Coming Weakness in JOE

Plus, ACI & FDC

Dear Bottarelli Research Member,

In past Bottarelli Research alerts, we’ve made money playing puts options on St. Joe Co. (JOE – NYSE). Now, I think it’s time we do it again.

As a quick refresher, St. Joe is a real estate company headquartered in Jacksonville, Florida. As of December ‘05, JOE owned 838,000 acres of land in northwest Florida, which represents a large majority of their operation. The reason I took a new look at JOE is because I just returned home from a vacation to Orlando where we experienced dripping-wet humidity in mid-September. My wife and I concluded that we could never life in Florida, but we weren’t’ the only ones coming to this conclusion. Nearly every other clothes-soaked group we spoke to — young and old — were complaining about the brutal Florida humidity. And with global warming, it’ll only get worse.

Of course, this isn’t the sole reason I’m bearish on JOE. Aside from my personal weatherman’s bias, two other technical events are presenting us with a downside opportunity on JOE.

First, we have more troubling news from the U.S. home builders which shows that their confidence has fallen for the 8th straight month, dropping to its lowest level in 15 years! In short, builders in all four regions of the country are pessimistic about the market outlook, which dropped the NAHB/Wells Fargo housing market index to a level of 30. As a point of reference, a reading of 50 would indicate builder sentiment was balanced between good and poor. A year ago, the index was at 65.

It’s easy to see why the sector is in such trouble. Falling sales, rising sales cancellations, and increasing inventories of unsold units points to weakness for the rest of the 2006 calendar year and well into 2007. And when it comes to housing, you don’t witness fast turnarounds. Rather, you have a situation that has to slowly run it course before correcting itself naturally. With further weakness on the horizon, a quick look at the JOE chat presents an interesting opportunity:

As you can see, JOE has just bounced up to its 200-day moving average and is now experiencing weakness. To my eye, this signals a move down to at least the midpoint between the 50 day and 200 day moving averages, which amounts to a $3.50 down-move back to the $50 level. Let’s combine the technical chart formation with the continued weakness in the housing sector to enter into downside puts on JOE. Here’s the play:

PLAY: Buy the JOE October 55 Puts (JOE VK) at or under $4.80, good for the day. Current bid/ask spread is $4.50 to $4.70. Place a protective stop loss at $2.50.

In other news, First Data Corp. (FDC – NYSE) is now attributing today’s downside action to the financial outlook for its Western Union spin-off, which has projected revenues of $4.4 billion to $4.5 billion for 2006 with a 10% to 12% growth projection by 2007. In a statement, president and CEO of Western Union Christina Gold said “as previously discussed, we believe the slower growth rates in these markets largely reflect the uncertainty caused by the immigration debate and the related activities in the U.S." To me, it still doesn’t add up.

After all, if this news event had already been “previously discussed” as she says, when why is it causing such a negative effect in today’s trading? First we have the FDC earnings restatement this morning and now we have a vague statement from the WU CEO saying they expect slower growth rates? I really think management dropped the ball on this one — and it’s a darn shame. I really looked forward to making a nice winner on our FDC calls and then collecting free WU stock. As it stands, we’re out of the calls. But if you’re holding the stock, I think you’ll still come out ok as your free WU shares will make up for today’s $3.00 loss in FDC.

And finally, let’s close off our play on Arch Coal (ACI – NYSE).

Although today’s slight up-move still places the stock in a bearish downside trend, I’d rather be overly cautions here and adhere to our tighter-than-normal stop loss on our ACI October 27.5 Puts (ACI VT) at $1.30. I’m hearing a lot of whispers about the end of the commodities boom, which would mean further weakness for coal stocks like ACI. In fact, we may end up playing puts on ACI again in the future, but for now, let’s take the cautions approach and close off the play.

Lock and load

Sincerely,