Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/2/2010

Table of Contents

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

Market Wrap

Conviction Fades on Microsoft Comments

by Jim Brown

Click here to email Jim Brown

The major averages rallied for the fourth day but failed to hold the gains. Conviction faded after lunch when the indexes failed to maintain their upward momentum.

Market Stats Table

The economic reports for the day consisted of the Chain Store Sales for last week, bankruptcy filings and auto sales for February. Chain store sales fell by -0.8% due mostly from the impact of the last blizzard to hit the northeast. No surprise there.

The auto sales for February showed Ford was the big winner. Total sales for all manufacturers came in at an annualized rate of 10.4 million and that was 100,000 over analyst estimates. Expectations were low because of the three blizzards in February. After today's number release analysts are now expecting sales in March to approach the 12 million mark as sales missed in February are closed in March.

Ford sold 142,285 vehicles in February and that put them number one in sales. That was a +43% increase in sales over February 2009. Ford car sales rose +54% while truck sales rose +36%. Market share in the U.S. rose to 17%, nearly 3% higher than Feb-2009. Fleet sales rose +74% compared to an average of 30-35%. Ford's marketing manager said there was a lot of pent up demand by corporations and they were coming back into the market to upgrade their fleets. Ford said it planned on building 595,000 vehicles in Q2 and that was 144,000 more than 2009-Q2. They are on track to build 570,000 in Q1.

GM sold 141,951 vehicles and that was the first time they were beaten by Ford since 1998. GM sales rose only +11.5% but that included the brands they are dumping. Without Pontiac, Hummer, Saab and Saturn the core GM sales were up +32%. Buick sales rose +47% to 9,121 vehicles while Chevy sales rose +32% to 99,999 vehicles. GM also announced a recall of 1.3 million cars for power steering problems.

Despite all the bad news Toyota sold 100,027 units, -8.7% from February 2009. Sales of the Prius rose +10.2% to 7,968. Toyota is recalling more than 8 million vehicles. Toyota announced today they were recalling another 1.6 million cars for leaky hoses. Toyota announced that returning buyers would be given two years of free maintenance and zero percent financing for five years. This is a move to overcome the recent negative publicity.

Bankruptcy filings for Q4 rose by 23.8% BUT that was a steep decline from the prior quarters. This drop in filings suggests we are reaching the end of the recession and consumer finances are improving. Those that were laid off have dealt with the issue and with layoffs decreasing there is less chance of bankruptcies increasing. That does not mean that consumers are no longer fighting financial problems but only that the major detriments in the form of job losses are declining. The number of bankruptcy filings were 12.39 per 1,000 households in Q4. This was the lowest level since the first quarter when filings were 4.04 per 1,000 households.

Bankruptcy Filings Chart

The economic events for Wednesday include Mortgage Applications, Challenger Employment, ISM Services, Fed Beige Book and the Oil and Gas Inventory report. The ISM services should show a slight decline due to the storms. The Beige Book should be market neutral leaving the Challenger Employment to agitate the market. The Challenger report will give analysts a better idea of what to expect from the Non-Farm Payrolls on Friday. Currently the consensus estimates are for a loss of 50,000 jobs but there are whisper numbers of more than 100,000 jobs lost. Clearly, with all the negative predictions, the potential is for an upside surprise. Remember the census hiring.

In stock news CF Industries (CF) launched another hostile bid for Terra Industries (TRA) in hopes the higher price would breakup the deal between Yara International and Terra. CF offered $4.75 billion for Terra. That would equate to $47.40 per share in cash and stock. The Yara bid is for $41.10, all in cash. Shares of Terra gained +4.76 to $45.96. Yara will have five days to decide to raise their bid once the Terra board decides the CF bid is superior. The larger bid for Terra by CF is probably more of a defensive action to stall the hostile bid for CF by Agrium (AGU). Agrium has filed suit against two of CF's board members alleging fiduciary breaches and conflicts of interest. Agrium has nominated two dissident candidates to the CF board, which will likely create a proxy battle at the next shareholder meeting.

One of the conditions in the Agrium offer was that CF terminate its bid for Terra. CF did terminate its first bid for Terra earlier this year when Terra continued to rebuff its offer and saying the company was not for sale. When the Yara deal was announced shortly thereafter CF became angry that its bid was ignored while Terra worked behind the scenes with Yara. This prompted CF to go hostile again. Meanwhile, Potash has been discussed as a takeover target as well. POT has a $34 billion market cap compared to the $5B market cap of Terra.

The reason these fertilizer wars are so active is the perceived future demand for fertilizer. As the world population increases and becomes more affluent the more food they require. Add in the U.S. ethanol mandate and hundreds of thousands of acres of marginal farmland is being pressed into use. The more marginal the land the more fertilizer it requires to produce a suitable crop.

Chart of Terra Industries

Qualcomm (QCOM) shares jumped on news that they boosted their dividend from 17 to 19-cents and announced a $3 billion share buyback. The new dividend is payable on March 28th. QCOM also raised its earnings guidance to the high end of its range. QCOM stock was heavily shorted after it predicted a subdued economic recovery and gave cautious guidance back on Feb 1st. At that time analysts were expecting 57 cents in earnings when Qualcomm gave the 49-53 cent estimate. When Qualcomm said today it would be at the high end of that same range analysts liked the comment. For whatever reason QCOM shorts were squeezed hard.

Qualcomm Chart

Coal stocks got a boost today when a rumor circulated about Massey and Patriot Coal (PCX) and a possible acquisition. Patriot was rumored to be an acquisition target by Massey (MEE) but Massey refused to comment on the rumor. PCX rallied +11% on the news and surprisingly Massey rallied +4%. Normally the potential acquirer goes down. All the coal companies with the exception of the equipment companies (JOYG, BUCY) were up because of the attention to the sector. Most of the coal companies have given positive guidance recently on the rising demand for coal.

Patriot Coal Chart

Dell shares rose slightly after a UBS upgrade to a buy. UBS said Dell shares had declined to the point where the stock was now an attractive buy. The UBS analyst said the market share losses were troubling but Dell would not need to gain share to hit the revised UBS profit estimate of $1.19 for 2011. UBS said sales in Asia from an upgrade cycle would benefit Dell. They also said falling component prices would be a benefit.

Dell Chart

Microsoft said today it would see a relatively minor increase in costs in 2011 as it waits for a rebound in technology spending. Microsoft cut more than $3 billion from its original spending plan last year and cut 5,000 jobs. Microsoft is now expecting costs to rise about 2.5% in 2010 to $26.2-$26.5 billion. Microsoft also said it had sold 90 million copies of Windows 7. Microsoft reiterated their view that business technology spending would resume in fiscal 2011. The Microsoft news killed the tech rally at midday.

Earnings problems today came from Staples, Nutrisystems and Allos Theraputics. Allos (ALTH) lost -10% after posting a loss of 22-cents per share compared to analyst estimates for a loss of 20-cents. Operating costs rose +73%. Nutrisystems (NTRI) dropped -16% after posting weak Q1 results including a continued drop in sales and a sharp increase in costs. NTRI projected a Q1 profit of 10-13 cents including a $3 million charge and analysts were expecting a profit of 54-cents. Staples (SPLS) lost -10% after reporting profits that missed estimates and giving a muted outlook for 2010. Staples said sales improved but unemployment and the lingering recession was causing people to hold back from buying quantities of office supplies.

Nomura Holdings analysts Paul Cliff and Gavin Wood said today that contract prices for iron ore and coking coal, the kind used to fuel blast furnaces, would double in the next two years. The bank previously predicted a 40-50% increase in 2010. Today the analysts said prices could rise 70% in 2010 as global steel production recovers. Morgan Stanley also said in a note they expect steel prices to rise 60% in 2010. The spot price of steel rose to its highest price in a year today by 1.1% to 134.50 per ton. That is about 107% higher than the contract price for Australian ore.

The analysts said comments from Rio Tinto and Vale suggest that contract prices were being settled much closer to spot prices. The iron ore market is one of the few markets where there is a major discrepancy between the contract rates and the spot or cash rates. They believe the prices will converge as demand increases. The Rio Tinto CEO said on Monday the 40-year old tradition of negotiating prices for annual contracts needs to change before it collapses. Goldman Sachs said BHP, RTP, and Fortescue Metals Group could miss out on $20 billion in sales revenue by selling ore on long-term contracts rather than at spot prices. The big steel producers rose in morning trading but gave back some of their gains at the close.

The dollar fell again today to 80.37 after hitting a new high overnight at 81.29 on the dollar index. The volatility in the dollar has been extreme and the effect on the commodities is show in the wide intraday swings. Crude oil hit a new six-week high at 80.95 at exactly the same tick as the dollar was hitting the intraday low. Crude declined at the close to 79.67 on fears of a rise in inventories in the EIA report tomorrow. Gold gained +19 intraday to $1135 and a new six-week high.

Gold Chart

Dollar Index Chart

The Dow did not participate in the morning tech and small cap rally and at midday eleven of the Dow stocks were negative. Those in negative territory included IBM, MSFT, HPQ, INTC and CSCO. It is tough to keep a tech rally moving when the largest of the big cap techs are in negative territory. The big caps were weak pretty much from the opening spike but they really rolled over after the Microsoft guidance about no technology buying wave until 2011. That was the kiss of death for the morning rally.

The Dow rallied over resistance at 10400 to 10456 but returned to the 10400 level at the close. In theory this should now be support but I doubt the small foray above that level was long enough for the traditional role reversal from resistance to support to occur. The intraday spike on a daily chart looks suspiciously like a climax spike only there was not enough volume to really make that case. If I were only looking at the Dow I would be exceedingly cautious about going long at this level.

Dow Chart

The S&P had formidable resistance at 1115 and actually moved over that level for the entire day and reaching 1123 before losing traction. The decline at the close to come back and rest on that 1115 level also appears like a climax spike. However, as in the case of the Dow, the spike was not high enough, not on enough volume and it did not close below the open. It may look like a duck and walk like a duck but there is still a slight moooo coming from the chart.

I would love to wake up tomorrow and have the S&P hitting a new high but I am not holding my breath. I am also not expecting a sharp decline. There is strong support at 1100, 1090, 1085 and I doubt a profit-taking decline could penetrate those levels. I also believe we are in the kind of market where every dip is bought. Given the strong support on the S&P I would be a dip buyer to those support levels above.

S&P-500 Chart

The Nasdaq has been the second strongest index and broke explosively over resistance at 2250 on Monday. That explosive breakout came after two days of strong gains and today's performance stretches the string of positive days to four. The +100 point rebound from the Thursday lows was verging on overbought and we needed some profit taking to recharge the bulls for their next attack on stronger resistance at 2325. That doji candle is a warning sign that the bulls are running out of energy. If confirmed by a decline on Wednesday we could be in for some profit taking back below the 2250 resistance level.

I don't view this as negative. As I said above I believe we are in buy the dip mode and given the strong performance of the Nasdaq leaders over the last week we really needed a dip to remove some of the froth. I would be a buyer back to 2200. Under 2200 I would stand aside.

Nasdaq Chart

The Russell was by far the most bullish index over the last three weeks. Fund managers are sucking up small caps like a Hoover vacuum in a cat box. The Russell broke over 623 and then used it as support for four days. When the second rally leg was launched last Thursday we had two days of explosive movement. Today's market took the Russell to just over 650 and strong resistance from January.

This is an IMPORTANT point. While the other indexes returned to just over the flat line the Russell barely budged from that resistance at 650. This was a very bullish close and indicates no remorse by recent small cap buyers. A strong break over 650 means we have moved into a full-fledged bull market. I know those are strong words in mixed company but that is what it looks like to me. It would be nice if the Dow and S&P were confirming but a continued rally in small caps will eventually be infectious to the big caps. Besides, fund managers were hiding in highly liquid big caps in January and it stands to reason that some will have to be sold to raise cash for small cap purchases.

In order to be fair and balanced for the bearish case the Russell is overbought if you factor in the rebound from the February lows. However, the week of consolidation at 623 recoiled the spring. That does not mean we are just going to blow past 650. We could just as easily put in a double top at that level and return to lower levels to await the Q1 earnings cycle. Wait for the breakout and watch for a breakdown.

Russell 2000 Chart

Another bullish event was the break over the 100-day average on the NYSE Composite. It was a lot more bullish at midday when the index was 33 points higher but the close over the 100-day still counts. You can see in the chart that this has been strong resistance. A continued more higher would be strongly bullish but not without roadblocks. The resistance at 7250 is also strong. The NYSE Composite is made up of everything from the smallest stocks to the giant stocks like XOM, GE, WMT. It is a cross section of Americana in the stock world. The NYSE along with the Russell are suggesting this rally has legs. However, today's breakout is only the first step in a long journey. Be patient and wait for confirmation. I wish I had $100 for every chart I have seen that looked like the Russell above where it appeared a breakout was imminent but the next day's chart was a dismal failure. Trust me there are quite a few. So be patient and watch for confirmation.

NYSE Composite Chart

In summary the economics due out on Wednesday are not expected to be market movers. The biggest risk is from a negative resolution to the Greek debt crisis. Every day there is another wave of announcements, rumors and denials out of the EU but the bottom line is that Greece is hurtling towards a cash crunch on March 15th if it is unable to sell debt or receive a bailout in some form. Greece needs Euro 10 billion by March-15th, E20 billion by May 1st. The fuse is lit and time is running out for a successful resolution. The odds are good it will be positive and that would be bullish for the global markets. However, the downside risk still exists.

I would expect any dips to be bought and I would agree with that strategy. The bears are in denial of the rally and that has them shorting every resistance point. This helps feed the rally when they are forced to cover. Market volume was the highest in four days at 8.2 billion shares. Only two days have been higher dating back to Feb-9th. This is also bullish because it means more people are getting involved. Friday and Monday only managed 7.6 billion shares. A nine billion plus day would be evidence of increasing conviction.

If job loss estimates are revised lower after the Challenger report tomorrow and the Jobless Claims on Thursday then I would expect a buy the news rally on Friday if the job losses are less than expected.

Jim Brown


New Option Plays

Not All Techs Are in Rally Mode

by Jim Brown

Click here to email Jim Brown
When tech stocks are breaking out we should pay attention to those that are breaking down.


NEW DIRECTIONAL PUT PLAYS

SWI - Solar Winds - $18.30

Company Description:

SolarWinds, Inc. (SolarWinds) designs, develops, markets, sells and supports enterprise information technology (IT), management software to IT professionals in organizations of all sizes. The Company’s offerings ranges from individual software tools to software products, which solve problems faced every day by IT professionals and help to enable management of networks and IT environments. The Company’s customers include small and mid-size businesses, enterprises, and local, state and federal government entities, which have purchased one or more of the products. SolarWinds offer a portfolio of products for network management and products for IT management. It includes free tools, tools for engineers, entry-level monitoring product, and enterprise-class network and IT management products.

Why We Like It:
Solar Winds is a tech stock that is declining in a bullish tech market. The stock has been going downhill for a couple months and is on the verge of breaking critical support.

Suggested Options:
I am looking for support to break and I am recommending the June $17.50 put. I wanted to recommend the April put but we don't normally recommend options with little or no open interest. The April cycle is new and it will need a week or so to develop open interest so I went with the June. I am going to list both but the official recommendation is the June strike.

BUY PUT APR 17.50 (SWI 10P1750) open interest= zero,  current ask $.85 
BUY PUT JUN 17.50 (SWI 10R1750) open interest= 899, current ask $1.55

Annotated Chart:

Entry  on  March 3rd at $ 00.00 
Change since picked:       + 0.00
Earnings Date            02/8/10 
Average Daily Volume =  600K  
Listed on  March 2nd, 2010         



In Play Updates and Reviews

Another Day, Another Rally, Almost

by Jim Brown

Click here to email Jim Brown

Editor's Note:

I screwed up! I forgot to include the new plays from Sunday in the Monday update. It did not take but 30 minutes before astute readers were emailing me and politely calling my attention to that error. I made sure tonight that the update was complete although there were a couple of plays I wish I could have left out.

We were stopped on Siemens and the FXA. With the currency market whipping about like a leaf in a hurricane it is tough to play currencies with options. The intraday swings are too violent and the long term moves too slow.


CALL Play Updates

MYGN - Myriad Genetics - $23.80, stop $22.50 *NEW*

Why We Like It:
Myriad posted profits that increased +67% in early February. The beat the street by 2-cents, saw their stock shoot up to nearly $26 and then implode to trade under $21 two weeks later. The selling appears to be over and the stock is ramping back up to retest that $26 level. Myriad will host an investor day in New York on Wednesday and unveil several new products.

Nice two day run to extend the rally. No complaints here!

Exit Target = $25.00

Position: CALL MAY 25.00 (MYGN 10E2500) @ $1.05

Entry  on  March 1st at $ 23.01 
Change since picked:       + 0.79
Earnings Date            02/3/10 
Average Daily Volume =  1.62   million  
Listed on  February 28, 2010         


BUCY - Bucyrus International - $63.18, Stop $61.00 *NEW*

Why We Like It:
On their earnings conference call the company said they were seeing a strong pickup in demand and improving. Earnings were up +21% to $1.07 and beat the consensus of 92-cents. Earnings were on the 18th and there was the obligatory post earnings decline but investors quickly bought the dip.

BUCY and JOYG, both mining equipment makers, traded lower on Tuesday despite the rest of the coal sector seeing nice gains. I wonder if the rumor of an acquisition in the space means there will be one less customer?

Exit Target = $68.00

Position: CALL APR 65.00 (BUCY 10D6500) @ $3.82 

Entry  on  March 1st at $ 62.56 
Change since picked:       + 0.62
Earnings Date            02/18/10 
Average Daily Volume =  1.75   million  
Listed on  February 28, 2010         


VMW - VMWare - $50.95 *Not Triggered*

Why We Like It:
VM Ware is taking over computing. The rush to virtualize to obtain maximum use of all your servers is revolutionizing the data center. IDC believes only 20% of datacenters are fully converted leaving a whopping 80% as a growing market. As corporations enter the Windows 7 upgrade cycle they will be building out their server farms with the newer software to support all those Windows 7 desktops and that means large numbers of virtualized servers. VMW does not own the market and there are other competitors but they are the strongest and the lead dog in the harness. For those competitors following in their tracks the view is always the same.

Monster spike on Tuesday but much of it was given back into the close. I would really like to see a Nasdaq dip to get us filled! That may not happen since VMW announced at the close it was buying back $400 million in stock.

We have a $49.50 trigger on entering this trade.

Suggested Options:
I am recommending the July $55 Calls because VMW has just edged over $50 and even if we buy it on a dip the premiums are going to be high for the $50 options.

BUY CALL JUL 55.00 (VMW 10G55) open interest= 198     current ask $3.30

Entry  on  March 2nd at $ xx.xx <-- TRIGGER @ $49.50
Change since picked:       + 0.00
Earnings Date            04/26/10 (unconfirmed)
Average Daily Volume =       1.75    million  
Listed on  March 1st, 2010         


Colgate Palmolive - CL - close: 83.84 change: +.07 stop: 82.50

Slowly inching higher on no specific news.

Our target to exit is $85.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 1.72
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         


TEVA Pharmaceuticals - TEVA - close: 60.93 change: +0.34 stop: 59.50

Another new high on Teva but it gave back 75 cents into the close. TEVA won a court case on Tuesday to sell generic Merck drugs Cozaar and Hyzaar. Those patents expire in April and the court gave Teva a 180-day head start on selling the generics. This overturned a prior ruling that said Teva had forfeited their 180-day privilege.

Our target to exit is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 1.88
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         


PUT Play Updates

Caterpillar - CAT - close: 58.11 change: +0.30 stop: 59.01

No specific news on CAT and the stock spiked higher at the open only to decline the rest of the day ending with only a 30 cent gain.

CAT is an aggressive put. If the global economy is recovering then CAT should lead the advance. However, if the recovery is losing traction CAT should also lead the way down. We are not suggesting new positions at this time. This is an aggressive short-term trade. Our target to exit is $52.50. *NEW*

Entry  on  February 23 at $ 56.66 
Change since picked:       - 0.17
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =         12 million  
Listed on  February 23, 2010         


CLOSED BULLISH PLAYS

Sina Corp. - SINA - close: 38.14 change: +0.76 *Closed*

Nice recovery and SINA is now retesting resistance at 38.50. Our instructions were to exit at the close today ahead of SINA earnings on Wednesday.

Chart:

Entry  on  February 22 at $ 36.50
Change since picked:       + 0.71
Earnings Date            03/03/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         


CLOSED BEARISH PLAYS

Australian Dollar ETF - FXA - close: 90.39 change: +.32 stopped: 90.60

No specific news on FXA but currencies were all over the map. The intraday spike on the dollar's decline stopped us out at $90.60.

Chart:

Entry  on  February 23 at $ 89.23 /gap higher entry
Change since picked:       + 1.33
Earnings Date            --/--/--
Average Daily Volume =        200 thousand 
Listed on  February 23, 2010         


SIEMENS - SI - close: 89.28 change: +1.61 stopped: 89.75

Siemens rallied with the market and on a press release about a new communications offering. The intraday spike was enough to hit our stop at $89.75.

Chart:

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 6.62
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010