Option Investor

Daily Newsletter, Saturday, 6/28/2014

Table of Contents

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

Market Wrap

Bipolar Markets

by Jim Brown

Click here to email Jim Brown

The Dow and S&P declined slightly and the Nasdaq and Russell rallied slightly. Not bad for a week that normally produces a -2% loss.

Market Statistics

The S&P added another year to raise the totals to 22 of the past 25 years for post June expiration losses but it was by the narrowest of margins with the S&P declining only 0.1% for the week. Historically this week normally loses about 2.1%.

The Nasdaq ended up with a decent gain of +30 points for the week to close at a new 14-year high. The Russell squeezed out a gain despite the big drop on Tuesday. The rebound over the last three days recovered +21 points of that Tuesday drop from three month highs.

Volume was ridiculously low with only 2.8 billion shares on Wednesday and well under the average of 5.9 billion. Thursday picked up slightly to 5.0 billion and Friday soared to 8.64 billion as a result of the Russell index rebalance.

I am really happy about the Russell rebound when the rebalance pressures normally push it lower as the week progresses. This should be positive for next week when follow up buying on the new stocks will help lift the index higher.

Friday's economics were lackluster and limited. The final revision of the June consumer sentiment rose slightly from the initial reading of 81.2 to 82.5. The current conditions component improved slightly from 94.5 to 96.6 and the expectations component declined slightly from 73.7 to 73.5. Since the revision was minimal the report was ignored.

Agricultural prices for June declined -2.9% compared to a -0.9% drop in May. Investors should have been thrilled after the +7.1%, +4.7% and +3.6% rises in Feb, Mar and April. The biggest decline was a -9.8% drop in food grains and -7.6% drop in feed grains and hay. This means it will be cheaper to feed livestock and those prices should decline from record levels.

Fruit prices rose +6.1% driven by higher orange prices and commercial vegetables rose +11.3%. That was offset by a -3.3% decline in dairy and -4.1% decline in poultry and eggs. Meat animals declined -0.8%. Retail food prices have been rising at the fastest rate in years and any weakness will be appreciated. The 2012 drought is still impacting meat and grain prices as farmers rebuild their herds with a cautious eye. Many were hurt significantly when the drought killed hay fields and they were forced to sell their cattle cheap rather than buy expensive feed.

The agricultural report is normally ignored by equity traders but commodity traders do pay attention.

Next week is a short week with July 4th falling on Friday. However, we will have three critical reports. The national ISM Manufacturing for June is Tuesday and most analysts are only expecting a minimal rise. There are quite a few expecting a negative surprise. The regional manufacturing reports have been weak and that should translate into the national numbers.

The Factory Orders for May are out on Wednesday and those are expected to decline from 0.7% to 0.3% and could potentially go negative. This will impact GDP calculations for Q2, which are already declining.

The big reports for the week are the ADP Employment on Wednesday and Nonfarm Payrolls on Thursday. The ADP forecast is for new jobs to rise from 179,000 in May to 205,000 in June. The range of estimates is from 190,000 to 240,000.

The Nonfarm forecast is for a decline from 217,000 jobs in May to 213,000 in June. The range of estimates on the Nonfarm report is from 199,000 to 290,000. Clearly there is a wide disagreement in expectations.

There is a lot of confusion surrounding the employment numbers. Some of the regional reports have shown improving metrics and some have shown a decline in the employment components. Whatever numbers are reported next week will be important. The Nonfarm needs to remain in the 200,000 range to continue the Fed's current economic growth scenario. If jobs begin to decline from that 200,000 range there is going to be a lot of revisions to economic growth forecasts.

I can't let last week expire without rehashing the negative GDP revision. Initially the government said growth rose a miniscule +0.11% in Q1. Investors were lukewarm on the report and the market actually rose slightly. In the next revision they said growth declined -0.98% and investors still shook it off as a negative weather event and the S&P rose +32 points over the next six days.

Last week the government's final report showed growth declined -2.9% in Q1 and way below the first couple of estimates and the market rallied again. Eventually economics will matter. Analysts again tried to blame the weather but the cracks in the argument were growing. Some even went back to see how the GDP reacted to past spells of cold winter weather. Oops! They found out that winter actually comes every year. In most cases the GDP was not materially impacted and the weather excuse began to fall apart.

The -2.9% decline was the lowest quarter since Q1-2009 and the biggest downward revision to Q1 since 1976. It was the largest contraction in Q1 in 32 years. The combined GDP growth for the last four quarters fell from +2.6% to only +1.5% and lower than the trend of +2.0% for the last five years.

Corporate profits fell -9.1% in Q1 after rising +2.2% in Q4. This is the lowest level in four years! Final sales declined -1.3% and the largest drop since Q1-2009. Consumer spending contributed only 0.7 points and significantly below the prior estimate at +2.1 points. Total consumer spending growth fell from +3.1% to +1.0%. Foreign trade reduced the GDP by -1.5 points and it would be hard to blame that on the weather.

Analysts blamed not only the weather and the drop in consumer spending but also the decline in unemployment insurance benefits and slower inventory accumulation. Investment spending declined for the first time since 2012 and the decline in net exports was the first drop in three quarters.

Six weeks ago analysts were predicting a snapback in the economy in Q2 with GDP estimates well over 3.5% with most in the +4.0% range and some analysts suggesting we could have a +5% quarter. Fast forward to today and those estimates are crashing. A +2.0-2.5% number was being circulated but after the weak personal income and spending numbers on Thursday I heard some estimates in the high +1% range.

Some analysts who were projecting that big snapback in Q2 are now reversing those projections because of the latest data showing a lack of rebound in May and June.

Obviously the Q2 estimates are going to be all over the map for the next month and we don't get the first official government estimate until the end of July. If that number comes in under 2% with the potential for further downward revisions as in Q1 the market and the Fed are going to be doing some serious soul searching. Recessions typically appear every 5-7 years and we are moving into year six of this recovery. However, the slow pace of the recovery could actually extend the length of the cycle. Nobody is expecting negative growth in Q2 but we do have a very good chance of slowing growth over the rest of 2014.

The prior week the Fed lowered its GDP estimates for the full year to +2.2% from +2.9%. In order to hit that new number we would have to have GDP over 3.9% for each of the next three quarters. This is not likely to happen. This means the Fed is going to be forced to lower projections again to something in the +1.8% range. The IMF just cut U.S. GDP estimates to +2% for the full year.

I guess if the Q2 GDP disappoints we can blame it on the World Cup and two weeks of lost productivity.

It was another summer Friday ahead of a holiday week and if it were not for the Russell reconstitution the volume would have been very low. Quite a few traders will be off all next week and that means very light volume. Art Cashin said the already low volume may be the result of the charges against Barclay's for running a dark pool to benefit high-frequency traders. Art speculated that the low volume may be due to high-frequency traders sitting out right now while they decide how the trading environment is changing as a result of the Barclay's attack and the pledge by SEC Commission Chair Mary Jo White. She has pledged to change high-frequency trading rules later this year.

Art also said he was worried about the low volatility. "You will hear a good deal of people saying that this much calm and complacence in the market will spring out in a negative fashion." The earnings warning by Dupont (DD) is fueling concerns that Q2 earnings may be weak.

Dupont warned on Thursday that full year earnings would sink to $4.00-$4.10 down from $4.20-$4.45 compared to analyst estimates of $4.30 and they could take a charge of 20 cents due to restructuring. They lowered current quarter earnings estimates to $1.28 compared to analyst estimates of $1.46. Dupont said seed sales had slowed and herbicide sales were weak. Dupont blamed it on the weather but that suggests they are forecasting weather issues for the rest of the year as well. If it was just weather why are they restructuring? I think this is another example of the weather being used as a "kitchen sink" excuse.

I don't want my weekend commentaries to be a weekly shout out for Amazon but that is the way it is working out. Late Friday news broke that Amazon may be ready to take aim at GrubHub and launch a local takeout-delivery service. It would be an extension of the Amazon Local daily deal service similar to Groupon. TechCrunch first reported the news after the feature was turned on briefly for testing and then quickly taken back down. There were rumors Amazon could be looking at acquiring Peach, a takeout service in Seattle, Maryland and Virginia or Caviar, which operates in San Francisco, Chicago, Washington DC, New York and Boston with gps tracking of customer orders.

Deutsche Bank analyst Karen Short also warned on Friday that Amazon could quickly disrupt the grocery store business with its Amazon Fresh grocery delivery business. They have been testing that service in Seattle, Los Angeles and San Francisco. Short warned they could already be building out the local infrastructure and easily just turn it on at some point in the future. Existing grocery stores could lose several percentage points of market share very quickly and with only a 1% profit margin this could represent a 10% EBITDA dollar loss.

Amazon just keeps launching weekly efforts to conquer the world. Two weeks ago it was the local services market place to compete with Yelp and Angie's list. A couple weeks earlier it was the Fire TV. Last week was the Fire Phone. Where will it all end?

Manitowoc (MTW) said it was in talks with activist investment fund Relational Investors about a proposal to breakup the company. Relational has an 8.5% stake in Manitowoc. The company primarily manufactures two things, cranes and food service freezers and ice makers. Relational believes the company would perform better as two separate companies. The MTW CEO said they would consider the Relational proposal. Jefferies upgraded the stock and raised the price target to $33. Shares of MTW spiked +11% to close at $32.92.

Green Mountain (GMCR) rallied +4% after Argus upgraded the company from hold to buy. They based the upgrade on solid revenue and earnings improvements for the rest of 2014 and throughout 2015. The analyst expected 2014 revenue growth of 10% with an increase in the sales of K-cups and brewers. The firm raised the price target to $140. The K-cup product is a gift that just keeps on giving for Green Mountain.

Carlos Slim's holding company, Inmobilaria Carso, told America Movil's board it will acquire AT&T's 8.3% stake, which includes 24% of the voting shares. The value of the stake is roughly $6 billion. AT&T has to sell the stake to avoid a conflict of interest when it buys DirecTV, which competes with America Movil for pay-TV customers in Latin America. The deal will provide AT&T with another $6 billion in cash as it tries to raise $48.5 billion for the DirecTV acquisition. AT&T also said it reached an agreement to sell $2 billion in receivables to a group of banks led by Citigroup. Part of the deal was to sell $1.6 billion in future installment payments for phones for $800 million in cash and the balance to be paid out over time. The company also expects to receive $2 billion for some asset sales in Connecticut before year end. Shares of AT&T barely moved on the news.

Allergan (AGN) rose another 2% after the company agreed with Bill Ackman's Pershing Square Capital Management not to trigger the poison pill as a result of Ackman's request for a special shareholder meeting. Ackman wants to replace several board members in an effort to take over the company in conjunction with Valeant (VRX). Ackman said he was pleased to reach the agreement without the assistance of the court. Ackman had sued Allergan over the poison pill provisions. Ackman said to call the special meeting they would need support from about 25% of Allergan shareholders and they were about halfway there. Valeant has offered $54.2 billion for Allergan. That is the latest offer after they raised it twice. Ackman owns 9.7% of Allergan. The poison pill triggers at 10% ownership. The pill allows existing shareholders with less than 10% positions to buy large amounts of stock at a steep discount in the event of a hostile takeover. This would massively dilute any potential acquirer's position. I think the end is in sight for Allergan.

Barclay's (BCS) recovered slightly on Friday with a +2% rebound but the damage is far from over. On Thursday the New York attorney general filed a 30 page complaint against Barclay's alleging fraud in the way the bank handled the dark pool. He claims Barclay's lied to brokerage customers while partnering with high-frequency trading firms. Instantly money managers and brokers shunned the LX dark pool and Barclay's stock fell more than -6%. Banks and brokers that immediately disconnected from the LX pool included Deutsche Bank, Royal Bank of Canada, Sanford Bernstein and Investment Technology Group. Goldman Sachs, Morgan Stanley and JP Morgan had previously halted connections to the pool before the AG complaint. The AG said Barclay's horded orders for stocks to make it more lucrative for the high-frequency traders. While they did this they continually assured investors they were protecting their interests when in fact they were selling the order flow to the pool participants.

The constant stream of negative news about high-frequency trading and dark pools is not going to give investors a lot of faith about the stock market. The Flash Boys book several weeks ago ignited another firestorm on whether the markets are rigged.

I believe the days of high-frequency trading as we know it today are numbered. There are too many regulators smelling blood in the water and they are circling the participants trying to figure out how to charge them with wrongdoing. Eventually they will find the key and the industry will have to change.

Retail investors already believe the market is rigged against them even though HF trading has narrowed spreads to unbelievably low levels and provided extra liquidity even in low volume markets. This uneasiness about the market is part of the reason we are seeing equity outflows. The Investment Company Institute said investors pulled money out of equities in the week ended June 25th making it the eighth consecutive week of outflows. More than $20 billion flowed into bond funds over the same period.

Retail investor interest in the equity market is sagging for multiple reasons. CNBC viewership is tanking along with investor interest in the market. Viewership is at the lowest level since 1997. On Friday the 20th Jim Cramer's Mad Money show had only 2,000 viewers in the targeted 25-54 demographic. Cramer has been spreading himself all over the various CNBC time slots trying to capture viewers for his nightly show. Apparently it is not working. Mad Money may be going dark soon unless something changes quickly.

In the "you have got to be kidding" department Caesar's Entertainment (CZR) with a massive $23 billion in debt, loans and bonds near default with creditors nipping at their heels, said it was ready to invest $5 billion developing a casino in Japan. Caesar's said it would have no trouble financing the project. This is from a company where the debt is rated at nine levels below investment grade.

Japanese lawmakers began debating a bill this month to legalize casinos. Japan is the world's third largest economy and they are in serious trouble. They need extra revenue and economic activity. Their debt to GDP is the highest of any industrialized country. Prime Minister Shinzo Abe said they would try to pass a law ending the ban on casinos in an effort to boost tourism along with the Tokyo Olympics in 2020.

Caesar's said they could finance it but they would also consider selling shares in Japan through a public listing to finance the casino project. Wynn Resorts and MGM Resorts have also said they intend to sell shares for planed resorts if casinos are approved. Getting three major casinos approved, designed, permitted and built by 2020 would still be a challenge. CLSA Ltd said the Japanese casino market could be worth $25 billion a year by 2025.

I applaud Caesars for attempting this project because it would be a lucrative market. However, they need to come up with a plan to pay down their existing debt before the creditors start taking over properties. Just this week Caesars said they were shutting down the Showboat in Atlantic City to reduce capacity in the East Coast gambling hub. Caesars acquired the Showboat in 1998. Caesars has four properties in Atlantic City including the Showboat, Caesars, Bally's and Harrah's out of the 11 total casinos there. The Atlantic Club shutdown in January and the newest casino Revel AC filed for bankruptcy for the second time in two years. They told employees they were shutting down in August if no buyer is found. Penn National Gaming cancelled plans for a casino citing the deteriorating demand in the area.

One decision down, one to go. Alibaba plans to list on the NYSE under the ticker BABA and will be the third largest tech company on the NYSE based on their $168 billion valuation. Only IBM and Oracle would be larger. Ba means 8 in Chinese and is considered a lucky number. BABA would be 88 and they would like to begin trading on August 8th. According to recent rumors the company is looking to sell a 12% stake worth about $20 billion.

The Nasdaq has been fighting an uphill battle for large IPOs after the botched Facebook IPO. Of the ten technology IPOs in Q1 the NYSE won 7 of them. This shows the reversal of fortunes for the Nasdaq. From 2001-2011 the Nasdaq won 122 tech IPOs and the NYSE only 42. Since January 2012 the NYSE has won 45 while the Nasdaq scored 35. Facebook was the largest for the Nasdaq and represented about 50% of the dollar volume of the 35 listed.

The next question will be the pricing. Nobody has a clue how they are going to price their shares and because of the high demand they could issue more shares or raise the price. When this IPO does happen it is going to suck a lot of air out of the market. The money for that $20 billion IPO is going to come out of other shares. Investors will lighten up on their existing positions to buy BABA. The real winners here will be Yahoo with a 24% stake and SoftBank (SFTBY) with a 34.4% stake. Yahoo is going to sell half of its stake but SoftBank said they would not be sellers in the IPO. Softbank only invested a little less than $200 million in the Alibaba stake in 2000, which is now estimated to be worth $50 billion. Softbank is one of only three companies to post more than a one-trillion yen profit in 2013. The other two were Toyota and NTT DoCoMo. Softbank owns stakes in more than 1,300 tech companies.

The S&P is up +4.7% in Q2 and is only one day away from completing the longest stretch of quarterly gains since 1998. We would have to see a major crash on Monday to turn the S&P negative for the quarter. The S&P has traded for 50 consecutive days without a 1% move and that is the longest stretch since 1995. The U.S. market has gone for two years without a 10% correction and in any playbook that is pressing our luck.

The key to keeping this streak alive is going to be earnings growth or more importantly revenue growth for Q2. The earnings over the last several quarters have been engineered from stock buybacks and cost cutting. Revenues are barely rising. We need to see the revenue growth surge to really get investors excited.

If the Q2 earnings are simply another quarter of earnings rising by a couple pennies and revenue flat to barely positive and a new round of stock buybacks announced we could see some negative reactions.

TrimTabs.com said announced buybacks in Q2 slowed to $92.7 billion, down from $138.5 billion in Q1. This will be the lowest in seven quarters. Buybacks in June have declined to $11.5 billion and the lowest level since May 2012. Only four companies have announced buybacks of more than $1 billion in June. On the flipside TrimTabs said companies are selling new shares at the fastest rate since Q3-2013. This always happens at new market highs.

Here is the $64k question. Did they stop the buybacks because they ran out of money or because they expect to buy the stocks back cheaper in the future? I would vote for a combination of the two. With the markets at new highs stocks are not cheap. That means you can buy back less and your money does not go as far. Also, with stocks at new highs going into summer there is always the potential for a correction.

Lastly, since we know Q1 was a weak quarter for sales and profits and Q2 may not be much better there is the possibility companies have elected to save cash to get them over the next soft patch as we head into the midterm election weakness.

The S&P closed at the high of the day at 1,960 after a late day buying spurt thanks to the Russell rebalance. Support at 1,950 was tested twice last week and penetrated both times but traders bought both dips. That should have been enough to reinforce that level as future support. The next battle is the closing highs at 1,962 on both the 20th and 23rd. We are really close to making a new high and buyers don't appear to be diminishing despite the arrival of summer. Next week's extremely low volume could easily allow a major move to develop and after testing 1,950 it could be to the upside.

The 50-day average is now 1909 and rising pretty sharply. This is short term support. The longer term support is the 125-day average at 1,867. The S&P returns to this average about once every 2.5 months. The last touch was on April 15th making Monday 2.5 months. We are due for another retest of that level.

The Dow was the weakest index last week with a -95 point decline for the week. It would have been worse than that but the Dow rebounded +80 points in the final minutes of trading. On the bright side the short term uptrend support held.

The daily chart shows strong resistance at that 17,000 level and the range between that resistance at 16,700 and uptrend support is narrowing. The longer term trend is clearly higher but the Dow is struggling after the +171 point gain the prior week. Every day that passes we move further into the summer doldrums but we still have the Q2 earnings cycle to provide lift over the next three weeks. That assumes a lack of serious earnings warnings next week when companies hope everyone will be at the beach.

The Nasdaq is clearly in breakout mode. The strong resistance band from 4,344-4,371 is history and should now be support. The Nasdaq closed at a 14 year high and the internals for the last several days were bullish.

The Nasdaq and the Russell should be positive over the next couple of days as leftover buying from the rebalance pushes the indexes higher. Apple appears to be over its post split depression phase and should contribute to a higher Nasdaq.

The Russell indexes confounded historical norms and actually rose for the week rather than decline on pre rebalance selling. This is very positive for next week because there is always some leftover buying as fund managers level out their positions to fit the new Russell weightings.

Because of the order on close buying the volume on the NYSE spiked from 400 million shares at 3:50 to 1.485 billion at 4:05. This spike confounded some chat rooms where ignorance of reality prevailed. They were calling it everything from a fat finger trade by the Fed to a rumor of ISIS pulling out of Iraq. A lot of information rockets across the Internet but quite a bit of it is worthless. Always consider the source of the headline.

The Russell 2000 still has strong resistance at 1,194 and several levels just above that. The Russell is not likely to be breaking out to new highs over the next week but I would not complain if I am wrong.

In theory the markets should rise the next two days as a result of lingering rebalance buying as fund managers finish their portfolio adjustments. It will be a very low volume week with several high profile economic reports. The Manufacturing ISM on Tuesday will be the first hurdle but after the market rallied on a -2.9% contraction in GDP I don't know what it would take to push the market lower.

The payroll reports on Wednesday and Thursday are also critical but as long as the numbers don't deviate from expectations by a huge amount the market will probably take almost anything in stride. The expectations for 7% earnings growth or better in Q2 and the continued paint drying pace of the QE taper should keep the markets positive. I always cringe when I write things like "should keep the markets positive" because that is a clear kiss of death for the rally. Let's hope this time the market is not listening.

Random Thoughts

There is not much in this section this week. The news flow was pretty stagnant except for Iraq, the Ukraine and the world cup. I have already run out of words on Iraq and Ukraine and I have nothing to say about the World Cup. However, Nike (NKE) normally declines in the weeks after the event on a sell the news drop. They rise into the event and then decline afterwards.

July is the best month in Q3 for the markets. Of course August and September are so bad it makes July the clear winner. Since 1950 July has averaged a minor +1.2% gain on the S&P. July 2009 and 2010 were so strong they boosted the average from near zero to that 1.2% average. Of course two years does not make a trend. Midterm election Julys are normally negative with the Dow and S&P ranking as only the 5th best month of the year but the Nasdaq ranks as the 11th and the Russell 2000 the 12th or the worst month of the year for the Russell.

The Stock Trader's Almanac pointed out that June is the end of the Nasdaq's 8th best months string that runs from November through June. We are heading into the four worst months for the Nasdaq. The Investors Intelligence sentiment rating has seen the bullish sentiment at more than 60% for four consecutive weeks and reached a multi-year high two weeks ago. Similar readings were seen in August 1987, December 2004 and October 2007 and at the end of 2013. The CBOE equity put-call ratio declined to 0.47 last week and the lowest since January 2011 representing extreme complacency.

Here are two interesting charts showing the Fed has no clue where they are going. They have consistently missed on their projections for economic growth, stimulus and inflation. Blind Leading the Blind

Two major banks in Bulgaria were the focus of depositor runs after two men started publishing bogus news on the Internet and warning people to withdraw their deposits or lose them. The government had to take over Bulgaria's fourth largest lender Corporate Commercial Bank (CorpBank) after tens of thousands of customers stormed the bank's locations demanding their deposits. Two days ago the third largest lender First Investment Bank warned the government they were seeing a surge in large scale cash withdrawals and were short of funds. If only two men can cause the collapse of two of the top four banks in Bulgaria in only a week's time what could a terrorist group of hundreds do to the financial system in any country? I think we have just seen the first in a new wave of terrorist attacks. I am sure the various individual groups like Al-Qaeda and the government sponsored groups from places like North Korea and China were awakened by the headlines and this will be on their playlist in the future.

Most Americans will believe anything they read on the Internet and it would be very easy for several hundred terrorists with smartphones to flood the Internet with warnings about our banks. Individuals should take this as a warning and keep some cash at home just in case.

Customers waiting for cash ar BankCorp

NATO Secretary General Anders Fogh Rasmussen, a person that rarely comments on energy matters, told the London based think tank Chatham House on June 19th that Russia was secretly backing some European anti-fracking environmentalists in order to stop Europe from joining the shale-gas revolution. By outlawing fracking it keeps Europe from producing its own energy and keeps them dependent on energy from Russia. Rasmussen claimed NATO allies had detected Russian manipulation at work in the "sophisticated information and disinformation operations" within Europe's well-organized anti-fracking groups. As punishment for the Ukraine refusing Russian involvement Gazprom raised gas prices to the Ukraine in April by 80%. Russia has used its gas exports to Europe as a political lever numerous times over the last decade. It is no surprise that they would resort to funding environmentalists to keep the gas flowing. Last year alone Gazprom spent more than $6 million on Washington lobbyists and they have far less to gain here than in Europe.

Got water? In most of the U.S. we are fortunate to have plenty of water. That is not true in the rest of the world. More than 2.5 billion people don't have fresh water that is safe. In March Australia opened a futures exchange that deals in water. Since March 1.6 million dollars representing about 16.5 billion liters of water have changed hands. While that may be a drop in the bucket as far as fresh water goes it is the start of commoditization of water. Recent droughts in the American west and in Texas have shown lawmakers in those areas the need to prepare for significantly larger water storage plans. I think it is only a matter of time before water futures are going to be traded in the USA. In the southwest water rights are hard fought and are deeded down for generations. Without irrigation water there are no crops.

A Mexican military helicopter crossed the border into Arizona and fired two shots at two border patrol officers sitting in a marked patrol car. Reportedly the military copter was assisting Mexican federal police on the ground in a drug operation on a ranch in Altar, Sonora when they were shot at by criminals. How or why the helicopter strayed into the U.S. and why they fired upon the marked patrol car is unknown. The Mexican government contacted the local U.S. authorities and apologized for the incident. The helicopter flew within 15 yards of the patrol car when the shots were fired sometime after midnight. Later in the day when reporting of the event started exploding across the news wires the Mexican government changed their story saying there was no event and no Mexican helicopters were involved in the operation.

In January two heavily armed Mexican soldiers were confronted inside Arizona by border patrol agents and a standoff ensued but no shots were fired. In 2011 more than 30 uniformed soldiers in military vehicles crossed the Rio Grande into Arizona and were eventually confronted by border patrol and they returned to Mexico. The agents said the foray into Arizona was "inadvertent." They just accidentally crossed the Rio Grande River and wandered for an hour in Arizona. I guess they don't have maps or GPS devices. They should have asked the drug smugglers for directions.

Washington D.C. police were ordered to return to work this weekend in an "All Hands on Deck" initiative to fight an expected onslaught of summer crime. The unions have filed paperwork challenging the "all days off cancelled" order by the Police Chief. The all hands on deck command has been used seven times since 2007. Apparently criminals don't take off during holiday weeks.

A blackout hit most of Venezuela on Friday just as President Maduro was speaking on TV. Various excuses were given for the nationwide blackout and all of them due to natural causes or blamed on deteriorating equipment. In December power went off during another Maduro speech and it was due to gunmen attacking power transmission lines to cut the power. The real problem is 15 years of socialist policies that have collapsed the economy and left the country unable to pay for anything including utility maintenance. Maduro has suffered through three months of public disturbances demanding his resignation because of economic conditions. He said the protests were a U.S. backed attempt to overthrow him. The rule for dictators is to always blame the USA to deflect protests against yourself.

President Obama requested $500 million to arm the rebels against President Bassar Assad in Syria. The problem there is that most of the rebels left in Syria are ISIS fighters. To clarify this imitative he said the U.S. wanted to train and arm the "moderate factions" among the rebels. Good luck with that litmus test to find "moderate rebels." Hi, we are giving out guns. Are you a moderate?

In the truth is stranger than fiction department the Banghazi terror suspect captured on film waving a rifle with the embassy in flames behind him has pled not guilty in front of a federal judge in Washington DC. Ahmed Abu Khatallah, has given numerous television interviews to all the major U.S. networks while he was free in Benghazi in which he described the event. Officials said he was talkative and cooperating on his slow ride to the U.S. aboard the U.S.S. New York before he was read his Miranda rights. One official said the conversations "continued" after he was Mirandized. I am sure once he has an attorney assigned those conversations will cease. Officials say any information he revealed before he was Mirandized could not be used and would not be admissible in court. Would somebody explain to me why a terrorist overseas has any Miranda rights in the USA? If the president can legally fire Hellfire missiles from drones at terrorists without reading them their rights why does this one have rights?

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"This is no longer conjecture. We cannot simply turn a blind eye to data that is weak and argue that all bad news is good news for stocks. At some point, bad news is bad news. At some point, volatility will rise from the ashes of complacency."

Michael A. Gayed


New Plays

Surging Chinese Auto Sales

by James Brown

Click here to email James Brown


Bitauto Holdings - BITA - close: 46.26 change: +0.02

Stop Loss: 43.45
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 28, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 933 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
According to BITA's website, Bitauto Holdings Limited is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in four segments: the bitauto.com advertising business, the EP platform business, the taoche.com business, and the digital marketing solutions business. They were founded in 2000 and headquartered in Beijing, China.

BITA has partnerships with all the major Chinese Internet portals like Sina, Tencent, Yahoo! China, Alibaba, Netese, Qihoo360, and Tom. They have sales networks in more than 70 cities.

The company is developing a trend of beating analysts' estimates. Their most recent quarterly report was May 8th with their Q1 results. Wall Street expected a profit of 16 cents on revenues of $54.3 million. BITA delivered a profit of 18 cents with revenues climbing +46.6% to $56.9 million. The company has also made significant progress with its gross margins, which jumped to 79.1%.

This trend is likely to continue. Earnings are up +296% from 2010 to last year (2013). Sales are up +246% over the same time frame. Wall Street is expecting BITA's profits to rise 50 percent in 2014.

It's not surprising to see why. Millions of Chinese people are entering the middle class. That means surging demand for automobiles. China is now the biggest auto market on the planet with almost 20 million new cars purchased every year. The U.S. is having a good year for new cars sales too but we are only on track for 16.7 million vehicles this year.

Currently shares of BITA are hovering near their highs and what looks like resistance in the $47.00 area. The stock peaked to $47.00 back in March this year and it's been trying to breakout past this area the last several days.

We want to use a trigger to launch bullish positions at $47.75. Please note I do consider a more aggressive, higher-risk trade. BITA has been a volatile stock in the past. Investors may want to use small positions to limit their risk. We are not setting any targets tonight but the point & figure chart is bullish and forecasting at $57.00 target.

Trigger @ $47.75 *small positions to limit risk*

Suggested Position: buy BITA stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the Oct $50 call (BITA141018C50) current ask $4.70

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

Annotated chart:

In Play Updates and Reviews

Stocks Extend Their First Half Gains

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market is poised to end the second half of 2014 on a high note.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $44.00 change: -0.55

Stop Loss: 39.85
Target(s): to be determined
Current Gain/Loss: + 9.3%

Entry on May 28 at $40.25
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: see below

06/28/14: The rally in AAL has stalled a bit under round-number resistance near $45.00. If you are looking for a new entry point then consider a breakout past $45.00.

Tonight we are moving the stop loss to $39.85.

Earlier Comments: May 17, 2014:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

current Position: Long AAL stock @ $40.25

- (or for more adventurous traders, try this option) -

Long Aug $40 call (AAL140816C40) entry $2.65*

06/28/14 new stop @ 39.85
06/14/14 new stop @ 38.85
05/28/14 triggered @ 40.25
*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


Arrowhead Research - ARWR - close: 14.35 change: +0.13

Stop Loss: 12.75
Target(s): to be determined
Current Gain/Loss: +19.1%

Entry on May 27 at $12.05
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

06/28/14: ARWR managed to outrun the market on Friday with a +0.9% gain. Shares remain very volatile. I am not suggesting new positions at this time.

Earlier Comments: May 19, 2014:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Current Position: Long ARWR stock @ $12.05

- (or for more adventurous traders, try this option) -

Long Sep $12.50 call (ARWR140920C12.5) entry $3.40*

06/25/14 new stop @ 12.75
06/09/14 the intraday pullback today might be a short-term top. Our trade is up +20% and investors may want to take some money off the table
05/27/14 triggered @ 12.05
*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


The Dow Chemical Co. - DOW - close: 51.61 change: -0.51

Stop Loss: 50.85
Target(s): To Be Determined
Current Gain/Loss: + 0.7%

Entry on May 27 at $51.25
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.5 million
New Positions: see below

06/28/14: On Thursday night DuPont (DD) issued an earnings warning. This sparked some selling in DOW as both companies are in the chemical business. Shares of DOW dipped toward their simple 50-dma but bounced at $50.87. Our stop loss happens to be $50.85.

The long-term trend is still up but short-term DOW could be in trouble. More conservative investors may want to exit early now. I am not suggesting new positions.

Earlier Comments: May 24, 2014:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. As Wall Street searches for returns and yield DOW will likely continue to show up on their radar screen.

The company has been doing a good jog on maintaining cost controls and returning capital to shareholders. The Q1 2014 earnings report showed net profits surged +75% from a year ago. The first quarter was their sixth consecutive quarter of year-over-year earnings growth.

Dow has raised their dividend by 15% and now sports a 3.0% yield. They plan to complete a $4.5 billion stock buyback program in 2014.

In spite of higher feedstock and energy costs DOW still managed to see margins grow. They expect 2014 to see this margin growth gain further momentum.

Wall Street has been upgrading the stock and raising earnings forecasts.

Shares of DOW are in a long-term up trend (see weekly chart below). Yet the last couple of months have seen shares consolidating gains in a sideways move near $50. This consolidation looks like it's about over. DOW is poised for a breakout higher.

Current Position: Long DOW stock @ $51.25

- (or for more adventurous traders, try this option) -

Long Sep $50 call (DOW140920C50) entry $2.88*

06/28/14 DOW spiked lower after DuPont issued an earnings warning the night before
06/24/14 new stop @ 50.85
06/14/14 new stop @ 49.75
05/27/14 triggered @ 51.25
*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


Flextronics Intl. - FLEX - close: 11.20 change: +0.09

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 8.7%

Entry on June 00 at
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.9 million
New Positions: see below

06/28/14: FLEX displayed some relative strength on Friday with a +0.8% gain and a close above its simple 10-dma. Hopefully this means the two-week consolidation is about over.

I am not suggesting new positions here.

Earlier Comments: May 31, 2014:
FLEX is in the technology sector. The company is the second largest contract electronics manufacturer. They make electronic components for some of the world's biggest companies like Apple, Samsung, Cisco Systems, Google, IBM, and Microsoft.

FLEX reported earnings on April 30th and results beat Wall Street's estimates on both the top and bottom line. EPS was 24 cents, 4 cents above consensus estimates. Revenues rose 27% from a year ago to $6.72 billion for the quarter, well above analysts' estimates. Operating income surged +72% from a year ago.

Just a few days ago the stock broke out past major resistance in the $9.75 region following its analysts day. FLEX appears to be making improvements that will bring about better margins and earnings growth. The most recent quarter saw gross margins improve 170 basis points.

The company ended the quarter with $1.59 billion in cash and cash equivalents and have continued to deliver on their strong stock buyback program. FLEX has already repurchased 9% of its outstanding shares in fiscal 2014. Value investors also love FLEX's strong free cash flow, which is the highest among its peers at more than 12% FCF. The company looks poised to outperform its peers with EPS growth of +27% by the end of 2016 versus average growth of +20% from its rivals.

current Position: Long FLEX stock @ $10.30

- (or for more adventurous traders, try this option) -

Long Oct $10 call (FLEX1018C10) entry $0.80

06/16/14 new stop @ 10.75
06/07/14 set target at $11.75
06/03/14 triggered @ 10.30
Option Format: symbol-year-month-day-call-strike


Ingersoll-Rand Plc - IR - close: 62.70 change: +0.13

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: - 1.8%

Entry on June 20 at $63.85
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: see below

06/28/14: IR bounced near its rising 20-dma for the second day in a row. Shares remain under short-term resistance near $63.00. I would wait for a rally past $63.00 before considering new positions.

Earlier Comments: June 10, 2014:
IR is in the industrial goods sector. They operate two business divisions, their Climate and Industrial segments. The climate business accounts for the majority of their sales as they compete in the heating, ventilation, and air conditioning markets. They're best known for their Club Car, Ingersoll Rand, Thermo King, and Trane brand names.

The company has been consistently growing earnings with EPS growth of +28% from 2011 to 2013. They've also seen operating margins improve over the same three-year period. Their most recent earnings report in April beat analysts' estimates by three cents with a profit of 29 cents a share. Revenues were up +3.2% from a year ago to $2.72 billion. Orders were up +5% for the quarter while margins in its climate business rose 210 basis points.

Steady revenue growth and margin growth sound like a pretty good deal if you're bullish on the stock. Management followed up their earnings news by raising their guidance on the second quarter this year.

Weather was a factor in the first quarter but now that we're into summer any increase in construction should be a boon for IR. In yesterday's new play (AOS) we noted that the U.S. real estimate market looks poised for improvement. Housing starts were up 13 percent month over month in April. New permits to build houses hit their highest levels in five years. This should all point to improved sales for IR's HVAC business.

We know that somebody is bullish on IR. The last couple of weeks have seen some pretty big option bets. Thousands of July calls options have been purchased expecting IR's rally to continue over the next few weeks.

Technically we are seeing IR rebound from its long-term up trend. The last four months have also built what appears to be an inverse head-and-shoulders pattern, which forecasts a $69-70 target.

We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

current Position: Long IR stock @ $63.85

- (or for more adventurous traders, try this option) -

Long Sept $65 call (IR140920C65) entry $2.36*

06/20/14 triggered on gap higher at $63.85
suggested entry point was $63.75
*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


Sky-mobi Limited - MOBI - close: 7.98 change: +0.31

Stop Loss: 7.19
Target(s): To Be Determined
Current Gain/Loss: +2.7%

Entry on June 26th $ 7.77
Listed on June 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 696 thousand
New Positions: see below

06/28/14: MOBI followed the market higher with a late Friday afternoon surge. Shares outperformed the major indices with a+4.0% gain. I would still consider new positions now but traders might want to wait for a rise past Thursday's intraday high of $8.22 before launching positions.

Earlier Comments: June 25, 2014:
China is a massive market and continues to see strong growth in mobile phone adoption. That means more application downloads for the smartphone market. MOBI is cashing in on the app download business with their Maopao app store with 147 million users. They've already had over 15 billion apps downloaded from their store since 2005.

MOBI has strategic partnerships with China Mobile and China Unicom plus over 100 Chinese OEMs who pre-install MOBI's Maopao store on their mobile platforms. This allows MOBI to gain 400,000 new users every day.

When the stock market peaked in early March investors sold all of the high-growth and momentum names. MOBI was caught up in that sell-off with a correction from $12.00 to $6.00. Now shares appear to have found a bottom at the $6.00 level. The recent pullback this week looks like and entry point given MOBI's long-term prospects. The mobile gaming market in China is expected to surge +94% in 2014. MOBI's sales will surge as gaming grows.

Technically MOBI is starting to bounce after a 50% retracement of the rally off its June lows. We want to jump on board and buy today's bounce at the opening bell tomorrow morning. More conservative investors might want to consider waiting for a rally past $8.00 as an alternative entry point.

We are not setting a target just yet. I will point out that the point & figure chart is bullish and forecasting at $13.00 target.

This can be a volatile stock. Traders may want to consider limiting their position size to reduce their risk.

Current Position: Long MOBI stock @ $7.77

- (or for more adventurous traders, try this option) -

Long Oct $10 call (MOBI141018c10) entry $0.85

06/26/14 trade opens. MOBI opened @ 7.77
Option Format: symbol-year-month-day-call-strike


Microsoft Corp. - MSFT - close: 42.25 change: +0.53

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: + 1.0%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

06/28/14: MSFT finally appears to be breaking out past resistance near $42.00. I would consider new positions at current levels.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

- (or for more adventurous traders, try this option) -

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike


SoftBank Corp. - SFTBY - close: 37.64 change: +0.16

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +2.6%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

06/28/14: Alibaba.com is getting closer to its hyped IPO. The company has chosen the NYSE and plans to use the ticker symbol "BABA." The latest estimates suggest BABA will IPO with a value of $168 billion.

There are rumors that BABA could IPO on August 8th since the number "eight" is considered lucky in China.

There was a Reuters story that said SFTBY does not plan to cash out of its stake in Alibaba. At the moment SFTBY's 34.4 percent ownership in BABA could be worth more than $50 billion when Alibaba goes public.

Meanwhile shares of SFTBY continue to churn sideways. Investors might want to wait for a rally past the June 20th high ($38.65) before initiating positions.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.


Super Micro Computer, Inc. - SMCI - close: 24.69 change: -0.76

Stop Loss: 24.15
Target(s): To Be Determined
Current Gain/Loss: +11.0%

Entry on June 09 at $22.25
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 467 thousand
New Positions: see below

06/28/14: Hmm... SMCI continues to see profit taking. Shares lost -2.98% on Friday and closed under its 10-dma. That is short-term bearish. Readers may want to exit now to lock in gains.

We are going to keep the play open but raise the stop loss to $24.15.

Earlier Comments:
SMCI is in the technology sector. The company makes high performance servers (computers). The stock has been stuck in the $8.00-18.00 trading range for years. That changed back in January when SMCI reported earnings that beat analysts' estimates on both the top and bottom line. If that wasn't enough SMCI's management also raised their guidance. Shares soared to all-time highs on this news. You can see the spike higher in January.

When investors turned sour on high-growth and momentum names this past spring shares of SMCI corrected sharply but now it's back and poised to challenge its highs. That's because SMCI has delivered another strong quarter of growth.

SMCI reported its Q3 results on April 22nd. Wall Street was expecting a profit of $0.27 per share on revenues of $335.19 million. SMCI bested estimates with a profit of $0.37 per share and revenues soared +34.5% to $373.8 million. Management then guided higher for the current quarter and raised its top and bottom line estimates above Wall Street's estimate. It was their second straight quarter of record highs for revenues and earnings.

Analysts have started revising their numbers on SMCI as the company is growing faster than its rivals. Some might consider SMCI cheap with a P/E at 20.

The point & figure chart is bullish and forecasting at $25 target.

current Position: long SMCI stock @ $22.25

- (or for more adventurous traders, try this option) -

Long Oct $22.50 call (SMCI141018C22.50) entry $2.25*

06/28/14 new stop @ 24.15
06/16/14 SMCI rallies +10.7%
06/09/14 triggered @ 22.25
*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


Waste Connections, Inc. - WCN - close: 48.14 change: +0.33

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: +0.8%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 464 thousand
New Positions: see below

06/28/14: WCN continued to push higher on Friday and closed at an all-time high. If you're looking for an entry point consider buying dips near its 10-dma.

Earlier Comments: June 21, 2014:
According to the company website, Waste Connections is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets.

Through its R360 Environmental Solutions subsidiary, the Company also is a leading provider of non-hazardous oilfield waste treatment, recovery, and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins. Waste Connections serves more than two million residential, commercial, industrial and exploration and production customers from a network of operations across the United States. We also provide intermodal services for the movement of solid waste and cargo containers in the Pacific Northwest.

We seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. We also target niche markets, like exploration and production, or E&P, waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

Apparently the company's strategy is working. WCN is developing a pattern of beating Wall Street's earnings estimates on both the top and bottom line. WCN's model is generating more profit than its rival with EBITDA margins of 34% compared to its larger rival Waste Management's 24% margins.

WCN is seeing strong growth in its oil field waste business. The company said that its E&P (oil) waste business surged +20% in the first quarter of 2014. It's traditional solid waste business grew +5.5%. Management is optimistic with 2014 off to a strong start. Revenues are up. Free cash flow is up. Margins are improving. They expect to see 12% to 15% growth this year.

Technically shares of WCN just broke out from a two-week consolidation and closed at all-time highs. One could argue that WCN produced a big, inverse head-and-shoulders pattern over the last several months. The point & figure chart is bullish and suggesting a $62 price target.

WCN does have options but the option spreads are too wide to trade.

Current Position: Long WCN stock @ $47.75

06/25/14 triggered @ 47.75


Wells Fargo & Co - WFC - close: 52.90 change: +0.53

Stop Loss: 50.90
Target(s): To Be Determined
Current Gain/Loss: + 3.8%

Entry on June 02 at $50.94
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 13.5 million
New Positions: see below

06/28/14: WFC has spent the last few days consolidating sideways in the $52.00-53.00 zone. The stock looks poised to breakout to new highs again. Tonight we are raising the stop loss to $50.90.

WFC has earnings coming up on July 11th. We might choose to exit before the announcement.

Earlier Comments: May 31, 2014:
WFC is in the financial sector. They are a major, money center bank, headquarter in San Francisco with annual revenues of $81.72 billion and net income of over $21.5 billion. The financial sector has been a strong performer these last couple of weeks and WFC has helped lead the group higher.

Currently WFC is up +11.8% year to date. Its closest rivals are all negative for the year. Bank of America (BAC) is down -2.75%. JPMorgan Chase (JPM) is off -4.98%. Citigroup (C) is down -8.7% for 2014. WFC says business is good and they expect it to get better. The bank reported that credit quality has been improving. They managed to reduce their loan loss reserves in the first quarter and they expect this trend to continue in 2014.

At WFC's recent analyst day their CFO said they want to raise how much money they return to shareholders. They'd like to pay out 55 percent to 75 percent of net income back to shareholders as dividends and stock buybacks. That's up from 34% in 2013 but the new capital plans are subject to regulatory approval.

The shareholder friendly management at WFC is probably just one reason that Warren Buffet likes this company. WFC is Berkshire Hathaway's largest holding. Some have suggested that WFC is the best way to benefit from any long-term rebound in the U.S. housing market and consumer spending.

In recent news WFC says it is poised to end some of its legal troubles surrounding the robo-signing scandal during the housing crisis. It could final settle this issue for $67 million fine and put this issue behind it.

Technically shares of WFC looks very bullish with a long-term up trend. This past month has seen WFC breakout past key resistance at the $50.00 level. Shares ended the week at a new all-time high.

Current Position: Long WFC stock @ $50.94

- (or for more adventurous traders, try this option) -

Long Oct $50 call (WFC141018C50) entry $2.31

06/28/14 new stop @ 50.90
06/16/14 new stop @ 49.70
06/09/14 new stop @ 48.75
06/02/14 trade begins. WFC gapped higher at $50.95
Option Format: symbol-year-month-day-call-strike


Xylem Inc. - XYL - close: 39.25 change: +0.12

Stop Loss: 37.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

06/28/14: XYL is starting to bounce. Shares look like they might challenge resistance near $40.00 again soon. I don't see any changes from my earlier comments.

Earlier Comments: June 21, 2014:
Xylem is a spinoff from ITT Corp. and became an independent company in October 2011. Now they're a leading global water technology company doing business in more than 150 countries. The company name, Xylem, is from the classical Greek that refers to the supporting tissues that help transport water and nutrients from a plant's roots to its leaves.

Business has been good. The last two quarters in a row XYL has managed to beat Wall Street's earnings estimates on both the top and bottom line. The company has garnered positive analyst comments suggesting XYL could see strong revenue and margin growth over the next two or three years.

After their latest quarterly report XYL's CEO noted they were seeing strong growth in emerging markets. The Q1 2014 results saw earnings growth of more than 25%. Results have been boosted by strong sales of its pumps and technology that disinfects wastewater and kills viruses and parasites. Their backlog has risen $793 million, up six percent.

Long-term the company could see significant growth. Water consumption across the globe is rising at twice the rate of the world's population. This is creating huge demand on water resources. A Citigroup analyst recently pointed at XYL as the best publically traded "pure play" on water and water processing.

XYL expects to see a lot more growth overseas for both its water purification systems, desalination, power generation, and hydraulic fracking.

Technically shares have been showing relative strength with three weeks of gains in a row. Friday is an all-time closing high for the stock. Shares are hovering just below potential round-number resistance at the $40.00 level. Tonight we are suggesting a trigger to open bullish positions at $40.25.

Trigger @ $40.25

Suggested Position: buy XYL stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the Oct $40 call (XYL141018C40)

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


BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 52.77 change: -0.05

Stop Loss: 55.10
Target(s): To Be Determined
Current Gain/Loss: +1.6%

Entry on June 25 at $53.65
Listed on June 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

06/28/14: TJX did not see any follow through on Thursday's intraday bounce. Shares struggled with the $53.00 level and were fading lower into the closing bell.

I am not suggesting new positions at this time.

Earlier Comments: June 24, 2014:
According to their website, the TJX Companies, Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. With over 3,200 stores in the U.S., Canada and Europe, 3 e-commerce sites and approximately 191,000 Associates at the end of 2013, we see ourselves as a global, off-price, value retailer and our mission is to deliver great value to our customers through the combination of fashion, brand, quality and price.

The stock has been a strong performer on Wall Street for years. Shares of TJX are up 2008 lows near $10 a share to until they peaked near $64.00 late last year. It would appear the long-term momentum is fading.

TJX, along with most retailers, are facing a tough consumer market. Big ticket items like new homes and automobiles are selling well. Smaller purchases like fashion and apparel have been tough unless you're in the luxury market.

The U.S. Commerce Department reported that consumer spending fell -0.1% in April, marking the first decline in a year. It is worth noting that consumer spending was up the prior two months, but that didn't help TJX first quarter sales. TJX reported earnings on May 20th. Their Q1 results (ending April) were 64 cents a share on revenues of $6.49 billion. That was three cents less than Wall Street's estimate of 67 cents a share on revenues of $6.59 billion.

TJX management said their Q1 same-store sales growth was only +1%, which was below guidance. TJX then lowered their 2015 guidance. There has been some speculation that TJX could be losing some market share to the return of JC Penney (JCP).

The issue could be bigger than just one or two stores fighting for market share. The U.S. consumer is facing higher prices. Consumer price inflation is up, especially for everyday items. Over the past twelve months the CPI has risen +2.1%. The price of meat, chicken, eggs, and fish is up +7.7%. The price of fruits and vegetables are up +3.2%.

The consumer is also facing higher gasoline prices. AAA said the national average on gas had risen to $3.68 per gallon. That is the high for this time of year. AAA is currently forecasting a range of $3.55 to $3.70 per gallon. Fortunately, they are hoping that gasoline prices will not hit $4.00 a gallon. However, that could change quickly if the violence in Iraq escalates and terrorist start to impact Iraq's oil exports. Another issue here at home is talk of raising the U.S. federal tax on gasoline from 18.5 cents per gallon to 30.5 cents over the next two years. Call your senator if you do not want that tax to go up.

All of these price increases are weighing on most Americans who are stuck with flat or very low wage gains. Oddly enough consumer confidence just hit a six-year high today. Hope springs eternal but just because consumers are hopeful doesn't mean they're actually spending more money.

Technically shares of TJX are bearish. It has a trend of lower highs and lower lows and just broke down under support near $54.00. We are not setting a bearish target tonight but I will point out that the point and figure chart is bearish and forecasting at $45.00 target.

Current Position: short TJX stock @ $53.65

- (or for more adventurous traders, try this option) -

Long Oct $50 put (TJX141018P50) entry $1.05*

06/25/14 triggered @ 53.65
*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