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Daily Newsletter, Wednesday, 1/13/2010

Table of Contents

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

Market Wrap

New Highs Despite a Rocketing Deficit

by Judy Alster

Click here to email Judy Alster
"Yes, we helped to destroy the economy but no, you mustn't blame us" about sums up bankers' testimony on Capitol Hill Wednesday in front of a special commission; the panel inquiry is expected to last a year. CEOs of Goldman-Sachs and Bank of America said, "We regret the consequence that people have lost money" and "We understand the anger felt by many citizens," but still maintained that their risky behavior seemed like the thing to do at the time. No surprises here. Bank stocks had no real reason to fall on any of this and they didn't; next to health care they were today's big movers. (There's an Arabic proverb for all this: "The dogs bark but the caravan passes on.")

BANK OF AMERICA:

Bank of America (BAC) rose 1.83%, Goldman (GS) gained 0.79%, J.P. Morgan rose 2.5% and Morgan Stanley (MS) stopped a three-day slide with a 0.35% gain.

S&P BANK ETF:

That almost-cup-and-handle pattern, above, is one I'm seeing in any number of stocks and indexes, by the way. As you know, when the "handle" formed by a brief downtrend reverses to top the edge of the "cup" and continue on up, that's a solid bullish sign. Another proverb, though, is "Many's the slip twixt the cup and the lip," so no chicken-counting just yet.

Merck and Co.'s upgrade and a positive comment on its pipeline benefited not only Merck, a big Dow gainer today, but other pharmaceuticals and healthcare as well:

MERCK:

Investors could be turning defensive, not surprising in a weak economy where solid, tangible industries like healthcare and utilities seem (and often are) safer bets than the outer reaches of technology. Gas and electricity provider Pepco Holdings (POM), for example, put on 2%; the company's 6.4% dividend probably doesn't hurt:

PEPCO HOLDINGS -- utilities attract in a down economy:

Earnings are starting to trickle in, with today featuring Sealy Corp. (ZZ), not a snooze with fourth-quarter net income of $2.6 million or 2 cents a share, better than last year's net loss of $41.4 million or 45 cents. Revenue increased to $332.1 million from $325.8 million; analysts had forecast earnings of a penny a share on revenue of $317.2 million.

SEALY not asleep, its earnings up:

One of those defensive-type companies, filtration- and packaging maker Clarcor (CLC) posted a better-than-expected quarterly profit, helped by strong product demand and cost-reduction measures. In spite of a 12% revenue drop, the company reported net income of $24.7 million or 49 cents a share, compared with $ 29.1 million or 56 cents a year ago. For 2010 it expects earnings between $1.55 and $1.70 a share, about in line with analysts expectations of $1.65 a share.

CLARCOR:

Stocks saw a broad rally Wednesday helped by the Merck upgrade, while financials rose on the outlook, finally, for higher profits. Despite a drop soon after the open and before the close, the indexes exhibited sharply higher highs and higher lows throughout the session.

MARKET WRAP, Wednesday, Jan. 13:

DOW JONES INDUSTRIAL AVERAGE:

The Dow Jones Industrial Average gained 51.53 points or 0.50% to 10.680.77. The S&P500 was up 9.46 or 0.83% to 1145.68 and the Nasdaq was the winner, up 25.59 or 1.12% to 2,307.90.

S&P500:

Support for stocks led to selling among Treasuries, which extended their losses after a $21 billion auction of 10-year Notes garnered a yield of 3.75% amid very active bidding. The benchmark 10-year Note fell 19 ticks, which pushed its yield back up toward 3.8%.

NASDAQ:

Advancing issues and volume easily outdid decliners, but with fewer than a billion shares trading on the NYSE, enthusiasm could have been higher. Telecommunications was the only category in the broad index trading lower, off 0.4%; integrated telecoms dropped 0.7%.

Because it has a beige cover. Anecdotal and chatty rather than scientific, the Federal Reserve's Beige Book report still commands attention. The book is produced about two weeks before the major policy-setting meetings of the Fed's Open Market Committee (this one is a prelude to the January 26-27 meeting); each time a different Fed district bank compiles evidence on economic conditions from each of the Federal Reserve's 12 districts. The moderator this time was the Federal Reserve Bank of Philadelphia, with economic conditions from Nov. 21 through Jan. 4.

The Fed found the recovery spreading but slowly, noting in its usual clunky fashion that "while economic activity remains at a low level, conditions have improved modestly further and those improvements are broader geographically than in the last report." Weak labor and real estate markets were, of course, the speed bumps. Ten districts reported at least some increased activity or improvement in economic conditions, with Philadelphia and Richmond reporting mixed conditions.

As for details, retail sales for the holiday season "were slightly higher than in 2008 but still far below 2007 levels." (Well, naturally: Late 2007 was right before the roof fell on our heads.) Manufacturing was up in half of the twelve Fed Districts, mixed in three and weak in three. However, manufacturers were generally more optimistic about growth in the coming months, a good sign. Home sales were up in most regions with gains mostly in low-end sales. Nonresidential real estate conditions remained soft almost everywhere. Finance was a concern as loan demand continued to decline or stay dull in most fed regions. Some districts reported that credit quality is still deteriorating, with commercial loan delinquencies now doing their version of residential delinquencies. Labor market conditions are still nothing to write home about, hand in hand with wages. Except for some metals, prices are about level.

Upshot? The recovery continues to take slow baby steps. Risks remain in credit markets, especially for commercial real estate lending. Consumer debt is with us yet. Nobody seems to see much speeding up for the next few months. Inflation is well-behaved, so the Fed is likely to keep rates where they are. I could do worse than quote bond expert David Ader: "At best we can say that there are some signs of hope, but in the context of the bad news being less bad."

Jostling the Beige Book for the spotlight was the Treasury Department's budget deficit which came in around expectations: $91.9 billion in December, wow, the 15th straight deficit and the largest December deficit on record. As regards spending, we had a $13 billion payment to Fannie Mae and an $8 billion increase in unemployment benefits, as TARP outlays zoomed to $3.9 billion from November's $2.2 billion. (Is it just me, or do these numbers begin to sound absurd?) For the first three months of the fiscal year, the deficit is running ahead of last year at $388.5 billion, up from $332.5 billion; that's a 17% rise.

SOME GOVERNMENT OUTLAYS AND latest DEBT TOTALS WITH 2010 DEBT ESTIMATE:

Above you see the actual outlays for the dozen or so biggest-spending government departments for the last four fiscal years, and (insert box) the debt total for 2006-2009 and estimated debt for fiscal 2010. No comment is required.

Oh, well . . . at least year-to-date receipts are off 11%, with lower individual income taxes reflecting the millions who have lost their jobs and corporate tax revenues down as companies struggle to deal with falling demand for their products. Even though spending was down from the same period last year, tax revenue fell even more, dropping by $59.7 billion as individual income and payroll taxes declined. Interest paid on the debt in December was $104.6 billion -- an alarming 34% of federal outlays for the month. Some economists have been warning for a while that the government's financing costs will begin rising sharply once the recovery begins and the Fed starts raising rates to make sure inflation doesn't get out of hand. The Treasury estimates the annual deficit will climb to $1.502 trillion for the full fiscal year 2010, up from $1.42 trillion in 2009. Equities took a quick understandable dive on the report but soon resumed their upward move as if nothing had happened.

But quick! Guess what commodity rose on the news! That's correct:

S&P GOLD TRUST

Soybeans, lumber and most cattle were up Wednesday, too, should you be wondering.

Big buildups in all petroleum categories are continuing to pressure oil prices, now below $80 after falling from a two-month high Tuesday. The Energy Information Administration's report found oil inventories rising 3.7 million barrels last week, gasoline inventories up 3.8 million and distillates up 1.4 million. Rising imports combined with flat demand are the cause: Oil imports jumped 0.5 million barrels a day last week to 8.9 million barrels, with imports of both gasoline and distillates higher. The reason for the surge was that cargoes being held out at sea due to end-of-year tax considerations were finally offloaded.

Refineries, where margins are traditionally thin, are still operating at only 81.3% of capacity. Gasoline output fell a steep 0.6 million barrels a day to 8.5 million barrels while distillate output, reflecting seasonal and especially recent demand for heating oil, rose slightly to 3.9 million barrels a day. Still, the drawdowns in heating-oil supplies were largely offset by the higher imports.

Crude-oil futures ended lower, slumping for a third consecutive session, with oil for February delivery down $1.14, or 1.4%, at $79.65 a barrel on the New York Mercantile Exchange. Some energy stocks recovered to finish with a small gain, but the U.S. Oil Fund (USO) followed it down to close at $39.30, off 33 cents or 0.83%; the Powershares Oil Fund (DBO) was off the same 0.83% at $27.60. One airline industry index was up nearly 1% in response, with all its components but one rising.

CRUDE OIL PRICES:

After hours came the interesting news that Federal regulators are planning their first major step to rein in oil speculators. On Thursday the Commodity Futures Trading Commission will consider setting trade limits on the New York Mercantile Exchange to keep fund managers and other speculative investors from wielding too much influence in the market.

Oil speculators have proliferated on the Nymex Oil on recent years, placing large bets on the direction of oil prices; the correlation between their activities and wild oil spikes isn't entirely coincidental. The limits proposed by the CFTC would cap how many contracts traders could buy; violators would be told to get rid of especially large positions. The CFTC also has the power to issue fines and revoke trading privileges on the exchange. Whether this will actually control future spikes in energy prices remains to be seen, as does the effect of the news on oil company shares.

In housing, we saw a respectable rise in the Mortgage Bankers Association's purchase index last week: It rose 0.8% while the refinance index jumped 21.8%. Interest rates remain 'way down with 30-year loans averaging 5.13%. It's still nothing to pin either real hopes or real gloom on, as the information out of the MBA has been inconsistent in recent weeks.

Trucker Werner (WERN) jumped sharply on an upgrade after DeutscheBank said the trucking sector is improving and the company, whose shares seem cheap, will be able to increase its rates; the stock jumped 58 cents or 2.75% to $21.69 . . . There was after-hours excitement at Zale Corp. (ZLC) with the forced resignations of its chief executive and two other top executives, just one day after rival Signet Jewelers released figures showing how much better it did in holiday sales. The shakeup came after several poor quarters at Zale . . . Also after the close, RealNetworks (RNWK) said founder Rob Glaser has stepped down as chief executive, but will remain board chairman . . . And now Hershey is preparing a counterbid to Kraft's (KFT) for U.K. candy maker Cadbury. This is shaping up as a pretty exciting duel . . . .

Earnings announcements accelerate Thursday and include potential big market mover Intel (INTC), engine maker Briggs & Stratton (BGS), Chinese agribusiness Origin Agritech (SEED), Korean steelmaker Posco (PKX); Shaw Communications (SJR) and gaming supplier Shuffle Master (SHFL). In economic reports, we could see some reaction to the jobless claims numbers; also on tap are retail sales, the European Central Bank announcement and the natural gas report. Keep your eye on import and export prices, too.


New Plays

Watch The Banks

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Fifth Third Bancorp - FITB - close: 11.52 change: +0.53 stop: 10.49

Why We Like It:
Banking stocks have displayed relative strength this year. Investors were a little nervous ahead of this morning's financial crisis committee in Washington but the sector rallied once the meeting began to wind down. I suspect that bank sector earnings could be a lot better than expected and JPM reports earnings on Friday. JPM's results could reignite the rally for banks.

I like FITB because the stock is showing relative strength. Traders bought the dip this morning at $10.69. FITB rallied to new 52-week highs on very strong volume. I'm suggesting we open small bullish positions now (half your normal trade size). This is going to be a short-term trade. We'll plan to exit ahead of the January 21st earnings report just to be safe. Our first target is $13.00.

Annotated chart:

Entry on   January 13 at $11.52 
Change since picked:     + 0.00   			
Earnings Date          01/21/10 (confirmed)    
Average Daily Volume:      12.7 million 
Listed on   January 09, 2009    



In Play Updates and Reviews

WYN Soars On Upgrade

by James Brown

Click here to email James Brown


BULLISH Play Updates

Bank of Hawaii - BOH - close: 49.40 change: +0.76 stop: 47.80 *new*

Banks decided to rebound today and BOH added 1.5%. Shares hit a new 52-week high and they're getting close to our target to exit a $49.85. More aggressive traders may want to aim higher but I would not hold over the earnings report due out January 25th. I am raising our stop loss to $47.80.

Entry on  November 18 at $46.20     
Change since picked:     + 2.44   
Earnings Date          01/25/10 (confirmed)
Average Daily Volume:       424 thousand   
Listed on  November 17, 2009    


Cisco Systems Inc. - CSCO - close: 24.64 change: +0.44 stop: 23.95

CSCO is bouncing from the bottom of its two-week trading range. Aggressive traders could jump in now but I'm suggesting readers wait. Use a trigger to buy CSCO at $25.05. If triggered our first target is $27.40, which is a little optimistic but we will plan to exit ahead of the early February earnings report. The plan is to keep our positions small to reduce risk.

Entry on   January xx at $xx.xx <-- TRIGGER @ 25.05 
Change since picked:     + 0.00 (small positions)   
Earnings Date          02/03/10 (confirmed)         
Average Daily Volume:        34 million      
Listed on   January 09, 2009    


CSX Corp. - CSX - close: 51.02 change: +0.31 stop: 48.90

Today's intraday dip to $50.11 was an entry point to get long shares of CSX. I would still open positions now near $51.

This is going to be a very short-term play. Earnings are coming up on January 19th. While I am tempted to hold over the report we will exit ahead of the announcement. There are just too many unknown variables that can turn an earnings report into a painful lesson in risk management. Our first target is $53.95.

Entry on   January 12 at $50.71 
Change since picked:     + 0.31   			
Earnings Date          01/19/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 12, 2009    


Diana Shipping Inc. - DSX - close: 16.18 change: +0.14 stop: 14.95

Traders bought the dip this morning again. Volume was a little light today but DSX acts like it wants to go higher. This sector and this stock can be volatile. I do consider this an aggressive, higher-risk trade. We want to keep positions small. Our first target is $17.90.

Entry on   January 09 at $16.44 /gap higher entry
Change since picked:     - 0.26 (small positions)
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       1.5 million       
Listed on   January 09, 2009    


Home Depot - HD - close: 28.13 change: +0.15 stop: 27.80

The bounce in HD today was pretty mild. I remain very cautious here. More conservative traders may want to exit early. I'm not suggesting new positions at this time.

Our first target is $30.60. Our second target is $32.45. We'll plan to exit ahead of the February earnings report. FYI: The P&F chart is very bullish with a $44 target.

Entry on  December 14 at $28.82 *gap higher entry 
Change since picked:     - 0.69   			 
Earnings Date          02/23/10 (unconfirmed)     
Average Daily Volume:      15.7 million      
Listed on  December 12, 2009    


Hologic Inc. - HOLX - close: 15.17 change: +0.25 stop: 14.40

We finally got the breakout in HOLX. Shares rallied past resistance near $15.05 and hit our trigger to open positions at $15.15. Our first target is $16.45. Watch the 100-dma as potential resistance. I would keep positions small.

chart:

Entry on   January 13 at $15.15   (small positions)
Change since picked:     + 0.02   			  
Earnings Date          02/01/10 (unconfirmed)      
Average Daily Volume:       2.7 million      
Listed on   January 04, 2009    


Potlatch Corp. - PCH - close: 32.76 change: +0.59 stop: 31.49

PCH is bouncing back toward resistance near $32.00. The stock looks ready to breakout higher. I am not suggesting new positions at this time. Our first target to take profits is at $33.60. Our second target is $35.75.

Entry on  November 16 at $30.30 
Change since picked:     + 2.46 
Earnings Date          02/11/10 (unconfirmed) 
Average Daily Volume:       503 thousand     
Listed on  November 11, 2009    


Renolds American - RAI - close: 53.51 change: +0.36 stop: 52.45

RAI managed to push past minor resistance at $53.50 but it remains under significant resistance near $54.00. I am not suggesting new bullish positions at this time. We've already sold half our position near $53. Our second and final target is $55.90.

Entry on  November 14 at $50.32  
Change since picked:     + 3.19  
                       /sell half @ 53.15 (+5.6%) 
Earnings Date          02/11/10 (unconfirmed)     
Average Daily Volume:       1.6 million      
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 23.37 change: +0.55 stop: 21.95

SBUX delivered a nice bounce and out performed most of the market with a 2.4% gain. I still hesitate to launch new positions. We want to exit ahead of the January 20th earnings report. Our target to exit is $24.90.

Entry on  December 10 at $22.25   
Change since picked:     + 1.12   
Earnings Date          01/20/10 (confirmed)
Average Daily Volume:      10.9 million    
Listed on  November 30, 2009    


Sigma Designs - SIGM - close: 12.23 change: +0.43 stop: 10.95

Uh-oh! It looks like SIGM might run away from us. We did not get triggered yesterday and I lowered our entry point to $11.35 following yesterday's market decline. Now SIGM soared 3.6% to a new relative high. We do not want to chase this move but we might want to consider a higher entry point. Wait for a pull back. I would still keep positions small as I remain cautious on the market. Our first target to take profits is at $12.95.

Entry on   January xx at $xx.xx <-- TRIGGER @ 11.35 
Change since picked:     + 0.00   			  
Earnings Date          03/04/10 (unconfirmed)      
Average Daily Volume:       392 thousand  
Listed on   January 09, 2009    


Sonoco Products - SON - close: 30.25 change: -0.00 stop: 29.20

It was a very quiet day for SON and shares closed unchanged on the session. I am not suggesting new positions at this time. More conservative traders may want to raise their stops toward the rising 30-dma (current 29.70). Our plan was to use small positions. Our first target is $34.50.

Entry on  December 26 at $30.31    
Change since picked:     - 0.06 (small positions) 
Earnings Date          02/04/10 (unconfirmed)     
Average Daily Volume:       343 thousand    
Listed on  December 26, 2009    


Seagate Technology - STX - close: 18.19 change: +0.47 stop: 17.45

STX is still consolidating sideways. I don't see any changes from my prior comments. More conservative traders will want to consider an early exit right here! I'm not suggesting new positions.

Remember, we plan to exit ahead of the January 20th earnings report. Our target to exit is $19.75. The plan was to keep positions small to limit our risk.

Entry on  December 19 at $17.83 /gap open higher (small positions)
Change since picked:     + 0.36  			     
Earnings Date          01/20/10 (confirmed)        
Average Daily Volume:       8.2 million     
Listed on  December 19, 2009    


Vishay Intertechnology - VSH - close: 8.95 change: +0.24 stop: 8.20

Traders were quick to buy the dip in VSH and the stock managed to rebound sharply. Shares added 2.7% and look poised to rally past the $9.00 level soon. I would use this rebound as a new bullish entry point. Our target is $9.95. The plan was to keep positions small to limit our risk.

Entry on   January 08 at $ 8.85 (small positions)
Change since picked:     + 0.10   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:       1.1 million 
Listed on   January 05, 2009    


Wright Express Corp. - WXS - close: 33.13 change: +1.22 stop: 30.95

After a two-week correction shares of WXS are back in rally mode. The stock added 3.8% and is challenging the 52-week high. Readers can use this move as a new entry point. Traders might want to bump their stops toward $31.50.

Our target is $35.90. I'm setting a longer-term target at $39.50 but we want to sell the majority of our position at $35.90. We will plan to exit ahead of the February earnings report.

Entry on  December 21 at $32.30   
Change since picked:     + 0.83   
Earnings Date          02/10/10 (unconfirmed)
Average Daily Volume:       209 thousand   
Listed on  December 19, 2009    


BEARISH Play Updates

Best Buy - BBY - close: 39.73 change: +0.47 stop: 41.26

BBY is seeing an oversold bounce. Look for resistance in the $40-41 zone. Wait for the bounce to roll over before initiating new positions. There is no need to rush into positions now. We'll probably get a new entry point in the next couple of days.

Our first target is $35.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     + 0.78   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    


CLOSED BULLISH PLAYS

Steel Dynamics - STLD - close: 18.78 change: -0.30 stop: 18.45

It was a volatile morning for STLD. Shares gapped open higher this morning with a move to $19.39 only to reverse very quickly and plunge to $18.24. Our stop loss was hit at $18.45. I would keep STLD on your watch list as we might get a new bullish entry point soon although I might wait until after the earnings report in late January.

STLD had already hit our first target at $19.95. Our second and final target was $21.95.

FYI: This morning STLD announced the first production of iron nuggets at the Mesabi Nugget Facility at Hoyt Lakes, MN. According to STLD's press release this new factory, which took two years to build, is using a new process in conjunction with Kobe Steel Ltd. of Japan, that has the potential to "revolutionize" iron and steel production.

chart:

Entry on   January 06 at $18.75 (small positions)    
Change since picked:     - 0.30 <--stopped @ 18.45 (-1.6%)
                              1st target hit @ 19.95 (+6.4%)
Earnings Date          01/26/10 (unconfirmed)        
Average Daily Volume:       5.7 million      
Listed on   January 04, 2009    


Wyndham Worldwide - WYN - close: 22.19 change: +1.75 stop: 19.90

It's time to take profits in WYN! Shares of WYN exploded higher with a 8.5% gain. The stock was upgraded to a buy this morning. The stock reacted by gapping open higher at $21.68 and hitting new highs at $22.26 this afternoon. I am suggesting we exit this trade now instead of waiting for our second target at $22.40. More aggressive traders can let it ride and just monitor your stops.

chart:

Entry on  November 10 at $18.88 (1/2 position) /gap open higher
Change since picked:     + 3.31    
                           /early (final) exit @ 22.19 (+17.5%)
                          /1st target hit @ 21.00 (+11.2%)
Earnings Date          02/11/10 (unconfirmed)         
Average Daily Volume:       3.5 million     
Listed on  November 10, 2009