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Weekly Newsletter, Saturday, 09/20/2008

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Table of Contents

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

Leaps Trader Commentary

Waving the White Flag

How do we react to the wildest week I have ever seen in the markets? The financial markets were being whipped into a frenzy by daily news events and the government is stepping in daily to manage the outcome. This is not a market. It is a financial system being reported by the National Enquirer.

The government banned short selling on 799 stocks in a quadruple witching expiration week. Since option market makers cover themselves when they sell us puts by shorting the stock this was a very nasty event. Sure it was only financial stocks but that makes up the biggest sector of the stock market and therefore the majority of any index fund. It should surprise nobody that the markets reacted strongly to the news. Volume across all exchanges was more than 18 billion shares on Thursday and a new record.

If that was not enough the government announced a plan to announce (not a typo) the erasure of half a trillion in bad mortgages off the books of banks suffering under the crush of bad loans. What market would not rally when the Fed and Treasury announced they were going to sprinkle fairy dust on bad balance sheets. If only they had acted two weeks earlier Lehman and Merrill would still be independent.

The price of oil is not related to financial stocks in the strictest sense but it rallied nearly $15 from the Tuesday lows. Did peak oil suddenly appear? Not unless I missed the announcement. Oil inventories were down sharply at -6 million barrels but that was far less than most whisper numbers. Gasoline inventories at 184 million barrels were at the lowest level since records have been kept starting in 1990 but we already knew than before the inventory report.

There were multiple reasons for oil rising, including the approaching expiration of the October contract on Monday, but the main reason was simply short covering and general market hysteria. If you can no longer short financials and the Fed is going to magically heal the financial sector then funds have to find someplace to put all that money they made shorting banks. Commodities suddenly looked like a safe haven since the dollar was going to tank on the massive government bailout of our financial system. The U.S. dollar index fell nearly 300 basis points over just the last week. The new 12-month high in the dollar on 9/11 was quickly turned into a new two week low.

It is impossible to invest in this market. You can trade it if your time in the position is measured in minutes instead of days but you can't invest in it. Goldman Sachs had a $68 range for the week. Several energy stocks had a $20 range. The monster intraday swings make holding any position with a stop loss a loss period. I have never seen a market so volatile with 400 point swings commonplace.

Will next week be any different? I sure hope so but until a trend actually appears I think we need to watch from the sidelines.

I just arrived in Sacramento for the Peak Oil conference, which begins on Sunday for three days. I am sure the news from the last two weeks will be on everyone's discussion list. I will be reporting daily in the nightly emails on what we heard and what everyone expects. Maybe by this time next week the markets will have cooled and we can return to taking a position that last more than a couple days. At least we will have the most current information available about the fundamentals of the oil market. That does not guarantee an instant profit but at least gives us a base from which to plan.

Jim Brown


October Crude Futures Chart - Daily

October Natural Gas Futures Chart - Daily

October Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None - see watch list


New Non-Energy Plays

None - see watch list


Dropped Plays
GS Goldman Sachs *** Stopped ***
HP Helmerich Payne *** Stopped ***
FTI FMC Technology *** Stopped ***
PCP Precision Cast Parts *** Stopped ***
USO US Oil Fund *** Stopped ***
VLO Valero *** Stopped ***
HES Hess Corp *** Stopped ***

New Watch List Plays Triggered
NOV $60.09 National Oilwell Varco
NE $46.88 Noble Corp
PBR $47.32 Petrobras
FTK $13.90 Flotek
MDR $32.83 McDermott Intl
JEC $64.41 Jacobs Engineering
FLR $64.11 Fluor

Portfolio Listing & Top Picks

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

If you are looking to add another position these 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.

No Top Picks This Week:

For several weeks I warned we could see oil drop to the mid $90s and that happened last week. The sharp rebound on government moves to stabilize the financial sector is way overdone. I am not suggesting adding to any plays next week.
 


New Plays

Most Recent Plays

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

NOV $60.09 - National Oilwell Varco

Company Info:

National Oilwell Varco, Inc. is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. It has three segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services. The Rig Technology segment designs, manufactures, sells and services systems for the drilling, completion and servicing of oil and gas wells. The Petroleum Services & Supplies segment provides consumable goods and services used to drill, complete, remediate and workover oil and gas wells, service pipelines, flowlines and other oilfield tubular goods. The Distribution Services segment provides maintenance, repair and operating supplies, and spare parts to drill site and production locations worldwide. In July 2007, NOV acquired, through a wholly owned subsidiary, a 76% stake in Sara Services and Engineers Private Limited. In April 2008, it acquired Grant Prideco, Inc.

No LEAPS

Breakdown trigger: $53, Hit 9/15

Position: FEB $60 Call NOV-BL @ $5.50

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

NE $46.88 - Noble Corp

Company Info:

Noble Corporation (Noble) is engaged in contract drilling services worldwide. It performs contract drilling services with its fleet of 62 offshore drilling units located worldwide. This fleet consists of 13 semi-submersibles, three drillships, 43 jackups and three submersibles. The fleet count includes two F&G JU-2000E jackups and three deepwater dynamically positioned semisubmersibles under construction. As of December 31, 2007, approximately 85% of its fleet was deployed internationally. Its other operations include labor contract drilling services, and through November 2007, engineering and consulting services. Its operations are conducted principally in the Middle East, India, United States, Gulf of Mexico, Mexico, the North Sea, Brazil, West Africa and Canada. During the year ended December 31, 2007, Noble completed the rationalization of its technology services division with the sale of the rotary steerable system assets of its Noble Downhole Technology Ltd. subsidiary.

Breakdown trigger: $44, hit 9/15

Position: 2010 $50 LEAP Call YVJ-AJ @ $7.80

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

PBR $47.32 - Petrobras

I am still leery of Petrobras because of possible government intervention but they just discovered another 5-8 billion barrel field in early September. Estimates on costs to build out the Tupi field range from $600 billion to $1.2 trillion. Brazil does not have that kind of money and may be deciding it is best to leave Petrobras intact and able to raise the money through the market.

Company Info:

Petroleo Brasileiro SA - Petrobras (Petrobras) is a Brazil-based holding company is engaged in the exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and in the refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy related activities. Petrobras has 109 production platforms and 15 refineries. It operates 31,089 kilometers of pipelines. The Company has various subsidiaries: 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: $40, hit 9/16

Position: 2010 $50 LEAP Call YMO-AJ @ $4.80

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

FTK $13.90 - Flotek

Company Info:

Flotek Industries, Inc. is a global supplier of drilling and production related products and services to the energy and mining industries. Its core focus is oilfield specialty chemicals and logistics, downhole drilling tools and downhole production tools. Flotek offers its products primarily through its sales organizations, as well as through independent distributors and agents. The customers for its products and services include oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. Five customers accounted for approximately 34% of its consolidated revenue during the year ended December 31, 2007. The Company's reportable segments are Chemical and Logistics, Drilling Products and Artificial Lift. All three segments market products domestically and internationally.

Breakdown trigger: $11, hit 9/15

Position: 2010 $15 LEAP Call YVB-AC $3.60

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

MDR $32.83 - McDermott Intl

Company Info:

McDermott International, Inc. is an engineering and construction company with specialty manufacturing and service capabilities and is the parent company of the McDermott group of companies, including J. Ray McDermott, S.A. (JRMSA) and The Babcock & Wilcox Company (B&W). The Company operates in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems. On July 27, 2007, the Company acquired Secunda International Limited. On May 1, 2007, it acquired Marine Mechanical Corporation.

Breakdown trigger: $27, hit 9/16

Position: 2010 $35 LEAP Call YAE-AG @ $4.90

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

JEC $64.41 - Jacobs Engineering

Company Info:

Jacobs Engineering Group Inc. (Jacobs) is a professional services firm in the United States. The Companys business focuses on providing a range of technical, professional and construction services to industrial, commercial, and governmental clients around the world. Jacobs provides four categories of services: Project Services (which include engineering, design, architectural, and similar services); Process, Scientific and Systems Consulting services (which includes services performed in connection with a variety of scientific testing, analysis and consulting activities); Construction services (which encompasses traditional field construction services, as well as modular construction activities, and includes direct-hire construction and construction management services), and Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients, as well as services involving process plant maintenance).

Breakdown trigger: $60, hit 9/15

Position: 2010 $80 LEAP Call WEU-AP $6.80
(No $70 LEAP listed)

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

FLR $64.11 - Fluor

Company Info:

Fluor Corporation is a holding company that, through its subsidiaries, provides engineering, procurement and construction management (EPCM) and project management services. Fluor serves a number of industries worldwide, including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing. Fluor is also a primary service provider to the United States Federal Government. It performs operations and maintenance activities for major industrial clients, and also operates and maintains their equipment fleet. The Company is aligned into five principal operating segments: Oil and Gas, Industrial and Infrastructure, Government, Global Services and Power. Fluor Constructors International, Inc., which is organized and operates separately from its business segments, provides unionized management, construction and management services in the United States and Canada, both independently and as a subcontractor on projects to its segments

Breakdown trigger: $60, hit 9/15

Position: 2010 $70 LEAP Call LLF-AZ, @ $11.60

 


Play Updates

Existing Plays

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

VLO $34.18 -$1.69 - Valero *** Stopped ***

The Tuesday dip hit $28.93 and triggered our $29 stop loss by 7 cents. There is no justice in the world this week.

Breakdown trigger: $32, hit 9/09

Position: 2010 $40 LEAP Call YPY-AH @ $4.50, exit $3.60 9/16

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

USO $82.63 +1.14 - US Oil Fund *** Stopped ***

The USO dropped -$8 from Friday's close to Tuesday's low then recovered to close up for the week. Our stop at $78.50 was hit on Monday.

Breakdown trigger: $82, hit 9/10

Position: JAN $90 Call UNA-AL @ $5.30, exit $3.50 9/15

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

HP $52.66 +4.69 - Helmerich & Payne *** Stopped ***

HP tagged our $42 stop on Tuesday and then rebounded +10 before the week was over.

Breakdown trigger: $52, hit 9/02

Position: 2010 $60 LEAP Call LQB-AL @ $9.10, exit 6.70 9/16

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

PCP $88.40 -14.65 - Precision Cast Parts *** Stopped ***

PCP was the only real loser for the week. The other stops were hit on the market dip and then rebounded. PCP was crushed and the rebound was sold on no news.

Breakout trigger: $105, Hit 9/02

Position:
Jan 2010 $120 LEAP Call YAM-AD @ $14.90, exit 12.40 9/16

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

HES $94.78 +2.50 - Hess Corp *** Stopped ***

Hess was another market victim falling to $71 on Tuesday only to rebound to close over $94 on Friday. A $23 rebound after we were stopped.

Breakdown trigger: $95, hit 9/03, net debit $4.40

Long 2010 $100 LEAP Call WHS-AT @ $20.70, exit 10.70 9/16
Short 2010 $90 LEAP Put WHS-MR @ $16.30, exit 23.80 9/16

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

FTI $52.77 +2.59 - FMC Technologies *** Stopped ***

Another Tuesday dip causality and a $10 rebound from the week's lows.

Entry $48.88 9/07

Position: APR $55 Call FTI-DK @ $5.60, exit 3.90 9/16


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

XHB $22.37 +1.11 - S&P Homebuilder SPDR *** Stopped ***

Too much volatility in the financials. Stopped on Thursday.

Entered: $21.80 (9/08)

Position: 2010 $25 LEAP Call KHG-AY @ $3.70, exit $2.39 9/18

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

GS $119.80 -24.41 - Goldman Sachs - *** Stopped ***

Goldman had a $68 range for the week. Our stop at $148 took us out when the volatility began but Goldman fell all the way to $86 before rebounding back over $140. No way to invest in this kind of volatility.

Entered at open: $171 9/08, net credit entry 0.55

Long 2010 $200 LEAP Call WSD-AT @ 21.45, exit 13.85
Shrt 2010 $150 LEAP Put WSD-MG @ 22.00, exit 32.00
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries

None until the market calms down. This extreme volatility is not tradable in a buy and hold position.

Current Watch List

None
 


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