Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/26/2016

Table of Contents

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

Market Wrap

Dip Buyer Rally

by Jim Brown

Click here to email Jim Brown

A sell program knocked the Dow to a -105 point loss in the morning but dip buyers were ready and waiting.

Market Statistics

The sell program was brief and could have been timed to coincide with the normal pre-FOMC bounce. Historically the day before a Fed-meeting announcement the market is positive. Launching a sell program into that positive market would be one way to unload some stocks without crashing a low volume market. Whatever the reason for the drop the dip buyers were waiting and the rebound was immediate. The Russell 2000 was a big gainer with a close at a new 52-week high. That is strongly bullish for the broader market.

The economic news was also good and helped to power the market higher. The New Home sales for June rose from 551,000 to 592,000 for a 3.5% rise. Analysts were only expecting a rise to 560,000. The Midwest saw sales rise 10.4% and West +10.9%. However, the Northeast saw sales decline -5.6% and the South declined -0.3%. The months of supply on the market shrank to 4.9 from 5.1 and a high of 5.5 months in the Jan-Mar period. The median home price rose sharply from $288,500 to $309,900 for a 7% increase.

Record low interest rates are helping this sales boom. Let us hope the Fed does not do anything to upset this trend when they release their meeting announcement on Wednesday.


The Richmond Fed Manufacturing Survey rebounded back into positive territory with a July headline number of 10, up from -9.6 in June. All of the internal components were positive for the first time in more than a year. New orders spiked from -17.3 to +15.0 and order backlogs rose from -12.1 to 1.0.

In the separate Services Survey, the headline number rose from zero to 8.0 for July.



Consumer Confidence for July declined slightly from 97.4 to 97.3. However, that June number was revised down from 98.0. The present conditions component rose from 116.6 to 118.3 and the expectations component rose declined from 84.6 to 83.3. Those respondents planning on buying a car declined from 12.7% to 10.8%. Homebuyers rose slightly from 4.8% to 4.9% and appliance shoppers rose slightly from 48.1% to 48.3%.


The big event on the calendar for Wednesday is the FOMC announcement and the potential for them to turn hawkish in their statement and increase expectations for a rate hike in September. Currently the market is not expecting a rate hike until early 2017 so any hawkish tone would be market negative.

Friday is the next hurdle day with the Bank of Japan stimulus announcement, the stress test results for the EU banks and the first look at the Q2 GDP. Since the core S&P earnings peak on Thursday for this cycle, the market could be fragile and react to those headline events.


It was all earnings, all the time on Tuesday. Even though Apple (AAPL) was the last to report I will discuss them first. They reported earnings of $1.42 compared to estimates for $1.38. Revenue of $40.4 billion narrowly beat estimates for $40.1 billion. They sold 40.4 million iPhones and slightly more than the 40.1 million expected. All of those estimates had been lowered dramatically over the last quarter. IPhone sales were down 17% but still beat those lowered estimates. For comparison, in the year ago quarter Apple had earnings of $1.85 and revenue of $49.61 billion.

iPad sales hit 10 million and the first gain in 10 quarters. Estimates were for 9.14 million. Mac sales were 4.3 million compared to estimates for 4.39 million. Services revenue rose 19% to $6 billion. Tim Cook said services revenue would be the size of a Fortune 100 company in 2017. Since Northwestern Mutual is the smallest company on the Fortune 100 with revenue of $28.1 billion I think Cook meant to say the Fortune 500. The 400th company on the Fortune 500 is Symantec with revenue of $6.5 billion.

Tim Cook said new customers switching from other carriers accounted for the largest percentage of quarterly iPhone sales Apple has ever measured. Apple is closing in on the sale of its billionth iPhone.

For the current quarter, they guided to revenue of $45.5 to $47.5 billion and analysts were expecting $45.94 billion. Sales in China fell -33% to $8.8 billion. Cook still bragged about the China business but it is becoming very competitive and having the highest priced phone is going to be a volume loser in the end.

Shares spiked $5 in the afterhours session to close at $101.88.


Twitter (TWTR) reported adjusted earnings of 13 cents compared to estimates for 12 cents. Revenue of $602 million missed estimates for $605.5 million. For the current quarter, the company guided to revenue in the range of $590-$610 million and analysts were expecting $682.8 million. While that guidance sounds bad, they basically guided for the same revenue as they just posted in Q2. Twitter has a lot of things in the pipeline that will not really get off the ground until Q4. They plan on live streaming one NBA and one NHL game per week along with a nightly sports highlight show covering 120 sports. They also contracted to live stream 10 NFL Thursday night games. There are dozens of other events they have lined up but most do not start until very late Q3 and early Q4.

Twitter is moving in the right direction and advertiser demand is very strong for their new services. However, they cannot book the sales until the events arrive. Average monthly users rose slightly from 310 to 313 million to break the decline streak over the last several quarters. The CFO said they were seeing sequential growth in monthly active and daily active users because of their change in format.

Shares fell $2 in afterhours trading.


Panera Bread (PNRA) reported earnings of $1.78 compared to estimates for $1.75. Revenue of $698.9 million barely beat estimates for $698.3 million. They guided for full year earnings in the range of $6.60-$6.70 per share. Analysts were expecting $6.68 per share. The CEO said, "At a time when other restaurants are feeling the impact of a slowing consumer environment, we are maintaining our momentum." Same store sales were up 4.2% to barely beat estimates for 4.1%. For the full year, the company is guiding for 4-5% sales growth. Shares rallied $7.89 in afterhours after being down -9.38 in the regular session.


The morning session was very busy for earnings with McDonalds the biggest loser and the biggest impact on the Dow with a loss of -$5.69. The company reported earnings of $1.25 that missed estimates of $1.38 by nearly 10%. Revenue of $6.265 billion also missed estimates for $6.281 billion. McDonalds blamed the strong dollar and weak international currencies for the miss.

Revenues at company own stores declined -8% to $3.917 billion but revenue at franchised locations rose 5% to $2.348 billion. Global comps rose +3.1% but that was less than the 6.2% rise last quarter. U.S. comps rose only 1.8% and was much lower than the 5.4% last quarter. The breakfast all day bounce is wearing off. McDonalds is trying to wean customers off the former $1 menu that hurt sales and profits. They are stressing the McPick 2 for $5 menu and some customers are converting.

The nearly $6 drop in MCD shares knocked around 40 points off the Dow. Were it not for a strong showing by Caterpillar with +$4 gain the damage would have been a lot worse.


Dow component Caterpillar (CAT) reported adjusted earnings of $1.09 compared t estimates for 96 cents. That was down from a revised $1.40 in the year ago quarter. Revenue was $10.3 billion, down from $12.3 billion. Management is cutting costs like crazy to offset the global decline in sales. The cut estimates for full year revenue to $40.0-$40.5 billion, down from $40-$42 billion. They cut earnings guidance from $3.70 to $3.55. The company said despite the guidance cuts and falling sales they were still optimistic about the global outlook although it was a tough economy and currency issues were a challenge.


Dow component United Technology (UTX) posted earnings of $1.82 that easily beat estimates for $1.68. Revenue of $14.87 billion also beat estimates for $14.7 billion. The company said backorders were growing rapidly. They now have more than 8,200 orders for Geared Turbofan aircraft engines. The company raised earnings guidance on the low end by 15 cents to $6.45-$6.60 per share. Revenue is expected to be $57-$58 billion compared to prior guidance for $56-$58 billion. They are working on cutting another $1.5 billion in costs, which will add $900 million in annual savings. Shares rallied $3.24 on the news.


Dow component 3M (MMM) reported earnings of $2.08 compared to estimates for $2.07. Revenue of $7.66 billion missed estimates for $7.71 billion. They lowered full year guidance from $8.10-$8.45 to $8.15-$8.30. Analysts were expecting $8.23. Shares were at a 52-week high and sold off on the lowered guidance.


Under Armour (UA) reported earnings of 1 cent that included a 3 cent charge for the Sports Authority bankruptcy. That matched analyst estimates. Revenue of $1.0 billion rose 28% and were in line with estimates. The company reiterated its guidance for full year revenue for $4.925 billion and a 24% increase. Earnings are expected to rise 8-9% to $440-$445 million. In an effort to replace Sports Authority they have entered into an agreement with Kohl's (KSS) to sell apparel, accessories and footwear at more than 1,100 stores all across the U.S starting on March 1st. Currently UA is sold in 11,000 stores in the U.S. compared to 24,000 for Nike. Kohl's said more than 400,000 customers searched the Kohl's website last year looking for the Under Armour brand. This could be a good deal for UA revenue but it may cheapen the brand since Kohl's is a low price discount retailer.


Gilead Sciences (GILD) reported earnings of $3.03 that beat estimates for $3.02 but were lower than the $3.10 in the comparison quarter. Revenue of $7.78 billion missed estimates for $7.85 billion and was down -5.7% from a year ago.

The company cut full year revenue guidance by $500 million to $29.5-$30.5 billion citing challenges in the Hep-C market including fewer patients and shorter treatment duration. This combined to produce lower revenue per patient. Shares suffered multiple downgrades.

The company is trying to increase sales of its HIV drugs as the Hep-C drugs decline in cost and usage. Sales of Hep-C drugs were down -32% in Europe but up 13% in the USA. Harvoni sales declined -28.9% but the replacement drug Sovaldi rose 5.2%. The newest Hep-C drug, Epclusa was only approved in late June but should see a sharp rise in sales in the coming quarter because of its lower side effects and single pill dosage.


Facebook and Boeing are the high profile stocks to watch on Wednesday as the earnings cycle rolls on. Thursday is the big day with Amazon and Google and the peak of the Q2 earnings cycle.


Analog Devices (ADI) said it was buying Linear Technology (LLTC) for $14.8 billion in cash and stock worth about $60 per share. That is a 24% premium to Monday's closing price on LLTC. The combined companies will be worth about $30 billion. The announcement hit the wires about 30 min before the close and shares of LLTC immediately jumped from $49 to $62 as shorts were forced to cover. That has got to be painful.


Crude prices continue to tumble on oversupply of refined products and the return to glut status for crude production. The API inventory report after the bell showed a 1.4 million barrel build in crude at Cushing Oklahoma along with a 2.3 million barrel decline overall. Crude prices declined to $42.65 on their way to $40. Some analysts now believe they could return to $35 but the general consensus is in the $38-$40 range. This will continue to weigh on energy equities. If the Fed turns hawkish and the dollar strengthens again it would be bearish for crude prices.

Morgan Stanley (MS) made a big splash in the oil market this morning when they said crude prices could spiral down as low as $30 this fall. They correctly repeated that the spike in prices was due to outages in Canada, Libya, Nigeria and elsewhere and those have mostly been resolved and the outages will not last forever. MS pointed out that the pace of production declines in the U.S. had slowed significantly and rigs were rushing back to work over the last four weeks.


Markets

The S&P rebounded from the 10-point decline this morning to close fractionally positive at 2,169. The current historic high is 2,175 from Friday. The S&P has traded in a narrow range from 2,155 to 2,175 over the last nine trading sessions. That is extremely narrow and the lack of volume suggests it is a controlled consolidation rather than a distribution phase. The difference is that a consolidation suggests there will be an upside breakout while a distribution phase suggests there will be a downside breakout. A distribution phase is generally accompanied by higher volume with advancing/declining volume roughly even. We are still averaging only about 5.85 billion shares a day and that is very light. Everyone is waiting for something to happen so they can trade in the direction of the trend.

The Fed decision at 2:PM on Wednesday could be a make or break event. If they maintain their lukewarm bias from the prior meeting, the market could move higher. If they turn more hawkish because of the stronger jobs and manufacturing reports, the market could turn lower. While nobody expects a rate hike in 2016 a hawkish tone could put the September meeting back into focus.

Hedgeye captured it perfectly in this cartoon. The rally is not over until Yellen turns hawkish.


Despite the fractional close on the S&P today the indicators are signaling weakness. They have not completely turned negative yet but they are suggesting the rally's strength is ebbing. A slip back to 2,115 or even 2,100 could be positive because it would allow some profit taking and the opportunity for new buyers to jump in.

However, the strength of today's rebound showed the dip buyers were ready and waiting so assuming the Fed does not spoil the party the market path may still be higher at least until the peak in the Q2 earnings cycle on Thursday.


Over the prior 8 days, the Dow had only traded in a 151-point range. That is very narrow for an index in the 18,500 range. On Tuesday that expanded after the -105 point drop after the morning sell program but the rebound put it right back into that prior range.

The number of Dow components reporting caused the early volatility and that is now behind us. There are still some components left but they are not the high profile variety.

The Dow established a new support level today at 18,400. That is the critical level to watch on future declines. A second break of that level may not be bought so quickly. Resistance is now 18,600 and support at 18,400. That is still a narrow range so any breakout could be significant after two weeks of dormancy.



The Nasdaq is still fighting the initial resistance band starting at 5,100 and has only managed to gain 10 points into that band. The large number of high profile tech earnings starting with Apple tonight and ending with Amazon and Google on Thursday should produce some extra volatility depending on how they report. The Apple earnings boosted the Nasdaq futures to a +29 point gain tonight but the S&P futures are holding at about +3 so not quite as bullish.



The Russell 2000 closed at a 52-week high with the breakout well above the 1205-1210 resistance level. This is a sentiment indicator for the broader market. If the Russell can add to its gains, the rest of the indexes should power higher as well.


I would not be adding new positions ahead of the Fed. There is too much risk they can say something that will cause significant volatility and possibly a market decline. I would be looking to buy a Fed generated dip once it appears to have run its course but not before Thursday. The post Fed markets have a tendency to swing in both directions before picking one on the day following the event.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Waiting on the Fed

by Jim Brown

Click here to email Jim Brown

Editors Note:

With economic data turning positive, the Fed is in position to spoil the party. With the Jobs report turning hot at +287,000 for June, the regional activity reports turning positive and Friday's GDP expected to jump to +2.4% there is a real danger the Fed could revert back to a rate hike posture. If this were to occur at 2:PM on Wednesday the market could react negatively. We risk nothing by waiting until Wednesday night to add new plays.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Dip Buyers Offset Sell Program

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow fell -105 at its lows but rebounded to lose only 19 points. The S&P declined nearly 10 points but rebounded to close fractionally positive. Floor traders on the NYSE blamed a sell program in a light volume market for the morning drop. The dip buyers were alive and well ahead of the Apple earnings. Turns out that was the right move with Apple shares spiking $5 after their report.

Unless there is a sell the news event on Wednesday this should lift the markets again as the uncertainty over Apple earnings is lifted.



Current Portfolio




Current Position Changes


XBI - Biotech ETF

The long call position was opened at $59.24.


RH - Restoration Hardware

The long call position remains unopened until $31.50. High was $30.48.


JACK - Jack in the Box

The long call position was stopped out at $88.65.


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


AKRX - Akorn Inc -
Company Description

Comments:

No specific news. Minor decline from a 7-month high.

Original Trade Description: July 20th.

Akorn, Inc. is a specialty generic pharmaceutical company that develops, manufactures, and markets generic and branded prescription pharmaceuticals, as well as private-label over-the-counter (OTC) consumer health products and animal health pharmaceuticals in the United States and internationally. It operates in two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment markets generic and branded ophthalmics, injectables, oral liquids, otics, topicals, inhalants, and nasal sprays. This segment's generic products include Atropine Sulfate Ophthalmic Solution; Clobetasol Propionate Ointment; Dehydrated Alcohol Injection; Ephedrine Sulfate Injection; Hydralazine Hydrochloride Injection; Lidocaine Ointment; Methylene Blue Injection; Myorisan Soft Gelatin Capsules; Nembutal Sodium Solution; and Progesterone Capsules. The Consumer Health segment markets branded and private label animal health products, as well as OTC products for the treatment of dry eye under the TheraTears brand name. This segment also markets other OTC consumer health products, including Mag-Ox, a magnesium supplement, as well as the Diabetic Tussin line of cough and cold products.

Akorn has hundreds of existing products and 86 drugs with applications pending with the FDA. Those applications include 27 ophthalmic drugs, 12 topical drugs and 34 injectable drugs with a target market of $9.2 billion. Six of the applications have already been tentatively approved and 50 are currently being approved. At least 25 will be approved by 2017 and they expect to file an additional 20 applications this year. Akorn is targeting generic applications on the highest volume branded prescription drugs. They exclusively file Para IV applications. The first generic company to submit a substantially completed ANDA (Abbreviated New Drug Application) is given marketing exclusivity for the first 180 days on the market. There is no competition in that period and they can get a head start on prescriptions in that period. Most patients never change from the original generic they are assigned.

Revenue rose from $318 million in 2013 to $985 million in 2015. In 2016, the company expects to earn $1.08 billion. The company's guidance is for 80% earnings growth in 2016.

Earnings August 4th.

Shares of Akorn closed at a 7 month high on Wednesday at $31.80. The current uptrend began with the post Brexit low at $26. Resistance is $38.50.

Position 7/22/16:

Long Sept $35 call @ $1.30, see portfolio graphic for stop loss.


JACK - Jack in the Box - Company Description

Comments:

Shares closed at a new 52-week high on Monday and was crushed today but McDonalds earnings miss and a sector downgrade by Stifel. We were stopped out at $88.65.

Original Trade Description: July 18th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of February 17, 2016, it operated and franchised approximately 2,200 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada.

Jack in the Box bought Qdoba from ACI Capital, Western Growth Capital and other private investors in 2003. That chain started with the Zuma Fresh Mexican grill in Denver Colorado in 1995. The chain became famous because of the fresh food and fast service even though lines often stretched well out the door. Their claim to fame was the fresh food. They replaced the traditional animal fats with vegetable oils and used fresh vegetables whenever they were available. The name was changed to Z-Teca in 1997 because of trademark claims and then changed to Qdoba in 1999 for the same reason.

They captured another segment of fans in 2014 when they changed the price structure to a fixed price based on the protein and everything else was included. A chicken burrito cost $7.80 and steak burrito $8.49. You can add anything you want for no additional charge.

Qdoba also serves breakfast and some locations are open 24 hours.

Chipotle Mexican (CMG) also started in Denver two years before Qdoba. Chipotle has had multiple food issues over the last three years and business is falling fast. Same store sales have routinely declined more than 10% per quarter. Morgan Stanley penned a brutal downgrade last week and cut the price target from $500 to $405. Maxim Group reiterated a sell with a target of $300. DB is targeting $350. Morgan Stanley surveyed 2,000 customers in June and 13% of those questioned said they would not go back to Chipotle. Another 13% said they have returned rarely compared to frequently before the food problems started. Some 45% said they are eating there less often and 26% said they had not eaten there since the food problems.

Morgan said customers had found alternate dining locations during their abstinence from Chipotle. One of those locations is Qdoba where business has been increasing rapidly.

In their Q1 earnings, the company said they were going to open more Qdoba stores with 50-60 in 2016 and 20 additional Jack in the Box stores. They reported a 39% increase in earnings to 85 cents that beat estimates for 70 cents. Same store sales (SSS) at Qdoba rose 2.1% for company owned stores and 3.1% for franchised stores. The number of transactions increased 3.7%. They guided to SSS at 1.5% to 2.5% for the full year.

Shares popped 12% on the earnings news to $87. Since then they consolidated for a month and are back at a 52-week high at $88.50, which is also resistance. A break over that level could retest the 2015 high at $99.99.

Earnings August 10th.

With a trade at $89.25

Stopped 7/26/16: Long September $95 call @ $2.11, exit $1.83, -.29 loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. We are holding this position over earnings on Wednesday.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings July 27th.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer-term option and suggest we hold over the July 27th earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.


NVDA - Nvidia - Company Description

Comments:

No specific news and another historic high.

Original Trade Description: July 19th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Update 7/25/16: Nvidia announced two more high-end graphics cards on July 25th for the professional workplace. These are for professionals that need extremely high graphics rendering like video editors, photographers, CAD software users, etc. The P5000 handles up to 4 monitors with 16gb of embedded GDDR5X memory. The P6000 also handles up to 4 monitors with 24gb of GDDR5X memory. Earnings August 11th.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

Position 7/20/16 with a NVDA trade at $54

Long Oct $60 call @ $1.55, no initial stop loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. Eight week high close above the $100 level.

Original Trade Description: June 27th.

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails mens and womens apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warners, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands.

PVH has been absolutely crushed in the sell off because they were thought to have as large presence in the UK. Shares closed at a new 9-month high of $102.70 on Thursday. Today they touched $84 intraday for a whopping $18 or roughly 18% decline in two days from a new high.

PVH thought it was important enough that they filed a disclosure with the SEC saying they only derived 3% of their revenues from the UK. Even with the massive drop in the pound the company did not think any UK weakness would be material to their results.

The company has been on a growth spurt by acquiring brands and doing license deals with other brands to improve the variety of its offerings. On June 15th the CEO spoke at a Piper Jaffray Consumer Conference and said business was improving in Q2. He said the problems with other retailers represented an opportunity for the Calvin Klein and Tommy Hilfiger brands. He said the Tommy Hilfiger women's business generates 30% of their revenue and was a growth opportunity since they recently added it to the line. They teamed up with super model Gigi Hadid to make the brand more relative to younger, fashion oriented women.

With their Q1 earnings they raised guidance from $6.30-$6.50 to $6.45-$6.55 a share for the full year. The CEO said the guidance was conservative because this "does not seem like the environment ro tray and be a hero."

Earnings August 24th.

Position 6/28/16:

Long August $90 call @ $4.23, see portfolio graphic for stop loss.


RH - Restoration Hardware - Company Profile

Comments:

No specific news. Minor loss back below resistance.

Position remains unopened until RH trades at $31.50.

Original Trade Description: July 23rd.

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

On June 22nd, shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

On July 18th Friedman bought 32,918 shares of the stock at an average price of $27.75 or roughly $915,000. He did not need to make this buy since he already owns 2,207,451 shares. A CEO would only buy another million dollars of the stock if he really believed it was going higher. Director Keith Belling bought 4,000 shares on June 28th for $101,000 to bring his holdings up to 18,608 shares.

If the market continues higher I would expect RH to break through resistance at $31.25. Because of the potential for a market decline I am putting an entry trigger on the position. The option is cheap so we will not have much risk.

With a RH trade at $31.50

Buy Sept $35 call, currently $1.10, no initial stop loss.


TASR - Taser Intl - Company Description

Comments:

No specific news. Another new closing high. Earnings date changed from 3rd to 4th of August.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. Earnings August 4th.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Position 7/15/16 with a TASR trade at $27.80

Long Sept $29 call @ $1.49, no initial stop loss.


WDC - Western Digital - Company Description

Comments:

WDC announced it had developed the next generation 3D NAND technology with 64 layers of vertical storage capability. Initial production is expected later this year and commercial volumes of BiCS3 in the first half of 2017. Initial production will be in 256 Gigabit modules with a range up to 1 Terabit on a single chip. Susquehanna Financial said the new chip could allow WDC to topple the current leader, Samsung, in 3D NAND.

Original Trade Description: July 9th.

Western Digital Corporation, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections.

WDC just completed the acquisition of flash memory maker SanDisk on May 12th and the combination will put it significantly ahead of Storage Technology (STX). WDC can include flash memory into its disk drive products to make them significantly faster as well as expand its offerings in the SSD market. By acquiring the SanDisk product line it provides a large amount of marketing breadth and created the premium data storage company.

Last Wednesday WDC raised adjusted earnings guidance to 72 cents, up from 65-70 cents. Analysts were expecting 68 cents. They raised revenue guidance from $3.35-$3.45 billion to $3.46 billion. Analysts were expecting $3.41 billion. This is the second guidance raise for this quarter. Back on May 26th they raised revenue guidance from $2.6-$2.7 billion to $3.35-$3.45 billion.

Earnings July 28th.

WDC has solid resistance at $51 but a breakout over that resistance could quickly sprint to $60. I am using the October options to avoid the rapid decline in August premium after July expiration next Friday. We will exit before earnings on the 28th. This is a short-term play to capture any continued market breakout.

Position 7/11/16:

Long Oct $52.50 call @ $3.23, see portfolio graphic for stop loss.


XBI - Biotech ETF - ETF Profile

Comments:

The XBI closed at a six month high at $59.88 on no specific news.

Original Trade Description: July 25th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The fund is equally weighted unlike the IBB which is market cap weighted.

The biotech sector was crushed back in January when Clinton locked on to high priced drugs as un American and pledged to force companies to sell drugs at reasonable prices. Several other candidates picked up the topic and the sector was trashed. The two remaining candidates have moved on to other issues and Clinton is looking less likely to win. Trump is a businessman and understands companies have to make a profit in order to fund future research. He has made comments about drug prices but he is not expected to actually change anything in that area if elected.

After several false starts the ETF is about to break out to a 6-month high over $60. If the XBI does breakout the next material resistance is $70 and it traded as high as $90 last year before the Valeant disaster.

Fortunately, the XBI is not a stock and does not report earnings so we can hold it through the earnings cycle. Any biotech stocks reporting decent earnings will lift the ETF. I am using the September strike because the next series is December and the options are grossly expensive.

Position 7/26/16: Long Sept $60 call @ $2.41. See portfolio graphic for stop loss.


Z - Zillow Group - Company Description

Comments:

No specific news. New high on stronger than expected home sales.

Original Trade Description: June 29th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. It offers a portfolio of brands and products to help people find vital information about homes, and connect with local professionals. The company's brands focus on various stages of the home lifecycle, such as renting, buying, selling, financing, and home improvement. Its portfolio of consumer brands includes real estate and rental marketplaces comprising Zillow, Trulia, StreetEasy, and HotPads. The company also provides advertising services to real estate agents and rental and mortgage professionals; and owns and operates various brands that offer technology solutions to real estate, rental and mortgage professionals, including DotLoop, Mortech, Diverse Solutions, and Retsly.

Back in August 2015 Zillow Group split its stock 2:1 but the new stock had no voting rights. The Class C stock trades under the symbol Z while the Class A stock with rights traded under the symbol ZG. The company did this so the voting rights would not be diluted. Multiple companies have done this including the biggest to date with Google and Facebook. The split has no impact on the company operation except that employees now receive Z shares and any acquisitions will be made with Z shares.

The company acquired Trulia.com for $2.6 billion in 2015 and contrary to analyst concerns the integration has been relatively smooth. There were some hiccups but everything is functioning normally today.

They reported Q1 earnings of 13 cents that beat estimates for a loss of 9 cents. Revenue rose from $127.3 million to $186 million and beat estimates for $177 million. They also raised full year guidance from $805-$815 million to $825-$835 million. Analysts were expecting $794 million. They ended the quarter with $514 million in cash. Marketplace revenue rose 23%, real estate revenue rose 34% and mortgage revenue rose 65%.

Earnings August 4th.

In early June, the company made a windfall settlement with Move.com for $130 million after two years of litigation. Analysts were expecting $1.8-$2.0 billion. This pending litigation had been a cloud over the stock for the last 8 months. After the settlement shares spiked to $32 and traded sideways for two weeks before moving up to new highs at $35.50. The Brexit crash knocked the shares back to $32.75 but after the last two days of gains it is threatening to breakout once again.

Shares closed at $35 so the August $40 strike is a little far out for a short period of time. I am going to stretch to the November $40 strike, which will have significant expectation premium when we exit before earnings.

Position 6/30/16:

Long Nov $40 call @ $2.30, initial stop loss $32.50.



BEARISH Play Updates (Alpha by Symbol)

AMCX - AMC Networks - Company Description

Comments:

No specific news. Still struggling to avoid a new low.

Original Trade Description: July 16th.

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Position 7/18/16:

Long Sept $55 put @ $2.30, see portfolio graphic for stop loss.


HSY - Hershey Company - Company Description

Comments:

Deutsche Bank raised the price target on Hershey from $91 to $105 but that was nearly $7 below the price HSY was at when the report was released. DB reiterated a hold rating on Hershey. DB said there was downside risk to earnings as the company tried to expand to emerging markets. Shares declined -$1.50 on the news.

Original Trade Description: July 2nd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hersheys, Reeses, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

Earnings July 28th.

Position 7/5/16:

Long August $110 put @ $5.15, no initial stop loss.
Short August $100 put @ $1.52, no initial stop loss.
Net debit $3.63


IWM - Russell 2000 ETF - ETF Description

Comments:

Despite the market dip at the open the market rebounded with the IWM closing at a new 52-week high at $120.80. That resistance at $120 has not released its hold but it is slipping fast.

Original Trade Description: July 2nd.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.




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