Covering All Basis

SLB “Fueling” the Oil Sector

Dear Bottarelli Research Member,

It’s good to see the oil sector is getting a much-needed boost from Schlumberger (SLB – NYSE), as the world’s largest oilfield services company is up over $2.30 after reporting a fourth-quarter earnings increase of 71%. This could be the spark the lifts the entire sector as we head into next week, so let’s keep a close eye on our MRO April 90 Calls (MRO DR) for a quick profit opportunity.

As I’ve said before, the fact that MRO has established support at its 200-day moving average means that a move back up past the $90 level is most likely to occur next — which would result in a very nice gainer on our MRO calls. But quite honestly, I’m looking to close off this position prior to next Wednesday. Why?

That’s when ConocoPhillips (COP – NYSE) reports its fourth-quarter results — and the early indications are that lower oil prices will result in earnings that are down 26% from a year ago. This could spook oil investors who are used to these companies reporting blow-out results quarter after quarter.

Now keep in mind, COP already warned The Street that sharply lower oil prices and refining margins would diminish their Q4 results, so there’s a chance that the reduced expectations have already been priced into these stocks. So we might see one of those situations where a knee-jerk reaction pushes shares lower at the open — which provides us with a mid-morning buying opportunity. After COP reports earnings next Wednesday, ExxonMobil (XOM – NYSE) and Chevron (CVX – NYSE) will follow up the next week, reporting on February 1st and February 2nd.

So the bottom line is, it may be prudent to keep a tight trigger finger on our MRO trade — at least until we get a feel of how the market reacts to COP’s Wednesday earnings report. My gut feeling is that any major pre-market move (either up or down) could be an opportunity to take the opposite side for some nice intra-day profits. I’ll keep you posted, as always.

In other positional news, shares of US Steel (X – NYSE) are recovering today — but they have yet to break through the 50-day moving average. If this level acts as a ceiling, then our X February 70 Puts (X NN) could still represent a strong downside play. But as it turns out, I set a tight stop on this one at $2.40 which has triggered in today’s trading. The prudent thing to do is temporarily close the position and look to possibly re-enter next week, as I still think X is headed $5 to $6 lower.

At the same time, we’re also exposed to the upside in the metals sector via our TIE February 30 Calls (TIE BF), which are getting a nice boost today. My thesis for entering X puts alongside TIE calls was that this position allowed us to trade in and out of the metal sector’s volatility depending on that particular day’s move. So even though our X puts are down, TIE is experiencing strength that’ll hopefully carry our TIE February 30 calls into profitability.

Also ticking higher today are our BBI January 2008 10 Calls (YCQ AB) and our CHINA January 2008 7.5 Calls (WRW AU). Like I mentioned before, if our BBI calls trade up to $0.75 or $0.80, I’d be inclined to take the 100% profits off the table. Perhaps selling half of the position — and letting the other half ride — is the proper way to handle this one, especially since we have an entire year of expiration time.

In terms of new trade opportunities, continue to keep a close eye on Focus Media (FMCN – NASDAQ). Similar to our trade on Lamar (LAMR – NASDAQ), FMCN is one of the top advertising companies in China. In fact, they have a monopoly on China’s outdoor LCD screen ads, which is a sector that’s projected to grow between 15%–20% in 2007. The growth will be driven by pre-Olympic spending (as advertisers scramble to lock up placements prior to the 2008 Olympics) and by financial institutions ahead of the Chinese bank deregulation. All this bodes well for FMCN, and I’d like to establish an upside position when the timing is right.

As always, I’ll keep you fully posted should any new trade opportunities arise. But until then…

Lock and load

Sincerely,