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1. Commentary
2. Financials
3. Techs
4. Biotechs
5. Earnings
6. Closing Thoughts
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1. Commentary
The market continued its slide as the all three major indexes lost ground again last week. There was strength in certain sectors while other sectors continued their volatile ways, especially the financial stocks. The bulls have been unable to put together any kind of winning streak and when they do, it seems the bears are jumping back in and taking the market lower.
For the week, the Dow lost 203 points to finish at 8077, down 2.5%. For the year, the Dow is down 8%. The S&P 500 fell 18 points, or 2.1%, and closed at 831 bringing it YTD loss to 7.9%. The Nasdaq dropped 52 points and settled at 1477, down 3.4% for the week and 6.3% YTD.
The financial sector tanked another 7% last week and can be attributed to the wild girations we are still getting in the market. It was more bad news from the sector and it will be a relief when they are able to get clear their balance sheets of all the bad assets. The problem is that right now, nobody knows what “fair value” is although we should get a clearer picture over the next 90 days. If the situation improves, we can thank the new administration later.
The financial sector will again be in the spotlight this coming week. There are a slew of financial companies reporting earnings as over 125 companies in the S&P 500 will be stepping up to the plate. Add the FOMC meeting on Wednesday, toss in a few lousy economic reports that are likely to come, and we have the makings of another busy week.
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2. Financials
The banking stocks continued to make negative news as a number of them reported crappy earnings. There was some drama as well. Bank of America (BAC, $6.24, up $0.53) has lost over half its value since the start of the year and now trades on the single-digits. The stock rallied nearly 10% on Friday, but lost 13% for the week, making it the Dow’s second worst performer.
Merrill Lynch’s CEO John Thain got the ax but not before he paid out $4 billion in bonuses while at the same time reporting $15 billion more in losses to Bank of America. It is clear that BofA overpaid for Merrill and it was clear Thain overpaid on his $35,000 “commode with legs” and his $87,000 area rug in his plush new position with the company…
Capital One (COF, $19.32, down $2.62) shares tanked more than 10% after reporting it had to write-off another billion for bad loans and posted a worse-than-expected loss for the quarter. There were a number of analysts who cut their price target on the stock and lowered their rating. On Thursday, when Capital One missed earnings, they also said more credit losses are on the way. Not good.
The Capital One February 17.50 puts (COFNW, $1.60, down $0.15) actually lost 10% because they were so inflated as far as pricing goes. Over 13,000 contracts traded hands but they did trade to a high of $3 when the stock hit a low of $16.91 on Friday. Further out, bearish traders are also targeting the March 15 puts (COFOC, $1.50 ,down $0.05). If the stock is at $12 by March 20, 2009 these puts will double in value and will be worth at least $3 by expiration. Hmmm…
American Express (AXP, $16.00, down $0.06) also hit a fresh 52-week low of $14.72. Amazing. AmEx used to be a $50 stock. The company reports earnings after the market closes on Monday. Those who are bullish on American Express, see Capital One’s results.
Of course, we caught a little bit of the downside action in financials when HSBC Holdings (HBC, $35.65, down $1.15) hit a low of $33.48. We were all over this one a couple of weeks ago and the trades turned out to be huge winners.
From Tuesday’s blog 1/20/09:
HSBC Holdings (HBC, $33.84, down $6.11) is getting crushed again this morning on more concerns about the European banks. If you thought it was bad over here, it’s worse in Europe. There are a slew of banks that are under serious selling pressure and the fall is stunning.
The February 45 puts (HBCNI, $11.70, up $5.30) were profiled last Tuesday (1/13/09) at $3. At $12, it’s a 300% return. Our stop was at $6.50 and these calls closed at $6.40 on Friday. Sometimes, it’s just the nature of the beast.
The March 45 puts (HBCOI, $12.60, up $4.35) are up another 50% from an entry price of $4.75 and stops were set at $8. The puts closed at $8.25 which was higher than our stop but the stop was still triggered.
The March 40 puts (HBCOH, $8.85, up $3.55) are up an additional 65% from an entry price of $2.75. Stops were set at $5 and the previous close was $5.30.
The March 35 puts (HBCOG, $5.50, up $2.00) are up 60% from an entry price of $1.70. I had set a stop of $3 for them and as luck would have it, that was hit as well. –
So are there any names we can trust? Maybe. Goldman Sachs (GS, $74.91, up $3.88), and JPMorgan (JPM, $24.28, up $1.18) got it when they switched over to a bank holding company but who knows what these two stocks are really worth?
There will be an opportunity to trade these stocks and we may be able to make a little money trading the options but the premiums are jacked-up in both of these names because of the volatility. These are the two companies that are going to be around no matter what happens to Citigroup ($3.47, up $0.36) or Bank of America.
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3. Techs
It was the the good, bad and ugly with Tech this week. The Good?
Apple (AAPL, $88.36, unchanged) International Business Machines (IBM, $89.49, down $0.58) and Google (GOOG, $324.70, up $18.20). The bad was eBay’s (EBAY, $12.00, up $0.33) 15% revenue drop and the ugly was the Microsoft (MSFT, $17.20, up $0.09) debacle.
Apple, IBM, and Google had good quarters by Wall Street’s standards. eBay’s numbers slipped and Microsoft dropped a bomb on Wall Street when they missed earnings by two cents AND announced them before the market opened and not after.
The best out of the bunch might be IBM which beat earnings by 25 cents and provided some decent quidance. The stock jumped $10 from $81 to $91 on Tuesday and held up strong the rest of the week. The February 95 calls (IBMBS, $1.15, down $0.25) look like a good trade this week but I wouldn’t buy them until after the market is open at least 30 minutes on Monday.
There is resistance at $93 for the stock which could mean the limit for this trade but if IBM can get past this level, it could clear the way to a move back towards $100.
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4. Biotechs
There’s alot happening with Pharma and Bio right now. Pfizer (PFE, $17.45, up $0.24) is closing in on a deal to buy Wyeth (WYE, $43.74, up $4.91) for $67 billion that could “reshape the global drug industry”.
Pfizer will pay shareholders about $50 a share for Wyeth ($33 in cash and 0.985 of a share of Pfizer) as it attempts to address concerns over its ability to offset upcoming patent expirations. Pfizer has a number of drugs that facing expiration, including its blockbuster drug Lipitor, and the deal is crucial to Pfizer.
The two companies spent Sunday hammering out that exchange ratio and other final terms of the deal but that is the jist of it. Pfizer, also expects to raise $25 billion to help fund the deal, with help from Bank of America, JP Morgan and Goldman Sachs.
The other news I want to talk about is Genentech (DNA, $84.30, up $2.60).
Roche still has an $89/share bid on the table from last summer but there has been speculation that a higher bid is coming. There are many analysts that believe a new bid from Roche could push the shares closer to $100 and there may be pressure on Roche to speed things up.
Genentech expects to report results in mid-April in its Avastin colon cancer trial, in addition to pending FDA decisions to expand the drug’s use. The stock had a good day on Friday but drifted lower during the week and is still trading lower than where it was a week ago.
The February 95 calls (DWNBS, $0.40, up $0.20) were entered at 85 cents and the March 95 calls (DWNCS, $0.95, up $0.25) were profiled at $1.50. As you can see, these options are out-of-the-money and have lost 30%-50% of their value from their entry price. I had lifted the stops on these call options because I do believe a deal is forthcoming. However, if Genentech’s stock price doesn’t move much this week, you may want to sell the February calls.
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5. Earnings
Monday: Amercian Express, Caterpillar (CAT, $35.66, down $1.57), Freeport-McMoRan Copper & Gold ($22.81, up $0.25), Halliburton Company (HAL, $18.25, up $1.40), McDonald’s (MCD, $58.02, down $0.70), and Texas Instruments (TXI, $24.21, up $0.36).
Tuesday: Bristol-Myers Squibb (BMY, $22.39, up $0.04), DuPont (DD, $24.16, up $0.24), Gilead Sciences (GILD, $48.25, down $0.45), Valero Energy (VLO, $24.59, up $1.29), and Verizon (VZ, $30.44, up $0.28)
Wednesday: AT&T (T, $26.12, up $0.61), ConocoPhillips (COP, $48.18, down $0.09), Flextronics (FLEX, $2.56, down $0.07), Pfizer, Starbucks (SBUX, $9.08, down $0.04), and Wells Fargo (WFC, $15.87, up $0.08).
Thursday: Altria Group (MO, $$16.84, down $0.12), Amazon.com (AMZN, $50.63, up $0.69), Ford Motor (F, $1.80, down $0.14), Rambus (RMBS, $8.81, up $0.46), Raytheon (RTN, $50.38, down $1.16), and Under Armour (UA, $18.77, down $0.60).
Friday: Chevron (CVX, $70.82, up $0.87), Honeywell (HON, $32.21, up $0.24), and Procter & Gamble (PG, $56.00, down $0.96).
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6. Closing Thoughts
I have been mentioning the key support levels and I hate to sound like a broken record but they are important. The Dow has been trading between 8000 and 9000 since the November low of 7392. This has provided support for the market but it appears the bears are trying to take the Dow down to a new trading level. That level could be 7400-8000 or it could be even lower. Then again, the market is due for a rally.
The bulls are banking on the stimulus package to help the market while the bears simply don’t believe the plan will work. We’ve been in this tight range for three months now and pretty soon we should know what the next leg of the market is going to be. In the meantime, we have used both call and put options in the current market with tight stops and one foot already out the door.
In markets like this, we may leave some profits on the table but that’s okay. I’d rather walk away with a 100% return than risk having to give some of those profits back. The market remains volatile which has helped make us mad money in two or three trading sessions. That trend should continue this week and if some of these trades happen to jump 50% or more, there is nothing wrong with closing them out. Of course, I’ll be here throughout the week with updates.
Rick Rouse
Rick@OptionsMentoring.com
