CVX - $52.25 Chevron Texaco ** No stop **
Chevron fell harder than the rest of the oil group this week but I am still very comfortable with the position. Once the digestion of the Unocal news is over CVX will end up with a fortune in new reserves. Our $55 insurance put is now $3 in the money and we have very little risk.
Chevron announced in early April that it was purchasing Unocal for $18 billion in cash and stock and both CVX and UCL dropped sharply. This was not a surprise for Chevron to make the purchase but the timing caught everyone off guard.
In theory everyone was waiting for oil to drop in Q2 and allow the next round of acquisitions to be made at a more reasonable value. Instead Chevron did a take under on Unocal by offering less than the current share price. It is a good deal if you can pull it off.
Chevron beat out several other firms including China's CNOOC who had been a hot pursuer but had to drop out at the last minute after it could not complete the final terms in time.
Chevron will likely sell off about $3 billion in non-core assets once the deal is consummated. The main asset Chevron wanted was the 1.7 billion barrels of proven reserves and tens of thousands of acres of additional leases still to be explored. Chevrons current average cost of produced crude is $27. After selling the non-core assets they will end up with the Unocal proven reserves at about $9 a bbl plus billions in other assets like gas fields, power plants and joint ventures around the world. This was a very sweet deal for Chevron.
It may take some time for the cloud to lift from the stock price but the next jump in oil prices should do wonders. Chevron dropped back to its 100-day average at $55.50 on the news and this should be very strong support. There is not expected to be any hurdles to getting the deal approved as most of the assets are either out of the country or will be divested as part of the deal.
The Unocal leap was actually triggered when the price hit $59 on the announcement. With UCL trading at $58.74 at Friday's close there would not have been any material movement. Because any Unocal leap will eventually end up being a Chevron leap I am electing to use the previously recommended Chevron leap as the actual position. I am using Friday's close for the entry price.
JBLU - $19.04 Jet Blue ** No Stop **
JBLU faded from its highs early in the week despite the drop in oil prices. Resistance at the 100-day average held and the ugly markets took their toll.
This is a long-term play as airlines will eventually be hit hardest by rising oil prices. It is strictly a play on oil and the change in environment for the airlines. The Q2 demand drop was expected to provide a drop in oil and a rise in airline prices. It happened almost exactly as expected. Now we sit and wait for the reversal.
2007 $20.00 LEAP Put VYO-MD @ 4.60
Insurance Call: June $22.50 JCQ-FX @ .85
Entry $19.50 (4/05)
TOO - $22.79 TOO Inc ** Stop Loss $25.50 **
TOO broke support at $23.50 and it could be difficult for the retailer to climb back over that level given the current concern over consumer spending. The 200-day average at $22 is the only remaining support before $16.
Too, Inc. is a specialty retailer that sells apparel, underwear, sleepwear, swimwear, lifestyle and personal care products for young girls. Recently some negative news has begun to surface from brokers and analysts. It appears TOO maybe having some problems and is losing market share. In order to reclaim that share it is offering what some brokers describe as absurd incentives to attract buyers.
Merrill lynch analyst Mark Friedman said last week that weak sales were a growing concern and we could see an earnings miss for Q1. He lowered same store sales growth estimates to an anemic +3%. He also cautioned that their current sales promotion may be TOO much of a good thing. They call it the TOO Bucks promotion. If you buy $50 of merchandise they will give you TWO $25 coupons to use at a later date. Previously they had offered the same promotion with only one $25 certificate. Friedman feels that giving away $50 in certificates for every $50 sale could be an act of desperation and definitely one that will impact profits. If the promotion catches fire and becomes a strong success then Q2 should suffer greatly as all those certificates come back to haunt them.
The chart clearly shows a loss of momentum and a potential for a sharp drop if an earnings miss occurs. With gas prices putting the squeeze on consumers the retail sector is not a promising place to be long.
TOO does not have LEAPs so I am recommending the November options.
BUY NOV $22.50 PUT TOO-WX currently $2.05
No insurance call.
Entry $24.22 (4/10)
GM - $25.69 General Motors ** No Stop **
GM broke support at $28 and is heading south at a high rate of speed despite the drop in oil prices. I could easily see single digits in the distant future given the various troubles ahead.
My long-term view is very bearish on the automakers due to the potential for $100 dollar oil over the next year or so. If $2.50 gas is bad for business $5.00 gas will be a death knell for gas-guzzlers.
With earnings approaching there is a good possibility GM will reveal some more negative details about its profits and its pension/healthcare problems.
I am using the 2007 leap puts because I think this will be a long term problem for GM and the other car makers as well. We could easily see prices in the teens before this put expires.
2007 $30 PUT VGN-MF Currently $7.20
Entry $29.35 (4/04)
CAL - $11.98 Continental Airlines ** Stop $14.50 **
CAL felt the heat despite the falling oil prices and broke support at $12.50 to close at a two week low. No real change here but once oil begins to rise again I believe we will see fewer flyers on higher ticket prices.
The airline industry as we know it is doomed. It is only a matter of time before it becomes too expensive to fly due to dwindling oil reserves and the tens of thousands of current routes will be cut in half and possibly half again. There is no substitute for oil to keep the planes in the air and that means costs will continue to skyrocket. Those airlines with defined benefit pension plans will be stuck with shrinking routes, more layoffs, higher costs and lower profits. In the not too distant future air travel for fun will be a fond memory and heading off to grandma's for the weekend or to Vail for skiing will simply be too expensive to justify.
Business travelers will be the majority of the fares and the high cost of those fares will restrict them to only the absolutely necessary trips.
I am very bearish on the future of the airlines and it is only a matter of time until the rest of the world catches on to the coming reality.
2007 $10.00 LEAP Put OVJ-MB @ $3.10
No insurance call due to the low price on the Leap.
Entry $12.00 (03/31)
OSTK $40.97 Overstock.com ** Stop loss $46.50 **
OSTK broke support at $42 and is poised to accelerate to the downside. With earnings ahead I like the current trend. CIBC and RBC Capital both initiated coverage last week with an "under perform." Earnings will be released on April 22nd.
Overstock.com is poised to repeat the Amazon story. They rallied to the excess peaks on the story and promise of the future and are now finding it difficult to follow through on that promise.
For a complete and lengthy explanation of this play please refer back to the April 3rd edition of the LEAP newsletter.
I believe Overstock.com will return to its $20 roots and with earnings just ahead we could easily have some negative surprises. Unfortunately they don't have leaps but we can still play with September puts. I realize many readers may not have the same incentive to short OSTK that I do and I understand. However, looking at a chart should suggest to you that others have found them lacking as well.
September $40 Put QKT-UH @ $5.70
No insurance call due to prices out of range.
Entry $42.60 (04/04)
SMH - $29.93 Semi Holders ** Leap Dropped, retain put **
Warnings in the chip sector and the IBM earnings miss wiped out any chance of a SMH rebound. I am closing the call side and leaving the PUT side open. If Intel trips on Tuesday we could have a home run to the downside.
Semiconductors have been the only strength sector for techs and we are rapidly running out of time for any real rebound. If techs do not rebound over the next two weeks I plan on closing this play for non-performance. I don't want to hold it into the summer doldrums.
2006 $35.00 LEAP Call YRH-AG @ $2.75, closed $1.40, -1.35
Entry $33 (03/15)
ADBE - Adobe Systems $67.18 ** Stopped $66.50 **
Adobe is still holding its gains but I am getting even more nervous. I raised the stop to $66.50 and I am hoping for a Nasdaq rebound to hit our profit target at $69. We came within 11 cents on Wednesday. I am maintaining that profit stop at $69.
Adobe is the king of the document and image business and continues to announce new products. The company announced earnings in December that rose +33% and beat estimates. Income for the year rose +69% on a +29% increase in revenue. Adobe affirmed guidance for 2005 and the stock has been beating the Nasdaq in percentage gains. In 2004 the stock rose +60%. Since they have already announced earnings we have very little event risk over the next month.
I recommended the February $55 put as insurance at 80 cents. That gave us six weeks for the Q1 earnings to cycle and for ADBE to pick a direction. If we are not profitable by Feb-18th expiration we will close and take our lumps.
Jan-06 $60 LEAP WAE-AL @ 7.50, exit 11.90, +4.40, net +2.85
Added new insurance on Feb-22nd
Stop loss $66.50
Entry $58.78 (01/09)
SYMC $18.89 Symantec - Veritas ** Close LEAP, retain put **
SYMC broke support at $20 on Friday and I am throwing in the towel. The strong drop on Friday was due to a 10K reporting large stock sales by officers. The sales were according to 10B5-1 rules but the evidence of selling prior to the May-4th earnings was a red flag to many.
We will close the LEAP, currently $2 for a $4.30 loss. After accounting for the two insurance puts that loss drops to -2.25 if everything was closed today. Considering the worsening of sentiment on SYMC, officers selling ahead of earnings we could see $16. I want to keep the July $22.50 put open with an exit target of $16.25. This should come very close to a breakeven on the position. This is not how I want to breakeven but it is better than a loss any day.
2007 $25 LEAP Call OBL-AE @ $6.30, exit $2.00
Entry $25.37 (12/19)