Option Investor

Daily Newsletter, Monday, 3/1/2010

Table of Contents

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

Market Wrap

This Time Around, Merger Monday Lifts Stocks

by Todd Shriber

Click here to email Todd Shriber
Last Monday, news of a couple of decent-sized takeovers did little to help stocks, but that was not the case today as Merger Monday was working in full bloom, helping all three major U.S. indexes notch solid performances. The Dow Jones Industrial Average gained 78.53 points to close above the psychologically important 10,400 level. The S&P 500 tacked on more than 1% to make its way above 1115 and technology appeared to provide some leadership, at least for a day, as the Nasdaq gained almost 1.6% to close above 2273.

Stats Table

Before I get into all the M&A news, it should be noted that the Institute For Supply Management (ISM) said U.S. manufacturers were active again in February as the ISM reported a factory index number of 56.5 for the month. That's below January's reading of 58.4, a five-year high, but the February reading may indicate that U.S. manufacturers are doing their part to spur the economic recovery along. Readings of above 50 on the ISM number are considered bullish, below 50 is bearish. The manufacturing index has been above 50 for seven straight months.

Factory payrolls slumped by 20,000, something economists are attributing to brutal snowstorms that hit certain regions of the U.S. during February. That may not bode well for Friday's unemployment number. White House economics advisor Larry Summers was on CNBC today saying that previous blizzards of the magnitude of the recent storms have led to job losses in the range of 100,000 to 200,000. Still, the ISM's employment index was up to 56.1 in February from 53.3 in January. ISM's non-manufacturing data is released on Wednesday and factory orders follow on Thursday.

ISM Table

Not to be Debbie Downer, but it should be noted that much of this manufacturing activity is attributable to inventory restocking, not necessarily fresh demand. U.S. companies slashed inventories last year by a record $120 billion amid one of the worst recessions on record, according to Bloomberg News. As all this pertains to GDP, remember that the consumer accounts for roughly two-thirds of U.S. GDP so there is a ceiling on the impact manufacturers can have on the broader economy.

In other words, the consumer is going to need start spending again to really move the recovery. That may be happening as consumer spending was up 0.5% in January but wages rose just 0.1%. Perhaps that indicates we are getting back to normal, and not the good kind of normal, as consumers are spending more than they make. Old habits apparently die hard.

Onto the M&A news, the biggest deal of the day involved the U.S. version of a state-run enterprise. Of course, I am referring to beleaguered insurer American International Group (AIG). AIG said it will sell its Asian life-insurance business to London-based Prudential for $35.5 billion in cash, stock and other securities.

AIG owes Uncle Sam a tidy sum and to the company's credit, it has been diligent in trying to close its tab as today's deal represents the 21st asset sale by AIG since it borrowed money from U.S. taxpayers in 2008. AIG rose just over 4% on the news, but it may still be hard to get enthusiastic about the shares. Today's announcement helped the stock creep barely above the 50-day moving average and the shares are still a fair bit removed from the 200-day line. There was also noticeable selling in the AIG March 35 calls, indicating options traders are comfortable making the bet that the stock will not move above $35 before expiration on March 19th.

AIG Chart

Millipore (MIL), the maker of laboratory equipment that I mentioned last week when rumors swirled that Thermo Fisher Scientific (TMO) might be interested in acquiring in the former for $6 billion, was back in the headlines today. While the Thermo Fisher deal was never really confirmed, Germany's Merck said it will be happy to acquire Millipore for $7.2 billion in cash. The price tag includes debt and it was believed that Thermo Fisher's offer excluded debt.

Merck's offer is a 13.3% premium to Millipore's Friday closing price and news of the deal sent the latter to a close of $104.90. The time to have bought Millipore shares was on or before February 19th when the stock was still trading around $71. At least one European analyst that tracks Merck called the deal ''expensive'' and that's good news for Millipore shareholders. (Please note that Germany's Merck is a Frankfurt-listed stock and not part of the U.S.-based Merck (MRK) that is a Dow component.)

Millipore Chart

Keeping with the theme of foreign companies eying U.S. pharmaceuticals firms, OSI Pharmaceuticals (OSIP), the maker of cancer treatments, drew a $3.5 billion hostile takeover offer from Japan's Astellas Pharma. The Astellas offer is all cash and values OSI at $52 a share and sent OSI shares up by more than 50% on Monday to a close of $56.25. That was good for OSI's best one-day performance in six years.

OSI makes Tarceva, which is used to treat lung and pancreas cancer. OSI is also reportedly trying to gain approval to market Tarceva as a treatment for ovarian and colorectal cancers. The drug is marketed via a partnership with Swiss pharma giant Roche Holdings and that tidbit has led to some speculation that Roche may step in and be OSI's white knight to keep the company away from Astellas.

For its part, Astellas has previously shown it wants to be a player in the U.S. market and this is not its first hostile takeover attempt of a U.S. company. Astellas tried to acquire CV Therapeutics last year, but was eventually outbid by Gilead Sciences. OSI management is saying the Astellas bid undervalues the company. That might be a show of some hubris as OSI shares, prior to Monday, had not traded above $50 since August 2008.

OSI Chart

As I mentioned earlier, the Nasdaq was the top gainer among the major U.S. indexes, no doubt helped by news that global semiconductor sales were up 0.3% in January to $22.5 billion. SanDisk (SNDK), the largest maker of flash memory cards, boosted its first-quarter revenue forecast to $925 million to $1 billion and that send the shares higher by nearly 12%.

Intel (INTC), the largest semiconductor maker in the world, was up by almost 1.7%, good for the biggest gain in the Dow, but there was some news out of the company after the close that may weigh on the stock tomorrow. Sean Maloney, an executive vice president and head of Intel's architecture unit, suffered a stroke and is taking a medical leave of absence. Maloney, 53, has been viewed by some Wall Street analysts as a likely successor to current Intel CEO Paul Otellini. On the bright side, the prognosis for Maloney's recovery is ''excellent,'' according to Intel, and he is expected to return to work in several months.

It is always hard to mention a rally in tech stocks without including Apple (AAPL) and that was the case on Monday as well as Deutsche Bank, citing strong iPhone sales momentum, added Apple shares to its short-term buy list. Apple shares were up just over 2% on the news. Remember that last week rumors started circulating that Apple may split its stock, but the company quelled that chatter and went onto to say it likely will not use any of its $40 billion in free cash for dividends or share repurchases.

Apple Chart

Financials were absent from the positive trade after HSBC (HBC), the U.K.'s largest bank, said its 2009 full-year results missed consensus estimates after the bank had to set aside more provisions for bad loans. Profits also fell at HSBC's African, Asian and European units, Bloomberg reported. Proving that is a small world after all, U.S.-based banks of all stripes fell on the news.

Regionals BB&T (BBT) and KeyCorp (KEY) were both more down than 2.5% and Citigroup (C), JPMorgan Chase (JPM) and American Express (AXP) all finished the day lower while Bank of America (BAC) and Wells Fargo (WFC) both notched small gains.

Taking a look at the charts, the Dow's close above 10,400 puts the index right at an important resistance area with 10,300 looking it will act as the first support level. There is not a lot of company-specific news left, barring surprises, to provide a jolt to Dow constituents and with the jobs report looming on Friday, we might be in for some sideways trading over the next few days.

Of note, Home Depot (HD) did make a new 52-high on Monday, but that may be some delayed reaction to last week's earnings report and that is nice, but a dour jobs report on Friday will likely have negative implications for the Dow.

Dow Chart

Like the Dow, the S&P 500 closed right at an important resistance level on Monday. For the S&P 500 that is 1115. If stocks cannot advance from here, a retreat to 1085 is a legitimate possibility. And if 1085 does not act as support one more time, watch out for a move down to 1035-1045. Earnings season is basically over and most of the S&P 500 beat the prior year's numbers, but that was expected and not much of an accomplishment when considering most companies lost money in the fourth quarter of 2008. The near-term catalysts really are not there to induce fresh buying save for a positive surprise from Friday's jobs report.

S&P 500 Chart

The Nasdaq looked good on Monday and looks a little more positive than the Dow and S&P 500. The Nasdaq has moved above resistance at 2251, the 61.8% Fibonacci retracement, and it appears tech investors may be a bit more resilient than others. That said, Apple really could have helped the Nasdaq by announcing a dividend, even it was just a one-time special dividend. Personally, I think stock splits are of little consequence, but dividends and share repurchases really do get investors excited about a stock.

Speaking of, Qualcomm announced after the close on Monday that it would raise its quarterly dividend 12% and repurchase $3 billion of its own shares. Then again, this stock is so battered and its chart so broken that reaction to this news may do little to lift the Nasdaq's fortunes for the remainder of this week.

Nasdaq Chart

With Monday's trade in the books, the S&P 500 is now slightly positive on the year and at least for a day, there were reasons for stocks to move higher. Unfortunately, not every day of the week can replicate the M&A news flow we saw today. So what is left in terms of ammunition for the bulls? January and February are usually the best months of the year for positive dividend news and here we are in March barely positive on the year. March is historically a bullish month, but those anecdotes do not always hold true as January, another historically bullish month, showed us. Bottom line: It is easier to be slightly bearish than it is to be overtly bullish at this juncture.

New Option Plays

The Future of Computing

by Jim Brown

Click here to email Jim Brown


VMW - VMWare - $50.30

Company Description:

VMware, Inc. is a provider of virtualization solutions from the desktop to the data center. The Company’s suite of virtualization solutions addresses a range of information technology (IT) problems that include cost and operational inefficiencies, business continuity, software lifecycle management and desktop management. It works closely with over 900 technology partners, including server, microprocessor, storage, networking and software vendors. In November 2008, VMware, Inc. bought Trango Virtual Processors, which specializes in virtualization software for mobile phones, which allows a single phone to run multiple operating systems. In September 2009, the Company announced the completion of its acquisition of SpringSource, an enterprise and web application development and management. In February 2010, the Company acquired Zimbra, the vendor of open source email and collaboration software, from Yahoo! Inc.

Why We Like It:
VM Ware is taking over computing. The rush to virtualize to obtain maximum use of all your servers is revolutionizing the data center. IDC believes only 20% of datacenters are fully converted leaving a whopping 80% as a growing market. As corporations enter the Windows 7 upgrade cycle they will be building out their server farms with the newer software to support all those Windows 7 desktops and that means large numbers of virtualized servers. VMW does not own the market and there are other competitors but they are the strongest and the lead dog in the harness. For those competitors following in their tracks the view is always the same.

VMW posted a decent gain on Monday but did not spike out of the market. I am hoping there will be a minor retracement in the Nasdaq and we can buy this a little cheaper. I am putting a $49.50 trigger on entering this trade.

Suggested Options:
I am recommending the July $55 Calls because VMW has just edged over $50 and even if we buy it on a dip the premiums are going to be high for the $50 options.

BUY CALL JUL 55.00 (VMW 10G55) open interest= 198     current ask $2.70

90 Min Chart:

Daily Chart:

Entry  on  March 2nd at $ xx.xx <-- TRIGGER @ $49.50
Change since picked:       + 0.00
Earnings Date            04/26/10 (unconfirmed)
Average Daily Volume =       1.75    million  
Listed on  March 1st, 2010         

In Play Updates and Reviews

Surprise Rally On Negative Economics

by Jim Brown

Click here to email Jim Brown

CALL Play Updates

Colgate Palmolive - CL - close: 83.75 change: +.85 stop: 82.50

Good day for Colgate as the stock edged over resistance at $83. No specific news, just a good day in the market pushing consumer stocks higher.

Our target to exit is $85.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 1.65
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         

Sina Corp. - SINA - close: 37.37 change: -0.45 stop: 36.95

Worries over China's growth knocked 45-cents off SINA today. Earnings are Wednesday so we need to exit this play at the close on Tuesday. Since we are going to exit at the close I raised the stop to $36.95 just in case there is more weakness on Tuesday.

Currently we have a target to take profits at $39.95.

Entry  on  February 22 at $ 36.50
Change since picked:       + 0.71
Earnings Date            03/03/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         

TEVA Pharmaceuticals - TEVA - close: 60.60 change: +0.60 stop: 59.50

Shares of TEVA continue to show relative strength with a new high on Monday. I am raising our stop loss again to $59.50. I never want to give back any gains and I am still concerned about potential market weakness. Our target to exit is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 1.54
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         

PUT Play Updates

Caterpillar - CAT - close: 57.86 change: +0.80 stop: 59.01

CAT rallied with the market but most of the gains were on the opening gap. CAT announced on Sunday it was tightening its "No Iran" business policy. While CAT already had a "no direct sales" policy they have now upgraded that to "no sales to anyone that might be indirectly procuring for Iran.

CAT is an aggressive put. If the global economy is recovering then CAT should lead the advance. However, if the recovery is losing traction CAT should also lead the way down. We are not suggesting new positions at this time. This is an aggressive short-term trade. Our target to exit is $52.50. *NEW*

Entry  on  February 23 at $ 56.66 
Change since picked:       + 0.13
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =         12 million  
Listed on  February 23, 2010         

Australian Dollar ETF - FXA - close: 90.07 change: +.24 stop: 90.60

Minimal gain and still below resistance at 90.35. The FXA is in a trend of lower highs and lower lows. Our time frame for the Australian dollar to decline is several weeks so you'll need to exercise some patience. There is possible support at the 200-dma but our first target is $83.00. Our second, longer-term target is $80.10.

Entry  on  February 23 at $ 89.23 /gap higher entry
Change since picked:       + 0.84
Earnings Date            --/--/--
Average Daily Volume =        200 thousand 
Listed on  February 23, 2010         

SIEMENS - SI - close: 87.72 change: +1.50 stop: 89.75

No specific news on Siemens but the stock rallied with the sector to just below resistance. Since oil prices collapsed intraday it was surprising to see the energy stocks do so well.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 6.62
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         


Autozone Inc - AZO - close: 165.97 change: +.07 *Closed*

Autozone earnings are Tuesday and the game plan has been to close this position at the closing bell on Monday. AZO has been pinned to the $166 level for three days now while our March option premium bled away. The option was quoted $4.50x$4.80 at the close.

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 3.21
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         
Chart of AZO


Franklin Resources Inc. - BEN - close: 102.84 change: +1.12 stopped: 102.51

BEN continued to rally with a spike at the open hitting our stop and taking us out of the play. There was no specific news.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 3.25 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         
Chart of BEN

Mckesson Corp. - MCK - close: 60.40 change: +1.25 stopped: 59.75

No specific news for McKesson today but the entire sector was higher and MCK triggered the stop at $59.75 at the open.

Entry  on   January 30 at $ 58.82 
Change since picked:       + 1.58
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         
Chart of MCK