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Weekly Newsletter, Saturday, 04/05/2008

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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

Logic Does Not Apply To Energy

I hate to seem like a broken record but the insane movement in the price of oil given an off the chart gain in inventory shows there is no logic at work in the oil sector. On Wednesday the EIA showed a gain of 7.3 million barrels of oil for the week. This was the largest inventory build since the week of Dec-14th and should have been bearish for prices. Instead prices rebounded from the Tuesday low of $99.55 to close at $106.16 for the week. Nearly a $7 gain on a 7 million barrel build.

Some analysts blamed it on gasoline, which has seen three consecutive weeks of losses totaling 11.2 million barrels. Gasoline inventories are falling so oil has to move higher or so the sentiment goes. Why? Gasoline levels were at 15-year highs. They needed to decline. Oil inventories are rising because refiners are putting capacity on hold rather than refine gasoline at a loss. Capacity for last week was 82.45 rather than the 90-95% we normally see. The shift in inventories for gas/oil was normal and reasonable. The gain in price was not. The falling dollar also got the blame as did temporary refinery outages on the West Coast.

Weekly Inventory Table

Further evidence of an impending oil glut came from the Persian Gulf. Oil from the various OPEC countries in the Persian Gulf comes to the U.S. on Very Large Crude Carriers (VLCC) tankers. These lease by the day and are normally in very short supply when oil is tight. Over just the last week the daily rental rate on a VLCC fell from $56,000 to $35,000. This indicates a sudden decrease in the number of bookings and by inference to a slowdown of shipments to the U.S. shores. Wednesday's EIA report showed the lowest import rate since Jan-2007. All of these facts support the case for lower oil prices at least in the short-term. Nobody is listening.

Last week I reported that 61-year Aloha Airlines went out of business. On Thursday ATA filed for bankruptcy, laid off all 2200 employees and ceased operations. On Saturday budget airline Skybus ceased operations and said it would file bankruptcy next week. The problem was high oil prices, tough competition and the inability to raise ticket prices to cover rising costs. Northwest said they were embarking on an immediate cost cutting program to combat the tough times facing the airline industry. On Saturday American Airlines said it was imposing a hiring freeze in an attempt to further cut costs. American spent $9.3 billion in fuel in 2007, more than triple the amount they spent in 2000. This story is far from over and not everyone believed me last week. I wrote about the tough times ahead for the airlines before all this news broke. Now there are three less carriers and that will help ticket prices but only slightly. There needs to be a lot more pain before those remaining will begin hiking prices enough to save themselves from the same fate.

India announced to the world this weekend that they are going to be a force to be reckoned with as a global competitor in exploration and development of the world's remaining reserves. India said it will spend $300 billion over the next 5-7 years on exploration and production. India is Asia's third biggest oil consumer with a population of more than one billion. Spending more than $45 billion a year would put them well ahead of Exxon's $25 billion budget. They said they would be investing $450 million in exploration in Venezuela and will sign an agreement with PDVSA next week. They will be exploring in the San Cristobal area. The sudden emergence of India from relative obscurity in the energy sector suggests they will be going head to head with China on the global exploration stage.

We had a great week in the portfolio and that means several positions are due for some profit taking. I cut the top picks list to only four and a couple of those need to pull back to get an entry.

Jim Brown


May Crude Futures Chart - Daily

May Natural Gas Futures Chart - Daily

April Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks

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

If you are looking to add another position this are 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.

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

After strong gains across the board I am only including 4 stocks in the top picks this week. My Interquote is down so no graphic this week.

Top Picks

TS Buy dip to $49
MDR Buy breakout to $59
CY Strong resistance at $27.50, buy breakout
SPWR Buy pullback to $80
 


New Plays

Most Recent Plays

None this week.
 


Play Updates

Existing Plays

*******************
Energy Play Updates
*******************

MDR - $58.16 +2.51 McDermott Intl ** No Stop **

No specific news but another nice week for McDermott.

Breakout trigger: $51.00 (hit 3/24)

LEAP Call Spread
Long 2009 $55 LEAP Call OYZ-AK @ $8.28
Shrt 2009 $75 LEAP Call OYZ-AO @ $3.10

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

TS $51.00 +2.17 - Tenaris *** Stop Loss $42 ***

Easing over resistance at $50 and a new 5-month high. No specific news but the uptrend is continuing.

Breakdown trigger: $46.00 hit 3/19

Position: SEP $50 Call TSW-IJ @ $3.40

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

HP $49.41 +3.25 Helmerich & Payne *** Stop Loss $41 ***

HP broke out to a new historic high and never looked back. It has been a long time since an energy stock hit a new high even with oil at $110. This is still a buy on any pullback.

Earnings: Jan-31st $1.02

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

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


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

SPWR $90.40 +16.77 - SunPower

SunPower continues to rock with news items almost daily about new projects in the solar sector. Definitely no complaints here.

Southern California Edison announced a 250-megawatt solar project in California that will consist of two square miles of solar panels. That turned up the heat on the solar stocks and the race was on. That single project is more than the entire U.S. production of solar cells in 2006.

Here is the story

Breakout trigger: $66 (hit 3/24)

LEAP Call Spread
Long 2010 $80 LEAP Call LMO-AP @ $20.00
Shrt 2010 $130 LEAP Call LMO-AW @ $8.70

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

CY 26.68 +3.67 - Cypress Semi *** Stop Loss $21.50 ***

No specific news on Cypress other than an earnings date of Apr-17th. Cypress is spiking on the gains in SunPower where they are a major stockholder.

Breakout trigger: $21.50 (hit 3/24)

Position 2010 $25 LEAP Call WSY-AE @ $4.90

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

TOL $24.46 +2.01 - Toll Brothers *** Stop Loss $21.50 ***

Toll is holding right at resistance but showing no indications of a failure. Odds are good we are either going to see a sell the news/rally event this week or a breakout. It is a coin flip from my view.

Breakout trigger: $25

Position: 2010 $30 LEAP Call YKW-AF @ $5.40

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

C $24.08 +3.25 - Citigroup *** Stop Loss $20.00 **

Citi is holding its gains for the week but showing no indications it is going higher. For short-term traders the rebound from the March lows provides a perfect exit point. For bears they may not be so eager to jump back in just yet.

Position: 2010 $25 LEAP Call WRV-AE @ $4.00

Insurance:
Position: June $17.50 Put C-RR @ $1.25


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

AAPL $153.08 +10.07 Apple Inc *** Covered LEAP Call ***

This week is going to be a critical resistance test for Apple at $155 and the convergence of the 100/200 ($154/$150) day averages. A positive breakout here would be huge.

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 $119.99 +4.65 Research in Motion - No stop

Another 3-month high on blowout earnings. Definitely no complaints here.

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

None - I am cautiously pessimistic for next week. I do believe oil could weaken and the broader market did not handle the jobs numbers well.

Current Watch List

PBR - Petrobras

This company has everything going for it and there is no reason for this decline other than sector rotation. If we see $90 on a dip we need to be buyers.

Company Info:

Petroleo Brasileiro SA - Petrobras (Petrobras) is a Brazil-based holding company engaged in the exploration, production, refinement and distribution of oil and gas. The Company is involved in four business areas: Exploration and Production, Downstream, Gas & Energy and International. Petrobras has 109 production platforms and 15 refineries. It operates 31,089 kilometers of pipelines. The Company has various subsidiaries: Petrobras Quimica SA - Petroquisa, which is engaged in the production, commercialization, distribution, import and export of chemical products; Petrobras Distribuidora SA - BR, which is involved in the distribution and commercialization of oil products and natural gas, and Petrobras Netherlands BV - PNBV, which is active in the purchase, sale and rent of equipment and platforms for the production of oil and gas. Petrobras operates in Brazil, Argentina, Mexico, Portugal, the United States, Peru and Turkey, among others.

Breakdown trigger: $100 *** New Trigger ***

Buy 2010 $120 LEAP Call YMO-AD ** New Strike **
Sell 2010 $140 LEAP Call YMO-AH

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

USO - U.S. Oil Fund

The USO fell -$8 last week to trade under $80. If we really get some margin selling in the commodities and especially oil it is possible but not probable we could see $72. If by some freak combination of circumstances we do tag that level we want to be long.

Breakdown trigger: $72

Buy 2009 $75 LEAP Call OLL-AW
Sell 2009 $95 LEAP Call OLL-AQ
 


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