International Sales Increasingly Supply Earnings Growth 05-14-2010

Cusick's Corner
In 2009 the Euro averaged around $1.39 and many US companies created profit targets based somewhat around that level (some higher, some lower and not all are hedging the exchange rates). Now that the Euro (ECM10) is currently around 1.24 and has dropped over 13% since the beginning of the year, many profit targets may not be met and earnings guidance may have to be changed. A drop in the Euro generally creates a stronger Dollar, making US exports more expensive which results in lower sales. During the weekend, take a look at your portfolio holdings and check what parts of the world generate revenue for that company. Take GOOG for example (info in quotes from Standard & Poor’s Stock Reports which are available for free on Quote Detail) “International sources contributed 53% of GOOG revenues in the first quarters of 2010 and 2009.” Some other stocks to look up: MCD – “International segment has supplied much of its earnings growth over the past two decades, and, in 2009, contributed 53% of operating income (before corporate expenses and one-time charges).” AMZN – “International sales accounts for 48%.” JNJ – “International sales accounted for about 50% of 2009.” International sales play an increasingly larger role in the profitability of many companies and currency fluctuations ultimately affect the bottom line. This short list will help you get started on your research and we will expand on this next week. See you Monday.

The stock market averages suffered losses amid ongoing concerns about the European debt crisis. The Dow Jones Industrial Average fell in morning trading after European equity markets faced another round of selling Friday. France’s CAC 40 Index tumbled 4.6 percent. Germany’s DAX and UK’s FTSE both lost more than 3 percent and the euro sank to only 1.2375 on the dollar, down from 1.25 early in the day. European equity markets and the euro are under pressure amid ongoing concerns about the debt crisis and the potential impact on both banking systems and economic activity in the eurozone. The problems overseas overshadowed the day’s domestic news, which included a better-than-expected reading on retail sales (up .5 percent in April vs. .4 percent consensus), but a weaker-than-expected University of Michigan Consumer Sentiment Index (73.3 in May vs. 73.5 consensus). At the end of the day, the economic data mattered little, as risk aversion is once again on the rise across global equity markets. While the Dow Jones Industrial Average lost 163 points, the CBOE Volatility Index (.VIX) rallied 4.76 to 31.44.

Bullish Flow
Psychiatric Solutions (PSYS) bucked the bearish trend and finished the day up 63 cents to $32.63. Options action picked up as well. About 18,000 calls and 2,600 puts traded on the behavioral healthcare provider. May 35 calls traded 5,680X. June 32, 5, 35, and 37.5 calls saw brisk trading as well. The company is in the process of evaluating strategic options and on April 16 Deutsche Bank said Universal Health is taking a close look at PSYS. The relative strength in the stock and increasing call volume might be in anticipation of some type of buyout announcement in the weeks ahead.

Dish Networks (DISH), McDermott (MDR), and Parker Hannifin (PH) also had bullish order flow.

Bearish Flow
Host Hotel and Resorts (HST) lost $1.19 to $14.89 and puts saw a day of heavy trading Friday. About 9,800 puts and only 145 calls traded in the name. June 12.5 puts were the most actives with 5,300 contract trading. 94 percent traded at the offer and open interest is just is 1592; suggesting buyers were opening new positions. June 17.5 and October 15 puts saw similar action. Implied volatility rallied 8.5 percent to 50. No news on HST, but Friday’s options action seemed somewhat defensive or bearish for the Bethesda, MD hotel/motel REIT.

Bearish flow also picked up in Precision Drilling (PDC), Monsanto (MON), and Jabil Circuits (JBL).

Index Trading
The CBOE Volatility Index (.VIX) rose 4.65 to 31.33 and the top options trades Friday were in VIX options. In morning trading, a block of 50,000 May 35 calls traded at 83 cents while another block of June 37.5 calls traded at $2.03 per contract. This spread looks like a position adjustment, where the strategist is selling to close a position in May to open a similar one in June. VIX May options contracts expire next Wednesday. However, this might also be a short-term diagonal spread, or a bet that the volatility index (futures) will stay below 35 through the May expiration and then rally from that point forward.

ETF Trading
Put volume picked up in the exchange-traded fund marketplace, as nervous investors have been scrambling to buy portfolio protection. About 5.3 million puts and 3 million calls traded across all products. The S&P Depositary Receipts (SPY), or “Spiders”, lost $2.10 to $113.89 and SPY May puts were the most actively traded contracts. May 115s saw the most volume. 188,000 traded. May 114 and 112s saw heavy trading as well. In all, 2.1 million puts traded in the fund, or about 2X the number of calls. Since SPY holds all of the S&P 500 names, investors sometimes buy puts on the fund to speculate on a bearish move in the market or to hedge existing stock portfolios.