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Market Wrap

Close But No Cigar

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IBM powered the Dow for another strong gain while the rest of the indexes moved sideways. 13,000 beckoned all day but the Dow was unable to make the stretch. IBM announced it was raising its dividend by one third and boosting its stock buyback program by a whopping $15 billion. This produced a +$4 spike in IBM shares and that equates to about +30 Dow points. Honeywell, another Dow component added +1.75 points giving the Dow another 12 point boost. The Dow struggled intraday to within 11 points of Dow 13,000 but retreated back to 12,950 by the close.

Dow Chart - 30 min

Nasdaq Chart - 30 min

The big news of the day was the -8.4% drop in existing home sales in March. This was far worse than any estimate and the news knocked the major indexes back to three day lows when it was announced. The market dip was short lived but the weakness in the housing sector remains. Home prices remained flat but inventory levels are now at 7.3 months of supply, 17% above the same period in 2006. The drop was the largest drop since 1989 and the sales rate was the lowest since 2003.

Companies are continuing to blame the housing blues on their weak performance. Today GM blamed the housing slump for losing its lead as the largest automaker. Toyota sold 2.35 million vehicles in the first quarter and GM only sold 2.26 according to preliminary estimates. GM said the reduction and availability of home equity due to falling home prices and disappearing loan options had reduced the amount of cash available for auto purchases.

The first reading of Consumer Confidence for April showed the headline number falling to 104.0 from 108.2 in March. This was also below analyst estimates of 105.5. The present conditions component fell from 138.5 to 131.3 and the expectations component fell from 87.9 to 85.8. That was the first drop in the present conditions component since October. The internal components for jobs and business conditions also fell. Higher gasoline prices were still being mentioned as a concern.


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The business conditions in the Richmond Fed region remained weak in April with the Richmond Fed Survey dropping to -11 and the 5th month in negative territory. Shipments fell to -15 from -10 and the six-month outlook slipped to 19 from 26. This report is following the same trend as the New York and Philly Fed surveys indicating the over all business conditions remain weak. The economic calendar for the rest of the week includes the Beige Book on Wednesday and the GDP on Friday as the remaining highlights.

On the earnings front there was plenty of news. I mentioned Whirlpool in Sunday's commentary as a key event for the week. Whirlpool (WHR) reported earnings of $1.55 per share on continuing operations. This compares to analyst estimates of only $1.15 per share. Revenue jumped +24% to $4.39 billion, also above analyst's estimates of $4.11 billion. WHR also said it was restarting its stock buyback program it had put on hold when it acquired Maytag. The combination of factors saw WHR stock spike +$12.50 to $102.85. More importantly it shows that global appliance sales are still strong despite cautious comments from WHR on U.S. revenue. WHR said sales in North America fell -9.5% and projected sales for the full year to decline by up to 3% if the housing slump continued. Shorts who had been expecting bad news were crushed by the better than expected global results.

Apple was the recipient of some good news today with their earnings due out tomorrow. The former CFO agreed to settle with the SEC by paying a $150,000 fine and returning $3.5 million in option profits. The former CFO, Fred Anderson, had agreed to cooperate with the SEC on the probe. The SEC also announced they were filing charges against former Apple counsel Nancy Heinen. In papers released by the SEC it appears Apple has been given a pass in corporate accountability and CEO Steve Jobs may also escape any penalties. After the deal with Fred Anderson was announced he fired a parting shot at Jobs saying everything he did was done with the full knowledge of Jobs. Jobs reportedly told Anderson the board had given full approval for the grants and would verify it in the official documents. Anderson said he acted on Job's assurance and concluded the grants were being handled correctly. In today's release by the SEC they said they would not be filing any actions against Apple partly due to the degree of assistance received from Apple in the investigation.

Vonage was also given another reprieve in its patent case with Verizon. A Federal court issued a permanent stay removing the injunction forbidding them from signing up new customers. This allows them to continue business as usual until the patent issue is eventually resolved in the appeals process. This removes the potential for bankruptcy at least for the immediate future. VG jumped +40% on the news but sellers appeared quickly and saw the spike as an opportunity to exit.

Amazon reported blowout earnings after the bell and immediately jumped more than 10% in after hours trading. Amazon said profits more than doubled and were helped by a lower tax rate and a +32% jump in sales. Profits were $111 million or 26 cents per share compared to 12 cents in the comparison quarter. Analysts were expecting only 15 cents. Amazon trades at nearly 50 times earnings compared to only 21 times at Ebay. Amazon also gave stronger than expected guidance for the current quarter and full year.

The Energizer bunny (ENR) keeps going and going and that produced profits of $1.14 per share compared to analyst estimates of 85 cents. This produced a $6.25 spike in the stock to $97.26. Revenue jumped +16% and they said higher costs for the rest of the year would likely be offset by retail price increases.

Paccar (PCAR) surprised analysts with earnings of $1.37 compared to estimates of $1.20. Shares closed at $86.56 with a +$7.77 gain after peaking at $90.70 earlier in the day. PCAR makes commercial trucks and truck parts. PCAR said business outside of the US accounted for more than 50% of sales and produced the profit gains. The weak US sales were due primarily to accelerated purchases by dealers in 2006 to beat the new emission laws. Those inventories will soon be depleted and PCAR will again be selling in the US market. PCAR did guide slightly lower for the rest of 2007 but analysts were already projecting weakness.

Snap-on (SNA) jumped +7.41 to $56.20 on earnings that jumped +76% to 66 cents per share. Earnings beat analyst estimates of 53 cents on new products and lower costs. Sales in North America rose +16% and previously announced cost cutting efforts were paying off.

Not all earnings surprises were to the upside. Dow component Lexmark (LXK) fell -10% or -$5.57 on weaker than expected results. The company blamed declining inkjet sales, aggressive hardware pricing and higher operating expenses for the weak results. Net profits fell to 96 cents missing the street estimates for $1.03. Lexmark is facing increased competition and aggressive pricing has them selling inkjet printers at a loss while hoping to make it up on future sales of ink. They guided lower for the current quarter with revenue expected to fall in single digits. Earnings are expected to fall to between 82 to 92 cents and analysts were expecting a rise to 95 cents.

Coach (COH) posted a 38% increase in profits to slightly beat street estimates but then warned that future growth may be less than expected. COH estimates were for 2007 earnings to be $1.67 per share with analysts expecting $1.72. COH fell -3.09 on the news. Analysts were quick to suggest any drop was a buying opportunity given their plan to open 40 new stores per year in the U.S. for the next few years. They are on track to open 30 new international stores with eight in China. The CEO was on CNBC and complained that its products were finding their way into the discount market and into stores like Wal-Mart. He said he had no control after distributors took delivery and the appearance of their products in the discount market was bad for the high end Coach image.

Earnings are continuing to surprise mostly to the upside. This is definitely a quarter where companies under promised and over delivered. This has been key to the market advance to 13,000. For those companies already reported 67% have beaten estimates, 17% reported inline and only 16% missed. Currently earnings are showing growth of 10.8% and well over estimated in the 3% to 5% range just two weeks ago. Thomson Financial warned that investors should not expect this to continue with weaker companies still to come. However, if everyone only reported inline with estimates for the rest of the cycle earnings would come in at 6% growth. Currently we are seeing upside surprises running a 5:1 ratio over negative surprises.

Oil prices rose sharply on Monday and gave back a large portion of those gains today to close back down at $64.58. Yesterday's spike to $66.30 may be over in the minds of some traders but the long summer is still ahead. The EIA reported gasoline consumption in the US was growing at a +5% rate and double what analysts had predicted. Prices are all over the map. I personally paid $2.74-$2.84 in Albuquerque New Mexico and Dallas Texas last week and $2.94 in Oklahoma City. Service stations in Northern Kansas on I70 nailed me for $3.09. This week I paid $3.14 in Utah and $3.24 in Las Vegas. I am headed to Los Angeles later this week and then up to San Francisco over the weekend. I am afraid to even guess what I will pay there. Next week I will be in Salt Lake and then stop off to visit my son on an oil rig in Big Piney Wyoming before heading back to Denver. I will be the first to admit this trip is going to crimp my wallet from feeding my SUV. I am hearing of $3.50 gas on the West Coast and prices soaring in Florida. We are not even close to hurricane season and summer driving is still 6 weeks away.

Boone Pickens was interviewed on CNBC again today and he reiterated his expectations for Peak Oil to occur over the next 12 months. He feels global oil production will peak around 86 mbpd and oil prices will begin their permanent rise higher. The +5% demand growth in gasoline consumption in the US is just one clue that higher gas prices have been accepted once again and drivers have resigned themselves to bigger fuel bills. Of course there were other analysts claiming oil would return to $40 but it is easy for them to project ridiculous targets when they have nothing invested. Pickens has billions of his own invested in oil and billions from investors in his energy fund BP Capital. He obviously has a reason to talk oil prices higher but that will only work on a very short term basis. If he loses billions by calling it wrong he will fall back into obscurity. I am betting with him on this one. He is predicting $80-$100 oil in 2008.

Wednesday's oil inventories are expected to show a -1.5 mb drop in crude but a build of +500K bbls in gasoline and distillates. Refinery utilizations are officially expected to rise to 91% but there was some news today that suggests it may not continue rising. Valero cited power outages in Texas as the reason for several production drops. BP also reported problems at its Whiting refinery that could slow production for months to come.

Exxon announced completion of a new record length for a single well. The well dubbed Z-11 drilled to a measured distance of 37,016 feet or 7.01 miles. This is not straight down and even more incredible it was a horizontal well with the most of that distance horizontal under the ocean. This is just another reason why future oil supplies are going to be much harder to produce and more expensive.

BP reported earnings that were less than exciting due mostly to falling production rates and the lower price of oil over the quarter. BP reported production had fallen to 3.91 mbpd from 4.04 mbpd in the comparison quarter. BP's profits fell -17%.

The Dow may be flirting with 13,000 but the rest of the indexes have gone back to their consolidation action we saw for most of last week. Dow 13,000 is only a psychological level and has no material technical merit. With the majority of the Dow components already reported there will be far fewer events to provide an additional upward spike.

The Nasdaq has stalled at 2525 exactly as expected since this is fairly strong resistance. With tech stocks not providing the same market boost as the weighting sensitive Dow it may be significantly more difficult to produce that Nasdaq breakout. The Nasdaq futures are only showing a minor +$2 pop from the Amazon news. 2500 remains support but 2525 remains strong resistance.

The S&P-500 has also failed to move higher despite some strong results from individual components. Resistance at 1485 is holding with even stronger resistance is waiting at 1500 and 1527.

Russell 2000 Chart - 30 min

The Russell-2000 has also stalled at 830 and is working on a potential 2nd lower high from the 832 level hit back on April 17th. This suggests fund managers have cooled their buying enthusiasm and may be cautiously looking at a potential "sell in May and go away" event. The NYSE Composite has also stalled and has now stretched its consolidation at 9600 to seven days.

We are facing a timing problem as the markets spend time at their recent highs. This consolidation phase could end with another buy program inspired sprint higher as it has several times in recent weeks OR lacking any energizing event the rally could just expire at this level as May approaches. Without any surprise by Friday I would lean towards a top being formed at this level.

Apple will be the focus on Wednesday as they report their earnings. It will be even more important now that the SEC has decided not to pursue any further charges against Apple or their officers. It is the equivalent of a get out of jail free card ahead of what could be strong earnings. Microsoft will report on Thursday after the close with traders very interested in Vista statistics.

I would continue to play the long side of the market but be very conscious that the markets are very extended. I stand ready to reverse to a short if the Russell fails again at 830.

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