Option Investor
Newsletter

Daily Newsletter, Monday, 3/14/2016

Table of Contents

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

Market Wrap

Waiting For The Fed, Again

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Today's market action was light and in a tight range as trader wait on the FOMC once again.

Today's action is a positive sign for us bulls considering the drop in oil prices, but comes with a few caveats; namely the candles formed are indecisive little spinning tops, there is an important FOMC policy announcement in two days and a whole lot of data due out this week.

The international markets were not as indecisive as ours. Asian indices climbed by roughly 1.75% driven by last week's ECB move and positive data from China. China reported over the weekend that industrial production grew by 5.4% and retail sales grew 10.4%. Another positive for China; regulators say they won't relaunch market circuit-breakers for a few years to come. In Europe trading was choppy but left the indices in positive territory, buoyed by last week's ECB move and hurt by falling oil prices. The move was led by the DAX with a gain of about 1.6% which is now trading at 2 month highs.

Market Statistics

Futures trading indicated a flat to slightly negative open for the US indices all morning. There was very little fluctuation in the pre-market, even with the volatility seen in the oil pits. The open was quiet and without much fanfare, indices fell below break even in the first half hour of trading but found their footing by 10AM. Early losses were in the range of -0.5% for all the indices and by noon this was whittled down to -0.25% or less; many of the indices were able to poke their heads into positive territory by this point of the day. Afternoon trading saw the indices drift sideways at or above break-even levels into the close of the day.

Economic Calendar

The Economy

No official economic today but not to worry, there is plenty to move the market later this week. The biggest event on the calendar is the FOMC meeting and policy announcement on Wednesday. As of this morning there is a 0% chance of a rate hike according to the CME's Fed Watch Tool and a 4% chance they will lower it. The probability of rate hikes go up the further out I look, the April meeting has a about a 25% chance of a rate hike and the June meeting about 50%.


Data points to be aware of include PPI and CPI due out tomorrow and Wednesday, before the Fed announces their decision. Signs of inflation will definitely point to rates rising sooner rather than later. Also on tap and important in terms of rate hikes are the Retail Sales figure, due out tomorrow, 5 reads on business/manufacturing, housing starts/building permits, Leading Indicators, Michigan Sentiment and the weekly jobless claims.

Moody's Survey Of Business Confidence gained 1.7% this week, the fourth week of gain since hitting bottom in February. This week's reading is 30.9% and is the highest level in almost 2 months. According to Mr. Zandi's commentary sentiment is firming along with the global financial market rally and that responses to all questions have shown improvement. Forward outlook remains positive with most businesses expecting improvement in conditions into the summer months at least.


According to data from FactSet 4th quarter 2015 S&P 500 earnings growth stands at -3.4% with one company left to report.

The estimated rate of growth for the 1st quarter of 2016 has been revised lower once again, to -8.3% from -8% last week. There are 6 companies scheduled to report this week for the 1st quarter. Since the beginning of the quarter estimates have fallen sharply from +0.3% driven by downward revisions in all 10 sectors, led by the energy sector. The energy sector has seen earnings declines estimates more than double in that time. Ex-energy the index is expected to show earnings decline of only -2%.


Looking out to the end of the year earnings growth continues to be revised lower as does full year expectations. The 2nd, 3rd ad 4th quarters are expected to see earnings growth in the range of -2.2%, +4.2% and +9.0% with the important factor being a return to positive growth in the 2nd half of the year. I'm still looking for the elusive bottom and exit to the ongoing earnings recession; for now it looks like the 2nd quarter is it but if oil prices don't hold up, or some other negative factor emerges, this could quickly change.


The Oil Index

Oil prices fell today, about -5% at the low of the day, on remarks from Iran. Iran says that OPEC and the rest of the world should leave it and its oil production levels be, putting a fly in the ointment for those counting on an OPEC/Russia deal to freeze production levels. Despite the headline there was some support present in the market and stepped in to drive prices back above $37 before the close of the day. WTI closed with a loss near -3.25% and above $37.25. For now oil price is in the hands of speculators, driven by rumor and hope. Fundamentally the outlook is still bearish as indicated by the news issued from Saudi Arabia over the weekend and this morning; they are still producing record amounts of oil and they see 2016 demand lower than previously estimated.

The Oil Index fell about -1% in today's session but is holding near the recent high. Falling oil prices could pull this index lower but so long as they hang at/near current levels should support the energy sector and hopes of improving earnings over the next few quarters. Today's action is supported by bullish indicators, positive momentum is holding steady and stochastic is making a bullish crossover at the upper signal line, and could lead to higher prices but that is dependent on oil prices. If the index is able to move higher next resistance target is near 1,125, support is near 1,025 should it pull back.


The Gold Index

Gold prices pulled back nearly -2% in today's session but remain above $1225. This move is in anticipation of the FOMC meeting and likely profit taking and/or protection seekers getting ready for whatever it is they (the FOMC) is going to do. In my view it will take an overtly hawkish fed and/or hotter than expected data to strengthen the dollar and move gold lower. With the ECB delivering what looks like their last blast, and the FOMC not expected to raise rates until the summer or later, I really don't see the dollar strengthening much, or gold falling much further without some surprise factor coming into play. Downside target for support is near $1225 and then $1200, upside target is near $1280 with a chance that gold will remain range bound at/near current levels until another rate hike becomes more certain.

The Gold Index fell about -4% today but remains above the $19 level. The index has been in consolidation between $19 and $21 for the past two weeks and is waiting on the FOMC to dictate direction. If hawkish sounding the dollar is likely to rise and drive gold and the gold index lower, if dovish the opposite. The real risk is for them to be neither hot nor cold in their statement, as they were at the last meeting, and leave gold prices in limbo at current levels. The indicators have been weakening over the past few weeks and are pointing lower, ordinarily a negative sign, but with the FOMC outcome uncertain are relieving overbought conditions which could allow the index to hold these levels indefinitely.


In The News, Story Stocks and Earnings

The Dollar Index rose about a half percent today but remains weak and indicated lower. Today's action shows support near $96 but this support could evaporate quickly once the FOMC policy statement is released. Another factor in play is the BOJ meeting and their policy statement, due out tomorrow. They may increase QE but are in similar position as the ECB; how much more can they do, how much more can they indicate they will do, without doing more harm than good to the economy. Current support in the DXY is near $96 with next target near $95.50 and then $94. Resistance target is near $97.25 and the underside of the short term moving average.


Starwood Hotels received an unsolicated bid from a consortium of Chinese investors led by Anbang, purchaser of the Waldorf Astoria in 2014. The bid presents a premium to Starwood's closing price last week and is above the price offered by Marriot. The Marriot deal is still in the works although negotiations have begun with Anbang. The consortium has offered to buy all outstanding shares for $76 each, about $13 billion, and Starwood would be responsible to pay a $400 million fee to Marriot if it pulls out of the deal. The news caused a surge in shares of Starwood whiched gapped up at the open and closed with a gain of 7.82%.


The Fresh Market announced it would be purchased by Apollo Group today in a deal worth $1.36 billion. The deal would acquire shares of TFM at $28.50 in cash and effectively ends Krogers bid for the company. The board of directors approved the deal unanimously which is expected to close sometimes next quarter. Shares of TFM surged more than 23% to trade just shy of $28.50.


GW Pharma announced positive results for a cannabinoid drug intended to treat childhood epilepsy. The drug reduced the frequency of seizures among a certain class of patients by 39% in a phase III trial and has opened a path to USDA approval. The news was well received by the market as it may lead to additional uses of medicinal marijuana and drove shares of the stock up by 120%.


The Indices

Today's action was very light, and in light of the fact we have an important FOMC meeting at hand to be expected. Today's candles, across the board, are small and indicative of indecision or pause in the market with no one index closing with more than a 0.1% move in either direction. The biggest loser was the S&P 500. The broad market closed with a loss of -0.13% after trading in a very tight range all day. Despite the loss the index was able to set a new 2.5 month intraday high and close just above the 2018 resistance target. The indicators remain bullish and pointing higher so it looks like, at least for now, that the index wants to continue moving higher. The caveat of course is the FOMC meeting. Next upside target is near 2,050 with first downside target near 1980 should a pull back occur.


The next biggest lose in today's session is the Dow Jones Transportation average although it closed closer to flat than not. The transports finished the day down -0.03% and created a very small spinning top candle. This index is riding a wave of strong momentum that could carry it higher although at the present time declining momentum and weakening stochastic are reason to be cautious. Over the past two weeks it has been inside a consolidation zone with boundaries at 7,500 and 7,750, so long as it remains inside this zone declining indicators are a good thing and could set it up for another move higher. A break below this zone could lead to a pull back to support, possibly as low as 7,000, with an upside target near 8,400 should a break to the upside occur.


The days smallest gainer is the NASDAQ Composite which closed up by 0.04%. The tech heavy index created a very small candle but was able to set a new 2.5 month high which, along with bullish indicators, suggest a test of the 4,800 level could be at hand. The indicators are bullish; MACD is positive and stable, stochastic is flat and high in the upper signal zone but both show signs the rally is running out of steam. At best this is indicative of a pause and consolidation, at worst it will precede a pull back to support. If the index pull back to support first target is near 4,625 and the short term moving average with next target near 4,500. If the index can break above the 4,800 level next target for resistance is near 5,000.


The day's biggest gainer was the Dow Jones Industrial Average. The blue chips were able to move higher by 0.09% and set a new 2.5 month high. Despite setting a new high resistance at the 17,230 level is present and may keep it from moving higher although the indicators are bullish. A break above this level would have a target near 17,650 while a failure to break could find support as soon as 17,000.


The market has been rallying over the past month and looks like it wants to move higher. The rally is losing steam but that is because the market is focused on the FOMC meeting and policy statement scheduled for Wednesday. How the market reacts to the news is hard to say; we need growth for the market to keep moving higher, but we need that growth to be just right in order to keep interest rate hikes at bay.

Aside from the FOMC meeting there are two other factors at play that need to be monitored. One is oil prices. While oil prices are up and the energy sector is up they are helping to support the broader market and the rally. If oil trading reverts to the fundamentals and falls back to retest lows it could derail the rally. Another, and the one I think more important and also affected by oil prices, is earnings outlook.

Earnings outlook continues to weaken. While it is weakening there is little reason to expect a rally in the near term. Longer term growth is in the forecast, giving reason to believe the January/February bottom is solid, but until we enter an actual period in which earnings are expected to grow the market remains vulnerable to correction.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Managing Customers

by Jim Brown

Click here to email Jim Brown

Editors Note:

The days of the Rolodex are over and the Internet is making it more important for salespeople to stay in continuous touch with their clients. You can no longer count on your sales people to page through their client files and make the right calls to the right people at the right time. After several decades of dozens of standalone call management software programs the cloud has put state of the art tools in the hands of everyone.


NEW DIRECTIONAL CALL PLAYS


CRM - SalesForce.com -
Company Description

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Buy May $75 call, currently $3.15, initial stop loss $66.85


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Ready to Rumble

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P held its gains from last week and held right at resistance at 2,020. The lack of a material drop suggests there are gains ahead. I was expecting a bigger bout of profit taking today after Friday's big gains to cap off a volatile week.

The S&P dropped -10 points at the open but it was quickly bought and prices moved up slowly all day as traders consolidated positions ahead of the Fed. There was a -5 point drop right at the close to knock the S&P back into negative territory with a -2 point loss.

By holding the gains from last week this suggests investors are expecting the historical pre Fed rally on Tuesday. Let's hope they are correct.



Current Portfolio




Current Position Changes


DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.


NTAP - NetApp

This position was entered at the open at $26.78.


KR - Kroger

This position was entered at the open at $38.43.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AKAM - Akamai Technologies -
Company Description

Comments:

Akamai cannot seem to gain any traction in the choppy market. The Dow only had one day of real gains last week and that was Friday and AKAM was up sharply on Friday. Shares are simply trading with the market.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.


AON - AON Plc - Company Description

Comments:

No material movement in a weak market. No news.

Original Trade Description: March 9th.

AON offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services globally with operations in more than 120 countries.

Q4 earnings of $2.09 were up +34%. Revenues of $3.28 billion narrowly missed estimates for $3.33 billion due to the impact of the strong dollar. The dollar reduced earnings by 10 cents. They repurchased 4.2 million shares for $400 million. For the ful lyear free cash flow increased 10% to a record $1.7 billion.

The CEO said in the earnings release "In a year of substantial earnings volatility driven by macroeconomic factors and industry headwinds, investments in our industry leading platform contributed to our strongest rate of organic growth in Risk Solutions since 2007."

Earnings April 29th.

I have wanted to add AON as a position since their post earnings spike in early February but the stock just kept climbing. The last three days provided some consolidation and allowed the call premiums to shrink. I believe AON will continue higher out of this consolidation period to test resistance at $102.50, which would be my exit target.

I want to see a trade at $99.50 to insure we do not enter a new play just as the market rolls over. That is closer to the preferred strike price so the option is going to cost a little more than the price listed below.

Position 3/10/16 with an AON trade at $99.50

Long April $100 call @ $1.70, initial stop loss $97.75


AOS - AO Smith - Company Description

Comments:

No material movement in a weak market. No news.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


CAB - Cabellas - Company Description

Comments:

No material movement in a weak market. No news.

Original Trade Description: February 17th.

Cabelas is a specialty retailer and direct marketer of hunting, fishing, campiny and related outdoor merchandise. They operate more than 77 retail stores and a large e-commerce website along with direct mail catalogs. They also have a very profitable financial services segment offering a Cabelas Club Visa credit card.

The company has expanded profitability by moving most of its merchandise to its private label brand. Instead of being North Face, Coleman, Redwing, etc, everything is manufactured and sold using the Cabelas label.

Cabelas reported Q4 adjusted earnings of $1.26 that beat estimates for $1.22 per share. Revenue of $1.41 billion also beat estimates for $1.36 billion. Full year revenue was $4 billion and earnings of $2.67.

Merchandise sales rose +10.1% and retail store revenues rose +14.3%. same store sales comps rose only 4.9% because of the unusually warm weather that depressed the sale of cold weather clothing. Financial services revenue rose +15.7% with a 21.3% increase in interest collected. The number of active Visa accounts rose +14.4%.

The company guided for revenues to rise at a high single digit rate with earnings per share to grow in low double digits.

Cabelas shares from a low of $39 in the February dip to close at $48.40 today. I know that is a 25% jump in three weeks but I believe there is more to come. Shares are facing resistance at $48.75 but a breakout there could return to the March 2015 highs around $58. I recommend we position ourselves for the potential breakout.

Earnings are May 21st.

Position 3/3/16 after a CAB trade at $49.05

Long April $50 call, entry $2.07, see portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

Minor decline in a weak market. No news.

The position remains unopened until DLPH trades at $72.50.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.


EA - Electronic Arts - Company Description

Comments:

One of the few gainers today. Resistance still at $65. No news.

Target $70.35 for an exit.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.


EMR - Emerson Electric - Company Description

Comments:

Still holding its gains. Next target is resistance at $52.35. Awarded a contract to automate the Maersk Oil Culzean gas field.

Maersk and its co-venturers are investing around $4.5 billion in the Culzean development. Three offshore platforms will support 12-slot wellheads and house a central processing facility, control room and living quarters. As the main automation contractor, Emerson will provide automation services and technologies for the three offshore platforms as well as for an onshore observation facility that can support remote operations if needed.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, entry $1.60, see portfolio graphic for stop loss.


HPQ - Hewlett Packard - Company Description

Comments:

HPQ posted a rare decline but it was minor.

Exit the position with a trade at $12.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



JNJ - Johnson & Johnson - Company Description

Comments:

New 15-month high intraday at $108.30. Upgraded by Goldman Sachs.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KORS - Michael Kors - Company Description

Comments:

New 9 month high intraday on Barrons article predicting another 30% gain. Shares came within 36 cents of our exit target.

Target $59.85 for an exit.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.

Target $59.85 for an exit.


KR - Kroger - Company Description

Comments:

Minor decline after a big gain on Friday. News broke that a PE firm was acquiring Fresh Market and Kroger had lost out in the bidding.

Original Trade Description: March 11th.

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss


N - NetSuite - Company Description

Comments:

Still fighting resistance at $64.50 but on the verge of a breakout. No news.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


NTAP - NetApp - Company Description

Comments:

Minor decline in a weak market after gains the prior week. Resistance at $27 still the current barrier.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.


PII - Polaris Industries - Company Description

Comments:

Minor decline after a good move last week. Purely market related.

Target $105.85 for an exit.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

Still testing resistance at $55. If we can move convincingly over that level we could get some additional short covering.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

Continued relative strength with a close at a 4 month high. No news.

The company is presenting at the BAML Consumer and Retail conference on March 15th a 2:40 PM ET.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

With a QSR trade at $38.15

Buy April $39 call, currently $1.10, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

We saw a decent drop in the VXX even though the markets were choppy. If the pre Fed rally come as expected on Tuesday we could hit our exit target tomorrow.

Because we are running out of time on the March put, I have an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally do not move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss






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