Option Investor

Daily Newsletter, Tuesday, 7/8/2014

Table of Contents

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

Market Wrap

Small Cap Reversal?

by James Brown

Click here to email James Brown

The U.S. stock market accelerated lower for its worst two-day drop in weeks. Suddenly everyone's worried about a correction with small caps leading the way. Market Statistics:

Stocks do not need a reason to go down. That was a common thought discussed in the financial media today. A few pundits suggested that stocks were weak thanks to disappointing economic data out of Germany. All of the European markets were down across the board with Britain, Germany, and France all down -1.25% or worse. European banks were leading the decline with a -6% plunge in the last three days.

Mike Santoli of Yahoo Finance suggested that the market rally was just tired and we were due for a pullback. His thoughts echoed several Wall Street analysts this morning. Jeffrey Saut, chief investment strategist at Ramond James, said "I think we are vulnerable to a 10 percent to 12 percent decline in the weeks ahead." Citigroup also voiced concerns of a "severe" pullback in U.S. stocks. Elliot Spar, with Stifel, Nicolaus & Co, probably said it best with his comment, "This market could go down for any reason or no reason at all. It looks like we got the latter."

Small cap and momentum stocks led the decline today. The Russell 2000 index fell -1.22% and the NASDAQ composite lost -1.34%. The volatility index (VIX) was up +10% intraday and settled with a +7% gain. This puts the VIX two-day gain at about 20%. To keep that in perspective the VIX is only up a couple of points from last week's seven-year low.

Money was looking for safe havens and U.S. bonds were the winner. The yield on the 10-year bond dropped to 2.56% today. Precious metals and oil all closed in the green but the gains were so small we might as well say they were unchanged on the session. Gold ended the day at $1,316.60 an ounce. Silver closed at $21.02. Oil settled at $103.36 a barrel. Art Cashin warned investors to keep an eye on the 10-year bond yield. A drop under 2.55% could be a warning signal.

Momentum stocks and high-beta names were the market's worst performers today. Market watchers were quick to speculate if we might see another correction in the momentum names like the one we saw in March. Just four months ago the momentum names were crushed with a six-week sell-off that left large chunks of the market relatively unscathed. After a huge bounce from their April lows many of these momentum names were trading at lofty valuations.

Facebook (FB), the world's biggest social network, is trading at 43 times forward earnings. FB closed down -3.8% today and it's down -7.7% from its July 1st close near $68. Yelp Inc. (YELP), an online business and restaurant guide, is trading for 70 times forward earnings and shares plunged -6.6% today. YELP is down -10.9% from its July 2nd close near $79.40. Shares of Pandora (P), one of the largest online streaming music companies, trades for 150 times forward earnings and the stock crashed -7.3% today and is off -13.5% from its July 2nd close near $30.

A few of the market's biggest decliners today are:

It was a quiet day for economic data in the U.S. so investors took the cues from overseas. Unfortunately Europe continues to struggle with a slowing economy. Yesterday Germany reported a disappointing number for its industrial production. Economists were expecting a small gain but German industrial production fell -1.8%. Today Britain followed suit and reported a negative industrial production number, down 0.7%. Germany is also seeing a slowdown in exports. May exports were down -1.1% and imports dropped -3.4%. Meanwhile the Organization for Economic Cooperation and Development (OECD) said their leading indicators for Germany dropped for the third month in a row.

This slowing momentum in Germany is a major warning signal for Europe. Germany has been the growth engine for the region. They have the biggest economy and account for almost 30% of the Eurozone's GDP. If Germany is struggling to keep growth alive what does that say for the rest of the region? Most of the southern European nations are already in recession.

Back home in the U.S. we did see Richmond Federal Reserve President Jeffrey Lacker making headlines. Lacker is currently not a voting member on the Federal Open Market Committee but analysts were still listening as they try to glean clues to the Fed's next move. Lacker spoke at an event in North Carolina today. In his speech he said inflation had likely bottomed and would start to move higher. He did express concern over the lack of growth. Lacker confessed that his previous estimate for growth above 3 percent in the near future "is unlikely" and expects U.S. growth in the 2 to 2 1/2 percent range. Lacker concluded with,

"I expect growth to continue at about the modest pace we've seen over the first five years of this expansion. While the acceleration that many have been forecasting for right around the corner would be welcome, that scenario seems less likely than a scenario in which growth continues to be held back by household cautiousness, low productivity growth and restrained housing markets."

One of the biggest stories today was the demise of Crumbs. A few years ago the gourmet cupcake fad exploded in major metropolitan areas. Crumbs Bake Shop (Crumbs Holdings, symbol: CRMB) came to market right at the peak of the fad in 2011. The stock's IPO price was $13 a share. Today it settled at 4 cents as the company announced it was shutting its doors.

When CRMB went public they had 37 stores in six states. They quickly ballooned to over 50 stores in 10 states. The future looked bright as customers rushed to pay upwards of $4.50 for a 4-inch, 600 calorie cupcake. Unfortunately fads normally fade and this one was no different. The company lost $10.3 million in 2012. That surged to a -$18.2 million loss in 2013. Rising competition and the post-craze drop in traffic was a one-two punch that CRMB could not recover from.

(CRMB's stock price history and the last remaining CRMB cupcake)

At least someone in New York must be a Rahm Emanuel fan and acting on the idea, "never let a serious crisis go to waste." An ingenious eBay seller has listed what they claim could be the last Crumbs Bake Shop cupcake up for auction. The eBay listing reads,

"Crumbs is shutting its doors forever, leaving behind nothing but... well, crumbs. Except for this last, precious cupcake -- the Holy Grail of confections from chain bakeries that have closed.

Bid on this still-delicious soon-to-be relic, and you'll be able to tell your grandchildren that you devoured the last Crumbs cupcake."

You can view the eBay listing here. The current bid is a surprising $250.00.

Tesla Motors (TSLA) was also in the news after the Beijing Municipal Science and Technology Commission issued a new report on their plans to build 10,000 electric car charging stations by 2017. Unfortunately for Tesla the current designs do not fit Tesla's cars. China wants to desperately solve their air pollution crisis. Promoting electric vehicles is a great step. Yet there is no worldwide agreed upon standard for rapid-charging systems. Europe, the U.S., Japan, and Tesla all have different configurations. China's will be the fifth proposed standard. In other news Tesla is also being sued by a Chinese businessman who had registered the trademark Tesla in China. The businessman is currently suing Tesla to stop selling and marketing cars in China. The case goes to court on August 5th.

chart of Tesla (TSLA)

Alcoa (AA) is the largest producer of aluminum in America. They officially kicked off the Q2 earnings season tonight. Wall Street has been bullish on the stock. The company has beat earnings estimates eight out of the last ten quarters. They did it again tonight. Analysts were expecting a profit of 12 cents a share for the second quarter. AA delivered 18 cents. Revenues came in at $5.84 billion, which was better than the $5.65 billion estimate.

AA has been trying to transform themselves and building up their value-added business. This division for AA just delivered their best quarter ever. This "downstream" business accounts for 59% of Alcoa's revenues but 70% of its profits. Alcoa is forecasting strong growth in the aerospace industry of 8 to 9% this year. They also reaffirmed their forecast for 7% growth in global aluminum demand in 2014. The stock ended today at $14.85 and is currently trading near $15.00 after hours. AA shares have surged +39 percent this year versus a +6.2 percent gain in the S&P 500 and a +2.7 percent climb in the Dow Jones Industrials, which AA used to be a component.

chart of Alcoa (AA)

Major Indices:

The S&P 500 lost -0.7%. It's down about 21 points from last week's closing high of 1985. That's only a one percent pullback and yet people are already waving the correction flag. That seems a little premature. The S&P 500 did bounce near short-term support at 1960, which happens to be near the bottom of its short-term bullish channel.

If this index breaks down below 1960 and its 20-dma (currently near 1957) then we could be in for a drop toward its 50-dma closer to 1920. If 1920 fails then 1900 should be round-number, psychological support. A drop to 1900 would only be a -4.2% decline. In a normal stock market we tend to see a -10% correction once or twice a year. Currently the S&P 500 has not seen a 10% pullback in over 1,000 days.

chart of the S&P 500 index:

Intraday chart of the S&P 500 index

The pullback in the NASDAQ composite index looks a lot uglier with a -1.3% drop. You can see where the index bounced off its prior March 2014 peak, which is an area that also coincided with its 20-dma on the daily chart. The NASDAQ is down almost 100 points from last week's high. That is a -2% drop in two days. Thanks to the underperformance in the momentum names everyone is suddenly worried we might see another sell-off like the one in March where the NASDAQ lost almost 9% (to its April lows).

If the NASDAQ breaks down below the March peak then 4300 is the next likely level of support. A really ugly drop could pull the NASDAQ down to its long-term trend line of higher lows on the weekly chart.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index ($RUT) had everyone's attention today. Small caps underperformed with a -1.2% decline. This index is already down almost 3% from last week's closing high. Not only has the $RUT reversed hard at resistance near its March peak but today's drop has broken a multi-week trend line of higher lows.

Jim warned readers in his weekend commentary that if the $RUT failed near its March peak it could form a bearish double top pattern. Odds of a double top just skyrocketed with this sharp, two-day reversal in the $RUT. This index did bounce near its 30-dma today but the nearest support could be down in the 1040-1050 area. This area should be underpinned by its 50-dma and 200-dma.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Looking at tomorrow there will be a lot of focus on the Federal Reserve's minutes from the last FOMC meeting. Last month the Fed reduced its QE program by another $10 billion, which was expected. At the current pace the Fed's QE program will end this year. The market has been trying to speculate on when the Fed will start raising interest rates. In the last two weeks we've seen some major banks move up their estimates on when the Fed will start to hike rates. Instead of the second half of 2015 there are more analysts expecting a rate hike in the first half of next year.

In the past when the market suddenly worried about the Fed hiking rates sooner than expected the market sold off. That doesn't appear to be the case today. The U.S. hasn't seen a rate hike since 2006. As long as inflation remains tame the Fed should be in no rush to raise rates. The minutes will hit the news wires around 2:00 p.m. eastern tomorrow.

The market does face geopolitical risk. The fighting continues in Ukraine between the Kiev government and pro-Russian rebels. The U.S. stock market also continues to ignore the civil war brewing in Iraq. What about Israel? Will stocks remain this sanguine if the situation between Israel and Gaza escalates?

Over the weekend Hamas, a Palestinian terrorist group, fired dozens of rockets and mortars into Israel. The Israelis responded with airstrikes on Hamas weapon sites and tunnels used to attack Israel. Today Hamas managed to launch rockets into Tel Aviv. There is new intelligence that would suggest Hamas now has up to 400 long-range rockets. That is four times more than Israeli intelligence estimated. The rockets that landed in Israel's second biggest city did not kill anyone but Israel is considering an invasion into Gaza before they do. The Israeli military is calling up 40,000 reservists for a potential ground assault.

Odds are investors will ignore the geopolitical headlines tomorrow and focus on the stock market technicals and earnings season. Currently analysts expect S&P 500 companies to deliver 5 percent earnings growth in the second quarter and 3 percent revenue growth. Thus far there have been four negative earnings pre-announcements for every one positive pre-announcement. One has to consider the idea that all the bad earnings news is already priced in. All of the negative earnings pre-announcements has already lowered the bar and we might actually see stocks rally on earnings news. Of course the real key will be guidance. The second quarter is already in the rearview mirror. Investors want to know what corporations are expecting for the second half of 2014. The pace of earnings will pick up speed next week.

In other news the Wall Street Journal turned 125 years old today. Their first issue was July 8th, 1889. It cost two cents for all four pages. You can view the front page of their first issue right here.


New Option Plays

An Ugly Day For Small Caps

by James Brown

Click here to email James Brown

Editor's Note:

We are seeing a divergence in the market again. Stocks have delivered a two-day pullback this week. Yet the S&P 500 index is only down -1% from last week's record highs. The small cap Russell 2000 index is down nearly -3%. The NASDAQ composite is down -2%.

Do investors have cold feet ahead of the Q2 earnings season? Are they worried about corporate results missing expectations? Of is this just normal profit taking after last week's rally?

The two-day drop has erased about one week of gains in the NASDAQ and only about three days of gains for the S&P 500. It feels a little early for all the chicken littles to be crying "market correction" right now.

That doesn't mean I would jump into new bullish positions tomorrow. Corrections can be sharp and ugly. I'd rather wait and watch for a bounce before considering new positions.

No new positions tonight.

In Play Updates and Reviews

Stocks Accelerate Lower

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's profit taking accelerated on Tuesday. Momentum names were the market's worst performers today.

SYNA hit our stop loss.

Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 95.35 change: -0.62

Stop Loss: 88.80
Target(s): To Be Determined
Current Option Gain/Loss: +24.6%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: AAPL spiked to a new two-year high this morning but gains faded as the market dropped. AAPL managed to pare its losses with a bounce from its midday lows.

I am not suggesting new positions at this time. Investors need to decide. Will you exit your calls as AAPL near resistance at the $100.00 mark? Or will you hold on as until we get closer to the expected iPhone 6 product launch in September.

Earlier Comments: June 28, 2014:
You don't get any more high-profile than Apple Inc. (AAPL). Many consider AAPL a technology company but they are known for their consumer electronics. Their ecosystem continues to grow with iPods, iPads, iPhones, Macintosh computers, Apple TV, and soon Beats music headphones and possibly an iWatch.

Right now the market is focused on Apple's upcoming launch of its next iPhone, rumored to be the iPhone 6. It's also rumored to be coming out on September 19th. Everything seems to be a rumor these days when it comes to Apple's next product. Right now the big rumor is that Apple might introduce two different iPhone 6s. One with a 4.7 inch display and one with a 5.5 inch display.

It really doesn't matter what the display size is. There is a legion of loyal iPhone customers that will jump at the chance to upgrade. One analyst firm is estimating that iPhone 6 sales could hit a record-breaking 80 million units in 2014 alone. That's amazing if the phone doesn't come out until mid September.

Why do we care about Apple's next iPhone launch? We care because the stock tends to see a pre-launch rally in its stock price. Now that shares have split 7-for-1 just a few weeks ago we can actually trade it. AAPL stock rallied seven out of eight weeks in a row until it peaked at round-number resistance near $95.00 on June 10th. The stock split was June 6th.

Since peaking at $95.00 AAPL has slowly consolidated sideways. I heard a lot of traders on CNBC saying they wanted to buy it at $85.00. It looks like that may not happen. Investors have jumped in to buy the dip at $90.00. The point & figure chart is bullish and forecasting at $131.00 target. I think AAPL can rally toward $100 before its iPhone launch in mid September as long as the broader market cooperates.

Be careful when choosing an option strike. There are a lot of weird strikes due to AAPL's 7:1 split. We are listing the October $95.00 call. (FYI: Look for the Oct. $95 call with more than 22,000 in open interest)

- Suggested Positions -

Long Oct $95 call (AAPL141018C95) entry $3.93

06/30/14 triggered @ 92.75
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $92.75
Average Daily Volume = 38 million
Listed on June 28, 2014

Ameriprise Financial - AMP - close: 121.10 change: -0.90

Stop Loss: 114.40
Target(s): To Be Determined
Current Option Gain/Loss: +22.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: AMP kept pace with the S&P 500's decline and closed down -0.7%. Shares should find some short-term support near the $120.00 mark.

I am not suggesting new positions at this time. Readers may want to raise their stop loss.

Earlier Comments: June 18, 2014:
AMP is in the financial sector. The company, and its subsidiaries, provides a range of financial products including advice and wealth management. The company had a record year in 2013 and it looks like the momentum has continued into 2014. The company' last earnings report was its Q1 results, reported on April 28th. Wall Street was expecting a profit of $1.88 per share on revenues of $2.84 billion. AMP delivered $2.04 with revenues rising +11% to $3 billion.

AMP's Q1 results were a +19% improvement from a year ago. Furthermore both revenues and margins are improving. AMP raised its dividend 12 percent to 58 cents (currently at a 2.0% yield) and announced a $2.5 billion stock buy back program.

Technically shares of AMP are in a long-term up trend and just recently broke out from a five-month consolidation. Traders have already jumped in to buy the dip at prior resistance near $115.00.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

Entry on June 20 at $118.80
Average Daily Volume = 823 thousand
Listed on June 18, 2014

Anadarko Petroleum - APC - close: 107.49 change: +0.70

Stop Loss: 105.85
Target(s): To Be Determined
Current Option Gain/Loss: + 38.5%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: APC almost hit our stop loss this morning. Shares opened weak and spiked down to $105.98 but quickly rebounded. APC managed to show relative strength with a +0.65% gain by the closing bell.

I am not suggesting new positions at this time.

Earlier Comments: June 10, 2014:
APC is in the basic materials sector. The company is a very active oil and natural gas producer. They have assets in the Rocky Mountains, the Southern U.S., the Gulf of Mexico, and Alaska. Plus, APC is active internationally with assets in Algeria, Brazil, China, Colombia, Ghana, Liberia, Mozambique, New Zealand, Sierra Leone, and South Africa. Altogether APC has a strong onshore and off-shore portfolio.

The company's latest earnings report on May 5th was better than expected. Wall Street was expecting $1.14 per share. APC delivered $1.26. APC said they set record volumes in the quarter at 819,000 barrels of oil equivalent (BOE) per day. Management went on to raise their full-year sales-volume. A week later they increased their dividend by 50% from 18 cents to 27 cents per share.

APC could end up a big liquefied natural gas (LNG) producer with their assets in Mozambique (Southeast Africa). Last year APC drilled two natural gas off-shore wells. This year they could drill up to eight new wells. The company recently upgraded their view on how much recoverable gas in their northern Mozambique assets to 50 trillion to 70 trillion cubic feet. APC is developing an LNG project and plan to deliver their first LNG cargo in 2018.

One of the biggest headlines for APC has been its settlement over the TROX litigation. This refers to a large lawsuit over the bankrupt Tronox company, which was spun-off from APC's Kerr-McGee division. Previously the estimated penalty range for this TROX lawsuit was in the $5.15 billion to $14.17 billion with many analysts estimating the final results would probably be around $10 billion. On April 3rd this year APC reported they would settle this for $5.15 billion, the very low end of the range and the stock exploded higher. Getting past this TROX liability has removed a very dark cloud for the company and the stock price.

It is worth noting that APC still has potential legal risk from the April 2010 Macondo well blow out. BP Plc was the operator and majority owner of the well but APC did own 25% of it. The U.S. judges are arguing that APC will be held responsible for its 25% of the penalties. The final numbers could be huge. The U.S. Clean Water Act allows the government to fine the companies $1,100 per barrel of oil spilled into the Gulf. Plus, they could add another $4,300 penalty per barrel for gross negligence. Right now BP is arguing with the courts over how much oil was spilled. The U.S. is claiming 4.2 million barrels of oil escaped into the Gulf of Mexico. BP estimates only 2.45 million barrels. APC management has suggested they may not be fined for any gross negligence penalties since they did not have any direct operational involvement. The penalty phase for this lawsuit is scheduled for January 2015. This issue is clearly not stopping the rally in shares of APC today.

Technically shares of APC have been consolidating sideways under resistance near $105 with a bullish trend of higher lows. Now the stock is on the verge of breaking out.

- Suggested Positions -

Long NOV $110 call (APC141122C110) entry $4.80*

07/05/14 new stop @ 105.85
06/28/14 new stop @ 102.40
06/11/14 APC hit our trigger at $105.25
rumors this morning that XOM might buy APC.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on June 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014

Cheniere Energy, Inc. - LNG - close: 70.76 change: -1.74

Stop Loss: 64.90
Target(s): To Be Determined
Current Option Gain/Loss: -15.3%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: I cautioned readers that we might see LNG dip toward support near $70.00. Shares fell -2.4% to close near its 10-dma today. The intraday low was $70.44. The pullback may not be over yet. Nimble traders may want to watch for a dip to $69.50 and then buy a bounce back above the $70.00 mark.

Earlier Comments: June 28, 2014:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 5.53 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

Just a couple of days ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been consolidating sideways the last few weeks after the sharp end of May rally. That big pop at the end of May was market reaction to news that the U.S. Department of Energy proposed new rules to streamline their approval process and focus on projects with the best chance of actually getting built. That was good news for LNG and the company is on track to be the first to export LNG produced in the U.S.

- Suggested Positions -

Long Sep $75 call (LNG140920C75) entry $3.45

06/30/14 triggered @ 70.25
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $70.25
Average Daily Volume = 3.0 million
Listed on June 28, 2014

Starbucks Corp. - SBUX - close: 78.56 change: -0.13

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +40.9%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: SBUX managed to ignore most of the market's weakness today. Shares pared their losses to just -0.1%.

I am not suggesting new positions at the moment.

Earlier Comments: June 14, 2014:
The twin-tailed siren of Stabucks could be ready to sing for investors again. The company is named after the first mate in Herman Melville's Moby Dick. According to company literature their mission is "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time."

Notice it didn't say one cup of coffee at a time. Make no mistake. Coffee is big business. According to Business Insider coffee is worth about $100 billion globally and planet earth drinks about 500 billion cups of coffee every year. Quite a few of those cups are consumed at Starbucks' ubiquitous coffee chain, which now has over 10,000 company-run stores and over 9,500 licensed stores.

Believe it or not but tea is a bigger market. Tea producers churn out more than 4 billion kilograms of tea every year. Tea is the second-most consumed beverage behind water. Several months ago SBUX purchased the Teavana chain for $620 million. Now they're planning to update and expand the brand into 1,000 tea bars in the next five years.

SBUX recently said that food remains a big opportunity and currently food sales are only 22% of its U.S. business. SBUX purchased the French bakery chain "La Boulange" in 2012 and they've started distributing some of the bakery's products in more than 6,000 Starbucks stores. These should reach all of their coffee stores by the end of this year. They're also testing lunch items and testing alcohol sales in certain states. That means Malbec wines and bacon-wrapped dates could be available at a Starbucks store near you soon. The company said that adding food items has increased purchases and boosting ticket growth.

This past week SBUX said they're going to roll out wireless charging mats for smartphones in some of their stores soon.

Put it altogether and the company has big plans. Their latest earnings report in late April was mixed. Profits were in-line with estimates but revenues were a miss although same-store sales came in above expectations. SBUX management raised their Q4 guidance and 2014 guidance following its results.

- Suggested Positions -

Long OCT $80 call (SBUX141018c80) entry $1.66

07/05/14 new stop @ 74.75
06/28/14 new stop @ 73.40
06/17/14: triggered @ 75.65
Option Format: symbol-year-month-day-call-strike

Entry on June 17 at $75.65
Average Daily Volume = 3.5 million
Listed on June 14, 2014

U.S. Silica Holdings - SLCA - close: 54.50 change: -0.84

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: +11.1%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: SLCA underperformed the market with a -1.5% decline. Traders could watch for another dip or a bounce near the rising 30-dma, currently near $52.85, as a new entry point for bullish positions.

Earlier Comments: June 14, 2014:
There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long Sep $55 call (SLCA140920C55) entry $3.15*

07/01/14 new stop @ 49.25
06/17/14 triggered @ 52.15
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on June 17 at $52.15
Average Daily Volume = 1.2 million
Listed on June 14, 2014

Energy SPDR ETF - XLE - close: 99.46 change: -0.16

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

07/08/14: Energy stocks held up reasonably well during today's market-wide sell-off. The XLE dipped near its 20-dma and settled with a minor loss of just -0.16%.

Currently we are on the sidelines waiting for a move higher. Our suggested entry point is $100.75.

Earlier Comments: July 5, 2014:
Energy stocks are some of the stock market's best performers this year. The S&P 500 index is up +7.4% year to date. The XLE is up +13.4%. Earlier in the year a harsh winter helped drive demand for heating fuels. Now the industry is boosted by rising geopolitical events between Ukraine & Russia and more recently a Sunni jihadist uprising that is pushing Iraq toward a civil war.

Iraq is the third largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). The country produces about three million barrels of oil a day. Iraq also accounted for over half of OPEC's recent production growth. Today the world is concerned that a civil war between hard-line Sunni Muslims in the north and northwest of Iraq and the Shia Muslim government in the south and southeast could damage or severely handicap Iraq's oil production. Meanwhile the Kurds will carve out their own independent nation at the very northern tip of Iraq.

Why should we care about a civil war in Iraq and its three million barrels of oil production a day? We should care because the difference between global oil demand and global oil supply is very tight. The U.S. Energy Information Administration (EIA) estimates that global oil demand will be in the 92 and 93 million barrels a day (mb/d) range in 2014-2015. Furthermore demand will rise 1.2 mb/d both in 2014 and 2015. The Paris-based International Energy Agency (IEA), from the latest data in June 2014, estimates global demand will rise 1.3 mb/d in 2014 to a total of 92.8 mb/d. Yet global supplies are only at 92.6 mb/d.

The world is already falling behind on oil supplies. People often forget that once you drill an oil well production is always declining as there is less and less oil in that well. Eventually wells run dry. Globally this lost production is between -3% and -5% a year. Not only do we need to discover, drill, and produce another +1.3 mb/d to meet growing demand we also have to replace the -3.6 mb/d we're losing every year due to maturing wells. That's almost 5 million barrels of oil a day!

You can see now why Iraq's 3 mb/d production is a focus for the equity markets. We've been lucky so far that nearly all of the fighting in Iraq has been in the northern half while most of the country's oil production and infrastructure is in the southern half. Thus far Iraq's production has not been seriously damaged. There is no guarantee the fighting will stay contained to the north. What happens if Baghdad falls or if the country is permanently divided? Terrorist could target Iraq's production facilities and pipelines.

Fortunately oil production in the U.S. is booming. America just hit 11 million barrels a day. That makes the U.S. the biggest single producer in the world. Current forecast put U.S. production hitting a peak of 13.1 mb/d in 2019. Unfortunately global demand might rise by another 5 or 6 mb/d by then (let's not forget the lost production from declining wells).

Oil prices will most likely remain elevated for an extended period of time. That should mean good news for all the energy companies, up stream, down stream, and everyone in between. A good way to play this strength in energy demand is the XLE, the Energy Select SPDR Exchange Trade Fund (ETF).

The XLE is a basket of over 40 of the biggest names in the energy space from production, to drilling, oil services, and refining. The XLE's top ten components are:

Exxon Mobil (XOM)
Chevron Corp. (CVX)
Schlumberger Ltd. (SLB)
ConocoPhillips (COP)
EOG Resources (EOG)
Pioneer Natural Resources (PXD)
Halliburton Co (HAL)
Occidental Petroleum (OXY)
Anadarko Petroleum (APC)
The Williams Companies Inc. (WMB)

As the violence in Iraq worsened last month we saw the XLE sprint higher in the first three weeks of June. When the stock market experienced some widespread profit taking on June 24th traders rushed into to lock in profits on the XLE. Since then the ETF has been slowly drifting higher.

We believe the up trend continues. The July 1st high was $100.66. Tonight we're suggesting a trigger to buy calls at $100.75. We'll start this trade with a stop loss at $97.95.

Trigger @ $100.75

- Suggested Positions -

Buy the Oct $105 call (XLE141018C105)

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

Entry on July -- at $---.--
Average Daily Volume = 8.8 million
Listed on July 05, 2014

PUT Play Updates

Tractor Supply Co. - TSCO - close: 60.79 change: -0.75

Stop Loss: 62.65
Target(s): To Be Determined
Current Option Gain/Loss: + 4.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: Shares of TSCO continue to roll over under resistance as expected.

Earlier Comments: June 24, 2014:
TSCO has everything from cowboy boots to chicken coops and everything you might possibly need on the farm. The company has over 1,300 stores in 48 states. This specialty retailer is focused on the "lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses."

A lot of things are on the rise for TSCO. They have rising sales, a rising dividend, rising stock buyback program. What is not rising is their stock price. Shares peaked in January this year after surging to all-time highs in 2013. The company has been raising its dividend, now up to 16 cents a share. They also recently announced another $1 billion to their stock buyback program. Unfortunately these do not seem to be helping the share price.

Their last earnings report was April 23rd. TSCO reported Q1 earnings of 35 cents a share on revenues of $1.18 billion. That missed estimates of 37 cents on revenues of $1.21 billion. To be fair the terrible weather in the first quarter really did affect their sales, given their farm and rancher focus. Management believes these sales will return as the weather improves. TSCO reaffirmed their 2014 sales guidance of $5.62 billion to $5.7 billion and same-store sales of 2.5% to 4%. The company plans to open over 100 new stores this year.

Not everyone on Wall Street believes TSCO is a buy. The company was recently downgraded thanks to its high valuation (over 26 times its 2014 earnings estimates) and weaker gross margins. TSCO also seems to be suffering from slowing same-store sales. Last year their average same-store sales growth was +4.8%. The fourth quarter's was +3.5%. The first quarter of 2014 it was down to +2.2%. Again, you could blame that on the weather but it's not a good trend.

We are not setting an exit target tonight. It is worth noting that the point & figure chart is bearish and suggesting a $46 target.

- Suggested Positions -

Long Oct $60 PUT (TSCO141018P60) entry $2.45

07/01/14 new stop @ 62.65
06/26/14 triggered
Option Format: symbol-year-month-day-call-strike

Entry on June 26 at $61.90
Average Daily Volume = 871 thousand
Listed on June 24, 2014


Synaptics Inc. - SYNA - close: 89.20 change: -2.01

Stop Loss: 87.65
Target(s): To Be Determined
Current Option Gain/Loss: -45.6%
Time Frame: 8 to 12 weeks
New Positions: see below

07/08/14: Momentum names were the biggest targets for profit taking yesterday and today. Shares of SYNA traded down to $86.41 before rebounding and trimming its loss to just -2.2%. Our stop was hit at $87.65.

- Suggested Positions -

Sep $95 call (SYNA140920C95) entry $6.35* exit $3.45** (-45.6%)

07/08/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/02/14 triggered @ 92.35
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Entry on July 02 at $92.35
Average Daily Volume = 1.45 million
Listed on July 01, 2014