10:30pm (EST)
1. Market Summary
2. Potash Gets Takeover Offer
3. Figuring Out FedEx
4. Earnings
5. Week Ahead & Other Tidbits
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1. Market Summary
The bears were looking to take the overall week and were doing a good job as they had the Dow reeling triple-digits at halftime on Friday. We mentioned in our morning update there wouldn’t be any major economic news to trade and the bulls seemed a little nervous opening new positions over the weekend. Although the bulls cut their losses in half by the closing bell, the major indexes finished mostly lower for the day and mixed for the week.
The Dow fell 58 points, or 0.6%, and finished at 10,213. Hewlett-Packard (HPQ, $39.85, down $0.91), one of the Dow’s 30 blue-chips, fell 2% after lackluster earnings results and accounted for 7 of the 58 points. For the week, the index fell 90 points, or 0.9%, and settled just above our 10,200 target. There was a huge battle on Tuesday and Wednesday at the 10,400 level but the charts have been telling us a test to support was coming. Resistance remains 10,400 and the bears will target 10,000 this week. A break below 10K could lead to a little panic selling which would bring Dow 9,800 into play.
The S&P 500 slipped 4 points, or 0.4%, to finish at 1,071 and also closed right near our target of 1,070. The index fell 8 points for the week and traded to a low of 1,063 on Friday. The 1,100 level remains a brick wall for the fragile bulls and the latest drop should clear the way for a test of 1,050 and then 1,000. The May 6 “flash crash” low was 1,065 and the July low was 1,010 for the S&P. The writing is on the wall for a test lower unless the bulls hold.
The Nasdaq actually finished the day fractionally higher (0.81 points) and closed at 2,179. For the week, the index added 6 points, or 0.3%, but continues find resistance at the 2,200 level. Our near-term target has been 2,150 and the index touched a low of 2,155 on Monday and 2,159 on Friday. A break below these levels should pave the way for a test to 2,050.
Although the momentum has favored the bears over the past few weeks, we must remember we could still stay stuck in this trading range. Right now the major indexes are nearing their lower channels of this range so it will be important to watch to see if the bulls can hold these levels.
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2. Potash Gets Takeover Offer
Potash (POT, $149.67, up $0.83) caught wind last Tuesday after BHP Billiton (BHP, $67.44, up $.09) submitted a bid for the company for $130 a share. Potash closed at $110 on Monday and ran to $142.95 after the announcement. Now, beyond the obvious fact that investors believe BHP’s bid is too low, this kind of stock movement far beyond the asking price of a proposed takeover is worth a little more research.
First, let’s look at Potash itself. If BHP decides they want this company, they will almost certainly have to pay more for it than where the stock sits now. The rumor mill has put a price tag of $160 for a deal getting done but shareholders (and its CEO) will point to the fact that shares have reached a high of $241 (a “double top”) in June 2008. Whisper numbers go as high as BHP paying up to $200/share to get Potash. Other bids may come as the company has said it was open for a bidding war. However, there are few companies that can do $35+ billion deals and there are some who say BHP should walk away.
So why does BHP want to buy a fertilizer company?
Potash the fertilizer is used to increase crop yields and there aren’t many substitutes for it. To dumb it down, there aren’t a lot of potash mines around the world and it takes 4-7 years to get a new one producing, so barriers to entry are high. The price of potash has also been going higher, it tends to run in three year bull cycles, and we could be at the beginning of a huge pop in prices thanks to some crop issues we discuss below.
One of the major reasons for the increase in potash prices is the incredible 75% climb in the price of wheat since July. This is not just a commodity spike that will soon die. The wheat crops and many other crops have been devastated by droughts and floods this year to an extent not seen in decades. Fires in Russia have forced them to ban wheat exports, and the country is a major wheat exporter.
And there could be more trouble on the way. Supplies are very tight and getting tighter, the winter wheat crop hasn’t gone into the ground yet and conditions are so bad there is a threat wheat might not get planted in Canada. What this means is U.S. farmers will be planting a lot more wheat since the price is going to remain elevated for at least the next 6 months. Farmers will need more potash to get the best yield but they should get great prices if supplies remain low and will continue to buy lots of potash.
This also means less corn will be planted, which will drive the price of corn up, and cause the corn farmers to use even more fertilizer to get better corn yields since corn takes a lot more potash than wheat. In addition, because grain prices have been low the last few years, many farmers have skipped putting down potash, and they now need to play catch up.
All of this distress in grain prices means that not only is there a play on potash, but there could be an across the board movement in the Agricultural sector as well. Let’s take a look at a few stocks we have on our Watch List and our comments.
First, the other players with their fingers in the potash pie, include Mosiac (MOS, $56.64, up $0.08), which we will be profile next week, Agrium (AG, $68.71, up $.27), Intrepid Potash (IPI, $23.72, down $.33 ) CF Industries Holdings (CF, $90.01, up $1.16) and for those who want to invest way overseas, Sociedad Quimica Y Minera (SQM, $43.12, up $.16).
Other stocks that could be on the move:
Deere (DE, $65.13, down $0.58) is an obvious play. If farmers are making more money, they are spending more money, and nothing boosts production like the latest big green machine from this company.
Monsanto (MON, $57.73, up $0.56) makes seeds designed to tolerate drought and increase yield. Shares are well off their 52-week high of $87 and yields nearly a 2% dividend.
Bunge (BG, $53.64, down $0.43) is a little more off the beaten path. The company has some fertilizer, it does some storage, and it is tied to soybeans, another crop that may see a rise in prices.
Andersons (ANDE, $35.87, down $0.47) does a lot of wheat storage and is in the transportation business as well. They are also involved with ethanol. If corn prices go up, ethanol should go up.
Syngenta AG (SYT, $47.48, down $.52) is in the seed business too.
The Agricultural sector is heating up and could be entering a secular bull market. This simply means a sector doesn’t always trade with the overall market and, given the current conditions, these stocks might continue to get second and third looks.
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3. Figuring Out FedEx
FedEx (FDX, $81.23, down $0.35) is one of the largest package delivery holding companies in the world. They operate 4 units: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The company has already closed the books on 2010 with revenues of nearly $35 billion (their 2011 year began in June).
The 52-week range on the stock is $66.29-$97.75, which at current levels, represents a 17% discount from its high. So, are shares attractive at $81 or are they going lower? It’s hard to say because FedEx always confuses Wall Street with their earnings, the Dow Jones Transportation Index (DJTA) is looking weak, and, the economy is still sputtering.
When the company reported earnings in mid-June of $1.33 a share, they matched analysts’ expectations, but, the stock got clobbered because they projected 1Q earnings that were deemed too low. Over the next two weeks, FedEx dropped from $83 to just under $70 which was strong support.
We often say you can learn a lot from listening to conference calls or reading transcripts but what tripped us up at the time was this. In their update, FedEx said it was pulling planes out of storage to keep up with demand. This is not a cheap process and the very savvy executives at FedEx would not be doing that unless they were seeing good growth and they were confident of that growth going forward.
When you combine that with their earnings beat, it is easy to surmise that they may have been sandbagging their numbers. Sure enough, in late July, FedEx came out and raised both their 1Q and yearly revenue numbers as well as reinstating their 401k match. Shares jumped 6% that day and moved back into the $80’s before “double topping” at $87 earlier this month.
So, why did FedEx adjust its numbers again a month later? They got jealous.
A week before FedEx raised its numbers, United Parcel Services (UPS, $65.10, down $0.32) came out with their earnings. UPS also beat the Street but they raised their guidance. FedEx got a lift that day as these companies are virtually identical from an investor perspective. Both companies are very well run, give a good snapshot on the health of the economy, and they generally move in tandem.
At current levels, FedEx shares are right near the levels they were at when they raised guidance and they will report earnings in mid-September. The missing piece of this puzzle will be the August numbers. If they are good, or better-than expected, then FedEx should match or beat expectations.
However, the DJTA and FedEx are showing bearish charts so be careful if you are thinking of going long and strong in a sector that could be weakening.
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4. Earnings
MONDAY - Cninsure (CISG, $23.79, up $0.14), Focus Media Holding (FMCN, $18.11, up $0.28), Kensey Nash (KNSY, $22.86, up $0.37) and Sanderson Farms (SAFM, $43.16, up $0.13).
TUESDAY – Avago Technologies (AVGO, $20.43, down $0.08), Big Lots (BIG, $31.80, up $0.72), Burger King Holdings (BKC, $16.45, down $0.27), Bank of Montreal (BMO, $55.78, down $0.35), DSW (DSW, $25.74, up $0.73), Medtronic (MDT, $34.77, down $0.71), VeriFone Systems (PAY, $22.6, up $0.26) and Trina Solar (TSL, $23.01, up $0.16).
WEDNESDAY – American Eagle Outfitters (AEO, $13.05, down $0.05), BHP Billiton (BHP, $67.44, up $0.09), Brown Shoe (BWS, $12.84, down $0.16), Canadian Imperial Bank of Commerce (CM, $65.12, down $1.20), Cyberonics (CYBX, $22.81, up $0.25), Guess (GES, $39.31, up $0.63), JDS Uniphase (JDSU, $10.42, up $0.05), Jo-Ann Stores (JAS, $38.03, down $0.27), OSI Systems (OSIS, $27.56, down $0.11), Raven Industries (RAVN, $30.97, down $0.55), rue21 (RUE, $22.12, up $0.37) and Shoe Carnival (SCVL, $17.71, up $0.47).
THURSDAY – Aruba Networks (ARUN, $16.67, up $0.10), Bio-Reference Laboratories (BRLI, $19.10, down $0.02), Dollar Financial (DLLR, $15.67, down $0.53), J. Crew Group (JCG, $34.41, up $0.62), OmniVision Technologies (OVTI, $21.23, up $0.24), Patterson Companies (PDCO, $26.93, down $0.13), Regis (RGS, $16.98, down $0.05), Royal Bank of Canada (RY, $49.05, down $0.46) and Signet Jewelers (SIG, $27.95, up $0.14).
FRIDAY – Frontline (FRO, $28.72, down $0.55) and Tiffany (TIF, $43.30, up $0.09).
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5. Week Ahead & Other Tidbits
Economic News:
None on Monday.
The National Association of Realtors will release existing homes sales for July on Tuesday. The figures are likely to show a decline of 4.3% from June. The Commerce Department will follow that report with new homes sales for July on Wednesday. Wall Street is looking for a rise of 2.4%. Durable goods orders for July will also be out on Wednesday.
Thursday (as usual) the market gets another look at the weekly new jobless claims, which was terrible last time out.
As for other economic data, there are a couple of big ones on Friday. The Commerce Department will provide an update on 2Q gross domestic product (GDP), and the University of Michigan will update its consumer sentiment index for August. Wall Street is looking for GDP numbers to show 1.4% growth, down from 2.4%.
Crude oil closed at $73.46 per barrel and fell 2.6% for the week.
Gold ended at $1,228 per ounce after adding 1% for the week.
We expect a pivotal week so make sure you stay updated by reading our daily 9am and 1pm (EST) updates. On that note, we will be back Monday morning with a fresh outlook on the market and all of our current trades.
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Bulls Having A Banner Week
Thursday, June 30th, 2011
12:35pm (EST)
The market is pushing higher as the bulls try to make it 4-in-a-row and a clean sweep for the week. The major indexes are up 4%, on average, as we wind down June and look ahead to what should be an exciting July.
Economic news has been mixed today as jobless claims came in at 428,000 versus expectations for 420,000. Continuing claims dropped 12,000 to 3.70 million. It’s been 2 months since we have seen a print under 400,000 so instead of the president worrying about private jets, he should concentrate more on “shovel-ready” jobs.
Of course, he didn’t speak about all the limos Wall Street uses because Washington does the same but how many $5,000 locks are on each and every government officials office versus Wall Street? Traders on Wall Street all work together in an open environment and their doors are open. The knuckleheads who work for us lock themselves behind closed doors and can’t figure out how to lower a $14 trillion deficit.
Elsewhere, the Chicago Purchasing Managers Index came in at 61.1 which was higher than the previous month and better-than-expected.
The Dow is up 142 points to 12,403 while the S&P 500 is higher by 13 points to 1,319. The Nasdaq is showing a 32 point pop and is at 2,772. Call it window dressing, end of quarter, a bounce off support, whatever, but the bulls are rolling as they look to take out another layer of resistance.
As far as specific stocks, Vivus (VVUS, $8.02, up $0.14) is back over $8 and testing key resistance today after the company filed for FDA approval for its good wood drug, Avabafil. The drug will compete with Pfizer’s (PFE, $20.61, down $0.06) Viagra and other mom-and-pop players, but more importantly, the drug will bring revenue in for Vivus. Of course, we are more interested in seeing the company’s diet drug, Qnexa, come to market but it’s nice that they have a developing pipeline and that they aren’t a one-trick pony.
There has been a party in the Vivus July 8 calls (VVUS110716C000, $0.18, down $0.12) as over 3,000 contracts have traded hands so far today. These options expire in 2 weeks so it will be interesting to watch this battle going forward.
We have an ongoing option trade in Vivus but it’s not the July calls. We went further out because we feel they could be the first company to bring a diet drug to market and obesity is a multi-billion dollar market. The first company in with a safe obesity drug stands to make a windfall.
Other hot stocks this week include Potash (POT, $56.22, down $0.64) which is taking a little breather following a sweet run. We wanted to profile an option trade today because we have following the stock all week on our Watch List. This section in our Members Area lists possible trades that we are watching but aren’t “official” recommendations. However, the action has been incredible. We list these trades because we are either waiting for a breakout or breakdown or because our portfolio is full from time-to-time, and we want to keep fresh ideas on the board as we close out old trades or take profits while looking for new positions.
Sometimes these trades take-off before we can add them to our portfolio and in some cases we don’t like to “chase” but we will still follow the position. Anyhows, Potash trades monthly and WEEKLY options and we just wanted to show you the power of options and how leverage can be a thing of beauty.
Potash started the week at $52.54 and here were our thoughts Monday morning with a chart and a possible option trade (quotes from that day).
“Potash (POT, $52.54, down $0.40)
July 55 calls (POT110716C00055000, $0.70, down $0.10)
Thoughts: If shares can break above their 200-day MA, they could make a quick run back to $55 (black line, blue circles) which was previous support and is now short-term resistance. Potash also trades WEEKLY options so we may use these options or another chain if we see an opportunity.” (END)
Here were our thoughts this morning as we have been following Potash all week:
“Thoughts: These July 55 calls (POT110716C00055000, $2.55, up $1.15) options opened at 72 cents on Monday and our chart work was spot on. The WEEKLY July 55 calls (POT110701C00055000, $2.00, up $1.50) opened at 21 cents on Monday. Yes, we wish this would have been an official recommendation but some of you swung the bat and are being rewarded judging by your happy emails to us over the last few days.” (END)
We suggested selling half positions along the way and we certainly would have been out of the trade by now because the stock has done what we planned on by hitting double-nickels ($55) and the weekly options expire tomorrow.
It would have been super-awesome to have been able to turn $200 into $2,000 or $2,000 into $20,000 but it’s good to know our hard work is paying off for our subscribers. We have bagged quite a few triple-digit winners this year and in June we have hit 4, but this is one elephant we wished we would have bagged earlier in the week.
We have given you a ton of examples this week on how options work and what makes them move because we truly believe the next 6 months are going to offer some incredible trading opportunities. In fact, we could see triple-digit moves in the Dow, up or down, on a regular basis in the weeks and months ahead and it will be a great time to try to make some big money.
If you are not yet a subscriber, we urge you to give us a try. We had a hot June but we are expecting an even hotter July with earnings season coming up, the end of QE2, and with the uncertainty over the U.S debt, you can bet there will be volatility.
We will be back in the morning with our next update but look for an email today with a Special Offer for our Weekly Wrap. This publication is on F-I-R-E!
We are CLOSING 2 trades today and the profits are 50% and 133% which makes it 5 triple-digit winners for June…Subscribers, check the Members Area for the current updates.
Tags: About options trading, option trading, POT, stock and option, stock exchange, stock to buy, stock trading, trade online, trading futures, trading online, trading system, Vivus drug approval, VVUS, what are stock options, what is a call, what is option trading
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