Saturday, July 7, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week the market did not take a holiday with the rest of the country. It started the week strong on the coat-tails of M&A activity and it closed higher on Monday. That theme was revisited Thursday when Blackstone announced a $26 billion takeover of Hilton Hotels. Takeovers are creating a feeding frenzy and at any moment a stock can jump 10% higher on speculation. It is almost impossible to short stocks in this market. The trend is so strong that “even the dogs are barking ". That's “the street’s” way of saying that the weak stocks are rising with the tide.

The table was set for a positive reaction to the Unemployment Report. As I mentioned last week, this report has generated a positive reaction each month this year. Initially, strong employment numbers pushed the 10-year bond yield over 5.2% and the market reacted negatively. Traders digested the news and quickly concluded that full employment might actually be good for the economy. The wage inflation component came in at .3%. That is a little hot, but it was within expectations. Next week, the economic calendar is fairly light.

Consumer credit, wholesale inventories, trade balances, retail sales and consumer sentiment are scheduled for release. Retail sales has the potential to impact the market. As a sector, retail same-store sales only increased 1.2% in the last week of June. Last Tuesday, we learned that the percentage of loans that were 30-days past due rose to their highest level since 2001. Delinquencies on home mortgages are rising due to adjustable-rate loans and May marked the 26th consecutive month where the personal savings rate was negative. (As a side note, I will ride this market higher, but the negative savings rate has me very concerned 3-5 years out. Aging baby-boomers must start saving for retirement and that noose will draw tighter with every passing year.) The retail sales number will give us some insight on the strength of the consumer. My suspicion is that the number will come in light and the blame will fall on higher gasoline prices and the weather. Ironically, gasoline prices have actually come down during the last few weeks. I believe that inflation, debt levels and higher interest rates are tapping the consumer out.

Next week, the new earnings season will begin with Alcoa on Monday. The big releases won't kick in for another week, however, there are a few interesting stocks this week (AA, PEP. INFY, DNA, FAST, TXI, YUM, CTAS, GE). Yum could set the tone for the restaurant group. I feel this strong stock may be faced will the same issues plaguing the retail sector. INFY will give us some insights on rising wage inflation in India. DNA could spark a lackluster biotech sector. GE is one of the largest stocks in the world and it recently had a three-year breakout. I expect solid earnings from the industrial divisions to more than offset weakness in other areas.
From a technical perspective, the SPY is within striking distance of the all-time high. Even the tech stocks are making a new multi-year high and the QQQQ has shown relative strength. I still struggle with this sector because I have not seen a corresponding rise in guidance. Certainly there are pockets of strength, but overall, the earnings have not been revised upwards. Consequently, I still like keeping my money in the heavy equipment stocks and the energy group. I expect companies with an international footprint to do well. I'm a bit more skeptical of companies that rely solely on domestic revenues.

The market has become much more volatile in the last month and I suspect a major move is looming. Earnings are likely to determine the direction. Last quarter, low ball estimates were handily exceeded. Now the expectations have been adjusted and with rising interest rates it will be more difficult to surprise “the street”. The bid to the market is very strong and I am expecting a choppy move higher from this point on. It will be important to buy dips and to take profits on any rally that loses its steam. That pattern will continue until the Fed raises rates. I'm not expecting that this year so I believe we will have a good run the rest of the year. Stock selection will be critical.

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