The morning economic reports were led by the Producer Price Index (PPI), which spiked +1.1% on the headline number. Core prices rose only +0.2% and that is good if you don't eat food and use energy. Even at the relatively benign +0.2% for March it is still rising at a 5% annualized rate. Core prices for crude materials rose +3.5% for the month and +16.7% year over year. Prices for finished energy prices rose at a 22.5% annualized rate in Q1. In earlier stages of processing the rates were much higher. Intermediate energy products grew at a 46.4% rate and crude energy products grew at a 120.7% rate. Regardless of how you slice and dice the numbers the impact of rising oil prices is pushing the prices we pay for everything to record levels. With this much inflation in the pipeline the odds of future Fed rate cuts are dropping fast. The odds of a 50 point cut at the end of April FOMC meeting is now only 64%.
Dow Chart - Daily
We got a surprise this morning from the NY Empire State Manufacturing Survey when it came in fractionally higher at +0.6 compared to the -22 in March. After two months of sharp decline of -22.2 and -11.7 the survey returned to positive territory although only fractionally. Consensus estimates were looking for a drop of -16. Shipments improved to 17.5 from -5.2 and stood out as the only component to really improve. New orders, back orders and employment were mixed but with only minor movements from the prior month. The headline number appears to be an anomaly from the spike in shipments and not a new trend. Prices paid rose again to 57.3 from 50.6 and confirming the data we saw in the PPI.
In a "no news is good news" report the NAHB Housing Market Index was flat at 20 for the third consecutive month. This is still 52 points below its high in June 2005. Buyer traffic is picking up but very slowly. With consumer confidence falling to decade lows and loans becoming harder to get it was surprising that conditions did not decline. I suspect the slight recovery over the last three months is simply a function of spring buyers getting a head start knowing it was going to be a battle getting to the closing table. Unfortunately we also got the latest foreclosure numbers for March that came in with a 57% increase.
NAHB Housing Market Index Chart
A survey from BigResearch made the news today with the depth and breadth of how consumers are reacting to the higher gasoline prices. When better than 50% of respondents are actively taking steps to counter the price of gasoline this shows how oil prices are adding to the downturn in the economy.
Oil Price Survey
Economic reports for Wednesday include the Consumer Price Index (CPI), Mortgage Applications, New Residential Construction, Industrial Production and the Fed Beige Book. The two most important are the CPI (8:30) and the Beige Book (2:00). The CPI will tell us how much of the inflation seen in the PPI has filtered down to the consumer level. The Beige Book will give us some insight into the Fed's rate cut mentality. If conditions continued to decline in all the Fed's regions then there may be some more cuts ahead. If some of those regions showed improvement or maybe just no additional decline then the Fed could move to the sidelines.
Earnings in the U.S. are entering a nuclear winter according to the new Goldman Sachs U.S. Investment Strategist David Kostin. Kostin replaced Abby Joseph Cohen as their mouthpiece on the market. Kostin may be trying to make a name for himself with this week's call for the S&P to decline to 1160 over the next couple months. The S&P closed today at 1334 making a drop to 1160 an additional -13% drop. His year-end target is only 1380 or only 3% above where we closed today. This is quite a change from the perma-bull stance of Abby Cohen.
Oil prices hit $114.08 just after the close of regular trading as we close in on the expiration of crude options on Thursday and crude futures next Tuesday. Helping to push oil prices higher was news that imports from Venezuela fell -18% after shipments to Exxon were halted. That is a non-event since there was ample oil available elsewhere to replace it. The news still added to the market hype. This was the third consecutive day key Mexican ports were closed due to bad weather. That cut exports to the U.S. but again, it was just a temporary halt and not material on a long-term basis. The IEA also reported that Russian oil production had declined for the first time in ten years and the term "peaked" was used over and over in the press releases. Russia is one of the biggest global producers with about 10 mbpd of production. They have been expected to peak for a couple years. This is just one more data point suggesting global peak oil may not be far away. Nigeria reported a small outage of 5,000 bpd due to civil strife and Shell's Capline pipeline in the U.S. was shutdown for a few hours to fix a leak. Lots of news, none of it relative to $114 oil.
May Crude Futures Chart
Petrobras (PBR) gained +$12 over the last two days after Brazil's National Petroleum Agency said the company had discovered 33 billion barrels of oil. The NPA statement was quickly denied by Petrobras but the gains stuck. On Tuesday even the NPA said the report was in error but the gains stuck. Petrobras has only drilled one well in the Carioca field and is currently drilling a second well in a smaller area nearby. They are months if not a year or more away from saying they found any specific quantity of oil. They have not even presented their plan on proving out the field to the NPA. This will take multiple exploratory wells to 25,000 feet or deeper. The targeted deposits are under 7,000 feet of water, 10,000 feet of sand and rock and another 6,600 feet of salt. There is no assurance this deposit can ever be commercially completed. The salt structure is very difficult to drill and produce because shifts in the salt can crush pipes and close the well. Any completion requires heavily reinforced well pipes and the associated problems of working at depths of 25,000 feet in 7,000 feet of water. Nobel Corp (NE) was awarded a $4 billion contract by Petrobras to drill in similar conditions in the recently discovered Tupi field, which is next to the Carioca field. Think about that number. $4 billion to drill a group of deepwater wells. This is extremely difficult and expensive and Petrobras could have more than $10 billion invested before the first barrel is produced. It will be more than ten years before any production is seen from the Carioca field and that assumes it can be commercially completed. I like Petrobras and I suspect they will eventually achieve production status of some amount from these finds but it may not be material until 2020. I would be a long-term buyer of PBR on any material pullback.
After the bell today the first of the big techs reported and there was nothing to worry about. Intel (INTC) reported earnings inline with estimates of 25 cents per share or $1.44 billion in profits. Gross margin was 53.8%. Revenue rose to $9.67 billion and just barely over the $9.63 billion analysts expected. Intel raised guidance for Q2 to a range of $9.0-$9.6 billon and gross margin of 56%. Analyst current estimates for Q2 are for a profit of 28 cents. CEO Paul Otellini said "We saw healthy demand in processors and chipsets across all segments. Looking forward we remain optimistic about our growth opportunities." INTC shares rose +1.50 on the news.
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Seagate Technology (STX) saw its profit jump +62% but saw sales of disk drives for laptops decline. STX posted earnings of 70 cents compared to 37 cents in the year ago quarter. Analysts had expected 69 cents. Seagate had raised guidance in March saying it sold more drives than expected as shipments jumped +20%. They sold 43 million drives in Q1.
Washington Mutual posted a loss of -$1.1 billion as their provisions for bad loans doubled. That equates to -$1.40 per share compared to a profit of +0.86 cents in the year ago quarter. WM said it had to set aside $3.5 billion to cover bad loans in its $250 billion portfolio. WM was volatile on the announcement but returned to gain +31 cents on the news.
Railroad operator CSX said fuel surcharges and rising volumes of ethanol and grains pushed profits +46% higher in Q1. CSX earned 85 cents per share compared to 52 cents in the year ago quarter. Revenue rose +12%. Analysts had expected only 74 cents giving CSX an 11-cent beat. CSX also raised guidance to the upper end of its prior range. CSX spiked to $59.63 in after hours after closing at $57.90.
The biggest disappointment for the day came from State Street (STT). They posted profits of $1.39 per share compared to analyst estimates for $1.30 per share. STT initially rose on the news but the excitement was short lived. State Street said it was facing unrealized losses of billions of dollars. On the conference call the CFO said it already suffered a loss of $3.2 billion on its portfolio and a $2.5 billion loss on its conduits. S&P and Fitch immediately suggested the bank could be downgraded given the revelations of possible further losses. State Street manages $14.9 trillion in assets for banks and investors and has a $75 billion investment portfolio of its own. STT lost -7.63 or -10% on the news.
Crocs Inc (CROX) was hammered for a -43% loss after warning on almost every metric on Monday night. Is it time to kiss the plastic shoe trend goodbye?
CROX Chart - Daily
Big earnings on tap for Wednesday include EBAY, IBM, JPM and WFC. So far this week's results were strong in techs and weak as expected in the financials. This could be setting up for a positive surprise for the week. With the market on pins and needles already this could produce a sigh of relief and bring some buyers off the sidelines. Just remember what David Kostin from Goldman Sachs predicted on Monday, a -13% S&P drop from here. Obviously very educated and highly thought of analysts can still err in their forecasts so it will be interesting to see how the rest of the week and month play out. Futures are up strong in evening trading so it appears tomorrow could start off strong.
The Dow had declined to rest on support on 12300 for the last two days and it struggled to a +60 point gain for the day to close at 12355. Dow futures are up +50 overnight and could climb higher by tomorrow morning if Asia gains on the Intel news. After holding over 12300 for two days that sets up a clear level to short if that support fails.
The Nasdaq declined to support at 2265 ahead of the Intel earnings but recovered to close at 2285. Futures are showing +20 overnight and with Intel raising guidance and Seagate shipping 20% more drive than expected it looks very positive. The land mine in our immediate future would be IBM earnings on Wednesday. If they post good earnings and guidance then we will be headed higher, possibly much higher. IBM is either going to be the spoiler or the leader when they announce on Wednesday. IBM recovered $2 on Tuesday to finish flat and they are up another $1.25 in after hours. IBM gets 65% of its earnings from overseas so a weak U.S. market may not impact them enough to cause a big miss.
Nasdaq Chart - Daily
S&P-500 Chart - Daily
The S&P never reached my 1320 support level this week and that is bullish for me. The tone of the markets intraday was negative but the S&P found buyers on every dip. The S&P closed at 1334 and futures are up +8 overnight. Resistance is strong at 1380 and I would really love to see a monster short squeeze on techs and financials to push us back to that level. With WFC, SLM and JPM reporting tomorrow morning we could get a financial bounce if they report better than expected. Those three stocks are not really in the line of fire today although all of them still exist in a sector in trouble. If all the bad expectations are priced in then we have the potential for a positive surprise. The State Street earnings would be the type of report we do not want from JPM or WFC and nobody really expects it. The biggest financial earnings risk for the week is the Merrill Lynch earnings on Thursday. Merrill is the most leveraged of the big brokers and they could produce the biggest positive or negative surprise. Put buying on Merrill is running 3:1 over calls.
Just because the tone in the market appears to be turning positive does not mean we can just throw money at it. We still need to be cautious and wait for a clear breakout before backing up the truck. We should still trade this reversal of sentiment but with caution. My recommendation for the last two weeks has been to buy dips above SPX 1320 and that still stands. Should that level be broken I would still reverse to a short. Remember, we are approaching the "sell in May and go away" period that starts the worst six months of the year on a historical basis. Given the crash from the October highs I personally doubt that the next six months are going to be lower from here but that is always a possibility. Goldman Sach's David Kostin obviously thinks so and his pay grade is much higher than mine. Just trade what the market gives us and let the big dogs make the forecasts. We can always cheer their calls or laugh at them later.
New Long Plays
Chevron - CVX - close: 90.17 chg: +0.87 stop: 88.45
Why We Like It:
Picked on April 15 at $90.17
NVIDIA - NVDA - close: 18.12 change: +0.21 stop: 17.59
Why We Like It:
Picked on April 15 at $18.12
Starbucks - SBUX - close: 17.32 chg: +0.35 stop: 16.84
Why We Like It:
Picked on April 15 at $17.32
New Short Plays
Long Play Updates
DuPont - DD - close: 48.93 chg: +0.13 stop: 47.45
There is no change from our previous comments. DD continues to consolidate sideways. At this time we would look for a dip or a bounce near $48.00 as a new bullish entry point. 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
Energen - EGN - close: 67.85 chg: +0.23 stop: 63.45
Crude oil reached new highs today and the oil stocks continue to show relative strength. 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
Gerdau S.A. - GGB - close: 35.69 chg: +0.68 stop: 34.64
Good news! Traders did buy the dip in GGB and the stock actually gapped open higher at $35.57 this morning. This move looks like a new entry point to buy the stock. Our first target is the $39.75-40.00 range. We'll place a secondary, higher-risk target at $42.00. The P&F chart is bullish with a $57 target. We do not want to hold over the early May earnings report (unconfirmed).
Picked on April 10 at $36.84
iShares Telecom - IYZ - close: 23.21 chg: -0.03 stop: 22.89
The IYZ is still trying to find a bottom near the $23.00 level. We're not suggesting new positions at this time. 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
Coal ETF - KOL - close: 42.17 change: +0.53 stop: 38.69
Coal stocks are still showing strength. We've been waiting for a dip but we might want to change to a breakout entry point. Currently our suggested entry point to buy the KOL is the $40.00-39.50 zone. If triggered at $40.00 our target is the $44.75-45.00 range.
Picked on April xx at $xx.xx <-- see TRIGGER
Agribusiness ETF - MOO - close: 60.18 chg: +0.95 stop: 54.75
Agriculture stocks and the MOO continue to rise. The MOO just broke through resistance at the $60.00 mark. Technically this is a bullish entry point but we don't want to chase it. We are sticking with our plan and suggesting readers wait for a dip into the $56.00-55.00 zone. However, we are raising our stop loss to $54.75. 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
Nintendo Co - NTDOY - close: 66.05 chg: -3.20 stop: 64.90 *new*
Ouch! Lately it's been up one day and down the next for NTDOY but today saw shares give up more than 4.6%. We did not see any company-specific news to account for the sell-off. The Japanese market was actually up today so it couldn't be a market-fueled sell-off. Readers need to be defensive here. Today's decline looks like it might have broken the up trend of higher lows. We are raising our stop loss to $64.90. 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 $68.50 *triggered/gap open
Teleflex Inc. - TFX - close: 49.43 chg: +0.13 stop: 49.49
We are still in a wait-and-see mode with TFX. We're waiting to see if shares can breakout over resistance near $51.00. I know we were looking for a bounce today and TFX just barely squeaked by with a 0.2% gain. Right now we are suggesting a trigger to go long at $51.05. Our short-term target is the $54.75-55.00 range, which should intersect with the stock's longer-term trendline of lower highs. The long-term trend is still bearish. We're just trying to play the oversold bounce. We do not want to hold over the late April earnings report.
Picked on April xx at $xx.xx <-- see TRIGGER
Terra Ind. - TRA - close: 45.74 chg: -0.54 stop: 39.74
It was a volatile day for TRA. The stock almost had a 10% swing on an intraday basis. We didn't see anything specific behind the volatility but traders definitely bought the dip near $44.00. We are suggesting readers buy a dip in the $42.50-42.00 zone. If triggered our target is the $49.00-50.00 range. FYI: The latest data puts short interest at more than 20% of the 88.8 million-share float. We do not want to hold over the late April earnings report. This industry has seen a lot of volatility so watch your stops carefully!
Picked on April xx at $xx.xx <-- see TRIGGER
Short Play Updates
Dell Inc. - DELL - close: 18.28 chg: +0.04 stop: 19.55
After several days of declines DELL eked out a minor gain. Today's trading was really pretty boring. After hours was when we started to see some movement. Intel's earnings report, at this time, is getting a positive spin and shares of DELL were trading higher, around $18.50ish on the Intel news. A failed rally near $19.00 would look like a good entry point for shorts. We're suggesting a stop loss at $19.55 but you could try a stop closer to $19.25 or $19.05. The P&F chart already points to a $7.00 target and the move under $18.50 has produced a new triple-bottom breakdown sell signal on the P&F chart. We're going to be aggressive and list two targets. Our first target is the $16.00 mark. Our second target is the $13.50 mark
Picked on April 10 at $18.77
Freddie Mac - FRE - close: 23.95 chg: +0.85 stop: 27.55
Today's 3.6% bounce in FRE is just that - a bounce, inside its bearish trend. The stock was short-term oversold. A failed rally near $25.00 could be used as a new entry point for shorts. More conservative traders might want to consider a tighter stop loss. Our first target is the $20.50-20.00 zone.
Picked on April 09 at $24.90 *triggered
Longs Drug Stores - LDG - cls: 37.69 chg: -0.00 stop: 40.16
It was a quiet day for LDG. The stock traded sideways in a 70-cent range. LDG has already hit our target at $38.25. 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 /1st target hit 38.25
Financial Sector SPDR - XLF - close: 24.79 chg: +0.25 stop: 26.51
The financial sector also produced an oversold bounce but we think it's temporary. Look for a failed rally in the $25.00-26.00 zone as a new entry point for shorts. We'll try and limit our risk with a stop loss at $26.51. Aggressive traders could put their stop above $27.00 and more conservative traders put their stop closer to $26.00. We're setting two targets. Our first target is the $22.50 mark. Our second target is the $21.00 mark.
Picked on April 13 at $25.13
Closed Long Plays
Corning Inc. - GLW - close: 24.60 chg: -0.38 stop: 23.90
We are giving up on GLW. The stock really under performed the market today with another failed rally and a bearish engulfing candlestick pattern. While we are closing the play and cutting our losses we'd keep GLW on our watch list. The stock could rally again if GLW really does start to benefit from consumers spending their tax rebates on flat-panel items.
Picked on March 25 at $25.14 *early exit 24.60
Closed Short Plays
Cognizant Tech - CTSH - cls: 29.32 chg: +2.35 stop: 30.26
Ouch! What happened here? CTSH gapped open higher at $27.75 and then rallied to an 8.7% gain on above average volume. There was no news specific to CTSH. The only thing that might account for today's short covering in CTSH was the earnings report from Infosys (INFY). Shares of CTSH still have overhead resistance at the trend of lower highs and its 100-dma. However, we do not want to wait around to find out of resistance holds. We're suggesting an early exit now.
Picked on March 30 at $29.18 /early exit 29.32
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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