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Daily Newsletter, Tuesday, 03/27/2007

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Table of Contents

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

Market Wrap

Builder Sinkhole

Just when everyone thought it was safe to venture back into the market Lennar says builder foundations are facing a growing sinkhole. Before the open Lennar confessed a 73% decline in Q1 earnings and withdrew its guidance for all of 2007. CEO Stuart Miller said a lack of demand and problems with subprime lenders were continuing to pressure sales. He said market conditions were still challenging in most areas and some markets were continuing to deteriorate. They reported earnings of $68 million or 43 cents per share and inline with street estimates. The problem came from their lowered guidance. Lennar said problems with lenders were keeping buyers at bay. It has been reported over the last two weeks that lender loan programs were disappearing daily and causing a serious drag on the entire food chain. Not only are builders seeing houses go unsold because subprime borrowers can't get loans but prime buyers are also being impacted. Prime buyers with no loan problems are finding it harder to sell their current homes because subprime borrowers have been taken out of the market. To put it briefly prime buyers cannot buy because nobody in the subprime category can get a loan for their existing homes. This is providing a ripple effect all the way up the food chain. Nearly every new home transaction has two or more sales. New homebuyers need someone to buy their existing home before they can move up. The buyer of that existing home needs somebody to buy their existing home so they can move up. This can continue down the chain of succession for several homes until a qualified buyer appears to trigger the entire upgrade process. We are seeing even more challenges now due to the evaporation of loans. Buyers with contracts in hand and loan commitments are seeing those commitments disappear as lenders and the investors behind those lenders terminate loan programs and cancel commitments. Title companies are reporting a large wave of cancellations in loan commitments leaving buyers and sellers stranded and buyers racing about to find a new loan at the last minute. This loan confusion is causing great consternation in the housing sector and that is keeping buyers at bay. Lennar recovered its early losses by day's end but the entire sector remained weak.

Dow Chart - Daily

Nasdaq Chart - Daily

After the close Beazer Homes (BZH) was knocked for a -$5 loss after news broke that the FBI, IRS, DOJ, HUD and the US Attorney's office in Charlotte had launched investigations into apparent mortgage fraud. The FBI said its investigation involved "fraud in general" and more specifically related to corporate, mortgage and investment issues. Tough times in any industry tends to produce questionable business practices.

S&P released a survey this morning that showed prices of homes in the US fell -0.7% in January compared to January-2006 and it was the worst showing since Jan-2004. David Seiders from the NAHB revised his estimate for new home sales in 2007 down for the 3rd time in the last two months. His original estimate was for a drop in sales of -2% for all of 2007. Two weeks ago he revised that down to a drop of -4%. Today he revised it again to project a drop of -8% for all of 2007 and he is worried that may not be enough given the sudden evaporation of funding sources.

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The Richmond Fed Survey came in at -10 for March and the same level we saw in February indicating continued economic contraction in the region. The low for the cycle was -11 in January but there have been no indications of a recovery for the last two months.

Consumer Confidence for March took an unexpected turn with a drop from 111.2 in February to 107.2 for March. The drop to a three-month low was blamed on rising gasoline prices and the subprime slime currently impacting the housing sector. The expectations component fell to 86.9 from 93.8 while the present conditions component remained mostly unchanged at 137. The -7 point drop in the expectations component reflects uneasiness about home prices and the eventual impact to the economy of the subprime weakness. A Fed survey out this week suggested the current subprime problem could last up to two years. Let's hope they are wrong. In the short term gas prices have risen from an average of $2.16 earlier this year to more than $2.60 last week. With oil prices well over $60 again and driving season just ahead consumers are fearful that $3 handle will return once again.

May Crude Oil Chart - 390 min

After the bell today there was a rumor Iran had fired a missile at a US Navy ship in the Persian Gulf. Oil futures soared to $68.09 and S&P futures fell -10 points in just a few ticks. Fortunately the Navy was quick to say they had no evidence of any attack and oil prices retreated back to $64.25 but that level was still +1.50 over the closing price. The US launched a training exercise early Tuesday involving more than 200 planes as a warning to Iran not to try any more aggressive moves like the capture of the 15 British sailors last week. Since the training exercise had the effect of escalating tensions in the Gulf the rumor of an Iranian missile attack was perfect timing on somebody's part. The aircraft carrier John C Stennis moved into the Gulf last night to take part in the weeklong exercises with the carrier group headed by the Dwight D Eisenhower. The war games involve more than 10,000 U.S. personnel mounting simulated attacks on enemy aircraft and ships, while hunting submarines and looking for mines. Those commanders are probably pretty nervous right now since Iran has the 4th largest inventory of bottom rising sea mines. Some analysts think Iran has already seeded the shipping lanes in and out of the Gulf with mines, which are laying dormant and waiting for an activation signal. On the British front Prime Minister Blair warned Tuesday that the standoff with Iran over the 15 captured soldiers could escalate if they are not released immediately. Iran said they would not be released until a complete investigation had been completed. Blair threatened to release hard evidence showing they were in Iraqi waters when captured. This would have double consequences since it would mean Iran knowingly ventured out of their territorial waters to make the attack.

Tomorrow all eyes will be on Ben Bernanke as he testifies before a House committee. Everyone will want to know exactly what he meant by that carefully worded FOMC statement. Did his mention of increased inflation concerns contradict moving to a neutral bias on rates? He will definitely be on the hot seat but we have seen over the last year he handles pressure well. The Fed's Director of Banking Supervision, Roger Cole, said on Tuesday "We are not observing spillover effects from the problems in the subprime market to traditional mortgage portfolios or, more generally, to the safety and soundness of the banking system." Bernanke will obviously be grilled on the potential of that happening in the future since the Fed's own survey suggests the crisis could continue for up to two more years. Senator Dodd, a committee chair, said in reference to the subprime problem, "I don't want this to go on any longer, this has got to stop!" Regardless of what is said tomorrow it is bound to create some additional volatility.

Citigroup, a lead underwriter of the Vonage IPO, cut it's rating on the stock to a sell and said the company may be facing bankruptcy over the next two years. Wow, talk about a fall from grace! Citigroup said a failure to quickly respond to the patent problems could force Vonage to restructure or file bankruptcy by 2009. Citigroup and Deutsche Bank Securities were the lead underwriters for the IPO. The Vonage CEO paraphrased Mark Twain on Monday in response to the daily dose of bad news. "The rumors of Vonage's death have been greatly exaggerated. Friday's events represent one small step in what is sure to be a long legal battle." The question in everyone's mind is whether Vonage can survive that battle.

Because of the sinkhole in the housing sector we are seeing renewed weakness in materials stocks and stocks like Home Depot and Lowe's. Transportation stocks have also lost their lift as oil prices move higher. About the only stocks moving higher on Tuesday were energy stocks. The sector in general was mixed but clean energy stocks got a sharp boost after a big deal in Connecticut for FuelCell and an upgrade from a major broker. FuelCell (FCEL) was selected by the Connecticut Clean Energy Fund for six projects that would total about 68 megawatts. The value of these projects would be in the $200 million range. Shares of FCEL jumped +20% on the news. In other news Bank of America and American Technology Research upgraded First Solar (FSLR) and Sunpower (SPWR). They both said the outlook for Sunpower was the brightest in the sector. SPWR spiked +5% on the news. SunTech (STP) garnered a buy rating with American Tech saying they should reach one gigawatt by 2010 and long before their closest competitors. Evergreen Solar (ESLR) was hit with a sell rating by BAC.

I have to admit this week is not going as I expected on Sunday. Monday's opening dip was bought and the major averages returned to neutral by days end. I thought no harm, no foul and end of quarter window dressing is still in play. Tuesday's opening drop brought on by Lennar and weak economics failed to rebound although the opening drop also failed to worsen as the day progressed. Dow 12400 continued to act as a support magnet despite the -71 point drop. On the Nasdaq the same could be said about the 2440 level as bulls refused to give in to the sellers.

Russell-2000 Chart - 30 min

Unfortunately our fund manager sentiment indicator, the Russell-2000, declined to near 800 and was showing more weakness than the big cap averages. This is not a good sign. If managers were really going to try to keep their portfolios sparkling for the rest of the week they would have been throwing more money at the small cap leaders. I fear a break of 800 could get ugly very quickly. The rebound has faded but sellers have not yet regained their confidence. We have not seen any material flurry of earnings warnings yet but the same could be said for a lack of positive guidance events. The bulls are running on sentiment fumes and hoping for an event to produce a fill up. Bernanke has a good record of pumping up the markets during his recent public appearances. Let's hope his testimony tomorrow is a repeat of the prior appearances.

Once past the Bernanke testimony look for economic frustration to appear with Thursday's GDP revision and Kansas Fed Survey. Friday's PMI is expected to show a slight improvement over February's 47.9 headline number which was nearly a five-year low. For guidance I would watch the Russell 2000. Buy a dip to 800 but short a break below that level.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
AHG None

New Long Plays

Apria Healthcare - AHG - cls: 32.37 chg: +0.05 stop: 29.99

Company Description:
Apria provides home respiratory therapy, home infusion therapy and home medical equipment through approximately 500 branches serving patients in all 50 states. With approximately $1.5 billion in annual revenues, it is the nation's leading homecare company. (source: company press release or website)

Why We Like It:
We still believe there is a chance that this week will see some window dressing by money managers. So far the market has been caught somewhat off guard by the news on new home sales and then the news from Lennar today. Yet that isn't stopping the bullish trend in AHG. We're suggesting long positions now with shares above $31.00. More conservative traders may want to see a new high over $33.00 before considering new positions. We'll put our stop at $29.99 while conservative types might want to use a tighter stop. Our target is the $35.75-36.00 range. We do not want to hold over the late April earnings report.

Editor's note: We apologize for the charts today. Our normal charting program was having technical difficulties.

Picked on March 27 at $32.37
Change since picked: + 0.00
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 910 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Bright Horizons - BFAM - cls: 37.95 chg: -0.40 stop: 37.45

Tuesday's market weakness weighed on BFAM and shares continued lower posting a 1% loss. The stock has still not completely filled the gap from last week so we're expecting another dip toward $37.50. Readers can watch for a bounce near $37.50 as a new entry point. Our target at the $39.85-40.00 range.

Picked on March 21 at $38.62 *gap higher*
Change since picked: - 0.67
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume: 185 thousand

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Bristow Group - BRS - close: 36.52 chg: -0.44 stop: 34.99

Strength in crude oil today was not enough to save BRS from the widespread market weakness. Shares slipped 1.1% and closed near its 50-dma and the $36.50 level. We've been suggesting that readers look for a dip near $36.50 or $36.00 as a new entry point to buy the stock although given the market weakness we'd probably wait for signs of a bounce first. More conservative traders may want to use a tighter stop near $35.30. Our target is the February highs in the $38.40-38.50 range. FYI: The P&F chart is bullish and points to a $47 target.

Picked on March 11 at $35.88
Change since picked: + 0.64
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand

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Countrywide Fincl. - CFC - cls: 34.71 chg: -1.53 stop: 33.95

Ouch! It was a rough day for CFC. The stock lost over 4.2% and on above average volume. CFC was the S&P 500's biggest percentage loser today as investors panicked over the news from homebuilder Lennar (LEN). The homebuilder issued a warning and said that the spring selling season has yet to materialize. Combine that with a falling consumer confidence number and investors hit the sell button. We are concerned with the close under $35.00, which should have been short-term support. More conservative traders should strongly consider an exit early immediately to cut their losses. We're not suggesting new positions at this time.

Picked on March 25 at $36.83
Change since picked: - 2.12
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 9.5 million

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Canadan Nat.Res. - CNQ - cls: 54.33 chg: -0.03 stop: 48.95

We see little change in CNQ. The stock held up relatively well on Tuesday thanks to strength in crude oil. Traders bought the dip at $53.84 this morning. Our target is the $58.00-60.00 range. The rally past $53.00 has produced a brand new Point & Figure chart buy signal with a $62 target. We do expect some resistance near $56.00-56.50.

Picked on March 21 at $53.05
Change since picked: + 1.28
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million

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eBay Inc. - EBAY - close: 33.33 chg: +0.11 stop: 29.85

EBAY managed to out perform the market today with a 0.3% gain. Volume was a bit low so it's tough to put any real confidence behind today's move, which by itself was anemic. We remain optimistic but we are not suggesting new positions at this time. More conservative traders may want to tighten their stops. We have two targets. Our first, more conservative target, will be the $33.85-34.00 range, since EBAY has resistance near the $34.00 level. Our second, more aggressive target, will be the $37.00-38.00 zone. FYI: We do not want to hold over the late April earnings.

Picked on March 05 at $30.49
Change since picked: + 2.84
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million

---

EMC Corp. - EMC - cls: 13.61 chg: -0.05 stop: 12.74

We don't see any big changes in EMC. The stock slipped five cents but traders bought the dip near $13.50. More conservative traders may want to adjust their stop toward $13.00. Our target is the $14.50-15.00 range. FYI: The P&F chart is still bearish from the February-March sell-off.

Picked on March 21 at $13.26
Change since picked: + 0.35
Earnings Date 04/17/07 (unconfirmed)
Average Daily Volume: 29.1 million

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Helmerich Payne - HP - cls: 30.81 chg: -0.03 stop: 27.95

HP resisted any significant profit taking but shares continue to look short-term overbought. It could get more overbought if money managers decide to buy more to dress up their portfolios for the end of the quarter. More conservative traders may want to take some money off the table or lower their target into the $31.75-32.00 range. We're keeping our target at $32.50 for now. We are not suggesting new positions at this time.

Picked on March 19 at $28.77 *gap higher*
Change since picked: + 2.04
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 1.4 million

---

KLA-Tencor - KLAC - cls: 53.86 chg: -0.53 stop: 52.75

Weakness in the major indices combined with weakness in Intel (INTC) under cut any strength in the semiconductors. Shares of KLAC tried to rally this morning but failed under the $55.00 level. We're still waiting for a breakout over resistance near $55.00. Our suggested trigger to buy the stock is at $55.15. If triggered our target is the $59.50-60.00 range. Before opening positions consider our time frame. We do not want to hold over the mid-April earnings report. That gives us about three weeks, which may be a little optimistic. FYI: The P&F chart is bullish with a $69 target. Nimble traders may also want to consider an alternative entry on a dip or bounce near $53.00.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/16/07 (unconfirmed)
Average Daily Volume: 4.9 million

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Northwest Pipe Co. - NWPX - cls: 37.25 chg: -1.24 stop: 34.95 *new*

Warning! The trading in NWPX today looks like a bearish reversal. The stock traded higher this morning but reversed after hitting $39.14. NWPX gave back most of yesterday's gains and the daily chart has produced a "dark cloud cover" candlestick pattern. We are not suggesting new positions and we're raising our stop loss to $34.95. More conservative traders may want to exit early or tighten their stops even further. Our target is the $39.85-40.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $53 target.

Picked on March 25 at $36.85
Change since picked: + 0.40
Earnings Date 03/22/07 (confirmed)
Average Daily Volume: 57 thousand

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Titanium Metals - TIE -cls: 36.30 chg: -0.60 stop: 34.49

Today's pull back in TIE near $36.00 looks like another entry point. However, given the market weakness it might pay off to wait and see where stocks go next before initiating any new long positions. Our target is the $39.85-40.00 range. The P&F chart points to a $54 target.

Picked on March 21 at $36.30
Change since picked: + 0.00
Earnings Date 05/15/07 (unconfirmed)
Average Daily Volume: 2.4 million

---

TEPPCO Part. - TPP - close: 44.01 chg: +0.01 stop: 41.95

Tuesday proved to be a quiet day for TPP. The stock traded in a 16-cent range. Technically the close over $44.00 is bullish but we hesitate to suggest new positions here. More conservative traders may want to tighten their stops. Our target is the $44.90-45.00 range. The Point & Figure chart is very bullish with a $67 target.

Picked on March 06 at $42.88
Change since picked: + 1.13
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand
 

Short Play Updates

None
 

Closed Long Plays

Rentech - RTK - close: 3.12 chg: -0.11 stop: 2.49

Target achieved. As expected RTK continued to rally midday and traded to an intraday high of $3.30. We recently adjusted our target to the $3.28-3.30 range. If you didn't exit with us be warned. Today's action looks like a short-term reversal and RTK could easily dip back toward $3.00 or the $2.70-2.65 zone.

Picked on March 18 at $ 2.64
Change since picked: + 0.48
Earnings Date 05/11/07 (unconfirmed)
Average Daily Volume: 915 thousand
 

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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