EOT Position Update – June 1, 2011

| June 1, 2011

June 1, 2011

Market Snapshot

Weaker than expected economic data sucker punched the markets today.

Both the ISM index and the ADP employment report surprised investors by missing analyst estimates.  Investors took this as a sign economic growth is slowing.

But it’s no surprise to us.  As I pointed out in last week’s market update, weak economic data was to be expected.

Over the last few months, the long leading indicators have been telling us global industrial growth is going to slow this summer.  Now we’re seeing shorter term leading indicators confirm these predictions.

Here’s the bottom line…

Free markets are cyclical.  Economic growth accelerates then it slows.  It’s called the business cycle, and there’s no way to avoid it.  Nor should we want to.

However, we do want the periods of slowing economic growth to land softly… then re-accelerate.  We don’t want slow growth to turn into a recession where the economy actually shrinks.

The good news is… There’s no indication we’re actually heading for recession.  So far, the economic data only shows slowing economic growth.

The bad news is… Slowing growth will hurt stocks in the short run.

Right now earnings projections are based on US economic growth accelerating at around 3%.  But if economic growth comes up short, then earnings growth for cyclical companies will too.

Inevitably, that leads to massive cuts to earnings estimates.  And when earnings growth rates are slashed, stock prices usually get hammered.

For these and many other reasons, stocks will likely trade in choppy – up one day and down the next – action in the short run.  But longer term, I see economic growth accelerating and stocks continuing their bull market run.

Let’s move onto the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  SBUX January 2012 $38 Calls
SBUX is our latest trade.  It’s down in lockstep with the markets.  But it’s still well within the consolidation range carved out over the last few months.  And don’t forget, we have plenty of time for this trade to work out… Our options don’t expire until January 2012.  If you haven’t bought this option yet, go ahead and buy up to $2.80. Resistance is at $40 and $45.  Support is at $32.50 and $30.

  POT September 2011 $60 Calls
POT got a big vote of confidence from an analyst over at Citi.  The analyst cited strong fundamentals and an attractive valuation.  I think agribusiness stocks like POT will weather the economic slowdown better than other sectors of the economy.  It’s simple supply and demand… Demand for grains for ethanol and internationally should remain strong.  And supply could be limited by wet planting conditions leading to fewer acres planted.  Continue holding for bigger gains ahead.  Resistance is at $62.50 and $70.  Support is at $50 and $48.

  WMT June 2011 $55 Puts
WMT will likely test support of the 200-day moving average in short order.  The stock didn’t rally along with the broad markets on Tuesday.  And it sold off in concert with the markets today.  That’s a good sign bearish momentum is mounting.  Our option is in the money and should increase in value quickly as the stock moves lower.  Continue holding for WMT’s next leg down.  Resistance is at $57 and $58.  Support is at $52 and $50.

  WPRT October 2011 $30 Calls
WPRT is hanging tough.  In fact, it’s carving out a solid base after a big move up a few months back.  That’s great, but we really need Congress to throw their weight behind the NAT GAS Act to push our options higher.  Unfortunately, the legislation is tied up in partisan politics.  Here’s the bottom line.  If the legislation passes, our options will be a homerun… But if it’s not, we’ll likely see the time value of our options erode as the stock hovers around $25.  Continue holding as we await the news on the fate of the NAT GAS Act.  Resistance is at $30 and $35.  Support is at $20 and $17.50.

Category: EOT Update

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