Table of Contents
Leaps Trader Commentary
Crude prices spent a week over $62 and under $70 and it appears a bottom is trying to form. Without forced liquidation by funds the price of oil actually took a break from daily declines.
I am actually starting to turn a little bullish on oil prices although I am not sure the selling is over. We saw funds clear the decks over the last two weeks and then produce a textbook window dressing rally going into their year-end on Friday. My concern is that they could come back as sellers next week in anticipation of some bad economics and potential election problems.
I am confident enough that we may have seen a bottom for oil that I am putting another ETF play in this weekend using DIG. That is the Proshares Ultra 2:1 oil ETF. It has declined from $131 to form a solid bottom at $24. Obviously buying calls on a $35 ETF that could run to $70 or $80 over the next six months is something anybody would like to do.
I heard an interesting statistic last week. Charles Biderman, a noted analyst who tracks money flows, said the commodity boom was created by a switch to commodities by hedge funds starting in 2004. From 2004 through 2007 over $250 billion in new money was going into commodity funds. It doubled the size of the commodity sector to $1.9 trillion of which hedge funds controlled $945 billion. This created a massive bull market in commodities just as the global economy led by China and India was exploding. In 2008 the retail investor finally caught on when oil prices started making the news every day and another $250 billion was redirected to commodities. Most of the money moving into commodity funds came from real estate sales according to Biderman. These windfall profits from homes escalating 25% a year were fattening the wallets of investors and they needed someplace to park their money. The new commodity bull market was sucking up all the loose change in the investor community.
Because those funds were highly leveraged in the futures market every ten dollars invested controlled $100 in commodities or more and sometimes a lot more. Over 500 million barrels of oil were trading each day even though only 86 million were bring consumed. It was a fascinating money trail including the collapse. Once the July top was reached those highly leveraged hedge funds could not exit fast enough. The falling commodity prices on one side were being accelerated by investor redemptions on the money side. It was a nightmare on Wall Street and the funds may take a long time to recover. Actually many commodity funds have shut down for the rest of 2008 and will not reopen until 2009. They want the smoke to clear and then pick their entries for the next run.
Jim Rogers, noted commodity investor over the last 30 years and co founder of the Quantum Fund with George Soros in 1970, is buying commodities again. He was interviewed last week and he gave the tired speech about buying things when nobody else wanted them but it is still the truth. It just takes a lot of money and patience. He argued that despite the recent commodity boom and bust most people still don't have a clue about investing in the sector. He claims only about 100 of the world's 70,000 mutual funds are commodity funds. Rogers thinks the current commodity cycle will run another 10 years or longer and the current recessionary environment would eventually fade and the commodity boom would return. He quoted statistics about usage in China and India and why there will not be enough to meet demand in the years to come. He said three billion people in Asia want to live like we do and that would continue to constrain supplies for the next decade.
I believe oil and copper are going to be key commodities. The only true copper ETF (COPA) only trades on the London Exchange. The Power Shares Base metal ETF (DBB) has 1/3 copper, 1/3 aluminum and 1/3 Zinc and it is optionable. I am considering a position on it once we know what is going to happen with the global recession. Over the short-term I am going to add a steel play to capitalize from the extreme oversold conditions.
I loaded up the watch list again as many energy stocks appear to have found a bottom and may be preparing for a new move higher. I added several small cap plays that were low volatility and flying under the radar. If we do get a broad market rally I am hoping the fund managers will try to do the same in looking for 2009 positions.
Changes in Portfolio
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Portfolio Listing & Top Picks
Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.
Position Summary Table
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.
Time To Go Long?
New Energy Plays
DIG - Proshares Ultra Oil & Gas ETF
The signs are growing that the energy sector may be ready to rebound from its oversold condition. OPEC is making noises about another production cut in December and the IEA is going to release their long awaited World Outlook 2008 on Nov 15th.
Unfortunately with the 200% Ultra ETFs the price you pay for double the performance is a wide bid/ask spread. In the case of DIG it is over $1 in most cases. Contrast that with the potential for a 20-point run and I believe it is worth it. If you can do a limit order and split the spread I have been successful with that in the past. Just don't let the price run away from you while you are trying to save a few pennies.
I chose a distant strike because of the high premiums closer to the money. With the $50 strike our risk is less in terms of premium at risk and that allows a wider stop.
Ultra Oil & Gas ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones U.S. Oil & Gas Index.
Buy March $50 Call DPB-CX currently $5.00
Chart of DIG
New Non-Energy Plays
STLD - Steel Dynamics
STLD is a major scrap recycler and therefore has little risk associated with mining and a low cost per ton of raw material. STLD appears to have bottomed back in mid October and is about ready to breakout over resistance at $12. Earnings are still up +61% over the last year so business is good and the economic decline is making scrap even cheaper.
Steel Dynamics, Inc. is a steel producer. The Company, with its acquisition of OmniSource Corporation (OmniSource), is a scrap processor in the United States. During the year ended December 31, 2007, its consolidated shipments, excluding shipments between its operating divisions, totaled 6.2 million tons, which includes steel making, fabrication and scrap processing. On July 2, 2007, Steel Dynamics, Inc. purchased The Techs Holdings Inc. (The Techs), which is a flat-rolled steel galvanizing company that consists of three non-union galvanizing facilities: GalvTech, MetalTech and NexTech. On October 26, 2007, the Company completed its acquisition of OmniSource, a scrap recycling company. On June 10, 2008, Steel Dynamics, Inc. completed the previously announced transaction, wherein its wholly owned subsidiary OmniSource Corporation, through a wholly owned subsidiary, Carolina Investment Company, LLC, acquired the remaining stock of Recycle South, LLC.
BUY 2010 $15 LEAP Call WAF-AC currently $3.40
Chart of STLD
New Watch List Plays Triggered
GS - Goldman Sachs *** Stopped ***
One Drop But Lots of Gains
Energy Play Updates
NE $32.21 +6.31 - NobleFor the week after their earnings Noble was a strong performer rebounding +$11 off Tuesday's lows. They announced a 4-cent quarterly dividend for shareholders of record on Nov 12th. Noble runs a fleet of 63 offshore rigs operating worldwide. Noble was also boosted by news of a new billion-dollar contract by Transocean. No change in play.
Earnings Oct 22nd, $1.43 per share up from $1.18 and est of $1.33
Breakdown Trigger: $35, hit 10.6
Position: 2010 $40 LEAP Call YVJ-AJ @ $5.20
NOV $29.89 +4.39 - National OilwellNice rebound but $32 still holding as resistance. Zacks pointed out that NOV received $2.4 billion in new orders during the quarter and their backlog hit a record of $12.8 billion. Approximately 90% of that backlog is overseas and 85% is offshore equipment. They have cash of about $1.7 billion. It all sounds good to me!
Earnings: Oct-23rd $1.44, +28% compared to analyst est of $1.31
Breakdown trigger: $28.50, hit 10/8
Position: May 2009 $40 Call NOV-EH @ $6.00
PBR $26.89 +$5.84 - PetrobrasNo specific news but Latin American markets rebounded with the U.S. markets and Petrobras benefited. Petrobras said it was considering its options on development of their big offshore field given the drop in crude prices.
No earnings schedule.
Breakdown trigger: $28.50, hit 10/6
Position: 2010 $40 LEAP Call YMO-AH @ $7.00
PDE $18.79 +$4.42 - PrideEarnings were strong on Thursday with continuing operations seeing a +62% boost in profits. Fleet utilization was 98%.
Earnings: Oct 30th, $1.09 vs .67 Q3-07 and est of $1.03
Breakdown trigger: $20, hit 10/6
Position: 2010 $25 LEAP Call YAD-AE @ $5.00
RIG $82.33 +$16.07 - TransoceanTransocean announced a new $1.17 billion contract for an ultra deep water drill ship that can drill in 12,000 ft of water and drill 40,000 foot wells. The new rig's day rate equates to $640,000 per day in rent. The client was not disclosed but the day rate was a record. The new contract shocked a bunch of naysayers who had been predicting the decline in drilling costs. The contract news plus earnings from others in the sector helped propel RIG +$25 off its Tuesday lows.
Earnings schedule: Nov-5th
Breakdown trigger: $80, hit 10/6
Position: 2010 $100 LEAP Call YDR-AZ @ 13.40
UWM $25.76 +5.85 - Russell 2000 Proshares Ultra ETFWe were stopped out of the UWM play on Tuesday when the market took that monster dive. I sent an email out that night telling everyone to buy the opening dip on Wednesday. UWM opened at $21.04 and dipped to $20.48 in the first 30 minutes before taking off again.
I apologize for placing that stop too tight. I really did not think it would break $18 but with 1000-point swings in the market it is impossible to think any stop is safe.
I am still expecting a strong move higher over the next three months so we have plenty of time to watch this position. If the Russell moves back to 700 the UWM should hit $50. The dollar we lost on the stop is chump change compared to our potential profit.
Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000® Index.
Recommended 10/23 at $19.94 on the UWM
Position UWM $25 April Call Option ULX-DY @ avg cost $5.50
ATI $26.54 +$5.25 - Allegheny TechnologiesATI posted better than expected earnings but warned that nobody was protected from a protracted slowdown in global growth. ATI said it had $273 million in cash and no debt and could weather any slowdown with no problem. A challenge is the machinist strike at Boeing, which halted production on the 787.
Earnings: 10/22 -26%, $1.45 vs $1.88 year ago, $1.44 est
Breakout trigger: $26, hit 10/13
Position: 2010 $40 LEAP Call YFQ-AW @ $3.60
BAC $24.17 +$3.10 - Bank of AmericaDecent recovery in BAC but nothing to get excited. The banking bailouts are still too new for anyone to really know if they are working. Keep the faith here! No specific news of note.
Earnings: Oct 6th @ 15 cents
Entered: Oct 13th @ $20.87
Position: 2010 $25 LEAP Call WBA-AE @ $5.90
GS $ 92.50 -7.90 - Goldman Sachs *** Stopped ***Something stinking at Goldman. The stock price continues to be under pressure despite lots of positive news. Somebody knows something and the market is in the dark. We were stopped on the Tuesday dip at $89.
Earnings were Sept 16th
Breakdown Trigger: $100, hit 10/9
Position: 2010 $120 LEAP Call WSD-AD @ $23.75, exit $19, 10/28
JPM $41.25 +$5.82 - JP MorganWe came within 50 cents of being stopped on Tuesday and JPM used that dip for an $8 rebound. On Friday JPM said they were modifying mortgages and putting a moratorium on foreclosures on $70 billion in mortgages and 400,000 customers. This prompted a +10% gain. Hopefully we are out of the woods on JPM. BAC is modifying 500,000 loans. This has got to help home prices eventually.
Earnings: Oct 15th @ 11 cents
Breakdown trigger: $40. Hit 10/6
Position: 2010 $50 LEAP Call WJP-AJ @ $6.00
XLF $15.53 $+1.98 - Financial SPDRI am encouraged by the uptick in the XLF and hopefully as more banks step up to the table to take the Fed money the sector will pick up some speed.
Breakdown trigger: $17, hit 10/6
Position: 2010 $20 LEAP Call WFS-AT @ $3.00
Leaps Trader Watch List
Dropped Watch List Entries
New Watch List Entries
IO - ION Geophysical
HK - Petrohawk Energy
XCO - EXCO Resources
DRQ - Dril-Quip
MOS - Mosaic
HLX - Helix Energy Solutions
ENER - Energy Conversion Devices
DWSN - Dawson Geophysical
BUCY - Bucyrus International
Current Watch List
IO - ION Geophysical
ION Geophysical Corporation (ION), formerly Input/Output, Inc., is a technology-focused seismic solutions company that provides acquisition equipment, software, and planning and seismic processing and interpretation services to the global energy industry. Its products, technologies and services are used by oil and gas exploration and production (E&P) companies and seismic acquisition contractors to generate high-resolution images of the subsurface during exploration, exploitation, and production operations. The Company’s products and services include land and marine seismic data acquisition equipment, navigation and data management software products, survey design planning services, seismic data processing services and seismic data libraries. ION operates through four business segments. Three of these segments, Land Imaging Systems, Marine Imaging Systems and Data Management Solutions, make up its ION Systems division. The fourth segment is the Company’s ION Solutions division.
Breakdown trigger: $5.50
BUY 2010 $7.50 LEAP Call LAC-AU currently $1.95
HK - Petrohawk Energy
Petrohawk has already broken over its October highs. I would like to catch this one on a pullback.
Petrohawk Energy Corporation (Petrohawk) is an independent oil and natural gas company engaged in the acquisition, development, production and exploration of oil and natural gas properties located onshore in North America. The Company’s properties are primarily located in the Mid-Continent region, including North Louisiana, the Fayetteville Shale in the Arkoma basin of Arkansas and in the Western region, including the Permian Basin of West Texas and southeastern New Mexico. At December 31, 2007, the Company’s estimated total proved oil and natural gas reserves were approximately 1,062 billion cubic feet of natural gas equivalent, consisting of 18 million barrels of oil, and 955 billion cubic feet of natural gas and natural gas liquids.
Breakdown trigger: $16
BUY MARCH $20 Call HK-CD
XCO - EXCO ResourcesCompany Info:
EXCO Resources, Inc. (EXCO) is an independent oil and natural gas company engaged in the acquisition, development and exploitation of onshore North American oil and natural gas properties. The Company’s operations are focused in key North American oil and natural gas areas, including East Texas/North Louisiana, Appalachia, Mid-Continent and Permian. As of December 31, 2007, EXCO’s proved reserves were approximately 1.9 trillion cubic feet equivalents (Tcfe), of which 93.3% were natural gas and 70.8% were proved developed reserves. During the year ended December 31, 2007, EXCO produced 121.3 billions of cubic feet equivalent (Bcfe) of oil and natural gas. On March 30, 2007, EXCO completed the acquisition of oil and natural gas properties, acreage and other assets in the Vernon and Ansley fields in North Louisiana from Anadarko Petroleum Corporation and Anadarko Gathering Company.
Breakout trigger: $11
BUY JUN $12.50 Call XCO-FV
DRQ - Dril-Quip
Dril-Quip, Inc. (Dril-Quip) designs, manufactures, sells and services engineered offshore drilling and production equipment that is suited for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. The Company manufactures its products at its facilities located in Houston, Texas; Aberdeen, Scotland; Singapore and Macae, Brazil. The Company maintains additional facilities for fabrication and/or reconditioning in Norway, Denmark, and Australia.
Breakdown trigger: $22
BUY JUN $30 Call DRQ-FF
MOS - Mosaic
I am going to keep running this play until we get it right. We were stopped out two weeks ago only to see it rally $15 the next 4 days. This time I am moving the strike out farther and giving us a wider stop. Once we get an entry I am hoping for a long run. People still need to eat and we are adding 150 million new mouths every year.
The Mosaic Company (Mosaic) is a producer of phosphate and potash crop nutrients for the agricultural industry. The Company operates its business through three business segments: phosphates, potash and offshore. The Phosphates segment produce phosphate fertilizer and feed phosphate which are used in crop nutrients and animal feed ingredients, respectively. The principal inputs used in crop nutrients production are phosphate rock, sulfur and ammonia. The Potash segment mines ad processes potash in Canada and the United States and sells potash in North America and internationally. The Offshore segment produces and markets fertilizer products and provides other ancillary services to wholesalers, cooperatives, independent retailers, and farmers in South America and the Asia-Pacific regions. As of May 31, 2008, Cargill, Incorporated owned approximately 64.4% of the Company’s interest. As of May 31, 2008, the Company had a 50% interest in Saskferco Products Inc
Breakdown trigger: $35
BUY 2010 $50 LEAP Call LXW-AJ
Breakout trigger: $46
BUY 2010 $60 LEAP Call LXW-AL
HLX - Helix Energy Solutions
Helix Energy Solutions Group, Inc. (Helix) is an international offshore energy company providing reservoir development solutions and other contracting services to the energy market, as well as to other oil and gas properties. Helix operates in the Gulf of Mexico, North Sea, Asia Pacific and Middle East regions. The Contracting Services segment utilizes the vessels and offshore equipment that when applied with the methodologies reduce finding and development (F&D) costs. The Oil and Gas segment is engaged in prospect generation, exploration, development and production activities. On December 11, 2007, the Company’s wholly owned subsidiary Cal Dive (CDI) completed the acquisition of Horizon Offshore, Inc. (Horizon). In July 2007, the Company acquired the remaining 42% interest in Well Ops SEA Pty Ltd. On September 30, 2007, Helix 30% working interest in the Phoenix oilfield, the Boris oilfield and the Little Burn oilfield to Sojitz GOM Deepwater, Inc. (Sojitz).
Breakdown trigger: $8.50
BUY 2010 $10 LEAP Call WAI-AB
Breakout trigger: $13.00
BUY 2010 $20 LEAP Call WAI-AD
ENER - Energy Conversion Devices
Energy Conversion Devices, Inc. (ECD) commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets. The Company designs, manufactures and sells photovoltaic (PV) products, known as PV or solar laminates that generate renewable energy by converting sunlight into electricity. Solar laminate sales represent more than 90% of the Company’s revenues. It also receive fees and royalties from licensees of its nickel metal hydride (NiMH) battery technology and sell high-performance nickel hydroxide used in NiMH batteries. It has two principal joint ventures that are commercializing technologies invented by ECD: Cobasys LLC, which manufactures and sells rechargeable NiMH batteries, and Ovonyx, Inc., which is commercializing phase-change memory devices through licensing and joint development agreements. The Company operates its business in two segments: United Solar Ovonic and Ovonic Materials.
Breakdown trigger: $30
BUY 2010 $50 LEAP Call KYU-AJ
DWSN - Dawson Geophysical
Dawson Geophysical Company is a provider of onshore seismic data acquisition services in United States. The Company acquires and processes two-dimensional (2-D), three-dimensional (3-D) and multi-component seismic data for its clients, ranging from major oil and gas companies to independent oil and gas operators, as well as, providers of multi-client data libraries. Its clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons and to optimize the development and production of hydrocarbon reservoirs. During the fiscal year ended September 30, 2007 (fiscal 2007), all of its revenues were derived from 3-D seismic data acquisition operations. As of September 30, 2007, it operated 15 3-D seismic data acquisition crews in the lower 48 states of the United States and a seismic data processing center.
Caution: Don't buy these strikes if the bid/ask spread is more than $1.50. I am seeing some really wide spreads but it could be just after hours positioning.
Breakdown trigger: $22.50
BUY MAR $30 Call DVQ-CF
Breakout trigger: $28.00
BUY MAR $35 Call DVQ-CG
BUCY - Bucyrus International
Coal mining is only going to increase as will the need for equipment.
Bucyrus International, Inc. designs, manufactures mining equipment for the extraction of coal, copper, oil sands, iron ore and other minerals in mining centers throughout the world. In addition to the manufacture of original equipment, the Company also provides the aftermarket replacement parts and service for equipment. The Company operates in two business segments: surface mining and underground mining. The Company’s manufacturing facilities include Australia, China, Germany, Poland and the United States, and service and sales centers include Australia, Brazil, Canada, Chile, China, England, India, Mexico, Peru, Russia, South Africa and the United States. The Company’s surface mining equipment includes draglines, electric mining shovels and rotary blasthole drills. In May 2007, the Company completed the acquisition of DBT GmbH, a subsidiary of RAG Coal International AG.
Breakdown trigger: $22
BUY 2010 $30 LEAP Call YHB-AF
Breakout trigger: $28.50
BUY 2010 $40 LEAP Call YHB-AH
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