Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/19/2010

Table of Contents

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

Market Wrap

What Can Brown Do For You?

by Jim Brown

Click here to email Jim Brown

This rally brought to you by Brown, Scott Brown. The weekend leap into the lead in the Massachusetts senate race by Scott Brown sent shorts racing to cover those Friday positions.

Market Stats Table

The weekend election polls showed a strong surge by republican Senate candidate Scott Brown in Massachusetts and the markets exploded higher on the prospects of gridlock returning to Washington. If Scott Brown wins the game changes on the healthcare debate, cap and tax and possibly the new bank tax proposed by the president. If Brown wins the democrats lose their 60 vote super majority in the Senate and can no longer pass any major legislation without some republican support. The Senate seat up for grabs is the seat held by Ted Kennedy for the last 46 years. To have it go republican immediately after his death is a strong message to other democrats up for reelection in 2010.

The markets rallied strongly at the open when the weekend polls had Brown up 8-10 points over his opponent. The surge has been very strong and in only the last two weeks. Polls as recent as Jan 6th had Coakley up by +17 points. I can't remember a race that changed this dramatically in that short of a period. Even a last ditch effort and visit to MA by Bill Clinton and President Obama did not appear to help Coakley. Note the dramatic shift in the poll numbers over the last month.

Real Clear Politics Poll Summary

The economic news was no help today but the shorts being squeezed didn't care. The NAHB Housing Market Index fell again in January to 15 from December's reading of 16. Economists were expecting a rebound to 18. The rebound high was 19 back in September. The drop was attributed to declines in the current sales of single-family homes as well as a drop in buyer traffic. Traffic fell to 12 and the lowest level since June. All the regional indexes also fell at least a point. Factors influencing the slide included rising interest rates, tight credit and the large number of upcoming foreclosures. The continued news about the next wave of option ARM foreclosures is damping buyer interest.

NAHB Index Chart

There has been no decline in the appetite for U.S. debt with international investors purchasing $129.3 billion in long-term securities in November. Private buying was $96 billion and foreign institutions purchased $33.3 billion. In comparison U.S. residents purchase an inconsequential amount of only $2.5 billion of foreign securities. The $129 billion was triple the prior rates. The jump was attributed to the news of the Dubai debt default and worries over a default by Greece.

The economics and election news were just the lead off acts for IBM earnings after the bell. IBM was the main event and the rest was filler. After the bell IBM reported earnings of $3.59 per share compared to analyst estimates of $3.47 per share. Unfortunately it was not enough to please investors. After an initial spike of about $2 IBM shares sold off to close the after hours session at just over $131 and a -$3 loss after the close.

IBM gave only a slight increase in guidance and revenue for Q4 was up only +1%. This is a case where expectations were not met. It was the first increase in revenue since July-September quarter in 2008. IBM earned $4.8 billion for the quarter on revenue of $27.2 billion. Hardware sales fell while services and software sales rose. Hardware revenue has been on a slow decline as the cost of new equipment continues to decline with the cost of components. IBM signed an additional $18.8 billion in new services contracts in Q4. That is a +9% over the comparison quarter.

IBM said it would earn "at least $11" in 2010. That was an improvement from their prior guidance of a range from $10-$11. By not giving an upper end to the current guidance it frees them to continue to adjust guidance without having to be specific. IBM earned $13.4 billion, a +9% increase for the full year in 2009 while revenue fell -8% to $95.8 billion.

IBM ended the quarter with cash on hand of $14 billion. The earnings per share were helped by the recurring IBM earnings trick of strategic share buybacks. They purchased $7.4 billion in shares over the quarter and paid dividends of $2.9 billion. IBM does not announce buybacks until they report earnings. That means analysts predict earnings based on the number of shares outstanding as of the prior report. In this case it was about 1.35 billion shares. IBM bought back roughly 59 million shares and that impacted earnings per share by about 15 cents to the upside. Estimates were $3.47 and actual earnings were $3.59 per share. That means without the benefit of the share buybacks earnings would have been flat or down. IBM probably manufacturers earnings better than they do hardware. Retail investors never hear the behind the scenes details so all they see is the big beat on the earnings per share and that keeps the stock moving higher long-term.

IBM Chart

Broker TD Ameritrade (AMTD) rallied strongly at the open after reporting a decline in earnings of -26%. The reason for the share gain was a jump of +61% in new assets that management said would make them money when interest rates finally rise. The CEO also said trading activity which had fallen sharply in Nov/Dec had bounced back strongly in 2010. He said the middle of November investors locked in their positions, added some protection then took off for the rest of the year. That is exactly what we were reporting in these pages for most of December.

AMTD earned only 23-cents per share, down from 31-cents in the comparison quarter and below analyst estimates of 26-cents. AMTD added $8.7 billion in new account assets was attributed to registered independent advisors or RIAs moving to AMTD and bringing their clients. AMTD said with interest rates near zero they had to waive $20 million in fees on money market funds and forfeited $200 million in revenue during the quarter due to the low rates. AMTD said once rates rise they would see significant jump in revenue from the new accounts. AMTD gave back about half its opening gains but still finished positive for the day.

AMTD Chart

Charles Schwab (SCHW) reported earnings after the bell of 14-cents and that missed analyst estimates of 15-cents. Schwab earned 27-cents in the comparison quarter. The also announced a secondary offering of 26 million shares. Trading revenue fell -36% to $224 million from $352 million. SCHW lost a buck in after hours trading.

SCHW Chart

CSX, the country's third largest railroad reported earnings that rose +23% compared to last year but excluding items that fell to -16%. Earnings Q4-08 contained a large one-time loss for the sale of some real estate. CSX said shipping gains moving from truck shipping to railroad shipping rose but the gains were more than offset by declines in food and coal shipments. Coal demand in the U.S. has fallen over the last year because energy conservation measures by consumers as well as lower electrics demand by businesses has led to lower electric generation with coal. This is temporary but could last another 12-18 months. CSX lost $2 in after hours. UNP and BNI report earnings on Thursday.

CSX Chart

Citigroup reported an earnings loss of 33-cents this morning, which equates to -$7.6 billion. The loss of 33 cents matched analyst estimates. CEO Vikram Pandit said loan performance outside the U.S. looks strong but losses could increase in Q1. "U.S consumer credit remains an issue." Citi set aside additional reserves of $8.2 billion to cover credit losses and other items. This was lower than the $12.7 billion in additional reserves in Q4-08. Even though they have paid back some of the TARP loans the government still owns 7.7 billion shares. That equates to about 25% of the total outstanding shares. There is a monster reverse split in Citi's future. Citi shares sold off at the open but recovered to close slightly positive at $3.50.

Citi Chart

The clear earnings winner was LED maker Cree Inc. CREE posted a profit of 38-cents and beat analysts projections of 30-cents by nearly 33%. CREE CEO, Chuck Swoboda, said the revolution in lighting continues to gain momentum. Customers are buying more LED light bulbs instead of less efficient incandescent bulbs. They said their lights had been selected for initial deployment in 650 Wal-Mart stores. Revenue rose +35% to $199.5 million. CREE also raised guidance significantly to 44-cents for the current quarter compared to analyst estimates for 29 cents. CREE shares spiked +$6 in after hours to more than $60. CREE sank -$4 on Friday after Morgan Joseph cut them from a buy to a hold. I wonder how that analyst feels tonight?

CREE Chart

Earnings due out on Wednesday include BAC, WFC, MS, USB, AMR, BK, EAT, COH, EBAY, FFIV, STX, SLM, SBUX and STT. Bank America is expected to post a loss of 52-cents. Wells Fargo is also going to post a loss with a $2 billion charge to pay off TARP. Morgan Stanley is expected to post a profit of 38-cents but say that trading volume is declining. There is an outside chance that BAC could produce an upside surprise.

Not only are pigs preparing to fly in Massachusetts but hell is likely to freeze over on Wednesday. Warren Buffet's Berkshire Hathaway could approve a 50:1 split of the Berkshire B shares. Warren has always been against splitting his shares because he feels that induces trading rather than investing. However, as part of his deal to acquire Burlington Northern (BNI) he is being forced to split the shares. The B shares closed up +$85 on the news to close at $3,332. A 50:1 split would give normal people the opportunity to buy shares under $100. It will also make it possible for the shares to be included into the S&P-500 and that could cause another spurt of buying.

Berkshire has a market cap of $155 billion and when it acquires BNI that will remove BNI from the S&P-500. It would be a logical move for S&P to take that opportunity to replace BNI with BRK.b shares. That would create a monster buying binge as all the index funds are forced to buy huge quantities of BRK.b. If only they had options I would be backing up the truck. Post split I expect they will add options. I only hope it happens before the S&P addition.

Berkshire Chart

The Dow rallied back to a new high at 10729 intraday and held its gains with a close at 10723. The -$3 after hours drop by Dow component IBM is sure to impact the Dow at the open but positive results by Bank America could offset that drop. The S&P futures are not showing any weakness overnight and I suspect the IBM earnings will be ignored to some extent. As I prepare to hit send on this market wrap the polls have closed in Massachusetts and Scott Brown is being called the winner. With more than 79% of precincts reporting Brown has 52.3% of the vote and Coakley only 46.7.%. This should continue to be a positive for the markets on Wednesday as the talking heads discuss how the loss of the democratic supermajority will impact current and future legislation. When Brown was called the winner the dollar index spiked sharply higher on the possibility there would be less government spending. I would say that was a long shot but I don't produce the news only write about it.

The Dow dip on Friday was right to support and the rally today was right to resistance. Nothing concrete can really be determined by either move. Until the Dow moves outside those levels it is simply more range bound trading with some triple digit excitement to spice it up. Resistance on the Dow is 10725 and support at 10560.

Dow Chart

The S&P returned to close exactly on 1150 and exactly on resistance that has held every test in 2010. With the Scott Brown victory tonight that resistance could break. A move over 1150 has plenty of room to run as the volume of earnings increases every day for the next week. Support is now 1130.

S&P Chart

At the risk of sounding like a broken record the Nasdaq stopped exactly on resistance at 2320 and appears poised for a big move higher. That catalyst could be chip earnings like we saw from CREE tonight. The big techs like Google, Amazon, Microsoft and Apple will not report for several days and that could keep the excitement at a higher pitch than had they already reported. IBM's earnings were higher on the face despite the internal fuzzy math. Unfortunately a decline by IBM on Wednesday could offset the positive news from CREE. Ebay announces after the close and will be no help during the day. Resistance is 2320 and support 2280.

Nasdaq Chart

The Russell chart looks just like those above with a dead stop on resistance so no real clues there. I am wondering just how long the Scott Brown news can really hold up the market since the opposing party will do everything in their power to claim it was no big deal. Will investors believe the hype or the reality is unknown. I would be a buyer of any breakout and wary of any selling. My personal view is for a continued sell off once the majors report earnings so I am cautious of any rally that appears too good to be true.

Jim Brown


New Plays

Short Squeeze Candidate

by James Brown

Click here to email James Brown

Editor's Note:

The major indices rallied toward their recent highs and bullish candidates are pretty common. I'm providing a list of stocks that are currently on my watch list. Keep in mind I haven't looked up their earnings dates yet and would not want to hold over any earnings announcements.

Stocks that look interesting: AKAM, COF, DOW, HPQ, MS, QCOM, TGT, SLE & WCRX.


NEW BULLISH Plays

ParkerVision Inc. - PRKR - close: 2.01 change: +0.10 stop: 1.79

Why We Like It:
PRKR is a semiconductor company, based in Florida, that specializes in radio frequency (RF) technologies. The stock broke out over resistance a few days ago and traders have been buying the dip near its 50-dma (and the $1.85 level). Today's bounce looks like a new bullish entry point to hop on board. I do consider this an aggressive trade. The stock has clearly been under performing the market over the last few months and trading has been somewhat volatile. I suspect that PRKR could see a short squeeze. The most recent data listed short interest at more than 16% of the very small 28 million-share float.

We want to keep positions small to limit our risk. I am suggesting bullish positions now. Our first target to take profits is at $2.45. Our second target is $2.75. We do not want to hold over the mid March earnings report.

Annotated chart:

Entry on   January 19 at $ 2.01 (small positions)
Change since picked:     + 0.00   			
Earnings Date          03/15/10 (unconfirmed)    
Average Daily Volume:       183 thousand
Listed on   January 19, 2009    



In Play Updates and Reviews

Check Your Time Frame

by James Brown

Click here to email James Brown

We've got a couple of plays about to close as earnings approach.


BULLISH Play Updates

Cisco Systems Inc. - CSCO - close: 24.85 change: +0.45 stop: 23.95

Good news! There was no follow through on CSCO's bearish reversal pattern from Friday. Unfortunately we're not out of the woods yet. Today's session (+1.8%) is an inside day. Tomorrow's performance could portend CSCO's direction. I'd wait for a new move over $25.10 before launching new positions.

Our first target to take profits is at $27.40. The goal is a little optimistic since we plan to exit ahead of the early February earnings report. We want to keep our positions small to reduce risk.

Entry on   January 14 at $25.05 
Change since picked:     - 0.20 (small positions)   
Earnings Date          02/03/10 (confirmed)         
Average Daily Volume:        34 million      
Listed on   January 09, 2009    


CVR Energy - CVI - close: 8.41 change: +0.37 stop: 7.50

The rally in CVI continues. Shares out performed many of its peers with a 4.6% gain. The stock also hit our trigger to open bullish positions at $8.20. Now that the trade is open our target long-term target is $12.50. CVI has to push past resistance at the 200-dma (near $8.74) and the $10.00 level first.

chart:

Entry on   January 19 at $ 8.20 
Change since picked:     + 0.21 
Earnings Date          03/10/10 (confirmed)         
Average Daily Volume:       411 thousand     
Listed on   January 17, 2009    


Diana Shipping Inc. - DSX - close: 15.59 change: -0.50 stop: 14.95

I have been suggesting readers wait for a dip or a bounce near $15.50 and we got the dip today. Shares hit $15.41 late this afternoon. I couldn't find any news to account for DSX's relative weakness today so readers may want to wait for a bounce first before initiating new positions. 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:     - 0.85 (small positions)
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       1.5 million       
Listed on   January 09, 2009    


Fifth Third Bancorp - FITB - close: 11.39 change: +0.03 stop: 10.49

The banking sector posted gains but under performed the wider market. FITB's gains were miniscule as shares spent most of the session churning sideways. While I would consider new positions here near the rising 10-dma a dip near $11.00 would be a better entry point. More conservative traders may want to tighten their stops toward $11.00.

Our plan was to use small positions on FITB. This is going to be a very 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.

Entry on   January 13 at $11.43 (small positions)/gap down entry
Change since picked:     - 0.04   			
Earnings Date          01/21/10 (confirmed)    
Average Daily Volume:      12.7 million 
Listed on   January 09, 2009    


Home Depot - HD - close: 28.88 change: +0.31 stop: 27.80

We're back to breakeven after nearly three weeks of watching HD consolidate sideways. Shares rallied past some moving averages and is now testing its short-term trend of lower highs. A breakout from here would be very positive.

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:     + 0.06   			 
Earnings Date          02/23/10 (unconfirmed)     
Average Daily Volume:      15.7 million      
Listed on  December 12, 2009    


Hologic Inc. - HOLX - close: 15.94 change: +0.56 stop: 14.75 *new*

HOLX displayed some relative strength with a 3.6% gain and a breakout past its 100-dma. I am suggesting we sell at least half of our position at $16.45. We'll set a second target at $17.25. Please note our new stop loss at $14.75.

Entry on   January 13 at $15.15   (small positions)
Change since picked:     + 0.78   			  
Earnings Date          02/01/10 (unconfirmed)      
Average Daily Volume:       2.7 million      
Listed on   January 04, 2009    


North American Palladium - PAL - close: 4.78 change: +0.31 stop: 3.85

Commodities continued to rally in spite of a bounce in the U.S. dollar. Shares of PAL gapped open at $4.50 but managed a 6.9% gain by the close. This is a very aggressive trade because the stock is so overbought. Our stop loss is at $3.85 but more conservative traders may want to use a tighter stop. Consider keeping your position size small to limit your risk.

Our first target is $7.00.

Entry on   January 19 at $4.50 
Change since picked:    + 0.28   			
Earnings Date         02/22/10 (unconfirmed)   
Average Daily Volume:      1.4 million 
Listed on   January 17, 2009    


Potlatch Corp. - PCH - close: 32.94 change: +0.84 stop: 31.49

PCH delivered a nice gain today but is still struggling with resistance near $33.00. I don't see any changes from my prior comments. 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:     + 2.64 
Earnings Date          02/11/10 (unconfirmed) 
Average Daily Volume:       503 thousand     
Listed on  November 11, 2009    


Renolds American - RAI - close: 54.60 change: +0.79 stop: 52.85 *new*

Good news! RAI has finally broken out above resistance at the $54.00 level. The high today was $55.15. Our final target is $55.90. However, this actually looks like a new bullish entry point. I am suggesting new positions (keep them small). Our target for this new position is $59.50. Please note that our stop loss for both positions is now $52.85.

chart:

1st Trade
Entry on  November 14 at $50.32  
Change since picked:     + 4.28  
                       /sell half @ 53.15 (+5.6%) 
2nd Trade
Entry on   January 19 at $54.60 (small positions)
Change since picked:     + 0.00  
 
Earnings Date          02/11/10 (unconfirmed)     
Average Daily Volume:       1.6 million      
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 23.58 change: +0.31 stop: 22.49 *new*

This is it. Tomorrow is our last day. The plan is to exit on Wednesday at the close to avoid holding over SBUX's earnings report. I'm inching our stop loss up to $22.49. Our target to exit is $24.90.

Entry on  December 10 at $22.25   
Change since picked:     + 1.33   
Earnings Date          01/20/10 (confirmed) 
Average Daily Volume:      10.9 million    
Listed on  November 30, 2009    


Sigma Designs - SIGM - close: 11.71 change: +0.36 stop: 10.95

So far so good. SIGM is bouncing right where we expected it would. Shares hit $11.20 this morning and soared off its lows to end with a 3.1% gain. If you were waiting for a bounce you got it! The plan was to use small positions to keep our risk down. Our first target to take profits is at $12.95.

Entry on   January 15 at $11.30 
Change since picked:     + 0.41   			  
Earnings Date          03/04/10 (unconfirmed)      
Average Daily Volume:       392 thousand  
Listed on   January 09, 2009    


Seagate Technology - STX - close: 18.16 change: +0.39 stop: 17.45

In spite of today's gains shares of STX are still consolidating sideways. The range is narrowing and the stock should see a breakout one way or the other soon. The larger trend is up so odds are stronger for a bullish breakout higher. Unfortunately we're almost out of time. Tomorrow is our last day. We plan to exit at the close on Wednesday to avoid holding over earnings. 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:     + 0.33  			     
Earnings Date          01/20/10 (confirmed)        
Average Daily Volume:       8.2 million     
Listed on  December 19, 2009    


Vishay Intertechnology - VSH - close: 8.82 change: +0.05 stop: 8.20

Gains in VSH were pretty minor on Tuesday. Traders did buy the dip twice near $8.60. I see the intraday bounce as a new entry point. More conservative traders may want to up their stops toward $8.50ish. 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:     - 0.03   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:       1.1 million 
Listed on   January 05, 2009    


Wright Express Corp. - WXS - close: 33.51 change: +0.69 stop: 30.95

Good news! WXS displayed relative strength with a 2.1% gain and a new 52-week high. This looks like a new momentum entry point to buy the stock.

Our first 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:     + 1.21   
Earnings Date          02/10/10 (unconfirmed)
Average Daily Volume:       209 thousand   
Listed on  December 19, 2009    


BEARISH Play Updates

Best Buy - BBY - close: 39.10 change: +0.17 stop: 41.26

BBY managed to eke out a 17-cent bounce but the trend remains bearish. There is no change from my prior comments. I've been warning readers to expect a bounce at the 200-dma. Just wait for the bounce to roll over in the $40-41 zone and then we can reconsider new bearish positions. Alternatively you can wait for a breakdown under the 200-dma near $38.45 as our next entry point. Our first target is $35.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     + 0.15   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    


CLOSED BULLISH PLAYS

CSX Corp. - CSX - close: 50.51 change: +0.47 stop: 49.45

Traders bought the dip at $49.90 and CSX almost erased Friday's decline. The 0.9% gain out paced the 0.2% gain in the railroad index. Today's move looks like a new entry point. Unfortunately we are out of time. CSX reports earnings after the bell tonight. Our plan was to exit at the close on Tuesday. Keep CSX on your watch list. We might jump back in later this week.

Annotated chart:

Entry on   January 12 at $50.71 
Change since picked:     - 0.20 <-- exit early (-0.03%)
Earnings Date          01/19/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 12, 2009