Monday in the markets is going to be very exciting. There are no economic reports on Monday but Friday's employment surprise will be all the economic incentive traders will need. Several new events in the housing/mortgage sector will also be providing an incentive to trade. Friday may have been a market holiday but Monday is likely to make up for it.
Dow Chart - Daily
Nasdaq Chart - Daily
The only two economic reports next week that could be market moving are the FOMC minutes on Wednesday and the Producer Price Index (PPI) on Friday. The rest are just filler. The PPI is key because producer prices jumped +1.3% in February and another strong jump like that would have the Fed members jumping like ants on a griddle. The tenuous balance between fearing inflation and worrying about slow growth would be thrown completely out of line.
The housing sector continues to make the news on a daily basis. Ryland Homes (RYL) warned on Thursday that they would post a Q1 loss of 50-60 cents per share on an impairment charge of about $65 million. They were cautiously optimistic at the end of Q4 saying prices had begun to stabilize. As Q1 progressed they found that was not the case as "aggressive pricing strategies" in some markets persisted requiring a write down of some assets. On the bright side cancellations in Q1 fell to only 28% compared to 48% in Q4.
Dominion Homes (DHOM) reported a 54% drop in sales in Q1 but said it was still the best quarter since Q2-2006. Dominion just completed a four-year renewal of its credit facility to help "weather an anticipated loss in 2007 and to respond aggressively when the market recovers."
I am sure everyone has heard that New Century filed for bankruptcy earlier in the week. They announced on Friday they had sold or disposed of all pending loan applications. They also sold their loan servicing unit to Carrington Capital Management for $139 million as well as a loan portfolio to Greenwich Capital. They are currently trying to sell their loan origination platform. They also fired 3200 employees or 54% of their workforce. Rumor has it the other 46% is already looking for a new home. The Countrywide Financial CEO said on Thursday they had been deluged with good candidates and were staffing up using quality people they had not been able to attract before. I wrote earlier in the week that MBT was reporting deteriorating conditions higher up the mortgage ladder and American Home confirmed that on Friday. AHM cut its Q1 and full year earnings projections by 25% because of increasing difficulty in getting loans closed and resold in the capital markets. They quit offering several types of Alt-A mortgages and warned that delinquencies were rising. They said, "During March, conditions in the secondary-mortgage and mortgage-securities markets changed sharply." And, "While the market may recover - our working assumption must be that current market conditions will persist." AHM is not a subprime lender with less than 1% of its portfolio in subprime paper but the meltdown is now melting up into better credits and the mortgage resale market. AHM said investors in the mortgage-backed securities market were now offering to buy loans at "materially lower" prices. These are the same comments we got from MBT earlier in the week. If you are planning on buying a house this summer you should plan on paying a lot higher rate.
Vonage received what some were calling a death sentence on Friday morning when a District Court in Virginia signed an order preventing Vonage from signing up any new customers. The order came from a ruling that Vonage was violating three patents held by Verizon on the VOIP service. The judge also ordered Vonage to pay $58 million in damages on top of some monster royalty fees. Late Friday Vonage received a stay of execution by the Federal Court of Appeals pending further legal arguments in the case. Vonage now claims it has a work around, which it has just signed with Voice One, to get around the Verizon patents. Either way the stock of Vonage is apparently doomed to trade in the low single digits for quite some time.
Norfolk Southern (NSC) warned on Thursday that earnings would fall about 3% for Q1 on lower traffic due to slumping auto sales, extreme weather and lower gains on property sales. All the railroad stocks took an initial hit but rallied by the close as analysts came to their rescue. I have been waiting for the stocks to crack to gain an entry point for a long position but they refuse to die. Remember the comments last week about the 94 million acres of corn being planted? A lot of that corn will move by train and the ethanol being produced from the corn will also move by train. Coal demand is continuing to rise and petroleum, chemicals, ore and lumber imports from Canada are exploding. If you read the reasons for Norfolk's warning there was nothing new and nothing material. Everyone knows auto sales have been down and extreme weather played havoc with the airlines, trucking and now the railroads. No surprise there. I would look at any future dip as a buying opportunity.
Speaking of coal the sector got a boost last week from Arch Coal. The company said it was looking for acquisitions this year and beyond that strategically fit and add shareholder value. The CEO said he expected something to happen within the next few months. Since the various coal opportunities are limited it should not take a rocket scientist to realize his comments just lit a fire under the various candidates. Also, by making the comments he warned the 800-lb gorilla in the sector, Peabody Energy, that they were going to be on a shopping spree for strategic opportunities. If you were Peabody would you just sit back and watch Arch grow bigger by snapping up the various acquisition targets you had been coveting? I doubt it. By making the announcement the Arch Coal CEO may have shot himself in the foot or maybe I should say the mouth. If you want to acquire something cheap you should not tell anyone else you are shopping. Other companies in the sector include FCL, MEE, ARLP, ANR, JRCC, WLB, NRP, NCOC and EEE. That is a rather small shopping list.
The big electronics retailers (BBY & CC) reported earnings on Wednesday and the difference was night and day. Best Buy continues to gain market share and Circuit City is going backwards. CC is closing stores and replacing 3400 experience workers with cheaper help. They are moving away from "experienced sales people" to "cheaper workers." Translated that means those employees who have been with CC for years and risen up the salary ladder as they gained experienced are now being replaced with minimum wage entry level workers. This is exactly opposite the Best Buy strategy of offering knowledgeable sales staff and technicians as well. The theory for CC is that most customers do their research online and don't need an "experienced, high paid" sales person to take their money and print a receipt. I agree with that to some extent but there is a lot to be said to able to bounce ideas off somebody who knows what they are talking about. I recently had the projector in my theater room die. I spent two weeks wandering the net reading reviews and actual customer comments. Be careful relying on the reviews since many sites are compensated for their favorable views. However, it is tough to influence the hundreds of actual buyers of the product who have suffered the trials and tribulations of installing and using the product. Those venturing back on the net to post their views either love their product or hate it with very few in between. That is where the real truth appears. The advertising hype is separated from reality. But, back to the story. I had decided on a specific 1080P projector and went to Best Buy to get it. Surprise, they had no inventory other than a couple $1000 entry-level models. The sales staff was very knowledgeable BUT their sales tool was a PC with a big flat screen monitor connected to the Internet. Every question I asked was fed into Google or to book marked manufacturer sites. The answers were quick and precise since I did not have to depend on the memory of a pimpled teenager more concerned with watching the clock until closing than actually helping a customer. The Best Buy staff was very helpful even though they had no inventory. Everything was special ordered from their warehouse when sold, which makes sense to cut down on inventory costs. I ended up buying my receiver from Ultimate Electronics because they had the largest inventory AND even smarter sales people. The projector I bought online to save $1000 and I love it. Warning, there is a sales recommendation ahead. If you are looking for the best 1080P HD home theater projector on the market the Mitsubishi HC5000BL can't be beat for the price. I love it and it was worth every penny. This experience is why Best Buy does not stock high dollar items other than flat screen TVs. They may be kicking CC butt but the Internet retailers are doing the real volume with ZERO experienced sales people.
CC has already been sued by workers they are letting go claiming wrongful termination. They are seeking class action status. CC said it laid them off because they were making "well above the market-based salary range for their role" and replaced them with lower-paid new hires. In California the use of salary as the basis for determining who gets laid off is potentially illegal and may constitute age discrimination. The laid-off workers will get a severance package and, get this, a chance to reapply for their former jobs, at lower pay, after a 10-week wait. So, if CC can't replace them over the next 10 weeks with lower paid workers they will let them come back to work for minimum wage. Now that is not a worker I would want wandering around my store dealing with customers.
S&P-500 Chart - Daily
For next week the markets could be under pressure on fears about the Fed reaction to recent data. The rally last week came on the back of three distinct buy programs on Tuesday and without those three programs the Dow would have only gained +77 for the week and even that would have been doubtful. The programs busted resistance at 12500 by 10:30 on Tuesday but the Dow was only able to add +46 points from 10:30 on Tuesday until Thursday's close. This was not a particularly exciting performance. 12600 is the next material resistance level and 12500 should be primary support. A break of 12500 could easily see a retest of 12300. It all depends on how investors feel about the jobs data after a long holiday weekend. I would buy a dip to 12500 but reverse positions if support at 12500 breaks.
Russell-2000 Chart - Daily
NYSE Composite Chart - Daily
The Nasdaq rallied into Thursday's close to exactly 2470 and strong resistance. This is where I would expect trouble if trouble is going to appear with 2500 the next material resistance on any continued uptrend. The Russell and NYSE Composite continued to exhibit bullish signals and both closed at five-week highs. Unfortunately these moves were on very light holiday volume that barely broke four billion shares on Thursday. Were it not for the jobs data I would still be maintaining a bullish bias. April has a good record for market gains and earnings expectations are dropping so fast there is a good chance we could see some positive surprises.
However, it all depends on how investors react to the jobs data. The bulls could cheer the strength and claim an economic rebound in progress. Conversely the bears will be shouting inflation in a crowded market and trying to stampede everyone to the exits. About the only thing for sure is a lot of volatility at Monday's open. That will set the stage for Wednesday's FOMC minutes and worry over Friday's PPI.
Not to be forgotten this is the start of Q1 earnings and that will give traders something to focus on besides economics. Alcoa earnings on Tuesday is normally accepted as the official kickoff of the cycle as the first Dow stock to report. RIMM on Wednesday is the first big tech and results are expected to be strong. Products from PALM and MOT are just not keeping up with the popularity of the crackberry. GE ends the week with the consensus earnings estimate dead in the middle of GE's own projected range. Nobody is going out on a limb here since GE normally reports exactly what they say they are going to report. The only material benefit to GE's earnings is their guidance. They are so big and so diverse that they are seen as a proxy for the economy and whatever they say in guidance goes a long way towards soothing investor qualms about the economy. Recently GE has been repeatedly bullish about the economy and expectations and nobody expects any change. GE does have minimal subprime exposure but not enough to really impact their earnings. Analysts will still be looking for any comments about that division but baring a sudden change in outlook the GE earnings will be just another event to forget before the market closes for the day.
New Long Plays
Arrow Elctr. - ARW - cls: 39.63 chg: +0.69 stop: 37.74
Why We Like It:
Picked on April xx at $xx.xx <-- see TRIGGER
Brookfield Asset Mgmt - BAM - cls: 54.76 chg: +0.57 stop: 52.35
Why We Like It:
Picked on April 08 at $54.76
James River Coal - JRCC - cls: 8.15 chg: +0.12 stop: 7.45
Why We Like It:
Picked on April 08 at $ 8.15
UNIT Crp. - UNT - cls: 51.95 chg: +0.67 stop: 49.89
Why We Like It:
Picked on April 08 at $51.95
New Short Plays
Long Play Updates
Apria Healthcare - AHG - cls: 33.45 chg: +0.27 stop: 30.95*new*
AHG rallied to another new 52-week high on Thursday but pulled back from its highs to close up 0.8%. Volume came in low ahead of the long weekend. We remain bullish but if you're looking for a new entry point watch for a dip toward $33.00 or potentially near $32.50. We are inching up our stop loss to $30.95 keeping it just under the rising 50-dma. Our target is the $35.75-36.00 range. We do not want to hold over the May 1st earnings report.
Picked on March 27 at $32.37
Bristow Group - BRS - close: 36.31 chg: +0.30 stop: 34.99
Crude oil has pulled back from its recent highs due to Iran releasing its British prisoners. Yet the pull back in oil stalled near its 200-dma. The commodity's trend still looks bullish. Short-term BRS has suffered a similar pull back but the larger pattern is a bullish one (see chart). We are suggesting caution. If you look at an intraday chart BRS appears to have produced a bearish head-and-shoulders pattern over the last four weeks. Thus far traders have been defending the stock near its rising 100-dma but many of the technical indicators are starting to worsen. We hesitate to suggest new long positions until we see BRS break the short-term trend of lower highs. 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
Canadan Nat.Res. - CNQ - cls: 56.82 chg: -0.19 stop: 53.05
CNQ came close to our $58.00-60.00 target on Thursday. Shares rallied to $57.70 early in the session. Unfortunately, Canadian stocks turned lower and CNQ lost its momentum for the day. CNQ is now up four out of the last five weeks and it might be due for a rest. We're not suggesting new positions at this time and more conservative traders may want to exit early to lock in a profit or at least tighten their stops. FYI: The P&F chart is bullish and its target has risen from $71 to $74.
Picked on March 21 at $53.05
eBay Inc. - EBAY - close: 33.71 chg: -0.01 stop: 30.49
Time is running low for our play on EBAY. The stock hit our conservative target in the $33.85-34.00 range last week. Now shares are trying to breakout past resistance in the $34.00-34.40 range. The company is due to report earnings on April 18th and we plan to exit ahead of the announcement. We are not suggesting new plays but aggressive traders might want to consider new positions if EBAY can produce a new relative high over $34.40. Our aggressive target in the $37-38 zone might be too optimistic given our time frame.
Picked on March 05 at $30.49
EMC Corp. - EMC - cls: 14.44 chg: +0.09 stop: 13.24
EMC continues to show relative strength. The stock hit another new relative high on Thursday. We are repeating our earlier suggestion that more conservative traders may want to exit now and lock in a gain. Our target is the $14.50-15.00 range. We are not suggesting new positions.
Picked on March 21 at $13.26
Helmerich Payne - HP - cls: 30.90 chg: +0.25 stop: 28.99 *new*
HP has rebounded back to the top of its $30.00-31.00 trading range with Thursday's 0.8% gain. Volume came in relatively well in spite of the long, holiday weekend. The stock looks poised to breakout higher but more conservative traders may want to consider locking in a gain now anyway. We are adjusting our stop loss to $28.99. You may want to use a tighter stop. Our target is the $32.50 mark. More aggressive traders may want to aim higher, especially since the P&F chart points to a $48 target.
Picked on March 19 at $28.77 *gap higher*
KLA-Tencor - KLAC - cls: 55.85 chg: +0.61 stop: 52.75
KLAC turned in a strong week. The stock was upgraded and shares broke out over significant resistance at the $55.00 level. We now have less than three weeks before the company reports earnings. If you missed the entry point at $55.15 we would still consider new positions now or on a dip back toward $55.00. Our target is the $59.50-60.00 range. Please note that we do not want to hold over the April earnings report. FYI: The P&F chart is bullish with a $69 target.
Picked on April 04 at $55.15
Titan Intl - TWI - cls: 26.93 chg: +0.27 stop: 24.89
TWI spiked to another new all-time high on Thursday at $27.44. Shares pulled back from their highs and the move might be a short-term top. Volume came in above average on Thursday's 1% gain, most likely due to short covering. TWI does have relatively high short interest at 25% of the small 17 million-share float. Broken resistance near $26.00 should now be support. A pull back near $26 can be used as a new entry point. Our target is the $27.90-28.00 range. More aggressive traders may want to use a wider stop.
Picked on April 04 at $26.25
Short Play Updates
Hovnanian - HOV - cls: 24.49 chg: +0.53 stop: 26.16 *new*
Rival homebuilder Ryland homes (RYL) reported a first quarter loss but the results were better than expected. Plus the company had relatively positive comments on their outlook going forward. This inspired some bargain shopping and short covering in the sector. The DJUSHB index rose 1.6%. Shares of HOV out performed its peers with a 2.2% bounce but the stock had been looking oversold and due for a rebound. Readers can watch for a failed rally under $25.00 or its 10-dma near $25.50 as a new entry point for shorts. We are adjusting our stop loss down to $26.16. 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
Closed Long Plays
TEPPCO Part. - TPP - close: 44.88 chg: +0.28 stop: 43.45
Target achieved. TPP's relative strength finally produced a surge toward round-number, psychological resistance near $45.00. The intraday high on Thursday was $44.99. Our target was the $44.90-45.00 range. The trend in TPP remains bullish but shares need to breakout past the March 2005 (all-time) high at $45.00. We suspect TPP will see a pull back first before making another breakout attempt. If you're willing to endure some volatility more aggressive traders may want to hold the stock longer.
Picked on March 06 at $42.88
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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