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Daily Newsletter, Monday, 11/05/2007

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Table of Contents

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

Market Wrap

Are Big Banks Turning Back The Hands Of Time?

Shares of Citigroup (NYSE:C) $35.90 -4.85% fell to their lowest level in more than four years on heavy volume of 230 million chares after the banking giant said it will write off another $8 billion-$11 billion of it $55 billion subprime mortgage exposure due to continued turmoil in the credit markets, and would restate its recently reported (10/15/07) third-quarter net income to $2.21 billion, or $0.44 a share from the $2.38 billion, or $0.47 a share, citing corrections related to the valuation on its $43 billion in asset-backed collateralized debt obligations (CDOs).

Citigroup said it has direct subprime exposure of $55 billion, $43 billion of which is exposure to collateralized debt obligations. So far, Citigroup has been unwilling to unload the assets at lower prices than they were bought.

The bank's CFO Gary Crittended said "Selling them (CDOs) at distressed values wouldn't make sense at all."

While Citigroup's CFO Gary Crittended cautioned inventors (see 10/15/07 Market Wrap) that consumer credit market conditions were likely to "continue to deteriorate," the amount of the write-down's and charges came as shock to investors and has many wondering if other large banks and brokers holding the difficult to value assets haven't "turned back the hands of time," with off-balance sheet accounting of investments that have not been fully hedged, or disclosed to investors.

Citigroup's announcement also marks the widely anticipated end of Charles Prince's four-year tenure at the head of Citigroup. The company's board named Win Bischoff and interim CEO and senior adviser Robert Rubin as chairman until a successor is named.

Meanwhile, a central banker's warning Monday that the subprime mortgage market will likely deteriorate further added to the pressure on stock prices.

Merrill Lynch (NYSE:MER) $55.88 -2.44%, which traded down 8% on Friday was weak again today, while Morgan Stanley (NYSE:MS) $55.59 -5.61%, Goldman Sachs (NYSE:GS) $218.39 -4.88% and Bear Stearns (NYSE:BSC) $99.91 -2.20% weighed on the AMEX Broker/Dealer Index (XBD.X) 213.97 -2.71%.

Comments from Fed officials didn't help the brokers and banks today.

Fed Goverbir Randall Kroszner told the Consumer Bankers Association Fair Lending Conference in Washington that "conditions for subprime borrowers have the potential to get worse before they get better."

Meanwhile, the Fed said U.S. banks have tightened standards for most types of loans, including nontraditional and even prime mortgages as well as commercial loans, in an indication the subprime crisis is having a ripple effect on the broader economy.

Mortgage originator Countrywide Financial (NYSE:CFC) $14.78 +2.99% bucked the trend of mortgage-related weakness.

Wasatch Fund managers Chris Bowen and Ryan Snow said they dumped their Countrywide (CFC) stock last quarter and are in no hurry to get back in despite the lender's recent promise of a profit.

Countrywide's (CFC) chart had the stock closing at $19.01 on September 28th.

The Institute for Supply Management's index for gauging the health of the services sector offered modest optimism that the troubles in the financial sector hadn't spilled over into other areas of the economy.

The ISM's services index rose to a reading of 55.8 from 54.8 in September. A reading above 50 signifies economic expansion.

Economists forecasted a reading of 54.00.

A quick look inside the headline number the employment index falling to 51.8 from September's 52.7 measure, while the new orders index rose to 55.7 from 53.4. The closely monitored prices paid index fell to 63.5 from 66.1.

Saturday's decision by Pakistan President General Pervez Musharraf to suspend the country's constitution helped firm the U.S. dollar.

President Bush urged Musharraf to hold parliamentary elections as scheduled in January and relinquish his army post as soon as possible. "Our hope is that he will restore democracy as quickly as possible," Bush said.

Musharraf, who took power in a 1999 coup and is also head of Pakistan's army, suspended the constitution on Saturday ahead of a Supreme Court ruling on whether his recent re-election as president was legal. He ousted seven independent-minded Supreme Court judges, put a stranglehold on independent media and granted sweeping powers to authorities to crush dissent.

December Crude Oil futures (cl07z) settled down $1.95, or 2.03% at $93.98 after trading as high as $95.99 at the mid-point of today's floor trade.

Warmer temperatures across much of the U.S. had December Natural Gas futures (ng07z) settling down $0.4190, or -4.98% at $7.9990.

The Utilities HOLDRs (AMEX:UTH) $136.88 +1.40% were today's sector winner with heavyweights Exelon Corp. (NYSE: EXC) $83.92 +2.63% and Entergy Corp. (NYSE:ETR) $124.15 +4.60% driving the sector's gains.

Late Friday, Exelon said both nuclear reactors at it 2,300-megawatt Byron nuclear power station in Illinois were back online. The company said Unit 1 was operating at 94% capacity, while Unit II was running at 96%.

This morning, Entergy (ETR) reported Q3 earnings of $2.30/share, which beat Wall Street's estimates by $0.13/share.

NYSE and NASDAQ Internals -

Market internals were decidedly negative for a third-straight session with decliners outnumbering advancers by a 3:1 margin at the big board, while 4 and 5-lettered stocks symbols had decliners outnumbering advancers just better than 2:1.

Bearish leadership persists with today's 310 new lows at the big board surpassing their recent 206 from October 22nd.

Big tech names continue to hold at both exchanges, especially at the NASDAQ, but the 325 new lows will have keep profitable bulls on their toes should the broadening weakness trigger profit taking.

NASDAQ-100 Index (NDX.X) 2,200.48 -0.60% and its tracker the QQQQ $54.07 -0.64% paired losses into the close with heavyweights Apple Computer (NASDAQ:AAPL) $186.18 -0.89%, Microsoft (NASDAQ:MSFT) $36.73 -0.89%, Qualcomm (NASDAQ:QCOM) $40.85 -1.18%, Google (NASDAQ:GOOG) $725.65 +2.02% and Cisco Systems (NASDAQ:CSCO) $33.08 +1.75% finishing mixed.

Google (GOOG) closed at an all-time high after the company said it had struck an alliance with 34 handset makers, wireless carriers and other technology companies to create low-cost mobile phones based on "open" technology standards.

Global Equity Index Benchmarks and Currencies

While I'd have to think that the bulk of today's weakness in U.S. equity indexes could be attributed to Citigroup's comments, Monday's action saw China's Hangseng ($HSI) falling 1,527 points, or -5.01% after China's Premier raised uncertainties about the near-term launch of a proposal to allow mainland citizens to invest directly in the city's listed securities.

PetroChina (NYSE:PTR) $222.10 -12.92% was just one of China's American Depository Receipts (ADRs) showing a double-digit decline. Bear Stearns followed their 09/22 downgrade (from outperform to peer perform) with another downgrade this morning to "underperform" citing valuation.

In today's Market Monitor at OptionInvestor.com, Jane Fox noted a MarketWatch story regarding PetroChina (PTR).

MarketWatch reported that PTR shares more than doubled in their Shanghai debut, giving the oil giant a $1 trillion market capitalization, which at the time would have easily surpassed Exxon Mobil (NYSE:XOM) $87.66 -0.30% as the world's largest company.

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According to MarketWatch, PTR's shares ended at 43.96 yuan, up from their initial public offer (IPO) price of 16.70 yuan.

If my math is correct, then Chinese IPO pricing (16.70 yuan) would be equivalent to $124.47 (16.70 x $7.4535 = $124.47), where priced in US$, the shares would have finished trading $327.65 (43.96 yuan x $7.4535 = $327.65).

Certainly this becomes a bit baffling, and will likely have PTR, if not other China-based ADRs trading volatile in the sessions to come.

In the above table, things haven't changed much since last Monday's close, but despite a more modest 1.44% gain for the small-cap Russell 2000 Index ($RUT.X) from 10/22 to 10/29, this recent 3.81% decline is a negative as it relates to the "credit crunch" and the impact of tightening of credit standards as noted by the Fed today.

Russell 2000 Index ($RUT.X) - Daily Intervals

On 09/18/07 the FOMC lowered its target for the Fed Funds rate by 50 basis points to 4.75% and since that time, the RUT.X refused to close BELOW the 796 level. On Wednesday of last week, the FOMC again lowered its target for the Fed Funds rate by 25 basis points to 4.5%, but the small-caps, which will be more sensitive to U.S. economic trends, closed BELOW the 796 level.

This would fit the trend of past WEAKNESS starting to show some renewed signs of further technical WEAKNESS, and has had a tendency to "pull" the other averages lower.

A break much below the 782 level could broaden out further to the S&P 500 Index.

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

The SPX.X is little changed since last Monday's Market Wrap, but with the $RUT.X showing renewed signs that it may want to lead to the downside, there will be great emphasis placed on the recent relative lows and the 1,480 level.

A trade at 1,480 would also generate a reversing back lower point and figure "sell signal" and have the SPX vulnerable to 1,473 on the above chart, 1,440 on the point and figure chart (10-point box scale) and perhaps the bullish support trend from the point and figure chart which is currently at 1,410.

On the above chart of the SPX I've drawn in what I have labeled as a "cheater's trend." I call it that as it is a trend that some technicians will draw at a new relative low in order to talk themselves out of the thought, or observation, that a trend they thought should hold support, has witnessed some breaking of that trend (solid green).

Market participants may still hold bullish convictions here, but a break at 1,480 could well find some bulls moving to the sidelines.

On October 22, the relative low that I have my SOLID green upward trend attached at, Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) was at 58.55% and has just reversed back lower to "bear correction" status.

At tonight's close, this closely monitored indicator of supply and demand has fallen further to 52.81%, which means an additional 5.74%, or roughly 29 of the 500 components have witnessed reversing LOWER point and figure sell signals.

This would be considered BEARISH DIVERGENCE and have bulls very alert to further weakening of PRICE action.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

Play Editor's Note: The market's failure to rebound following Friday's intraday bounce is bearish. Readers should turn defensive on their bullish plays.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Alcoa - AA - cls: 37.90 change: -0.66 stop: 36.95

The consolidation in AA continues as the stock sinks closer to its 50-dma. A dip in metal prices may be to blame for AA's relative weakness and 1.7% decline. At this time we would suggest readers wait for a new rise past $39.00 or past $40.00 before initiating new positions. Our target is the $44.50-45.00 range. Our time frame is six to eight weeks. FYI: The P&F chart is bullish with a $53 target.

Picked on October 29 at $40.10
Change since picked: - 2.20
Earnings Date 10/09/07 (confirmed)
Average Daily Volume: 11.5 million

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Adobe - ADBE - close: 47.70 change: -0.18 stop: 45.85

Bulls continue to buy the dips in ADBE and the stock produced another rebound from its trend of higher lows today. Shares are consolidating under resistance at $48.00 and look set to break out higher soon. We're not suggesting new positions at this time. More conservative traders may want to take a little money off the table. Our target is the $49.50-50.00 range. The P&F chart is already bullish with a $51 target. Our time frame is about three weeks.

Picked on October 09 at $45.05
Change since picked: + 2.65
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 7.0 million

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CVS Caremark - CVS - cls: 41.35 change: -0.40 stop: 39.85

We do not see any changes from our weekend comments on CVS. The stock traded flat to down on Monday. Aggressive traders could go long now. We're suggesting a trigger to buy CVS at $42.15, which would be a new high. Meanwhile, keep your eye on the stock for an alternative entry point if shares dip (or bounce) near $40.50 again. If triggered at $42.15 our target is the $45.85-46.00 range. Our time frame is year-end.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/07 (confirmed)
Average Daily Volume: 10.5 million

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Gerdau Sa ADS - GGB - close: 30.69 change: +0.57 stop: 27.90

GGB displayed relative strength on Monday with a 1.89% gain. We do not see any changes from our weekend comments. More conservative traders might want to tighten their stops toward $29.00 or Friday's low at $29.28. Our target is the $33.50-35.00 range.

Picked on October 28 at $30.37
Change since picked: + 0.32
Earnings Date 11/07/07 (unconfirmed)
Average Daily Volume: 2.3 million

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Hewlett Packard - HPQ - cls: 52.54 chg: +0.14 stop: 49.95

It was a relatively quiet session for HPQ with the stock trading sideways almost all day until a late afternoon rally broke through the $52.50 level. We are still suggesting new positions here or wait for a breakout over $53.00. Our target is the $56.50-57.50 range. The Point & Figure chart is much more bullish with a triple-top breakout buy signal and a $72 target. We do not want to hold over the November 19th earnings report.

Picked on November 04 at $52.40
Change since picked: + 0.14
Earnings Date 11/19/07 (confirmed)
Average Daily Volume: 13.1 million

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Intel Corp. - INTC - cls: 26.84 change: +0.04 stop: 25.49

INTC produced a similar session with a quiet consolidation sideways until a late afternoon rally pushed it higher. We remain bullish here and would continue to suggest new positions. Nimble traders could have bought the dip this morning near $26.50. We would encourage more conservative investors to wait for a new relative high over $27.10 before initiating new positions. Our target is the $29.85-30.00 range. We're suggesting a stop loss at $25.49 but you may want to consider an alternative stop near the 50-dma (25.75) or closer to $26.00. FYI: Most quote services will tell you that INTC rose 15 cents today. However, if you look at the historical prices INTC only rose 4 cents. See this link: http://finance.yahoo.com/q/hp?s=INTC

Picked on November 04 at $26.80
Change since picked: + 0.04
Earnings Date 01/16/08 (unconfirmed)
Average Daily Volume: 65.2 million

---

Intuit - INTU - cls: 32.36 change: -0.18 stop: 30.75

Traders were quick to buy the dip in INTU near $32.00 this morning. We remain bullish here and don't see any changes from our weekend comments. This is going to be a short-term play. INTU is due to report earnings on November 15th. We do not want to hold over the announcement. Our target is the $35.00-36.00 range. The P&F chart is bullish with a $46 target.

Picked on November 04 at $32.54
Change since picked: - 0.18
Earnings Date 11/15/07 (confirmed)
Average Daily Volume: 3.0 million

---

Nokia - NOK - close: 39.49 change: -0.22 stop: 37.99

There is no change from our weekend comments on NOK. The stock traded sideways in a narrow range on Monday. Nimble traders could try and buy a dip near $39.00 or even closer to $38.00 if one appears. We're suggesting a trigger to buy the next breakout at $40.11. If triggered our at $40.11 our target is the $44.00-45.00 range.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 13.1 million

---

XTO Energy - XTO - cls: 66.46 change: -0.61 stop: 63.95

We have nothing new to report on for XTO. The stock traded sideways in a $1.50 range. We would still consider new positions with the stock above $65.00. Our target is the $72.50-75.00 range. The P&F chart is bullish with an $89 target.

Picked on November 01 at $67.25
Change since picked: - 0.79
Earnings Date 01/21/08 (unconfirmed)
Average Daily Volume: 3.3 million
 

Short Play Updates

Basic Energy - BAS - cls: 20.07 change: +0.07 stop: 20.85

We have to issue a bullish reversal warning for BAS. The stock managed to breakout and close above resistance at the $20.00 mark. This is not good news for the bears. Readers may want to abandon ship right here. We're not suggesting new positions! More conservative traders may want to tighten their stops toward $20.50, 20.26 or lower. We're not suggesting new positions at this time. The P&F chart is very bearish with a $9.00 target. We do not want to hold over the November 8th earnings report.

Picked on October 29 at $19.75
Change since picked: + 0.19
Earnings Date 11/08/07 (confirmed)
Average Daily Volume: 406 thousand

---

Gap Inc. - GPS - cls: 18.02 change: -0.19 stop: 19.05

Unfortunately, we don't have anything new to report on for GPS. The stock gapped open lower but spent the session trading sideways along the $18.00 level. We're going to start seeing some retail company earnings in the next week or two. Expectations are pretty low for the sector, which raises the risk of an upside surprise or having the companies issue better than expected guidance. The bears may have to tread lightly here. Our GPS target is the $16.00-15.50 range.

Picked on October 21 at $17.49 *gap down
Change since picked: + 0.53
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume: 8.7 million

---

NVE Corp. - NVEC - cls: 27.40 change: -0.27 stop: 30.05

NVEC continues to fade lower. The stock lost another 1% today. We would not suggesting new positions at this time. Our target is the $25.50-25.00 range. The bearish head-and-shoulders pattern in the charts is forecasting a $20-18 target. FYI: We would consider this an aggressive play simply for the fact that NVEC's average daily volume is very low! However, the real risk is a short squeeze. The latest data puts short interest at close to 30% of NVEC's very, very small 4.2-million share float. That represents a big risk for a short squeeze.

Picked on October 22 at $29.30 *gap down entry
Change since picked: - 1.90
Earnings Date 10/17/07 (confirmed)
Average Daily Volume: 76 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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