April's PPI was released this morning with a headline number of +0.2 percent. That was not a surprise as it was inline with expectations. The surprise came from the core rate, which excludes food and energy and spiked by 0.4%. Core prices for crude materials rose by a whopping +7.9%. The bleed over from energy prices into the core components was much higher than analysts expected. This was not good news for Fed watchers. Normally the core rate is lower than the headline number because those pesky food and energy costs are ignored. In April those rising costs bled over into the core items like autos and furniture. Transportation and materials costs are rising because of higher fuel costs and higher commodity prices. Specific problems are being seen in the core intermediate goods, which are often thought of as leading indicators for consumer inflation. Materials used in durable goods manufacturing rose +1.9% for the month. These are huge increases when the Fed is hoping for an inflation rate of less than 2% for the year. The higher inflation reading suggests the Fed is not going to be cutting rates again any time soon.
Wilshire 5000 Chart - Daily
Another report released today was the Chicago Fed National Activity Index for April. The CFNAI showed a drop to -1.17 and erased last month's minor gain. The cycle low is still the -1.59 headline reading from February. The chart below shows the 3-month moving average, which smoothes out the volatile month-to-month swings. On the 3-month average the -1.24 posted in April was the lowest level since Nov-2001. This level is consistent with a severe recession. The Fed believes that five consecutive months below -0.7 indicates an economy already in recession. Since 1967 that sub -0.7 5-month consecutive reading has occurred seven times and six of them were recessions. This report is backward looking and lags current conditions by about 60 days. That means we could already be recovering but this report will not show it for two months.
Those two reports were the most important for the week and that leaves the calendar open as head towards the holiday weekend. Traders will not be able to blame the economy for further market weakness. I believe the Fed will release the minutes on the last meeting on Wednesday afternoon and that could be the week's last volatile event.
Earnings reports and warnings are still producing market problems. Home Depot posted earnings that beat the street but guided analysts to the low end of its prior range for full year results. Profits were 41 cents per share and analysts were only expecting 37-cents. Same store sales fell -6.5% and revenue fell to $17.91 billion. HD guided analysts for a 19% to 24% decline in earnings for the full year. The HD CEO said they were seeing more risks than opportunities for the rest of 2008. HD said it was going to do the unthinkable and close 15 of its flagship stores and cut down on its expansion plans until the housing sector begins to rebound. HD said there was still no housing recovery in progress and in some areas it was continuing to get worse. Elsewhere in the sector Lowe's reported an 18% drop in earnings on Monday.
Monday's comments from Sandisk CEO Eli Harai were still weighing on the market on Tuesday. Eli told reporters "With oil prices hitting $127 a barrel, discretionary spending is going to be affected." He also said there was a chip glut that the market had to work through. SNDK shares fell -7% on his comments. The entire market tumble from his comments carried over into Tuesday. I believe it was just a handy excuse for the selling since every investor has already made that connection between high oil prices and slowing consumer spending. Smart Modular (SMOD) added to the gloom with a guidance warning citing a difficult pricing environment. The chip sector was still falling on Tuesday with more than -20 points erased since his comments.
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Target (TGT) reported on Tuesday that weaker than expected sales forced an earnings decline of 8%. The retailer reported that sales of non-essential items like lawn furniture were dropping fast while sales of commodity items like milk and diapers were still strong. It is just one more picture of discretionary spending curbs as consumers try and make their budgets stretch for the entire month. The CEO said they were increasing their ads in newspapers in an effort to capture as much of the tax rebates as possible. He also said credit charge offs rose 63% as cash strapped consumers failed to pay their debts. Saks reported profits that missed estimates and also said consumers were under pressure with sales shifting to the lower priced, lower margin items.
Noted Oppenheimer financial analyst Meredith Whitney is now saying that the credit crisis is "far from over" and believes losses could be far worse than even the most pessimistic estimates suggest. In a research note late Monday she said the crisis could extend well into 2009 and perhaps beyond. She said banks are being forced to reverse revenue they never should have booked in the first place. Many borrowed money in order to leverage into profitable mortgage loans and now those loans are going bad. Leverage is a wonderful thing when the trade is moving in your favor but it becomes especially nasty when it turns against you. Using leveraged funds for risk investments can require the banks to come up with cash they don't have when those investments turn negative. Meredith is expecting $170 billion in losses on just the banks she covers. Losses could be "far worse than even the most draconian estimates." We have seen the rebound in financials slow over the last two weeks and the XLF hit a 4-week low on Tuesday. With financials 21% of the S&P it would be extremely difficult for the S&P to move higher until the financials find a bottom again.
After the bell Hewlett Packard (HPQ) officially reported earnings of 87 cents per share but it was no surprise. They preannounced last week so there was little drama and the shares of HPQ barely moved after the announcement. The affirmed their prior forecast for the current quarter for $27.3 billion in revenue and 82-83 cents in profits.
June Crude Futures Chart - Daily
Oil prices hit a new intraday high at $129.58 and closed at $129.07 as the June futures contract expired. Boone Pickens was on CNBC's Squawk Box well before the open and forcefully reiterating his call for $150 oil in 2008. This call was discussed over and over all day and those still short that expiring June contract suffered a final squeeze. The expiring June contract gained +$2 for the day but the longer dated contracts positively exploded. The Dec-2016 contract closed at $138.85 for a whopping $8.87 gain. The more analysts predict higher prices in the short term the more these contracts are going to rise.
Oil Futures Gains Table
Meanwhile Alan Greenspan was saying that we are just seeing a speculative bubble in oil and it will decline. Since he retired from the Fed he has been a lightning rod on key issues. Unfortunately he has often been wrong and he is ruining his legacy with sound bite after sound bite of increasingly stupid remarks.
However the House of Representatives proved to be even dumber when they passed a bill allowing the Justice Dept to sue OPEC for the high prices. I have written about this several times lately and the stupidity of this action. OPEC nations don't like the U.S. and would not take kindly to any legal action. When somebody has a knife at your throat you don't continue to scream obscenities in their face and dare them to kill you. The U.S. has never complained over the last 40 years when OPEC kept prices lower by means of their production quotas. OPEC was seen as a good thing because oil prices remained relatively steady and allowed planners to know what oil was going to cost for years in advance. If the Justice department sues OPEC the group can just disband and then cut production individually and our oil prices will go to $200 instead of $70. The U.S. has no legal leverage on OPEC and they are holding all the cards. Targeting OPEC member country assets in the U.S. would surely lead to retaliatory action against America's oil consumption habit. Bush said he would veto the bill if it made it to his desk. My advice to the House would be to go do something useful like passing bills that would allow drilling in Alaska and off our coasts. Cuba is selling leases just off the coast of Florida but U.S. companies cannot drill there. Somebody please wake up and notice the price of gasoline before it is too late.
The case is building against Yahoo remaining independent. Another hedge fund, Third Point, is putting its five million shares of support behind Icahn and said they may increase that stake to 10 million. Boone Pickens also said he had bought 10 million shares to support Icahn. Paulson and Co. disclosed last week that it had acquired 50 million shares and is supporting Icahn. Carl also has options to buy another 49 million shares. Meanwhile Microsoft is back in talks with Yahoo on some kind of joint venture where Microsoft would buy the search business, invest in Yahoo and structure some kind of sell off of non core assets. Microsoft says this new proposal is worth more than $33 to Yahoo but there are not enough details available to do the math ourselves.
The inflation packed PPI this morning brought many investors back to reality. That reality is a Fed that will no longer be in rate cut mode and may soon be in rate hike mode. Analysts are now saying the Fed could begin raising rates by November at the latest. Of course that assumes the economy does not get any weaker. With the various economics reports giving mixed messages it is going to be a rough summer for analyst predictions. The reality that low rates may be ending is not pleasant on the surface but that also assumes the economy will be growing again. Investors would easily trade a booming economy for higher rates any day. It is the transition phase that is tricky.
The Dow fell to a low of 12781 intraday but quickly rebounded to close over support at 12800. That drop was 354 points from the 13135 high on Monday. While that sounds like a major disaster it simply erased four days of gains and knocked the Dow back to support. It was not a disaster and not a new trend. However, it is worrisome since this week is the last 5 days of the "Sell in May" cycle. If funds are going to use that strategy and go to cash over the summer then the prime time to exit is right after last Friday's option expiration. Any positions they had hedged with options are now at risk and they have to make the exit call or hedge the positions again.
Dow Chart - Daily
Nasdaq Chart - Daily
The Nasdaq was another picture perfect return to support and there was no change in the prior uptrend. The Nasdaq closed at 2491 and could decline to 2450 without damaging the trend. Ditto on the S&P-500. Nothing has changed despite the highly visible decline from Monday's high. Support remains 1390-1400 and the trend is still intact.
More encouraging for me was the strong showing by the Russell 2000 with only a -2.81 point drop today. The Russell declined to support at 732 and that support was solid. The Russell is still suggesting to me that fund managers are not selling stocks. They may not be strongly embracing the possibility of a summer rally but they are nibbling on every dip.
S&P-500 Chart - Daily
Russell-2000 Chart - Daily
The challenge remains volume. Without volume there is no conviction in either direction. Volume has remained in the 6.5-6.8 billion share range for the last six days. Internals are still positive despite the increase in declining volume over the last three days. There is some selling occurring but so far it is not a problem. As I said on Sunday we have to get past this week to be able to say the sell in May cycle is not going to happen this year. That gives us three more days of potential volatility. Remember, we are watching the Russell 2000 level of 730-732 as our long/short indicator. We want to buy dips to 730 and stay flat or short under that level. The Dow, S&P and Russell all did battle with resistance at the 200-day average and lost. That does not mean they lost the war, just the battle. Once over the 200-day averages this turns into a long-term fund buy signal. The key word there is "over" the averages. Until that battle has been won the markets could remain volatile.
New Long Plays
Timberland Co. - TBL - close: 17.97 chg: +0.32 stop: 17.35
Why We Like It:
Picked on May 20 at $17.97
Wabash National - WNC - cls: 8.36 chg: +0.21 stop: 7.84
Why We Like It:
Picked on May 20 at $ 8.36
New Short Plays
Long Play Updates
Avis Budget Group - CAR - close: 14.94 chg: -0.26 stop: 13.45
CAR skidded to a 1.7% loss but held up better than expected during a down day in the market. Our strategy is to buy a dip in the $13.85-13.75 zone. We'll use a stop at $13.45. If triggered our target is the $15.50-16.00 range or the 200-dma, which ever comes first. The Point & Figure chart is very bullish with a $22 target.
Picked on May xx at $xx.xx <-- see TRIGGER
Celanese Corp. - CE - close: 48.73 change: +1.16 stop: 45.95 *new*
CE displayed relative strength with an impressive 2.4% gain. Traders bought the dip this morning near CE's rising 10-dma. The stock is within striking distance of our target in the $49.90-50.00 range. More aggressive traders may want to aim higher. The P&F chart is forecasting a long-term target of $74. Note - we are raising our stop loss to $45.95.
Picked on May 11 at $46.35
iShares DJ US Oil & Gas - IEO - cls: 85.66 chg: +2.16 stop: 79.90*new*
Target exceeded. Another new record higher in crude oil powered the IEO to a new high. Shares hit $85.84 intraday. Our first target was the $85.00 mark. We hope readers have taken some money off the table here. We still suspect that crude could see some profit taking this week. Please note we're raising the stop loss to $79.90. Our secondary, more aggressive target is $87.50. This should be considered a high-risk play.
Picked on May 13 at $81.06 /1st target exceeded 85.00
iShares DJ Oil Serv. - IEZ - cls: 76.98 chg: +0.59 stop: 71.90
Oil services enjoyed another gain thanks to strong crude oil prices. The IEZ is still marching higher. The trend is bullish but we're still concerned about a possible sell-off in crude oil this week. Consider taking some money off the table right here. Our target is the $79.50-80.00 range. This should be considered a high-risk play.
Picked on May 13 at $73.74
Lululemon Athletica - LULU - cls: 34.33 chg: -1.27 stop: 33.49
LULU tumbled more than 3.5% lower today after one analyst said the stock was fully valued. Shares slipped to the $34.00 region with investors buying the dip twice near $33.70. We were suggesting that readers buy a dip in the $34.20-34.00 zone so the play is now open. More conservative traders might want to inch up their stop loss closer to today's low (33.69). Our target is the $39.00-40.00 zone. The P&F chart is very bullish with a major buy signal and a $50 target. FYI: The stock is heavily shorted and might see a short squeeze. The most recent data listed short interest at more than 56% of the small 13 million-share float.
Picked on May 20 at $34.20 *triggered
Agribusiness ETF - MOO - close: 62.99 chg: +0.49 stop: 60.45
Many of the agriculture stocks bounced today in spite of the market's weakness. This lifted the MOO to a 1.7% gain. This is short-term bullish and the rebound could be used as a new entry point. We have two targets. Our first target is the $65.50 level near its old highs. Our second target is the $68.00-70.00 range.
Picked on May 08 at $61.79
Oshkosh Corp. - OSK - close: 39.91 change: +0.41 stop: 38.99
OSK out performed the S&P 500 but the stock is still stuck in its sideways consolidation. We would not consider new bullish positions until OSK traded above $40.25 again. Our eight-week target is the $44.50-45.00 range. We would expect some resistance near $42.00. The Point & Figure chart is bullish with a $57 target.
Picked on May 13 at $39.90
Perdigao - PDA - close: 59.08 change: -0.86 stop: 54.95
The trend in PDA is still bullish but yesterday's session looks like a bearish reversal. We remain cautious here so we're not suggesting new positions at this time. More conservative traders might want to use a tighter stop loss. Our target is $64.00.
Picked on May 13 at $57.74
Sterlite Ind. - SLT - close: 22.30 chg: -0.13 stop: 20.95
Lack of any real profit taking in SLT is a good sign. Readers could use the dip to $22 as a new entry point. However, more conservative traders might want to use a tighter stop loss. Bear in mind that if the U.S. market continues lower we would expect a correction in SLT back to $21.50-21.00. Our target is the $25.75-26.00 zone. The Point & Figure chart is bullish with a $31 target.
Picked on May 19 at $22.25 *triggered
Short Play Updates
Closed Long Plays
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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