Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/19/2010

Table of Contents

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

Market Wrap

What Can Brown Do For You?

by Jim Brown

Click here to email Jim Brown

This rally brought to you by Brown, Scott Brown. The weekend leap into the lead in the Massachusetts senate race by Scott Brown sent shorts racing to cover those Friday positions.

Market Stats Table

The weekend election polls showed a strong surge by republican Senate candidate Scott Brown in Massachusetts and the markets exploded higher on the prospects of gridlock returning to Washington. If Scott Brown wins the game changes on the healthcare debate, cap and tax and possibly the new bank tax proposed by the president. If Brown wins the democrats lose their 60 vote super majority in the Senate and can no longer pass any major legislation without some republican support. The Senate seat up for grabs is the seat held by Ted Kennedy for the last 46 years. To have it go republican immediately after his death is a strong message to other democrats up for reelection in 2010.

The markets rallied strongly at the open when the weekend polls had Brown up 8-10 points over his opponent. The surge has been very strong and in only the last two weeks. Polls as recent as Jan 6th had Coakley up by +17 points. I can't remember a race that changed this dramatically in that short of a period. Even a last ditch effort and visit to MA by Bill Clinton and President Obama did not appear to help Coakley. Note the dramatic shift in the poll numbers over the last month.

Real Clear Politics Poll Summary

The economic news was no help today but the shorts being squeezed didn't care. The NAHB Housing Market Index fell again in January to 15 from December's reading of 16. Economists were expecting a rebound to 18. The rebound high was 19 back in September. The drop was attributed to declines in the current sales of single-family homes as well as a drop in buyer traffic. Traffic fell to 12 and the lowest level since June. All the regional indexes also fell at least a point. Factors influencing the slide included rising interest rates, tight credit and the large number of upcoming foreclosures. The continued news about the next wave of option ARM foreclosures is damping buyer interest.

NAHB Index Chart

There has been no decline in the appetite for U.S. debt with international investors purchasing $129.3 billion in long-term securities in November. Private buying was $96 billion and foreign institutions purchased $33.3 billion. In comparison U.S. residents purchase an inconsequential amount of only $2.5 billion of foreign securities. The $129 billion was triple the prior rates. The jump was attributed to the news of the Dubai debt default and worries over a default by Greece.

The economics and election news were just the lead off acts for IBM earnings after the bell. IBM was the main event and the rest was filler. After the bell IBM reported earnings of $3.59 per share compared to analyst estimates of $3.47 per share. Unfortunately it was not enough to please investors. After an initial spike of about $2 IBM shares sold off to close the after hours session at just over $131 and a -$3 loss after the close.

IBM gave only a slight increase in guidance and revenue for Q4 was up only +1%. This is a case where expectations were not met. It was the first increase in revenue since July-September quarter in 2008. IBM earned $4.8 billion for the quarter on revenue of $27.2 billion. Hardware sales fell while services and software sales rose. Hardware revenue has been on a slow decline as the cost of new equipment continues to decline with the cost of components. IBM signed an additional $18.8 billion in new services contracts in Q4. That is a +9% over the comparison quarter.

IBM said it would earn "at least $11" in 2010. That was an improvement from their prior guidance of a range from $10-$11. By not giving an upper end to the current guidance it frees them to continue to adjust guidance without having to be specific. IBM earned $13.4 billion, a +9% increase for the full year in 2009 while revenue fell -8% to $95.8 billion.

IBM ended the quarter with cash on hand of $14 billion. The earnings per share were helped by the recurring IBM earnings trick of strategic share buybacks. They purchased $7.4 billion in shares over the quarter and paid dividends of $2.9 billion. IBM does not announce buybacks until they report earnings. That means analysts predict earnings based on the number of shares outstanding as of the prior report. In this case it was about 1.35 billion shares. IBM bought back roughly 59 million shares and that impacted earnings per share by about 15 cents to the upside. Estimates were $3.47 and actual earnings were $3.59 per share. That means without the benefit of the share buybacks earnings would have been flat or down. IBM probably manufacturers earnings better than they do hardware. Retail investors never hear the behind the scenes details so all they see is the big beat on the earnings per share and that keeps the stock moving higher long-term.

IBM Chart

Broker TD Ameritrade (AMTD) rallied strongly at the open after reporting a decline in earnings of -26%. The reason for the share gain was a jump of +61% in new assets that management said would make them money when interest rates finally rise. The CEO also said trading activity which had fallen sharply in Nov/Dec had bounced back strongly in 2010. He said the middle of November investors locked in their positions, added some protection then took off for the rest of the year. That is exactly what we were reporting in these pages for most of December.

AMTD earned only 23-cents per share, down from 31-cents in the comparison quarter and below analyst estimates of 26-cents. AMTD added $8.7 billion in new account assets was attributed to registered independent advisors or RIAs moving to AMTD and bringing their clients. AMTD said with interest rates near zero they had to waive $20 million in fees on money market funds and forfeited $200 million in revenue during the quarter due to the low rates. AMTD said once rates rise they would see significant jump in revenue from the new accounts. AMTD gave back about half its opening gains but still finished positive for the day.

AMTD Chart

Charles Schwab (SCHW) reported earnings after the bell of 14-cents and that missed analyst estimates of 15-cents. Schwab earned 27-cents in the comparison quarter. The also announced a secondary offering of 26 million shares. Trading revenue fell -36% to $224 million from $352 million. SCHW lost a buck in after hours trading.

SCHW Chart

CSX, the country's third largest railroad reported earnings that rose +23% compared to last year but excluding items that fell to -16%. Earnings Q4-08 contained a large one-time loss for the sale of some real estate. CSX said shipping gains moving from truck shipping to railroad shipping rose but the gains were more than offset by declines in food and coal shipments. Coal demand in the U.S. has fallen over the last year because energy conservation measures by consumers as well as lower electrics demand by businesses has led to lower electric generation with coal. This is temporary but could last another 12-18 months. CSX lost $2 in after hours. UNP and BNI report earnings on Thursday.

CSX Chart

Citigroup reported an earnings loss of 33-cents this morning, which equates to -$7.6 billion. The loss of 33 cents matched analyst estimates. CEO Vikram Pandit said loan performance outside the U.S. looks strong but losses could increase in Q1. "U.S consumer credit remains an issue." Citi set aside additional reserves of $8.2 billion to cover credit losses and other items. This was lower than the $12.7 billion in additional reserves in Q4-08. Even though they have paid back some of the TARP loans the government still owns 7.7 billion shares. That equates to about 25% of the total outstanding shares. There is a monster reverse split in Citi's future. Citi shares sold off at the open but recovered to close slightly positive at $3.50.

Citi Chart

The clear earnings winner was LED maker Cree Inc. CREE posted a profit of 38-cents and beat analysts projections of 30-cents by nearly 33%. CREE CEO, Chuck Swoboda, said the revolution in lighting continues to gain momentum. Customers are buying more LED light bulbs instead of less efficient incandescent bulbs. They said their lights had been selected for initial deployment in 650 Wal-Mart stores. Revenue rose +35% to $199.5 million. CREE also raised guidance significantly to 44-cents for the current quarter compared to analyst estimates for 29 cents. CREE shares spiked +$6 in after hours to more than $60. CREE sank -$4 on Friday after Morgan Joseph cut them from a buy to a hold. I wonder how that analyst feels tonight?

CREE Chart

Earnings due out on Wednesday include BAC, WFC, MS, USB, AMR, BK, EAT, COH, EBAY, FFIV, STX, SLM, SBUX and STT. Bank America is expected to post a loss of 52-cents. Wells Fargo is also going to post a loss with a $2 billion charge to pay off TARP. Morgan Stanley is expected to post a profit of 38-cents but say that trading volume is declining. There is an outside chance that BAC could produce an upside surprise.

Not only are pigs preparing to fly in Massachusetts but hell is likely to freeze over on Wednesday. Warren Buffet's Berkshire Hathaway could approve a 50:1 split of the Berkshire B shares. Warren has always been against splitting his shares because he feels that induces trading rather than investing. However, as part of his deal to acquire Burlington Northern (BNI) he is being forced to split the shares. The B shares closed up +$85 on the news to close at $3,332. A 50:1 split would give normal people the opportunity to buy shares under $100. It will also make it possible for the shares to be included into the S&P-500 and that could cause another spurt of buying.

Berkshire has a market cap of $155 billion and when it acquires BNI that will remove BNI from the S&P-500. It would be a logical move for S&P to take that opportunity to replace BNI with BRK.b shares. That would create a monster buying binge as all the index funds are forced to buy huge quantities of BRK.b. If only they had options I would be backing up the truck. Post split I expect they will add options. I only hope it happens before the S&P addition.

Berkshire Chart

The Dow rallied back to a new high at 10729 intraday and held its gains with a close at 10723. The -$3 after hours drop by Dow component IBM is sure to impact the Dow at the open but positive results by Bank America could offset that drop. The S&P futures are not showing any weakness overnight and I suspect the IBM earnings will be ignored to some extent. As I prepare to hit send on this market wrap the polls have closed in Massachusetts and Scott Brown is being called the winner. With more than 79% of precincts reporting Brown has 52.3% of the vote and Coakley only 46.7.%. This should continue to be a positive for the markets on Wednesday as the talking heads discuss how the loss of the democratic supermajority will impact current and future legislation. When Brown was called the winner the dollar index spiked sharply higher on the possibility there would be less government spending. I would say that was a long shot but I don't produce the news only write about it.

The Dow dip on Friday was right to support and the rally today was right to resistance. Nothing concrete can really be determined by either move. Until the Dow moves outside those levels it is simply more range bound trading with some triple digit excitement to spice it up. Resistance on the Dow is 10725 and support at 10560.

Dow Chart

The S&P returned to close exactly on 1150 and exactly on resistance that has held every test in 2010. With the Scott Brown victory tonight that resistance could break. A move over 1150 has plenty of room to run as the volume of earnings increases every day for the next week. Support is now 1130.

S&P Chart

At the risk of sounding like a broken record the Nasdaq stopped exactly on resistance at 2320 and appears poised for a big move higher. That catalyst could be chip earnings like we saw from CREE tonight. The big techs like Google, Amazon, Microsoft and Apple will not report for several days and that could keep the excitement at a higher pitch than had they already reported. IBM's earnings were higher on the face despite the internal fuzzy math. Unfortunately a decline by IBM on Wednesday could offset the positive news from CREE. Ebay announces after the close and will be no help during the day. Resistance is 2320 and support 2280.

Nasdaq Chart

The Russell chart looks just like those above with a dead stop on resistance so no real clues there. I am wondering just how long the Scott Brown news can really hold up the market since the opposing party will do everything in their power to claim it was no big deal. Will investors believe the hype or the reality is unknown. I would be a buyer of any breakout and wary of any selling. My personal view is for a continued sell off once the majors report earnings so I am cautious of any rally that appears too good to be true.

Jim Brown


New Option Plays

Bulldozing Higher

by James Brown

Click here to email James Brown

Editor's Note:

The major indices rallied toward their recent highs and bullish candidates are pretty common. I'm providing a list of stocks that are currently on my watch list. Keep in mind I haven't looked up their earnings dates yet and would not want to hold over any earnings announcements.

Stocks that look interesting: CTSH, CTXS, CVX, COP, BAX, JNJ, GD, and DVN.


NEW DIRECTIONAL CALL PLAYS

Joyg Global - JOYG - close: 59.93 change: +1.48 stop: 57.75

Why We Like It:
Commodity stocks were on the move again in spite of strength in the U.S. dollar. Shares of JOYG look poised to continue their run higher after consolidating sideways (albeit in a volatile manner) the last several days. More aggressive traders may want to consider bullish positions now. I want to see a little more confirmation so I'm suggesting a trigger to buy calls at $61.51. If triggered our first target to take profits is at $64.95. Our second target is $69.00. FYI: The Point & Figure chart's long-term target is $79.00. We do not want to hold over the early March earnings report.

Suggested Options:
Traders could use the February or April calls (I don't see any open interest in March calls). My preference is the April $65 strike.

BUY CALL APR 65.00 JQY-DM open interest=3,402 current ask $2.90

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 61.51
Change since picked:       + 0.00
Earnings Date            03/03/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on   January 19, 2010         



In Play Updates and Reviews

Rally Toward The Highs

by James Brown

Click here to email James Brown

Stocks recovered from their intraday lows and the major averages rallied toward their recent highs. The gap down affected our latest entry points.


CALL Play Updates

Apple Inc. - AAPL - close: 215.04 change: +9.11 stop: 203.99

A market rally, positive analyst comments, a new higher price target, and speculation over AAPL's next product all came together and pushed AAPL to a $9 gain (+4.4%). The stock rallied toward its January highs near $215. Hopefully the rally continues. We are down to our last few days. AAPL is due to report earnings on January 25th and we do not want to hold over the report.

This was an aggressive bullish trade and the plan was to use small positions (1/4 to 1/2 your normal trade size). Our first target to exit is $219.50. Our second target is $224.50.

Entry  on   January 13 at $210.65 
Change since picked:       + 4.39
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =       17.1 million  
Listed on   January 13, 2010         


AvalonBay Commty. - AVB - close: 80.89 change: +1.46 stop: 77.90

It was a strong session for AVB. The stock produced a bullish engulfing (reversal) candlestick pattern. More aggressive traders may want to open positions now. I am suggesting we stick to our plan and wait for the stock to hit our trigger 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         


Express Scripts - ESRX - close: 91.00 change: +0.96 stop: 87.45

ESRX rallied off its intraday lows and posted a 1% gain. Shares look poised to run from here. I would use today's move as a new bullish 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:       - 0.65     
Earnings Date            02/24/10 (unconfirmed)
Average Daily Volume =        2.6 million      
Listed on   January 09, 2010         


FUQI Intl. - FUQI - close: 20.43 change: -0.30 stop: 18.99

FUQI continues to slip and is getting a lot closer to the $20.00 level, which should be support and a new entry point for us. However, if the market continues to rally on Wednesday I wouldn't be surprised to see FUQI rebound from here and readers could use a bounce tomorrow as a new entry point instead of waiting for a dip to $20.00 (the low today was $20.22).

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:       - 0.08       
Earnings Date            03/31/10 (unconfirmed)
Average Daily Volume =        1.0 million      
Listed on   January 04, 2010         


L-3 Communications - LLL - close: 89.54 change: +0.09 stop: 87.85

LLL really didn't make much progress today. Shares rallied off their lows but rolled over under the recent highs to close nearly unchanged. I am not suggesting new bullish positions at this time.

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:       + 2.74
                            /1st target hit @ 89.95 (+3.6%)
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.0 million      
Listed on  December 26, 2009         


TORO Co. - TTC - close: 43.05 change: +0.19 stop: 41.40

TTC dipped toward $42.50 this morning but the rebound stalled at $43.50. Readers may want to be patient here and wait for a dip or a bounce near $42.00 before launching new positions. 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:       + 0.45      
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        289 thousand     
Listed on   January 05, 2010         


UnitedHealth Group - UNH - close: 35.13 change: +1.38 stop: 31.95 *new*

The special election being held in Massachusetts to fill Ed Kennedy's senate spot has turned into a flash point on the healthcare debate. Healthcare stocks were in rally mode on expectations that the Republican candidate Scott Brown would beat Democrat Martha Coakley and disrupt the Democrats control over the senate floor.

Shares of UNH gapped open higher and spiked to $35.90 before settling with a 4% gain. If there is a clear winner tonight in the election it could have a big influence on the healthcare stocks. I am suggesting that readers start taking profits now and we'll probably want to sell on any opening spike tomorrow. Officially the newsletter will leave the final target at $36.00 but you may want to aim a little higher. Just be aware that any rally tomorrow could fizzle out as investors take profits. I am raising our stop loss to $31.95.

Entry  on  December 10 at $ 30.31    
Change since picked:       + 4.82    
Earnings Date            01/21/10 (unconfirmed) 
Average Daily Volume =        819 thousand      
Listed on  December 10, 2009         


Yanzhou Coal Mining. - YZC - close: 23.81 change: -0.18 stop: 22.50

Coal stocks, as a sector, gapped open lower and then bounced off their intraday lows. The KOL coal ETF gained 1.75%. Shares of YZC under performed its peers with a 0.75% decline. Yet shares also gapped open lower, which affected our entry point. I don't see any changes from our weekend comments and would still consider new bullish positions at this time. Our first target to take profits is at $26.50.

Entry  on   January 19 at $23.77 /gap down entry
                            /originally listed at $23.93
Change since picked:       + 0.04
Earnings Date            (Unknown)
Average Daily Volume =    444,000  
Listed on   January 17, 2010         


PUT Play Updates

Interoil Corp. - IOC - close: 72.82 change: -1.92 Stop: 76.50

The sell-off in shares of IOC continues. Shares gapped open lower at $74.01 and dipped to $71.23 before paring its losses. The close under its 30-dma is short-term bearish. If you didn't launch positions this morning you could wait for a new failed rally in the $74-75 zone. Our target to exit is $67.00.

Entry  on   January 19 at $74.01 /gap down entry
Change since picked:      - 1.19
Earnings Date           (Unknown)
Average Daily Volume =        1.1 million  
Listed on   January 17, 2010         


CLOSED BULLISH PLAYS

Caterpillar - CAT - close: 60.93 change: +0.81 stop: 59.45

The intraday bounce in shares of CAT today looks like a new bullish entry point. Unfortunately, CAT gapped open lower at $59.76 and dipped to $59.35 before bouncing. That means shares hit our stop loss at $59.45 closing this trade. Nimble traders may want to re-open positions right here with a stop under today's low. CAT has earnings coming up in about six days so I'm going to leave the play closed.

Chart:

Entry  on   January 09 at $ 60.95 /gap higher entry (small positions)
Change since picked:       - 1.50 <-- stopped @ 59.45 (-2.4%)
                         /take profits early $ 64.13 (+5.2%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        4.8 million    
Listed on   January 09, 2010         


Union Pacific - UNP - close: 65.52 change: -0.05 stop: 64.90

Shares of UNP underperformed its peers in the railroad sector and the S&P 500. The stock broke down under the $65.00 level on an intraday basis and hit our stop loss at $64.90. UNP managed to rebound once it tagged the 50-dma. I would seriously consider buying calls on a bounce from here with a stop under today's low. Yet UNP is due to report earnings in a couple of days so discipline tells me to wait until after the earnings report.

Chart:

Entry  on   January 12 at $ 67.39 
Change since picked:       - 2.49 <-- stopped out @ 64.90 (-3.6%)
Earnings Date            01/21/10 (confirmed)
Average Daily Volume =        2.5 million    
Listed on   January 12, 2010