Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/28/2012

Table of Contents

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

Market Wrap

Isaac Arrives, Draghi Cancels

by Jim Brown

Click here to email Jim Brown

Isaac was officially upgraded to hurricane status and will hit New Orleans tonight. Mario Draghi cancelled his appearance in Jackson Hole.

Market Statistics

The big story for the day was of course hurricane Isaac, which was officially upgraded to a category 1 storm with sustained winds of 75 miles per hour. The storm will hit New Orleans before midnight tonight on almost the exact anniversary of hurricane Katrina. Katrina made landfall on August 29th, 2005 at 12:40 AM as a category 4 storm with winds of 145 mph. By 7:AM winds had increased to 175 mph and gusts to 190 mph and category 5 levels. Isaac is only a severe thunderstorm by comparison. The biggest problem from Isaac should be flooding with rainfall amounts expected to be in the range of 15-20 inches.

Since Katrina nearly $20 billion has been spent to upgrade levees and pumps and assuming they work as planned the damage from Isaac should be minimal. By the time the market opens on Wednesday the worst should be over and the good news from Isaac will begin to make the headlines. As Isaac moves overland with rain bands up to 250 miles from the center it will provide much needed rain with a 500 mile swath through the middle of the country all the way to the great lakes. Rains will fill rivers and lakes end concerns about a lack of water to transport crops to market. Concerns will move to worries over too much water during harvest season but with 2-3 weeks to go before harvest begins that should not be a problem.

Isaac Tracking Chart

The biggest impact from Isaac today was the dramatic evacuations from the rigs and platforms in the Gulf. The BSEE reported as of 11:30 this morning that personnel had been evacuated from 503 production platforms or 84.4% of the 596 platforms in the Gulf. The BSEE said 49 drilling rigs had been evacuated out of the 76 rigs currently in the Gulf. When rigs and platforms are evacuated the flow of oil and gas is shutoff on the ocean floor in order to prevent leaks if the platforms are damaged or blown off the location by the storm.

The BSEE reported 93.28% of Gulf oil production had been shut-in. They also reported 66.7% of gas production had been shut-in. Those shut-in amounts equal 1.287 mbpd of oil and 3.0 bcf of gas.

The BSEE also reported 2.4 mbpd of refinery production in the path of Isaac was also offline. Refiners in the Louisiana area are at risk from flooding and loss of electricity. Rather than have electricity drop suddenly in the middle of refinery runs and cause complicated restart procedures the refiners prefer to shutdown gracefully so they are in a position to restart promptly once the storm passes. There are more than enough supplies of oil and refined products in storage so no shortage is expected. Gasoline prices have actually declined because the damage is expected to be light.

WTI Crude Chart

Gasoline Chart

On the economic front the Consumer Confidence report for August fell from 65.9 to 60.6 and the lowest level since November. This was NOT a good report. The present conditions component declined slightly to 45.8 from 45.9. The expectations component fell from 78.4 to 70.5. This -7.9 point drop in the expectations suggests consumers are not going to be contributing to the recovery over the next few months. This was the fifth decline in the headline number over the last six months.

Those planning on buying a car fell from 14.3 to 11.6. Appliance buying trends were almost unchanged at 48.1. The big surprise was a rise in home buying expectations from 4.6 to 5.3. That is a strong gain in home buying sentiment.

Those respondents that felt business conditions would be worse over the next six months rose +2.6 to 17.7% and the highest since October. Those who felt jobs would be harder to get over the next six months rose +2.8 to 23.4% and the highest level since November.

With consumer confidence at the lowest level of the year the economic outlook for the next three months is worsening. The Q4 GDP estimates have declined to 1.4% to 1.9% and Q1 GDP to +0.9%. Consumers appear to be worried over rising fuel prices and a lack of a material recovery in jobs. The constant reminder about the fiscal cliff is also weighing on confidence.

The Bloomberg Consumer Comfort Index also fell to its lows for the year last Thursday.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey improved slightly from -17.3 to -9. That is still in contraction territory but it was a minor improvement. New orders came in at -20 compared to -25 in July. Backorders improved only slightly to -25 from -27.3. Employment fell to -5 from +1 and the first time in negative territory in eight months.

July was a very negative report and August was only a minor improvement and activity is still declining only at a slightly slower pace. With new orders and back orders both in decline it suggests there is further pain ahead.

Richmond Fed Chart

The Case Shiller Home Price Index showed prices actually rose by +0.5% compared to -0.7% in the prior month. Unfortunately this report covers the June period and this is old news. The housing sector has been in rally mode from improving fundamentals for several months and the Case Shiller index is a lagging indicator of that improvement.

The economic reports for Wednesday include the GDP revision for Q2 with expectations for a slight decline to +1.5% growth. The second material report is the Fed Beige Book and a report of the economic conditions in the 12 Fed districts.

The reports for the rest of the week have an important bearing on Bernanke's speech on Friday. If they show any improvement then Bernanke is likely to low key his speech. If the numbers continue to show a sharp decline like the confidence number today then we could expect Bernanke to be a little more aggressive in his comments. This is another example where the market may expect bad economics to be good for the market if it causes the Fed to act.

There was a major change in the event calendar today when ECB head Mario Draghi cancelled his trip to Jackson Hole as well as his speech on Saturday. Draghi cancelled his appearance citing "the heavy workload foreseen in the next few days." With the ECB meeting on the 6th, German ESM vote on the 12th and the EU Finance minister meeting on the 16th, he does have a full calendar. Considering the distance from Frankfurt to Jackson Hole he is passing on a 16 hour trip each way plus the three days he would have spent at the conference. Add in speech composition time and it was a big outlay of time and effort only three days before a critical ECB meeting.

So that leaves only Bernanke as a focal point at the Jackson Hole event. There were probably more expectations over the Draghi speech than Bernanke and now those additional expectations will be focused on Bernanke. Remember, Draghi recently said he would do "whatever is necessary" to rescue the euro and prevent a breakup of the eurozone. Attendees were hoping he would elaborate on what those plans would be.

ECB policymaker Joerg Asmussen said the ECB was still working on operational and technical details of the new bond buying plan that will be aimed at reducing borrowing costs of Spain and Italy. In theory Draghi stayed home to help on those preparations. In reality Draghi may not have had anything he could say to backup the "whatever it takes" comment. Open mouth, insert foot, what do you do for an encore? He can't really say anything until after the Sept 6th ECB meeting.

Bundesbank chief Jens Weidman is planning on attending the Jackson Hole event and in an interview on Monday he warned that the plan being considered verged on the ECB taboo of outright financing of governments. Clearly there are some serious conflicts behind the scenes at the ECB and Draghi is probably will be acting in the role of a firefighter next week.

Since Bernanke speaks Friday morning the impact from his speech will be immediate. There will no longer be a holdover of reaction in anticipation of Draghi on Saturday. That means Friday could see a major market move in an extremely low volume market.

Economic Calendar

There was very little news today other than hurricane Isaac. President Obama did take the opportunity to issue a new decree mandating a 54.5 mpg efficiency standard for cars and trucks by 2025. The new decree will force cars to hit a combined average of 34.1 mpg by 2017. You can expect cars to get smaller and lighter but cost more because of the new technology that will be needed to hit the mpg targets. President Obama said the additional costs would be justified because the cars would save more than $8,000 in fuel expenses over the lifetime of the car. The new decree builds on the last presidential decree that demanded cars average 35.5 mpg by 2016. He said these changes will strengthen the nation's energy security and would be good for middle class families.

The president did not mention the Strategic Petroleum Reserve in his comments on the hurricane today. He has gotten so much flack from other nations and the IEA on his proposal to release reserves that he probably decided it was better left until after the hurricane damage was seen and could provide political cover for the move.

Surprisingly the G7 made a surprise announcement calling for oil producers to increase output, saying higher fuel prices posed "substantial risk" to the global economy. The G7 Finance Ministers said, "The current rise in oil prices reflects geopolitical concerns and certain supply disruption. We encourage oil producing countries to increase their output to meet demand, while drawing prudently on excess capacity. We stand ready to call on the IEA to take appropriate action to ensure the market is fully and timely supplied." The press announcement was released by the Treasury Dept. Apparently this was the president's way of accomplishing his goal without having it come from the White House.

Monster Beverage (MNST), Pepsi (PEP) maker of AMP, and Living Essentials LLC were subpoenaed by the NY State Attorney General seeking information on their marketing and advertising practices. The AG is investigating whether the companies overstated the benefits of the ingredients while understating the role of caffeine. Industry sources believe caffeine is the main ingredient. The various drinks do not disclose the actual content of every ingredient in each drink. The state of NY is turning into a nanny state where it wants to regulate what you can eat and drink. I believe the drinks should disclose all their ingredients by amount and then let the user decide if they want to drink it and not have the state decide for them.

Monster Energy Ingredients - 5 Hour Energy Ingredients

YELP Inc (YELP) declined -4% ahead of a share lockup expiration of nearly 53 million shares on Wednesday. That is SEVEN times the shares offered in the initial IPO on March 2nd. With the three month average volume at 700,000 shares per day this threatens to be a really bad week for Yelp.

YELP Chart

Angie's List (ANGI) has been crushed since its lockup expiration on August 14th.

ANGI Chart

Lexmark (LXK) said it will stop making inkjet printers and focus on more profitable imaging and software businesses. The company was never big in the inkjet business and said it will continue to sell laser printers and beef up its services business. Lexmark said it would sell about 1,000 inkjet patents and cut 1,700 jobs or 13% of its workforce. Inkjet printers have never been big money makers. The money is in the replacement printer cartridges. LXK said revenue from the cartridge business fell -66% in the first half of 2012. Canon, Hewlett Packard and Epson account for 90% of inkjet printer sales. Shares of LXK rallied +14% on the news.

LXK Chart

The S&P traded sideways again with only a -1 point loss at the close. The S&P traded in a narrow 8 point range and that was only due to a sharp drop at 10:00 on the weak consumer confidence numbers. Ignoring that 7 point range in about 15 min the rest of the day was a very tight 3 point move.

S&P 1412.50 was a solid top all day but we really can't draw any conclusions from today's market movement because there was no news and volume was very light at 4.5 billion shares. That is the third consecutive day for volume in that range and it should be worse as the week progresses ahead of the holiday. Friday is going to be the wild day with the Bernanke speech. Everything else leading up to Friday's climax is just practice. I would not be surprised to see the S&P bleed back to the 1400 range ahead of the Friday event.

S&P Chart - 30 Min

S&P Chart - Daily

The Dow finished negative for the sixth time in the last seven sessions. However, it managed to close over initial support at 13,100. That support level is weakening and I could see a bleed back to 13,000 by Friday. The range for the day was 66 points. The Dow and S&P have only had one day with greater than a 1% move in the month of August.

The Dow has significant risk back to 12,600-12,800 if the market mood turns negative.

Dow Chart

The Nasdaq traded in a 20 point range and managed a minor gain of +4 points at the close. The gain came from Google +8, Bidu +4 and AMZN, PNRA and PCLN at +2 each. Apple closed fractionally negative at 675 for second day after they won the patent case against Samsung. The ramp higher into the September 12th iPhone announcement should begin next week.

The Nasdaq Composite has flat lined just under resistance at 3100 with support at 3050 but the Nasdaq 100 is close to a break out on the strength in the big caps. Resistance is 2790.

Nasdaq Composite Chart

Nasdaq 100 Chart

The Russell 2000 small caps are quietly wedging up to resistance at 815 and nobody seems to be paying attention. A stealth breakout here could lead to a battle at 820 and resistance from July. The bulls lost that battle last week but there is always time for a rematch. A move over 820 would target stronger resistance at 832.

Russell Chart

The markets will be headline driven on Wednesday from the GDP and Beige Book reports. They will be viewed not on their own merits but on how they might impact Bernanke's speech on Friday.

I personally believe the market is assigning far too much importance to the Friday speech. The potential for a letdown is very real. Maybe Bernanke should call in sick and skip the speech and put the focus back on the Sept 12th FOMC meeting. I doubt that will happen. This is his chance to again blame the current economic morass on Congress and try to shame them into making some decisions before the elections. Unfortunately that has about as much chance as a snowstorm in August.

With volume extremely low I would caution about making any sizeable bets. You have my permission to take the rest of the week off and come back after Labor Day. The market will still be here and it will probably be directional.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Specialty Chemicals

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Cabot Corp. - CBT - close: 35.26 change: -0.21

Stop Loss: 35.85
Target(s): 31.50
Current Gain/Loss: unopened

Entry on August xx at $ xx.xx
Listed on August 28, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 338 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
CBT is a specialty chemical company. The stock has been sinking under a bearish trend of lower highs for weeks. Now CBT is facing significant support at the $35.00 level. A breakdown could spark a much bigger sell-off.

I am suggesting a trigger to launch bearish positions at $34.85. If triggered we'll start with a stop loss at $35.85. Our multi-week target is $31.50. The Point & Figure chart for CBT is bearish with a $25.00 target.

FYI: CBT will begin trading ex-dividend on August 29th. The quarterly cash dividend should be 20 cents so we can expect CBT to gap down at the open on August 29th by 20 cents.

Trigger @ 34.85

Suggested Position: short CBT stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Oct $35 PUT (CBT1220v35) current ask $1.90

Annotated chart:




In Play Updates and Reviews

Another Sideways Session

by James Brown

Click here to email James Brown

Editor's Note:
Stocks continue to drift sideways as investors wait for Friday and Ben Bernanke's speech from Jackson Hole.

Current Portfolio:


BULLISH Play Updates

Bank of America - BAC - close: 7.96 change: -0.11

Stop Loss: 7.90
Target(s): 9.25 or 9.75
Current Gain/Loss: - 3.5%

Entry on August 21 at $8.25
Listed on August 20, 2011
Time Frame: 6 to 9 weeks
Average Daily Volume = 103 million
New Positions: see below

Comments:
08/28/12 update: Warning! BAC continues to pullback. Shares have broken what should have been short-term support at the 10-dma and the $8.00 mark. If there is any follow through lower tomorrow BAC should hit our stop loss at $7.90.

The plan was to use small positions to limit our risk.

current Position: Long BAC stock @ $8.25

- or -

Long 2013 Jan $9.00 call (BAC1319a9) Entry $0.47

08/21/12 triggered @ 8.25



eBay Inc. - EBAY - close: 46.94 change: -0.04

Stop Loss: 44.75
Target(s): 49.75
Current Gain/Loss: + 1.5%

Entry on August 17 at $46.25
Listed on August 16, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.3 million
New Positions: see below

Comments:
08/28/12 update: Tuesday looked like a carbon copy of Monday with EBAY drifting sideways in a narrow range. Look for short-term support near $46.00 and again at $45.00.

current Position: Long EBAY stock @ $46.25

- or -

Long Oct $47 call (EBAY1220J47) Entry $1.89

08/17/12 triggered at $46.25



Energy XXI Ltd. - EXXI - close: 32.99 change: -0.41

Stop Loss: 32.45
Target(s): 37.75
Current Gain/Loss: - 3.1%

Entry on August 15 at $34.05
Listed on August 11, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 968 thousand
New Positions: see below

Comments:
08/28/12 update: EXXI is not looking so hot. The stock underperformed today with a -1.2% decline. Shares briefly traded underneath their 200-dma and the $33.00 level. If there is any follow through lower tomorrow EXXI should hit our stop loss at $32.45.

I am not suggesting new positions.

current Position: Long EXXI stock @ $34.05

- or -

Long Sep $35 call (EXXI1222i35) Entry $1.45

08/15/12 triggered at $34.05



Integra Life Sciences - IART - close: 40.09 change: +0.54

Stop Loss: 39.45
Target(s): 44.50
Current Gain/Loss: unopened

Entry on August xx at $ xx.xx
Listed on August 21, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 171 thousand
New Positions: Yes, see below

Comments:
08/28/12 update: IART displayed some relative strength with a +1.3% gain. The close over $40.00 is bullish but at $40.09 it's not a very convincing breakout.

Right now the plan is to launch bullish positions at $40.60. Our multi-week target is $44.50. FYI: The Point & Figure chart for IART is bullish with a long-term $61 target.

Trigger @ 40.60

Suggested Position: buy IART stock @ $40.60



Nuance Comm. - NUAN - close: 24.07 change: +0.11

Stop Loss: 23.40
Target(s): 28.00
Current Gain/Loss: - 1.8%

Entry on August 21 at $24.50
Listed on August 18, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.1 million
New Positions: see below

Comments:
08/28/12 update: I blame the sideways churn in shares of NUAN on the similar sideways chop in the market's major indices. Unfortunately it looks worse on NUAN because the stock is underneath its 200-dma. I am not suggesting new positions at this time.

current Position: Long NUAN stock @ $24.50

- (or for more adventurous traders, try this option) -

Long Oct $25 call (NUAN1220j25) Entry $1.30*

08/25/12 new stop loss @ 23.40
08/21/12 triggered @ 24.50
*option entry price is an estimate. it did not trade at the time our play was opened.



PulteGroup - PHM - close: 13.28 change: +0.04

Stop Loss: 12.45
Target(s): 13.90
Current Gain/Loss: + 8.1%
Time Frame: 6 to 8 weeks

Entry on August 09 at $12.29
Listed on August 8, 2011
Average Daily Volume = 14.5 million New Positions: see below

Comments:
08/28/12 update: PHM is still consolidating sideways. I will note that some of the technical indicators on the daily chart are nearing bearish signals. Readers may want to exit early right now.

Our exit target is $13.90. I am not suggesting new positions.

Current Position: Long PHM stock @ $12.29

- or -

Long Oct $13 call (PHM1220j13) Entry $0.70

08/25/12 adjust exit target to $13.90
08/20/12 new stop loss @ 12.45
08/18/12 new stop loss @ 11.95
08/17/12 PHM stalls/reverses at resistance near $14.00
08/09/12 new stop loss @ 11.80
08/09/12 triggered on gap higher at $12.29. Trigger was $12.25.



Theravance Inc. - THRX - close: 27.19 change: +0.28

Stop Loss: 25.90
Target(s): 31.00
Current Gain/Loss: - 1.7%

Entry on August 24 at $ 27.65
Listed on August 23, 2011
Time Frame: 4 to 8 weeks
Average Daily Volume = 492 thousand
New Positions: see below

Comments:
08/28/12 update: There was no follow through on yesterday's pullback. THRX looks poised to make another rally towards short-term resistance at $28.00. More conservative traders may want to raise their stops close to $26.51 (yesterday's low).

I am not suggesting new positions at this time.

Earlier Comments:
THRX is a biotech firm and the stock could see a short squeeze. The most recent data listed short interest at 22% of the 52.6 million-share float. We do want to keep our position size small.

*small positions*

current Position: Long THRX stock @ $27.65

- (or for more adventurous traders, try this option) -

Long Oct $30 call (THRX1220j30) entry $1.55



Tempur Pedic Intl. - TPX - close: 32.15 change: -0.26

Stop Loss: 29.75
Target(s): 39.00
Current Gain/Loss: - 1.1%
Time Frame: 6 to 8 weeks

Entry on August 16 at $32.50
Listed on August 7, 2011
Average Daily Volume = 2.5 million New Positions: see below

Comments:
08/28/12 update: TPX is struggling to maintain its upward momentum with the market moving sideways. More conservative traders may want to up their stop closer to the $31.00 level.

Earlier Comments:
I do consider this somewhat of an aggressive trade so we will want to limit the size of our position. Our multi-week target is $39.00 since the $40.00 level is probably round-number resistance.

(small positions)

current Position: Long TPX stock @ $32.50

- or -

Long Sep $33 call (TPX1222I33) Entry $1.75

08/16/12 triggered @ 32.50



BEARISH Play Updates

Cliffs Natural Resources - CLF - close: 37.36 change: -0.36

Stop Loss: 40.05
Target(s): 36.50
Current Gain/Loss: +11.0%

Entry on August 15 at $41.99
Listed on August 14, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 5.3 million
New Positions: see below

Comments:
08/28/12 update: CLF gapped down and then spent the rest of the day moving sideways. Readers may want to take profits now. I am not suggesting new positions.

current Position: short CLF stock @ $41.99

- or -

Long Oct $40 PUT (CLF1220V40) Entry $2.20

08/27/12 new stop loss @ 40.05, readers may want to take profits now
08/25/12 new stop loss @ 41.60
08/21/12 new stop loss @ 43.05



Dolby Labs - DLB - close: 34.14 change: +0.08

Stop Loss: 35.11
Target(s): 30.15
Current Gain/Loss: - 1.6%

Entry on August 24 at $33.60
Listed on August 23, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 992 thousand
New Positions: see below

Comments:
08/28/12 update: DLB is still churning sideways on either side of $34.00. I don't see any changes from my previous comments. I would still consider new positions now at current levels or you could wait for a new drop under $33.75 as another entry point.

*Small Positions*

current Position: short DLB stock @ $33.60

- (or for more adventurous traders, try this option) -

Long Sep $35 PUT (DLB1222u35) Entry $1.90



Navistar Intl. - NAV - close: 22.76 change: -0.56

Stop Loss: 25.15
Target(s): 20.25
Current Gain/Loss: +2.0%

Entry on August 28 at $ 23.22
Listed on August 25, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.7 million
New Positions: see below

Comments:
08/28/12 update: NAV opened at $23.22 and fell to a -2.4% decline for the day. The stock is essentially testing last week's low. If the stock manages to bounce we can look for short-term resistance near $24.00.

Suggested Position: short NAV stock @ $23.22 )

- (or for more adventurous traders, try this option) -

Long Sep $20 PUT (NAV1222u20) Entry $0.70

08/28/12 trade opens with NAV at $23.22
08/27/12 NAV gaps open above our stop loss, effectively negating our trade. We are reloading and trying again. Launch positions at the open tomorrow



Strayer Education - STRA - close: 65.04 change: +0.15

Stop Loss: 68.65
Target(s): 61.50
Current Gain/Loss: + 3.6%

Entry on August 23 at $67.50
Listed on August 22, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 294 thousand
New Positions: see below

Comments:
08/28/12 update: STRA saw its decline stall with a sideways session. If the stock were to suddenly bounce look for resistance near $68.00. I am not suggesting new positions at this time.

Earlier Comments:
Part of our challenge is that the for-profit education stocks have been bearish for a while. The most recent data listed short interest in STRA at 41% of the very small 11 million share float. That raises our risk of a short squeeze. Given this risk I'd rather buy put options but the options spreads are too wide to trade. We'll try and limit our risk by keeping our position size small.

*Small Positions Only!*

current Position: short STRA stock @ $67.50

08/27/12 new stop loss @ 68.65
08/25/12 new stop loss @ 70.25



Tesco Corp. - TESO - close: 9.95 change: +0.21

Stop Loss: 10.55
Target(s): 8.15
Current Gain/Loss: - 1.9%

Entry on August 28 at $9.76
Listed on August 27, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 304 thousand
New Positions: see below

Comments:
08/28/12 update: TESO opened at $9.76 and eventually bounced back toward round-number resistance at the $10.00 level. I would still consider new positions at current levels.

FYI: The Point & Figure chart for TESO is bearish with a $4.00 target.

current Position: short TESO stock @ $9.76



TIM Participacoes S.A. - TSU - close: 18.97 change: -0.15

Stop Loss: 20.55
Target(s): 17.50
Current Gain/Loss: + 4.2%

Entry on August 22 at $19.80
Listed on August 21, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
08/28/12 update: TSU continues to sink and closed at a new 52-week low. I am not suggesting new positions at this time.

current Position: short TSU stock @ $19.80 (Small Positions)

08/27/12 new stop loss @ 20.55
08/22/12 triggered @ 19.80