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Weekly Newsletter, Saturday, 12/20/2008

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Table of Contents

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

Leaps Trader Commentary

Really, We Are Going To Cut

OPEC just can't get any respect. They claim they are going to cut another 2.2 million barrels of production but nobody believes them. Maybe it is because they have 20+ years of history where cheating was the norm?

The problem with OPEC is compliance with quotas. It always has and more than likely always will be. Public data shows compliance with the 1.5 mbpd cut which took place in November is showing a 52% to 63% rate. Saudi Oil Minister al-Naimi said it was 85% when he made his announcement last week. Analysts theorize he avoided the real facts because Saudi did not want to publicize the cheating while they are trying to put a bottom under prices. In the table below the various organizations that track OPEC production are pretty uniform in showing an average of only 847,000 bpd was actually cut in November. Cheating was alive and well.

Actual OPEC cuts from November
[Image 4]

In the announcement last week OPEC specifically said production would be cut 4.2 mbpd from the actual September production of 29.045 mbpd and starting on Jan 1st. We are assuming the cuts will be prorated across the entire group. In the table below you can see their production rate in September, which served as the base rate for the production quota changes in November. The center column is the actual percentage rate the countries lowered their production in November. Note that Angola and Ecuador actually increased production. Now compare the last column and see how much everyone will have to cut production on Jan 1st. Note that the numbers are more than twice as large in some cases. What are the odds these cuts will be made? Zero. This is why OPEC has a public relations problem. This also why the price of oil is likely to continue down until some real action is taken OR the recession ends.

OPEC Quota Chart
[Image 5]

The price of oil did not drop -27% last week to $32.40 because of the prospects for cheating. The price of oil was crushed because OPEC did not present a uniform front to the press and the cut was not large enough to satisfy the whisper number. Many analysts thought they needed to cut by at least 4 mbpd to reduce the stress on rising levels of oil in storage.

Crude prices were crushed because traders had been long January oil in expectations for a big cut and a big spike in prices. When it did not occur traders jammed the exits with only 2 days left in the expiring January contract. Add in the full storage tanks at Cushing Oklahoma and the price of oil hit a 4-year low. Cushing is the delivery point for crude futures contracts and they are running out of storage. When storage is in short supply the price of storage rises sharply. Anyone long oil is faced with selling it cheaper to offset the increase in storage fees. The bottom line to the story is still an OPEC meeting two days before futures expiration. It was a recipe for disaster.

The other monthly contracts for 2009 are trading sharply higher than the January contract. The February contract was trading at nearly $9 over the January price. This is an obscene example of contango. That is when future prices are higher than current prices. This suggests traders are confident prices are going to rise in 2009. In the short term I would bet on the February contract taking a steep hit next week as prices normalize and the February holders start worrying about storage.

2009 Futures Contracts
[Image 6]

After watching the price of January crude dive I was planning on adding some crude futures to the list but after seeing the monster prices I am going to pass until February's expiration cycle. (Jan 20th) By then we should have a better idea of how the oil market and the stock market is going to act in the first quarter.

These price drops are killing Venezuela, Russia, Iran and even Brazil. They all live on their oil revenues and that revenue has been slashed to the bone. Russia is already starting to see some signs of unrest. Iran and Venezuela depend on oil to pay for their social programs so the rulers can stay in power. Brazil is facing the expenditure of $500 billion to produce their new offshore finds but at $40 a barrel that money will be tough to find and slow development down by several years. That slows revenue and Brazil had already started budgeting for their windfall profits. Back to the drawing board for them.

Solar saw a massive win last week. First Solar has arrived at grid parity with its products. That is where electricity produced by solar is the same price as that produced conventionally. This is the Holy Grail for solar companies and evidently First Solar actually achieved without subsidies a $0.075 per KWH yield in Nevada where conventional power costs $0.09 per KWH. This means organizations looking for cheap power are no longer tied to the conventional grid. This vastly broadens the market for solar and that will lower the price even further. This is the dawning of a new day for the solar sector. FSLR was up +26 for the week.

I am not adding any plays this week. I believe we will see some additional minor gains into the holidays but after next weekend we could see some sharp declines going into January. I will add some watch list plays next week in anticipation of that decline. We missed being triggered on that NXY play by 3 cents on the spike higher and now it has returned to support. Whew! I would much rather get the breakdown entry.

Check out the end of year renewal special. There is another crude oil video and two special reports on energy.

Click here for the full package description

Jim Brown

January Crude Futures Chart - Daily
[Image 1]
Natural Gas Futures Chart - Daily
[Image 2]
January 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

I looked at the list several times this weekend and there was nothing I wanted to buy this week. The winners have run too high and we could see profit taking after Christmas. The weaker positions could get weaker. This is the time to just play the cards we have and not add to positions.


New Plays

OPEC Stumbles Again


New Energy Plays


None


New Non-Energy Plays


None


New Watch List Plays Triggered


MDR - McDermott Intl

McDermott shot up on Wednesday after they announced they won a 3-year contract from the DOE for $3.3 billion to manage a liquid waste program. They have an optional 2 yr addition that could take the award to $5 billion. We were triggered on the spike and paid too much for the option but the company is expected to benefit from Obama's infrastructure and clean energy program as well.

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.

Breakout trigger: $10.50, hit 12/17

Position: 2010 $12.50 LEAP Call YAE-AV @ $3.40

Chart of MDR
[Image 1]


Play Updates

Holding Our Own Into Year End

None of our plays declined last week and one was a huge winner. With the markets flat I have no complaints.


Dropped Plays


None


Energy Play Updates


HLX $6.57 -0.46 - Helix Energy Solutions

Helix was at a new our week high on Wednesday but the drop in crude brought it back to flat. No change in play.

Position: 2010 $10 LEAP Call WAI-AB @ $2.45


FXI $30.55 +0.56 - iShares China Index

Another new high on Thursday but a minor decline knocked it back for only a minor gain. The drop in commodity prices and oil prices is a huge benefit to China. The FXI will eventually explode once those benefits start working through the system.

Breakout trigger: $29, hit 12/08

Position: 2010 $35 LEAP Call YOF-AI @ $5.10


DIG $26.93 -2.67 - Proshares Ultra Oil & Gas

I was shocked by the lack of a material decline in DIG given the -27% drop in oil prices for the week. We gave back about 60% of the prior week's gain and that is not a bad deal. The ramp into the OPEC meeting helped defray the post meeting drop.

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, hit 12/1

Position: MAR $35 Call DPB-CG $5.40


FSLR $140.68 +23.76 - First Solar

Outstanding! Not only did they get added to the Nasdaq 100 but an analyst at Pacific Crest said FSLR had reached "grid parity." That means they are producing electricity per KWH equal to or less than conventional electricity. A 12.6 megawatt plant in Nevada is producing without subsidies at $0.075 per KWH and conventional power is $0.09 per KWH. This is the holy grail of the solar community. Once solar is cheaper than conventional power the battle has been won and it will only get cheaper as technology progresses.

The only other company close is SunPower and we are playing that though Cypress Semiconductor.

Covered Call position:

Long 100 Shares FSLR @ $128
Short 2010 $150 LEAP Call LZL-AA currently $40.70
Profit if called is $40.70 in premium + $22 in stock (49%)

Put spread position:

Long 2010 $100 LEAP Put LQM-MT @ $32.90
Shrt 2010 $250 LEAP Put LZL-MJ @ $135.70, net credit $103


SMG $28.72 -.34 - Scotts Miracle Gro

SMG appears to have lost its bloom but support at $28 is still holding. Stop is $27.

Breakdown trigger: $25, hit 11/21

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


FLS $52.05 +0.02 - Flowserve

After an $8 gain last week I will be happy with a flat performance. Still FLS was at a new 6-week high on Wednesday. The trend is still with us.

Breakdown trigger: $45, hit 12/1

Position: April $55 Call FGV-DK (no leaps) $5.33


Stock Positions


ESLR $3.04 +0.29 - Evergreen Solar

No change in play.

Evergreen was picked by RBC Capital as one of the top 20 stocks to benefit from the Obama infrastructure plan. Part of the plan is to make office buildings more energy efficient through upgrades to their energy handling and the addition of solar.

Too cheap for LEAPS, buy the stock instead.

Position: Stock in ESLR @ $2.75


CSIQ $6.22 +0.67 - Canadian Solar

No change in play.

Canadian not only supplies solar for commercial and residential applications but also sells those solar panels you see on the top of road signs, traffic lights, warning lights, etc. They are diversified and don't rely on only one product.

Stock too cheap for leaps, buy the stock.

Position: Stock in CSIQ @ $5.55


FTK $2.30 -$.75 Flotek

No news but a 10% drop on Friday. No change in play.

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.

Position: Stock of FTK @ $3.01


CLNE $6.12 +1.28 - Clean Energy Fuels

VERY NICE week for CLNE with a nice gain to a new 6-week high. No change in play

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.

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.

Position: Stock of CLNE @ $4.84


CY $4.13 -.58 - Cypress Semiconductor

Gave back most of last week's gain on one day. No change in play.

Options don't make sense on a $4 stock.

Position: Stock in CY @ $4.11


BZH $1.65 -0.05 Beazer Homes

No change in play.

The stock price is so cheap that options don't make sense.

Position: STOCK in BZH @ $2.15


Non-Energy Positions


HPQ $35.40 -.57 Hewlett Packard

Still knocking on the resistance at $36. No change in play.

Breakdown trigger: $33, hit 11/25

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


VIX 44.93 -9.35 - Volatility Index

A new 3-month low on Friday but our time is expiring. I believe we will see some market declines at year-end so I am planning on exiting this play next weekend. Maintain the stop at 70.

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


AAPL $90.00 -8.27 - Apple Inc

I fear there are some problems in Apple's future. Dropping out of MacWorld just a couple weeks before the event is not a good sign. It brings back fears about the health of Steve Jobs. Maintain the stop at $87 and hope Jobs makes a statement about his health.

Breakout trigger: $96, hit 12/03

Position: 2010 $120 LEAP Call WAA-AD $18.40


UWM $19.28 +1.23 - ProShares Ultra Russell 2000 ETF

If it were any other week on the calendar I would be cheering the new 6-week intraday high on Friday. Unfortunately we are getting close and closer to January and I fear there will be a serious give back in the first ten days. Hopefully fund managers will continue window dressing in small caps and push us well over resistance at $20 before next weekend.

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, hit 12/1

Position: April $25 Call ULX-DY $2.55


POT $72.26 +5.71 - Potash

This is definitely a Jekyl and Hyde stock. The prior week they raised some estimates and saw a big pop in the stock price. This week they cut estimates and gave back $12 but still finished with a nice gain. Volatility has NOT left POT.

Breakout trigger: $58, hit 12/09

Position: 2010 $80 LEAP Call WPT-AP @ $17.30


Leaps Trader Watch List


New Watch List Entries


DRYS - Dryships

WYN - Wyndham Worldwide


Current Watch List


XLE - S&P Energy SPDR

Company Info:

The S&P Energy sector SPDR represents about 13% of the S&P-500. Energy companies in this Index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips.

Breakdown trigger: $44

BUY 2010 $50 LEAP Call WHA-AX


NXY - Nexen

Nexen is a very well run exploration and production company and was recently rumored to be a takeover target of Total SA (TOT). That $19.7 billion bid never occurred and NXY dropped back to support last week. I believe that Total and others are waiting to see if oil prices fall further before making any bids. If oil prices drop they can buy assets cheaper. If oil prices rise their stock is worth more as a currency.

On Tuesday the 9th Nexen announced its budget for 2009 and expects more than $1 billion in free cash flow to add to their current $1.8 billion cash balance and use for share buybacks. They expect to spend $2.6 billion on oil and gas projects in 2009. They have another $2 billion in fully committed, undrawn credit.

This is a small but strong company with great prospects.

Company Info:

Nexen Inc. (Nexen) is an independent, Canadian-based, global energy company. Nexen operates in four segments: oil and gas, Syncrude, energy marketing and chemicals. The Company owns 7.23% of the Syncrude Joint Venture, which develops and produces synthetic crude oil from mining bitumen in the oil sands in northern Alberta. Energy marketing includes its crude oil, natural gas, natural gas liquids, ethanol and power marketing business in North America, Europe and Asia. Chemicals includes operations in North America and Brazil that manufacture, market and distribute sodium chlorate, caustic soda and chlorine through the Canexus Limited Partnership.

Breakdown trigger: $15

BUY 2010 $17.50 LEAP Call KJA-AW

Breakout trigger: (CANCELLED)


DRYS - DryShips

DRYS has been crushed by the 80% drop in cargo rates. This is only temporary. Once the recession runs its course the demand for products will again rocket higher. Currently $11 with a high of $116 back in July. Plenty of room to run.

Company Info:

DryShips Inc. (DryShips) is a holding company that, through its subsidiaries, is engaged in the ocean transportation services of drybulk cargoes worldwide through the ownership and operation of the drybulk carrier vessels. As of December 31, 2007, the Company owned and operated a fleet of 38 vessels and eight new buildings consisting of nine Capesize drybulk carriers (including four new building Capesize drybulk carriers), 33 Panamax drybulk carriers (including two new building Panamax drybulk carriers), two new building Kamsarmax drybulk carriers and two Supramax drybulk carriers. Its fleet carries a variety of drybulk commodities, including major bulks, such as coal, iron ore and grains, and minor bulks, such as bauxite, phosphate, fertilizers and steel products. In July 2008, the Company, through its subsidiary, Primelead Limited, acquired the remaining interest in Ocean Rig ASA. Primelead Limited is owner of 100% of the shares in Ocean Rig ASA.

Breakdown trigger: $8

BUY 2011 $12.50 LEAP Call ZDU-AV
(The price of the 2010 $12.50 call was only 70 cents less.)

OR

Buy the stock at $8.00


WYN - Wyndham Worldwide

WYN appears to be bucking the trend with a nice rebound off the November lows. They recently said demand for rooms was strong despite the economic mess. They are cutting jobs and upgrading their advertising. They are discounting rooms to introduce people the Wyndham properties. It appears to be working.

Company Info:

Wyndham Worldwide Corporation (Wyndham Worldwide), is a hospitality company. The Company offers individual consumers and business-to-business customers a suite of hospitality products and services across various accommodation alternatives and price ranges through its portfolio of brands. With more than 20 brands, which include Wyndham Hotels and Resorts, Ramada, Days Inn, Super 8, TripRewards, RCI, The Registry Collection, Endless Vacation Rentals, Landal GreenParks, English Country Cottages, Novasol, Wyndham Vacation Resorts and WorldMark by Wyndham. Wyndham Worldwide operates primarily in the lodging, vacation exchange and rentals, and vacation ownership segments of the hospitality industry. In July 2008, the Company completed the acquisition of U.S. Franchise Systems, Inc. and its Microtel Inns & Suites and Hawthorn Suites hotel brands from a subsidiary of Global Hyatt Corporation.

Breakdown trigger: $6

BUY Stock in WYN @ $6.00

OR BUY May $7.50 Call WYN-EU currently $1.65 (no leaps)


Dropped Watch List Entries


None

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