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Daily Newsletter, Saturday, 12/15/2007

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Table of Contents

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

Market Wrap

Now We Know!

Last Sunday I said if the Fed only cuts 25-points and keeps the inflation paragraph in the statement then we should beware the PPI and CPI reports. The Fed has this data ahead of the release date and they clearly considered it relative when they cut rates. They knew the market would tank even worse than it did if the did not cut at all given their pre-meeting Fedspeak. Now we know why they were so wimpy in their actions. The inflation monster is back and he is very hungry.

Dow Chart - 180 min

Nasdaq-100 NDX Chart - Daily

On Thursday the Producer Price Index (PPI) headline number spiked +3.2% and that was the second highest reading since the inception of the report back in 1947. You can try to spin this any way you want but the bottom line is the return of much stronger inflation. The YOY inflation rate spiked from 6.0% to 7.7% and the highest level since 1981. The largest contributor to this spike was a 14.1% jump in energy prices. The core rate, even after taking out food and energy, rose by +0.4%. The jump in inflation was not limited to producer prices. The Consumer Price Index headline number on Friday spiked +0.8% and the largest increase in more than two years. This compares to only a +0.3% rise in October. Even the core index rose +0.3%, after 5-months of +0.2% gains, and the biggest rise since January. Over the last 3-months the top-line CPI has risen at an annualized rate of 5.6%. It would be impossible for the Fed to not react to this sudden return of inflation. The Economist's food-price index is now at its highest since it began in 1845, having risen by one-third over the past year.

CPI Chart

The biggest problem for the market late last week was the new inflation revelations. Since the Fed can't ignore the signs they are nearly locked out of any future rate cuts if the current trends last through January. The next meeting is Jan-29/30th and the Fed will have nearly two months of additional data before they have to decide again. This makes the inflation component in any future economic report very key for Fed direction.

There are only a couple of material reports next week but they are likely to be ignored as we head into the holidays. The Risk of Recession update is due out on Monday then we get two activity reports on Thursday. The Chicago Fed National Activity Index and the Philly Fed Survey will probably be the two most watched reports and both are expected to show declines in activity.

Economic Calendar

Next week will be notable because of the earnings reports by the major brokers. Goldman Sachs reports earnings on Tuesday, Morgan Stanley reports on Wednesday and Bear Stearns on Thursday. Actually for an off week before the holidays there are quite a few major earnings report on tap. Besides the financials there ADBE, ORCL, PALM and RIMM. Those could be some volatile events.

Earnings Schedule

RIMM rebounded from my buy call at $100 last week to $109 but faded into Friday's close at $106. If you took that suggestion you should remember that RIMM has earnings on Thursday. They are expected to have sold 1.65 million BlackBerry phones for the quarter. Some analysts are still saying that RIMM is losing ground in the smart phone market but I am still a believer. I would not recommend holding over earnings but I know many traders do. I still think $100 is decent support but even good stocks sink in a down market. Use your own judgment.

Citigroup finally caved into pressure to take responsibility for their troubled investment funds. Citi had been pressured to take the troubled SIV funds back in house after they broke the arms length rule by putting $10 billion additional capital into them to keep them operational. Investors were suing Citi to recover losses from the subprime funds. On Friday Citi said it would move its seven SIVs back onto its balance sheet. The SIVs have $62 billion in assets or $49 billion excluding cash and cash equivalents and $58 billion in debt. By taking them back onto their balance sheets it guarantees the funds will probably not go under and help create transparency for future dispositions. The new CEO, Vikram Pandit, probably got a blank approval from the board on almost any amount of housecleaning needed to bring Citi back into favor on Wall Street. Taking responsibilities for the SIVs could put Citi into a capital squeeze. Bank America analyst John MacDonald warned Citi capital reserves could drop to 6.8% by year's end. Regulators like banks to remain above 6% and a level they feel is safe. Citi has $2.36 trillion in assets and while a failure is not expected there is concern. Besides the SIVs Citi has $55 billion in direct exposure to subprime mortgages. $43 billion of that is exposure to CDOs. Citi has already said they would write down $11 billion of this debt in Q4 due to decaying credit quality. CIBC World Markets said Citi would have to sell about $100 billion in assets to raise cash and probably cut its 54-cent dividend. The dividend cut is already being priced into the stock. Citi (NYSE:C) lost nearly 10% for the week.

Bank America helped spoil the bounce in bank stocks back on Wednesday when they said the end of year results would be "quite disappointing." The CEO said announced write-downs of $3 billion from bad debt would not be enough and larger losses were still ahead. BAC lost 6.5% for the week despite being named by Inside Mortgage Finance as the largest mortgage loan originator for the first nine months of 2007. BAC originated $110 billion in mortgage loans for the first nine months and that beat Countrywide and Wells Fargo. In just Q3 BAC loans jumped +27% over the same period in 2006. This was mostly due to the problems at Countrywide and people looking for a secure lender to handle their loan. BAC is not nearly as large as Citi but they have 57 million customers. That is a pretty strong ace in the hole when it comes to generating new business.

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All the good news was not enough to rescue traders who bought the end of November dip. Like the housing market traders have been trying to pick a bottom in financials for the last four months to no avail. The XLF fell -8.5% just since the Fed announcement on Tuesday. Once traders figured out the Fed was not coming to their rescue the financials were sold hard.

Black and Decker (BDK) also helped spoil the party on Friday after it warned that earnings would be well below expectations. BDK said it would earn $1.03 after special items and analysts were expecting $1.61. BDK said business conditions had been weaker than expected and sales to home improvement centers had slowed. BDK said they what they were seeing indicated a slowdown in remodeling as well as a slowdown in new home construction. Sales will decrease in the low single digits according to the company spokesman. BDK also said they would take a $25 million charge for a recall on certain DeWalt cordless drills. Brokers fled from BDK leaving estimate cuts in their wake. BDK lost 8.5% on Friday. Whirlpool lost another $2 on the BDK warning and that added up to a -$8 loss from the week's highs.

Oil prices fell a buck on Friday but the big move was a +$4 spike on Wednesday leaving it up +3.10 for the week. There is no reason and worries over rising inflation and gains in the dollar should have held it back. Support is holding at $87 as we await the news of the next cold wave. The U.S. is going to update the long-term weather forecast next week and that could add a little more volatility but the big event will be the expiration of the current January contract on Tuesday. At Friday's close we have moved back into contango meaning the futures contracts for future months are trading at higher prices than the current month. That suggests fears of a winter oil shortage are dissipating. That is somewhat surprising since inventory levels have declined sharply over the last eight weeks. Fog shutdown the Houston ship channel for several days last week so inventory levels could fall even further in Wednesday's report.

The U.S. dollar continued its rebound despite nearly every analyst including Jim Rogers telling traders this is a shorting opportunity. Friday's close was a new 6-week high. This should have some impact on oil prices but a 3-cent move in the dollar is not an earthshaking change in dollar valued oil.

FedEx said Monday would be the biggest shipping day of the year for them. FedEx is expected to haul 10.4 million packages through the system on that day. That is a 6% increase over the 9.8 million shipped on the busiest day in 2006. It is the last day you can ship by FedEx ground and expect it to arrive by Christmas. UPS expects to handle more than 22 million packages with the help of an additional 60,000 seasonal workers. Those workers will be picking up their last paycheck in two weeks and along with retail layoffs putting about 200,000 workers back on unemployment in January. My UPS driver has been coming about 6:PM and he still has a truck full of boxes.

Friday was not a good day in the markets. Actually the last three days have not been exciting for the bulls. When the Fed failed to cut 50 points and failed to issue a strongly worded statement the market support evaporated. Add in the earnings warnings, sector wide downgrades, additional subprime write-downs, recession warnings and sharply rising inflation and there was no reason to buy stocks. In fact there were a lot of reasons to sell stocks rather than buy them. The bulls are still hanging on to their SPX 1550-1600 year-end hopes tighter than a lifejacket on the Titanic. Unfortunately even good people drown when a ship or market sinks.

There are basically eight trading days left in 2007 plus a couple half days of no consequence. Volume is going to continue to decrease and mutual funds are going to quit trading as volume slows. About the only people left in the market are those taking care of tax selling. This means loser stocks are going to be sold even lower as investors sell losers to offset profits from winners. Other tax sellers will be selling winners to offset losses. It is not a pretty picture now that the rebound appears to be dead. As long as there was hope of a year-end rally there were people hanging on to shares. If current support levels break next week it could be an ugly week. November lows could be tested again.

The post Fed volatility and especially volatility into Friday's close could have been accelerated by next week's quadruple witching. Since volume will slow to a crawl next week the big option positions were probably closed over the last couple days. Positions were taken ahead of the Fed and those positions are now being unwound.

A slim positive for Friday was the low volume. Friday's volume was only 5.8 billion shares and nearly 2 billion under a good day's totals. This will shrink even further as next week progresses.

The Dow dropped back to 13400 after Tuesday's Fed announcement. Wednesday's bizarre Fed auction announcement caught all the shorts leaning to the downside again and the +271 point opening spike was a monster short squeeze but traders reloaded again at the top and the indexes have been under pressure ever since. On Friday that 13400 support failed with a -178 drop and a close at 13337. The last material support before retesting the 12800 November lows is 13250. That is only about 80 points under Friday's close and in this market that is about a 15 min move. The volatility has been huge and multiple triple digit moves in opposite directions have been as frequent as Britney's visits to rehab.

The Nasdaq-100 (NDX) has declined to initial support at 2075 and appears to be trying to hang on to that level. With Oracle, Adobe, RIMM, PALM and a handful of chip stocks reporting earnings next week any further weakness in guidance and this support could fail. Next support is 2050 followed by the November lows at 2000. If any tech stocks were going to be bought it would be the big caps in the NDX. Check for weakness here before going long anything else.

S&P-500 Chart - Daily

Russell-2000 Chart - Weekly

The S&P-500 failed at 1490 on Tuesday after the Fed announcement. That was a clear sell signal. The Fed auction spike on Wednesday morning was just another opportunity to get short at a higher level but 1490 was the key. The S&P failed to regain 1490 on either Thursday or Friday and each intraday failure below that level was another sell signal. 1460 is now the target. I said on Tuesday I would look to buy a dip to 1460 on a short-term trade only and we could easily see that on Monday. Under 1460 the same recommendation stands to double up on your shorts with 1420 as a target.

The Russell-2000 is leading the major indexes lower with a 4.1% drop for the week compared to 2+% drops for the other majors. There is no reason to buy small caps ahead of year-end. There was no material Q4 bounce and what little bounce we did see was sold hard after the Fed announcement. With the country headed into recession you don't want to be in small caps. That should be a clear indicator for us for next week. Any continued weakness in the Russell should be copied by the S&P.

The wildcards are going to be the low volume, quadruple witching, tech and financial earnings. The economic reports will be watched by the few traders still showing up for work but there is not likely to be much reaction. Remain short under SPX 1490 and double up under 1460.

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Jim Brown

"Averaging down in a down market is tantamount to taking a seat on the down escalator at Macy's."
Richard Russell (Dow Theory Letters 1984)

 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None BOBE
  CLI
  CHRW
  GVA

Play Editor's Note: Our market bias is bearish and it wasn't hard to find bearish candidates. A few stocks we are keeping an eye on as potential plays are: EMS, PSYS, LAMR, PDCO, SBUX, SLAB, DBD, GLW, GOLD, and TTEC.


New Long Plays

None today.
 

New Short Plays

Bob Evans Farms - BOBE - cls: 29.01 chg: -0.82 stop: 31.75

Company Description:
Bob Evans Farms, Inc. owns and operates full-service restaurants under the Bob Evans and Mimi's Cafe brand names. At the end of the second fiscal quarter ended Oct. 26, 2007, Bob Evans owned and operated 579 family restaurants in 18 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States, while Mimi's Cafe owned and operated 118 casual restaurants located in 22 states, primarily in California and other western states. (source: company press release or website)

Why We Like It:
The market is concerned about the coming recession and a slow down in the consumer. That's why almost anything retail or restaurant related is suffering. BOBE rallied sharply back in November but that has run into resistance near $32 and the stock looks poised to begin a new leg lower. Friday's close under the 50-dma is bearish. The P&F chart is bearish and points to a $23 target. BOBE does have potential support near $27.00 but we're aiming for the $25.25-25.00 zone. More conservative traders may want to wait for a decline under $28.50 before initiating positions. FYI: The most recent data puts short interest at 11.6% of the 32.74 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze.

Picked on December 16 at $29.01
Change since picked: + 0.00
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 467 thousand

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Mack-Cali Realty - CLI - cls: 32.74 chg: -0.76 stop: 35.15

Company Description:
Mack-Cali Realty Corporation is a fully-integrated, self-administered, self-managed real estate investment trust (REIT) providing management, leasing, development, construction and other tenant-related services for its class A real estate portfolio. Mack-Cali owns or has interests in 302 properties, primarily office and office/flex buildings located in the Northeast, totaling approximately 34.9 million square feet. (source: company press release or website)

Why We Like It:
Almost anything REIT-related looks bearish right now. What caught our eye on CLI was the stock's very recent breakdown from its trading range. Broken support near $34.00 should now be overhead resistance. Our target is the $30.25-30.00 range. The P&F chart is bearish with a $27 target.

Picked on December 16 at $32.74
Change since picked: + 0.00
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 751 thousand

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C.H.Robinson - CHRW - cls: 51.52 chg: -0.98 stop: 54.55

Company Description:
Founded in 1905, C.H. Robinson Worldwide, Inc., is a global provider of multimodal transportation services and logistics solutions, serving over 25,000 customers through a network of 218 offices in North America, South America, Europe, and Asia. (source: company press release or website)

Why We Like It:
Investors are starting to worry about a slow down in the economy and oil prices look like they are stabilizing near $90, which is bad news for the transports. Both the major indices and the transportation index look like they are poised to move lower. CHRW could see a lot of profit taking after its sharp rally from the November lows. The weekly chart shows CHRW starting to roll over under the top edge of its wide trading range (see chart). Friday's close under $52.00 looks like our entry point for shorts. Our target is the $46.00 level. More conservative traders may want to get out near $47.50 while aggressive traders could aim for real support near $45.00. The P&F chart points to a $34 target. FYI: The most recent data puts short interest at 5.2% of the stock's 166.8 million-share float. That is a relatively high amount and raises the risk of a short squeeze.

Picked on December 16 at $51.52
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 1.7 million

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Granite Constr. - GVA - close: 38.73 change: -2.07 stop: 42.15

Company Description:
Granite Construction Incorporated is a member of the S&P 400 Index, Russell 2000 and the Domini 400 Social Index and is the parent company of Granite Construction Company, one of the nation's largest heavy civil contractors and construction materials producers. Granite Construction Company serves both public and private sector clients through its offices nationwide. (source: company press release or website)

Why We Like It:
Shares of GVA have been pounded these past several months and it doesn't look like it's over. The oversold bounce from its November lows has run into new resistance near $42.00. Actually shares were in a $40-42 trading range. Friday's breakdown is a new entry point for shorts. Our only complaint was the low volume on the move. We're suggesting shorts with GVA under $40. Our target is the $34-33 range near its lows for the year. FYI: The most recent date puts short interest at 7.8% of the 34.4 million-share float.

Picked on December 16 at $38.73
Change since picked: + 0.00
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 1.1 million
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Salesforece.com - CRM - close: 59.55 change: +0.26 stop: 55.95*new*

CRM continues to show relative strength. The stock hit a new multi-year high on Friday at $60.30. The move over $60 looked like a new bullish entry point. Our biggest concern is how strong will CRM really be if the major indices keep sinking. We remain bullish on CRM above $58.00 but would hesitate to open new positions based on market conditions. The Point & Figure chart is bullish with a $74 target. Our target is the $64.00-65.00 range. Please note that we're raising our stop loss to $55.95.

Picked on December 11 at $59.25 *triggered
Change since picked: + 0.30
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 1.7 million

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Coca-Cola - KO - close: 63.81 change: -0.28 stop: 61.45 *new*

Slow and steady is KO's march higher. The stock hit another new multi-year high on Friday before turning lower at the end of the day. We are not suggesting new positions but a dip or bounce near $63.00 could be used as a new entry point. We are adjusting our stop loss to $61.45. 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
Change since picked: + 1.86
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 8.3 million

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PC Mall - MALL - close: 10.50 change: -0.05 stop: 9.90

There is no change from our comments on Thursday regarding MALL. Trades continue to buy dips near support at $10.00. However, given the market's bearish tone we would hesitate to start new bullish plays here. MALL has already hit our initial target at $12.25. 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.

Picked on December 04 at $10.25 *triggered
Change since picked: + 0.25
Earnings Date 02/04/08 (unconfirmed)
Average Daily Volume: 356 thousand
 

Short Play Updates

DELL Inc. - DELL - close: 23.57 change: -0.03 stop: 25.05 *new*

On Friday DELL produced three failed rallies under the $24.00 level and this looks like a new bearish entry point to consider shorts. We are adjusting our stop loss down to $25.05. In addition to having resistance near $24.00 the 10-dma has also been consistent resistance lately. Our target is the $22.10-22.00 zone above the March lows. The P&F chart is very bearish with a $17.00 target.

Picked on December 11 at $24.36
Change since picked: - 0.79
Earnings Date 11/29/07 (confirmed)
Average Daily Volume: 27.4 million

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IAC Interactive - IACI - cls: 26.87 chg: -0.49 stop: 28.81

IACI continues to drift lower. The stock's bearish head-and-shoulders pattern is almost complete. All the bears need now is a breakdown under the neckline. However, odds are good that IACI will bounce first at the initial attempt. A failed rally under $28.00 can be used as a new entry point for shorts. We have two targets. Our first target is the $25.50-25.00 range. The H&S pattern, if it follows through, is forecasting a target in the $22 region. Our second, more aggressive target will be the $22.50 level. The P&F chart is still bullish for now but is on the verge of a breakdown. FYI: The latest data puts short interest at about 4% of the 120 million-share float.

Picked on December 11 at $27.60
Change since picked: - 0.73
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume: 2.8 million

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Medicis Pharma - MRX - close: 25.78 change: -0.53 stop: 28.05

Friday's close under $26.00 is good news for the bears. Now both the short-term and long-term trend for MRX is bearish. The stock continues to have potential support near $25.50 so don't be surprised to see another bounce there. A failed rally in the $26.50-27.00 zone could be used as a new entry point for shorts. 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
Change since picked: - 0.30
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million

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Paychex - PAYX - close: 38.36 change: -0.99 stop: 40.76

PAYX is doing well for the bears. Shares have continued lower following last week's failed rally near its 200-dma. Friday saw PAYX drop another 2.5%. We're running low on time. PAYX is due to report earnings on Wednesday, December 20th after the closing bell. That only gives us three more trading days. Given this time issue we're not suggesting new positions. Our target is the $37.25-37.00 range. More aggressive traders could aim for the $36 level and its April lows.

Picked on December 11 at $39.62
Change since picked: - 1.26
Earnings Date 12/19/07 (confirmed)
Average Daily Volume: 2.7 thousand

---

Tempur-Pedic Intl. - TPX - cls: 27.66 chg: -1.53 stop: 30.67*new*

Shares of TPX lost another 5.2% on Friday and the stock is quickly approaching our first target in the $27.25-27.00 range. Readers should be prepared for another oversold bounce near $27.00 again but TPX has plenty of resistance near $30.00. We are adjusting our stop loss to $30.67 (breakeven). We would only consider new positions on another failed rally under $30.00. Our second target is the $25.25-25.00 range. FYI: It's important to note that the most recent data puts short interest at almost 19% of the 68-million share float. That is a high degree of short interest and raises the risk of a short squeeze.

Picked on December 12 at $30.67
Change since picked: - 3.01
Earnings Date 01/24/08 (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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