I had a feeling I would be talking about a lower market in the “weekly wrap-up” and my gut feeling proved me right. It was a terrible week for the market if you were bullish (although the Gold stocks did well) as the bears came out in force to push the Dow to its lowest level in nearly two years. Four words for you leading the debacle: Oil, Banks, Housing and the Dollar. These are the real “Four Horsemen” of the market right now.
This past week, the Dow plunged 496 points, or 4.2%, to finish at 11,346. The S&P 500 dropped 40 points, or 3%, to close at 1,278. The Nasdaq fell 91 digits to end at 2,315, a 3.8% decline. In case you are keeping score, in two weeks the Dow has lost over 900 points…
The focal point of the week was the FOMC meeting. The Fed did nothing meaning they will likely keep rates steady for the near-term. However, oil took center stage once again and higher gas prices are affecting a number of stocks in different sectors.
Nobody is buying new cars. Ford (F, $4.98, down $0.09) lost $0.83 for the week and General Motors (GM, $11.55, up $0.12) lost $2.24 with Friday’s 1% gain. And let’s not forget CarMax (KMX, $14.85, down $0.08) which continues to set new 52-week lows.
And what about the Restuarant stocks? Punished. Sonic (SONC, $14.42, down $0.11) is down nearly 50% from its 52-week high. Jack in the Box (JBX, $23.02, down $0.36) is down from a high of $36. McDonald’s (MCD, $56.50, up $0.05) has held up rather well but I’m really starting to like Sonic at these levels. I’m not sure on the options yet because I still think the stock could head lower although support is strong at $14. However, if Sonic can’t hold $14, it could be headed to $10. Write this one down and check it around Christmas as a lottery pick…The December 17.50 call (ZSQLW, $0.70, unchanged) will be worth at least $2.50 if Sonic can get back to $20. These are the farthest out options available right now for Sonic and if the stock is at $18.20 by 12/19/08, we break even. That might be asking a bit too much from the options but buying the stock at these levels could be worth it in a couple of years.
Same thing can’t be said with the Financial stocks. You just can’t trust them no matter how low they are getting. A few are getting so cheap that they are trading for less than half of their book value. Wachovia (WB, $16.22, down $0.70) has a book value of $36 although I really don’t trust that number. It’s getting to the point where Wachovia is getting attractive enough for someone to buy and a nice premium could come. But when? Will a bid come at these levels or will Wachovia keep drifting lower and then a bid for $16 comes? Or will Wachovia dilute shareholder value by raising money and offering more shares? Is bankruptcy a possibility? Do you really trust Merrill Lynch (MER $32.70, down $0.35) with a looming $3-$5+ billion mortgage-related write-down coming when it releases earnings? Merrill has a 52-week high of $89. Keep an eye on the July 32.50 puts (MERSA, $2.16, up $0.05) which were pretty active Friday.
Turning back to oil, OPEC’s president said oil could hit $150 or $170 a barrel this summer. Duh. It closed at a record high of $142 a barrel on Friday. That might now be as high as the $200 some have predicted but either way this is getting absurd and has been for quite some time. Gas at $5? We just recently hit an average of $4 a gallon and now they are saying it could go up another 20% in a month or two? Yikes.
It’s tough to say how this will all shake out but with so many negaitives surrounding the market and no major catalysts in site, we could see a lower market heading into the holiday weekend.
Rick Rouse
Rick@OptionsMentoring.com
