1. Market Summary
2. Microsoft (MSFT) – A “Safe” Covered Call
3. TiVo (TIVO) Facing Stiffer Competition
5. Weekly Wrap Portfolio Update
6. Week Ahead
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1. Market Summary
September was certainly a month to remember as the market continued its violent swings but stayed within its current 2-month trading range. Wall Street traded in reaction to an improved outlook on Europe’s debt and the fact that there will be a resolution to Greece’s bailout by mid-October, Blondie style – one way or another.
The bulls were coming into the week trying to hold the bottom range of support and did well by rallying 2% on Monday. The Dow reclaimed the 11K level while Tech closed back above 2,500.
On Tuesday, the bulls extended their winning streak to 3-straight and took out two layers of resistance before a late day fade which was worrisome as the indexes finished below their first level of resistance.
We were right. On Wednesday, the market fell nearly 2%, on average, as the Dow barely held 11,000 while the S&P 500 was clinging to 1,150. The Nasdaq had finished back below 2,500.
Thursday’s action was choppy as both sides exchanged blows. The bulls got the early jump and held their gains for much of the day although Tech was weak. By midday, the bears had battled back and we doing some damage as the market tested new lows for the week. However, a final hour rally gave the bulls the win as they headed into Friday with slight gains for the week.
Futures were pointing towards a weak open on Friday and after a test to Thursday’s lows, the bulls tried to rally past the first layer of resistance before lunchtime. They were nearly there but the bulls should have stayed at the bar and ordered a cocktail because the rest of the session was nasty.
The Dow fell 240 points, or 2.2%, to settle at 10,913. We mentioned two areas of resistance last week for the blue-chips and they were 11,200 and 11,350 (green line, brown circles) which were tested earlier in the week. The break below 11,000 on Friday opens the door for a test down to short-term support at 10,800. The next level of support lies at 10,500 (blue line, black circles) and then the all important 10,000 (orange line, green circles) level. The Dow started the week at 10,771 and managed to gain 142 points, or 1.3%, but is off 664 points, or 5.7%, for 2011. The index fell 12.1% for the quarter.
The S&P 500 gave back 29 points, or 2.5%, to finish at 1,131. The index struggled with resistance at the 1,200 (blue line, orange circles) level on Tuesday and Wednesday but 1,175 became just as difficult to clear. We knew with the 1,150 low on Wednesday that there was a good chance by Friday that the index would be testing support at 1,125-1,120. The S&P finished at its low for the week, which easily puts 1,100 (green line, black circles) into play, and a break below this level could lead to 1,050 (purple line, brown circles) this week. The S&P started Monday at 1,136 and only slipped 5 points, or 0.4%, for the week although it is showing a loss of 126 points, or 10% for the year. The index fell 14.3% in the 3rd quarter.
The Nasdaq skidded 65 points, or 2.6%, to settle at 2,415. Tech lagged the other two indexes for much of the week after making a push to resistance at 2,600 (orange line, green circles). The close below 2,500 was a warning sign on Wednesday, after the fade on Tuesday, and we were counting sheep at 2,400 (blue line, brown circles) in our sleep. There is further risk down to 2,350 to start the week but 2,300 (green line, orange circles) looks like a strong possibility. For the 5 days, the Nasdaq declined 67 points, or 2.7%, and is down 237 points, or 9%, YTD. For the quarter, Tech tanked 12.1%.
The S&P Volatility Index (^VIX, 42.96, up 4.12) started the week at 41.25 and traded above 43 on Monday and hit this level on Friday. We mentioned a move above 40 (green line, black circles) would lead to a lower a market. A run at 50 (orange line, purple circles) appears imminent which is where the VIX would be if our lower targets for the S&P come into play. For the 3rd quarter, the VIX was up 160%.
Statistically, September is the worst month of the year for the stock market with an average loss of 0.6% for the month. Surprisingly, October, which has been known to be the month of big crashes, averages gains of 0.6% for the month.
Although the market looks ripe for a bounce, we still believe the indexes will test new lows before the bulls get it in gear. We should hear something on Greece by October 13 so until then the uncertainty of a bailout or not will dominate the headlines. As we get closer to a bottom there will be a point where money will in come off the sidelines. It is estimated that there is $3.3 trillion being held by non-financial companies and with the S&P 500 trading at 10.7 times, stocks are cheap. The 10-year average is 15 times earnings.
Global 3Q merger & acquisitions (M&A) were down 20% from the second quarter so even though stocks are cheap, companies are hoarding cash and waiting for cheaper prices. This environment will improve once the Europe banking system is stabilized as will initial public offerings (IPO’s) which have dried up. For the quarter, companies cancelled $9 billion in U.S. IPO’s while $34 billion were delayed worldwide. From our count, there are 350 companies in the pipeline waiting for better market conditions. Last week we gave our bear market targets again that we mentioned in mid-August and they were: Dow 10,248; S&P 1,090; and Nasdaq 2,298. The Russell 2000 plunged 22% for the quarter which is enough to meet the technical definition of a bear market. Will the other 3 join it?
= = = = = = = = = = = = = = = 2. Microsoft (MSFT) – A “Safe” Covered Call Despite several setbacks, software monopoly giant Microsoft (MSFT, $24.89, down $0.56) still has a lot of muscle and very attractive valuations. Plus Windows 8 and its Netflix-like service may be enough to kick-start the stock, or help it at least reach resistance. The $200 billion software giant based in Redmond, Washington has made many early investors millionaires. As the chart shows below, on December 24, 1989, shares traded for only $0.56. Ten years later, shares traded for $58.72, an annual gain of 581%. Thus, an investment of $10,000 in 1989 would have grown to about $1 million by 1999. However, the shares have plunged to almost half that in 2000 and virtually haven’t gone anywhere since. Shares reached about $36 at its peak in December 2007 and fell to a low of $15.28 on March 6, 2009 before rebounding to its current price of $24.89. The black line in the chart shows its 10-year average. Despite the fact that the price hasn’t gone much of anywhere, the shares appear attractively valued, especially when comparing the company’s stock numbers to its top competitors and its industry. Industry = Application Software AAPL = Apple GOOG = Google ORCL = Oracle RHT = Red Hat
|Revenue Growth (%)||8.30||82.00||32.30||11.60||28.00||21.90|
|Gross Margin (%)||77.73||39.82||65.18||83.40||77.26||69.86|
|Total Debt ($billion)||13.14||0.00||6.14||14.79||0.00||—|
|Return on Assets (%)||17.64||22.25||12.41||12.06||5.15||—|
|Return on Equity (%)||44.84||41.99||19.47||24.50||10.38||—|
|Dividend Yield (%)||3.10||—||—||0.80||—||—|
|Dividend Change (%)||0.60||—||—||0.10||—||—|
|Current Month||Last Month||Two Months Ago||Three Months Ago|
Windows 8 seems to be a competitor to the Android mobile operating system with its ability to switch from touch screen to desktop mode. It is designed for PCs and tablets, unlike Windows 7 which was built for PCs, and has multitasking capabilities. Everything that runs on Windows 7 also runs on Windows 8. It can run on ARM or x86 chips, many different types of hardware, and different screen sizes, something Android had difficulty doing. Some additional features include connectivity to Xbox Live, photo sharing, and apps. The company estimates that 400 million people will eventually adopt Windows 8. Over 400 million licenses for Windows 7 have been sold. The company recently announced plans to offer streaming cable services from Comcast (CMCSA) and Verizon Communications (VZ) over its Xbox Live. This could allow the company to steal some market share from Netflix (NFLX). Subscribers to Xbox Live have already enjoyed growing content including viewing thousands of live sports events and highlights through ESPN, playing Xbox 360 games online with friends, streaming HD movies from Netflix, and streaming videos from Amazon.com (AMZN) and Hulu Plus. = = = = = = = = = = = = = = = 3. TiVo (TIVO) Facing Stiffer Competition DVR pioneer TiVo (TIVO, $9.34, down $0.39) may have trouble surviving in the current climate with increased competition from cable and satellite providers. But efforts may be futile as the $1.13 billion company based in Alviso, California has been raking in less and less revenue. It is not profitable, bringing in $55 million in the 4th quarter, down from $68 million in the same period a year ago. Analysts predict that revenue will continue to fall to $50.81 million in the 1st quarter but will rise to $53.05 million in the 2nd quarter. Estimates included in graphs below. Investors still hope that the company has some firepower with its patent suits but this is not a winning strategy and eventually reality will catch up with them. The company’s main source of revenue, selling DVRs, is under fire by competitors like Dish Network (DISH) which provide their own DVRs. Deals with advertisers and some networks like Comcast, RCN, Suddenlink, and Virgin Media is keeping the company alive. It also won a one-time payment from DISH totaling $300 million. Another bright spot, Facebook is allowing TiVo subscribers to share information about what content they are watching with friends.
At $9.34, the stock is near its low target of $9.00 made by the 11 analysts recorded by Thomson/First Call. Mean target is $14.45; median target is $14.00; and high target is $20.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.1, unchanged from a week ago.
|Current Month||Last Month||Two Months Ago||Three Months Ago|
Ford Motor (F, $9.67, down $0.33) October 11 calls (F111022C00011000, $0.10, down $0.03) Original Entry Price: $10.63 (9/20/11) Lowered Price from Selling Options: $10.28 Exit Target: $15+ Return: -6% Stop Target: None Action: After touching a low of $9.32 the prior week, Ford flirted with resistance at $10 (green line, orange circles) but couldn’t close above this level. There is risk down to $8 (blue line, black circles) on further weakness.
We recommended buying the stock at $10.63 on 9/20/11 and for every 100 shares to sell the October 11 calls for 35 cents. This lowered the cost basis to $10.28. If shares are called away at $11 in mid-October the trade will make 7%.
Vivus (VVUS, $8.07, down $0.11) October 9 calls (VVUS111022C00009000, $0.10, down $0.05) Original Entry Price: $8.45 (9/9/11) Lowered Price from Selling Options: $8.05 Exit Target: $10+ Return: 0% Stop Target: None Action: Shares continue to hold $8 (green line, blue circles) which has been solid long-term support. Vivus tested resistance at $9 (orange line, black circles) on Tuesday and Wednesday before dipping to a low of $7.87 on Thursday. There is additional support at $7.50 (purple line, orange circles). The diet drug stocks are making noise but we like Vivus the best because of their stronger pipeline. We did a big write-up on Vivus a few weeks ago for those of you just joining us which can be reviewed in the Weekly Wrap premium section. We recommended buying the stock at $8.45 on 9/9/11 and for every 100 shares to sell the October 9 calls for 40 cents. This lowered the cost basis to $8.05. If shares are called away at $9 in mid-October the trade will make 12%.
MGM Resorts (MGM, $9.29, down $0.64) October 12 calls (MGM111022C00012000, $0.07, down $0.04) Original Entry Price: $11.73 (8/12/11) Lowered Price from Selling Options: $10.23 Exit Target: $12+ Return: -9% Stop Target: None Action: MGM traded above $11 (purple line, orange circle) early in the week but fell below multi-year support at $10 (green line, blue circles) on worries that growth in China’s Casino industry was slowing. There is further risk down to $7.50 (orange line, black circles). We recommended buying the stock at $11.73 on 8/12/11 and for every 100 shares to sell the September 12 calls for 90 cents. This lowered the cost basis to $10.83. On 9/20/11 we recommended selling the October 12 call option for $0.60 which lowered the cost basis to $10.23. If called away in mid-October at $12 the trade makes 17%. Newpark Resources (NR, $6.09, down $0.39) December 10 call (NR111217C00010000, $0.30, flat) Original Entry Price: $9.45 (7/27/11) Lowered Price from Selling Options: $8.10 Exit Target: $10+ Return: -25% Stop Target: None Action: Newpark was range bound between $6 and $7 for much of the week. There is no “bid” for these options although the “ask” is at 30 cents. Longer-term support at $5.50 (blue line, black circles) could come into play on further weakness while $7.50 (green line, orange circles) represents short-term resistance. We recommended buying the stock at $9.45 on 7/27/11 and for every 100 shares to sell the August 10 calls for 50 cents. This lowered the cost basis to $8.95. On 9/15/11 we recommended selling the December 10 call option for $0.85 which lowered the cost basis to $8.10. If we are called away at $10 in mid-December, the trade makes 23%.
Rambus (RMBS, $14.00, down $0.24) October 15 calls (RMBS111022C00015000, $2.50, down $0.10) Original Entry Price: $15.60 (7/22/11) Lowered Price from Selling Options: $12.95 Exit Target: $20+ Return: 8% Stop Target: None Action: Rambus held $14 (green line, blue circles) all week until Thursday which is when shares dipped to a low of $13.71 before closing at $14.24 that day. We still have a feeling a run to $16 (orange line, black circles) is coming and from there a pop to $19 (purple line, green circle) could happen on short-covering. We recommended buying the stock at $15.60 on 7/22/11 and for every 100 shares to sell the September 17 calls for 65 cents. This lowered the cost basis to $14.95. On 9/20/11 we recommended selling the October 15 call option for $2 which lowered the cost basis to $12.95. If we are called away, the trade makes 16%. Symantec (SYMC, $16.30, down $0.59) October 18 call (SYMC111022C00018000, $0.23, down $0.06) Original Entry Price: $18.77 (6/8/11) Lowered Price from Selling Options: $17.37 Exit Target: $20+ Return: -6% Stop Target: None Action: After a push up to resistance at $17.53 (green line, purple circles) mid-week, shares pulled back and appear headed to short-term support at $16 (green line, black circles). We like the range shares have been holding and our target is $20 for the stock over the next 6 months. We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents. This lowered the cost basis to $18.17. On 7/18/11 we recommended selling the August 20 calls for 35 cents which lowered the cost basis to $17.82. On 9/15/11 we recommended selling the October 18 call option for $0.45 which lowered the cost basis to $17.37. If we are called away, the trade makes 4%.
Rare Element Resources (REE, $5.08, down $0.50) Original Entry Price: $12.38 (5/31/11) Lowered Price from Selling Options: $11.23 Exit Target: $15+ Return: -55% Stop Target: None Action: We wanted to see if Rare would bottom before we stepped-in and added to this position. We said there was further risk down to $4 (green line, black circles) and shares reached a low of $5.05 on Friday. Once we get down in the $4’s, we will send out a trade alert. This will average our cost down to under 40% and we will look to write calls on a rebound down the road. We recommended buying the stock at $12.38 on 5/31/11 and for every 100 shares to sell the July 12 calls for $1.15. This lowered the cost basis to $11.23.
AKS Steel Holding (AKS, $6.54, down $0.30) Original Entry Price: $15.93 (5/2/11) Lowered Price from Selling Options: $14.58 Exit Target: $20+ Return: -55% Stop Target: None Action: After popping to a high of $7.51 by Tuesday, shares reached a low of $6.55 by Thursday. On Friday they touched $6.50 (green line, black circles) which is multi-year support. We will be adding to this position soon which will also lower our cost basis to under 40% but we are waiting to see how the first few weeks of October unfolds. Resistance is at $8 (purple line). We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents. This lowered the cost basis to $15.43. On 7/1/11 we recommended selling the August 16 call option for $0.85 which lowered the cost basis to $14.58.
American Capital (ACAS, $6.82, down $0.33) October 9 calls (ACAS111022C00009000, $0.03, down $0.01) Original Entry Price: $9.73 (4/19/11) Lowered Price from Selling Options: $8.38 Exit Target: $15+ Return: -19% Stop Target: None Action: Shares faded lower all week after testing $8 (green line, blue circles) which was prior support and will now serve as resistance. The next wave of support comes in at $6 (orange line, black circles) but longer-term, ACAS is easily a double-digit stock. We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents. This lowered the cost basis to $9.23. On 7/1/11 we recommended selling the August 10 call option for $0.55 which lowered the cost basis to $8.68. On 9/13/11 we recommended selling the October 9 call option for $0.30 which lowered the cost basis to $8.38. If shares are called away at $9 by mid-October the trade will make 7%.
Cisco Systems (CSCO, $15.50, down $0.35) November 17 calls (CSCO111119C00017000, $0.42, down $0.08) Original Entry Price: $17.14 (3/17/11) Lowered Price from Selling Options: $15.63 Exit Target: $20+ Return: 0% Stop Target: None Action: Cisco tried to make a run past resistance at $16.50 (green line, black circles) but dipped below short-term support at $16 (orange line, blue circles) to finish the week. There is additional support at $15 (purple line, brown circles) which is the bottom of the trading range that has been intact since June. We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents. This lowered the cost basis to $16.58. On 7/5/11 the company paid out a 6 cent quarterly dividend. This lowered the cost basis to $16.52. On 7/22/11 we recommended selling the August 17 calls for 30 cents which lowered the cost basis to $16.22. On 9/9/11 we recommended selling the November 17 calls for 65 cents which lowered the cost basis to $15.57. If shares are above $17 by mid-November and we are called away, the trade makes 9%.
Spreadtrum Communications (SPRD, $17.95, up $1.20) November 25 call (SPRD111119C00025000, $0.45, up $0.10) Entry Price: $23.45 (2/7/11) Lowered Price from Selling Options: $20.48 Exit Target: $30 Return: -12% Stop Target: None Action: After starting the week at $19.75 and reaching a peak of $20.80 by Wednesday, the bottom fell out as short-term support at $19 (purple line, black lines) failed. On Thursday, the stock traded to a low of $16.11 (green line, orange circles) which is the next wave of support. The rebound on Friday was nice to see but we would like to see a close above $19-$20 this week which would set us up for another run at $22 and a possible breakout. Spreadtrum announced another quarterly dividend which is the second one since we recommended this trade which will lower our cost basis by 5 cents when it’s paid out. Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents. This lowered the cost basis to $22.48. On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48. On 7/7/11 the company paid out a 5 cent quarterly dividend. This lowered the cost basis to $21.43. On 9/15/11 we recommended selling the November 25 call option for $1 which lowered the cost basis to $20.43. If we are called away, the trade makes 22%.
DryShips (DRYS, $2.34. down $0.15) January 2012 7.50 call (DRYS120121C00007500, $0.05, flat) Entry Price: $5.25 (1/03/11) Lowered Price from Selling Options: $4.60 Exit Target: $8 Return: -49% Stop Target: None Action: There is further risk down to $2 (green line, orange circle) while resistance at $3 (blue line, black circles) will continue to be a factor. DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell. The January call options could have been sold for 65 cents which lowered the cost basis to $4.60. If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%. = = = = = = = = = = = = = = = 6. Week Ahead The economic calendar is busy this week starting with Monday’s ISM manufacturing index for September which is due out 30 minutes after the open. If the market gets a reading above 50, it means the economy is expanding. A reading in the 40’s favors the bears. Construction spending for August will also be released at 10am (EST). Later in the day, an hour before the close, the market will get the latest Auto and Truck Sales figures. On Tuesday, August Factory Orders will be released. Wednesday, before the bell, the MBA Mortgage Index is due out along with the latest ADP private payrolls report for September and the Challenger, Gray & Christmas update on job cuts. Also in the mix will be the ISM Services Index for September, as well as the usual report on Crude Inventories. For Thursday, we get another look at the weekly jobless claims numbers with Initial Claims and Continuing Claims ahead of the bell. These two reports will set the stage for Friday’s Nonfarm Payrolls report for September as well as the Unemployment Rate, Hourly Earnings, and the Average Workweek figures. Also on the agenda are Wholesale Inventories and Consumer Credit for August.]]>