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Daily Newsletter, Tuesday, 5/5/2015

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Oil Up, Equities Down

by Jim Brown

Click here to email Jim Brown

About a month ago everyone was hoping oil prices would rise so the energy sector would lift the equity markets. The opposite happened today but we can't blame oil prices. Crude traded as high as $61.10 and the high for the year but it did not help he market. Today economics got the blame along with David Einhorn.

Market Statistics

Oil stocks were down as a result of a presentation by David Einhorn of Greenlight Capital on Monday. His attack on frackers contaminated the entire sector and stocks were down hard despite the new highs on oil. More on this later.

The economic numbers get the lion's share of the blame for today's decline although the market has been showing a lack of conviction for several days. Today's economics simply gave investors a reason to sell. A major sell off in Europe also added to the negativity.

In the U.S. the International Trade numbers upset market. The trade deficit exploded higher from -$35.9 billion in February to -$51.4 billion in March. The estimates were for a rise to -$41.3 billion. To say this was a blowout would be an understatement. This was the biggest trade deficit since October 2008.

Exports rose only +0.9% while imports rose +7.7%. That immediately knocked the estimates for Q1-GDP down 6 tenths of a percent from +0.3% growth to a contraction of -0.3%. It will also weigh on Q2 growth estimates but the range there is so wide (0.8% to 4.0%) that it is hard to know by how much until the new estimates are posted. The last consensus was for +2.9% growth.

The analysts were quick to blame the dollar because the goods deficit rose from -$55.7 billion to -$70.6 billion. They also blamed the port disruption for the inequality between imports and exports. I am sure both of those had something to do with it but you can't get away from the fact that the U.S. economy weakened all through the first quarter.

On the flip side the February trade deficit was unexpectedly low at -$35.9 billion was the lowest since November 2013. That would seem to lend more credibility to the port disruption as a factor in both months.

The market did not care if there was a reason. Futures begin falling as soon as the report was released and it was a steady decline from there.

Moody's Trade Balance Chart

The ISM Nonmanufacturing report for April that came out 90 minutes later managed to stall the decline for about 45 minutes but selling eventually resumed. The ISM services for April rose slightly from 56.5 to 57.8 compared to forecasts for a minor decline to 56.3.

New orders rose from 57.8 to 59.3, backorders from 53.5 to 54.5 and employment from 56.6 to 56.7. It was a solid report but it was not that strong. Some analysts immediately said this pointed to a rebounding economy in Q2. Unfortunately those small gains mentioned above are not pointing to a rebound but more likely to a muddling through until the dollar weakens further.


The first employment report for the week was the Intuit Small Business Employment Index. The index declined from 0.07% to 0.06% and hardly a major move. However, this is down from the recent 0.15% high in November. This reading is the equivalent of adding 15,000 jobs by small businesses in April.

Wages declined -0.2% to $2,774 per month or $33,290 per year. That was the first contraction since July-2013. Average monthly hours declined -0.08% to 108.3 hours or about 25 hours per week. That was the eighth consecutive monthly decline in hours. Small business revenues declined -0.3% for the sixth consecutive monthly decline. All industries posted declines.

This report is normally overlooked but those last two points should not be ignored. Hours and wages have been declining for more than six months. That is a result of the weak labor market and the shrinking labor force participation rate. Unemployed workers can make more by staying at home and collecting benefits than they can by taking a part time job for 25 hours a week or less. The 30 hour workweek in Obamacare is a factor in this decline in hours.

The calendar for the rest of the week is heavily weighted to payroll reports but there is also a full slate of Fed speeches on Wednesday. Coming this soon after the FOMC meeting each will be trying to frame their view of Fed policy and "suggest" their timeline for the coming rate hikes.

Part of the weakness in the market today could have been worry over the coming payroll numbers.


Dow component Disney (DIS) reported earnings of $1.23 that easily beat estimates for $1.11. Revenue of $12.46 billion also beat estimates of $12.24 billion. The company said there was an increase in spending at its theme parks and higher ad sales in its media business. Theme park profits rose +24% to $566 million.

The stronger overall earnings were unexpected since the "Frozen" movie has now run its course. Disney studios saw a -10% decline in profits because they didn't have any blockbuster movies in Q1.

CEO Bob Iger said the expectations for the next Star Wars movie are off the scale. There has not been a Star Wars moving since 2005. There are 14 new Disney movies due out before December 2019. Disney shares rallied more than $2 at the open but faded to close fractionally negative in a weak market.


Herbalife (HLF) reported earnings of $1.29 compared to estimates for $1.11. The company raised guidance for the current quarter to a range of $1.05 to $1.15 and analysts had been expecting $1.06. Full year earnings are now projected by Herbalife to be $4.30 to $4.60, up from $4.10-$4.50. Bill Ackman will not be happy. Shares of HLF rallied $6 in afterhours trading.


SolarCity (SCTY) reported earnings of $1.52 compared to estimates for $1.60. However, revenue of $67.5 million beat estimates for $57.8 million. The company guided for a loss of $1.60-$1.70 for the current quarter. Shares declined $1 in afterhours.


Mylan (MYL) reported adjusted earnings of 70 cents that missed estimates by a penny. Revenue of $1.87 billion also fell short of estimates at $2.05 billion. The company blamed the miss on the strong dollar that lowered revenue by -$93 million. The company reiterated its target of $6 in earnings by 2018. Mylan offered $32.7 billion for Perrigo (PRGO) last month. Teva Pharma (TEVA) offered $40.1 billion for Mylan on the condition it dropped its bid for Perrigo. Mylan shares were unchanged after earnings.


Electronic Arts (EA) reported earnings of 39 cents that beat estimates of 25 cents. Revenue of $896 million also beat estimates of $838.8 million. The company raised guidance for revenue in the current quarter to $1.14 billion and analysts were expecting $752 million. EA guided to full year earnings of $2.75 and revenue of $4.4 billion. Shares rose +$2 in afterhours.


The earnings calendar for Wednesday is going to be focused on Tesla, Whole Foods Market, Trip Advisor and Green Mountain Coffee. The biggest event for the rest of the week will be Alibaba on Thursday. Expectations are dropping fast and there could be a big disappointment. However, with a 37% short interest any surprise is going to create a rocket ride higher.


Bank of America (BAC) upgraded NetFlix (NFLX) to a buy from underperform. The move shocked numerous analysts because BAC had been negative on the stock for so long. BAC said the fast growing portfolio of original content will extend the saturation point in the USA and fuel long term subscriber growth in the international market. The original content will also provide a barrier to entry and reduce other competitive threats. The bank said Netflix had a total addressable market today of about 330 million broadband connected households and that would rise to 480 million, excluding China, as the international roll out continues in the coming years. BAC raised the price target from $350 to $722. The stock closed at $565. That was a major change of heart by Bank of America. Netflix has said it is going to split its shares once shareholders approve the new shares at the June meeting.


Amazon and JetBlue (JBLU) announced free in-flight streaming of Amazon movies to Amazon Prime customers. The service will operate over JetBlue's free Wi-Fi and will be called Fly-Fi for Amazon Prime. Members will be able to stream any Amazon content including movies and streaming TV, plus they will be able to rent or buy other titles from Amazon's instant video store. Amazon shares were up early but ended down -$2 for the day.

Salesforce.com (CRM) spiked again as rumors spread that Microsoft (MSFT) was mulling a bid for the company. Shares spiked as much as 6.4% intraday and caused a volatility halt in trading. The report came from Bloomberg. Reportedly Microsoft began considering making a bid after news broke last month that someone else had approached Salesforce about an acquisition. That was widely thought to have been Oracle. Salesforce is now working with two investment banks to formulate a response to the two suitors. People reportedly having inside information on the matter said Microsoft was NOT in talks currently but "might" compete for the company if it was for sale. Shares declined to a +1.6% gain as the new faded.


Golar LNG (GLNG) shares soared +20% on news the company had commissioned the third floating LNG liquefaction vessel. Golar is a transporter of LNG with numerous transport vessels of various sizes. They have recently begun moving towards offering a floating liquefaction vessel that can be moored offshore near the wells and convert the natural gas into LNG for transport. This is less expensive than laying pipelines to shore and be forced to construct a $5-$8 billion facility to convert it to LNG. There are no permitting issues with an offshore LNG facility. They can be built in a couple years and be flexible to move to where there is the most need or the most profitability. They will also feed the transport division with gas that can be shipped to the most desirable location.


The Biotech Index ($BTK) corrected from a high of 4,144 to a low of 3,278 in only five days for a -10% drop last week. After rebounding about 2.5% on Friday the index opened significantly higher on Tuesday and then declined -3.8% from those highs to give up -2% for the day. This bio-wreck is killing the Nasdaq, which lost -77 points today alone.

There is no specific reason for the biotecks to implode except that they were the strongest sector in Q1 with a +25% gain from the end of December to the high on March 20th. It was time to take some profits and rotate those funds elsewhere. Since March 16th the energy sector was up +13% at today's highs. Apparently that is where they were putting the money. David Einhorn's presentation on Monday may have changed that idea.


David Einhorn took on the energy sector at the Ira Sohn conference on Monday. Specifically he attacked the frackers as a sector with never ending negative opportunities. He singled out Pioneer Natural Resources (PXD) as the MotherFracker of all frackers. Link to presentation slides in PDF Basically he contends that they raise tens of billions of dollars and pour every dollar back into drilling more holes. Along the way their "profits" have so many exclusions and footnotes that any sane investor would run for the hills.

The easiest point to understand from the entire presentation is the difference between reserves and proved reserves. In theory "reserves" mean all the oil that is thought to be underground and potentially recoverable. "Proved reserves" is the oil and gas under existing wells that is currently being produced. Sometimes this is also called developed reserves.

In theory the more money you spend drilling wells the faster your proved reserves should rise. If you drill 500 wells a year you should be able add all that newly found oil as reserves. The problem is that the shale wells you drilled 3 years ago have already produced 85% of the recoverable oil. The new reserves from 3 years ago are now depleted. A producer would hope that the total reserves would continue to grow, which means you are finding oil faster than you are producing oil.

Unfortunately in the case of Pioneer they spent roughly $16 billion in capex for drilling since 2006 and their proved reserves are less today than they were in 2006. Along the way they produced about 470 million barrels of oil but the money they got for that oil they put right back into the ground in the form of new wells.

Einhorn slide, page 34.

I have been writing about this for the last six years. Shale drilling is a treadmill that runs faster every day. Shale wells deplete about 75% in the first year and another 25% in the second and third years. A well coming online at 1,000 bpd is producing only 250 bpd at the end of the first year, 187 bpd at the end of the second year and 140 bpd at the end of the third year. The well may produce at a trickle for many years thereafter.

If a company drills 100 wells per quarter they have to keep drilling 100 wells per quarter in order to keep up with the depletion from the wells they drilled 4 quarters ago. They cannot rest. The instant they stop drilling their production will begin to decline and their reserves will shrink. They have to spend every dollar they can scrape together to keep the treadmill oiled and running at full speed. The problem is that the more wells they drilled over the last several years they more wells they have to drill this year to offset the decline in those older wells. There is no escape from this treadmill. This is why U.S. production is going to fall off a cliff later this year now that drilling has reached a six-year low.

In Q4 Baker Hughes said there were about 9,350 wells drilled. That probably dropped to about 5,000 in Q1 and probably to 4,000 in Q2 because of the drop in active rigs. Currently only about 30% of the wells being drilled are being completed. The rest are being put into inventory now called the "fraclog." That means they have been drilled but not fracked and completed. About 50% of the well's cost is in drilling the hole. The other 50% comes from fracking the well, installing the pumps and producing equipment and connecting it to a pipeline. Producers today are saving that second 50% and are waiting for oil prices to rise before they begin to complete the wells in their fraclog.

Einhorn has figured out what everyone else has known for the last six years. There is no future in shale production unless oil prices are well over $75 per barrel. However, Pioneer and EOG Resources both plan on adding additional rigs this summer if prices reach $65 and remain stable. Both have wells and leases in the Permian and that is the cheapest shale field to develop today. Einhorn also figured out that shale production will peak in 2017 although he did not realize it. His charts and graphs paint the picture of slowing production but he is looking at it from the viewpoint of an investor looking at a fracking company. What he did not factor into his short thesis is that the sharp drop in shale production over the next year is going to lift oil prices significantly because it all boils down to supply and demand. Demand is rising because fuel is cheaper. Currently it is rising 1.0 to 1.5 million barrels per year. Supply at $65 oil is going to decline about 1.0 to 1.5 mbpd in the USA. There is currently a global surplus of about 1.5 mbpd. Do the math.

Einhorn may be right in the long term about the frackers but they have several years to run and when they restart their drilling programs this time around they are going to be a lot more conservative. They now know there is no reason to race to produce all their oil at low prices. They can take their time and prices will rise and they can actually make a profit for a few years before they run out of drilling locations. Just my two cents.


Crude oil rose +$1.47 in the regular session and is up to $60.75 in the evening session. Also helping to push prices up was a report that protestors in Libya had shutdown a major pipeline forcing the closure of several oil fields and effectively closing the port of Zueitina. Pipeline and port closures have reduced Libyan exports to about 400,000 bpd, down from 800,000 bpd several months ago. Before the ousting of Qaddafi Libya produced about 1.6 million barrels per day.

AAA said the national average for gasoline has risen to $2.63 per gallon.


Market

The S&P closed within 3 points of a historic high on Monday. Today's close was -28 points from a historic high. The S&P lost -1.2% compared to -0.8% on the Dow, -1.5% on the Nasdaq and -1.4% on the Russell 2000. The biotechs and chip stocks sunk the Nasdaq and the rising interest rates tanked the small caps.

The blowout in the trade deficit sent the yields on the ten-year treasury soaring by almost +2% for the day to close at 2.176%. The selloff in treasuries seems counterintuitive since bad economic news would push the Fed rate hikes farther out into the future. However, once an idea has taken hold as it did last Wednesday when the Fed said all meetings are now on the table for a rate hike, it is hard for investors to shift gears. They know rates are going to rise and they are fleeing treasuries.


There was also a meltdown overseas. The Shanghai markets fell -4% and the Hang Seng -1.3%. The European markets were down -2% or more. The bleeding overseas translated into a weak open in the U.S. and everything worsened from there.


The S&P retreated from overhead resistance at 2120 and plunged to initial support at 2090. Despite the 25 point drop the index remains inside its recent trend and nothing has really changed. A decline below 2075 would be required to change the trend.

Support is 2090, 2080, 2075 and resistance 2117, 2120.


The 18,100 resistance level on the Dow is still holding firm. The index was dragged down by Apple's -$3 loss or -22.50 Dow points. Goldman and Home Depot accounted for another -16 Dow points each.

The Dow was down -164 at the lows and closed down -142. Despite the big move it remains in its sideways trend and inside the 17,800-18,100 trading range. Today was just a volatility day and unless the Dow tacks on a couple more days in the same direction it was just noise.



The Nasdaq may have started a new pattern. On Thursday the index had a high of 5015 and closed at 4941. On Monday the high was 5043 but closed at 5016. Today the high was 5008 and closed at 4939. That is the lowest close since April 17th. The 5000 level has reasserted itself as strong resistance and the two big red candles with the spinning top between them is a sign of a topping pattern. The spinning top or doji on Monday was formed when the open at 5018 and close at 5016 were only 2 points apart on a day with a 30 point range. That means the buyers and sellers were closely matched and when followed by a big down day it suggests further weakness to follow. The lower close is another confirmation signal.



The small cap Russell 2000 is in full breakdown mode. The attempted rebound back over support at 1230 failed and light support at 1208 is the only thing between us and a drop to 1150. Conventional wisdom suggests the small caps are declining because higher interest rates will impact their ability to be profitable. I think that is a stretch when we are talking about a 2% rate on the ten-year but anything is possible. I believe they are falling because they are normally weak over the summer doldrums and investors are exiting to avoid the rush later.

The break below the 100-day average is a clear sell signal. If there is no material rebound on Wednesday we could be in for a change in the overall market direction.


The market is weak. There is no denying it. While the S&P may have come within rock throwing distance of a new high the Dow has been fighting overhead resistance at 18,100 since mid March. There is no conviction to the upside rallies and there is no conviction to the selling. We are trapped in a range until one side of the other can manage a breakout.

Today's decline could be seen as a failed rebound. However, the S&P futures are up +3.50 as I write this. The dip buyers are alive and well.

I would continue to be cautious in holding too many longs and I would keep my stop losses in place. Eventually the market is going to pick a direction and the pace could be very fast given the length of time we have spent trapped in the range. This is coiling the spring and when it releases it could be violent.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Acquisition Target

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Omincare Inc. - OCR - close: 90.12 change: +0.27

Stop Loss: 86.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 921 thousand
Entry on May -- at $---.--
Listed on May 05, 2015
Time Frame: Exit prior to June option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
Wall Street loves mergers and acquisitions. OCR has put itself up for sale.

OCR is in the healthcare sector. According to the company, "Omnicare, Inc., a Fortune 500 company based in Cincinnati, Ohio, provides comprehensive pharmaceutical services to patients and providers across the United States. As the market-leader in professional pharmacy, related consulting and data management services for skilled nursing, assisted living and other chronic care institutions, Omnicare leverages its unparalleled clinical insight into the geriatric market along with some of the industry's most innovative technological capabilities to the benefit of its long-term care customers. Omnicare also provides specialty pharmacy and key commercialization services for the bio-pharmaceutical industry through its Specialty Care Group."

Most of OCR's sales are in the long-term care group. This business essentially helps nursing homes with their resident's medications and dispensed more than 110 million prescriptions last year.

The company has been a consistent earnings producer. OCR has beaten Wall Street's estimates on both the top and bottom line the last four quarters in a row. Their most recent report was April 29th. OCR announced its 2015 Q1 results with earnings up +12% from a year ago at $1.02 per share. Revenues were up +5.7% to $1.66 billion. The company is forecasting 2015 earnings in the $4.08-4.16 per share range with sales in the $6.50-6.70 billion zone.

Currently the spark behind OCR's surge to new highs is M&A speculation. Around April 21st it was disclosed that OCR was exploring a sale of the company. Potential bidders include Cardinal Health (CAH), CVS, Express Scripts (ESRX), McKesson (MCK), and Walgreens Boots Alliance (WBA). Initial bids are expected in May. One analyst has estimated the company could go for $101.00 per share. It's important to note that there is no guarantee OCR will reach a deal and none of the potential bidders are talking to reporters.

Technically shares of OCR have been showing relative strength. At the moment OCR is on the verge of breaking out past resistance near $90-91. Tonight we're suggesting a trigger to buy calls at $90.35. More conservative traders may want to use a trigger closer to $91.00. The stock has been volatile since it was discovered the company is for sale. Investors may want to use small positions to limit risk.

Trigger @ $90.35

- Suggested Positions -

Buy the JUN $95 CALL (OCR150619C95) current ask $2.25
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:



In Play Updates and Reviews

Investors Nervous Ahead of Friday's Jobs Number

by James Brown

Click here to email James Brown

Editor's Note:

The market seems nervous ahead of Friday's nonfarm payroll number. Before the bell today a disappointing trade deficit number refreshed fears about the slowing U.S. economy. The next revision on Q1 GDP could be negative.

CAT and NTRS both hit our bullish entry triggers.


Current Portfolio:


CALL Play Updates

Apogee Enterprises - APOG - close: 53.33 change: -0.50

Stop Loss: 51.75
Target(s): To Be Determined
Current Option Gain/Loss: -20.0%
Average Daily Volume = 223 thousand
Entry on April 27 at $53.85
Listed on April 25, 2015
Time Frame: Exit PRIOR to earnings in June
New Positions: see below

Comments:
05/05/14: APOG is not having a good weak. Yesterday's failed rally has been followed by a -0.9% drop today. Shares did fare better than the NASDAQ's -1.5% decline today.

I am not suggesting new positions at this time.

Trade Description: April 25, 2015:
The U.S. economy has been limping along with slow growth. During the first quarter earnings season we have heard how the strong dollar has hurt big cap companies' sales and margins. That's one reason why money has been flowing into small cap, domestic companies, which are less impacted by the dollar. Investors are always looking for strong growth as well.

APOG fits the bill. The company is in the industrial goods sector. They are part of the building materials industry. According to the company, "Apogee Enterprises, Inc. (www.apog.com), headquartered in Minneapolis, is a leader in technologies involving the design and development of value-added glass products, services and systems for the architectural and picture framing industries."

Looking at the last four quarters (fiscal year 2015) bottom line results have been mixed. Yet revenues have been consistently showing double-digit growth. Q1 revenues were up +17.6%. Q2 revenues were +30%. Q3 revenues rose +22.6%. The company's most recent earnings report was April 8th. APOG delivered 2015 Q4 results of $0.47 a share, which was +74% higher than a year ago and above analysts' estimates. Q4 revenues were up +15% and above expectations. Margins improved 240 basis points to 8%.

The company said their architectural glass segment's revenues rose +22%. Architectural service revenues were flat. Architectural framing systems rose +22%. Large-scale optical technologies segment reported revenues up +18% last quarter. APOG ended the fourth quarter with a backlog of $491 million, up +49% from a year ago. Their fiscal 2015 results saw revenues up +21% and adjusted EPS up +58%.

Joseph Puishys, APOG's CEO, commented on their results, saying,

"Apogee's growth engine continued in the fourth quarter as we again grew revenues in the double digits and income more than 50 percent. Performance across the company was strong, with double-digit earnings and revenue growth in three of four segments... We built our backlog significantly during the year, giving us momentum moving into fiscal 2016. We expect fiscal 2016 will continue our trend of double-digit top-line growth and very strong bottom-line growth."
APOG provided relatively optimistic guidance for fiscal year 2016. They see revenues rising +10% to +15% and expect to see sales cross the $1 billion mark soon.

The stock shot higher following its Q4 report in April. The last couple of weeks have seen shares consolidate a bit but traders have started to buy the pullback. We think the rally continues. Tonight we're suggesting a trigger to buy calls at $53.85. We'll try and limit our risk with an initial stop loss at $51.75.

- Suggested Positions -

Long AUG $55 CALL (APOG150821C55) entry $2.75

04/27/15 triggered @ 53.85
Option Format: symbol-year-month-day-call-strike


Caterpillar Inc. - CAT - close: 87.00 change: -0.30

Stop Loss: 83.85
Target(s): To Be Determined
Current Option Gain/Loss: -22.5%
Average Daily Volume = 6.2 million
Entry on May 05 at $88.10
Listed on May 02, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/05/14: Our new candidate in CAT has hit our suggested entry point. Shares spiked toward new multi-week highs this morning. Unfortunately shares ran out of steam. Shares faded to a -0.3% decline compared to the -1.1% drop in the S&P 500. Nimble traders could use a dip near $86.00 as a potential entry point. If you prefer to buy breakouts then wait for a rally past today's high ($88.22).

Trade Description: May 2, 2015:
Have shares of CAT found a bottom? It's starting to look that way. CAT is still down -21% from its 2014 highs but it's up +12% from its Q1 lows with a steady trend of higher lows as traders buy the dips.

CAT is in the industrial goods sector. According to the company, "For 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets. With 2014 sales and revenues of $55.184 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment."

Earnings results and guidance has been a moving target for CAT. The combination of a slowing global economy, volatile currency fluctuations, and weakness in commodities have generated big swings in their business. In July 2014 CAT lowered guidance. Three months later they raised guidance. The next quarter they lowered guidance. Today the company has raised guidance again.

CAT's most recent earnings report was April 23rd. They announced a Q1 profit of $1.72 a share. That was +16% higher than a year ago and almost +40% above Wall Street estimates. Revenues fell -4% from a year ago but sales of $12.7 billion were still above analysts' expectations.

CAT's Q1 results were all about North America, which saw gains almost across the board. Overall construction sales for CAT in North America were up +9% from a year ago. Unfortunately, this was overshadowed by declines everywhere else. Asia, Europe, Latin America - just about every other region CAT does business saw double-digit sales declines. Yet it appears that investors seem to be willing to look past this weakness.

CAT's CEO commented on their 2015 outlook, "We had a solid first quarter, which led to raising the profit outlook for 2015. However, we continue to face headwinds and uncertainty in 2015, and our outlook for the year reflects that. We expect sales and profit in each of the remaining three quarters of 2015 to be lower than the first quarter. We expect sales for oil applications to decline starting in the second quarter, and from a profit perspective, the first quarter included the gain on the sale of our remaining interest in the logistics business and that won't repeat. The first quarter is usually the most seasonally favorable of the year for costs, and we don't expect the rest of the year to be as favorable."

Most of the major oil and gas companies have reduced their capex spending plans for 2015 and this should be negative for CAT. The stock's reaction is suggesting all the bad news is already priced in.

CAT's management raised their 2015 guidance and adjusted their estimate from $4.65 to $4.75, excluding their restructuring costs they raised their estimate from $4.75 to $5.00. Wall Street's estimate was $4.75 per share. CAT reaffirmed their sales estimate for $50 billion this year.

A couple of analysts with Stifel are bullish on CAT. They believe the combination of the company's big stock buy back program (about $10 billion), a strong dividend (more than 3%), and a healthy North American construction market will buoy CAT's stock while investors wait for a turnaround in commodities.

Technically the stock has been showing relative strength the last few weeks. The point & figure chart has turned bullish and is currently forecasting a long-term target of $108.00. Today CAT is hovering below potential resistance near $88.00. We are suggesting a trigger to buy calls at $88.10.

- Suggested Positions -

Long JUL $90 CALL (CAT150717C90) entry $2.00

05/05/15 triggered @ 88.10
Option Format: symbol-year-month-day-call-strike


The Greenbrier Cos. - GBX - close: 63.76 change: +0.34

Stop Loss: 54.85
Target(s): To Be Determined
Current Option Gain/Loss: +71.4%
Average Daily Volume = 683 thousand
Entry on May 01 at $59.05
Listed on April 30, 2015
Time Frame: Exit PRIOR to June option expiration
New Positions: see below

Comments:
05/05/14: GBX managed to buck the market's down trend today. Shares added +0.5% but continue to struggle with short-term resistance near $64.00. Traders may want to start raising their stop loss.

I am not suggesting new positions at this time.

Trade Description: April 30, 2015:
Currently shares of GBX are up +7.3% in 2015. That's after a -$10.00 drop from its April highs. I'm surprised shares aren't doing better as the earnings picture continues to improve. The recent pullback looks like an opportunity for bullish investors.

GBX is in the services sector. They manufacture and service railroad cars. According to the company, "Greenbrier, (www.gbrx.com), headquartered in Lake Oswego, Oregon, is a leading supplier of transportation equipment and services to the railroad industry. Greenbrier builds new railroad freight cars in our 4 manufacturing facilities in the U.S. and Mexico and marine barges at our U.S. manufacturing facility. Greenbrier also sells reconditioned wheel sets and provides wheel services at 9 locations throughout the U.S. We recondition, manufacture and sell railcar parts at 4 U.S. sites. Greenbrier is a 50/50 joint venture partner with Watco Companies, LLC in GBW Railcar Services, LLC, which repairs and refurbishes freight cars at 34 locations across North America, including 14 tank car repair and maintenance facilities certified by the Association of American Railroads. Greenbrier builds new railroad freight cars and refurbishes freight cars for the European market through our operations in Poland. Greenbrier owns approximately 8,300 railcars, and performs management services for approximately 241,000 railcars."

Looking at the last few quarterly reports from GBX the company tends to beat Wall Street's earnings estimates. Their Q4 2014 report, last October, was an exception. Yet GBX has still raised their guidance the last four earnings reports in a row. Their backlog of business is booming!

GBX's most recent report was April 7th. The company delivered their 2015 Q2 results with a profit of $1.57 per share. That was 37 cents better than analysts expected. Revenues were up +27% to $630 million, also above estimates. GBX said their aggregate gross margin improved from 17.8% to 19.9%. Their new railcar deliveries improved from 4,000 units in the prior quarter to 5,200 units. Their new railcar backlog is up to 46,000 units, valued at $4.78 billion.

GBX's Chairman and CEO William Furman commented on his company's results, "Our record results this quarter, including margin expansion and earnings growth, reflect the soundness of our diversified and integrated business model, improved business execution and greater scale. Our aggregate gross margin in the second quarter grew to 19.9%, nearly twice last year's level; at the same time we continue to execute on ramping up production on new manufacturing lines."

Furman also commented on their order growth, saying, "Our diverse new railcar backlog of 46,000 units represents the sixth consecutive quarter where the quantity and value of our backlog has increased. It is now more than triple the size of just one year ago, with production on certain production lines stretching into 2019. Nearly 80% of our year-to-date orders for 24,200 railcars are non-energy related, including orders for double stack intermodal cars, grain hopper cars, automotive carrying cars, non-energy related tank cars, boxcars, and mill gondola cars for scrap steel. These orders, along with others in our backlog, include multi-year orders for various car types, a positive indication that our customers believe, as do we, that end-user demand for new railcars will remain solid for the foreseeable future. The regulatory picture for tank cars transporting hazardous materials should be clarified no later than May. We expect Greenbrier's Tank Car of the Future will be the new standard, and that additional new car and retrofit orders will occur regardless of oil prices."

Furman pointed out that most of their new orders are for non-energy related cars. That's because the energy (i.e. oil production) business in the U.S. has been depressed given last year's slide in crude oil. Energy companies have been cutting back on spending. On the plus side, when the energy sector rebounds, it will be a bonus for GBX. The U.S. government is working on new requirements for oil-tanker railcars. When the government regulations on oil-tanker safety is finalized GBX will see a surge in orders for new tanker cars over the next few years.

GBX managed raised their guidance again. They now expected 2015 earnings in the $5.65-5.95 range versus Wall Street's estimate around $5.42. GBX also raised their sales guidance into the $2.6-2.7 billion zone versus analysts' estimates of $2.62 billion.

We don't see any catalyst for the recent pullback in GBX shares. It looks like a correction toward the stock's bullish trend of higher lows. If shares bounce it could fuel some short covering. The most recent data listed short interest at 33% of the small 22.3 million share float.

I will issue one caveat. The broader Dow Jones Transportation Average looks weak. While the story on GBX is bullish that doesn't mean shares will be able to resist a broader sell-off among the transport stocks. Traders may want to start with small positions considering the recent weakness in the transportation average.

Tonight we are suggesting a trigger to buy calls on GBX at $59.05. More conservative traders may want to wait for a breakout past the simple 200-dma (near $60.00) as an alternative entry point.

- Suggested Positions -

Long JUN $60 CALL (GBX150619C60) entry $2.90

05/01/15 triggered @ 59.05
05/01/15 U.S. DOT announces new rules on railroad tanker cars
Option Format: symbol-year-month-day-call-strike


Global Payments Inc. - GPN - close: 101.07 change: +0.15

Stop Loss: 98.25
Target(s): To Be Determined
Current Option Gain/Loss: -3.5%
Average Daily Volume = 589 thousand
Entry on April 21 at $101.05
Listed on April 18, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/05/14: GPN continues to find support near the $100.00 area. I am suggesting traders wait for a rally past $102.50 before considering new positions.

Trade Description: April 18, 2015:
GPN is in the services sector. They provide money transfers and electronic payment solutions.

According to the company website, "Global Payments Inc. (GPN) is a leading worldwide provider of payment technology services that delivers innovative solutions driven by customer needs globally. Our partnerships, technologies and employee expertise enable us to provide a broad range of products and services that allow our customers to accept all payment types across a variety of distribution channels in many markets around the world. Headquartered in Atlanta, Georgia with more than 4,300 employees worldwide, Global Payments is a Fortune 1000 Company with merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and Brazil."

The company has been consistently delivering strong earnings growth. GPN has beaten Wall Street's expectations and guided higher the last three quarters in a row. Their most recent report was April 8th when GPN delivered their 2015 Q3 results. Earnings were up +18.7% to $1.14 a share. Revenues were up +8% to $665 million. Growth was driven by strong performances in the U.S. and their Asia-Pacific operations.

Management raised their forecast again. They see 2015 earnings in the $4.77-4.84 range, which would be +8% to +10% growth. They're forecasting 2015 revenues in the $2.75-2.80 billion range or +16% to +18% growth.

GPN management is also shareholder friendly and has been significantly boosting their stock buy back program. They recently announced an accelerated share repurchase program up to $100 million.

The stock has rallied on the strong earnings results and buyback news. Today GPN is hovering near all-time highs around psychological resistance at the $100 level. It was impressive that GPN did not participate in the market's widespread sell-off on Friday. We want to be ready to hop on board if GPN can rally past resistance at $100.

Tonight we're suggesting a trigger to buy calls at $101.05.

- Suggested Positions -

Long AUG $105 CALL (GPN150821C105) entry $2.85

04/21/15 triggered @ 101.05
Option Format: symbol-year-month-day-call-strike


Northern Trust Corp. - NTRS - close: 74.56 change: +0.01

Stop Loss: 71.75
Target(s): To Be Determined
Current Option Gain/Loss: -18.6%
Average Daily Volume = 1.1 million
Entry on May 05 at $75.05
Listed on May 04, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/05/14: NTRS gapped open lower this morning near $74.00 but traders bought the dip near its 10-dma. Shares rebounded to a new high and traded above round-number resistance at $75.00. Our trigger to launch positions was hit at $75.05. Unfortunately the market's widespread sell-off was too much for NTRS and the stock faded back to unchanged on the session.

Our trade is open but I'd wait for a new rally past $75.00 before initiating new positions.

Trade Description: May 4, 2015:
NTRS has been around for 125 years. The company looks pretty good for its age. Shares are outperforming the broader market and its peers. Currently NTRS is up +10% in 2015 versus a -0.6% decline in the financial sector.

According to the company, "Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2015, Northern Trust had assets under custody of US$6.1 trillion, and assets under management of US$960.1 billion. For 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation."

The last couple of earnings reports have been healthy. Their Q4 report in January came in better than expected on both the top and bottom line. NTRS' most recent report was its 2015 Q1 results on April 21st. Wall Street was looking for a profit of $0.87 a share on revenues of $1.12 billion. NTRS said their earnings rose +25% from a year ago to $0.94 and revenues were up +9.0% to $1.13 billion.

NTRS' Chairman and CEO Frederick Waddell commented on his company's performance, "We are pleased with our financial performance in the first quarter of 2015, which reflects continued growth in our business serving personal and institutional clients. Trust, investment and other servicing fees, which represent two-thirds of our revenue, increased 7% compared to last year. New business and higher equity markets contributed to growth in assets under custody and under management of 6% and 5%, respectively. Total revenue grew 9% and we maintained a disciplined focus on expenses, which increased 3%, producing meaningful operating leverage. As a result, our pre-tax profit margin improved to 31.2% in the first quarter and our return on equity was within our target range of 10-15%. We also look forward to returning capital to our stockholders in the year ahead as the Federal Reserve did not object to the proposed capital actions in our 2015 Capital Plan. Our Capital Plan and proposed capital distributions demonstrate the strength of Northern Trust's focused business model, financial position and commitment to stockholders."

Shares of NTRS popped to new multi-year highs on its Q1 report. Instead of giving back its gains the stock has been able to consolidate at these highs. Shares displayed relative strength again with today's +1.1% gain. Today's move is also a bullish breakout past resistance near $74.00. The point & figure chart is bullish and forecasting a long-term target of $86.00. Tonight we're suggesting a trigger to buy calls at $75.05.

- Suggested Positions -

Long JUL $75 CALL (NTRS150717C75) entry $2.15

05/05/15 triggered @ 75.05
Option Format: symbol-year-month-day-call-strike


Splunk, Inc. - SPLK - close: 65.73 change: -1.44

Stop Loss: 63.85
Target(s): To Be Determined
Current Option Gain/Loss: -7.5%
Average Daily Volume = 1.9 million
Entry on April 23 at $66.25
Listed on April 22, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/05/14: Uh-oh! The tech-heavy NASDAQ was an underperformer today. The NASDAQ composite lost -1.5%. Shares of SPLK fared even worse with a -2.1% decline. SPLK finally bounced near round-number support at $65.00. More conservative traders may want to raise their stop loss.

I'm not suggesting new positions at the moment.

Trade Description: April 22, 2015:
Big data and cyber security are buzzwords in the information technology industry. One firm appears to have found its niche providing solutions for both of them.

SPLK is in the technology sector. They are considered part of the application software industry. According to the company, "Splunk Inc. (SPLK) provides the leading software platform for real-time Operational Intelligence. Splunk® software and cloud services enable organizations to search, monitor, analyze and visualize machine-generated big data coming from websites, applications, servers, networks, sensors and mobile devices. More than 9,000 enterprises, government agencies, universities and service providers in more than 100 countries use Splunk software to deepen business and customer understanding, mitigate cybersecurity risk, prevent fraud, improve service performance and reduce cost. Splunk products include Splunk® Enterprise, Splunk Cloud™, Hunk®, Splunk Light™, Splunk MINT and premium Splunk Apps."

The company is seeing significant earnings momentum. Their FY2015 Q2 report in August beat analysts' estimates on both the top and bottom line. Revenues were up +51.7% from the year ago period. Management raised their guidance. They did it again with their Q3 results in November with a beat on both the top and bottom line with revenues rising +47.6% and SPLK raised their guidance.

The company's most recent report was February 26th, 2015. SPLK delivered their fiscal year 2015 Q4 results. Analysts were looking for earnings of $0.04 a share on revenues of $136.98 million. SPLK delivered $0.09 a share. Revenues soared +47.5% to $147.4 million. For the whole year (FY2015) SPLK's revenues were up +49%.

SPLK CEO and Chairman, Godfrey Sullivan, commented on their performance, saying, "We are proud to welcome more than 600 new customers to the Splunk family, which now includes over 9,000 customers around the world. We finished FY15 with strong performance across the board and posted our best quarter yet for both Splunk Cloud and the Splunk App for Enterprise Security. Our investments in cloud and solutions are helping to drive global customer adoption."

SPLK management raised guidance again for FY2016 Q1 and for the full year. They now forecast revenues above Wall Street estimates. SPLK expects 2016 sales to hit $600 million, which is a +33% improvement from 2015.

Wall Street is very bullish on the stock. Shares have seen a parade of upgrades and raised price targets. Here's a brief list of price targets: Deutsche Bank $80, JMP Securities $81, Citigroup $81, Wedbush $82, Morgan Stanley $84, Credit Suisse $85, Canaccord $86, and FBR Capital with a $90 price target on SPLK shares. The point & figure chart is only forecasting at $76 target but it could grow.

Technically SPLK has been consolidating sideways in the $60-65 zone the last couple of weeks. Today shares displayed relative strength with a +2.6% gain and a breakout past resistance near $65.00. I'm suggesting a trigger to launch bullish positions at $66.25. The levels to watch are potential overhead resistance at $70 and $75.

- Suggested Positions -

Long AUG $70 CALL (SPLK150821C70) entry $4.54

04/30/15 new stop @ 63.85
04/23/15 triggered @ 66.25
Option Format: symbol-year-month-day-call-strike




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