What a day for market moving events. We had profit warnings by companies like Intel and Staples, conflicting comments by a handful of Fed heads and our daily Ambac rumor. Shorts were celebrating in the morning as Bernanke suggested mortgage holders cut principle on mortgage loans and Intel soured the semis with a bearish outlook. By 2:30 those same shorts were on the run again after the afternoon Ambac rumor hit the wires. The Dow rebounded from its -220 lows to close down only -45 after the Ambac rumor was squashed just before the close. What a day!
Dow Chart - Daily
Fortunately there were no material economic reports to further complicate the picture. Wednesday has a full calendar with the Challenger Employment report, Productivity, Factory Orders, ISM Services and the Fed Beige Book. The big report is still the Non-Farm payrolls on Friday. We already saw the ISM fall back to contraction territory at 48.3 on Monday and the reports for the rest of the week are expected to be more of the same. The employment component for the ISM at 46.0 was not as weak as many had feared and that took some of the bearishness out of the expectations for the payroll report on Friday. The official estimates are still holding for a gain of 25,000 jobs but the whisper numbers are still in negative territory.
The big shocker in the economic realm this morning was a speech by Ben Bernanke. In the speech he suggested mortgage holders reduce the principal on loans to keep homeowners from letting them foreclose. I was astounded he would suggest this and there was an audible rumble of dissent from the bankers in the room when he said it. The idea is to give the homeowner an incentive with the lower loan balance to remain in the home and hope to have some equity when they finally sell it. If you are a mortgage banker the concept of cutting the principal 10%, say from $200,000 to $180,000 on a loan in trouble is nearly unthinkable. The drop in mortgage payments would be minimal and would do little towards actually letting the homeowner off the hook. Secondly it would limit the banks eventual recovery if the loan finally went into foreclosure. Banks are open to cutting interest rates to the bone or doing payment workout promotions to give the homeowner breathing room but receiving less interest is significantly different than cutting principle. The first option simply means less revenue and a potentially longer payout. The second option to cut principle is an immediate loss on their balance sheet and does little to solve the problem. I think Bernanke hurt his credibility significantly with the suggestion. This comment may come back to haunt him for years to come. Mortgage bankers fired back saying writing down the initial loan amount may help now but it would set a precedent if the value of homes continued to fall and balances went underwater again. Are we going to be forced to write the loan down again? Bankers would rather take their lumps up front if it goes into foreclosure and let PMI make up the difference. Arbitrarily cutting the loan balance would probably not be covered by PMI.
This same option was floated last month by the Office of Thrift Supervision with
a suggestion that banks receive a warrant for the amount of the reduction. That
warrant could only be exercised if the house eventually sold for more than the
value when the balance was cut. That is even more unwieldy since the homeowner
would actually not receive any benefit if the house value went up. The bank
still gets the money and the homeowner gets only a minor break on the payment.
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Fed Vice Chairman Donald Kohn told lawmakers yesterday that challenging market conditions will likely hurt earnings and consumer lending. Since the start of 2007 more than 45 of the worlds biggest banks have taken write-downs of more than $181 billion according to Kohn. He said he was worried about the liquidity of the nations 50 largest banks given their write-downs and future expected losses.
All of this bearish Fedspeak has sent the chances of further rate cuts much higher. The Fed Funds Futures are now projecting a 163% chance of a 50-point cut, a 100% chance of a 75-point cut and a 75% chance of a full 100-point cut. Several analysts interviewed on Tuesday said the Fed was likely to cut 50-points this week and another 50-points when they meet on March-18th. There is a 100% chance that the Fed rate will be 2.0% after the April 30th meeting.
The financial sector was not celebrating the rate cut chances with continued downgrades pushing the sector back to 52-week lows. Citibank estimates were cut again by Merrill and the CEO of the Dubai Investment Capital said a continued bailout of Citi would require additional foreign investment. Citi fell to a nine-year low on the warnings. Citi denied the need for outside capital but other analysts were echoing the Dubai claims. Citi has already written down $18 billion in loans and Merrill said they would have to write down another $18 billion in Q1. Goldman cut its Q1 estimates for Citi from a profit of 15-cents per share to a loss of $1 saying they made a mistake in the model that produced the earlier estimate. The WSJ said job cuts at Citi, currently announced at 24,000 would grow to 30,000 as a result of the continuing losses.
Intel warned after the close on Monday that profit margins on flash memory chips was lower than expected due to a rapid decline in chip prices. Intel and the tech sector declined on the news pushing the Nasdaq to 2221 intraday. That decline was reversed when AMAT and CSCO released positive news to the market. AMAT said it received its biggest private company order ever totaling $1.9 billion. The order for an unnamed private corporation was to supply and install equipment for multiple solar factories outside the U.S. with much of it going to China. AMAT said this order was five times bigger than any order it had previously received. This triggered a rebound in some of the chip stocks and a couple solar stocks. Trina Solar (TSL) posted earnings that tripled on strong demand for solar-power systems and higher profit margins. TSL rose +$1.75 on the news and further helped halt the selling in chips.
Late in the day Cisco CEO John Chambers said at a conference that he is more comfortable with the company's long-term growth rate than he was on the last conference call. He said there would still be short-term bumps in the road but he expected the slowdown in growth to be shallow. He said, "nothing has changed in Cisco's guidance", implying that the recent economic downturn had not impacted Cisco's sales. Cisco does generate a lot of its income from overseas and that is compensating for any weakness in America. CSCO rebounded sharply from the afternoon lows and helped push the Nasdaq back into positive territory.
About the same time as the Champers comments we got the normal breaking news alert on CNBC that an Ambac deal was imminent. I don't know what Charlie Gasparino is going to do for a market moving alert effort once the Ambac deal gets done. Within minutes he was back on the air with the daily qualification that it may not happen and "sources" said there was still a lot of work to be done. It did not matter to CNBC, ABK had already popped +$2 or +22% on the news. They got their bounce and on to other stories. Reuters quickly posted a story saying there was not going to be any announcement according to "a person briefed on the matter." We need to start assigning deep throat like names to these sources. The Financial Times reported that Ambac had decided not to split the two business units and keep the CDO business with the municipal bond business. Personally I don't think anybody will know anything for sure until a formal announcement is made. This is just headline spamming by the various news wires.
Another tech story that was not widely reported was a strong guidance upgrade by Seagate Technology. (STX) Seagate said a better than expected product mix and fast acceptance of its new industry leading products would produce earnings in the range of 68-72 cents. Analysts were expecting 63-cents per share. I reported on Seagate back in January and suggested it was a strong buy given their earnings and sales guidance back then. STX had risen +20% since mid January. Their new 15K.6 SAS drives have 61% less power requirements and a 28% increase in speed over prior models. The standard 250GB SATA-II drives are selling for $69 online and are well worth it.
Office Supply store Staples (SPLS) cut its 2008 sales and profit outlook for 2008 and expects the economic weakness to linger throughout the year. Goldman Sachs analyst Matthew Fassler said North American same-store sales trends had slowed meaningfully and more than we expected. Barnes & Noble (BKS) missed estimates and was downgraded by several firms. BKS had raised its profit estimates but analysts said the outlook was too aggressive. A JP Morgan analyst said it was aggressive because of difficult comparisons and softening sales trends. The analyst pointed out that book sales soften during election years. JPM cut them to sell, Credit Suisse cut them to neutral.
Tax preparer Jackson Hewitt (JTX) was knocked for a 30% loss of $6.61 after they said earnings had fallen on a slow start to tax season. A Goldman analyst said the numbers were far worse than even his bearish estimates. On investor minds was the report of much slower tax filer traffic. I guess if you can't make your mortgage payment then filing your taxes early is not really a priority.
Apple Computer or Apple Inc as they are now called held their shareholder meeting today and the star CEO was under fire. AAPL stock was up +153% in 2007 but down -40% in 2008. Shareholders wanted to know what Steve Jobs was going to do about it. He was questioned on whether Apple would spend some of its $18 billion in cash on stock buybacks or a dividend and Jobs said no deal. Shareholders also said no deal to runaway pay and voted in a "say in pay" proposal. Apple is the first major company that found shareholders disgruntled enough to pass the initiative. Approximately 40 companies have seen the proposal make the ballot but then fail on the vote. Jobs said Apple was making plans to enter India and China with the iPhone but would not say when it might happen. Jobs stuck to the 10 million phone estimate for 2008 despite the slowdown in consumer buying. AAPL rose +2.89 on what was considered a successful but uneasy meeting. Thursday is the software meeting where Apple will lay out its roadmap for the various iPhone products.
Google reported its vice president of global operations had deserted the "do no harm" company to join Facebook as its COO. Sheryl Sandberg worked at Google for six years and prior to that was chief of staff at the Treasury Department under Clinton. The 38-year old Sandberg will now report directly to 23-year old Facebook founder Mark Zuckerberg. That ought to be an interesting working relationship. I am sure she walked from Google with more stock options than she can spend so the Facebook project is probably more a thrill of a new challenge than a desperate need of income. With Google hitting a new 52-week low of $435 today she better cash those options quick.
Crude Oil Chart - Daily
Crude oil prices hit $103.95 and a new all time high on Monday but declined to close at $99.20 today. The drop in crude came with heavy selling in all commodities but there were extra reasons for the drop in crude. OPEC ministers meet tonight in Vienna to discuss production rates for the next 60 days. Almost every oil minister has said over the past week that there will not be any increase in production. No surprise there. At the same time they appear to have agreed in advance not to cut production despite the buildup of supplies. President Bush implored them today not to cut oil production and indirectly increase the recession in North America. Today almost all analysts and ministers have said the only avenue left for OPEC is to leave production at current levels and strongly describe the rising inventories around the world. They cannot or maybe should not cut production in the face of rising prices and a slowing global economy. They don't need any additional negative press but then sticks and stones, etc, maybe $100 oil is worth it. OPEC tends to dance to a different drummer so despite the overwhelming sentiment about no change in production anything is possible. On a side note Exxon (XOM) has an analyst meeting at 9:AM tomorrow and there are several major items on the table including a possible boycott of Exxon by OPEC. Venezuela is pressing OPEC to cut off Exxon because of the XOM/VZ battle. Volatility could be huge.
At its lows today the Dow had fallen over 220 points to a low of 12032 and right at the bottom of the range seen since Jan-22nd. It is still well above the January lows of 11634 but still at critical support. The sentiment was extremely bearish and it appeared on the surface that we could easily have been down -300 in just minutes. With internals declining by the minute and shorts loading up for the express trip back to those January lows the market was ripe for a news related short squeeze. The combination of the comments from John Chambers and the daily breaking news alert on Ambac put fear back into the shorts and the squeeze was on. The Dow rebounded +175 points and the Nasdaq +40 to close barely positive. Initial support remains 12,000 and resistance is hundreds of point above us at 12500 and not relative without an Ambac deal.
The Nasdaq, even with the rebound, is looking very negative. The new six-week low today at 2221 had all the signs of a breakdown until the Cisco and Applied Materials news produced the squeeze. There was limited follow through to the squeeze overnight so there is no indication if there will be follow through at the open. This could be just another rally to short but I am not recommending it today.
Nasdaq Chart - Daily
S&P-500 Chart - Daily
The S&P-500 declined to its January closing low of 1310 and like the Nasdaq looked a lot like a major breakdown in progress until the afternoon news hit the wires. The afternoon recovery allowed a lot of traders to breath easier but it may only be temporary. Support is 1310 with the January lows at 1275 as a fall back position.
The charts on all the major exchanges look very ugly. But, as they say it is always darker before the dawn. I am still cautious about this week given the declining economics and the Non-Farm Payrolls on Friday. I think traders are going to be cautious about going long until after that report. There are strong expectations that the Fed could hit us with another intermeeting rate cut. Because everyone expects it the lack of an announcement is negative. The Fed could wait for Friday's jobs report before making a move. If jobs suddenly improved then the cut would be off the table until March-18th. That is a lot of indecision and the Fed Beige Book tomorrow afternoon is only going to further cloud the issue. We also have the daily Ambac news. If they ever announce a resolution and a successful bailout plan the markets are likely to rally hard. With hundreds of billions in Ambac debt on their books the financials are struggling with what they are going to write down when they report earnings in two weeks. If the Ambac deal is announced prior to that then they can value that debt higher. If it does not get done then expect some major additional write-downs. The window is closing on both the banks and rating agencies and something needs to happen very soon. That would be a major positive for the market and could be the trigger to the end of the credit crunch. That is the wild card for me as it has been for the last four weeks. Without an Ambac deal I expect the markets to continue to trend downward. Internals have been declining for the last five days and volume increasing the last three. Tuesday was the largest volume day since Feb-7th and most of it was declining. With a deal we could have a monster short squeeze similar to the one started on Feb-22nd. I am still an observer on equities and a short on oil (USO) assuming OPEC does not do anything stupid like cut production.
Play Editor's Note: My market bias remains bearish but today's afternoon rebound really throws a wrench in our short-term trading strategies. Plus, a real bailout plan for ABK could spark some serious short covering and a real rally for equities. The next couple of days could be pivotal for the market. FYI: Keep an eye on the FXY, which is a way to play the Japanese Yen against the U.S. dollar. A pull back near $95 might be a short-term bullish entry point to buy calls.
Wynn Resorts - WYNN - close: 97.28 change: -1.69 stop: 94.75
Why We Like It:
BUY CALL MAR 95.00 UWY-CS open interest= 999 current ask $5.90
BUY CALL APR 95.00 UWY-DS open interest= 16 current ask $8.90
Picked on March 04 at $ 97.28
iShares China 25 - FXI - cls: 140.43 chg: -6.02 stop: 149.45
Hmmm... so what do we do now? We've been eyeballing the $140 region as a potential alternative for bullish entry points. Now that the FXI is here we have to decide if it is going to work for us. The FXI lost 4.1% in the U.S. market and did so on above average volume usually not a good sign. Considering the market's overall tone we're going to wait. If we're patient we might get a better entry point near $136-135 instead, which is around the January lows. We'll be looking for a bounce near $135 which would give us an opportunity to place a relatively tight stop loss just south of there. We were officially waiting for a breakout over $160 with our suggested trigger at $161.01. If we are triggered our target is the $178.00-180.00 zone although we'll have to keep a wary eye on potential resistance at the 100-dma.
Picked on February xx at $ xx.xx <-- see TRIGGER
Potash - POT - close: 156.76 change: -0.60 stop: 147.75
POT out performed its peers in the fertilizer industry and shares closed with a fractional loss today. Traders were buying the dip near $153. That doesn't mean we should be opening new positions. In reality we are seeing the same bearish technicals on short-term and daily time frames as we are in some of its peers. We're long-term bullish on this stock but would probably hesitate to jump in here. However, we will note that POT almost delivered a perfect bounce from prior resistance and what should be support in the $152.50 zone. More conservative traders may want to tighten their stops closer to $150 (or even under 152). Considering the market's recent weakness, readers could always protect themselves by jumping out now. Then you could jump back in on a dip near $150 or the 50-dma or a breakout over its trendline of lower highs. POT has already surpassed our early target in the $158-160 zone so readers should have already booked some profits. Our second, more aggressive target is the $168.00-170.00 zone. More aggressive traders may want to aim significantly higher. The Point & Figure chart is forecasting a $222 target. Again, this is a very volatile stock. Readers should consider it an aggressive, higher-risk trade.
Picked on February 12 at $147.50 *triggered
Shaw Group - SGR - close: 62.76 change: -0.15 stop: 59.85
Warning! SGR did deliver a bounce like we were expecting but it failed near $65.00. This is short-term bearish and SGR looks headed for the $60.00 level and it would not take much to stop us out at $59.85. More conservative traders will want to strongly consider an early exit right here to limit any losses. We are not suggesting new positions at this time. We have two targets. Our first target is the $69.50-70.00 zone. Our second, more aggressive target is the $74.00-75.00 zone. The Point & Figure chart is very bullish with an $81 target.
Picked on February 24 at $ 64.53
Smith Intl - SII - close: 62.02 change: -0.79 stop: 59.90
We see a similar pattern setting up in SII. The stock bounced but it failed early on and failed again this afternoon. This looks very short-term bearish and more conservative traders will want to strongly consider an early exit now to limit or avoid any losses. Short-term and daily technicals are rolling over. The stock has already hit our first target in the $64 zone. Our second target is the $68.00-70.00 zone. The P&F chart for SII is very bullish with an $80 target (it was a $77 target last week).
Picked on February 17 at $ 60.52
Yahoo! Inc. - YHOO - close: 28.06 change: +0.29 stop: n/a
What is this? Do our eyes deceive us? YHOO not only posted a gain but out performed the market although it may have gotten a boost from the 2.2% bounce in shares of MSFT, which were effectively upgraded this morning. We do not see any changes from our previous comments on YHOO. We have less than three weeks before March options expire. Right now we're speculating that MSFT will raise its bid before expiration. This remains a very risky, aggressive bet. Our suggested calls were the March $30 or March $32.50 strikes.
Picked on February 17 at $ 29.66
Ambac Fincl. - ABK - cls: 10.72 change: +0.78 stop: n/a
Shares of ABK soared this afternoon and ended the session with a 7.8% gain on hopes that a deal was close to being done. There seemed to be conflicting stories about whether or not the street would get any news tomorrow. Yesterday we reported that many believe there would be material news in the next 24 to 48 hours. If an acceptable deal does get announced the financial stocks are likely to see a sizeable rebound. Just news of a bailout plan may not be enough. The details and interpretation of the plan will be what moves the stock and the market. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. If you are considering new positions here then think about an out of the money April call as a potential hedge against a deal getting done. Previously we had been suggesting the May out-of-the money puts and a speculative out-of-the money March ($20) call as a hedge should a bailout plan come to pass.
Picked on January 27 at $ 11.54
MBIA Inc. - MBI - close: 12.98 change: +0.36 stop: n/a
ABK is getting all the headlines but shares of MBI aren't moving much either. The stock continues to drift sideways. We don't see any changes from our weekend comments. If you're thinking about opening new plays then consider an out of the money April call as a hedge against a bailout coming to pass. We had been suggesting the out-of-the-money May puts and a March $22.50 (or $20.00) call as a hedge in case a bailout plan for the bond insurers does get done. We will definitely hold over the April earnings if we get the chance.
Picked on January 27 at $ 14.20
NII Holdings - NIHD - close: 39.96 change: -0.28 stop: 41.26
NIHD failed to escape the market volatility on Tuesday. The stock dropped from $40.62 to $38.63 and then back again. The drop under $39.00 was enough to hit our suggested trigger to buy puts at $38.95. The play is now open. If you are looking for a new entry point a failed rally near $40.50 or a new decline under $39.00 would be suggested entry points. Our target is the $35.50-35.00 zone. More aggressive traders could aim for the trendline of lower lows. The Point & Figure chart is bearish with a $19 target. FYI: The latest data lists short interest at 3.8% of the 171.7 million-share float, which is only about 1.5 days worth of short interest.
Picked on March 04 at $ 38.95 *triggered
Precision Castparts - PCP - cls: 106.00 chg: -3.18 stop: 111.51*new*
Weakness in PCP continued. The stock slipped to $103.26 before paring its losses. We are going to adjust our stop loss to $111.51. Another failed rally under $110 could be used as a new entry point for puts. Our target is the $101.00-100.00 zone. The most challenging part of this trade is our stop loss placement. After Friday's 4.4% decline knowing where to put the stop is tough. The $112 area looks like a good spot but just to give PCP a little room to move we're suggesting a stop at $112.65.
Picked on March 03 at $109.49 *triggered
Everest Re Group - RE - close: 95.23 chg: -0.01 stop: 100.35*new*
RE slipped to $94.24 and then recovered back to breakeven. Broken support near $96.00 should be new resistance but if it does trade over $96.00 look for a failed rally near $98.00 as a new entry point for puts. We are adjusting our stop loss down to $100.35, just above the February 27th high. We have two short-term targets. Our first, conservative target is $93.50. Our second, more aggressive target is the $91.00-90.00 zone. We're suggesting a stop loss at $102.01 but more conservative traders might be able to get away with a stop around $100.51. FYI: The P&F chart is bearish with a $74 target.
Picked on February 28 at $ 97.93
Sears Holding - SHLD - close: 95.94 change: -0.53 stop: 100.51
The action in SHLD today just screams "bearish failed rally". The stock spiked to $100 and quickly faded. More aggressive traders will want to consider buying puts right now with a stop just above $100. We are going to stick to our plan. We are suggesting a trigger to buy puts at $94.00. If we are triggered at $94.00 our target is the $85.50-85.00 zone near its January lows. Looking at the weekly chart and its bearish channel more aggressive traders may want to aim for $80 but we would expect a bounce near $85.00. FYI: A breakdown under $94 would produce a new triple-bottom breakdown sell signal on the Point & Figure chart. There are a lot of investors who believe SHLD is going lower. The most recent data puts short interest at more than 19% of the 65 million-share float. That is almost 7 days worth of short interest. Naturally that raises our risk of a short squeeze.
Picked on February xx at $ xx.xx <-- see TRIGGER
(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.)
CROCS Inc. - CROX - close: 22.29 chg: -0.71 stop: n/a
Was the market open? Then CROX must have traded lower. It's been almost that bad since the company's last earnings report. Shares closed down with another 3% decline today. The stock is very oversold and way overdue for a correction. If CROX gives us one more spike lower the puts should hit our target. Speaking of puts the March $25 puts hit an intraday high of $3.40 on Tuesday. We are currently not suggesting new positions. The options we had suggested were the March $40 calls (CQJ-CH) and the March $25 puts (CZL-OE). Our estimated cost was $2.50. We were previously suggesting an exit if either option hit $4.25. We have since adjusted our target to $3.75. We have just less than three weeks left before March options expire. More aggressive traders may want to keep the $4.25 target. Editor's note: It looks like the root symbol for the March $25 put changed from CQJ to CZL a few days ago.
Picked on February 17 at $ 33.43
CF Industries - CF - close: 119.62 change: -0.86 stop: 117.45
There was no doubt today. CF tried to rally this morning but quickly failed near short-term resistance. The ensuing sell-off pushed CF to an intraday low of $115.05. CF definitely hit our stop loss at $117.45 this time. Now both short-term and daily technicals have rolled over yet CF remains very much in a long-term up trend. Nimble traders could try and scalp a few points toward $110. We are bullish on this sector and will step back and watch for a new entry point either near the 50-dma or the 100-dma currently near $100, which would look like a great entry point.
Picked on February 19 at $121.03 *gap entry / stopped 117.45
Monsanto - MON - cls: 111.72 change: -6.91 stop: 113.99
MON is another agriculture/fertilizer stock that got hammered today. Once it broke support at $115 it didn't stop until shares hit $107.85. The selling was pretty ugly and it happened on strong volume, which is another bearish sign. MON remains in a longer-term up trend so we're going to keep an eye on it for support near its 100-dma (near $105) or a dip near $100. Shares hit our stop loss at $113.99. We warned readers these stocks were volatile and today was a good example why.
Picked on February 12 at $118.09 *gap entry /stopped 113.99
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