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Daily Newsletter, Wednesday, 1/13/2010

Table of Contents

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

Market Wrap

New Highs Despite a Rocketing Deficit

by Judy Alster

Click here to email Judy Alster
"Yes, we helped to destroy the economy but no, you mustn't blame us" about sums up bankers' testimony on Capitol Hill Wednesday in front of a special commission; the panel inquiry is expected to last a year. CEOs of Goldman-Sachs and Bank of America said, "We regret the consequence that people have lost money" and "We understand the anger felt by many citizens," but still maintained that their risky behavior seemed like the thing to do at the time. No surprises here. Bank stocks had no real reason to fall on any of this and they didn't; next to health care they were today's big movers. (There's an Arabic proverb for all this: "The dogs bark but the caravan passes on.")

BANK OF AMERICA:

Bank of America (BAC) rose 1.83%, Goldman (GS) gained 0.79%, J.P. Morgan rose 2.5% and Morgan Stanley (MS) stopped a three-day slide with a 0.35% gain.

S&P BANK ETF:

That almost-cup-and-handle pattern, above, is one I'm seeing in any number of stocks and indexes, by the way. As you know, when the "handle" formed by a brief downtrend reverses to top the edge of the "cup" and continue on up, that's a solid bullish sign. Another proverb, though, is "Many's the slip twixt the cup and the lip," so no chicken-counting just yet.

Merck and Co.'s upgrade and a positive comment on its pipeline benefited not only Merck, a big Dow gainer today, but other pharmaceuticals and healthcare as well:

MERCK:

Investors could be turning defensive, not surprising in a weak economy where solid, tangible industries like healthcare and utilities seem (and often are) safer bets than the outer reaches of technology. Gas and electricity provider Pepco Holdings (POM), for example, put on 2%; the company's 6.4% dividend probably doesn't hurt:

PEPCO HOLDINGS -- utilities attract in a down economy:

Earnings are starting to trickle in, with today featuring Sealy Corp. (ZZ), not a snooze with fourth-quarter net income of $2.6 million or 2 cents a share, better than last year's net loss of $41.4 million or 45 cents. Revenue increased to $332.1 million from $325.8 million; analysts had forecast earnings of a penny a share on revenue of $317.2 million.

SEALY not asleep, its earnings up:

One of those defensive-type companies, filtration- and packaging maker Clarcor (CLC) posted a better-than-expected quarterly profit, helped by strong product demand and cost-reduction measures. In spite of a 12% revenue drop, the company reported net income of $24.7 million or 49 cents a share, compared with $ 29.1 million or 56 cents a year ago. For 2010 it expects earnings between $1.55 and $1.70 a share, about in line with analysts expectations of $1.65 a share.

CLARCOR:

Stocks saw a broad rally Wednesday helped by the Merck upgrade, while financials rose on the outlook, finally, for higher profits. Despite a drop soon after the open and before the close, the indexes exhibited sharply higher highs and higher lows throughout the session.

MARKET WRAP, Wednesday, Jan. 13:

DOW JONES INDUSTRIAL AVERAGE:

The Dow Jones Industrial Average gained 51.53 points or 0.50% to 10.680.77. The S&P500 was up 9.46 or 0.83% to 1145.68 and the Nasdaq was the winner, up 25.59 or 1.12% to 2,307.90.

S&P500:

Support for stocks led to selling among Treasuries, which extended their losses after a $21 billion auction of 10-year Notes garnered a yield of 3.75% amid very active bidding. The benchmark 10-year Note fell 19 ticks, which pushed its yield back up toward 3.8%.

NASDAQ:

Advancing issues and volume easily outdid decliners, but with fewer than a billion shares trading on the NYSE, enthusiasm could have been higher. Telecommunications was the only category in the broad index trading lower, off 0.4%; integrated telecoms dropped 0.7%.

Because it has a beige cover. Anecdotal and chatty rather than scientific, the Federal Reserve's Beige Book report still commands attention. The book is produced about two weeks before the major policy-setting meetings of the Fed's Open Market Committee (this one is a prelude to the January 26-27 meeting); each time a different Fed district bank compiles evidence on economic conditions from each of the Federal Reserve's 12 districts. The moderator this time was the Federal Reserve Bank of Philadelphia, with economic conditions from Nov. 21 through Jan. 4.

The Fed found the recovery spreading but slowly, noting in its usual clunky fashion that "while economic activity remains at a low level, conditions have improved modestly further and those improvements are broader geographically than in the last report." Weak labor and real estate markets were, of course, the speed bumps. Ten districts reported at least some increased activity or improvement in economic conditions, with Philadelphia and Richmond reporting mixed conditions.

As for details, retail sales for the holiday season "were slightly higher than in 2008 but still far below 2007 levels." (Well, naturally: Late 2007 was right before the roof fell on our heads.) Manufacturing was up in half of the twelve Fed Districts, mixed in three and weak in three. However, manufacturers were generally more optimistic about growth in the coming months, a good sign. Home sales were up in most regions with gains mostly in low-end sales. Nonresidential real estate conditions remained soft almost everywhere. Finance was a concern as loan demand continued to decline or stay dull in most fed regions. Some districts reported that credit quality is still deteriorating, with commercial loan delinquencies now doing their version of residential delinquencies. Labor market conditions are still nothing to write home about, hand in hand with wages. Except for some metals, prices are about level.

Upshot? The recovery continues to take slow baby steps. Risks remain in credit markets, especially for commercial real estate lending. Consumer debt is with us yet. Nobody seems to see much speeding up for the next few months. Inflation is well-behaved, so the Fed is likely to keep rates where they are. I could do worse than quote bond expert David Ader: "At best we can say that there are some signs of hope, but in the context of the bad news being less bad."

Jostling the Beige Book for the spotlight was the Treasury Department's budget deficit which came in around expectations: $91.9 billion in December, wow, the 15th straight deficit and the largest December deficit on record. As regards spending, we had a $13 billion payment to Fannie Mae and an $8 billion increase in unemployment benefits, as TARP outlays zoomed to $3.9 billion from November's $2.2 billion. (Is it just me, or do these numbers begin to sound absurd?) For the first three months of the fiscal year, the deficit is running ahead of last year at $388.5 billion, up from $332.5 billion; that's a 17% rise.

SOME GOVERNMENT OUTLAYS AND latest DEBT TOTALS WITH 2010 DEBT ESTIMATE:

Above you see the actual outlays for the dozen or so biggest-spending government departments for the last four fiscal years, and (insert box) the debt total for 2006-2009 and estimated debt for fiscal 2010. No comment is required.

Oh, well . . . at least year-to-date receipts are off 11%, with lower individual income taxes reflecting the millions who have lost their jobs and corporate tax revenues down as companies struggle to deal with falling demand for their products. Even though spending was down from the same period last year, tax revenue fell even more, dropping by $59.7 billion as individual income and payroll taxes declined. Interest paid on the debt in December was $104.6 billion -- an alarming 34% of federal outlays for the month. Some economists have been warning for a while that the government's financing costs will begin rising sharply once the recovery begins and the Fed starts raising rates to make sure inflation doesn't get out of hand. The Treasury estimates the annual deficit will climb to $1.502 trillion for the full fiscal year 2010, up from $1.42 trillion in 2009. Equities took a quick understandable dive on the report but soon resumed their upward move as if nothing had happened.

But quick! Guess what commodity rose on the news! That's correct:

S&P GOLD TRUST

Soybeans, lumber and most cattle were up Wednesday, too, should you be wondering.

Big buildups in all petroleum categories are continuing to pressure oil prices, now below $80 after falling from a two-month high Tuesday. The Energy Information Administration's report found oil inventories rising 3.7 million barrels last week, gasoline inventories up 3.8 million and distillates up 1.4 million. Rising imports combined with flat demand are the cause: Oil imports jumped 0.5 million barrels a day last week to 8.9 million barrels, with imports of both gasoline and distillates higher. The reason for the surge was that cargoes being held out at sea due to end-of-year tax considerations were finally offloaded.

Refineries, where margins are traditionally thin, are still operating at only 81.3% of capacity. Gasoline output fell a steep 0.6 million barrels a day to 8.5 million barrels while distillate output, reflecting seasonal and especially recent demand for heating oil, rose slightly to 3.9 million barrels a day. Still, the drawdowns in heating-oil supplies were largely offset by the higher imports.

Crude-oil futures ended lower, slumping for a third consecutive session, with oil for February delivery down $1.14, or 1.4%, at $79.65 a barrel on the New York Mercantile Exchange. Some energy stocks recovered to finish with a small gain, but the U.S. Oil Fund (USO) followed it down to close at $39.30, off 33 cents or 0.83%; the Powershares Oil Fund (DBO) was off the same 0.83% at $27.60. One airline industry index was up nearly 1% in response, with all its components but one rising.

CRUDE OIL PRICES:

After hours came the interesting news that Federal regulators are planning their first major step to rein in oil speculators. On Thursday the Commodity Futures Trading Commission will consider setting trade limits on the New York Mercantile Exchange to keep fund managers and other speculative investors from wielding too much influence in the market.

Oil speculators have proliferated on the Nymex Oil on recent years, placing large bets on the direction of oil prices; the correlation between their activities and wild oil spikes isn't entirely coincidental. The limits proposed by the CFTC would cap how many contracts traders could buy; violators would be told to get rid of especially large positions. The CFTC also has the power to issue fines and revoke trading privileges on the exchange. Whether this will actually control future spikes in energy prices remains to be seen, as does the effect of the news on oil company shares.

In housing, we saw a respectable rise in the Mortgage Bankers Association's purchase index last week: It rose 0.8% while the refinance index jumped 21.8%. Interest rates remain 'way down with 30-year loans averaging 5.13%. It's still nothing to pin either real hopes or real gloom on, as the information out of the MBA has been inconsistent in recent weeks.

Trucker Werner (WERN) jumped sharply on an upgrade after DeutscheBank said the trucking sector is improving and the company, whose shares seem cheap, will be able to increase its rates; the stock jumped 58 cents or 2.75% to $21.69 . . . There was after-hours excitement at Zale Corp. (ZLC) with the forced resignations of its chief executive and two other top executives, just one day after rival Signet Jewelers released figures showing how much better it did in holiday sales. The shakeup came after several poor quarters at Zale . . . Also after the close, RealNetworks (RNWK) said founder Rob Glaser has stepped down as chief executive, but will remain board chairman . . . And now Hershey is preparing a counterbid to Kraft's (KFT) for U.K. candy maker Cadbury. This is shaping up as a pretty exciting duel . . . .

Earnings announcements accelerate Thursday and include potential big market mover Intel (INTC), engine maker Briggs & Stratton (BGS), Chinese agribusiness Origin Agritech (SEED), Korean steelmaker Posco (PKX); Shaw Communications (SJR) and gaming supplier Shuffle Master (SHFL). In economic reports, we could see some reaction to the jobless claims numbers; also on tap are retail sales, the European Central Bank announcement and the natural gas report. Keep your eye on import and export prices, too.


New Option Plays

High Profile

by James Brown

Click here to email James Brown

These big cap names will attract lots of interest if the market can keep the rally alive.


NEW DIRECTIONAL CALL PLAYS

Apple Inc. - AAPL - close: 210.65 change: +2.93 stop: 203.99

Why We Like It:
Bulls poured into AAPL once the selling stalled at $204 this morning. The big intraday rebound looks like a short-term bullish reversal. Volume was above average on the move, which is a positive sign. I think AAPL could rally into its earnings report, which is coming up quick on January 25th. We will plan to exit ahead of the announcement.

I'm suggesting bullish positions now. You might want to wait for a little more confirmation with a move over $213, the January 11th high. As you can tell from AAPL's performance today the stock can be volatile. I consider this an aggressive trade. I would use very small positions (1/4 to 1/2 your normal trade). Our first target to exit is $219.50. Our second target is $224.50.

Suggested Options:
I'm suggesting the February calls but we'll exit ahead of earnings on January 25th. My preference is the $220 strike.

BUY CALL FEB 220 AJL-BX open interest=32,265 current ask $6.50

Annotated Chart:

Entry  on   January 13 at $210.65 
Change since picked:       + 0.00
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =       17.1 million  
Listed on   January 13, 2010         


Goldman Sachs - GS - close: 169.07 change: +1.25 stop: 164.95

Why We Like It:
After a one-week correction shares of GS look like they've found a new trading bottom near $166. I believe shares are poised to rally into their earnings report, which is coming up on January 21st. We will plan to exit ahead of the report, which makes this a short-term trade. Buy calls now. Use a stop loss under today's low. I'm suggesting a stop at $164.95. Our first target to take profits is at $174.90. Our second target is $179.00.

Suggested Options:
I am suggesting the February calls but we'll exit ahead of earnings. I would use the $170 or $175 strike but my preference is for the $175s.

BUY CALL FEB 175 GPY-BO open interest=8918 current ask $4.25

Annotated Chart:

Entry  on   January 13 at $169.07 
Change since picked:       + 0.00
Earnings Date            01/21/10 (unconfirmed) 
Average Daily Volume =        7.1 million  
Listed on   January 13, 2010         



In Play Updates and Reviews

Stocks Bounce Intraday

by James Brown

Click here to email James Brown


CALL Play Updates

AvalonBay Commty. - AVB - close: 80.42 change: +1.83 stop: 77.90

AVB almost completely erased yesterday's decline and the close over $80.00 is encouraging. However, I'm suggesting we wait for the move over $82. Our plan is to buy calls at $82.05. If triggered our first target is $87.50. We will plan to exit ahead of the early February earnings report.

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 82.05     
Change since picked: + 0.00
Earnings Date 02/03/10 (confirmed)
Average Daily Volume = 1.4 million
Listed on January 09, 2010


Caterpillar - CAT - close: 62.33 change: +0.09 stop: 59.45

CAT did not see much of a bounce. Shares traded sideways in a very narrow range. The $60 level should now be new support. Our second and final target is $67.00. Earnings are coming up quick and we plan to exit ahead of the report on January 26th.

Entry  on   January 09 at $ 60.95 /gap higher entry (small positions)     
Change since picked: + 1.38
/take profits early $ 64.13 (+5.2%) Earnings Date 01/26/10 (confirmed)
Average Daily Volume = 4.8 million
Listed on January 09, 2010


Express Scripts - ESRX - close: 90.10 change: +0.93 stop: 87.45

Today's bounce back above $90.00 is a new entry point to buy calls. Our first target is $95.75. Our second target is $99.75. We do not want to hold over the February earnings report.

Entry  on   January 09 at $ 91.65 (small positions)     
Change since picked: - 1.55
Earnings Date 02/24/10 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on January 09, 2010


FUQI Intl. - FUQI - close: 21.31 change: +0.16 stop: 18.99

Traders bought the dip near $20.60 today. If you are looking for a new entry point I would still wait for a dip closer to $20.00. This was a very aggressive trade and I suggested very small positions. Our target to exit is $24.75 but more conservative traders may want to start taking profits early anywhere above $22.50.

Entry  on   January 06 at $ 20.51   (small positions 1/4)  
Change since picked: + 0.80
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 04, 2010


J.P.Morgan Chase - JPM - close: 44.25 change: +0.76 stop: 42.85 *new*

Banks produced a bounce and JPM out paced many of its peers with a 1.7% gain. We plan to exit tomorrow at the closing bell to avoid holding over earnings on Friday. I'm upping our stop loss to $42.85, just under today's low.

Entry  on   January 04 at $ 42.85 (small positions 1/2)      
Change since picked: + 1.40
take profits on 01/09/10 @ 44.68 (+4.2%) Earnings Date 01/15/10 (confirmed)
Average Daily Volume = 31.6 million
Listed on January 04, 2010


L-3 Communications - LLL - close: 88.94 change: +0.76 stop: 86.90

The consolidation in LLL is starting to look more bullish as LLL creeps toward its 2009 highs. I remain somewhat cautious here and hesitate to launch new positions. If you have the January calls you'll need to exit tomorrow or Friday!

I did label this an aggressive, higher-risk trade. Our first target to take profits is at $89.95. Our second and final target is $94.00. We want to exit ahead of the late January earnings report. FYI: The Point & Figure chart is bullish with a $104 target.

Entry  on  December 28 at $ 86.80       
Change since picked: + 2.14
Earnings Date 01/28/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 26, 2009


Precision Castparts - PCP - close: 114.81 change: +0.32 stop: 112.25

Traders bought the dip near $113 for the second day in a row. More conservative traders could up their stops toward $112.90. I'm not suggesting new positions. Our final target is $118.75. More aggressive traders could aim higher. Our original play listed the January calls so we'll have to exit tomorrow or Friday.

Picked on  December 01 at $107.35      
Change since picked: + 7.46
/1st target hit $112.45 (+4.7%)
Earnings Date 01/20/10 (unconfirmed)
Average Daily Volume = 817 thousand
Listed on November 28, 2009


TORO Co. - TTC - close: 43.85 change: +0.63 stop: 41.40

TTC erased yesterday's losses and is coiling near short-term resistance at $44.00. If the market shows any strength tomorrow TTC has a decent chance to breakout. Our exit target is $45.90. We don't want to hold over the February earnings report. The plan calls for small positions to limit our risk.

Entry  on   January 07 at $ 42.60 (small positions)      
Change since picked: + 1.25
Earnings Date 02/18/10 (unconfirmed)
Average Daily Volume = 289 thousand
Listed on January 05, 2010


UnitedHealth Group - UNH - close: 32.54 change: +0.49 stop: 29.90

Traders bought the dip in UNH again. This continues to look like a new entry point as long as you apply a relatively tight stop loss. If you have January options we have to exit this week. That leaves us tomorrow or Friday. Conservative traders will want to consider an exit near short-term resistance at $33.

This was a "lottery ticket" style of play. We knew it was risky given all the political ups and downs for the healthcare bill. Our time frame was several weeks and we listed January and March calls. At this time if you choose to open new positions I'd use March calls but that would require holding over the late January earnings report (to get the most out of your March calls). Our first target is $34.00. Our longer-term target is $36.00.

Entry  on  December 10 at $ 30.31       
Change since picked: + 2.23
Earnings Date 01/21/10 (unconfirmed)
Average Daily Volume = 819 thousand
Listed on December 10, 2009


Union Pacific - UNP - close: 67.47 change: +0.08 stop: 64.90

I don't see any change from yesterday's comments. Traders bought the dip at $66.55 today. I would still open bullish positions at current levels. Our first target is $69.95. Our second target is $72.00 but that is very optimistic. Earnings are coming up this month and we plan to exit ahead of earnings. I'm listing our stop loss at $64.90 but more conservative traders might be able to get away with a stop closer to $66.25 or $66.50. The low today was $66.76. Our risk/reward is not super attractive here so consider smaller positions.

Entry  on   January 12 at $ 67.39     
Change since picked: + 0.08
Earnings Date 01/21/10 (confirmed)
Average Daily Volume = 2.5 million
Listed on January 12, 2010


Whirlpool - WHR - close: 83.07 change: +0.72 stop: 79.90

If WHR can clear the $84 level again I'd be tempted to launch new positions. I'd use February or March calls. Our original play suggested January calls so we'll need to exit our current trade before expiration.

WHR has already hit our first target at $84.75. Our second target is $89.00.

Entry  on  December 19 at $ 80.76 /gap higher entry      
Change since picked: + 2.31
/1st target hit $84.75 (+4.9%)
Earnings Date 02/08/10 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on December 19, 2009


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BEARISH PLAYS

Sears Holding - SHLD - close: 103.12 change: +2.69 stop: 102.05

SHLD is showing way more strength than expected. There was no weakness yesterday when the market turned lower and today shares hit new relative highs. The stock hit our stop loss at $102.05 closing this trade.

Chart:

Entry  on   January 09 at $ 99.17 (small positions)    
Change since picked: + 2.88 <-- stopped @ 102.05 (+2.9%)
Earnings Date 02/25/10 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on January 09, 2010