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Friday, March 31, 2006

Through TheFly's Eyes: Anheuser-Busch Companies, Inc./Hansen Natural Corp.

According to a Beverage Business Insights report, Anheuser-Busch (BUD) and Hansen Natural (HANS) are discussing a potential partnership, which pushed Hansen’s stock up +4.6% before the market opened today.

Brokerage firm Stifel Nicolaus & Company believes there is truth to the report, but noted that the partnership could be as little as a distribution agreement or as large as a complete acquisition of Hansen by Anheuser-Busch. Stifel elaborated on the possibilities, saying, “a potential combination of an alcoholic energy drink bearing Hansen’s Monster name could also make strategic sense for Anheuser-Busch, which has limited success in the energy drink category." Citigroup Smith Barney reiterated their Buy rating on Hansen, saying a partnership could drive growth for Anheuser-Busch.

From the sector’s reaction at mid-day Friday, Wall Street appeared to be siding with a possible Hansen/Anheuser-Busch partnership, if any deal occurs at all. Analysts view a partnership as a solid positive for Hansen: it will expand the company’s reach in all channels of distribution, and may enable Hansen to team up with Budweiser on a new branded beer, energy beer, or other type of energy-alcohol beverage. In early afternoon trading, Hansen was up $5.35 to $124.50, while Anheuser-Busch rose 20 cents $42.97. Meanwhile, competitor breweries also moved higher: Heineken (HINKY) gained 30c to $19 and SABMiller (SBMRY) rose 60c to $20.50. Further, it’s easy to see why any workable deal would enhance Hansen’s value: Budweiser, the oft-stated “King of Beers” is also, in fact, “King of Beer Shelf Space,” with about 30 brands and an astounding 50% market share in the United States, a mouthwatering stat for any distributor. And while in theory Hansen could partner with several competitor brewers to achieve similar goals, many analysts agree that partnering with Budweiser makes the battle for supermarket and liquor store shelf space considerably easier. Hansen already has established a solid presence in convenience stores with its energy drinks.

What does Budweiser get from a potential partnership? The King of Beers gets a chance to diversify further. Budweiser, which also is one of the largest aluminum can recyclers in the world, and a major player in theme parks, gets another hedge against two longstanding consumption trends. While no one is arguing that breweries will disappear overnight, two secular trends bear watching, marketers say: more adults are choosing energy and/or health drinks and shunning alcohol, and among those who do drink alcohol, wine is making steady gains against beer. Budweiser’s potential partnership could very well represent another fortress against any long-term shift away from alcohol, in general, and beer, in specific.

Our Options strategist does not see this news moving Anheuser-Busch’s stock, stating that the option implied volatility of 18 is near its 26-week average, suggesting non-directional price fluctuations.

Our Technical analyst notes that Hansen’s stock has been in a strong, steady and relatively narrow (not all that volatile) channel since breaking out of former resistance (red/green dashed line on chart). There are no guarantees of course with technical factors, but if price can remain within the bounds of the price channel (dashed blue lines) then it will reach $160 by May or June (see chart). That would likely be a hard limit for the price move as we can see by the sloping dashed red line. This appears to be a strong resistance line that has held the stock in check for some time. If price begins to lose upward momentum, the following levels become key supports to observe: $124.14, $118.25, $112.89 (lower limit of the channel today, this gets higher as each day goes by since the channel slopes upward) and $109.85. This last level would actually place the stock outside of the current bullish price channel and would suggest the upside move, at least on this path, is over. There is no resistance on the chart other than today's high and the blue channel lines.

Anheuser-Busch’s stock, on the other hand, is like the "evil twin" of HANS in some respects. It has been in a steady downtrend for almost two years, as defined by the red dashed resistance line on the chart. There have been some potentially bullish developments on the chart that are important to be aware of. First is that price "double bottomed" (came down to the same level, separated by months of time, and the price "held" - dashed green line). Second is that there was a "breakout" above the red resistance line. As long as the stock can continue to hold above this level (minor breaks below are alright as long as the stock does not consistently close below) there is a good chance that the prior bearish downtrend is over. Third is the new short-term bullish channel that has formed. This for now becomes the visual means by which we can judge the nascent uptrend. If price can stay within the lower limit (outside line to right of chart) of the channel and above the red resistance line, then there is a good chance a new bullish trend is under way.

There is one very large proviso and that is that today price is coming dangerously close to that red dashed line. If that line (which is now, importantly, support - $42.75) should break then real doubt may be cast on the viability of the new trend. It may simply be that this is a testing process and that traders will keep hitting this area hard to see if buyers come in instead of selling. How the stock performs during this test (the blue channel line suggests end of next week at latest) is going to determine whether this is truly an "all clear" or if this was just a relief rally within the bearish trend.

Support levels to watch are $42.63 (the "must hold" level) and $41.90 (stock would be firmly back in downtrend). Resistance is at $43.00, $43.65 (near channel midpoint at $43.74) $44.44 and the upper limit of the channel at $44.96.

Charts created with Equis MetaStock

Through TheFly's Eyes: Pinnacle Entertainment, Inc/Aztar Corporation

On March 13, Pinnacle (PNK) announced that it would acquire Aztar Corporation (AZR) for $2.1B, or $38 a share after both boards unanimously approved the deal. The bid represented a 24% premium over Aztar’s previous closing price. Several reports say that private equity firm Colony Capital may have entered the picture with a $41 a share offer for Aztar. If the reports prove true, Pinnacle is left with two options: to counter the Colony offer, or to collect a $55M break up fee from Aztar.

JPMorgan, which rates Pinnacle an Overweight, believes if the offer by Colony Capital is true, it limits Pinnacle’s near-term upside because of the possibility of a counter offer. However, Citigroup Smith Barney feels the synergies may be greater for Colony, “as it operates in both Las Vegas and Atlantic City.” As for the effect on Aztar, firms do not seem too excited by the thought of a bidding war. Calyon Securities believes that a counter offer from Pinnacle is not out of the question, and has raised its price target to $41 from $38, but still rates Aztar a Neutral. Jeffries & Company also maintained their Hold rating after hearing rumors of Colony topping Pinnacle’s bid.

Our options strategist concurs with this lack of excitement, stating that Aztar’s August option implied volatility of 16 is at the low end of its 26-week range, which suggests the likelihood of Aztar trading below $37 or above $44 over the next five months is low.

The takeover talk sent the casino/gaming sector modestly higher in mid-day trading Friday, as dealmakers contemplated the next moving in this potential buyout/takeover saga. Aztar was up 10c to $42.90, MGM Mirage (MGM) was up 8c to $43.05, Harrah’s (HET) rose 20c to $78.75, and Wynn Resorts (WYNN) was down 60c to $76.35. Meanwhile Pinnacle Entertainment (PNK), which earlier this month signed a merger agreement with Aztar, fell 90c to $28.35, apparently as Wall Street factored-in Pinnacle’s chances of completing its proposed deal. Moreover, Wall Street’s stance basically reflects one of a field of observers studying a chess game: there was talk that Pinnacle may now move to sweeten offer to Aztar, triggering a bidding war. Another take has Pinnacle relinquishing its interest in buying Aztar, which industry officials agree has underperformed financially, in favor of courting another casino/gaming target. Pinnacle, as expected, was mum on the matter, communicating nothing beyond the fact that it has a signed merger agreement with Aztar. Which ever way the Colony Capital LLC / Aztar bid plays out, the issue has underscored a paradoxical, but ever-more-common dimension of investment, and corporate practice in the United States: that a company, by underperforming, or operating at less than an efficient level, can in fact place itself in a position where it would want to be - in a position to be bought for a favorable price. Unless both potential buyers back away from Aztar, it will be the underperformer Aztar who will be in a position to declare “check-mate.”

Our Technical analyst notes that the stock broke out of a pattern market technicians call a "Bullish Ascending Triangle." This, as can be seen on the chart, is a triangle with a flattish top (in this case only two price levels established it which is unusual, shown by the red resistance line) and an ascending (green) support line. The base of the triangle, shown by the dashed green line, is used as a rough measure of where price could potentially go. This line is added to the coordinate on the triangle where price broke out and gives us a suggested price target of $47. This breakout was "confirmed" (made more convincing) by the very large volume spike that accompanied it. Support now becomes at minimum the top of the gap-up in order for the pattern to stay promising (roughly at the $38 dollar level). It would not be a bullish development if price came back down to the triangle top at this stage.

As for Pinnacle’s technicals, he stock has been moving in a strongly bullish pattern now for some time, moving in fact in a progressively wider range of swings (more volatile) over time. We want to look particularly at the channel the stock is trading in (on chart, upward sloping box-shape) and the uptrend line. We can see today that the stock is coming very close to hitting its uptrend line. Breaks of uptrend lines are bearish. The channel is a bit further below and a break of that line would probably be very bearish. Why? Because it is often the case a trendline can be broken and the stock recover from there. With both the bullish price channel and the uptrend line broken the stock would be in greater danger of further decline. Support today is at $28.00, $27.55 and the channel low at $27.32. Resistance is at $28.60, $29.10 and the midpoint of the channel at $29.47. It would be more bullish if the stock could rally from here and stay above the midpoint.

Charts created with Equis MetaStock

Thursday, March 30, 2006

Through TheFly's Eyes: JPMorgan Chase & Co.

CNBC reported earlier today that Bank of New York (BK) was close to selling 300 of its branches for an estimated $4B, most of which to JPMorgan Chase (JPM). Punk, Ziegel & Co. feels that not only will JPMorgan buy Bank of New York, but next year it will buy Morgan Stanley (MS). Merrill Lynch believes that Astoria (AF), New York Community Bancorp (NYB) and Hudson City (HCBK) should all trade up on the potential deal.

Analysts saw the potential deal as another sign of healthy consolidation in the retail banking field, assuming that JPMorgan then shuts down hundreds of redundant banks. Retail banking is still viewed by most analysts as “over-retailed,” hence the potential deal would continue what Wall Street views as a positive branch-rightsizing trend. However, only the Bank of New York rose on the news, up $1.40 to $35.80 in early Thursday afternoon trading. Predictably, JPMorgan was down 40c to $41.20, a normal move, given that the acquirer in a transaction generally drops in price. However JPMorgan’s primary competitors also declined: the Bank of America (BAC) was down 40c to $45.55, Citigroup (C) was down 30c to $47.30, and Merrill Lynch (MER) was down 65c to $77.65. The sector’s move lower on the news gave some in the financial community an opportunity to trot out an old Wall Street adage: “Where there’s one, there’s more,” with the `one’ being the potential Bank of New York branch sale. Is more retail bank branch consolidation on the horizon? At least initially, the retail banking sector appears to be signaling ‘yes.’

Our Technical analyst notes that JPMorgan’s stock has made a parabolic bounce, as we can see from the chart, off its lows in October of last year. That low coincided with the lows of the general market. It's no surprise given the weight and importance of the financials in the various indexes that this would be so. As one old salt told me, the banking complex is the most important complex for the tape. It won't rally or fail unless the financials are cooperating by moving in the same direction.

For that reason it's worth considering that the rough curving trend-line we see is topping out, possibly losing upside momentum much the same way a ball flying through the air does. It's not yet a failure by any means, but that topping process is one we must watch carefully. The key levels happen to be very close by today and some are marked on the chart for handy reference. The levels to watch are $41.04, $40.95, $40.30, $39.69, $39.00, $38.42 and $37.80. Resistance, levels which if broken to the upside would be bullish are as follows: $41.70, $42.50 (key level), $43.19.

Chart created with Equis MetaStock

Through TheFly's Eyes: Nokia Corporation

Nokia (NOK) is up $1.00 to $21.20 in intra-day trading today after raising its 2006 mobile device growth to 15% from 10%. Appropriately, analysts are reacting positively to this news. American Technology Research reiterated their Buy rating because the increased forecast gives the firm confidence in their Street high handset estimates for 2006 and 2007. Piper Jaffray maintained their Outperform and raised their guidance, saying they expect margins to expand.

Other firms focused on the broader effect of the announcement. JP Morgan Chase saw the announcement as a positive for Motorola (MOT) and Qualcomm (QCOM). American Technology Research notes that Texas Instruments (TXN) and supplier Silicon Laboratories (SLAB) as beneficiaries of Nokia launching three new phone models.

The Nokia announcement propelled the telecom sector higher in mid-day trading Thursday. Nokia was up $1.00 to $21.20, Erickson (ERICY) rose $1.05 to $39.25, Motorola (MOT) gained 45c to $22.30, and Siemens (SI) rose $1.90 to $93.80. Wall Street’s initial response to Nokia’s update appeared to one of confirmation of continued solid economic growth, globally, despite recent economic headwinds and hurdles. Persistently high oil prices, rising short-term interest rates in the U.S., and the prospect of decelerating earnings growth had given some on Wall Street fodder to charge that the economic expansion was fading, but Nokia’s bullish forecast has dispelled much of that concern, at least for the immediate future. Nokia is considered a growth bellwether because mobile units/cell phones are thought to be one of the first, optional consumption items consumers eliminate during an economic slowdown. Conversely, robust projections from Nokia – which manufactures 1 in 3 of all mobile handsets used globally – are viewed by analysts as a sign of solid consumer demand, and undoubtedly, as a sign of above-trend GDP growth globally, particularly in the developing world. And there’s nothing like above-trend GDP growth to gladden investors’ hearts.

Nokia’s April at the money option implied volatility is 31, May at 25 and July at 24. The intra-day call option volume of 10,451 contracts compares to intra-day put volume of 8,291 contracts. Differential of option implied volatility indicates differing views on Nokia’s risks, says our Options strategist

Our Technical analyst notes that Nokia’s stock has actually been moving up nicely, and somewhat stealthily, for the last several months. This is typical of a stock coming out of a long base (trading in a narrow horizontal channel where the stock appears to be going nowhere, or is "dead money") where the trend-line is polynomial (it curves and more closely resembles a power function than a straight line which eventually, if the trend holds, becomes parabolic).

The stock in addition appears to be clearing years or prior overhead resistance which is very bullish in these "long base breakout" situations. Base breakouts are tricky because one can never be quite certain that the stock is not simply coming up to the top of the prior range and might simply trade back down. That is why waiting for the actual breakout instead of anticipating it is so important. This can best be done by drawing a rectangle around the base so that it will be clear when and where the top of the base has been broken.

The most easily seen bullish aspect of today's move is the bullish gap-up (price jumps without trading in between two distant prices). Generally speaking gaps beget gaps if the trend is strong enough and gaps tend to be separated by prices continuing in the direction of the gap. In other words it is a signal that prices have a higher probability of continuing to rise.

For Nokia, which still faces many layers of overhead resistance from the go-go 1990s, the next resistance levels to watch (upside objectives) are as follows: $21.53, $21.88, $22.30, $22.69, $23.16, $23.52. As each level is surpassed, it becomes support (a place to put protective stops or add to positions depending on holding period and risk tolerance). Current support for today is at the low ($21.04 as this is written) and at the last peak nearby on the chart at $20.77. A breakdown which starts to "fill the gap" (price moves back into the clear gap on the chart, in this case between yesterday's high at $20.34 and $20.77) would be bearish suggesting the move is a "false breakout". These do happen so it is important to be aware of this signal and its importance in gauging whether this is "exhaustion " (end of a move) or a breakout (start of a move).

Wednesday, March 29, 2006

Through TheFly's Eyes: General Motors Corporation

American auto maker General Motors (GM), often referred to as "beleaguered," is in the news again with more financial issues. The company announced yesterday that it has restated its financial results and those of its GMAC unit back to 2000. This additional noise comes after reports of other financial issues, additional job cuts and a possible sale of the company’s profitable General Motors Acceptance Corp (GMAC) unit. Additionally, General Motors is locked in a three way labor battle with its former parts division, Delphi, and the United Auto Workers union.

Brokerage firms cannot agree what to rate General Motors nor what the most important catalyst is for the company. JP Morgan Chase, which rates GM an Overweight, notes that GM feels a GMAC sale “is a complex endeavor” but is “working to finalize a transaction as rapidly as they can,” which JP Morgan feels may create some investor concerns. The firm is confident a sale of the unit is achievable, however. Lehman Brothers, which rates GM an Equal Weight, is focused on the strife between Delphi and the UAW. They believe GM will eventually have to intervene to resolve the labor dispute, which could drag on for some time. Soleil Securities, which rates GM a Sell, is not focused on the company’s finances or labor, but on its product line. The firm believes the launch of the GMT900 full size SUV class is poorly timed as consumers are moving away from the SUV segment.

The result of all this? Shares of General Motors (GM) dropped about $1 to $21.70 in mid-day trading. These new financial issues will not help GM’s “junk” credit rating – a rating that will hamper the company’s turnaround effort, due to the higher interest rate associated with the sub-par rating. This is exactly the type of additional hurdle GM does not need, with the company already facing a likely fleet revision, due to the declining popularity of low-mpg SUVs, and increased competition from lower-cost and higher-mpg imports.

However, GM’s news did not spur a sell-off among the other major automakers: Ford (F) was up about 10c to $8.20, Daimler Chrysler (DCX) was up a $1.10 to $56.55, and Toyota (TM) was up 85c to $108.35. The initial Wall Street consensus Wednesday appears to be that while Ford faces the same SUV-fleet issues and structural costs as GM, so far Ford’s financial status is not as serious. (With the emphasis on “so far.”) Further, Daimler Chrysler, with slightly lower structural costs than GM and Ford, appears to be better-positioned to weather the domestic auto sector’s transition period – a period when lower cost, better-product foreign auto makers, such as Toyota and Nissan (NSANY), are likely to gain even more market share. Wall Street is united on the seriousness of GM’s situation: what Wall Street is divided on is whether GM can implement the major structural changes necessary, and quickly enough, to spark a sales turnaround in the years ahead. The record shows that GM has done it before, but as of late March 2006, few on Wall Street are willing to venture that GM will be able to do it again.

Our Options strategist notes that General Motors’ option implied volatility of 50 is at the low end of its 26- week range which suggests decreasing price risk.

Our Technical analyst points out that General Motor’s stock has been the worst performer of the Dow 30 stocks over the past year having lost greater than 60% of its value at its recent low.

Technically the stock's downward momentum (its rate of change) has slowed and the stock has found something of a bottom at the $18-$19 area. It is also trading in a very narrow ranged channel (bullish, began in early March) which until today looked set to break out and form a complete double bottom. That is, that the price chart over the last six months would resemble a "W" shape. For a true double bottom to be in place we'd want to see price above the apex of the middle of that "W", in this case above $25 dollars. Right now the stock is at its channel low. A breakdown through the lower limit at $21.68 (bottom today) of the channel would be very bearish. The downside objectives in that case would be at the following support levels: $21.63, $20.73, $19.81, $19.02, $18.47. If the stock can stay above the channel, the following are resistance areas which become upside objectives in a rally: $21.94, $22.31, $22.78, $23.06, $23.56.

Another bearish factor is that we could interpret the current pattern as a bearish continuation triangle (see chart below). This triangle would suggest a downside target to the $13 area which would be a new all-time low for the stock. That pattern would not be valid unless the stock breaks down below $20 sometime in the next several days. The chart shows the boundaries over time where the pattern is still valid (stock price stays within triangle bounds) and where the "break" line is (dashed green line) as well as the possible downside target area.

Chart created with Equis MetaStock

Tuesday, March 28, 2006

Through TheFly's Eyes: Soft Drink Sector

Are changes at Coca Cola (KO), $42.30, long overdue? Morgan Stanley analyst William Pecoriello says Coca Cola faces two major investment decisions: 1) decide whether to own more bottling assets and 2) accelerate diversification beyond carbonated soft drinks. Regardless of whether Coca Cola had rested on its market share, or on its extensive, global sales & distribution network, Coca Cola slipped during the 1990s, and failed to see the emerging non-carbonated soft drink trend. That oversight created a large opportunity for nimbler Pepsico (PEP), $58.60. During the decade, Pepsico registered stronger international sales growth, and was not afraid to venture into the non-carbonated line: the company’s Aquafina won market share, and is now a staple brand in the U.S. bottled water segment. Always viewed as nimbler than Coca Cola, Pepsico now has the reputation of being more “in touch” with younger consumers, and an organization more-likely to spot a trend, or a hip, new sensation that could mature into a trend. Moreover, while market researchers are quick to point out that only a tiny fraction of fads mature into a trend, Pepsico’s younger generation sensors are viewed as giving it a competitive advantage versus Coca Cola regarding trend recognition – a significant edge.

Meanwhile, Cadbury Schweppes (CSG), $40.50, which posted a 46% increase in full-year profit in 2005, rounds-out a “Soft Drink Big 3” that controls 90% of the U.S. beverage market. One would think that with the overarching presences of Pepsico and Coca Cola, there wouldn’t be room for a third significant player, but that is not the case. Cadbury has successfully defended its overall market share for its well-established brands: 7UP, A&W Root Beer, Canada Dry, Dr. Pepper, and Hawaiian Punch.

Finally the soft drink sector has shown that while the Big 3 have the capitalization to research, roll-out and promote brands, an underdog success story is possible in the sector: upstart Glaceau, a private company, is making inroads with noncarbonated drinks such as VitaminWater, as the carbonated share of the soft drink sector dropped to 73% in 2005 from 83% in 1999.

Sector Outlook: When the non-carbonated segment burst upon the scene in the decade many now call the “Roaring 90s,” some doubted the alternative soft drink’s durability. In the first five years of this decade, non-carbonated has demonstrated that it is a trend, not a fad, and that non-carbonated is likely to grab additional market share from the carbonated stalwarts as the decade progresses. Given the sector’s evolution, Pepsico is best-positioned to deliver the products consumers like, and the returns investors want. Even so, there’s a Wall Street adage that argues: “No one ever went broke holding Coke.” Coca Cola is a pace (and possibly a product) behind the times, but that’s not enough to abandon the venerable giant. Look for Pepsico and Coca Cola’s duel to continue as the decade progresses.

Through TheFly's Eyes: Apple Computer, Inc.

Between court disputes with France and the Beatles, Steve Jobs shuffling 10 million shares worth of his stock options and the company’s CTO departing, Apple Computer (AAPL) has made a lot of noise recently. But is any of it market moving or is the microscope just too focused on the Cupertino, CA, based technology company?

The ongoing dispute with France has interesting implications. With the French lawmaking body approving a copyright bill that would force Apple to break open its exclusive iTunes and iPod formats, the company must now decide whether to comply with the regulations or leave France totally. There is analyst speculation that Apple will choose to drop out of the French market rather than open its formats to competitors. Apple has not made an official decision yet, but did issue a statement, saying, “If this happens, legal music sales will plummet just when legitimate alternatives to piracy are winning over customers. iPod sales will likely increase as users freely load their iPods with 'interoperable' music which cannot be adequately protected. Free movies for iPods should not be far behind in what will rapidly become a state-sponsored culture of piracy.”

As for Apple’s other legal dispute, Apple Corps Ltd., which represents the Beatles, is suing Apple Computer for using the Apple name and logo in relation to music distribution, which breaks a previous agreement by the two like-named companies. According to Gene Muster, an analyst with Piper Jaffray, Apple Computer may be forced to pay Apple Corps between $50M and $100M to settle the dispute, which is thought to be more of a public relations mess than a harmful fine.

The news of Apple CEO Steve Jobs withholding 4.57M shares of stock to pay taxes is not in itself a terribly newsworthy event, except that the Street originally misinterpreted it to mean that Mr. Jobs sold a large stake of his shares in the company. In fact, Mr. Jobs did not sell any of his stake in Apple.

The final, and most recent, bit of news is the departure of Apple’s chief technical officer, Avandis Tevanian, from the company, which Apple confirmed to the San Francisco Chronicle yesterday. He is leaving on March 31, the same day as Jon Rubinstein, the senior VP of the iPod division. Mr. Rubinstein is retiring, but it is unclear what Mr. Tevanian is doing.

The effect of all of this on Apple, which is nearing its 30th birthday this April 1st, is that shares are virtually unchanged in mid-day trading, up only 19c to $59.70. The initial sector and market reaction to Apple appeared to be muted: Dell (DELL) was down just 5c to $30.05, while Hewlett-Packard (HPQ) was down 29c to $32.82. Meanwhile, the market was neutral to mixed, with the U.S. Federal Reserve set to announce its decision on short-term interest rates. Wall Street, understandably, was focused on the Fed’s decision and accompanying policy statement – a decision that has broader and more long-term implications for the economy and the stock market.

Apple’s option implied volatility of 42 is near its 26-week average. The company’s intra-day call option volume of 27,484 contracts compares to intra-day put volume of 10,382 contracts according to Track Data. Average option implied volatility suggests non-directional price fluctuations, notes our Options strategist.

Our Technical analyst provides us with another angle. Apple’s stock has taken quite a beating since reaching its parabolic peak (a trend that is just that, a parabola instead of a steady line) in early January of this year and is down some 33% since that time. The stock is trading in a bearish price channel (downward sloping) that suggests $57.48 (the lower limit of the channel today) is a reasonable downside objective. The stock has little support below where it is currently trading until $55.35. There is a strong layer of support here which was the breakout area for the big move up starting in October of last year. Our best guess is that there will be an attempt to move the stock if it hits this level and maybe before then. Why? Old resistance levels that become support levels (as this once was, now it has become support since the stock is trading above this level) generally test well. They provide an easy floor value that traders suspect will hold given the length of time the prior level held. As it turns out this support (then resistance, these flip names depending on which side of them the current stock price is at) lasted a few months so there is likely to be a sense that this is "firm footing". Trading stops (a price that if reached will elect an automatic sell in this case) will likely be placed just under this area, varying depending on the risk profile of the traders involved. Where could the stock go then? The bearish price channel itself is very wide ranging. The middle of this channel is today at $63.16 and the top or upper limit is at $68.73. Remember the channel slopes downward so these values over time get lower. At the $55.35 zone, the middle of the channel would be at $57.99 and the upper limit at $60.99.

Monday, March 27, 2006

Through TheFly's Eyes: Encysive Pharmaceuticals, Inc.

After the market close Friday, Encysive Pharmaceuticals (ENCY) received an approvable letter from the Food and Drug Administration regarding its drug Thelin, which was under review for the treatment of pulmonary arterial hypertension. The approvable letter was not positive, however, as it contained concerns and observations which must be satisfied by the company before the drug would achieve FDA approval, including a request for additional clinical trial work.

The letter caused Encysive to trade down to $5 before the market opened this morning, after a previous close of $9.08. The stock, at the time of writing, has settled at $4.77. Our Options strategist notes that the option implied volatility has fallen to 74 from last week's level of 83, which suggests reduced price fluctuations.

The FDA letter also caused a flurry of downgrades by research firms. Needham & Company downgraded Encysive to Buy from Strong Buy. Brean Murray, First Albany and Oppenheimer & Co all downgraded the company to a Neutral position from a Buy position. CE Unterberg and Leerink Swann both downgraded the company further to an Underperform position, CE Unterberg from Buy, Leerink from Market Perform. All of the firms cited the FDA letter and the lack of clarity regarding if and when Thelin would reach the market.

The initial consensus among traders was that the FDA’s communication represented a substantial delay for Thelin, which gave a boost to Encysive’s primary drug-class competitor, Myogen (MYOG), the maker of Ambrisentan. Myogen was up $1.70 to $36.70 at mid-day. Analysts said the market appeared to be discounting that Thelin and Ambrisentan will be in roughly equal positions when Ambrisentan comes to market, with respect to the biotech segment, and that the two companies will now compete eye-to-eye to gain market share.

The chart for Encysive has one feature that is generally a large red flag, a very large bearish (down) gap back in December of 2005, notes our Technical analyst. A gap is simply a large difference between prior day closing and the high of the next day. In this case the gap was over $3, which given the stock was trading at a bit over $11 at the time is a huge percentage difference. This was followed by the stock recovering some of its lost ground (about 50%) with the stock then trading in a horizontal pattern in a very narrow range of price difference for many months. This could have given the impression that there was an all clear. However, it is important to learn that stocks that break out of tight ranges have very extreme price reactions. Those reactions can happen without warning. Further, prices then tend to persist in the direction of the break. That's what has happened here this morning with another very large bearish gap evident on the chart, nearly cutting the stock in half as this is written from the prior day.

Friday, March 24, 2006

Through TheFly's Eyes: Google Inc.

After the market close yesterday, Google (GOOG) was added to the S&P 500 index to replace Burlington Resources (BR), which is being acquired by ConocoPhillips (COP). The addition follows months of speculation and anticipation that Google would make the index. S&P spokesman David Guarino said, “Based on the calendar of publicly announced deals, this was the best time to make the addition. The stock price wasn't a factor in our decision.”

The news of the S&P addition, which will increase Google’s broad ownership, was greeted favorably by the Street. This morning Stifel Nicolaus & Company upgraded Google to a Buy from a Hold, a rating they held on the company since they upgraded it from a Sell on February 26. Jefferies & Company maintains their Buy rating on the search engine giant, saying this should create a positive momentum swing for both Google and the sector.

On a broader scale, the announcement represents, to paraphrase Charles Dickens, “A little of the best of times, and a little of the worst of times,” for investors. On the upside, the Google news sparked a modest rally in the search engine sector at mid-day Friday: Google was up $26.47 to $368.17, Yahoo! (YHOO) was up 30c to $32.15, and Microsoft (MSFT) was up 4 cents up $26.90. Further, there was talk around Wall Street that Google could spark a broader rally across sectors - a tech/networking/Internet rally extending deep into the spring. Moreover, many tech industry watchers viewed the S&P inclusion as further confirmation of Google’s unique business model and way of conducting business – something that could reflect positively on Google’s companion companies. On the downside, traders and S&P watchers expressed concern about possible increased S&P 500 Index volatility stemming from the Google inclusion. While Google gives every indication of fundamental value and that the company will be around for a long time, Google’s cache and charisma bring with it speculation and froth – two realities that complicate the trade equation, particularly technical-based trades. In addition, others were concerned about the S&P 500 Index comparability over time. As one economist put it best, “Every time you try to make an index more-reflective of the current field of companies, you risk decreasing comparability to the previous S&P 500 Index.” Therefore, traders and analysts will be watching the S&P index and Google closely in the months ahead, to see if Google blends in inconspicuously, or blends in with a bang.

Our Options strategist notes that Google’s April option implied volatility of 42 prior to the S&P addition is near its 26-week average, which suggests non-directional price fluctuations.

Our Technical analyst notes that the stock has moved up about 8% today. He sees some interesting technical factors and a more quantitative one - that the stock will need to be purchased before or on that day by funds that track the S&P 500 and therefore need to own it. Let's deal with that last factor first. One estimate suggests that some 7.3 billion dollars of the stock will need to be purchased by fund managers. Although that may seem like a lot of money it works out to about 2 days of normal trading volume in the shares. That certainly has the capacity to impact prices in the short run and that is what we are seeing happen today. Traders have "discounted" that event and priced the stock accordingly.

On a purely technical basis the stock is still in a downtrend despite the pop in price. In fact until yesterday it was trading inside two bearish price channels that intersected (see chart). That is not a positive going forward unless it can clear both and it has a ways to go before that happens. It is interesting to note the two price channels and the 30-day moving average happened to intersect yesterday. That may prove to be a very important area for a future test - more bullish if it can stay above that level. There is another intersection on the chart to keep an eye on at $387.87. That is where the uptrend line and the current bearish price channel intersect and could prove to be very strong resistance

Resistance, the level at which a stock may have trouble moving above, is today at $370.09 (high so far today), then at $377.43, the 50 day moving average at $381.48 and then the upper limit of the current bearish channel which is today at $389.68. It would need to break above that level to change the bearish trend. Note that the channel slopes downward making it easier to break above this level over time, but the uptrend line moves away in the opposite direction (making it progressively more difficult over time for the stock's general direction to be perceived as being in an uptrend, hence bearish).

Support levels for Google are a tougher matter. The stock has moved so erratically in price that there is very little established support (levels that have been tested in the past) near where it is trading today. We can use the low today as the first support, $363.00 (and the closing high presuming it is above here by end of day). Next support would be at the midpoint of the current channel at $357.57 (near the 30 day moving average at $356) and then the traditionally important 200-day moving average at $348.94 (in this case tracks the uptrend line very closely).

Chart created with Equis MetaStock

Thursday, March 23, 2006

Through TheFly's Eyes: YRC Worldwide Inc.

YRC Worldwide (YRCW), the company formerly known as Yellow Roadway, announced yesterday after the close that it was lowering its Q1 earnings guidance by 35c a share. Trading of the company's stock was also halted after hours.

This announcement was not greeted warmly by Wall Street. Morgan Keegan removed YRC Worldwide from their Focus List. BB & T Capital Markets lowered their investment rating to Hold from Buy, citing a lack of visibility into the second half of the year. JP Morgan Chase, which maintained a Neutral rating on YRC Worldwide, took the opportunity to point out that it does not see other less-than-truckload carriers like Arkansas Best (ABFS), CNF Transportation (CNF) and Old Dominion (ODFL) having margin pressure in Q1. Even Deutsche Bank, which still rates YRC Worldwide a Buy, was forced to lower their price target and estimates after the pre-announcement.

Our Options strategist notes that YRC Worldwide’s option implied volatility of 29 was below its 26-week average of 33, which suggests a decreasing price risk.

News that YRC Worldwide’s shipping volumes for the quarter are projected to be lower than the company’s expectations sent the trucking freight sector tumbling in mid-morning trading Thursday. In addition to YRC’s $6.20 loss to $39.05, Arkansas Best Corp. was down $2.15 to $40.35 and CNF was down 85c to $50.70. The consensus on Wall Street appeared to place a “What have you done for me, lately?” attitude toward the sector. That’s because trucking has experienced several consecutive years of double-digit growth – a healthy expansion in any analyst’s estimation. Even so, Wall Street punished the sector early Wednesday – an overreaction in the view of one analyst, given the sectors good, recent, performance history. Moreover, the sell-off seems in-tune with the Street’s current psychology, where investors are quick to exit sectors in favor of “the hot sector of the moment.” Still others see the Street’s sell-off response as rational and evidence-based, given the possibility of decelerating earnings growth from the major trucking companies. To be sure, it will be the sector’s earnings in the quarters ahead that will go a long way toward determining whether Wednesday’s sell-off was prudent, or panicky.

Our Technical Analyst was excited by YRC Worldwide’ s chart, because the stock presents a rare opportunity to see a near textbook example of a bearish Head and Shoulders pattern. It should be stressed that patterns do not always work, but they can increase the probabilities for being on the right side of a trade. In the chart below we can see the characteristic "humps" in the chart which explains the name of the pattern. It consists of a left shoulder, a head (peak in price) and a right shoulder. What is really important is the neckline. This type of pattern is not valid unless the neckline is "broken" (price drops below the neckline, or support). What the pattern told us is that there was a strong possibility on a break of the neckline of the stock falling some $8 dollars in price (and we are measuring conservatively here, not to the tip of the peak). As we can see from the price action today, the stock fell almost exactly to the pattern objective. Where the stock might go from here is now no longer related to the pattern. It has fulfilled, or completed and we need to look at other technical clues such as trendlines and support and resistance to get a better idea of where the stock might be headed. As it turns out the stock today stopped right at an important support area ($38.38-$38.25). The next support levels are at $37.75, $37.13, $36.50. Resistance, a price the stock may have difficulty rising against, is at $39.62, $40.14 (today's high) and $40.63.

Chart created with Equis MetaStock

Wednesday, March 22, 2006

Through TheFly's Eyes: Microsoft Corporation

Last night Microsoft (MSFT) announced a delay in the release of their next-generation Windows Vista operating system. The company said they are on-track to complete the product this year, with business availability in November 2006 and broad consumer availability in January 2007. Consumer availability was previously expected to come this year.

Brokerage firms see considerable market impact coming from this announcement, and not only for Microsoft. Merrill Lynch, which rates Microsoft a Buy, believes the delay of the operating system creates near-term uncertainty and overhang, but expects the company’s revenues to rebound in the third quarter of 2007. Lehman Brothers and J.P. Morgan Chase both feel the delay is not a large risk and both continue to rate Microsoft an Overweight. UBS Warburg and Deutsche Bank both believe the Vista delay is a positive for Apple Computer (AAPL), which will launch the next version of its operating system, "Leopard," as soon as November, and a negative for Dell Computer (DELL) and Hewlett Packard (HPQ). Soleil Securities also feels this announcement is a negative for Gateway (GTW).

Although one would think the news that Microsoft would delay the introduction of the next version of its operating software, Vista, would spark a substantial sell-off in the computer and related sectors, it was not the case in mid-day trading Wednesday. True, Microsoft was down 77c to $26.98, but the computer sector was only mildly lower: Hewlett-Packard was down 50c to $33.55, but Dell was down only 25 cents to $29.97, while Apple, expected to benefit slightly from Microsoft’s delay, was up 50c to $62.30. Meanwhile, the broader tech and semiconductor sectors were mixed –a mild response, many analysts argued, given Microsoft’s role in operating systems and modern business information processes. What caused the initial, muted response? As is so often the case on Wall Street, traders and institutions appear to have discounted the Vista delay weeks before the announcement – i.e. already priced-in the expected sub-par news. Further, several sector watchers did not characterize the delay as a big negative for Microsoft and the sectors it influences: one analyst said Microsoft’s delay represents a postponement - not a loss of sales – essentially shifting sales to the subsequent quarters, with no reduction in the company’s 2006 earnings. Further, while some see mild gains for Apple-based systems, to-date no Wall Street professional sees a major market share loss for Microsoft: the delay represents a setback, not a catastrophe. And provided Microsoft can make good on its revised Vista release of November 2006 for businesses, January 2007 for consumers, Wall Street apparently is willing to give Microsoft a “pass” regarding this bit of sub-par news.

Our Options analyst notes that Microsoft’s option implied volatility of 18 is near its 26-week average, implying non-directional price fluctuations. Hewlett Packard’s option implied volatility also implies non-directional price fluctuations, but Dell Computer’s implied volatility of 19, at the low end of its 52-week range, implies decreasing price risks for April.

Our Technical analyst notes the news of the delay has caused the stock to trade down mid-day to $26.98 on heavy volume. On a technical basis this puts the stock under the midpoint of the narrow neutral/bullish price channel it has traded within over the last five months (the bottom of this channel is at $26.01, its midpoint is at $27.12, and the top is at $28.24). The $27 area is one that has been an important inflection point over the prior two years. Dips below it have been sold down to around the $24 area, crosses above $27 have been bought up to the $29 area. There is likely to be something of a battle at this level. Many value investors use $27 as an entry point and may come out to "defend" the stock at that level. The action may resemble a tug of war on either side of $27 until there is a "break" (clear resolution of the direction price is going to go in which would mean a strong move up or down). Support is currently at $27.04, $26.63, $26.22, $26.01 (the lower level of the channel, very bearish if broken). Resistance is currently at $27.13, $27.59, $28.24 (the top of the channel, very bullish if there is a "breakout" above that price).