Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/3/2010

Table of Contents

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

Market Wrap

Positive Economic Data Fails To Help The Bulls

by Todd Shriber

Click here to email Todd Shriber
It was a mixed bag for U.S. stocks on Wednesday as solid economic data points, while indicating the economic recovery may be gaining some steam, did not translate into impressive gains for equities. The Dow Jones Industrial Average was the biggest decliner among the major U.S. indexes, shedding nine points to close at 10,396.76. The S&P 500 drew closer to resistance at 1125 by turning in a paltry gain of 0.48 to finish the day just below 1119. The Nasdaq Composite lost just a tenth of a point to close at 2280.68 despite the fact that the Nasdaq 100 was up fractionally.

Stats Table

All and all, the S&P 500 was up for the fourth consecutive day and the losses turned in by the Dow and the Nasdaq are not really alarming. Or are they? Take a look at the intraday charts and you will see that the Dow was off to a fine start, but the bulls apparently ran out of gas as a mid-session sell-off erased some nice gains. Same for the Nasdaq. Perhaps some of those notorious sell programs kicked in around lunch time in New York and that suppressed the bulls.

As I mentioned on Monday, there was another Institute for Supply Management (ISM) report due out today, the ISM Non-Manufacturing Index, and the news was good. The data showed the U.S. services sector grew at its most rapid clip in two years during February. The non-manufacturing index surged to 53% in February from 50.5% in January. The index had been locked in a tight range of 48% to 51% since August. Like its manufacturing cousin that I highlighted on Monday, readings above 50% on the non-manufacturing index are bullish. Those below 50% are considered bearish.

Nine of the 18 industries tracked in the survey showed growth last month and the business activity index rose to 54.8% from 52.5% in January. February was the third straight month the business activity index increased. As the chart below indicates, the ISM non-manufacturing index now rests at its highest level in almost two years.

ISM Chart

Speaking of positive economic reports, U.S. employers cut payrolls at their most lethargic pace in two years during the month of February, according to ADP Employer Services. ADP, whose report is widely followed, said private sector job losses totaled 20,000 in February, representing the 25th consecutive month of declines, but the enthusiasm for February's numbers may have been tempered by an upward revision for January's job losses to 60,000 from 22,000.

Despite a gain of 3,000 manufacturing jobs, goods-producers still eliminated 37,000 jobs in February, ADP said. While the ADP report is important to a certain extent, investors place greater emphasis on the government-issued employment report, which will be delivered Friday. To be sure, there are stark differences between the ADP and Bureau of Labor Statistics numbers. For the week of the ADP survey, if an employee worked no hours, he is still considered ''employed'' by ADP, but that same worker is considered ''unemployed'' by the BLS standards.

That is one difference worth noting. The other is that neither the ISM nor ADP numbers reflect the impact of the recent snowstorms in some parts of the U.S. on the employment picture. The BLS number on Friday will and as I mentioned on Monday, White House economic advisor Larry Summers said storms of this magnitude usually lead to job losses of 100,000 to 200,000. Economists seem to be forecasting February job losses of 150,000 to 200,000.

ADP/BLS Chart

The Federal Reserve released its Beige Book data on Wednesday and there was not much of a difference between today's release and the most recent minutes from the last FOMC meeting. The Fed noted slight upticks in economic activity in nine of its 12 regions and pointed out that things were a little sluggish in the Richmond region due to the aforementioned snowstorms. Consumer spending improved from the last Beige Book report and the Fed highlighted energy exploration is also picking up. Inflation still appears benign.

Commodities enjoyed a solid day as the dollar was weak. Crude oil for April delivery made its way back above $80 a barrel, gaining $1.19 to close at $80.87. That is good for oil's best closing price in six weeks and crude futures are now up 94% in the past year, according to Bloomberg News. U.S. refineries are more active than they have been since October and that should increase demand for oil.

Oil Chart

Aided by rumors of a Greece bailout and speculation that the recent earthquake in Chile may hinder production, copper prices rose for the fourth straight session and have now tacked on more than 6% in the past three days. Copper for May delivering rose 2.35 cents to $3.435 a pound on the New York Mercantile Exchange. Chile is the world's largest copper producer, so it is reasonable to expect prices for the red metal would move higher in the wake of the horrific 8.8 magnitude earthquake that struck Chile on February 27.

That said, demand might be legitimately increasing and that matters more to the long-term prospects for copper prices than any natural disaster. Orders to deliver copper from warehouse-stored stockpiles surged 21% today and have soared 85% in the past three days, Bloomberg reported, citing data from the London Mercantile Exchange (LME). LME-tracked inventories fell today and increased bookings combined with declining inventories usually means demand is firming, if not increasing.

Copper Chart

In terms of stock-specific news, there was some mergers and acquisitions news hitting the wires today as Pfizer (PFE), the Dow component and largest U.S. pharmaceuticals firm, announced that it has bid $4.08 billion for Germany's Ratiopharm GmbH. Ratiopharm is a maker of generic drugs and Pfizer will likely be butting heads with a familiar rival, Israel's Teva Pharmaceuticals (TEVA), the world's biggest maker of generic drugs, to acquire Ratiopharm. Ratiopharm is Europe's largest generic drug maker.

Pfizer is like an enigma wrapped in a riddle. There was a time that owning Pfizer meant availing yourself of a nice dividend, but the dividend was cut last year so Pfizer could acquire Wyeth. To be fair, Pfizer has since raised its dividend, but not to pre-Wyeth buyout levels. Now, Pfizer is basically a company that can offer investors a decent yield, but not much in the way of growth prospects beyond more acquisitions. The imminent loss of patents on Lipitor and Effexor makes an acquisition of generic drug maker not only prudent, but almost necessary for Pfizer.

Pfizer has consistently been an investment banker's dream, regularly acquiring rival firms, but all those acquisitions have failed to impress Wall Street, as the chart below indicates.

Pfizer Chart

Speaking of Pfizer, the shares were down 1.6% today, but that was probably not due to the Ratiopharm news. News that Dimebon, an Alzheimer's drug Pfizer had been working on with Medivation (MDVN), failed to work in a late-state stage trial helped Pfizer end the day lower. Dimebon failed to improve cognitive function in patients that took the drug for six month. That is extremely disappointing news given the level of optimism surrounding the drug after its successful early and mid-stage trials.

Pfizer is already involved in the Alzheimer's market and Dimebon's failure probably will not hamper the company too much over the long-term. Unfortunately, Dimebon was believed to be the only Alzheimer's treatment close to approval that could stop or even reverse Alzheimer's.

As is often the case with these joint partnerships in the pharma world, when the trials fail to produce the desired results, it is not the blue chip name, Pfizer in this case, that absorbs most of the punishment from the Street. It is the smaller, biotech-esque partner. Regarding Dimebon, I am referring to Medivation (MDVN), Pfizer's partner on the drug. Shares of Medivation were bludgeoned to the tune of 67.5%, or a loss of $27.15, to close at $13.10 after touching a new 52-week low of $12.55 earlier in the session. More than 45 million shares changed hands compared to average daily volume of less than 622,000.

The March 15 calls on Medivation fell by $22.79 and the March 17.50 calls slumped $18.80. Normally, I include daily charts, but Medivation's weekly chart actually shows the decline in better detail. It is included here.

Medivation Chart

It was indeed a mixed day for stocks as 18 of the Dow's 30 constituents finished the day lower with Pfizer the biggest loser on the day. In fact, Pfizer was the only Dow component to lose more than 1%. Coca-Cola (KO) was the Dow's top performer, gaining almost 1.2%. Not a lot has changed since Monday as the Dow is still having trouble regaining 10,500 and 10,300 remains as the first support level. It would be surprising to see a volatile, wide trading range for the Dow on Thursday just one day before the jobs report.

Dow Chart

As I always say, a small up day is better than a down day and I will apply that maxim to the S&P 500 on Wednesday. The index is still above what was considered strong resistance at 1115, but 1125 is the next area that needs to be cleared to induce some fresh buying of any magnitude. Again, it would be surprising to see the S&P 500 flirt with resistance at 1125 or support at 1100 tomorrow. Of course, the jobs report will be the key factor in how stocks finish the week.

S&P 500 Chart

The Nasdaq posted a small loss today and that really is not a cause for concern when considering it was the index's first down in the past five and that the Nasdaq added 100 points between last Thursday and yesterday. Next resistance is 2325 and support looks firm at 2250. A move back below 2250 and toward 2200 could represent a decent buying opportunity. Further downward pressure from there might give the bears the upper hand.

Nasdaq Chart

I mentioned on Monday that we might see some sluggish trade heading into Friday's job report and that is exactly what we got on Wednesday. That said, it is worth noting that volume has been fair this week and the ratio of new highs to new lows on the NYSE and Nasdaq during Wednesday's session was impressive. If you are looking for a stock to watch on Thursday on some good company-specific news, try General Dynamics (GD). The defense contractor announced a 10% dividend increase after the close on Wednesday.


New Plays

Bad News Behind Us

by Jim Brown

Click here to email Jim Brown
Everyone in this sector has reported earnings and it was not pretty. However, things are starting to look up again.


NEW BULLISH Plays

FWLT - Foster Wheeler $25.16

Company Description: Foster Wheeler AG, formerly Foster Wheeler Limited, operates through two business groups: Global Engineering and Construction Group (Global E&C Group) and Global Power Group. The Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. The Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities worldwide.

Why We Like It:
All of the construction and engineering stocks have reported earnings with a real mix of results. FWLT reported profits on 2/25 that fell -35% but they still beat the street. Foster dropped on a soft outlook. Several others in the group (MDR, FLR, SGR, URS, SHAW) also reported soft bookings but they all predicted stronger conditions as the year progressed. Each of the group had their volatility events on the announcements but all appear to be starting to trend higher again. Foster is a relatively cheap stock at $25 and that is strong support from last year. I am betting the worst is over and as the recovery signs begin increasing so will these stocks.

I am going to put a tight stop on it at just under the March first low. That gives us about $1.35 in cushion. The first target will be resistance at $28 and we will set a second target as we close in on that level. I could see a return to $35 later this year but I doubt we want to hold it in the newsletter that long.

BUY FWLT with a stop at $23.75.

Option buyers:
BUY APR $26.00 CALL (FWLT 10D2600) Open interest = 658, ask=$1.15

chart:

chart:

Entry on  March 04 at  $xx.xx 
Change since picked:   + 0.00   			
Earnings Date             N/A
Average Daily Volume:    4.5M      
Listed on  March 3rd, 2010    



In Play Updates and Reviews

Holding Our Breath

by Jim Brown

Click here to email Jim Brown
Will the markets rally into the Friday jobs numbers on better than expected hopes or pull back on fears of a negative surprise?


BULLISH Play Updates

Ford Motor Co. - F - close: 12.68 change: +0.47 stop: 12.15 *NEW*

Outstanding! Evidently the investing public did not take those recommendations to take profits on Ford and buy back on the dip. If they did then they should be really disappointed tonight.

I raised the stop slightly to $12.15 and just under the lows for Tuesday.

The intraday spike to $12.50 on Tuesday hit our first exit target.

Our second, longer-term target is $13.40. Our time frame is several weeks.

Entry on  February 23 at $11.72 /gap higher entry
Change since picked:     + 0.96   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:        96 million 
Listed on  February 23, 2010    


NUCOR - NUE - close: 43.17 change: +0.25 stop: 42.25 *NEW*

Three positive days is starting to look like a trend higher but I don't like that -85 cent drop from the intraday high at $43.98. Most of it came on the closing ticks so we really can't decipher the reason.

Our first target to take profits is at $46.75. Our second and final target is $49.85. Our time frame is about four to six weeks.

Entry on  February 16 at $42.98 (small positions)/gap higher entry
Change since picked:     + 0.19   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on  February 16, 2009    


ROSS Stores - ROST - close: 49.45 change: +0.17 stop: 49.05

This stock is moving so slow it could be summer before we hit the $49.75 exit. We came close again today at $49.65. That was 3-cents higher than Tuesday. Personally I think holding out for a dime is foolhardy. I am lowering the exit target to $49.65 and will be glad to get it.

Entry on  February 13 at $46.43 (small positions)
Change since picked:     + 2.61   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  February 13, 2009    


Raytheon Co - RTN - close: 56.49 change: -0.38 stop: 56.20 *NEW*

Seriously looking like a top forming in RTN. The high today was below yesterday's resistance high. That is not a good sign. I am raising the stop to $56.20.

Our stop loss is breakeven $56.20. Our target to exit is $59.50. Our time frame is four to six weeks.

Entry on  February 25 at $55.85
Change since picked:     + 0.64   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       2.9 million 
Listed on  February 20, 2009    


POWR - Powersecure Intl $7.57, Change -0.04, stop $7.30

POWR held the high ground and only gave back four cents. The rising wedge is still intact with continued higher lows.

This is an earnings lottery play. POWR will report earnings on March 11th. They have already preannounced the backlog will be better than previously expected. The stock is currently $7.57 and the $7.50 March call is only 60-cents. I believe the company will announced decent earnings and move sharply higher. The chart already shows upside pressure building. A positive number could generate some additional short covering. With the cheap option already in the month it will not take much of a move to get a nice return.

Position: POWR stock with a stop at $7.30.

Option buyers:
Position: MARCH $7.50 CALL (POWR 10C0750) @ $.55

Entry on  March 03 at $ 7.64 
Change since picked:  + 0.00   			
Earnings Date       03/11/10 (confirmed)    
Average Daily Volume:    78K      
Listed on  March 2nd, 2010    


BEARISH Play Updates

Ameritrade - AMTD - close: 17.31 change: -0.06 stop: 17.65 *NEW*

This is like watching paint dry. AMTD is going in the right direction but grass grows faster than this. Hopefully if we get a negative day in the market we will see a bigger decline in AMTD. The first target is $16.75. Our second target is $15.05.

Entry on   January 28 at $17.88 
Change since picked:     - 0.48   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009