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Daily Newsletter, Monday, 04/02/2007

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Table of Contents

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

Market Wrap

M&A Deals Help Offset Weak ISM, M&T Bank Warning

A plethora of M&A was just enough to offset a weaker-than-expected March ISM Manufacturing Index reading and an earnings warning from M&T Bank Corp. (NYSE:MTB) $105.95 -8.52% as the major indices finished fractionally higher.

In one of the largest private equity deals of the year, electronic payment processor First Data (NYSE:FDC) $32.45 +20.63% said it had agreed to be taken private by an affiliate of private equity group Kohlberg Kravis Roberts & Co. for $29 billion (including $2 billion in debt). If consummated, the deal values First Data at $34/share.

Under the terms of the deal, First Data can solicit third party proposals over the next 50 days, which the company said it intends to do.

In 1995, First Data merged with First Financial Management Corp., whose holdings included Western Union. First Data spun off Western Union (NYSE:WU) $22.18 +1.04% last September, and just recently (March '07) announced a deal to acquire the debit and ATM payment processing business Instant Cash Services for an undisclosed amount.

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Additional M&A deals had the nation's second-largest newspaper publisher Tribune Co. (NYSE:TRB) $32.81 +2.18% saying it had accepted real estate mogul Sam Zell's offer of $8.2 billion, or $34/share in cash. Mr. Zell's team said they plan to invest $315 million in the media conglomerate, with Mr. Zell becoming chairman of Tribune's board when the buyout is completed sometime in Q4 2007.

Analysts say a big chunk of new debt will be required to pay the $34/share cash buyout, with Mr. Zell counting on repaying the debt largely through tax benefits from a new employee stock option plan that would supplement existing retirement accounts for the company's 20,000 workers. Many analysts also see Zell selling the Major League Baseball franchise Chicago Cubs and Tribune's stake in Comcast SportsNet.

Analysts think the Chicago Cubs spinoff could fetch $600 million. Tribune bought the franchise in 1981 for $20.5 million.

While not as "bid a deal" as First Data and Tribune, shareholders of Global Imaging (NASDAQ:GISX) $28.64 +46.87% printed huge gains after the provider of office technology solutions said it had agreed to be bought by Xerox (NYSE:XRX) $17.08 +1.12% in a deal valued at $1.5 billion, or $29/share.

U.S. Market Watch - 04/02/07 Close

The major indexes fell to their lows of the session just after 10:00 AM EDT when the Institute for Supply Management (ISM) said weak capital spending and the slump in the auto and housing sectors had its March ISM Manufacturing Index falling to 50.9% from February's 52.3%. While readings above 50.00% signal expansion, the data offered a bit of a downside surprise to last week's regional Chicago Purchasing Manager's report (biggest monthly jump in history to 61.7% from February's 47.9%).

Economists were looking for signs of healthier expansion and a 51.3% reading.

Mining stocks as depicted by the AMEX Gold Bugs Index ($HUI.X) 345.16 +2.22% reversed earlier losses to take today's top spot among sectors winners as the Institute said its ISM Manufacturing Prices Index jumped to 65.5% from February's 59.0%. Economists were looking for prices to expand to a more modest 60.0% measure.

Most other major ISM sub indexes fell in March. The new orders index dropped to 51.6% from 54.9%, while the production index slipped to 53.00% from February's 54.1%. The employment index showed contraction at 48.7% after February's expansionary reading of 51.1%.

Tomorrow's U.S. domestic vehicle sales may grab some attention. Total domestic sales are forecast to have remained flat with February's 12.8 million units annually.

On Sunday, Japan said vehicle sales in that country fell for a 21st-straight month, falling 12.6% year-over-year to 487,738 vehicles.

Japan's Toyota Motor Corp. (NYSE:TM) $126.92 -0.96% closed below $127.00, a level of horizontal support since mid-January.

Japan's benchmark Nikkei-225 ($NIKK) fell 1.5% on Monday to close at 17,028.41. As I continue to monitor the $/yen cross rate, losses in Japan also came on the heels of that country's Tankan Large Manufacturers Index reading of 23, which was below economists' forecast of 24 and prior reading of 25. The Tankan's Large Non-Manufacturers Index was also slightly below economists' forecast of 23, at 22.

US Dollar / Japanese Yen Cross Rate - Daily Intervals

Some may argue that the "yen carry trade" is over, but I'm not so certain. While the U.S. dollar has stabilized against the Japanese yen, last week's USD/JPY dip to 116.50 did have the major indices giving back some gains intra-day in response.

Intra-day observations that I've made have me seeing this above relationship tending to FOLLOW equity moves the last couple of weeks. Ideally, equity traders would rather have the USD/JPY be a LEADING indicator, or measure for what equities are about to do. Should we wake up one morning with the USD/JPY much above 118.50, I would have to be looking for S&P 500 (SPX.X) 1,424.55 +0.25% strength above 1,440, as well as bullishness out of Japan. Conversely, a USJ/JPY break back below 115.75 could quickly have the SPX vulnerable to their recent 03/14/07 relative low of 1,364.06.

I should note the S&P 500 (SPX.X) low close this year has come on March 5th at 1,374.12.

Now the banks ....

As noted in tonight's first paragraph, banking stocks were notably weak in today's session after S&P Bank Index (BIX.X) 381.07 -1.61% component M&T Bank Corp. (MTB) warned that the problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative, or "Alt-A," residential mortgage loans that M&T originates for sale in the secondary market.

In an SEC filing, company executives said, "Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter," and "At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected."

Alt-A loans are the highest of the below-prime category, generally comprising mortgages made to creditworthy borrowers but with limited documentation.

In essence, M&T's filing means that the bank thinks the loans it has recently originated are worth more than investors in mortgage-backed debt are willing to pay for them, another way of saying that the large amount of cash that floated the U.S. housing market for the past few years is evaporating.

S&P Banking Index (BIX.X) - Daily Intervals

As long-time subscribers know, I have often pointed to the banks as a key indicator of market direction. UP and DOWN!

One glaring sign that INSTITUTIONAL investors/traders are still bearish/cautious the group is action that took place today, which follows recent rally high of 402.63, that found SELLING at March's MONTHLY Pivot (401.85). In PINK I've displayed March's MONTHLY Pivot Levels, as well as April's MONTHLY Pivot levels, where we see the BIX.X begin the month BELOW its MONTHLY Pivot of 388.20.

The MONTHLY Pivot action in March, which found the BIX.X falling to trade its MONTHLY S2 (support #2) at 380.23, doesn't find a little distribution back at MONTHLY Pivot, but some notable distribution. As if, well... INSTITUTIONAL computers/traders were just waiting to hit the group on the rally.

The DARK PURPLE DASHED lines of retracement would define a range from the 06/23/06 relative low close, to the most recent all-time high close found on 02/20/07.

S&P 500 Index (SPX.X) - Daily Intervals

Both the BIX.X and the S&P 500 Index (SPX.X) traded their recent relative highs on 02/20/07, but the continued weakness in the BIX.X will have the SPX.X hard-pressed in my opinion to see daylight above 1,440.

While the dollar/yen relationship is also being closely watched, I would put GREATER emphasis near-term on the banks, and financials as a whole, as they comprise the LARGEST weighting in the SPX.

Sidelines on oil, for now ....

As an updated to my Market Wrap from Monday, March 19, I'm strongly suggesting "oil bulls" take profits at trend in the U.S. Oil Fund (AMEX:USO) $53.56 +0.39% as it tests its bearish resistance trend at $54.00.

U.S. Oil Fund (USO) - $0.50-box size

Some of the "fundamental" data I've been working with regarding weekly EIA inventory data and news flows has hopefully put some gains in trader's accounts. I think traders should be protecting gains at trend, but now look for another buying opportunity should the USO pull back to that recent triple top buy signal at $52.00. Oil is looking bullish into the summer driving season.

Perhaps any news out of Iran regarding the release of 15 sailors provides the catalyst for some profit taking.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 93.65 chg: +0.74 stop: 88.85

Positive news about a deal between AAPL and EMI helped the stock rise 0.8% but on relatively low volume. The news this morning was a deal with EMI offering its entire library free of anti-piracy software (DRM) for $1.29 through AAPL's iTunes store. We remain bullish on the stock but lack of volume behind the rally is a concern. We would not be surprised to see another dip. Our target is the $97.50-100.00 range.

Picked on March 19 at $ 91.01
Change since picked: + 1.90
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

---

Allegheny Tech. - ATI - cls: 108.87 chg: +2.18 stop: 105.75

ATI continues to look stronger. Shares rose 2% and they're nearing resistance at the $110 mark. We are sticking to our plan and waiting for a bullish breakout over resistance near $110. We're suggesting a trigger to buy calls at $110.26. If triggered our target is the $117.00-120.00 range. FYI: The P&F chart points to a $123 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 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

---

Bunge Ltd. - BG - cls: 83.69 chg: +1.47 stop: 77.95

The first trading day of April turned out to be a strong one for BG. Traders bought the dip near $82 this morning and the stock closed up with a 1.78% gain. Shares are nearing our target in 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: + 2.94
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 990 thousand

---

Chaparral Steel - CHAP - cls: 58.87 chg: +0.70 stop: 54.95

CHAP continues to march higher. Bulls jumped on the dip near $58 this morning and the stock posted a 1.2% gain by the closing bell. Volume did come in relatively low and that's a caution sign for the bulls. The stock is quickly nearing our target in the $59.50-60.00 range. This close to our target we're not suggesting new positions. 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: + 3.14
Earnings Date 03/20/07 (confirmed)
Average Daily Volume = 627 thousand

---

Celgene - CELG - close: 53.80 chg: +1.34 stop: 49.95

CELG out performed its peers in the biotech sector and the rest of the NASDAQ with a strong 2.5% gain today. The stock rallied past its 10-dma and 50-dma. The move over $53.00 and $53.50 looks like a new entry point. 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: + 1.15
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million

---

ConocoPhillips - COP - cls: 68.19 chg: -0.16 stop: 64.85

Intraday crude oil spiked higher but a lack of new developments with the Iran hostage story left crude trading closer to unchanged by the session's end. Oil stocks were generally higher but shares of COP under performed its peers. Oddly, COP appears to be ignoring strength in crude and actually looks poised to move lower at least short-term. We would be cautious about starting new positions. 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: + 1.88
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million

---

Holly Corp. - HOC - cls: 59.00 chg: -0.30 stop: 56.45

HOC is another oil stock that is under performing crude and the oil sector. The stock is down six days in a row so it's probably due for a bounce soon. We have been expecting a dip near $58.00. Wait and watch for a bounce near $58.00 before considering new positions. Our target is the $62.00-62.50 range.

Picked on March 14 at $ 57.87
Change since picked: + 1.13
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand

---

Lockheed Martin - LMT - cls: 96.93 chg: -0.09 stop: 97.49

We see no changes from our weekend comments on LMT. News that the company had won several new deals today failed to inspire any buying pressure. The stock is still slipping toward support near $95 and the 100-dma. Currently, we are still on the sidelines waiting for a breakout over resistance near $100. Our suggested trigger to buy calls is at $100.25. However, we're going to keep a close eye on the $95 level and if LMT produces a convincing bounce near $95 we might suggest aggressive positions there (obviously with an adjusted stop loss). Our target is the $104.85-105.00 range. 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

---

Sunoco - SUN - close: 71.51 chg: +1.07 stop: 65.65

SUN bounced from short-term support near $70 and its rising 10-dma but failed to breakout over resistance near $72.00. The stock closed the session up 1.5%. Our target is the $74.00-75.00 range.

Picked on March 20 at $ 68.15
Change since picked: + 3.36
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million
 

Put Updates

F5 Networks - FFIV - cls: 64.89 chg: -1.79 stop: 71.01

FFIV continued to under perform the markets on Monday. The stock dropped 2.68% and on above average volume. Today's decline was a bearish breakdown under the exponential 200-dma. FFIV's next level of potential support is the post-October 2006 gap low near $63.50 and the simple 200-dma near $62.50. However, the P&F chart looks very bearish with a breakdown under support and a $58 price target. We're going to aim for the $60.50-60.00 range. We do not want to hold over the late April earnings report. FYI: FFIV can be volatile so expect a lot of up and downs in the option prices.

Picked on April 01 at $ 66.68
Change since picked: - 1.79
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

MDC Holdings - MDC - cls: 48.03 chg: -0.04 stop: 50.05

Homebuilders were trading lower today but MDC managed to maintain its hold on the $48.00 level. We don't see any changes from our weekend comments. The recent news about a Federal investigation into Beazer (BZH) doesn't build any confidence for investors. MDC also has a mortgage arm and could see its own investigation of its lending practices. We are suggesting that readers buy puts on a breakdown under $47.00. We'll use a trigger at $46.95 as our suggested entry point. If triggered our target is the $41.00-40.00 range. Prepare for some support near $45.00. The P&F chart looks very bearish with a $35 target. We do not want to hold over the mid-April earnings report so our target might be a little optimistic. Then again, stocks tend to drop faster than they rise.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/07 (unconfirmed)
Average Daily Volume = 870 thousand
 

Strangle Updates

None
 

Dropped Calls

Millicom - MICC - cls: 80.39 chg: +2.03 stop: 73.49

Target achieved. Actually, MICC exceeded our target in the $80.00-81.00 range with an intraday high of $81.39. We were suggesting traders exit under $82.00 because the stock encountered resistance there back in February. More aggressive traders might want to aim higher. The Point & Figure chart is bullish with an $88 target.

Picked on March 27 at $ 76.01
Change since picked: + 4.38
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 616 thousand

---

New Century - NEWC - close: 0.915 chg: -0.145 stop: n/a

It looks like it's game over for NEWC. The company filed for chapter 11 bankruptcy today. We had been speculating that someone would make a bid for the company before they filed for bankruptcy. Now that the company has filed we're dropping it as a play.

Picked on March 11 at $ 3.21
Change since picked: - 2.30
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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