Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/15/2016

Table of Contents

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

Market Wrap

Where was the Pre-Fed Rally?

by Jim Brown

Click here to email Jim Brown

Falling oil prices, negative economics and a head fake by the Bank of Japan combined to kill the historical pre Fed rally.

Market Statistics

The big oil rebound is fading after investors began to realize that Iran was not going to play along unless they got an exemption that allowed them to add 1.4 million barrels to their daily production. The production freeze is beginning to thaw even before an official agreement is reached. With the current month WTI futures scheduled to expire on Monday those still holding longs and hoping for a freeze agreement are going to have to sell.


The Bank of Japan failed to issue new stimulus to push their rates even further into negative territory. The BOJ left rates unchanged but said its assessment of inflation expectations had "weakened recently" which suggests they may increase stimulus again at some point in the future. However, they removed the language from the statement they used last time that warned further rate cuts were possible. This confusion over the potential BOJ moves caused Asian and European markets to decline.


In the U.S. the Retail Sales for February fell -0.1% after a -0.4% decline in January. Unfortunately, January sales were originally thought to have risen +0.2% but were revised to that -0.4% drop in this report. Declines were broad based including auto dealers, electronics and appliance stores, furniture stores, department stores and grocery stores. Sales at gasoline stations declined -4% because of the drop in fuel prices. Gains came from building supply stores, sporting goods stores and restaurants.

Sales compared to February 2015 levels are still showing gains. Sales are up overall +3.1% over the last 12 months. If you exclude autos that declined to +2.1% but if you exclude autos and gasoline it rises to +4.3%. Obviously, that is because falling gasoline prices skew the comparisons. The numbers are also impacted by extreme winter storms in February 2015 that depressed sales and producing an unfair comparison.

The Producer Price Index for February declined -0.2% after a +0.1% rise in January. Prices have declined 5 of the last 7 months. Goods prices declined -0.6%, services were flat at zero and core goods rose +0.1%. The year over year comparison was flat at zero on the headline number with goods prices declining -2.8%. Any version of goods relating to energy was off the scale in comparisons with intermediate unprocessed goods down -16.7% and core goods -25.8% all due to oil price declines.

Analysts believe the decline in inflation has reached a turning point and prices will rise from here. Commodity prices reached a level where it is unprofitable to mine or produce them and that has reduced production quantities and prices will rise. The same is true for oil prices. The rebound may be slow but the bottom in prices is behind us.

The NAHB Housing Market Index came in at 58 for March. That is the same level as February and the lowest level since last May. Buyer traffic rebounded from 39 to 43 and the biggest gain since June. The six-month expectations component declined from 64 to 61.

The biggest economic positive for the day was the NY Empire Manufacturing Survey. The headline number for March came in at +0.6 compared to estimates for -10.0 and the February reading of -16.6. That was the largest monthly gain in five years. That is the first positive reading for the headline number since July with a -19.4 reading as the low in January.

New orders rose from -11.6 to +9.6 and backorders rose slightly from -6.9 to -4.0. Employment declined slightly from -1.0 to -2.0. Analysts claim global recession fears appear to be fading despite continued weak economic growth. Also, the strong job gains in February have improved sentiment after the sharp drop in January that was also revised higher.


The two big events remaining for the week are the FOMC decision and press conference on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The Fed is the most important because of their guidance for the June meeting. While nobody expects a rate hike tomorrow there is a growing army of analysts that expect one in June. How Yellen phrases her guidance will be critical.


The disaster of the day was Valeant Pharmaceutical (VRX). The company reported adjusted earnings of $2.50 that missed estimates for $2.61. Revenue of $2.79 billion beat estimates for $2.75 billion. However, the company guided lower for the full year. They cut prior revenue guidance from $12.5-$12.7 billion to $11.0-$11.2 billion. They now expect to earn $9.50 to $10.50 a share. While that was troubling, there were other problems. In the actual earnings release, they projected adjusted EBITDA of $6.2 to $6.6 billion. On the conference call, they said it would be $6.0 billion. When questioned about the difference between the press release and the numbers on the call the company said, "It must have been a typo." They immediately put out a corrected press release.

The problem here is that the right hand does not know what the left hand is doing. Their constant restatement of numbers and downplaying the future has created a severe lack of confidence by investors. Also, they warned that "accounting problems" could force them to miss the deadline on their SEC filings and put them into technical default. A failure to file by the Tuesday deadline means that holders of at least 25% of any series of debt instruments could deliver a notice of default. That could cause lenders to accelerate the debt and place restrictions on future borrowing ability.

This is material because Valeant has more than $30 billion in net debt after allowing for cash on hand. Valeant said it was planning to pay down $1.7 billion in 2016, but that was also lower than the $2.25 billion they had previously guided. Valeant's market cap has fallen to $11 billion and now has a 3:1 debt to equity ratio. Valeant is also under investigation by the SEC for accounting irregularities and by several state agencies over high drug prices.

Shares declined another 51% on the news. This stock is down from $263 to $33 in only 7 months. Bill Ackman increased his stake in Valeant two weeks ago with a 14 million-share purchase. He now holds 30.7 million shares at an average price of $142.99 or $4.389 billion, which is now worth only $1.028 billion. He sent out a letter to shareholders this afternoon saying he was going to take a much more active role on the board and he still believes the company is worth several times its current valuation. That may be but it could take years to recover given the extreme blow to investor confidence.


The drop in Valeant caused biotech investors everywhere to run for the exits in nearly every biotech stock. The Biotech Index ($BTK) dropped -4% and succeeded in dragging the Nasdaq and the Russell 2000 down with it. The BTK has strong resistance at 3,000 and the support at 2,800 is likely to be broken with a retest of 2,600. This could continue to weigh on the major indexes and the market in general.


The one pharma stock that did not react to the news was Celator Pharmaceuticals (CPXX). After the close on Monday, Steve Cohen of Point72 Asset Management disclosed an 8.3% ownership position of 2.8 million shares. Shares rocketed +432% higher to $8.94 in trading on Tuesday. That increased the value of Cohen's stake by $20.7 million. With the stock trading at an average of about $1.75 over the last month, that stake was probably worth about $5 million before the spike. Bill Ackman, read it and weep.


Mead Johnson (NYSE:MJN) shares rose 11% on reports Danone and Nestle were interested in acquiring the nutrition specialist. Among other products, Mead makes Enfamil infant formula. Reports claim Mead is working with Lazard on a possible buyout. Danone and Nestle are locked in a price war and both lowered prices over the last year. That makes it tougher for companies like Mead to compete. Mead was spun off from Bristol Meyers in 2009. The good news is a bidding war between those two giants could push Mead's price higher.


Children's Place (PLCE) reported earnings of $1.19 that beat estimates for $1.11. Revenue of $498.5 million beat estimates for $497.2 million. They guided for the current quarter to earnings of $1.00-$1.06 and analysts were expecting 93 cents. The company also raised its quarterly dividend from 15 cents to 20 cents. Shares rallied +8.2% on four times average volume.


Redbox DVD kiosk owner Outerwall (OUTR) said it was exploring strategic alternatives and other financial options. A month ago a major shareholder, Engaged Capital LLC, urged the company to explore options including going private. The company also increased its quarterly dividend by 100% to 60 cents to give an implied yield of 7% in hopes of lifting its stock price. With streaming video replacing DVD rentals and phone companies giving tradeins on cell phones working or not, the company's DVD rental business is fading and the cell phone kiosks are losing money. Redbox is just one generation behind Blockbuster in obsolescence.


Terex Corp (TEX) rallied +7.4% after China's Zoomlion Heavy Industry Science & Technology Co Ltd raised its bid to $3.4 billion and added a special dividend of $1 to its prior $30 per share cash offer. Terex responded by asking for $32.75 in cash to terminate an existing merger agreement with Finland's Konecranes. It is unclear what Terex will do because some major shareholders have asked that it continue negotiations with Zoomlion in hopes of getting a higher price.


After the bell, Oracle (ORCL) reported earnings of 64 cents that beat estimates for 62 cents. Revenue of $9.012 billion missed estimates for $9.125 billion. Those numbers were down from $9.33 billion in the same period last year.

Oracle blamed the dollar for a significant impact on its results saying revenue would have been 1% higher on a constant currency basis. Revenues from cloud computing rose +40% to $735 million but software revenue declined -4% to $6.3 billion. Gross margins for the high growth cloud business are nearing 80% and that will help Oracle in the years to come. The company guided for earnings in the current quarter of 84-87 cents and analysts were expecting 82 cents.

With quarterly revenue falling for the fourth consecutive quarter the company is resorting to buybacks to lift the stock price. They authorized an additional $10 billion in their buyback program. Oracle is struggling to grow with old enemies Microsoft and IBM still around and Google, Salesforce and Amazon becoming an even greater threat. Shares rose $2 in afterhours trading.


Morgan Stanley (MS) strategists are becoming increasingly worried about a global recession and slashed their targets for the S&P from 2,175 to 2,050. They also said there was no reason to believe the current rally would continue. "Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities," the analysts said in the note. "The probability of a global recession has risen." They are putting the risk today at 30%.

Morgan Stanley sees the U.S. economy growing by 1.7% with the Eurozone growing 1.5%. Those estimates are down from 1.9% and 1.8% respectively. Emerging market growth expectations were cut from 4.4% to 4.0%. They believe the U.S. market is the safest port in the potential storm but a full-blown recession will cause all assets to be sold equally. They recommend consumer discretionary, utilities and financials as the best places to hide. To turn this into a positive comment there is a 70% chance there will be no recession.

Markets

What we have here is a failure to communicate. The Fed has failed to communicate in the many appearances by Fed speakers, a coherent strategy for future rate policy. One speaker says the Fed should exercise patience and the next one on the schedule says the Fed should accelerate its rate hike process. Several times a week we get these conflicting views and now nobody knows what to expect from the Fed this week.

The market is confused and traders have no conviction. While nobody expects a hike this week there is always the potential for a surprise. Instead of producing the normal pre Fed rally on Tuesday, investors moved to the sidelines. Decliners were 3:1 over advancers but conviction was sorely lacking. Volume on Monday of 6.3 billion shares was the second lowest of the year and today at 6.5 billion was only marginally better. Nobody was trading and it appeared even the high frequency traders were going dormant.

The S&P continues to hold just under the confluence of resistance at 2,020 with a 2,015 close. While there is no conviction to push it higher the opening dips on both days were bought. The Dow declined -108 at the open and ended with a gain of +22. The S&P and Nasdaq were negative because of the -4% crash in the biotech sector.

If Yellen puts on her dove costume and placates the market on Wednesday afternoon, we could move higher. However, there is significant risk in the guidance. If she pulls a Mario Draghi and develops foot in mouth disease, we could easily retest 1,990 or even 1,950. With Q1 earnings still four weeks away there is room to move to the upside if traders could develop some confidence in the future. A break through 2,020 could test 2,075 but that would likely be the spring high ahead of the sell in May season.


The Dow managed a gain thanks to Apple's $2 boost. Morgan Stanley upgraded the tech giant saying iPhone sales were being underestimated and they reiterated their $135 price target. The Dow is holding the recent gains thanks to stocks like Home Depot, Johnson & Johnson, Procter & Gamble and Microsoft. They are seen to be somewhat recession proof and are considered safe havens.

Financials are up one day and down the next so support from that sector has been unreliable. The Dow is holding over 17,135 and approaching resistance at 17,300. A breakout on some positive Fedspeak could take it to 17,775.



The Nasdaq is suffering under the burden of the biotech crash. In the losers list below the vast majority of the big losers are biotech and pharma stocks. Until the biotechs find a bottom the Nasdaq will be weak.

The Nasdaq Composite is wandering around at the 50% retracement level of 4,691 and cannot seem to move too far away in either direction. There is major resistance at 4,806 and the 61% retracement level, which is also the 100-day average. Any breakout from the current congestion is going to find a ceiling there. Support is the 4,600 level and just over the 38% retracement level.



The Russell is building quite a solid top at the 1,078 level. The Russell is being pressured by the decline in energy stocks and biotechs. We have seen several spikes above 1,078 but each is immediately sold. The 1,064 level has emerged as initial support but that may only be temporary. Note that the RSI is weakening and the MACD is rolling over.


Our fate rests in the words from Janet Yellen at 2:30. She can make or break the market for the rest of the week. Just remember that the initial move after the 2:PM announcement is typically a head fake. The real direction will come after she speaks at 2:30.

There may also be a market reaction to the results of the Tuesday primaries. As I write this Trump appears to be ahead everywhere but Ohio and Rubio has suspended his campaign.

I would recommend holding off on adding new positions until Thursday. There is no reason to jump into traffic when the direction can change every 5 minutes. There is always another day to trade if you have money in your account.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Playing in Traffic

by Jim Brown

Click here to email Jim Brown

Editors Note:

Volatility on Wednesday is going to be the equivalent of playing in freeway traffic. It could be hazardous to your financial health. The Fed decision at 2:PM and Yellen press conference at 2:30 will be the highlight of the day. Typically there are strong moves in both directions after those Fed events.

We already have a full portfolio and I do not want to add new plays only to see them stopped out before the day is over. We need to be wise stewards of our trading accounts and only launch new plays when there is at least a chance of knowing market direction.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Not What We Expected

by Jim Brown

Click here to email Jim Brown

Editors Note:

The negative economics and falling oil prices killed the potential for a pre Fed rally. The historical trend was broken today and market internals were a lot more negative than the closing indexes would suggest. Decliners were 3:1 over advancers but volume was still light. Monday was the second lowest volume day of the year. Everything now depends on the Fed on Wednesday and how Yellen phrases the guidance.



Current Portfolio




Current Position Changes


CRM - SalesForce.com

This long position was entered at the open at $71.78.


CAB - Cabelas

This long position was stopped out on the drop to $48.65 on the weak retail sales numbers for February.


DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.


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:

No material movement in a weak market. No news.

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:

Cabelas broke support to stop us out at $46.85. There was no news relative to Cabelas but the entire retail sector crashed after the weak Retail Sales report for February.

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

Stopped 3/15/16: Long April $50 call, entry $2.07, exit .75, -1.32 loss


CRM - SalesForce.com - Company Description

Comments:

CRM dipped at the open with the market to give us a better entry point.

Original Trade Description: March 14th.

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


DLPH - Delphi Automotive - Company Description

Comments:

Nice gain in a weak market after bouncing off support at $67. UBS upgraded to neutral.

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 again today. Resistance at $65 was broken. 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.

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 another rare decline but nice bounce off the lows.

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 $108.35.

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:

Shares gave back Monday's gains after the retail sales report disappointed. No Kors specific news.

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 on the retail sales report.

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. Down with the Nasdaq. 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:

Drop back to support after a big drop in the Nasdaq. 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:

Big decline in a weak market despite new coverage initiated by Lake Street with a buy rating. 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. Minor decline with a drop back to initial support at $54.

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:

Another retail sales report casualty with a $1.57 drop that erased two days of gains. No news.

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:

There was only a minor gain in the VXX even though the markets were choppy. The lack of a pre Fed rally was depressing.

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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