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Daily Newsletter, Tuesday, 06/07/2005

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Table of Contents

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

Market Wrap

Why Worry?

On Monday night Greenspan calmed the investment community with his rendition of the current rate scenario. In an uncharacteristically lucid performance, probably for the benefit of the translators, he said he did not understand why rates persisted in remaining low despite the Fed trying to push them higher. He did not touch on the baseball analogy used by Fisher or try in any way to confirm or correct Fisher's statement. The lack of a rebuttal response seemed to give the all clear to investors and the market blasted ahead at the open.

Dow Chart - Daily

Nasdaq Chart - Daily

Greenspan said the decline in U.S. Treasury rates over the past year, despite a +200 basis point hike by the Fed, was clearly without precedent. The yield on the ten-year note at sub 4% levels is nearly -100 points lower than when the Fed began its rate hike cycle. For a central banker trying to create the opposite impact this scenario represents an unprecedented reversal of fortunes. Greenspan went on to suggest multiple reasons for the divergence but none were seen as the primary cause. Greenspan noted that the drop in rates was not limited to the U.S. but was currently a global phenomenon. He said the rate convergence was providing low risk capital for investors who were trying to squeeze higher profits out of slimmer margins. A prospect he suggested would eventually end in failure.

He said the hedge fund community had exhausted the low hanging fruit of readily available profits leaving markets with little potential for better than normal returns. In a very Greenspan like comments he suggested those returns would be hard to produce. "Consequently, after its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy." "Could become less wealthy" is a Greenspanism for strong losses ahead if funds persist in trying to squeeze the last drop of gains out of the market by excessive leveraging using these low rates. This suggests to me that he plans on continuing to hike rates until he sees the desired impact. Those funds failing to understand this scenario are doomed to lose money.

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If Greenspan wants to see ten-year yields back in the 5-6% range to slow the easy access to cheap money then he will continue the rate hikes until the market reacts to the level he wants. We may be in the eighth inning according to Fisher but with the rate hike doves and hawks tied this game could go well into extra innings. With the analysts fixing their hopes on one and done in June I feel there is a huge potential for disappointment. There is also the potential that Greenspan decided his speech to Beijing was not the place to talk in baseball analogies when he has televised testimony and Q&A coming on Thursday. If he wants to send a message to the markets this is where he typically does it. Many market moving comments have come out of the testimony sessions and odds are growing that Thursday's comments could be repeated for many weeks to come. We are three weeks away from the June Fed meeting and it is entirely possible that the measured pace language could be discarded in an attempt to suggest faster hikes ahead. This is one way the Fed could shock the market back into a more cautionary stance without actually raising more than 25 points in June. Fear of larger future hikes could put risk back into treasuries and rates could become much more volatile. If you have not refinanced yet I think the low rate window will close in about three weeks.

The Atlanta Fed President, Jack Guynn, said on Tuesday that the Fed was NOT at a neutral point yet on rates and had some distance to go. This comment wilted the morning bloom in the market and helped push stocks back to the lows for the day just after 2:PM. This comment called into question the comments from Fisher last week. All eyes will be on Greenspan on Thursday for the real answer.

In other news GM shocked the market with a plan to cut -25,000 workers by 2008 and close several U.S. plants. CEO Rick Wagoner, speaking at the GM shareholder meeting, said it would produce annual savings of nearly $2.5 billion. This came on the day that Kirk Kerkorian's offer to purchase 28 million shares at $31 expires. GM had declined to $30.40 on Monday but the news from the shareholder meeting sent the price back to $31 with Kirk's tender seen as a floor under the stock at least until Tuesday's close. The company said it was in talks with the unions in an effort to reduce the $1500 per car attributable to health care costs. Wagoner said it was preferable to work out a deal with the unions but he suggested there was some doubt it would happen. From the tone of the Q&A it would appear GM has a major union battle ahead and for GM to recover it would require a major union concession and one that might only be gained after a prolonged battle including strikes and a potential bankruptcy to break the contracts. Overseas autoworkers cost only about 10% of the comparable U.S. worker. This puts GM under serious competitive pressures at a time where consumers are faced with many attractive options when shopping for a new car.

Oil prices fell to $53.50 on fears that inventories will show an increase on Wednesday. These inventory fears were offset by rumors that OPEC was considering another production increase at its June-15th meeting. Their official quota now is 27.5mb per day but rumors are suggesting that a surge in demand has boosted that output to just over 30mb over the last two weeks. This is crazy for anybody trying to understand the real facts. Frontline said last week that May deliveries from OPEC had slowed but today we hear that they are considering raising their quota. OPEC is definitely managing price expectations with their alternating comments designed both to depress new exploration and keep prices over $50. The EIA raised their official Q3 average price prediction to $53 and said gasoline would likely remain over $2 the rest of the year with short term prices in the $2.17 range. Many analysts think speculators are creating the price pressures but a recent survey showed that traders on the floor controlled less than 9% of all contracts. More than 91% of all contracts are held by institutions either as investments or hedges.

GOOG came within 49 cents of $300 early today but that was close enough to the magic $300 number to trigger selling. After a flurry of new price targets by analysts at the $300 number and higher the gains have been coming almost daily. Unfortunately the attention also attracted sellers and those holding the stock probably feel the attention signals the end of the bounce. It is widely expected GOOG will be added to the S&P soon and much of the buying is speculators hoping to capitalize on the announcement when it comes. GOOG closed at $293.

SMSC garnered the chip spotlight by raising guidance for the current quarter. Guidance was raised to a profit of 13-16 cents, up from prior guidance of 8-12 cents. AAPL fell over a buck to $36.50 a day after it announced a switch to Intel chips instead of IBM. This was a continuation of the four-day down trend. IBM rebounded sharply from Monday's drop but erased most of its gains before the day was over. The SOX spiked sharply to 439 at the morning open on short covering and several positive chip comments. Before the day was over the SOX gave up all its gains and retreated to 428 and the bottom of the range we have seen over the last two weeks. This is a very precarious position as we near the Intel update on Thursday. A good report could provide some serious short covering but any flat or negative news could provoke a substantial drop back to the 405-415 level where all the major averages converge.

The drop in the SOX knocked the props from under the Nasdaq and the tech index fell to close down -8.60 for the day at 2067. This was a substantial drop from the intraday highs at 2096 which was only one point away from its June highs and highs for the last five months. There is definitely some fear of Intel's update on Thursday even if it is just means taking some profits off the table in caution. The SOX drop was the sharpest sector drop in techs but there was general afternoon weakness across all the majors. It was not just chip related. The Nasdaq closed just above support at 2065 that has held for the last two weeks and the very bottom of its range for that period. A further drop from there on volume could see a return to the prior support level in the 2000-2010 range.

SOX Chart

The Dow closed nearly in the middle of its recent range at 10485. The Dow has been swapping sides with 10425 and 10575 several times a week for the last two weeks. The 10425 support will likely be tested before Greenspan's testimony on Thursday and without any further advance Fedspeak that support should hold. The volatility on the Dow has been extreme with alternating triple digit moves with morning short squeezes being followed by strong retracements. Investors are being chopped to ribbons by the bungee markets but traders are having a ball buying support and selling resistance.

SPX Chart - Daily

Wilshire Chart - Daily

The SPX has been moving progressively higher although in jerky fashion. The morning spike to 1209 was erased with a closing drop to 1197 with 1195 uptrend support. The Wilshire 5000 and NYSE composite are also showing the uptrend pattern of the SPX. The broader market is inching higher while the Dow and Nasdaq Compx are struggling. This uptrend by the broader indexes is slowly making bullish converts out of prior bears. Should the Greenspan testimony and Intel update on Thursday pass without a negative surprise I will probably revert to buying support and abandon my neutral to bearish bias I had for summer. My Sunday commentary should be interesting.

Wednesday is sorely lacking in material economics with Wholesale Trade and Oil and Gas Inventories the only reports on tap. Oil inventories are expected to show slight increases and a negative surprise here could really ramp prices given the current news. The only real events remaining this week are the Greenspan testimony and Intel. I believe traders are marking time until those events pass before committing additional funds. I suggest everyone do the same. Continue to enter passively and exit aggressively.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None IOC
  MANT

New Long Plays

None today.
 

New Short Plays

Interoil Corp - IOC - close: 23.24 change: -3.00 stop: 25.55

Company Description:
InterOil Corporation is developing a Fully-Integrated Niche Energy Company in Papua New Guinea. The Company has positioned itself to Own Assets through the Entire Value Chain - from Well-Head to Retail. (source: company website)

Why We Like It:
IOC appears to have completely disconnected from the rest of the oil sector. Shares peaked in February-March and have been sliding ever since, which looks pretty bearish compared to the strength in crude oil and the rest of the industry. Now after six weeks of consolidating above support in the $24.50-25.00 range the stock just broke down on huge volume about three times the average daily volume. This technical breakdown also helped produce a new triple-bottom breakdown sell signal on its P&F chart, which now points to a $14.00 target. We're willing to (hypothetically) short the stock here with a short-term target near the $20.00 level. Readers can choose to open plays here or hope for an oversold bounce back toward what should be resistance near $24.50. A failed rally under $24.50 would be the preferred entry point but IOC may not offer it. We'll set the target in the $20.50-20.00 range.

Picked on June 07 at $23.24
Change since picked: - 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 352 thousand

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ManTech Intl - MANT - close: 28.42 change: -1.16 stop: 30.05

Company Description:
Headquartered in Fairfax, Virginia, ManTech International Corporation is a leading provider of innovative technologies and solutions for mission-critical national security programs for the Intelligence Community and the Departments of Defense, State, Homeland Security, Justice and other U.S. federal government customers. ManTech's expertise includes systems engineering, systems integration, technology and software development, enterprise security architecture, information assurance, intelligence operations support, network and critical infrastructure protection, information technology, communications integration and engineering support. With 2004 annual revenues of $842 million and more than 5,500 highly qualified employees, the company operates in the United States and 40 countries worldwide. (source: company press release)

Why We Like It:
Longer-term we're actually bullish on MANT but the stock's failed rally-bearish reversal today looks like an entry point for a short-term pull back. The stock has been consolidating sideways under resistance at the $30.00 mark for just over two weeks. Today's early breakout quickly reversed and the move has produced a bearish engulfing candlestick, which is normally seen as a bearish reversal. Volume was very strong at almost four times the norm suggesting more weakness ahead. We are targeting a short-term move into the $25.75-25.50 range. At that point our bias will probably turn bullish since the $25.00-25.50 region should be strong support for MANT. More conservative traders can wait for confirmation of the bearish reversal with a drop below the $28.00 mark.

Picked on June 07 at $28.42
Change since picked: - 0.00
Earnings Date 08/15/05 (unconfirmed)
Average Daily Volume: 165 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone-Smith - ASN - close: 37.91 chg: +0.65 stop: 36.26 *new*

Almost made it! ASN surged with the market rally today and hit an intraday high of $38.23. That's not quite enough to hit our target range of $38.50-39.00. We are encouraged that ASN managed to hold to most of its gains unlike the broader indices. However, the stock looks poised to pull back tomorrow. More conservative traders may want to seriously consider exiting now for a gain. We would expect ASN to pull back toward the $37.00 region on any market decline. We're going to raise our stop loss to break even at $36.26.

Picked on May 06 at $36.26
Change since picked: + 1.65
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand

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Canon - CAJ - close: 54.80 change: +0.03 stop: 52.85

There is little change in shares of CAJ. The outlook remains bullish but traders will need to be patient. We see no changes from our weekend update.

Picked on May 29 at $55.24
Change since picked: - 0.44
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand

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Caremark - CMX - close: 45.14 chg: -0.51 stop: 41.95

CMX almost hit our target today. The stock hit an intraday high of $46.83 but our target is the $47.00-48.00 range. Shares immediately began to sell-off producing a "failed rally" pattern. This would suggest that CMX may be poised to see more profit taking tomorrow. At this time we'd look for shares to pull back toward the $44.00 level. If the broader market indices produce any sort of sharp decline we'd look for CMX to dip even lower.

Picked on May 09 at $43.30
Change since picked: + 1.84
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million

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Greenbrier Co - GBX - close: 28.97 change: -0.06 stop: 25.49

We don't see any change here in GBX. The stock has been consolidating sideways the last couple of sessions. This leads us to believe that we will see GBX pull back before it moves higher. Traders can watch for a dip into the $27.50-28.00 region as a new bullish entry point although we'd probably wait for the bounce to begin before initiating plays.

Picked on June 01 at $28.67
Change since picked: + 0.30
Earnings Date 06/29/05 (unconfirmed)
Average Daily Volume: 227 thousand

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General Electric - GE - close: 36.84 chg: +0.23 stop: 34.95

Thus far we remain on the sidelines untriggered in GE. The stock rallied with the markets today but it also rolled over producing a "failed rally" pattern. Odds are good the stock will retrace back to the $36.50 level. We suspect GE could dip even deeper than that and that's why our suggested entry point is a decline into the $36.00-35.50 range. If need be we'll adjust our entry but for now we're happy to wait and watch.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/16/05 (unconfirmed)
Average Daily Volume: 18.7 million


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Georgia Gulf - GGC - close: 34.64 change: +0.60 stop: 30.95

GGC popped higher with the markets this morning but GGC was unable to hold on to its gains. We remain bullish on the stock but traders can choose their entry point. One would be to look for a dip toward the $33.00 region. The other would be a more momentum-style entry point on a push past today's high near $35.40. At this time we'd prefer to see a dip.

Picked on June 05 at $34.33
Change since picked: + 0.31
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 598 thousand

---

Greenhill & Co - GHL - close: 36.43 chg: +0.68 stop: 34.99

GHL made a run for the $37.00 level but the rally failed. No change from our previous update on 06/05/05.

Picked on May 09 at $34.11
Change since picked: + 2.32
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 70 thousand

---

Humana - HUM - close: 38.17 chg: -0.04 stop: 33.99 *new*

HUM produced another new high again today but the rally failed and we'd look for shares to pull back toward the $36.50-36.75 region. If the broader indices decline much more HUM is likely to follow. The stock should have stronger support near the $35.00 level. Don't rush to initiate new plays here. We're going to raise our stop loss to $33.99.

Picked on May 09 at $36.33
Change since picked: + 1.84
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 1.3 million

---

Microsoft - MSFT - close: 25.51 chg: +0.14 stop: 24.60

MSFT helped lead the rally in tech stocks this morning but like the NASDAQ the rally in MSFT failed. We remain on the sidelines waiting for MSFT to pull back toward our entry point in the $25.25-25.00 range.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 70.8 million

---

Marvel Enterprises - MVL - close: 21.57 change: +0.01 stop: 20.45

No change from our previous update on 06/05/05.

Picked on June 01 at $21.86
Change since picked: + 0.31
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 911 thousand

---

Nova Chemicals - NCX - close: 31.31 change: -0.12 stop: 29.99

As expected NCX is still showing weakness. The stock has some minor support in the $30.50-31.00 range but we are not suggesting new bullish plays at this time.

Picked on June 01 at $33.03
Change since picked: - 1.71
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume: 660 thousand

---

Ship Fincl Intl - SFL - close: 19.50 change: -0.50 stop: 18.95 *new*

SFL is experiencing some profit taking today and the stock lost 2.5 percent to close near its simple 50-dma. The next level of support is probably $19.25 and then $19.00. We're going to raise our stop loss a bit to $18.95.

Picked on May 31 at $19.34
Change since picked: + 0.16
Earnings Date 05/31/05 (confirmed)
Average Daily Volume: 344 thousand

---

Sirius Satellite Radio - SIRI - cls: 5.84 chg: -0.05 stop: 5.45

There is little change in shares of SIRI although momentum definitely appears to be slowing. We'd like to see a bounce in the $5.75 region but if the market declines much more SIRI is likely to test the $5.50 level as support. Be patient when considering new bullish positions.

Picked on May 22 at $ 5.65
Change since picked: + 0.19
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million

---

Yahoo! Inc. - YHOO - close: 37.44 change: -1.08 stop: 35.99

Uh-oh! Conservative traders may want to abandon ship here. YHOO traded higher at the open and hit an intraday high of $38.95. That's 5-cents away from our $39.00 target but the rally failed and shares lost 2.8 percent on heavy volume. More importantly today's session produced a bearish engulfing candlestick, which is normally interpreted as a bearish reversal pattern. We would expect YHOO to pull back toward the $36.50-36.00 range before attempting to move higher.

Picked on May 18 at $36.05
Change since picked: + 1.39
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 20.9 million
 

Short Play Updates

Ball Corp - BLL - close: 37.59 chg: -0.21 stop: 38.15

BLL traded higher this morning and broke through the $38.00 level but only hit a high of $38.08. BLL's strength quickly failed and the move looks like a small "failed rally" pattern. Volume on the session was pretty strong. This might be a new bearish entry point but we'll stick to our previous comments about waiting for a new relative low under $37.35 before initiating new short plays.

Picked on May 05 at $38.98
Change since picked: - 1.33
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 611 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.

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