Option Investor
Newsletter

Daily Newsletter, Thursday, 11/3/2011

Table of Contents

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

Market Wrap

Lord of Chaos

by Jim Brown

Click here to email Jim Brown
Greek Prime Minister George Papandreou was called the lord of chaos by a major Greek newspaper but he may not be lord of anything in 48 hours.

Market Statistics

Papandreou went to the G20 meeting where he was hammered for his impromptu call for a referendum on the austerity package. Back at home the opposition was growing with emergency meetings on how to keep the bailout from melting down. The on again, off again vote that would have prevented Greece from getting any further bailout funds until mid December or later, is now off again. The opposition to Papandreou agreed to support the new version of the austerity package if Papandreou agreed to resign. After the vote was cancelled and Papandreou failed to resign the opposition party leader, Antonis Samaras, gave an impassioned speech on the floor of the parliament where he called Papandreou a liar for failing to resign as agreed and asked for members to vote against Papandreou in the no confidence vote scheduled for midnight Friday. With numerous defections from the ruling socialist party it appears Papandreou will be evicted from his position after that vote.

Samaras is calling for snap elections immediately after the confidence vote and for a caretaker government to take control until a real vote for a new PM can be held.

The story in Greece/Europe has been literally changing by the hour. The G20 meeting is also producing some fireworks. Apparently Italy, Spain, France, the USA and the EU Commission is trying to force Germany to allow the ECB to take a larger role in overseeing the financial conditions of the EU countries and be allowed to permanently buy bonds. They want the ECB to take the role of the Federal Reserve and have broader authority and deeper pockets. Germany has been adamantly against letting the ECB have free reign and the ability to take on debt without country approvals. Since Germany is nearly 20% of the EU it would mean any debt incurred by the ECB would be guaranteed up to 20% by Germany. German citizens are already on the hook for $4,100 each for the Ireland, Portugal and Greece bailouts.

The new head of the ECB, Mario Draghi, surprised everyone today with an unexpected quarter point rate cut to 1.25% after the ECB raised rates twice earlier in the year. The surprise cut signaled Draghi could be more reactive to current conditions and stimulating growth rather than constantly worried about inflation, which is currently +3% in Europe. A stimulative ECB could help ease recession worries from the current debt crisis.

I have gotten far more education into the EU and the individual intricacies of the EU countries over the last year than I ever wanted to know. This is driving investors crazy and the alternating triple digit market moves and rampant volatility is making investing about as safe as roulette. At midnight last night I wrote an email to the Option Writer subscribers warning them the futures were down -15 points. By the open they had completely recovered and the Dow gapped up +150 points. This is ridiculous but I think we are nearing a point where Europe will take a back seat once this Papandreou thing has passed.

The market rallied sharply on the rate cut, the abandonment of the Greek referendum and the possibility for a more aggressive ECB. However, economics in the U.S. were also fueling the fire. The weekly Jobless Claims dropped -9,000 to 397,000. If those numbers don't compute from what you remember from last week it is because they revised last week higher by 4,000 to 406,000. The weekly quote and revise cycle makes it nearly impossible to determine a trend on a week to week basis. However, assuming this week is not revised higher it was only the third time under 400K since April.

Jobless Claims

Factory Orders for September rose unexpectedly by +0.3% compared to consensus estimates for a decline of -0.1%. Core capital goods orders rose +2.9%, also not expected. Backorders rose +0.9%. The unexpected improvement in orders suggests Q4 GDP could be slightly higher than expected.

Nonfarm business productivity rose +3.1% in Q3 compared to a decline of -0.7% in Q2. This was also stronger than expected. Production output rose more than hours worked and pushed unit labor costs lower by -2.4%. Since manufacturers can only get a finite amount of production out of existing workers this suggests they will have to hire people soon if business continues to improve.

ISM Nonmanufacturing for October declined by .01 to 52.9 from 53.0. Expectations were for a rise to 53.5. The miniscule decline still left the services sector in growth mode. Analysts pointed out that new orders had been choppy because of the headline events making businesses unsure about the future. Once Europe is not hogging the headlines and the Congressional super committee decision is behind us we should see business begin to improve. Today businesses don't know what the tax and regulation picture is going to look like after year end. The committee could drop a bomb on business with some big change to revenue or it could announce something positive for taxes. Businesses are afraid to expand until the future picture is clear.

ISM Services Chart

The only report due out on Friday is the Nonfarm Payrolls for October. The consensus estimate is for a gain of +100,000. Morgan Stanley is expecting a gain of +125,000. I am not sure it really matters to the market that jobs number could be lower. As long as it is over 50K it should not be a problem. If it is well over 100K it could really provide a boost. The recent economic reports have continued to be marginally better but a gain in employment would be a major boost since the current unemployment is the biggest drain on the economy.

There were a lot of earnings today with some big winners and losers. Este Lauder (EL) reported earnings of $1.41 and severely beating estimates of $1.18. On top of the strong earnings they raised guidance, declared a 2:1 stock split and raised their dividend by 40%. Talk about an outstanding earnings report! EL shares rallied +18% on the news.

Este Lauder Chart

Alpha Natural (ANR) rallied +13% after posting earnings of 35-cents compared to estimates of 4-cents. Revenue more than doubled. The CEO said "despite predictions in the financial markets that the sky was falling in August and September we have not seen any real change in worldwide demand for either met coal or steam coal. On the contrary, China has continued to ramp up its production of steel and set a new record for coal imports in September.

Alpha Chart

Kellogg Co (K) reported earnings that declined -14% on rising commodity costs and plant renovations. Kellogg's also lowered guidance below current expectations. Earnings fell to 80-cents and analysts were expecting 89-cents. Kellogg forecast earnings for the full year to $3.38 and analysts were expecting $3.45.

The biggest disappointment was Abercrombie & Fitch (ANF). Shares of ANF fell -20% after warning of sluggish growth overseas. Everything else was positive in their report. Same store sales rose +7% and revenue rose +21% to $1.08 billion. However, sales fell at stores in Europe, Japan and Canada. The warning was critical because retailers have been counting on international sales to overcome the slow growth in the USA.

Abercrombie Chart

Starbucks (SBUX) reported earnings of 47-cents compared to 37-cents in the year ago quarter. Analysts were expecting 36-cents. It was a blowout quarter for Starbucks. Same store sales in the U.S. rose +10% and +9% globally. Revenue rose +7% to $3 billion. Coffee prices have come down by -20% since September 1st and the CEO projected a strong Q4 as a result. CEO Howard Schultz said they were buying coffee now for the end of 2012 and into the 2013 harvest in order to lock in prices. They are expecting to have their K-cups in every major grocery store chain by year end. Starbucks announced plans to buy back 20 million shares and raised its dividend +31% to 17 cents. It would appear SBUX is on a serious growth spurt.

Starbucks Chart

Linkedin (LNKD) reported earnings after the close and it lost 2-cents per share. That compares to earnings of 2-cents in the year ago quarter. Revenue doubled to $139 million and they added 15.4 million subscribers to bring their total to 131.2 million. The company said it was spending more to expand its business. They also said they were going to sell another $100 million in shares to fund its expansion. Investors were not excited with the earnings or the impending dilution. Shares declined -$8 after the report.

Linkedin Chart

Groupon (GRPN) priced its IPO at $20 per share compared to the expected range of $16-$18. The stock will trade on Friday and analysts either love it or hate it, there appears to be no middle road. Groupon is only selling a small fraction of itself, 4.7%, and that values Groupon at $12.7 billion. Eleven bookrunners are promoting the IPO and that is a record number for any IPO. Quite a few analysts are recommending investors immediately flip any shares they were lucky enough to get. Groupon is $405 million in debt and they IPO will only raise about $700 million. Reportedly vendors running Groupon promotions are not coming back for a repeat offer. For instance if you are selling a service for $100 Groupon will want you to offer it for $50. Of that $50 Groupon gets 50-65% and the vendor the rest. They end up selling their service for something around $20. Groupon has created a class of consumer called Groupon junkies that wait for the next deal for a similar service rather than revisit the initial vendor.

The dollar declined and Euro rose on the potential resolution of the vote question in Greece. The surprise rate cut by the ECB and the comments from Bernanke on Wednesday helped fuel speculation there will be further stimulus both in Europe and the U.S. and that pushed gold higher. The rally triggered some short covering after it broke over technical resistance at $1750. Gold posted a +$36 gain to close at $1765. The breakout over resistance suggests we could see another run at the highs in the coming months.

Gold Chart

Crude oil closed at a three month high on expectations for economic growth, a cheaper dollar and falling inventories in distillates. A break over $95 could trigger additional short covering and a test of $100 once again.

Crude Oil Chart

Friday will be another headline day. Greece will be the headline every hour on the hour as the clock winds down towards the confidence vote at midnight Greece time. That is 6:PM ET. Anything is possible so traders will be cautious going into the close depending on how the news flow is projecting the results.

The U.S. news will be the Nonfarm Payrolls before the open. I think investors are so tired of the negative outlooks and geopolitical headlines they will be hoping for good news but ignoring bad news unless it is very bad.

The S&P rebounded back over 1250 to close at 1261 and a positive jobs report could push it back to the highs from last week. Quite a few analysts believe we could rally into year end if Europe goes quiet. Hedge funds are down about 8.5% for the year into Oct 1st and analysts believe they will chase stocks into year end. The remaining pothole is the super committee deadline on the 23rd. So far it has not impacted the markets since there have been bigger headlines from Europe.

Support is 1225 and resistance 1285.

S&P Chart

The Dow rebounded back over the 200-day average at 11,975 and back into the 12,000s. A decent jobs report and no headlines from Greece could see a return to the resistance high from last week at 12,285. Those are a couple of big "IFs" but it is possible.

Dow Chart

The Nasdaq closed back above the 200-day but it was a lackluster rebound. However, Apple gained +$6 and appears to have built a base at $395. That should encourage investors but it will take a move over $410 to really get the rally started. I would be a buyer of Apple over $410. The positive move in Apple could signal the beginning of a new trend higher for techs.

The Nasdaq needs to move over 2740 to trigger additional short covering. It is very close with the close at 2697.

Nasdaq Chart

The Russell chart is a clone of the Nasdaq and fund managers have not yet begun to buy small caps. A move over 765 is needed to inspire confidence.

Russell 2000 Chart

I am in buy the dip mode again. There are still some headlines in our future and they may not all be positive. However, I think the short term trend should be higher. Remember, Greece will vote on ousting Papandreou at 6:PM ET on Friday. That could impact the sentiment at the close depending on what news flow was like during the day.

Buy the dip, sell too soon.

Jim Brown

Send Jim an email


New Option Plays

Cloud Computing

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

VMware, Inc. - VMW - close: 100.19 change: +3.00

Stop Loss: 93.95
Target(s): 104.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Cloud computing remains a hot topic for investors. VMW is definitely a contender in this space. The stock's up trend has stalled at round-number resistance near $100. I suspect the market could see some profit taking following the jobs data tomorrow morning. Thus we want to be in a buy-the-dip mode.

I am suggesting we open small bullish positions in VMW on a dip at $97.00 with a stop loss at $93.95. Recent support has been the $94.00-95.00 area. If triggered at $97.00 we'll aim for the $104.75 mark.

buy-the-dip Trigger @ $97.00

- Suggested Positions -

buy the NOV $100 call (VMW1119K100)

- or -

buy the DEC $100 call (VMW1117L100)

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 01/24/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 3, 2011



In Play Updates and Reviews

Stocks & Gold Continue to Rally

by James Brown

Click here to email James Brown

Editor's Note:

The market's bounce continues in spite of the fervor in Europe over the potential for a Greek referendum vote on the EU bailout.

I am concerned with BBBY and we want to exit tomorrow.

-James

Current Portfolio:


CALL Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 61.99 change: +0.09

Stop Loss: 59.95
Target(s): 64.75
Current Option Gain/Loss: -18.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
11/03 update: The S&P 500 rallied another 1.8% but BBBY only gains 9 cents (+0.1%)? This is not a good sign. I am growing increasingly worried about this stock's lack of movement. I am suggesting an early exit tomorrow at the closing bell. We will raise our stop loss to $59.95 tonight.

*Small Positions*- Suggested Positions -

Long NOV $62.50 call (BBBY1119K62.5) Entry $1.50

11/03 new stop loss @ 59.95
11/03 prepare to exit tomorrow at the closing bell
10/27 new stop loss @ 59.75

Entry on October 14 at $61.00
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on October 12, 2011


Costco Wholesale - COST - close: 84.70 change: +0.27

Stop Loss: 81.80
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -17.7% & Jan $90 call: +26.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/03 update: This morning COST announced October same-store sales growth of +9.0%. That was just a little bit under analysts estimates of +9.2%. The stock saw a spike down to $82.88 before rebounding and closing in positive territory.

I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week exit target is $97.50. Cautious traders will want to consider an exit near $90 or $94 instead. Keep positions small.

(small positions)- Suggested Positions -

Long NOV $85 call (COST1119K85) Entry $1.52

- or -

Long 2012 Jan $90 call (COST1221A90) Entry $1.01

11/01 COST bounced at short-term support near $82 but readers may want to exit positions early right now
10/27 trade opened on gap higher at $85.00
10/26 Adjusted entry point strategy. Buy calls tomorrow if COST and S&P 500 index open positive. New stop loss at $81.80.

Entry on October xx at $ xx.xx
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on October 22, 2011


SPDR Gold Shares - GLD - close: 171.72 change: +2.66

Stop Loss: 163.40
Target(s): 182.50
Current Option Gain/Loss: +19.1%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/03 update: The U.S. dollar declined today and that helped boost gold prices. Of course all the confusion and frustration and fear in Europe is also lifting gold prices. Today the GLD gapped higher at $171.17 and closed up +1.5%. The breakout past potential resistance at $170 is bullish. More conservative traders might want to consider inching up their stop loss.

Our multi-week target is $182.50.

- Suggested Positions - (Small Positions)

Long 2012 Jan $175 call (GLD1221A175) Entry $6.00

Entry on November 2 at $168.59
Earnings Date --/--/--
Average Daily Volume = 15.3 million
Listed on November 1, 2011


Goldman Sachs - GS - close: 107.68 change: +1.55

Stop Loss: 97.45
Target(s): 113.75
Current Option Gain/Loss: +63.2%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
11/03 update: It was a volatile session for GS, especially the first hour. Shares saw an early spike toward $109, which failed and then shares plunged toward $102 only to reverse again. GS eventually closed higher on the session. If you can stomach all the volatility then today's bounce might be a new bullish entry point.

We have a stop loss at $97.45 but more conservative traders may want to consider using a stop loss closer to $100.00 or near $102.00 instead.

Earlier Comments:
We do want to keep our position small because GS can be a volatile stock.

- Suggested Positions - (small positions)

Long NOV $105 call (GS1119K105) Entry $3.40

11/02 corrected our entry price for the correct November call
11/01 new stop loss @ 97.45
11/01 GS gapped open lower at $103.49, under our trigger. Play opened.

Entry on November 1 at $103.49
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 8.5 million
Listed on October 31, 2011


Schnitzer Steel Industries - SCHN - close: 48.83 change: +1.23

Stop Loss: 44.49
Target(s): 52.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/03 update: Our new trade on SCHN is open. Unfortunately the stock's gap higher this morning had a negative impact on our entry point. The stock opened at $48.38 but if you were nimble shares offered a better entry point on a dip back to $47.13 before rebounding again. Shares ended the session up a strong +2.5%. FYI: The Point & Figure chart for SCHN is bullish with a $61 target.

- Suggested Positions -

Long DEC $50 call (SCHN1117L50) Entry $2.50

11/03 SCHN gapped open at $48.38

Entry on November 3 at $48.38
Earnings Date 01/05/12 (unconfirmed)
Average Daily Volume = 311 thousand
Listed on November 2, 2011


SPDR S&P 500 ETF - SPY - close: 126.25 change: +2.26

Stop Loss: 118.40
Target(s): 124.90
Current Option Gain/Loss: Unopened
Time Frame: up to November expiration
New Positions: Yes, see below

Comments:
11/03 update: Hmm... it's starting to look like we may have missed the move. The SPY is bouncing a lot faster than expected. Shares have not hit our entry point yet at $120.50. I would not chase it here. We will re-evaluate this trade after Friday's session. For the moment our strategy is unchanged.

Earlier Comments:
If triggered we'll use a stop loss at $118.40. Stocks could see a sharp bounce so we'll try and limit our investment by using November calls.

buy-the-dip Trigger @ $120.50

- Suggested Positions -

buy the NOV $122 call (SPY1119K122)

Entry on November xx at $---.--
Earnings Date --/--/--
Average Daily Volume = 267 million
Listed on November 1, 2011


Tech Data Corp - TECD - close: 50.40 change: +0.97

Stop Loss: 47.49
Target(s): 53.75
Current Option Gain/Loss: Unopened
Time Frame: up to November earnings
New Positions: see below

Comments:
11/03 update: It was another strong day for TECD. Unfortunately the stock's gap open higher this morning is negative for our entry point. The stock did see an immediate dip back to $49.01 before reversing higher again and closing with a +1.9% gain.

Earlier Comments:
We'll set our stop loss at 47.49. Our target is $53.75. Don't be surprised if the $52.00 level acts as short-term resistance. FYI: The Point & Figure chart for TECD is bullish with a $67 target.

- Suggested Positions -

Long DEC $50 call (TECD1117L50) Entry $2.85

11/03 TECD gapped open at $50.03

Entry on November 3 at $50.03
Earnings Date 11/21/11 (confirmed)
Average Daily Volume = 650 thousand
Listed on November 2, 2011


Visa, Inc. - V - close: 93.18 change: +1.68

Stop Loss: 88.75
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: +21.8% & Dec$95c: + 7.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/03 update: Influential analyst Meredith Whitney downgraded both Visa and MasterCard from "buy" to "outperform" today. Shares of V dipped to $90.28 on the news but bounced back into positive territory. If you were looking for another entry point that was it. I am not suggesting new positions at this time.

- Suggested Positions -

Long Nov. $95 call (V1119K95) Entry $1.10

- or -

Long Dec. $95 call (V1117L95) Entry $2.75

11/01 new stop loss @ 88.75
11/01 Visa gapped lower at $91.16
10/31 adjusted trigger to $92.25

Entry on November 1 at $91.16
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


PUT Play Updates

Shutterfly, Inc. - SFLY - close: 41.89 change: -0.03

Stop Loss: 44.15
Target(s): 35.25
Current Option Gain/Loss: -10.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/03 update: SFLY is still underperforming the market but I would not initiate new positions here. The stock saw a spike higher this morning to $43.00, which immediately failed and shares retested the $40.50 level intraday.

I am not suggesting new positions at this time.

Earlier Comments:
FYI: The spread on our put is a bit wide, which makes an impact on our gain/loss for this trade.

The $40 level could offer potential support but we're aiming for $35.25 as our exit target.

- Suggested Positions -

Long NOV $40 PUT (SFLY1119W40) Entry $0.95

11/01 new stop loss @ 44.15

Entry on October 28 at $42.88
Earnings Date 10/26/11 (confirmed)
Average Daily Volume = 1.1 million
Listed on October 27, 2011