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MTG - $63.37 - M.G.I.C. Investment Corp ** Stop $65.25 **

We saw a little bounce on Thursday that recovered some of the drop from earlier in the week but there is still no life in the stock. Mortgage applications continue to decline as evidenced by the weekly MBA Mortgage Application Survey. Foreclosure rates are climbing and defaults are growing. As housing prices decline and interest rate move higher we are going to see marginal homeowners squeezed. It may take a few more weeks and $62 is support so put this on the back burner and we will watch for it to simmer.


Original play description:

MGIC provides mortgage insurance to lenders for borrowers with high loan to value ratios. The borrower pays the mortgage protection insurance premiums with their monthly payment. With the very high loan to value mortgages of the last couple years MGIC has a rising risk of default. Earnings were on Thursday and revenue fell -8% along with a net decrease in premiums received of -8.2%. New insurance written also fell. The percentage of delinquent loans at year-end rose to 4.52% from 3.99%.

I know several homeowners, three in the same block, that are only days/weeks away from foreclosure and everyone had taken advantage of the accelerating home values to refi, some more than once. Home values have fallen nearly -20% in this Colorado area despite what you read in the papers. The foreclosure boom is coming and MGIC will suffer.


Company Info:

MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), provides private mortgage insurance in the United States to the home mortgage lending industry. Its principal products are primary mortgage insurance and pool mortgage insurance. Primary mortgage insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which a portfolio of loans is individually insured in a single, bulk transaction. It is licensed in all 50 states of the United States, the District of Columbia and Puerto Rico. In addition to mortgage insurance on first liens, the Company provides lenders with various underwriting and other services and products related to home mortgage lending through other subsidiaries.

Buy 2008 $65 LEAP Put YHM-MM currently $6.50
(No 2007 $65 put exists)

Insurance Call: None

Entry $67.22 (01/15)

FCX - $52.00 - Freeport McMoran ** Stopped $58 **

FCX was hammered when Indonesia said it was going to restructure the profit sharing agreement for FCX. With gold prices soaring it appears Indonesia wanted more of the action. We were stopped at $58 for a $5 profit on the LEAP or +83%.

Company Info:

Freeport-McMoran Copper & Gold Inc. is a copper and gold mining and production company. The Company's principal asset is the Grasberg mine. Grasberg contains gold reserve and copper reserves. Its principal operating subsidiary is PT Freeport Indonesia. The Company owns approximately 90.64% of PT Freeport Indonesia, and the Government of Indonesia owns the remaining approximate 9.36%. PT Freeport Indonesia mines, processes and explores for ore containing copper, gold and silver. It operates in the remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea. PT Freeport Indonesia markets its concentrates containing copper, gold and silver worldwide. The Company also smelts and refines copper concentrates in Spain, and markets the refined copper products through Atlantic Copper, S.A., the wholly owned subsidiary of the Company among others, such as PT Irja Eastern Minerals and FM Services Company


2007 $55 LEAP Call OMT-AK @ $6.00, exit $11.00, +$5.00 (2/07)

Insurance put: Cancelled - not triggered 1/29

Entry $52.00 (12/21)

VLO - $50.70 Valero ** No Stop **

That was really UGLY. However, it worked out almost perfectly for our insurance coverage. We hit the profit stop of $54 on the $57.50 put on Thursday and that reduced our cost in the LEAP by -$3.10 !! Unfortunately that same put soared from $4.70 to $8.20 on Friday with the continued drop in VLO but we can't gripe. The insurance scenario we had in place over the last month has reduced our cost in the LEAP from $6.60 to $1.60 and we still have a March $45 put in place to protect us against a further drop. Set a $48 profit stop on that put and hopefully we can get our cost under a buck on the LEAP. I have complete confidence VLO will set a new high before the year is out and we will be sitting pretty!


Insurance commentary for Feb-6th
The insurance I recommended last week end worked perfectly. The gap open on Monday allowed us to sell the March $65 call for $2.70 assuming you waited for the initial gap open to slow or as much as $3.30 is you waited for the spike to cool. The same gap open pushed the protective put lower to a range of $1.45 to $1.90. Using an average price of $2.50 on the call and $1.60 on the put we ended up with a net gain of +0.90 cents and now have insurance of a March $57.50 put. That put is now worth $2.75 and the call $1.40. I am recommending we buy back the call on Monday at $1.40 and after our net gain of +90 cents on the initiation of the insurance position we now have a cost in the put of 50 cents. Should VLO continue lower we can sell the put for a profit to further reduce our cost in the LEAP. Target VLO at $54 to exit the put. Otherwise it will remain insurance until it expires.


Company Info:

Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.

2007 $60 LEAP Call VHB-AL @ $6.60
1/30 Cost reduced by spread on put/call -0.90, now $5.70
2/06 Cost reduced by -1.00 on closed call, now $4.70
2/09 Cost reduced by -3.10 on closed $57 put, now $1.60

Monday Feb-13th
Set profit stop on March $45 put at $48 on VLO

Insurance Put: March $45 Put VLO-OI @ $1.20 ** Still open **
Put entered on 12/27 when VLO traded at $51

Monday Feb-6th:

Close the March $65 Call VLO-CM @ $1.50, +1.00
Set a profit target on the March $57 put at $54, exit $4.70 (2/9)

Monday Jan-30th:

Sell March $65 Call VLO-CM @ $2.50 bid
Buy March $57.50 Put VLO-OY @ $1.60 ask
Set a stop loss on the call at $64. Profit stop at $54
Set a profit stop on the put at $52.

Entry $52.30 (12/16)

HW - $36.35 - Headwaters ** No Stop **

HW continues to hold just under resistance and as long as it holds under $39.95 we are fully protected against a further drop. While we have no downside risk until the May expiration I tend to grow bored easily. If we don't see movement over the next 3-4 weeks I may bail to avoid premium decay.

********

Headwaters (HW) has a compound annual growth rate of more than +120% mainly because it deals with the ash left over from burned coal. Coal generates a lot of ash and it is a problem the electric generating plants have to deal with when these cold fronts really suck up their coal supplies. Headwaters has three separate businesses from that ash. They have a business that buys and sells it for various purposes. Second they have produced a bonding agent to that makes it easy to transport without blowing out of the rail cars. They sell this to others for profit. Third they have a patented process for converting this ash into a synthetic fuel, which is licensed to plants that actually do the conversion.

They also make building materials and a cement substitute that uses this ash to make concrete more durable. Considering the thousands of tons of ash generated each week this appears to be a gold mine for Headwaters. When electric plants fight the tons of daily ash Headwaters is there to help and converts that ash back to dollars. This sounds too good to be true and I think that was the real problem with the decline from $46 in August to the $30 level in October. The ramp from IPO in April from $30 to $46 and decline back to $30 is complete. Those that got in on the good IPO story took their profits as energy prices declined. Now may be the time to jump back on the coal train with Headwaters rather than Peabody.

Company Info:

Headwaters Incorporated is a diversified company providing products, technologies and services to the energy, construction and home improvement industries. Headwaters conduct its business primarily through four business units, including Headwaters Resources, Headwaters Technology Innovation Group (HTI), Headwaters Construction Materials and Headwaters Technology Innovation Group. In September 2004, the Company acquired Tapco Holdings Inc., a manufacturer of building products and professional tools used in residential remodeling and construction. In June 2004, the Company acquired Eldorado Stone, LLC, a manufacturer of architectural manufactured stone based in San Marcos, California. Eldorado Stone is being purchased from Graham Partners, a middle-market private equity firm. Eldorado Stone will be integrated into Headwaters' coal-based construction materials operations.


2007 $40 LEAP Call ZPP-AH @ $4.30

Dec-27th Insurance Combo:
Sell May $40 Call HW-EH currently $2.05, set stop at $39.95
Buy May $35 Put HW-QG currently $2.15

Entry $35.50 (11/22)

CHK - $29.57 Chesapeake Energy ** No Stop **

I really hate that we were stopped on the covered call last week at $34.95. That $2.15 in premium would be very valuable to us today. We still have an April $25 put as insurance but I hope we don't have to use it. If we get a bounce soon I will sell another call to defray costs until the summer demand cycle starts pushing gas prices higher. Meanwhile target $25 to sell the existing put.

CHK also announced it was selling 7.7 million shares in Pioneer Drilling (PDC) to Lehman Brothers. CHK owned 16.5% of PDC and decided to sell the entire position. PDC also sold 3 million share to Lehman to raise capital for additional drilling rigs. Makes you wonder why CHK closed the position since PDC will have 65 rigs, mostly new, by year-end. Who is going to drill for CHK now?

There was no insider trading over the last week. Evidently the insiders are still waiting for he spring demand drop for gas.

Prior commentary:
The CEO said on Wednesday (2/01) that CHK is more likely a buyer of other companies and assets than a target of a takeover itself. He said there were many potential targets smaller than Chesapeake and the drop in gas prices made them attractive. He said gas prices should remain in the $7.50-$10.50 range the rest of the year. He did not expect any major to make a big play like Conoco did when it purchased Burlington late last year for $35 billion. He also said CHK's $2.2 billion acquisition of Columbia Natural Resources was going better than planned and the opportunity appears to be bigger than originally thought. McClendon said CHK had actively hedged its output when prices were higher and were profiting from the swings in prices. He said the plunge in gas prices was "fantastic" because it made acquisitions cheaper, stemmed demand destruction and gave consumers a break on their utility bills. CHK also announced the private placement of $500 million in 6.5% notes due in 2017. The proceeds would be used to pay off bank debt. What a deal! Gas will be $30 by then and the $500 million plus interest will be chump change.

Insider Trading:

A reader alerted me to the insider buying on CHK, (thanks Joe!) and I must say it is amazing. The Chairman and the President made a total of 18 market buys between Dec-14th and Jan-25th totaling over $82 million. That is an obscene amount of confidence and suggests to me that something is going on at CHK and their outlook is extremely positive. With a market cap of $11 billion they could be a takeover candidate made much more possible by being the third largest holder of gas reserved in the U.S.

Company Info:

Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.

2007 $35 LEAP VEC-AG @ $4.00

Insurance Put:
April $25 CHK-PE when CHK traded at $28 on 11/07 @ $2.30

Covered Call 12/27:
Sold the April $35 Call CHK-DG currently $2.15
Set a stop loss on the call at $34.95, exit @ $2.70, -55, 1/30


Entry $29 (11/04)

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