This past week the markets moved mostly sideways
but the tide still turned in our favor…
MBIA (MBI) SLID DRAMATICALLY LOWER BOOSTING OUR
MARCH 12.50 PUTS BY A QUICK AND GENEROUS TWENTY-THREE PERCENT!
By the looks of things the profits on that play are
just getting started--of course we’ve also got the calls to cover the
upside but the puts are making up for both of them as the stock slides
lower. Federal Express moved mostly sideways ending the week pretty much
where it started but that one is poised to profit as well. We officially
got out of RCI as it rebounded up to our stop although apparently
several of you got out at a much better price when the stock ticked
below our profit trigger on the sixth.
It looks like we’ve got a market in transition
which makes picking your individual plays that much more critical—to
find out where the potential is let’s take a good look at…
WHICH WAY THIS MARKET IS HEADED
This past week the
markets churned sideways with very little conviction one way or the
other. Only one day managed to break 7 billion in volume---extremely
light for an options expiration week. Volume in the high 6-billion range
is anemic for any directional trend and this level of trading shows an
extreme lack of conviction by both bulls and bears.
The S&P closed
nearer the upper end of its range than the Dow/Nasdaq due to buying in
the financial stocks. With financials accounting for 21% of the S&P any
gains show up immediately in the index—just keep in mind the financials
are not out of the woods yet and that trend could reverse as quickly as
the next mammoth write-off announcement.
Tech stocks didn’t
do as well but still managed to close right in the middle of their
range. However the trend is to the downside so unless overhead
resistance is broken it would be smart to maintain a bearish bias.
Hewlett-Packard will be the key for techs this coming week. Their
earnings on Tuesday will be the biggest influence on the Nasdaq with
traders especially paying attention to forward guidance.
One argument for
the bullish cause is that the market didn’t crumble last week in the
face of some pretty withering economic news. Consumer Sentiment fell to
69.6 for February from a reading of 78.4 in January marking the lowest
reading since Feb-1992. This level of confidence is right where it’s
been in past recessions--the expectations component fell to 59.1 from
68.1 and the present conditions component fell to 85.4 from 94.4. A
pessimistic consumer doesn’t bode well for retail sales—and retail sales
are what drive the US economy.
Speaking of retail
Best Buy (BBY) warned last week that fiscal 2008 profits would be lower
than expected due in part to lower sales in January. Keep in mind Best
Buy is the king of the electronic retailers so when they’re headed south
so is the sector.
Wal-Mart (WMT)
reports earnings on Tuesday and analysts are mixed over what to expect.
WMT cut prices to the bone in December and the strategy worked with same
store sales rising 2.7%. However conditions worsened in January when
shoppers redeemed gift cards for necessities and low margin food—not
exactly what the company was hoping for. Sales only rose a half a
percent when analysts were expecting 2.0%. If Wal-Mart disappoints this
week it could tie a big fat anvil to the entire market. Tuesday is the
first day of trading this week because of President’s Day and it’s
liable to be a doozy between Wal-Mart and Hewlett-Packard. HP might do
okay but I wouldn’t hold my breath on WMT.
The NY Empire State
Manufacturing Survey fell -21 points from 9.0 to -11.7 in February. This
was a massive drop and completely out of context with the last 12
months. This is the lowest reading since May-2005. New orders dropped 12
points to -11.9 and shipments fell 20.7 points to -4.9. The only
component that rose was the prices paid index which rose to 47.4 from
40.2 indicating inflation is still rising. The employment components
fell with both the hours worked and number of employees declining.
Like I said it’s a
bullish sign the markets didn’t implode considering the economic
news—maybe everyone’s counting on those government stimulus checks to
make everything okay.
The economic
calendar for the last two weeks was light but that is about to change.
We get the Fed minutes on Wednesday and the Consumer Price Index (CPI)
and the Philly Fed Survey on Thursday. After the Empire Survey the
Philly Fed Survey might be a little scary. The consensus is for a rise
from the very bearish -20.9 in January to "only" -12.0 in February—but
once again the recent trend has been surprises to the downside.
The Fed meets again
on March 18th and so far Bernanke has been indicating another rate cut
when he testified last week. Meanwhile his predecessor Greenspan howled
from the podium in Houston at an energy conference that the U.S. now has
better than a 50% chance of a recession. And still the markets held
steady.
The biggest
sentiment problem right now is a combination of a reluctant consumer,
with rapidly rising inflation and very low economic growth. The way the
economic reports are panning out the Fed will likely become trapped
between their desire to goose growth and combat rapidly spiraling
inflation. The reports we saw last week definitely showed signs of this
condition. The last time we really had serious stagflation was the late
1970s when growth slowed to a crawl and interest rates spiked to
18%-19%. If you think the real estate market is slow now imagine ANY
kind of interest rate rise.
If inflation in
the CPI report next week continues to spike higher we could be looking
at another Fed disaster in the making. The market would not look
positively at rapidly rising inflation in those critical reports over
the next two weeks.
The most immediate
crisis right now is still the bond insurers. After a week of frustrated
meetings the State of New York warned they might act to break-up the
companies into their component parts if an agreement can’t be reached
within a week. On Friday FGIC announced they would split their company
into two parts with the bond insurance portion breaking away from the
toxic waste that guaranteed subprime CDOs. FGIC was downgraded by
Moody's to A3 from AAA and said the FGIC balance sheet had materially
weakened due to CDO deals.
The problem with the bond insurers is not necessarily insolvency but
that their reserves have fallen to levels that do not support their
previous AAA credit ratings. To regain that rating they would need tens
of billions in new capital or to split their business parts to allow the
low risk bond business to be recapitalized and reviewed by the rating
agencies to recover their AAA rating—but in-spite of some heroic efforts
it’s doubtful they will be able to avoid credit downgrades.
In another
indicator of deteriorating mortgage and credit quality Countrywide
reported on Friday that delinquency rates rose to 7.47% in January
compared to 4.32% in Jan-2007. Countrywide has about $1.48 trillion
worth of mortgages outstanding. Foreclosures pending rose to 1.48% in
January compared to 0.77% in Jan-2007. These numbers continued to spike
higher despite the massive effort underway to offer options to those in
trouble.
So we’ve got a
market that has remained remarkably resilient in the face of plummeting
consumer confidence, rising mortgage delinquencies, a bond insurer
crisis and signs of renewed inflation—the question is…
HOW DO WE MAKE
MONEY ON IT?
We’ve got two plays
this week—and in spite of a resilient market they’re both bearish.
Our first play is
on a building and remodeling component supplier that just announced
earnings late last week. Earnings were actually decent but forward
guidance was downright scary—scary enough for investors to dump the
stock in droves. The downside momentum is strong and the stock looks
like it has much further to fall. And we’ll be hopping on some well
placed puts first thing Tuesday to take advantage of it!
Our next play is on
an energy producer that looks to have peaked—and what a steep peak it
is. The stock is bumping up against a resistance level that has turned
the stock sharply south twice in the past four months and now it looks
like it will happen again. And when this one decides to plunge it
doesn’t screw around—the right puts could make us a fortune in short
order!
We’ve got two great
new plays lined up and a market on the move so let’s get going…
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