Apple Time

7/21/12

Welcome to this week’s edition of the Lewison Letter.  As mentioned in my last letter, much of the week’s move was going to rely on Tuesday’s earnings report from Intel, which turned out to beat estimates, sending the markets higher until, Friday’s European issues resurfaced.  With Spanish yields once again rising above 7%, all of Europe sold off, taking the US stock market down with it.  Still, for the week, the S&P and Dow finished slightly higher and the Nasdaq rallied almost 0.75%.  What has to keep you optimistic is that the markets shrugged of a slew of bearish economic data, and just about everything else thrown at it, a real sign of a strong market.  However, as we saw on Friday, the US markets will continue to trade on European headlines until anything out there is resolved. 

Looking ahead to this week, the markets will once again be dominated by corporate earnings.  Monday should be relatively uneventful, with none of the major Dow components reporting and no economic data being released.  That will bring us to Tuesday where we’ll get the biggest and most important earnings report of the quarter, from none other than Apple.  As the weeks have gone on, more and more analysts are expecting Apple to miss based on European weakness and lower guidance.  That just reminds me of the Four Tops hit song, “The Same Old Song.”  Every quarter, analysts become bearish of Apple’s earnings right before they report because of European weakness or slower iPhone sales in anticipation of the next iPhone.  And quarter-after-quarter, Apple’s only surprise is how ridiculously easy that beat their estimates.  This quarter will be no different, as Apple seems to be the only company in the world selling anything these days.  Analysts are looking for $11.02/share, which is way too low, as I expect apple to earn $11.15/share, an increase of 43% YOY.  If you listened to Verizon and Qualcomm, you’ll know that iPhone & iPad sales should be through the roof.  Now, after what happened with Chipotle on Thursday night (down almost $100 at point), I will once again advice not trading Apple before they report after the close.  If you own Apple, hold it, if not, buy on any dips because long-term it’s going much higher.  On Wednesday, Dow component Caterpillar will report before the open, which could sway the direction for the day as CAT is looked at as an overall barometer of the global economy.  Other than that, we’ll also hear from Dunkin Donuts, which will give you a read through to Starbucks.  Chevron reports at the end of the week, which sitting at all-time highs, should continue to go higher.  The bottom line is this, if Apple beats, the market will trend higher the entire week, shrugging off any negative US economic data.  If Apple misses, then look for a broad sell-off, and buy on dips (mainly caused by Europe headlines). 

 

INDICES

                  While the S&P did not hit my target of 1390, it came within 10 points and completed a confirmed 5^th wave up with a bearish engulfing line on Friday’s sell-off, closing the week at 1362.66, which is the exact 61.8% Fibonacci retracement.  This level should hold, but if not, we could be in for another 20 points to the downside, where the next floor I’m looking at is 1344 or the 50% retracement and upward trend line from the Cramer low to the low on July 12^th.  With that being said, I am still in the camp that says we trend higher towards 1400, and remain still bullish until we get to that level.  Again, the direction of the market will be determined by Apple on Tuesday night, so hold off on buying until then.  As for the Apple controlled Nasdaq, the levels I am following are 3040 on the upside and 2865 on the downside.  With Friday’s close at 2925, the index is trading in no-man’s land, so wait to buy or the sell the Nasdaq components until you get closer to the two levels I mentioned.

CRUDE OIL

                  If you ever wanted to know how powerful an inverted head-and-shoulders formation can be, take a look at the crude oil market this week which rallied almost 5%, aided by tension between Iran and Israel, only to sell off 1.37% on Friday with the broader market on European worries.  As I mentioned last week, my price target for crude oil is $90.37, which I continue to see as the average price over the month.  I’m looking for a high on oil to be $94.29 and a low of $85.53, the 50% and 23.6% Fibonacci retracements, respectively.  Unfortunately, when I look at the gasoline contract, I see gas heading much higher, meaning higher prices at the pump.  September gasoline has traded higher for an entire month now, rallying 11% compared to a 7.5% increase in oil.  On Thursday and Friday, gasoline held previous resistance levels of $2.7896/gallon, which is now the floor that I’m looking for gas to hold, with a new resistance level of $3.0274/gallon, a 6% increase from Friday’s close.  The best way to play the energy sector is still through Exxon (XOM), Chevron (CVX), Tesoro (TES), Valero (VLO) and Conoco Phillips (COP).  Additionally, you should continue to own the pipleline companies like Kinder Morgan (KMP), Linn Energy (LINE) and Energy Transfer Partners (ETP).  But watch for oil and gasoline to hit the key levels I talked to about and trade against those levels.  If gasoline trades above $3/gallon, I would advise taking some profits off the table and wait for a pullback to buy more. 

GRAINS

                  I will admit that my price targets on soybeans, corn and wheat were all way too low, as the entire grain complex has rallied at or near all-time highs.  In the last 4 weeks, soybeans are up 21.5%, corn is up 39.7% and wheat has rallied 34.9%.  First looking at wheat, the market is setting up the 2^nd highest monthly close all-time.  I really don’t see an end to the grain rally anytime soon, nor do I think this recent drought is entirely priced in, so I’m calling for $11.00/bushel wheat over the next month or two.  The corn market is a little different.  There has been so much attention on corn prices the last three months that I think 90-95% of the corn rally is over.  Additionally, if you look at prices over the last 10 years, corn closed on Friday just 2 cents from all-time highs of $7.9975/bushel.  If corn prices fail to go higher, it will set up a triple top, and the biggest short of the decade.  Unfortunately, that being said, I still cannot recommend getting short the grains and I think corn still has some more room to the upside.  Looking at soybeans prices, Friday’s move put in a fresh all-time high of $16.91/bushel, and I don’t it isn’t over yet.  Taking a look at Fibonacci numbers, I’m looking for soybeans to trade up to $17.71/bushel, completing the 5^th wave up from the lows of 2008, and making soybeans a huge short trade.  There is still plenty of time in the growing season for soybeans, which is why it has had the smallest rally of the three, and weather forecasts for the next thirty days are calling for continuously hot temperatures and very little rainfall, all bullish for bean prices.  While I said in the past few weeks, it’s too late to be in the agriculture sector, that has proven to be wrong and as I’m forecasting, there is still a lot of room to the upside.  What really convinced me is the move that CF Industries (CF) made this week, putting in new all-time highs of $208.43, and closing above $200 for the first time ever.  But right now the best way to play the grains is through Mosaic (MOS) and Monsanto (MON).  But keep in mind that while there is still upside in these names, the grains can turn fast and hard so have a very short leash to the downside. 

When I reported on Chipotle (CMG) I made it a point to make sure nobody bought before they reported earnings and hopefully everyone took that advice.  As I was once bullish this stock, when facts change, I change too.  Chipotle did beat on net income but revenues and sales were dramatically lower than estimated and guidance was weak, sighting higher commodity costs.  Unfortunately for Chipotle, that sounds like a terrible excuse for producing terrible numbers.  Feeder cattle prices are at multi-year lows and live cattle prices are down 4.7% for the year.  So while corn and wheat prices are up, they are getting relief in meat prices, along with lower energy costs with natural gas down 33% from this time last year and oil prices down 9% for the year.  So if you think CMG is a buy now, think again, as I need to see 2 straight quarters of solid growth before I can get behind this stock again.

Once again, Tuesday will be the biggest day of the week, with Apple reporting after the close.  Hold off on buying or selling anything until we hear from Apple.  If the stock sells off, I want you to buy as much as you can because even at its current price of $606, it still remains one of the cheapest stocks in the market.  Pay attention to the key price levels I mentioned for the S&P and Nasdaq and buy and sell against those levels.  This is a market that wants to go higher and the only thing keeping it down are the problems in Europe.

                  Full disclosure: I traded out of my long AAPL calls and used that premium to sell AAPL puts. 

Jeff Lewison

Chipotle Mexican Grill

7/18/12

                  This week I was asked to look into Chipotle (CMG), and this is actually a good stock to look at due to rising grain prices over the last couple months.  For those who are not too familiar with the company, Chipotle operates almost 1300 Mexican restaurants throughout the US, Canada and a few locations in Europe.  Most recently they opened their first Asian restaurant, Chopshop, in hopes of becoming as big as their Mexican cuisine.  As of today’s close at $398.06, Chipotle is currently up almost 16% for the year, but is 11% off all-time highs of $442.40 put in back in April.   

                  Among the many things I like about this $12.6B company is that it has a terrific management team that has built an outstanding balance sheet.  The company currently has a little more than $450M in cash to only $3.63M in debt, giving it $14.66/share in cash.  Last year operating margins came in slightly below 16% and revenues were $2.4B.  Now, at its current price, Chipotle is trading at 36x FY13 earnings.  While the P/E is relatively high compared to competitors Panera Bread, McDonalds, Yum and Buffalo Wild Wings, it’s actually a discount from its’ average P/E over the last 5 years of 40.  Analysts are currently expecting CMG to earn $8.89/share in FY12 and $11.10/share in FY13, good for a 23% and 25% YOY increase, respectively. 

                  On a technical basis, Chipotle is really in “no man’s land” at these prices, where I would not want to initiate a new long position or short position in the stock.  When I buy and sell stocks, I trade around key technical levels (Fibonacci’s, floors, resistance levels, trend lines, etc…).  The 78.6% Fibonacci retracement from the 52-week high ($442.40) to the 52-week low ($271.53) is $404.96, just 1.5% above today’s closing price.  Unfortunately, this doesn’t give a hint as to whether the stock should go higher or lower.  Instead, the resistance level that I’m looking at for CMG is at $420 and the floor is the 61.8% Fibonacci retracement of $375.56.  So, you’re really looking at a 5.50% upside to a 6% downside.  Those are not the kind of odds that I like.  Additionally, Chipotle traded right up to the 50-day moving average of $399.27 and failed to close above it, which means even at these levels, there is significant selling pressure.  While I am bullish this stock, I need it to pull back before I can recommend buying. 

                  Analysts are currently mixed on what to do with Chipotle.  With an average price target of $445, there are 9 buys, 14 holds and 3 sells on the stock going into tomorrow’s earnings report.  Unless you want to take a big chance, DO NOT trade this stock until after their earnings come out tomorrow after the close.  Analysts are expecting Chipotle to earn $2.30/share, but I’m actually looking for $2.33/share, both of which I think will not be a problem.  What I am interested in hearing is how commodity prices are going to affect them in future quarters.  I think Chipotle will be just fine even with corn prices at 10-year highs.  What will aid them is meat prices have dropped dramatically over the last few months, which should offset any rise in grain prices.  I’m also looking for Chipotle to talk about new locations for Chopshop and do not want to hear anything about unfavorable currency rates since this is mainly a US based company.    

                  As I wrote a few weeks ago, I expect more than 75% of S&P 500 companies to beat earnings estimates, and I see no reason Chipotle disappoints tomorrow.  The only bad thing about that is the stock tends to rally between 5-6% on beats, meaning come Friday morning, CMG could be trading at $420.  The good news is that if Chipotle’s net income comes in low, the stock should sell off closer to that $375 level, at which point you should buy it aggressively and stop yourself out at $370 on the downside, which would be the lowest it has traded since early February.  My long-term (12-18 month) price target for Chipotle is $465, which would be a 17% gain from today’s close.  With that being said, I still cannot recommend buying this stock until it sells off closer to $375, and certainly not before they report earnings after the close tomorrow.   

                  Full disclosure: I closed out my short S&P puts today as I got about as much as I could from the option.  I am currently long AAPL, SBUX, HD and NKE through calls.  

Jeff Lewison         

We're Going Higher

7/15/12                 

 Welcome to this week’s edition of the Lewison Letter.  It was another wild week on Wall Street with the S&P and Dow settling higher but the Nasdaq got hammered all week long to close down 1%, despite a 1.60% rally on Friday.  For the coming week, I’m expecting it to continue to be rocky, as we will get earnings from just about every major financial company out there.  Friday, JPMorgan and Wells Fargo both reported stronger than expected quarters, citing strong mortgage numbers.  JPM was also aided by only losing $5.8B on their careless trading instead of the recently reported $9B.  With JPM and Wells being two of the powerhouse banks in the country, I’m not expecting similar results from the likes of Citibank or Bank of America, both reporting early in the week.  Later in the week, we will get results from Morgan Stanley, Goldamn Sachs and US Bancorp, all of which I think beat estimates and rally the markets on higher investment income.  Throughout the week, we will get reports from many Dow components like Johnson & Johnson, Intel, Coca-cola, Verizon, and General Electric.  While all are important, I don’t think any of them will move the market, except for Intel.  That’s the report you need to pay attention to.  The reason that the tech-heavy Nasdaq got clobbered all week long was due to chipmakers lowering guidance and outlook for the year so much that Apple even got hit for almost a 3% loss.  Expectations are so low for Intel that I think they beat, but I am concerned about their guidance going forward.  If they are more optimistic than competitor AMD was last week, then look for a rally in tech and therefore a rally in Apple.  In addition to the many earnings reports coming out, Monday will also feature retail sales numbers, business inventories and Empire manufacturing.  On Tuesday, we’ll get the June CPI number and Wednesday will feature crude oil inventories and the Fed Beige Book at 1:00pm CT.  All of this added up, along with hot & cold Europe, spells out another illogical market for the week.  But as the old saying goes; the markets will remain illogical longer than you can remain solvent. 

INDICES

                  Despite the S&P closing lower for 5 straight sessions before Friday, the market closed higher for the week, aided by “as expected” GDP from China on Thursday night and better than expected earnings from financial bellwethers, JPMorgan and Wells Fargo.  Contrary to almost every analyst on Wall Street, I’m going to say that we tread higher for the time being.  Looking at the charts, the S&P held the 50-day moving average during the sell-offs on Tuesday, Wednesday and Thursday, only to rally 22 points on Friday, putting in a bullish engulfing line that engulfs the entire 4 previous days of price action, a very bullish indicator.  Additionally, since putting in the Cramer bottom back in early June, the S&P is building a 5^th wave up (Elliot Wave theory-see previous letters for explanation), putting in a series of higher highs and higher lows, another very bullish indicator.  Thursday’s price action also gave you a perfect low to trade against, as the S&P traded all the way down to the 38.2% Fibonacci retracement of 1326, before rallying 30 straight points to Friday’s close of 1356.75.  My price target that I’m looking for on the S&P is 1395, which would not only complete the 5^th wave up, but also hit the uptrend line connecting the highs from May 29^th and June 19^th.  Until we drop below 1326, I will remain bullish until 1395, where I think you can get short or take profits.  One stock that I picked up this past week is Home Depot (HD), which eventhough it rallied on Friday, is still a great stock and has a low risk entry.  Currently trading at $52.09, HD put in an upside gap on June 6^th and 7^th ($50.60-$50.91).  Since then, HD has tried three times to fill that gap, failing all three times, representing a very strong floor.  You should be a buyer of Home Depot against that level and let it ride, as I see a strong quarter coming up, coinciding with a slight rebound in the housing market.    

                  While the Nasdaq was hammered all week long, despite a couple rallies from Apple earlier in the week, I am still staying bullish until it breaks key levels that I’m looking at.  Last week’s low on the Nasdaq was put in on Thursday at 2837.75, only to rally about 71 points higher to close Friday at 2908.47.  If you use the same time frame as the S&P, the Nasdaq is also building a 5^th wave up from the Cramer low, with defined trend lines connecting the higher highs and higher lows.  Using Thursday low to trade against, I will stay bullish until the Nasdaq falls through 2837, and will remain bullish until it hits my target of 3016, the upper end of the uptrend line connecting the same highs as the S&P, and also filling the downside gap made on May 4^th.  I of course cannot talk about the Nasdaq without mentioning Apple.  I am still long deep in the money calls and remain bullish the stock against $582, which is the 78.6% Fibonacci retracement from the 52-week high to the low, and also is the exact price for the short term uptrend line connecting the Cramer low to the low on May 28^th.  If you are not in Apple yet, hold off until they report earnings a week from Tuesday so that you aren’t trading before a big announcement.  If the stock sells off, it’s very easy; you buy above $582, and sell or hold off below that level. 

CRUDE OIL

                  This past week was kind of an uneventful week in the oil markets.  The only even of any significance came in the middle of the week, when the US increased sanctions against Iran, sending oil prices higher for the week, up $3/barrel.  Iran sanctions are not going to ease anytime soon, and while I don’t think that these sanctions are as big a deal as many people are making them out to be (mainly because the Saudis have already told us they will cover any Iranian shortfall), it will still be bullish for crude prices, as I continue to see oil trade up to the 38.2% Fibonacci retracement of $90.53/barrel, a 4% upside from Friday’s close of $87.07.  Over the last 45 days, crude oil has built a very strong inverted head-and-shoulders formation, with the top of the shoulder trend line coming into play at $84.16.  That’s the level I would trade energy stocks and oil against.  Remain bullish north of that price and bearish below that price.  The absolute best way to play energy right now is through the energy transport (pipeline) companies.  My favorite in this space is one that has unfortunately rallied hard over the last couple weeks, Kinder Morgan Energy Partners (KMP).  This company is a master limited partnership that operates as a pipeline transport and energy storage company.  Their pipelines deliver diesel and jet fuel along with LNG (liquid natural gas) over 8,400 miles.  They yield a nearly 6% dividend with solid growth and great management.  I also like Energy Transfer Partners (ETP), which yields 7.90%, and Linn Energy (LINE) yielding 7.30%.  If you prefer to play energy through the major oil companies, my favorites in this space is Exxon Mobil (XOM), Chevron (CVX) and Phillips 66 (PSX), yielding 2.70%, 3.40%, 2.30%, respectively. 

GOLD  

                  This week was a key week for the gold market, not because it actually acted as a safe haven, which it isn’t, but because on a technical basis, gold solidified its low base at $1,550/troy ounce.  Since rallying out of the hole on June 1, gold been treading the line of $1,550 for almost a month and a half now, having never closed below that level.  In fact, the last time gold closed below $1,550 was back on May 16.  If you want further evidence that $1,550 is a perfect level to trade against, gold has only closed below that level three times in the last 52 weeks, only to rally out within a day or two.  Translating that into GLD (the gold ETF, which is the largest commodity ETF in the world), gold should be bought against the $150/share level.  With gold having traded up to $154.14 on Friday, you have a very low risk entry point with a high reward.  Solidifying the gold trade is a similar setup in Silver where the metal has held the $26/ounce level 4 times in the last 52 weeks, only to rally each time.  These two metals trade hand-in-hand and with both holding key technical levels, it’s time to buy.  My price target for gold is $1676/ounce or in GLD terms, $167/share, giving you a 9% upside with only downside risk of 2.50% (assuming you use the $150/share price as your stop loss). 

US Treasuries

                  134’305…that number represents the all-time high in the 10-year US Treasury contract.  That also represents the end of the treasury market as we know it.  With the contract closing at 134’200 on Friday, up 2.5 points despite the major rally in the stock market, you’re probably thinking I’m an idiot and have no idea what I’m talking about.  However, while that may be true, let me tell you why I think I’m right and one of the only people out there saying this.  First of all, while the stock market sold off Monday-Thursday, the treasury market rallied a grand total of 6.5 points during that time period, and failed to match or make a new high.  The high for the contract was put in on June 1, just a day before the Cramer low in the stock market.  Since then, the stock market has rallied out of the hole and the treasuries have only sold off 12 points, but what’s important is that yields on 10-year treasuries have fallen and stabilized below 1.50% for a few days now.  Almost every utility, energy, consumer staple and tech company that pays a dividend offers a higher yield and more growth than treasuries do.  That’s my biggest reason why I think we have found a top in treasuries.  Even Apple, the largest growth company in the world, offers a higher yield than US Treasuries.  There comes a point where the safety and security of US Treasuries just isn’t worth it, and I think rates below 1.50% for an investment that has little growth left, is a bad place to put your money.  I am also under the belief that the treasury market has priced in any additional QE that the Fed might do, which means they won’t rally on any news of more easing.  If you want an incredibly low risk trade with a potentially high reward, then you should be a buyer of the Proshares Ultrashort Lehman 20year Treasury (TBT).  It’s currently trading at $14.79/share and I think you can use $14.50 as a stop loss, risking just 2%, which could turn into a massive gain when I’m right.

Despite the crazy market action that we have seen over the last few months, there is still a lot of value out there, and it’s all about picking the right stocks at the right time.  For the time being, stay out of tech stocks until Apple reports on June 24.  Many stocks like Walmart, Colgate, Petsmart, Home Depot (which I recently acquired) and Disney are all sitting at or near all-time highs and should continue to be bought until the market says otherwise.  Lastly, keep in mind that high dividend paying energy stocks are a great place to park your money and earn a high dividend while getting some good growth.

                  Full disclosure: I am currently short S&P puts, long AAPL, SBUX, NKE and HD through long-dated, deep-in-the-money calls.

Jeff Lewison  

Costco

7/10/12

                  I was recently asked to do a report on Costco (COST), so here we go.  For those who are unfamiliar with this company, Costco operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories.  Costco is a $40.5B company that operates 605 total warehouses with 438 in the US and only 22 stores in Europe, all of which are located in the United Kingdom.   

                  Last week, Costco reported slightly weaker-than-expected June same-store sales of a 3% increase when analysts were looking for a gain of 3.7%.  They reported that net sales for the month totaled slightly more than $9B; good enough for a 6% increase YOY.  Sales for the first half of the year were up 10% YOY at $80.46B.  Management cited lower gasoline prices did not have much of an impact on June sales but does anticipate a positive impact in future months. With oil prices near 9 month lows and I think will continue to stay low for the foreseeable future, and natural gas prices trading below $3.00 per 10,000 million British thermal units, US companies will be major benefactors of the lower commodity prices.

                  Looking at analyst’s estimates, Costco is expected to earn $3.89/share in FY12 and $4.42/share in FY13, giving it a forward P/E of 21.  While that’s more expensive than competitors, Target and Walmart, it is still relatively cheap compared to its historical P/E of about 24.  Going back to the company earnings, Costco has beaten estimates 8 of the last 10 times and I think that continues going forward, meaning analyst estimates are too low.  Back in May, Costco reported earnings of $0.88/share which was up 20% YOY, with expanding operating margins.  I think these trends continue.  In FY11, Costco earned $3.30/share, meaning that analysts are expecting an increase of 18% in FY12 and 13.6% in FY13.  On the company’s Q3 conference call, management was very impressed with new memberships and renewals and expects that trend to continue.  With energy prices dropping, consumers will have more money to spend and if you have ever been to a Costco, you know they are spending a lot of it there.  I’m looking for Costco to earn $3.96/share in FY12 (20% increase YOY) and $4.65/share in FY13 (17% increase YOY), meaning that Costco is trading at 20x FY13.  So in all, I think it’s fairly valued when you look at the earnings.  However, Costco has $5.98B in cash and only $1.37B in debt, giving it a whopping $13.82/share in cash.  That doesn’t even compare to Walmart’s $2.40/share and Target’s $1.04/share in cash.  If you back out the cash, COST is trading at just 17x FY13 earnings, which is a 41% discount from historical levels, making it much cheaper than Walmart and Target.

                  The next thing I looked at are monthly, weekly and daily charts and it doesn’t matter which chart you look at because they are all bullish.  Looking at May, COST put in a low at $81.98 earlier in the month, only to rally and finish at $86.39, less than 3% off the month’s high, putting in a morning star formation (where the stock opens near the highs, trade lower, only to rally back and close at or near the highs, often times higher than the open.  At the same time, the bar pierces the previous bar).  That formation usually signals the sell-off is over, and you want to get confirmation with the following bar, in this case; June’s price action.  That is exactly what you got.  The stock rallied hard the entire month, putting in a monthly bullish engulfing line (formation in which the body of June, engulfs the entire body of May), with a low of $85.17 and at the time, a new all-time high of $95.11, only to close at $95/share.  When looking at a weekly and daily chart, Costco looks to be building a bull flag, which is more evident in the daily chart.  What’s better is that on June 29, the stock put in a gap between $93 and $93.43.  While that’s only about 0.50%, it’s very significant, as COST has failed to fill that gap, and instead is building a rounded bottom with $93.18 as the floor. 

                  Right now there are 23 analysts covering the stock with an average price target of $91.52, about 2.5% below Tuesday’s close.  Again, I think the analysts have this one wrong.  Using a measured move from May’s low up to the gap at $93, I see the stock hitting $104.45, another $10.65, or 11% of upside from Tuesday’s close.  If you’re looking to trade this stock, this is a great entry point, stopping yourself out at $92, which if COST fills the gap, $92.10 is the next floor that should hold.  If you want to invest in the stock, this is still a great entry point, but put your stop loss at $90.08, the low of the previous gap made on June 15, and just $0.05 below the 76.8% Fibonacci retracement from the 52-week high to 52-week low.

                  In short, Costco is a great company with good growth and a terrific balance sheet.  What is more important is that almost all of its’ business comes from the US.  The stock has held up very strong in these choppy markets and has been pushing new all-time highs almost on a daily basis.  Costco is a very safe stock to be in, with very little volatility, and with what we have seen over the last couple months of trading, that’s always a good thing. 

                  Full disclosure: I hold no positions in COST, nor do I plan on entering into a position in the next 72 hours. 

Jeff Lewison 

80,000 jobs???

7/8/12

EQUITIES        

         

Welcome to this week’s edition of the renowned Lewison Letter.  While we saw a shortened week of trading and very light volume to go with it (Friday’s volume was the lowest of the year), nevertheless, this week’s US economic data didn’t fail to disappoint.  Earlier in the week, the ISM (Institute of Supply Management) said the manufacturing sector contracted in June for the first time since July 2009.  Consumer confidence continues to decline and retail sales were down.  We found all of that out before the big bomb dropped Friday morning.  As I predicted in last week’s letter, I expected a whopping total of 80,000 new jobs in June, which was exactly the number the US Department of Labor put out and was the sole reason for the Dow dropping 124 points and the Nasdaq falling 39 points (more on this later).  Needless to say, Friday’s bludgeoning left many investors selling out of stocks and buying up US Treasuries, as the yield on the 10-year note fell to a one-month low of 1.536%, approaching all-time lows of 1.437% hit in early June.  While the jobs picture is still an embarrassment and the situation in Europe is still a disaster, with Spanish bond yields pushing towards 7% again, I’m going to play the role of the contrarian and tell you that the move to safety is still the wrong move and that there are plenty of ways to successfully trade/play this market.

                  While the Nasdaq’s beating of a 39 point drop was bad, it could have been a whole lot worse, which is why I think it’s still safe to be in equities, but in the right equities at the right time.  I have said many times in previous letters, that there are really 4 equity markets and that was very evident this past week; Dow, S&P, Nasdaq and Apple.  Following the markets as close as I do, it’s easy to see the impact that Apple has on the Nasdaq, being the single reason the Nasdaq finished positive for the week, while the Dow and S&P did not, despite being the weakest on Friday.  Had this jobs number come out the previous week instead of a few days ago, the Nasdaq would have been down 70 points because Apple would have been down $20.  But June 29 was a very important day for the Nasdaq because it marked the highest close in Apple since May 2^nd.  Since then, Apple has rallied almost 4%, carrying the Nasdaq higher, including only being down about 0.50% on Friday, greatly outperforming all three indices.  I’ve said many times that where Apple goes, so goes the stock market.  The key level I was looking at on Apple was for it to break through the resistance at $585.  It blew through that level on July 2^nd and has gone straight up since.  That’s what gives me confidence that this market will hold key levels and that being in equities is the right place to be.  Now, that doesn’t mean that you should be all in on stocks on Monday.  I do see a continuation of Friday’s sell-off in the early part of the week, but then I think we rally based on prospects that the Fed will act to keep rates low and boost the economy.  I reiterate that you should only buy on pullbacks, so be patient. 

                  It’s important to note that the S&P traded down to a key technical level on Friday and held that level well.  The level I’m talking about is the 50% Fibonacci retracement from April’s high to the Cramer low on June 1 (This was the day that Cramer became the most bearish I’ve seen in years, the day that I advised people start getting long again).  The 50% level is at 1344.50, and the S&P traded down to a low of 1348 on Friday before rallying 6 points into the close.  That will be the first key level to keep your eye on.  If we hold that level on Monday, then I see a rally out of there the rest of the week.  If we fall through that level, I am looking at the 38.2% retracement at 1326 to be the new floor.  I continue to recommend stocks that look cheap, have great balance sheets and good long-term growth prospects.  I recently established new positions in Apple, Starbucks and Nike, all of which I think are at great levels to get in on.  I prefer to play these stocks with long-dated deep in the money call options, limiting your risk and allowing you to control a lot more shares for a lot less money.  Other stocks I like are Whole Foods, Petsmart, and Macys.

GRAINS

                  Despite all the talk about the economy and jobs and Apple, there are a lot of other markets that are creating great opportunities, most notably in the grains.  I will admit that the moves in corn, soybeans and wheat have surprised even me, and blew right through my price targets.  Soybeans and wheat are at multi-year highs, while corn is pushing 52-week highs.  All three grains are up sharply Sunday night as more hot weather and no rainfall continues to destroy US crops.  While I see more upside for the grains, this is not a sector I want to be long because when the prices start dropping, they are going to drop hard and fast, in limit moves.  My new price targets are as follows: Soybeans should hit $16.54/bushel, corn should hit $7.55/bushel and wheat should hit $9.00/bushel.  That still leaves some room to the upside in stocks like Mosaic, Potash and Monsanto.  However, my favorite in the sector is actual the one I think you can be short and be short with success, and that’s CF Industries.  This is a Deerfield, IL company that is one of the leaders in manufacturing and distributing fertilizer products.  If you look at a chart of this stock, it put in a perfect double top at $203, with bearish moves on both of those days.  I think if this stock gets back anywhere near that level, you short it, stopping yourself out at $205.20.    

OIL

                  Now on to my favorite market of them oil; West Texas Intermediate Light Sweet Crude Oil.  This was a wild week for crude oil, starting the week as low as $82.10/barrel, trading as high as $88.98/barrel, only to close up $0.26 for the week at $84.46.  In technical terms, this weekly move is called a doji line, where the open and close are about equal, signaling a volatile price movement is eminent.  Last week I mentioned that I want to be short crude oil against $85.61, which I was, but got stopped out with a loss as prices rose due to supply fears on the Iranians shutting down the Straight of Hormuz and testing out missile launches that could hit Israel.  Thursday’s inventory report showed an oversupply, sending prices lower, only to be hit even harder on Friday from the weakness in US job creation, lowering demand.  While oil is a supply & demand story, it’s also trading on technicals, as it looks to be building an inverted head-and-shoulders at the bottom of a 5^th wave down and 52-week lows (which also happens to be a double bottom).  While I am still looking to be a seller against $85.61, I would be a buyer against the floor of $80.86/barrel, which was the June 20 low and the bottom of the shoulder line.  I see oil trading in that $5 range for a week or two before breaking out to the upside of $90.53.  Unfortunately that means higher prices at the pump for consumers.  Names I like in the space continue to be the pipeline companies like PPL Corporation (PPL), Linn Energy (LINN), Energy Transfer Partners (ETP), and the big oil that pays a nice dividend like Exxon (XOM) and Conoco Phillips (COP).

                  This coming week will kick off earnings season with Alcoa reporting tomorrow, followed by many of the financials.  With almost every analyst lowering their expectations due to the suffering global economy, I think that we’ll see more beats and raises than misses.  I’m looking for 75% of the S&P companies to beat earnings estimates this quarter, which only bodes well for equities.  With that being said, Europe will continue to dominate the headlines and where Europe goes, we go.  Keep an eye on Spanish and Italian bond yields because if they continue to trend towards 7%, then the markets will continue to sell off. 

                  Full disclosure: I am long Nasdaq, short S&P puts, long AAPL, SBUX and NKE calls.

Jeff Lewison           

                  

Thank You Europe

7/1/12

                  It’s time now for this Europe inspired edition of the Lewison Letter.  As I’ve been saying for months now, this market goes up and down solely on the basis of what happens each and every day out of Europe, and for those who doubted that, hopefully you finally realized that starting at about 1:30pm CT, when the S&P was at 1313.25 and oil had hit a 8 month low of $77.28/barrel.  At that exact moment I was long the S&P and short crude oil, and did cover my short, moments seeing the key reversal in both markets.  At 1:30pm CT, rumors started circulating that German Chancellor, Angela Merkel, had cancelled a conference call with world leaders, leading to speculation that Germany was ready to help bail out the European Union, rumors which turned out to be very true.  Early Friday morning, Germany agreed that a single supervisor should oversee banks in all 17 nations that use the euro currency.  Additionally, European leaders agreed to short-term measures to help bail out Spanish and Italian banks, sending bond yields in those countries sharply lower.  These events led to the 9.4% rally in crude oil, 3% rally in the Nasdaq and send the S&P to its best day of the year, up 2.5%.  Late in the morning, the markets became very technical driven, which I’ll talk more about later on.  But what really accelerated these markets late in the morning was massive short covering and end-of-the-year painting of the tape. 

                  Let me first talk about the month saving day for the Dow, S&P, and Nasdaq.  While all three indices finished in the red for the 2^nd quarter, they all finished the month higher by about 3%.  From Thursday’s low, the S&P rallied almost 50 points in less a little more than two trading days, right up to the key 61.8% Fibonacci retracement.  That 1362 high that the S&P hit at the close yesterday is the major resistance level that I have been talking about and it acted as such again.  As of this writing the S&P futures are off about 3 points, again propelling away from that key ceiling.  I expect more selling pressure to come into play on Monday, keeping the S&P in this trading range for the foreseeable future.  I also advise against trading this market until after Friday’s non-farm payrolls report comes out.  Nobody is really expecting any kind of job creation so any slight surprise in this number will rally the markets.  That being said, any number less than 80,000 jobs would be a major disappointment and will crush this market.      

                  The biggest commodity move on Friday was in energy with August crude oil rallying almost 9.5% ($84.96/barrel), which was the biggest rally in oil since March of 2009 and doesn’t spell good things for summer driving.  Right around 11:50pm CT, oil really took off, blowing through a three month downtrend line and then finally the resistance level I mentioned last week of $81.53, right up to within $0.30 of the 23.6% Fibonacci retracement of $85.61, which now acts as the new ceiling for crude.  If you’re in the same camp as me and think that Friday was a lot of short covering, then use that level to sell oil against, which I plan on doing this week.  As of this writing oil is already selling off sharply, down $1.17/barrel or 1.37%.  Until oil closes above $85.61, I would continue to stare clear of oil refiners and explorers, but instead continue to own the oil transports such as Linn Energy (LINN), Duke Energy (DUK), Energy Transfer Partners (ETP) or PPL Corporation (PPL).  All of those stocks pay hefty dividends and aren’t subject to price risk.  If you’re unsure on when to play the oil sector, wait until after Thursday’s crude inventory report at 9:30am CT, as I expect supplies to remain near record highs, sending prices lower. 

                  Turning to the CBOT mothership, the grains, soybeans, corn and wheat continued to rise sharply all week long, with soybeans at the highest level they have traded at for the November contract in years, sitting at $14.285/bushel.  Corn and wheat are trading at their highest levels since early March and August, respectively, with corn closing at $6.34/bushel and wheat trading for $7.585/bushel.  While I think that grain prices will continue a little higher, if you’re agriculture stocks, I recommend taking profits and waiting for a pullback.  One thing I’ve learned trading grains, when an upward movement breaks down, it breaks down very hard and very quickly.  I see soybeans topping out at $14.565/ bushel, corn topping out at $6.55/bushel and wheat having a ceiling at $805.50/bushel, all levels you should look to trade against.  If you’re a savvy investor, you can reverse your longs and short stocks like CF Industries (which will give you the biggest bang for your buck), Potash, Monsanto and Mosaic.  Right now, corn is currently trading up $0.185 cents, but made a high of $6.65 before selling off.  Keep these high levels in mind because any sight of rain, and these markets will tank.

                  The last thing I want to cover is the ever-important gold market.  On Friday, gold rallied more than $50, to close above $1600/ounce for the first time in 10 days.  However, like the oil market, I believe most of this move is short covering, where I see gold to sell off again this week.  It’s already down $12.70/ounce or 0.80% tonight and should continue to drop and challenge the recent lows of $1550/ounce.  I still expect the US Dollar to trade up to $83.50, pushing gold prices even lower. 

                  All-in-all, Friday was a great day if you were long, but this week, we will be back to reality and it will be just like nothing every happened.  Copper will continue to drop, oil will pull back sharply and gold will continue it’s slippery slide back towards $1500.  I continue to reiterate that these markets are completely controlled by actions in Europe and the only thing that matters out of the US data will be Friday’s unemployment numbers.  For a couple quick trade recommendations, I still like stocks like Starbucks (SBUX), which recently put in a triple bottom and Apple (AAPL) which will continue to put up monster quarters for years to come.  If you want to put on a position this week, I recommend waiting until we get Friday’s jobs report.  There will be light volumes all week long because of the July 4^th holiday. 

                  Full disclosure: I am currently short S&P puts and will be initiating a short crude oil play against $85.61.

Jeff Lewison