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Newsletter

Daily Newsletter, Tuesday, 5/17/2016

Table of Contents

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

Market Wrap

It's Alive!

by Jim Brown

Click here to email Jim Brown

Positive economics suddenly resurrected the fear of a Fed rate hike at the June meeting.

Market Statistics

The June meeting is a live meeting. Investors have tried to ignore it in hopes it would go away but the sudden rise in inflation has made that impossible. Add to the economics the comments from San Francisco Fed president John Williams that the Fed will rise 2-3 times in 2016 and comments from Robert Kaplan that the Fed will move quickly to normalize rates. Richmond Fed president Jeffrey Lacker said June rate hike should be on the table, "The case for raising rates looks pretty strong in June." Suddenly the June meeting is not just alive but it is expanding in importance.

The report causing trouble this morning was the Consumer Price Index for April. The headline number rose 0.4% and the largest gain since February 2013. The core rate excluding food and energy rose +0.2%. On a trailing 12 month basis the headline CPI is up +1.1% and the core CPI is up +2.1%.

The headline number was lifted by a +1.9% increase in fuel oil and +8.0% rise in gasoline prices. Food prices rose +0.2%.

In theory, the Fed is smart enough to realize that the current inflation is caused by rising oil prices rather than normal inflationary forces. Hiking rates in June will not do anything about the rising inflation caused by higher gasoline prices. If they hike for the wrong reasons, it will be a market disaster. Higher rates will hurt oil producers already suffering from low prices. Rising rates would raise their debt payments and make it harder for them to recover from the oil crash.


Industrial Production for April rose +0.7% and well over estimates for +0.3%. This was the first rise in three months. The March reading was revised down from -0.6% to -0.9%. That was the weakest reading since August 2012.

The April headline number is misleading because utility production rose +5.8% and mining/energy declined -2.3%. Business equipment production rose +2.4%. Those numbers skewed the headline significantly. Production has been handicapped by the strong dollar and weak global economy. This report looks good on the surface but many of the internal components were still weak. I would disregard the April reading since the chart clearly shows a strong decline going into April. Utility production is not really an economic plus.


New residential construction starts rose +6.6% in April from 1.089 million to 1.172 million. That was more than the 1.125 million analysts were expecting but still well under the February rate of 1.213 million. Single family starts rose +3.3% and multifamily starts rose +13.9%. Permits rose +1.5% and multifamily permits rose +8.0%. Completions fell from 1.048 million to 933,000 or an -11% decline.

In the chart, you can see that housing starts have plateaued at 1.2 million and appear to be tapering off. With mortgage rates at near record lows, this is troubling for the sector. Home buying appears to be tapering off and housing is a very large portion of the economy.


Internet E-Commerce sales for Q1 rose from $89.1 billion to $92.8 billion in Q4. Compared to the $80.6 billion in Q1-2015 and $70.1 billion in Q1-2014 this is proof the retail economy is moving to the web. To put that into context Amazon's sales in Q1 were $29.1 billion. That was a $7 billion increase over Q1-2015. Out of the $12 billion increase in all E-Commerce revenue over 2015 levels, $7 billion or 58% of the increase was sold by Amazon. To look at it a different way Amazon's $29.1 billion in Q1 revenue was 42% of all the E-Commerce revenue from all sources. Also, Amazon's revenue for the quarter rose 28.2%. They will be 50% of all E-Commerce revenue soon.


The economic calendar for the rest of the week is headlined by the FOMC minutes and the Philly Fed Manufacturing Survey. The Philly survey is expected to show a strong increase so anything in the opposite direction would be a big disappointment.

The NY Empire State Manufacturing Survey on Monday was expected to show a +6.5 and posted a very disappointing -9.0 instead. If the Philly survey, which is much more important, showed a similar decline, it would be a disaster.

Some analysts believe the FOMC minutes on Wednesday could contain language suggesting a June rate hike even though the official post-meeting announcement gave no indications. Worry over the minutes were part of the market's problem today.

I believe raising rates in June would send the wrong signal that the Fed was in a hurry to hike rates because they are behind the curve. I believe they would be better off to use the June meeting to signal their intention to raise rates at the July meeting. That would show they were being deliberate rather than urgent and it would give the market time to decipher the Fedspeak and adjust accordingly. It will also give oil prices time to level out and reduce their impact on the inflation figures.


After the bell, Japan's GDP for Q1 came in at +0.4% growth compared to expectations for +0.1%. This was a significant improvement from the -0.4% decline in Q4. Analysts were worried that Q1 could come in negative and fit the definition of a technical recession with two consecutive quarters of negative growth. While domestic demand for things like televisions and food rose +0.2% there were still problems. In a separate report capex spending declined -1.5% in Q1 and the fastest pace of decline in a year. S&P futures spiked higher on the GDP and then turned negative on the capex spending.

On the earnings front, Dow component Home Depot (HD) reported earnings of $1.44 that easily beat estimates for $1.33. Earnings rose 24% for the quarter. Revenue rose +9% to $22.76 billion, up from $20.89 billion and higher than the $22.32 billion analysts expected. Same store sales rose 6.5% globally and +7.4% in the USA. The company cited warmer than normal weather and a rebound in the housing sector. April temperatures set record highs and was the 7th consecutive month of record highs.

HD said it expected full year earnings of about $6.27 per share with revenue rising 6.3% and same store sales up 4.9%. They had previously forecasted earnings of $6.12-$6.18 and sales growth of 5.1-6.0%. Despite the big earnings beat and higher guidance, shares dropped -$3.50. Analysts believe investors were expecting an even bigger beat and that is why shares dropped. I believe investors are just afraid of the market and they wanted to take profits quickly before they evaporated.


Red Robin Gourmet Burgers (RRGB) reported earnings of $1.03 that missed estimates for $1.11. Revenue of $402 million rose +1.8% but missed estimates for $415 million. Same store sales declined -2.6%. The company said the number of guests declined -4.1%. Shares fell -19% on the news.


TJ Max (TJX) reported earnings of 75 cents that beat estimates for 70 cents. Earnings rose +7.14%. Revenue rose +10% to $7.5 billion. Same store sales rose +7% and more than the +5% in the comparison quarter. During the quarter, the company spent $375 million to buyback five million shares. TJX even increased its dividend by 24% in Q1 for the 20th consecutive year of dividend increases. They guided for Q2 for earnings in the range of 77-79 cents with same store sales rising 2-3%. Full year guidance rose from $3.29-$3.38 to $3.35 to $3.42. Shares spiked at the open to $78.38 but declined with the market to trade flat again.


Children's Place (PLCE) reported earnings of $1.32 that easily beat estimates for $1.03. Revenue of $419 million also bet forecasts for $413 million. They guided for the current quarter to a loss of 22-30 cents. Full year earnings are expected to be $4.17 to $4.27 per share. The current quarter is typically a weak quarter for the children's retailer. Shares spiked to $74.40 on the news but faded with the market to $71.


Wednesday and Thursday are the last big days for the Q1 earnings cycle. Walmart, Target, Gap, Foot Locker and L Brands finish out the retail earnings. Cisco Systems and Salesforce.com are the biggest tech stocks left to report.


Intel (INTC) was initiated with an underperform rating by CLSA saying the declining growth in the semiconductor industry is going to require more specific focus by companies in the space. The analyst said it raised the rating on Qualcomm (QCOM) with a price target of $65 compared to a close at $52. Broadcom/Avago (AVGO) was started with a buy rating and a $165 price target compared to the prior close at $142.65. The consensus target on AVGO is higher at $178.52. NXP Semiconductor (NXPI) was started with a buy rating and $105 target after a close at $85. Microchip (MCHP) was started as a buy with a $58 target after a close at $48.

Of all those mentioned above I like Qualcomm but the stock has been stuck in a $3 range for three months. That is dead money until it breaks out. Broadcom is threatening to break support at $140 because of the decline in orders from Apple. No excitement there either.



Clorox (CLX) announced a quarterly dividend of 80 cents, up from 77 cents, payable on August 12th to holders on July 27th. That is roughly a 2% yield. Clorox has increased annual dividends every year since 1977. Shares fell 2% on the news.


David scored a direct hit on Goliath today. Coherus (CHRS) reported the U.S. Patent Trial and Appeal Board (PTAB) had agreed to hear a case against AbbVie's (ABBV) $14 billion drug Humira. That one drug represents 60% of AbbVie's revenue. AbbVie has a market cap of $97 billion and Coherus has a market cap of $738 million. Coherus is developing a biosimilar drug to compete with Humira. A successful patent challenge could help get that drug to market sooner. The patent review will take up to a year and could cause AbbVie a significant problem if the specific patent under review is invalidated.

Amgen (AMGN) has already tried to petition the PTAB twice on Humira and were declined on both. This is the first appeal the board has agreed to review on Humira. AbbVie claims Humira is safe and will produce $18 billion a year in sales through 2020. They have 70 patents on the drug that do not begin expiring until 2022. Coherus has requested reviews on two other Humira patents and the PTAB has to decide on reviewing them by June 15th. Obviously, it could take a long time before this appeal has any actual impact on AbbVie, even if the PTAB finds in Coherus favor. The decline in ABBV shares is not warranted today. The bounce in CHRS could last until the June 15th deadline on the other two appeal requests.



Many stocks with recent gains imploded on Tuesday. One example would be Kraft Heinz (KHC) with a -4.3% drop on absolutely no news. This is a sign investors are finally throwing in the towel and heading to the sidelines. Profits are being taken even on the strong stocks.


Twitter (TWTR) may be ending the 140-character limit for tweets. Originally, the 140-character limit was because of the limit on text messaging. With 140 characters, the tweet would fit into a single text message. Since almost nobody uses plain text messaging anymore, it is time for Twitter to upgrade. Twitter users already send more than 140 characters by being creative and sending pictures of text rather than the actual text. That way there is a much larger practical limit. However, the text pictures cannot be searched and indexed. They are just pictures. Dorsey recently described the 140-character limit as a "beautiful constraint" that inspires creativity, brevity and a "sense of speed" and Twitter does not want to lose that feeling.

Bloomberg reported on Monday that Twitter was going to quit counting the characters in links and photos in the 140 character limit. Twitter declined to comment on the report but Bloomberg said they had a good source that said the change could come over the next couple of weeks. Shares were up a nickel on the news.


Dell Inc sold $20 billion in secured bonds on Tuesday and the offering was 300% oversubscribed. They had offers for $85 billion. The investment grade notes were spread across six tranches with maturities ranging from 3 years to 30 years. A $4.5 billion 10-year bond was priced with a yield of 4.25% above comparable treasuries or roughly 6%. They still need to sell $4.0 billion in junk rated, unsecured bonds, to raise enough cash to complete the $63 billion acquisition of EMC. They are still waiting on approval from Chinese regulators and EMC shareholders. When the acquisition is completed, Dell will have $50 billion in debt and has committed to pay that down by $5 billion a year from operating cash.

That $20 billion is the 4th largest bond sale on record. The largest was Verizon in 2013 for $49 billion, Anheuser-Busch InBev in 2016 for $46 billion and Allergan in 2015 for $21 billion. Last week companies including AbbVie and Chevron sold $47 billion in investment grade bonds to bring the year to date total to a record $506 billion.

After the bell, the American Petroleum Institute (API) reported a -1.1 billion decline in U.S. crude inventories. Cushing inventories rose 508,000 to a new record. Gasoline declined -1.9 million barrels and distillates declined -2.0 million barrels. The API inventories rarely agree with the EIA inventories due out Wednesday morning. Crude rose slightly on the API numbers but the real move will come after the EIA reports at 10:30 on Wednesday.

In regular trading crude rose to $48.43 and a new six-month high. With record open interest in long futures contracts and with futures expiring on Friday there is sure to be some volatility the rest of the week. The $50 level is the next target and I would expect a serious sell the news event when that level it reached.


Markets

The three-peat is complete. For three consecutive weeks, the Dow has surged triple digits in a monster short squeeze only to roll over and decline triple digits the next day and completely erase the gains. The Dow closed at a new 8-week low after trading under key support at 17,500 intraday. The S&P came within one point of touching critical support at 2,040.

The market is now poised to break those critical support levels and slide until the end of May. Whatever happens we know it will not be straight down. The last three weeks have proven that much. However, we have seen seemingly bulletproof short squeezes erased in just one day. The sellers are definitely waiting for the rips rather than chasing prices lower but I think the market sentiment is changing. If those support levels break, they may throw caution out the window and hit the sell trigger anyway.

If the 2,040 level breaks on the S&P the next logical resting place is the 1990-2000 level followed by 1,975 and then 1,950. Resistance is now 2,070 and the highs from Thursday and Monday.


The Dow traded down to 17,469 intraday and well under the critical support at 17,500. However, the rebound at the close pulled it back from a -240 loss to only -180 and a close at 17,529. That does not mean that 17,500 support is still intact. The intraday dip damaged it and the next decline will more than likely stick.

The next support level is 17,400 followed by 17,135 and then 16,500.



The Nasdaq lost -60 points for the day and closed just over key support at 4,700. A break there targets 4,600 and then 4400-4200. The Nasdaq traded in correction territory intraday but pulled out to only a 9.9% decline at the close. The odds of a breakdown in this index are nearly 100%. The Nasdaq was supported again by the biotech sector, which declined only 0.6% and the least of all the major indexes. The relative strength in the sector was amazing since it has been up for the prior two days. This is rare. The biotechs have been doing the two-steps down, one-step back for weeks. After two major gains, today should have been a major decline. One analyst pointed to the coming ASCO Oncology conference on June 3-7th as the reason biotechs are rising.




The small cap Russell 2000 was the biggest decliner today with a -1.7% drop. The S&P-600 small cap index matched its move with a -1.67% decline. The Russell closed under key support at 1,100 with a close at 1,097. The 1,090 level is the next support target. The Russell declined -18 points today in what could be considered a rout. If that were to happen again tomorrow, the market sentiment would turn seriously negative and we would move into plunge mode.


The hero for the day was the Dow Transports with a +45 point gain. I know, it is shocking to see the transports up the same time oil is up and the broader market is tanking. It only took multiple upgrades to the airline sector and the railroads but they did rally even if they closed well off their highs.

The 7,500 support level was tested on Friday and followed by two days of gains. The Transport index finished -123 points off its intraday high and probably would have turned negative if time had not expired.


Follow the volume. I have mentioned several times recently the market move with the heaviest volume is the move we should trust. Monday's short squeeze came on 6.4 billion shares and the lowest volume since April 26th. Today's volume was 7.6 billion shares and the highest volume since May 3rd. This suggests the market direction is down even if there are a couple up days in our future. If those critical support levels of 17500, 4700, 2040 break we could see an acceleration of selling. Be prepared.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Correctly Positioned

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market appears to be headed south as May comes to a close. We are positioned heavily bearish in the current portfolio with 3 call positions and 8 put positions. I believe we are correctly positioned and after today's decline none of my watch list stocks offered what I considered a killer entry point. I am recommending we stand aside on Wednesday and hold what we have. The FOMC minutes are probably going to produce some market volatility at 2:PM and it could be in either direction. We have no reason to step into that traffic with a new play.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

New 8-week Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

The third consecutive weekly triple digit short squeeze on Monday was completely erased by a triple digit decline today. The Dow closed at a new 8-week low at 17,529 after trading as low as -240 intraday. That intraday low was 17,469 and well under the support at 17,500. This support break did attract some buyers at the close but the fix is in. The dip below support weakened it and we should move lower before Friday.

The S&P dipped to 2,041 and that put it negative for the year but it rebounded to 2,047 at the close to put it back up +4 points for 2016. That is hardly a guarantee that we are going higher and that support at 2,040 is in serious danger of breaking.

CLSA issued new ratings on multiple chip stocks this morning and the entire sector popped on the news. This knocked us out of CAVM and SWKS even though they both closed lower for the day.



Current Portfolio




Current Position Changes


GILD - Gilead Sciences

The long put position remains unopened until a trade at $81.65.


AXP - American Express

The long put position was opened at $63.50.


CAVM - Cavium

The long put position was stopped out at $47.50.


SWKS - Skyworks Solutions

The long put position was stopped out at $63.35.


TWTR - Twitter

The long put position was closed at the open.


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


ACN - Accenture PLC -
Company Description

Comments:

No specific news. Still holding at the highs.

Original Trade Description: April 20th.

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

Position 5/2/16 with an ACN trade at $113.25

Long June $115 call @ $2.13, see portfolio graphic for stop loss.


MKC - McCormick & Co - Company Description

Comments:

No specific news. Big drop on market weakness.

Original Trade Description: May 11th.

McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in America. The company was founded in 1889.

This is truly a recession proof business. Everyone in the world uses spices in the food and you are not going to go without salt or pepper regardless of how poor you are. They reported earnings of 73 cents that beat estimates and revenue rose +2% to $1.03 billion. Cost of goods fell -1.6% and profit margins rose +1.8%. Cash on hand rose 36.7% and inventories declined. They guided for full year revenue growth of 4-6%, earnings growth of 6-8% and earnings of $3.68-$3.75. They pay $1.72 in annual dividends at 43 cents per quarter.

Earnings June 30th.

In mid April they acquired Botanical Foods Company based in Australia for $114 million. They provide packaged herbs and sales are growing at double digit rates. They export their products to 15 countries under the Gourmet Garden brand. McCormick expects the acquisition to be fully accretive to earnings in 2017.

The key point for this recommendation is that the shares are not going down despite the weak market over the last three weeks. Shares continue to climb despite the broader markets. However, they did decline 47 cents today after a four-week high yesterday. This will be a hedge against the market suddenly turning unexpectedly bullish. If shares move over Tuesday's high, I expect them to retest the April highs at $101.

Position 5/12/16:

Long June $100 call @ $.95, no initial stop loss.


SKX - Skechers - Company Description

Comments:

No specific news. Lost the $31 level with a $1 drop in a weak market.

Original Trade Description: May 4th.

Skechers designs, develops, markets and distributes footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand. The company owns, operates of has franchised more than 872 stores internationally. They opened 78 stores in Q1 and plan on opening 160-165 more throughout the rest of 2016.

The company reported record earnings that rose from 37 cents to 63 cents for Q1 and easily beat the 43-cent estimate. Operating income rose 57.1%. Revenue surged 27.4% to $978.8 million and easily beat the estimates for $890 million. The company raised guidance for the current quarter to $875-$900 million.

Wholesale revenues rose 47.1% with an 8.5% increase in distributor sales and 23.2% increase in retail sales. Comparable same store sales rose 9.8%. Domestic retail sales rose 15.3% and international sales +59%. International same store sales rose 17.7%. To say that the company is doing everything right would be an understatement.

Earnings July 21st.

Shares split 3:1 in October just as a revenue miss for Q3 knocked the shares down 35% from $46 to $31. The stock went sideways for the last six months but has recently rebounded to resistance at $35. The strong earnings spiked the stock to that level and it has traded sideways for the last week as it consolidated those gains. In the last two days of market weakness shares lost $1 and were actually positive on Wednesday. I believe we are going to see a breakout to a six-month high.

I know it is strange to recommend a bullish position in a negative market but the lack of a market related decline in SKX suggests they will surge higher if the market were to turn positive.

I am going to recommend a slightly longer option on this position so the premium will not decay as fast if the market continues to be weak.

Also, because we are in a negative market I am going to put an entry trigger on the position. I do not want to recommend a bullish position and have the market gap down -100 points on Thursday. If SKX does not rebound to hit the entry point we lose nothing.

Position 5/9/16 with a SKX trade at $32.25:

Long July $35 call @ $1.00. No initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


ABC - AmerisourceBergen - Company Description

Comments:

No specific news. Minor decline thanks to strength in biotech sector.

Original Trade Description: May 12th.

AmerisourceBergen sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. Its Pharmaceutical Distribution segment distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to various healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers.

The drug market is not working out well for ABC. In the recent earnings they reported earnings of $1.68 that beat earnings by 9 cents. However, revenue rose 9% to $35.7 billion and missed estiimates for $35.8 billion. If that was the whole story ABC would be a lot better off today.

The company warned on full year guidance and on 2017 expectations. They reduced full year guidance from $5.73-$5.83 per share to $5.44-$5.54 and analysts were expecting $5.78.

The CEO said, "Looking ahead, we expect our gross profit in the second half of the year to be negatively impacted by certain accelerating headwinds, including an increase in the rate of generic deflation and a lower contribution from new generic launches. In addition, an internal strategic initiative we had launched to increase sales of PRxO Generics and to increase our independent retail segment revenues is ramping slower than we had anticipated."

The company said 2016 revenue growth would be 8% and below prior estimates. For 2017 they expect 4%-6% earnings growth to $5.71-$5.82 per share and below current analysts estimates for 2016.

Earnings 7/28.

The long-term guidance warning tanked the stock but that was just the beginning of the declines. Shares are at a new 52-week low and still falling.

I am recommending an ITM June $75 option because it has high open interest (2,728) and a small spread. It is also cheaper than the next available strike, which would be the August $72.50 at $3.20 with a 50 cent spread and open interest of 15. I do not expect to be in this position for more than a couple weeks so the short term June option makes more sense.

Position 5/13/16:

Long June $75 put @ $2.60, see portfolio graphic for stop loss.


AMX - American Express - Company Description

Comments:

Perfect entry on the day the stock broke support. Big decline and we are now along for the ride.

Original Trade Description: May 16th.

American Express provides charge and credit payment card products and travel related services to consumers and businesses worldwide.

I seriously doubt that anyone reading this play description is unfamiliar with American Express. Unfortunately, their prestige has take a number of hits over the last two years.

Costco dumped American Express and is moving to Visa as its accepted card. AXP said that loss represented 10% of AXP card holders.

Fidelity Investments also dropped AXP for Visa because Visa is accepted many more places than American Express. Fidelity has 68.9 million accounts. That has got to hurt AXP.

Jet Blue announced it was replacing AXP cards with a new MasterCard.

There are numerous other companies that have dropped AmExp as their preferred card. The reason is simple. Not all merchants accept the AMX card and the fees associated with that card are higher for merchants. The card also has higher credit requirements for being approved. It does not do these businesses any good to offer a partner card if only a small number of applicants can qualify.

American Express is different from MC/V because it actually owns the debt. When you charge on an AMX card it is AMX that is making you the loan. With wages in the U.S. declining for the last 7 years that means higher risk of default for AMX accounts.

V/MC accounts are backed by an issuing bank or credit union. V/MC have no risk in the transactions, they just take a processing fee.

A federal judge ruled against AMX in a lawsuit filed by the DOJ because AMX was penalizing retailers for suggesting customers use a different card because the AMX transaction fees were higher. The judge said retailers had the right to discourage AMX usage.

In the testimony for the suit CEO Chenault whined, "They have a billion cards, AMX has 55 million. They have 9 million merchants and AMX only has 6 million. I am dwarfed. We are swimming in a sea of bank cards." And that is exactly the problem.

The bank cards have lower credit standards, lower merchant fees and more generous customer bonus awards programs. The prestige of the AMX is fading and even the invitation only Black card, made out of titanium, is losing its luster.

Shares faded from $96 to $50 and then rebounded in April to $67. Now they are fading again. They guided to earnings declines for the second half of 2016 because of the switch from AMX to other cards at various corporate customers like Costco. Earnings will rise in Q2 because of the sale of their Costco card portfolio but then decline the rest of the year. The CEO warned at the shareholder meeting, "We continue to face substantial competitive and environmental challenges."

Earnings July 28th.

Shares have flat lined recently with support at $63.75. If that level breaks we could see a decline to $59 fairly quickly. With the summer doldrums ahead, investors are not going to be patient with a stock that is basically dormant and forecasting lower earnings in the second half. Why would an equity fund want to own that stock in this environment?

Position 5/17/16 with an AXP trade at $63.50

Long July $62.50 put @ $1.70, initial stop loss $65.50.


CAVM - Cavium Ind - Company Description

Comments:

No specific news. Big spike at the open stopped us out at $47.50 by 2 cents before the stock rolled over to close at $46.50. CLSA upgraded numerous semiconductor stock before the open and CAVM was up with the crowd.

Original Trade Description: May 5th.

Cavium designs, develops and markets semiconductor processors for intelligent and secure networks in the U.S. and internationally. They offer wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. What that company description does not say is that Cavium designs chips for Apple iPhones and iPads.

Cavium recently reported earnings of 25 cents on revenue of $101.9 million. Analysts were expecting 25 cents and $102 million. That is about as "in line" as you can get. However, they warned that the current quarter would see revenue in the $105-$108 million range and earnings of 28-30 cents. Analysts were expecting $110.6 million and 32 cents.

On the call management said, "We expect the access and service provider markets to be flat to down due to some delays in volume infrastructure and Asia. We expect the enterprise and datacenter markets to be up despite a soft enterprise macro." Investors were not impressed with the lackluster guidance and the stock tanked.

Add in Apple guidance warning and Cavium began a long decline. I kept thinking we would see rebound but shares just keep sliding. I now believe we will see a new low as tech stocks weaken into summer.

Earnings July 27th.

I realize the stock looks oversold but I believe the Apple guidance warning is the gift that keeps on giving. The warning from multiple tech vendors on slowing enterprise buying is also a long-term warning.

Position 5/6/16 with a CAVM trade at $46.40

Closed 5/17/16: Long June $45 put @ $2.25. Exit $1.36, -.89 loss.


CP - Canadian pacific Railway - Company Description

Comments:

No specific news. New six-week low. No change in the outlook.

Original Trade Description: May 9th.

Canadian Pacific is a transcontinental railroad in Canada and the USA. It transports bulk commodities including grain, coal, fertilizer, crude oil and refined products, lumber and minerals. They operate about 12,500 miles of track across Canada and the Northern and Midwest USA.

The fires have knocked more than one million barrels per day of production offline. Every day another operator announces a shutdown because the fire is approaching, employees are evacuating their homes or the roads and utilities are shutting down.

The actual oil facilities are relatively fire proof. They are engineered to avoid that danger. However, they cannot run without employees and more than 100,000 people have been evacuated from the area. Nearly 2,000 homes and businesses have been destroyed. The water is undrinkable and there is no gas or electric service. Roads are closed and facilities have been shutdown.

When the fire burns out and the workers come home, they may not have a home left standing. That means they are going to be out of work for weeks trying to relocate their families. The local governments are not going to let people back into existing homes because of the lack of water, gas, sewage, electricity, etc. This is going to be a long-term problem.

It could take weeks or even months to reopen the oil sands facilities because of the lack of electricity. The transmission lines have been destroyed. In some areas the towers have melted. The oil sands cannot operate without electricity. Pipelines, pumping stations, etc will also be offline until the electricity returns.

If production is going to be offline for weeks or even months there will be a lot less crude oil moved by train. With the entire province in turmoil there will be all manner of delays and trains carrying other commodities could be halted or severely delayed.

CP depends on crude oil, refined products, coal, lumber and grain for the majority of its revenue. I foresee weeks of delays and significantly lower railroad traffic. Shares are already declining on the news but I expect them to decline a lot further as investors begin to factor in the loss to earnings in Q2.

Earnings July 20th.

Position 5/10/16:

Long June $130 put @ $2.95, initial stop loss $142.50


FSLR - First Solar - Company Description

Comments:

No specific news. Minor decline but still a decline.

Original Trade Description: May 2nd.

First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.

The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.

The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.

With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.

Earnings August 2nd.

Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.

I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.

Position 5/3/16

Long June $52.50 put @ $2.40, see portfolio graphic for stop loss.


GILD - Gilead Sciences - Company Description

Comments:

No specific news. Strength in the biotech sector kept Gilead from falling more.

The position remains unopened until GILD trades at $81.65.

Original Trade Description: May 14th.

Gilead is a research based biopharmaceutical company that discovers, develope and commercializes medicines in areas of unmet needs. They have numerous well known drugs for treatment of HIV and various cancers but their most recent winners have been for treatment of Hep-C.

The first Hep-C drug was Sovaldi and that one was revised and reformulated in conjunction with another drug and the result was the blockbuster drug Harvoni. When taken in an 8 to 12 week regimen it cures Hep-C in 98% of patients. Otherwise they would be facing liver transplants or death. It does not just end the symptoms but it cures the disease. The downside is that it costs $96,000 for the 12 week treatment.

Last year Gilead lost a patent dispute with Merck and now that company has a competitive drug that they are discounting well under the cost of Harvoni. In the Q1 earnings Harvoni sales declined 16% from $3.58 billion to $3.02 billion. Sales in the U.S. declined more than 50% from $3.02 billion to $1.41 billion. Sales in Japan were expected to offset some of that decline but failed.

The problem is the drug Zepatier from Merck. This competitor is being priced "aggressively" in order to take market share from Gilead.

Gilead is a great company but they made a mistake on the patent and that allowed Merck to enter the market. Gilead bought back $8 billion in shares in Q1 and that helped boost the stock price to $102 ahead of earnings. They still have $21 billion in cash but stock purchases have slowed as they look for an acquisition to give them a larger drug pipeline. The board did approve another $12 billion buyback but they are not likely to be aggressive in light of the rapid decline in sales.

In order to combat the Merck drug, Gilead is being forced to significantly discount Harvoni and that means cash flow and margins will continue shrinking. They also issued guidance that was lighter than analysts expected as a result of the price cuts.

Earnings July 26th.

Shares have declined to $82, which is support from the low in January. While they have fallen significantly, I believe they will continue to decline and make a new low. The current political environment is strongly against high priced drugs and politicians will continue to try and outdo each other with headlines as the election heats up. This should weigh on the entire sector.

Initial support is $80 but given the growing negatives, it could retest support at $63.

With a GILD trade at $81.65, which would be a new 52-week low:

Buy July $80 put, currently $2.66, initial stop loss $86.75


HOG - Harley Davidson - Company Description

Comments:

No specific news. Minor decline with support at $44.75.

Original Trade Description: May 11th.

Harley Davidson manufactures cruiser and touring motorcycles. They design, manufacture and sell wholesale on-road Harley Davidson motorcycle as well as a line of motorcycle parts, accessories and general merchandise, motorcycle insurance and motorcycle maintenance contracts. The company was founded in 1903.

Harley has had a long and tortured career. Motorcycles are very cyclical. When economic times are tough the sales decline sharply. When times are good and the country is at full employment the sales rise sharply.

The problem is the price. The cost of motorcycles has rocketed higher over the last decade and bikes can cost $20,000 to $40,000. That is a lot of money for the blue collar worker that would be their biggest market if money was not a factor. Middle income families are just that, families and living expenses are high. With wages falling for the last 7 years it has caused a problem for sales of high-ticket items. High income jobs like those in the oil patch that allow for excess extra income have taken a serious hit with a loss of 192,000 jobs over the last two years. The U.S. accounted for 89% of global demand for Harley Davidson bikes.

In their last earnings report sales in the U.S. were declining and margins were shrinking. They suffered from the strong dollar impacting overseas sales, unfavorable product mix, meaning only the lower priced bikes were selling and increased manufacturing costs. Touring bikes, the high dollar bikes with the highest margins saw sales decline -0.8% while lower cost cruisers rose 15.1% and Sportster/street bikes rose +1.2%. Free cash flow is shrinking. Average revenue growth over the last 3 years has been 2.4% compared to 8.7% at competitors.

Debt is rising as they build new manufacturing plants and increasing competition from cheaper competitors is hurting sales.

Earnings July 19th.

Competitor Polaris (PII) has eaten into Harley sales with their new line of Indian motorcycles. They bought the iconic brand in 2011 and began introducing bikes to compete with Harley and sales are booming.

Analysts warned last month the shrinking cash flow and rising debt levels put the 2.9% dividend yield in danger. Shares have declined from $49.50 when they reported earnings to $45.60 today.

I am recommending a short term June $45 put. That gives us about three weeks to profit as the market weakens from now into early June. The next available strike is August and at $3, I would rather play with the short term June position.

Position 5/12/16:

Long June $45 put @ $1.50, See portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

S&P gave back all the gains from Monday. Now poised again for a support break. We need the decline to appear quickly before our June options evaporate.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.
4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.


SWKS - Skyworks Solutions - Company Description

Comments:

No specific news. Upgrade to multiple chip stocks boosted the entire sector at the open to stop us out at $63.35.

Original Trade Description: May 7th.

Skyworks designs, develops, manufacturers and markets proprietary semiconductor products. They are a component supplier to smartphone makers worldwide.

We all know about the decline in iPhone sales in Q1 and Apple's order to cut manufacturing by 30% in Q2 after a similar decline in Q1. iPhone sales are slowing but it is not just the iPhone. Chinese smartphone manufacturers are all struggling to increase sales in a saturated market. In China about 45% of the phones have now been upgraded to 4G and the industry is ramping up the transition to 5G in late 2017. That means the 2016 versions of new phones have a shortage of new features to justify their hefty prices.

In their earnings last week Skyworks reported operating earnings of $1.25 compared to estimates for $1.15. Revenue of $775.1 million rose only 1.7% from the year ago quarter and missed current estimates. The company guided to current quarter revenues of $750 million with earnings of $1.21. These were below analyst estimates.

Skyworks is a great company. They are well positioned for future growth, have many new products, $1.177 billion in cash and zero debt. They are paying a 26-cent dividend on June 2nd to holders on May 12th. Their problem is the slowing smartphone market.

We know they will have a good Q4 because of the Apple iPhone 7 but the next few weeks of summer doldrums could see them touch a new low on the iPhone sales cloud currently hanging over the sector.

Shares rebounded from the opening dip on Friday along with the market. I think we should use this bounce to initiate a new short-term put position on Skyworks.

Position 5/10/16 with a SWKS trade at $64.15

Closed 5/17/16: Long June $62.50 put @ $2.00, exit $2.35, +.35 gain.


TWTR - Twitter - Company Description

Comments:

Twitter may be about to announce it will no longer count the characters in a link or a picture against the 140 character limit in the tweet. Bloomberg is reporting this but Twitter has no comment. This would be less of a move than what analysts expected. The report did cause shares to spike after the open. We did close the long put on the opening dip and now we have a left over long call so we want Twitter to do something to cause a bounce or be bought.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, see portfolio graphic for stop loss.
Closed 5/17/16: Long June $16 put @ $1.45, exit $1.96, +.51 gain.
Net debit $3.52.




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