Position Update (Plus SBUX, MNST, & More)

DNA & MON Ready to Hit the Spotlight

Dear Bottarelli Research Member,

This morning, I wrote an alert titled “Something’s Amiss on MON,” which pointed out that our speculative earnings play on Monsanto (MON – NYSE) opened the day trading down $2.30 on absolutely no news exactly one day prior to their Q3 earnings announcement.

Events like this always reek of “foul play,” and I’ve spent most of the day researching what could be happening. Nothing I’ve found is anywhere close to concrete evidence, as items from “reduced whisper numbers” to random message board banter have produced no leads. All the while, shares of MON have slowly crept higher throughout the day, which hopefully signals that any shenanigans are over. For anyone still in the MON October 47.5 Calls (MON JW), I sincerely hope we get the last laugh when MON repots strong earnings.

Our other speculative play on Genentech (DNA – NYSE) could hopefully get a lift after the bell today as they report their Q3 results. Everything I’m seeing indicates that DNA will come in very, very strong — but earnings reports like this always come down to whether or not Wall Street accepts the results as “disappointing” or not. Luckily, we have a potential ace up our sleeve.

Even if DNA’s results come in weak, we could still make the play a winner if the FDA grants DNA approval later in the week. If you followed my advice yesterday, you’ve already booked a nice gain on half of your DNA calls. Now let’s see if we can turn the remaining half of your DNA October 85 Calls (DWN JQ) into an even bigger winner!

Staying within the healthcare sector, I’d like to use the recent dip in the Pharmaceutical HOLDRs (PPH – AMEX) as a buying opportunity. As you know, we’re holding the PPH November 75 Calls (PPH KO) with an entry price of $3.80, and similar to DNA, the upcoming earnings from mostly all of the PPH components look very strong. What I like about the PPH is that after three year of hibernation, Big Pharma is making a strong comeback.

Case in point, over the last three years, this collection of PPH holdings has gained only 3.24%. But this year it’s a different story. Year to date, this same basket is up 11.99%, nearly 2.5x higher than their three-year average. I think this is a telling example of the breakout we’re now witnessing, which is why I’m going to use any more weakness to add to our PPH November 75 Calls (PPH KO). When it’s time, I’ll let you know.

There’s also some interesting trading action happening over in the oil patch. Despite the price of crude dropping $1.44 to $58.52 a barrel, we’re seeing strong upside gains in many of the oil names I come to mention in these pages. Companies like Transocean (RIG — NYSE) and especially Marathon Oil (MRO – NYSE) are making strong upside moves today, which makes me wonder if traders are buying these stocks as oil drops back down to $58 in anticipation of a price bounce at the $58 level? Just look at MRO’s jump today despite falling crude prices and you’ll see what I mean:

I’d love to get back into a quick play on RIG or MRO, but I’d like to see a little more stabilization before issuing the next play. Stay tuned.

In other news, Andrew McKelvey abruptly resigned as chairman and chief executive officer of job-seeking website Monster Worldwide (MNST – NASDAQ). Stories like this always get my attention because nobody knows the inner-workings of a company like the CEO. With heavy compensation packages and golden parachutes, it has to take quite an event for any of these guys to give up their positions, which is why there could be something happening behind the scenes at MNST that push shares lower. I’ll keep a close eye on the stock for any potential put plays.

We also have a very unique chart formation in Starbucks (SBUX — NASDAQ), one which represents the hard-to-find “double gap.” Take a look below:

As you can see, SBUX gapped down in early August, falling from $33 to $29 in one day. But since that fall, SBUX has recovered all of the losses — and then gapped up in early October, jumping from $34 to $39.

It’s a bona-fide market fact that all gaps get filled. It’s just a matter of when they’ll eventually fill (which is why I remain bearish on NKE and RIMM, but that’s another story). Using SBUX’s past history as a guide, I’d guess that they move lower and fill their recent upside gap in the same time horizon that they used to rally and fill their downside gap back in August, which is around one calendar month.

The reason for the 5% upside jump was strong September growth in same-store sales and revenues for September, which increased 20% over last year thanks to 2,000 new store openings. But as every street corner gets filled up with a Starbucks, the concern of over-saturation has hit the street, which sparked an October 6^th downgrade from UBS from buy to neutral. If the markets show any signs of selling off, I’d look to enter puts on SBUX as well as MNST. As always, I’ll keep you fully posted. And as always…

Lock and load

Sincerely,