Option Investor

Daily Newsletter, Tuesday, 7/29/2014

Table of Contents

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

Market Wrap

Market Sanctioned

by Jim Brown

Click here to email Jim Brown

The announcement of stronger Russian sanctions by the EU and the U.S. knocked the markets into negative territory after a positive open.

Market Statistics

The expectations for painful sanctions by the U.S. and EU sent the markets lower for multiple reasons. Russia is a major trading partner for Europe and reducing that trade through sanctions will lower profits for international companies and slow economies all over Europe. There is also the threat of reverse sanctions by Russia against the U.S. and EU.

Sanctions were increased on the Russian banking sector restricting access to bank financing and equity markets for Russian companies. Russian state-owned banks can no longer sell shares or bonds in Europe. The EU also restricted the export of oil equipment and technology necessary for Russian's energy sector. New contracts to sell arms, machinery, electronics and other civilian products with potential military uses will also be banned.

The U.S. slapped sanctions on three state owned banks prohibiting them from selling shares or bonds in the U.S. or receiving financing from U.S. firms. The U.S. also sanctioned United Shipbuilding of St Petersburg and said their assets in the U.S. would be frozen and U.S. companies would be prohibited from doing any business with them.

Russian lawmakers have reportedly drafted amendments that would brand countries that impose sanctions on Russia as "aggressor countries." The amendments would create a mechanism for restricting companies from those countries from doing business in Russia. They specifically included Deloitte, KPMG, Ernst and Young, Boston Consulting Group and McKinsey from supplying auditing and consulting services in Russia. It is theorized they singled out the auditing companies because those companies frequently find evidence of government bribes, payments and corruption and cause problems for the Russian companies. Kicking those auditors out of the country allows Russian companies to legitimately use a Russian auditor that will look the other way when that corruption is found. However, some of the public companies have covenants that require them to use U.S. or European based auditors for exactly those reasons. Prohibiting them from using a reputable firm will further prevent them from selling shares or being traded on the global markets. This could backfire against Russia.

The government has already started attacking companies like McDonalds, Tyson Foods and others. McDonalds was told they could not sell certain menu items because they were illegal. Russia said the nutrition information on the menu did not conform to the rules even though they had been previously approved by authorities.

This is a typical tactic by the Russian government. They come up with some bogus claim to prevent the company from operating but not one that would produce blowback from consumers. Telling consumers the nutrition content was misstated and illegal makes it seem like the government is looking out for its citizens. When it is an oil company they claim they violated EPA regulations and revoke their license. This has happened to more than one company and Russia took them over and gave their assets to a Russian owned energy company.

Russia said it may ban imports of chicken from the U.S. and fruit from Europe if additional sanctions were imposed by those countries. Russia said it may be forced to ban those items for "food safety" reasons. Russia was the second largest market for U.S. chickens behind Mexico in 2013. Russia said it was also considering a ban of U.S. media. Clearly Russia does not want the truth disclosed to Russian citizens.

The equity markets are concerned this will turn into an economic war with each side continuing to ratchet up sanctions and counter sanctions until Putin is forced to increase his military efforts to save face at home. Putin is not concerned about sanctions that only scratch the surface. He knows he has the trump card because Europe depends on Russia's gas and oil supplies. If he cut off the gas and oil Europe's united front would crumble within weeks. Putin is a bully and he has a strangle hold on Europe. This may not turn out well in the months ahead. Europe's economy is struggling with 1% growth and the U.S. is not far behind.

The U.S. warned that Russia broke the 1987 anti-missile treaty when it test fired a ground launched cruise missile with a range between 300-3,400 miles last week. Why do you think Putin chose last week to break the treaty and test new missile technology? It was a warning that he still holds the military cards and could ratchet up the conflict in the Ukraine to include other border states and there is nothing the U.S. or NATO can do about it. This is a dangerous situation and Putin has no fear of reprisals from any European country. He knows President Obama is not going to war to stop Russia's land grab. Putin is so sure nobody is going to stop him that Russian forces have been firing artillery into the Ukraine from Russia for the last two weeks. Basically that is an act of war but nobody can do anything about it.

The equity markets have been relatively tame as the Ukrainian crisis grew from disturbances to protests to slicing off Crimea and now trying to carve up Ukraine even further. At some point the markets will take notice if the situation appears to be increasing in severity.

The markets opened higher after the Consumer Confidence for July spiked +4.5 points from 86.4 to 90.9 and a seven year high. Economists had only expected a +1 point gain. The number for June was revised up from 85.2 to 86.4. Consumers said the job market had improved and that buoyed the long term outlook.

The current conditions component rose from 86.3 to 88.3 but the expectations component spiked from 86.4 to 92.7, a whopping 6.3 points. Those respondents that felt jobs were plentiful rose from 14.6% to 15.9% and a six-year high. This could point to higher employment numbers later this week.

Contrary to the soaring confidence the buying plans declined. Those planning on buying a car fell from 12.2% to 11.6%, home 5.4% to 4.4% and a major appliance from 50.4% to 46.5%.

The Case Shiller home prices for May rose +9.3% year over year compared to +10.8% in April. This is a lagging number and was ignored.

The Texas Service Sector Outlook for July rose from 21.1 to 22.4. The gain in the headline number was due to a sharp jump in the revenue component from 16.9 to 21.5. That is the highest reading since February 2012. However, the employment component declined sharply from 16.5 to 4.6. Hours worked declined from 7.3 to 3.9. Unlike the positive employment growth in the Consumer Confidence these numbers suggest a decline in hiring in Texas.

Foreclosure filings in June fell -2.4% from May to 107,145. This is down -16.1% from the same period in 2013. Bank repossessions declined -5.2%. Foreclosure inventories were up +10.5% for the month but are down -7% over June 2013.

The market has been rather calm the last two days because the fireworks are about to start tomorrow. The early week economic reports were just sound bites but the big guns come out on Wednesday. The ADP Employment is looking for a drop in new jobs from 281,000 to 200,000. The GDP could be in the range of 2.5% to 3.0% or it could miss that range by 2% in either direction. The whisper numbers are all over the map. The lowest I have heard was +1.5% growth. We have had numerous companies complain about weather impacting their Q2 earnings so there may have been some lingering impact from Q1. Just remember that initial estimates are normally revised lower in the revision next month.

The Fed meeting announcement could also be a wild card. With confidence soaring and the potential for another strong payroll number the Fed heads could tweak their comments to suggest a quicker end to QE or a faster move to the first rate hike. Many analysts think the Fed is behind the curve and the Fed heads do read the news. This could make them more agreeable to accelerating the time table.

What we should see is a slightly improved statement saying the economy is still recovering modestly and another $10 billion cut in QE. They may say something about ending it at the October meeting since Yellen alluded to that in her last testimony.

The Nonfarm Payrolls on Friday are expected to decline from 288,000 new jobs to 247,000 new jobs. This is just educated speculation since there are 154 million people in the workforce and 4.5 million quit every month and 4.5 million are hired. There is no way to accurately count the number of new workers in the month it happened. They know three months from now because they have the payroll records. Far too much importance is placed on the monthly Nonfarm Payroll guesses.

The ISM Manufacturing index for July will be important because it is a broader look at the health of the manufacturing economy on a national basis. Expectations are for a fractional improvement.

UPS stirred up the market this morning when they reported a -58% decline in profits and they cut their full year outlook. Adjusted earnings were $1.21 per share compared to estimates for $1.24. UPS had to take a charge of $665 million for a transfer of liabilities for Teamster employees to a defined contribution health care plan.

UPS also lowered full year forecasts from $5.05 to $4.90-$5.00 as a result of spending $175 million to improve infrastructure ahead of the holiday season. A late December surge last year had UPS and FDX backlogged and delivering packages several days late after Christmas. UPS is adding 50 new sorting facilities, which will increase capacity by 5% and accelerating implementation of new software that will more effectively route delivery trucks. They are also going to operate on Black Friday, a traditional holiday for UPS employees. Shares fell -4% on the news.

Aetna (AET) fell -3.5% after the insurer reported a rise in medical costs. The benefit from a bunch of new drugs that are conquering existing diseases is being felt by insurers as the cost of these drugs is rising. The Hep C drug Sovaldi marketed by Gilead Sciences (GILD) cures Hep C in 97% of patients and prevents the need for liver transplants and patient deaths but it costs $84,000 for a 12 week course of treatment. More than 80,000 patients have been treated but the CDC said there are 2.7 million people in the U.S. with the disease. The World Health Organization said there are 130 million people around the world with the disease. That is a huge market for Gilead but here at home it is a major blow to costs for insurers. WellCare (WCG) reported a hit to earnings due to higher drug costs as well. This is likely to be seen all across the insurance sector.

Twitter (TWTR) reported earnings after the bell of +2 cents compared to estimates for a loss of a penny. Revenue rose to $312 million compared to estimates for $283 million. They raised guidance for the full year from $1.2-1.25 billion to a range of $1.3-$1.33 billion. There revenue per active user rose to $1.02 compared to estimates of 96 cents. The number of monthly active users rose to 271 million, a +24% increase, compared to estimates for 267 million. TWTR shares rallied +29% or +$12 in afterhours.

American Express (AXP) reported earnings of $8.66 that was in line with estimates but revenue of $1.43 billion beat estimates of $1.38 billion. Shares were flat after the report.

Amgen (AMGN) reported earnings after the close that rose +23% to $2.37 that beat estimates by 30 cents. Revenue rose +11% to $5.18 billion compared to estimates of $4.92 billion. The company said it will lay off 12-15% of its workforce and close four sites to reduce expenses. This will reduce its real estate footprint by -23%. They will take a charge of up to $950 million through 2015.

Buffalo Wild Wings (BWLD) reported earnings that rose +43% to $1.25 and beat forecasts by a nickel. Lower chicken prices helped grow operating margins from 7.9% to 9.6%. Revenue rose +20% to $366 million beating estimates of $359.5 million. Same store sales rose +7.7% at company owned stores. BWLD said the World Cup added a full percent to same store sales.

However, the company sees full year earnings growth of 25-30% and Wall Street was expecting 35.8%. This led to a sharp decline of -$18 in afterhours.

The rest of the week is peppered with earnings from some big companies. So far the earnings cycle has been far better than expected with earnings growth of +8.3%. There are still abnormally high revenue misses at 37% but overall it has been a good reporting cycle.

The stream of earnings news after the bell pushed the S&P futures up +2 points. The S&P cash closed at 1,970 in regular trading and close to breaking Monday's low at 1,967. It would be hard to make a reasonable judgment on market direction from the trading activity so far this week. This has been the calm before the storm of economic events. Once we get to the weekend we should have a much better read on direction.

The S&P support is still in the 1950-1960 range and resistance at 1985 and 1990.

The Dow rose to +75 at the open but as the sanction headlines began to hit the wires it began to fade. After the president's speech just after 3:PM the decline accelerated. The rising support from February was broken on Monday and that became resistance today at 17,000. The Dow closed at 16,917 and -133 points off its high for the day.

If the Dow continues lower the next material support is 16,720 and 16,800. The Dow has put in a pattern of lower highs since the 16th.

The four biggest losers were companies that have already reported earnings and are experiencing post earnings depression.

The Nasdaq Composite has failed for three days to return to the resistance high at 4,485 from last Thursday. It is not that tech stocks have really sold off but they are definitely not performing. They are still well above support at 4,344-4,350 so we could see several more days of declines without breaking the trend. The Nasdaq would have to break below 4,344 to turn bearish.

The Russell 2000 was actually the best performer today with a minor gain of +2 points. That is significant because it did not turn negative when the Dow was falling -133 points from its high. This suggests fund managers are not afraid of the small caps and may actually be nibbling at some stocks. However, it is far too small a movement to draw any real conclusions. The Russell declined to 1,132 on Monday and just above the 1,131 low from the 18th. This could have been seen as a double bottom by some investors. I would not jump to that conclusion just yet. We knew there would be some support there but it did not produce a giant rebound. We need to get past the next three days and see if that support holds in the face of some potentially negative economics. However, if those economics were positive this would be a perfect spot for a bounce.

On the flipside the Dow Transports are in a tail spin. The Transports hit a new high of 8,515 on Wednesday and Thursday and then crashed back to 8,218 today. This was the second day of significant declines with a -115 point loss and nearly -300 points since Thursday's high. This is a negative signal since the Transports and Dow tend to move in sync in rallies with the Transports leading to the downside. The 100-day average at 7,895 is support with a round number bump in the road at 8,000.

The Russell 3000, a broad market index of the largest 3,000 stocks in the market tends to revert to its 100-day average about once every three months. It has been 2.5 months since the last test. The index has not been able to move up since the new high on July 3rd. This suggests the breadth of the market is fading and we could see some weakness in August.

I believe the earnings news still has some spark left for the market although the quantity and quality of earnings will decline starting next week. The economics over the next three days are the key for market direction in August. I would continue to be careful about buying the dips because we could see a deeper decline at any time now. I don't think the market is going to crash but probably just consolidate at a lower level in August.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Sinking Industrial Goods

by James Brown

Click here to email James Brown


Pall Corp. - PLL - close: 79.66 change: -0.62

Stop Loss: 81.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 437 thousand
Entry on July -- at $---.--
Listed on July 29, 2014
Time Frame: likely exit before September
New Positions: Yes, see below

Company Description

Why We Like It:
PLL is in the industrial goods sector. It is considered part of the diversified machinery industry. They market to a lot of different customers around the world. PLL operates in the aerospace and defense industry, the animal health, biopharma, food and beverage, fuels and chemicals, graphic arts, laboratories, machinery and equipment, medical, microelectronics, power generation, and water treatment.

The company describes themselves as, "Pall Corporation is a filtration, separation and purification leader providing solutions to meet the critical fluid management needs of customers across the broad spectrum of life sciences and industry. Pall works with customers to advance health, safety and environmentally responsible technologies. The company's engineered products enable process and product innovation and minimize emissions and waste."

PLL's latest earnings report on May 29th was a disappointment. Wall Street was expecting a profit of $0.83 a share. PLL delivered 81 cents. Revenues did come in better than expected. Guidance was only in-line with prior estimates. The results failed to generate any investor excitement for the stock.

Quite the opposite seems to have happened. PLL produced what appears to be a triple-top pattern from late May through June. Then in July the stock has collapsed through several layers of support. Today we are seeing PLL breakdown under significant support at the $80.00 mark, support at its 300-dma, and support at its long-term trend line of higher lows (see weekly chart below).

Today's intraday low was $79.65. Tonight we're suggesting a trigger to buy puts at $79.45. We're not setting an exit target yet but I will point out that the point & figure chart is bearish and forecasting at $72.00 target.

Keep in mind that PLL is scheduled to report earnings again in very late August. There is no confirmed date yet. We will likely exit prior to the announcement.

Trigger @ $79.45

- Suggested Positions -

Buy the Sep $80 PUT (PLL140920P80) current ask $2.55

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Sanctions Sink Stocks

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market produced a widespread decline although the pullback in the major indices wasn't that bad. The biggest concern today seemed to be new EU sanctions against Russia.

GILD hit our entry trigger.

Current Portfolio:

CALL Play Updates

Gilead Sciences, Inc. - GILD - close: 92.99 change: +1.53

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: +8.1%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

07/29/14: GILD continues to show relative strength. The stock pushed past short-term resistance near $92.00 and outperformed the market with a +1.6% gain. Our trigger to buy calls was hit at $92.25.

Earlier Comments: July 28, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

07/29/14 triggered @ 92.25
*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

Golar LNG Ltd. - GLNG - close: 63.38 change: +1.22

Stop Loss: 59.65
Target(s): To Be Determined
Current Option Gain/Loss: +11.4%
Average Daily Volume = 1.3 million
Entry on July 25 at $62.25
Listed on July 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

07/29/14: GLNG also displayed relative strength today with a push to new highs and a +1.9% gain.

Tonight we'll adjust our stop loss up to $59.65.

Earlier Comments: July 22, 2014:
GLNG describes themselves as, "one of the world's largest independent owners and operators of LNG carriers with over 30 years of experience. We developed the world's first Floating Storage and Regasification Unit (FSRU) projects based on the conversion of existing LNG carriers. We lead the industry with committed projects. We are progressing plans to grow our business further upstream via Floating liquefaction (FLNG). Our strategic objective is to become an integrated midstream player in the LNG industry."

The big picture play here is LNG exports. The shale-gas industry in the United States is booming so there has been a surge in supply. Meanwhile demand remains strong globally and the price of natural gas in Europe is double what is in the U.S. and the price is triple in Asia. Seeing an opportunity the American gas industry is planning on exporting more natural gas. The problem is that natural gas has to be liquefied before it can be transported. Turning natural gas to liquefied natural gas means cooling the material to -259 degrees Fahrenheit. Creating an LNG export terminal is a multi-year, multi-billion project. The U.S. is currently building several LNG export terminals to be completed in the next few years.

At the same time there has been a rise in the number of LNG transport ships to move all of this natural gas. Unfortunately the timing is a bit off. At the moment there is more LNG transport ships than really needed. The current global LNG fleet is about 365 vessels. That number is supposed to grow by another 29 ships this year but several of them have been delayed. However, by 2017-2018 it looks like there could be a shortage of LNG transport ships, which will drive rates higher for the shipping companies.

GLNG has about a dozen ships. They should take delivery of several more in the next 12 to 18 months. Instead of scrapping their older ships the company has decided to turn some of them into floating storage & regasification units (FSRU). They are also working on a floating liquefaction (FLNG) project.

Long-term the company looks poised to capitalize on the natural gas transport market. Investors have taken notice with a strong rally this year. Of course a +3.2% dividend yield doesn't hurt either.

Shares of GLNG have been consolidating sideways in the $57.50-62.00 zone for the last few weeks. Today GLNG is on the verge of breaking out from this trading range. We want to be ready if it does.

We are suggesting a trigger to buy calls at $62.25. Earnings are coming up in late August (potentially around the 27th) and we will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $65 call (GLNG140920C65) entry $3.32

07/29/14 new stop @ 59.65
07/25/14 triggered @ 62.25
Option Format: symbol-year-month-day-call-strike

Harman Intl. Industries - HAR - close: 112.59 change: -0.26

Stop Loss: 111.90
Target(s): To Be Determined
Current Option Gain/Loss: -45.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/29/14: HAR's performance today does not bode well for tomorrow. The early morning rally pierced short-term support at its 10-dma, 20-dma, and the $114.00 level. Unfortunately the rally didn't last and HAR has reversed. I suspect we will see HAR break support at $112.00 tomorrow and hit our stop at $111.90. More conservative investors may want to exit immediately.

FYI: Earnings are coming up on August 7th.

Earlier Comments: July 12, 2014:
Automobile sales in the U.S. have been strong this year. Instead of playing the carmakers, which run the risk of announcing yet another recall, consider a derivative play. HAR makes speakers and electronics that are part of the growing "connected car" trend (a.k.a. infotainment systems).

HAR is developing a very bullish trend of beating Wall Street's earnings estimates. Their last two reports were both upside surprises in January and May. Both times HAR not only beat estimates on the top and bottom line but management also guided earnings higher.

The most recent report was May 21st. Analysts were expecting a profit of $1.00 a share on revenues of $1.27 billion. HAR delivered $1.12 a share with revenues hitting $1.4 billion. HAR said recovering demand in European luxury cars and growing demand in China helped fuel their gains.

Management explains that consumers want the connected car experience. The HAR teams says there is pent up demand in Europe that will likely stabilize soon. Meanwhile their business in China is surging. China is now the largest automobile market in the world and HAR's sales surged +60% in China last quarter.

Looking at that last quarter HAR reported revenues were up +32% from a year ago to $1.4 billion. Their bottom line EPS grew +41% to $1.12. They expect to end their fiscal year 2014 with revenues of $5.275 billion, up +23% from the year before.

HAR has also been making acquisitions. They recently announced a $365 million deal to buy AMX LLC, which is an enterprise control and automation system company. HAR plans to roll that up into their professional division. HAR also bought Yurbuds last month. Yurbuds is the number one brand of sports headphones in the U.S.

Last month HAR announced they were raising their quarterly dividend from 30 cents to 33 cents a share.

Technically shares have broken out from a five-month consolidation phase in the $100-115 zone. Shares have weathered the market's recent weakness pretty well. Friday's close at $116.51 is a new seven-year high. I suspect HAR can rally into the $125-130 zone, which has been resistance in the past. The Point & Figure chart is more bullish and currently projecting at $146 target.

Tonight I'm suggesting a trigger to buy calls at $117.25. More patient investors may want to use a different strategy and buy a dip or a bounce from the $114.00 level, which looks like it could be short-term support.

We'll start with a relatively wide stop loss at $109.90.

- Suggested Positions -

Long OCT $120 call (HAR141018c120) entry $6.00*

07/26/14 new stop @ 111.90
07/14/14 triggered @ 117.25
*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 14 at $117.25
Average Daily Volume = 715 thousand
Listed on July 12, 2014

JB Hunt Transport - JBHT - close: 78.26 change: -0.82

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

07/29/14: The Dow Jones transportation average displayed relative weakness today with a -1.3% decline. This weighed on shares of JBHT, which retreated -1.0%. If JBHT breaks through short-term support at $78.00 we will likely remove this stock as a candidate. Currently we're on the sidelines waiting for a breakout higher. Our suggested entry point is $80.25.

Earlier Comments: July 26, 2014:
According to JBHT's website the company describes themselves as, "one of the largest transportation logistics companies in North America, provides safe and reliable transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico. Utilizing an integrated, multimodal approach, we provide capacity-oriented solutions centered on delivering customer value and industry-leading service."

"Our service offerings include transportation of full truckload freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors. We also have arrangements with most of the major North American rail carriers to transport truckload freight in containers and trailers. We also provide customized freight movement, revenue equipment, labor and systems services that are tailored to meet individual customers' requirements and typically involve long-term contracts. Our customer base is extremely diverse and includes a large number of Fortune 500 companies."

Just before Q2 earnings season started Barclays upgraded their view on the transportation sector. The analyst firm felt that an improving economic picture in the U.S. would fuel significant earnings growth for the transport industry. It appears to be a good call with the transportation sector leading the market higher. The Dow Jones Transportation Average is up +13.8% year to date and hitting all-time highs.

JBHT is only up +2.5% year to date but it too is near all-time highs and looks poised to run. JBHT reported earnings on July 15th. Wall Street was looking for earnings of 79 cents a share on revenues of $1.54 billion. JBHT delivered a profit that was in-line with estimates while revenues rose +11.9% to beat estimates at $1.55 billion.

Some of the standout performances for JBHT were their DCS and ICS segments. The Dedicated Contract Services (DCS) business saw revenues up +15% in the second quarter over a year ago. Their Integrated Capacity Solutions (ICS) business reported revenue growth of +31% from a year ago. Management guided their full-year 2014 revenues in the $6.14-6.25 billion range. That's a +10% to 12% rise for the year.

JBHT's President and CEO John N. Roberts III offer this perspective on the quarter, "The slowdown in train velocity and the difficult driver recruiting environment has challenged our growth in JBI. We are pleased we were able to maintain profitability levels despite these obstacles. The worsening driver supply conditions will continue to be a headwind for DCS and JBT as well. The planned improvement in JBT is ahead of schedule and though there is more to do, we are extremely pleased with the progress thus far."

JBHT bought back 990,000 shares of its stock during the second quarter for $75 million. They still have about $263 million left in their buyback program. As of June 30, 2014 JBHT had 117 million shares outstanding.

JBHT's earnings report earned some upgrades with two firms raising their outlook on the stock. One of them was Credit Suisse who raised their price target on JBHT from $78 to $86. The Credit Suisse analyst also adjusted their earnings growth from 7% today to +22% in 2015.

Currently shares of JBHT are hovering just below major resistance at $80.00. If the stock breaks out it could see a run towards $90 or higher. The Point & Figure chart is forecasting at $95.00 target.

We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the Nov $80 call (JBHT141122C80)

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

Cheniere Energy, Inc. - LNG - close: 74.46 change: +0.18

Stop Loss: 71.95
Target(s): To Be Determined
Current Option Gain/Loss: -13.0%
Time Frame: Exit PRIOR to earnings on July 31st
New Positions: see below

07/29/14: Traders were quick to buy the dip in LNG at its simple 10-dma this morning. LNG managed to end the day with a gain in spite of the afternoon drift lower. This stock was also getting a lot of positive comments from the traders on CNBC's Fast Money show tonight.

The company is now scheduled to report earnings on July 31st.

We want to exit this trade tomorrow, July 30th, at the closing bell, to avoid holding over the earnings report. After the post-earnings dust settles we'll re-evaluate a new entry point.

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

07/29/14 prepare to exit tomorrow (July 30th) at the close
07/28/14 new stop @ 71.95, prepare to exit before July 31st
07/23/14 new stop @ 69.90
07/22/14 new stop @ 69.40
07/10/14 new stop @ 66.40
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

Sanderson Farms, Inc. - SAFM - close: 100.50 change: -1.37

Stop Loss: 98.90
Target(s): To Be Determined
Current Option Gain/Loss: -41.3%
Time Frame: exit PRIOR to earnings on Aug. 26th
New Positions: see below

07/29/14: SAFM spiked higher at the open but spent the rest of the day fading lower. Shares eventually underperformed the major indices with a -1.3% decline. The stock is headed for support near $100.00.

Currently our stop loss is $98.90. More conservative investors may want to inch their stop loss higher.

Earlier Comments: July 12, 2014:
Sanderson Farms actually started out as a farm supply business back in 1947. A few years later they started raising chickens. Today they are the third largest chicken ranch in the United States processing more than 9.3 million chickens a week.

If you have been shopping for a little backyard BBQ this summer then you already know that meat prices are high. A long, widespread drought has been plaguing cattle ranchers for months and beef prices are soaring. At the same time disease has killed millions of pigs this year reducing the supply of pork. This has fueled a surge in beef and pork prices. Chicken has been on the rise as well but consumers appear to be buying more chicken as an alternative to pricier meats.

SAFM has developed a very strong trend of beating Wall Street's earnings estimates. They have beat analysts' estimates the last two quarters in a row by a very wide margin. Consensus estimates for the first quarter of 2014 was 85 cents. SAFM reported $1.25. Analyst estimates for the second quarter was $1.75. SAFM smashed that with a profit of $2.21 a share. Revenues have also beaten expectations. For the whole year SAFM's earnings are expected to rise +68%.

Summer is the peak season for chicken demand. Investors could start to bid up shares of SAFM ahead of its next earnings report in late August. Meanwhile SAFM could provide a floor in the stock price. Earlier this year management extended their stock buyback program to buy up to 1.0 million shares. That is almost five percent of the stock's 20.3 million share float. They have 23.0 million shares outstanding.

It is also worth noting that SAFM could be a buyout target. Back in May this year shares of Hillshire Brands Co (HSH) soared from $37 to $45 on a takeover bid. Suddenly a bidding erupted and three weeks later HSH had popped to $62 a share. Bloomberg thinks that SAFM could also be a takeover target as the meat industry continues to consolidate.

A takeover would be bad news for all the shorts in SAFM. The most recent data listed short interest at 17% of the float. The current breakout to new highs and the rally past round-number resistance at $100.00 could fuel more short covering.

Friday's high was $102.28. I am suggesting a trigger to buy calls at $102.55. More nimble traders might want to consider waiting for a potential dip into the $100.00-100.50 zone instead as an alternative entry point. The low on Friday was $99.90. We're not setting an exit target yet but do plan to exit prior to earnings in late August.

- Suggested Positions -

Long NOV $110 call (SAFM141122C110) entry $5.80

07/26/14 new stop @ 98.90
07/24/14 new stop @ 97.75
07/17/14 today's move breaks short-term support. More conservative investors may want to exit early now.
07/14/14 triggered @ 102.55
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $102.55
Average Daily Volume = 305 thousand
Listed on July 12, 2014

Energy SPDR ETF - XLE - close: 99.35 change: -0.25

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: -40.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Our XLE trade is struggling. At the moment the XLE is still hovering at support near its 40-dma and the bottom of its bullish channel. Unfortunately this energy stock ETF looks poised to break that support soon. Readers may want to raise their stop loss.

I am not suggesting new positions at this time.

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.

- Suggested Positions -

Long Oct $105 call (XLE141018C105) entry $0.84

07/24/14 triggered @ 100.75
Option Format: symbol-year-month-day-call-strike

Entry on July 24 at $100.75
Average Daily Volume = 8.8 million
Listed on July 05, 2014

PUT Play Updates

United Natural Foods, Inc. - UNFI - close: 58.82 change: -0.27

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: -5.7%
Average Daily Volume = 443 thousand
Entry on July 28 at $59.00
Listed on July 26, 2014
Time Frame: exit PRIOR to earnings in mid September
New Positions: see below

07/29/14: The decline in UNFI continued today and shares lost another -0.45%. I would still consider new positions now at current levels.

Earlier Comments: July 26, 2014:
Natural and organic foods are a growing business today. The consumer is choosing healthier and typically more expensive foods, which had driven long-term gains for companies like UNFI and Whole Foods (WFM). Yet all of this growth has caught the attention of competitors.

According to UNFI's website the company, "is the leading independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce, in the United States. In addition to excellent distribution services, we provide a range of innovative, value-added services for our customers and suppliers, to foster mutual success and growth. Our services include marketing and promotional tools, merchandising, category management and store support services."

UNFI's business also includes a chain of retail stores with their Earth Origins Market brand. They also do a lot of importing and processing of nuts, seeds, and fruits with their Woodstock Farms company. UNFI just recently announced the acquisition of Tony's Fine Foods.

The challenge is that grocery and food products are normally a low-margin business. The organic and natural niche has enjoyed bigger margins but those margins are contracting as more and competition tries to hop on the natural and organic bandwagon. Large regional food chains and nationwide titans like Wal-mart and Target could steal market share. It has been a serious problem for Whole Foods (WFM) and that makes it a problem for UNFI because WFM is UNFI's biggest customer. WFM accounts for over one third of the company's revenues.

If growing competition wasn't enough the grocers and processors like UNFI also face rising input costs as suppliers raise prices. Margins are getting squeezed from both sides.

Now UNFI's latest earnings report wasn't that bad. The company announced earnings on June 11th. Results were in-line with Wall Street estimates. Sales improved +13.8% from a year ago. Yet gross margins inched down from 16.8 percent to 16.7 percent. That doesn't seem like much but it confirms the trend. Furthermore, while the prior quarter's sales were up +13.8% UNFI is only expecting full-year revenues to grow 11.0%-11.6% this year.

You can see on the chart where UNFI plunged in early June on its earnings report. The oversold bounce failed near $67.00 and the stock has gone almost straight down since then. Today UNFI is flirting with a breakdown near support in the $60.00 area. Last week the stock bounced at $59.25 and $59.30. We are suggesting a trigger to buy put options at $59.00.

Please note that Whole Foods (WFM) is scheduled to report earnings Wednesday, July 30th, after the closing bell. WFM's results and their guidance will have an influence on shares of UNFI. More conservative investors may want to wait until after we see how the market reacts to WFM's results before initiating positions on UNFI.

- Suggested Positions -

Long NOV $55 PUT (UNFI141122P55) entry $2.07

07/28/14 triggered @ 59.00
Option Format: symbol-year-month-day-call-strike