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Newsletter

Daily Newsletter, Tuesday, 8/30/2011

Table of Contents

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

Market Wrap

Confidence Crumbles, Fed Divided

by Jim Brown

Click here to email Jim Brown
Consumer confidence fell to a two-year low and the Fed minutes of the August meeting showed a sharply divided Fed.

Market Statistics

The Consumer Confidence report for August was dismal. Confidence fell from 59.5 to 44.5 and the lowest level since April 2009. The majority of the damage came from the expectations component, which fell from 74.9 to 51.9, a drop of -23 points. The current conditions component only declined slightly from 35.7 to 33.3. That would suggest consumers feel things are about as bad as they can be today but they had previously expected the future to be significantly better. Those hopes were dashed with the debt debacle, credit downgrade and the string of regional activity reports turning sharply negative.

Those planning on buying a home fell sharply from 4.9% to 3.7% but auto shoppers increased to 12.9% from 11.9%. Appliance buying plans inproved from 47.7% to 50.1%. That increase in plans to buy cars and appliances differs sharply from the employment components.

Those who believe jobs are hard to get increased significantly from 44.8% to 49.1%. Those who felt jobs were plentiful fell slightly from 5.1% to 4.7%. Fewer people expected a raise and more people expected their income to decrease. Why those employment factors would lead to an increase in consumer buying plans is a mystery.

More than half of the respondents expect the stock market to be lower in a year. That is the first time the majority was expecting a decline since March 2009. More than 60% are expecting higher interest rates so obviously the herd is wrong in at least some of their assumptions.

This report is driven in part by the real world experiences of consumers who have been surveyed. This suggests Friday's jobs report could show fewer jobs than previously expected. The current estimates for job gains range from 30,000 to 70,000.

Other real time indexes like the Rasmussen and Bloomberg showed a low for consumer confidence around the 9th of August. That was the result of the S&P credit downgrade on the USA. The cutoff for the Michigan Confidence was August 18th so the survey did not capture the late month rebound as shown in the other two surveys. This confidence number should be the low for this cycle unless economic conditions worsen drastically.

Consumer Confidence Chart

The Case Shiller showed another decline in June home prices over the last 12 months of -4.5%. That is the same number we saw in the May report. Since this is such a lagging report it was mostly ignored.

The most watched report for the day was the FOMC minutes for the August meeting. The minutes showed a Fed that was sharply divided with some members wanting to take additional action immediately at the August meeting but others were strongly opposed. The compromise was the plan to keep rates low into 2013. Three members dissented and that was the most since 1992.

The Fed data showed the recession was deeper than previously expected and the economy had slowed significantly from 2010 levels. The Fed stressed over the rising unemployment and lackluster job growth. They discussed the declining inflation thanks to lower oil prices producing lower fuel prices.

The sovereign debt crisis in Europe was discussed about how that would impact U.S. markets. New data changed their view of how much the Japanese quake impacted the U.S. economy and they revised the impact lower and attributed more of the U.S. weakness with internal problems.

The minutes said "many participants saw increased downside risk to the outlook for economic growth." The slower growth was expected to reduce inflation pressures.

They expressed increased concern that the length of time workers have been unemployed would increase the time required to absorb those workers back into the system. With the Fed's dual mandate of full employment and stable prices it would appear the majority of the members felt additional policy stimulus was needed to accelerate employment.

The FOMC members were confused about what had happened to their recovery and what they could do to provide further stimulus without raising inflation. Most agree there is no monetary crisis at present and that means the Fed's normal methods of economic stimulation are less effective. They discussed QE3 but passed on it for that meeting.

Ahead of the minutes today Chicago Fed President Evans said in an interview the economy was still in a liquidity trap and we need an even lower interest rate, both real rates and Fed rates, to adjust the relationship between savings and investments. Translation, we need to push rates so low that savers will be forced to become investors just to keep up with inflation. He also said the current rising unemployment rate was consistent with a recession so more Fed action was needed.

I predicted in my weekend commentary the Fed was planning on taking additional action at the September 20th FOMC meeting based on the comments by Bernanke in his Friday speech. After the release of the minutes I am even more convinced they will follow through with some new policy statement.

Two of the dissenters at the August meeting have now made their reasons for dissenting known and it would appear they are now leaning towards the consensus views today. Job growth would appear to be slowing again and economic forecasts are being slashed almost daily. Even if the dissenters remained Bernanke still has enough support to take action. With two of those dissenters already sounding more dovish the potential for action is almost guaranteed.

The market rallied on Friday/Monday was due to expectations of future Fed action. When the Dow declined triple digits today on the Consumer Confidence and then rallied back to close positive it was on the growing expectations for Fed action as evidenced in the minutes. The lack of market follow through was related to the strong resistance at this level and the potential for negative news from the ADP payrolls, ISM NY and ISM Chicago on Wednesday. The bad news bulls may be back but they are being fed bad news with a fire hose and they may need to digest some before the markets can move higher. If by chance the Wednesday reports are less bad than expected we could see a positive reaction. However, at this point "bad news is good news" to some extent because it will force the Fed to act. If we suddenly got a string of better than expected economic reports it could actually keep the Fed on hold so slightly better economics may not be that bullish.

The reports due out on Wednesday are important but the ISM on Thursday is critical. Official expectations are for 50 and right on the line separating contraction from expansion. Under 50 is contraction and I don't see how it would be possible for a number over 50 given the regional declines. I almost feel the official estimates are being held at 50 to avoid pressuring sentiment any more than necessary. If they were predicting a decline to 40 and seriously in contraction territory it would be market negative.

The payroll report on Friday is the next major event and the official estimates are running between 30,000-70,000 but some are expecting a loss of jobs. The ADP report on Wednesday will give analysts one last chance to adjust their estimates for the payroll report on Friday.

Economic Calendar

Gold prices rallied strongly once again on expectations the Fed is going to act in September. Gold rallied +44 to $1836 and right at the top of its recent resistance range. Actual gold demand continues to grow according to the CEO of Goldcorp (GG) and we are approaching the high demand festival season in India and Asia plus central bank buying is increasing. He expects a short-term dip but said $2400 is still a logical target for gold over the next couple years.

Gold Chart

Oil prices rallied sharply after the new Libyan government oil spokesman, Nouri Berouin, told Reuters it could take a long time for production to return. Some production will resume soon but returning to pre war levels could take years. His preliminary estimate is 15 months "once we start returning fields to production." He said minefields around some facilities could slow the restart. Also, some workers left the fields so quickly that the fields could have been damaged by the hasty shutdown. He said, "Once our fields are secure we need to clear the mines. Building up output will require logistical support from our foreign partners." That translates to "We don't have any money, parts or experience." He said the national oil companies will be restructured and become more independent. Since the oil companies were basically a cash cow for Gadhafi a restructuring would be a good idea but those kinds of actions rarely go smoothly since the people in charge then are probably not in charge now.

Brent crude rallied strongly on the news.

WTI Crude Chart

Brent Crude Chart

Hurricane Irene may have caused as much as $20 billion in damages with the majority of that due to flooding rather than wind damage. Unfortunately a new tropical storm named Katia is moving towards the Caribbean and it already has winds in excess of 60 mph and it is still well east of the warm Caribbean waters. The current storm track, although preliminary, has it targeting North Carolina and the east coast. The landfall would not occur until next Wednesday.

Tropical Storm Katia

Now you see it, now you don't. Hewlett Packard shocked the world with the cancellation of their tablet program two weeks ago after only six weeks on the market. On Saturday after the announcement they slashed prices to $99 and $149 to blow out all their inventory and there was a feeding frenzy. Within hours of the news hitting the web there were no HP tablets available anywhere. After a very short dip on Ebay they are again selling in the $250 range for the 16gb model and $300 for the 32gb models. Bidding is extremely brisk with dozens of bids on every auction. The TouchPad went from "can't give them away" to "I am willing to pay big money to get one." HP said the "stunning demand" for the tablets had convinced them to make another production run to meet unfilled demand before officially retiring the product.

Resurrecting the TouchPad could help HP sell off its PC business. While many buyers may not be interested in the actual PC business the addition of a working tablet they could quickly revitalize makes the PC division more valuable. Several companies have expressed interest in the WebOS software. I view this as more confirmation the current Hewlett Packard management is in a fog. They should have considered all these factors before their ill-timed cancellation announcement. HPQ shares are up +15% from their post announcement lows.

Hewlett Packard Chart

Fourteen Borders stores will be resurrected by Book-a-Million (BAMM). The stores were slated for closure after Borders filed bankruptcy and said it was going to liquidate. BAMM will take over the leases beginning on September 20th. Borders is liquidating its remaining 399 stores.

Peabody Energy (BTU) and partner ArcelorMittal finally acquired Macarthur Coal after a year of pursuing the acquisition. Macarthur finally relented against the pressure of Peabody's hostile bid and recommended shareholders accept the sweetened bid of $16 per share. That was a 44% premium over the share price before the offer was made. ArcelorMittal was already a 16% shareholder in Macarthur and the second biggest shareholder. The deal is worth $5.2 billion and gives Peabody another 270 million tons of coal. Peabody also signed a deal to develop a Chinese surface mine and produce 50 million tons of coal annually over the next several decades. Peabody also gained a big chunk of Australian coal terminal space with the Macarthur acquisition. The terminal in Australia is shared by multiple coal companies and ships stack up outside the harbor in lines that can sometimes take weeks to load coal destined for Asia. Having another loading facility in that terminal is a big plus for Peabody. BTU has rallied +$6 in the last week on expectations the deal would get done.

Peabody Chart

Stock news was pretty light today because we are in the middle of the quarter, earnings are over and we are heading into a holiday weekend. Volume has been very weak thanks to the damage from Irene, the heavy risk from the heavy economic calendar and the pending holiday. Volume on Monday was 6.6 billion shares and the lowest volume since August 3rd. Today was not much better at 7.3 billion shares.

This is month end and given the rally in bonds over the last month there were probably some asset allocation programs at work on Monday as strict funds were forced to shift investments from bonds into equities.

End of month retirement contributions will probably be light with most deposits being allocated to money market funds rather than equities. There are still some analysts expecting a return to S&P 1100 for another retest if the week's economics takes a seriously negative turn. Investor sentiment is very bearish.

However, fund managers are facing a monster performance comparison problem compared to Q3/Q4 of 2010. That was a major gain for most funds and 2011 has been a serious challenge for funds to remain positive much less post large gains.

After peaking in February there was two months of declines followed by another peak in April followed by more declines. The markets are basically flat for the year and it would have taken a very nimble manager to profit from the year's volatility. John Paulson's high profile funds are down from -21% to over -30% for the year. If funds are going to make any money for the year it will have to be done over the next 60 days before the fund fiscal year end on October 31st.

This suggests the incentive to buy stocks on any "less bad" news should be strong.

The S&P rallied to 1220 intraday before falling back to 1213 at the close. The peek over the mid August high at 1208 was critical and nobody really expected it to simply continue higher because of the strong resistance at that level. The fact we did not sell off sharply on that resistance and the bad economic news is short term bullish. Unfortunately we don't know how much of that was month end allocation programs and it was on low volume.

The current S&P level is critical. A move higher from here would trigger significant short covering and quite a few traders would not be surprised to see the markets fail here. This would be a textbook failure point but every rally has one and once they pass it the market tone shifts. Interim support is now 1160 and resistance at 1220 and the intraday high.

S&P Chart

The Dow extended its gains over prior resistance at 11,500 and I view this as slightly bullish. However, the Dow only had 14 components in positive territory and CAT and BA provided +25 Dow points of gains so that tells you how weak the rest of the components were.

I view today as a consolidation day. The rebound from the confidence report lows while at the top of its recent gains was also bullish. Any continued move higher from here could trigger another wave of buying but it would help to have some positive economics to boost the blue chips. We can only rally so far on bad news and Fed expectations.

Dow Chart

The Nasdaq extended its gain above prior resistance and appears to be on track to test resistance from the March/June lows at 2600. A positive breakout there should give the index wings.

Nasdaq Chart

The Russell rallied to retest the resistance at the 50% retracement level of the August-2010 to May-2011 rally. This should be decent resistance but the Russell has been on fire. It gained more than 4% on Monday. One more move higher should cement the trend but I would not be surprised to see some consolidation first.

Russell Chart

Economics will be the key for the rest of the week. Europe was fairly quiet this week so it could return to the forefront at any time. For the time being bad economic news is good news for Fed action but there is a limit to how much bad news is good and how much the Fed can impact the markets. If economics turn seriously negative like the confidence report today I seriously doubt any Fed hopes will keep the market alive.

Keep your stops close and don't hesitate to take profits.

Jim Brown

Send Jim an email


New Plays

Stocks Are Short-term Overbought

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index is up +8% and the NASDAQ is up +10% in just over a week. Stocks look short-term overbought and due for a pull back. While the path of least resistance is probably up we don't want to chase the market right here.

Thus I'm not adding any new candidates tonight. Here's what I'm watching for potential entry points:

AN - the stock has broken out over major resistance at $40.00. Another bounce from $40.00 or better yet a bounce from its rising 10-dma could be used as an entry point.

CCMP - shares have built a bottom over the last four weeks. Yesterday's breakout over resistance near $40.00 looks like an entry point. Yet shares are trading under lots of technical resistance (like its 40 and 50-dma). Plus there is very clear resistance in the $42.50-43.00 area, which would be my first target.

CHD - this stock is hitting new all-time highs. I was tempted to launch positions tonight but I'd rather wait and see if shares will pull back and retest the $42.00 level as new support.

BCE - Wait for a breakout past the $40.50 level.

EXPE - This online travel stock has been soaring higher in recent days. The breakout past the 50-dma is bullish. Yet shares look overbought. Wait for a dip or a bounce in the $28.50-28.00 area.

VECO - shares appear to be forming a bottom but I'd prefer to launch positions on a breakout past $38.00 or a new bounce from its short-term bullish trend of higher lows.

- James


In Play Updates and Reviews

GA Bounces, Steel continues to rise

by James Brown

Click here to email James Brown

Editor's Note:
Stocks managed to extend their gains. The market is up for the fifth day in the last six sessions.

Our GA trade saw a big bounce. The SLX continues to rise. Readers may want to take profits early in the AUXL trade.

Our shipping shorts are moving against us (again) and OSG was stopped out.

-James

Current Portfolio:


BULLISH Play Updates

Auxilium Pharma - AUXL - close: 17.67 change: -0.03

Stop Loss: 16.45
Target(s): --.--, 18.45
Current Gain/Loss: +9.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
08/30 update: AUXL did not make any progress today. Shares remain stuck under its 50-dma and the $18.00 level. I would seriously consider an early exit right here to lock in gains. The 10-dm has risen to $16.67. We will raise our stop loss to $16.45. I am not suggesting new positions at this time.

Given the market's recent volatility we do want to keep our position size small.

Current Position: Long AUXL stock @ $16.13

- or -

Long SEP $17.50 call (AUXL1117I17.5) Entry $0.45

08/30 new stop loss @ 16.45
08/29 new stop loss @ 16.25
08/27 new stop loss @ 15.75
08/27 adjusted target to $18.45.
08/25 Planned exit to sell half. AUXL @ 17.07 (+5.8%)
sold half of Sep. $17.50 call, bid @ 0.60 (+33.3%)
08/24 Take profits (sell half) Tomorrow at the close
08/24 new stop loss @ 15.25
08/23 new stop loss @ 14.95.
08/23 added 2nd target at $19.75

Entry on August 22 at $16.13
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011


Avon Products Inc. - AVP - close: 22.28 change: +0.24

Stop Loss: 20.75
Target(s): 23.50, 24.40
Current Gain/Loss: + 1.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
08/30 update: It was AVP's turn to outperform. Traders bought the morning dip near $21.60 and the stock closed at a new two-week high. I remain cautious here in spite of today's bullish close. We are not suggesting new positions at this time. More conservative traders may want to raise their stops.

- small bullish positions -

Suggested Position: Long AVP stock @ $21.91

- or -

Long SEP $23 call (AVP1117I23) entry $0.50

08/23 new stop loss @ 7.55
08/23 adding a 2nd position
08/20 new stop loss @ 7.38

Entry on August 15 at $ 8.46
Earnings Date 11/16/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on August 13, 2011


Limited Brands, Inc. - LTD - close: 38.31 change: +0.59

Stop Loss: 34.49
Target(s): 39.75, 42.25
Current Gain/Loss: + 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
08/30 update: LTD continues to climb. The stock closed above potential resistance at $38.00 and its 100-dma today. We will raise our stop loss to $34.90. More conservative traders may want to use a stop loss closer to $36 instead. I would prefer to wait for a dip instead of buy LTD here.

Earlier Comments:
The $38 and $41 levels might offer some overhead resistance.

Current Position: Long LTD stock @ $37.06

- or -

Long OCT $38 call (LTD1122J38) Entry $1.85*

08/29 *option did not trade. this is an estimate.

Entry on August 29 at $37.06
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on August 27, 2011


Peet's Coffee & Tea - PEET - close: 58.02 change: -0.01

Stop Loss: 53.25
Target(s): 62.00
Current Gain/Loss: +2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
08/30 update: PEET ended Tuesday's session virtually unchanged. Yet the action today was bearish. The intraday rally reversed at $59.36. I am concerned that PEET will now see a short-term dip back toward $56 or $54. I would wait for a dip near $56 before considering new positions.

Earlier Comments:
There is a good chance that PEET could see another short squeeze. The most recent data listed short interest at 23.7% of the very small 12.6 million-share float. I would keep our position size small. We are not trading the options. The spreads are too wide.

Current Position: Long PEET stock @ $56.64

Entry on August 29 at $56.64
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 268 thousand
Listed on August 27, 2011


RealD Inc. - RLD - close: 14.77 change: -0.09

Stop Loss: 13.90
Target(s): 18.00
Current Gain/Loss: + 5.2%
Time Frame: 6 to 10 weeks
New Positions: see below

Comments:
08/30 update: I am growing concerned over the lack of movement in RLD. Shares have been trading sideways in a very narrow range for almost three full days. I am not suggesting new positions at this time. We will inch our stop loss up to $13.90.

Earlier Comments:
We want to use small positions to limit our risk.

current Position: Long RLD stock @ $14.04

- or -

Long SEP $15.00 call (RLD1117I15) Entry $0.60

08/30 new stop loss @ 13.90
08/27 new stop loss @ 13.75
08/25 planned exit to sell half at the close.
RLD +4.0%, option @ $0.90 (+50%)
08/24 Prepare to take profits early and sell half tomorrow at the closing bell.
08/24 new stop loss at $13.25
08/22 gap open entry at $14.04

Entry on August 22 at $14.04
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011


Steel ETF - SLX - close: 55.21 change: +0.31

Stop Loss: 51.75
Target(s): 54.50, 59.00
Current Gain/Loss: +10.4%
Time Frame: 2 to 6 weeks
New Positions: see below

Comments:
08/30 update: SLX managed to post another gain but it's still trading under the mid August highs near $56.00. Cautious traders may want to exit completely right here. I am raising our stop loss up to $51.75. I am not suggesting new positions at this time.

The plan was to keep our position size small to limit our risk.

Play Triggered.

Suggested Position: Long this ETF @ $50.00

- or -

Long SEP $55 call (SLX1117I55) Entry $0.90

08/30 new stop loss @ 51.75
08/29 1st target hit at $54.00.
stock position at $54.00 (+8.0%)
08/27 adjusted targets to $54.50 and $59.00
08/26 Play triggered at $50.00
08/25 new strategy: buy a dip at $50.00, new stop 49.40

Entry on August 26 at $50.00
Earnings Date --/--/--
Average Daily Volume = 126 thousand
Listed on August 23, 2011


BEARISH Play Updates

Nordic American Tanker - NAT - close: 18.29 change: +0.32

Stop Loss: 18.55
Target(s): 12.75, 10.50
Current Gain/Loss: - 7.7%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
08/30 update: Our bearish play on NAT is in significant danger. Yesterday I suggested readers may want to exit early. I'm making that same suggestion today. NAT's close over short-term resistance at $18.00 is bullish. If there is any follow through tomorrow we will likely see NAT hit our stop loss at $18.55.

Earlier Comments:
You may want to consider using put options instead since your risk is limited to the cost of the put you purchase.

- small positions -

Current Position: short NAT stock @ $17.05

- or -

Long OCT $15 PUT (NAT1122V15) Entry $0.75*

08/24 NAT provides another entry point with failed rally at $18
08/22 gap open entry @ 17.05
* option entry is an estimate. option did not trade today

Entry on August 22 at $17.05
Earnings Date 11/07/11 (unconfirmed)
Average Daily Volume = 583 thousand
Listed on August 20, 2011


CLOSED BEARISH PLAYS

Overseas Shipholding Group - OSG - close: 18.43 change: +1.12

Stop Loss: 17.55
Target(s): 12.50, 10.25
Current Gain/Loss: -14.3%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
08/30 update: The short covering in OSG continues and the stock added another +6.4% today. Our stop loss was not hit this morning. It was surpassed with OSG gapped open higher at $17.75. The next level of resistance is probably the $20.00 area.

The plan was to keep our position size small to limit our risk.

- Small Bearish Positions -

closed Position: short OSG stock @ $15.52, exit 17.75 (-14.3%)

- or -

Long OCT $14 PUT (OSG1122V14) Entry $1.50, exit 0.50* (-66.6%)

08/30 stopped out @ 17.75 (gap open higher)
*option did not trade today, this is an estimate.
08/27 Turn cautious. OSG did not break support at $15.00 on Friday.
08/22 gap open entry at $15.52

chart:

Entry on August 22 at $15.52
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 981 thousand
Listed on August 20, 2011