11:30pm (EST)
1. Market Summary
2. Vale S.A. (VALE) – Approaching Value
3. Earnings
4. Weekly Wrap Portfolio Update
5. Week Ahead
(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section. We have a ton of charts to go over so please look at them to get the clues on where this market is headed. Also, we are running a little late so please give us about an hour to get the charts loaded to the site.)
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1. Market Summary
“Although the bulls slipped again last week, September was a month to remember as the market rallied 4%, on average. The indexes failed to make a run at our fluff targets but came close. If there is a pullback or correction, these fluff targets could become yearend targets depending on how much damage the bears do.
For the month, the Dow was up 347 points or 2.6% while the S&P 500 gained 34 points, or 2.4%. The Nasdaq popped 50 points higher, or 1.6%. For the third quarter, the Dow was up 4.3%, the S&P 500 was higher by 5.8%. The Nasdaq popped 6.2% for 3Q.
We warned on Tuesday that the market had its first Friday/ Monday negative close in 6 weeks and Friday’s drop is cause for concern. The trading range over the summer provided up and down Friday and Monday’s which is typical but if we get a lower Monday a trend change could be coming.
We have one more week before earnings season starts and the laundry list of companies that have already pre-warned include: Caterpillar (CAT, $86.04, down $0.88), Dow Chemical (DOW, $28.96, down $0.20), FedEx (FDX, $84.62, down $1.15), Ford (F, $9.86, down $0.16), Procter & Gamble (PG, $69.36, up $0.06), Norfolk Southern (NSC, $63.63, down $0.55) and U.S. Steel (X, $19.07, down $0.24).
Perhaps the bar has been lowered enough, again, that the companies that do beat estimates could prop the market up in October. Our feeling is there could be a slew of companies that miss by a penny or two which is why they didn’t warn Wall Street. If it’s more than that, the market could take a serious hit. Alcoa (AA, $8.86, down $0.13) will be the first Dow component to announce and they will confess on October 9. If shares are up this week, they could have a good quarter in store. If shares trade lower, it could be a warning sign.
October has a history of famous stock market “crashes” so we did some research over the weekend. Believe it or not, September is technically the worst month for stocks but October is more remembered because of scary Halloween’s and the “Black” days.
There are a few investors who may remember the first stock market crash back in 1929 and we were just a teenager when the market tanked in the 80’s which gave us an early lesson in life. The message was not to ever take the market for granted because in one day things can go south in a hurry. It is why we have always respected the bears and why we learned how to short stocks and how to use put options before we ever invested.
In 1929, the Dow dropped 11% intraday on October 24 falling from 305 the previous day before recovering to end the session down only 2%. The day was labeled “Black Thursday”. Four days later, “Black Tuesday” marked the start of the Great Depression as the Dow dropped 11% from a previous close of 260 to 230.
These two days were significant as the Dow tanked 25% in four days following Black Tuesday and 90% in 3 years after Black Thursday occurred.
In 1987, we remember October 19 which would become known as “Black Monday”. The Dow was at 2,246 and plummeted nearly 23%, or 508 points, to end the session at 1,738. Many investors took a tremendous hit to their 401K and retirement plans.
We were a teenager in the 1980’s and just getting our feet wet in the market. Although we personally didn’t take a hit because we weren’t in the market in 1987, it taught us a very valuable lesson and that was to respect the bears. It is also why we learned how to short the market and buy put options which served us well before the crash of 2000.
We aren’t ready to go on record to say there will be a “correction” or a crash this month but we have experienced several October storm clouds over the past 25 years and we typically LOVE them. If there is panic, and the market does start to drop like a rock, buying puts will be very lucrative.
We aren’t sure what the Vegas odds would be on a correction but with so many fundamentals looking bearish, it is something to think about. We have defined clear support and resistance targets so if there is a breakdown or breakout, we should get a few warnings signs.” (from 9/30/2012 Weekly Wrap/ Monday Morning Outlook)…
The bulls were held hostage by Spain’s pending bailout for much of the week but managed to push resistance during the morning hours. The bears were in control of the afternoon sessions which lead to choppy trading but the bulls did a good job of holding their gains going into Friday’s Nonfarm Payroll report.
Some were calling Thursday’s pop the Romney Rally, which we coined back in early September, as the bulls were up 1% ahead of the news. Presidential candidate, Mitt Romney did a great job in the Mile High city to get back in the race and he certainly wasn’t the only one questioning Friday’s unemployment rate which came in at 7.8%.
The Dow added 34 points, or 0.3%, to end at 13,610 on Friday. The blue-chips traded down to 13,424 on Tuesday but the bears had trouble pushing 13,350. This is now the second wave of short-term support should 13,500 fail to hold this week. The index peaked at 13,661 on Friday and the close above the 13,600 level gets our fluff targets from September of 13,800-14,000 back in play. The Dow began the week at 13,437 and gained 173 points, or 1.3%, following Friday’s close. For the year, the blue-chips are higher by 1,393 points, or 11.4%.
The S&P 500 slipped a half-point, or 0.03%, and finished at 1,460. The index held positive territory on Monday all session long and dipped to 1,439 on Tuesday. The bears were trying to push 1,425 but the 1-point dent was all they could muster for the week as short-term support has moved up to 1,435. Wednesday’s close at 1,450 opened the door for a run back to 1,475 and Friday’s high was 1,470. Our chart work from mid-August showed a possible push to 1,500 in September and we have mentioned for a few weeks the bulls need to hold 1,475 on the close before we can expect a run. The 52-week high of 1,474.51 came on September 14. The S&P 500 started Monday at 1,440 and finished the week up 20 points, or 1.4%. YTD, the index is up 203 points, or 16.2%
The Nasdaq fell a baker’s dozen (13 points), or 0.4%, to close at 3,136. Tech tested the 3,100 level on Monday and Tuesday after dipping to a low of 3,103 and 3,101, respectively. There was further risk down to 3,050 if the bears had popped this level but 3,100 has held every day since September 6, except for one, which is when the Nasdaq closed at 3,093 (September 27). On the flip side, the bulls continue to have trouble with the 3,150 level which was tested midweek. The index closed at 3,149 on Thursday after testing 3,153 and we wanted to see a close above 3,175 on Friday for confirmation of a run to our September fluff targets of 3,200-3,250. The high was 3,171 but Tech gave back all of its gains and then some by the closing bell. The Nasdaq came into the week at 3,116 and was able to advance 20 points, or 0.6%, despite lagging the other indexes. For 2012, the index is showing a gain of 531 points, or 20.4%.
The Russell 2000 lost 2 points, or 0.2%, to settle at 842. The small-caps started the week with a gain and held positive territory until Wednesday which is when the index tested 835. This level was tested again on Thursday and is just above short-term support at 830 followed by 820. We have said a close above 850 could lead to a run to 875-900 and Friday’s high was 853. The Russell 2000 was at 837 before Monday’s opening bell and was up 5 points, or 0.7%, following Friday’s close. Year-to-date, the index has advanced 102 points, or 13.8%.
The S&P Volatility Index ($VIX, 14.33, down 0.22) was at 15.73 to start the week and traded up to 16.50 on Tuesday’s pullback. This is well below bearish resistance at 17.50 and the close below 15 for the week gets the low teens back in the mix on a continued rally.
The first clue we were looking for last week was the close on Monday. The bears had won 3-straight Friday/ Monday’s but that streak was snapped as the Dow and S&P 500 were up 0.5%, on average, Monday. This past Friday was negative but the blue-chips were up and the VIX closed lower. The Monday win was only the second in 4 months for the bulls and if this Monday is negative then we can still use the closes as clues money is still moving out of the market.
Shares of Alcoa (AA, $9.09, up $0.02) were up for the week but we wanted to see a close past $9.20 as indication the company might report better-than-expected earnings. Alcoa has beaten Wall Street’s estimates the last 2 quarters, and they still might, but after opening higher, shares finished lower for the session back in July. They will confess on Tuesday before the bell.
As far as the overall 3Q earnings picture, the suit-and-ties are looking for quarterly earnings to decline by 2%. The biggest sector that could drag down results are the oil and gas companies. Many of the pencil-pushers have said overall earnings would be up 2%, if not for their weaker-than-expected results. However, there were some big Tech names that have already warned which makes this a treacherous earnings season to trade.
In some cases, the bar has been lowered from the previous quarter so some companies could surprise to the upside. There will also be a few high profile companies who didn’t warn over the past week or two that could miss by a penny or three. These companies could see their stock prices hammered if they miss estimates by a mile and investors’ wonder why they didn’t warn.
We have also said the Financial stocks needed to show some strength and over the past few weeks they have. JPMorgan Chase (JPM, $41.71, down $0.11) and Wells Fargo (WFC, $35.48, down $0.13) will report their numbers on Friday so watch how they trade this week.
The biggest development we saw on Friday was how Apple (AAPL, $652.59, down $14.21) traded. We profiled 2 sweet option trades for the Daily last week using Apple call options as we said to watch for the $650 level to hold last Tuesday. Shares made a run to $675 two days later which we said was resistance and where to close the trade at. The 2 call option trades made 100% and 50%, respectively, in 48 hours. We are thinking about playing Apple this week but we could be playing it to the downside if $650 doesn’t hold.
Apple is a big component of the market and any weakness trickles down to the major averages just like it does when shares are rallying. The Nasdaq makes up 20% of the Nasdaq so a test back to $620 would spell trouble for Tech and the market, overall. If $650 holds and Apple announces the iPad mini this week like we have predicted then shares could push $675 or even $700 again. Monday could be a big swing day and we will be watching the stock like a hawk at the open.
Europe will be back in the news this week, specifically Greece and Spain. There were rumors Spain would ask for a bailout over the weekend but they will likely wait a couple of more weeks before doing so. Greece wants the European Central Bank (ECB) to give them more money or forgive more debt so this situation is only worsening and could be in the headlines this week.
The charts are bullish and if the bulls can hold or advance the flag to start the week, we could see a push towards our upper end price targets. The fundamentals do not support a further rally but we have to trade what is in front of us and respect the wall of worry. At the same time, we are preparing for some sort of pullback, perhaps major, and when we will get defensive.
We said last week to respect October’s history but we also know you can’t fight the trend or the Fed which is why we have done well with call options over the past couple of months. We still have some defensive positions open in our Daily for protection and if the market continues higher we should get called away from a few more trades in our Weekly.
There are still a number of headwinds, both positive and negative, facing the market but by the end of the week, we should see one side emerge from the current 3-week trading range. The bulls have shown strength all year long but the bears might growl once more before they go in hibernation for the rest of the year.
As we head to press, futures are showing a slightly lower open for Monday. Dow futures are down 21 points to 13,515 while the S&P 500 futures are lower by 3 points to 1,452. The Nasdaq 100 futures are off by 5 points to 2,799.
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Key of Technicals Used In Following Articles
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Bollinger Band
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Bands plotted two standard deviations away from a simple moving average, the closer the price to the upper band, the more overbought the stock is, and the closer the price to the lower band, the more oversold the stock is. |
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Bullish Kicker |
Bullish candlestick pattern, the stock is heading down, forming two or three bearish candlesticks. On the next day, the stock gaps open above the previous days high and close. |
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Hammer |
A reversal candlestick pattern that could either be bullish or bearish, it forms when a security moves significantly lower after the open, but rallies to close well above the intraday low. It looks like a square lollipop with a long stick. |
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Moving Average |
Average price over a length of time, it is used to spot trends. |
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MFI (Money Flow Index) |
Increases when money flowing into a stock (positive money flow) is increases with respect to money flowing out of the stock (negative money flow), an MFI of 100 would mean that there is no money flowing out of a stock and only money flowing into the stock. General consensus says an MFI of 80 is overbought and an MFI of 20 is oversold.
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RSI (Relative Strength Index)
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Momentum oscillator that measures the speed of directional price movement, general consensus says an RSI of 70 is overbought and an RSI of 30 is oversold.
RS = Relative Strength U = Up Days EMA = Exponential Moving Average D = Down Days n = number of days in period |
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Stochastic %K and %D |
An oscillation in closing prices, the %K is the change in closing price with respect to past high and low of a period, usually 14 days. The %D is the average of the %K values for a past period, usually 3 days. A bearish signal is given when %K crosses below the %D in overbought territory, defined as reading above 80. A bullish signal is given when %K crosses above the %D in oversold territory, defined as reading below 20. |
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W%R (William’s%R) |
Change in high price to closing price with respect to past high and low of a period, usually 14 days, a reading above 20 is considered overbought territory, and a reading below 80 is considered oversold territory. |
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Support/Resistance |
These predetermined levels are used to predict when prices will reverse. |
2. Vale S.A. (VALE) – Approaching Value
By Michael Bryant
Vale S.A. (VALE, $17.71, down $0.25) has grown to become the largest iron ore-miner in the world. However, due to the global slowdown, its stock has been falling from a high of $35 in early 2011 to current levels. Valuation-wise, the stock could be a good buy.
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The $91.27 billion iron ore mining giant based in Rio de Janeiro, Brazil had a great run from 2003-2008. In 2003, the company was the third largest iron ore-miner in the world. Now it is the largest iron ore-miner in the world. However, the 2008 credit crisis and subsequent global slowdown has nearly stalled this growth. Besides mining, it is also involved in fertilizers, logistics, and the steel business. The company’s Logistic Services segment provides cargo transportation services for third parties through ships, ports, and railroads. |
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Vale operates throughout the world and mines coal, copper, iron ore, manganese and ferroalloys, non-ferrous minerals like nickel, and precious metals. Its coal mining operations are in China, Mongolia, Australia, and Mozambique. Its copper operations are in central Africa, South Africa, Brazil, Chile, Canada, Kazakhstan, and Austria. |
Its iron ore operations are in Brazil, Guinea, and Oman. Its manganese and ferroalloys operations are in Brazil and Gabon. Its nickel operations are in Canada, United States, Brazil, Angola, United Kingdom, China, Mongolia, Japan, South Korea, Taiwan, Indonesia, and New Caledonia. Its precious metals operations are in Canada and the United Kingdom. It also mines fertilizer minerals in Canada, Brazil, Peru, Argentina, and Mozambique. Its fertilizer operations include potash, phosphates, and nitrogen. It provides logistic services in Brazil, Paraguay, Peru, Argentina, Liberia, Gabon, Malawi, Mozambique, Oman, and Malaysia. It also generates energy through hydroelectric power plants.
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Vale’s revenue can be divided into five segments, as shown in its 2nd quarter filing on the left. The numbers are its revenues in millions of dollars from that quarter. The top three parts of its revenue are iron ore, pellets, and nickel co and by-products. Pellets are used in blast furnaces for steel making. Iron ore is also a chief component of steel making. |
Bulk materials, which make a large chunk of total revenue, have fallen in the past quarter due mainly to the slowing economies of China and Europe. And these two regions make up about 50% of total revenue, as shown in the table below. Revenue is in millions of dollars.
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North America |
Europe |
China |
Japan |
Other |
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1st qtr 2010 |
468 (7.5%) |
1,375 (21.7%) |
2,160 (34.6%) |
832 (13.3%) |
1,432 (22.9%) |
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2nd qtr 2010 |
552 (6.0%) |
2,381 (25.7%) |
2,794 (30.1%) |
1,072 (11.6%) |
2.476 (26.7%) |
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3rd qtr 2010 |
711 (5.1%) |
2,493 (18.0%) |
5,158 (37.1%) |
1,674 (12.1%) |
3,851 (27.7%) |
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4th qtr 2010 |
1,107 (7.6%) |
2,681 (18.5%) |
5,267 (36.3%) |
1,662 (11.4%) |
3,799 (26.2%) |
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1st qtr 2011 |
1,203 (9.1%) |
2,636 (20.0%) |
4,024 (30.6%) |
1,509 (11.5%) |
3,793 (28.8%) |
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2nd qtr 2011 |
964 (6.3%) |
3,068 (20.0%) |
5,005 (32.6%) |
1,789 (11.7%) |
4,519 (29.4%) |
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3rd qtr 2011 |
1,106 (6.6%) |
3,167 (18.9%) |
5,927 (35.4%) |
1,973 (11.8%) |
4,568 (27.3%) |
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4th qtr 2011 |
1,012 (6.9%) |
2,567 (17.4%) |
4,615 (31.3%) |
2,003 (13.6%) |
4,558 (30.9%) |
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1st qtr 2012 |
905 (8.0%) |
1,889 (16.7%) |
3,551 (31.3%) |
1,335 (11.8%) |
3,659 (32.3%) |
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2nd qtr 2012 |
894 (7.4%) |
2,321 (19.1%) |
3,802 (31.3%) |
1,273 (10.5%) |
3,860 (31.8%) |
The Chinese government has made it clear that they want to slow their country’s growth to a sustainable 7.5%. Current growth rate is 7.9%, so additional slowing is expected. Meanwhile, Europe is slowing dramatically, and could face a recession as early as next year. Out of the four largest European economies, only Germany and France still have positive growth rates. But both Germany’s and France’s growth rates have fallen to below 1% in the last year. Italy has -2.6%, and the United Kingdom is -0.6%.
Despite these setbacks, the price of iron ore, which dictates nearly half of the company’s total revenue, will likely rise, partly because of a temporary shutdown of transport operations to one of its largest iron ore mine in northern Brazil. Earlier last week, Indians demanding property rights blocked part of the railroad. This shutdown likely caused a supply shortage. The company has notified that operations have recently resumed. Further, the Communist Party of China will convene on November 8th to choose a new government. Rumor is that they will announce another infrastructure stimulus package. Lastly, if the mining boom is ending, why is Caterpillar (CAT) developing a larger 120-ton shovel? Why is Glencore strongly trying to merge with Xstrata in a $35 billion deal?
Analysts expect revenue to rise very slowly in the 3rd and 4th quarters. This could leave room for upgrades in revenue estimates. Such upgrades should cause the stock to rise.
Source: Numbers calculated from Yahoo Finance and Finviz.com |
BHP = BHP Billiton CLF = Cliffs Natural Resources RIO = Rio Tinto
Comparing it to three of its top competitors, the stock appears undervalued, with positives (green) outnumbering negatives (red) 19 to 6.
CLF, a U.S.-based iron ore miner, is probably the closest match to VALE, since most of its revenue comes from iron ore. But VALE also mines other metals and thus also competes with BHP and RIO, two of the world’s largest miners. Further, both BHP and RIO own massive iron ore mines in Australia, which allows them to better serve China and Japan due to less distance for ore to be shipped. As we noted above, most of VALE’s iron ore mines are in Brazil.
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The positives are that every margin except return on equity is either the best in the group or close to the best. Since CLF is the best match and BHP is the world’s largest miner, the fact that VALE has a lower return on equity than both of these companies is why we gave it a negative mark. Other highly bullish numbers are that the PEG ratio is the lowest listed, and the price/equity and price/book are the second lowest. The current ratio, the only one above two, tells that VALE is in better financial standings than the other three. Institutional ownership may be low for a large company, but it is the highest of the three foreign-based companies. Short interest is low, and the high negative change in short interest means many are covering.
The greatest concern is that the price/sales and price/revenue are on the higher side, and the trailing PE almost matches the forward PE. This means that analysts do not think the company will grow much, if at all, in the near future.
At $17.71, the stock is between its median target of $22.00 and its low target of $12.39 made by the 20 analysts recorded by Thomson/First Call. Mean target is $23.01, and high target is $31.70. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.5, down from 2.4 a week ago.
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Current Month |
Last Month |
Two Months Ago |
Three Months Ago |
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Strong Buy |
4 |
3 |
4 |
4 |
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Buy |
10 |
10 |
11 |
10 |
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Hold |
8 |
8 |
7 |
8 |
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Underperform |
0 |
0 |
0 |
0 |
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Sell |
2 |
1 |
1 |
1 |
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The long-term graph shows that the stock seems to be nearing to support around $15. Further, it seems to have formed a bullish falling wedge pattern. Lastly, if the pattern of golden crosses and death crosses continue, we can expect a golden cross in the near future. |
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Like the long-term graph, the short-term graph also looks bullish. The price has broken out of its falling wedge pattern and is retesting the breakout. If it falls back into the falling wedge, it will signal a failed breakout. But nevertheless, a falling wedge is bullish, and the stock price will eventually rise in the near future. When the MFI, RSI, Stochastic %K, and W%R were at similar levels, as indicated by the orange line, the price rose. The Stochastic %K and W%R are in oversold territory. Further, the MACD looks to be forming a bullish upward cross. But any move higher would probably not go above $20.76, the 200-dma. |
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3. Earnings
The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter. If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are from 10/5/12 close)
Monday
AngioDynamics (ANGO, $12.51, up $0.02), Art’s-Way Manufacturing (ARTW, $6.25, down $0.23), China Natural Resources (CHNR, $5.95, Flat), Daxor (DXR, $7.96, down $0.05), Electro Rent (ELRC, $17.52, down $0.30), Healthcare Services (HCSG, $23.76, up $0.22), New Hampshire Thrift Bancshares (NHTB, $12.91, up $0.13), Skyline (SKY, $5.31, down $0.23), Taylor Devices (TAYD, $8.89, up $0.34), Weis Markets (WMK, $41.91, up $0.03)
Tuesday
Alcoa (AA, $9.09, up $0.02), Century (CNBKA, $33.59, up $0.73), Gladstone Capital (GLADP, $25.56, up $0.24), Mistras (MG, $23.28, down $0.36), Yum! Brands (YUM, $66.00, down $0.47)
Wednesday
ADTRAN (ADTN, $16.19, down $0.48), Costco Wholesale (COST, $101.79, up $0.31), Helen of Troy (HELE, $32.52, up $0.10), Host Hotels & Resorts (HST, $15.72, down $0.03), Material Sciences (MASC, $8.99, down $0.06), Richardson Electronics (RELL, $11.92, down $0.08), Ruby Tuesday (RT, $7.09, down $0.13), Sycamore Networks (SCMR, $14.70, up $0.02), VOXX (VOXX, $7.40, down $0.23), VSB Bancorp (VSBN, $10.74, Flat)
Thursday
Ames National (ATLO, $21.17, up $0.08), Annie’s (BNNY, $45.43, down $0.95), Bank of the Ozarks (OZRK, $34.47, up $0.28), Bank of South Carolina (BKSC, $11.50, down $0.05), Cantel Medical (CMN, $28.45, up $0.24), Fastenal (FAST, $44.18, down $0.32), GenCorp (GY, $9.96, down $0.03), Groupon (GRPN, $5.25, up $0.45), JB Hunt Transport (JBHT, $55.20, up $0.94), Mission West (MSW, $8.69, down $0.06), Oil-Dri Corp. of America (ODC, $23.00, down $0.17), Saba Software (SABA, $9.46, down $0.99), Safeway (SWY, $16.16, down $0.19), Winnebago (WGO, $12.40, up $0.17), Zep, (ZEP, $14.69, down $0.13)
Friday
Cubic (CUB, $50.35, down $0.24), Diamondrock Hospitality (DRH, $9.67, down $0.09), Gladstone Commercial (GOOD, $18.67, up $0.03), iGATE (IGTE, $18.17, up $0.14), KMG Chemicals (KMG, $18.15, down $0.02), JPMorgan Chase (JPM, $41.71, down $0.11), Webster Financial (WBS, $24.03, down $0.13), Wells Fargo (WFC, $35.48, down $0.13), Winmark (WINA, $53.30, down $1.59)
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4. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 10/5/12)
Closed Trades for 2012 (24-0, overall): ARNA +117%, SZYM +11%, BAC +26%, EFTC +8%, SZYM +55%, VVUS +38%, CALL +19%, BAC +20%, SYMC +16%, DAR +20%,TIVO +5%, MGM +22%, ZNGA+13%, SGMS +6%, VVUS +17%, F +8%, AA +7%, CLNE +27%, DNDN +18%, MGM +19%, ACAS +3%, P +9%, BAC +6%, AA +3%.
TiVo (TIVO, $10.31, down $0.15)
October 10 calls (TIVO121020C00010000, $0.40, down $0.05)
Original Entry Price: $9.65 (9/19/12)
Lowered Price from Selling Options: $9.17
Exit Target: $12+
Return: 12%
Stop Target: $7
Action: Shares traded up to $10.61 to start the week and we were looking for a close above $10.50 which has been short-term resistance. A move above this level should lead to a run at $11-$11.50. Support should hold at $10 on a pullback which was prior resistance.
We recommended buying the stock at $9.65 on 9/19/2012 and for every 100 shares to sell the October 10 call for 48 cents. This lowered the cost basis to $9.17.
If shares are called away in mid-October at $10 the trade will make 9%.
Solazyme (SZYM, $10.96, down $0.29)
Original Entry Price: $12.35 (8/9/12)
Lowered Price from Selling Options: $11.55
Exit Target: $15+
Return: -5%
Stop Target: $9
Action: Shares went out at their lows for the week after touching $10.93 on Friday. Support has been solid at $11 with backup at $10. A move above the 100-day
and 200-day MA’s would be bullish and could lead to a test of $12.50.
We recommended buying the stock at $12.35 on 8/9/2012 and for every 100 shares to sell the September 12.50 calls for 80 cents. This lowered the cost basis to $11.55.
Vivus (VVUS, $18.55, down $0.58)
Original Entry Price: $22.70 (7/27/12)
Lowered Price from Selling Options: $21.35
Exit Target: $30+
Return: -13%
Stop Target: $15
Action: Vivus closed back above $18 to start the week which was a good sign and prior support. Shares traded to $19.38 on Friday and we will look to sell another option on a move above $21.
We recommended buying the stock at $22.70 on 7/27/2012 and for every 100 shares to sell the August 24 calls for 95 cents. This lowered the cost basis to $21.75.
On 9/6/12 we sold the September 24 calls for 40 cents which lowered our cost basis to $21.35.
Antares Pharma (ATRS, $4.01, down $0.01)
November 5 calls (ATRS121117C00005000, $0.15, flat)
Original Entry Price: $4.94 (7/13/12)
Lowered Price from Selling Options: $3.94
Exit Target: $8+
Return: 2%
Stop Target: None
Action: Shares hit a high of $4.50 on Tuesday but fell near $4 following the equity offering on Wednesday. The company sold 12.5 million shares at $4 which raised $47 million after expenses. This will help their balance sheet but it slightly diluted shareholder value. There is risk down to $3.50 but $3.80 should hold on a pullback. Shares could be stuck in a range for a few weeks following the secondary offering which is fine by us as we sold the November 5 calls. We think shares will reach $6-$8 in the first half of 2013 so we can write another option if we are not called away.
We recommended buying the stock at $4.94 on 7/13/2012 and for every 100 shares to sell the August 5 calls for 70 cents. This lowered the cost basis to $4.24.
On 9/6/12 we sold the November 5 calls for 30 cents which lowered our cost basis to $3.94. If we are called away at $5 in mid-November the trade will make 27%. .
Antares Pharma (ATRS, $4.01, down $0.01)
February (2013) 7.50 calls (ATRS130216C0007500, $0.20, flat)
Original Entry Price: $0.80 (7/13/12)
Exit Target: $1.60
Return: -75%
Stop Target: None
Action: This is a LEAP call option which has over 5 months before expiration.
Pizza Inn (PZZI, $2.90, down $0.06)
Original Entry Price: $4.50 (2/22/12)
Lowered Price from Selling Options: No options available
Exit Target: $9
Return: -36%
Stop Target: None
Action: Shares closed above $3 to start the week but fell to a low of $2.67 on Friday. The company opened its 9th restaurant so we aren’t worried about the short-term dips in the stock. We said there is risk down to $2.40-$2.20 and if shares do hit the low $2’s we will add to the position.
Pizza Inn continues to open new pie shops in Texas. The company’s latest restaurant in Houston was its ninth.
The company recently won the prestigious 2012 Hot Concepts award from the Nation’s Restaurant News and the buzz is growing. The company is targeting 75 major cities to expand and some will be company owned or franchised. Insiders are buying shares at these low levels and we feel you should be loading up too while they are still under $3. We have a 12 to 18-month price target of $10 for Pizza Inn.
MGM Resorts (MGM, $10.54, up $0.07)
Original Entry Price: $13.77 (2/2/12)
Lowered Price from Selling Options: $12.67
Exit Target: $15
Return: -17%
Stop Target: None
Action: Shares reached a low of $10.36 last week but were able to hold the uptrend line. There is still risk down to $10 but a close above $11 would be bullish. We will look to sell another option once shares clear $12 again.
We recommended buying the stock at $13.77 on 2/2/2012 and for every 100 shares to sell the March 15 calls for 45 cents. This lowered the cost basis to $13.32.
On 3/20/12 we recommended selling the April 14 calls for $0.65 which lowered the cost basis to $12.67.
Newpark Resources (NR, $7.08, up $0.05)
Original Entry Price: $9.45 (7/27/11)
Lowered Price from Selling Options: $7.85
Exit Target: $11
Return: -6%
Stop Target: None
Action: After testing a high of $8.31 in mid-September, shares fell below $7 to $6.92 last week. We mentioned a break below $7 could lead to $6.50 on further weakness but we were glad to see $7 hold on Friday. We would like to see a move back towards $7.50 which is short-term resistance and where we may sell another call option.
We recommended buying the stock at $9.45 on 7/27/2011 and for every 100 shares to sell the August 10 calls for 50 cents. This lowered the cost basis to $8.95.
On 9/15/2011 we recommended selling the December 10 calls for $0.85 which lowered the cost basis to $8.10.
On 1/25/2012 we recommended selling the March 12.50 calls for $0.25 which lowered the cost basis to $7.85.
Trades on HOLD: DryShips (DRYS, $2.29, up $0.02), AKS Steel Holding (AKS, $4.87, up $0.05), Rare Element Resources (REE, $4.67, up $0.12), Rambus (RMBS, $5.39, down $0.03), Patriot Coal (PCXCQ, $0.13, up $0.01), OCZ Technology Group (OCZ, $3.16, down $0.02), Bebe Stores (BEBE, $4.33, down $0.06), Scientific Games (SGMS, $7.80, down $0.01)
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5. Week Ahead
The bond market is closed on Monday and there are no major economic reports scheduled. Tuesday is also light.
On Wednesday, the MBA Mortgage Index is due out at 7am (EST). Wholesale Inventories will be released at 10am, followed by the Fed’s Beige Book and the Treasury Budget at 2pm.
Thursday’s action includes the latest Initial and Continuing Claims numbers, Trade Balance figures, and Import/ Export prices – all at 8:30am. Crude Inventories will be out at 11am.
Friday’s docket includes the Producer Price Index (PPI) numbers at 8:30am with the Michigan Sentiment hitting the Street at 9:55am.