Option Investor
Newsletter

Daily Newsletter, Monday, 10/17/2011

Table of Contents

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

Market Wrap

What Should Have Been

by Todd Shriber

Click here to email Todd Shriber
What probably should have been a decent day at the very least for U.S. stocks turned ugly as Germany threw a wet dish towel on the rally by saying a speedy resolution to the Euro zone's debt woes probably is not in the cards. I am not sure why that is a surprise since we are well into year two of dealing with this issue, but all the major U.S. indexes plunged as a result, ignoring some decent earnings news and some big deals in the energy sector.

Market Stats

European Union policymakers had been shooting for a resolution to be unveiled at an Oct. 23 gathering in Brussels, but that dream has fallen by the wayside thanks to Germany. The reality is Germany does not need to do what the EU's problem children want it to do and the Germans certainly do not need to obey anyone's time line but their own.

Yet that was only part of the problem today. U.S. economic data was only tepid at best. The Federal Reserve said industrial production rose a seasonally adjusted 0.2% in September, but the August number was revised down to no growth from an initial reading of an increase of 0.2%. Economists expected a gain of 0.1% in September.

The New York Federal Reserve said manufacturing activity in the region showed an October reading of -8.5, only slightly better than the September reading of -8.8. The Empire State Index has labored below zero for five consecutive months.

Europe and lingering concerns about the U.S. recovery obfuscated some good news at the stock level. For starters, shares of El Paso (EP) surged xx% after Kinder Morgan (KMI) agreed to buy the company for about $38 billion, creating the largest U.S. pipeline operator. The combined company would own 80,000 miles of pipeline across the U.S. and the transaction appears to be one generated by the boom in various U.S. shale plays.

You may have seen $21 billion floated around as the price tag for this deal, but Kinder Morgan is assuming $17 billion in El Paso debt and that is where $38 billion comes from. That sounds like a debt and it is, something Kinder Morgan acknowledged in its press statement, but the company also said ''the sale of EP's exploration and production business, dropdown transactions to KMP and EPB, and excess cash flows should allow for a rapid reduction in debt levels.''

Good news if you are invested in KMI for the dividend: ''If this transaction were to close at the beginning of 2012 and factoring in KMI's normal expected annual growth, KMI would expect to pay a dividend per share of approximately $1.45 in 2012, up substantially from its current annual rate of $1.20 per share,'' according to the statement.

Overall, the market appears to be sweet on this deal, which is the second-largest announced takeover in the U.S. this year behind only AT&T's (T) $39 billion offer for Deutsche Telekom's T-Mobile unit. Kinder Morgan expects the El Paso transaction to close in the second quarter of 2012.

El Paso Chart

Speaking of acquisitions spurred by the North American shale boom, Statoil (STO), Norway's largest oil company, said it will acquire Brigham Exploration (BEXP) for $4.4 billion in cash in a move by the Norwegian company to bolster its shale exposure due to declining output in the North Sea. Actually, Statoil announced two major North Sea discoveries in the summer, but the company has been moving to expand its shale exposure in recent years.

In 2008, Statoil bought almost $3.4 billion in shale assets from Chesapeake Energy (CHK) and paid $225 million for some Eagle Ford Shale acreage in June. By acquiring Brigham, Statoil becomes a major player in the Bakken Shale. The deal will give Statoil more than 375,000 net acres in the Williston Basin, where the Bakken and Three Forks are located, according to Bloomberg News. The deal makes Statoil one of the top-10 Bakken producers along U.S. oil giants Exxon Mobil (XOM) and ConocoPhillips (COP), Bloomberg added.

Statoil estimated the risked resource base at 300-500 million barrels. Brigham's current Bakken production is 21,000 barrels per day, but Statoil forecast an increase to 60,000-100,000 barrels per day in the next five years. The deal is expected to close in the first quarter next year.

Brigham Chart

Keeping with the shale theme, Halliburton (HAL), the world's second-largest provider of oilfield services, said its third-quarter profit jumped to $683 million, or 74 cents per share, from $544 million or 60 cents per share a year earlier. Revenue surged 40% to $6.55 billion. Excluding one-time items, Halliburton earned 94 cents a share. Analysts expected 92 cents on revenue of $6.39 billion.

That didn't keep the stock from tumbling nearly 8% on heavy volume. Halliburton's problem wasn't the third-quarter numbers. It was some comments from CEO Dave Lesar that prompted some analysts to opine the company might need to lower its fourth-quarter guidance of $1.03 a per share. Operational delays in Iraq and Libya also hampered Halliburton's Q3 numbers, but the more pressing issue is how robust demand in North American shale plays will remain.

Combine the fact that Halliburton expects to hire 12,000 new U.S. workers this year with Statoil's Brigham acquisition and the shale outlook still looks pretty solid.

Halliburton Chart

One last note from the energy sector: Shares of Anadarko Petroleum (APC), the second-largest U.S. independent oil and natural gas producer, is putting the Gulf of Mexico oil spill behind it by settling with BP (BP) for $4 billion. Texas-based Anadarko held a 25% non-operating interest in the Macondo well project and had been adamant in its belief that BP was primarily at fault for the largest oil spill in U.S. history.

BP saddled Anadarko with a bill for cleanup costs shortly after the spill and the two companies have been doing some legal wrangling ever since. Earlier this year, Anadarko CEO Jim Hackett said his company would consider coming to the table to talk settlement with BP under the right circumstances. Apparently, the circumstances are right and Anadarko will pay BP $4 billion using a $5 billion credit facility. The U.S. company is expected to sell some assets in Brazil to reduce that debt.

Investors liked the news as Anadarko 5.5% on volume that was roughly triple the daily average on a day that was otherwise nasty for energy stocks not tied to M&A chatter.

Anadarko Chart

There is a deluge of earnings news from the financial services sector this week and Citigroup (C) and Wells-Fargo (WFC) got the ball rolling today. Citi, the third-largest U.S. bank by assets, said its third-quarter profit rose to $3.77 billion, or $1.23 per share, from $2.17 billion, or 72 cents per share, a year earlier. On an adjusted basis, Citi earned $2.6 billion, or 84 cents per share. Revenue slipped 12% to $4.84 billion. Analysts expected a profit of 81 cents a share. Non-performing loans fell to $7.95 billion from $12.46 billion last year.

Shares of Citi opened the day in fine fashion, but could not hold those gains and finished down 1.7%. Monday was far more harsh to California-based Wells-Fargo as shares of that stock slid 8.4%. The bank reported a third-quarter profit of $4.06 billion, or 72 cents per share, compared with$3.34 billion, or 60 cents per share, a year earlier. However, revenue fell 4% to $19.63 billion, below the $20.24 billion analysts expected.

On days like today, it is hard to find bank stocks in the green and if the chart of the Financial Select Sector SPDR (XLF) is any guide, financials may be in for more downside.

XLF Chart

In the category of stocks that could be flirting with fallen star status, there is Green Mountain Coffee Roasters (GMCR). In February, GMCR was trading just over $30. Last month, the stock almost hit $116. Sounds fun, right? Not so much. At least not after today. GMCR fell 10.4% on volume that was more than five times the daily average after hedge fund manager David Einhorn criticized the company's disclosure methods and said the most recent quarterly numbers posted by Green Mountain were ''too good to be true.” The company has a ''litany of accounting questions,'' Einhorn said, according to Bloomberg News.

After news broke last year that GMCR was facing an SEC inquiry, accounting issues would probably be the last headlines investors in this stock would want to see. Einhorn added the GMCR has looming patent issue with its K-cups that must be dealt with. In other words, not a good day to be long GMCR.

Green Mountain Chart

Looking at the charts, the S&P 500 had put in a voracious rally over the previous nine days leading up to Monday, so a decline may have been order, but it probably was not a decline of this magnitude. With Monday's big drop, the S&P 500 closed right at support at 1200. From there, next support is 1190. We are back to eying resistance at 1220-1230 now.

S&P 500 Chart

If 11,500 on the Dow was supposed to be support, it did not hold up today. Below 11,400, 11,250 is back in play. IBM's Q3 numbers after the bell have the highest-priced Dow stock trading down by almost 4% in the after-hours session, so we might headed for a lower open for the blue-chip index. Four Dow stocks (BAC, JNJ, KO and INTC) report earnings on Tuesday.

Dow Chart

Even with a drop of nearly 2%, the Nasdaq was able to keep its ahead above water with water being 2600. Tuesday will be a key day for the Nasdaq as investors digest IBM earnings, which is not going well at this point, and Intel and Apple (AAPL) report. Next resistance is 2700 and a drop below 2600 could result in a run down to 2475-2500.

Nasdaq Chart

As I just mentioned, stocks may have been due for a pullback after an almost 14% jump in less than 10 days, but Monday was particularly ugly. The worst part about Monday's declines is not the magnitude. It is the ominous reminder that decent to very good stock-specific news, whether be earnings, M&A, etc., continues to be trumped by macroeconomic fears. As long as that remains the case, it will be hard for riskier assets to log any meaningful gains over longer time horizons.

Todd Shriber


New Plays

Overdue Profit Taking

by James Brown

Click here to email James Brown

Editor's Note:

The flood of Q3 earnings headlines has begun but the focus was on Europe. Cautious comments from a German official that a comprehensive plan to save the Eurozone by this coming weekend was unlikely helped spark some long overdue profit taking in equity markets. The major U.S. indices gave up -2%.

Overall earnings news was mixed but there were a couple of big headliners. Wells Fargo (WFC) disappointed today. IBM reported after the closing bell and while it beat on the bottom line the top line was weak. Shares of IBM are trading lower after hours and could lead the tech sector lower tomorrow.

The S&P 500 index closed at support near 1200 today. The next level of support is 1180. However, a normal 38.2% Fibonacci retracement of the October bounce would mean a dip back toward the 1170-1165 area. Nimble traders could buy a dip or a bounce in the S&P 500 ETF (symbol: SPY) at these key levels.

No new trades tonight. We do think a buy-the-dip strategy can work but after IBM's news tonight I suspect the dip isn't over yet.

-James


In Play Updates and Reviews

WAG spikes. KBH and NTAP underperform

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market experienced some overdue profit taking on Monday. We saw KBH and NTAP hit our stop losses today. WAG, a bearish play, hit our stop on news regarding its dispute with ESRX.

I am temporarily removing our entry point plans on SBUX until we see how the market fares tomorrow.

Investors should note that IBM's disappointing earnings results tonight could send stocks lower tomorrow morning. Readers will want to double check their stop loss placement.

-James

Current Portfolio:


BULLISH Play Updates

Adobe Systems - ADBE - close: 26.24 change: -0.57

Stop Loss: 24.75
Target(s): 29.50
Current Gain/Loss: -3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/17 update: Profit taking across the market today pulled ADBE back toward prior resistance and what should be support near $26.00. Normally I would be tempted to launch new bullish positions here. However, I am concerned that reaction to IBM's earnings out tonight could pull stocks lower again tomorrow. I would wait for a bounce in ADBE before considering new positions.

Current Position: Long ADBE @ 27.13

- or -

Long NOV $27 call (ADBE1119K27) Entry $1.27

10/14 ADBE gapped higher at $27.13

Entry on October 14 at $27.13
Earnings Date 12/15/11 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on October 11, 2011


Autodesk, Inc. - ADSK - close: 31.25 change: -1.17

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: +2.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/17 update: ADSK hit some long overdue profit taking today with a -3.6% pull back. Volume was light on the session, which is a good sign. I do not see any changes from my weekend comments. ADSK could easily dip back toward the $30.00 level, which should be support. Wait for a dip or a bounce near $30 before considering new positions.

The plan was to keep our position size small since ADSK is short-term overbought here.

*Small Positions*

current Position: Long ADSK stock @ 30.35

- or -

Long NOV $32 call (ADSK1119K32) Entry $1.60

10/15 new stop loss @ 29.75, adjusted target to $34.00

Entry on October 12 at $30.35
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on October 11, 2011


Bristol-Myers Squibb - BMY - close: 32.44 change: +0.00

Stop Loss: 31.75
Target(s): 33.50
Current Gain/Loss: +4.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/17 update: BMY closed unchanged on the session. Traders bought the dip near $32.00 this morning and BMY spent most of the day drifting sideways. Per the weekend update our plan was to take some profits (sell half) at the open this morning in our 2012 Jan. $30 calls, which opened down at $2.90 (+28.3%). I am not suggesting new positions at this time.

Earlier Comments:
Our final target is $33.50.

current Position: Long BMY stock @ $31.15

- or -

Long 2012 Jan. $30 call (BMY1221A30) Entry $2.26

10/17 2012 Jan. $30 call open (bid) @ 2.90 (+28.3%)
10/15 new stop loss @ 31.75
10/15 Plan to take profits on the call, sell half on Monday
10/10 new stop loss @ 30.95
10/04 new stop loss @ 30.75
09/27 new stop loss @ 29.90
09/26 trade opened

Entry on September 26 at $31.15
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 13.6 million
Listed on September 22, 2011


PowerShares Gold Double Long - DGP - close: 55.51 change: -0.58

Stop Loss: 53.45
Target(s): 60.00
Current Gain/Loss: +0.4%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
10/17 update: Monday was a quiet day for precious metals. The DGP dipped toward $55 and its 10-dma before settling with a -1% pull back. I am growing cautious here. More conservative traders may want to exit early.

- Small Positions -

current Position: long the DGP @ $55.26

10/15 new stop loss @ 53.45
10/13 Not making any progress. Cautious traders may want to exit early now with DGP near breakeven
10/08 adjusted exit target to $60.00
10/04 new stop loss @ 50.50
09/27 trade opened
09/26 reload this trade. Buy the open tomorrow, new stop 49.40
09/26 Trade opened on gap down at $51.96.
Trade stopped out at $51.45 (-0.9% loss)

Entry on September 27 at $55.26
Earnings Date --/--/--

1st Attempt:

Entry on September 26 at $51.96
Exit on September 26 at $51.45 (-0.9%)


Average Daily Volume = 1.3 million
Listed on September 24, 2011


Copper ETF - JJC - close: 43.30 change: -1.06

Stop Loss: 41.75
Target(s): 47.50
Current Gain/Loss: + 0.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/17 update: Monday's -2.3% drop in the JJC erased most of our unrealized gains. Readers might want to consider new positions on a dip or a bounce near the 10-dma or the $42.00 level.

current Position: Long JJC (ETF) @ $43.25

- or -

Long NOV $45 call (JJC1119K45) Entry $1.90

10/15 new stop loss at $41.75
10/10 JJC hit our upside trigger at $43.25, stop 41.25

Entry on October 10 at $43.25
Earnings Date --/--/--
Average Daily Volume = 461 thousand
Listed on October 08, 2011


Lowe's Companies - LOW - close: 20.89 change: +0.10

Stop Loss: 19.75
Target(s): 22.85
Current Gain/Loss: + 0.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/17 update: LOW made headlines this morning with news it was closing 20 underperforming stores across 15 states. Ten of those stores closed as of yesterday (Oct. 16th). The stock saw an initial move lower, then a spike higher to its 100-dma before paring its gains. The stock actually closed up on the day once you back out the 14-cent dividend. The ex-dividend date was today.

I am not suggesting new positions at this time.

Earlier Comments:
The $22.00 level might be resistance but I'm listing our exit target at $22.85. I would keep our position size small.

current Position: Long LOW stock @ 20.75

- or -

Long NOV $21 call (LOW1119K21) Entry $0.85

Entry on October 10 at $20.75
Earnings Date 11/14/11 (unconfirmed)
Average Daily Volume = 16.7 million
Listed on October 08, 2011


EnPro Industries - NPO - close: 31.35 change: -0.81

Stop Loss: 29.80
Target(s): 34.00
Current Gain/Loss: + 1.5%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
10/17 update: NPO underperformed with a -2.5% decline. This is really bad news for our October $30 call. More conservative traders holding these calls may want to exit immediately. There is a good chance we'll see NPO test $31.00 or $30.00 this week. No new positions at this time.

Earlier Comments:
We want to keep our position small to limit risk.

(Small Positions)

current Position: Long NPO stock @ $30.87

- or -

Long Oct $30 call (NPO1122J30) Entry $1.75

10/17 October options are running out of time. Consider an early exit
10/15 adjusted target for stock to $34.00
10/15 adjusted target for option to $33.00
10/10 new stop loss at $29.80

Entry on October 07 at $30.87
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 282 thousand
Listed on October 06, 2011


VeriFone Systems - PAY - close: 38.35 change: -1.25

Stop Loss: 37.95
Target(s): 44.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
10/17 update: PAY followed the market lower and closed with a -3.1% loss. Shares are trading near short-term support at $38.00. Nimble traders could buy a bounce from this level. Our plan is to open bullish positions at $40.50.

Earlier Comments:
We will aim for $44.85 as our exit target. More conservative traders may want to exit near the 200-dma. FYI: The Point & Figure chart for PAY is bullish with a $59 target.

Trigger @ 40.50

Suggested Position: buy PAY stock @ $40.50

- or -

buy the NOV $42 call (PAY1119K42)

Entry on October xx at $ xx.xx
Earnings Date 12/01/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on October 13, 2011


Starbucks Corp. - SBUX - close: 41.16 change: -1.06

Stop Loss: 40.80
Target(s): 46.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/17 update: Our trade in SBUX is not open yet. Both the stock and the S&P 500 index opened lower today. Shares essentially erased Friday's gain. Readers might want to consider buying a dip near $40.00 although a normal 38.2% Fibonacci retracement of the October bounce would be a dip near $39.50 instead. Please note that we are going to temporarily remove our entry point plans. We'll wait to see how SBUX fares tomorrow and re-evaluate. The exception would be an unexpected surge to a new high. If that happens then we'll open small bullish positions at $42.26. FYI: Friday's high was $42.22.

Earlier Comments:
We'll tentatively set our exit target at $46.00 but we'll need to be nimble. I'm suggesting a stop loss at $40.80. FYI: The Point & Figure chart for SBUX is bullish with a $57 target.

*See Entry Point Details Above* (Small positions)

No Entry Point Tomorrow, unless SBUX hits a new high.

10/17 Trade not open. We are temporarily removing our entry point strategy to see how shares fare tomorrow.

Entry on October xx at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 8.5 million
Listed on October 13, 2011


SuccessFactors, Inc. - SFSF - close: 26.09 change: -0.13

Stop Loss: 24.90
Target(s): 29.50
Current Gain/Loss: +1.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/17 update: Surprise! SFSF was not supposed to report earnings until Oct. 26th. Yet after the closing bell tonight the company pre-announced better than expected results. SFSF expects Q3 revenues in the $93-95 million range compared to prior estimates in the $83-84 million zone. SFSF is expected to post a profit versus prior guidance of breakeven. The stock is trading near $28.00 in after hours markets.

I am not suggesting new positions at this time. We will raise our stop loss to $24.90. Conservative traders may want to exit early at the open (if it's near $28.00). Our final target is still $29.50.

FYI: I cautioned readers that $28.00 looked like potential resistance.

current Position: Long SFSF stock @ $25.83

- or -

Long NOV $27 call (SFSF1119K27) Entry $1.25

10/17 new stop loss @ 24.90
10/17 After the closing bell SFSF pre-announces stronger earnings results.
10/15 new stop loss @ 24.45

Entry on October 14 at $25.83
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on October 13, 2011


BEARISH Play Updates

None. We do not have any active bearish trades.


CLOSED BULLISH PLAYS

KB Home - KBH - close: 6.68 change: -0.14

Stop Loss: 6.25
Target(s): 8.75
Current Gain/Loss: -9.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/17 update: Market profit taking on Monday proved to be too much for shares of KBH. The stock underperformed with a -5.8% pull back. Shares didn't hit our stop loss at $6.25 until the last few minutes of trading. Murphy's law would suggest the stock will rally higher tomorrow.

I would keep KBH on your watch list. The stock could still see a short squeeze.

Earlier Comments:
This is an aggressive trade. We want to keep our position size small to limit our risk.

(small positions)

closed Position: Long KBH stock @ $6.91, exit $6.25 (-9.5%)

- or -

NOV $7.00 call (KBH1119K7) Entry $0.57, exit $0.25 (-56.1%)

- or -

2012 JAN $7.50 call (KBH1221A7.5) Entry $0.69, exit $0.45 (-34.7%)

10/17 stopped out at $6.25
10/14 trade opened with gap higher at $6.91

chart:

Entry on October 14 at $6.91
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on October 13, 2011


NetApp, Inc. - NTAP - close: 38.05 change: -1.18

Stop Loss: 37.95
Target(s): 44.00
Current Gain/Loss: -4.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/17 update: Our NTAP trade has been stopped out. Shares underperformed today and closed down -3.0%. The stock dipped to technical support near its 50-dma and hit $37.59 at its lows. Our stop was hit at $37.95.

I would keep NTAP on your watch list. Tech stocks could see another decline tomorrow as investors react to IBM's earnings. Look for NTAP to fall toward $37.00 or its 30-dma near $36.50. A drop to either level could be a new bullish entry point.

Earlier Comments:
I do consider this an aggressive trade so we will want to keep our position size small.

(small positions)

closed Position: Long NTAP stock @ 39.55, exit $37.95 (-4.0%)

- or -

NOV $40 call (NTAP1119K40) Entry $2.10, exit $1.38 (-34.2%)

10/17 stopped out at $37.95

chart:

Entry on October 14 at $39.55
Earnings Date 11/16/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on October 12, 2011


CLOSED BEARISH PLAYS

Walgreen Co. - WAG - close: 33.89 change: +0.89

Stop Loss: 34.26
Target(s): 30.50
Current Gain/Loss: -3.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/17 update: The stock market is full of unexpected events. WAG has been in a dispute with Express Scripts, which is WAG's pharmacy benefits manager. Today investors were surprised by news that WAG is negotiating with ESRX a price guarantee to ESRX for all Department of Defense consumers that get their medications at WAG. Wall Street saw this as a positive development and shares of WAG spiked higher at the open. Shares hit $34.50 intraday and our stop loss was hit at $34.26.

closed Position: short WAG stock @ $33.11, exit $34.26 (-3.4%)

- or -

Oct. $32 put (WAG1122V32) Entry $0.19, Exit $0.03 (-84.2%)

- or -

NOV $31 put (WAG1119W31) Entry $0.59, Exit $0.33 (-44.0%)

10/17 stopped out at $34.26

chart:

Entry on October 13 at $33.11
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 8.6 million
Listed on October 12, 2011