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Market Wrap

Wamu and Consumer Credit Drive Action; Alcoa Reports Q1 Earnings

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The major averages got off to a bullish start Monday with banking shares leading gains on talk that Washington Mutual (NYSE:WM) $13.15 +29.30% may be close to getting a $5 billion private equity investment from buyout firm TPG, Inc.

As gains built towards the mid-point of the session, today's loan economic report brought in some selling after the Federal Reserve said Americans increased their outstanding credit in February but at nearly half the rate as in the previous month.

The Fed said consumer borrowing in February rose at an annual rate of 2.4%, or by $5.2 billion, to bring total consumer credit up to $2.5 trillion.

Economists polled by Thomson's IFR Markets had expected total consumer borrowing to rise by $5.3 billion in February.

Consumer borrowing in January was upwardly revised to a $10.3 billion from the previously reported $6.9 billion.

The majority of the increase in total consumer debt was for credit card debt, or revolving credit, which rose to annualized 5.9% rate in February, or by $4.7 billion.

Consumer borrowing for auto loans and other types of so-called non-revolving credit, rose at an annual rate of 0.4% in February, an increase of $497 million.

The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

Closing U.S. Market Watch - (05:00 PM EDT)

In this weekend's Market Wrap, I had mentioned the NYSE reporting that short interest as of March 31 had risen 4.2% to 16.1 billion shares.

This afternoon, NYSE regulators said they and the Financial Industry Regulatory Authority were investigating a large increase in short interest data released Friday for Lehman Brothers' 7.9% preferred stock.

Late this afternoon, the NYSE said their initial investigation revealed an error and that the previously measured short interest on the preferred stock was incorrect.

After tonight's close, the NYSE now reports that it has amended NYSE short interest as of March 31 to 15.6 billion shares.

Despite some fractional dollar firming against the euro, May Crude Oil futures (cl08k) settled up $2.86, or +2.69% at $109.09 on technical buying. May Unleaded (rb08k) tracked crude oil higher, but at a less aggressive pace, settling up $0.0268, or +0.97% at $2.7835.

With some notable deterioration in the unleaded/oil crack spread, I thought it best if Valero Energy (NYSE:VLO) $49.63 -1.93% move to the sidelines as the stock was trading $50.54.

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As I type (with Tuesday's energy futures session underway), May crude oil's 5DyNet% is up 7.08% vs. unleaded's 5.70%, while crude oil's 20DyNet% is up 1.91% vs. unleaded's 1.83%.

May Nat. Gas futures (ng08k) reclaimed the bulk of Thursday and Friday's losses with a 5.03% gain to settle up $0.469 at $9.7910.

The Amex Nat. Gas Index (XNG.X) 630.68 +0.91% closed at a new 52-week high.

In today's OptionInvestor.com Market Monitor I notes some of global energy advisor Tristone Capital's coverage/updates to past call, that looked like a "take profit" on these, and buy these as they look to be breaking out. The old "rotate your capital and play follow the leader" that's a long-held strategy of institutional traders.

As one example, with Apache Corp. (NYSE:APA) $128.60 +1.73% surging to yet another all-time high in today's session ($131.45), Tristone cut its rating on the shares to "outperform" from "Top Pick," yet raised its target on energy producer (largely natural gas) to $148 from $122.

The firm then raised it rating on Newfield Exploration (NYSE: NFX) $56.09 +2.52% to "Top Pick," also raising the firm's prior target to $78 from $68.

APA and NFX Montage - Daily Intervals

While Tristone made several "downgrade" calls and rotated them to "top picks" today, their call is a classic example of how institutional firms can look to take profit from one trade and rotate to another, perhaps a very SIMILAR stock (sector) that may well play some catch up.

Fascinating action in APA from the $90.00, a level many Market Monitor subscribers will remember from several months ago as I warned of shorting the break to a new high. Notable how the stock found buyers on a date becoming more familiar to major market index traders and 1/23/08.

Newfield (NFX) looks like it is set to test its recent all-time high of $57.75 having also found an inflection low on 1/23/08.

Tristone also raised Devon Energy (NYSE:DVN) $108.44 +1.02% to "top pick" status and raised it price target to $140 from $85.

Shares of semiconductor equipment maker Applied Materials (NASDAQ:AMAT) $20.19 -3.35% were weak after Credit Suisse analyst Satya Kumar downgraded the shares to "neutral" from "outperform." Mr. Kumar said his research showed the company is having difficulty manufacturing its large solar panels, and noted the panels are expensive because of their size. Mr. Kumar added that the company's efficiency goals are too low. By 2010, AMAT plans to make solar panels that cost $1/watt of power generated, but more efficient panels are already on the market.

Citigroup's Timothy Arcuri may have agreed and suggested investors swap out of AMAT and into fellow equipment maker KLA-Tencor (NASDAQ:KLAC) $42.81 +6.57%. While Mr. Arcuri maintained his "buy" rating on AMAT, he thought KLAC could surprise to the upside in the March and June quarters with his research suggesting the company is seeing some increased adoption rates at Samsung and a resurgence or orders from Taiwan Semiconductor (NYSE:TSM) $10.49 +0.57%.

The Semiconductor HOLDRs (SMH) $30.29 -0.49% were little changed.
(See this weekend's Market Wrap)

Chip maker Intel (NASDAQ:INTC) $21.75 fell $0.12.

Earnings season kicks off today and fundamentalists as well as technicians will be taking notice as to calendar Q1 earnings.

Shares of Dow component Alcoa (NYSE:AA) $37.44 -4.00% traded weak into this evenings release of its quarterly (Q1 for the aluminum giant).

Alcoa (NYSE:AA) - Daily Interval Chart

Aluminum producer Alcoa said its Q1 earnings plunged 54% as higher raw material and energy costs and a weaker dollar cut into results.

Net income fell to $303 million, or $0.37/share compared with $662 million, or $0.75/share during the same period last year. Excluding items, AA said earnings per share were $0.44 vs. a comparable $0.79 in the year-ago quarter. Revenue fell 7% from a year ago to $7.38 billion from $7.91 billion.

While the top line results beat Wall Streets average estimate of $7.18 billion, bottom line figures came in shy of the $0.48/share estimate.

Alcoa executives said the weaker dollar impacted results negatively by $68 million, or $0.08/share, on a quarter-by-quarter basis.

However, and this confuses me (Jeff Bailey) a bit, AA also noted that the weaker dollar positively impacted MANY commodity prices in the recent quarter and that the price of aluminum climbed 24.5% in the last three months.

I have not fully read AA's earnings press release at this point, but would like to investigate further just why/how the weaker dollar has had NEGATIVE impact.

I would hate to think that at some point, AA "blame" a stronger dollar for weakening aluminum prices, thus having a negative impact on earnings.

In February, Alcoa and Aluminum Corporation of China Ltd. (NYSE:ACH) $44.90 +2.16% announced they were jointly buying 12% of Rio Tinto PLC's (NYSE:RTP) $456.30 +0.39% shares in a deal reportedly valued at $14.05 billion. Alcoa said it contributed $1.2 billion to the total investment.

In this weekend's Market Wrap, I made multiple broader market notes as to a major bottom having been found in the major U.S. equity benchmarks.

There are a couple POTENTIAL head/should BOTTOM patterns developing in AA. One near-term pattern (blue) has already developed, where a break much above $40.70 and the 10/29/07 high would be a neckline.

A more severe pullback into last August's lows near $30.25 also a possible pattern.

Rather "shocking" that a deep cyclical like AA showing some muster above its 12/31/07 close.

Shares of AA were rather quiet in this evening's after-hours session, ticking lower at $37.23.

Morgan Stanley Cyclical Index (CYC.X) - Daily Intervals

In today's OptionInvestor.com MM, I did note that the CYC.X had retraced 50% of its "TRAN-like" decline. (See Dow Transports in this weekend's wrap).

As one component of the CYC.X (AA, C, CAT, CSX, DD, DE, DOW, ETN, F, FCX, FDX, GCI, GT, HON, HPQ, IP, IR, JCI, MAS, MGA, MMM, MOT, PPG, PTV, R, SHLD, TIN, UTX, WHR and X), AA would be showing some strength relative to its 150-day SMA (dark purple) and its 12/31/07.

With AA being the first to issue some fundamental data as to both domestic and global trends, we'll want to follow the MARKET's response over the next several sessions.

Dow Industrials (INDU) - Daily Intervals

This weekend's Market Wrap was a lot of charts and tables to digest.

You can see a lot of "stock component overlap" with the CYC.X and the Dow Industrials Components, a PRICE weighted index.

Dow Industials' 30 components - Sorted by PRICE

BOTTOM line earnings can be VERY difficult to "compare" vs. a year ago, as company's take special one-time charges, or gains on various parts of their business, or shifts in their business strategy.

Revenues are revenues. On a 52-week basis, the PRICE of AA was still up 8.23% versus this day last year.

General Electric (NYSE:GE) $37.26 -0.79% is the next component to report (4/11/08 before market open) and it has its finger in just about every piece of the U.S. and global economy.

Wall Street is looking for the company to earn $0.51/share (year ago $0.44/share) on revenue of $43.66 billion (+15.9% vs. year ago).

IWM and QQQQ Montage - Daily Intervals

Other than the strong start to the new quarter (04/01/08) there's not a lot to say about the iShares Russell 2000 (IWM) and the NASDAQ-100 Tracker (QQQQ). Volumes are rather light and since the recent lows, we haven't seen volume near the 50-day average.

In this weekend's market wrap I had mentioned that I had profiled a 1/2 position short in the IWM, which we were holding INTO the end of Q1, but a LOWERED stop from $69.82 entry was hit at $68.82 on 03/31/08.

I wouldn't be bashful with the picking up a bullish position back in there if given a second chance.
 

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