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Daily Newsletter, Monday, 06/30/2008

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Table of Contents

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

Market Wrap

Majors Finish First Half Mixed

Stocks finished mixed-to-lower as the second quarter came to and end Monday in another brisk volume trade at the big board.

While well off Thursday and Friday's rising daily volumes of 5.23 billion and 6.09 billion shares, traders remained active among the one, two, and three-lettered stock symbols at the big board.

Economic figures released here in the U.S. were regional and continued to suggest that while the economy is not slipping into a full-blown recession, it's limping along at best.

Just after the cash market open the Chicago Purchasing Manager's Index, a barometer for business activity in the Midwest (Illinois, Michigan and Indiana) was released. The group said its overall index rose to 49.6 for June, from 49.1 in May and was above economists' forecast for a decline to 48.0. While not as weak as many had feared, the sub-50 reading still showed sign of business activity contracting for a fifth-straight month.

Other important readings due out this week are the Labor Department's June employment report and ISM's Non-Manufacturing Composite. Both reports are slated for release on Thursday.

Just before the clock struck 12:00 PM EDT, oil prices eased from their morning highs with August Crude Oil futures (cl08q) having traded another record high of $143.67 before the 07:00 AM EDT hour when the EIA revised April U.S. oil usage to -3.9% versus the same period last year. But a dip to $139.20 was gobbled up as the EIA said U.S. oil use rose by 36,000 barrels per day versus March.

By day's end, Nymex August Crude Oil futures (cl08q) settled down $0.21, or -0.15% at a fitting $140.00 round-number close. August Nat. Gas futures (ng08q) settled up a hefty $0.1550, or 1.17% at $13.353.

On a more global scale, Japan's Nikkei-225 ($NIKK), which finished Monday's session down 63 points, or -0.46% managed to finish up 7.6% for the second-quarter as the yen fell 6.3% against the greenback during the same period.

While the land of the rising sun recouped a portion of it 18.2% decline from the first quarter, financial reforms and a devastating earthquake in Mainland China had the Shanghai Composite ($SSEC) glowing red by an additional 21.2% in the second quarter.

European bourses put in a mixed-to-higher trade to start the week. A 96-point gain had London's FTSE-100 ($FTSE) rising 1.74% as oil and mining shares bolstered gains. Despite the bounce, buyers were unable to push the FTSE-100 into positive territory at the end of the quarter with the pound relatively unchanged versus the dollar on a year-to-date basis.

Germany's DAX ($DAX) finished lower by just more than 3-points, or -0.06% at 6,418, while France's CAC-40 ($CAC) rose 37 points, or +0.85% to 4,434, while pacing euro-zone weakness with a 5.8% decline for the second quarter.

Major Global Markets, Currencies, Oil and Gold

Since our visit last Monday, oil prices as depicted by the U.S. Oil Fund (USO) $113.77 +0.01% have risen an additional 2.57%, as bullish momentum accelerated thru the second quarter with the USO surging 39.8%.

While "black gold" rose 39.8% in the second quarter, its shiny counterpart in the StreetTracks Gold (GLD) $91.40 -0.07% (~$914.00 spot) finished up 1.1% for the quarter, while the U.S. Dollar Index (DXY) finished at 72.50 for the quarter, up roughly 1.0% versus a weighted basket of global currencies.

Since I'm on the topic of commodities, Corn futures, or "granular gold" as it is being called these days traded limit down at 724'6 from Friday's 754'6 for the July contract after the latest U.S. Department of Agriculture (USDA) figures showed farmers had planted more than a million more acres of corn than had been expected back in March.

The USDA said farmers expect to harvest 78.9 million acres of corn, down 8.7% from the 86.5 million harvested last year. The 8.7% decline includes the damage to corn crops caused by flooding in the Midwest.

Wall Street ended the second quarter of 2008 rather mixed.

An additional 7.4% decline for the narrowly comprised Dow Industrials ($INDU) in the second quarter caps off the worst first half for the Dow Industrials since 1970.

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Shares of Chevron (NYSE:CVX) $99.13 +1.35% capped off a component-best 16.13% gain for the quarter, while discount retailer Wal-Mart (NYSE:WMT) $56.20 -0.17% rose 6.68% on the quarter and now leads a rather narrow list of YTD gainers by a wide margin, with an 18.24% gain thru the first half of the year. International Business Machines (NYSE:IBM) $118.53 -1.26% fell $1.52 today, but still holds a 9.65% gain since its 12/31/07 close of $108.10.

Only CVX (16.13%), WMT (6.68%), XOM (+4.20%), IBM (+3.52%), INTC (+1.42%) and MCD (+0.81%) showed price gains for the quarter.

While rising energy prices, and commodity price in general garnered much of the second-quarter's headlines, concerns about the financial sector, even if they aren't as pronounced as at the start of the quarter continued to provide major headwinds for the Dow Industrials, the broader S&P 500 Index ($SPX) 1,280.00 +0.12% at the end of the second-quarter.

General Motors (NYSE:GM) $11.50 -0.43% traded at its lowest level since 1954 earlier in the session and plunged 39.63% during the second-quarter as slowing auto-sales combined with the credit crunch hurt results at its GMAC unit.

Insurer American Intl. Group (NYSE:AIG) $26.46 -4.64% closed at another multi-year low today, and darned near outpaced GM for biggest percentage decliner in the second-quarter.

Bank of America (NYSE:BAC) $23.87 -2.92% also closed at a multi-year low having dropped 37.04% in the just completed second quarter.

Dow Components - Sorted by Q2 % Gain/Loss

Simply sorting the Dow-30 components by their Q2 gain/loss and placing the $NDX, which gained 3.1% on the quarter probably speaks "volumes" as to the importance of International Business Machines (NYSE:IBM) and larger-cap technology. Mind-you, there's more than technology comprising the NDX/QQQQ, but there isn't a "financial" in the bunch.

The Russell 2000 Index ($RUT) has been relinquishing gains as I thought they might into the end of the second quarter, and a "follow the weakness" trade on 06/18/08 in the ProShares UltraShort Russell 2000 (TWM) $78.80 +2.41% as the Dow Diamonds (DIA) $113.55 +0.07% closed below $120.75 that very day has paid off handsomely to this point.

This "follow the weakness" we're seeing in the RUT is what tends to occur as some very handsome BULLISH gains start getting SOLD by bulls as they see other gains diminish, or losses build in other parts of the market.

Still, the more domestic and economically sensitive small caps have shown some relative strength compared to their BIG CAP brethren and still suggests that while the U.S. economy sputters, it remains a question as to how severe a slowdown is.

The Financial Select SPDRs (XLF) $20.20 -1.79%, which is comprised of bank, brokers, insurers fell 19% for the quarter, and it remains apparent that JPM, C, BAC and AIG remained under selling pressure during the quarter, some of the "financial" portions of GE's (GE Capital) and GM's business units are still being closely scrutinized.

Closing U.S. Market Watch -

Since last summer, roughly 1-year ago (see YrNet%), banks and brokerages have written down more than $300 billion of mortgage-backed securities and other "risky" investments. Later this month even more losses are expected when companies like Citigroup (NYSE:C) $16.76 -2.84%, Merrill Lynch (NYSE:MER) $31.71 -3.02% report their second-quarter results.

For the second-quarter, Merrill's stock price has fallen 20.6%, roughly inline with the XLF itself.

Late this evening, a rather "bold" and bullish call came from Morgan Stanley with the firm saying investor's should buy Lehman Brothers (NYSE:LEH) $19.81 -10.96%. This despite rumors that the beleaguered investment bank could be bought out well below its current price.

"We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing," wrote analysts Patrick Pinschmidt and Avi Ghosh. "The firm's ability to weather near-term market headwinds and return to respectable return on equity generation should help the shares trade closer to book value."

Morgan Stanley's duo thinks Lehman's return on equity (ROE) will rise from 3% in the second half of this year to 12% in 2009 and 14% in 2010, even as the firm's debt trading declines 28% from its peak.

Pinschmidt and Gosh think LEH should trade nearer to book value, which currently stands at roughly $39/share.

S&P Depository Receipts (SPY) - Daily Intervals

After closing BELOW $132.02 and 19.1% conventional retracement, buyers have been unable to muster any type of gain and the SPX once again rests at/near its lowest close of 2008 and the 03/10/08 close of $127.57.

While the closely monitored S&P 500 Bullish % (BPSPX) from Dorsey/Wright and Associates shows 30.80% of the SPX/SPY components (154 out of 500) still having a "buy signal" associated with their chart, and this 30.8% well above the 03/17/08 relative low measure of 23.09%, which would be deemed "bullish divergence," I think bears should be protecting gains here, and bulls have some time to monitor things, and see if some of the New High and New Low indications, as well as the various major market bullish % indicators reverse back up.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
SSCC None
T  

New Long Plays

Smurfit-Stone - SSCC - cls: 4.07 chg: -0.26 stop: 3.84

Company Description:
Smurfit-Stone Container Corporation is the industry's leading integrated containerboard and corrugated packaging producer and is one of the world's largest paper recyclers. (source: company press release or website)

Why We Like It:
We are going to gamble on a bounce in SSCC. The stock broke down under support just over a week ago and has collapsed, losing almost 30%. Shares managed to bounce near $4.00 and its multi-month trendline of lower lows today. The trend is obviously bearish but SSCC is due for a correction. This is a very high-risk play. We're suggesting a stop loss at $3.84. You may want to use a stop closer to today's low of $3.92. We have two targets. Our first target is $4.45. Our second target is $4.85.

Picked on June 30 at $ 4.07
Change since picked: + 0.00
Earnings Date 07/28/08 (unconfirmed)
Average Daily Volume: 6.3 million

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AT&T - T - close: 33.69 change: +0.93 stop: 32.49

Company Description:
AT&T Inc. is a premier communications holding company. Its subsidiaries and affiliates, AT&T operating companies, are the providers of AT&T services in the United States and around the world. (source: company press release or website)

Why We Like It:
Shares of T have fallen almost 20% in just the last month. The stock is very oversold and due for a bounce. It looks like that bounce may have begun today. The stock produced a bullish engulfing candlestick pattern, which is typically a one-day bullish reversal pattern. This could just be an oversold bounce on the way to new lows so we suggest a relatively tight stop. Our target is the $36.00-36.50 zone. This is a high-risk play as we speculate on a short-term bottom on T.

Picked on June 30 at $33.69
Change since picked: + 0.00
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 24.4 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Bill Barrett - BBG - close: 59.41 chg: +0.40 stop: see details

Our new bullish play in BBG is now open. The stock rallied to $60.43 this morning. We were suggesting that readers buy the stock at $60.10 since a breakout over resistance at $60.00 would be bullish. Unfortunately, BBG has trimmed its gains and closed back under the $60.00 level. This could be a false breakout or a bull trap pattern. While we would still be tempted to buy the dip our stop loss is $57.45. Look for a dip or bounce in the $58.50-58.00 zone or wait for a new relative high as another entry point. Our target is $64.85. We're contemplating a secondary target closer to $70. The P&F chart is bullish with a $67 target.

Picked on June 30 at $60.10 *triggered
Change since picked: - 0.69
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume: 758 thousand

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E*trade Financial - ETFC - close: 3.14 change: +0.04 stop: 2.99

ETFC rallied this morning after a positive press release from the company where ETFC set its earnings announcement date for July 22nd. Here is an excerpt from the press release:

"The Company also announced that it continued to experience strong performance in its retail franchise during the second quarter, generating positive trends in net new customer accounts and asset flows. While the overall credit environment remains highly challenging, the strength and stability of the Companys retail business continues to generate earnings in the Bank to absorb credit losses in excess of managements current three-year forecast. The Company also affirmed that it continues to expect excess risk-based capital at the Bank (excess to the regulatory minimum threshold for well capitalized) to approach $1 billion by year end. Additionally, the Company completed actions during the second quarter that further reduced Parent Company debt by approximately $95.8 million, for total year-to-date reduction of $155.8 million."

We would still consider new positions here but expect a dip back to $3.10. Our short-term target is the $3.45 mark. This should be considered an aggressive, higher-risk play since we're effectively calling a short-term bottom and as we all know "calling bottoms" in the market or stocks can be hazardous.
FYI: Just because this is a low-dollar stock do not be tempted to increase the amount of capital you normally commit to a single trade.

Picked on June 29 at $ 3.10
Change since picked: + 0.04
Earnings Date 07/22/08 (confirmed)
Average Daily Volume: 17.4 million

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FLIR Sys. - FLIR - close: 40.57 change: -0.81 stop: 37.95

We have to urge some caution on FLIR. The trading in the stock today was short-term bearish. Shares produced a failed rally at the $42.00 level. We would expect a dip back to the $39.65-39.00 zone at a minimum. Wait for the dip and use it or a bounce there as a new entry point for bullish positions. Overall we don't see any additional changes from our weekend comments. FLIR could see a continuation of the short-squeeze. The latest data listed short interest at more than 13% of the 130-million share float. That's about two weeks worth of short interest (granted the bears could have covered several days worth on Friday). We are suggesting long positions here but would prefer to buy a dip near the $40.00 level. Our target is the $44.95 mark (for now). The P&F chart points to a $73 target.

Picked on June 29 at $41.38
Change since picked: - 0.81
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 2.2 million

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Masimo Corp. - MASI - close: 34.35 chg: -0.51 stop: 32.95

There is no change from our weekend comments on MASI. We are still waiting for a breakout over $35.00. The MACD is nearing a new buy signal. The P&F chart is already positive with a $56 target. If MASI can trade over $36.00 it will produce a new P&F triple-top breakout buy signal. We are suggesting that readers use a trigger to buy MASI at $35.65, which would be above the May peak. More aggressive traders might want to jump the gun early on a move over $35.10. If triggered at $35.65 our target is the $39.95 mark. More aggressive traders could aim for the highs near $42.00 but we do not want to hold over the late July earnings report.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/28/08 (unconfirmed)
Average Daily Volume: 461 thousand

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UltraShort SmallCap - SDD - cls: 76.31 chg: +1.42 stop: 69.90*new*

The SDD is extending its gains. This ultra-short ETF added another 1.89%. If you haven't taken any profits yet we would do so now. We are adjusting the stop loss to $69.90. SDD has already surpassed our first target at $74.90. We're not suggesting new positions at this time. We have two targets. Our secondary, more aggressive target is at $79.50.

Picked on June 25 at $71.21 *1st target achieved
Change since picked: + 5.10
Earnings Date 00/00/00
Average Daily Volume: 63 thousand

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Companhia Siderurgica Nac. - SID - cls: 44.41 chg: +0.70 stop: 40.99

SID added another 1.6%. Shares are testing potential short-term resistance at $45.00. Don't be surprised to see another dip back toward $43.75-43.25 again. Readers can use a pull back into that area as a new bullish entry point. Keep a tight stop loss! We have two targets. our first target is the $45.95 mark. Our secondary target is the $49.50-50.00 zone.

Picked on June 26 at $42.75 *triggered
Change since picked: + 1.66
Earnings Date 08/04/08 (unconfirmed)
Average Daily Volume: 3.3 million

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Steel Dynamics - STLD - close: 39.07 change: +0.66 stop: 36.95

STLD out performed the markets today after some positive analyst comments this morning on the rising price of steel and a tight market. Shares of STLD added 1.9% but failed under the $40.00 level. This might be a bearish failed rally or it might be part of a short-term bull flag pattern. We are still cautious on the stock. Wait for a new rise over $40.00 before considering new positions. You may want to raise your stop toward Thursday's low of $37.35. Our target is the $44.00-45.00 range. We do not want to hold over the July earnings report. The P&F chart is bullish with a $50 target.

Picked on June 17 at $40.17 *triggered/gap open entry
Change since picked: - 1.10
Earnings Date 07/21/08 (confirmed)
Average Daily Volume: 4.6 million

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TBS Intl. - TBSI - close: 39.95 change: +1.04 stop: 35.75 *new*

TBSI rallied again adding more than 2.6% and challenging resistance at its simple 200-dma. If TBSI provides another dip back to the $39.00-38.50 zone we would use it as an entry point. Today we're raising the stop loss to $35.75, under Friday's low. We have two targets. Our first target is $42.50. Our second target is $44.90.

Picked on June 25 at $38.09
Change since picked: + 1.86
Earnings Date 04/04/08 (unconfirmed)
Average Daily Volume: 1.0 million

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Union Drilling - UDRL - close: 21.68 chg: -0.06 stop: 20.65

Another new high in crude oil intraday helped fuel a rally to $22.28 in UDRL. The stock reversed just as oil gave up its intraday gains. This move is very short-term bearish and we'd look for a dip back to $21.20-21.00 as a new bullish entry point. We're suggesting a tight stop loss at $20.65. Our target is the $23.90 mark. We do not want to hold over the late July earnings report. FYI: The P&F chart is bullish with a $30 target.

Picked on June 29 at $21.74
Change since picked: - 0.06
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 187 thousand
 

Short Play Updates

None
 

Closed Long Plays

None
 

Closed Short Plays

Allstate - ALL - close: 45.59 change: -0.93 stop: 49.31

Target achieved. Insurance stocks really under performed today. The IUX index lost 2.65%. Shares of ALL closed with a 2% loss. The stock hit an intraday low of $45.49. We recently changed our exit target to $45.55. ALL is very short-term oversold and due for a bounce.

Picked on June 11 at $49.31 *target exceeded 45.55
Change since picked: - 3.72
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 3.9 million
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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