Your Friday Follow-Up

Setting Up Next Week

Dear Bottarelli Research Member,

As we continue to work our sale of the MNST November 40 Puts (BSQ WH) and the ALK November 40 Calls (ALK KH), I’d like to take a moment and address our other positions going into next week.

Starting with the airline sector, I’m won’t be too worried if we don’t get our $3.70 sale price on Alaska Air today. Today’s jump in oil prices is pushing the entire airline sector lower, but hopefully this will be a short-lived occurrence. As many of the major U.S. airlines begin to report Q3 earnings next week, the sector should get a boost from the 16% drop in jet fuel prices from the July/August to September period. These lower costs should provide a nice buffer to any potential decline in airline travelers.

Not only that, but we may get a helping hand from the low-cost carriers. As I mentioned yesterday, we want to stay away from playing the upside on these names — but they could come in and help us next week. You see, companies like JetBlue (JBLU — NASDAQ) and Southwest Airlines Co. (LUV – NYSE) just scaled back their Q3 earnings expectations in late September, saying margins would be 4% to 6% and revenue growth would come in below 10%. This caused a drop in the sector, but it could set up a situation in which the bar is set so low, the major carriers could use the lowered fuel costs to come in and impress Wall Street. American Airlines (AMR – NYSE) the largest legacy carrier, is expected to release their results on October 16^th. If they can offer a lift, I’ll use that upside strength to take profits on our ALK November 40 Calls (ALK KH).

Our other call position in the PPH November 75 Calls (PPH KO) could witness some serious action next week. That’s because the top holdings in the PPH are all getting ready to report earnings, with Abbott Labs, Eli Lilly, Forest Labs, Johnson & Johnson, Merck, Pfizer, Schering Plough, and Wyeth all slated to check in.

As I noted in previous alerts, the last few years have been troublesome for this group due to intense generic competition. But to combat this, many companies have significantly cut costs while maintaining a steady growth from their newer products, which could prove to be the catalyst that allows them to beat expectations and continue their recent up-swing. Here’s the breakdown:

Tuesday: The world’s largest healthcare conglomerate Johnson & Johnson (JNJ – NYSE) is expected to show a 7% jump in adjusted earnings per share of $0.93 cents. Also, pharmaceutical maker Forest Laboratories (FRX – NYSE) will be reporting its second-quarter fiscal earnings, which are expected to show a 10% gain in revenue of $807 million. Ironically, Forest just launched a generic version of Pfizer’s blockbuster antidepressant Zoloft (which recently lost patent protection), so theoretically any down-tick in Pfizer could be absorbed by Forest (which is a good reason why I like holding a basket of companies like this).

Wednesday: Abbott Laboratories (ABT — NYSE) is expected to report a 2% increase to $5.48 billion, with adjusted earnings per share at $0.58. Investors may take hold of Abbott’s top-selling drug rheumatoid arthritis drug Humira, which looks to have sales 50% higher than last year’s quarter. ABT’s vascular division is also expected to look impressive, with a $380 million number that’s a whopping 380% increase from 2005.

Thursday: This is when the world’s biggest pharmaceutical company Pfizer (PFE – NYSE) checks in. As I mentioned in Forest’s paragraph above, Pfizer’s top-line will be absent of Zoloft, which caused a 12% downward earnings adjustment. The key number will come from sales of Lipitor, the planet’s best-selling drug. Analysts at Bank of America see Lipitor sales of $3.1 billion for the quarter, up 5% from last year.

Eli Lilly (LLY — NYSE) will also come in on Thursday, with expectations of $3.9 billion, which would represent an 8% increase over last year’s quarter. Lilly’s antidepressant drug Cymbalta should witness quarterly sales of $340 million, up 90% from last year. Wyeth (WYE – NYSE) is also in the schedule, highlighted by their rheumatoid arthritis drug Enbrel. Expectations are that Enbrel will post quarterly sales of $360 million, which is up 30% from last year.

Friday will feature Merck (MRK – NYSE) which is expected to report a 24% drop in adjusted earnings per share of $0.49 due to lost Zocor sales. But investors may take heart in new cholesterol drug Vytorin and cervical cancer drug Gardasil. Schering-Plough (SGP – NYSE) also checks in on Friday, and they’re expected to post adjusted earnings of $0.15 cents a share, a 6% increase over last year.

So as you can see, it’ll be a big week for the PPH. Hold your PPH November 75 Calls (PPH KO) for more upside potential.

Switching gears, while I don’t want to beat a dead horse, I’m still shocked by the recent movements of Monsanto (MON – NYSE). As I mentioned, MON is a pure play on the ever-increasing world population, and just this week reports show that the US population just broke 300 million mark. At the same time, the US Department of Agriculture reported that the world’s stockpiles of wheat are at their lowest level in more than a quarter century. Over on the Chicago Board of Trade, wheat futures hit a new 10-year high of $5.51 a bushel and corn futures hit their highest level since June 2004. This should be considered good news for seed and corn plays like MON and Archer-Daniels-Midland (ADM – NYSE).In fact, if you revisit the MON chart, I still feel we got shafted on our call play.

Although I refuse to cry over spilled milk, the recent up-ticks in MON seem to confirm that something odd happened in the days leading up to their earnings release. I’m still bullish on the company, but recent events lead me to play this sector in other ways.

Continuing with our Friday updates, the recent retail sales number reported a fall of 0.4% in September — which was way below analysts’ expectations of an increase of 0.2%. This continues to support my bearish thesis on played-out online retailer Overstock.com (OSTK – NASDAQ). I noticed that our OSTK November 20 Puts (QKT WD) hit our stop earlier this week but have since bounced back. Therefore, I’ll continue to report on the position for those members still holding.

Unfortunately, the oil inventory number from yesterday failed to drop oil prices any further, which stopped out our speculative play on RIG November 65 Puts (RIG WM). Without question, the oil patch continues to be the most volatile sector around, which lends itself to quick profit opportunities going forward. In fact, it may be a good idea to begin adding longer-dated calls on drillers like Diamond Offshore Drilling (DO – NYSE) or Marathon Oil (MRO – NYSE) on any pullbacks.

I’m also interested in taking on some additional longer-dated calls on plays that could be “immune” to any major sell-off. As I’ve mentioned before, Freeport-McMoRan Copper & Gold (FCX – NYSE) is a name that tops my list in that category.

But another interesting contrarian play could be Southwestern Energy (SWN – NYSE). With natural gas prices so low, it could prove to be a steal to own SWN calls leading into winter (and that’s even if the so-called experts are calling for “mild” temperatures. Call me crazy, but we just got snow here in Chicago).

As you can see, next week proves to be another exciting week of trading. So have a good weekend and until next week,

Lock and load!

Sincerely,