Table of Contents
Crude prices continued to plunge last week to $68.57 before rebounding to $74.30 intraday on Friday. The rebound came on news that OPEC had rescheduled its emergency production meeting from Nov-18th to Oct-24th. OPEC is scared that a global recession will send prices much lower than their unofficial target of $90-$100. As a temporary dip from hedge fund liquidations they could stand $70 but they have already tasted the fruits of $100 oil and I believe they will do whatever it takes to see that level again. OPEC said in a statement last week that they will also consider the global economic outlook as well as current demand in determining future production levels.
We have had numerous geopolitical challenges as well as weather problems over the last month and all were ignored. OPEC is probably shocked by these events. I would bet they are wishing for a return that investor speculation that they cursed as the cause of high prices back in the summer.
OPEC is expected to cut as much as one million barrels in addition to the 500,000 barrels they cut at the last meeting. The results of the last cut only amounted to about 175,000 bpd fewer being shipped since the September meeting. It appears there was no rush to close those valves. If OPEC does agree to make a massive cut next week it will be mostly up to Saudi Arabia to take that production offline. The other OPEC nations are already struggling to survive on $70 oil and cannot be counted on to pump less. In the past Saudi grew tired of being the only OPEC nation to cut production and in the late 1990s went on a production binge to oversupply the world with oil and drive down prices to punish the other OPEC nations who refused to cut. Oil prices fell to $10 a barrel before everyone agreed to toe the line. Hopefully for our positions Saudi will not have to remind them again by pushing prices lower. Hopefully those reminders will occur in committee and everyone will salute and obey orders.
On the positive side the drop from $140 to $70 has produced a $350 billion price cut at the pump for U.S. consumers. The average price of U.S. gasoline on Friday was $2.99 per gallon according to AAA. Based on the current price of oil we could see gasoline prices decline below $2.75 and potentially $2.50. While I can't conceive that refiners are going to let prices fall that low it will depend on demand. If demand falls so will the prices. The EIA reported on Thursday that demand in the U.S. actually rose for the first time in the last six weeks. It was probably all those SUV drivers finally filling up their tanks instead of just getting $75 when the pump cut off their credit cards.
The falling gasoline prices are the worst event possible for recent conservation plans. If gas returns to $2.75 the sales of SUVs will rocket again and the automakers will be running in circles trying to decide what kind of cars to build. Conservation will be put on the back burner again and talk of peak oil will disappear, at least for the next year. As energy investors we understand that nothing has changed in the long-term outlook. This is just an Indian summer of sorts for consumers. The petroleum winter will eventually arrive.
Also impacting crude prices last week was the expiration of crude options on Thursday. Next week November crude futures will expire on Tuesday. You can bet that anyone still holding November contracts are going to be creating additional volatility when they close those positions next week. Once into the December contract the impact of OPEC and heating oil sales will be the controlling factor. The gasoline shortage in the Southeast is nearly over. Most refineries are back online and gasoline inventories have increased by 7 million barrels in each of the last two weeks.
TrimTabs claims the redemptions by hedge funds should be about over. The redemption period has passed and the next window is Dec-31st to Jan-15th. However, TrimTabs also said mutual funds were seeing withdrawals of $5 billion per day because the average investor does not understand the massive bailout programs. Until these redemptions stop the market will still be at their mercy. The way to tell if redemptions are still occurring is to watch the tape from 2:30 to the close. If sellers continue to appear then funds are still receiving redemptions. They open the daily mail, process the phone requests and then determine their positive/negative cash balance for the day. If there were more redemptions than deposits the order goes out to sell. Once we see buyers before the close instead of sellers the worst will be over.
I did not add any new plays this week. We have a full portfolio and I hesitate to add anything else until we see what the market is going to do. I personally believe we are at or near a bottom but we could still see some volatility until the expiring options are cleared and we get through a week without any financial disaster. Earnings are going to be heavy next week and that could help distract investors from worry over the financial crisis.
November Natural Gas Futures Chart - Daily
November Gasoline Chart - Weekly
Changes in Portfolio
Portfolio Listing & 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.
We could still see oil prices drop further so I limited the oil plays here to ZERO. I am very comfortable with these four stocks but we are in a bear market.
Most Recent Plays
ATI $24.27 - Allegheny Technologies
Monday's massive market spike produced a breakout entry at $26 and fortunately the dive late in the week was quickly bought. Decent support at $20.
Earnings scheduled for 10/22
Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Companys products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium and niobium, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings, and grey and ductile iron castings. ATIs specialty metals are produced in a range of alloys and product forms, and are selected for use in environments that demand metals having hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. The Company focuses its technological and unsurpassed manufacturing capabilities to serve global end use markets with diversified and specialized product offerings. It operates in three business segments: High Performance Metals Segment, Flat-Rolled Products Segment and Engineered Products Segment.
Breakout trigger: $26, hit 10/13
Position: 2010 $40 LEAP Call YFQ-AW @ $3.60
FWLT - Foster Wheeler
FWLT still trying to form a bottom at $25 and long-term support.
Earnings schedule: Nov 5th
Foster Wheeler Limited operates through two business groups, the Global Engineering & Construction Group (Global E&C Group) and the Global Power Group. The Global E&C Group, which operates globally, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. The Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities globally. In February 2008, the Company completed the acquisition of Biokinetics. On April 7, 2006, the Company completed the purchase of the remaining 51% interest in MF Power.
Breakout trigger: $31, hit 10/13
Position: 2010 $40 LEAP Call LWM-AH @ $8.00
NE $28.37 - Noble
JPM said drillers should be cash positive through 2009 but specifically called out RIG, DO and NE as having cash backlogs in excess of capital requirements through 2012.
Earnings Oct 22nd
Breakdown Trigger: $35, hit 10.6
Position: 2010 $40 LEAP Call YVJ-AJ @ $5.20
MDR $17.88 - McDermott
Still holding above strong support at $15 as we await oil prices to find a bottom. No news other than $960 million contract win.
Earnings schedule: November 15th ??
Breakdown trigger: $18, hit 10/6
Position: 2010 $25 LEAP Call YAE-AE @ $3.90
FLR $39.94 - Fluor
Fluor is holding above support at $35 while the market tries to find a bottom. Earnings still two weeks away. No specific news other than contract wins for $420 million.
Earnings Nov 6th
Breakdown trigger: $37.50, hit 10/10
Position: 2010 $50 LEAP Call LLF-AX @ $10.70
NOV $25.58 - National Oilwell
Same story as the rest. Decline to strong support just over $20 and holding until the market determines direction.
Earnings schedule: Oct-23rd
Breakdown trigger: $28.50, hit 10/8
Position: May 2009 $40 Call NOV-EH @ $6.00
PBR $26.21 - Petrobras
Strong support at $20. Brazil is the strongest of the BRIC countries and Petrobras is in the strongest position of any offshore driller today. The only risk is the potential for Brazil to nationalize those new offshore finds and take them away from Petrobras.
No earnings schedule.
Breakdown trigger: $28.50, hit 10/6
Position: 2010 $40 LEAP Call YMO-AH @ $7.00
PDE $17.38 - Pride
Strong support at $15, strong takeover target. Upgraded by Howard Weil to outperform.
Earnings Schedule: Oct 30th
Breakdown trigger: $20, hit 10/6
Position: 2010 $25 LEAP Call YAD-AE @ $5.00
FLS $65.81 - Flowserve
Strong support at $60 and a minor uptick starting to appear. A breakout over $70 should get the ball rolling again. Tied to the market with no news.
Earnings schedule: Oct 28th
Breakdown trigger: $55
Buy April $70 Call FLS-DN, $8.50, 10/08
RIG $70.26 - Transocean
RIG has been rocking in a $25 range under $90 as the funds sold anything to raise cash. JPM said RIG has excess cash through 2012 and outstanding prospects. RIG has not mentioned any reduction in capital expenditures given their 6 year backlog of projects.
Earnings schedule: Nov-5th
Breakdown trigger: $80, hit 10/6
Position: 2010 $100 LEAP Call YDR-AZ @ 13.40
MOS $33.66 - Mosaic
Strong support at $32. TrimTabs said selling in MOS and other hedge fund favorites may be done because hedge funds have passed their redemption window. Let's hope they are correct. Mosaic reported earnings on 10/1 that rose more than 300% over the comparison quarter. They projected earnings would continue to grow through 2009.
Entered: Oct 13th @ $36.40
Position: 2010 $50 LEAP Call LXW-AJ @ $12.80
BAC $23.24 - Bank of America
BAC rebounded off its prior week lows and held the majority of its gains. On Friday the justice Dept approved the Merrill acquisition clearing the way for BAC to move forward with the deal. The FTC has already cleared the deal. Shareholders of both companies must approve the deal and it should close in Q1. After the deal BAC will have more than $2.5 trillion in client assets and 20,000 financial advisers. The big drop in BAC shares from $32 to $22 came after BAC priced a $10 billion share offering on Oct 9th.
Earnings: Oct 6th @ 15 cents
Entered: Oct 13th @ $20.87
Position: 2010 $25 LEAP Call WBA-AE @ $5.90
GS $ 114.50 - Goldman Sachs
We survived! After plunging through our $100 trigger the prior week to a low of $74 Goldman rebounded to $128 only two days later. Profits were taken and Goldman still retained the majority of its rebound. The worst should be over for the banking sector but we need a week of no surprises before new gains can begin. Notice how I included my wishful thinking in that statement.
Earnings were Sept 16th
Breakdown Trigger: $100, hit 10/9
Position: 2010 $120 LEAP Call WSD-AD @ $23.75
JPM $39.35 - JP Morgan
JPM reported earnings on the 15th and they were still earnings not losses. Granted they were only 11 cents per share but much better than the 21-cent loss analysts had expected. Once the financial sector begins to firm I believe JPM will be a leader out of the depression.
Earnings: Oct 15th @ 11 cents
Breakdown trigger: $40. Hit 10/6
Position: 2010 $50 LEAP Call WJP-AJ @ $6.00
XLF $15.35 - Financial SPDR
The XLF continues to hold over support at $14 as we wait for a few more banks to report and the government bailouts to kick in.
Breakdown trigger: $17, hit 10/6
Position: 2010 $20 LEAP Call WFS-AT @ $3.00
Leaps Trader Watch List
Current Watch List
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