/04

Position: Sept $55 Call UNT-IK @ $3.80

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

PBR $111.67 -5.67 Petrobras *** Stop Loss $108 ***

Petrobras lost ground again as the Latin American markets turned negative. Everybody is still bullish on Petrobras despite a slight drop in earnings the week before. This is profit taking in a down market. Petrobras is the number one deepwater play and has recently made discoveries in the billions of barrels. Support at $110 currently and I hope it holds but I am raising the stop just in case.

Breakout trigger: $101.50, hit 1/24

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

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

VLO $52.51 -5.26 Valero *** Stopped $54 ***

19-year highs in gasoline inventories and record oil prices combined to crush the refiners and Valero was at the top of the list. No specific news other than crack spreads going to zero or worse.

Breakdown trigger: $50.00, hit 1/23

Position:
2009 $60 LEAP Call VHB-AL @ $5.00, exit $6.30, 3/06, +1.30

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

FLS $100.64 -8.26 Flowserv *** Stop loss $94 ***

FLS declined to support at $100 on a bearish market rather than any news on Flowserve. I raised the stop to $94 just in case.

Breakdown trigger: $77.50, hit 1/22

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

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

FLR $138.51 -.74 - Fluor Corp *** Stop $105 ***

Thursday saw a rise to resistance at $145 followed by a $6 drop on Friday. Since FLR was up $6 for the week that just took us back to even. Citigroup, UBS and Friedman Billings recently upgraded FLR to a buy. Definitely no complaints.

Earnings: Feb 28th +$2.82 with items vs street $1.18

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 $136.31 -4.20 - Transocean Inc ** Stop Loss $130 **

No change and no specific news other than a lot of articles saying how good a buy RIG is at these levels. Support is $135 and I am adding a stop at $130.

Earnings: Feb 20th, +70%

Breakdown trigger: Hit 12/4 @ $130

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

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

CLB $118.25 -3.35 Core Labs *** Stop $115 ***

Core Labs held its own all week until the Friday decline setup by the market drop. Zacks reiterated their buy rating and a price target of $142. I am adding a stop at $115 just in case.

Earnings: $1.36, +39%.

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 $62.82 -2.63 - Foster Wheeler ** Stopped $62 **

The $10 decline the prior week sealed our fate. I raised the stop to just under the drop and Friday's failure took us out. The nearly $20 drop in two days on an earnings miss was too much to overcome.

Earnings: Feb-26th Missed 56 vs 76 cents due to items.

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, exit 3/07 $9.20, -5.25

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

NOV $59.96 -2.34 - National Oilwell Varco *** Stopped $59 ***

NOV moved one step closer to acquiring Grant Prideco with the antitrust approvals in the bag. Now the Prideco shareholders have to approve it. The deal is worth 13% less now than when it was announced due to weakness in the acquirer's shares. The merger news pushed NOV below our stop taking us out of the play.

Earnings: Feb 6th +57%

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

Position:
2008 May $90 Call NON-ER @ $7.20, exit 3/07, .25, -6.95

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

HP $44.15 -.68 Helmerich & Payne *** Stop Loss $41 ***

Still one of the most bullish charts in the sector. HP confirmed they have a contract to operate 7 new flex rigs in Latin America on five-year contracts beginning in Q4.

Earnings: Jan-31st $1.02

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

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

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

JEC $76.02 -4.27 Jacobs Engineering *** Stop $73.00 ***

Can I have that entry back from last week? JEC held at support at $79 all week until Friday. The -2.50 drop took JEC back to next level support at $75. Lots of positive news about new contract wins but the market drop was too strong for JEC to overcome.

Breakout trigger: $82.50 hit 2/25

Position: 2009 $90 LEAP Call VJE-AR @ $12.00

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

ATI $77.35 -7.28 - Allegheny Technology *** Stop $69.00 ***

No news but a major drop. For the second strait week ATI had one bad day that knocked major bucks off the price. I put a stop just under Friday's low.

Entry: ATI 76.60 02/10

Position: 2009 $90 LEAP Call OYG-AR @ $8.90

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

TEX $64.45 -3.00 Terex Corp *** Stop $59.00 ***

Tuesday and Friday were the only losing days but they combined to push TEX just under support at $65. TEX completed the acquisition of ASV on Tuesday. Adding a stop at $59.

Earnings: Feb 21st, +72%, +27% in revenue

Position: Jan 2009 $70 LEAP Call VXQ-AN @ $8.60

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

SGR $60.08 -4.30 Shaw Group ** Stop $57 ***

No material news but $6 of declines in the last two days along with the market. Adding a stop at $57.

Breakdown trigger: $55 Hit Jan-16th

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

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

MOS $104.06 -7.24 - Mosaic Co *** Stop $97.00 ***

MOS was holding its gains very well until Friday and the -7.39 drop accounted for the entire week's move. No specific news but the number of analysts singing its praises continues to grow. I added a stop at $97.

Breakdown trigger: $85 Hit Jan-10th

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

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

AAPL $122.25 -2.77 Apple Inc *** Covered LEAP Call ***

Apple continues to hold over $120 after a positive shareholder meeting and a successful developers conference. It may be too much to hope that the weakness is behind us but lets do it anyway.

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 $150 LEAP Call VAA-AW @ $20.80
Breakeven: AAPL @ $136.12

Position changes:
Closed $200 LEAP Short @ $9.40 ($30.00 - 9.40 = gain +20.60)
Replaced with $150 LEAP short @ $20.80
AAPL cost basis $177.52 - $41.40 (20.60 + 20.80) = 136.12
Breakeven: AAPL @ $136.12

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

RIMM $98.04 -5.76 Research in Motion - Stop Loss $80

RIMM was knocked for a two week loss of -15 on worries that Apple was going to steal its thunder with the iPhone revisions. It is too soon to know if the weakness will stick and $95 is decent support.

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 (cost $102.60 -9.10 $150 LEAP = 93.50)
SHORT 2009 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

Closed: 1/14
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 +9.10
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
TS
Tenaris

Current Watch List

TS - Tenaris

Tenaris is a global manufacturer of pipe used in oil and gas drilling and infrastructure. Business is not expected to slow.

Company Info

Tenaris S.A. (Tenaris) is a holding company. The Company, together with its subsidiaries, operates as a global manufacturer and supplier of tubular products and services used in the drilling, completion and production of oil and gas, and a supplier of tubular products and services used in process and power plants, and in specialized industrial and automotive applications. It has three major business segments. The Tubes segment includes the operations that consist of the production and sale of both seamless and welded steel tubular products and related services mainly for energy and industrial applications. The Projects segment includes the operations that consist of the production and sale of welded steel pipe products mainly used in the construction of major pipeline projects. The Others segment includes the operations that consist of the production and sale of sucker rods, welded steel pipes for electric conduits, industrial equipment and raw materials, such as hot briquetted iron

Breakdown trigger: $44.00

Buy SEP $50 Call TSW-IK
 


DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives