Tuesday saw U.S. stocks fall as renewed worries about European banks weighed on financial stocks and investors flocked to such safe-haven assets such as the dollar, Treasurys and gold.
Stocks kicked off the holiday-shortened week on a sour note today, thanks to fresh financial concerns from across the pond. According to the Wall Street Journal, European banks may harbor more risky debt than the recent round of stress tests revealed, reviving fears about the true fiscal health of the euro zone.
As a result of the uncertainty, investors shunned stocks in favor of "safe-haven assets" like Treasury notes and gold, with the widespread worry translating into a record high for the malleable metal. Against this backdrop, the major market indexes snapped their four-session winning streak, with the Dow Jones Industrial Average (DJIA) giving up triple digits by the close.
“At the end of the day, there really is nothing going on in the economy that can sustain any upward move. Without the financials, it’s really tough for the markets to do anything on a sustained basis,” said NYSE veteran trader Ted Weisberg of Seaport Securities. “I think we’re probably in trouble until the next quarterly earnings reports.”
"Everyone returned from the three-day weekend and decided to hit the 'sell' button, I guess," opined Schaeffer’s Senior Technical Strategist, Ryan Detrick. From a broader standpoint, he thinks the S&P 500 Index (SPX) will eventually break north of its current range between 1,040 and 1,130, but says the big question will be the catalysts. "I think it'll be two things: better-than-expected third-quarter earnings, and the excitement – whether you like it or not – of gridlock coming to Washington this November in the form of the Republicans in power in the House," he explained.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,340.69) finished with a loss, of 107.24 points, or 1.03%.
The S&P 500 Index (SPX – 1,091.84) also had a loss, on the day, of 12.67 points, or 1.15%.
The Nasdaq Composite (COMP – 2,208.89) had a loss of 24.86 points, or 1.11%.
The Russell 2000 Index of smaller companies managed a major loss of 14.07 points, or 2.19%, to settle at 629.29.
Most of the Dow's 30 stocks closed in the red, led by American Express (AXP) and Walt Disney (DIS) . Two of the index's best performers were defensive plays Coca-Cola (KO) and McDonald's (MCD) .
Financial stocks were the biggest drags, losing 2.2% amid a selloff in European banks like the U.K.'s Barclays (BCS) and Spain's Banco Santander (STD) . The group was hurt by a Wall Street Journal report questioning whether the European bank stress tests were tough enough and by concerns that lenders there may need to raise more cash.
Technology stocks failed to rally around Oracle (ORCL) , which saw its stock jump 6% after announcing it has tapped former Hewlett-Packard (HPQ) CEO Mark Hurd as its president. Hurd was seen as a very successful leader of H-P, but was pushed out in a controversial move sparked by ethics violations. H-P filed suit against Hurd on Tuesday, alleging violations of a confidentiality provision, the Journal reported.
Trading was among the lightest of the year, with 6.07 billion shares changing hands on the NYSE, Nasdaq and Amex combined. That contrasted with the 2009 average daily volume of 9.65 billion shares. Light volume tends to exaggerate market moves and can indicate a lack of conviction.
About three stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume was very light at 3.2 billion shares.
Volume often starts to pick back up after Labor Day when traders return from summer vacations. But Brian Peardon, a wealth adviser at Harrison Financial Group, said many investors might continue to stay out of the market even when they get back because of uncertainty about the global economy.
"It's very tough for the public to decipher what's happening," Peardon said.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) settled near its session lows today, giving up 107.2 points, or 1%, by the close.
• The S&P 500 Index’s (SPX) swallowed a loss of 12.7 points, or 1.2%, today, surrendering its short-lived perch atop the 1,100 level.
• The Nasdaq Composite (COMP), the tech-rich index, backpedaled 24.9 points, or 1.1%, to finish near its own session nadir.
• Crude futures finished the session south of breakeven today, as revived concerns about Europe's fiscal health sparked fears of waning demand. Furthermore, the euro-zone jitters bolstered the greenback against its European rival, making it more expensive for holders of foreign currency to buy the dollar-denominated commodity. By the close, crude oil for October delivery shed 51 cents, or 0.7%, to end at $74.09 per barrel.
• Gold futures: Renewed fears about European balance sheets proved to be a boon for gold futures today. The precious metal's status as a safe-haven investment lured a plethora of nervous traders, sending December-dated gold futures $8.20, or 0.7%, higher to end at $1,259.30 an ounce – a new record peak.
• Bonds: The reignited eurozone fears also spurred investors to buy U.S. Treasurys, sending prices higher and yields lower. The yield on the 10-year Treasury note fell to 2.61% from 2.71% late Friday.
European Bank Stress Tests
Fears that European banks may be in worse shape than indicated by recent financial stress tests spooked investors, said Anthony Conroy, head trader at BNY ConvergEx Group.
"Investors are questioning the shape of the banks, because reports are saying that their sovereign debt holdings are weaker than previously thought," he said. "People see this news coming out and begin to worry more about a possible double-dip [recession], because you can't have a healthy economy without healthy financials." The renewed worries came after an analysis in Tuesday's Wall Street Journal that said Europe's stress tests -- aimed at measuring the health of the continent's financial sector -- understated major banks' holdings of government debt.
Other Political Issues
President Obama will introduce a new $200 billion tax cut on Wednesday that will allow businesses to write off all new investments in equipment made between now and the end of 2011. A reading on hiring from employment firm Manpower showed that employers are likely to remain reluctant to boost hiring in the fourth quarter.
Also weighing on banks, Germany's banking association said the country's 10 biggest banks may need 105 billion euros in new capital as regulators revamp rules designed to prevent future crises.
In currencies: The European concerns sparked a selloff in the euro, which tumbled 1.42% to $1.2690, weighing on commodities and commodity-related stocks.
European Markets dipped. The CAC 40 in France tumbled 1.1%, the DAX in Germany fell 0.6%, and Britain's FTSE 100 lost 0.6%.
Asian Markets: ended mixed. Japan's benchmark Nikkei index dropped 0.8%, while the Shanghai Composite edged up 0.1% and the Hang Seng in Hong Kong gained 0.2%.
Company Earnings Reports and News
Phillips-Van Heusen Corp (PVH)
Apparel maker Corp Phillips-Van Heusen Corp (PVH) raised its adjusted profit and revenue outlook for 2010, and reported better-than-expected second-quarter earnings.
Phillips-Van Heusen said on Monday it had a second quarter net loss, but excluding charges associated with its newly-acquired Tommy Hilfiger brand, the company reported earnings that beat analysts' estimates.
The company cited growth in all three of its units and said preppy casual brand Tommy Hilfiger contributed $532 million to revenues.
The Tommy Hilfiger deal, which closed in May, is expected to double the company's sales and is seen as a vehicle to expand internationally while increasing revenue from department stores. The company also owns the Calvin Klein label and other sportswear lines such as Arrow, Izod and Bass, which it calls its heritage brands. It also makes apparel for licensed brands such as Michael Kors, Timberland and Nautica.
PVH raised its full-year adjusted earnings per share outlook to a range of $3.70 to $3.80, from $3.55 to $3.65 per share. It also raised its revenue projection to $4.44 billion to $4.47 billion for the year, from an earlier range of $4.35 billion to $4.4 billion.
Tommy Hilfiger is expected to contribute about $1.81 billion to $1.83 billion to total revenue, PVH said.
For the full year, Calvin Klein and PVH's heritage brands are expected to grow 10 to 11 percent on a combined basis, with same store sales for those two units up 7 percent to 8 percent.
In the second quarter ended Aug. 1, PVH posted a net loss of $54.6 million, or 83 cents per share, compared with a year-ago net profit of $26.6 million, or 51 cents per share.
Adjusting for the acquisition and integration of Tommy Hilfiger, the company posted earnings of 72 cents.
Analysts, on average, had been expecting adjusted earnings of 54 cents per share, according to Thomson Reuters.
In June, PVH said it would likely beat its projected second-quarter earnings range of 50 cents to 52 cents per share.
Revenue rose 108 percent to $1.10 billion in the quarter, driven by $532 million from Tommy Hilfiger and an 8 percent increase in revenue from the company's Calvin Klein and Heritage brands businesses.
Wall Street, on average, had been expecting revenue of $1.09 billion.
The company said it expects third-quarter adjusted earnings per share of between $1.37 and $1.42 on revenue of $1.42 billion to $1.44 billion.
That compares to the $1.42 per share expected by analysts on revenue of $1.43 billion.
PVH said it had paid $100 million of its debt on its term loans ahead of schedule during the second quarter, and expected to repay another $300 million at the end of 2010, more than it had originally projected.
The $3 billion cash and stock deal to acquire Tommy Hilfiger from London-based Apax Partners has been one of the year's biggest but was viewed by some analysts as costly to PVH. Shares rose to $51.13 after closing at $50.50, on the New York Stock Exchange.
Company News and Movements
• Shares of Oracle (ORCL) gained 6% after the business software maker said it has hired former Hewlett-Packard (HPQ) CEO Mark Hurd as its president. Later in the day, HP filed suit to block Hurd from the taking the job.
• Barclays (BCS) shares sank 5.4% after the British bank announced its CEO John Varley will retire March 31. Bob Diamond, the bank's U.S.-born president and investment banking chief, will replace Varley.
• Hartford Financial (HIG) and Lincoln National (LNC) lost more than 4% a piece after the Treasury Department announced plans to unload over the next several weeks warrants it received in the insurers as part of the controversial TARP bailout. The U.S. owns 52 million warrants in Hartford and 13 million warrants in Lincoln and said the sales will occur over the “next several weeks.”
• HSBC (HBC) Chairman Stephen Green is reportedly steeping down effective in January to become Prime Minister David Cameron's Trade Minister. It’s not clear who will replace Green.
• Air Products (APD) upped its bid for Airgas (ARG) to $65.50 a share, representing a 50% premium on the stock. The previous offer stood at $63.50.
Research In Motion Limited (RIMM)
Research In Motion Limited (RIMM) was the victim of a negative analyst note this morning. More specifically, Goldman Sachs slashed its price target on the stock to $45 from $50, citing further deterioration in the company's enterprise trends.
However, despite the BlackBerry maker's struggle to maintain market share, as well as its overseas drama of late, Zacks reports that most analysts remain enamored of the stock. More specifically, RIMM still boasts 20 "strong buys" and five "buy" ratings, compared to 14 "holds" and only four "sells."
Furthermore, Thomson Reuters deems the consensus 12-month price target on the stock at a jaw-dropping $73.86 – a steep premium of 65% to RIMM's closing price of $44.78 on Friday.
The options crowd, on the other hand, has started to board RIMM's bearish bandwagon. During the past two weeks on the International Securities Exchange (ISE), speculators have bought to open more RIMM puts than calls, as indicated by the stock's 10-day put/call volume ratio of 1.31. What's more, this reading ranks in the 94th annual percentile, implying that traders on the ISE have initiated bearish bets over bullish at a faster clip only 6% of the time during the past year.
Technically speaking, RIMM has given up roughly 34% since the start of 2010, led lower beneath its 10-week and 100-week moving averages. From a shorter-term perspective, the equity has underperformed the broader S&P 500 Index (SPX) by 25% during the past 60 sessions, and is now trading in territory not explored since March 2009.
As the shares of RIMM trek lower, the bullish holdouts among the brokerage bunch could follow Goldman's – and options traders' – lead. Another round of downgrades and/or price-target reductions could exacerbate the struggling security's slide.
Ciena Corporation (CIEN)
Earnings are set to roll in from Ciena Corporation (CIEN) on Wednesday, Sept. 8, and analysts are forecasting a loss of 33 cents per share compared to the company's year-ago loss of 5 cents per share. Historically, the firm has had mixed results in the earnings confessional, with the company beating the consensus estimate only twice during the past four quarters.
CIEN makes transport and switching equipment that increases the capacity of long-distance fiber-optic networks, according to Hoover's. Ciena serves telecommunications service providers, cable companies, large enterprises, and government entities.
Heading into the earnings report, options players have shown a preference for the stock's calls. The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have reported 2.7 calls purchased to open for every one put purchased to open during the past 50 trading sessions. This ratio of calls to puts is higher than 86% of all those taken during the past year, pointing to a rising optimism.
What's more, the put/call open interest ratio (SOIR) for CIEN comes in at 0.90, which is lower than 71% of all those taken during the past 12 months. In other words, short-term options players have been more optimistically aligned toward the shares only 29% of the time during the past 52 weeks.
However, some of these calls could be hedges against existing bearish positions. During the past month, the number of CIEN shares sold short increased by nearly 5% to 22.8 million shares. This accumulation of bearish bets is more than six times the stock's average daily trading volume and accounts for 25% of the company's total float. A call position matched with shorted shares would protect the bearish bet against an unexpected rally.
Meanwhile, Wall Street is decidedly unenthusiastic. According to Zacks, the stock has earned eight "buy" ratings, but also nine "holds," and three "sells." This bearish configuration leaves ample room for potential upgrades should the company report stronger-than-expected earnings.
Technically speaking, the shares of CIEN are up more than 22% since the beginning of the year. However, the equity has recently stumbled a bit. Since reaching a peak near 19.50 in May, the stock has retreated. The stock has now settled into a sideways trend between support in the 12 area and resistance in the 13.50-14 area.
Traders should keep a close watch on the stock's trading range. A positive earnings report could send the stock into resistance at the 14 level, while a negative earnings report could cause the shares to test support at the 12 area.
Public Storage (PSA)
The shares of real estate investment trust (REIT) Public Storage (PSA) – which acquires, develops, owns and operates self-storage facilities in the U.S. – have defied the broad-market trend lower today, rallying to a new multi-year high of $104.27 in early trading. Luring buyers from the sidelines could've been a bullishly biased article in the Wall Street Journal over the weekend, which opined that the self-storage sector – along with a few other "unglamorous niches" – could provide relatively decent returns amid the current market environment.
More specifically, the column notes that while the self-storage market was "once shunned by the investing elite," the sector tends to fare relatively well during recessions, with many components outpacing the broader equities market in 2010. Furthermore, the article says that "if you haven't heard about these seemingly arcane plays yet, it may be because the smarter money is getting there first."
If that's not enough motive to consider this "offbeat" sector, the column notes that almost one in 10 U.S. families rents a storage unit, compared to just one in 17 in 1995, according to the Self Storage Association. Plus, costs are lower than other types of commercial property, since self-storage facilities "tend to require a handful of employees and need minimal maintenance," which often translates into noteworthy returns.
And speaking of returns, the WSJ column points out that PSA has already generated total returns of more than 25% this year. From a longer-term perspective, the equity has skyrocketed roughly 50% during the past year, guided higher atop its ascending 10-month moving average. What's more, the stock's recent quest for new highs has placed the shares north of former resistance in the $100 region – a neighborhood that's rejected most of PSA's rally attempts since early 2007.
What's more, it appears a batch of bullish options traders are betting on the shares to remain north of the century mark – at least in the short term. More specifically, PSA has seen almost 2,200 September 100 puts change hands on open interest of fewer than 1,500, pointing to new positions. However, roughly two-thirds of the puts have traded at the bid price, suggesting they were sold.
By writing to open the September 100 puts, the sellers are betting the shares of PSA will settle atop the $100 level when front-month options expire. In this best-case scenario, the puts will expire worthless, allowing the traders to pocket the initial premium received from the sale – which also doubles as the maximum potential reward on the play.
Taking a broader look at the sentiment in the options pits, we find that bullish bets are becoming more prevalent for PSA. During the past two weeks on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), the stock has racked up a call/put volume ratio of 13.50. What's more, this ratio ranks in the 98th annual percentile, implying that speculators on the exchanges have rarely bought to open PSA calls over puts at a faster clip during the past year.
However, not everyone on the Street is optimistic toward the outperformer. Short interest on the stock escalated by 9.2% during the past month, and now represents about 3.7% of the equity's total available float. In fact, at PSA's average pace of trading, it would take more than a week for all of these pessimistic positions to be repurchased.
Should the shares of PSA continue their trajectory north of the $100 level, the bearish holdouts could get spooked – which could translate into a significant short-covering rally.
The following companies also had some impressive options movements:-
DryShips Inc. (DRYS)
DryShips Inc. (DRYS) this morning confessed that it obtained another waiver on its $230 million loan due Dec. 1, after the previous waiver letter expired on Aug. 15. In addition, the shipping issue said it signed supplemental agreements to extend other waivers with Piraeus Bank to March 31, 2012, though the company said it "remains in full compliance" with all of its loan agreements. Furthermore, DryShips also filed with the Securities and Exchange Commission (SEC) to offer up to $350 million in shares as a ploy to raise capital.
As a result of the emerging balance-sheet concerns, the shares of DRYS have tumbled into the red – sparking a slew of put activity on the stock. So far today, the equity has seen nearly 7,000 puts cross the tape – more than 10 times its expected single-session put volume.
Garnering the most attention has been the stock's at-the-money September 4 put, which has seen close to 6,500 contracts change hands – 71% of which have traded at the ask price, suggesting they were bought. However, with more than 14,200 puts already docked at the September 4 strike, we can't yet tell how much of today's activity will translate into freshly purchased pessimistic positions.
From a broader perspective, though, today's preference for puts echoes a growing trend among the options crowd. The stock's 10-day put/call volume ratio on the International Securities Exchange (ISE) sits at 0.34, in the 86th annual percentile. In other words, during the past two weeks, traders on the ISE have bought to open DRYS puts over calls at a much faster clip than usual.
At last check, the shares of DRYS have surrendered 5.5% to flirt with the $4.20 neighborhood.
Take Two Interactive Software, Inc. (TTWO)
Last Thursday, Take Two Interactive Software, Inc. (TTWO) reported that it swung to a third-quarter profit of $5.9 million, as sales surged by more than 270% due to strong demand for its "Red Dead Redemption" video game. Moreover, TTWO's profit of 28 cents per share blew past analysts' expectations for a loss of 6 cents per share.
TTWO soared higher on the news, closing last week above its 10-week trendline for the first time since Aug. 6. However, the shares still face overhead resistance from their 20-week moving average, which is located right around the $10 level.
Despite TTWO's strong quarterly report, option players placed bearish bets at breakneck speed on Friday, with some 5,800 puts changing hands on the session -- 36 times the stock's expected put daily put volume of just 158 contracts.
Option players focused on the October 10 put, with over 5,000 contracts crossing the tape on Friday. The bulk of theses puts changed hands at the ask price, indicating they were likely bought, and open interest increased by roughly 5,000 contracts over the weekend. By buying to open the October 10 put, traders are counting on TTWO to remain beneath this round number over the next two months.
Bearish activity detected in SinoCoking Coal and Coke Chemical Industries (SCOK) , with 2566 puts trading, or 2x the recent average daily put volume in the name.
Bullish flow detected in Invesco (IVZ) , with 3134 calls trading, or 30x the recent average daily call volume in the name.
Bullish flow detected in Nucor Corporation (NUE) , with 15959 calls trading, or 5x the recent average daily call volume in the name.
Increasing options volume in also being seen in TEVA, Avanir Pharmaceuticals (AVNR) , and Momenta Pharmaceuticals (MNTA) .
During last week's stock rally, the Dow turned positive for the year. But Tuesday's losses quickly turned the index back into the red.
"The soundness of stress tests are, and continue to be, in question," said Brian O'Reilly, president of the Collingwood Group. Uncertainty about the tests could be a drag on the market until European regulators provide some more transparency about exactly what figures were included in the test, O'Reilly said.
The reports renewed worries about European government debt, which had flared up earlier this year following a fiscal crisis in Greece that spread to other weak European economies and helped bring stocks down worldwide.
Stocks had been doing well last week, rallying on improved news about job growth and gains in manufacturing in the U.S. and China. The better economic news helped the market end higher for the week, breaking three straight weeks of losses.
Many investors still have faith the economy is growing, but the pace of that growth is in question. Economic reports have been inconsistent, leaving traders overreacting to every bit of news, said James Angel, professor of finance at Georgetown University's McDonough School of Business.
"What it's going to take to keep (a rally) going is more good news," said Angel said.
On Friday, the major indexes gained more than 1%, after a government report showed fewer jobs were lost in July than economists had expected. U.S. markets were closed Monday for Labor Day.
"We're in September, which is traditionally a softer month for stocks, and so far we've escaped that," said Peter Cardillo, chief market economist for Avalon Partners. "But lingering worries won't diminish until we get more indicators that show the decline in economic activity is leveling off and beginning to turn around again."
“This will be a week free of any meaningful data releases and void of earnings so I suspect the bears will have an opportunity to pull the ghosts of recent past back into focus,” Peter Kenny, managing director at Knight Capital Group, wrote in a note.
“Chasing this past week’s rally is a fool’s errand. If the market is pricing in the decreased likelihood of a double dip, then we are priced in fairly fully.”
Several reports later this week could shed more light on the U.S. economy including the "beige book" report from the Federal Reserve coming out on Wednesday and weekly unemployment numbers due out on Thursday.
"It looks more like a consolidation than some type of conviction selloff," said Maier Tarlow, a New York Stock Exchange floor trader at Raven Securities. "We think that the market has got a bullish trend now, and unless we see repeated selloffs on better volume, we're going to keep that opinion."
The decline ended a four-day rally for the S&P 500, although it was the magnitude of last week's move, not the duration, that was striking. The index jumped more than 5 percent over the last three days of the week on solid volume.
"We had a couple of days of nice buying on good volume which was an indication that institutions were stepping back in to buy stocks," said Tarlow.
Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston, said he expected markets to remain volatile and range-bound until after U.S. elections in November. Then markets could rally sharply, he said.
"I don't think it's necessarily a reversal that has a lot of upside from here," he said of last week's rally. Part of the move was "a reactionary bounce to the pretty dramatic selling we had in August," he said.
Zaro said he saw the S&P 500 hitting a ceiling at around 1,120 to 1,130, with a downside limit at around 1,000 before a late-year rally after the elections.
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