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Daily Newsletter, Monday, 04/07/2008

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Table of Contents

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

Market Wrap

Wamu and Consumer Credit Drive Action; Alcoa Reports Q1 Earnings

The major averages got off to a bullish start Monday with banking shares leading gains on talk that Washington Mutual (NYSE:WM) $13.15 +29.30% may be close to getting a $5 billion private equity investment from buyout firm TPG, Inc.

As gains built towards the mid-point of the session, today's loan economic report brought in some selling after the Federal Reserve said Americans increased their outstanding credit in February but at nearly half the rate as in the previous month.

The Fed said consumer borrowing in February rose at an annual rate of 2.4%, or by $5.2 billion, to bring total consumer credit up to $2.5 trillion.

Economists polled by Thomson's IFR Markets had expected total consumer borrowing to rise by $5.3 billion in February.

Consumer borrowing in January was upwardly revised to a $10.3 billion from the previously reported $6.9 billion.

The majority of the increase in total consumer debt was for credit card debt, or revolving credit, which rose to annualized 5.9% rate in February, or by $4.7 billion.

Consumer borrowing for auto loans and other types of so-called non-revolving credit, rose at an annual rate of 0.4% in February, an increase of $497 million.

The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

Closing U.S. Market Watch - (05:00 PM EDT)

In this weekend's Market Wrap, I had mentioned the NYSE reporting that short interest as of March 31 had risen 4.2% to 16.1 billion shares.

This afternoon, NYSE regulators said they and the Financial Industry Regulatory Authority were investigating a large increase in short interest data released Friday for Lehman Brothers' 7.9% preferred stock.

Late this afternoon, the NYSE said their initial investigation revealed an error and that the previously measured short interest on the preferred stock was incorrect.

After tonight's close, the NYSE now reports that it has amended NYSE short interest as of March 31 to 15.6 billion shares.

Despite some fractional dollar firming against the euro, May Crude Oil futures (cl08k) settled up $2.86, or +2.69% at $109.09 on technical buying. May Unleaded (rb08k) tracked crude oil higher, but at a less aggressive pace, settling up $0.0268, or +0.97% at $2.7835.

With some notable deterioration in the unleaded/oil crack spread, I thought it best if Valero Energy (NYSE:VLO) $49.63 -1.93% move to the sidelines as the stock was trading $50.54.

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As I type (with Tuesday's energy futures session underway), May crude oil's 5DyNet% is up 7.08% vs. unleaded's 5.70%, while crude oil's 20DyNet% is up 1.91% vs. unleaded's 1.83%.

May Nat. Gas futures (ng08k) reclaimed the bulk of Thursday and Friday's losses with a 5.03% gain to settle up $0.469 at $9.7910.

The Amex Nat. Gas Index (XNG.X) 630.68 +0.91% closed at a new 52-week high.

In today's OptionInvestor.com Market Monitor I notes some of global energy advisor Tristone Capital's coverage/updates to past call, that looked like a "take profit" on these, and buy these as they look to be breaking out. The old "rotate your capital and play follow the leader" that's a long-held strategy of institutional traders.

As one example, with Apache Corp. (NYSE:APA) $128.60 +1.73% surging to yet another all-time high in today's session ($131.45), Tristone cut its rating on the shares to "outperform" from "Top Pick," yet raised its target on energy producer (largely natural gas) to $148 from $122.

The firm then raised it rating on Newfield Exploration (NYSE: NFX) $56.09 +2.52% to "Top Pick," also raising the firm's prior target to $78 from $68.

APA and NFX Montage - Daily Intervals

While Tristone made several "downgrade" calls and rotated them to "top picks" today, their call is a classic example of how institutional firms can look to take profit from one trade and rotate to another, perhaps a very SIMILAR stock (sector) that may well play some catch up.

Fascinating action in APA from the $90.00, a level many Market Monitor subscribers will remember from several months ago as I warned of shorting the break to a new high. Notable how the stock found buyers on a date becoming more familiar to major market index traders and 1/23/08.

Newfield (NFX) looks like it is set to test its recent all-time high of $57.75 having also found an inflection low on 1/23/08.

Tristone also raised Devon Energy (NYSE:DVN) $108.44 +1.02% to "top pick" status and raised it price target to $140 from $85.

Shares of semiconductor equipment maker Applied Materials (NASDAQ:AMAT) $20.19 -3.35% were weak after Credit Suisse analyst Satya Kumar downgraded the shares to "neutral" from "outperform." Mr. Kumar said his research showed the company is having difficulty manufacturing its large solar panels, and noted the panels are expensive because of their size. Mr. Kumar added that the company's efficiency goals are too low. By 2010, AMAT plans to make solar panels that cost $1/watt of power generated, but more efficient panels are already on the market.

Citigroup's Timothy Arcuri may have agreed and suggested investors swap out of AMAT and into fellow equipment maker KLA-Tencor (NASDAQ:KLAC) $42.81 +6.57%. While Mr. Arcuri maintained his "buy" rating on AMAT, he thought KLAC could surprise to the upside in the March and June quarters with his research suggesting the company is seeing some increased adoption rates at Samsung and a resurgence or orders from Taiwan Semiconductor (NYSE:TSM) $10.49 +0.57%.

The Semiconductor HOLDRs (SMH) $30.29 -0.49% were little changed.
(See this weekend's Market Wrap)

Chip maker Intel (NASDAQ:INTC) $21.75 fell $0.12.

Earnings season kicks off today and fundamentalists as well as technicians will be taking notice as to calendar Q1 earnings.

Shares of Dow component Alcoa (NYSE:AA) $37.44 -4.00% traded weak into this evenings release of its quarterly (Q1 for the aluminum giant).

Alcoa (NYSE:AA) - Daily Interval Chart

Aluminum producer Alcoa said its Q1 earnings plunged 54% as higher raw material and energy costs and a weaker dollar cut into results.

Net income fell to $303 million, or $0.37/share compared with $662 million, or $0.75/share during the same period last year. Excluding items, AA said earnings per share were $0.44 vs. a comparable $0.79 in the year-ago quarter. Revenue fell 7% from a year ago to $7.38 billion from $7.91 billion.

While the top line results beat Wall Streets average estimate of $7.18 billion, bottom line figures came in shy of the $0.48/share estimate.

Alcoa executives said the weaker dollar impacted results negatively by $68 million, or $0.08/share, on a quarter-by-quarter basis.

However, and this confuses me (Jeff Bailey) a bit, AA also noted that the weaker dollar positively impacted MANY commodity prices in the recent quarter and that the price of aluminum climbed 24.5% in the last three months.

I have not fully read AA's earnings press release at this point, but would like to investigate further just why/how the weaker dollar has had NEGATIVE impact.

I would hate to think that at some point, AA "blame" a stronger dollar for weakening aluminum prices, thus having a negative impact on earnings.

In February, Alcoa and Aluminum Corporation of China Ltd. (NYSE:ACH) $44.90 +2.16% announced they were jointly buying 12% of Rio Tinto PLC's (NYSE:RTP) $456.30 +0.39% shares in a deal reportedly valued at $14.05 billion. Alcoa said it contributed $1.2 billion to the total investment.

In this weekend's Market Wrap, I made multiple broader market notes as to a major bottom having been found in the major U.S. equity benchmarks.

There are a couple POTENTIAL head/should BOTTOM patterns developing in AA. One near-term pattern (blue) has already developed, where a break much above $40.70 and the 10/29/07 high would be a neckline.

A more severe pullback into last August's lows near $30.25 also a possible pattern.

Rather "shocking" that a deep cyclical like AA showing some muster above its 12/31/07 close.

Shares of AA were rather quiet in this evening's after-hours session, ticking lower at $37.23.

Morgan Stanley Cyclical Index (CYC.X) - Daily Intervals

In today's OptionInvestor.com MM, I did note that the CYC.X had retraced 50% of its "TRAN-like" decline. (See Dow Transports in this weekend's wrap).

As one component of the CYC.X (AA, C, CAT, CSX, DD, DE, DOW, ETN, F, FCX, FDX, GCI, GT, HON, HPQ, IP, IR, JCI, MAS, MGA, MMM, MOT, PPG, PTV, R, SHLD, TIN, UTX, WHR and X), AA would be showing some strength relative to its 150-day SMA (dark purple) and its 12/31/07.

With AA being the first to issue some fundamental data as to both domestic and global trends, we'll want to follow the MARKET's response over the next several sessions.

Dow Industrials (INDU) - Daily Intervals

This weekend's Market Wrap was a lot of charts and tables to digest.

You can see a lot of "stock component overlap" with the CYC.X and the Dow Industrials Components, a PRICE weighted index.

Dow Industials' 30 components - Sorted by PRICE

BOTTOM line earnings can be VERY difficult to "compare" vs. a year ago, as company's take special one-time charges, or gains on various parts of their business, or shifts in their business strategy.

Revenues are revenues. On a 52-week basis, the PRICE of AA was still up 8.23% versus this day last year.

General Electric (NYSE:GE) $37.26 -0.79% is the next component to report (4/11/08 before market open) and it has its finger in just about every piece of the U.S. and global economy.

Wall Street is looking for the company to earn $0.51/share (year ago $0.44/share) on revenue of $43.66 billion (+15.9% vs. year ago).

IWM and QQQQ Montage - Daily Intervals

Other than the strong start to the new quarter (04/01/08) there's not a lot to say about the iShares Russell 2000 (IWM) and the NASDAQ-100 Tracker (QQQQ). Volumes are rather light and since the recent lows, we haven't seen volume near the 50-day average.

In this weekend's market wrap I had mentioned that I had profiled a 1/2 position short in the IWM, which we were holding INTO the end of Q1, but a LOWERED stop from $69.82 entry was hit at $68.82 on 03/31/08.

I wouldn't be bashful with the picking up a bullish position back in there if given a second chance.
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None None

Play Editor's Note: I want to remind readers that a lot of major indices and sector indices are still trading just under significant resistance levels. A breakout higher would obviously be very bullish but after last week's gains odds are probably stronger that we see a pull back or some sort of correction first so the market can build up a good head of steam for the next breakout.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

DuPont - DD - close: 48.99 chg: -0.51 stop: 46.95

Bearish reversal alert! Shares of DD did not perform well on Monday. The stock has produced a failed rally under round-number resistance at $50.00 and a bearish engulfing candlestick pattern. This is negative and we are expecting a pull back. There is going to be a tug of war between the bulls and the bears near $48.00 since broken resistance at $48.00 should be new support. We are going to suggest readers buy dips near $48.00 but you might want to raise your stop loss to reduce your risk. Our target is the $52.50-54.00 zone. We don't want to hold over the late April earnings report. FYI: The Point & Figure chart has a bullish triple-top breakout buy signal and a $63 target.

Picked on April 02 at $48.84
Change since picked: + 0.15
Earnings Date 04/22/08 (unconfirmed)
Average Daily Volume: 7.2 million

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Energen - EGN - close: 65.67 chg: +1.81 stop: 61.69

Monday turned out to be a strong day for EGN. The stock broke out higher and ended the session with a 2.8% gain. We were suggesting readers buy the stock at $64.65 so the play is now open. Our short-term target is the $69.50-70.00 zone. If we have time we'll consider a secondary, more aggressive target above $70. The P&F chart is bullish and the upside target just jumped from $77 to $80. We do not want to hold over the late April earnings report.

Picked on April 07 at $64.65 *triggered
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 657 thousand


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Corning Inc. - GLW - close: 25.83 chg: +0.27 stop: 23.65

GLW managed to out perform the wider market today but we suspect shares are poised to dip soon. Look for a pull back near $25.30-25.25 as a new entry point for bullish positions (or maybe a dip to $25.00-24.75). We're listing two targets. Our first target is the $27.00 level. Our second target is the $29.00 level. We do not want to hold over the late April earnings report. FYI: A move over $26.00 should produce a new P&F chart buy signal.

Picked on March 25 at $25.14
Change since picked: + 0.69
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 14.7 million

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Honeywell - HON - close: 58.11 chg: -0.16 stop: 54.49

We do not see any changes from our weekend comments on HON. Our target is the $59.90-60.00 zone. More aggressive traders could aim for the top of the larger range near $62.00. Keep in mind that we do not want to hold over the earnings report.

Picked on March 25 at $56.00
Change since picked: + 2.11
Earnings Date 04/18/08 (confirmed)
Average Daily Volume: 6.7 million

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Hormel Foods - HRL - close: 42.47 change: +0.02 stop: 39.85

It was a quiet session for HRL too. We don't see any changes from our weekend comments. We would either wait for a dip back toward the 10-dma (near 41.65) or a new high over $42.65 before considering new positions. More conservative traders may want to consider a stop closer to $41. Our target is the $45.75-46.00 range. We anticipate holding this stock on the newsletter for about six to eight weeks. The Point & Figure chart is bullish with a $64 target. FYI: This past week HRL declared a quarterly cash dividend of 18.5 cents per share payable on May 15, 2008 to shareholders of record on April 19th. HRL has been paying quarterly dividends for almost 80 years.

Picked on March 31 at $41.83 *triggered/gap open
Change since picked: + 0.64
Earnings Date 05/22/08 (unconfirmed)
Average Daily Volume: 513 thousand

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iShares Telecom - IYZ - close: 24.36 chg: +0.23 stop: 22.89

The IYZ hit a new relative high midday but eventually pared its gains by the closing bell. Shares still look bullish and a dip or bounce near $23.50 could be used as a new bullish entry point. We are adjusting the stop loss to $22.89. We have two targets. Our 1st target is the $25.85-26.00 range. Our second target is the $27.85-28.00 zone.

Picked on March 25 at $23.50 *triggered
Change since picked: + 0.86
Earnings Date 00/00/00
Average Daily Volume: 429 thousand

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Coal ETF - KOL - close: 40.95 change: +0.06 stop: 37.95

Coal stocks made headlines today after ACI reaffirmed its earnings guidance. The problem was not with their guidance but with Wall Street's expectations that they might raise guidance. The news sucked the wind out of the commodity rally and coal stocks sank into the closing bell. The KOL ETF managed to post a gain and looking at the intraday chart is almost looks like an entry point right here. However, we are going to stick to our plan and wait for a dip into the $39.50-39.00 zone as a bullish entry point to buy KOL. If triggered our target is the $44.75-45.00 range.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 240 thousand

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Agribusiness ETF - MOO - close: 57.73 chg: +0.59 stop: 53.95

Commodities were hot today although the ACI-coal news pared most of the gains in commodity related stocks. Our plan calls for investors to buy a dip in MOO in the $56.00-55.00 zone. If triggered our target is the $59.85-60.00 range. The Point & Figure chart is bullish with a $72 target.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 1.0 million

---

Meritage Homes - MTH - close: 21.84 chg: -0.25 stop: 19.49

We do not see any changes from our weekend comments on MTH. We continue to suggest that our readers lock in some gains right here. You might also want to consider a tighter stop loss near $20.00. We are not suggesting new positions although a dip or bounce near $20.00 could be used as an entry point. Our target is the $24.75 mark.

Picked on March 24 at $18.60 *triggered
Change since picked: + 3.24
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 893 thousand

---

Nintendo Co - NTDOY - close: 68.50 chg: +1.20 stop: 63.95

Our play in NTDOY is open. Unfortunately, I can't find an opening price anywhere. All I can find is the daily range of $68.35-69.05. We were suggesting readers buy NTDOY at $68.01 or higher. Since we can't find an opening price I'm going to take the average of today's trading at $68.70 and use that as the newsletter's "entry" point. Our target is the $74.00-75.00 zone. Keep in mind that NTDOY is traded as an ADR here in the United States and shares will gap open up or down every day as they adjust to trading overseas. FYI: Some quote services might ask you to use the symbol NTDOY.PK to pull up data on NTDOY.

Picked on April 07 at $68.70 *triggered/gap open
Change since picked: - 0.20
Earnings Date 00/00/08 (unconfirmed)
Average Daily Volume: 312 thousand

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Pulte Homes - PHM - close: 15.86 chg: +0.05 stop: 14.95

Be careful here with PHM. We just added this stock over the weekend with a suggested entry point to go long at $16.65. The stock rallied to $16.81 and then reversed midday when the broader market turned lower. This is technically a short-term bearish reversal or failed rally even though the early morning move was a bullish breakout over resistance. The play is open for us but we would suggest readers look for a dip near $15.50 or another rally over $16.50 before considering new bullish positions. Our first target is the $19.90-20.00 zone. This should be considered an aggressive, higher risk play because the homebuilding stocks have become very volatile and subject to a lot of whipsaws. Plus, due to volatility, we're playing with a wide stop loss. We do not want to hold over PHM's earnings report in late April.

Picked on April 07 at $16.65 *triggered
Change since picked: - 0.79
Earnings Date 04/23/08 (confirmed)
Average Daily Volume: 10.0 million
 

Short Play Updates

Cognizant Tech - CTSH - cls: 28.97 chg: -0.42 stop: 30.75

Shares of CTSH are still wilting. The stock definitely looks poised for another move down. We would consider new positions here. Our first target is the 26.25-26.00 zone. Our second, more aggressive target is the $24.25-24.00 range. The P&F chart is bearish with an $18 target.

Picked on March 30 at $29.18
Change since picked: - 0.21
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume: 5.1 million

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Longs Drug Stores - LDG - cls: 39.89 chg: -1.68 stop: 43.55

Retail stocks under performed the market and LDG really under performed with a 4% sell-off. Shares even broken round-number support at $40.00. Our first target is the $38.25-38.00 zone. Our second target is the $35.25-35.00 zone. The P&F chart is bearish with a $29.00 target.

Picked on March 30 at $41.30
Change since picked: - 1.41
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume: 596 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.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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