Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/2/2009

Table of Contents

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

Market Wrap

Economic News Not Too Bad, but Nobody Cared

by Judy Alster

Click here to email Judy Alster
The ADP employment report came out Wednesday, informing us that employment in the U.S. private sector fell by 298,000 in August. It was not terrible news.

According to ADP's results, the goods-producing sector cut 152,000 jobs in August, including 74,000 in manufacturing, which turned out to be the smallest decline since July 2008. Goods producers are drawing down inventory, as we know, and because of that, their need to lay off workers could be coming to an end.

Moreover, nonfarm private employment in the service-providing sector fell by 146,000, which could qualify as "only 146,000," since it's down from the service numbers in the previous report. Let's consider that a hopeful sign.

Actually, the ADP total job losses were the fewest in any month since last September, having averaged close to 700,000 in the first quarter and 500,000 in the second quarter. According to the firm that designs and computes the ADP survey, this trend should continue and the job market may even begin to show job growth by the last two months of the year. (I think that's a little optimistic, but I could be wrong.)

SERVICE SECTOR CUTS SLOWING DOWN:

The ADP report doesn't include the government sector, though. Economists believe, and anecdotal evidence would seem to back it up, that we may start seeing an increase in government jobs due to the economic-stimulus plan enacted earlier this year and a general upsizing of government (with the possible exception of the Post Office).

By the way, although ADP only picks up their customer activities, it's still a respectable trend indicator. Despite the slowdown in job losses, practically everything ended lower:

MARKET INDEXES, WEDNESDAY, SEPT. 2:

Evidently the market was looking for a positive surprise; there was even talk that we'd see job gains this month in the ADP report. (Yeah, well, we all wanted a pony for our seventh birthday and that didn't happen either.) After opening lower in response to the news, the major indexes soon moved off their lows; but despite several fairly encouraging economic reports, they fiddled around all day and ended fractions lower:

DOW JONES:

S&P500:

NASDAQ:

Earlier in the morning, and foreshadowing the ADP numbers, Challenger's layoff count announcement fell in August, to 76,456 from July's 97,373. Their government component, with a lot of post office cuts, made up half of all layoffs. Non-government categories showed easing levels.

The big Bureau of Labor Statistics employment report comes out Friday. Stay tuned.

Bad economic data is often good for precious metals. Thanks to the blah private-sector jobs report that pressured the dollar and made precious metals look like a good place to invest, gold futures jumped Wednesday to their highest level in three months after a long stretch of sideways trading. Gold for December delivery ended up $22, or 2.3%, at $978.50 an ounce on the Comex division of the New York Mercantile Exchange, at one point topping $981. It was the highest settlement since June 4.

The dollar fell against most major currencies after the ADP report was announced.

THE DOLLAR:

GOLD PRICES:

SPDR Gold Trust, along with miners like Yamana Gold (AUY) and Gold Fields (GFI), had double-digit jumps in volume.

In "lite" news, productivity in the second quarter was revised up slightly with the Labor Department's updated estimate for the quarter. Overall, productivity was up (okay, on cost cutting) by businesses as reflected by a drop in unit labor costs. Q2 productivity was revised to an annualized 6.6% boost from the initial estimate of 6.4%, a little better than estimates. Unit labor costs were revised to an annualized drop of 5.9%, about in line with estimates.

Year-over-year, productivity grew 1.9% in the second quarter, after a 1% gain in the first. Unit labor costs also fell, to minus 1.2% from minus 0.1%.

MANUFACTURING PRODUCTIVITY, annualized percentage change:

As I've said many times, often until people start to leave the room, cutting jobs and hours to get a rise in productivity and a drop in unit labor costs doesn't really improve consumer earning power. Nor is it the way we want to see profits increased. I promise I won't say it again. For a few weeks.

And from the Commerce Department, factory orders were up 1.3% in July, the biggest increase since June of last year and extending a run of decent gains including that nearly 1% rise in June. Durable goods orders, boosted by an aircraft-related jump 18.5% in transportation goods, jumped 5.1 percent for the biggest gain in two years (plus 4.9 percent first reported).

Motor vehicle orders fell 1.3% with this component likely to reverse given empty dealer lots following the big cash-for-clunkers stimulus promotion. Sadly, nondurable goods orders fell 1.9%, the largest drop this year and reflecting declines in petroleum and coal products.

LIGHT MOTOR VEHICLE SALES, seasonally adjusted:

Inventories were down 0.7% in the month. Shipments were unchanged, but they included a second month of solid gains for capital goods.

The factory sector has already bottomed and genuinely looks like it's beginning to recover. Declining inventories are nice. Let's see some real hiring.

The Energy Information Administration reported a mild 0.4 million barrel draw in crude oil and a big 3-million barrel draw in gasoline last week. A 1.2-million barrel buildup in distillates is offsetting that a bit, along with weak demand for jet fuel, down what you might call a whopping 12.1%. Bullish for oil, though, with gasoline demand steady at a year-over-year 0.5% with refineries operating at a somewhat-increased 87.2% of capacity, with increased runs for both gasoline and distillates.

Oil ended the day off its reaction-high, but still up a penny. Are the high-$60s where oil will remain for a while?

CRUDE PRICES:

Probably the biggest threat to a steady recovery right now is this grim specter of debt that won't go away. Sustainable economic growth needs rising consumer earning power. All consumers. We'll recover, but for the time being in fits and starts.

Speaking of oil, you may know that in the industry, a monster find is known as "an elephant." That's what giant BP Plc (BP) has on its hands in the Gulf of Mexico, if reports Wednesday are to be believed. BP said it had made the "giant" find at its Tiber Prospect by drilling one of the deepest wells ever sunk by the industry. Analysts think BP's new elephant could contain over one billion barrels of recoverable reserves. Recoverable reserves refers to how much of the "oil in place" can be exploited, anywhere from 20% on up. With a 35% recovery rate, and perhaps four billion barrels in place, BP's proven reserves would rise by 868 million barrels.

BP is already the biggest oil producer in the U.S. and biggest leaseholder in the Gulf of Mexico; it has a 62% working interest in the block; Brazilian state-controlled Petrobras (PBR) owns 20% and ConocoPhillips (COP) owns 18%. The company did nicely today:

BP PLC:

Just out of curiosity I checked to see whether the big oil find would knock alternative energy prices today. Shares of solar energy companies, at least, held fairly steady, but the industry has not had a good summer. For one thing, solar energy remains far more expensive to generate than energy from coal, oil, natural gas or even wind. (One thing keeping alternative energy alive is that $3 billion in subsidies.) The cost of solar is still out of reach of average homebuyers; solar-panelizing an average house costs something like $16,000. However, that may be about to change: A big inventory buildup and scary overcapacity are having a serious effect on the solar panel industry. Inventory is averaging 122 days this year vs. 71 days last year, while the amount of capacity actually utilized dropped from 48% last year to about 28% this year.

Making matters worse, China, already a low-cost producer, is dropping prices to $1.80 a watt for polysilicon-based products; in the third quarter of 2008, the average selling price was $4.05 a watt. And now, to reduce shipping costs, China's Suntech (STP) plans to announce by the end of the year that it will build a solar panel assembly plant in the U.S. Average selling prices could drop below $1 a watt next year and even further in 2011. As is always the way in the inevitable shake-out of any industry after the first delirious rapture, many of the 200-odd solar manufacturers may not survive. Despite its Q2 income drop, reduced 2009 forecast, Suntech should make the cut. The stock is off 33% in the last month; could be a buy for those with nerves of steel:

SUNTECH:

If you're idly wondering what's preventing highly-touted wind power from lighting your living room, it's largely due to the U.S.'s aging and ill-placed transmission lines: the lines are in or near cities, the wind is mostly out on the lonesome plains. However, Woodward Governor (WGOV) is helping utilities adapt wind systems to their power grids; it makes the equipment that turns the wind turbine's kinetic energy into electrical energy. The company saw a 38% decrease in Q2 profit due to restructuring charges, but raises its guidance for the year 2009. It could gain mightily from the stimulus package.

Another name to watch in this space is American Superconductor Corporation (AMSC), a wind-farm engineering consultant and a manufacturer of voltage regulation systems and power converters. The company not only gets upfront customer payments, it gets continuing royalty payments from its turbines. In May it reported its first quarterly profit in its history, three cents a share. It also had a backlog of nearly $560 million at the end of March. Price to earnings, earnings growth and sales ratios are all pretty high, but there's no debt, there's about $100 million in cash, and the company is moving into China and India.

AMERICAN SUPERCONDUCTOR:

And oops, the Mortgage Bankers' Association's purchase index slipped 1% last week. The refinance index fell 3.1%. Mortgage rates were down in the week with the average 30-year mortgage averaging 5.15%, down 9 basis points. Let’s chalk it up to the fact that nothing happens in late August (unless you're maybe in the toy or winter-wear business).

On a slow earnings day, homebuilder Hovnanian (HOV) reported earnings after hours. It narrowed its loss in the third quarter partly on slashed costs, partly on signed contracts for new homes, but the results disappointed Wall Street anyway. Hovnanian's results were pretty much a reflection of most major homebuilders recently: New orders are picking up as buyers respond to lower prices and other incentives, but sales remain well-below year-ago levels and profitability is, so far, out of reach.

Frantic for some really good news, I found drugmaker Sepracor (SEPR), who makes sleep-aid Lunesta, spiking 26.46% on news that the company will soon be the target of a $2.7 billion takeover effort by Japanese pharma Dainippon Sumitomo:

SEPRACOR:

Tomorrow stand by for the European Central Bank announcement (the first meeting of the month is usually interest-rate related), Jobless Claims and the Natural Gas report. Del Monte Foods (DLM), Layne Christensen (LAYN) and Ciena Corp. (CIEN) report earnings.

Also coming up: Analysts expect the early results of the back-to-school selling season to be weak Thursday when retailers report their August results. (Are you surprised?) The results will give insight into whether consumers are finally dusting off their credit cards, how well back-to-school offerings like jeans, dresses and T-shirts are being received and incidentally, how the Christmas shopping season is likely to shape up. Labor Day falls a week later this year and several states' tax-free shopping weeks occurred in August this year rather than July, which makes year-over-year comparisons difficult. Probably August and September together will give a more accurate picture. Parenthetically, retail buying for the teen market has to be one of the top 10 tough gigs in the world.


New Plays

Wholesale Goods

by James Brown

Click here to email James Brown
Editor's Note:

There were a number of stocks that caught my eye today. I wanted to share them as potential trading ideas.

NAV is bouncing from its trendline of higher lows. Readers might want to buy the stock on a new rally past $44.00 or $45.00. NAV still has some resistance near $48.00 but the larger trend is still up. I'd use a tight stop to limit risk. It's possible NAV has formed a bearish double top so trade small if you decide to pursue it.

MO has been consolidating above resistance at the $18.00 level. Nimble traders could try buying dips near $18.00 with a tight stop. I'd look for a new relative high.

LEAP Wireless (LEAP) looks like it's forming a bottom near its long-term lows. LEAP has resistance at $18.00 and again at $19.00.

TXT is showing a lot of relative strength and broke through resistance in the $16.00-16.50 zone. I wouldn't chase it but watch it to see where it finds support.

Finally, gold futures were in rally mode and most of the gold miners were surging. The DGP is actually a double-long gold ETN that is breaking out. However, I haven't done any research yet to see if the metal ETNs are coming under the same scrutiny as the oil and gas ETNs. If they are then we want to avoid a leveraged ETN like the DGP. An alternative might be the GDX gold-miner ETF or the GLD.


NEW BULLISH Plays

Costco - COST - close: 50.65 change: +0.00 stop loss: 47.90

Why We Like It:
Late last month COST broke out over significant resistance at $50.00. The recent pull back is now retesting this level as support. The move is offering a bullish entry point to buy the dip. Shares should have additional support with the exponential 200-dma near $49.60 and the 50-dma near $48.00. Readers might consider this an aggressive entry point because August same-store sales data for many major retailers comes out tomorrow.

Personally, I think the August same-store sales data for the retail sector will be below expectations but expectations are already pretty low so there is a chance for an upside surprise. I don't have a bias on COST's results tomorrow. The upward trend suggests investors are bullish. More conservative traders can wait and see how shares react to the news first and conservative traders may want to use a much tighter stop loss in the $49.50-50.00 zone.

Our first bullish target is $54.90. Currently the Point & Figure chart is bullish with a $58.00 target.

Annotated chart:

Entry on September 02 at $50.65 
Change since picked:     + 0.00   			
Earnings Date          10/07/09 (unconfirmed)    
Average Daily Volume:       4.0 million 
Listed on September 02, 2009    



In Play Updates and Reviews

The Mini-Correction Continues

by James Brown

Click here to email James Brown

Losses were mild on Wednesday as the intraday bounce has already begun to roll over.


BULLISH Play Updates

China Mobile Ltd. - CHL - close: 48.20 chg: -0.01 stop: 47.90

The Chinese Shanghai index managed a bounce but the Hong Kong Hang Seng index posted another large decline. CHL is based in Hong Kong and traded on the Hong Kong exchange. Thus I'm surprised that shares of CHL didn't show more weakness today. The stock briefly dipped under support at $48.00 and hit $47.93 before bouncing. The trend is down and if the Hong Kong market drops again I'd bet on us being stopped out tomorrow. However, until that happens this dip to support near $48.00 and its 200-dma is a bullish entry point. Our first target is $54.00. Our second target is $58.00. Our time frame is several weeks.

Entry on    August 31 at $48.73 /gap down entry point
Change since picked:     - 0.53   			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Capstone Turbine - CPST - close: 1.36 change: -0.02 stop: 0.94

CPST is still showing some strength by resisting any serious profit taking. Currently our plan is to buy the stock on a dip at $1.05.

CPST's P&F chart is bullish with a $2.88 target. I'm setting our first target to take profits at $1.50. We'll tentatively set a second target at $1.85. Remember, just because the stock is "cheap" don't go overboard.

Entry on    August xx at $xx.xx <-- TRIGGER @ 1.05
Change since picked:     + 0.00   			
Earnings Date          11/09/09 (unconfirmed)    
Average Daily Volume:       4.8 million 
Listed on  August 29, 2009    


Ford Motor Co. - F - close: 7.03 change: -0.21 stop: 7.39

Ford briefly traded under $7.00 and bounced from its rising 50-dma at $6.87. The short-term trend is still down. We have a buy-the-dip trigger at $6.50 with a stop loss at $5.99 using small position sizes. We also have a breakout trigger at $7.85 with a stop loss at $7.39. If triggered at $7.85 our first target is just under the old highs at $8.80. Our second target is $9.40.

Entry on    August xx at $xx.xx <-- TRIGGER @ 7.85 or $6.50
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:        90 million 
Listed on  August 27, 2009    


IDEX Corp. - IEX - close: 26.41 change: +0.15 stop: 25.40

IEX traded under its 50-dma this morning but managed a bounce. The 0.5% gain is a show of relative strength. I still hesitate to open new bullish positions given the wider market's recent weakness. Our first target is $29.85. My time frame is six to eight weeks.

Entry on    August 17 at $26.10 *triggered         
Change since picked:     + 0.31   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 40.86 change: -0.81 stop: 39.90 *new*

As expected JPM is contracting and looks headed for the $40.00 level. I'm actually adjusting the stop loss to $39.90 so we don't get stopped out on a minor dip under the $40.00 mark (of course you could argue 10 cents is a pretty minor dip). A bounce from $40 can be used as a new bullish entry point. Our plan was to use smaller position sizes (1/2 to 1/4 our normal size). Our target is $47.40. My time frame is about six weeks.

Entry on    August 21 at $43.50 *triggered (1/2 to 1/4 normal size)
Change since picked:     - 2.64   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Microsoft - MSFT - close: 23.86 change: -0.14 stop: 22.75

MSFT is dipping toward its 50-dma near $23.75. I wouldn't bet on this moving average holding as support. Look for a dip towards $23.00. MSFT moves slowly so there's no big rush to jump in. Currently our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 0.86   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Playboy Ent. - PLA - close: 2.57 change: -0.05 stop: 2.45

Odds are growing that PLA will test the $2.50 level. Wait for a dip or a bounce at $2.50 as our next entry point.

Our first target to take profits is at $3.30. Our second target is $3.95. FYI: The Point & Figure chart is bullish with a $7.50 target.

Entry on September 01 at $ 2.65
Change since picked:     - 0.08   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Raytheon Co. - RTN - close: 46.28 change: -0.28 stop: 46.40

There is no change from my previous comments on RTN. The plan is to buy a breakout over resistance. Our trigger to buy the stock is at $48.65. We'll use a stop loss under the recent low. If triggered our first target is $52.50. Our second target is $54.85.

FYI: If RTN breaks down under $45.00 we may want to consider bearish trades.

Entry on    August xx at $xx.xx <-- TRIGGER 48.65
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       2.7 million 
Listed on  August 22, 2009    


Ship Finance Intl. - SFL - close: 11.86 change: -0.39 stop: 11.70

SFL is now down seven days in a row. You'd think the stock would see an oversold bounce by now. Shares broke the $12.00 level but managed to hold at its 50-dma near $11.80. If there is any follow through tomorrow we'll most likely get stopped out at $11.70. I'm not suggesting new bullish positions at this time. Our first target is $14.80. Our second target is $17.00. Our time frame is several weeks.

Entry on    August 27 at $12.80 *triggered
Change since picked:     - 0.94   			
Earnings Date          11/27/09 (unconfirmed)    
Average Daily Volume:       499 thousand
Listed on  August 25, 2009    


Superior Energy - SPN - close: 17.64 change: -0.36 stop: 17.59

SPN is still slipping lower. Shares also fell to their 50-dma. The low today was $17.61. If there is any market weakness tomorrow we'll probably get stopped out. I'm not suggesting new positions at this time. Our first target to take profits is at $19.90. Our second and final target is at $21.75. I fully expect SPN to find resistance near $20.00 and its exponential 200-dma so the second target could take a while.

*New entry point*
Entry on    August 27 at $18.42 *new entry       
Change since picked:     - 0.78   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       927 thousand
Listed on  August 24, 2009    


TEVA Pharmaceuticals - TEVA - close: 50.53 change: -0.56 stop: 48.95

TEVA is giving in to some profit taking. The stock has broken very short-term support at $51.00 and broken down under its 40 and 50-dma. The next level of support is the $50.00 mark. I'm not suggesting new bullish positions at this time. Our first target is $54.75. Our second target is $59.50. Our time frame is eight to ten weeks.

Entry on    August 17 at $50.50 *triggered                
Change since picked:     + 0.03   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 17.12 chg: +0.28 stop: 18.60 *new*

AKAM dipped to $16.76 before bouncing. If the oversold bounce continues watch for a potential failure in the $17.75-18.00 zone. I am not suggesting new positions at this time. Our first target is $16.25. More aggressive traders may want to aim lower.

Entry on    August 11 at $18.44 
Change since picked:     - 1.32   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


Electronic Arts - ERTS - close: 18.21 change: +0.39 stop: 19.55

ERTS almost erased yesterday's losses. A failed rally in the $18.50-19.00 zone can be used as a new entry point for bearish positions. Our first target to take profits is at $17.05. Our second and final target is at $16.15. FYI: The P&F chart is currently bearish with a $14 target.

Entry on    August 29 at $18.31 /gap down entry
                              /originally listed at $18.76
Change since picked:     - 0.10   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       9.3 million 
Listed on  August 29, 2009    


Goodrich Petrol. - GDP - close: 21.43 change: -1.01 stop: 25.26

The sell-off continues with GDP losing another 4.5% on above average volume. The stock might see a bounce near its July low near $21.00. You may not want to chase it at this point so wait for a failed bounce. The Point & Figure chart is bearish with a $10 target. I'm setting our first target at $20.25. Our second target is $18.50.

Warning - Readers need to be aware that I'm not the only one that thinks GDP is going lower. The most recent data listed short interest at more than 25% of the 24 million share float. That's a lot of interest and a small float, which equals high-risk! Instead of trying to short GDP you might want to consider put options, which have limited risk.

Entry on September 01 at $22.44 
Change since picked:     - 1.01   			
Earnings Date          11/04/09 (unconfirmed)    
Average Daily Volume:       524 thousand
Listed on September 01, 2009    


Northwest Pipe Co. - NWPX - close: 30.78 change: -0.95 stop: 33.55

The sell-off in NWPX is picking up speed. Shares actually gapped open lower at $31.42. We've adjusted our entry point. If you don't want to chase an eight-day decline then look for a bounce or failed rally near $32.50-33.00. Our first target is $28.00. Our second target is $25.50. The P&F chart is bearish with a $25 target. FYI: Instead of trying to short NWPX readers may want to consider buying put options, which have limited risk.

Entry on September 01 at $31.42 /gap down entry
                             /originally listed at $31.73
Change since picked:     - 0.64   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:        57 thousand
Listed on September 01, 2009    


CLOSED BULLISH PLAYS

Oil States Intl. - OIS - close: 28.62 change: +0.20 stop: 27.95

The market weakness this morning was enough to push OIS under the $28.00 level and hit our stop loss. I'd keep OIS on your watch list. A bounce from its longer-term trendline of support (near its 50-dma) should be another entry point for bullish positions.

chart:

Entry on    August 21 at $30.20 *triggered          
Change since picked:     - 2.25<-- stopped out @ 27.95 (-7.4%)
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       738 thousand
Listed on  August 13, 2009