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Daily Newsletter, Monday, 11/05/2007

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Table of Contents

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

Market Wrap

Are Big Banks Turning Back The Hands Of Time?

Shares of Citigroup (NYSE:C) $35.90 -4.85% fell to their lowest level in more than four years on heavy volume of 230 million chares after the banking giant said it will write off another $8 billion-$11 billion of it $55 billion subprime mortgage exposure due to continued turmoil in the credit markets, and would restate its recently reported (10/15/07) third-quarter net income to $2.21 billion, or $0.44 a share from the $2.38 billion, or $0.47 a share, citing corrections related to the valuation on its $43 billion in asset-backed collateralized debt obligations (CDOs).

Citigroup said it has direct subprime exposure of $55 billion, $43 billion of which is exposure to collateralized debt obligations. So far, Citigroup has been unwilling to unload the assets at lower prices than they were bought.

The bank's CFO Gary Crittended said "Selling them (CDOs) at distressed values wouldn't make sense at all."

While Citigroup's CFO Gary Crittended cautioned inventors (see 10/15/07 Market Wrap) that consumer credit market conditions were likely to "continue to deteriorate," the amount of the write-down's and charges came as shock to investors and has many wondering if other large banks and brokers holding the difficult to value assets haven't "turned back the hands of time," with off-balance sheet accounting of investments that have not been fully hedged, or disclosed to investors.

Citigroup's announcement also marks the widely anticipated end of Charles Prince's four-year tenure at the head of Citigroup. The company's board named Win Bischoff and interim CEO and senior adviser Robert Rubin as chairman until a successor is named.

Meanwhile, a central banker's warning Monday that the subprime mortgage market will likely deteriorate further added to the pressure on stock prices.

Merrill Lynch (NYSE:MER) $55.88 -2.44%, which traded down 8% on Friday was weak again today, while Morgan Stanley (NYSE:MS) $55.59 -5.61%, Goldman Sachs (NYSE:GS) $218.39 -4.88% and Bear Stearns (NYSE:BSC) $99.91 -2.20% weighed on the AMEX Broker/Dealer Index (XBD.X) 213.97 -2.71%.

Comments from Fed officials didn't help the brokers and banks today.

Fed Goverbir Randall Kroszner told the Consumer Bankers Association Fair Lending Conference in Washington that "conditions for subprime borrowers have the potential to get worse before they get better."

Meanwhile, the Fed said U.S. banks have tightened standards for most types of loans, including nontraditional and even prime mortgages as well as commercial loans, in an indication the subprime crisis is having a ripple effect on the broader economy.

Mortgage originator Countrywide Financial (NYSE:CFC) $14.78 +2.99% bucked the trend of mortgage-related weakness.

Wasatch Fund managers Chris Bowen and Ryan Snow said they dumped their Countrywide (CFC) stock last quarter and are in no hurry to get back in despite the lender's recent promise of a profit.

Countrywide's (CFC) chart had the stock closing at $19.01 on September 28th.

The Institute for Supply Management's index for gauging the health of the services sector offered modest optimism that the troubles in the financial sector hadn't spilled over into other areas of the economy.

The ISM's services index rose to a reading of 55.8 from 54.8 in September. A reading above 50 signifies economic expansion.

Economists forecasted a reading of 54.00.

A quick look inside the headline number the employment index falling to 51.8 from September's 52.7 measure, while the new orders index rose to 55.7 from 53.4. The closely monitored prices paid index fell to 63.5 from 66.1.

Saturday's decision by Pakistan President General Pervez Musharraf to suspend the country's constitution helped firm the U.S. dollar.

President Bush urged Musharraf to hold parliamentary elections as scheduled in January and relinquish his army post as soon as possible. "Our hope is that he will restore democracy as quickly as possible," Bush said.

Musharraf, who took power in a 1999 coup and is also head of Pakistan's army, suspended the constitution on Saturday ahead of a Supreme Court ruling on whether his recent re-election as president was legal. He ousted seven independent-minded Supreme Court judges, put a stranglehold on independent media and granted sweeping powers to authorities to crush dissent.

December Crude Oil futures (cl07z) settled down $1.95, or 2.03% at $93.98 after trading as high as $95.99 at the mid-point of today's floor trade.

Warmer temperatures across much of the U.S. had December Natural Gas futures (ng07z) settling down $0.4190, or -4.98% at $7.9990.

The Utilities HOLDRs (AMEX:UTH) $136.88 +1.40% were today's sector winner with heavyweights Exelon Corp. (NYSE: EXC) $83.92 +2.63% and Entergy Corp. (NYSE:ETR) $124.15 +4.60% driving the sector's gains.

Late Friday, Exelon said both nuclear reactors at it 2,300-megawatt Byron nuclear power station in Illinois were back online. The company said Unit 1 was operating at 94% capacity, while Unit II was running at 96%.

This morning, Entergy (ETR) reported Q3 earnings of $2.30/share, which beat Wall Street's estimates by $0.13/share.

NYSE and NASDAQ Internals -

Market internals were decidedly negative for a third-straight session with decliners outnumbering advancers by a 3:1 margin at the big board, while 4 and 5-lettered stocks symbols had decliners outnumbering advancers just better than 2:1.

Bearish leadership persists with today's 310 new lows at the big board surpassing their recent 206 from October 22nd.

Big tech names continue to hold at both exchanges, especially at the NASDAQ, but the 325 new lows will have keep profitable bulls on their toes should the broadening weakness trigger profit taking.

NASDAQ-100 Index (NDX.X) 2,200.48 -0.60% and its tracker the QQQQ $54.07 -0.64% paired losses into the close with heavyweights Apple Computer (NASDAQ:AAPL) $186.18 -0.89%, Microsoft (NASDAQ:MSFT) $36.73 -0.89%, Qualcomm (NASDAQ:QCOM) $40.85 -1.18%, Google (NASDAQ:GOOG) $725.65 +2.02% and Cisco Systems (NASDAQ:CSCO) $33.08 +1.75% finishing mixed.

Google (GOOG) closed at an all-time high after the company said it had struck an alliance with 34 handset makers, wireless carriers and other technology companies to create low-cost mobile phones based on "open" technology standards.

Global Equity Index Benchmarks and Currencies

While I'd have to think that the bulk of today's weakness in U.S. equity indexes could be attributed to Citigroup's comments, Monday's action saw China's Hangseng ($HSI) falling 1,527 points, or -5.01% after China's Premier raised uncertainties about the near-term launch of a proposal to allow mainland citizens to invest directly in the city's listed securities.

PetroChina (NYSE:PTR) $222.10 -12.92% was just one of China's American Depository Receipts (ADRs) showing a double-digit decline. Bear Stearns followed their 09/22 downgrade (from outperform to peer perform) with another downgrade this morning to "underperform" citing valuation.

In today's Market Monitor at OptionInvestor.com, Jane Fox noted a MarketWatch story regarding PetroChina (PTR).

MarketWatch reported that PTR shares more than doubled in their Shanghai debut, giving the oil giant a $1 trillion market capitalization, which at the time would have easily surpassed Exxon Mobil (NYSE:XOM) $87.66 -0.30% as the world's largest company.

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According to MarketWatch, PTR's shares ended at 43.96 yuan, up from their initial public offer (IPO) price of 16.70 yuan.

If my math is correct, then Chinese IPO pricing (16.70 yuan) would be equivalent to $124.47 (16.70 x $7.4535 = $124.47), where priced in US$, the shares would have finished trading $327.65 (43.96 yuan x $7.4535 = $327.65).

Certainly this becomes a bit baffling, and will likely have PTR, if not other China-based ADRs trading volatile in the sessions to come.

In the above table, things haven't changed much since last Monday's close, but despite a more modest 1.44% gain for the small-cap Russell 2000 Index ($RUT.X) from 10/22 to 10/29, this recent 3.81% decline is a negative as it relates to the "credit crunch" and the impact of tightening of credit standards as noted by the Fed today.

Russell 2000 Index ($RUT.X) - Daily Intervals

On 09/18/07 the FOMC lowered its target for the Fed Funds rate by 50 basis points to 4.75% and since that time, the RUT.X refused to close BELOW the 796 level. On Wednesday of last week, the FOMC again lowered its target for the Fed Funds rate by 25 basis points to 4.5%, but the small-caps, which will be more sensitive to U.S. economic trends, closed BELOW the 796 level.

This would fit the trend of past WEAKNESS starting to show some renewed signs of further technical WEAKNESS, and has had a tendency to "pull" the other averages lower.

A break much below the 782 level could broaden out further to the S&P 500 Index.

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

The SPX.X is little changed since last Monday's Market Wrap, but with the $RUT.X showing renewed signs that it may want to lead to the downside, there will be great emphasis placed on the recent relative lows and the 1,480 level.

A trade at 1,480 would also generate a reversing back lower point and figure "sell signal" and have the SPX vulnerable to 1,473 on the above chart, 1,440 on the point and figure chart (10-point box scale) and perhaps the bullish support trend from the point and figure chart which is currently at 1,410.

On the above chart of the SPX I've drawn in what I have labeled as a "cheater's trend." I call it that as it is a trend that some technicians will draw at a new relative low in order to talk themselves out of the thought, or observation, that a trend they thought should hold support, has witnessed some breaking of that trend (solid green).

Market participants may still hold bullish convictions here, but a break at 1,480 could well find some bulls moving to the sidelines.

On October 22, the relative low that I have my SOLID green upward trend attached at, Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) was at 58.55% and has just reversed back lower to "bear correction" status.

At tonight's close, this closely monitored indicator of supply and demand has fallen further to 52.81%, which means an additional 5.74%, or roughly 29 of the 500 components have witnessed reversing LOWER point and figure sell signals.

This would be considered BEARISH DIVERGENCE and have bulls very alert to further weakening of PRICE action.
 


New Plays

New Option Plays

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

Play Editor's Note: The market's failure to rebound following Friday's intraday bounce is bearish. Readers should turn defensive on their bullish plays.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aracruz Celulose - ARA - cls: 75.98 chg: -0.19 stop: 72.49

We do not have anything new to report on for ARA. The stock bounced multiple times near $75.00 intraday. We remain bullish on the stock but readers might want to wait for a rally past $76.75 or $77.00 before initiating new plays. The P&F chart is still bullish with a $93 target. We are leaving our stop loss at $72.49 but more conservative traders could inch their stop closer to the $73.75 area (near Friday's low). We have two targets. Our short-term target is the $79.90-80.00 range. Our more aggressive target is the $82.50-85.00 range.

Picked on October 31 at $ 76.89
Change since picked: - 0.91
Earnings Date 10/09/07 (confirmed)
Average Daily Volume = 427 thousand

---

Boeing - BA - close: 97.97 change: +0.21 stop: 94.85

BA had an intraday range of just over $2.00 and it was a bumpy ride inside that $2.00 spread. The stock gapped open lower but climbed back to retest overhead resistance at its 50-dma. Volume has been sliding over the last couple of sessions. We remain positive here but readers may want to wait for a breakout over the 50-dma before initiating positions. Our target is the $104-105 zone. More aggressive traders could aim for the highs near $107.

Picked on October 29 at $ 97.25
Change since picked: + 0.72
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 6.3 million

---

Deere Co. - DE - close: 154.28 change: +1.55 stop: 144.45

DE continued to trade higher. Traders quickly bought the dip this morning near $150. The stock rallied to almost $156 before paring its gains. The MACD is inching closer to a new buy signal. We would still consider new positions here. Our stop loss is at $144.45, just under the rising 50-dma. More conservative traders could put their stop closer to Friday's low (148.50). There is some resistance near $155 and $157 but we have two targets. Our first target is the $159.50-160.00 range. Our second target is the $164.00-165.00 zone.

Picked on November 04 at $152.73
Change since picked: + 1.55
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume = 2.4 million

---

DST Systems - DST - close: 85.33 change: -1.25 stop: 83.45

DST pulled back from resistance near $87 but traders did buy the dip midday as DST filled the gap from November 1st. We are suggesting a trigger to catch the next breakout at $87.25. If triggered our target is the $94.00-95.00 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/22/07 (confirmed)
Average Daily Volume = 606 thousand

---

Goodrich Corp. - GR - close: 70.71 change: +0.42 stop: 66.90

There was no slow down in GR's rally. The stock continued to march higher and hit an intraday high at $71.13, breaking resistance at $71.00 on an intraday basis. Our suggested trigger to buy calls was at $71.05 so the play is now open. Our conservative target is the $74.90-75.00 range. Our more aggressive target is the $78.00-80.00 range. The P&F chart is bullish and points to a $99 target.

Picked on November 05 at $ 71.05
Change since picked: - 0.34
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 1.0 million

---

Kennametal - KMT - close: 88.81 change: -0.36 stop: 86.90

We want to warn readers that the trading in KMT today was bearish. The stock only lost 36 cents but it looks poised for more declines and any sort of pull back will probably dip toward $85.00. Readers will want to consider a tighter stop near $87.75 or just exiting early and waiting for a new relative high (or maybe buying a bounce near $85.00). We're not suggesting new positions at this time. Our target is the $99.00-100.00 range. The P&F chart has a triple-top breakout buy signal with a $102 target. FYI: KMT has a 2-for-1 stock split set for December 19th.

Picked on October 31 at $ 91.21
Change since picked: - 2.40
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 404 million

---

L-3 Comm. - LLL - cls: 111.06 chg: +1.00 stop: 103.90

LLL continues to show relative strength. The stock confirmed Friday's breakout over resistance near $110 and closed at new highs on strong volume. We have two targets. Our first target is the $114.00-115.00 range. Our second, more aggressive target is the $118.00-120.00 range. More conservative traders may want to tighten their stops. FYI: The P&F chart's bullish target has risen from $133 to $139. Plus, LLL will webcast its upcoming investor conference on Tuesday, November 6th, 2007 at 8:00 a.m. ET.

Picked on October 29 at $108.10
Change since picked: + 2.96
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 627 thousand

---

S&P 100 Index - OEX - close: 701.71 chg: -3.24 stop: 694.99

Monday's lack of follow through on Friday's rebound is bearish. The market (and the OEX) bounced again near its Friday lows but the rebound was failing this afternoon. This is not very encouraging and if you opened positions in the OEX today you may want to tighten your stop loss. At this time we would wait for a rally over $706 in the OEX before considering new bullish call positions. More conservative traders may want to see a rally past $710 first. We have two targets. Our first target is the $724-725 range. Our second, more aggressive target is the $734-735 zone. FYI: The options are expensive. We would consider this higher-risk!

Picked on November 04 at $704.95
Change since picked: - 3.24
Earnings Date 00/00/00
Average Daily Volume = million

---

Petro Canada - PCZ - close: 57.41 change: -0.76 stop: 54.90

Today's dip looks like a new entry point if you're an aggressive and nimble trader. We are sticking to the plan and suggesting that readers wait for a new high. That means we need to wait for a breakout over resistance at $59.00. Our trigger to buy calls on PCZ will be $59.25. If triggered our target is the $64.50-65.00 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 742 thousand

---

PowerShares NDX ETF - QQQQ - cls: 54.07 chg: -0.35 stop: 52.49

Our play on the Qs is not off to a strong start. We don't see any changes from our weekend comments except that readers might want to wait for a rise past $54.50 or $54.60 before initiating call positions. Our stop loss is at $52.49 but more conservative traders might be able to get away with a tighter stop. Our target is the $58.00-60.00 range.

Picked on November 04 at $ 54.42
Change since picked: - 0.35
Earnings Date 00/00/00
Average Daily Volume = 125 million

---

Research In Motion - RIMM - cls: 127.97 chg: +1.02 stop: 117.49

Positive analyst comments and a new raised price target to $160 helped push RIMM to an intraday high of $131.47. The stock's relative strength today is encouraging. We do not see any changes from our weekend comments. Our target is the $138.00-140.00 range. More aggressive traders could aim higher. The P&F chart is forecasting a $163 target.

Picked on November 04 at $126.95
Change since picked: + 1.02
Earnings Date 12/20/07 (unconfirmed)
Average Daily Volume = 20.9 million

---

Siemens - SI - close: 136.64 change: +1.24 stop: 129.75

SI continued to rally in spite of weakness in overseas markets. The stock spiked to an intraday high of $137.49 and was bouncing again late this afternoon. Technical indicators have improved recently and we remain bullish here. Currently our target is the $139.85-140.00 range but we're thinking about adding a more aggressive target in the $144-145 zone. The P&F chart is pretty bullish with a $182 target. FYI: SI trades as an ADR here in the U.S. and will most likely gap open one way or the other every session as the ADR adjusts to trading in Europe.

Picked on October 29 at $135.54 *gap higher entry
Change since picked: + 1.10
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 582 thousand

---

Sina Corp. - SINA - cls: 58.42 change: +0.59 stop: 53.45

Monday proved to be yet another volatile day for SINA. We do not see any changes from our weekend comments. Currently we have two targets. Our first target is the $59.50-60.00 range. Our second, more aggressive target is the $63.00-65.00 range. More conservative traders may want to tighten their stops toward $55.00. Meanwhile it looks like SINA will report earnings in the November 8th - 22nd range but we still don't have a confirmed date yet. We do not want to hold over the report.

Picked on October 23 at $ 53.40
Change since picked: + 5.02
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume = 1.0 million
 

Put Updates

None
 

Strangle Updates

(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.)

---

Borg Warner - BWA - cls: 103.50 change: -0.17 stop: n/a

This morning before the opening bell BWA issued a press release and raised their expectations for new business in the power train sales. Unfortunately, the stock didn't move much on the news. We are not suggesting new strangle positions. At this time we have two weeks left on November options. The options we suggested for a strangle were the November $100 calls (BWA-KT) and the November $90 puts (BWA-WR). Our estimated cost was $4.50. We want to sell if either option hits $7.25 or more.

FYI: Many quote services are listing the intraday low as $95.51. This is a bad tick. The stock didn't trade under $102 today.

Picked on October 23 at $ 95.67
Change since picked: + 7.83
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 392 thousand

---

Express Scripts - ESRX - cls: 64.83 chg: -0.22 stop: n/a

ESRX traded sideways in the $64-66 range. We are no longer suggesting new strangle positions on ESRX. The options we suggested for a strangle were the November $65 calls (XTQ-KM) and the November $55 puts (XTQ-WK). Our estimated cost was $1.95. We want to sell if either option hits $3.50 or higher.

Picked on October 21 at $ 59.65
Change since picked: + 5.18
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 2.1 million

---

Intl. Bus. Mach. - IBM - cls: 113.40 chg: -1.19 stop: n/a

It looks like the rebound in IBM is in trouble. The stock failed near $115 again and painted a bearish engulfing candlestick pattern. The lack of a big move on earnings has doomed this strangle play. Unless IBM sees some really big swings in the next couple of weeks this is a bust. Our November strangle suggested the November $125 call (IBM-KE) and the November $110 put (IBM-WB). Our estimated cost was $3.00. We wanted to sell if either option hits $6.00.

Picked on October 15 at $118.03
Change since picked: - 4.63
Earnings Date 10/16/07 (confirmed)
Average Daily Volume = 7.5 million

---

Monster Worldwide - MNST - cls: 38.43 chg: -0.44 stop: n/a

MNST continued to slide and tested short-term support near $38.00 this afternoon. We have two weeks left on the November options. We are no longer suggesting new positions. The options we suggested for our strangle were the November $40 calls (BSQ-KH) and the November $35 puts (BSQ-WG). Our estimated cost is $1.75. We want to sell if either option hits $2.95 or higher.

Picked on October 23 at $ 37.22
Change since picked: + 1.21
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Calls

BHP Billiton - BHP - cls: 83.73 chg: +1.30 stop: 78.49

Overseas markets were down sharply on Monday as the world reacted to the Citigroup news and the bank's massive write downs. This fanned the flames of fear in the financials. The Australian index plunged and shares of BHP gapped open lower at $79.10 as U.S. shares adjusted to trading overseas. It was rather unlucky timing of us to adjust our suggested entry point from above $87.50 to Friday's close. Technically we would have been triggered this morning on the gap down and the stock would have hit our stop at $78.49. This may just be a temporary decline. Keep an eye on BHP for a rebound.

Picked on November 4 at $ 83.73
Change since picked: - 4.15
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume = 4.0 million

---

Haynes Intl. - HAYN - cls: 83.08 change: -1.04 stop: 81.49

Over the weekend we raised our stop loss to $81.49 to reduce our risk and it worked. HAYN displayed relative weakness with an intraday dip to $81.35 before bouncing back. The stock has broken down under its 50-dma and traded under its trendline of support we outlined in the weekend newsletter.

Picked on October 28 at $ 86.49
Change since picked: - 2.37
Earnings Date 12/10/07 (unconfirmed)
Average Daily Volume = 166 thousand
 

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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