Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/24/2010

Table of Contents

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

Market Wrap

Bernanke Speaks; Investors Mostly Like the Sound

by Judy Alster

Click here to email Judy Alster
Federal Reserve Chairman Ben Bernanke's chairman's semiannual monetary policy testimony to the House Financial Services Committee was the big news Wednesday but in truth, we didn't learn much that was new. For example, the Fed chief assured the committee that the central bank is investigating what tools to use once the economy requires higher rates, and reiterated that the economy still needs record-low interest rates for several months at least because the climb out of the deep recession is expected to be slow. The stock market was grateful for that, and the reassurance of low rates offset some distressing news about January new-home sales and prices.

The chairman insisted that last Thursday's surprise increase in the emergency-lending "discount" rate to banks wouldn't mean higher borrowing costs for consumers and companies any time soon, and he's been proven right so far, as the market has not thudded since then. After an admittedly volatile day, the three major indexes closed up just about 1% -- but not on significant volume.

INDEX WRAP, WEDNESDAY, FEB. 24:

Not surprisingly, the dollar fell against the euro and yen after the reaffirmation of low rates, but only slightly:

THE DOLLAR TAPPED THE BRAKES AFTER ITS 8.4% RISE SINCE DECEMBER:

To recap, Bernanke again reminded Congress that over the next couple of years the job market is expected to remain weak and inflation will stay down (one wonders how he knows that about inflation) . . . . Voicing a growing worry, the chairman noted that "Of particular concern, because of its long-term implication for workers' skills and wages, is the increasing incidence of long-term unemployment." (Listen, workers' skills and wages aren't even half of it. This is a frightening subject indeed, and time and space limitations forbid my doing it justice here. For a highly insightful, in-depth discussion of this problem, take a look later at the current issue or the online version of The Atlantic magazine.) . . . . Among other assertions, Bernanke said "most economists" agree that the massive stimulus passed last year has created jobs but that we could see another similar action . . . . He said the Fed expects the economy to expand by between 3% and 3.5% this year and between 3.5% and 4.5% in 2011; the unemployment rate is seen falling only slowly, to around 7% by the end of 2012. (We'll see about that. The jobless rate fell to 9.7% in January from 10% in December, but a separate government survey showed the economy continued to shed jobs last month.)

The market liked what it heard, sending practically everything up except some commodities and the dollar. Financial-stock shareholders seemed especially pleased and helped pull the Dow up 91.75 points after its 101-point downhill mogul run Tuesday. Most major financials -- Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Morgan Stanley (MS) -- were up around 2% or more, reflected by the S&P Bank ETF:

S&P KBW BANK ETF:

Even more enthusiastic were some regional banks like Umpqua Holdings (UMPQ), SVB Financial Group (SIVB), First Merit (FMER), PacWest Bancorp (PACW), Fulton Financial (FULT) and MB Financial, the last of which jumped $1.05 or 5.20%. Need I add that many bank stocks pay dividends. Many if not most of those dividends have fallen, some drastically, in the last two years; several are now climbing slowly back. When doing your due diligence on dividend stocks, check to make sure the worst is over.

FULTON FINANCIAL -- REGIONAL BANKS STOCKS WERE STARS WEDNESDAY:

The tech-heavy Nasdaq rose Wednesday, helped by software company Autodesk Inc. (ADSK), who reported after the close Tuesday. Autodesk announced stronger-than-expected Q4 earnings and revenue, signifying that corporate wallets are opening as demand improves for its architects' and designers' software -- a very good sign. Many of the company's customers appeared to be upgrading their software, healthy for both revenue and margins. The company reported net income of $50.1 million or 21 cents a share after a year-ago loss of $105.30 million or 47 cents. Excluding items, Autodesk earned 30 cents a share, beating analysts' estimated 23 cents. Net revenue including licensing and maintenance fell to $456.1 million from $489.8 million last year but also easily beat analysts' target of $432 million.

Autodesk is well positioned for increased revenue in 2010 because of its international client base as well as improved U.S. capital spending. Shareholders loved it; the stock gained almost 9% on outstanding volume.

AUTODESK BEAT THE STREET:

The Nasdaq was up 22.46 or just over 1% to 2,235; a nice move but volume was only so-so.

NASDAQ:

The Dow almost but not quite made up for its Tuesday rout, closing at 10,374.16 or 0.89%, but also not yet thrilling:

DOW JONES INDUSTRIAL AVERAGE:

And the S&P500 topped its 1,100 resistance by 5 points or 0.97%, but it's still 'way too soon to break out the good champagne:

S&P500:

There was big volume, though, for several companies announcing earnings; more on that below.

Another company breaking to a new 52-week high on very good volume, was retailer Limited Brands (LTD), parent of the demure Victoria's Secret. The company saw a sharp rise in fourth-quarter profit, although it was the result of cost-cutting and tight inventory controls. Still, profit topped expectations and, added to a higher February outlook, bumped the stock up 2.4%. Limited earned $356.1 million or $1.08 per share, sharply up from $16.1 million or 5 cents a year ago. Quarterly revenue, helped by a 1% rise in same-store sales, reached $3.06 billion, from $3 billion in the year-ago period. For the year, same-store sales (sales at stores open at least a year) had a 4% drop but adjusted income at $1.01 a share gained 3 cents over the prior year.

Never really famous for bargains, Victoria's Secret has seen the light and is luring customers in with lower prices for some articles. It's evidently been paying off because earlier this month, the company reported a 6% rise in January sales at stores open at least a year. February should come in even higher, possibly in the low double-digits. The stock, like the company's models, looks like it has excellent support:

LIMITED BRANDS:

Over in entertainment DreamWorks Animation (DWA) reported that revenue slipped 3% to $194.2 million -- there should be an "only" in front of that number because the studio hasn't had a theatrical release since last March's Monsters vs. Aliens. Still, the company has the benefit of releasing its films on IMAX and in 3-D, which jacks up ticket prices; even bigger movers were DVD, pay-per-view and television licensing, which drove DreamWorks's $194.2 million in fourth-quarter revenue, well ahead of the $176.95 million analysts were looking for. The same was true for earnings, which at 50 cents a share fell short of last year but left estimates of 37 cents in the dust. Still, investors in their perverse way wanted more and sent the stock down 1.8%.

Ever since Disney (DIS) acquired Pixar, DreamWorks Animation is the only pure computer animation play, and with its franchises, it can expect big things from sequels of proven properties. If Shrek Forever After is even remotely like its predecessors -- Wow; and that's to be followed this year by How to Train Your Dragon and Megamind. A potentially promising wild card here is the 3-D television sets set to come out starting this year (and about which my husband is already making noise. Terrific: Now we can search for the remote and the glasses.) Disney, Sony (SNE) and Discovery Communications (DISCA) are already planning 3-D cable programming this year, which should lead to sales of new sets, good news for chipmakers, display-panel makers, cable companies and electronics retailers, to name a few.

DREAMWORKS -- EARNINGS UP EVEN WITHOUT A MOVIE BLOCKBUSTER:

One of the biggest announcers today, up $6.09 or $12.26, was discount retailer Dollar Tree (DLTR), who earned $135 million or $1.52 a share, up from last year's $105.2 million or $1.15; analysts were expecting $1.44. Sales rose an impressive 12.4% to $1.56 billion, while same-store sales grew 6.6%. All this while coming out of a recession, mind you. Dollar Tree expects 2010 earnings between $3.96 and $4.23 a share with sales of $5.59 billion to $5.76 billion. The company, who currently operates some 3,800 stores, plans to open 220 Dollar Tree stores and 25 Deal$ stores during the year, and wants to ultimately operate up to 7,000 Dollar Tree stores in the U.S. Who can argue with that kind of success?

DOLLAR TREE, ANOTHER EXPECTATION-BEATER:

Other companies announcing earnings today were apparel retailer Chico's FAS (CHS), who earned an adjusted $18.8 million or 10 cents a share, compared to a loss of $24.8 million or 14 cents last year, better than estimated. Same-store sales climbed 14.6%. Analysts wanted revenue of $421.1 million and got $435.7 million. The stock still lost four cents to $13.88 on three-times average volume; doubtless the news was already factored into the price . . . Luxury homebuilder Toll Brothers (TOL) posted another loss for its first quarter, but narrower than last year's: 25 cents a share, better than the 35 cent loss analysts were expecting. The stock, 22% off its August high, lost 12 cents on high volume.

Let me get just briefly back to the Fed chairman's remarks about housing. The Fed is sticking to its plans to end buying $1.25 trillion in mortgage-backed securities by the end of March, something that might lead to slightly higher mortgage rates, which some contrarian economists think could actually goose the housing market as people rush to lock in rates before they rise again.

(We could soon be seeing a new, tamer Federal Reserve, not a bad prospect. The House has approved a financial regulation bill that would focus great scrutiny on the Fed's interest-rate decisions, and the Senate wants to eliminate the Fed's regulatory powers over banks, after some senators accused Bernanke of missing every signal of the crisis. Stay tuned.)

Finally, it's Bernanke's opinion that the commercial real estate market -- retail, industrial and office space, despite some recent improvement -- presents the greatest risk where obtaining credit is concerned. Even so, shares of the most widely-held commercial real estate investment trusts have held up reasonably well over the last year, as this graph of Resource Capital (RSO) shows. Although buyer beware: RSO, like some other commercial REITs (and even though it just lowered its quarterly payout), pays a double-digit dividend that could be too hot not to cool down. Other commercial REITS that you may care to glance at, if you're interested in the group, are Lexington Realty Trust (LXP) and Washington Real Estate (WRE), with more realistic 6+% yields. Do not neglect to check dividend history.

RESOURCE CAPITAL (RSO), WIDELY-HELD COMMERCIAL REIT:

Wednesday's residential housing news was not at all good (except for buyers, of course). January with its unpleasant weather and post-Christmas bills is usually a tough month for the housing sector anyway, and relentlessly low prices and heavy inventory don't help. But new-home sales managed to fall in January to a much lower-than-expected annual rate of 309,000. Prices fell, too, with the median price down 5.6% on the month to $203,500, for another year-over-year decline, now at minus-2.4%. Inventory jumped to 9.1 months, reversing eight months of incremental improvement.

Graphs abound of home prices and home sales, but here's an unusual take on the subject -- home ownership rates through the end of 2009.

HOME OWNERSHIP RATES, 2001 to present:

From its peak in 2004 of 69.2% to the Q409 rate of 67.2%, the home ownership rate declined by two percentage points, but appears for the time being to have stabilized. Interestingly, despite the declining home ownership rate, there were more owner-occupied housing units at the end of 2009 than there were at the end of 2004. The reason for this apparent paradox is population growth. While the home ownership growth rate declined substantially, the number of households in the United States continued to grow throughout the recession, and a majority of heads of household continue to own homes. Is 67.2% the new normal?

As for crude, there was a rise in imports last week to the tune of 3 million barrels -- but there was a also a 700,000 barrel drawdown at the main delivery point, on top of crude-oil product draws. Gasoline stocks fell 900,000 barrels (only the second down week this year); distillates fell 600,000 barrels. To meet the reductions, refineries actually boosted output of both gasoline and distillates.

Inventory levels of all products remain high and demand remains soft, with gasoline demand showing the sixth straight year-over-year decline, down -0.3% last week. Demand for distillates is down 6.8% Oil fell a few cents on the news but a weaker dollar against the Euro sent it up $1.48 or 1.88% at the close to $80.34.

CRUDE OIL, GRAVITATING TO +-$80 A BARREL:

On that subject, drilling contractor Transocean (RIG) posted disappointing Q4 results -- $2.24 per share, although that includes several one-time items and may not be comparable to the consensus of $2.56. At any rate, revenues fell 10% to $2.55 billion, well short of the $2.83 billion consensus. The market sat it in the corner with a 5.7% loss on volume of almost 20 million.

TRANSOCEAN DOWN ON DISAPPOINTING EARNINGS, REVENUE:

On Thursday, important consumer discretionary-company announcements will include Revlon (REV), Kohl's (KSS), Heinz (HNZ), and Safeway (SWY); also look for Deutsche Telekom (DT) and France Telecom (FTE), Gerdau American Steel (GNA) and miner Sociedad Quimica de Chile (SQM).

Thursday features the Health Care Summit and more comments by Ben Bernanke, as well as jobless claims, durable goods orders and the natural gas report. With GDP and the Chicago ISM survey of purchasing managers, Friday should prove exciting.

This will be my last regular Market Wrap. I've certainly enjoyed writing these Wednesday updates and hope you've enjoyed reading them. Many thanks for your suggestions and comments. Good luck and good trading to all.


New Option Plays

Market Movers

by James Brown

Click here to email James Brown

Editor's Note:

Traders may want to take a step back. The market seems a little confused. After a two week bounce yesterday's decline looked like a clear reversal lower. The more optimistic view point is that yesterday's dip was just that a temporary pull back in a new up trend. Stocks rallied on Bernanke's comments this morning and completely ignored the dismal new home sales numbers. Yet the rally in the S&P 500 failed to breakout past yesterday's trading range, which suggest indecision by investors.

There is a lot of economic data and news yet to happen this week. Tomorrow we'll get more Bernanke testimony. The markets will also digest the durable goods number, weekly initial jobless claims, and the Kansas Fed manufacturing survey. Plus, the big story tomorrow will be the Thursday night Obama healthcare debate. Then on Friday we get the ISM reports and the GDP revision.

Any of these events or reports could move the market and with so many coming out the next couple of sessions could be choppy. I'm not adding any new plays to the newsletter tonight. Let's see what happens tomorrow.



In Play Updates and Reviews

No Follow Through

by James Brown

Click here to email James Brown

There was no follow through on Tuesday's market decline, which might embolden bullish traders


CALL Play Updates

Autozone Inc - AZO - close: 164.96 change: +0.72 stop: 159.40

AZO is still looking strong but we've only got three days left for this play to work. AZO remains under short-term resistance near $166.00. I am not suggesting new positions at this time. We want to exit ahead of the March 2nd earnings report. Our target to exit is $167.50.

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 3.21
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         


Celgene Corp. - CELG - close: 59.49 change: +0.35 stop: 53.90

CELG did not see any follow through on yesterday's bearish reversal. I still think we should wait for a dip but more aggressive traders could try buying calls on a breakout over the $60.50 level. Right now our plan is to buy calls on a dip at $56.50. If triggered at $56.50 our first target is $62.50. Our second, longer-term multi-week target is $69.00.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 56.50
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        3.6 million  
Listed on  February 20, 2010         


Colgate Palmolive - CL - close: 82.96 change: +1.07 stop: 79.75 *new*

CL displayed some relative strength with a 1.3% gain and a new relative high. I am raising our stop loss to $79.75. Our target to exit is $86.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 1.40
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         


Sina Corp. - SINA - close: 36.92 change: -0.04 stop: 34.95

Uh-oh! There was no follow through on SINA's bounce off the 200-dma from yesterday. Shares actually tested this support again today. The lack of a rebound is bearish and more conservative traders may want to abandon ship. I'm not suggesting new positions at this time. Wait for a new rise over $37.60 before considering new bullish positions. Our first target to take profits is at $39.95.

Entry  on  February 22 at $ 36.50
Change since picked:       + 0.42
Earnings Date            03/15/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         


TEVA Pharmaceuticals - TEVA - close: 59.56 change: +0.11 stop: 56.40

TEVA tried to breakout over the $60.00 level and hit $60.14 but couldn't hold it. I don't see any changes from my prior comments. If this stock we could see a dip toward $58.00-57.00 or its 50-dma. Wait for the dip or buy the bounce after the dip occurs. Our first target is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 0.82
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 200.66 change: +3.60 stop: 206.26

AAPL managed to erase yesterday's losses and reclaim the $200 level with today's 1.8% bounce. If this stock closes over $202.50 again odds are good we'll get stopped out. Be careful.

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. The plan was to use small positions to limit our risk.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 0.42
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Abbott Labs - ABT - close: 54.33 change: +0.36 stop: 55.05

There is no change from my prior comments. I remain very cautious on ABT and I'm tempted to close it early but shares remain under resistance at $55.00. No new positions at this time.

Our first target was $50.15. More aggressive traders can target the 200-dma or support near $48.00.

Entry  on  February 10 at $ 52.80
Change since picked:       + 1.53
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        7.5 million  
Listed on  February 09, 2010         


Franklen Resources Inc. - BEN - close: 101.65 change: +1.62 stop: 104.26

Financial stocks were some of the best performers today after Bernanke reinforced the view that rates would remain low a long time. Shares of BEN erased yesterday's losses with a 1.6% gain. More conservative traders may want to tighten their stops even further. I'm keeping our stop above the 50-dma. No new positions at this time. Our exit target is $95.00.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 2.06 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Caterpillar - CAT - close: 56.96 change: +0.30 stop: 59.01

CAT's bounce was pretty meager and fueled by light volume. I remain short-term bearish and would still consider new put positions at current levels. I do consider this an aggressive trade since CAT might have some support in the $56-55 zone.

Our target to exit is $51.00. Please note that the $54.00 level might offer some support.

Entry  on  February 23 at $ 56.66 
Change since picked:       + 0.30
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =         12 million  
Listed on  February 23, 2010         


Australian Dollar ETF - FXA - close: 89.50 change: +0.49 stop: 90.60

The FXA gapped open higher but it didn't make much progress after that. I would still open bearish positions in the $89.00-90.00 zone. The FXA has demonstrated resistance at the $90.50 level. Our time frame is several weeks and I'm suggesting the April or June puts. There is potential support at the 200-dma near $86.00 but I'm setting our first target at $83.00. Our second target at $80.00.

Entry  on  February 23 at $ 89.23 /gap higher entry
Change since picked:       + 0.27
Earnings Date            --/--/--
Average Daily Volume =        200 thousand 
Listed on  February 23, 2010         


Goldman Sachs - GS - close: 158.33 change: +1.63 stop: 156.05

GS is still inching higher but remains inside the $160-150 trading range. There is no change from my prior comments. We have two triggers on GS. One trigger at $147.45 to buy puts. Another trigger at $163.00 to buy calls.

If triggered at $147.45 we'll use a stop loss at $156.06 and our first target will be $138.00. I'm suggesting the March $140 puts.

If triggered at $163.00 to buy calls we'll use a stop loss at $155.75 and our target will be $177.50. I'm suggesting the March $170 calls.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 147.45
Change since picked:       + 0.00
Earnings Date            04/13/10 (unconfirmed)
Average Daily Volume =         17 million  
Listed on  February 00, 2010         


Intl. Bus. Mach. - IBM - close: 127.59 change: +1.13 stop: 130.11 *new*

Our aggressive bearish play on IBM is not panning out. The stock temporarily traded above resistance near $128.00 this morning. Shares actually look poised to breakout higher. I am suggesting more conservative traders exit early now! We will lower our stop loss to $130.11 although if IBM closes above $128.00 we'll probably close this trade. No new positions at this time. Our first target is $122.00. Our second target is the 200-dma.

Entry  on  February 18 at $127.00
Change since picked:       + 0.59
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         


JPMorgan Chase - JPM - close: 40.85 change: +0.97 stop: 41.65

The choppiness and indecision continues. Yesterday JPM was down 97 cents. Today it's up 97 cents. More conservative traders will want to consider an early exit right here and now. I am not suggesting new bearish positions at this time. Our first target to take profits is at $35.25. Our second target is $32.00.

Entry  on   January 26 at $ 38.44 
Change since picked:       + 2.41
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 59.27 change: +0.74 stop: 61.55

MCK gained 1.2% on its short-term oversold bounce. Look for a new lower high in the $60-61 zone. Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       + 0.45
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


SIEMENS - SI - close: 86.93 change: +0.72 stop: 92.05

Shares of SI are still churning sideways. I don't see any changes from my prior comments. I am not suggesting new positions at this time. SI has already hit our first target at $87.55. Our second and final target is $81.00.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 7.41
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         


United Technology - UTX - close: 68.62 change: +0.83 stop: 69.26

Lack of follow through on yesterday's decline is a warning sign for us. I am not suggesting new positions at this time. Our target to take profits is $61.00 near the rising 200-dma.

Entry  on  February 04 at $ 66.38 
Change since picked:       + 2.24
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010         


Walter Energy - WLT - close: 77.80 change: +0.47 stop: 81.25

Shares of WLT gapped open higher at $78.01 but the rally didn't get very far. I'm still bearish but this remains an aggressive trade. Our target is $72.00. More aggressive traders could aim lower. Keep in mind that WLT can be a volatile stock. I would keep positions small to limit your risk.

Entry  on  February 23 at $ 78.01 /gap open higher
Change since picked:       - 0.21
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 23, 2010