After the close today the news was all about tech earnings. IBM, Intel, Motorola, Yahoo, Novellus and Linear Tech all got their 15 minutes in the spotlight. This followed major earnings reports during regular trading from Merrill Lynch and Dow components UTX and JNJ. It was a major start for the earnings season and results were definitely mixed. These earnings came after a strong economic reporting calendar that kept the market uneasy all morning. About the only thing missing was a nuclear blast but that could come at any minute from North Korea.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning started off with Producer Price Index for September, which showed a headline drop of -1.3% and twice the consensus estimates for a drop of -0.7%. Producer prices fell mostly due to the sharp drop in energy prices. After removing the impact of energy the core rate grew by +0.6%, triple the analyst estimates and the strongest jump in 22 months. Car and truck prices led the gains with the largest jump in 15 years. The overall prices for finished goods fell by -8.4% in September led by a -22.2% drop in gasoline prices. However, prices for finished food products rose at a +7.6% annualized rate. Overall the sharp jump in the core rate suggested inflation worries are not over but the decline in other areas as well as the slowing economy should continue to keep the Fed on the sidelines when it meets next week.
Industrial Production for September fell -0.6% and the biggest decline in a year. Analysts had expected production to slow by only -0.2%. Capacity utilization fell -0.6% as well to 81.9% and erased the gains seen over the prior three months. Manufacturing production fell -0.3% and the largest drop since the Katrina impact in Sept-2005. The good news in this report was the drop in capacity utilization, which the Fed hopes will drag inflation lower. Surplus capacity produces lower prices as manufacturers are forced to compete for market share through pricing.
The Q3 manufacturing survey for California showed a headline drop to 56.7 from 60.3. This still represents growth but at a slower rate. Production and new orders components both declined but remained in growth mode. Slower growth in California is confirmation of the slowing on a national scale. California has been leading in manufacturing growth and that has not changed despite the drop in this report.
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On the consumer side the NAHB Housing market Index rose slightly to 31 in October from September's reading of 30. Although minimal this was the first gain in eight months. The present conditions component was flat at 32 but the six-month expectations component jumped sharply to 41 from 37. Potential buyer traffic also rose slightly. The headline peak for the index was 72 back in June 2005. While the slight uptick may not mean the housing decline is over it may represent the beginning of a stabilization phase leading to a rise in the spring.
The earnings parade picked up speed this morning with some major companies making announcements. Merrill Lynch posted massive profits of $1.94 billion or $2 per share compared to $1.40 per share in the comparison quarter. This was net of the BlackRock purchase, which produced an additional gain of $1.1 billion. The outlook was strong and analysts can't say enough positive things about Merrill. MER gained +.41 for the day but this was on top of nearly a +$20 gain since June and a bad day in the markets. MER was also fighting some disappointments in the sector with LaBranch (LAB) falling -20% for the week on disappointing earnings and a drop in Jefferies today of -8%.
United Technology dropped -1.51 after reporting earnings that beat the street by +3 cents. Analysts said the weakness was due to the possible impact on Carrier air conditioner sales from the weak housing market. I believe it was simply profit taking from the large gains over the last three months. Once earnings are over traders move on to the next opportunity stock and excitement fades. Everybody expected UTX to do well so there was no surprise. Johnson & Johnson gained +1.15 after beating the street by +5 cents and giving investors positive guidance on current drug sales trends. The stock was also reacting to the acquisition of Icos by Lilly for $2.1 billion. This produced a strong sector bounce with further consolidations expected.
After the bell it was a tech party. IBM beat estimates by +10 cents and revenue at $22.6B was much larger than estimates of $21.1B. IBM rocketed +$4.53 in after hours trading as shorts ran for cover. IBM was trading at a 10 month high going into the close and many bears had shorted the highs thinking IBM could fail to impress traders as it has for the last five quarters. The service business has been the weak link for years and that saw a sharp jump in orders of +$10.5 billion and $12.0 billion in revenue. IBM made acquisitions of more than $3.6 billion in the quarter. Even at today's prices IBM only trades at 13 times 2007 earnings and a -14% discount to Hewlett-Packard.
Intel posted earnings that were -35% below the same quarter in 2005 on sales that fell -12%. Intel beat the street by +3 cents and managed to eke out a small revenue gain over street estimates. However margins were flat at 50% where analysts were expecting to see some gains. Intel has been in a price war with AMD and Intel said it was about over. However, those flat margins indicate Intel is not letting up just yet. The guidance was lackluster and inline with estimates and Intel gave back their early gains in after hours trading. Intel was cut to neutral by Goldman Sachs before the open leading to a -75 cent drop in regular trading before their earnings.
Motorola was the big disappointment for chips after the close with a -45% decline in profits on revenue that was well below analyst's estimates. The earnings per share were inline with estimates but revenue guidance of $11.6B-$12.1B was below the range analysts expected. After a +41% jump in the stock price over the last three months it was punished severely in after hours trading. MOT lost -$2 in after hours closing at just under $23 after losing -64 cents in regular trading. MOT hit $26.35 on Monday.
Also reporting earnings was Novellus (NVLS) with earnings of +57 cents and beating estimates by +6 cents. Novellus traded down -1.22 in after hours after warning of lower expectations for Q4. NVLS had lost -59 cents in regular trading. Linear Technology (LLTC) reported earnings inline with estimates but also warned that sales would slow in Q4. LLTC said the overall business environment was weaker than expected and bookings fell slightly. LLTC expected profits and sales to decline -5% to -7% in Q4. LLTC fell -90 cents in regular trading and -$1.57 in after hours.
Also after the close the Semi Book-to-Bill numbers for September were released with the headline number remaining flat with August at 1.0 or $1 in orders for every $1 in shipments. However, August was revised down to 0.99 so they could claim a rise. The BTB number is highly suspect and tends to be revised to fit the story more often than not. They also report it as a three-month moving average instead of giving us the actual data. This way they can play with the numbers with even greater flexibility. To compound these games they don't release the data until after 6:PM to even further dilute the impact. Given the weak guidance from nearly all the chip companies for Q4 the odds are good this will be the last month at a breakeven for the BTB regardless of how much they manipulate the index.
Yahoo also reported earnings at +11 cents and inline with estimates. This was initially negative since analysts had hoped Yahoo would actually do better than the lowered estimates they gave when they warned earlier this cycle. YHOO initially fell nearly -$1 in after hours but rebounded significantly from the overnight low of $23.20 to close at $25.30 after the conference call. The bounce came after CEO Terry Semel said the new Yahoo advertising system was ready and they would begin selling ads on the system early next year. This has been delayed over and over again and my immediate thought was why wait until "early next year" if the system is ready now? It sounded to me like they were trying to throw the market a bone by carefully wording the announcement to disguise the continued delay but traders bought it hook line and sinker.
At the close noted market analyst John Murphy was interviewed on CNBC and his outlook on the future was for a dip of -2% to -3% due simply to the overbought conditions in the market. Tonight's mixed earnings performance may have clouded that outlook for tomorrow. The chip sector is definitely under pressure with all the reporters trading down in after hours. This was offset by the unexpected gains in Yahoo keeping the Nasdaq futures roughly flat in the overnight session. The real motive power for Wednesday will be IBM. As a Dow component the +4.50 after hours gain should equate to around a +26 point Dow gain at the open. IBM is the highest weighted Dow stock with a weighting of 5.739. Intel was the other Dow component reporting tonight and currently down only a few cents in after hours it should have no significant drag on the Dow. Tomorrow Dow component JP Morgan (JPM) will report and they are expected to be a positive impact for the Dow. Unfortunately like MER and GS, JP Morgan has been moving steadily higher and may not react as strongly as IBM to good news.
The Dow setup for tomorrow as I see it is another run at 12000 at the open. The strong intraday dip today, -105 points at its bottom, was bought strongly and rebounded back to within range of Dow 12000 once again. If IBM tacks on +30 points and JPM reports great numbers we should be knocking on the door once again. We only missed it by -3 points on Monday. Once 12K is tagged it could get dicey. As John Murphy put it there is strong psychological resistance to a move over 12000 until we spend some time consolidating recent gains. We still don't know if the current gains were actually borrowed from gains normally made later in the quarter or will they be in addition to those gains? I would not recommend bailing on long positions but I would hesitate adding to them given the mix of earnings results.
SPX Chart - 120 min
Oil continued its volatile ways with a -1.50 drop from the overnight high at $60.54. It is nearly impossible for it to hold a trend other than horizontal since support at $60 broke back on Oct-3rd. The same stories are still being circulated and nothing new has appeared to feed the bulls hunger. That may change before the week is out with oil inventories expected to decline by on million bbls tomorrow and the arrival of cold weather. Cold helps push up the prices of heating oil on expectations of future demand and that drags oil prices along with it. OPEC members are expected to solidify their cuts at a meeting currently underway in Doha and the real argument is a cut in quota or a cut in production. Until that is resolved the bulls have nothing concrete to use as a reason to add to positions. The cold weather should also raise natural gas prices but not until the size of the weekly injection is see on Thursday. We are simply too early on the winter curve to see any major gains. Continue buying the dips in energy because prices will rise as colder weather increases.
The transports could get a boost tomorrow from the CSX earnings tonight. CSX earned +54 cents and beat the street by +3 cents as profits doubled over the same quarter in 2005. Their outlook remained strong with volumes growing across all segments. Railroads are in the highly prized position of being able to choose their future customers from a pool of those wanting to ship by rail. Capacity is stretched to its limits and they are adding to that as quickly as possible but it is a lengthy process. As that capacity comes online they have a backlog of shippers waiting to fill it. CSX is my favorite transportation stock.
Abby Joseph Cohen also made an appearance today saying that although earnings for Q3 were expected to be inline she expected a slowdown for 2007. She also felt GDP would continue to decline but not into a dangerous range. This outlook was bullish according to Abby saying that slow growth and lower earnings would mean a longer period of growth and stronger earnings in the future. She is always fundamentally bullish and said she expects a +10% rise in the markets over the next 12 months. Her official S&P target is 1475 but +10% from here would be an even 1500. I will take it although we all know it will not be straight up.
Tomorrow's earnings include ABT, AMD, AAPL, BSX, CDWC, ET, EBAY, JPM, OXY, RYL and WM to name a few. Economic reports include Mortgage Applications, Consumer Price Index, New Residential Construction and Oil and Gas Inventories. If the news does produce a Dow spike to 12K I would be cautious about running with the bulls. I would remain long but tighten stops just in case the irrational exuberance loses traction.
Today marked a milestone for the U.S. with the population going over 300,000,000 at 7:24 AM this morning. Obviously this is just an estimate by the Census Bureau and by 8:PM tonight that number had grown by another +4,000. According to the Bureau there is a new birth every 7 seconds, a death every 13 seconds and a new immigrant arrives every 31 seconds. This results in a net addition of one person every 11 seconds, 24/7/365. The last major benchmark of 200,000,000 reached in 1967. It took only 39 years to add 100,000,000 despite a sharp drop in births in the 1980s. It took 49 years to go from 100M to 200M and at the present rate it will take only 36 years to reach 400M. The table below shows the growth by decade. The U.S. is the third most populous country behind India and China.
To carry this thread a little further consider the following statistics for the global population.
U.S. daily increase: 7,854
Roughly every 3.2 years the world population is expanding by an amount equal to the current population of the US. At the current rate of growth the global population will reach 7.0 billion people sometime in 2010. That extra 450 million people will each consume an average of 4.3 bbls of oil per year or another 1.935 billion bbls per year. That will be a +6.2% increase to the 30.842 bil bbls per year we consume now. To put this in perspective that is an additional 5.3 million bbls per day, every day, 365 days per year. That is the equivalent of finding another Iran, the second largest OPEC exporter at 3.75 mbpd and another Libya at 1.7 mbpd. They would need to be discovered, drilled and production put in place in only three years. Even if fields of that size still existed it takes 7-9 years to go from discovery into full production. Why some people can't understand Peak Oil is beyond me. Even if the numbers are off by a couple years the result is the same. Buy energy on the dips and forget it.
Ambac Fincl. - ABK - close: 85.43 chg: +0.24 stop: 83.45
Shares of ABK gapped down at the open this morning but managed to rebound thanks in part to one analyst upping their price target on ABK from $90 to $92. Traders bought the dip near $84.50 this morning, which was our last suggested entry point to buy calls. We only have about a week and a half before ABK reports earnings on Oct. 25th. We do not want to hold over the announcement. Our target is the $88.00-90.00 range.
Picked on October 04 at $ 84.40
BP Prudhoe Bay - BPT - close: 72.50 chg: +0.50 stop: 72.45
BPT managed to bounce on Tuesday while the rest of the oil sector slid lower. The stock is still under resistance at $75 and its 50-dma and 200-dma. We're still suggesting a trigger to open positions at $75.05, above resistance at the $75.00 level. If triggered our target is the $79.00-80.00 range. FYI: A move over $75 would produce a new Point & Figure chart buy signal.
Picked on October xx at $ xx.xx <-- see TRIGGER
Peabody Energy - BTU - close: 41.55 chg: -0.84 stop: 39.99*new*
Coal stocks hit some profit taking on Tuesday after nearly three weeks of gains. Shares of BTU lost 1.98%. Don't forget that we plan to exit tomorrow (Wednesday) at the closing bell to avoid holding over the company's earnings report on Thursday morning. We're upping the stop loss to $39.99.
Picked on October 11 at $ 40.05
Beazer Homes - BZH - close: 41.74 change: -0.56 stop: 39.85
Homebuilders continued to struggle on Tuesday even though the homebuilder confidence index managed to tick higher after eight months of declines. We are concerned about the lack of upward momentum. If you're not willing to endure a pull back toward support near $40 and its 50-dma then you may want to exit early right here. We'd watch for a bounce near $41.00 or $40.00 as the next entry point to buy calls. Our target is the $49.00-50.00 range. We do not want to hold over the early November earnings report.
Picked on October 11 at $ 42.75
Carpenter Tech. - CRS - cls: 113.59 chg: -0.21 stop: 104.95
Steel-related stocks also suffered some profit taking on Tuesday but traders bought the dip and shares of CRS managed to recoup most of its losses. The profit taking may not be over yet. Readers can watch for a dip toward $110 as a potential entry point (or if you prefer a bounce from $110). Our target is the $118.00-120.00 range. Don't forget we plan to exit ahead of the October 26th earnings report.
Picked on October 11 at $110.51
Devon Energy - DVN - close: 66.50 chg: -0.51 stop: 60.95
Oil stocks were really strong on Monday but the group suffered some profit taking on Tuesday. Readers can use this dip as a new entry point although it might pay off to wait for a dip back toward the $65 region. Our target is the $69.50-70.00 range. We do not want to hold over the November 1st earnings report. FYI: The P&F chart is bullish with a $78 target.
Picked on October 15 at $ 64.72
Emerson Electric - EMR - close: 85.84 chg: -0.15 stop: 82.99
EMR also suffered some profit taking on Tuesday but the intraday chart shows that traders were buying dips in the $85.50-85.65 range all day long. This may prove to be a new entry point to buy calls. Our target is the $89.00-90.00 range. FYI: In the news today EMR announced it was reporting earnings on November 7th. We do not want to hold over the event.
Picked on October 05 at $ 85.15
EOG Resources - EOG - close: 66.20 chg: -1.03 stop: 63.95
It's the same story with EOG. A pull back in crude oil futures had traders selling to lock in some profits after yesterday's big move. The intraday chart shows a nice bounce from today's low at $65.35, which is very close to the exponential 200-dma. Our short-term target is the $69.50-70.00 range. More aggressive traders may want to aim higher but watch out for the 200-dma. We do not want to hold over the October 31st earnings report.
Picked on October 16 at $ 66.05
Fortune Brands - FO - close: 75.40 chg: -1.21 stop: 73.99
Ouch! FO lost 1.5% on Tuesday. More importantly this looks like a bearish reversal following the recent bullish breakout over resistance near $76 and its 200-dma. More conservative traders may want to cut their losses now. We couldn't find any specific news to account for the spike lower this morning. We're not suggesting new positions at this time. Wait for a new move over $76.25 or higher. Our target is the $79.90-80.00 range. We do not want to hold over the late October earnings report.
Picked on October 13 at $ 76.26
Frontier Oil - FTO - close: 28.94 change: -0.77 stop: 25.99
Be ready! We told readers in our initial description that FTO would likely encounter resistance at the $30.00 level. Right on cue the stock produced a failed rally with its jump to $29.99 this morning. Today's move also produced a bearish engulfing candlestick pattern. We expect a dip back toward the $28.00 level and maybe the $27.50 region. We would wait for signs of a bounce to begin before considering new call positions. Our target is the $32.50-33.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart is still bearish for FTO.
Picked on October 15 at $ 28.90
NCI Building Sys. - NCS - cls: 61.50 chg: +0.25 stop: 57.99
Traders bought the dip this morning in NCS and the stock displayed relative strength by posting another gain. The MACD on the daily chart is very close to a new buy signal. We're still suggesting new positions. Our target is the $67.00-70.00 range.
Picked on October 16 at $ 61.26
Rockwell Automation - ROK - cls: 61.13 chg: -1.13 stop: 59.45
The profit taking in ROK shook the stock for a 1.8% loss on Tuesday. Volume came in pretty low, which is what we would want to see on a pull back. Readers can choose to buy the dip here or wait for a potential pull back toward the 10-dma near $60.50 or even the $60.00 level. Yesterday we were (and still are) suggesting a dip to $61 as a new entry point. Our target is the $64.90-66.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart points to a $76 target.
Picked on October 12 at $ 60.86
Sepracor - SEPR - close: 52.32 chg: +0.06 stop: 49.90
We do not see any changes from our previous updates on SEPR. We're not suggesting new positions due to our dwindling time frame. Odds of a dip back toward the 10-dma and 200-dma near $50.75-51.00 are probably pretty good. Our target is the $55.50-56.00 range. Don't forget that we plan to exit ahead of the earnings report.
Picked on October 09 at $ 51.25
Unibanco - UBB - close: 79.76 change: -2.14 stop: 76.45
The profit taking in financials was pretty mild in the states but Brazilian ADR UBB was hit harder with a 2.6% decline. One Reuters article said that UBB had reported earnings today, which would suggest today's loss was a "sell the news" reaction. Yet we checked the normal news channels and didn't find any earnings news on UBB. We also checked the company's website and didn't find any news about reporting earnings today. According to our sources UBB isn't expected to report earnings until early November. Whatever the case today's decline is bearish with a close under $80 and its 10-dma. We'd expect a dip back toward the $78.00-77.00 region, which is where we would expect a bounce. Our target is the $85.00-86.00 range. We do not want to hold over the earnings report.
Picked on October 08 at $ 79.12
Vimpel Comm. - VIP - close: 62.29 chg: -1.41 stop: 59.95
VIP did not escape the market-wide profit taking on Tuesday. Shares lost 2.2% after its recent gains. Readers can use the pull back as a new entry point to buy calls or wait and watch to see if shares continue to dip toward $61 (maybe $60). Our target is the $67.50-70.00 range. We do not want to hold over the mid-November earnings.
Picked on October 12 at $ 62.17
Vulcan Materials - VMC - cls: 82.27 chg: -0.75 stop: 79.85
We warned readers last night that VMC looked poised for a pull back today. There is still a chance that VMC will continue to dip toward the 10-dma near $81. Our target is the $84.50-85.00 range. We do not want to hold over the late October earnings report.
Picked on October 09 at $ 80.26
Medco Health Sol. - MHS - cls: 56.80 chg: -0.06 stop: 58.05
The oversold bounce in MHS stalled on Tuesday with shares struggling to make it past the $57 level and its 200-dma. It wasn't a very clear failed rally today so we'd probably wait a bit before opening new positions. The P&F chart points to a $49 target. We think shares can slip toward the $52.00-51.00 range. We do not want to hold over the early November earnings report.
Picked on October 15 at $ 56.10
(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.)
Boston Properties - BXP - close: 104.48 chg: -1.05 stop: n/a
Lack of real directional movement in BXP is killing our strangle play. We need to exit before the closing bell on Friday or our options will expire worthless. Our suggested options were the October $105 call (BXP-JA) and the October $100 put (BXP-VT). Our estimated cost is about $1.90. We're adjusting our target to $2.50 for either option.
Picked on October 01 at $103.34
ConocoPhillips - COP - close: 60.80 chg: -0.29 stop: n/a
The profit taking in COP was pretty mild on Tuesday. Traders bought the dip at $60.17 midday. Readers could have used the pull back as a new entry point to open strangle positions. Our suggested entry point was the $59.50-60.50 range (the closer to $60.00 the better). We do plan to hold over the October 26th earnings report. At current prices our estimated cost is about $1.15. We are suggesting an exit if either option rise to $2.00 or more. Our suggested options were the November $65 call (COP-KM) and the November $55 put (COP-WK).
Picked on October 15 at $ 60.03
Google - GOOG - close: 420.64 chg: - 1.11 stop: n/a
Shares of GOOG essentially traded sideways as investors wait for the company's earnings report due out on October 19th after the closing bell. We're not suggesting new strangle positions. The options in our strangle strategy are the November $440 call (GOP-KH) and the November $360 put (GGD-WL). Our estimated cost for this position is about $13.00. Our suggested exit is at $24.00 or higher.
Picked on October 01 at $401.90
CIGNA - CI - close: 116.27 change: -0.96 stop: 116.95
It looks like CI is breaking down not higher. Today's decline is a breakdown from the recent trading range. Aggressive traders may even want to consider switching to puts. We'd watch for a drop under the 50-dma (currently near $114.00) or the $114.00 mark as a potential entry point to buy puts although be advised that the 200-dma near $110 might offer some support. It was our plan to buy calls on a breakout over $120 but CI never hit our trigger at $120.26 so the play was never opened.
Picked on October xx at $ xx.xx <-- see TRIGGER
Entergy - ETR - close: 84.07 change: +1.69 stop: 79.99
Target achieved. The company raised its third quarter earnings guidance and the stock rose just over 2% on the news on strong volume. Our target was the $84.00 mark.
Picked on October 03 at $ 80.33
KB Home - KBH - close: 43.35 change: -0.77 stop: 44.99
We are dropping KBH as a bullish candidate. The housing stocks are struggling and have reversed last week's rally. Shares of KBH are definitely not cooperating with us and today's loss (-1.7%) is a breakdown under the 50-dma. Our plan was to buy calls with a trigger at $48.05. The stock never hit our trigger so we're dropping it unopened.
Picked on October xx at $ xx.xx <-- see TRIGGER
Omnicom - OMC - close: 94.30 chg: -0.24 stop: 92.95
We're throwing in the towel on OMC and suggesting an early exit. Almost all of the technical indicators on the daily chart are suggesting that the next move will be down. Of course Murphy's law will probably have the stock surging higher tomorrow now that we've closed the play. If you don't want to exit early with us consider tightening your stop loss toward the $94 level.
Picked on September 10 at $ 90.97
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