Beating the Bear

VIX, OSG, and New FWLT Play

PLAY: Buy the FWLT November 75 Calls (UFB KO) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

PROTECTIVE PLAY: Buy the VIX October 25 Calls (VIX JE) at market, good for the week. Implement the scaled-selling technique as these calls reach 50% and above.

ADD-ON PLAY: Buy more OSG January 95 Calls (OSG AS) at market, good for the week. This will lower your cost basis on your entire position, so be sure to adjust your scaled-selling targets accordingly.

Dear Bottarelli Research Member,

Before getting into today’s newest LEAPS pick, I’d like to begin by covering three important tactical points. The first two tactical points involve prospering in bear market conditions, and the third tactical point includes a new LEAPS watch list. So let’s dive right in!

Tactical Point #1: Perhaps the most important tactical move for today’s alert is establishing a way to protect ourselves against the tremendous market weakness. In my view, the best way to accomplish this is using call options on the CBOE Volatility Index (VIX).

The VIX is a measure of the market’s expectation of 30-day volatility (constructed by using the implied volatilities from both calls and puts). When I was on the floor of the CBOE, the VIX was the best way for traders to measure market risk — and that’s why it’s commonly referred to as the “investor fear gauge.”

As a baseline measure, any VIX values above 30 are generally associated with high volatility (which translates into heightened levels of fear and uncertainty) while VIX values below 20 generally correspond to less stressful market environments.

As you can see from the VIX chart below, the current values around 24 are significantly underneath the 32 levels we witnessed back in March.

I find this rather peculiar because the Dow has recently established a new 52-week low. That means we’re now trading at market levels below where we were in March, yet the VIX is still at levels 33% below its March highs. In other words, the current level of fear has yet to reach the same levels we saw in March, and this tells me that we could easily see another big jump on the VIX. Therefore, it makes sense to protect ourselves from any further selling pressure by using VIX October 25 Calls (VIX JE).

If the markets fall even further, these calls will quickly increase in value, thus offering us a way to protect our existing LEAPS positions against continued market downside. So, as today’s first order of business, let’s add VIX calls to our LEAPS ledger now!

PROTECTIVE PLAY: Buy the VIX October 25 Calls (VIX JE) at market, good for the week. Implement the scaled-selling technique as these calls reach 50% and above.

Tactical Point #2: After adding these VIX calls, I’d like to capitalize on the recent market weakness to add to our OSG January 95 Calls (OSG AS). While most of our LEAPS positions did a good job of withstanding the market’s selling pressure, the one position that has come under the most stress is OSG. But I still believe in the upside potential of the stock, which is why I’d like to add to our January calls now.

After all, our extended January expiration offers us plenty of time to witness a recovery on OSG, especially since the $75.00 level is such a strong level of support. Remember, one of the major benefits of LEAPS is that they offer you a high level of leverage while also offering you an extended expiration cycle. Therefore, let’s take advantage of the recent OSG weakness to add to our January 95 calls!

ADD-ON PLAY: Buy more OSG January 95 Calls (OSG AS) at market, good for the week. This will lower your cost basis on your entire position, so be sure to adjust your scaled-selling targets accordingly.

Tactical Point #3: Finally, I’ve received some notes from LEAPS members who asked for a list of future LEAPS play candidates, just so that they can track these names alongside me on a weekly and monthly basis. So in that spirit, I will list some of the top LEAPS candidates that are currently on my watch list. All of the names listed below could become official LEAPS recommendations in the future. A brief note about each stock is also listed for you below:

Celgene (CELG – NASDAQ): Top biotech with a loaded product pipeline. Shares have quietly emerged as the NASDAQ’s top performer in 2008 without any fanfare whatsoever.

Southern Copper (PCU – NYSE) & Freeport-McMoRan Copper & Gold (FCX – NYSE): Two of the most powerful metals plays you can buy. Each offers you a nice combination of gold and copper exposure. Chart-wise, they could dip a little further, and if so, could trigger a strong LEAPS play.

Market Vectors Russia (RSX – NYSE): This ETF tracks the price and yield performance of the DAX Global Russia Index. I happen to like this one because Russia is one of the most powerful “BRIC” economies that nobody is talking about. For example, while China and India (and to a lesser extent, Brazil) get all of the investor attention, Russia remains a powerful investment play yet it somehow remains a distant afterthought. With exposure to companies like Gazprom, Lukoil, and MMC Norilsk Nickel, the RSX offers you a fantastic way to diversify outside of the U.S. markets and enjoy continued upward growth in Russia.

Atwood Oceanics (ATW – NYSE): Here is a stock that’s been aggressively setting new 52-week highs in the midst of the major market weakness. I never let stocks like this go un-noticed, and I’d like to establish a new LEAPS position on any forthcoming dips.

DryShips (DRYS – NASDAQ): Similar to our play on OSG, I also like shares of DRYS. You see, dry bulk shipping will be in strong demand for years to come, but the trick is correctly timing this powerful sector. If you can time it correctly, stocks like DRYS and OSG can quickly gain upwards of 35% to 55%, and you can only imagine what that would do to their call options. Therefore, DRYS is a stock that is always on my watch list.

Bunge (BG – NYSE): Here is one of my favorite agriculture plays. While the option premiums on potash plays like AGU, MOS, and POT remain sky high, a company like BG looks quite attractive. After all, their business model offers a wonderful combination of agribusiness, fertilizer, and food products, and their option premiums are quite reasonable compared to their peers.

Tesoro Corporation (TSO – NYSE) & Valero Energy (VLO – NYSE): Both of these plays represent major turnaround stocks. You see, increasing oil prices have dramatically reduced the margins of oil refiners, and TSO and VLO are two of the biggest oil refiners on Wall Street. If oil prices begin to come down, we could see a big time price jump in both stocks. Timing is critical, but the potential for a major LEAPS gain is certainly in the cards.

Clean Harbors (CLHB – NASDAQ): Here is another stock that’s hitting new 52-week highs despite brutal market conditions. I find CLHB truly unique. They collect, transport, treat, and dispose of hazardous and non-hazardous wastes for industrial customers, health care providers, governmental entities, and environmental services companies — which I consider a very powerful and important market niche.

Union Pacific (UNP – NYSE): Despite a recent pullback, shares of top railroad operators, like UNP, continue to look attractive as oil prices remain at sky-high levels. With the airline and the trucking sectors each on the verge of disaster, railroads look better than ever before.

JA Solar Holdings (JASO – NASDAQ), SunPower Corporation (SPWR – NASDAQ), & Suntech Power Holdings (STP – NYSE): The solar-power darlings of the 2007 investing year have fallen on hard times in 2008. I find this rather ironic, especially since the case for solar power is more attractive than ever before. If the market firms up, all three names could blast higher, making them potential LEAPS plays going forward.

Now, after reviewing all of these LEAPS candidates, I feel the timing is right to gain upside exposure in the global engineering and infrastructure sector. Therefore, today’s top play comes in the form of Foster Wheeler (FWLT – NASDAQ).

Foster Wheeler provides global construction and engineering services to the oil/gas, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant sectors. Their operations are broken down into two segments, noted below…

Global Engineering and Construction Group: This segment designs, engineers, and constructs infrastructure facilities in sectors such as oil and gas processing, natural gas liquefaction, oil refining, chemical, petrochemical, pharmaceutical, biotechnology, and healthcare.

Global Power Group: This segment manufactures and erects steam-generating and auxiliary equipment for electric power generating stations. They also service existing infrastructure, which entails plant upgrading and life extension.

In short, FWLT is a pure play on global infrastructure, and the case for their explosive growth is quite simple.

You see, in many respects, a company like FWLT will not be subjected to economic cycles. Rather, they’re positioned to capitalize on a global mega-trend that’ll be in place long after the current bear market comes and goes.

Merrill Lynch, for example, just doubled their forecasts for emerging market infrastructure spending. They expect spending of $2.25 trillion (yes, with a “T”) over the next three years, which is up from the $1.25 trillion they originally forecasted. That alone is a powerful statistic that makes a strong case for FWLT.

But it gets even better…

In one of the most under-reported stories of the year, Saudi Arabia’s national oil company (Saudi Aramco) recently announced that they plan to increase their refining capacity by three quarters within the next five years.

Now get this: Saudi Aramco currently sits on a quarter of the world’s proven reserves of crude. As a company, they dwarf top oil names like ExxonMobil and PetroChina. And although they don’t report their financials, it is very likely that Saudi Aramco earns $1 billion per day in revenue.

Amazing? You bet. And now, they plan to allocate upwards of $70 billion for new refining and petrochemical ventures. And since Saudi Aramco has successfully worked with Foster Wheeler in the past, you better believe that their ambitious plans for new refineries will drive an obscene amount of business FWLT’s way. The way I see it, FWLT has secured a client in Saudi Aramco where money is no object.

That’s why I feel any near-term price drops in FWLT shares offer us a wonderful buying opportunity.

And remember, the potential deals with Saudi Aramco only account for one client. Aside from Saudi Arabia, China’s infrastructure growth remains phenomenal. And then you have every other developing nation — all of which continue towards rapid urbanization. All of this points to infrastructure build-outs for housing, electricity, water, sewage, and transportation, which leads directly to business for FWLT. After all, you can’t have an infrastructure project without an engineering and construction firm — and FWLT is one of the world’s best.

Furthermore, Foster Wheeler also produces coal fluid boilers which remove 95% of the sulfur from coal. And they also have exposure to the liquefied natural gas market, which is expected to grow from $8.7 billion to $25.4 billion between now and 2011.

Looking specifically at FWLT’s stock performance, shares have gained 33.60% over the last 52-weeks — solidly out-performing the -15.74% loss on the S&P 500.

With quarterly revenue growth at 55.90%, $1.16 billion in cash, and 81.40% of shares held by institutions, the stock looks like a very strong buy on any dips.

So let’s take advantage of this current price dip to add November calls to our LEAPS ledger now!

PLAY: Buy the FWLT November 75 Calls (UFB KO) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

UPDATES

WFT January 2009 50 Calls (WFT AJ): We locked in a 50% return on these calls, and we’re currently holding the remaining half for more upside.

ETR January 140 Calls (ODF AH): Despite aweak market,shares of ETR have remained strong, and these calls traded as high as $4.00 in this week’s trading. This is a gain of 48.15% off our June 4^th entry price of $2.70, so be sure to lock in profits on half of your position if these calls reach 50% profits in next week’s trading.

RIO January 37.5 Calls (VOH AU) & PBR January 90 Calls (PMJ AR): I continue to like our two Brazil-based plays, so maintain each January position for an upside recovery.

And from my family to yours, have a fun and safe holiday weekend!

Sincerely,