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Daily Newsletter, Wednesday, 10/01/2008

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Table of Contents

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

Market Wrap

Constituent "Flip Flop," Buffett Chuckles On Way To Bank

Market Wrap

After a sharp decline on Monday, followed by a bounce Tuesday, stocks finished mixed to lower today as stock market participants and now those with some type of "economic interest" awaits word from Congress on a rescue/bail out plan aimed at the tight credit markets.

Of course, it took an 8% SPX decline from roughly 1,215 to 1,112, a GE Capital to no longer offer loans to start a McDonald's or Sonic franchise, an inability for "good credit" consumers wanting to refinance a mortgage, or buy a new car, for some to understand that Bernanke and Paulson's calls for immediacy were not to bail out the fat cats on Wall Street.

If you listened, or read any financial news network today, the calls from constituents to their Senators had many "flip flopping" from last week as their business, or job suddenly seemed at risk as the tightening credit markets put a squeeze on things.

Yes, the sleeper hold was getting tight, and it wasn't just getting tight for the "fat cats" on Wall Street.

Wednesday's Global Economic Calendar -

A stronger-than-expected German retail sales report had Germany's DAX finishing down 0.4% at 5,806, and more than likely gives us an observation of what market participants around the globe will be monitoring this evening and approximately 07:45 PM EDT.

Perhaps in anticipation of a "yes" vote, the Britain's FTSE-100 finished with a 1.2% gain to 4,959 to start the new quarter, even as its Manufacturing purchasing manager's index (PMI) showed a larger-than-forecasted contraction measure of 41.0 in September from a downwardly revised 45.3 in August.

That reading out of the UK gives those in the US and around the globe a preview of upcoming PMI's as the US financial system and flow of capital, or "lack of flow," trickles down.

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I should note that there were reports this morning that France (a member of the EU) proposed a EUR300 billion rescue package for member countries. Later in the session, France's finance ministry denied the reports. Germany reportedly opposed any such package, which according to France, never existed.

I'm not kidding.

A sharp decline in the US September ISM Manufacturing to a still expansionary measure of 53.5 (reading above 50.00 signal expansion) from the elevated 77.00 suggests the demand/supply relationship for prices in my opinion.

ISM Sep Mfg. At A Glance -

Prices of inputs saw a sharp decline in September and was the largest contributor to September's ISM. However, if you believe as I do that commodity prices tend to follow the stocks, there's probably some more downside to those figures coming.

Another area, or perhaps equity market I see as having some potentially BIG downside still is emerging markets that have benefited from "easy money" were the credit crunch is starting to be felt.

I would think institutional money as well as individual money in developing countries' markets will be monitoring tonight's "rescue bill" vote.

Yes, even some eBay (NASDAQ:EBAY) $20.85 -6.83% sellers and buyers that have noted the "no longer accepting" out of country funds due to the tight credit markets.

Market Internals -

At 10:00 AM EDT, some equity selling did come in on the US PMI data,

Banks and brokers were among today's sector winners, but the insurers as depicted by the S&P Insurance Index ($IUX.X) 204.33 -5.25% were notably weak.

JP Morgan (NYSE:JPM) $49.63 +6.27% did close at a 52-week high, having been gobbling up some financial assets on the cheap. Probably the "best thing" that happened to Bear Sterns in more than a year too.

Now, Mr. Buffett's Berkshire Hathaway (BRK.A) $137,000 +4.90% while not yet at its 12/11/07 intra-day high of $151,650.00 is starting to trade bullish again, and Mr. Buffett stepped into the chaos again today and unveiled a plan to buy $3 billion worth of General Electric (NYSE:GE) $24.18 -5.17%. Berkshire also received warrants to buy $3 billion worth of GE stock at $22.25/share over the next 5-years.

If that sounds ANYTHING like the "first plan" taxpayers could have got, or SHOULD WANT with the "rescue plan," then you know where Mr. Buffett is going, and he's following, or chuckling all the way to the bank. Yes ... JP Morgan bank.

Then at 10:35 AM EDT we got the headlines from the Energy Information Agency. It takes me awhile to tabulate more than just the headline numbers of crude oil stockpiles, total gasoline stockpiles and refinery capacity utilization, but here's some of the numbers that traders and investors need to recognize (in my opinion).

OptionInvestor.com Market Monitor -

We did see some selling on the "headline number" in oil as it relates to the 4.3M build, but factor out the 1.38M draw in the SPR as the Department of Energy (DOE) releases some more oil due to the impact of Hurricane Ike, and 2.92 million barrel build still above the forecast of +1.8 million barrels.

In last Wednesday's wrap I thought, based on hurricane history, that we'd start to see refineries start bringing some capacity back online, and while we did, with utilization up to 72.27% from the prior week's 66.71%, that's a bit off from the ~75.00% recovery week from Katrina and Rita in 2005.

Energy Secretary Bodman noted today that electrical damage is more extensive than first thought and will prolong a full recovery to at least 4 to 5 weeks in the Gulf region.

The DOE said it has delivered an additional 900,000 barrels of crude oil from the SPR today.

Metals Mining Services said 52 of the 3,800 oil/gas production platforms were destroyed in the US Gulf. The 52 platforms accounted for 13,300 b/d of oil and 90mmcf/d natural gas.

Shares of beaten down banker National City Corp (NYSE:NCC) $2.89 +65.14% inched higher, but remain shy of their "we'll have a bill by Sunday" Friday close of $3.71.

Two (2) iShares with an "emerging market's" flavor I'm fond of from the PUT OPTION side of things should the "rescue plan" be further delayed ended mixed.

The iShares Emerging Markets (EEM) $34.58 +1.19% and the iShares S. Korea (EWY) $39.05 -1.71%.

On a NO "rescue plan" (most expect the rescue plan now), the EWY may be the best PUT OPTION on the board.

Here's the field position of the GLOBAL bullish % at Monday's close.

Global Bullish % - Dorsey/Wright 09/29/08 Close

One "primary reason" I would think a broader iShares Emerging Markets (EEM) trades up from Monday's close, is that many "emerging market" countries were and still are "oversold" below our 30% measure.

The "South Korea" bullish % at 46.67% isn't in the best of field positions considering how "oversold" the rest of the world is.

Let me check ... At tonight's close the S. Korea bullish % has reversed back lower to 30.27%.

iShares S. Korea (EWJ) - $1 and $0.50 box

I would think any "lingering" of the credit crunch would have even GREATER impact on developing countries' that hunger for foreign investment and business to keep their engines running.

RISK to a "buy signal" ($44.00) is roughly $4, so look for an OPTION that is $4.00 or less, then hold on for your life.

You think US market indices are volatile? You haven't traded/invested in an emerging market.

A passage of the "rescue bill?" RISK to another "sell signal" at $36.00 is roughly $3.50, but field position may not be as favorable for a stronger PRICE gain bounce.

S&P 500 Index (SPX) - 10-point box

The top chart in tonight's Market Wrap was a 60-minute interval chart of the SPX. There was MAJOR internal damage done on Monday to the various major market bullish %.

For example, the S&P 500 Bullish % (BPSPX) was 47.80% last Wednesday, at Friday's "we'll have a bill by Sunday" the BPSPX from Dorsey/Wright was 47.00. At Monday's "no bill" had fallen to 24.20% and at tonight's close is once again at BPSPX inflection lows from March and July at 24.00%, or 23.20%, but still off the January low measure of 14%.

I'd certainly expect some "when in doubt, get out" long liquidation, even on the passage of a "rescue bill" back near 1,210, and more of an "all out" near 1,250.

Well, its editor's deadline for the wrap, and still no word on rescue bill. Should be coming shortly.
 

New Plays

Most Recent Plays

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

Play Editor's Note: Aggressive traders might want to check out JOYG and FCX. Both look very bearish. It wouldn't surprise me to see JOYG drop to the $36.00-35.00 zone. Unfortunately, the stock is so volatile that stop loss placement is a big challenge. FCX could drop to the $47.50 level.


New Long Plays

US Bancorp - USB - close: 36.68 change: +0.66 stop: 32.99

Company Description:
U.S. Bancorp, with $247 billion in assets, is the parent company of U.S. Bank, the 6th largest commercial bank in the United States. The company operates 2,542 banking offices and 4,895 ATMs, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. (source: company press release or website)

Why We Like It:
It looks like USB is going to be one of the huge banks that comes out of this financial crisis stronger than before. The stock has been able to maintain a bullish trend the last few weeks and shares are close to breaking out from their recent trading range. We are suggesting bullish positions now or on a dip near $35.00. The financials remain a very volatile sector so we're playing with a wide stop loss on USB. You might want to tighten your stop on Friday when gets close to the next congressional vote on the bailout plan. We're setting two targets. Our first target is $39.95. Our second target is $42.20. FYI: If no deal is approved on Friday - look out below for all the financials!

Picked on October 01 at $36.68
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume: 22.7 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Wells Fargo - WFC - close: 36.70 change: -0.83 stop: 32.95

After yesterday's huge rally in WFC a little profit taking like today would be normal. However, it's a concern because WFC under performed its peers in the banking sector. The BKX and BIX were up 6.9% and 2.9% respectively. We remain bullish on WFC and would still consider buying dips near $35.00 but we're starting to think that USB might be a better candidate for bullish positions. Our first target for WFC is the $42.50 mark and suggest readers sell 50% to 75% of their position there. Our secondary target is $47.50.

Picked on September 30 at $ 37.53
Change since picked: - 0.83
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 54.5 million
 

Short Play Updates

None
 

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.

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