The markets moved sideways as the Fed began its two-day meeting to discuss rates and releasing a lot more data regarding their economic outlook. Besides the normal FOMC rate/inflation discussion the FOMC is considering releasing a much more specific economic outlook four times a year. Bernanke feels the markets will know how to better react to Fed actions if they know in advance exactly what the Fed sees and expects in the economy. The Fed-onomics reports would fall short of giving explicit inflation targets but would take some of the mystery out of what the Fed is actually looking at and what they feel is coming in the future. It will diverge from the "economy seems likely to expand at a moderate pace on balance over coming quarters" statement we have seen after past FOMC meetings. More information can't hurt and will ease the dissention among analysts as to what the Fed was actually saying in their statements. Reading between the lines of Fedspeak may become much easier.
Dow Chart - Daily
Nasdaq Chart - Daily
Today was a very light day for economic reports with the reading on January Consumer Confidence the only report. The headline number rose only slightly to 110.3 from the upwardly revised reading of 110.0 in December. Previously December was reported as 109. It was a non-event as far as the market was concerned despite the reading being the highest since May-2002. The major reports due out tomorrow as well as the FOMC announcement will trump Consumer Confidence and other economic reports over the last two weeks. Reports due out tomorrow include the Employment Cost Index, Q4 GDP, NAPM-NY, Chicago PMI, Construction Spending and the FOMC announcement at 2:15. It is going to be a very busy day.
The GDP is officially expected to be in the 3.1% range but estimates are all over the map from 1.8% to 3.6%. Some analysts feel the weakness in the auto sector was not being reflected correctly in the Q3 GDP and the correction could be reflected in the Q4 results resulting in a significantly lower GDP number. The Chicago PMI is expected to be in the 51.8% range but again the estimates range from numbers below 50 representing a contraction to numbers as high as 55 indicating a sharp increase in activity. Thursday continues the economic focus with the national ISM Index with estimates just over 50 and in expansion territory. Friday closes the week with the Non-Farm payrolls with official expectations for a gain of +150,000 jobs. Unofficial whisper numbers vary from 90K to a gain of more than 200K jobs. The next three days could be very volatile given the variety of economic events on the calendar.
Earnings continue to be the headline topic while we wait on the Fed and the coming economics. Headlining the earnings calendar today was Dow component 3M and it was not a pretty picture. MMM posted weaker than expected profits and cautioned about a slowdown in the global economy. 3M, like GE, is normally seen as a proxy for the economy because of the variety of products they offer. A warning about economic slowing from this proxy is normally a big event. MMM lost -4.26 on the news knocking -35 points off the Dow but the markets ignored the event.
UPS reported earnings that were inline with estimates and benefiting from a strong spike in package shipments during the holiday season. UPS guided analysts lower to an earnings range of $4.10 to $4.25 for all of 2007 with negative comments regarding the state of the economy. Analysts had expected $4.26 for the full year. After saying UPS was facing a "challenging year" CFO Scott Davis said the earnings guidance assumed the economy would improve by the end of 2007. UPS declined a dollar on the soft guidance. FedEx gave back -$1.59 on the UPS comments.
Lexmark (LXK) fell -3.72 after giving weaker than expected Q1 guidance. LXK said it would earn between 93 cents and $1.03 per share. Analysts were expecting $1.04. LXK said sales would decline in the low to mid single digits. The warning overshadowed a beat in Q4 earnings by 9 cents.
After the bell Allstate (ALL) reported earnings that rose +16.5% to $1.78 but fell below analyst estimates of $1.84. Allstate fell -$2 in after hours trading. Sandisk (SNDK) posted a loss of 17 cents after charges on sales that rose +55%. Excluding a long list of charges they earned 87 cents per share. Analysts had expected earnings of 72 cents. The market did not take the news well with a sharp drop of -$4 in after hours trading.
Juniper Networks (JNPR) said Q4 revenue rose +4% but did not release earnings for the third straight quarter as it continues to wade through problems from stock option grants. Revenue was $595.8 million compared to analyst estimates of $593 million. JNPR has until March 31st to file reports for Q3/Q4 or face delisting by the Nasdaq. JNPR fell more than dollar in after hours.
On the plus side consumer products company Procter Gamble (PG) reported profits that rose +12% to 84 cents per share. Analysts had expected 83 cents. PG raised results expectations by a couple cents for the full year. Colgate Palmolive (CL) posted earnings of 80 cents excluding charges. Analysts had expected 77 cents. PG shares recovered from a sharp morning drop to end the day down only 29 cents. Colgate gained +71 cents for the day after a corresponding drop at the open.
The only real winners in the earnings parade today were companies that had previously warned and then beat those lowered estimates. It appears the thing to do is under promise and over deliver even if it means taking some hits along the way on guidance. Three companies who have done that for Q4 were ITW, BDK and CNW. ITW spiked +$3.24 after beating lowered estimates, BDK +3.09 and CNW +3.14.
The key to the current earnings cycle is guidance and that guidance has been less than stellar. With 46% of the S&P already reported, 69% of those have reported better than expected earnings. Only 16% have missed estimates. Unfortunately only 7% have guided higher and 10% have guided lower. This +7% rate of upside guidance is a 14-quarter LOW! The 10% of lower guidance is the highest level in three quarters. On January 1st earnings estimates for Q1 were for 8.7% growth and that number has declined to 5.5% growth. This would definitely end the 13 quarters of double-digit earnings growth for sure. That streak may come to an end in Q4 but it is still too close to call at this point. Earnings for Q4 are right at the 10% level with 46% of the S&P reported. The biggest drop in earnings expectations for Q1 has come from the energy sector where estimates have fallen from 13% growth to a -1% decline. The problem is high comparisons and low current oil prices.
March Crude Oil Chart - 60 min
Those low oil prices took a significant jump higher today with nearly a +$3 gain to close at $57. Analysts were again blaming it on nearly everything but the real culprit. First on the list of reasons was an announcement by Saudi Arabia that they would cut production by another 158,000 bpd starting on Thursday. It appears OPEC has finally begun to take the new quotas seriously as Saudi followed announced cuts by several other OPEC nations. Cold weather was also blamed for the rise in prices on the assumption that heating oil demand would spike significantly. That may be true but supplies are already at record levels and even a 2-3 week cold snap will not impact those levels significantly. The real culprit was again futures expiration. Natural gas futures expired on Monday and gas spiked +11% today as traders established new positions ahead of what is expected to be a -200bcf draw in inventory levels this week. Crude prices were propelled higher today by tomorrow's futures expiration in heating oil and reformulated gasoline contracts. Traders short those contracts were forced to cover in the face of bullish events. Since the crude markets are intertwined the strong gains in NatGas (+11%), RBOB (+6%) and heating oil (+6%) produced a very strong spike in crude of +5.8%. If I am right we should see a dip in oil prices as traders move to establish new short positions in those futures contracts that expired. Don't get me wrong. I would love to see the rise in oil prices continue unabated but I just don't see it yet. I know several analysts were saying we could see $60 by the weekend but I think they have been inhaling too many fumes. Energy investors should be encouraged that support held at $50 but until we actually see OPEC make the cuts in February I think $60 is just wishful thinking. My energy positions would benefit substantially if I am wrong but we will get there, just not this week. Jim Rogers was on CNBC today and he was not only predicting $100 oil in our near future but also $150 oil several years from now. He gave the same reasons Boone Pickens and I have been preaching. The future is known based on the facts. The only unknown is the timing.
Microsoft closed down again but only fractionally after news broke about yet another Vista challenge. 70 million gamers may be about to say hasta la Vista to the new Microsoft operating system. It appears more than 500 online games played by more than 70 million people will not run on Vista. New PCs, which come preloaded with Vista have the necessary patches to run but the Vista software you buy at stores like CompUSA, CDW or any online retailer will not run the games. Alex St John, CEO of game publisher WildTangent blasted Microsoft for a flawed implementation and negligent way of treating the majority of game publishers. He said 90% of online games do not work with Vista. WildTangent has a patch that allows their 300+ games to work but he said games from MSN, AOL, Yahoo and Real Arcade will not work on PCs upgraded with Vista. Microsoft already has a service pack in the works to fix the hundreds of reported problems since Vista's release. According to one poll at support.com 77% of consumers are afraid of Vista and with the reported problems that percentage is rising. This is not a good sign for Vista sales. The EU is also claiming that Vista has the same problems as previous Windows versions in that it is anti-competitive and shows Microsoft has not changed despite its pleadings to the contrary in past Windows complaints.
Vista is not Microsoft's only problem right now. Alcatel-Lucent (ALU) has filed suit against Microsoft for $2 billion claiming Microsoft owes ALU royalties for the use of MP3 technology in its Media Player software. The jury in the case was seated on Monday. This case could have a far-reaching impact to hundreds of companies who have produced products or software to play MP3 songs. Microsoft licenses a patent from German researcher Fraunhofer Institute for Integrated Circuits IIS through Thomson SA. Whew! Fraunhofer helped develop MP3 audio-compression technology in conjunction with Bell Labs, a predecessor company to Lucent Technologies, which Alcatel SA acquired last year. If ALU is successful in their suit they could collect royalties from the same companies that pay Fraunhofer license fees today. It would be a windfall for ALU and could easily reach $10 billion in prior royalties plus future licensing payments. Obviously this case will not be over soon and the technical details the jury will have to sit through would be mind numbing even to MIT graduates. When you are the big name with deep pockets everybody on the planet wants a piece of you.
Motorola found itself square in the sights of Carl Icahn today. Icahn filed for a seat for himself on the 13-member Motorola board. Icahn and his associates own 33.5 million shares of Motorola or roughly 1.4%. He told CNBC he bought the stock because it was cheap. Motorola currently has $11.3 billion in cash and little debt. Icahn wants Motorola to return the cash to shareholders in the form of dividends or buybacks and take on more debt. Motorola is currently involved in buying Symbol Technologies for about $3.9 billion of which most will be cash. That knocks about $3B off their cash hoard. Motorola just finished a $4B buyback program over the last 14 months and just announced a new $4B buyback program for the next 24 months. That would knock another $4B off the cash surplus bringing it down to a little more than $4B after the Symbol acquisition. I think Carl may not have done his homework here or there is really an alternative motive here that has not come to light. Motorola jumped +1.27 on the announcement giving Icahn a tidy $42.545 million gain over Monday's value. Unfortunately Icahn is probably still in a losing position since MOT gapped down on Jan-5th from $20.50 to $18. That was the end of a very long drop from a high of $26.30 back in October. Depending on when Icahn bought his shares he could be seriously underwater and this is simply a high profile ploy to get him back to neutral. He has done it many times before.
Homebuilders have been neutral this week after some strong volatility last week. Investors are not sure which way to jump amid the conflicting reports. Locally here in Denver the new home market is on fire. One person reported to me this week that traffic was very heavy at the model homes last weekend and one builder said it business was frantic. He had sold four homes on one day alone. The new home sector has been beaten up severely in the press and rumors of strong buyer incentives are bringing shoppers out of the woodwork in hopes of getting a great deal. I suspect we are going to see some strong numbers over the next six months as builders try to blow out inventory over the spring shopping season and buyers snap up these deals like a Kmart blue light special.
Tuesday will go down in the ledger books as a gain for the markets but it was far from impressive on the surface. Under the surface the internals were strong at a roughly 2:1 advancers over decliners pace. It was however the lightest volume day since Dec-29th. Traders were obviously bullish and buying the dips but at the same time cautious ahead of tomorrow's Fed announcement and that strong calendar of economic events. The most bullish performance was not on the Dow, Nasdaq or S&P but the small cap Russell-2000 index. The Russell sprinted higher to come within two points of its historic resistance high at 800. Given the weakness in the Dow, Nasdaq and S&P over the last three days this is a major change in sentiment. If small caps are rising it means funds are buying. That means they are no longer concerned about the near future and the danger of being trapped in illiquid stocks. Whether that bullishness can withstand a hawkish Fed announcement and a minefield of economic news is the question.
RRussell-2000 Chart - Daily
Given the recent strength in economic reports the Fed is likely to raise the level of hawkish comments in their statement. The focus will probably be on the dangers of inflation and the comments an attempt to manipulate real interest rates in the bond markets. How equities will react depends on how they word the statement. Several analysts have come out this week saying they think the Fed will go easy on the markets this time around since inflation pressures have been moderating. Falling energy prices should continue to reduce those pressures for the next 30-60 days. This gives the Fed room to maneuver and some feel they will not want to slap the markets into a correction. Strong equity markets will help consumer sentiment and the housing market. This will remove some of the clouds still hanging over the economy. It is a very thin tightrope the Fed must walk to accomplish this task if they even want to try at all. Other analysts think the Fed will have to come out strong to shock the bond market and keep real rates higher thus continuing to slow inflation. I know, this is about as mind numbing as thinking about the testimony in the MP3 licensing trial but it is real and it will impact us tomorrow. Just how and in what direction we will not know until it happens.
The Dow moved up +32 points to 12525 and right in the neutral zone in the middle of its recent range. There are no clues as to direction thanks to the -35 Dow points subtracted by MMM. It is stuck in neutral but only one strong day away from its highs.
The Nasdaq tried to rally but was only successful in adding +7 points and stalling just under 2450. This is also the middle of its recent range and could be considered a neutral zone like the Dow. There was no conviction and when left to wander it found the path of least resistance was right down the middle between 2420-2470. The earnings after the bell were mixed enough to keep the futures only fractionally negative despite a couple of high profile misses like SNDK.
S&P-500 Chart - Daily
The S&P-500 closed at its high for the day at 1428 with a gain of +8. It was more bullish than either the Dow or Nasdaq. Investors seemed to be positioning for another breakout over 1430 should Wednesday's news be positive. I would not be surprised to see it move to between 1430-1435 ahead of the Fed statement at 2:15. Bullish sentiment seems to be growing despite the wall of worry waiting on Wednesday. I would still maintain a long bias over 1430 and a short bias on a failure at that level. Unless you are adept at moving in and out of positions and eat volatility for breakfast I would be very cautious about trying to trade tomorrows events. We could go either way or both ways in a hurry several times tomorrow or simply flat line into the Fed announcement. In a market decided by external high profile events it is sometimes better to wait until the fog clears before stepping into traffic. There is always another trading day but there may not always be money to trade.
Play Editor's note: The results from a two-day FOMC meeting are due out Wednesday afternoon. No one really expects any change in monetary policy but the markets will probably churn sideways anyway as investors and analysts wait to hear the commentary on the Fed's view on the economy. We will wait until after the report to add new plays.
Alexandria RealEst. - ARE - cls: 106.79 chg: +0.85 stop: 101.99
ARE continues to show relative strength. The stock rose another 0.8% and set another new all-time high in spite of some pockets of weakness in the REITs. We do not see any changes from our previous updates. If you're looking for a new entry point consider waiting for a dip (or a bounce) near $104.00-105.00. Our target is the $109.90-110.00 range. More aggressive traders may want to aim higher but we have a limited time frame. ARE is due to report earnings (unconfirmed) on February 8th. We do not want to hold over the report.
Picked on January 29 at $105.51
KB Home - KBH - close: 51.67 change: +0.02 stop: 49.99
The homebuilding sector barely budged today. Shares of KBH followed suit and closed virtually unchanged. Investors are probably waiting to hear the FOMC's decision on interest due out tomorrow afternoon. Thus, tomorrow is likely to be sideways at least until the Fed decision is released. Given the SEC news from last week more conservative traders may want to exit early right here! We are not suggesting new bullish positions at this time but more aggressive traders may want to consider buying a bounce from here. Our target is the $54.90-55.00 range.
Picked on January 21 at $ 51.74
Macerich - MAC - close: 94.80 change: +0.99 stop: 89.95
MAC is another REIT that is showing plenty of relative strength. The stock rose another 1% to close at another all-time high. Today's breakout past the $94.00 level is a bullish move! If you are looking for a new entry point consider waiting for a dip back toward the $94.00-93.50 region. MAC is definitely overbought and that makes this an aggressive, higher-risk momentum play. Our target is the $98.00-100.00 range. We do not want to hold over the February 13th earnings report.
Picked on January 28 at $ 93.46
Mohawk Ind. - MHK - close: 78.20 chg: -0.82 stop: 77.45
Warning! MHK displayed relative weakness on Tuesday with a 1% decline and a bearish engulfing candlestick pattern. Technical indicators are turning bearish and the stock closed right on its four-week trendline of support. More conservative traders may want to exit immediately or tighten your stop toward $77.75 or $77.95. At this point in the game, if MHK bounces tomorrow, we'd wait for a new trade over $80.00 or a new relative high before considering new bullish positions. Our target is the $84.00-85.00 range. We do not want to hold over the February earnings report.
Picked on January 21 at $ 78.38
Marathon Oil - MRO - close: 89.31 change: +2.11 stop: 86.99*new*
Wow! What a difference a day can make. Crude oil produced one of its biggest one day gains in years and closed near $57 a barrel. This lifted the energy sector and shares of MRO closed up with a 2.4% gain. Unfortunately, volume on today's move was lacking and we're almost out of time. We are planning to exit tomorrow at the closing bell to avoid holding over the February 1st earnings report. Please note that we're inching up the stop loss to $86.99.
Picked on January 22 at $ 88.05
OM Group - OMG - close: 48.40 change: +0.19 stop: 43.89
OMG continues to inch higher. We do not see any significant changes from our previous comments. Readers can choose to buy calls now or wait for a potential dip into the $47.50-47.00 region as a new entry point. Our target is the $54.00-55.00 range. We do not want to hold over the early March earnings. FYI: The P&F chart points to a $57 target.
Picked on January 25 at $ 48.05
Teleflex - TFX - close: 65.70 chg: +0.23 stop: 64.75
It looks like TFX is trying to bounce. Early this afternoon traders bought the dip near $65.00 again. The stock remains under potential resistance at its 10-dma and its short-term trendline of lower highs. We are not suggesting new bullish positions until we see TFX break its short-term trend of lower highs. Our target is the $71.00-72.00 range. FYI: The P&F chart points to an $81 target. We plan to exit ahead of the mid February earnings report.
Picked on January 14 at $ 67.11
Celgene Corp. - CELG - close: 54.25 chg: +0.66 stop: 55.01 *new*
CELG produced a 1.2% bounce on Tuesday but the stock remains under short-term resistance at its simple 10-dma and its multi-week trendline of lower highs (resistance). The company reports earnings on Thursday so we plan to exit tomorrow at the closing bell. Please note that we're adjusting the stop loss to $55.01.
Picked on January 18 at $ 54.98
F5 Networks - FFIV - close: 72.90 change: +0.69 stop: 76.25
Energy stocks may have been today's best performers but the networking sector turned in a decent bounce. The NWX networking index closed up 0.7%. Shares of FFIV out performed most of its peers with a 0.9% oversold bounce. Volume on today's rebound for FFIV was pretty low so it's hard to put much conviction behind the move. We would watch for a failed rally under its 10-dma or the 50-dma as a new entry point to buy puts. That is essentially the $74.00-75.00 range. More conservative traders may want to wait for more confirmation and only buy puts on a break down under $70.00. A 38.2% Fibonacci retracement would be very close to $65.00 and FFIV's rising 100-dma so we are aiming for the $66.00-65.00 range. FYI: The Point & Figure chart has produced a triple-bottom breakdown sell signal with a $63 target.
Picked on January 28 at $ 72.70
Ralph Lauren/Polo - RL - cls: 80.40 change: +0.07 stop: 82.05
It looks like the big rally in crude oil today squashed any rebound in the retailers. The RLX retail index barely moved and shares of RL closed almost unchanged. If you want to get nit-picky the trading in RL today almost looks like a failed rally under its 10-dma, which would make it a new entry point. We would wait for a new drop under $79.50 or $79.39 before considering new put positions. More conservative traders may want more confirmation and can look for a drop under $77.50 before opening plays. Our target is the $73.00-72.50 range but traders may want to exit at the rising 100-dma. We do not want to hold over the February 7th earnings report and that gives us seven trading days. FYI: The P&F chart is still bullish (for now).
Picked on January 28 at $ 78.80
Whole Foods - WFMI - close: 44.37 chg: +1.12 stop: 45.51
The oversold bounce from Monday continued into Tuesday's session. Shares of WFMI rose 2.58% and managed to breakout back above its simple 10-dma. The stock is now facing overhead resistance near the $45.00 level. A failed rally under $45.00 can be used as a new entry point to buy puts. Our target is the $40.25-40.00 range. We do not want to hold over the February earnings report. FYI: The P&F chart points to a $26 target.
Picked on January 19 at $ 44.85
(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.)
Google - GOOG - cls: 494.32 change: +1.85 stop: n/a
GOOG traded near $498.00 for the third time in three days. This is relatively good news since it provided an attractive entry point to open new strangle positions ahead of the company's earnings report. Tomorrow is our last day to open any positions ahead of GOOG's earnings. The company reports after the closing bell on Wednesday. Wall Street expects GOOG to report a profit of $2.91 a share. Our suggested entry range is the $490-510 range and the closer to $500.00 the better. This is not for the faint of heart and options can be expensive so we consider this an aggressive, higher-risk trade. In the Sunday newsletter we suggested two different potential strangle strategies. One involved the February $530 call (GOP-BW) and the February $470 put (GOP-NG). This strategy had an estimated cost of $17.40 and we want to exit if either option rises to $29.00 or more. The second strangle strategy involved the February $550 call (GOP-BY) and the February $450 put (GOP-NJ). This second strategy had an estimated cost of $8.70 and we want to sell if either option rises to $16.00 or more. Editor's note: Many times the biggest move in GOOG is on the first day after earnings but it might pay off to hold the strangle position for two or three days to capture the largest chunk of any post earnings news. If after three days following the earnings report and the options have not hit our target we'll probably exit.
Picked on January 28 at $495.84
Intuitive Surgical - ISRG - cls: 98.20 chg: +0.68 stop: n/a
Shares of ISRG dipped back to an intraday low of $95.44 before bouncing again. This intraday dip provided another great entry point to open any strangle plays ahead of the company's earnings report. We have two days left to consider new positions since ISRG doesn't announce earnings until after the closing bell on February 1st. We are suggesting that readers open strangle positions in the $92.50-97.50 range but the closer to $95.00 the better. Our suggested strangle involves the February $100 call (AXQ-BT) and the February $90 put (AXQ-NR). Our estimated cost was $7.20 and we want to sell if either option rises to $14.80 or more.
Picked on January 28 at $ 94.98
United Parcel Srv. - UPS - cls: 72.70 chg: -0.95 stop: n/a
Shares of UPS held up relatively well considering the earnings news today. The company reported earnings that were in-line with expectations but gave a slightly bearish forecast for 2007. The market reacted with a gap down to open at $71.17 and an intraday low of $70.38 before UPS bounced back to close with a 1.2% decline. The rebound was a surprise given the huge move in crude oil today. We are going to need to see a much bigger move in UPS if our strangle play is going to be profitable. We suggested the February $75 call (UPS-BO) and the February $70 put (UPS-NN). Our estimated cost was $1.65. We want to exit if either option rises to $3.75 or more. FYI: We are no longer suggesting new positions.
Picked on January 28 at $ 72.49
Altria Group - MO - close: 87.54 change: -0.52 stop: 86.85
Our time is up on the bullish play in MO. The company is due to report earnings tomorrow morning. Wall Street expects a profit of $1.22 a share. It was our plan to exit today at the closing bell to avoid holding over the announcement. It is widely expected that MO will announce plans to spin-off its Kraft (KFT) division. While there might be a pop on the news odds are good the news is already baked into the stock price.
Picked on January 04 at $ 87.65
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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