What can Brown do for you? UPS guidance turned blue this morning and after UPS earnings the markets turned red. UPS CFO, Scott Davis, said there were a "lot of signs the economy is moderating" and that created a gloomy morning for Wall Street. UPS also missed estimates and warned that Q3 results would also disappoint. UPS is seen as a leading indicator of the health of the economy since the majority of goods sold by small businesses move by UPS trucks. The opening bounce on positive economic news was quickly erased.
Dow Chart - 180 min
Nasdaq Chart - 180 min
The market sprinted higher after the open on positive economics led by a stronger than expected Consumer Confidence report. July Consumer confidence rose to 106.5 from 105.4 and better than analyst's estimates for a fall to 104.5. The gain was due to a jump in the expectations component more than an improvement in the present conditions. The jump in confidence was even more surprising given the rising price of gasoline over $3.00. Survey respondents felt better about job prospects and business conditions than in June.
The Richmond Fed Manufacturing Survey jumped to 12 in July from 4 in June. This was the second consecutive month of gains since the low of only 1 in May. This report differed from the NY and Philly Fed surveys, which fell -10 and -2.6 points respectively. Order backlogs at -1 nearly recovered to positive territory from the -15 low seen in June. Capacity utilization spiked significantly from -8 to +12 for a +20 point gain. New orders and shipments also improved +11 points each from low single digits to the mid teens. The only decline came in the expectations component, which fell -7 points to +14.
Existing home sales fell from 6.71 million annualized units in May to 6.62 million in June. This was actually better than an expected drop to 6.60 million. Sales were down -8.9% year over year. Despite the drop house prices still rose +0.9%. That is a far cry from the +15% to +30% we saw back in June 2005 but still an increase. Much of the decline is due to a severe drop in condo sales as a flood of new units hit the market. Single-family home sales fell -3% in the South but condo sales fell -14%. Inventories of single-family homes for sale rose to 6.6 months, +36% over June 2005. This is a nine-year high! If the Fed does take a pass at the August 8th meeting or stop we could see house sales spike due to a better outlook on future interest rates. Once rates appear to have topped the ARM buyers will come back hoping for a lower rate when their ARM resets in the future. A 5.5% interest rate is still very reasonable compared to historic levels. The falling home sales are seen as a detriment to further rate hikes.
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Chain store sales continued to languish with only a +0.2% rise for the week. Year over year sales slid to only +1.9% and a 17-month low. Back to school shopping is expected to provide boost to sales in August but rising gasoline prices should weaken that boost.
On Wednesday we will get another look at mortgage applications, the Chicago Fed National Activity Index, the Fed Beige Book and oil inventories. The Beige Book will give us a current look at economic conditions around the country as the Fed sees it.
The bad news started with UPS and it seemed like the bullish market undertones were going to evaporate. UPS was hit by higher fuel prices and slowing growth that caused it to miss analyst estimates by -3 cents. No big deal there but the outlook was the killer. The CFO warned that earnings growth for the rest of the year would be at the low end of estimates. Davis said fuel surcharges had lagged costs by six weeks and increased expenses in rail, health care and pensions added to the earnings miss. Despite his repeated comments on the slowing of the economy he said it only had a slight impact on UPS results. UPS said ground volume increased +4.6% and next day air rose +4.2%. The comments about the slight impact and rising volumes were completely ignored by the market with UPS falling -12.77 intraday and taking the transport sector with it. That was the biggest drop since the UPS IPO in 1999 and on 10 times normal volume. Merrill Lynch cut UPS from a buy to a sell saying the valuations no longer make sense. They made sense to somebody because UPS rebounded +4.55 before the close to lose only -$8.22 for the day. While that was a dramatic loss it was much better than it could have been. The rebound in UPS helped stimulate the rebound in the broader market.
Overall the earnings news was positive and once the UPS blow was absorbed we saw a nice rebound on economic fundamentals. The individual stocks reporting were not necessarily rewarded but a better feeling emerged about the state of the economy. US Steel (X) reported a +62% jump in profits on strong demand and rising prices. Earnings came in at +$3.22 per share compared to estimates of only $2.41 per share. The CEO said demand was very strong and he expected prices to continue to rise in Q3 and beyond. No complaints there and X rose +2.55.
Lockheed Martin (LMT) saw earnings rise +26% to $1.34 per share compared to estimates for only $1.16. Lockheed raised guidance and had only positive things to say about business in its sector. LMT gained +1.69 to a new historic high on top of a +$6 gain over the last month.
Altria (MO) rose to a new historic high after beating estimates by +4 cents and raising guidance. Altria also said they were seeing an improvement in underlying fundamentals across all business segments. McDonalds, also a Dow component, beat the street on a +9% rise in revenue and a +12% rise in income. Results in Europe were the best in ten years. The CEO said customer spending was holding up well in spite of high gas prices and said the $1 menu was the foundation of their US revenue. It seems everybody has a buck even after buying gas. It appears nobody had $35 bucks to buy a share of stock as MCD lost ground for the day.
Colgate -1.44, Dupont +0.10, Kraft +2.06, Whirlpool +.96 and Energizer all joined the positive performance club with strong earnings and decent guidance. Energizer (ENR) spiked +5 on their report. Eye care company Alcon (ACL) soared +12 after posting profits of +$1.50 per shares compared to estimates of $1.16. Sandisk (SNDK) gained nearly +$6 after posting earnings of +47 cents compared to estimates of +44 cents. WR Hambrecht reiterated their buy rating and $70 price target with SNDK closing at $46. Hambrecht was only one of several analysts to make positive comments on SNDK.
Leading the losers list was Nutrisystems (NTRI) with a -$13.48 drop, -20%, after the president said he was leaving and they posted earnings that showed a sharp spike in customer acquisition costs. Analysts were ok with the rise in costs because the new advertising programs are targeted to men, a segment previously ignored by NTRI. Legg Mason (LM) posted earnings that missed estimates by a nickel and was hit for a -$8 loss. Zoran (ZRAN) was hit for a -$5.56 loss after warning that Q3 earnings would be below estimates. MMM fell another -5%, -$3.58, with their earnings announcement and this is after a -$11 drop after their warnings on July 6th. They continued to guide lower on slowing flat screen sales.
It all boiled down to expectations and performance. Those disappointing were hammered while a few of those beating estimates by a mile were rewarded. Overall Q3 guidance continues to be slightly weaker than normal but the economic outlook given in that guidance has been steady. Currently earnings estimates for Q3 are +14.8% and only slightly below the +15.3% estimate on July-1st. The biggest drop in expectations comes from the tech sector where Q3 estimates are currently +6.0% and down from +10.0% on July-1st. UPS did not say there was a crash coming just that growth was moderating. Sometimes the real message gets lost in the way it is stated. Burlington Northern (BNI) posted a +28% rise in profits and gave strong guidance but was hammered for a -2.30 loss on sector weakness due to UPS.
Top 20 Winners and Losers
Oil prices fell -1.30 to close at $73.75 after a rumor hit the street that the two kidnapped Israeli soldiers had been returned. It was denied almost immediately but the damage was already done. Further helping to hold the prices down was the round of meetings by Rice in the Middle East on the current crisis. It is becoming increasingly more likely that the conflict will remain between Israel and Lebanon and not involve Syria and Iran. This cooled expectations for an oil squeeze despite several other events making the news. In Venezuela the Amuay refinery, one of the biggest in the world, reported it would be offline for 5-7 months after a fire destroyed critical components this week. That will put a crimp in gasoline prices as the global supply shifts to take up that slack. The Exxon refinery in Beaumont is reporting lowered production for the next 3-5 weeks and there was a new pipeline problem in Nigeria. Add in Valero's -65,000 bbl curtailment and gas prices are going higher despite slowing late summer demand. Boone Pickens was on TV again saying $100 oil was a guaranteed event before the end of 2007 if not before the end of 2006. Factors he thought could produce it in 2006 were Iran and hurricanes. The potential for a Gulf storm has eased according to the NOAA but the odds are growing daily that one is just around the corner.
BP, reported profits that jumped +30% to $7.3 billion for Q2 despite slowing production at its various fields. BP is still suffering production losses in the gulf from Katrina and lost significant production at the Texas City refinery from hurricane damage and an explosion in 2005. BP also lost production from a pipeline leak in Alaska. It saw a global average selling price for its oil of $65.96 a bbl in Q2 compared to $47.79 a year earlier. XTO Energy (XTO) doubled its income for the quarter and lifted its production forecast for the rest of 2006. Rowan Companies (RDC) more than doubled its earnings for the quarter and beat the street by +12 cents. The rest of the week will see a flurry of energy companies report and expectations are for more of the same. That sets up the potential for a strong sell the news event if any company fails to toe the line with the bar set high.
September Crude Oil Chart - Daily
After the bell today Amazon (AMZN) reported earnings of a nickel that fell -58% and missed street estimates by -2 cents and was the 6th straight quarter of decreasing earnings. Revenue increased to $2.1B from $1.75B. Amazon said it was hurt by a $10 million termination penalty for canceling the Toys-R-Us partnership. Amazon also said continued investment in new technology and customer goodwill through free shipping impacted results. The news impacted AMZN stock to the tune of -$4 or -12% in after hours trading to close at $29.50.
Sun Microsystems (SUNW) beat the street on +20% revenue growth but posted a larger loss than previously expected due to higher expenses from previously announced job cuts. Sun is cutting -5000 jobs to company wide restructuring effort. This was the first growth quarter in five years for Sun and they said it was actually accelerating. If you remember last week Dell said they were seeing weakness in the enterprise server business and that is exactly where Sun lives. It appears Sun finally found the right combination and is taking back share from Dell. Sun rose about +5% in after hours trading.
Hewlett Packard (HPQ) announced after the close it was buying Mercury Interactive (MERQ) for $52 or $4.5 billion. This was said to be dilutive to 2007 earnings by -4 cents but would add +2 cents to 2008. It also puts them in the race with IBM, which has also been beefing up its software division. MERQ was trading at $39 before the announcement.
Tuesday is the heaviest earnings day for the entire Q2 cycle but that does not mean there will be any big drop in earnings news any time soon. There were five Dow components that reported today but Boeing was the big winner although it does not report until tomorrow. The strong Lockheed results sent Boeing for a +2.31 ride. Second on the Dow leaders list was AT&T with a +81% increase in profits. AT&T (T) jumped +1.17. Those two companies helped overcome the -3.56 loss by MMM and pull the Dow out of its midmorning slump.
The Dow lost -84 points from its 10:00 high at 11083 to the 11:15 low at 10999. It remained near the lows until a buy program appeared just after 2:PM and the rest as they say is history. The bears were hoping for a nice ride back to the bottom of the current range and loaded up on the failed morning spike. The buy program was persistent and another short squeeze made it into the record books. The rebound was pretty on an intraday chart and the new two-week high is nothing to complain about. Unfortunately the 11104 close is still well below the upper end of our current range at 11250. This two-day rally was also sooner than I expected. I had speculated on Sunday that we could see some options overhang and a dip on Monday to be followed by a positioning rally ahead of the Fed meeting on August 8th. The merger mania that appeared ahead of Monday's open erased any thoughts of a dip and another short squeeze appeared. Those bears have got to be getting tired of these head fakes to the downside and the immediate rebounds but then trading summer rallies is fraught with peril.
I had expected a potential return to the top of the range at 11250 before the meeting but a move this early leaves me wondering what we are going to do for an encore for the next nine trading days. The on again, off again rate hike speculation for August 8th is back on the table and most analysts are calling it the last one. Haven't we heard that before? With this rampant speculation of a halt to hikes it is entirely possible this rally could continue under high volatility conditions for another week. If we do near the 11250 range for the Dow it would get interesting. Do traders have enough guts to push that resistance envelope or will they be content to simply tread water at that level and wait for a week? According to one analyst on CNBC today the cash positions at funds is under 4% and indicates they are nearly fully invested. According to the internals table I posted above volume on the heaviest earnings day of the quarter barely broke 5B shares but advancers were nearly 2:1 over decliners. The put/call ratio was 1.0 meaning there was heavy put buying and rising fear that the rally will not stick.
SPX Chart - 180 min
Rather than speculate on direction ahead of this potentially volatile period I suggest we watch the S&P as our indicator of market strength. Today's rebound found resistance at 1270 with stronger resistance at 1280 and 1290. It should be an uphill battle to break those levels before the FOMC meeting, especially the 1290-1295 band. As long as the S&P remains under 1290-1295 the current move is just an oscillation within the current range. A break over 1295 would trigger another short squeeze of potentially major proportions since long-term bears targeting a Sep/Oct dip loaded the boat at that level on the prior two attempts. Wednesday's Beige Book and Friday's GDP will be the economic events to watch for market moving potential in addition to earnings. Don't count out the SOX as a market mover this week. Positive results from individual companies can't seem to power the SOX back over 400 but news from companies like TXN, SNDK, FLEX and STM have taken away the bearishness of last week. If the SOX catches fire this week the Nasdaq could reverse its role as market anchor with a move over current resistance at 2100. Summer rallies seldom have any strength or staying power but we may be approaching the perfect storm in the form of a setup. Investors think the Fed will quit in August, chips are posting strong profits, bears can't break support and just maybe the Goldilocks economy is just warm enough to appease the Fed and investors at the same time. Stranger things have happened than a breakout rally in July but whatever the result remember that August and September are historically the two worst months for the market. Don't get married to any long positions for they tend to age quickly over the next 75 days.
EOG Resources - EOG - close: 69.38 chg: +2.01 stop: 67.49
Why We Like It:
BUY CALL AUG 65.00 EOG-HM open interest=1326 current ask $6.10
Picked on July xx at $ xx.xx <-- see TRIGGER
General Dynamics - GD - cls: 69.38 chg: +1.37 stop: 67.45
Why We Like It:
BUY CALL AUG 67.50 GD-HU open interest=3575 current ask $2.95
BUY CALL SEP 65.00 GD-IM open interest= 20 current ask $5.60
Picked on July xx at $ xx.xx <-- see TRIGGER
Dominion - D - close: 78.05 change: +0.58 stop: 74.99
A positive follow through on yesterday's big market bounce helped lift shares of D to a new relative high over minor resistance at the $78.00 level. The stock also produced a bullish engulfing candlestick pattern. We remain bullish and continued to target the $81.00-82.00 range. although more conservative types may want to exit near $80.00. Please note that we do not want to hold over D's early August earnings report, which gives us about eight trading days.
Picked on July 17 at $ 76.05
Goldman Sachs - GS - close: 148.49 chg: +1.59 stop: 141.79
Our new bullish play on GS is now open. The stock broke out past its simple 50-dma and minor resistance at the $148.00 level. Our trigger to buy calls was at $148.05. The move today helped produce a new MACD buy signal on the daily chart. Our target is the $154.00-155.00 range. We do note that the stock stalled at the $150 level this afternoon. Yesterday we suggested that more conservative traders wait for a move over $150 before considering new positions. More conservative traders may also want to play with a tighter stop loss. Our stop is at $141.79. Conservative types may want to put their stop closer to $145.
Picked on July 25 at $148.05
The Houston Exp. - THX - cls: 62.60 chg: +0.73 stop: 59.99
Oil stocks continued to rally on Tuesday in spite of a pull back in crude oil. The OIX oil index added 0.9% and the OSX oil services index added 3.3%. Shares of THX rose 1.17% and broke out past resistance at the $62.50 level. Our trigger to buy calls was at $62.60, which has been hit, so the play is now open. Our target is the $67.50-70.00 range. We do not want to hold over the early August earnings report. FYI: The Point & Figure chart is bullish and points to a $76 target. Plus, tomorrow will bring the weekly oil inventory numbers and these could produce some movement in the sector.
Picked on July 25 at $ 62.60
Apollo Group - APOL - close: 47.59 chg: -0.15 stop: 50.05
APOL displayed relative weakness today. The stock failed to participate in the market's follow through rally. The stock remains in its bearish trend of lower highs but we're not suggesting new plays at this time. Our target is the $45.50-45.00 range.
Picked on July 09 at $ 49.92
Chicago Merc. - CME - close: 455.25 change: - 9.75 stop: n/a
Hmmm.... our speculative earnings sell-off play in CME is not panning out how we expected it might but that doesn't mean it's "game over" just yet. The company reported earnings this morning and beat analysts' estimates by 3 cents per share. Yet the stock appeared to gap open lower this morning around $456 (see the intraday chart). There was a bounce and another afternoon rally attempt but both stalled under the $460 region. Concerning investors were revenues and margins. The company's revenues came in under analysts' expectations and profit margins shrank on some of their most heavily traded products. We are not suggesting new plays at this time but more aggressive traders might want to consider buying puts if CME falls under today's low near $446. Currently we're aiming for a decline into the $420-400 range.
Editor's note: For all of our relatively newer readers we want to remind you that we almost never hold an option position over an earnings report. There are too many unknown variables that could move the stock against you. The company could hit Wall Street's estimates but miss the revenue number. Or they could issue an earnings warning or guide higher. There are a number of potential stock movers that could push shares violently either direction. For example: Yesterday (Monday) we closed put plays in ACL and JEC to avoid holding over their earnings report. Today, after reporting earnings, shares of ACL and JEC are up 13.6% and 9.1%, respectively. The exception to this rule is a strangle play when normally we want to hold over the earnings report because we're counting on the extreme volatility the reports can generate. As far as this put play with CME we were very specific that it was pure speculation and if the stock didn't sell-off then odds were it would be a 100% loss.
Picked on July 23 at $452.00
IDEXX Labs - IDXX - close: 75.21 chg: +0.90 stop: 76.05
IDXX is still bouncing and the stock is eroding our potential gains. We've been suggesting for days now that traders exit early and lock in a profit. The only reason we are not closing the play is that IDXX remains under resistance at its 50-dma and 200-dma in the $75.50-76.00 region and the stock could still reverse lower although that likelihood is shrinking. Our conservative target at $75.25 has already been hit and we're currently aiming for $72.50. We do not want to hold over the earnings report on Friday, July 28th.
Picked on June 12 at $ 77.95
Manpower Inc. - MAN - close: 60.99 chg: +0.73 stop: 62.25
MAN spent most of the session trading sideways until a late day rally in the last hour of trading. The close over MAN's 10-dma is bullish and bad news for our put play. Conservative traders may want to cut their losses right here. We are not suggesting new positions.
Picked on July 20 at $ 59.42
Union Pacific - UNP - close: 84.24 chg: -1.18 stop: 87.01
It would have been a rough day for UNP had it not been for the last hour rally. The transports were hit hard by weakness in UPS, which tumbled more than 10% after a disappointing earnings report. The railroad index also closed lower after BNI reported earnings that came in better than expected and issued strong comments about demand but investors still chose to sell the news. We find the initial weakness in UNP this morning very telling since the company received an analyst upgrade to a "buy" but the news failed to stop any selling pressure. This is a tough spot to consider new plays. The wider market is bouncing higher but the railroads are showing weakness. We'd probably hesitate to open new put plays in UNP at the moment.
Picked on July 21 at $ 83.75
(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.)
Bausch Lomb - BOL - close: 47.91 change: +0.44 stop: n/a
Shares of BOL are still trading inside our suggested entry range (47.00-48.00) to open strangle positions. Tomorrow is our last day to open positions ahead of BOL's earnings report expected on July 27th before the market's open. Our estimated cost was $2.15. Our goal will be to sell if either option rises to $3.25 or more. More aggressive traders may want to aim higher. The options in our suggested strangle are the August $50 call (BOL-HJ) and the August $45 put (BOL-TI).
Picked on July 23 at $ 47.40
L-3 Comm. - LLL - close: 76.78 chg: +0.54 stop: n/a
LLL added another 0.7% following yesterday's breakout over the 50-dma. The stock is currently outside our suggested entry range (74.00-76.00) to open positions. If LLL does pull back tomorrow traders could still try and open strangles but we'd want to try and get as close to the $75 level as possible. Tomorrow is our last day to open any positions ahead of the company's earnings report expected on Thursday. Our estimated cost was $1.35. We will plan to sell if either option rises to $2.25 or more. The options in our LLL strangle are the August $80 call (LLL-HP) and the August $70 put (LLL-TN).
Picked on July 23 at $ 75.26
3M Co. - MMM - close: 68.11 change: -3.58 stop: n/a
MMM reported earnings this morning. The company missed estimates by 2 cents and issued an earnings warning for the third quarter. The market reaction was naturally negative with the stock plunging through significant support at the $70.00 level. While MMM might see an oversold bounce broken support at $70 should now act as new resistance. We are not suggesting new strangle plays. Our estimated cost was $0.75. We are planning to exit if either options rises to $1.50 or more. The options in our strangle are the August 65 put (MMM-TM) and the August 75 call (MMM-HO).
Picked on July 23 at $ 70.72
Phelps Dodge - PD - close: 79.43 change: +2.75 stop: n/a
PD produced a big bounce today. The stock added 3.5% on below average volume to close right under round-number resistance at the $80 level. The company did receive some good news today. Canada's antitrust agency gave PD the okay to continue with its Inco acquisition. Shares of PD are currently outside of our suggested entry range (76-78) to buy a strangle and since earnings are expected tomorrow morning we're not suggesting new strangle positions. Analysts are looking for PD to report earnings of $4.01 a share. Our estimated cost is at $2.15. We're planning to sell if either option rises to $3.15 or more. The options in our strangle are the August $85 call (DPB-HQ) and the August $70 put (PT-TN).
Picked on July 23 at $ 77.20
CORRECTION: In the Monday night newsletter we mistakenly listed Alcon (ACL) as a "closed call" when it was actually a "closed put" play.
Air Products Chem. - APD - cls: 61.81 chg: +0.18 stop: 64.01
It was our plan to exit on Tuesday at the closing bell to avoid holding over tomorrow's earnings report from APD. The stock tried to rally but was struggling with technical resistance at its 10-dma and 200-dma near $62. Wall Street is looking for APD to report earnings of $0.91 per share tomorrow morning.
Picked on July 09 at $ 62.95
Oil Serv. Holders - OIH - cls: 139.46 chg: +5.36 stop: 134.26
The oil stocks are rebounding and leading the way are the oil service stocks. The OSX index added 3.3%. The OIH out performed with a 3.99% gain right back toward the 200-dma and the $140 region. It was our plan to buy a breakdown under support and the neckline to its head-and-shoulders pattern at $130. Our trigger to buy puts was at $129.00. However, OIH never hit our trigger so we're dropping the HOLDR as a bearish candidate.
Picked on July xx at $ xx.xx <-- see TRIGGER
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