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Daily Newsletter, Tuesday, 03/25/2008

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Table of Contents

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

Market Wrap

Volatility Pause

The markets took all day to recover from the morning dip but traders were not complaining. The Consumer Confidence report knocked the wind out of the market but after recovering from the blow shoppers returned primarily to the tech sector. The bulls have been rather unsteady over the last five days but the trend is still up.

Dow Chart - Daily

The economic black hole this morning was the Consumer Confidence report for March. The headline number fell to 64.5 from 76.4 in February. With the exception of March 2003 the index is at its lowest since October 1993. In March 2003 confidence fell from 81 to 61 and back to 84 over a 4-month period. This was due to the start of the war in Iraq. This month's drop was due mostly to a plunge in the expectations component to 47.9 from 58.0. The present conditions component is still holding the high ground at 89.2. That is still down from 104 in Feb and 114 in Jan but still relatively strong. The headline number has fallen nearly 23 points over just the last two months. The employment component fell 2.7 percentage points to only 18.8% of consumers feeling jobs were still plentiful. That is the lowest reading since 2004. The drop in housing prices has depressed confidence but those planning on buying a home ticked up slightly to 3.3% from 2.9%. The home prices, mortgage refinance problems and $3.25 gasoline is putting a real squeeze on consumers and today's report shows just how bad. Once confidence bottoms into a recession the markets average a 27% gain over the next 18 months.

Consumer Confidence Chart

The S&P/Case-Shiller Monthly Home Price Index showed home prices fell -2.4% in January for the 20-city index. This was the sharpest decline in the 21-year history of the index. The same index of prices has fallen -10.7% over the last 12-months and that is also a record. The 10-city index fell even harder by 11.4% over the last year. Major price drops from the recent peak included San Diego -21%, Miami -19.7%, Las Vegas -20.8%, Los Angeles -18.1%, San Francisco -15.8% and Washington -15.2%. The drop in prices has produced an uptick in sales and that will eventually reduce the excess inventory. It is possible we have seen the bottom in the sector BUT the rebound may be very slow until the mortgage companies begin feeling comfortable with selling mortgage paper again. Getting a loan is still a major challenge.

The Richmond Fed Manufacturing Survey was a bright point in a morning of gloom. The headline number rose to +6 in March from -5 in February. The current cycle low was -8 in January. This could be a sign that the recession chances are dropping and the scare could be about over. That would be a long shot because the Richmond Fed Index is historically a volatile report. All the components improved except for the six-month outlook, which fell from 23 to 14 and the lowest level since Aug-2006. Raw materials prices also rose +4.97% due mostly to the higher cost of energy and oil. That was the sharpest increase since the survey began in 1993.

Richmond Fed Chart

Reports remaining this week include New Home Sales and Durable Goods on Wednesday, GDP and Kansas Fed Survey on Thursday and Personal Income and Consumer Sentiment on Friday.

Other than those reports mentioned above it was a very tame day as traders digested their gains from the last week in relation to the economic news. The agriculture sector got a monster boost from Monsanto (MON) after they raised estimates for the third time this quarter. MON spiked +$10 on the news. Monsanto said its seeds business will contribute more profit than expected and volume in soybeans had increased. They also said their weed killer Roundup and other herbicides were performing well with demand exceeding supply. This is a direct result of more acreage being pushed into production to capture the high prices of the current food commodity rally. Estimates are now expected to be $1.75 per share after items and analysts had only expected a $1.34 profit.

In the same sector India announced a new deal to acquire potash from the Belarussian Potash Co. This is unusual because of its timing. India typically waits until after China negotiates its annual contract with suppliers before going into the market. China buys so much that they normally get a discount off the stated prices. India and others then use the China price as a starting point for their purchases. This year India jumped in front of China and locked up a major source of supply at $625 per tonne delivered. That is more than double last years contract price of $270 per tonne. This shows how tight the market is and India did not want to be left out if China placed a much bigger order than expected. JP Morgan analyst David Silver said North American supplies are near record lows and major suppliers are essentially sold out. China is expected to buy more than 10 million tones if they can get it. That is more than $6.2 billion dollars for potash (potassium) fertilizer. Mosaic (MOS) announced their earnings will be on April 4th and they should be strong.

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Valero (VLO) is the largest refiner in the U.S. and they warned on Q1 earnings before the open. Valero said they now expect to earn between 10-35 cents compared to street estimates of 91 cents. Valero said gasoline inventories in the U.S. are now at a 15-year high and there is no pricing power by refiners. Operation and equipment problems at three refineries were expected to cost $400 million. Citi and Goldman Sachs said if it was not for the unexpected equipment problems Valero would probably have hit their estimates. This prevented the damage from being too severe with a loss of only $1.98 for the day.

Also in the energy sector Anadarko (APC) raised its full year 2008 production guidance and its capital budget. The production guidance rose by 2 million barrels. Divestitures have provided additional capital to increase exploration and that leads to increased production. They also raised their 2008 capital budget by 9% to a range of $4.9-$5.1 billion.

Boone Pickens was on TV again today saying he over estimated prices for the first half but he still expects them to remain in the $100 range and to rise higher over the second half of the year. Demand in the U.S. has eased but demand elsewhere continues to grow. As an example demand in China rose by +6.2% in February.
Oil prices traded as low as $99.13 before an end of day buying spike pushed prices back to $101.50.

Crude Oil Chart - Daily

The drop in oil prices has produced a strong rally in the transportation sector. The Dow Transports have rebounded +500 points in the last two weeks and are approaching critical resistance at 5000. This is a major turn of events from news of airlines canceling plane orders and taking older planes out of service in an attempt to save money. Airline fares have risen from $25-$84 over the last six months due to fuel based increases. The rally in the transports over the last two days has pushed them back over the 200-day average and that is bullish if it holds. A move over 5000 would be a major confidence builder. Just over the last two days FDX and UPS have made major moves. CSX and Burlington Northern (BNI) are also very strong on news that more freight is moving from trucks to the rails to avoid the high cost of diesel. This is a trend that will continue for years to come as diesel prices make it tough for trucks to compete on the long haul routes.

Dow Transportation Chart - Daily

Ford (F) is expected to announce this week the sale of Jaguar and Land Rover to India's discount manufacturer Tata Motors. The sales price is expected to be in the $2 billion range. Tata is famous for its recent no frills model that sells for $2,500. It will be interesting to see how the clash of luxury and Spartan economy will end. Tata wants to break into the USA and European markets and this is seen as an opportunity to buy some respectability.

Merrill (MER) downgraded Bank America (BAC) saying the bursting of the housing bubble will continue to depress earnings. MER cut the rating on BAC and Suntrust (STI) to sell from neutral. There is also the worry that Bank America will have to pay more for Countrywide. CFC stock has gained than 50% in the last week on the new Fed financing offers. BAC is already underwater on its $2 billion investment at $18 on CFC but over the long term analysts still feel the CFC buyout is a good deal for BAC. Paying more could change that view. Merrill may have been targeting others with downgrades but Merrill itself was the target of a downgrade by JP Morgan Chase and UBS. They expect Merrill to announce another new round of write-downs. BAC lost -1.48, STI -1.76 and MER -0.53. Goldman said the global losses due to the subprime credit crisis would hit $1.2 trillion before it was over.

After the bell the news broke that the $19 billion Clear Channel privatization deal is nearly dead. The buyers can't get financing and the banks that were underwriting the initial deal have backed out. CCU fell -21% in after hours to $25.82. This deal has been cursed since it was announced in Nov-2006 and was scheduled to close next Monday. CCU is the largest radio station operator in the U.S. and has more than one million advertising signs worldwide.

Clear Channel Chart - 180 min

Jabil Circuit (JBL) said after the bell that an "economic air pocket" was hurting demand for cell phones and televisions. JBL said revenue fell in their quarter ended in February but they did expect business to recover later this year. Revenue in cell phone chips fell 31% and televisions fell 40%. In the same vein chipmaker SiRF Technology Holdings (SIRF) lowered its Q1 revenue outlook and withdrew earnings guidance due to significantly lower orders. They said demand had fallen by 50% for some major buyers and even more for others. SIRF chips are used in the GPS navigation devices sold by Garmin and TomTom. SIRF said it would cut 7% of its workforce and take a pre tax charge of $2 million. SIRF will close offices in San Francisco and Stockholm Sweden. SIRF was hit with sell ratings by Piper Jaffray.

Last Tuesday I suggested the bottom was behind us. The -293 drop the next day tested my nerves but I continue to believe that the bottom is in. The major averages still have significant overhead resistance but market sentiment is changing. Several weeks ago we saw increased afternoon selling whenever there was bad news and that was almost daily. We are still getting the bad news but at a slower rate and the markets shake it off and move higher.

The Dow has rebounded almost +800 points since last Monday and is rapidly approaching that critical resistance at 12750. It is not a confirmed rally until that resistance breaks but you can't complain about an 800-point move. The major indexes tested their January lows and it appears to have been successful.

The Nasdaq is even closer to resistance at 2365 and will face a test with the Oracle earnings on Wednesday after the close. Unless they really stink up the place traders should shake off any weakness and continue trying to establish positions in stocks like Apple (AAPL) and Research in Motion (RIMM). Google lost -10 for the day but was up +45 from Thursday's low so traders should not complain. Google is still under pressure from investors worried about the white space project, the Gphone and Google's various outside projects like the moon lander contest and the green energy initiative. Investors are worried that Google is getting away from their core expertise and into things that will consume vast quantities of money.

Nasdaq Chart - Daily

S&P-500 Chart - Daily

The S&P-500 has moved to test 1360 over the last two days and could be looking tired. The S&P is moving on the backs of the financial sector, it's biggest component. Those financials were trading downgrade fire today and that slowed the progress on the S&P. There was a good retest of the January lows that lasted for two weeks and the bears could not force a break of support. This is a strong show of support but until we start making new relative highs it could still be called a bear market rally. That would require a move over 1385 to really prove some bullish conviction.

Volume was very anemic both days this week with barely more than 7 billion shares each day. This is a conviction test. Traders still in cash want to see if the selling returns or they are hoping for a slight pullback to buy. Neither has happened this week and the rebound from a triple digit Dow low at today's open suggests buying the dips is going to become the news strategy rather than selling the rallies. That would be my recommendation unless we see a breakdown below 1300 in the S&P. For the trend to stick we need to remain above that level. The market is excited to see the recovery in the financial sector but they are still wary that there is another shoe to drop like Bear Stearns. That could take many more weeks and be well into the April earnings cycle before caution fades. We are in the earnings warning season right now and so far the few dismal warnings have failed to blunt enthusiasm. The closer we get to April without an earnings warning disaster the better investors will feel.

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
FPL None None
FLR    
RAI    

New Calls

FPL Group - FPL - close: 62.60 chg: +0.19 stop: 59.49

Company Description:
FPL Energy is a competitive energy supplier utilizing clean fuels such as natural gas, wind, solar, hydro and nuclear to generate electricity. It is the nations leader in wind energy, with 56 projects currently in operation in 16 states. (source: company press release or website)

Why We Like It:
Shares of FPL look poised to breakout higher from their four-week trading range. The stock was upgraded yesterday but shares have not yet pushed through technical resistance at its 200-dma. We see additional resistance at the 50-dma near 63.45 so we're suggesting readers buy calls at $63.55. Now normally, when a stock's 50-dma crosses under its 200-dma, it's a very bearish signal but that tends to be a longer-term trend change. FPL could still put in a significant rally although we would expect a lower high compared to where it traded in January. We're setting our first target in the $67.00-67.50 zone. This is not the most attractive risk/reward set up with a wide stop loss under Friday's low but if FPL can close above its 50-dma we'll tighten the stop. FYI: An alternative entry point would be another dip or bounce near $60.00.

Suggested Options:
Our suggested trigger to buy calls is at $63.55. We are suggesting the May calls.

BUY CALL MAY 60.00 FPL-EL open interest= 29 current ask $4.60
BUY CALL MAY 65.00 FPL-EM open interest= 59 current ask $2.00

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume = 2.6 million

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Fluor - FLR - close: 141.77 chg: +4.11 stop: 134.45

Company Description:
Fluor Corporation provides services on a global basis in the fields of engineering, procurement, construction, operations, maintenance and project management. Headquartered in Irving, Texas, Fluor is a FORTUNE 500 company with revenues of $16.7 billion in 2007. (source: company press release or website)

Why We Like It:
It's been a while since we've played FLR. The stock has spent months consolidating in a bearish pattern of lower lows and lower highs. The last few weeks have seen FLR trade more sideways and now the stock is on the verge of a breakout higher. The recent rally has lifted the stock to its five-month trendline of resistance. The P&F chart is already bullish with a $184 target. We need to see FLR breakout so we're suggesting a trigger to buy calls at $146.50. The biggest challenge is controlling our risk. The stock can see huge intraday swings, which makes this a more aggressive trade. We're going to try and play it with a stop at $134.45. That might be too tight. We're setting two targets. Our first target is the $159.00-160.00 zone. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May.

Suggested Options:
Our suggested entry point is $146.50. We are suggesting the May calls.

BUY CALL MAY 140 FLR-EH open interest= 0 current ask $12.50
BUY CALL MAY 145 FLR-EI open interest= 4 current ask $ 9.90
BUY CALL MAY 150 FLR-EJ open interest=16 current ask $ 7.90
BUY CALL MAY 155 FLR-EK open interest=52 current ask $ 6.10
BUY CALL MAY 160 FLR-EL open interest=14 current ask $ 4.60

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Reynolds American - RAI - close: 61.32 chg: +0.76 stop: 59.65

Company Description:
Reynolds American Inc. is the parent company of R.J. Reynolds Tobacco Company; Conwood Company, LLC; Santa Fe Natural Tobacco Company, Inc; and R.J. Reynolds Global Products, Inc. (source: company press release or website)

Why We Like It:
It seems a bit counter intuitive to be buying calls on RAI when the stock has such a clear pattern of lower highs over the past few weeks. However, the stock has significant support at $60.00 and if shares are going to bounce this should be the spot for it to rally. The action over the last few days shows how traders have been buying the dips. We're suggesting a stop loss under the recent low. There is a lot of congestion in the $64 region but our target is the $65.50-66.00 zone. We do not want to hold over the late April earnings. FYI: The P&F chart is bearish and points lower.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 60.00 RAI-EL open interest= 295 current ask $3.30
BUY CALL MAY 65.00 RAI-EM open interest=1317 current ask $1.00

Picked on March 25 at $ 61.32
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 1.6 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - close: 140.98 chg: +1.45 stop: 124.85

AAPL continued to rally into Tuesday and shares hit new two-month highs in addition to breaking out past resistance near $140. The move is bullish but there is bound to be a tug-of-war between buyers and sellers. We should be seeing end of quarter window dressing or in AAPL's case it could be undressing since the stock had a terrible quarter. Yet at the same time you've got the bullish camp seeing the last couple of months as a bottom in the stock. We remain bullish but patient traders may want to wait for a dip back into the $137-135 zone as a new entry point for calls. Yesterday we raised the stop loss to $124.85. Our target is the $148.00-150.00 zone. More aggressive traders could aim higher, maybe $160ish. The Point & Figure chart is bullish with a $166 target.

Picked on March 23 at $133.27
Change since picked: + 7.71
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 48.5 million

---

DIAMONDS - DIA - close: 125.13 change: -0.21 stop: 120.75

The worse than expected consumer sentiment data failed to derail the market. Today's move looks like a pause in the rally. The big question for traders right now is will the rally continue past the quarter end on Monday? We remain bullish on the DIA with it trading above its 50-dma. Our target is the $128.00-130.00 zone.

Picked on March 23 at $123.11
Change since picked: + 2.02
Earnings Date 00/00/00
Average Daily Volume = 19.1 million

---

Essex Prop. Trust - ESS - cls: 116.39 chg: -0.15 stop: 109.90

We remain bullish on ESS but patient traders may want to wait for a dip before jumping into new call positions. Shares should find short-term support near $112.50 and again near its rising 10-dma. Our target is the $124.50-125.00 range. Traders should expect some resistance near $120 but it will probably be temporary. The Point & Figure chart is bullish with a triple-top breakout buy signal and a $132 target. FYI: Aggressive traders could also try buying calls on another dip near $111-110.

Picked on March 24 at $115.50 *triggered
Change since picked: + 0.89
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand

---

Intuitive Surgical - ISRG - cls: 325.93 chg: - 1.31 stop: 278.00

There was no follow through rally for ISRG today but neither was there any serious profit taking. The lack of selling after yesterday's monster move can be seen as a bullish sign. You might want to consider taking some profits off the table now. We are not suggesting new positions at this time. Our target is the $339.00-340.00 zone. More aggressive traders may want to aim higher. The bullish target on the P&F chart just jumped from $360 to $456 on Monday.

Picked on March 23 at $300.69
Change since picked: +25.24
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Ambac Fincl. - ABK - cls: 6.70 change: +0.29 stop: n/a

ABK reversed yesterday's decline with a 4.5% pop today. In the news today ABK announced that the company's chairman and CEO would present at the Bank of America 2008 Smid Cap Conference on March 26th. We are not suggesting new bearish positions in ABK. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes).

The bounce from $5.00 is struggling.
Picked on January 27 at $ 11.54
Change since picked: - 4.84
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

Cytec Ind. - CYT - close: 54.19 chg: +1.14 stop: 56.15

We did not see any news today to account for CYT's relative strength. The stock has broken out above short-term resistance at $54.00 and broken its four-week trendline of resistance. More conservative traders may want to tighten their stops. We are not suggesting new bearish positions at this time. The $50.00 level looks like nearest support so we are targeting a drop into the $50.25-50.00 zone. More aggressive traders might want to consider aiming lower.

Picked on March 09 at $ 54.72
Change since picked: - 0.53
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 601 million

---

MBIA Inc. - MBI - close: 14.13 change: -0.04 stop: n/a

There was no follow through rally for MBI but neither was there any profit taking. This is a bullish development for the stock. Volume came in very low, which suggest investors are still in a wait and see mode. We're not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes). We will definitely hold over the April earnings if we get the chance.

Picked on January 27 at $ 14.20
Change since picked: - 0.07
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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