You would think there was nothing else going on in the world for all the attention the approaching Fed meeting is receiving. The various analysts and talking heads have worked themselves into a frenzy arguing the chances for another rate cut. The markets are slowly consolidating the gains from last week as they await the outcome. Meanwhile financials were knocked for a huge loss after JP Morgan cut estimates on credit fears.
Dow Chart - 90 min
Nasdaq Chart - Daily
The only economic report today was the Chain Store Sales snapshot for the week ended Dec-1st. This was the first full week of the holiday shopping season. Unfortunately the ICSC/UBS survey of 60+ retail chains showed sales fell -2% week to week. This was supposed to be a strong week and was also helped by colder weather that would cause shoppers to want to buy winter apparel. Apparently shoppers were not as induced to throw money at holiday sales as they have been in the past. The ICSC/UBS survey is based on sales at 60+ chain stores. Another survey reported today was Shoppertrak and their results are based on more than 50,000 stores. Their survey reported sales were down -12.5% week to week and that is very disconcerting to retailers. According to the surveys only 22% of all households report they have completed their holiday shopping despite an early Hanukkah. This compares to 25% in 2006 and 32% in 2005 for the same week. Also, one third of shoppers reported buying only for themselves rather than others. This is also abnormally high and suggests tight budgets are going to put the squeeze on gifting. That would pressure overall sales for the season as more people are removed from the gift list. The surveys also said lower priced items were selling the best and that gave Wal-Mart (WMT) a boost in today's trading. Thursday the major chain stores will report actual sales for full month of November and that will be the actual view from inside the stores rather than analysts surveying from the outside.
There are quite a few reports tomorrow but the only one that counts is on Friday. On Wednesday we will get Mortgage Applications, Challenger Jobs, Productivity and Costs, Factor Orders and the ISM Non-Mfg Index. Those will make good filler but the key to next week's FOMC meeting is the nonfarm payrolls on Friday. The official estimates are still for a gain of +65,000 jobs. A negative report should guarantee a 50-point cut and another surprise in the 100,000 range could cancel any chance of a rate cut.
Speculation over the coming Fed action next Tuesday is reaching extreme levels in the media. The market was clearly pricing in a 50 point cut but there are cracks appearing in the foundation of those expectations. The Fed appeared united in their support of a rate cut when Janet Yellin closed out the pre-meeting Fedspeak with comments that conditions had worsened unexpectedly and the Fed must respond quickly to any signs of weakness. The cut appeared guaranteed when her speech ended but now analysts are jockeying for bragging rights and making sure their rate call is known. Quite a few analysts are now saying the Fed does not need to cut rates and only a 25-point cut would be likely. This would be a token cut because of the Fed speakers raising expectations without cause. These analysts claim a rate cut will not help the current credit crunch. The problem afflicting the credit markets today is a crisis of confidence not an economic crisis. The various Fed heads have mentioned this several times before in the last week of speeches. They claimed they would love to fix the problem but making money cheaper does nothing to fix the crisis in confidence. Banks simply do not trust other banks today because they don't know how much subprime exposure or mortgage exposure they have on the books. Without corporate money flowing the credit markets are at a standstill. Proponents of this view claim the Fed should not cut rates and further devalue the dollar and increase chances of inflation. The vocal majority of the regional Fed presidents appear to be more concerned about economic conditions than the actual voting members of the Fed.
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Those holding the opposite view believe the Fed could help repair confidence by cutting rates and making statements that they would continue to take action to fire up the economy. A rate cut by the Fed will also help the subprime problem by making the mortgage resets and new loans less painful. A rate cut will also impress consumers and investors that the Fed is vigilant and flexible and put their minds at ease. Canada may have helped the Fed decision when the Bank of Canada cut rates today by 25-points to 4.25%. The bank officials said there had been a downside shift in the balance of risks from their October projections.
The markets are a different matter. As of Friday they had fully priced in a 50-point cut. As of today's close those expectations may have declined to only 25-points. The dueling analysts on stock TV have diminished the expectations for traders since the Friday high and in my opinion that is a good thing. In our present market we don't need to be overly optimistic about anything. This suggests that any move by the Fed will be appreciated by the market as long as they cut something. Time will tell if this view holds up since it is still a week before the announcement.
In stock news today the morning headline was a cut in earnings estimates for all the major banks courtesy of JP Morgan and Punk Ziegel. Ken Worthington, an analyst at JPM, cut estimates on all the major brokers with the exception of Bear Stearns. JPM feels earnings will suffer from further write-downs in debt and a slowdown to a crawl in M&A activity. We had a serious bubble in M&A over the last two years and that has come to a screeching halt in the current credit crunch. There are more than $240 billion in leveraged financings still incomplete and nobody wants to take the paper. This leaves the initiating banks holding the stuck paper and their own credit capabilities in jeopardy. You can't do new deals if you can't unload the old deals. Spreads are still widening and that will cause losses at the originating banks when they do eventually sell the paper. UBS analysts are very concerned about the new losses still to be taken from the subprime CDOs and the current explosion in foreclosures. Analyst Richard Bove of Punk Ziegel put sell ratings on BSC, LEH, GS, MS and MER. Bove said banks and brokers will not be able to recover there prior profit levels for another 12-18 months and earnings disappointments will be frequent. This new round of downgrades in the financials took all the wind out of the markets. The financial sector makes up 21% of the S&P so an implosion in bank stocks is a serious challenge to S&P gains. Losses today included GS -12, BSC -4.79, and MS -2.27 among the biggest losers but nearly all banks and brokers lost ground.
After the bell Fannie Mae (FNM) announced they were cutting the dividend 35% and going to issue $7 billion in preferred stock in December. They also warned that soaring credit related expenses would hurt Q4 earnings and likely 2008 results. The stock sale will follow a very successful offering by Freddie Mac (FRE) just last week. That $6 billion offering was 500% over subscribed. Fannie said they needed to add to capital in order to prepare for credit losses and maintain its ability to purchase and guarantee mortgages. Fannie shocked investors with a $1.5 billion loss for Q3 and Freddie followed suit with a $2 billion loss. A Freddie Mac index released on Tuesday showed that home prices in the 3rd quarter fell at the sharpest rate in 25 years.
Research in Motion (RIMM) lost another -3.25 to an intraday low of $100 after Nokia raised their earnings estimates. RIMM has been pounded for the last three days with nearly a $25 drop on comments by one analyst who thought the Palm products were outselling the BlackBerry. That remains to be seen but when Nokia said today that competition was depressing margins to something in the 16-17% range that prompted more selling in RIMM since RIMM has to compete with Nokia's lowered prices. Nokia has a 39% global market share in cell phones and a strong suite of offerings in the higher dollar business models. Nokia said there would be a global increase in sales approaching 10% in 2008 and bring the global saturation point to more than 4 billion subscribers. At $100 this is either a great buying opportunity on RIMM or the last stop before a truly horrific fall.
RIMM Chart - Daily
Autozone (AZO) knocked the ball out of the park on earnings with 2.02 per share. Analysts had expected $1.91. That may not seem like a big margin of difference to produce a +21 spike in the stock but anything to do with autos has been heavily shorted. The surprise earnings beat instead of a miss and a gloomy forecast caught shorts off guard.
Freeport McMoran (FCX) reported a 40% increase in their dividend at 2:PM and the stock rebounded from a daylong slide. The dividend increased to $1.75 from $1.25 and is payable quarterly beginning in January. They also said they would buy back 20 million shares. FCX has paid off nearly $10 billion in debt since it bought Phelps Dodge in March. That debt repayment schedule is expected to conclude in December.
Delta Airlines (DAL) said they could post a loss in Q4 due to higher oil prices. This is the first real sign of strain in the airline sector from oil hitting record levels. Delta said it is still trying to decide if it wants to merge with another carrier. You can read that as "Delta has been unable to find another carrier willing to merge with them."
Comcast (CMCSA) warned after the bell that due to "an increasingly challenging economic and competitive environment and consistent with trends across the sector" it is reducing guidance for 2007. The company sees cable revenue falling from prior guidance as well as a drop in operating cash flow to 80% of 2006 levels. If cable TV is seeing such challenging economic factors then we are all doomed. Cable TV and alcoholic beverages are normally the last items kicked out of the consumer budget.
Abby Joseph Cohen, chief market strategist at Goldman Sachs was on CNBC updating her market views. She had previously projected 1600 for the S&P by year-end and she covered that topic saying that was the target 12 months ago and before the subprime crisis made the news. She updated her forecast saying we would see 1675 in 2008. She also did not expect the U.S. to fall into a recession but she did expect GDP to decelerate sharply through the first half of 2008 but then rebound strongly. She predicted further significant write offs in the financial sector as the fair value accounting rules take effect. She expects that will clear up any unknowns on the balance sheets and relieve the credit crisis. She also expected volatility to continue until mid 2008 as the economy weakened and the balance sheet problems of the financial stocks were revealed.
Oil prices fell nearly a buck to $88 but recovered slightly before the close. The OPEC meeting is tomorrow, actually tonight in our time, and there is quite a lot of disagreement currently hitting the wires. Venezuela, Iran, Qatar and Lybia don't want any further production hikes. OPEC in general does not want to be blamed for pushing the U.S. into an economic recession due to high oil prices. Saudi Arabia is the key vote here and a week ago they were expected to lobby for another hike of 500,000 bpd. Now with prices nearly $12 off their high that is not such a sure thing. Hiking output now would likely be effective on Jan-1st. With the 30-60 day lead time to ship oil from the middle east to the U.S. that oil would get here just as the March drop in demand appeared. With demand slowing rapidly from late Feb to late April OPEC is not going to want shiploads of oil to be hitting the U.S. market and further depressing prices. OPEC continues to claim the current $90 price is due to speculation and not a shortage and they appear to be correct. There is plenty of oil in the system baring a suddenly developing ice age in the northeast. OPEC may decide to throw complainers a bone and officially raise the output level but it remains to be seen if they will actually pump any more oil. I have posted charts here several times in recent weeks showing that the individual OPEC member states have been unable to meet their quotas since Nov-1st so raising them further should have limited additional production. Any announced increase will be more of a public relations gesture than a meaningful increase in production. Whatever they decide to do oil prices could definitely be volatile on Wednesday.
Q4 earnings estimates for the S&P were updated today by Thomson Financial. The current estimate is for earnings growth of +0.3% or practically zero. This compares to Q4 estimates back on October 1st of +11.5%. The biggest drag came from financials where estimates are for an earnings decline of -31% compared to an earnings gain of +7% back on Oct-1st. Helping to keep earnings positive were an upgrade on energy estimates to +16% growth and tech growth of +22%. Still, looking for earnings to be flat for Q4 is not a market positive event.
Hanukkah began at sundown today and although it is not as big a Jewish holiday as Rosh Hashana or Yom Kippur it will still subtract from volume the rest of the week. Since the market is just passing time until the Jobs report on Friday and the FOMC on Tuesday that lack of volume may not be missed. Volume today across all the exchanges was 5.7 billion shares and almost exactly the same as Monday. Recent volume averages have been over 7 billion shares so we are already seeing a 16% drop.
TThe Dow has declined -215 points from the intraday high on Friday to close at 13250 today. That is as close to interim support as we dare venture or risk a return to 12800. The Dow has been rather well behaved after the +740 point rebound last week and some consolidation or minor profit taking was expected. That should be over with the decline back to 13250 assuming there are no further news events to spoil the party.
Nasdaq 100 Chart - Daily
The Nasdaq Composite already broke its initial support at 2650 with its decline to 2620 today. There is no other clearly defined support until 2550 but I am not ready to don a bear coat just yet. The Nasdaq-100 (NDX) has not broken initial support at 2050 although its close at 2059.39 was getting close. I would continue to buy a dip to 2050 as I indicated in my Sunday commentary. Under 2050 the next material support is 2000.
The S&P-500 was my reference index on Sunday with a recommendation to buy dips back to 1460. Today's close at 1462 should be a good test to see if that suggestion was worthwhile. The S&P-500 is suffering from the financial flu and until somebody decides to buy financials again it may be a rocky road higher. I would continue to plan on being short below 1460 with risk to 1420.
S&P-500 Chart - 60 min
Wednesday's economic reports should not be market moving and low volume should prevail. However, we know from past experience low volume is a curse and the playground of the bears. We need to be ready for whatever the market throws at us ahead of the Fed meeting. Uncertainty will be rampant but that same uncertainty has provided a couple of calm days so far this week. Consider it a trading market until after the Fed meeting.
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New Long Plays
New Short Plays
Long Play Updates
Arch Coal - ACI - close: 37.45 change: +0.10 stop: 34.95
ACI has been somewhat resistant to profit taking. Shares dipped to $36.93 this morning but rebounded into the green. We are looking for a dip toward $36.00. Our suggested entry point to buy ACI is the $36.50-36.00 range. We'll use a stop loss at $34.95. Conservative traders could adjust their stops closer to $36. Our target is the $41.50-42.00 range. The Point & Figure chart is bullish with a $68 target.
Picked on November xx at $xx.xx <-- see TRIGGER
Canadian Natl.Railway - CNI - cls: 48.22 chg: +0.09 stop: 45.99
CNI also suffered some profit taking this morning but traders bought the dip near $47.00. The big rebound is encouraging. We would still consider new positions here but more conservative traders might want to wait for a new rally over $48.50 to confirm the rebound. Our target is the $51.85-52.00 range. Readers might want to watch the DJUSRR railroad index to see if the sector can breakout over its trend of lower highs. FYI: The P&F chart is still bearish following the November sell-off.
Picked on December 03 at $48.00 *triggered
Fresh Del Monte - FDP - close: 32.10 chg: +0.94 stop: 28.39
We may have missed the boat with FDP. We wanted to buy a dip following Friday's bullish breakout but shares have continued to rally instead. We would not chase it here. Currently we're suggesting a trigger to buy FDP in the $30.15-29.00 range. We would seriously consider adjusting that entry zone to $29.50-29.00 but we'll keep our original plan for now. Look for signs of a bounce before opening positions. Aggressive traders will want to put their stop loss under $27.50. We're suggesting a stop at $28.39. We have two targets. Our first target is the $32.50 mark, which was resistance back in October. Our second target is the $34.00-35.00 range. FYI: The P&F chart is still bearish from the early November sell-off.
Picked on December xx at $xx.xx <-- see TRIGGER
Coca-Cola - KO - close: 62.75 change: +0.55 stop: 59.59
KO displayed some relative strength. Traders bought the dip near $61.50 and the stock is now challenging short-term resistance near $63.00. Our end of year target is the $66.00-67.00 range. The bullish P&F chart suggests a $69 target.
Picked on November 15 at $61.95
PC Mall - MALL - close: 10.59 change: -0.27 stop: 9.49
Perfect! MALL dipped toward $10.00 (hitting $10.10) and bulls bought the dip producing what looks like a short-term bullish reversal. Our suggested entry point was $10.25-10.00. Now that the play is open we have two targets. Our first target is the $12.25-12.50 zone near its 200-dma. Our second, more aggressive target is the $13.75-14.00 region. FYI: The P&F chart is still bearish following the sharp sell-off. We would consider this an aggressive play given the stock's volatility and our wide stop loss.
Picked on December 04 at $10.25 *triggered
Children's Place - PLCE - cls: 28.75 chg: -0.14 stop: 24.90
Retail stocks bucked the down trend on Tuesday. The RLX index rose 1.2%. Shares of PLCE dipped to $27.50 before bouncing back. The stock has the right idea but we're looking for a deeper dip. We are suggesting that readers buy a dip in the $26.50-26.00 zone. If triggered our target is the $29.85-30.00 range. We might consider a more aggressive target near $32.50 but the $30 level looks like it could be tough resistance. The P&F chart is actually bullish with a $36 target. FYI: PLCE will announce its November sales numbers on December 6th ahead of the opening bell.
Picked on November xx at $xx.xx <-- see TRIGGER
Short Play Updates
Amgen - AMGN - close: 54.91 change: -0.18 stop: 56.26
Volume was below average on today's session for AMGN so it's hard to draw any hard conclusions. However, intraday the stock produced a mini-double-top pattern near $55.50, which is a good sign for the bears. Our target is the $50.15-50.00 mark. More aggressive traders could aim for the August lows. We want to point out again that the weekly chart shows the potential for an inverse head-and-shoulders pattern. The Point & Figure chart is bearish with a $39 target. Any time you play a biotech company there is a higher level of risk. You never know when there will be a positive or negative press release about some drug, some clinical trial or some news from the FDA or a rival that could send shares of a biotech stock gapping either direction.
Picked on November 11 at $54.28
Cousins Properties - CUZ - close: 23.11 change: -0.66 stop: 25.05
CUZ has turned negative again for us with today's breakdown under the 10-dma. Volume was above average on today's 2.7% decline, which is a good sign for the bears. The stock looks poised for further weakness. More conservative traders might want to tighten their stops toward Friday's highs. Our target is the $20.25-20.00 range. The latest data puts short interest at over 10% of the 36.8 million-share float, which raises the risk of a short squeeze, especially with the stock near support.
Picked on November 19 at $23.65
Monster Worldwide - MNST - cls: 32.15 change: +0.02 stop: 35.05
MNST managed to hit a new multi-year low at $31.07 before bouncing back into the green. Unfortunately, this looks like a very short-term bullish reversal. We would expect a bounce back toward the $33 or $34 levels. More conservative traders might want to consider a tighter stop loss near $34.00. We have two targets. Our first target is the $30.15-30.00 range. Our second target is the $28.50-27.50 zone. The bearish P&F chart points to a $26 target.
Picked on November 26 at $32.35 *triggered
Medicis Pharma - MRX - close: 26.87 change: -0.05 stop: 28.05
Nothing has changed in MRX. We remain on the defensive here and we're not suggesting new positions at this time. The stock is quickly approaching its trendline of lower highs and if the stock continues higher it should hit the trendline (of resistance) in the $27.25-27.50 zone. Our target is the $23.00-22.50 zone. The P&F chart is bearish with a $19 target. FYI: Any time we play a biotech stock we're dealing with a high-risk situation. MRX seems to be more of a drug company but we're still at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other. Furthermore the most recent data puts short interest at more than 23% of MRX's 49.2 million-share float. That is a high-degree of short interest and raises the risk for a short squeeze.
Picked on November 18 at $26.08
Patterson-UTI Energy - PTEN - cls: 19.06 chg: +0.17 stop: 20.05
Oh-oh! PTEN is showing some unexpected relative strength. The stock spiked higher near the closing bell and closed above the $19.00 level. Shares managed to close above its 10-dma. At this time we would expect the bounce to continue into the $19.50-19.75 zone. A failed rally near either level could be used as a new bearish entry point. Our target is the $17.50-17.00 zone. FYI: The most recent data puts short interest at 10% of the stock's 152 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze.
Picked on November 26 at $18.95 *triggered
Trimble Navigation - TRMB - cls: 36.80 chg: -0.55 stop: 38.26
TRMB has produced yet another failed rally under $38.00 and its 100-dma. This could be used as a new entry point for shorts or you could use our suggestion from yesterday and wait for a drop under $36.75 again. More conservative traders might want to inch their stop loss down toward $38.00. Our target is the 200-dma and we're suggesting an exit in the $33.50-33.00 zone for now. The P&F chart is bearish with a $30.00 target. FYI: Short interest looks pretty low, which is surprising and may be out of date.
Picked on November 19 at $37.25
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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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