Option Investor

Weekly Newsletter, Saturday, 11/29/2008

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Table of Contents

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

Leaps Trader Commentary

Frustration Factor

Last week produced so much frustration it was enough to make me want to jump out a window. The final market plunge on 11/21 knocked us out of a record number of positions last week leaving the portfolio almost bare. The rebound from those lows has been amazing and the Dow recovered +1380 points. Crude prices appear to have stabilized over $50 and energy stocks have been moving higher. That is where the frustration appears.

I continually remind readers that the majority of the gains from a major market rebound come in the first few days of the rally. After the first week or so the combination of profit taking and hesitance about buying a breakout tends to slow the progress of the advance. For the last three months I tried to keep us invested as we bought numerous dips along the way. Last week's plunge cleaned out the portfolio and this week's rally produced those remarkable gains I warned about. Unfortunately we were mostly flat after being stopped. In the table below I took some of the positions we lost and compared the closing price on Friday with the stop price from the prior week. As you can see the gain from the rebound is painful to look at. Unfortunately the market rarely telegraphs its intent and the big gains are from short covering from traders caught flat footed looking the wrong way. It is painful but we must suck it up and move on.

Stop loss table
[Image 4]

OPEC is meeting this weekend and nobody really expected a production cut after the OPEC president said it would not happen. He said it was too early to determine the impact from the November cuts since many countries had not yet implemented those cuts. I can understand his frustration with the calls to cut production again since making the 13 countries in the cartel do something is harder than herding cats.

Late Friday an OPEC member heading into the weekend meeting told reporters a production cut should not be ruled out. That helped push prices to $57.24 in late trading.

I seriously doubt they will cut at this meeting but I would definitely expect a 1.5 mbpd cut at the Dec-17th meeting in Oran. OPEC will have the full month production numbers for everyone and will be able to slap specific members down for not enforcing the cut. You can bet there will be a lot of finger pointing at the meeting this week. If your nation cut production by 100,000 bpd at a cost of $150 million to your budget and you knew somebody else had not done the same I would expect some tempers to flare. With only 13 countries there is little hope the slackers can hide in the crowd.

I believe OPEC will cut production at the December meeting. I believe the low price of fuel will produce a quick rebound in demand around the world. I believe the global recession will ease significantly by the end of the second quarter. That is about the time the global inventories will have corrected from the Nov/Dec production cuts and crude will be fairly priced again. As we head into the summer hurricane season I feel pretty confident prices will be significantly higher. I am guessing around $70 but that is just a guess.

Because most traders realize OPEC and the other oil producing nations cannot continue to sell oil at $50 when the marginal cost of production is $57-$62 on the low side and as high as $72 for deepwater wells and hostile geographies, the price must go back up or production will drop significantly. The worst thing that could happen for Peak Oil would be a continued languishing of prices at $50 or lower. Exploration would slow to a crawl. The build out of fields and infrastructure and target dates for new production would be put off for years into the future. The arrival of Peak oil would actually be hastened by lower crude prices. I will cover all the reasons why in my year end report.

I included a couple of energy plays this weekend where I recommended buying the stocks instead of the options. The stocks have gotten so cheap an option simply made no sense.

I am not going to rush to rebuild the portfolio because we could see oil prices decline again if OPEC does nothing this weekend. I am also expecting a possible general market decline as we move into December. The first week of the month has been negative for the last three months but that is not what I am expecting. I think we will see some simply profit taking but the bears will pile on to see if they can force the markets lower. Time will tell but I still think the bottom is behind us.

Jim Brown

January Crude Futures Chart - 120M
[Image 1]
Jnuary Natural Gas Futures Chart - Daily
[Image 2]
December Gasoline Chart - Daily
[Image 3]

Portfolio Listing & Top Picks

Current Portfolio

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
Table lists CALLS/LEAPS only. Insurance puts, if applicable, are not shown.

[Image 1]

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.

Top Picks List
[Image 2]

New Plays

Positive Volatility, What a Change

New Energy Plays

FTK - Flotek

Flotek appears to have found a bottom and unless drilling comes to a halt their services should remain in strong demand.

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.

Options on FTK cost nearly as much as the stock and time decay works against you. Just buy the stock. At $3 it is cheaper than any LEAP.

BUY the STK of FTK currently $3.01

Chart of FTK
[Image 1]

CLNE - Clean Energy Fuels

Clean Energy is the leading provider of natural gas (CNG and LNG) for transportation in North America. It has a broad customer base in the refuse, transit, ports, shuttle, taxi, trucking, airport and municipal fleet markets, fueling more than 14,000 vehicles daily at over 170 strategic locations across the United States and Canada. With the sudden surplus of natural gas it will be easier to convince companies to switch to the cleaner, cheaper fuel. The Clean Truck Program at California's ports is planning to switch out 8,000 diesel trucks for Nat Gas trucks over the next five years. This is just one program and CLNE has a major jump on everyone else.

Company Info:

Clean Energy Fuels Corp. (Clean Energy) is a provider of natural gas as an alternative fuel for vehicle fleets in the United States and Canada. The Company offers a solution to enable customers to run their fleets on natural gas. It designs, builds, finances and operates fueling stations, and supplies customers with compressed natural gas (CNG) and liquefied natural gas (LNG). The Company also helps them acquire and finance natural gas vehicles, and obtain local, state and federal clean air rebates and incentives. The Company serves fleet vehicle operators in a variety of markets, including public transit, refuse hauling, airports, taxis, seaports, and regional trucking. It generates revenues primarily by selling CNG and LNG, and to an extent by building, operating and maintaining CNG and LNG fueling stations. In August 2008, Clean Energy Fuels Corp. announced that it acquired Dallas Clean Energy LLC (DCE) from Camco International Ltd.

Options on CLNE cost nearly as much as the stock and time decay works against you. Just buy the stock. At $5 it is cheaper than any LEAP.

BUY stock of CLNE currently $4.84

Chart of CLNE
[Image 2]

New Non-Energy Plays


New Watch List Plays Triggered

HPQ $35.28 - Hewlett Packard

We got the pullback from Monday's gap open to trigger our entry at $33 on Tuesday. HPQ closed on Friday near the high for the week despite a downgrade of the sector by JPM. The broker said PC sales could decline sharply in 2009 led by a 19% drop in desktops while laptop computers could rise by 10%. HPQ has already affirmed stronger guidance for 2009 so evidently they are looking at business from a different perspective than JPM.

Company Info:

Hewlett-Packard Company (HP), is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including in the public and education sectors. HP’s offerings span personal computing and other access devices; imaging and printing-related products and services; enterprise information technology infrastructure, including enterprise storage and server technology and software that optimizes business technology investments, and multi-vendor customer services, including technology support and maintenance, consulting and integration and outsourcing services. During the fiscal year ended October 31, 2007 (fiscal 2007), its operations were organized into seven business segments: Enterprise Storage and Servers (ESS), HP Services (HPS), HP Software, the Personal Systems Group (PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS) and Corporate Investments.

Breakdown trigger: $33, hit 11/25

Position: 2010 $40 LEAP Call WPW-AH @ $5.60

Chart of HPQ
[Image 3]

Play Updates

Finally a Bull Trend Returns

Dropped Plays

RIMM - Research in Motion

Energy Play Updates

TS $21.03 +3.28 - Tenaris

No complaints here with TS closing at the high for the week. Tenaris recently said it was going to pay a dividend sometime after Nov-28th of $153 million. TS got a bounce from the news even though it only works out to 13-cents per share.

Breakdown trigger: $20, hit 11/19

Position: JUNE $25 Call TS-FE @ 4.80

SMG $32.36 +5.98 - Scotts Miracle Gro

A breakout to a new six-month high! Outstanding! Scotts is exploding on its opportunity to enter the private label fertilizer business. Spectrum Brands will cease its private label business by Jan-21st and leave a monster hole in the market. Scotts has entered into discussions with its biggest customers about producing branded fertilizer products for them as soon as 2009.

Breakdown trigger: $25, hit 11/21

Position: 2010 $30 LEAP Call WOF-AF @ $5.20

DWSN $20.57 +3.65 - Dawson Geophysical

DWSN had no specific news and traded with the market to a new two week high on Friday. There is no stop on DWSN because of the cheap option.

Breakdown trigger: $22.50, 11/06

Position: MAR $30 Call DVQ-CF @ $2.05

Non-Energy Positions

RIMM $42.47 -2.33 - Research In Motion *** Dropped ***

I really hate to drop RIMM but there is some really bad news circulating about the new BlackBerry Storm. The New York Times ran a scathing article on the Storm in Wednesday's edition. Given the weakness in tech stocks already I fear that the strong support at $40 may break. Link to article:

Breakout trigger: $46, hit 11/18

Position: 2010 $60 LEAP Call YKD-AW, $11.20, exit 8.30, -2.75

VIX 55.28 -17.39 - Volatility Index

That was a very nice drop in the Vix for the week and I am hoping the trend continues. If the bulls can continue the surge the next stop could be 40.

Position: JAN $50 PUT VIX-MJ @ $3.90

Leaps Trader Watch List

New Watch List Entries

FXI - iShares China Index

AAPL - Apple Inc

FLS - Flowserve

Current Watch List

UWM - ProShares Ultra Russell 2000 ETF

Eventually there will be a rebound.

Company Info:

Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000 Index

Breakdown trigger: $16 ** New Trigger **

BUY April $25 Call ULX-DY ** New strike **

DIG - Proshares Ultra Oil & Gas

Company Info:

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.

Breakdown trigger: $30 ** New Trigger **

BUY MAR $35 Call DPB-CG ** New strike **

AAPL - Apple Inc

The problem with the BlackBerry Storm and the hit to the BlackBerry reputation should give buyers yet another reason to buy the iPhone.

Company Info:

Apple Inc.designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, , and digital content through the iTunes Store. It sells to consumer, small and mid-sized business (SMB), education, enterprise, government, and creative customers

Breakout trigger: $96

BUY 2010 $120 LEAP Call WAA-AD

FXI - iShares China Index

China has been hit hard by the global crash but their GDP is only expected to decline to around 7% growth. That is still twice anything the U.S. could even hope for over the next two years. China may be feeling our pain but they are still growing fast.

Company Info:

This ETF tracks the 25 largest and most liquid Chinese companies trading on the Hong Kong stock exchange. With assets of some US$3 billion, iShares FXI has its largest holdings in financial services (30%), energy (22%), telecommunications (21%), and business services (13%). iShares FXI has over 60% of its assets concentrated in its top 10 stocks. China Mobile (10.4%) and Petro China (9%) are its two largest holdings, followed by China Life Insurance (8%).

Breakout trigger: $29

BUY 2010 $35 LEAP Call YOF-AI currently $3.60 (11/30)

FLS - Flowserve

Flowserve was captive to the energy markets but it appears the worst may be over with a bottom at $40.

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: $45

BUY April $55 Call FGV-DK (no leaps)

Dropped Watch List Entries



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