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Daily Newsletter, Tuesday, 04/10/2007

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Table of Contents

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

Market Wrap

Reluctant Streak

The Dow closed positive for the 8th consecutive day and you have to go back to March-2003 to equal that streak. Traders are not rushing to buy with the Dow only adding +60 points over the last four days. The cautious reluctance is due to concerns over inflation, earnings and the economy. It is impressive that the streak has continued given the small gains and that demonstrates the underlying bullish sentiment despite the wall of worry.

Dow Chart - 240min

Nasdaq Chart - Daily

The economic calendar was slim today but headed by another sharp gain in Chain Store sales of +0.9% for the week. This was the 5th consecutive weekly gain and powered by Easter shopping. Even with the gain it was hampered by continued cold weather, which slowed sales of spring apparel. The continued strength in consumer buying is surprising given shrinking home equity loan capability. The tight labor market is the key with anyone who wants to work able to find a job and generate spending cash.

The tight jobs market was also evident in the Job Openings and Labor Turnover Survey (JOLTS) released this morning. Workers hired fell to 4.8 million in February from 4.96 million the prior month. However, separations also fell from 4.6 million to 4.48 million as higher wages kept people working. The available jobs also fell to 4.1 million from 4.22 million. This report provided additional confirmation the job market remains strong and consumers should continue spending until rising gasoline prices puts a crimp on their wallet.

The big report due out tomorrow is the FOMC minutes for the March meeting. With Fed heads hitting the speaking circuit over the last week and all saying they were vigilant on inflation it appears they are setting the stage for some minutes that may surprise traders. They could be subtly warning that the minutes will show rising inflation fear. By repeating the warning every day for the last week they could be trying to blunt the impact of that release. Conversely the minutes could show rising growth and that is why the Fed heads have gone out of their way to convince us they are still on inflation watch. Since 71% of the major bond traders still expect the next move will be a cut the Fed has an uphill battle in keeping real rates high without actually hiking them. Talking them up has been working with yields on the 10-year note rising to 4.75% and a new six-week high on Monday. The last week's talk-a-thon may have been an effort to prepare for some unexpected comments in tomorrow's FOMC minutes.

The housing sector is still under fire with DR Horton (DHI), the largest homebuilder by units sold, reporting that sales fell -37% and the dollar value of those sales fell by 41%. DHI sold 9,983 homes in Q1, down from 15,771 in Q1-2006. The value of those homes sold fell to $2.6 billion from $4.4 billion. CEO Donald Horton said there does not seem to be an immediate bottom and new home sales continue to be challenging. He said the normal spring buying season had yet to appear. S&P analyst Thomas Smith cut DHI to a sell from a buy saying he was taking a dimmer view of the near future. DHI fell fractionally on the news.

CEO Ara Hovnanian of Hovnanian Enterprises (HOV) appeared on CNBC saying that the subprime problem was being felt across the spectrum and having a strong psychological effect on buyers. This impact is causing even prime borrowers to hold off on making that purchase. He said it appeared a bottom was forming a couple months ago but since the subprime problem appeared sales had weakened once again. He said HOV sales would not be as bad as DR Horton just reported. He said in all but a couple of their developments sales were just off in the low single digits. HOV shares fell only 25 cents on the news.

Equifax reported mortgage delinquencies for all loans spiked to 2.87% in Q1 and the rate of increase was the largest since records have been kept. The delinquencies were not in just the subprime area but covered all loans including home equity loans. This was worse than the rates seen in the 2001 recession. Foreclosure auctions increased nationwide in Q1 with examples being New York City +56%, Miami +30% and Los Angeles +24%. Miami is seeing 73 foreclosures per 1000 households. Areas where property prices rose the most are seeing the largest number of defaults.

We saw yesterday another impact of the slowing housing sector. Valspar (VAL), a maker of paint and coatings, warned that earnings would be at the low end of it prior guidance. Fewer homes being built or remodeled prior to sale is producing a paint glut. Deutsche Bank named VAL in late March as a likely takeover candidate in a sector consolidation.

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Citigroup kept making the headlines but their news will not be out until tomorrow. Citigroup is expected to announce a major restructuring program that will involve some serious job cuts. Estimates of just how many cuts range from 15,000 to as high as 45,000. Lehman Brothers said they would need to cut as many as 80,000 (25%) to bring their revenue per employee inline with industry norms. Citigroup rose nearly $1 in anticipation of the announcement. Citigroup is planning a technology upgrade as well that could see jobs relocated to India or to smaller US cities where the cost of doing business in the form of wages and rents is considerably cheaper than New York. Citigroup is expected to take a charge of more than $1 billion for the restructuring. Citigroup operates in 100 countries, has over 8000 branches and 200 million customers.

Texas Utilities (TXU) announced plans to build several of the largest nuclear power plants in the US. TXU scrapped plans to build 8 coal-fired plants when it agreed to be acquired by KKR and Texas Pacific Group. Some wonder if TXU ever planned to build the coal fired plants at all or were they just a dirty flag raised to get local residents to support the eventual nuke plan when it was unveiled. The nuke plants would feature reactors designed and built by Mitsubishi Heavy Industries of Japan. They would be 50% larger than the current reactors run by TXU. There are 33 proposed nuclear plants in the US, which have completed the licensing requirements but construction has not yet begun. Construction is estimated to take from 5-7 years from start to finish. That suggests we are not going to see a surge in electricity to the grid any time soon. Ironically uranium supplier Cameco (CCJ) fell -1.45 on the news. According to the WSJ three other energy companies, NRG Energy, Exelon Corp and Amarillo Power also have plans to build nuclear plants in Texas. 19% of US electricity is produced by nuclear plants.

After the bell Alcoa (AA) kicked off the earnings season by beating estimates by +2 cents. Sales rose +11% but rising aluminum prices were credited with the earnings gains. Primary aluminum rose +15% from the year ago period and +5% in Q4 alone. AA rose +$1 in after hours trading.

The earnings estimates for Q1 continue to fall with the official estimates now between 2.9% and 3.3%. Thomson Financial rings in at 4.3% and Merrill is holding out on the high side at 7.7%. S&P reminded everyone that earnings trends typically beat the official estimate by about 3.3% and most investors are now looking for across the board upside surprises. This could be the reason investors are reluctantly buying the market on very low volume. They are hoping for an upside surprise but are uncomfortable with the constant downward revisions.

Problems like Seagate are causing investors to remain very cautious. Seagate (STX) warned that tightening competition and weaker demand for hard drives would force it to miss earnings estimates for the quarter. STX said revenue would be approximately $2.8 billion and well below the prior $2.9-$3.0B guidance. Seagate is fighting aggressive competition by Hitachi (HIT) in both production and pricing. The warning weighed on competitor Western Digital (WDC) but the biggest problem was fears that weaker demand actually meant slower PC sales at Hewlett-Packard and Dell. We will not know if that is true for another month.

May Crude Futures Chart - Daily

Oil prices fell off a cliff on Monday on a combination of a continued relaxation of mid east tensions the impending expiration of crude futures. The -4% drop was the largest one-day drop since 2005 and the energy bears came out in force. The $61.35 low was still well above strong resistance at $60 and still at launch point levels for a summer rally as gasoline demand rises. The EIA said today that crude demand in China rose +8.9% in March compared to last year. Warnings of slowing China demand appear to have been wishful thinking. The inventory reports on Wednesday are expected to show a decline of 1.7 million barrels of crude, -1.6 mb of gasoline and -700,000 of distillates. Gasoline levels are currently 10.5 mb below normal and prices could easily hit $3.50 this summer without hurricanes and $4 if one heads for the gulf. The refinery problems continue to plague the sector with a shutdown at a BP refinery after a power failure on Tuesday. There have been so many refinery outages there is a crude glut at Cushing Oklahoma. Cushing is the sdelivery point for Nymex Crude futures. Everyone who is making deliveries according to their futures contracts is delivering crude to Cushing through the various interconnected pipelines but with so many refinery problems the pipelines and storage areas are full.

Besides the FOMC minutes to be released on Wednesday we have Bernanke making another appearance to speak on "Market Discipline and Regulation." The speech is at 1:PM ET and he is taking questions after the speech so anything is possible.

Even if the market survives Bernanke and the FOMC minutes there is still an inflation stumbling block in our immediate future. The Producer Price Index (PPI) on Friday could cause the Fed to go into rate reaction mode if it shows a sharp increase in prices at the producer level.

The Dow continues to inch slowly higher with a paltry +4 point gain to today to keep its streak alive. The buy programs at the open on April 3rd pushed the Dow over 12500 but continued gains over the last week have been very slow, +60 points total, and very erratic. The Dow has traded in negative territory about as much as in the green over the last four days but somehow it has managed to pull out a minor gain each day at the close. This is not normally considered a bullish scenario. Volume has been in the low 4 million-share range for each day and the internals have been barely positive with the exception of advancing volume. If the Dow closes positive on Wednesday it will be the first time on over 10 years that it has posted a nine-day winning streak. Resistance is just overhead at 12600 and decent support just below at 12500..

The Nasdaq closed at 2477 and just above decent resistance. This is a slightly more bullish trend with little above but resistance at the five year high at 2530. Techs have shaken off warnings from various companies like Seagate today and appear about ready to make a strong break higher. With RIMM reporting on Wednesday they have the ability to make or break current tech sentiment. I would bet on good results from RIMM but so would a lot of other people and that could be the problem. RIMM has rallied +$12 in the last five days in anticipation of good earnings. That is definitely a disaster waiting to happen if RIMM should surprise negatively or just disappoint with less than stellar results.

NNYSE Composite Chart - Daily

Russell-2000 Chart - Daily

For our sentiment indexes, the Russell and NYSE Composite things could not be more bullish. The NYSE Composite closed at a new historic high today at 9468 and added +39 points to do it. This is very bullish especially if it can add to those gains on Wednesday. It would be seen as a market breakout and draw additional cash off the sidelines. The Russell has not yet equaled the NYSE but continues to inch higher with a close just under 815. Russell 830 is strong resistance and it's historic high. A continued breakout by the NYSE should power the Russell as well and be double confirmation of bullish fund manager sentiment.

S&P-500 Chart - Daily

On the negative side the S&P-500 is approaching a danger zone. With its close at 1448 today it is just below very strong resistance between 1450-1460. This could be the anchor that holds back the large cap markets or the breakout that sets them free. It is no coincidence the S&P has returned to strong resistance right before earnings. The stage is set for an earnings surprise and a new leg higher. The small caps are leading the pack but they will not be able to run much farther ahead without support from the large cap indexes. An S&P break over 1460 would be the confirmation needed. For the rest of the week watch that 1450-1460 resistance range as the economic events unfold. Remember to watch the FOMC minutes on Wednesday and the PPI on Friday. Once RIMM reports the earnings calendar for the rest of the week will be punctuated only by GE on Friday but nobody will care unless they miss horribly and that is not likely to happen. Next week the earnings calendar will pick up in intensity and so will market volatility.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

Play Editor's note: The market is not moving much this week as investors seem to be waiting for the first few major earnings report to dictate direction. Expectations are not very high and most believe that the S&P 500 components will come in slightly above the lowered estimates. The most important part of this earnings season will be guidance going forward. Thus far we have not found anything this week we wanted to add to the newsletter. Hopefully that will change soon!


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Apria Healthcare - AHG - cls: 33.39 chg: -0.07 stop: 30.95

AHG is still consolidating sideways in the $33-34 range. We remain bullish. 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
Change since picked: + 1.02
Earnings Date 05/01/07 (confirmed)
Average Daily Volume: 910 thousand

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Arrow Elctr. - ARW - cls: 39.98 chg: -0.18 stop: 37.74

Tuesday failed to produce any significant follow through on Monday's bullish breakout. A lackluster market didn't help. The overall pattern is bullish but short-term we wouldn't be surprised to see a dip back towards $39.00. We would watch for a bounce near $40 or above the 10-dma as a new entry point. Our target is the $43.75-45.00 range. We don't have much time and plan to exit ahead of the April 24th earnings report. FYI: More aggressive traders may want to use a wider stop loss under the 50-dma.

Picked on April 09 at $40.15
Change since picked: - 0.17
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 896 thousand

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Brookfield Asset Mgmt - BAM - cls: 55.23 chg: -0.31 stop: 52.35

BAM struggled to make it past the $56.00 level and shares drifted lower the rest of the day. Short-term the move today looks bearish. Watch for a dip to (or a bounce near) $54.00 as a new bullish entry point to buy the stock. Our target is the $58.75-59.00 range. We do not want to hold over the early May earnings.

Picked on April 08 at $54.76
Change since picked: + 0.47
Earnings Date 05/02/07 (confirmed)
Average Daily Volume: 675 thousand

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Bristow Group - BRS - close: 36.78 chg: +0.36 stop: 34.99

Entry point alert on BRS. The stock has broken out past its short-term trend of lower highs and is now challenging the 50-dma. Traders bought the dip midday near $36.50. We see today's action as a new entry point to buy the stock. 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: + 0.90
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand

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Canadan Nat.Res. - CNQ - cls: 56.77 chg: +0.28 stop: 53.05

We don't see any changes from our previous comments on CNQ. The trend is bullish but momentum is stalling and volume is evaporating along with momentum. More conservative traders may want to strongly consider exiting early right here for a gain. We're not suggesting new positions. Our target remains the $58.00-60.00 range. FYI: The P&F chart is bullish and its target has risen from $71 to $74.

Picked on March 21 at $53.05
Change since picked: + 3.72
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million

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eBay Inc. - EBAY - close: 33.99 chg: +0.25 stop: 30.49

Believe it or not, EBAY looks poised to breakout higher. After five days of consolidating near resistance at the $34.00 level shares look ready to breakout. Aggressive traders might want to buy the stock on a rise past $34.35 (new relative high). However, keep in mind that we could not hold over the April 18th earnings report. Our aggressive target in the $37-38 zone might be too optimistic given our time frame.

Picked on March 05 at $30.49
Change since picked: + 3.50
Earnings Date 04/18/07 (confirmed)
Average Daily Volume: 18 million

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Helmerich Payne - HP - cls: 31.33 chg: +0.30 stop: 28.99

A rebound in crude oil and some positive analyst comments on the oil sector helped HP produce a 0.9% gain. The stock looks ready to make a run at the $32 level soon. 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*
Change since picked: + 2.43
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume: 1.4 million

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James River Coal - JRCC - cls: 8.68 chg: -0.39 stop: 7.89

The M&A excitement in coal stocks deflated a little bit on Tuesday. JRCC lost 4.29% after yesterday's 11.2% gain. Yet this might be a new entry point as JRCC was bouncing from the $8.50 level this afternoon. It remains an aggressive (speculative) play. Our target is the $9.90-10.00 range. We do not want to hold over the early May earnings report.

Picked on April 08 at $ 8.15
Change since picked: + 0.53
Earnings Date 05/01/07 (unconfirmed)
Average Daily Volume: 647 thousand

---

KLA-Tencor - KLAC - cls: 56.37 chg: +0.84 stop: 52.75

Some positive analyst comments in the semiconductor sector offered a bullish environment for KLAC to make a new relative high and a breakout past the $56.00 level. Volume came in above average on today's 1.5% gain, which is bullish. 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
Change since picked: + 1.22
Earnings Date 04/26/07 (confirmed)
Average Daily Volume: 4.9 million

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Titan Intl - TWI - cls: 27.41 chg: -0.20 stop: 25.45

TWI seemed to run out of air as it sprinted toward the $28 level. Shares slowly drifted toward the $27.40 level and churned sideways the rest of the session. We would not suggest new positions at this time.
Our target is the $27.90-28.00 range. We're adjusting our stop loss to $25.45.

Picked on April 04 at $26.25
Change since picked: + 1.16
Earnings Date 04/23/07 (unconfirmed)
Average Daily Volume: 339 thousand

---

UNIT Crp. - UNT - cls: 52.98 chg: +0.96 stop: 49.89

Oil stocks were strong on Tuesday and UNT rallied 1.8% and looks poised to breakout past the $53.00 level and its December 2005 high. This could be another entry point. Our target is the $58.00-60.00 range. We do not want to hold over the late April earnings report.

Picked on April 08 at $51.95
Change since picked: + 1.03
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 407 thousand
 

Short Play Updates

Hovnanian - HOV - cls: 23.56 chg: -0.29 stop: 26.01 *new*

Homebuilders continue to slide. Rival builder DHI reported that sales for the quarter were slow and the spring selling season was not off to a good start. Shares of HOV reacted with a 1.2% decline and a new relative low. We are adjusting our stop loss to $26.01. Our target for HOV 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: - 1.13
Earnings Date 06/07/07 (unconfirmed)
Average Daily Volume: 1.9 million
 

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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