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Morning Update

Overnight Japan reported weaker than expected GDP, which means that the country is officially in recession. The contraction is due to, in part, slowing exports to China, which confirms a slowdown there as well. In Europe Italian PM Mario Monti lost support of former PM Berlisconi’s party in parliament. Monti is likely to quit before the end of 2013, which has European shares down and Italian bond yields trading at their widest spread to German Bunds in 4 months. Last week a weak Spanish bond auction sent Spanish bond yields higher as well, showing waning investor enthusiasm for Europe’s weakest links despite the actions of the ECB. In the US Obama and Boehner met in person, though there are no reports of what was discussed. In this case I see no news as good news. As long as they are not publicly complaining about a lack of bi-partisan cooperation I believe they are making progress. Reports also surfaced that republicans would be likely to support higher taxes on the wealthiest Americans if it meant an overhaul of entitlement programs, which is the type of compromise a deal will require.

In May 2012 ConocoPhillips spun off its refining arm, Phillips 66. Since its IPO Phillips 66 has appreciated by 60%, gaining 2.7% Friday on news the company would be raising its dividend by 25% and another $1 billion in share buybacks for the second quarter in a row. The stock’s call-put ratio was 9.2:1 on Friday, showing heavy call option activity. The biggest trade of the day was the purchase of 11,886 May 65 calls for $1.05 with the stock at 52.22. This is a bullish bet that PSX will be above 66.05, 18.8% higher, 158 days from now.

Phillips 66 currently yields 2.3% and has shown a commitment to returning shareholder value since its IPO. But this has not come at the cost of growth, which looks strong going forward. In June CEO Greg Garland announced that he would like to increase delivery of shale crudes to Phillip’s refineries by 100,000 to 150,000 bpd within 2 years. Garland plans to accomplish this by using rail cars, and the company has since purchased several thousand. Bakken crude is one of the most efficient crudes for refiners to use because it leaves very little residual waste products during the refining process. Phillips has also recently entered agreements with Kinder Morgan to deliver Ford Eagle crude to its Texas refineries. Garland believes that the exploration and production side of the energy business will continue to expand faster than the infrastructure for transporting crude oil. If this scenario plays out PSX will be able to keep its supply costs low and widen profit margins further in the future.

I would buy the stock on a dip or buy call options on the stock to profit on a continued rally. However, I would not chase this stock higher. PSX has rallied nearly $10 in the past 3 weeks so traders should look for profit taking as an opportunity or an entry.

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