Cellulosic Ethanol

Take a Mid-Week Break

By Bryan Bottarelli
Wednesday, November 01, 2006 10:44 AM EST
Wed, 1 Nov 2006 15:44:00 GMT
“Corn ethanol, though valuable, can play only a limited role, because its ability to displace gasoline is modest at best. But cellulosic ethanol, should it fulfill its promise, would help to wean us of our petroleum dependence.”
– Alan Greenspan to Senate Foreign Relations Committee, June 7th, 2006

Dear Bottarelli Research Member,

My colleague SR Nunnally has invited me to join her at the Cellulosic ethanol conference in Chicago this afternoon, so I’ll be taking the afternoon to size up the benefits of this new technology. Given our recent trading action in companies like Pacific Ethanol (PEIX – NASDAQ) and Archer-Daniels-Midland (ADM – NYSE), it’s clear that this is a budding sector that we’ll want to trade for the next few years, and I want to stay at the forefront of any new developments.

As a basic introduction, cellulosic ethanol is derived from fast-growing grasses or agricultural waste. The main obstacle, as with any new technology, is finding ways to bring down the cost and ramp up the production in order to make the technology competitive. In my view, staying apprised of the evolution of the U.S. ethanol industry could be nothing but positive as we move forward in our trading, so I’ll be taking the afternoon to learn more about this technology.

In the meantime, our upside positions in Goldman Sachs (GS – NYSE) and Hasbro (HAS – NYSE) continue to look good. The longer-dated HAS January 25 Calls (HAS AE) that we entered yesterday for $1.75 have traded as high as $1.95 today as HAS hit a new 52-week high at $26.00.

HAS

Also, our GS November 200 Calls (GPY KT) traded as high as $1.30 today as the stock is setting up for one final push to $200 a share. Maintain each position for more upside. If you plan to be busy for the next few days, you may consider setting a “busy man” sell order on the GS calls at $1.60, which would result in a cumulative gain of 30.08% on your basket position.

GS

On the flipside, our ANF December 80 Calls (ANF LP) have ticked down to our $2.60 stop on a new wave of bearishness in the overall retail sector. To my eye, this recent dip has set up another great opportunity to establish another position in ANF calls, as I’m sticking by my prediction that the stock will hit $100 by Christmas.

ANF

It’s clear that ANF is an over-performer in the retail space, so weakness in the likes of Wal-Mart and Gap should not be considered a blow to ANF. Plus, the fact that ANF is trading down on a meaningless downgrade (Credit Suisse moved the stock from “Outperform” to “Neutral,” whatever that means) tells me today’s down-move will be short-lived. If the stock finds support above the 50-day moving average at $72.50, I’d be inclined to recommend another call position.

I’ll be back with more tomorrow, but until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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