SOURCE: Schaeffer's Investment Research

June 24, 2005 16:14 ET

Schaeffer's Midday Options Update Features Citigroup, Alcoa, America West Holdings, and Johnson & Johnson

CINCINNATI, OH -- (MARKET WIRE) -- June 24, 2005 -- Today's Schaeffer's Midday Options Update features Citigroup (NYSE: C), Alcoa (NYSE: AA), America West Holdings (NYSE: AWA), and Johnson & Johnson (NYSE: JNJ). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day.

The Midday Options Update is published every day at www.SchaeffersResearch.com -- the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link: http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU4M&PAGE=1.

Options Update: Johnson & Johnson: No More Tears?

Crude futures have decided to make yet another run at the 60 level today, but so far have been unable to hold this level. Futures have jumped 41 cents to $59.83 per barrel after inching up to $60 in electronic trading. Black gold has benefited from concerns that supplies may fail to meet strong demand. Yesterday, crude briefly moved above $60 per barrel before closing at $59.42 per barrel, $1.33 higher. This strength in oil has had its effect on the Street today, as airlines have slipped thanks to rising jet fuel prices.

In other news, orders for U.S.-produced durable goods saw a 5.5-percent increase in May, thanks to higher demand for new airplanes. Analysts were expecting the Commerce Department to report a 1.8-percent rise in durable-goods orders on the back of a large increase in aircraft orders. Boeing (BA) reported that orders surged to 200 in May from April's total of 14 orders. Taking transportation out of the picture, durable-goods orders decreased by 0.2 percent in May.

The past month saw new home sales jump 2.1 percent to a 1.30 million seasonally adjusted annual rate as May sales were the second highest on record. May's sales lagged behind last October's 1.31-million-unit pace.

C's Got Leggs

Today, Citigroup (NYSE: C) announced that it has agreed to swap its global asset-management business for Legg Mason's (LM) broker/dealer operations, in a move to further jettison its less-profitable operations. The deal is worth $3.7 billion and will take C completely out of the mutual-fund scene. C added that LM will pay $1.5 billion in common and preferred shares as well as $550 million in the form of a five-year loan facility provided by Citigroup Corporate. The company's Chief Executive, Charles Prince, noted that this will allow C to enhance the scope of investment products that it offers to clients while allowing the company to focus resources on strengthening areas where it has competitive advantages. The CEO formerly known as Prince also stated that the deal reduces "any perception in an area where concerns about potential conflicts have been raised."

Kick the Can

Aluminum giant, Alcoa (NYSE: AA) presented plans to take a second-quarter charge of 25 to 28 cents per share and eliminate 6,500 jobs as part of a previously disclosed plan to streamline its operations. AA believes that the year-long restructuring will save $150 million per year before taxes. Aside from the revamping charges, which should equal between $220 million and $250 million, AA forecast a $100 million to $120 million tax benefit for the quarter. The can king stated that it will record after-tax profit of 25 cents per share in the quarter thanks to the sale of its stake in Elkem.

This is Your Pilot Speaking, We are Clear for Takeover

Late Thursday, America West Holdings (NYSE: AWA) announced that regulators at the Justice Department have cleared the way for its acquisition of US Airways Group (UAIRQ). The acquisition of the bankrupt carrier by AWA will create a nationwide low-fare carrier that is able to make money, despite the lofty level of oil prices. The mandatory waiting period expired last night at midnight without objection from the Justice Department, but AWA shareholders still need to approve the deal along with the Transportation Department, the Air Transportation Stabilization Board, UAIRQ's creditors, and the Securities and Exchange Commission.

Toy Story

Mattel (MAT) was downgraded to "market perform" from "outperform" at Piper Jaffray this morning. The brokerage cited the fact that little news came from the toymaker's analyst meeting, but what news did surface was negative. The brokerage's analyst cut MAT's stock price target to $20 from $23, while cutting his 2005 earnings estimate to $1.22 to $1.32 per share. The brokerage is concerned that the company's business plan accounts for oil prices below $50 per barrel, that the Barbie doll continues to struggle, and that the U.S. retail environment is weakening.

Most-Active Options Update

At 1:39 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,345.5) has lost 0.73 percent, while the S&P 500 Index (SPX - 1,196.10) has lost 0.39 percent. The Nasdaq Composite (COMP - 2,057.8) has lost 0.62 percent. At 1:42 p.m., 1,492,369 calls have traded hands compared to 1,193,541 puts, for a total put/call single-day volume ratio of 0.79 across all six options exchanges. The CBOE's put/call volume ratio stands at 0.74 today.

Johnson & Johnson

In yesterday's Options Update, I covered Guidant (GDT). Today, the company that is purchasing GDT, Johnson & Johnson (NYSE: JNJ), found its way onto our active options list. There is some speculation that the latest concerns over GDT's defibrillator systems may force the U.S. Food and Drug Administration to put pressure on JNJ to review its planned acquisition of GDT. When this situation first surfaced last week, JNJ stated that it still plans to buy GDT, though it needs to discuss the deal with the company to further understand its impact. Today, JNJ officials stated that it would not comment beyond last week's statement, despite the fact that GDT is telling doctors to stop using five models of its implantable cardiac defibrillators thanks to a faulty switch possibly causing malfunctions.

Options players have piled into JNJ's July 65 call (JNJGM) today. Despite this optimistic action, JNJ's Schaeffer's put/call open interest ratio (SOIR) still checks in at 1.35, as puts outnumber calls in the front three months of option activity. This is the highest SOIR reading taken on the sultan of tearless shampoos in the past 52 weeks, indicating that pessimism flows freely toward JNJ from the Street. Another pessimistic indicator from the Street is the massive amount of short interest (39.91 million) that has piled up against JNJ.

While the Street displays complete disdain toward JNJ, analysts paint a bit of a different picture. According to Zacks, JNJ garners seven "hold" ratings out of 20 total ratings. While analyst sentiment skews to the positive, with 11 "buy" or better ratings, the seven fence-sitters could serve to push JNJ higher should they be influenced to the positive side.

Glancing at JNJ's charts, I begin to wonder why the Street seems to dislike the health care product company. Aside from the fact that my wife and I have been receiving and purchasing a great deal of the company's products during the past months as we prepare for our first child, which I am sure has helped the company's sales, JNJ has been a steady performer thanks to the support of its 10-month moving average. This trendline helped power JNJ all the way to a new all-time high of 69.99, where resistance from the 70 level has sent the stock reeling a tad. However, reeling means that JNJ has pulled back to the support of the 65 level. Not only should the 65 level hold, as it is a former level of resistance, but JNJ's 10-month moving average is also rapidly approaching this level to make the support double fisted. Should these levels of support continue to hold, watch for JNJ to continue its trek upward. Especially if the company can find any good news or my wife and I continue to purchase their products.

Click on the following link to see a Monthly Chart for JNJ with 10-Month and 20-Month Moving Averages: http://www.schaeffersresearch.com/wire?ID=13485.

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About Schaeffer's Investment Research ( www.SchaeffersResearch.com )

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com, is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method.

The Above Is an Investment Opinion Being Issued by Schaeffer's Investment Research.

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