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Daily Newsletter, Tuesday, 05/09/2006

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Table of Contents

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

Market Wrap

Calm Before the Storm

The markets were calm on Tuesday and traded mixed on very low volume ahead of Wednesday's FOMC meeting. Blue chips traded up on the strength in metals and tech stocks traded lower on Dell's earnings warning. The Dow set a new six-year closing high at 11638 only -84 points away from its all time closing high. GM and CAT were the primary reasons for the Dow move higher. However, the Nasdaq and S&P have traded flat to down for the week. Nothing should be assumed based on today's moves because the indexes are just passing time waiting on the Fed.

Dow Chart - Daily

SPX Chart - 120 min

Nasdaq Chart - 120 min

The light economic calendar for Tuesday was led by the Job Openings and Labor Turnover Survey (JOLTS) report for March. Job openings held steady at 3.989 million, 9.0% from the same period last year. This was basically flat with the prior four months with job availability up nearly 1 million jobs over the Q1-2004 levels. According to the BLS there are currently 183 million jobs in the U.S. with 3.989 million unfilled. 63.0% of Americans are currently employed. Job separations at 3.4% were unchanged. The quit rate rose slightly to 2.1% and a level not seen since Aug-2003. This is an indication of a workers ability to change jobs at will. When jobs are tight the quit rate falls. When demand is high the quit rate rises. The quit rate has hovered in the 1.9-2.0 range for the last 12 months with a low range of 1.7% seen in Feb-2005 and the last six months of 2004. Since these numbers are nearly two months in arrears they were mostly ignored. The employment numbers last Friday were much more important and a month more current.

The Economy.com Risk of Recession dropped to 15.7% for April from 21% in March. The March number was revised down from 21% to 17%. The easing of the yield curve tightening, rising consumer confidence and market rally are pushing the risk to the bottom of the scale. The recent cycle high was 28.8% in June-2005. The only other report for Tuesday showed that the Wholesale trade for March rose only 0.2% and less than the 0.5% consensus. The inventory to sales ratio fell to 1.16 indicating manufacturers/distributors are keep a low profile and choosing to reorder often rather than stockpile inventory ahead of a potential economic slowdown.

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Economic reports scheduled for Wednesday include the weekly Mortgage Application Survey and Treasury Budget but they will be ignored due to the FOMC meeting overshadowing everything. The morning oil inventory report should produce some volatility in the energy sector but the rest of the market should continue to wander aimlessly while waiting on the Fed. The Fed is widely expected to raise rates to 5.0% but the key is of course the guidance statement. The market has priced in a one-and-done scenario so any suggestion of another hike in June would be catastrophic. The Fed funds futures are showing only a 40% chance of a June hike but they are suggesting we will see 5.25% in the August/September range.

I am not going to spend a lot of time on the Fed decision other than to say the markets are very nervous and in the case of the Dow, priced to perfection. With the Dow only -84 points from its all time closing high and no support from the Nasdaq and S&P there is a huge risk of a climax spike after the announcement that races to that 11722 target and then collapses. Most people expect the markets to take off for higher ground once the Fed pauses. Unfortunately that expectation is already priced into the market. I fear that any post Fed spike could be met with selling once the news fades. Historically the markets go down more often than up the day after a Fed meeting regardless of the decision. This decision is so well known it would be very easy to imagine a sell the news event. I am not telling anyone to sell but we need to let the market tell us what to do and not invest with emotion.

While the indexes were mixed and volume was very light there were some major moves in individual stocks. I am not talking about the -1.23 drop in Dell. There were some huge moves that make the Dell drop seem like chump change. For instance Hansen Natural Corp (HANS) jumped $24.59 to $176 after reporting blowout earnings and a huge deal with Anheuser Busch to market their products. HANS jumped more than the price of Dell stock at Dell's low of the day at $24.50.

Of course Google also ranked in the big movers with a 14 gain but for a $400 stock it was just another average day. If you want to get really big numbers look at Berkshire Hathaway class A (BRK.A) which rose $699 today to $89,899. But, since both of those are out of the range of most traders lets focus on the real movers.

Metals were king today with Gold soaring 22 to $702 and another 26 year high. That sent the major gold stocks, GG, FCX and NEM up a couple bucks each. But that was chicken feed compared to titanium. RTI International Metals announced a 10-year deal with Airbus worth more than $800 million. RTI soared 8.82 to close at $70. This prompted a rally in all the metal stocks including not only titanium but aluminum and copper. Big gainers included Titanium Metals (TIE) 5.15, Rio Tinto (RTP) 5.68 and Phelps Dodge (PD) 3.94 to name just a few. Silver joined the metals party with a huge jump that pushed the iShares Silver Trust (SLV) $5.00 higher.

Strong gains were not limited to the metals. Fluor spiked 8.20 to $101.94 on earnings that jumped 88% and beat estimates. Also riding the earnings wave was Chipotle (CMG), which more than doubled earnings from the prior year. CMG jumped 7.78 on the news. FMC Technologies (FTI) jumped 7.23 after posting earnings of 67 cents compared to analyst's estimates of 45 cents. Empire Resources (ERS) rebounded 6.72 to $41.65 but it was purely a dead cat bounce on no news after nearly a -$30 drop since last Thursday's $64.20 high. Somebody with a large position really wanted out in a hurry on Thursday and it took a couple days for cautious buyers to jump on the dip. They are an aluminum manufacturer and the spike in metals probably made them look like a screaming buy compared to the other metal stocks all at 52-week highs. Kerr McGee (KMG) gained 5.00 after announcing a 25% jump in their dividend and a 2:1 stock split payable July 3rd. US Airways (LCC) spiked 4.33 to $51.70 after posting a profit of 76 cents, 5 cents after special items, when analysts were expecting a loss of -16 cents.

Not all the big movers were to the upside. Escala Group (ESCL) fell -$19.99 to $12.10 after reporting that authorities had taken over their offices to search for evidence of wrongdoing. It has got to be a bad day when your stock drops -62% and the authorities will not even tell you what they are looking for. Sunrise Assisted Living (SRZ) fell -6.95 after postponing Q1 earnings to "review its accounting." They gave no date for the reviewed earnings and said they would announce a date after the review is completed. This does not sound good and traders retired their investments in Sunrise. National Medical Health Card Systems (NMHC) fell -4.09 after posting disappointing earnings. Syneron Medical (ELOS) must have felt misery loves company and gave back -4.09 on bad earnings to share the cellar with NMHC. Cigna joined the other healthcare providers in the house of pain with a drop of -4.24. The selling just will not quit in UNH, AET and WLP. United Health, the company that gave its CEO $1.6 billion in stock incentives, has surfaced as the target of multiple class action suits for violating securities laws relating to that compensation.

After the bell today Cisco (CSCO) reported earnings of 29 cents that beat the street estimates of 26 cents but on revenue that was lower than the same quarter in 2005. Cisco initially spiked about 1.50 in after hours but sank to lose about -35 cents after the conference call. After stock based compensation was included as required in 2006 and several other "items" the earnings fell to 22 cents and appeared to be under analyst's estimates. A favorable tax treatment on a special item had added 2 cents to the headline number. Cisco also bought back a bunch of shares and reported earnings on 6.29 billion shares rather than the 6.54 billion number that analysts were using causing subtraction of another penny. Subtract a couple cents here and a couple there and suddenly the outcome is a lot different. There was a lot of confusion about the release and it probably will not be cleared up until tomorrow. Cisco CEO John Chambers was positively glowing on the conference call about the business but when the guidance for next quarter was released it left a lot to be desired. It appears margins are shrinking and competition is increasing. On the bright side Chambers said that for the two months since SFA has been part of Cisco they shipped over one million set-top boxes. That is a strong number and should help the chipmakers that contributed to the party, CNXT and BRCM.

Disney also announced earnings of 37 cents that beat the street estimates of 31 cents and Disney managed to hang on to its meager after hours gains. Revenue rose slightly despite a drop in income from movies. The media division with ABC and ESPN provided the best results with a 20% jump in operating income.

GM rallied 2.25 after restating its first quarter earnings to show a profit instead of a loss. Deutsch Bank raised GM to a hold from sell after it sold controlling interest in GMAC for $14 billion. The analyst also downplayed a potential strike at Delphi. DB expects GM to end the year with nearly $27 billion in cash. That is a far cry from all the bankruptcy rumors only a quarter ago. DB was still cautious on GM since the annual cost savings have only amounted $4 billion annually and their cash burn rate is $6.7 billion a year.

Google is holding an analyst meeting on Wednesday and they are expected to announce a new product. Unfortunately they have failed to deliver on quite a few products in the past. Past announcements like Google Finance, Calendar, Gmail and Talk are still in beta with a fraction of their announced features and yet they continue to announce new products. Eventually this is going to catch up with them and analysts are going to start ignoring their new announcements.

June Crude Oil Chart - Daily

Dow Transports Chart - Daily

Oil inventories will provide the morning trade opportunities for the energy sector. June crude rallied 1.65 intraday to $71.50 but gave back a buck to close at $70.55. The inventory report is expected to show a decline in crude of -1.2 mb but a gain in gasoline of 1.5 mb and 700,000 bbls in distillates. With oil holding at $70.50 overnight it appears ready to run if those numbers disappoint. Likewise if they are stronger than expected it is poised at the exact point to begin another decline. I doubt it will fall far with support already proven at just over $68.

Iran's president, Mahmoud Ahmadinejad, tried the Saddam Hussein rope-a-dope delay tactic with his 18-page letter. The letter to President Bush on the eve of the U.N. resolution meeting failed to change anything. According to Investors Business Daily it is reported to be a rambling jumble of thoughts from a man who has lost touch with reason. They say it is a grab bag of age-old grievances, many having no touch with reality and showed a frightening view of his borderline paranoia. He railed at the U.S. for invading Iraq and again questioned Israel's right to exist. He then launched into a discussion of Islam, Christianity and monotheism. He did not mention the nuclear problem anywhere in the 18 pages other than his defense of scientific research as one of the basic rights of nations. He did not specify what scientific research he meant. He complained about the US reaction to 9/11, the war on terror detainees and US policy in Latin America. His effort to buy additional time while Iran frantically races to try and build a nuclear capability before the heat becomes unbearable may have garnered him a couple extra days. The U.N. group trying to word a resolution for a vote was expected to finish on Monday night. They adjourned on Tuesday without a final draft. According to Russia and China the letter was an attempt to start a dialog and they are still refusing any type of resolution that carries a risk of sanctions. Heck, Russia could have told him to write it to give them a reason to continue stonewalling the committee. Now it appears France, Britain and Germany may be trying to come up with a "carrot and stick" deal without the US. The German Foreign Minister said it could take up to two more weeks to come up with a resolution given the stand by Russia. The US has also started trying to build a non-UN coalition to provide a solid front of voluntary sanctions outside the UN. That is the biggest news of the day. If the US can put together enough friends willing to press the economic buttons then the Iran problem will move to the next level. Late Tuesday Iran suggested it might halt its nuclear program but only if it deals directly with the IAEA and not forced by the UN. This was simply more delaying tactics. Mahmoud arrived in Indonesia, the world's most populous Muslim nation on Tuesday and suggested he would ask Jakarta to mediate the nuclear confrontation. Bottom line, Iran will remain in the news and eventually the pot will boil and give additional support to oil prices.

The Saudi Oil Minster said on Tuesday that oil prices will remain firm the rest of the decade. He blamed strong economic growth, tight refining capacity and the long lead times necessary to bring new production into service. Ali al-Naimi is the de facto leader of the 11-nation OPEC band. He said a lack of additional refining capacity over the next four years would result in upward pressure on light crude. On another topic he offered to open Saudi Arabia for exploration to foreign companies with a focus on natural gas. Saudi uses huge amounts of gas to run its refineries and oil processing centers as well as electricity. It has been rumored for more than a year now that Saudi gas demand was about to exceed supply and today's comments definitely confirm it. He even offered Saudi's existing seismic data on gas reserves to any company interested in exploration. He also said Saudi oil reserves and data relating to those reserves would be off limits to foreigners. Seems to me that if they wanted to increase production as they claim and faced with spending $50 billion to do it that they would welcome outside investment and expertise. Could Saudi be trying to hide the true details about their shrinking oil reserves to maintain their credibility and leadership in OPEC for as long as possible? That is what Matthew Simmons has been saying for the last two years. These are interesting developments in my opinion. Note that by blaming high prices on a lack of refining it hides their lack of production and takes them out of the focus of blame.

Dollar Index Chart - Daily

Gold Chart - Daily

On Wednesday at 4:PM Eastern the Treasury Department will release a twice-yearly report mandated by Congress on the steps China has taken in regards to their currency. If the report named them a currency manipulator then it would put China into an adversarial relationship with the US. There was a 50:50 chance according to analysts until Tuesday morning. Treasury spokesman Tony Fratto briefed reporters this morning and his comments were softer than prior comments by John Snow. It appeared they were trying not to make the manipulation claim even though everyone knows they do it. Tony said the report would focus on their progress in "foreign exchange flexibility" rather than focus on what they are not doing. It appears the fix is in after the visit by Chinese President Hu Jintao in April. I expect a tepid reaction to a watered down report.

The markets tomorrow should continue to be tame ahead of the Fed announcement with sharper than normal after meeting volatility. The Dow is within range of the 11722 all time closing high. Hitting that number after the announcement would be the equivalent of ringing the dinner bell in a lumber camp after a hard days work. I would be extremely surprised if any spike stuck. But, stranger things have happened. The bullishness is so thick on Wall Street I can smell the manure in Denver.

If the Nasdaq and S&P were providing even a little support I would be more positive but now even the Russell has stopped moving higher. The only index following the Dow higher is the NYSE Composite. We now have the Cisco earnings to muddy the Nasdaq water and we don't know how that is going to play out on Wednesday. The Nasdaq roared out of the depths at 2300 last week for a 50 point run but there has been no follow through. It came to a dead stop at downtrend resistance from mid-April but there was no material decline even after the Dell warning. It is entirely possible that we are just consolidating those gains ahead of the Fed announcement. I would not count it out, just call it listless.

The S&P spiked over the 1315 resistance last Friday on strong short covering after the Jobs report but then went into a coma. It has traded sideways between 1322-1326 for two days now. That is a VERY tight range and could also be consolidation OR it could be confusion. Volume this week has been around 4.3 billion shares each day with declining volume taking only a slight lead over advancing volume. If you have been keeping up with my commentaries you know that volume for the prior two weeks was well over 5 billion shares for 11 of the prior 14 days with a 6.175 billion peak on April 27th. To have the market go catatonic at just over 4 billion shares this week is nearly a third off its volume highs. We are looking at a serious game of chicken between the buyers and sellers. Whoever blinks first loses. My worry is that everyone who wants to be long is already long on expectations that the Fed will suggest a pause after Wednesday. That means the only thing that could really juice the market would be an unexpected pass ON Wednesday. I seriously doubt that is going to happen. That means the most likely scenario is already priced into the market. That leaves us without any material event to push us higher. That also probably leaves me with egg on my face if the market explodes after the FOMC meeting and doesn't stop. But, I have to lay out the scenario as I see it and we will let the chips fall where they may. Remember, our current pivot point is SPX 1315. Remain long over that level and short below it.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Computer - AAPL - close: 71.03 chg: -0.86 stop: 68.45

We continue to suggest caution here with AAPL. The stock is struggling to maintain its bullish posture and some of its technical indicators are starting to falter. We've been warning readers to look for a dip toward $70.00 and it looks like that's about to happen. Wait for a bounce if you're considering new bullish positions. The weakness in the NASDAQ does not inspire a lot of confidence in tech issues right now.

Picked on May 04 at $ 72.25
Change since picked: - 1.22
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 36.0 million

---

Autoliv - ALV - close: 59.27 change: 0.68 stop: 54.99

Our short-term target at $60.00 has been achieved. The stock spiked higher this morning to trade at $60.19. The move was fueled by a rise in shares of GM, who restated its earnings to report a profit. ALV pared its gains and the move looks like a failed-rally/short-term top. We'd expect a dip back toward the $58.00 region. Our mid-June target is the $62.50-63.00 range. We're not suggesting new positions at this time.

Picked on May 04 at $ 57.53
Change since picked: 1.74
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 513 thousand

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Bear Stearns - BSC - close: 141.22 chg: -0.56 stop: 137.99

The XBD broker-dealer index churned sideways in a narrow point-and-a-half range today. The lack of sector strength let BSC continue to slide toward the $140 level. We don't see any changes from our previous updates. Aggressive traders may want to consider bullish positions on a bounce near $140. We are suggesting a trigger at $144.10 to buy calls. We do see some resistance at $148 but our target is going to be the $149.50-150.00 range. Our time frame is six weeks.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 06/15/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Cleveland Cliffs - CLF - close: 99.38 chg: 3.05 stop: 89.95

Gold futures are on fire and closed over $700.00 an ounce for the first time in 26 years. This helped fuel the rally in metal and mining stocks like CLF even though CLF doesn't deal in gold. The real contributing factor in CLF was probably the company's press release. Management announced an increase in the company's cash dividend, an increase in the company's stock buy back program and a 2-for-1 stock split to be payable on June 30th. Shares of CLF responded with a 3.1% gain on strong volume. We're not suggesting new bullish positions at this time but would prefer to wait for a dip back toward the $95 region, which should act as new support. Conservative traders might want to take some money off the table right here. Our target is the $104.50-105.00 range.

Picked on May 08 at $ 95.11
Change since picked: 4.27
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 692 thousand

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Goldman Sachs - GS - cls: 165.75 chg: 2.22 stop: 157.95

GS out performed its peers today with a 1.3% gain after CIBC raised their price target on the stock to $205. Everything continues to look bullish for GS but we're a little concerned by the lack of volume. The P&F chart points to a $173 target. We are going to target a rise into the $174.00-175.00 range. We'll plan to exit ahead of the June 13th earnings report.

Picked on May 07 at $164.39
Change since picked: 1.36
Earnings Date 06/13/06 (unconfirmed)
Average Daily Volume = 3.9 million

---

Red Hat - RHAT - close: 31.97 chg: -0.30 stop: 28.81

Tech stocks were mostly weak following DELL's earnings warning last night. Shares of RHAT pulled back about 0.9%. We don't see any changes from our previous updates. Our target is the $34.75-35.00 range.

Picked on May 04 at $ 31.11
Change since picked: 0.86
Earnings Date 06/27/06 (unconfirmed)
Average Daily Volume = 3.4 million
 

Put Updates

Amazon.com - AMZN - close: 34.84 chg: 0.15 stop: 36.51

AMZN is still trying to rebound from the $34.00 level. We are not suggesting new bearish positions at this time and more conservative traders may want to think about tightening their stop loss. Our target remains unchanged at $31.00-30.75. The P&F chart remains bearish and points to a $17.00 target.

Picked on May 01 at $ 34.85
Change since picked: - 0.01
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 6.3 million

---

Atheros Comm. - ATHR - close: 25.01 chg: -0.41 stop: 26.26

DELL's earnings warning cast a shadow on their main chip supplier Intel (INTC), which in turn weighed on the semiconductor sector. Shares of ATHR dipped under support at the 50-dma and the $25.00 level but managed to rebound back above $25.00 by the closing bell. Short-term oscillators remain bearish but we don't like the bullish tilt in the daily chart's MACD indicator. We're not suggesting new plays at this time.

Picked on May 01 at $ 23.77
Change since picked: 1.24
Earnings Date 04/24/06 (confirmed)
Average Daily Volume = 1.6 million

---

Research In Motion - RIMM - cls: 76.43 chg: 1.28 stop: 79.01

Watch out! It may be time to abandon ship. Shares of RIMM soared this morning to gap higher at $78.78 before it pared its gains to a 1.7% rise. The move appears to have been fueled by a very bullish call on the stock by Standard & Poor's equity research. The analyst there outlined why RIMM was a compelling buy discussing how it was out-doing its rivals and was prepared to launch its Blackberry business in China soon. The move today appears to have produced a new MACD buy signal on its daily chart. We are not suggesting new positions and more conservative traders may want to strongly consider exiting right now!

Picked on April 30 at $ 76.63
Change since picked: - 0.20
Earnings Date 07/06/06 (unconfirmed)
Average Daily Volume = 5.8 million
 

Strangle Updates

(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.)

---

Fedex - FDX - close: 119.42 chg: 0.36 stop: n/a

FDX managed a minor bounce from the $118 level. We don't see any changes from our previous updates. We're not suggesting new strangle positions at this time. We were suggesting the June $120 calls and the June $110 puts. This is a bet that FDX will trade significantly north of $120 or under $110 by June option expiration. Our estimated cost is about $2.60.

Picked on April 30 at $115.13
Change since picked: 4.29
Earnings Date 06/21/06 (unconfirmed)
Average Daily Volume = 1.4 million
 

Dropped Calls

CDW Corp. - CDWC - close: 57.89 chg: -1.67 stop: 57.99

Thank you Dell Computer (DELL). DELL issued an earnings warning last night and shares of CDWC were caught up in the sell-off this morning. Shares of DELL and CDWC gapped lower this morning. CDWC gapped open at $57.34, which is under our stop loss at $57.99. In the news today CDWC also released its April sales data. Here's an excerpt from CDWC's press release: "...announced average daily sales for April 2006 were $24.088 million, an increase of 5.5 percent compared to average daily sales of $22.834 million for April 2005. Total sales for April 2006 were $481.8 million based on 20 billing days compared to total sales of $479.5 million based on 21 billing days. Both the corporate and public sector segments grew average daily sales in April 2006. The public sector segment achieved 13.4 percent growth on an average daily basis and the corporate sector segment achieved 2.5 percent growth on an average daily basis..." We are closing the play at this morning's opening trade.

Picked on May 07 at $ 59.33
Change since picked: - 1.44
Earnings Date 04/25/06 (confirmed)
Average Daily Volume = 880 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 

DISCLAIMER

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