Option Investor

Weekly Newsletter, Saturday, 10/04/2008

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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

Fund Liquidations Continue

Ugly does not begin to describe the market and the damage to good stocks. Early in the week TrimTabs was saying we could see $50 billion in fund outflows for the month of September. Late Friday there were estimates it could be closer to $100 billion. Either number would be a withdrawal record. Investment advisors around the country are reporting their phones swamped with withdrawal requests.

Money market funds are imploding with investors going back to a mattress mentality. MM Funds are big buyers of corporate paper and this week they are net sellers of that paper as that market self destructs. It was reported on Friday that AT&T can no longer roll over its corporate debt and can only roll it over day to day. If AT&T can't get credit for more than one day at a time then what problems are lesser credits having? GE credit default swaps reached 750 basis points on Thursday. That is well over junk rates to guarantee their debt. After Warren Buffett bought $5 billion in super preferred stock that number fell to just over 500 basis points and still unheard of for a AAA credit. The corporate paper market is completely locked up and it is likely to get worse before it gets better.

Hundreds of lenders have cancelled their student loan programs leaving tens of thousands of students without funding for college. Universities are reporting waves of checks bouncing as loan commitments were withdrawn. Home equity lines of credit are nonexistent and have been withdrawn. Over $1.5 trillion in bank loan capacity has evaporated and that is causing severe dislocations in the credit market. These are dislocations the $700 billion bailout package will not address.

Good stocks with rising earnings are getting thrown out along with the bad ones as normally happens when the equity markets implode. We saw selling into every rally last week and despite the +457 point Tuesday and +300 points intraday on Friday the Dow still lost -817 for the week and the Nasdaq -235.

What aggressive investors should do in this environment is buy good companies at fire sale prices. Unfortunately we have tried to do that several times in recent weeks. If the market conditions I laid out above were not quite so dire I would be loading the watch list with a ton of entries. Instead I am only going to add a few. I would rather be late to a rally than continue to be early to a decline.

The price of crude settled just under $94 on Friday after a +$10 swing for the week. Unfortunately I think we could see it move lower. Nine major analysts lowered their estimates for crude prices with Merrill warning prices could drop to $50 in the "unlikely" event of a global recession. Nobody heard the "unlikely" and only heard $50 in 2009. There is strong support in the $85-$90 range but I believe that support may be tested. OPEC is already ramping up their sound bites but so far nobody is listening. They could easily announce another cutback in production next week but odds are "unlikely."

Drillers are getting hammered along with service companies and there is no reason for either to be losing ground other than the market. I believe that is where we need to be focusing our investments in energy. I am also going to add some banks to the watch list as well. I was going to add a couple as plays but they sold off sharply on Friday suggesting there was some profit taking ahead of the short sale ban expiring. The ban expires at 11:59 PM on Oct-8th. Banks have risen over the last two weeks and now that short selling may return we could see some more speculation on future failures and counter party concerns.

I also considered adding some puts but what? Crude may test $90 but the major damage is already done. I considered puts on the banking ETF XLF but there is a strong feeling the Fed could cut rates by 50 points next week in a surprise announcement. I believe it is best we continue to look at buying the dip rather than try to capitalize on further declines.

Jim Brownn

November Crude Futures Chart - Daily

November Natural Gas Futures Chart - Daily


Changes in Portfolio

New Energy Plays
None - see watch list

New Non-Energy Plays
None - see watch list

Dropped Plays
NE Noble Corp *** Stopped ***
NOV National Oilwell Varco *** Stopped ***
MDR McDermott Intl *** Stopped ***
FTK Flotek *** Stopped ***
FLR Fluor *** Stopped ***

New Watch List Plays Triggered


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. The rebound on the government bailout to stabilize the financial sector failed. I am not suggesting adding to any existing plays until conditions calm.

New Plays

Most Recent Plays

None this week.

Play Updates

Existing Plays

Energy Play Updates

NOV $41.25 -13.32 National Oilwell Varco *** Stopped ***

No specific news but the market dumping all week took us out of NOV on 9/29 at $46. Earnings call on Oct 23rd.


Breakdown trigger: $53, Hit 9/15

Position: FEB $60 Call NOV-BL @ $5.50, exit $4.80, 9/29


NE $37.49 -9.42 - Noble Corp *** Stopped ***

Noble was holding on to support until they announced they were going to take a $10 million charge for hurricane losses in the gulf. We were stopped at $39 on 10/02.

Breakdown trigger: $44, hit 9/15

Position: 2010 $50 LEAP Call YVJ-AJ @ $7.80, exit $6.40, 10/2


PBR $36.72 -9.84 Petrobras

Petrobras continues to announce new discoveries and the stock continues to fall as funds liquidate. I lowered the stop by a buck to $35 but unless the market suddenly explodes it will not be enough.

Breakdown trigger: $40, hit 9/16

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


FTK $8.46 -3.82 Flotek *** Stopped ***

No news but the same -25% drop in the energy sector stopped us out at $9 on Oct-2nd.

Breakdown trigger: $11, hit 9/15

Position: 2010 $15 LEAP Call YVB-AC $3.60, exit 2.40, 10/2


MDR $20.85 -7.62 McDermott Intl *** Stopped ***

No news, no reason for drop other than market. Stopped at $25 on 10/2. I am adding MDR on the watch list again this weekend.

Breakdown trigger: $27, hit 9/16

Position: 2010 $35 LEAP Call YAE-AG @ $4.90, exit $3.29 10/2


FLR $46.76 -8.75 Fluor *** Stopped ***

Stopped at $53 on new projects and new upgrades. Purely market related drop.

Breakdown trigger: $60, hit 9/15

Position: 2010 $70 LEAP Call LLF-AZ, @ $11.60, exit $7.60 9/29

Non-Energy Positions


Leaps Trader Watch List

Once a market bottom appears the rebound could be very sharp. Some of these triggers are at disaster levels rather than a simple dip. This looks like a lot of plays but we will probably never see the trigger on most.

Dropped Entries


New Watch List Entries
GS Goldman Sachs
NE Noble
JPM JP Morgan
XLF Financial SPDR
MDR McDermott
FLR Fluor
NOV National Oilwell
PBR Petrobras
PDE Pride
FLS Flowserve
RIG Transocean

Current Watch List

GS - Goldman Sachs

Company Info:

The Goldman Sachs Group, Inc. (Goldman Sachs) is a global investment banking, securities and investment management firm that provides a range of services worldwide to a client base that includes corporations, financial institutions, governments and high-net-worth individuals. Its activities are divided into three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. Investment Banking and Asset Management and Securities Services each represented 16% of net revenues during the fiscal year ended November 30, 2007 (fiscal 2007). Trading and Principal Investments represented 68% of net revenues in fiscal 2007. On December 11, 2007, Credit-Based Asset Servicing and Securitization LLC, a sub-prime mortgage investor, sold its Litton Loan Servicing business to Goldman Sachs. In June 2008, the Companys division, Goldman Sachs Urban Investment Group, and Cordova, Smart & Williams, LLC announced the acquisition of H2O Plus, LLC.

Breakdown Trigger: $100

Buy 2010 $120 LEAP Call WSD-AD


NE - Noble

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: $35

Buy 2010 $40 LEAP Call YVJ-AJ


JPM - JP Morgan

Company Info:

JPMorgan Chase & Co. is a financial holding company. JPMorgan Chase's principal bank subsidiaries are JPMorgan Chase Bank, National Association, a national banking association with branches in 17 states, and Chase Bank USA, National Association, a national bank that is the Company's credit card issuing bank. JPMorgan Chase's principal non-banking subsidiary is J.P. Morgan Securities Inc., its United States investment banking firm. The bank and non-bank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. In January 2008, JPMorgan Chase acquired an additional equity interest in Highbridge Capital Management, LLC. On May 30, 2008, the Company acquired The Bear Stearns Companies Inc. In September 2008, JPMorgan Chase acquired all deposits, assets and certain liabilities of Washington Mutual's (WM) banking operations from the Federal Deposit Insurance Corporation (FDIC).

Breakdown trigger: $40

Buy 2010 $50 LEAP Call WJP-AJ


XLF - Financial SPDR

Company Info:

Financial Select Sector SPDR Fund (the Fund) seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index (the Index). The Index includes financial service firms with diversified business lines ranging from investment management to commercial and investment banking. The Fund utilizes a passive or indexing investment approach to invest in a portfolio of stocks that seek to replicate the Index. The Funds investment advisor is SSgA Funds Management, Inc

Breakdown trigger: $17

Buy 2010 $20 LEAP Call WFS-AT


MDR - McDermott

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: $18

Buy 2010 $25 LEAP Call YAE-AE


FLR - 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: $37.50

Buy 2010 $50 LEAP Call LLF-AX


NOV - National Oilwell

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.

Breakdown trigger: $28.50

Buy May 2009 $40 Call NOV-EH


PBR - Petrobras

Just planning ahead in case we are stopped out of our current position.

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: $28.50

Buy 2010 $40 LEAP Call YMO-AH


PDE - Pride

Company Info:

Pride International, Inc. (Pride) is an offshore drilling contractor operating, as of February 27, 2008, a fleet of 64 rigs, consisting of two deepwater drillships, 12 semisubmersible rigs, 28 jackups, 10 platform rigs, five managed deepwater drilling rigs and seven Eastern Hemisphere-based land drilling rigs. Its customers include integrated oil and natural gas companies, state-owned national oil companies and independent oil and natural gas companies. Prides operations are conducted in oil and natural gas basins, including South America, the Gulf of Mexico, West Africa, the Mediterranean Sea, the Middle East and Asia Pacific. It provides contract drilling services to oil and natural gas exploration and production companies through the use of mobile offshore drilling rigs in United States and international waters. Pride provides the rigs and drilling crews and is responsible for the payment of operating and maintenance expenses.

Breakdown trigger: $20

Buy 2010 $25 LEAP Call YAD-AE


FLS - Flowserve

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. Flowserve offers a range of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. The Company sells its products and services to more than 10,000 companies, including engineering and construction firms, original equipment manufacturers (OEMs), distributors and end users. The Company operates through three business segments: Flowserve Pump Division (FPD) for engineered pumps, industrial pumps and related services; Flow Control Division (FCD) for engineered and industrial valves, control valves, actuators and controls and related services, and Flow Solutions Division (FSD) for precision mechanical seals and related products and services.

Breakdown trigger: $55

Buy April $70 Call FLS-DN


RIG - Transocean

Company Info:

Transocean Inc. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. As of February 20, 2008, the Company owned, had partial ownership interests in or operated 139 mobile offshore drilling units. Its fleet included 39 high-specification floaters (ultra-deepwater, deepwater and harsh environment semisubmersibles, and drillships), 29 midwater floaters, 10 high-specification jackups, 57 standard jackups and four other rigs. As of February 20, 2008, the Company also has eight ultra-deepwater floaters contracted for or under construction. The Companys primary business is to contract these drilling rigs, related equipment and work crews primarily on a day rate basis to drill oil and gas wells. In November 2007, the Company completed its merger transaction with GlobalSantaFe Corporation (GlobalSantaFe).

Breakdown trigger: $80

Buy 2010 $100 LEAP Call YDR-AZ


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