Option Investor

Daily Newsletter, Saturday, 3/19/2016

Table of Contents

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

Market Wrap

Market Nearing a Top

by Jim Brown

Click here to email Jim Brown

The Dow has rebounded 2,152 points from the 15,450 low on January 20th and is nearing massive resistance.

Market Statistics

Friday Statistics

If you measure the Dow rebound from the February 11th low at 15,503 that is 2,099 points or +13.5% compared to the 2,152 points and +13.9% from the January low. Regardless of which dip you use the rebound is severely over extended and has reached a level of significant resistance. The odds of the Dow moving through this resistance band without a significant problem are almost zero. It can be done but it would be a huge feat.

The S&P has a similar gauntlet of resistance from the Friday close at 2,050 to the May high at 2,132. Each level is likely to draw more sellers than the last and it becomes a cumulative effect.

We are six weeks from the start of the Sell in May cycle and I would be very surprised if the markets made it through those resistance bands before May. However, I have been surprised before. The biggest challenge this time is the extremely over extended Dow. Being very overbought already makes it even harder to continue climbing that wall of resistance worry.

More on this in the market section below.

There was only one economic report of note on Friday and that was the Consumer Sentiment for March. Sentiment fell from 91.7 to 90.0 and the lowest level since September. Analysts were expecting a rise to 92.1. This is the third consecutive monthly decline since the recent high at 92.6 in December when holiday cheer infected the survey.

The present conditions component fell from 106.8 to 105.6 and the expectations component declined from 81.9 to 80.0. Analysts said consumers were already complaining about rising gasoline prices and the potential for additional price hikes. How quickly consumers are spoiled by a few months of good fortune.

The calendar for next week is headlined by home sales and three Fed surveys from Chicago, Richmond and Kansas. The GDP revision will close the week and there are no expectations for a material change from the 1.0% growth in Q4. This is the last revision for Q4. The next report at the end of April will be for Q1 and expectations are for 1.9% growth. For the first time in a long time, the Atlanta Fed GDPNow forecast is roughly in line with the analyst average at 2.0% growth.

Starwood Hotels (HOT) cancelled a deal to sell itself to Marriott (MAR) after China-based Anbang Insurance, U.S. PE firm J.C. Flowers and China-based investors Primavera Capital, offered $78 or $13.2 billion for Starwood. The prior deal with Marriott was for $65.33 per share. The Chinese deal turned out to be an offer Starwood could not refuse.

Starwood operates the Westin, St Regis, Aloft and W Hotels among others. Some analysts believe the hiked offer could still be topped by Marriott because the prize is too big. If Marriott could complete the deal, they would become the largest hotel company in the world and offer many of the top lodging destinations.

Marriott signaled there might be a new offer saying, "it continues to believe that a combination of Marriott and Starwood is the best course for both companies" and "is carefully considering its alternatives." If Starwood actually accepts the Anbang offer the hotel chain will have to pay Marriott a $400 million breakup fee. Anbang is also close to acquiring another chain of hotels from the Blackstone Group for $6.5 billion. The Treasury Dept would be highly critical of a deal with Anbang and the department would have to approve that transaction. CIFUS would also have to approve the deal. Anbang has $129 billion in assets according to the Chinese state media.

According to S&P there has been $250 billion in M&A deals in 2016 and $116 billion involved foreign buyers. Dealogic claims $102.5 billion from foreigners with the record of $107.5 billion in all of 2015, which was twice the amount in 2014. Chinese buyers are racing to spend their yuan before it is devalued significantly later in 2016.

How do you know a company is really in trouble? The CEO sends out a press release saying, "Don't worry we are not going bankrupt." That is usually the kiss of death. Just having to say those words to assure people actually convinces more investors that it is a real possibility.

The Valeant (VRX) CEO, Mike Pearson, told his employees in a Wednesday memo that went public on Friday that "it expected to default on its $30 billion in debt because it had delayed its annual report beyond creditor deadlines." "I can assure you we are not going bankrupt." After the memo went public, the price of Valeant bonds fell 13% to 76 cents on the dollar. That suggests some of the holders suddenly considered the chance of a credit default.

Late last year the company started offering retention bonuses of $100,000 to employees who stayed with the company. They justified it saying working at Valeant was equivalent to working in "an emerging market or a dangerous place" where firms typically offer additional compensation. Some have compared Valeant to a "pharmaceutical Enron." Valeant has $17 billion in good will on its books and you can bet that is going to be written off soon and that will deflate the balance sheet even further. With more than $30 billion in net debt, it is going to be a tough uphill battle to recover without filing bankruptcy. Shares declined another 9% on Friday.

JP Morgan (JPM) authorized another $1.88 billion in stock buybacks in addition to the $6.4 billion authorized in 2015. Shares rose +3% on the news. Bank of America (BAC) authorized the purchase of another $800 million in stock in addition to the $4 billion authorized in 2015. BAC also gained +3% on the news. The price target on BAC is $18 and $69.50 on JPM.

Friday was quadruple option expiration and volume rose to 10.86 billion shares. That made it the third highest volume day of the year. Monday traded 6.31 billion shares for the lowest volume day of the year. The S&P rebalanced the weightings of some stocks as a result of their high level of share buybacks. The weightings for PG, PFE, GE, AAPL and MCD were all reduced at the close and all saw very minor declines in prices right at the close. For instance, PG lost -29 cents to $83.21 in the last 15 minutes of trading. Facebook (FB) was actually weighted higher and shares rose 46 cents at the bell. The impact of the reweighting was negligible.

Affymetrix (AFFX) spiked 14% at 11:30 after former executives offered to buy the company for $16.10 in cash. This beat out a bid by Thermo Fisher Scientific (TMO) that had offered $14 per share in cash in January. AFFX had previously accepted that $14 bid because it was a 50% premium at the time. The executives formed a new company called Origin. Origin's president, Wei Zhou, also founded a genomics company called Centrillion Technology in 2009. He said once Origin acquired Affymetrix that Origin had the option of combining with Centrillion to offer an unparalleled range of microarray and DNA sequencing technology products.

Western Digital (WDC) shares rose after they announced a debt offering for the acquisition of SanDisk (SNDK) after shareholders approved the $17 billion merger. Under the revised deal WDC will pay $67.50 in cash and 0.24 shares of WDC for every share of SNDK or roughly $80 with SNDK shares currently $76.57.

WDC is offering $1.5 billion of senior secured notes and $4.1 billion of senior unsecured notes due in 2023 and 2024 respectively. These are just part of a total package of loans and debt that could total $18 billion.

I believe the WDC acquisition of SNDK is a strong positive. They are expected to see synergy savings of up to $500 billion in the first two years and another $500 billion by 2020. They are also expected to see synergies of another $500 billion from their acquisition of Hitachi for $4.5 billion in 2012. The actual implementation of the acquisition was held up by Chinese authorities until approved last October. WDC has acquired four flash memory companies in the last two years and the acquisition of SanDisk will put them well ahead of Seagate (STX). Seagate acquired Samsung two years ago, which means there are only two major disk drive manufacturers today, WDC and STX.

Apple (AAPL) is holding a product event on Monday where it is expected to announce a new 4-inch iPhone and a 9.7-inch iPad along with some new watchbands. The phone is expected to be called a 5SE and is targeting the Asian market and lower budget consumers in the USA. The 5SE is expected to look like the 6 and 6S models with a metal casing, multiple colors and a 12-megapixel camera. The phone is also expected to have the A9 processor along with Apple Pay. RBC Capital expects sales of about $5 billion on the 5SE compared to total Apple revenue of about $230 billion in 2016.

RBC estimates there are about 35 million iPhones in the market with 4-inch screens that are at least 3 years old. These users actually prefer a smaller screen/phone and Apple needs to give them an upgrade path or risk losing them to an Android device. The current iPhone replacement cycle has expanded from 23 months to 27 months because the new phones have not had those new killer features that make users want to switch. Analysts believe the pricing for the phone could start in the $350 range up to $450.

If Apple could just make a new phone with a battery that lasts more than a few hours they could sell millions. My Motorola Android last 2-3 days without charging.

The new iPad is expected to have some of the features of the iPad Pro including a Smart Keyboard and stylus. There are no announcements expected on the watch other than some new bands. Apple is expected to sell about 10 million watches in 2016.

Amazon Kindle owners are going to be disappointed on Wednesday if they have not updated their Kindle software by Tuesday night. This is a mandatory update. You can go here Amazon Update to determine your device model and update methods.

Amazon also followed through on the agreement with Air Transport Services Group (ATSG) and acquired a 9.9% stake in the company. Amazon has the rights to acquire another 10% at $9.73 per share and a five-year time frame to complete the acquisition. This is part of the deal to lease 20 Boeing 767 wide body freighters from ATSG.

Shares of Office Depot (ODP) spiked earlier in the week when the New York Post said Amazon might be interested in acquiring the corporate business from Office Depot. Currently ODP is involved in a proposed merger with Staples (SPLS) but faces major regulatory problems. The two firms have a duopoly on large corporate contracts for business supplies and the Feds are against the deal. If Amazon were to acquire the corporate business from ODP then the merger might go through.

Lastly, Google (Alphabet) is reportedly trying to sell their robotics business. They purchased Boston Dynamics in 2013 in hopes of creating a viable robotics business unit. Their human-like robots were tailored for military purposes. While the company has scored a lot of money from the military for research, they have not found a way to produce them for civilian use. Amazon was rumored as a possible buyer since the company is making a big move into robots for commercial use. Amazon bought Kiva in 2012 to utilize their robots in warehouse and shipping. There was no comment from Amazon on the Google rumors.

Crude prices continued to inexplicably rise to a three-month high of $41.20 on Friday. Presumably, the rally was on news OPEC and non-OPEC producers led by Russia will meet on April 17th in Doha, Qatar. The very remote possibility that any actual agreement will come from this meeting was enough to cause yet another short squeeze in crude prices. After stalling at $38.50 for four days enough new shorts accumulated that the meeting announcement caused the squeeze to the highest level since December 9th.

The only way there will be an agreement in Doha is if they decide to go along with Iran's demand for a production cap of 4.0 mbpd compared to their current production of 2.6 mbpd. If they do agree to this then they are agreeing, not to a freeze, but to an increase in production of 1.4 mbpd over the next year.

However, the headlines will say "producers agree to an output freeze" and they will have been successful in talking up prices again despite any material decline in existing production. This is a propaganda war being waged by those OPEC members that could not raise production above January levels if their lives depended on it. Their only hope for rescuing their budgets is to talk up the price of oil rather than pump more.

WTI futures expire on Monday so we could see some extreme volatility to start the week.

Active rigs declined -4 to 476 and another 67-year low. There was a decline of 5 gas rigs and a gain of 1 oil rig. That new oil rig may have simply been a reclassification of a gas rig or a rig that had been moved from one field to another and reactivated. However, at our current rig levels and the current price of oil we could begin to see some rigs reactivated in the coming weeks. At $40 oil, a well can still be drilled in the Permian and make a profit. If oil prices rise any further I would expect to see the bottom in active rig counts. Oil prices typically rise in the summer as the driving season consumes more oil and inventories decline.


We may be approaching the end of the current rally. If you compare it to the August/September decline, the double bottoms are almost identical. The S&P rebounded +245 points from the September low at 1,871 to the November high of 2,116 or roughly a 13.1% rebound. Since the February low of 1,810 the S&P has rebounded +239 points or +13.2%. The September rebound took 36 days. The current rebound has taken 37 days.

Obviously, there is no rule that says one rebound has to follow the same script as a prior rebound but the S&P is only one good day away from downtrend resistance at 2,065 and then a steady stream of strong horizontal resistance at 2080, 2105, 2115, 2132, etc.

The identical patterns of the two rebounds are so easy to see that even a novice investor should recognize the similarity and become cautious. This is how tops are formed. It also becomes self-defeating in some cases because investors do not realize that conditions have changed.

In our current situation, the economic reports have improved. Recession fears have lessened and the Fed has backed off their original guidance for 3-4 hikes in 2016. Some analysts believe there may not be any hikes in 2016. The ECB is pouring stimulus on the fire and China cut reserve rates for the 5th time. Negative interest rates are more common than positive rates in Europe. While economists have not begun to upgrade economic expectations that could happen at any time.

The dollar is actually falling and closed at a five-month low last week after the Fed backed off their rate hike pledge. A weaker dollar helps U.S. international corporations and lifts commodity prices like oil, copper and gold higher. That lifts prices for energy companies and miners and puts a bid under the broader market. If the biotechs could find a bottom, we might be able to extend the rally.

Here is the key. As we approach those resistance levels, the natural tendency is for investors to take profits and shorts to back up the truck in expectations of another decline. If the dollar continues to fall and the biotechs behave, we could see those shorts get squeezed and the markets begin to rise again. Portfolio managers that thought they were being smart by lightening up on equities could suddenly find themselves underinvested as the market rose and they would be forced to chase stocks higher.

Personally, I believe we will fail as the S&P becomes stuck in those various resistance ranges. This is an election year and uncertainty is rampant. Earnings are getting worse not better. On Friday, FactSet predicted Q1 S&P earnings will decline -8.4% and it will be the first time since 2008/2009 that earnings have declined for four consecutive quarters. On December 31st, the estimate for Q1 was for earnings growth of +0.3%. So far of the 118 S&P companies that have issued guidance for Q1, 78% or 92 companies have lowered guidance. Only 26 companies have issued positive guidance. For Q4, with 99% of companies reporting, 69% beaten earnings estimates and only 48% beat revenue estimates. Revenue growth estimates for Q1 have fallen from +2.6% to a decline of -0.8% since January 1st.

Q1 profit margins are expected to drop to 9.3% and the lowest since the 8.9% margin in Q4-2012. Analysts have cut earnings estimates by an average of 9% since December 31st. That is almost double the ten-year average of -5.3%. Estimated earnings from the financial sector have fallen from growth of +1.6% to -6.7% decline. The technology sector estimates have fallen from +0.4% growth to a -7.2% decline. Earnings are declining at the fastest rate since 2009.

FactSet Chart

Given the negative expectations for earnings there is always the possibility for a string of positive surprises that overcome the negative expectations. However, I believe the negative implications from the political process will weigh on the market and the Sell in May cycle could be stronger than normal this year.

Regardless of what I believe, we need to monitor the S&P closely as it reaches the various resistance levels and trade what we see rather than what we expect to see.

The Dow is no different than the S&P. The index is a little more overextended and will be hitting that strong resistance at about 150 points over Friday's close. Because it is a narrow index, it has not been hit as badly from the biotech crash and was helped by the energy recovery and the firming in the financials. It still has the same resistance problems as the S&P and weakness could appear at any time.

If this were a stock, would you buy this chart?

The Nasdaq halted its gains on Friday almost exactly at major resistance at 4,806, which is the 61.8% Fibonacci retracement level. It is also the confluence of the 100-day average at 4,807 and the 150-day average at 4,803. This could be a very difficult level to cross unless there is some weekend catalyst that causes a blowout at the open on Monday.

The biotech sector is really weighing on the Nasdaq and the minor rebound in the $BTK on Friday was a breath of fresh air. Unfortunately, that only allowed the Nasdaq to gain 20 points. The BTK will have to rebound a lot further for the Nasdaq to have any hope of crossing that 4,806 resistance.

The Nasdaq oscillators (MACD, RSI) are still positive despite being at the upper end of their ranges. The RSI is showing no weakness yet.

The Russell was the strongest broad market index on Friday with a 1% gain. The Russell closed at a two-month high at 1,101 thanks to the strength in the biotechs and some energy stocks. The high close suggests market sentiment is improving. However, that can turn negative very quickly when the big cap indexes hit those resistance levels.

The Russell 1000, the top 1000 stocks by market capitalization, is also facing some serious resistance at 1,150 that confirms the outlook for the Dow and S&P.

My personal opinion is that the S&P will slow dramatically and more than likely stall somewhere around the 2,075 level. That could give us 2-3 more days of gains before the weakness appears. I would love to be wrong and for the S&P to charge right past 2,100 and attempt a new high before the summer doldrums appear. Since nobody can accurately predict market action at any given time, we must trade what we see rather than what we expect to see.

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Random Thoughts

Saudi Arabia wants to expand its market share for crude oil. Other than constantly cutting prices, how can they do that? One way is to buy up a lot of coastal refineries so they can refine their own oil. This not only gives them a locked in market share for decades to come but will also give them a retail price for their products.

It is one thing to sell a refinery oil for $35 a barrel. Oil is one of the most commonly sold commodities on the planet and prices do not vary much from one area to the next. That refinery processes the oil and turns it into gasoline, diesel, jet fuel and fuel oil and many other products. They earn a "crack spread" between the cost of the raw oil and the price of the refined products. This spread can be $10-$20 a barrel depending on seasons, competition and price fluctuation in crude.

If Saudi Aramco buys a refinery and processes its own oil then they also earn the crack spread on top of their cost per barrel of oil. Basically they gain an extra $10 or more on each barrel they sell.

Aramco had a 20 year partnership deal with Shell that was Motiva Enterprises. Last Wednesday Shell announced it was breaking up with Aramco after two decades. They are dividing the assets and leaving Aramco with only one refinery in the US. That is the nation's largest 603,000 bpd refinery in Port Arthur Texas. Shell will end up with two smaller plants in Louisiana with a combined capacity of 473,000 bpd. Aramco wanted all three plants but Shell refused to give in.

Aramco already has 5.5 mbpd of refinery capacity either owned outright or through partnerships all around the world. According to multiple people Aramco is going shopping for additional refineries and they would love to have them in the US since we are the largest consumer of oil and refined products.

Saudi has about 11.0 mbpd of crude production. If they bought up another 5.5 mbpd of refining capacity that would give them an extra $10 or more per barrel every day for decades to come. That appears to be a great strategy for Aramco.

The key now is to find out which U.S. refineries they might be targeting. I doubt Valero (VLO) is going to sell any of theirs and I would expect VLO to also be a bidder on any refineries Aramco might be targeting in order to preserve Valero's market share in the USA. They will not want Aramco to begin discounting refined products in the US. I will research this and report on the potential candidates in the coming weeks. There are 12 major refiners in the USA.

TransCanada Corp (TRP) the parent of the Keystone XL pipeline announced it was buying Columbia Pipeline Group (CPGX) for $13 billion. TRP is paying $25.50 per share for Columbia. The deal will give TRP another 15,000 miles of natural gas pipelines and link to TransCanada's existing 5,700-mile network. This will make TransCanada one of the largest pipeline operators in North America. This will become even more important once the multiple LNG export facilities on the Gulf are fully operational. If all the proposed trains are completed it would create as much as 20 Bcf per day of new demand. That gas would have to be piped from as far away as the Marcellus and the various shale fields in the Midwest. This will be a bonanza for TransCanada since they get paid for every cubic foot that moves through their pipelines. If a republican is elected as president the Keystone XL pipeline will also be approved and add to their volumes. TRP shares move very slow so I would not recommend buying on this news.

I was shocked when I looked at the AAII sentiment survey for this week. This was the fifth week of market gains but bullish sentiment actually declined sharply by -7.4%. I am guessing everyone is looking at the same charts we are and seeing that massive overhead resistance. I am surprised it registered to strongly on this survey. However, you may remember the first two days of the week were very choppy ahead of the Fed meeting. This survey closes on Wednesday and the real rally for the week had not yet begun. Next week's survey will be interesting

A week ago sophisticated computer hackers almost pulled off a $1 billion robbery from the New York Fed. The hackers infiltrated the Bangladesh central bank and for two weeks they planned their attack putting hooks in various places and deleting logs to erase their tracks. They submitted transactions over the SWIFT network to transfer $1 billion in total in a series of transfers to multiple banks. They extracted $101 million before a spelling error in the name of a destination foundation caused a human to question a specific transaction and raise flags on the other transactions in progress. They sent $81 million from the Bangladesh Bank's account at the Fed to four accounts in the Philippines and another $20 million to Sri Lanka. A bank in Sri Lanka caught the $20 transfer and returned the money. The money to the Philippines is still missing. It was transferred again to unknown destinations as soon as it was received.

The SWIFT network was not breached and continues to operate. The hackers infiltrated the Bangladesh computer network, captured logins and then simulated transactions as if a human was operating one of the three SWIFT terminals in the building. Security firm FireEye (FEYE) is doing a sweep of the Bangladesh Bank's systems and has found at least "32 compromised assets" that were used for reconnaissance and to gain control of the banks servers.

While $850 of the $1 billion theft was halted by a sharp eyed human, it is only a matter of time before even bigger thefts are completed. In a global banking system with tens of thousands of banks and networks there are far too many weak spots that hackers will find and compromise. Hackers are the Bonnie and Clyde of this generation. Knowing that somebody got away with $80 million will only encourage tens of thousands of other hackers around the world and it is only a matter of time before they succeed. In reality, they have already succeeded a lot more than we know because many banks will not report the thefts in order to save their reputation.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The main purpose of the market is to make fools of as many men as possible."

Bernard Baruch


New Plays

Railroad Recovery

by Jim Brown

Click here to email Jim Brown
Editor's Note

Transports are soaring and railroads are recovering but they need one thing to succeed. They need new rail cars because the old ones continually wear out and get damaged.


TRN - Trinity Industries - Company Profile

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings May 30th.

No entry trigger:

Buy TRN shares, currently $19.21, initial stop loss $17.50


Buy July $20 call, currently $1.45, no stop loss. Plan to keep it until June even if we are stopped out of the TRN shares.


No New Bearish Plays

In Play Updates and Reviews

Thank You Janet Yellen

by Jim Brown

Click here to email Jim Brown

Editors Note:

The dovish Fed statement and the benign press conference gave traders the confidence to continue buying stocks. How long that confidence will last is the $64 question. With the Fed out of the picture for the next couple months investors should begin to focus on earnings with the Q1 cycle starting in about 4 weeks. Unfortunately, that could be bad news with earnings expected to decline -8.4% and be down for the fourth consecutive quarter.

Many times when estimates are so negative a burst of good earnings news from the early reporters causes sentiment to rapidly reverse. I am hoping that will happen in April. We need something to help the market move over the severe resistance hurdle in our path.

I pointed out the resistance levels last week and we are 120 points closer today and only about 150 points under the first hurdle.

Current Portfolio

Current Position Changes

HIMX - Himax Technologies

The long position remains unopened until HIMX trades at $11.10.

BBOX - Black Box

The long position was opened with a BBOX trade at $14.25.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

AMLP - Alerian MLP ETF - ETF Profile


AMLP will continue to rise and fall with the price of oil. Long term the trend will be up.

Original Trade Description: March 2nd.

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

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

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

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

AMLP Holdings

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

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

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

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

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

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

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

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

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

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

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

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.


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

BBOX - Black Box Corp - Company Profile


After two weeks of sideways movement in the $13-$14 channel we finally saw a breakover that $14 resistance to launch the position. No news.

Original Trade Description: March 9th.

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

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

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

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

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

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

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

Earnings are May 5th.

Position 3/18/6 with a BBOX trade at $14.25

Long BBOX shares @ $14.25, initial stop loss $12.85

No options because of wide spreads.

CDW - CDW Corp - Company Profile


CDW closed over the 100/150 averages on Friday. That was a positive event. Any further gains could trigger a breakout. There is a nice pattern of higher lows over the last week. The size of the candles are shrinking and that suggests we are getting closer to future gains.

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

Original Trade Description: February 29th.

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

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

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

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

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

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

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

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

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


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

DRII - Diamond Resorts Intl - Company Profile


Nice rebound to a new three-month high but we are approaching resistance at $26.

Original Trade Description: March 10th.

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

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

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

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

Earnings May 25th.

Position 3/10/16 with a DRII trade at $24.25

Long DRII shares @ $24.25, initial stop loss $20.50.

No option recommended because of wide spreads and high prices.

DWRE - Demandware - Company Profile


DWRE came to a dead stop at resistance at $39.15 but the rebound decline was minimal at -25 cents. If we can get a move over $39.25 it should trigger short covering.

Target $43.25 for an exit on the stock position.

Original Trade Description: February 22nd

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

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

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

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

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

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

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

Earnings May 5th.

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

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


Closed 3/17/16: Long April $35 call @ $2.70, exit $3.60, +.90 gain

HIMX - Himax Technologies - Company Profile


Himax failed at resistance at $11 but it was only the second test. The trend is still intact.

The play remains unopened until HIMX trades at $11.10.

Original Trade Description: March 17th

Himax is a fabless semiconductor company providing display and imaging technologies to consumer electronics worldwide. They operate in two segments including Driver IC (integrated circuits) and Non-Driver products. Their ICs are used in television controllers, laptops, monitors, mobile phones, tablets, digital cameras, car navigation and other consumer electronic devices.

The company reported earnings for Q4 of 3.6 cents that beat estimates on a 7.5% increase in revenue to $178 million. They raised guidance for the current quarter and the full year. They are debt free and had $148 million in cash compared to $126 million in the prior quarter.

The company said business was booming and demand from China was growing rapidly. The various new products shown by various manufacturers at CES in January were now going into production demand for the ICs was increasing. The demand for 4K TVs is increasing as the prices drop and Himax expects demand to double in Q1 over Q4 and triple over Q1 2015. Large panel ICs are expected to grow from 10% to the high teens in percentage in the current quarter.

Shares closed at a two-year high on Monday and then dipped with the market. They returned to close at that high again on Thursday just under $11. A move over $11 targets resistance at $14.50.

With a HIMX trade at $11.10

Buy HIMX shares, initial stop loss $9.85

No option recommendation because of pricing issues.

HPE - Hewlett Packard Enterprise - Company Profile


Minor close over resistance at $17.25 but well off the intraday high at $17.58. Once it is really over that $17.25 resistance level shares could accelerate higher.

Original Trade Description: March 14th.

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

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

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

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

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

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

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

Earnings June 2nd.

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

Position 3/15/16:

Long HPE shares @ $16.36, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Another minor gain to close only 4 cents below resistance. I am continuing to stick with this position and any material dip will take us out with a minor profit. We have little risk at this point and the potential for a decent gain if the stock breaks out. No news.

Original Trade Description: February 19th

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

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

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

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

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

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

Earnings are April 27th.

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

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

WIN - Windstream Holdings - Company Profile


WIN spiked to resistance at $8.00 again but failed to penetrate. Maintain that $7.10 stop and hopefully the decline is over.

Original Trade Description: March 11th

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

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

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

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

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

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

Position 3/11/16

Long WIN shares @ $8.22, initial stop loss $7.10


Long August $9.00 call @ .40 cents. NO STOP LOSS

BEARISH Play Updates

EGHT - 8X8 Inc - Company Profile


Shares dropped at the open to $9.01 but rebounded in the positive market. No change in outlook with the trend is still intact.

Original Trade Description: March 16th

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

Position 3/17/16 with a EGHT trade at $9.80

Short EGHT shares @ $9.80, initial stop loss $10.25.

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