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Wednesday, July 30th, 2008
The Financial stocks look like they may be setting up for another run higher. The sentiment for these stocks can change daily but the recent developments with Merrill Lynch (MER, $27.13, up $0.88) may actually be a good things. Merrill has been raising capital and selling troubled investments which will greatly reduce risk to the company moving forward. Other banks may follow suit.
News this morning that the Federal Reserve is going to extend its emergency borrowing program for investment banks could also lead to a small rally. The program will also be available to commercial banks as well and will allow bids on cash loans that last for 84 days, along with the 28-day loans that are now available. The previous plan was set to expire in September but has now been extended through January 30, 2009.
I had profiled a few longer-term call options a couple of weeks ago and we were able to ride most of them for average gains of 50% in less than a week. I’m going with the same plays again although our holding period may be longer. The market could be setting up for another rally and Friday’s unemployment report will have a huge impact on the market. If all is well, we could be starting August with some sort of rally.
I still don’t trust Merrill Lynch as a company so we will see. The January 35 calls (MERAG, $2.00, up $0.20) were first profiled at $1.90 and we exited them in the $2.65-$2.75 range. Some of you may have gotten out at even higher prices as the calls hit a high of $3.35. I like entry points here at these levels as this could be a “trading bottom” for Merrill Lynch.
Citigroup (C, $18.87, up $0.42) has traded as high as $19.50 this morning but many of the financials popped at the open. The January 20 calls (CAD, $2.30, up $0.27) were originally profiled at $1.25 and were sold at $2.60 the first time around. I like them again even at current prices. The January 22.50 calls (CAA, $1.42, up $0.19) can also be considered.
Wachovia (WB, $16.85, up $1.15) is the first bank I think will eventually get bought and maybe a bid from Goldman Sachs (GS, $183.74, up $2.11) will surface down the road. The January 15 calls (WBAC, $4.70, up $0.60) were first mentioned at $1.30 and $2.60 was our exit point. The stock went on a wild ride the day it announced earnings, trading lower before skyrocketing higher. These calls are much higher than our original entry price so we are going to move to the January 20 calls (WBAD, $2.25, up $0.25).
The average cost to buy one contract for any of these plays is around $200. They are all still considered “lottery plays” but I’d rather be picking on where their stock prices will be in six months instead of trying to pick a 3-digit number for a daily draw.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Financial Stocks Look Ready to Bounce, LEAP options
Posted in Hot Stocks, Sectors | No Comments »
Tuesday, July 29th, 2008
Amgen (AMGN, $62.28, up $1.80) continued its recent hot streak today following Monday’s 12% gain on better-than-expected quarterly earnings and a raised 2008 forecast. There was a lot of action last Friday as traders were positioning for the company’s earnings report. The biggest news, however, wasn’t the company’s numbers so to speak. Late Friday, the company also reported Phase 3 clinical trial results that showed its bone drug, Denosumab, reduced the risk of bone fracture in post-menopausal women.
Amgen reported earnings per share of $1.14 on revenue of $3.76 billion. Net income fell nearly 8% to $941 million but the decline was smaller than expected and overlooked when the company raised its full year earnings forecast. Amgen provided revenue guidance for 2008 in a range of $14.6-$14.9 billion versus Wall Street’s expectations of $14.4 billion. Earnings are expected to be in the $4.25 to $4.45 range versus $4.19 a share which is what analysts were expecting.
The company is counting on Denosumab as its next biggest money-maker over the next few years with analysts predicting sales of $1.7 billion by 2012. The positive results from its latest study could push those numbers higher. As usual, the parade of upgrades on Monday should have been expected. Three brokerage firm raised the stock to a “Buy” rating while another initiated coverage with the same rating. Their price targets were anywhere from $70-$80 a share but the drug will still need FDA approval.
The August 60 calls (YAAHL, $3.15, up $0.75) have provided some stellar gains for those of you who may have bought them on Friday or Monday. However, there was heavy volume in the October 65 calls (YAAJM, $2.85, up $0.70) as nearly 18,000 contracts traded hands. Also noteworthy is the open interest in the October 50 puts which could suggest that option traders are looking to protective their positions as well should Amgen stumble from here.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Amgen's earnings, Denosumab
Posted in Earnings | No Comments »
Tuesday, July 29th, 2008
The market is on the upswing as we head to lunch following yesterday’s huge loss. Oil is down a little over $3 to $121 level and the talk is it could be on its way to $100 a barrel. Just a few weeks ago we were approaching $150 so the continued slide in oil is having a positive affect on the market.
The market also got some good economic news as the Conference Board’s July index of consumer confidence rose slightly to 51.9 from 51 in June. Consumer spending accounts for more than two-thirds of U.S. economic activity so the uptick was welcomed news.
The next stop for oil would be the $117 level which could pave the way for a slick road to $100 a barrel. Of course, the market may be getting ahead of itself but comments from OPEC’s president that oil’s current price is “abnormal” and could fall to $70 or $80 is fueling the fire. Oil is at a 10-week low and the recent slide has also coincided with a stronger U.S. dollar.
The dollar is at a 5-week high and a stronger dollar is pushing commodities prices lower. Copper, gold, and natural gas are all significantly off their highs of just two weeks ago. Barrick Gold (ABX, $42.63, down $1.57), Goldcorp (GG, $39.55, down $1.40), Gold Fields (GFI, $11.97, down $0.09) and Newmont Mining (NEM, $47.70, down $1.41) are all trading lower today.
Today’s rally can certainly be contributed to the fact that oil is lower. But any sustained rally is only likely to occur if oil continues to retreat. It’s tough to say if we get a straight drop to $100 a barrel for oil but if we do and it can stay at $100 a barrel or below, it will certainly help stabilize the market over the near term.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Conference Board's July index of consumer confidence, Gold stocks, oil lower
Posted in Commodities, Economic News, Oil, Sectors | No Comments »
Tuesday, July 29th, 2008
Just when it looked like the market had turned a corner, the bears once again seized control. Oil had a little bit to do with the sell-off but the financial sector was once again the center of attention.
The financial sector got off to a good start although market sentiment wasn’t all that great. There was some news over the weekend that a few more regional banks were shut down which brings the number to seven (and counting). The selling intensified in the afternoon session when the Treasury Secretary spoke.
When the dust settled, the Dow finished the session 239 points lower to 11,131. The 2% drop was paced by the financial sector which ended the session down 4.5%. The Nasdaq also lost 2%, or 46 points, and closed at 2,264. The S&P 500 took a 23 point hit and finished the day at 1,234.
Merrill Lynch (MER,$24.33, down $3.19) is on its way back down after spending most of last week above $30. The selling in Merrill started on Friday when the stock lost $1.50 and continued yesterday. There was no “big” news during the trading session but after the bell Merrill said it plans to raise $8.5 billion by selling new common stock. Hmmm. Reminds me of the Lehman Brothers Holdings (LEH, $15.27, down $1.78) debacle. Lehman sold $4 billion of common stock priced at $28 back in June and you see where its share price is.
In Merrill’s case, Singapore’s Temasek Holdings has already agreed to buy $3.4 billion of the new shares. Gee, imagine that. What is unbelievable is the fact that institutions, foreign companies, investors, hedge funds, or whoever is putting so much money into these inflated of deflated stocks. The knuckleheads who bought Lehman are looking at nearly a 50% loss and Vegas may soon be taking bets on where Merrill is eventually headed.
The fact that the financial sector is so volatile right now is great for us. I profiled some Merrill Lynch July 32.50 puts at the end of June when Merrill was on the way down. The puts went from $2.15 to $7.00 a few weeks later and we were eventually stopped out. But not before we booked 200%+ gains. Then the financial sector started to rally and we bought four different call options on four different companies, held them for a week, made money and were stopped out. The gains weren’t as big as the Merrill put option trade but many of you made 50% or more.
The point is, and although it is tricky, we can keep playing the same trends over and over. Sure, we will have to make some adjustments but the price swings are allowing us enough time to go both long and short and the market is giving us plenty of clues on which way the pendulum is swinging.
Here’s how the other stocks we continue to watch ended on Monday:
Citigroup (C, $17.43, down $1.42)
Wachovia (WB, $13.63, down $0.87)
Goldman Sachs (GS, $172.90, down $5.76)
Fannie Mae (FNM, $10.31, down $1.24)
Freddie Mac (FRE, $7.72, down $0.55)
We could be getting close to another bottom for these stocks which may provide another chance to go long. However, the financial sector could also be setting up for another major move to the downside.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Bear Markets, financial sector bear markets
Posted in Company Commentary, Market Analysis | No Comments »
Monday, July 28th, 2008
Chipotle Mexican Grill (CMG, $66.04, down $0.27) has continued its downtrend today following last week’s drubbing. The stock was hit hard last Thursday despite an outstanding 2Q earnings report. The biggest reason for the sell-off was the fact that the company said that sales growth had softened through July and that higher food and labor costs could pinch profits.
On Thursday morning, there were a bevy of downgrades on Chipotle. Jefferies & Company lowered its rating on the stock from “Buy” to “Hold”, JP Morgan downgraded the stock from “Overweight” to “Neutral” and RBC Capital Markets chimed in with a “Sector Perform” rating, a step down from “Outperform”. Don’t get me started. The analysts that made these calls were totally late to the party. The breakdown in Chipotle has been building for weeks and all an investor had to do was look at the charts.
If I had no idea Chipotle was announcing earnings and that the stock was on the verge of a major breakdown, I could have lost a lot of money. What would have happened if I was a new investor and I did some research and my first investment was going to be in Chipotle? I would have seen that three other “Wall Street” analysts agreed with my analysis and if I would have bought 100 shares at $80, I’d be showing nearly a 20% loss. That’s one of the problems I have with stock upgrades and downgrades.
Of course, we don’t rely on upgrades and downgrades for our trades but they can have an affect on our positions. This time, those downgrades are holding the stock in the $60′s for the time being. The August 70 puts (CMGTN, $5.80, unchanged) were profiled at $1.60 in the blog and should have been closed Friday for gains upwards of 200%. This was only a one to two day trade but some of you may have left some on the table hoping for another leg down.
The trade was another homerun and its best to close the trade instead of trying to squeeze a few more dollars out of it. I can tell you from experience, sometimes keeping a trade open for just a day or two longer can have a dramatic impact on your returns. There is support for Chipotle here in the mid-$60′s and further support in the upper-$50′s but it looks like the mid-$60′s are going to hold through the August expiration date.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Chipotle Mexican Grill August option puts
Posted in Company Commentary | No Comments »
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Market Back in Bear Territory
Tuesday, July 29th, 2008
Just when it looked like the market had turned a corner, the bears once again seized control. Oil had a little bit to do with the sell-off but the financial sector was once again the center of attention.
The financial sector got off to a good start although market sentiment wasn’t all that great. There was some news over the weekend that a few more regional banks were shut down which brings the number to seven (and counting). The selling intensified in the afternoon session when the Treasury Secretary spoke.
When the dust settled, the Dow finished the session 239 points lower to 11,131. The 2% drop was paced by the financial sector which ended the session down 4.5%. The Nasdaq also lost 2%, or 46 points, and closed at 2,264. The S&P 500 took a 23 point hit and finished the day at 1,234.
Merrill Lynch (MER,$24.33, down $3.19) is on its way back down after spending most of last week above $30. The selling in Merrill started on Friday when the stock lost $1.50 and continued yesterday. There was no “big” news during the trading session but after the bell Merrill said it plans to raise $8.5 billion by selling new common stock. Hmmm. Reminds me of the Lehman Brothers Holdings (LEH, $15.27, down $1.78) debacle. Lehman sold $4 billion of common stock priced at $28 back in June and you see where its share price is.
In Merrill’s case, Singapore’s Temasek Holdings has already agreed to buy $3.4 billion of the new shares. Gee, imagine that. What is unbelievable is the fact that institutions, foreign companies, investors, hedge funds, or whoever is putting so much money into these inflated of deflated stocks. The knuckleheads who bought Lehman are looking at nearly a 50% loss and Vegas may soon be taking bets on where Merrill is eventually headed.
The fact that the financial sector is so volatile right now is great for us. I profiled some Merrill Lynch July 32.50 puts at the end of June when Merrill was on the way down. The puts went from $2.15 to $7.00 a few weeks later and we were eventually stopped out. But not before we booked 200%+ gains. Then the financial sector started to rally and we bought four different call options on four different companies, held them for a week, made money and were stopped out. The gains weren’t as big as the Merrill put option trade but many of you made 50% or more.
The point is, and although it is tricky, we can keep playing the same trends over and over. Sure, we will have to make some adjustments but the price swings are allowing us enough time to go both long and short and the market is giving us plenty of clues on which way the pendulum is swinging.
Here’s how the other stocks we continue to watch ended on Monday:
Citigroup (C, $17.43, down $1.42)
Wachovia (WB, $13.63, down $0.87)
Goldman Sachs (GS, $172.90, down $5.76)
Fannie Mae (FNM, $10.31, down $1.24)
Freddie Mac (FRE, $7.72, down $0.55)
We could be getting close to another bottom for these stocks which may provide another chance to go long. However, the financial sector could also be setting up for another major move to the downside.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Bear Markets, financial sector bear markets
Posted in Company Commentary, Market Analysis | No Comments »