Option Investor
Newsletter

Daily Newsletter, Monday, 3/14/2016

Table of Contents

  1. Market Wrap
  2. New 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 Plays

Big Buybacks Coming

by Jim Brown

Click here to email Jim Brown
Editor's Note

Corporate share buybacks have been the major force in moving stocks higher in 2016. That is only going to increase with this company. Equity funds have been seeing withdrawals in 2016 and have been net negative in stock purchases. However, corporations have been buying back their stock every chance they get. That has been the only thing moving the market over the last month.


NEW BULLISH Plays


HPE - Hewlett Packard Enterprise - Company Profile

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "we saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

BUY HPE shares, currently $16.42, initial stop loss $14.50.




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Two Profitable Exits

by Jim Brown

Click here to email Jim Brown

Editors Note:

I warned we could see some profit taking on Monday after Friday's big gains to cap the week. The S&P dropped -10 points at the open and then moved up the rest of the day. Oil prices also declined as expected to pressure the markets.

We exited the Lions Gate and USO positions for decent gains. The USO dropped sharply at the open as a result of the overnight decline in oil prices and we were cheated out of some gains in that position but still exited with a win.

The day before a Fed decision is normally positive so I am hoping the market moves up sharply. The lack of any material selling today suggests a lot of investors bought the dip in expectations of the pre Fed rally.

Pre Fed rallies are not normally big gains but they are broad based.




Current Portfolio





Current Position Changes


CMRX - Chimerix

The long position remains unopened until CMRX trades at $5.75.


BBOX - Black Box

The long position remains unopened until BBOX trades at $14.25.


WIN - Windstream Holdings

The long position was entered at the open at $8.22.


LGF - Lions Gate Ent

The long position was closed at the open for a gain of $2.60 on the stock and $1.25 on the option.


USO - US Oil Fund

The long position was closed at the open for a gain of $.92 on the stock and $.19 on the option.


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


AMLP - Alerian MLP ETF - ETF Profile

Comments:

Down with a loss of a penny thanks to the drop in oil prices.

Tuesday 3/8 comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.

Optional

Long July $12 call, entry 55 cents. No stop loss.



BBOX - Black Box Corp - Company Profile

Comments:

BBOX still wander in its channel. Horizontal support at $13 remains unbroken. No news.

The position remains unopened until BBOX trades at $14.25

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.



CDW - CDW Corp - Company Profile

Comments:

Still fighting the moving averages but the short-term trend is still intact. The down trending 100-day is about to join the 150-day with resistance at $41. That could be a serious hurdle.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.

Optional

Long Apr $40 call @ $1.50, no initial stop loss.



CMRX - Chimerix - Company Profile

Comments:

Still holding over support with a minor gain today. Support at $5 was solid and we could reach the entry point at $5.75 next week.

This position remains unopened until CMRX trades at $5.75.

Original Trade Description: March 7th

Chimerix is a pharmaceutical company that discovers, develops and commercializes oral antivirals to address unmet needs in the USA. Their drug farthest along in testing was brincidofovir otherwise known as CMX001, which was planned for adult transplant patients to treat adenovirus infection. The drug did no better than a placebo in state 3 trials and they were cancelled.

However, there are other uses for that drug and they have multiple other drugs under development. This recommendation is not based on some super drug in their pipeline.

This is a technical trade based on the probability of either a sharp rebound or an acquisition.

As of today's close CMRX has a market value of about $250 million. At the end of Q4 they had $221 million in cash and $159 million in investments. The company has an estimated shareholder equity of $8.50 per share with no active drugs. With multiple drugs in the pipeline and continued research underway they represent a cheap acquisition for anyone who believes their drugs have promise. Because of their cash and investments that means any active acquisition would have to command a premium over that intrinsic $8.50 value. They do have a poison pill in place to prevent a hostile takeover but they would be open to a friendly acquisition.

They reported earnings on Feb 29th that were a loss of 82 cents compared to estimates for 68 cents. The company also said they were cutting 20% of the workforce (25 workers) in order to be "prudent with their capital."

Earnings are May 9th.

Shares traded to a low of $4.41 post earnings on the 29th and have risen steadily over the last five days with a 5% gain on Monday alone. I am recommending we buy the shares with a trade at $5.75 with our first exit target around $7.60 if no news appears. That would be a 32% gain if we exited there.

I am not recommending any options but the May $7.50 call is 65 cents.

With a CMRX trade at $5.75

Buy CMRX shares, initial stop loss $4.75.



DRII - Diamond Resorts Intl - Company Profile

Comments:

DRII managed another minor gain in a weak market. With 23% of the shares sold short there could be a significant rally soon.

Original Trade Description: March 10th.

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

With a DRII trade at $24.25

BUY DRII shares, initial stop loss $20.50.

No option recommended because of wide spreads and high prices. However, you could buy the shares and sell a covered call with the May $25 call @ $2.90.



DWRE - Demandware - Company Profile

Comments:

Another nice rebound from support but yet to recover the high from last week.

Target $43.25 for an exit.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.

Optional

Long April $35 call @ $2.70, see portfolio graphic for stop loss.



LGF - Lions Gate Entertainment - Company Description

Comments:

The position was closed at the open ahead of the movie opening on Thursday. There was a gain of +$2.60 on the stock and $1.25 on the option.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

Position 2/24/16 with a LGF trade at $21.25

Closed 3/14/16: Long LGF shares @ $21.25, exit $23.85, +$2.60 gain.

Optional

Closed 3/14/16: Long June $23 calls @ $1.50, exit $$2.75, +$1.25 gain



SGI - Silicon Graphics Intl - Company Profile

Comments:

SGI is still coiling under resistance at $6.85. Once it breaks out it could move fast.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

After stalling for five days at $38.50 oil prices finally cracked to trade as low as $36.68 intraday. The USO position dropped sharply at the open but we still escaped with a gain of 92 cents on the ETF and 19 cents on the option.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Closed 3/14/16: Long USO shares @ $9.00, exit $9.92, +.92 gain

Optional:

Closed 3/14/16: Long USO July $10.00 calls @ $.85. Exit $1.04, +.19 gain



WIN - Windstream Holdings - Company Profile

Comments:

Minimal loss after moving over resistance at $8 last week. Long term position, no rush.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Buy WIN shares, currently $8.22, initial stop loss $7.10

Optional

Buy August $9.00 call, currently .40 cents. NO STOP LOSS




BEARISH Play Updates


VXX - VIX Futures ETF ETF - ETF Description

Comments:

Weak market but volatility still fell. This suggests we should see a rally on Tuesday. We only need a couple positive days without any extreme volatility to hit the exit target.

The exit target is 19.50 to close the position.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
02/27/16 adjust exit target to $19.50
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82





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