Your Wednesday Update

More Dow Weakness – Is Oil Next?

Dear Bottarelli Research Member,

As we close out the trading day, I’d like to comment on our current positions. By in large, nothing fundamentally has changed from yesterday. The Dow continues to experience weakness, which is why we’re maintaining our near-term downside bias. And I truly believe that there’s a major “terror premium” currently priced into crude oil prices and stocks — and any resolution of the Iran/UK situation could quickly push prices back down. In fact, this “terror premium” is really no big secret.

In today’s trading, for example, crude oil prices have traded at their highest levels of the 2007 calendar year — yet major oil names like Exxon Mobil (XOM – NYSE), Marathon Oil (MRO – NYSE) and ConocoPhillips (COP – NYSE) have all traded lower. This tells me that the next oil stock move will be to the downside — regardless if crude continues to move up or not. As a result, I’d like to maintain our downside bias on Weatherford International (WFT – NYSE), as our WFT May 45 Puts (WFT QI) will quickly increase in value on any selling pressure.

Another downside position that I’d like to maintain is on InterMune (ITMN – NASDAQ), as the stock is finally receiving some downside pressure that I’ve been speaking about.

When you look at the numbers, it’s clear why I’m bearish on this company. With total cash of $214.55 million and total debt of $170 million, they don’t have much wiggle room when it comes to their balance sheet. With revenues of $90.78 million and quarterly revenue growth of -30.90% (year over year), that equates to around $2.73 in revenues per share — and it doesn’t appear that the company will witness any dramatic increase in sales until 2009 (and that’s the very best-case scenario).

On top of that, their Chief Scientific Officer, Dr. Larry Blatt, doesn’t exactly have a sparkling track record of success. Before ITMN he was head of research at Ribozime Pharmaceuticals, which failed and went bankrupt (burning millions of dollars in the process). Before that he worked at the National Genetics Institute, which also went broke and was eventually acquired in 2002. Add it all up, and I can’t justify anything but a bearish near-term outlook on ITMN, so let’s maintain our ITMN July 20 Puts (IQY SD).Some members has asked about a stop loss on this play, so if you would like to limit your risk, go ahead and place one at $0.45.

Looking at the call side, I think we’re getting close to a bottom on FedEx Corporation (FDX – NYSE).As you know, this trade has been rather volatile, as our FDX May 115 Calls (FDX EC) have been both in the red and in the black in the short time that we’ve held them. The stock is unfortunately down today — which triggered our stop loss. But we could soon see an opportunity to re-enter. After all, if you believe that the world economy will continue to grow, then you’re indirectly making a bullish argument for FedEx. They’re one of the most well-positioned companies in the global economy, and I don’t want to let a near-term hiccup (induced by cautionary earnings comments) deter us from an otherwise attractive trading opportunity. If I see another opportunity to go long, you can expect a new call play.

Another company in this same boat is Lockheed Martin (LMT – NYSE). They’re one of the best large-cap stocks money can buy, exhibited by their EPS growth, return on equity, and cash flow. If the LMT June 100 Calls (LMT FT) get knocked down any further, it may be time to add to our position. The fact that the stock now sits under its 50-day moving average could be a gift.

As I also mentioned yesterday, I’d like to take the same longer-dated upside bias on Allergan (AGN – NYSE). They are the undisputed leader in the booming cosmetic surgery market, lead by their $1 billion powerhouse Botox treatment. And don’t forget that it was just November of 2006 when the FDA approved the sale of silicone breast implants, which benefits Allergan due to their acquisition of Inamed. Also in their loaded product pipeline is Juvéderm (which is a gel doctors inject in the face to smooth out wrinkles), Restasis (which is a dry-eye treatment) and the lap-Band System (which is a silicone ring that restricts food entry into the stomachs of morbidly obese people). With all these products serving a rich and aging demographic, AGN expects to see continued earnings growth that’ll match — if not exceed — the 30% earnings growth they enjoyed last year.

And finally, I remain bearish on Big Lots (BIG – NYSE). It was only yesterday that discount retailers experienced weakness after Target (TGT – NYSE) reaffirmed its March sales outlook — which disappointed investors and dropped the shares 2%. Wal-Mart also moved lower on the news, as higher oil prices pinch the low-end consumer that companies like Big Lots strive to attract.

With a lot of room to move on the downside, maintain your BIG May 35 Puts (BIG QG) for more gains. And as always…

Lock and load!

Sincerely,