Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/31/2016

Table of Contents

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

Market Wrap

Brexit is Back

by Jim Brown

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In just a week, the tide has turned again with the Leave camp now beating the Remain camp 52-48% according to new Guardian survey.

Market Statistics

The tide has turned multiple times and only a week ago a different survey showed a 55 to 42% result in favor of remaining in the EU. That survey covered conservative voter while the most recent survey was randomly conducted by phone. The actual phone results were 45% leave, 42% remain and 13% did not know. By removing the undecided category, the numbers jump to 52-48% in favor of leaving. Another online survey found 47% favor leaving, 44% remaining and 9% undecided. If you remove the undecided, you get the same 52-48% in favor of leaving. The same poll was conducted in mid May and the Remain camp was ahead 55% to 45%. The trend is definitely changing. Source

The market did not like the increased uncertainty along with some negative economics and the Dow and S&P declined while the biotech sector continued to hold up the Nasdaq.

The Chicago ISM (formerly Chicago PMI) fell -1.1 to 49.3 in May from 50.4 in April. This is the sixth time it has been in contraction in the last 12 months. The production component declined -6.6 with new orders also falling into contraction under 50. Inventories fell -11.7 to 37.9 and the seventh consecutive month in contraction. Order backlogs rebounded +9 but remained in contraction for the 16th consecutive month.

This suggests the national ISM could also fall into contraction when it is reported on Wednesday.


Consumer Confidence for May fell from 94.7 to 92.6 and the lowest reading since July. The present conditions component fell from 117.1 to 112.9 and a 6-month low while the expectations component declined from 79.7 to 79.0 and the lowest level since February 2014. Those consumers planning on buying a car rose from 11.8% to 12.6%, homes up from 5.3% to 6.0%. Appliance buying plans declined from 51.6% to 50.3%. The high dollar purchase plans were strengthening while the common consumer items were fading. Consumer pessimism appears to be rising, which is common in an election cycle.


Personal income for April rose +0.4% to duplicate the rise in March. On a trailing 12-month basis income is up +4.4%. Personal spending rose +0.6% after zero gain in March. This was the fastest growth since May of 2015. Spending was concentrated on cars and parts at 5.4% compared to nondurable goods like clothing, gasoline and food at +0.7%. As consumers, we have not learned out lessons and spending growth is always higher than income growth.

The PCE (personal consumption expenditures) deflator rose +0.3% for April. This is the Fed's preferred inflation indicator. Gasoline was the biggest increase at +0.7%. The core rate was +0.2%. Over the trailing 12 months the headline PCE is +1.1% and the Core PCE is +1.6%. The Fed would like to see it at 2.0%.

The Case Shiller home price index rose +5.4% in March after the same reading in February. This is a lagging report and the data was ignored. The recent home sales reports have provided data that is more current.

The Texas Manufacturing Survey for April declined from -13.9 to -20.8. The production component declined from +5.8 to -13.1. New orders declined from +6.2 to -14.9. Inventories declined from 0.0 to -6.8. Backorders declined from -8.8 to -9.3. Employment fell from -3.7 to -6.7 and the average workweek fell from -1.0 to -11.8. This was an ugly report and corresponds with other regional reports over the last month. I do not see how the fed can raise rates in this environment.

On the calendar for Wednesday is the national ISM Manufacturing and the official estimate is for a decline to 50.6 but odds are increasing that it could be below 50 and in contraction territory. The Fed Beige book will be out in the afternoon and it should show some decreasing activity in some of the Fed regions because of reports like the Texas Survey and the Chicago PMI that I reported above.

The first payroll report is delayed until Thursday and the ADP is expected to show 180,000 jobs but the whisper numbers Tuesday afternoon were 160,000 to 175,000.


In stock news, Medtronic (MDT) reported earnings of $1.27 that rose +9.5% and beat estimates by a penny. Revenues of $7.567 billion rose +6% and beat estimates for $7.482 billion. Foreign currency problems reduced revenue by -$179 million. However, the company guided for the full year to earnings of $4.60-$4.70 and analysts were expecting $4.70. That would imply EPS growth of 12-16% after currency impacts. Shares declined slightly after the news.


Marketing software maker Marketo (MKTO) agreed to be acquired by private equity firm Vista Equity Partners for $1.79 billion or $35.25 per share. That was a 64% premium to the early May share price before rumors began to circulate. The Marketo CEO said this would allow the company to focus on customer success and to remain the independent category leader.


Great Plains Energy (GXP) agreed to buy rival Westar Energy (WR) for $12.2 billion including debt. This is the third major energy deal of the year with Dominion Resources agreeing to buy Questar for $4.4 billion and Exelon acquiring Pepco Holdings for $6.8 billion. Utility companies are seeing demand decline due to higher energy efficiency, increased solar and a weak economy. By consolidating in the sector, they can reduce costs and broaden their base. The Great Plains deal will increase its customer base from 850,000 customers to 1.5 million and its generation capacity from 6,400 megawatts to 13,000 megawatts.


Jaxx Pharmaceuticals (JAZZ) agreed to buy Celator Pharmaceuticals (CPXX) for $30.25 per share or $1.5 billion in cash to gain access to the company's developmental product for treating acute myeloid leukemia. That was a 76% premium to Celator's closing price on Friday. The drug is Vyxeos and is a combination of cytarabine and daunorubicn and it extended patient survival in the latest trials. The acquisition price was more than four times the anticipated annual sales of the drug. Celator cancelled its analyst meeting and shareholder meeting.


Monsanto (MON) shares gained another $3 on news that Bayer may be considering raising their prior $122 per share offer. Monsanto said the proposal was "incomplete and financially inadequate" but they would be willing to talk to Bayer if they were willing to pay a fair price. Analysts believe that would be in the $135 range.


Amazon (AMZN) shares hit a new historic high at $724 on no news in a weak market. Shares have recovered from the post earnings depression and appear to be headed for $800. They earned a whopping $1.25 for last year and that gives them a PE of 577. It would be tough to try and explain that to any Amazon bull. I think buyers believe it is going to $1,000 regardless of earnings performance. Amazon accounted for 42% of all E-Commerce revenue in Q1. The stock briefly eclipsed Facebook as the second largest market cap stock at $341 billion compared to Apple's $547 billion. Shares are up 70% in a year and 20% over the last quarter. Do not short this stock.


Apple (AAPL) shares declined slightly after Nikkei.com reported Apple may be preparing to lengthen its product cycle from 2 years to 3 years. The theory is that Apple could reduce costs of having to retool every other year and overhaul their manufacturing process. By stretching it to 3 years, it would give them more use of the components for each generation of the phones. Since consumers are keeping their phones longer, it would make sense. It would also allow the company time to come up with some new features that would make the new phones more desirable.

There are numerous rumors in circulation that the iPhone 7 will barely even be a refresh much less an entirely new phone. Some rumored new features are now being projected out to the iPhone 8 rather than the 7. If they did switch to a 3 year cycle that would put the delivery of the 8 all the way out into Q4-2019. The term "peak smartphone" is gaining more traction because there are only so many features you can pack into a smartphone case. Most new phones have similar features and Apple is the most expensive. CEO Tim Cook has said that Apple is developing some things that we will not be able to live without and we will wonder how we ever got along without them. Apparently, that is not going to be in the iPhone 7.


Crude prices traded up to $50.10 in the morning on worries over the continued attacks in Nigeria. However, the microphone grab contest has already started and the UAE Oil Minister Mohammed al-Mazroui started the headline fest by saying he was "happy with the oil market" now that oil prices have corrected higher. "We are optimistic. We are seeing the market correct upward." Having OPEC oil ministers "happy" going into the production meeting on Thursday suggests there will not be a big effort to freeze production. We may actually see some additional production to capture the current prices.

Further news out of OPEC included a claim by Iraq that it will supply 5 million barrels of extra crude to its partners in June. Last week the country said production had fallen from 4.7 mbpd to 4.5 mbpd because of infrastructure problems. Apparently, those problems have been corrected and now Iraqi pipelines are brimming with fresh oil. Iraq had been targeting exports of 3.47 mbpd ahead of the OPEC meeting.

Saudi Arabia, Kuwait, Iran and the UAE have already announced production increases for Q3. It would be hard to force through a production freeze given those announcements. The odds of anything positive coming out of the OPEC meeting are nearly zero.

Crude prices declined to $48.75 after the UAE comments. Long futures positions on the NYMEX are at the highs for the year and growing by 0.6% per week. Speculative short positions have been falling by 8% per week.


Markets

The S&P rallied to 2,103 at the open but the hang time was brief and is quickly fell back to 2,088 in late afternoon. The surge at the close back to 2,096 was helped by the rebalancing of the MCSI indexes. MCSI added half of the U.S. listed Chinese stocks back in December and they added the other half at the close today. That caused volumes to spike significantly and prices for some of those stocks also spiked. For instance Alibaba (BABA) has an average volume of 12 million shares and volume spiked today to 78 million. You can follow that volume all across the other Chinese ADRs including BIDU, CTRP, QIHU, etc. However, not all Chinese stocks went up. BIDU crashed at the close for a -$6.47 drop.

Goldman estimated there would be $43 billion of net buying on the Chinese ADR stocks. The amount of buying was expected to consume 14.4 days of net volume on those ADRs. However, quite a few of them were bought on Friday in anticipation of today's index rebalancing. Those traders that bought on Friday expected to sell into a surge this afternoon and apparently, some of them were significantly overbought.


The S&P closed right at the bottom of strong resistance that has held more than once since last August. The index is less than 2% away from a new high at 2,132 but the bloom from last week's rally may be fading. We would expect at least some retracement before the index tries to push higher but the number of bears coming out of the woodwork today suggests moving higher could be a really tough climb.


The Dow opened at just under 17,900 and then declined -175 points to 17,724 before the rebound at the close lifted the index back to -86 at 17,787. At one point, only two Dow components were positive and it was starting to look like a rout but the end of day buying rescued the index from dipping below the 17,700 level. The Dow has failed at about the same level for four consecutive days. The 17,880-17,900 range has turned into resistance that I did not expect until 17,925.

The Dow could be the weaker index for the rest of the week. The negative economic reports are taking some of the expectation out of a Fed rate hike and the potential for a further decline in oil prices is weakening XOM and CVX. Disney was weak after the Alice: Through the Looking Glass movie did poorly over the weekend.



The Nasdaq pulled a little closer to the resistance at 4,968 thanks to a 1.6% rally in the biotech sector. The acquisitions plus the ASCO cancer conference starting this weekend provided support for biotech stocks. In the point gainer list below note that most are biotechs. The $11 gain by Amazon did not hurt either.

The Nasdaq has further resistance at 5,000 and a strong resistance band between 5100-5160. Support is well back at 4,885 and then 4,700.



The biotech index hit resistance at 3,250 and this could be a problem for the rest of the week. The individual stocks have already run up ahead of the ASCO meeting and remains to be seen whether they can continue their run. If the biotechs stall here, the Nasdaq will lose one of its support pillars.


The Russell 2000 has strong resistance at 1,156 and the high today was 1,158 before the index pulled back to close at 1,154. If the index gets through this level the 1,165 resistance could also be strong. Small caps have been helped by the biotech rally and gains in financials and energy. All of those support pillars may be losing traction.


There are a lot of headlines coming out this week. The economic reports, payroll reports, OPEC, etc are all going to potentially roil the market. It would be hard to construct a scenario of events that would be market positive. The S&P futures are slightly positive tonight but that could change before morning. The continued news about the Brexit will only become more urgent over the next three weeks and the FOMC meeting is right in the middle. I would be careful about adding too many positions in either direction ahead of this mixmaster of events. We could easily move triple digits in either direction OR both.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Fully Loaded

by Jim Brown

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Editors Note:

With the market closing right at resistance after declining most of the day the direction in an event heavy week is undecided. We could easily move triple digits in either direction or both at any time. Buying new longs at strong resistance levels in the market could be suicide. We could win but it is not a favorable setup. I am recommending we hold what we have, which is 7 longs and 4 shorts. We were heavily short a week ago as the Dow tested 8-week lows and we were forced to reverse to heavily long in order to follow the market trend. The market is at a turning point. If it moves up from here we will be richly rewarded. If it moves down we are hedged. There is no reason to add plays every day of the week. Lately, every Tuesday has been a turnaround Tuesday of some sort leaving market direction in doubt.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not Convincing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P gave back -2 points to 2,097 after rising to 2,103 at the open and dipping to 2,088 intraday. This did not look like the start of a big decline since the intraday dip was bought quickly. If we do not decline on Tuesday, I would expect an attempt to move higher. The volume was very light early in the day but increased rapidly toward the close as the MSCI indexes were adjusted to include U.S. listed Chinese stocks. The total was 7.42 billion shares. For instance Alibaba (BABA) has an average volume of 12 million shares and they traded 78 million today with most of that just before the close.

The Chinese stocks popped on the increased volume and helped lift the indexes. However, the biotech sector was up strongly again ahead of the ASCO conference next weekend. The Biotech Index rallied +1.6% and kept the Nasdaq in positive territory.

With the Brexit worries coming back and a very heavy economic calendar this week there is plenty of opportunity for a market decline. Therefore, if we do not go lower I would expect another try to reach a new high on the S&P at 2,132.



Current Portfolio




Current Position Changes


OC - Owens Corning

The long call position was opened with a trade at $51.75.


ATVI - Activision Blizzard

The long call position was entered at the open with a trade at $39.54.


CP - Canadian Pacific

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


ATVI - Activision Blizzard -
Company Description

Comments:

Shares spiked at the open on a hike in the price target to $43 by Pacific Crest Securities while maintaining an overweight rating. The analyst said strong reviews of the Overwatch game suggested it would sell at least 7 million units in Q2. That is up from their prior estimate for 5 million.

The position was entered at the open at $39.54, which happened to be the high for the day.

Original Trade Description: May 28th.

Activision Blizzard designs, developes and publishes online, personal computer, video game console, handheld, mobile and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products.

At the end of Q1, ATVI had 544 million monthly active users thanks to the acquisition of King Digital. King had a very diverse network of 463 million global game players. Activision said the acquisition will be accretive to 2016 revenues and earnings by 30% and significantly accretive to free cash flow per share. It also brings 463 million players into the Activision Blizzard massive multiplayer PC games like World of Warcraft that have monthly subscription fees.

Activision actually has a World of Warcraft movie premiering on June 10th. If you go to the movie, you will get a copy of the PC game World of Warcraft free. The movie characters have custom weapons that will be available to players after the movie debut.

Their new game "Overwatch" has been played by 9.7 million people in the open beta phase where it is released to the public in order to get the bugs out of it. It is a good bet the majority of those players will be buyers when the game launched on May 24th. Initial sales were huge and Jefferies expects ATVI to sell 5-7 million copies in Q2. When it reaches 10 million units Jefferies said that would produce up to $250 million in revenue for ATVI or 7-9 cents a share in earnings.

Metacritic has a 93 rating on the game and out of 11 professional reviewers five gave it a perfect 100. The Jefferies team that played the game in order to review it said "it was easy to learn but difficult to master."

Gamers spend $509 million in April in the U.S. alone.

Activision said they were working with Twitch and Instagram and would be producing a lot of content on Facebook live. They are planning on launching live streams of E-Sports programming to all of Facebook's 1.6 billion users. E-Sports provides live competition by gamers for millions of dollars in prizes as other gamers watch. Activision just launched its MLG.tv live streaming platform where gamers can watch others play in real time.

Webush believes ATVI could earn $3 per share by 2018 with $2 per share in 2016. The company reported 23 cents for Q1 on record revenue of $1.46 billion. Those numbers were up from 16 cents and $1.28 billion. Analyst estimates were for 12 cents and revenue of $823 million. The company raised guidance for Q2 and for the full year. They are guiding for earnings of 38 cents in Q2, up +192% on revenue of $1.38 billion, up +81%. For the full year they guided to earnings of $1.78, up +35% and revenue of $6.28 billion, up +36%.

Adding to earnings were continued sales of Call of Duty: Black Ops 3 and Candy Crush Jelly Saga.

Earnings are August 4th.

Shares are approaching new high resistance at $40 and should breakout, market permitting. I am proposing the August $40 calls even though they are a little more expensive than the July. I want to exit the position while those calls still contain some earnings expectation.

Position 5/31/16:

Long Aug $40 Call @ $2.18, initial stop loss $36.85.


DIS - Disney - Company Description

Comments:

No specific news. Alice: Through the Looking Glass, brought in $34.2 million over the four-day weekend. To date Alice has brought in $103 million compared to the $170 million budget. It has a long run ahead and while it is not a hit, it will eventually be profitable. The "Finding Dory" and "The BFG" will be major hits so Disney will redeem itself in a couple weeks. Shares were down with the Dow.

Original Trade Description: May 19th.

Disney operates as an entertainment company worldwide through broadcast and cable television networks, domestic TV stations, radio networks, movies and media distribution of all types, theme parks, hotels and cruise lines.

Disney missed earnings on May 10th and shares have fallen from $106 to $98 over the last week. This sell off is overdone and shares are approaching support at $96. I believe now is the time to buy.

Disney's latest movie, Captain America: Civil War has already broken $1 billion at the box office in only two weeks. It could end up one of the highest grossing movies of all times. Disney has an entire list of movies headed for the theaters and some will be as big as Captain America. Star Wars: The Force Awakens has already grossed over $2 billion and there are many more episodes planned.

Disney Movie Schedule

May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

They also are opening the Shanghai Disney theme park on June 16th and they expect up to 100 million visitors in the first year with tickets starting at the introductory price of $57-$75. There are 330 million people living within 4 hours of the park. That is truly a cash-printing machine.

Disney has sold off because of a decline in ESPN subscriptions. This is vastly over rated as a problem. Given their recent billion dollar movies and the cash flow from Shanghai the ESPN problems will be forgotten. At this point all the bad news is already priced into the market.

With support at $96 and shares closing at $98 today I am recommending a July call that will expire two weeks before their next earnings report. It is cheap and we can capture any rebound from support. There is risk of a further decline to that support so I am putting the stop loss under that $96 level.

Position 5/20/16:

Long July $100 call @ $2.15, see portfolio graphic for stop loss.


IBM - International Business Machines - Company Description

Comments:

No specific news on IBM but shares closed at a new 9-month high.

Original Trade Description: May 26th.

IBM provides information technology products and services worldwide. The Global Technology Services segment provides IT infrastructure including outsourcing, integrated technology, cloud, and technology support services. IBM used to be a hardware company but that is rapidly shrinking and the services business is rapidly expanding. The company was founded in 1910.

Buffett calls IBM one of his "big four" investments in public companies including American Express, Cocs-Cola and Wells Fargo. He said IBM "possesses excellent business outlook and are run by talented managers that are shareholder oriented." He increased his stake from 7.8% to 8.4% worth $13 billion. IBM trades at 9x earnings and pays a dividend that yields 3.9% and has grown at an annual rate of 15% over the last five years. IBM is also a buyback machine. They routinely buy back billions in stock.

IBM has been suffering from a decline in revenue for the last several years. Their mainframe business is declining because China will no longer let critical companies by hardware from American companies for fear of spyware imbedded in the equipment. They also dumped their PC business to Lenovo in an effort to move away from commodity businesses and more into services.

Their cloud business is growing quickly. This week they announced a deal with FleetCor (FLT) to move its business to IBM's cloud. FleetCor processes 1.9 billion transactions a year. Forbes calls FleetCor one of its top 20 Most Innovative Companies. FleetCor manages more than a dozen datacenters globally at a cost of about $100 million. The company said, "IBM has more scale than us and we expect to see further efficiencies with IBM processing for us." They expect to save up to $40 million annually and expect greater security.

This is what IBM does best. They provide computing and services for Fortune 1000 companies. IBM said it signed 26 new service contracts last quarter for more than $100 million each. This is why IBM will rebound out of the funk they have been in for the last year. Amazon and Google do not have the capability to provide the services part of the cloud like IBM can. They provide hardware access but you do the rest. IBM does everything.

Earnings July 18th.

IBM shares have rebounded from $120 in February and are about to break out over 10-month resistance at $153.50. Once they break through that barrier, they could run for $15-$20 as unbelievers become believers and begin chasing the price higher.

If you want to take the cautious approach, you might want to wait until IBM trades at $153.75. I am recommending an immediate entry.

Position 5/27/16:

Long July $155 calls @ $2.40, initial stop loss $146.50.


MKC - McCormick & Co - Company Description

Comments:

No specific news. CEO will present at the Bernstein conference on June 3rd.

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, see portfolio graphic for stop loss.


OC - Owens Corning - Company Description

Comments:

No specific news. Shares spiked at the open to trigger the entry into the position at $51.75.

Original Trade Description: May 25th.

Owens Corning, together with its subsidiaries, produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabrics, non-wovens, and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. It sells its products primarily to the insulation installers, home centers, lumberyards, retailers, and distributors. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction.

As you can see in the company description, they do a lot more than just fiberglass insulation but that is what they are known for in the industry. The sharp uptick in new home sales reported this week suggests there is a corresponding spike in new home construction both in the last several months and over the summer months. OC is the premier supplier of insulation materials for new home construction and their profits will blossom as a result.

In their recent earnings, they reported 53 cents compared to estimates for 33 cents. However, revenue was a slight miss at $1.23 billion compared to estimates for $1.24 billion. Shares were crushed for a 15% drop over the next four days. They have completely recovered and today's close was a new high.

In their guidance they said all three divisions were improving and this was for a winter quarter when demand is slower. I believe this is a better bet than investing in a homebuilder. All the builders use OC products so buying OC is a builder agnostic trade.

Earnings July 27th.

Shares do not move very fast but they have been a steady gainer since the February lows. Because it is a slow mover the option premiums are very cheap. Because Wednesday's close was a new high and the market has been up strongly for two days I am going to put an entry trigger at $52.50. We want to make sure there is a breakout before we enter and that the market is not going to tank at the open on Thursday.

Position 5/31/16 with an OC trade at $51.75

Long August $55 call @ $.85, no initial stop because of the cheap option.


SKX - Skechers - Company Description

Comments:

No specific news. Uptick accelerated slightly.

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.


TWTR - Twitter - Company Description

Comments:

No specific news but shares were up slightly in a mixed market. More importantly they did not give back the big gains from Friday.

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.

Previously Closed 5/17/16: Long June $16 put @ $1.45, exit $1.96, +.51 gain.



BEARISH Play Updates (Alpha by Symbol)


ABC - AmerisourceBergen - Company Description

Comments:

No specific news. Biotech sector up +1.6% in a mixed market and that powered ABC to a nearly equal rebound.

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.


CP - Canadian pacific Railway - Company Description

Comments:

Shares spiked at the open but ended the day with a decline. We exited at the open for a minor loss of 45 cents.

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.

The company said domestic intermodal traffic fell -1% to 8,300 cars for the week ended May 7th. However, international intermodal volume declined -4.6%. Total intermodal volume declined -3%. Earnings July 20th.

Position 5/10/16:

Closed 5/31/16: Long June $130 put @ $2.95, exit $2.50, -.45 loss.


DLPH - Delphi Automotive - Company Description

Comments:

No specific news. Shares ticked up slightly on a bullish Nasdaq.

Original Trade Description: May 23rd.

Delphi, a former division of General Motors, manufacturers vehicle components and provided electrical and electronic, powertrain, and safety technology solutions to the automotive and commercial vehicle markets worldwide.

When they reported Q1 earnings of $1.36 they beat the estimates for $1.34. Revenues increased 7% to $4.05 billion but missed estimates for $4.08 billion. They repurchased 5.6 million shares worth $370 million in the quarter and had $137 million left to spend. In April the board authorized a new $1.5 billion repurchase program. They currently has $463 million in cash and $4.35 billion in debt.

On the surface it would appear they are a very healthy company. However, they are very dependent on U.S. auto production. The Autonation CEO said on his earnings call that auto inventories were at record highs and there was no space left to store them. He said manufacturers would have to cut back on production for the rest of the year to bring inventory levels back into balance.

Vehicle sales have been helped by low gasoline prices and the abundance of subprime loans available to consumers. Some 44% of borrowers were taking out 61-72 month loans. However, all good things must end. Gasoline prices are rising and are not likely to return to the recent lows for a very long time, if ever.

Recently banks reported that as many as 31% of those subprime loans were in trouble. While not technically in default, there have been problems like late or missed payments. Also, as many as 35% of those borrowers are underwater because the value of recently new cars has fallen sharply with the resale market still crowded with the used cars everyone is trading in to buy new.

As a result of those statistics the subprime auto loan market is evaporating. It is becoming increasingly hard to obtain financing and larger down payments are required. This is slowing the sale of new cars. In the March sales report the run rate fell to 16.6 million and a two year low. That rebounded to 17.4 million in April and analysts blamed the dip on the weather. However, the last five months have been significantly lower than the last five months in 2015 when the sales rate rose to 18.2 million. Manufacturers are compensating by raising incentives nearly to the rate immediately after the recession. Also, manufacturers leased a lot of cars in order to move inventory immediately after the recession. Those cars are now coming off lease with 2.55 million expiring in 2015 and that number will rise by 500,000 per year through 2018.

This is where Delphi runs into trouble. As auto sales decline it will reduce revenue for Delphi. We are also heading into the summer months when auto factories shut down to retool for the new models that come out in the fall.

Investors have caught on to the "peak auto" worries and Delphi shares have been declining since their earnings in early May. If a company is going to miss on revenue in the good times they are likely to miss again as auto sales slow.

Earnings August 3rd.

Position 5/24/16:

Long July $65 put @ $1.92, initial stop loss $69.25.

There is no open interest on the July strikes because the series was just added today after the May expiration. It should not be a worry because the pricing is not out of line and open interest will rise quickly.


NKE - Nike - Company Description

Comments:

No specific news. Shares rose slightly in a bullish market.

Original Trade Description: May 21st.

Nike designs, develops, markets and sells athletic footwear, apparel, equipment and accessories for men, women and kids worldwide. The company offers products in eight categories including running, basketball, football, men's training, women's training, sportswear, action sports and golf under the Nike and Jordan brand names.

Part of Nike's successful marketing involves signing deals with various celebrities, sports teams, franchises, etc, for endorsements and advertisements obtained by teams and players wearing Nike apparel. Sometimes Nike discounts their equipment to enterprises including colleges, group sports associations, etc along with an agreement not to use another brand.

Last week Nike signed an $870 million, 10-year deal with the Chelsea soccer club and they will provide all their equipment and apparel starting in 2017. I am pretty sure the club cannot use $87 million a year in uniforms, shoes, balls and nets. That means the rest of the money Nike is paying is for advertising the Nike swoosh on all their uniforms. That is an expensive advertising deal but evidently Nike thanks it is worth the money.

Recently Nike paid endorsements have reached unbelievable heights with LeBron James receiving a $1 billion lifetime contract to endorse Nike products and allow his name to be used for a line of basketball shoes. The problem occurs when these sports start quit playing. Within a few years they are all but forgotten as a new crop of athletes become the new superstars and a new crop of teenagers want new gear named after or endorsed by those new stars. Under Armour's Stephen Curry is a prime example. He is the new star on the block and they cannot keep his shoes in stock.

When Foot Locker reported earnings on May 19th they said Nike's basketball shoes were not selling. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales.

With so much of Nike's revenue coming from the Foot Locker chain it suggests Nike could have some earnings problems in the current quarter. If those shoes are not selling in Foot Locker they are probably not selling at Finish Line (FINL) either. Finish Line has been struggling with sales anyway and having a Nike product that is not moving could make the situation worse. Add in the bankruptcy and closure of 450 Sports Authority stores and another sales outlet for Nike bit the dust.

Nike is a good company. They have great products and they sell worldwide and online. Their last quarter earnings rose 22% to 55 cents and beat estimates for 48 cents. However, revenue of $8.03 billion missed estimates. Nike blamed the strong dollar for the revenue miss. They said futures orders rose 12% and that also missed estimates for 15%. They also missed on revenues in the prior quarter.

Now that basketball season is over and all those unsold basketball shoes are cluttering up store shelves we could see further weakness in the current quarter earnings due out on June 23rd. With all the retail earnings declines over the last couple weeks it makes sense that Nike may have been having some of the same volume problems. Since they missed on revenues in the prior two quarters, it would seem to be a good bet they will miss this quarter as well given the weakness in retail.

Shares crashed after their earnings problem on March 22nd and flatlined around $60 for a month. That sideways movement has now turned into a downward slide with the stock hitting a three-month lod on Friday before rebounding from the initial FL instigated dip. I believe the stock is going to continue to move lower and the bounce on Friday was an entry point.

Position 5/23/16:

Long July $55 put @ $1.75, see portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

The S&P gave back -2 points to 2,097 after rising to 2,103 at the open and dipping to 2,088 intraday. This did not look like the start of a big decline since the intraday dip was bought quickly. If we do not get a retracement of these gains next week our June options will quickly turn worthless.

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.




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