Option Investor

Daily Newsletter, Tuesday, 09/13/2005

Printer friendly version

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Katrina Flood Rising

The floodwaters from Katrina may be slowly receding but the flood of earnings warnings as a result of Katrina is rising rapidly. Whether it is the real culprit or just an opportunistic excuse for many is yet to be seen. Either way the outlook for Q3 earnings is slipping fast and odds are good the market will follow. There is no doubt the massive aid packages, insurance settlements and cheap loans will provide economic stimulus but that is still well into our future not today.

Dow Chart- Daily

Nasdaq Chart - Daily

SPX Chart - Daily

The morning opened with a very positive PPI where the August headline number actually dropped to 0.6 from the 1.0 posted in July. The data was collected in advance of Katrina so that was not a factor. Energy prices rose +3.7% for the month. Excluding food and energy the index fell -0.1%. There was a sharp jump in auto sales in July of +1.5% and that jump was reversed in August with a -1.3% decline. The lack of any appreciable inflation even in the face of a +3.7% jump in energy prices could give the Fed confidence that further rate hikes are not needed with inflation well under control.

Despite the sharp increase in energy prices the trade deficit for July released today actually fell from $59.49 billion to $57.94 billion. An increase in exports offset higher prices for petroleum imports amounting for nearly a $1B jump in imported oil prices.

The Manpower Employment Outlook Survey showed that 20 out of 23 countries expected to add employees during the fourth quarter. Employers in the U.S. only showed a slight increase in hiring plans with only 20% of employers planning on adding workers. This compares to 25% that had planned to add workers in Q3. This data was also collected before Katrina and should change significantly for September.


***The energy stock that Buffett bought***

Warren Buffett, the "Oracle of Omaha," parlayed a modest grub stake into a $43 billion personal fortune . mainly by investing in ordinary companies with mundane products: soda, razors, sneakers, banking, insurance.

Because he is a major investor, Buffett is required by law to file a quarterly "Form 13F" disclosing all of his current holdings. Recently he plunked down almost $28 million to buy 659,000 shares of an oil company with proven reserves of 1.3 billion barrels of oil equivalent, as disclosed in his Form 13F filing.

With oil at $55 a barrel, those assets would have a street value of $71.5 billion. Yet the market cap is a small fraction of that, just $11.3 billion ... and Buffett has proven repeatedly that he knows a bargain when he sees one! For a FREE research report on Warren Buffett's #1 energy stock pick, click here now:


The economic calendar for the rest of the week has Retail Sales for August on Wednesday. With gas prices spiking in August the impact to non-gasoline sales could be severe. However, we don't know if the data will show this bounce since it was late in the month. Wednesday also has the oil and gas inventories and the numbers should show a dramatic adjustment of inventory levels released last week. Now that the smoke has cleared better numbers should be available and they should show a sharp drop in inventory levels.

Thursday has Jobless Claims, which should jump sharply except that there are no offices for most Katrina victims to file claims. It could take several weeks for the real impact to appear. Not only could we see 500,000 claims from the disaster area alone there will be claims from other businesses impacted by the loss of input or output from the disaster area. On Thursday we will also see the CPI, Business Inventories, NY Empire State Survey and Philly Fed Survey. The material report for Friday will be Consumer Sentiment.

The National Association of Realtors released their forecast for Q4 a week late and predicted that new home sales would jump to a new record in light of the Katrina rebuilding effort. There are reportedly more than 250,000 homes destroyed by Katrina. They are estimating that only 200,000 will be rebuilt but that should push the national numbers to a new record once the rebuilding effort begins. New home prices are expected to rise +4% due to the higher cost of materials, up to +8% in some areas. This should push the average existing home price up by +10.8% in 2006 according to the NAR. Maybe there is a silver lining to Katrina for homeowners across the U.S.

The major problem in this release is that the rebuilding effort could last for up to ten years and be so stretched out that the benefits are hard to see. Officials said today that some homeowners may not be permitted to return for up to four years due to contamination issues. Can you imagine leaving your home with a couple suitcases of possessions ahead of the hurricane and then being told you can't come back for four years? That is astounding to me. Then when you come back your home may not even be there after being bulldozed for environmental reasons. I can't imagine a nightmare more frustrating for homeowners. There have been reports of orders for more than 5,000 manufactured homes and mobile homes to be delivered to the disaster area as temporary housing. FEMA is reportedly seeking temporary housing for 250,000 people currently homeless.

The Katrina effect is beginning to appear in the corporate world. I have mentioned before that Katrina warnings would appear just in time for the Q3 warnings parade now that we are in September. Leading today's list was Best Buy (BBY), which posted earnings that fell short of consensus estimates. BBY also warned that Q3 earnings would be below prior estimates. BBY said price promotions on cars and high gasoline prices were influencing consumer-spending patterns. They expect same store sales to rise slower than previous estimates due to impacts from Katrina and the continued high gasoline prices. This is the excuse you should expect to here from dozens if not hundreds of companies over the next four weeks for those choosing to warn rather than wait for their earnings report to confess. BBY fell -5.58 on the news.

The Katrina excuse will take its place right at the forefront of the earnings cycle and eventually those claiming it will be ignored since the impact is already being priced into the market. It will become the Q3 "get out of trouble free card" for everyone whether it applies or not. Books-A-Million (BAMM) has already used the excuse despite not having any stores in the disaster area. Their closest store was 50 miles from any damage. The chain said consumers were more interested in watching the various news reports and specials on TV than reading books. If Amazon and Barnes and Noble report the same thing then maybe I am wrong for criticizing them. Time will tell. Knight Ridder (KRI) warned that Q3 earnings would fall as a result of Katrina AND declining advertising revenues and higher costs for newsprint. KRI fell -3.44 on the news. Gannet (GCI), the largest newspaper chain in the country also reported that ad sales slipped post Katrina and the stock fell -2.37. Together the warnings weighed on the entire sector with NYT losing -1.40 and DJ -0.91. The point I am making here is that the impact from Katrina will be far reaching and hit many areas you would not connect to a hurricane in New Orleans.

The recovery effort is continuing with two notable events occurring today. The Louis Armstrong Airport reopened today for commercial traffic with Northwest Airlines and Delta being the first of a handful of flights to return to New Orleans. This is a far cry from the 350 flights a day before the hurricane but it is progress. Secondly, the Port of New Orleans reopened for traffic with ships lined up waiting to dock. With estimates of the cleanup and rebuilding effort taking as much as ten years these are highly visible events suggesting the clock has finally started on the effort.

If you like seafood you might want to load up quickly if your choice of entre come from the Gulf. Reportedly over 40% of the boats in the entire fleet were destroyed. 60% of the remaining boats were damaged. There is seafood coming out of western Louisiana but only a trickle compared to prior levels. Many fishermen who lost not only their boats but their houses as well may not go back into fishing for a living. Expect prices to rise for any seafood from that region. There is also the contamination problem. The EPA said the amount of contaminants currently being pumped into the gulf from the New Orleans pumping effort is huge. The Gulf is a big place but that contamination is going to be around a while close to shore.

Crude Oil Chart - Daily

The refinery picture has not improved despite the drop in gas prices. In a report released today it appears that 3 of the 4 refineries still closed will be offline for at least three months or more. That means for the majority of the heating oil season nearly 5% of our refining capacity will be offline. This should continue to pressure heating oil prices as our weather begins to turn cold. Oil prices continued to be weak as traders wait for the impact of oil supplies from overseas. Crude has been holding at the $63 range and a five-week low for two days and just above support at $62.50 from early August. The oil inventory data due out Wednesday could jerk prices out of their doldrums. If the levels are better than expected we could retreat to the 100-day average at $60. If the drop in inventory levels is worse than expected then we could begin a rebound back to the mid $60s but with oil headed in our direction from overseas I don't see any material rally until the impact of that oil is seen.

The transport sector is reeling from the high oil prices with the transports falling to a two month low. Delta and Northwest are said to be only days away from bankruptcy but the oil crisis is pressuring everyone. Yellow Roadway has already warned that Katrina will cut Q3 profits and that warning has pressured the entire trucking sector. The trucking sector will spend $85 billion on diesel in 2005 according to numbers released today. That will account for 25% of their costs and it is $23 billion more than they spent in 2004. Today Ryder (R), fell to a 2-year low, YELL and FDX hit a 52-week low.

There is a contingent that feels hurricane rebuilding always provides a boost to the markets. A study published today of the last ten major hurricanes showed that the net impact to the markets was ZERO. They measured the market movement for the following 12 months and while there were some years the markets moved higher there were also years where the markets fell sharply following a disastrous hurricane but the average was ZERO. Bottom line, there is no guarantee that the market will reap the benefits of any rebuilding effort. As we have already seen in this cycle the negative impact to some businesses is far reaching while others like WY, GP, HD and LOW are positive. For instance, we have yet to see the impact to the banking system from defaults on destroyed homes and businesses and from properties that were underinsured. One insurance executive today said those without flood insurance were likely to receive only 20% of the replacement value.

Hurricane Ophelia continues to churn towards North Carolina but it is only a class one storm. It does serve to warn everyone that the worst two months of the year for hurricanes are September and October. The gulf could easily be targeted by several more storms that could slow or even complicate the recovery effort. The storm clouds may have passed but the season hasn't.

SOX Chart - Daily

The post Katrina rally hit a wall of resistance at Dow 10700, Nasdaq 2185 and 1243 on the SPX. The SOX also came to a dead stop at 485, which has been strong resistance since June. This is exactly what I expected and wrote about last week. With warnings likely to increase over the coming weeks the potential for a breakdown is far stronger than the potential for a breakout. We have seen those resistance levels hold several times in the past and given the current uncertainty over the Katrina impact and the health of the economy there is little incentive to buy in front of a historically weak period. I outlined the fact that September highs were normally seen early in the month in last Tuesday's commentary. Even more dramatic is the date for the September lows which group late in the month. There is no guarantee the markets will repeat historical trends but we would be well advised to be cautious. I am reprinting the table here for reference.

Table of Recent September Highs and Lows

For the rest of the week I would watch SPX 1230 for a directional signal. That is short-term support and a level that should give us the first clue that fair weather bulls are abandoning their positions. Since the hurricane the SPX had rallied +43 points or +3.5%. The Dow had risen +350 points or +3.3% and the Nasdaq +74 points or +3.5%. That is a lot of profit for an early September rally and it is very likely traders will want to take it off the table as earnings warnings increase. On the flipside should the bulls suddenly show up in force and push the SPX over 1245 I would be a strong buyer for a potential counter trend move. Until that happens I will retain my negative bias. As always, enter any position passively and only when the price comes to you and be ready to exit aggressively if the trend you expected changes suddenly. September is known for its volatility as we have already seen this week.

New Plays

New Option Plays

Call Options Plays
Put Options Plays

New Calls

None today.

New Puts

Adobe Sys. - ADBE - close: 26.82 chg: -0.43 stop: *see note

Company Description:
Adobe is the world's leading provider of software solutions to create, manage and deliver high-impact, reliable digital content. (source: company press release or website)

Why We Like It:
The trend in ADBE looks rather bearish. There is a clear pattern of lower highs as the stock bounces from support in the $26-27 level over the last several months. The latest dip back in early August helped produce a new Point & Figure chart sell signal that now points to a $19.00 target. One that you'll notice if you study the chart is that ADBE's volatility has narrowed significantly over the last few weeks. That's because investors are waiting to hear from the company when they report earnings on Thursday, September 15th after the closing bell. This is one time we want to hold over the report because we're going to use a neutral strategy to catch any post-earnings reaction. Our plan is to buy an October 27.50 call and an October 25.00 put. Right now the call is trading around $1.00 and the put around $50-55 cents. So hypothetically we only need to see ADBE move more than $1.60 to be profitable. Fortunately the stock has a history of producing some significant post-earnings moves. The goal here is to cash in with a $1.00 to $1.50 profit. When you exit is up to you. Some of you may jump out the moment you get a decent profit. Others may want to hold these options well into the month of October. Since this is a neutral play. We don't care what direction ADBE moves, there is no stop loss.

Suggested Options:

BUY CALL OCT 27.50 AEQ-JY OI=7261 current ask $1.05
BUY PUT OCT 25.00 AEQ-VE OI=2636 current ask $0.55

Picked on September 13 at $ 26.82
Change since picked: + 0.00
Earnings Date 09/15/05 (confirmed)
Average Daily Volume = 6.2 million


Ishares DJ Fin. Serv. - IYF - cls: 95.76 chg: -0.56 stop: 96.75

Company Description:
The IYF is an ishares trust designed to track the performance of the Dow Jones Financial sector index.

Why We Like It:
The early September, post-Katrina rally is stalling and we suspect that the markets are poised to move back into its seasonal trends with September as the weakest month of the year for equities. Helping lead the way are some weak banking sector indices. Both the BKX and BIX are turning lower after testing resistance at the top of their descending channels. Instead of trying to pick just one banking stock to play we're choosing to buy puts on the IYF ishares. The weekly chart for the IYF shows a potential double-top and a clear bearish divergence with its MACD indicator (not to mention a recent MACD sell signal). The daily chart shows bearish signals in the RSI and stochastics. We would probably consider this a speculative play but we're going to try and significantly limit our risk with a tight stop at $96.75. If the IYF does not produce any follow through on what looks like a failed rally here we should be quickly stopped out. Traders should only use risk capital and small positions as the options do not see a lot of volume. Our six-week target is the $92.00 level.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 100.00 IYF-WT OI=220 current ask $4.90
BUY PUT NOV 95.00 IYF-WS OI=260 current ask $1.75

Picked on September 13 at $ 95.76
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 20 thousand


Hershey Co. - HSY - close: 58.21 change: -1.04 stop: 59.51

Company Description:
The Hershey Company is a leading snack food company and the largest North American manufacturer of quality chocolate and non-chocolate confectionery products. With revenues of over $4 billion and more than 13,000 employees worldwide, The Hershey Company markets such well-known brands as Hershey's, Reese's, Hershey's Kisses, Kit Kat, Almond Joy, Mounds, Jolly Rancher, Twizzlers, Ice Breakers, and Mauna Loa, as well as innovative new products such as Take 5 and Hershey's Cookies. In addition to its traditional confectionery products, Hershey offers a range of products specifically developed to address the nutritional interests of today's health-conscious consumer. These products include sugar-free Hershey's, Reese's and York candies, as well as Hershey's SmartZone bars for people seeking balanced nutrition. It also markets Hershey's cocoa, Hershey's syrup and other branded baking ingredients, toppings and beverages. (source: company press release or website)

Why We Like It:
The markets have been in rally mode the last two weeks but not so for shares of HSY. The stock has been stuck in a trading range between $57.40 and the $59.50 levels with the exponential 200-dma helping reinforce the upper boundary of resistance. Honestly, we're a little surprised. The stores have already put out their Halloween merchandise and you might tend to think that HSY would see some strength as a seasonal play. Apparently not this year - at least not yet. Today's decline looks like another failed rally from the top of its range with volume coming in above average. More aggressive traders may want to consider new put positions right here. We're going to wait for another decline under the $58.00 level. Our entry point will be $57.90. More conservative traders may want to wait for another new relative low altogether under $57.35. If triggered we'll target a move $54.00-53.50 range. Currently the bearish P&F chart points to a $51 target. We're going to use a tight stop at $59.51. More aggressive traders may want to use a stop over resistance at the $60.00 mark.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 60.00 HSY-WL OI=1311 current ask $2.25
BUY PUT NOV 55.00 HSY-WK OI= 480 current ask $0.50

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume = 760 thousand


MBIA Inc. - MBI - close: 57.75 chg: -0.37 stop: 59.01

Company Description:
MBIA Inc., through its subsidiaries, is a leading financial guarantor and provider of specialized financial services. MBIA's innovative and cost-effective products and services meet the credit enhancement, financial and investment needs of its public and private sector clients, domestically and internationally. (source: company press release or website)

Why We Like It:
If you're a trader who likes to trade on a story then MBI might be a candidate. The insurer stated that it insured upwards of $2.88 billion in municipal bonds for what reporters are calling the "Katrina region". About $1.13 billion of that was in the New Orleans area. How much the hurricane will affect MBI is still unknown. We're adding it to the list because of its technical pattern. The stock just produced a failed rally at its simple 200-dma, which also coincides with the top of its descending channel. We're expecting this to be a quick play as we try and catch a move back down toward the bottom of the channel in the $54.00 region. Our target will be $54.25. We are using a tight stop at $59.01 to reduce our risk.

Suggested Options:
We are suggesting the October puts since we expect a relatively quick move in MBI.

BUY PUT OCT 60.00 MBI-VL OI=1656 current ask $3.30
BUY PUT OCT 55.00 MBI-VK OI=1408 current ask $0.95

Picked on September 13 at $ 57.75
Change since picked: + 0.00
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 1.2 million

Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - cls: 61.00 chg: -0.01 stop: 57.99

AIG may be an insurance conglomerate but it is not a big health insurer. Yet bearish comments from Aetna (AET) certainly influenced the insurance sector today. Plus, there were more bearish comments in the press about potential losses for property insurers due to Katrina's damage. Despite all of this shares of AIG only closed with a one-cent loss, which we see as a sign of relative strength. But even AIG's relative strength may not save us if the rest of the market suddenly sinks into the historically weak September time period. Broader averages don't look to healthy so we'd shy away from making any new bullish positions. Watch for AIG to retest support near the $60.00 level.

Picked on September 11 at $ 61.23
Change since picked: - 0.23
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume = 7.2 million


Centex - CTX - close: 68.14 chg: -0.65 stop: 64.99

Homebuilders hit some more profit taking today. Yesterday we warned readers to expect some weakness this week so this shouldn't be a surprise. We're still watching to see if CTX will rebound from its simple 10-dma. Wait for signs of a bounce if you're considering new bullish positions.

Picked on September 01 at $ 68.25
Change since picked: - 0.09
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 1.6 million


KB Home - KBH - close: 75.91 chg: +0.03 stop: 71.50

KBH fared a bit better than some of its peers but we're still expecting some profit taking for the stock. We would not suggest new bullish positions until we see a bounce from its simple 10-dma.

Picked on September 07 at $ 75.89
Change since picked: + 0.02
Earnings Date 09/22/05 (confirmed)
Average Daily Volume = 2.5 million


MDC Holdings - MDC - close: 79.19 change: -0.70 stop: 74.45

No surprises here. We warned readers to look for a dip toward the $78 level and MDC did just that at the open today. The stock also bounced from this level as expected. The question now is whether or not the profit taking is over. We suspect that MDC will test the $78.00 level again and/or its simple 10-dma. Wait for the bounce before considering new bullish positions.

Picked on September 01 at $ 77.01
Change since picked: + 2.18
Earnings Date 10/13/05 (unconfirmed)
Average Daily Volume = 489 thousand


Noble Energy - NBL - close: 87.53 chg: -0.27 stop: 84.99

NBL continues to see some profit taking here and we don't believe it's over yet. Right now we're expecting NBL to slip toward the $86 region and maybe support near its 40-dma close to the $85 mark. We would not be suggesting new plays here. Wait for signs of a bounce.

Picked on September 11 at $ 89.80
Change since picked: - 2.27
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 796 thousand


Noble Corp - NE - close: 69.39 change: -0.43 stop: 67.25

NE is experiencing more profit taking as well. We expected as much and continue to look for NE to test the $69.00 level. More conservative traders may want to consider exiting early if NE trades under the $69.00 level. We're not suggesting new plays at this time.

Picked on August 31 at $ 71.30
Change since picked: - 1.91
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume = 1.8 million


Potlatch - PCH - close: 53.43 chg: -0.88 stop: 51.99

PCH hit some weakness during today's market-wide sell-off. The stock did manage a bounce from its rising 100-dma but we don't like what today's session did to its technicals. Traders should be on the defensive here. If PCH trades under today's low of 52.70 we will probably exit early.

Picked on September 07 at $ 54.45
Change since picked: - 1.02
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume = 229 thousand

Put Updates

Fedex Corp - FDX - close: 80.02 chg: -1.03 stop: 83.51

The transportation sector sank again on Tuesday and FDX slipped back toward the $80.00 level. We see no change from our previous updates although we'd probably look for a decline under $79.70 before initiating new bearish positions.

Picked on August 23 at $ 82.99
Change since picked: - 2.97
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume = 2.0 million


United Parcel Svc - UPS - cls: 68.43 chg: -0.08 stop: 72.01

No change from our previous update. Our target is the $68.00-67.00 range.

Picked on August 17 at $ 71.99
Change since picked: - 3.56
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 2.6 million

Dropped Calls


Dropped Puts



Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives