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Daily Newsletter, Tuesday, 03/27/2007

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Table of Contents

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

Market Wrap

Builder Sinkhole

Just when everyone thought it was safe to venture back into the market Lennar says builder foundations are facing a growing sinkhole. Before the open Lennar confessed a 73% decline in Q1 earnings and withdrew its guidance for all of 2007. CEO Stuart Miller said a lack of demand and problems with subprime lenders were continuing to pressure sales. He said market conditions were still challenging in most areas and some markets were continuing to deteriorate. They reported earnings of $68 million or 43 cents per share and inline with street estimates. The problem came from their lowered guidance. Lennar said problems with lenders were keeping buyers at bay. It has been reported over the last two weeks that lender loan programs were disappearing daily and causing a serious drag on the entire food chain. Not only are builders seeing houses go unsold because subprime borrowers can't get loans but prime buyers are also being impacted. Prime buyers with no loan problems are finding it harder to sell their current homes because subprime borrowers have been taken out of the market. To put it briefly prime buyers cannot buy because nobody in the subprime category can get a loan for their existing homes. This is providing a ripple effect all the way up the food chain. Nearly every new home transaction has two or more sales. New homebuyers need someone to buy their existing home before they can move up. The buyer of that existing home needs somebody to buy their existing home so they can move up. This can continue down the chain of succession for several homes until a qualified buyer appears to trigger the entire upgrade process. We are seeing even more challenges now due to the evaporation of loans. Buyers with contracts in hand and loan commitments are seeing those commitments disappear as lenders and the investors behind those lenders terminate loan programs and cancel commitments. Title companies are reporting a large wave of cancellations in loan commitments leaving buyers and sellers stranded and buyers racing about to find a new loan at the last minute. This loan confusion is causing great consternation in the housing sector and that is keeping buyers at bay. Lennar recovered its early losses by day's end but the entire sector remained weak.

Dow Chart - Daily

Nasdaq Chart - Daily

After the close Beazer Homes (BZH) was knocked for a -$5 loss after news broke that the FBI, IRS, DOJ, HUD and the US Attorney's office in Charlotte had launched investigations into apparent mortgage fraud. The FBI said its investigation involved "fraud in general" and more specifically related to corporate, mortgage and investment issues. Tough times in any industry tends to produce questionable business practices.

S&P released a survey this morning that showed prices of homes in the US fell -0.7% in January compared to January-2006 and it was the worst showing since Jan-2004. David Seiders from the NAHB revised his estimate for new home sales in 2007 down for the 3rd time in the last two months. His original estimate was for a drop in sales of -2% for all of 2007. Two weeks ago he revised that down to a drop of -4%. Today he revised it again to project a drop of -8% for all of 2007 and he is worried that may not be enough given the sudden evaporation of funding sources.

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The Richmond Fed Survey came in at -10 for March and the same level we saw in February indicating continued economic contraction in the region. The low for the cycle was -11 in January but there have been no indications of a recovery for the last two months.

Consumer Confidence for March took an unexpected turn with a drop from 111.2 in February to 107.2 for March. The drop to a three-month low was blamed on rising gasoline prices and the subprime slime currently impacting the housing sector. The expectations component fell to 86.9 from 93.8 while the present conditions component remained mostly unchanged at 137. The -7 point drop in the expectations component reflects uneasiness about home prices and the eventual impact to the economy of the subprime weakness. A Fed survey out this week suggested the current subprime problem could last up to two years. Let's hope they are wrong. In the short term gas prices have risen from an average of $2.16 earlier this year to more than $2.60 last week. With oil prices well over $60 again and driving season just ahead consumers are fearful that $3 handle will return once again.

May Crude Oil Chart - 390 min

After the bell today there was a rumor Iran had fired a missile at a US Navy ship in the Persian Gulf. Oil futures soared to $68.09 and S&P futures fell -10 points in just a few ticks. Fortunately the Navy was quick to say they had no evidence of any attack and oil prices retreated back to $64.25 but that level was still +1.50 over the closing price. The US launched a training exercise early Tuesday involving more than 200 planes as a warning to Iran not to try any more aggressive moves like the capture of the 15 British sailors last week. Since the training exercise had the effect of escalating tensions in the Gulf the rumor of an Iranian missile attack was perfect timing on somebody's part. The aircraft carrier John C Stennis moved into the Gulf last night to take part in the weeklong exercises with the carrier group headed by the Dwight D Eisenhower. The war games involve more than 10,000 U.S. personnel mounting simulated attacks on enemy aircraft and ships, while hunting submarines and looking for mines. Those commanders are probably pretty nervous right now since Iran has the 4th largest inventory of bottom rising sea mines. Some analysts think Iran has already seeded the shipping lanes in and out of the Gulf with mines, which are laying dormant and waiting for an activation signal. On the British front Prime Minister Blair warned Tuesday that the standoff with Iran over the 15 captured soldiers could escalate if they are not released immediately. Iran said they would not be released until a complete investigation had been completed. Blair threatened to release hard evidence showing they were in Iraqi waters when captured. This would have double consequences since it would mean Iran knowingly ventured out of their territorial waters to make the attack.

Tomorrow all eyes will be on Ben Bernanke as he testifies before a House committee. Everyone will want to know exactly what he meant by that carefully worded FOMC statement. Did his mention of increased inflation concerns contradict moving to a neutral bias on rates? He will definitely be on the hot seat but we have seen over the last year he handles pressure well. The Fed's Director of Banking Supervision, Roger Cole, said on Tuesday "We are not observing spillover effects from the problems in the subprime market to traditional mortgage portfolios or, more generally, to the safety and soundness of the banking system." Bernanke will obviously be grilled on the potential of that happening in the future since the Fed's own survey suggests the crisis could continue for up to two more years. Senator Dodd, a committee chair, said in reference to the subprime problem, "I don't want this to go on any longer, this has got to stop!" Regardless of what is said tomorrow it is bound to create some additional volatility.

Citigroup, a lead underwriter of the Vonage IPO, cut it's rating on the stock to a sell and said the company may be facing bankruptcy over the next two years. Wow, talk about a fall from grace! Citigroup said a failure to quickly respond to the patent problems could force Vonage to restructure or file bankruptcy by 2009. Citigroup and Deutsche Bank Securities were the lead underwriters for the IPO. The Vonage CEO paraphrased Mark Twain on Monday in response to the daily dose of bad news. "The rumors of Vonage's death have been greatly exaggerated. Friday's events represent one small step in what is sure to be a long legal battle." The question in everyone's mind is whether Vonage can survive that battle.

Because of the sinkhole in the housing sector we are seeing renewed weakness in materials stocks and stocks like Home Depot and Lowe's. Transportation stocks have also lost their lift as oil prices move higher. About the only stocks moving higher on Tuesday were energy stocks. The sector in general was mixed but clean energy stocks got a sharp boost after a big deal in Connecticut for FuelCell and an upgrade from a major broker. FuelCell (FCEL) was selected by the Connecticut Clean Energy Fund for six projects that would total about 68 megawatts. The value of these projects would be in the $200 million range. Shares of FCEL jumped +20% on the news. In other news Bank of America and American Technology Research upgraded First Solar (FSLR) and Sunpower (SPWR). They both said the outlook for Sunpower was the brightest in the sector. SPWR spiked +5% on the news. SunTech (STP) garnered a buy rating with American Tech saying they should reach one gigawatt by 2010 and long before their closest competitors. Evergreen Solar (ESLR) was hit with a sell rating by BAC.

I have to admit this week is not going as I expected on Sunday. Monday's opening dip was bought and the major averages returned to neutral by days end. I thought no harm, no foul and end of quarter window dressing is still in play. Tuesday's opening drop brought on by Lennar and weak economics failed to rebound although the opening drop also failed to worsen as the day progressed. Dow 12400 continued to act as a support magnet despite the -71 point drop. On the Nasdaq the same could be said about the 2440 level as bulls refused to give in to the sellers.

Russell-2000 Chart - 30 min

Unfortunately our fund manager sentiment indicator, the Russell-2000, declined to near 800 and was showing more weakness than the big cap averages. This is not a good sign. If managers were really going to try to keep their portfolios sparkling for the rest of the week they would have been throwing more money at the small cap leaders. I fear a break of 800 could get ugly very quickly. The rebound has faded but sellers have not yet regained their confidence. We have not seen any material flurry of earnings warnings yet but the same could be said for a lack of positive guidance events. The bulls are running on sentiment fumes and hoping for an event to produce a fill up. Bernanke has a good record of pumping up the markets during his recent public appearances. Let's hope his testimony tomorrow is a repeat of the prior appearances.

Once past the Bernanke testimony look for economic frustration to appear with Thursday's GDP revision and Kansas Fed Survey. Friday's PMI is expected to show a slight improvement over February's 47.9 headline number which was nearly a five-year low. For guidance I would watch the Russell 2000. Buy a dip to 800 but short a break below that level.
 


New Plays

New Option Plays

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

New Calls

Millicom - MICC - cls: 76.01 chg: +0.56 stop: 72.75

Company Description:
Millicom International Cellular S.A. is a global telecommunications investor with cellular operations in Asia, Latin America and Africa. It currently has cellular operations and licenses in 16 countries. The Group's cellular operations have a combined population under license of approximately 280 million people. (source: company press release or website)

Why We Like It:
The recent pull back in the markets has pulled MICC back towards the $75 level and offered us an entry point to jump on its bullish run higher. The stock did peak back in February over $80 but traders bought the dip near its rising 50-dma a few weeks ago. We do notice that volume is not coming in as strong during the big moves in January and February and that might be a cautionary sign but we'll try and limit our risk with a stop loss under the 50-dma. We're suggesting that readers buy calls with MICC above $75.00. Our target is the $80.00-81.00 range. The Point & Figure chart is bullish with an $88 target. We do not want to hold over the late April earnings report.

Editor's note: We apologize for the charts. Our normal charting program was experiencing technical difficulties.

Suggested Options:
We're suggesting the May calls although Aprils might work just as well and have more open interest.

BUY CALL MAY 75.00 CQD-EO open interest=36 current ask $6.00
BUY CALL MAY 80.00 CQD-EP open interest=80 current ask $3.50

Picked on March 27 at $ 76.01
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 616 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 95.46 chg: -0.39 stop: 88.85

AAPL weathered the market weakness on Tuesday relatively well. The stock did trade down 0.4% but not after hitting a new relative high at $96.83. Boosting the stock was news that Cingular, the mobile arm of AT&T, announced that they've already had one million customers inquire about the upcoming iPhone from Apple. The strength in AAPL didn't last and this might be a short-term top. More conservative traders should strongly consider exiting now to lock in a gain. We remain optimistic and continue to target the $97.50-100.00 range.

Picked on March 19 at $ 91.01
Change since picked: + 4.84
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

---

Allegheny Tech. - ATI - cls: 106.90 chg: -1.72 stop: 105.75

ATI suffered another round of profit taking but traders continue to buy the dips and bulls bought the dip twice near $106.30 today. We don't see any changes from our weekend comments. We're suggesting a trigger to buy calls at $110.26. If triggered our target is the $117.00-120.00 range. An alternative entry for the more nimble trader would be a dip near $105.00-106.00. FYI: The P&F chart points to a $123 target. We do not want to hold over the late April earnings report. Caution, we do see a bearish divergence between price and the MACD on the daily chart.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

---

Boeing - BA - close: 90.52 chg: -0.31 stop: 88.95

BA is still churning sideways near the $90 level. We don't see any changes from our weekend comments. More aggressive traders might want to consider new positions now. We're going to stick to our plan, which is to wait for a breakout over resistance near $92.00. Our suggested entry point to buy calls is at $92.15. If triggered our target is the $99.50-100.00 range. We do not want to hold over the late April earnings report. The P&F chart is already bullish and points to a $107 target.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 4.2 million

---

Bunge Ltd. - BG - cls: 80.28 chg: -1.47 stop: 77.95

Tuesday's market weakness must have been a good excuse to do some profit taking in BG. The stock erased most of Monday's gains with today's 1.8% decline. The only good thing about today's pull back was the light volume. We would watch for a bounce near the $80 level as a new entry point to buy calls. Our target is the $85.00-85.50 range. We do not want to hold over the late April earnings report.

Picked on March 26 at $ 80.75
Change since picked: - 0.47
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 990 thousand

---

CACI Intl - CAI - cls: 47.94 chg: -0.15 stop: 46.64

Shares of CAI didn't move much on Tuesday. The stock continues to trade sideways near $48.00 and above its 50-dma. Readers can choose to buy this dip or wait for a new rally past $48.50. More conservative traders may want to wait for a move over the January 18th high near $48.90 first. Our target is the $52.50 mark. We do not want to hold over the late April earnings. FYI: The P&F chart is still bearish from the big drop in January.

Picked on March 21 at $ 48.36
Change since picked: - 0.42
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 517 thousand

---

Chaparral Steel - CHAP - cls: 56.98 chg: +0.00 stop: 51.75

We considered CHAP closing unchanged on Tuesday as a sign of relative strength. Shares traded sideways in a 70-cent range and were inching higher by the closing bell. Our target is the $59.50-60.00 range. The P&F chart has a triple-top breakout buy signal with a $72 target.

Picked on March 25 at $ 55.73
Change since picked: + 1.25
Earnings Date 03/20/07 (confirmed)
Average Daily Volume = 627 thousand

---

Celgene - CELG - close: 53.04 chg: -0.96 stop: 49.95

Uh-oh! We warned readers to watch for a potential dip toward $53.00 but we didn't expect CELG to under perform the BTK biotech index so much today. The BTK index managed a 0.4% gain. CELG lost 1.78% and broke down under its simple 50-dma. Wait for signs of a bounce before considering new positions. More conservative traders may want to tighten their stops. Our target is the $57.50-60.00 range. We do not want to hold over the late April earnings report.

Picked on March 19 at $ 52.65
Change since picked: + 0.39
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million

---

ConocoPhillips - COP - cls: 69.48 chg: -0.08 stop: 64.85

Another day of gains for crude oil was not enough to push shares of COP past resistance at the $70.00 mark. Shares of COP traded sideways in a 73-cent range. If you're looking for a new entry point consider waiting and watching for a dip into the $68.75-68.50 range or wait for a breakout over $70.00. We're aiming for the $74.00-75.00 range. We do not want to hold over the late April earnings report.

Picked on March 20 at $ 66.31
Change since picked: + 3.17
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million

---

Holly Corp. - HOC - cls: 60.52 chg: -0.29 stop: 56.45

HOC suffered another round of profit taking in spite of a decent gain for crude oil. Thus far HOC is holding its gains above the $60 mark, which is encouraging. We are not suggesting new positions at this time. Our target is the $62.00-62.50 range.

Picked on March 14 at $ 57.87
Change since picked: + 2.65
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand

---

Johnson Controls - JCI - cls: 94.44 chg: -0.46 stop: 93.99

JCI continues to look weak and vulnerable here. The stock lost 0.4% and dipped toward technical support at its 50-dma. We are not suggesting new positions and suggest that more conservative traders exit early right here. Odds are very good that if the major averages are weak tomorrow that JCI will hit our $93.99 stop loss. We do not want to hold over the late April earnings report.

Picked on March 21 at $ 96.03
Change since picked: - 1.59
Earnings Date 04/20/07 (unconfirmed)
Average Daily Volume = million

---

Accredited Home Lenders - LEND - cls: 10.55 chg: -0.26 stop: n/a

An earnings warning from homebuilder Lennar (LEN) and news that the spring selling season has yet to materialize sent shivers through the market and hit the homebuilders and lenders hard. LEND gapped open lower and dipped to $9.40 before bouncing back. More conservative traders may want to exit immediately to protect any gains they have or at least consider placing a stop loss under the $9.40 level. We are not suggesting new positions. We are planning to exit on any take-out news or a rally into the $14-15 range.

Picked on March 14 at $ 6.04
Change since picked: + 4.51
Earnings Date 05/16/07 (unconfirmed)
Average Daily Volume = 3.0 million

---

Lockheed Martin - LMT - cls: 98.18 chg: -0.24 stop: 97.49

There is nothing new to report on for LMT. The stock is still trading sideways. Today's news out of ITT did not seem to influence other defense contractors. We remain on the sidelines. We're suggesting a trigger to buy calls in LMT at $100.25. If triggered our short-term target is $104.85-105.00. More aggressive traders may want to aim higher since the P&F chart aims at a $128 target. We do not want to hold over the late April earnings report.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.8 million

---

New Century - NEWC - close: 1.41 chg: -0.15 stop: n/a

The bad news out of homebuilder Lennar also hit the subprime lenders and NEWC slipped almost 10%. We don't have very high expectations at this point. We initially added NEWC as a lottery ticket play with a big risk and big reward on the speculation that someone would step in and buy the company. So far that has failed to materialize. It could still happen but we wouldn't bet on it any further. Thus we're not suggesting new positions.

Picked on March 11 at $ 3.21
Change since picked: - 1.70
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million

---

Sunoco - SUN - close: 70.92 chg: +0.19 stop: 65.65

Strength in crude oil helped the refiners and SUN posted a 0.2% gain. Traders stepped in to buy the dip near the $70.00 level. We see the intraday bounce as a new entry point to buy calls. The P&F chart is very bullish with an $82 target. Our target is the $74.00-75.00 range. Please note that we're adjusting the stop loss to $65.65.

Picked on March 20 at $ 68.15
Change since picked: + 2.77
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million
 

Put Updates

Bausch Lomb - BOL - cls: 49.47 change: -0.03 stop: 52.51

It was a quiet day for BOL. There was no big follow through lower on the recent failed rally near $50.00. Instead BOL churned sideways in a 44-cent range. Overall the trend remains bearish and we'd still consider new positions with the stock under $49.50. More conservative traders can tighten their stops. Our target is the $44.00-42.50 range but we want to warn readers that BOL may find some support near $47.50 and its December 2006 low.

Picked on March 18 at $ 49.51
Change since picked: - 0.04
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume = 678 thousand

---

Beazer Homes - BZH - close: 31.41 chg: -0.91 stop: 35.05 *new*

Homebuilder Lennar (LEN) issued an earnings warning and said that the spring selling season had failed to materialize. This hit the homebuilders hard. Shares of BZH fell 2.8% and closed at a new relative low on big volume. The intraday low today was $30.85, which is quickly approaching our target in the $30.50-30.00 range. More conservative traders may want to exit early now to lock in a gain. Please note we're adjusting our stop loss to $35.05. FYI: Traders should note that BZH does have a relatively high amount of short interest (17% of the float) and that does raise the risk of a short squeeze.

Picked on March 12 at $ 34.20
Change since picked: - 2.79
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.2 million
 

Strangle Updates

None
 

Dropped Calls

ESSEX Prop. - ESS - cls: 129.26 chg: -2.90 stop: 129.75

We have been stopped out of ESS at $129.75. We suspect the news from homebuilder Lennar (LEN) is what sparked the sell-off in anything related to real estate. ESS plunged through the $130 level early this morning. It's really too bad that investors overreacted in ESS. The stock hit an intraday high of $135.95 just two days ago, which was close to our $137-140 target range.

Picked on March 12 at $130.26
Change since picked: - 1.00
Earnings Date 02/07/07 (confirmed)
Average Daily Volume = 196 thousand
 

Dropped Puts

Electronic Arts - ERTS - cls: 51.31 chg: +0.97 stop: 51.55

We have been stopped out of ERTS at $51.55. Some of the news reports today claim that the rally in ERTS was due to the news that the company was joining forces with Nettwerk and creating a new music label. We don't think so. That news hit the wires yesterday afternoon while the market was still open. The news out of Gamestop (GME) is the likely culprit behind ERTS' rally. GME reported better than expected earnings and offered positive earnings guidance. Shares of GME gapped open higher and closed with an 11.4% gain.

Picked on March 18 at $ 48.92
Change since picked: + 2.39
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 4.0 million
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.

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