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Daily Newsletter, Friday, 10/10/2008

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Table of Contents

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

Market Wrap

Global Crisis Crushes Oil Prices

Global Crisis Crushes Oil Prices

The worsening global financial crisis caused oil prices to fall to $82 as fears of slowing demand suggested a surplus in production. OPEC was quick to warn that an emergency production cut would be coming in November but prices failed to respond.

The global market crisis worsened on Thursday with the Dow dropping another 678 points. On Friday morning Asia collapsed with the Japan Nikkei losing more than 10%. The drop was accelerated when Yamato Life Insurance filed for bankruptcy in Japan. Hong Kong's Hang Seng index fell more than 7% with Singapore's Straits Times index off more than 6%. The Australian ASX200 fell -8.34% and it's biggest one day percentage loss ever. The Indonesian markets were frozen indefinitely on Friday to "avoid deeper panic" stemming from the financial crisis.

The forced liquidation of mutual funds and hedge funds continued with heavy selling into the close. Declining volume was 13:1 over advancing volume. Nearly 14 billion shares were traded across all U.S. markets. Analysts are saying Friday could be really ugly ahead of the bank holiday on Monday. With banks only lending overnight the potential for a 3-day weekend could cause them to tighten cash flow even further. After the close ratings agencies warned they might cut the rating on Morgan Stanley and that came after 25% drop in the stock on Thursday.

On Friday there will be a $400 billion auction to determine a price in Lehman credit default swaps. With Lehman bonds trading in at 12-13 cents on the dollar the holders of Lehman bonds are going to be wiped out. If they bought insurance in the form of a CDS they can recover the lost principle from whoever sold the insurance assuming they still exist. This will be the largest CDS auction ever and the prospect of a complete disaster is weighing on the global credit markets.

Add in a downgrade on GM on Thursday that caused more than a 30% drop in the stock and the red ink continues to flow. The price of GM stock and the price of GM credit default swaps is apparently pointing to a GM bankruptcy. The rest of the auto sector is doing no better with auto loans almost impossible to get in today's market. If high gasoline prices were not bad enough the dealers can't even sell a car to a willing buyer if that buyer needs financing.

The price of energy stocks continues to fall along with the price of oil. It is not specifically because of the oil price drop because $85 oil is still a windfall for most energy companies. Chevron said on Friday morning that earnings in Q3 would be better than expected despite the drop in oil prices. Chevron (CVX) lost $9.10 to $64 on Thursday. Obviously there is no fundamental reason for the drop. Exxon (XOM) lost $9 or 12% to close at $68. Exxon has $38 billion in cash and short-term receivables and earns $11 billion a quarter. They will continue to earn over $10 billion even with crude at $85. There is no fundamental reason for the sell off in these companies.

The sell off in energy continues only because that is the only stocks with value that funds can sell to raise cash. Nearly every other sector is at 52-week or multi-year lows and the weakest sectors have been sold out. There is nothing left but energy and big tech to sell to raise cash.

Funds need to raise large quantities of cash right now. TrimTabs said funds saw withdrawals of $72 billion in September. That was a record for withdrawals. However, in the first week of October they saw another $50 billion in outflows. $43 billion in equity funds and $7 billion from bond funds. They have to raise cash by selling anything they still own that has a value. The losers were sold long ago. The mediocre stocks were sold next and now they are dumping anything left in hopes of remaining liquid through year-end. The various market reporters are blaming the drop in oil prices on potential demand destruction from the global crisis. I agree there will be some decline but the majority of the worlds mobile population will continue to drive to work, drive for business and drive for shopping. If they were doing it two weeks ago they will still be doing it two months from now. Losing a million barrels per day of consumption or even 1.5 mbpd is not the end of the energy society. It just means that gasoline will be cheaper and we all know that cheaper gasoline boosts consumption. This is just a cycle and once the equity markets find a bottom the cycle will reverse with energy stocks and commodity stocks becoming favorites again.

I would be a buyer of energy stocks at this level. I would buy the drillers and service companies that are not specifically linked to the price of oil.

Jim Brown OptionInvestor.com

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

Play Editor's note: I was extremely tempted to add new bullish positions today. A lot of stocks have been crushed back to long-term support levels or significant bottoms. However, if a coordinated, six-country rate cut can't sustain a market rebound then what will? Stocks don't go down in a straight line for too long and will eventually see a sustained rebound. Valuations will eventually get cheap enough that people will choose to step in. Unfortunately for the last couple of weeks everyone has been waiting for someone else to be the first person to step in and buy the dip. I'm going to list a few more stocks to watch or stocks that are near significant support levels. Aggressive traders might want to study these in more depth.

FRO: This is a major shipping company. The stock has tested its January 2008 lows and bounced. Volume was twice the norm. Normally this might be a bullish entry point. Unfortunately if the world does fall into recession then FRO will probably keep falling. Watch the $30.50-30.00 zone as a possible entry point. Suggested stop loss at $28.75.

PFE: This drug giant is testing support in the $17.00-17.15 region. If it breaks $17.00 it's probably going to $15.00. The Point & Figure chart is forecasting an $8.00 target.

HWK: This stock is testing significant support around $15.00. Today's bounce failed but it's worth watching. Longs could use a stop loss under $14.85. Bears might want to go short under $14.85. Be careful. This stock doesn't have a lot of volume.

WGO: This company makes recreational vehicles (RVs). Personally, I think the RV market is doomed with the coming peak-oil crisis. They might see a rebound next year in 2009 as oil and gasoline prices fall but long-term it could be bleak. Right now WGO is bouncing from its July lows and today's session has produced a bullish reversal candlestick pattern. You could buy this bounce with a stop under today's low. Target $14.75-15.00 ($13.00 for the more conservative trader).

ARM: This auto-related stock is testing significant support.

WNC: The short-term trend here is very bearish but the stock is testing very long-term support in the $7.00-6.80 region. There is an opportunity for longs or shorts depending on what direction is moves next.

TRA: Some of the fertilizer and potash stocks look like they're trying to bottom. Aggressive traders might want to go long on a move over $22.00 in TRA.

KSWS: This shoemaker is bouncing from support near $14.00.

BWS: This is another shoemaker that is bouncing from long-term support near $12.00.

ZEP: Here's another stock bouncing from significant support near $14.00.

ARA : This paper producer has been absolutely crushed over the last few months. Volume in the last four days has been astronomical. It would be tempting to buy it now. However, I am suggesting readers look for a dip near $12.00 with a stop loss under $11.50.

MSFT: We're still watching MSFT for a dip near $22.00. I'd be watching the $22.25-22.00 zone with a stop loss under $21.45.

CSCO: We're still watching CSCO for a dip into the $17.25-17.00 zone with a stop loss under $16.80.

PETM: Looking for a dip near $19.00-18.75.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

Coca-Cola Enterp. - CCE - cls: 13.45 chg: -0.72 stop: 15.01 *new*

Target exceeded! CCE continued to sink and shares lost another 5% to breakdown under the $14.00 level on big volume. The intraday low was $13.23. CCE traded under its September 2001 low of $13.46 and hit levels not seen since September 1996. We are very concerned that the market could see a snap back rally at any time. Thus we're dropping our stop loss to $15.01. If you haven't done any profit taking we strongly suggest you cash in on 50% to 75% of your position. We do have a secondary target at $12.50. FYI: We do not want to hold over the late October earnings report.

Picked on October 05 at $15.91 /1st target exceeded 14.05
Change since picked: - 2.46
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 2.7 million

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MarthaStewardLivingOmni - MSO - cls: 6.38 chg: -0.66 stop: 7.05*new*

Shares of MSO continue to plummet. The stock lost another 9.3% today. MSO is down almost 18% from our picked price. We strongly suggest readers consider a complete exit right here. However, since the trend is still strongly lower we are going to instead adjust our stop loss to $7.05. MSO hit our first target yesterday. We're currently aiming for our second target at $6.15.

Picked on October 05 at $ 7.78 /1st target hit
Change since picked: - 1.40
Earnings Date 11/03/08 (unconfirmed)
Average Daily Volume: 496 thousand

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Starbucks - SBUX - close: 11.53 change: -0.75 stop: 12.85 *new*

Target exceeded. SBUX slipped to new multi-year lows and quickly sank past our first target at $12.05. The intraday low was $11.50. We are adjusting our stop loss to $12.85, just above today's high. SBUX is now testing a long-term trendline of lower lows and thus we should be expecting a bounce very soon. We're not suggesting new bearish positions. Our second, multi-week target is $10.25.

Picked on October 05 at $13.66 /1st target hit $12.05
Change since picked: - 2.13
Earnings Date 11/10/08 (unconfirmed)
Average Daily Volume: 12.2 million
 

Closed Long Plays

None
 

Closed Short Plays

AT&T Inc. - T - close: 24.73 change: -0.61 stop: 28.12

Shares of T continued to hit new multi-year lows. The stock sank to $23.95 intraday. Our target was $25.05. The play is closed for us but more aggressive traders might be tempted to let it run. Our biggest concern now would be a sudden, snap-back rally in the markets.

Picked on October 05 at $28.12 /target hit 25.05
Change since picked: - 3.39
Earnings Date 10/22/08 (confirmed)
Average Daily Volume: 29.1 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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