EOT Position Update – March 2, 2011

March 2, 2011

Market Snapshot

$100 oil… It’s here, but for how long?

Right now the situation in Libya is front and center on everyone’s radar.  Every report of violence or disruption of oil production ripples through the oil market instantaneously.

As you know, there’s a steady stream of bad news coming out of Libya.  So, it shouldn’t come as a surprise to see fear driving oil prices higher.

Now investors are beginning to weigh the impact $100 oil will have over the long term.

If oil stays at these levels or moves even higher, it will certainly throw a wrench in the economic forecasts.  Remember, most GDP growth estimates were made with oil prices around $75 to $90 per barrel.

$100 oil will hurt the economy on multiple fronts.

It cuts into consumer purchasing power… If gas takes up a bigger percentage of the household budget, there’s less to spend on everything else.

And it also raises expenses at the producer level… That means corporate profits will get squeezed as well.  Clearly, that’s not good for the economy or stocks.

Here’s the good news…

If the situation in the Middle East and Africa calms down, the fear premium will come out of oil prices quickly.  Then we’ll see oil prices back around $80.  And the economic outlook for the US and the world with $80 oil is excellent.

Here’s my take… It’s still highly unlikely a violent uprising will disrupt a major oil exporter.  And sometime in the next few weeks we’ll see oil prices come down and stocks take off.

Until then, I’m treating this pullback in stocks as a great buying opportunity.

Let’s move onto the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  GM June 2011 $35 Calls
GM saw car sales jump 46% in February.  But the news wasn’t enough to light a fire under GM shares or our options.  Clearly, high oil prices are still weighing on GM and the auto industry.  But I’m expecting GM and our options to take off once oil prices come back down.  Resistance is at $37 and $40.  Support is at $31 and $29.

  LVS June 2011 $55 Calls
LVS isn’t moving in the right direction.  Now there’s news the SEC is investigating the Sands for bribery in Macau.  Clearly that’s never good.  This scandal has the potential to weigh down the shares over the next few months.  Go ahead and sell now to conserve capital for better opportunities.

  MCD June 2011 $80 Calls
MCD is in a holding pattern.  Latte sales growth and emerging markets growth should send this stock into the mid-$80s.  But rising commodity prices are giving investors reason to think their margins could get squeezed.  I think MCD is in a good position to pass rising costs onto the consumer.  That should keep margins healthy and the stock rising.  Sit tight for MCD to regain its momentum.  Resistance is at $80 and $85. Support is at $70 and $67.50.

  DO June 2011 $78.50 Calls
DO hit a high of over $80 yesterday.  The stock and our options are jumping higher along with oil prices.  That’s good enough to send us through our first resistance level. Congratulations to everyone locking in gains of 141%!  The next resistance is at $85.  Support is at $64 and $62.

  PEGA March 2011 $25 Calls
PEGA continues to surge higher.  Our call options will expire in a few weeks.  Anyone still holding this winner should go ahead and lock in your massive 738% gains soon!

Category: EOT Update