Daily Newsletter, Tuesday, 4/20/2010

Table of Contents

Market Wrap

96,000 iPhones A Day

by Jim Brown

Apple continues its domination of the smart phone space by selling 1.2 million iPhones more than analysts expected.

Market Stats Table

The economic news was ignored today and for good reason. The two reports were not ones that traders tend to watch. The weekly chain store sales rose to 0.2% from 0.1% the prior week. Obviously that was not earthshaking. The Risk of Recession report showed the risk of a recession six months in the future fell to 26% from 32% in the February report. That is the lowest risk rating since 2007. This suggests the recovery is becoming more sustainable.

Risk of Recession Chart

This is a very light week for economics. There is nothing material on the calendar for Wednesday. The big event is still the FOMC meeting next Tuesday.

Economic Calendar

The big news in the market today was still earnings and it will be earnings making the headlines the rest of the week. The various headliners made a big splash in the market with some posting gains but some disappointed. IBM reported earnings on Monday after the close and beat the street and raised guidance. The stock lost more than $3 because investors were disappointed by a drop in new service contract signings. Overall new contract signings fell -2% to $12.3 billion, weighed down by a -23% decline in application management contracts. IBM said the contract signings metric was impacted by a very strong comparison quarter in 2009. Overall revenues rose +10.6%.

Overall it was a strong earnings report with EPS at $1.97 compared to estimates at $1.93 per share. Profits were $2.6 billion. Unfortunately IBM lost -$2.54 for the day to close at $129.61. Buy the rumor, sell the news. IBM was up over $5 over the prior week on expectations.

IBM Chart

Steel Dynamics (STLD) posted earnings on Monday that beat the street and raised guidance for the rest of 2010. STLD posted earnings of 29-cents compared to analyst estimates of 26-cents. This compared to a 48-cent loss in the comparison quarter. STLD said the price of steel rose +$50 to $736 a ton in Q1. Shipments rose +20% sequentially. Overall it was a great earnings report. STLD shares fell -3% on the news.

STLD Chart

Juniper (JNPR) reported earnings after the close today of 27-cents and that beat analyst estimates of 26-cents. Revenue rose +19%. The quarterly profit of $163 million compared to a loss of $4 million in the comparison quarter. Juniper shares fell -7% in after hours trading.

Juniper Chart

Yahoo reported earnings after the close that nearly tripled. The results were the best quarter since Carol Bartz was hired as a turnaround specialist 15 months ago. Bartz said display advertising grew by +20%. Earnings of 15-cents excluding items beat analyst estimates of 9-cents per share. Revenue of $1.6 billion was only slightly higher than the $1.58 billion in the comparison quarter. Revenue after traffic acquisition costs was $1.13 billion and was below analyst estimates for $1.17 billion. Yahoo shares fell -4% in after hours.

Yahoo Chart

Apple was the biggest earnings report after hours. They crushed the estimates of $2.45 per share with earnings of $3.33 per share. Revenue rose to $13.5 billion and well ahead of the street estimates of $12.09 billion. Gross margins were 41.7%, up from 39.9% in the year ago quarter. Apple said it sold 2.94 million Macs (est was 2.9M), 8.75 million iPhones (est 7.5M) and 10.89 million iPods (est 10M). This was a huge beat on all major products. They sold a million iPhones more than analysts expected.

In after hours trading Apple shares spiked +7.1% or +$17.41 on the news to $258. On the downside Apple predicted earnings for Q2 of $2.28 to $2.39 compared to analyst estimates of $2.70 per share. Since Apple normally guides significantly lower nobody really got excited over the low estimates. Revenue was up +49% and net income was up +90%. $1.1 billion in iTunes were sold in Q1. iPhones had their best quarter ever with +131% year over year growth. Apple now has 286 stores that generated $1.68 billion in revenue. They are on track for 40-50 new stores in 2010. Cash balances increased +$1.9 billion. IPhone sales in Asia-Pacific up +474%, Europe +133%, Japan +183%. IPad orders much stronger than anticipated. COO Tim Cook said initial demand for the iPad has "shocked us."

Obviously Apple is the premier tech name and the after hours gains should drive the Nasdaq higher on Wednesday. Their current sales rate of just under 100,000 iPhones per day and 119,000 iPods per day is keeping Apple healthy. Apple is in the sweet spot of consumer demand with products everyone seems to want. Actually, their business can only get better as they expand to other countries, other carriers and broaden their product offerings.

The new iPhone that is expected to be announced in June will start an entirely new buying wave. You may have heard that an Apple software engineer, Gray Powell, lost his Apple iPhone prototype in a bar in Redwood City, CA a couple weeks ago. The phone was found and made its way to Gizmodo, a tech website, where they paid $5,000 to acquire it. They said it was functioning when they got it but Apple shut it down remotely when news broke. An Apple attorney sent a letter to Gizmodo this week demanding the return of the phone and Gizmodo quickly agreed. That letter validated their claims that the new iPhone prototype was the real thing. Link to new iPhone pictures

Chart of Apple

Goldman Sachs (GS) reported blowout earnings this morning of $5.59 per share that easily beat analyst estimates of $4.01 per share. Income nearly doubled to $3.29 billion for the quarter. It was a huge quarter for Goldman but shares weakened on news that the UK is going to launch an inquiry against Goldman along the lines of the SEC case. Goldman again pled its case during the conference call saying the SEC gave them no indications they were going to file charges last week. They said they were blindsided by the suit and the SEC did not follow its normal process of notifying the company of a pending complaint. It was also revealed that the vote by the five SEC commissioners to pursue the case was split 3:2 suggesting the SEC itself was not convinced it was a case they could win.

Goldman Sachs Chart

I got a firestorm of emails on my Goldman comments over the weekend. Clearly the investing community is polarized over the big banks. I received comments accusing me of drinking the GS Kool-Aid and didn't I understand that the big banks raped the financial system to their benefit during the financial crisis. How could I support the fat cat bankers? Hopefully President Obama can put them in their place and break them up into smaller pieces. How could I possibly recommend going long Goldman stock?

I was astounded at some of the comments. I thought Option Investor readers were a little better informed than the public that feeds off the 15-second sound bites from mainstream news. I did not realize there was so much hostility by informed investors.

Let me clear up some of these misconceptions. First, if Goldman did something wrong they should pay. I have no problem with anyone being punished for incorrect behavior. I was not making any kind of judgment call on Goldman as a company or their morality. I said in the commentary:

I don't have any special bias towards Goldman but I think they climbed to the top of the financial heap because they are smart and well managed. I seriously doubt they committed financial suicide in this transaction for a trivial $15 million fee.

I did NOT recommend going long Goldman stock. I said I would be going long Goldman in the Option Writer Newsletter. That recommendation was to sell a May $150 put in expectations of Goldman remaining above $150 through the May expiration and the put expiring worthless. It was an event driven trade to earn some inflated premium, not a judgment call to go long Goldman because I adored the company.

Some emails claimed I was too emotional in the commentary. Guilty! I was emotional because I viewed the SEC suit as politically motivated given the facts and the timing. I personally believe the government needs to stay out of the business world and let the regulators and the courts handle any problems that arise. To intentionally launch an attack on any company at the expense of shareholders just to get legislation passed should be illegal. Goldman shareholders lost $12 billion on Friday. Why didn't the SEC follow its normal course of business and warn Goldman of an impending action? Obviously there were political factors in play.

There were plenty of companies that reported earnings and saw their shares rise sharply. Some of those were Harley Davidson (HOG) +2.40, US Bank (USB) +0.60 and VMWare (VMW) +0.96. Stocks trading down after their earnings reports included Biogen Idc (BIIB), Delta Airlines (DAL), Brinker (EAT), Forest Labs (FRX), Johnson & Johnson (JNJ), Coca Cola (KO) and United Health (UNH).

Crude prices rallied +$2 to $83.45 as the May crude futures expired at the close today. Crude prices have been very volatile over the last couple weeks as inventories rose, demand fell and expiration pressures increased. The volcano has caused nearly five million barrels of jet fuel to go unused. According to different estimates there were between 95,000 and 140,000 flights canceled. That fuel demand will never return. When scheduled flights resume they will pickup on that day and all the fuel that would have been used over the prior week is backed up in the system. Refiners will have to lighten up on crude runs until that backup eases. We have already seen prices for jet fuel drop significantly and there are refiners trying to charter tankers to store excess fuel until demand returns.

The volcano holiday for Europe will result in a drop in economic activity for the month and slow the recovery. There are estimates that as many as two million people had their plans cancelled and as many as one million of those were tourists heading for Europe. Those vacations were canceled and/or redirected to locations away from Europe. The loss of one million vacationers plus an unknown number of business travelers is going to severely impact the European recovery.

Delta reported earnings today and they said they lost $5 million per day due to the European shutdown. The U.S. carriers actually had little impact due to the ash because there are only about 450 flights from the U.S. to Europe each day. For instance Delta said it lost $65 million due to the snowstorms in February when they had to cancel 7,000 flights in the USA.

Crude Futures Chart

Yesterday's afternoon rally struggled to continue today despite some strong earnings. So far in this cycle 14% of the S&P has reported and the anticipated earnings estimates are still in the 37% growth range. The key this cycle is the revenue numbers since companies are still seeing profits grow from the results of cost cutting. Investors want to see top line sales growth. With 14% of the S&P reported the blended revenues are up +11%. That is stronger than expected. However, the financial sector has been well above that level. Over 40% of financials have surprised to the upside with the average surprise +12%.

With earnings so strong it should be confusing to many traders as to why the market struggled to produce gains today. Obviously Apple was a stumbling point. While nobody expected Apple to miss earnings it is always the unexpected that causes the most trouble. Wise investors were probably waiting for the Apple report before adding to positions.

For Wednesday the Nasdaq should see a significant bounce at the open. Whether that carries over into the Dow is unknown. The Dow has resistance at last week's highs of 11,150 and strong support at 11,000. That gives the market plenty of room to maneuver. There are several Dow components reporting on Wednesday (BA, MCD, UTX) so plenty of risk for a major move in reaction to an earnings report. The drag on the Dow today came from earnings reports from IBM, KO and JNJ.

Dow Chart

The S&P-500 did manage to rebound over 1200 once again and should benefit from the Apple news although the S&P futures are weak tonight. The resistance from last week is 1214 and that will be the target at the open. Should that break the next resistance is 1222 and the 61% Fib retracement level from the March 2009 lows. Dragging on the S&P will be the drops in Yahoo and Juniper plus any continued declines in IBM and Goldman plus any new disappointments from Wednesday's reporting schedule. Support levels are 1185, 1175, 1165. A break under 1165 would be lights out for the current trend.

S&P-500 Chart

The Nasdaq will benefit from the $13 spike in Apple. How much is unknown since Juniper and Yahoo both fell sharply in after hours. The Nasdaq futures are up +11 tonight but they are off their highs. The NDX futures high from last week was 2038 and the futures are currently 2035. The S&P futures are up a miniscule half point and the Dow futures are slightly negative. There is some confusion in the overnight markets.

The Nasdaq Composite resistance high was 2018 and it closed tonight at an even 2500. A gain of 18 points would put it right back at resistance. This is long term Fib resistance from the March 2009 rebound. The Nasdaq is far from being assured of a breakout. With Ebay, QCOM, GENZ, NVLS, SBUX and SNDK reporting on Wednesday there is some event risk. Add in MSFT and AMZN on Thursday and the risk increases. Obviously everyone expects those companies to do good but they also expected IBM, JNPR and YHOO to do good. I continue to be cautious on the Nasdaq with real support well below at 2400.

Nasdaq Chart

In summary, the earnings to date have been good on the surface but more companies have declined after the reports than those that rallied. The top line revenue has been weak and guidance in some cases has been lower than expected. Apple is the exception rather than the rule and they also guided significantly lower but that guidance was ignored.

I am still concerned that earnings will peak on Thursday and traders will immediately begin worrying about the FOMC meeting that starts next Tuesday. It would be the perfect news event to precipitate a decline. We don't expect the Fed to alter its language but it is always a possibility.

I would be cautious about instituting new longs at new market highs on Wednesday.

Jim Brown

New Option Plays

This new play is on the global recovery.

by Scott Hawes

Company Description:
Diana Shipping Inc. is a holding company. The Company is a global provider of shipping transportation services. It specialize in transporting dry bulk cargoes, including such commodities as iron ore, coal, grain and other materials along worldwide shipping routes. As of December 31, 2009, its fleet consists of 22 dry bulk carriers, of which 14 are Panamax and eight are Capesize dry bulk carriers, having a combined carrying capacity of approximately 2.4 million dead weight tons (dwt). As of December 31, 2009, its fleet consisted of 13 modern Panamax dry bulk carriers and seven Capesize dry bulk carriers that had a combined carrying capacity of approximately 2.2 million dwt. Each of its vessels is owned through a separate wholly owned subsidiary. In January 2010, the Company established its wholly owned subsidiary Diana Containerships Inc. (DCI), with the purpose of acquiring containerships.(source: company press release or website)

Why We Like It:
DSX has broken out of a downtrend line from January 11 and also has upward trend line support from February 5. DSX curled back around to test the broken downtrend line which intersected with its upward trend line yesterday. The stock has also been in an upward sloping channel since February. DSX had a monster day today closing up +4.05%. I am suggesting opening call positions if DSX retraces some of today's gains. I would like to buy calls if DSX trades down to $15.02 which is just above the stock's 20-day SMA. I envision this as a fairly quick trade lasting about one week. We'll place a stop at $14.32 which is below Monday's low and all of the stocks moving averages. Our target is $15.65 with a more aggressive target at $16.00.

In Play Updates and Reviews

We are flat OXY and KO

by Scott Hawes

Good evening traders. The sell-off on Friday appears to be a thing a past as the indices have gained back most of their losses, but not all of them. Sellers are showing up and the indices are below the highs from last week. Apple may boost the markets tomorrow as they reported better than expected earnings, again! This is par for the course with Apple though and if the stock acts anything like other companies who have reported blockbuster earnings, then we may see some profit taking come in. I want to reiterate that being nimble with position management is paramount as the market is being driven by news which can create whipsaws in both directions. Be sure to protect profits.

I also wanted to take a moment to share with you how I manage exiting positions when there is a gap up or down in stocks at the open. This happened with OXY today and enabled us to stay in the position longer and exit at a better price. If you want to exit a position that has a gap up or down (or is very close to a stop) I suggest you devise a rule that fits your style. For long positions here is my rule of thumb: If the stock gaps down, wait for the first 15 minutes of trading before doing anything. Then place a new protective stop just under the low of that first 15 minutes of trading, i.e. below the 15-minute bar. Reverse the entire scenario for short positions. The reason I do this is because I want to measure the real strength or weakness in the stock. And I donâ€™t want a Good Til Cancelled (GTC) stop to be unnecessarily triggered at the open because often times stocks gap and reverse immediately, keeping me in the position. In OXYâ€™s case this worked perfectly today and the stock ultimately hit our target, keeping us in the position.

We initiated calls on GT this morning at $1.90. The stock spent most of the day bouncing back and forth but did close higher by +1.42%. I am expecting GT to rally from here and will be looking to exit the trade if GT trades into the $14.70 to $14.75 area which is our target. A more aggressive target is $15.90. GT has earnings on April 28 and I plan to be out of the trade by then. There is a key pivot level at $14.00 that I expect to hold as support if there is any weakness in GT. Readers who have not initiated positions may do so on any weakness but I am viewing this as a quick trade and plan to be out prior to earnings. Our target is $14.75. Our time frame is about one week.

Current Position: Long MAY CALL $12.50, entry @ $1.90

Entry on April 20th at $ 1.90
Earnings Date 4/28/10
Average Daily Volume = 4.3 million
Listed on April 19th, 2010

Why We Like It:
The overall market rally was not enough hold back SPG as it closed +2.12%. There is still plenty of resistance overhead that I expect to be a drag on the stock. SPG is still below its 20-day SMA (currently $85.17) and broken trend line from March 22. Often times when stocks break through SMA's and trend lines they will reverse to go back and test these levels prior to continuing in the direction of the break out, or break down in SPG's case. This may be what SPG is doing now. Our stop at $86.35 is above both of the aforementioned areas. Conservative traders may want to move up their target on SPG to $82.05 which is just above Friday's low. Should SPG trade to this level I will be looking to take profits and/or tighten stops depending on overall market weakness. A more aggressive target would be $79.50.

Current Position: BUY MAY PUT $80.00, entry at $2.20.

Entry on April 19th at $ 83.75
Earnings Date 4/30/2010
Average Daily Volume = 2.6 million
Listed on April 17th, 2010

Friday's sell-off appears to be a thing of the past as the indices have just about regained all of their losses, but not all of them. Many stocks that have reported earnings have been selling off on the good news. This may be a sentiment change as traders are eagerly taking profits. As such, I want to give SPY some room here to get moving back down in our direction. There is resistance from last week just overhead and I suspect SPY may retreat from here, although there may a push higher in the morning. Conservative traders should consider moving up their target to $118.85 which is just above Friday's low. Should SPY trade to this level I will be looking to exit the position. A second target could be $117.75. Our stop remains 123.05 which is just above SPY's 200-week SMA.

Current Position: SPY PUT MAY $119.00, entry at $2.05

Entry on April 13th at $ 2.05
Earnings Date Not Applicable
Average Daily Volume = 164 million
Listed on April 12th, 2010

CLOSED BULLISH PLAYS

Coca-Cola - KO - close: 55.47 change: -0.85 stop: $53.95

The price action in KO right from the opening bell was our queue to close the position for a loss. After beating earnings the stock proceeded to sell off hard and we are flat for a loss on the position. I have been suggesting to readers in the updates to considering exiting positions to preserve capital as KO was not performing well. The stock could not break through congestion in the $55 to $56 area. KO tends to be a defensive stock but investors are simply not enthused with their earnings report as the company missed revenue estimates. I suggest readers who still have positions exit soon. There is resistance in the $54.60 area on the intraday charts.

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010

Occidental Petrol. - OXY - close: $86.59 change: +1.90 stop: 83.45

OXY has been very volatile lately and we closed the position this morning for a small gain. The volatility often times signals a change in trend and I would rather preserve capital than hope OXY breaks out to new highs. I also wrote in the editor's note how traders could have managed exiting the position this morning as OXY rallied up to our target at $86.75. This could have kept you in the trade longer as the market was moving hogher.