1. Commentary
2. HSBC Holdings
3. Genentech
4. Intel
5. Earnings
6. Closing Thoughts
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1. Commentary
The market continued its slide last week led by the financial sector which lost over 15%. We had the usual suspects in-play as a number of high profile banks begged, borrowed, and pleaded with Congress for more money or sold assets to raise cash. In the end, some of the banks got a lift and the government presented an $825 billion stimulus plan that calls for $550 billion in spending and $275 billion in tax cuts. That was enough to bring the market back into positive territory on Friday but did little to help the outcome for the week.
The Dow lost 317 points, or 3.7%, to finish at 8281. The good news for the Dow is that it pretty much held the 8000 level without failing and that was huge for the bulls. The Nasdaq fell 42 points, or 2.7%, to close at 1529 for the week and also held key support levels. The S&P 500 was the biggest loser on a percentage basis as it lost 4.5%, or 40 points, and settled at 850.
The market’s volatility wasn’t as great as the volatility we saw in September and October but make no doubt, it is still there. As option traders that is great news because options have a better chance of ending up “in-the-money” in a high-volatility market than they do in a more stable market. However, you still have to be careful because high volatility can lead to the overpricing of options.
We should continue to see hundred-point swings in the Dow in the weeks ahead because we are still in a bear market. These types of markets can produce sharp bounces but until we start seeing better company earnings for several quarters, the bulls will likely have an uphill battle.
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2. HSBC Holdings
We took advantage of the financial sector’s woes and had a nice trade in HSBC Holdings (HBC, $39.95, down $0.38) going until we were stopped out. I mentioned the stock on Tuesday and here is what got the ball rolling:
From Tuesday’s Blog:
“HSBC Holdings (HBC, $46.70, down $0.98) could be on the verge of a major breakdown as the put option pits have been busier than a craps table on payday. The company is a British bank and speculation has been building that it may be the next house of cards that could fall.
HSBC has been dropping on revenue concerns and the put option activity was heavy on Monday. What is interesting was the amount of volume in some of the January put options which are set to expire this week. There were nearly 1800 contracts of the January 45 puts (HBCMI, $0.75, up $0.30) that switched hands yesterday.
The February 45 puts (HBCNI, $2.74, up $0.64) saw over 2600 contracts trade while the March 45 puts (HBCOI, $4.60, up $0.80) traded over…87,000 contracts! Holy sheet!
Folks, that is an amazing number of contracts traded for an option. The March 40 puts (HBCOH, $2.55, up $0.40) traded nearly 14,000 contracts and the March 35 puts (HBCOG, $1.50, up $0.25) traded 12 six.
That is over 100,000 contracts on 3 strike prices. So I did some research…
In December, HSBC was trading at $54 at the start of option expiration week and by Friday, the day the December options expired, bears had taken the stock down to $45. There was an enormous amount of put options buying that same week.
It appears option traders are betting big on HSBC breaking through its 52-week low of $44.59. Once again, the January put options would be the riskiest but I do like all of the February and March put options I have listed.” —
From Thursday:
“February 45 puts (HBCNI, $7.50, up $2.35). These puts were profiled Tuesday and could have been bought for under $3. We now have a profit of over 150% and you can set stops at $6.50.
The March 45 puts (HBCOI, $9.25, up $2.25) are up nearly 100% from an entry price of $4.75 and stops should be set at $8. The March 40 puts (HBCOH, $6.25, up $1.75) are up 125% from an entry price of $2.75 while the March 35 puts (HBCOG, $4.00, up $1.25) are up 135% from an entry price of $1.70. Wow. Set stops at $5 for the 40 puts and $3 for the 35 put options.
The March 25 puts (HBCOE, $1.60, up $0.50) continue to see huge volume as 26,000 contracts have traded so far. These puts were at $1 on Tuesday.” —
We were stopped out of all of these trades on Friday when the stock hit a high of $41.41 but as you can see, they did very well.
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3. Genentech
Genentech (DNA, $85.10, up $0.02) reported a solid quarter on Thursday as profits came in at $931 million, or $0.87 a share, up from $632 million, or $0.59, a year earlier. Revenue was up 25% to $3.7 billion from $3 billion. The nearly 50% rise in profits were due to the strength of the company’s blockbuster cancer drug Avastin, but Genentech disappointed Wall Street when they gave a weaker-than-expected outlook for 2009. Avastin brought in $730 million and could be used for treating brain cancer down the road.
Our main interest is what is happening between Roche and Genentech as far as a buyout offer. Genentech was mums on that subject as Wall Street continues to expect a new offer of at least $100/ share.
Roche recently commented that its bid for Genentech was on track, though no one really knows what the heck that means. Roche will come out with an offer but they will try to lowball. Genentech could start up to 15 clinical trials and apply for 10 FDA approvals this year and Roche badly wants in on that action. Additionally, Genentech could get up to 4 FDA approvals. Those will certainly be market moving events.
The February 95 calls (DWNBS, $0.70, unchanged) were entered at 85 cents and the March 95 calls (DWNCS, $1.25, down $0.05) were profiled at $1.50. Stops are set 50% belowthose entry points but can be lifted. I’m willing to take the risk of keeping them open. The premiums were not that much to start with and I think a bid is coming sooner rather than later for the company.
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4. Intel
Intel (INTC, $13.74, up $0.45) got through the week in relatively good fashion despite a 90% drop in the company’s 4Q profits. The company reported profits of $234 million, or $0.04 a share as revenue fell 23% to $8.2 billion. Intel issued two revenue warnings for the quarter over the past three months and didn’t provide much guidance for the current quarter except to say it expects sales of $7 billion.
The results met Wall Street’s expectations and analysts believe there could be a turnaround in store by the second half of the year. The stock was at $14.15 heading into the week and traded as low as $12.71. The 52-week low is $12.06 and traders had to be pleased that the stock held this level.
The January 20 2010 calls (WNLAD, $0.68, down $0.01) were trading for 92 cents and the January 15 2010 calls (WNLAC, $1.93, down $0.04) were going for $2.30 and both got cheaper. The premiums were a little juiced as you can see and I still don’t think they are attractive enough to go long. If you are thinking of buying the stock, you could maybe write covered calls on them but I still think there are better opportunities than Intel.
We will keep an eye on the stock and see if things pick up but right now I think shares are stuck in the $12-$14 range.
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5. Earnings
Here is a look at some of the companies that will be reporting earnings this week:
Tuesday: Forest Laboratories (FRX, $25.76, down $0.24), Johnson & Johnson (JNJ, $57.44, down $0.18), TD Ameritrade Holding (AMTD, $12.65, up $0.02).
Wednesday: Abbott (ABT, $49.92, up $0.70), Apple (AAPL, $82.33, down $1.05), eBay (EBAY, $13.26, down $0.18), U.S. Bancorp (USB, $18.32, down $0.70).
Thursday: Brinker International (EAT, $9.30, down $0.12), Capital One Financial (COF, $24.10, down $1.37), Google (GOOG, $299.67, up $0.68), Intuitive Surgical (ISRG, $99.97, down $0.71), Lockheed Martin (LMT, $82.16, up $2.68), Microsoft (MSFT, $19.71, up $0.47), Nokia (NOK, $14.01, down $0.04), Potash (POT, $72.34, up $2.48).
Friday: General Electric (GE, $13.96, up $0.19), Harley-Davidson (HOG, $13.70, down $0.25), Schlumberger (SLB, $39.90, down $0.28), Xerox (XRX, $7.69, down $0.13).
Talk about Murderers’ Row…these heavy hitters are Wall Street’s rendition of the 1920’s Yankees’ batting order. You can expect big price swings in many of these stocks this week.
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6. Closing Thoughts
The market is closed on Monday for Martin Luther King Jr. Day and Tuesday will no doubt be the biggest day ever in American history. Wall Steet will be watching Washington with the rest of America with the inauguration of President-elect Barack Obama. I would imagine the market closes on a positive note as the new dream team administration could give the market a fresh outlook. Obama will be armed with a war chest full of money and Wall Street will be eager to see where he puts it to work.
Congress is set to dispense the other $350 billion of the government’s $700 billion financial bailout fund and there’s another $825 billion coming in a stimulus package. The key after Tuesday will be the earnings with the biggest names in the market set to report. Not all sectors are as bad-off as the banks but there will need to be some evidence of things improving. So far we haven’t gotten that.
It does appear as though the market is shrugging off bad news to a degree but we are still in a dangerous market that can produce wild price swings. It looked as though the market was in serious trouble by mid-week and the Dow did manage to have back-to-back positive days despite the volatility to close the week.
The Dow hit a high of 14279 back on October 11, 2007 and since then it had bottomed to a low of 7392 by November 21. The 50% decline is where Wall Street and investors started nibbling but I don’t think Wall Street feels like the worst is over or 100% safe from another correction.
For us, I could care less where we are headed as long as the volatility continues. We have played both call and put options in this market which shows that sentiment changes on a weekly and sometimes daily basis.
Questions, comments, thoughts?
Rick Rouse
Rick@OptionsMentoring.com
