The Fed threw investors a bone during the November 1st FOMC meeting but it did not appear until today. The FOMC minutes for that meeting were released today at 2:PM and the market cheered. Regulators not only questioned the potential risks of going too far but also discussed the need to change the language from measured pace. Estimates for future rate hikes dropped sharply and the markets accelerated out of their pre-release slumber.
Dow Chart - Daily
Nasdaq Chart - Weekly
SPX Chart - Weekly
The FOMC minutes were a shock to the bond market and yields dropped sharply within seconds of the release. Yields on the ten-year note were stuck at 4.465% ahead of the news and fell sharply to 4.42% after the news. That may not sound like much to stock traders but for bond traders it was a major move in just a couple candles. The major points in the minutes began with a less hawkish posture towards future events and a bullish view of the economy. The committee noted "some recent favorable data on core inflation and labor costs". They also saw "underlying slack was likely quite limited" and short term inflation should be contained. The committee noted the housing market continued to be robust despite rising rates but that the long awaited cooling period was near. Overall they expect the economy to continue to grow and even pickup speed in early 2006 as the rebuilding pace increases.
The minutes contained this phrase, "some members cautioned that risks of going too far with the tightening process could eventually emerge." This was like waving a red flag in front of a stock bull. If members are worried about going too far then the likelihood of that occurring becomes less. They also said, "several aspects of the statement language (measured pace) would have to change before long, particularly those related to the characterization of and outlook for policy." Despite the discussion the members finally agreed the current statement structure could be maintained for the November statement as it accurately conveyed near-term economic and policy outlook.
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While all the suppositions could keep an English major in fits for a week the outlook clearly changed for stock and bond traders. Prior to the minutes a 4.75% Fed rate was almost guaranteed in March 2006 with a better than 50:50 chance of 5% at the next meeting. After the minutes the chances of 4.75% fell from slightly over 80% to 30%. A 5% rate is nearly impossible as forecast by the Fed funds futures. There is a meeting in December, January and March, which would have brought the rate to 4.75% given the measured pace language. Now the March hike is in serious doubt and 4.5% is sitting right in the crosshairs as the last hike.
This is very positive for the market since the number one thing stock traders want is for the Fed to move to the sidelines and let the economy find its own way. If they are planning on a halt in January then it stands to reason they really think the rate of inflation is slowing and by their own admission the economy is still growing. This is as close to the all-clear signal for stock traders as you can get. The markets rallied to new highs on the news and backslapping was the order of the day.
Good times rarely last long and that was the case tonight. Ben Bernanke filed his written responses to Sen. Jim Bunning and they may not be taken well tomorrow. Bernanke took a position against Fannie (FNM) and Freddie (FRE) and backed current proposals to cut their assets and limit their growth. He said capping their portfolios is important for controlling potential systemic risk. This happens to mirror the oft-repeated view of Greenspan. Bunning said after receiving the remarks that "Dr Bernanke doesn't give me much assurance that he will bring any meaningful change to the Federal Reserve." This suggests Bernanke will have to take a firmer stand on the pair to assure everyone he is not just a Greenspan clone. The combined portfolios of the two entities is over $1.5 trillion.
Bernanke also said that further energy price increases would pose upside risks to the outlook for inflation. Ben, you can count on that. He also said the housing market should be watched closely as growth in housing prices slows. He said a sharp slowdown is less likely than a moderate pause but is still possible with potentially strong impact to the economy. He said he did not see foreign investors losing their appetite for U.S. securities. He said if it did change the U.S. markets could absorb a significant shift in demands for U.S. debt, including investments by China.
There was a story making the rounds today that Russia was adding to gold reserves to increase holdings up to 15% of its foreign currency portfolio. With gold soaring over $495 on Monday it appears there is definitely a big buyer in the market. There is speculation that the rest of this decade could bring some drastic changes in currencies as the fallout from future higher energy prices circles the globe. With energy prices expected to double or triple before 2010 it could upset the global currency balance and destabilize the markets. By scaling down investment in potentially weak currencies and adding to gold reserves it will protect against a string of currency devaluations. It is thought that Asian countries, who typically hold very little gold in relation to their currency portfolios, could also start to add to gold hedges. For example China currently holds 600 tons, Japan 765 tons, Taiwan 423 tons. To reach the 15% level currently targeted by Russia China would have to buy 8000 tons, Japan 9000 tons and the basket of other Asian nations 9600 tons. Where would they get this money? From selling other currencies and U.S. treasuries. Obviously this would be a world changing event and does not take into account the demand from Middle Eastern nations like Saudi Arabia who typically hold gold as an offset for the drop in dollar denominated oil prices. I doubt anybody expects the Asian nations to buy anywhere near the amount needed to reach 15% of their portfolio but even a jump to 5% from their current 1-2% levels would be a major change in gold prices.
I personally feel that OPEC nations, especially Saudi, are probably active in the market now and are accumulating gold for the time when Peak Oil finally passes. Remember, most of the world's energy agencies are relying on OPEC's good faith reserve estimates as their supply cushion out to 2030. However, the worlds oil experts ALL claim those numbers to be overstated by a factor of 2 or 3 times. When the day comes that Saudi admits they can't increase production any further the worlds currencies will begin an inexorable decline that could last for a decade or more. It would be a good time to own gold since $1000 an ounce would then be in the realm of reality. Could this current run on gold be a sign that the hoarding has begun in advance of that event?
The boom in China may be slowing. China's Baosteel cut prices on steel by -10% today indicating there may be a surplus of steel in the market. China has been consuming steel and concrete faster than a football team stacking plates at an all you can eat buffet. This price cut could signal a cooling of that rapid pace of growth. China has been building roads and facilities like crazy ahead of the Beijing Olympics in 2008. It is possible those projects have passed the steel stage and that is reducing demand. It is also possible that global supply has simply caught up with demand. According to Fitch Ratings, the steel industry has enjoyed "extraordinarily robust market conditions." It is probably just time for a pause. US Steel (X) and Nucor both paused to the tune of about a buck on the news.
RIMM Chart - Daily
RIMM may soon know its fate as the case against NTP winds down. The judge in the case, James Spencer, has lost patience with the pair and said he was going to rule quickly on the current issues so he could get on with his life. He is frustrated with RIMM and NTP making the ruling anybody's guess. That ruling could come this week. With millions of Blackberries in user hands I seriously doubt they will be turned off as some have predicted. The government has already said they can't be turned off for government users as it would impact national security. NTP has accumulated $210 million in credit for the 8.55% of sales that Spencer awarded NTP the first time he ruled on the case. Both parties previously agreed to a $450 million settlement but that settlement fell apart when the U.S. Patent office rejected some of the patents on which the suit was based. RIMM claims all will eventually be rejected but time is running out on RIMM. If the judge rules against RIMM this week it will be forced to settle under the gun and it is likely to be very painful. Some estimates are over $1 billion. Last year RIMM sold more than $850 million in Blackberry products that were covered by the dispute. Personally I believe RIMM will either win or be forced to settle and life will go on. I do not believe it is a death sentence for the Blackberry. I believe all the bad news is priced into the stock and baring a massive change in the case of a whopping settlement over $1 billion I think $50 is the floor in the stock. The upside is huge. NTP will stand to profit from future sales on whatever terms the agreement stipulates and Blackberry sales are likely to spike sharply once the fighting is over. For that reason I believe RIMM will see $80 or higher on any successful termination of the case. The way to play this would be a long term call, say a March $80, currently $4, with the expectation of a drop to something in the $2 range on a negative event and something in the $10 range on a successful conclusion with RIMM still in the Blackberry business. You could also do a credit spread using the December $65-$90 puts ($19.30) or the January $60-$90 puts ($19.80). I like the deep in the money puts as the best way to catch the majority of a move.
The bulls are running and there appears to be nothing ahead to stop them. That is always a scary picture for me since disaster strikes when it is the least expected. Joe Battipaglia, a known market bull, was on CNBC today predicting another +10% gain in the markets over the next 4-6 months. That would be 1386 on the S&P and right at Dow 12000 for those who were wondering. While Joe's track record has not been stellar I give him credit for sticking to his guns in the face of bearish attacks. I would love for him to be right this time and for readers to profit from what would be an amazing move. However, there are some fundamental issues that we should discuss. Remember back earlier this year when funds were sitting on piles of cash? Well that is no longer the case. Fund cash positions are now at historic lows. Everybody has voted with their cash and have little left to invest. Hedge funds are still sitting on piles of money but most of them are already long as well and those with cash are looking to short the top.
Fundamentally we have the Fed nearing the end of its hike cycle and an economy that is growing. Slow but growing. Current GDP estimates for all of 2005 are +3.6% but they fall to 3.0% for 2006. Corporations are sitting on record amounts of cash, nearly $2 trillion for the S&P-500 according to Thomson Financial. The problem is they don't know what to do with it. They have all raised dividends and buybacks but are finding little to do to expand their business. Mergers and acquisitions have been very strong but there is a limit to those as well. There is a general consensus that earnings are declining and the rate of decline will pick up speed in 2006 with the S&P earnings falling to single digits. There are fears of another energy spike and companies are leery about investing a lot of money if the economy is going to fall flat on $75 or higher oil.
All of these concerns are likely to impact stocks in January even if the Fed takes a pause. With little fund cash on the sidelines and a potentially weaker 2006 we could see some selling appear towards the end of 2005. We know markets tend to over react in both directions. That suggests we could see higher highs over the next month but a cautionary stance is likely to develop towards the end of the year. If cold weather does send natural gas back up to its highs as many expect then profits from manufacturers will shrink. Retail sales, now expected to grow by +6% in December could fall off the cliff in January as the cold weather gets a grip and heating costs climb. This cautionary stance could appear as soon as next week. The Thanksgiving rally has been a profit maker for everyone and now might be a good time for those funds to be locking in profits and for institutional traders to be locking in year-end bonuses.
Crude Oil Chart - Daily
Oil prices have risen back to $59 from their $56.30 low on the current January contract. This has been very strong resistance over the last two weeks. A break over $59 could bring the oil bulls back to the party and a move over $63 would turn into a drunken buying brawl. 32% of natural gas production in the Gulf is still offline and much of that could remain offline until March. A prolonged cold spell could send gas prices soaring and also bring energy bulls back into the market. Goldman, the company that said oil could spike to $105 lowered their estimates today to only $62 for the rest of 2005. They said oil prices for 2006 should average $64. Considering there is normally a three month pause between winter heating and summer driving that could send prices lower it still suggests that we will see price spikes over $70 next year. Inventory levels due out tomorrow are expected to see a +600,000 bbl rise in crude, +1.1 mb rise in gasoline and +700,000 bbls in distillates. If the current cold snap produced a draw down in any of those levels we should expect prices to rise higher. Natural gas inventory levels normally released on Thursday will also be released on Wednesday and you can expect a decline in those levels to begin soon now that winter has started.
The Dow spike today stalled at the 10867 resistance we saw for three weeks in October 2004. It is very close to the January highs of 10984 and the psychological 11,000 barrier. After a strong pre-Thanksgiving run that would be the logical place for the rally to run out of gas. The other indexes are either at 4 yr highs or historic highs in the case of the TRAN, BKX and NYSE Composite. The laggards are the Dow and Russell-2000. The SOX at 482 has a long way to go to recover its 1362 high from 2000 and is still below recent resistance at 485. Even with the Intel and Micron bounce today the SOX has been unable to take out its Aug and Sept highs.
Overall I still want to be bullish with the apparent end to Fed easing in sight but my cautionary instinct is growing. We have come a long way in a short period of time and without any material profit taking along the way. The October lows may seem like just yesterday but they were nearly seven weeks ago. There was a two-day profit taking pause at the end of October but nothing material since. Continue to remain long but keep those stops tight. It is better to pick a new entry than give back your gains on a serious dip. A sharp 20% correction would be -140 Dow points, -18 on the S&P and -45 on the Nasdaq. In my opinion it would be a good buying opportunity for another trade in December. Once Christmas passes I would look for a change in the prevailing winds but we have four more weeks of trading before I pull in my horns. December will be interrupted by a Fed meeting on 12/13 and given the minutes today bullish hopes will be riding high for a change in the statement. Possibly too high.
Amerada Hess - AHC - close: 132.71 chg: +2.31 stop: 124.49 *new*
Another strong day for oil stocks helped propel AHC to a new two-month high over early November resistance near $131.50. Today's 1.7% gain in AHC may have also been fueled by news that the company had reached an agreement with the New Jersey Attorney General over an alleged violation for raising gasoline prices too fast. We are going to raise our stop loss to $124.49. Our seven-week target is the $139.85-140.00 range.
Picked on November 16 at $128.49
Apache Corp. - APA - close: 69.39 chg: +0.98 stop: 64.95
APA also benefited from the rise in oil prices and strength in the sector. Shares of APA broke out over technical resistance at its simple 100-dma. The stock also traded at and above our trigger to buy calls at $69.05 opening the play. Our target is the $75-76 range by year-end.
Picked on November 22 at $ 69.05
Goldman Sachs - GS - close: 132.60 chg: +0.19 stop: 124.99
The rally in the brokers appeared to pause a bit today. The outlook remains bullish and we're targeting a run into the $139-140 range before the company's earnings report in mid December.
Picked on November 20 at $131.58
Hovnanian - HOV - close: 51.05 change: +1.05 stop: 44.45
Tuesday proved to be a quiet session for HOV until a late day surge pushed the stock higher. There was a sharp rise in volume to accompany the late afternoon gains (see an intraday chart) and HOV extended its bullish breakout. Our target is the $54.50-55.00 range. We do not plan on holding past HOV's earnings report.
Picked on November 21 at $ 49.25
Intl. Bus. Mach. - IBM - cls: 87.99 chg: +0.70 stop: 83.99
Hardware stocks turned in a strong performance with the GHA index adding 1.45%. Shares of IBM lagged a bit with just an 0.8% gain. Our target is the $89.90-90.00 range.
Picked on November 15 at $ 85.25
NovAtel Inc. - NGPS - close: 31.46 chg: +0.68 stop: 27.75
NGPS continued to rise following Monday's bullish breakout over resistance. We see no changes from our previous update. Our target is the $35.00-36.00 range by year-end.
Picked on November 21 at $ 30.45
Phelps Dodge - PD - cls: 128.72 chg: -0.72 stop: 123.45
PD is still consolidating under the $130 level. We would not consider new bullish positions until PD trades back above $130.00 or even $131 depending on your own risk profile. Our target is the $139.90-140.00 range. The Point & Figure chart for PD points to a $150.00 target. More conservative traders may want to target the October high near $138.50.
Picked on November 18 at $131.25
Polaris Ind. - PII - close: 49.10 change: +0.63 stop: 45.95
PII added 1.29% and closed at a new six-week high. We see no changes from yesterday's update. Our target is the $54-55 range.
Picked on November 21 at $ 48.47
Rockwell Autom. - ROK - cls: 56.85 chg: -0.47 stop: 54.80
The relative weakness in ROK has now made it two days in a row. This is not a good sign and we will strongly consider exiting early if shares trade under the $56.26-56.00 range. We are not suggesting new plays.
Picked on November 03 at $ 55.90
Walter Inds. - WLT - close: 52.43 change: -0.12 stop: 45.95
The rally in WLT paused a bit on Tuesday but the stock closed up off its lows of the session. We see no changes from our previous update. Our target is the $57-58 range by December 31st. More conservative traders can aim for an exit near $55.
Picked on November 20 at $ 51.50
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
AmerisourceBergen - ABC - cls: 79.25 chg: +0.35 stop: n/a
We see no changes from our previous update on ABC. The stock is nearing round-number resistance at the $80.00 mark. We are not suggesting new strangle positions. Our current strangle involves the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). Our estimated cost was $2.80. Our current target is for a rise to $5.00 in the strangle.
Picked on October 16 at $ 74.81
Amer. Eagle Out. - AEOS - cls: 25.08 chg: +0.86 stop: n/a
AEOS has continued to bounce and the stock has now filled the gap down from its earnings report. At this time we're not suggesting new strangle positions. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70.
Picked on November 13 at $ 25.47
Abercrombie&Fitch - ANF - close: 64.00 chg: +1.06 stop: n/a
ANF posted another strong session up 1.68%. We would not be surprised by a dip back toward the $60 level before moving much higher. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.
Picked on November 13 at $ 59.67
Chicago Merc. Exchg. - CME - cls: 381.91 chg: -1.50 stop: n/a
CME saw some profit taking this morning with a dip to $377 but the stock rebounded to close with a minor loss. We're not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.
Picked on November 20 at $375.90
D.R.Horton - DHI - close: 36.89 chg: +0.75 stop: n/a
DHI shows a similar pattern to HOV. Both stocks had a quiet session until a sudden spike higher in the last couple of hours of trading. We are not suggesting new strangles at this time. Our current play involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.
Picked on November 13 at $ 32.56
Four Seasons - FS - close: 50.13 chg: -0.36 stop: n/a
We see no changes from our previous update on FS. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.
Picked on November 08 at $ 55.37
Hutchinson Tech. - HTCH - cls: 26.77 chg: +1.44 stop: n/a
Wow! Could this be the beginning of something more substantial? HTCH spiked higher to close with a 5.6% gain on above average volume. We were close to bailing out of the play for lack of movement. Now we just need to see some follow through on today's breakout! We are not suggesting new strangles at this time. The options in our strangle were the January $30 calls (UTQ-AF) and the January $20 puts (UTQ-MD). Our estimated cost was $1.65. We have adjusted our initial target from $3.00 to breakeven at $1.65 since the post-earnings reaction was not as big as expected.
Picked on October 26 at $ 24.89
Lear Corp - LEA - close: 28.25 chg: -0.39 stop: n/a
We see no changes from our previous updates on LEA. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). We are targeting a rise to $3.20 or more.
Picked on November 06 at $ 30.24
Loews - LTR - close: 97.70 change: -0.02 close: n/a
Hmm... the relative weakness in LTR these last two sessions is not a good sign for the bulls. This stall in its upward momentum is turning the technical indicators closer to a bearish signal. Volume was pretty strong for pre-holiday trading session and bears might point to that as distribution (a.k.a. someone is selling and getting out). More conservative traders might want to think about an early exit right here. We're going to keep the play open since there are still more than three weeks left before December expiration. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. We plan to exit if our strangle rises to $5.00 or if shares of LTR hit 99.90.
Picked on October 23 at $ 89.94
Verifone Holdings - PAY - cls: 23.35 chg: -0.44 stop: n/a
PAY is showing more relative weakness and the technicals are suggesting that PAY will continue lower. Watch for a retest of support near $22.00. We are not suggesting new strangle positions. Our remaining strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more.
Picked on October 12 at $ 19.98
Protein Design Labs - PDLI - cls: 28.48 chg: -0.09 stop: n/a
We see no changes from our previous update on PDLI. We are not suggesting new strangle positions. The options in our strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We'll plan to sell if either side rises to $3.25.
Picked on October 30 at $ 27.70
Spectrum Brands - SPC - close: 18.38 change: +0.28 stop: n/a
We see no changes from our previous update on SPC. We are not suggesting new strangle positions at this time. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW). We are aiming for a rise to $2.50 or more.
Picked on November 08 at $ 20.63
Questar Corp. - STR - close: 77.41 chg: +1.81 stop: n/a
STR produced a minor bullish reversal today but the stock remains in its sideways trading pattern. Our suggested entry window for strangles was the $75.50-77.00 (the closer to $75.00 the better) range so we're not suggesting new plays at this time. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more.
Picked on November 20 at $ 76.25
Valero Energy - VLO - close: 102.38 chg: +3.38 stop: n/a
A big day for oil stocks pushed VLO to a 3.4% gain. Today's rally could be the end of its recent consolidation pattern. Unfortunately, we are still on the sidelines. Our suggested entry window was $98.50-100.00. Shares of VLO gapped up to open at $100.15 and the intraday low was $100.06 so we remain spectators. We're going to keep the play open as a candidate but we're going to adjust our entry window to $101.00-99.00. If VLO dips back into this new entry window we'd open strangles. We're suggesting the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). At current prices this would cost about $5.85 but wait for shares to enter our $99-101 entry window. We'll aim for a rise to $9.50 in the strangle. Post split that target will change to $4.75 as our cost will adjust to $2.825. That's right, VLO will split 2-for-1 in December.
Picked on November 21 at $ 99.00
Intel Corp. - INTC - close: 26.16 chg: +0.91 stop: 23.45
Target achieved. An upgrade for new partner Micron (MU) pushed the SOX semiconductor higher and shares of Intel helped lead the rally. INTC spiked higher from the start and closed with a 3.6% gain on big volume. Our target has been the $26.00-26.50 range. More aggressive traders may want to keep the play open and ride INTC into the second half of December.
Picked on November 06 at $ 23.99
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