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Daily Newsletter, Tuesday, 04/03/2007

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Table of Contents

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

Market Wrap

Consumer Short Squeeze?

Positive consumer data produced a sharp spike at the open and it appeared on the surface that shorts scrambled for cover. I will question that assumption later but techs, especially semis, software, internets and biotech were strong. Upgrades were flying everywhere and sellers were nowhere to be found. Positive consumer data helped push builders and builder supply stores higher along with consumer stores like Target and Federated. Fears of tight budgets and high gasoline prices shutting down consumer spending appeared to have faded as oil prices collapsed on positive comments from both Iran and Britain.

Dow Chart - Daily

Nasdaq Chart - Daily

It was an interesting day in the consumer sector. It started off with a weekly gain in Chain Store Sales by 0.3% but that was not what prompted the consumer rally. Sales jumped +4.9% year over year and that was the second consecutive week over 4%. The year over year trend has been very strong in 2007 and it appears it is getting stronger. Warm weather and Easter sales were credited with the strong uptick in consumer buying. The International Council of Shopping Centers expects sales growth to accelerate with 5% handles being discussed. Sales have not topped 4% since last September and the 5% range since November 2005. Personally I think this consumer spending spree may be short lived. With gasoline prices heading for $3 and home equity loans evaporating the consumer will find themselves between the proverbial rock and hard place as the year progresses. On Tuesday traders overlooked that fact.

Auto sales illustrated the continued problem for the domestic automakers. Sales for March fell -300,000 units to 16.3 million on an annualized basis. Sales of the domestic makers fell sharper than expected with Ford dropping -12.2%, GM -7.7% and Chrysler -8%. Foreign automakers saw gains with Toyota up +7.7%, Honda +7.3% and Nissan +3.9%. The domestic makers claim nobody wants to buy a fuel-efficient vehicle and only want high horsepower fully featured rides. That does not seem to follow the facts of the sales numbers above. Those selling smaller fuel-efficient cars are gaining share while the US makers are losing share. In the US only 25% of autos are considered small cars where 40% is the number for Europe.

The housing meltdown is also impacting the automakers with truck sales falling off a cliff. Truck sales at Ford fell -9.2%, GM -11.3% and even Toyota saw a decline of -1%. Analysts claim the sharp slowdown in the housing sector has interrupted the normal truck replacement cycle by contractors. Contractors and workers in the housing sector tend to use the heck out of their trucks and replace them often when the money is flowing. With two hundred thousand housing workers laid off over the last 18 months and hundreds of developments cancelled or postponed the available work in the sector has fallen to multiyear lows. Paying the bills is now the top priority for contractors rather than buying a new truck.

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A report from the National Association of Realtors showed that pending home sales rose +0.7% in February. The NAR said that bad weather in Jan/Feb kept buyers off the streets or the number would have been higher. They expect the March/April numbers to provide solid indications for the strength of the recovery. While +0.7% may not seem like much it was enough to power the homebuilders to gains early in the day but the sellers did reappear by the close causing most to end up only fractionally.

Continental Airlines (CAL) said overall passenger revenue rose nearly 5% on a +3.4% increase in traffic. Continental said planes were flying closer to capacity and a +8.3% increase in trans-Atlantic traffic and +6.1% in other international flights helped profits. Continental did warn that March storms caused flight cancellations and would reduce earnings by $10 million when they report on April 19th. The sector rebounded sharply on the news and the rally was also helped by the drop in oil prices. CAL jumped +$3, AMR +1.60, LCC +2.82 and UAUA +1.82.

Google helped power the Internet sector with news it would start showing ads to EchoStar's (DISH) 13 million satellite TV subscribers. Google continues to find new ways to sell advertising and all of this advertising will drive revenue for Google. Goldman Sachs analyst Anthony Noto advised investors to buy Google with a price target of $620. That is the 3rd highest target with Cantor Fitzgerald the highest at $650. Google gained +14.70 to $472 on the news. Banc of America also reiterated a buy on GOOG with a target of $601. S&P provided the only damper with a reiterated hold opinion on fears their move into the radio segment has not produced the expected return despite significant investment.

Best Buy and Circuit City report earnings on Wednesday and analysts are worried that margins may be down despite strong sales of various electronics. Expectations are for 20% growth in TV, MP3, video games, computers and digital cameras. They expect double digit drops in music and camcorders. Analysts fear the electronics price war started late in 2006 by Wal-Mart may have carried over into 2007 and reduced margins despite the continued strong sales in flat screen HDTVs. BBY saw gains ahead of their earnings tomorrow but CC continued to weaken from last week's spike.

May Crude Oil Chart - Daily

Oil prices retreated to $64 intraday after both Britain and Iran expressed willingness to resolve the hostage crisis diplomatically. The cooling tensions may provide only a temporary decline in energy prices due to continued weakness in inventory levels in the US. Valero said some of their stations were experiencing spot shortages and blamed the shortages on the recent rash of refinery outages. This shows just how tight the inventory is and how any refinery disruption impacts the supply stream. That is critical because the Colorado State University hurricane forecast was released today. They are calling for a very active hurricane season with 17 named storms. They are expecting five major hurricanes with winds over 111 mph and four hurricanes of lesser strength. They claim there is a 74% chance of at least one major hurricane making landfall on the US coastline. While they expect this season to be very active they do not believe it will reach the record proportions of the 2004-2005 seasons. However, the forecast and the current inventory shortages will continue to keep a floor under prices.

It is official! S&P said today that Q4-2006 will not maintain its hold on double digit earnings growth and the streak of consecutive quarters ended at 18. The last quarter of single digit growth was back in Q1-2002. For the rest of 2007 S&P has lowered their earnings growth estimates once again. Beginning with Q1 at 5% growth they see Q2 at +5.8%, Q3 at +2.9% and Q4 rising again to +14.6%. They caution however that estimates are still falling and guidance with Q1 earnings will be crucial. The new estimate for Q3-2007 at +2.9% growth is due mostly to the strong comparisons to Q3-2006 rather than a sharp slowdown in earnings. The expected rebound in Q4-07 is due mostly to the favorable comparisons for oil companies. You may remember the price of oil fell sharply in Aug/Sep 2006 to trade just over $60 for the entire 4th quarter. Expectations are for prices to be over $60 later this year and for additional production coming online to increase revenue for US companies.

S&P said tech earnings for Q4 fell to only +1.3% growth but that was going to change in 2007. Estimates are for earnings growth of +9.5% in Q1 and +17% for all of 2007. That Q1 forecast has fallen from 14.4% just a month ago. Strength is expected in semiconductors, software and the Internet sector. It is no coincidence those were the tech leaders today.

Halliburton (HAL) announced that the KBR spinoff offer was significantly over subscribed. HAL offered to exchange 1.59 shares of KBR stock for 1 share of HAL stock. HAL is finally getting rid of the KBR anchor and was shocked that so many investors were willing to trade their HAL stock for new stock in KBR. Nearly 211 million shares were tendered for the 85 million KBR shares offered. Halliburton said they were only going to accept approximately 40% of the tendered shares on a prorated basis. What this means to Halliburton is nearly a 10% reduction in outstanding HAL shares ahead of a planned $3 billion buyback program. HAL closed at a new three month high on the news.

There are signs that the subprime meltdown is finally melting up as well. The bankruptcy filing of New Century on Monday was just one more nail in the subprime coffin but the problem is far from buried. M&T Bank (MTB) said in a SEC filing on Monday that the subprime loan problem had escalated into problems in the Alt-A loans that M&T originates for sale into the secondary market. They said a recent auction of Alt-A loans, those with slightly less than prime credit, saw fewer bids than normal and those bids were lower than expected. Unfavorable market conditions and a lack of market liquidity impacted MTB's willingness to sell loans into the secondary market. In plain english it means they were not willing to sell their loans for the steep discount being offered. Because loans on the books have to be carried at the lower of cost or market value these lower than expected bids caused the value of those loans on the books to be marked down by -$12 million in the first quarter or roughly 7 cents per share in earnings. Multiply this markdown by the hundreds of banks in the mortgage origination and resale business and you can see why the financial sector is going to be under pressure as they report Q1 earnings.

It appears the global sell off we saw in February is over. Indexes are retesting their highs around the globe and fears of a global economic slowdown appear to have faded. Germany hit a seven-year high today, Mexico a new high and China has returned to their highs after triggering the sell off just five weeks ago. The US markets are actually lagging the rest and today's bounce only succeeded in returning them to the resistance highs set in late March. It appears on the surface that the bulls have returned. However, the majority of Tuesday's gains were created by three distinct buy programs, which ended by 10:45. These buy programs created a minor short squeeze but the high at 12513 reached at the end of the 3rd program was almost exactly where we closed out the day. There was almost zero movement throughout the day and no climb into the close like we see on a true short squeeze.

The spike at 1:40 was on comments from St. Louis Fed President, Bill Poole. He said, "Our economy is sound, economic activity is growing at approximately the same rate as potential, despite the housing slowdown," he said, adding: "Inflation is retreating as energy prices stabilize." This prompted a knee jerk spike but it was quickly sold as he continued his speech. The comment that quickly cooled the spike was, "I regard price stability as zero inflation." Personally I doubt that will happen in my lifetime in a growing economy. Once that spike evaporated the Dow returned to its sideways pattern at exactly where the morning buy programs ended. This is not a bullish scenario except that there was no attempt to sell it off. Normally on a spike like this you would expect a couple attempts by funds to take it back down. If they are successful they know it was a head fake and not to be bought. If they are not successful then they know where new support has formed giving them a game plan for future buying.

Russell-2000 Chart - Daily

NYSE Composite Chart - Daily

Because there was no follow through to the morning spike I would normally be cautious about buying the breakout. However, the complete lack of any selling of the spike gives me a little more confidence in being long. This is a holiday week and many traders are not at work. Volume is going to fade rapidly but historically this is typically a bullish week. Obviously we don't want to put money to work based solely on a historical trend but it helps as a confirming reason when other indicators are bullish. Using the Russell-2000 and the NYSE Composite as our sentiment indicators you should be long from about 2:30 on Monday. That is when the Russell broke over 800 on decent volume and based on my Sunday comments you should be long over 800. All afternoon the Russell found solid support at 811 with no attempt to sell off. The same was true of the NYSE Composite and 9375. They were the two indexes showing the most bullish internals. Since I like to use them as sentiment indicators of fund manager buying it suggests to me those managers are not chasing prices but gradually easing their buy orders higher just under the current price. For the rest of the week I would continue to buy any dip above Russell 800 and hope normal historical trends prevail. With only two days left in the trading week the only material economic reports are the ISM non-Mfg and Factory Orders at 10:AM on Wednesday. Neither should be a market mover but then NAR Pending Home Sales for a month ago is hardly a breakout report either.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
TWI None

New Long Plays

Titan Intl - TWI - cls: 26.11 chg: +0.39 stop: 24.89

Company Description:
Titan International, Inc., a holding company, owns subsidiaries that supply wheels, tires and assemblies for off-highway equipment used in agricultural, earthmoving/construction and consumer (including all terrain vehicles and trailers) applications. (source: company press release or website)

Why We Like It:
Shares of TWI have been showing relative strength for a while now. The current rally ran into trouble near $26.00 in early March but the bullish trend of higher lows is about to blossom into a breakout higher. We are suggesting readers buy the stock on a new high. Our trigger is at $26.25. If triggered our target is the $27.90-28.00 range. We are going to try and limit our risk with a stop loss at $24.89. More aggressive traders may want to use a wider stop.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/23/07 (unconfirmed)
Average Daily Volume: 339 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Apria Healthcare - AHG - cls: 33.22 chg: +0.80 stop: 30.79 *new*

AHG rallied sharply and broke out to a new 52-week high on news that the U.S. Centers for Medicare and Medicaid Services (CMS) had announced a bidding program for the top ten markets. AHG, one of the larger providers of healthcare services, is expected to do relatively well in such an environment. Volume behind today's move was above average, which is technically a positive for the stock. We are raising our stop loss to $30.79, just under the rising 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: + 0.85
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 910 thousand

---

Bristow Group - BRS - close: 36.21 chg: -0.27 stop: 34.99

Positive comments about a potential peaceful resolution between Iran and Britain over the captive 15 British soldiers sent crude oil prices sliding 2% today. Most oil stocks managed to rally with the rest of the market today but BRS is still under performing. We hesitate to suggest new positions now but a bounce from its rising 100-dma near $35.80 could be used as a new entry point. 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: + 0.33
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand

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Canadan Nat.Res. - CNQ - cls: 56.24 chg: +0.04 stop: 51.95

CNQ bounced back from any weakness this morning and managed to close in the green. Keep an eye on crude oil and an ear on the Iran-Britain conflict to see how the trading currents are going to flow with or against CNQ. 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: + 3.19
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million

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eBay Inc. - EBAY - close: 33.80 chg: +0.80 stop: 30.49*new*

Target achieved. Bear Stearns raised their earnings estimates on EBAY this morning and the stock reacted with a spike higher. The intraday high on EBAY was $34.27 and shares closed up 2.4%. Our conservative target was the $33.85-34.00 range. The $34.00 level has been significant resistance so we expected a struggle here. Aggressive traders might want to consider new positions if EBAY can produce a new relative high over $34.35. We're not suggesting new plays at this time. 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. Please note that we're adjusting the stop to breakeven at $30.49.

Picked on March 05 at $30.49
Change since picked: + 3.31
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million

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EMC Corp. - EMC - cls: 14.29 chg: +0.20 stop: 13.24

The rally in EMC is picking up speed. Shares rose another 1.4% on Tuesday. Volume came in just above average, which is an improvement. EMC is starting to look a little short-term overbought so more conservative traders may want to take some money off the table right here. Yesterday we suggested that more conservative traders consider an early exit in the $14.30-14.35 range and the intraday high today was $14.39. We continue to target the $14.50-15.00 range. We are not suggesting new positions.

Picked on March 21 at $13.26
Change since picked: + 1.03
Earnings Date 04/17/07 (unconfirmed)
Average Daily Volume: 29.1 million

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Helmerich Payne - HP - cls: 30.70 chg: +0.07 stop: 28.49 *new*

We do not see any changes from our previous comments on HP. The overall trend is bullish but momentum has stalled. Shares are trading in the $30-31 trading range. More conservative traders may want to lock in a gain now or raise their stop toward $30.00. We are going to adjust our stop loss to $28.49. Our target is the $32.50 mark.

Picked on March 19 at $28.77 *gap higher*
Change since picked: + 1.93
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 1.4 million

---

KLA-Tencor - KLAC - cls: 54.22 chg: +0.71 stop: 52.75

KLAC is marching higher and nearing resistance at the $55.00 level. Our plan is to wait for a breakout over resistance near $55.00 with a trigger to go long at $55.15. 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: 44.56 chg: +0.11 stop: 43.45

TPP is still creeping higher and hit another new relative high today. Shares closed near their highs for the session, which bodes well for tomorrow. 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: + 1.68
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand
 

Short Play Updates

Hovnanian - HOV - cls: 24.53 chg: +0.16 stop: 26.76

The National Association of Realtors released their pending home sales report today and the results were better than expected. This eased some of the fears for the homebuilders and the group bounced higher. The DJUSHB home index rose 1.48%. Shares of HOV closed up 0.6% and more importantly appeared to produce a failed rally at the $25.00 level. The trend in HOV remains bearish but we'd be cautious about opening new short positions given the market rally today and the stock's high short interest. 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: - 0.16
Earnings Date 06/07/07 (unconfirmed)
Average Daily Volume: 1.9 million
 

Closed Long Plays

Kinetic Concepts - KCI - cls: 54.00 chg: +2.58 stop: 48.89

Target achieved. Actually KCI exceeded our target in the $54.75-55.00 range. The intraday high today was $56.23. Fueling the big move was news that the U.S. Centers for Medicare and Medicaid (CMS) had approved a bidding program for the top ten U.S. markets. Investors believe that this decision was a big plus for KCI. The stock hit new 52-week highs before paring its gains.

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