Option Investor

Daily Newsletter, Monday, 04/02/2007

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Table of Contents

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

Market Wrap

M&A Deals Help Offset Weak ISM, M&T Bank Warning

A plethora of M&A was just enough to offset a weaker-than-expected March ISM Manufacturing Index reading and an earnings warning from M&T Bank Corp. (NYSE:MTB) $105.95 -8.52% as the major indices finished fractionally higher.

In one of the largest private equity deals of the year, electronic payment processor First Data (NYSE:FDC) $32.45 +20.63% said it had agreed to be taken private by an affiliate of private equity group Kohlberg Kravis Roberts & Co. for $29 billion (including $2 billion in debt). If consummated, the deal values First Data at $34/share.

Under the terms of the deal, First Data can solicit third party proposals over the next 50 days, which the company said it intends to do.

In 1995, First Data merged with First Financial Management Corp., whose holdings included Western Union. First Data spun off Western Union (NYSE:WU) $22.18 +1.04% last September, and just recently (March '07) announced a deal to acquire the debit and ATM payment processing business Instant Cash Services for an undisclosed amount.


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Additional M&A deals had the nation's second-largest newspaper publisher Tribune Co. (NYSE:TRB) $32.81 +2.18% saying it had accepted real estate mogul Sam Zell's offer of $8.2 billion, or $34/share in cash. Mr. Zell's team said they plan to invest $315 million in the media conglomerate, with Mr. Zell becoming chairman of Tribune's board when the buyout is completed sometime in Q4 2007.

Analysts say a big chunk of new debt will be required to pay the $34/share cash buyout, with Mr. Zell counting on repaying the debt largely through tax benefits from a new employee stock option plan that would supplement existing retirement accounts for the company's 20,000 workers. Many analysts also see Zell selling the Major League Baseball franchise Chicago Cubs and Tribune's stake in Comcast SportsNet.

Analysts think the Chicago Cubs spinoff could fetch $600 million. Tribune bought the franchise in 1981 for $20.5 million.

While not as "bid a deal" as First Data and Tribune, shareholders of Global Imaging (NASDAQ:GISX) $28.64 +46.87% printed huge gains after the provider of office technology solutions said it had agreed to be bought by Xerox (NYSE:XRX) $17.08 +1.12% in a deal valued at $1.5 billion, or $29/share.

U.S. Market Watch - 04/02/07 Close

The major indexes fell to their lows of the session just after 10:00 AM EDT when the Institute for Supply Management (ISM) said weak capital spending and the slump in the auto and housing sectors had its March ISM Manufacturing Index falling to 50.9% from February's 52.3%. While readings above 50.00% signal expansion, the data offered a bit of a downside surprise to last week's regional Chicago Purchasing Manager's report (biggest monthly jump in history to 61.7% from February's 47.9%).

Economists were looking for signs of healthier expansion and a 51.3% reading.

Mining stocks as depicted by the AMEX Gold Bugs Index ($HUI.X) 345.16 +2.22% reversed earlier losses to take today's top spot among sectors winners as the Institute said its ISM Manufacturing Prices Index jumped to 65.5% from February's 59.0%. Economists were looking for prices to expand to a more modest 60.0% measure.

Most other major ISM sub indexes fell in March. The new orders index dropped to 51.6% from 54.9%, while the production index slipped to 53.00% from February's 54.1%. The employment index showed contraction at 48.7% after February's expansionary reading of 51.1%.

Tomorrow's U.S. domestic vehicle sales may grab some attention. Total domestic sales are forecast to have remained flat with February's 12.8 million units annually.

On Sunday, Japan said vehicle sales in that country fell for a 21st-straight month, falling 12.6% year-over-year to 487,738 vehicles.

Japan's Toyota Motor Corp. (NYSE:TM) $126.92 -0.96% closed below $127.00, a level of horizontal support since mid-January.

Japan's benchmark Nikkei-225 ($NIKK) fell 1.5% on Monday to close at 17,028.41. As I continue to monitor the $/yen cross rate, losses in Japan also came on the heels of that country's Tankan Large Manufacturers Index reading of 23, which was below economists' forecast of 24 and prior reading of 25. The Tankan's Large Non-Manufacturers Index was also slightly below economists' forecast of 23, at 22.

US Dollar / Japanese Yen Cross Rate - Daily Intervals

Some may argue that the "yen carry trade" is over, but I'm not so certain. While the U.S. dollar has stabilized against the Japanese yen, last week's USD/JPY dip to 116.50 did have the major indices giving back some gains intra-day in response.

Intra-day observations that I've made have me seeing this above relationship tending to FOLLOW equity moves the last couple of weeks. Ideally, equity traders would rather have the USD/JPY be a LEADING indicator, or measure for what equities are about to do. Should we wake up one morning with the USD/JPY much above 118.50, I would have to be looking for S&P 500 (SPX.X) 1,424.55 +0.25% strength above 1,440, as well as bullishness out of Japan. Conversely, a USJ/JPY break back below 115.75 could quickly have the SPX vulnerable to their recent 03/14/07 relative low of 1,364.06.

I should note the S&P 500 (SPX.X) low close this year has come on March 5th at 1,374.12.

Now the banks ....

As noted in tonight's first paragraph, banking stocks were notably weak in today's session after S&P Bank Index (BIX.X) 381.07 -1.61% component M&T Bank Corp. (MTB) warned that the problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative, or "Alt-A," residential mortgage loans that M&T originates for sale in the secondary market.

In an SEC filing, company executives said, "Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter," and "At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected."

Alt-A loans are the highest of the below-prime category, generally comprising mortgages made to creditworthy borrowers but with limited documentation.

In essence, M&T's filing means that the bank thinks the loans it has recently originated are worth more than investors in mortgage-backed debt are willing to pay for them, another way of saying that the large amount of cash that floated the U.S. housing market for the past few years is evaporating.

S&P Banking Index (BIX.X) - Daily Intervals

As long-time subscribers know, I have often pointed to the banks as a key indicator of market direction. UP and DOWN!

One glaring sign that INSTITUTIONAL investors/traders are still bearish/cautious the group is action that took place today, which follows recent rally high of 402.63, that found SELLING at March's MONTHLY Pivot (401.85). In PINK I've displayed March's MONTHLY Pivot Levels, as well as April's MONTHLY Pivot levels, where we see the BIX.X begin the month BELOW its MONTHLY Pivot of 388.20.

The MONTHLY Pivot action in March, which found the BIX.X falling to trade its MONTHLY S2 (support #2) at 380.23, doesn't find a little distribution back at MONTHLY Pivot, but some notable distribution. As if, well... INSTITUTIONAL computers/traders were just waiting to hit the group on the rally.

The DARK PURPLE DASHED lines of retracement would define a range from the 06/23/06 relative low close, to the most recent all-time high close found on 02/20/07.

S&P 500 Index (SPX.X) - Daily Intervals

Both the BIX.X and the S&P 500 Index (SPX.X) traded their recent relative highs on 02/20/07, but the continued weakness in the BIX.X will have the SPX.X hard-pressed in my opinion to see daylight above 1,440.

While the dollar/yen relationship is also being closely watched, I would put GREATER emphasis near-term on the banks, and financials as a whole, as they comprise the LARGEST weighting in the SPX.

Sidelines on oil, for now ....

As an updated to my Market Wrap from Monday, March 19, I'm strongly suggesting "oil bulls" take profits at trend in the U.S. Oil Fund (AMEX:USO) $53.56 +0.39% as it tests its bearish resistance trend at $54.00.

U.S. Oil Fund (USO) - $0.50-box size

Some of the "fundamental" data I've been working with regarding weekly EIA inventory data and news flows has hopefully put some gains in trader's accounts. I think traders should be protecting gains at trend, but now look for another buying opportunity should the USO pull back to that recent triple top buy signal at $52.00. Oil is looking bullish into the summer driving season.

Perhaps any news out of Iran regarding the release of 15 sailors provides the catalyst for some profit taking.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Apria Healthcare - AHG - cls: 32.42 chg: +0.17 stop: 29.99

AHG spent Monday's session stuck in its trading range but the afternoon saw a rally toward the top of its range. Shares could be poised to breakout soon. Readers can choose to buy this bounce or wait for a breakout over $32.50 (or even over $33.00) before considering new positions. Our stop loss is under the $30.00 mark but more conservative traders may want to tighten theirs toward the 50-dma. Our target is the $35.75-36.00 range. We do not want to hold over the late April earnings report.

Picked on March 27 at $32.37
Change since picked: + 0.05
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 910 thousand


Bristow Group - BRS - close: 36.48 chg: +0.03 stop: 34.99

An intraday rally and then pull back in crude oil failed to have any big impact on BRS. The larger pattern continues to look bullish but short-term the lack of upward momentum is weighing on the indicators. More conservative traders might want to tighten their stops toward last week's low. 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: + 0.60
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand


Canadan Nat.Res. - CNQ - cls: 56.20 chg: +1.01 stop: 51.95

CNQ is still marching higher. Shares rose 1.8% and closed back above potential resistance at the $56 level. Lack of follow through lower on Friday's decline is a positive sign. Our target is the $58.00-60.00 range. FYI: The P&F chart is bullish with a $71 target.

Picked on March 21 at $53.05
Change since picked: + 3.15
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million


eBay Inc. - EBAY - close: 33.00 chg: -0.15 stop: 29.85

We do not see any changes from our weekend updates on EBAY. The intermediate trend looks bullish but short-term the stock is stuck going sideways. If we have patience it looks like shares might hit our conservative target in the $33.85-34.00 range in the next several days. Our aggressive target in the $37-38 zone might be too optimistic given resistance at $34.00 and our plan to exit ahead of EBAY's April earnings. We're not suggesting new positions at this time. More conservative traders may want to tighten their stops.

Picked on March 05 at $30.49
Change since picked: + 2.51
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million


EMC Corp. - EMC - cls: 14.09 chg: +0.24 stop: 13.24 *new*

The rally in EMC continued into Monday's session. Shares broke out over potential resistance at the $14.00 mark. EMC closed up 1.7% to out perform its peers in tech and the market in general. We are adjusting our stop loss to $13.24. More conservative traders might want to take some money off the table or maybe tighten your target near $14.30-14.35. We continue to aim for the $14.50-15.00 range.

Picked on March 21 at $13.26
Change since picked: + 0.83
Earnings Date 04/17/07 (unconfirmed)
Average Daily Volume: 29.1 million


Helmerich Payne - HP - cls: 30.63 chg: +0.29 stop: 27.95

Traders bought the dip near $30.15 this morning and HP out performed the market with a 0.9% gain. Unfortunately, the stock is still under short-term resistance near $31.00. We remain bullish on oil but hesitate to suggest new positions in HP at this time. More conservative traders may want to lock in a gain now. Our target is the $32.50 mark.

Picked on March 19 at $28.77 *gap higher*
Change since picked: + 1.86
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 1.4 million


Kinetic Concepts - KCI - cls: 51.42 chg: +0.78 stop: 48.89

KCI's rebound continued into Monday. The stock rose 1.5% and broke out over potential resistance at the $51.00 level. Volume came in about above but that's better than what KCI has witnessed lately. We don't see any changes from our weekend comments. Technical indicators are turning bullish again. We're suggesting long positions now given Friday's bounce. More conservative traders may want to wait for a breakout past $51.20, the March 23rd high, or wait for a new relative high over $52.55. Bear in mind that our short-term target is the $54.75-55.00 range. FYI: The P&F chart is very bullish with a $99 target. We do not want to hold over the late April earnings report.

Picked on April 01 at $50.64
Change since picked: + 0.78
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 962 thousand


KLA-Tencor - KLAC - cls: 53.51 chg: +0.19 stop: 52.75

We don't see any changes from our previous comments on KLAC. The stock continues to have a bullish pattern of higher lows but we're sticking to our game plan. Our plan is to wait for a breakout over resistance near $55.00 with a trigger to go long at $55.15. However, more nimble traders might want to consider buying a dip. 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 two weeks, which may be too optimistic. FYI: The P&F chart is bullish with a $69 target.

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


TEPPCO Part. - TPP - close: 44.45 chg: +0.05 stop: 43.45

It's a battle but TPP is still inching higher. The stock dipped to $44.00 this morning but traders jumped in at the pull back and shares hit another new relative high midday. Our target is the $44.90-45.00 range. We are not suggesting new positions. The Point & Figure chart is very bullish with a $67 target.

Picked on March 06 at $42.88
Change since picked: + 1.57
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand

Short Play Updates

Hovnanian - HOV - cls: 24.37 chg: -0.79 stop: 26.76

More news about trouble in the sub-prime loan market, thanks to M&T Bank, sent new shivers down the homebuilding sector. The DJUSHB index slipped 1.29%. Shares of HOV under performed its peers, broke down under the $25.00 level, and closed with a 3.1% loss. Our suggested trigger to short the stock was at $24.69 so the play is now open. Volume behind today's move was strong, which is a good sign for the bears. Our target is the $20.50-20.00 range. FYI: HOV does have a very high amount of short interest at almost 35% of the 31.3 million-share float. That does raise the risk of a short squeeze should the stock suddenly move higher!

Picked on April 02 at $24.69
Change since picked: - 0.32
Earnings Date 06/07/07 (unconfirmed)
Average Daily Volume: 1.9 million

Closed Long Plays


Closed Short Plays


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


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