Option Investor
Newsletter

Daily Newsletter, Thursday, 8/11/2016

Table of Contents

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

Market Wrap

Party Like it is 1999

by Jim Brown

Click here to email Jim Brown

This was the first time all three major indexes closed at a new high on the same day since December 1999.

Market Statistics

The markets roared back from Wednesday's minor decline thanks to some strong earnings from the consumer retail sector and the tech giants. Stocks are rotating out of defensive sectors and into momentum techs, biotechs, and even energy stocks. The Dow closed 18 points over its prior high and the Nasdaq stretched its high by 3 points and the S&P by 3 points. While the three major indexes all closed at new highs, it was not a major breakout. We will always take a new high whenever it is offered but it would be far more bullish if the gain were more than 3 points.

There was very little in the way of economic news today. Import prices rose unexpectedly by +0.1% in July despite a -2.5% decline in petroleum prices. This came after an upward revision for June from +0.2% to +0.6%. The consensus estimate for July was for a -0.5% decline. Nonfuel import prices were surprisingly strong at +0.3%. Export prices rose +0.2%. On a trailing 12 month basis import prices are down -3.7% and -1.2% excluding fuels. Export prices are down -3.0%. The report was ignored.

The calendar for Friday has the two most important reports for the week. Those are the Producer Price Index and Retail Sales. The inflation at the producer level is expected to have risen +0.2%. The Retail Sales for July is expected to rise only 0.3% compared to the 0.6% gain in June. After the various retail earnings this week that missed revenue estimates we could see sales even weaker.


In earnings news, Kohl's (KSS) reported earnings of $1.22 that rose +14% and easily beat estimates for $1.04. Revenue of $4.182 billion beat estimates for $4.158 billion but sales did decline -2%. Same store sales fell -1.8% compared to the prior quarter at -3.9%. The company remains cautious about U.S. consumer spending and will close 18 stores. At the end of the quarter, there were 1,150 Kohl's stores, 12 FILA Outlet stores and 3 Off/Aisle clearance stores. The total store count was down -14 from the same period in 2015. They cut their full year earnings guidance from $4.05-$4.25 to $3.80-$4.00. On August 9th, Kohl's declared a dividend of 50 cents payable on Sept 21st to holders on Sept 7th. Despite the guidance cut Kohl's shares spiked $6.40.


Alibaba (BABA) reported earnings of 74 cents that beat estimates for 62 cents. Revenue of $4.84 billion rose 59% and beat estimates for $4.52 billion. Cloud computing revenue rose +156% to $187 million. While that is still a small portion of the enterprise, Alibaba is trying to copy Amazon Web Services and cloud revenue is expected to soar significantly, as the company's offerings are better understood and accepted. Revenue from the digital media and entertainment business spiked +286% to $472 million. That is due to the recently acquired Youku Tudou video streaming company and addition of news feeds from UCWeb. Retail revenue rose 49% to $3.52 billion and mobile revenue rose +119% to $2.64 billion. Alibaba is firing on all cylinders but the company was quiet about the SEC probe into its accounting practices. Shares spiked over $5 on the news.


Burger chain Shake Shack (SHAK) reported earnings of 14 cents that beat estimates for 13 cents. Revenue of $66.47 million beat estimates for $63 million. Same store sales rose 4.5% compared to 12.9% in the year ago quarter. The company raised guidance for 2016 revenues from $245-$249 million to $253-$256 million. The conference call turned contentious with analysts arguing with management about the economic metrics. The skepticism about the model is increasing. Shake Shack stores are valued at roughly $14 million each while a comparable store from Panera is only $5 million. Shake Shack only has 23 stores and it is more of a regional fad. Shares fell more than 7% on the earnings.


Retailer Macy's (M) reported earnings of 54 cents that beat estimates for 48 cents. Revenue declined from $6.1 billion to $5.87 billion but still beat estimates for $5.77 billion. Same store sales fell -2% but that was better than estimates for a 4.7% decline. They also announced plans to close 100 stores out of its fleet of 728 stores. The retailer is conceding that shoppers are increasingly more likely to shop online rather than go to a mall store. Macy's is also negotiating to sell some of its flagship stores that occupy premium real estate locations in an effort to capitalize on those values. Shares rallied 18% on the news. That was the most since December 2008.


Dillard's (DDS) reported earnings of 35 cents that beat estimates of 31 cents. However, that was a decline of 50% from the year ago quarter. Revenue of $1.45 billion misses estimates for $1.48 billion. Total merchandise sales fell -4% and same store sales fell -5%. Shares fell -$3 in afterhours. The big spike at the open was on the Macy's news and was immediately sold.


Nordstrom (JWN) reported earnings of 67 cents compared to estimates for 56 cents. However, that was down from $1.11 in the year ago quarter. Revenue of $3.6 billion missed estimates of $3.7 billion. The CEO said the company had made major progress in actively addressing inventory levels, expenses and capital expenditures. Shares rallied strongly on the news.


Nvidia (NVDA) reported a 23.9% jump in revenue to $1.43 billion. Earnings rose from 5 cents to 53 cents. Analysts expected 37 cents and $1.35 billion. It was a strong report. The company guided to revenue of $1.68 billion and well above consensus of $1.45 billion. The CEO said earnings were powered by "strong demand for the Pascal generation GPUs and surging interest in AI and deep learning." Nvidia makes the most powerful GPUs for super servers and giant computing clusters. The speed and capability of these GPU enabled computers is truly off the scale of human comprehension. They also make the fastest video graphics for gamers and professional use. Their top of the line card was just announced a $1249 and sold out immediately. Revenue from the gaming graphics rose 18.3% in the quarter. Nvidia shares have been making new highs almost every day since June and today was no exception.


The only material earnings on Friday come from JC Penny's. After the flurry of retail earnings on Thursday, their report will be mostly ignored in the rush to leave work early and enjoy another summer weekend. The number of companies reporting next week will decline significantly.


Valeant Pharmaceuticals (VRX) rallied sharply on Wednesday for more than $5 after their earnings and guidance. The stock fell -10% or -$3 today on news a U.S. attorney in Manhattan was spearheading a probe into the relationship between Valeant and Philador that could lead to criminal charges for securities fraud, mail fraud and wire fraud. The probe could lead to criminal charges against the company and against its officers at the time. Valeant had previously disclosed the probe along with about a dozen others from various regulatory agencies.

The probe is focused on whether Valeant used its relationship with drug marketer Philidor to inflate sales by shipping large quantities of unsold drugs to Philador and Philador then "paper sold" them to another handful of shell companies it had opened for the purpose. When the scandal broke, Valeant was forced to take a charge for unsold inventory but it was only a few million dollars and was minor compared to the billions in Valeant revenue. You can bet an aggressive attorney is going to find something to charge Valeant with but it is not likely to be the end of the world for Valeant. They will have to cop a plea and pay an enormous fine. However, if they do that for the 10-12 individual probes it would be very expensive. There is a potential argument here for combining all the cases together in one universal settlement.


Oil prices exploded higher after comments from the Saudi Arabian oil minister that the country would do what it could to help balance supply and demand. Prices spiked because short interest is very high at more than 300,000 contracts on WTI and Brent. The Venezuelan president has been actively trying to stir up support for another production freeze meeting in order to stabilize oil prices. Most analysts believe prices are going to see another sharp decline in Sept/Oct as summer demand slows while production is ramping up again.

Venezuelan president Maduro is dying politically and economically because of the crisis in his country. His oil production is falling and he needs every dollar he can get on every barrel he produces. The only way for that to happen is for OPEC to slow production so that prices will rise. He almost pulled off a production freeze last time around but the Iran/Saudi Arabia conflict killed the process when Saudi and Iran both refused to halt new production. Prices rose sharply during the two months before the meeting and that helped everyone. The various oil ministers from OPEC countries realized they could spike prices by simply talking about a production freeze. The comments were repeated over and over in the press and prices rose.

Now Maduro is trying to repeat that scenario as he begins his Middle East tour to talk up prices. He wants OPEC to force prices back to $70 per barrel. OPEC helped his cause this week by announcing it would hold an informal meeting on the sidelines of the Algerian energy conference in late September.

Offsetting this production freeze talk was news Saudi Arabia produced a record 10.67 million barrels per day in July. Iran said it produced 3.85 mbpd and the EIA had not expected that until mid 2017. If prices did spike to $70 there would be 500 rigs put back to work in the U.S. almost immediately. Production that has declined 1.15 mbpd in the U.S. would begin to surge and 6-9 months from now that drop would be well on its way to being erased. Saudi Arabia does not want that production back on the market and that is a good reason for Saudi to drag its feet and try to discourage any future production freeze.

OPEC is like the Fed. They talk a lot but can rarely agree on a solution. In this case, the talk can raise prices but it would only be temporary. U.S. refiners will reduce production after Labor Day for a month of maintenance before they begin producing winter blend fuels. This will allow crude inventories to rise but also allow excess refined product inventories to recede.


Markets

The S&P rallied +10 points to put it +3 points into new high territory. The index came back from the dip to support at 2,175 on Wednesday. I wrote last night it was just minor profit taking and nothing to be worried about. The market breadth is expanding despite no material increase in volume. For the last four days, volume had been right at 6.0 billion shares.

The new high close came on strong gains in the consumer sector and new highs for Amazon (AMZN) and Google (GOOGL). I do not want to be too bullish here but the trend is our friend until it ends. What we need is a real breakout that wakes up those cautious investors waiting patiently on the sidelines. Money has been flowing routinely out of the market over the last 17 weeks and we need a real breakout to make those investors reverse course. They need to wake up in the morning and say "Dang, this is a real rally. I need to buy stocks before it runs away from me."

Currently we have fund managers buying defensively just to make sure no other fund surges ahead of them in performance. Once the markets actually start a new leg higher by more than 3 points a day, the race for performance could push it significantly higher.

For Friday, the support is clearly defined as 2,175 and resistance 2,188 and the high for the day.


The new high on the Dow is barely discernible on chart. A new high by only 18 points on an index of 18,600 points is a rounding error. It is far from a "breakout" and the dead stop at that prior resistance suggests there are still sellers waiting. There was a real mix of winners with 3M surging 2 points on no news after two weeks of flat trading at $178. The declared a $1.11 dividend on Wednesday, so why did the stock spike today? That move is not likely to continue on Friday.

I would love to see the Dow post a big gain on Friday but until it does, I will continue to be skeptical of the rally.




The Nasdaq increased its historic high from 5,225 to 5,228. Like the Dow, a 3-point move on that index is a rounding error. We need a 20-40 point move to new highs to really shake up cautious investors. The biotech sector was the driving force again with a 1% gain but there was a broad range of contributors. However, when the 30th highest gainer on the Nasdaq only rose $2 that has got to give you some cause for concern. You would like to see a lot more big gainers.

The Nasdaq has traded in a 30 point range since the end of the short squeeze last Friday morning. That is very narrow given the trend for tech stocks to be more volatile. Resistance is now 5,235 and support 5,195.



The Russell 2000 small cap index only gained 6 points and is well below the new high level of 1,295. While the Russell is at a 12-month high is has not been as bullish as the big cap indexes. This is the case of a few big caps leading the charge higher and the troops are lagging.


I would be very skeptical about buying the market on Friday. We need to reevaluate after Friday and make plans for next week. There is always another day to trade if you do not make stupid decisions and rush into the market.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Friday Caution

by Jim Brown

Click here to email Jim Brown

Editors Note:

The minor breakout on the major indexes was high fived all around but S&P and Nasdaq only stretched existing highs by 3 points. The Nasdaq had very few "big" gainers and the S&P was powered by a couple of retail names with big earnings beats. There are no material earnings on Friday. Volume is going to be the lowest in weeks and we are right in the middle of the August doldrums. If the market is going to follow the seasonal norms for a decline into the end of August it should start soon. Next week is option expiration and Friday's move could have been related to that event. Professional traders typically exit positions the week ahead of expiration. I think we should be cautious for Friday and see what the market gives us. Monday could see a different market.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Minor High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets rebounded strongly from the Wednesday decline but the new highs were only a minimal gain. The Dow made a new high by 18 points and the S&P and Nasdaq by 3 points. That is hardly a breakout and barely bullish except for the widening of the market breadth. The Russell 2000 continues to be the laggard and a cause for concern.

I am worried there is a lack of any real excitement in the market. Yes, there was a +117 point rebound in the Dow but the breakout to a new high was only a miniscule amount.



Current Portfolio




Current Position Changes


PAG - Penske Automotive

The long call position was entered at $41.00.


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


AAPL - Apple Inc -
Company Profile

Comments:

Apple filed for a patent for a heart monitor that looks a lot like an Apple watch. It did not help the shares and Apple declined slightly. RBC raised their price target to $117.

Original Trade Description: August 3rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, education, and enterprise and government customers worldwide. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, Mac App Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Multiple leaks from vendors now point to an earlier release of the iPhone 7 on September 7th. That is a week earlier than normal and it stems from the iPhone 7 on the 7th. Pre-orders will start on the 9th and the actual first sale date on September 16th. This will give Apple an extra week of sales in Q3 and help boost their revenue for the quarter. I am sure that was also a motive behind the earlier release date. That will help Apple meet earnings and revenue estimates for Q3. Last time around the iPHone 6S and 6S+ did not go on sale until September 25th.

Other leaks confirm Apple is scrapping the 16gb model. The available memory range will no longer be 16/64/126gb but jump to 32/128/256gb. The prices for the 7 are reported to be $649, $749 and $849. The 7 Plus will be $749, $849 and $949. Those numbers roughly equate to a discount of $100 each over the 6s and 6S Plus models because the base memory increment doubled without an increase in price.

Lastly, there are numerous other leaks that suggest Apple is going to announce a brand new iPhone in September 2017 with a massive number of new design features to commemorate the 10th anniversary of the iPhone product. While that will not impact Apple's share price this season it is something to watch in 2017 and we need to get the trade launched immediately after the July earnings.

For this year, Apple shares spiked to $104 on the better than expected earnings. After spending a week consolidating, the shares are starting to move up again. Typically, they rally from early August until the actual announcement then suffer a sell the news event decline. I am recommending October options so there is still some expectation premium left when we exit in early September.

Position 8/4/16:

Long Oct $110 call @ $2.19, see portfolio graphic for stop loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news on G-III. Shares rallied strongly on earnings from Macy's.

Original Trade Description: August 3rd.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. G-III Apparel Group, Ltd. was founded in 1956.

G-III has been on a buying binge the last several years. They are expanding their brands and expanding the marketing of existing brands with license agreements with other companies.

Last week G-III announced the acquisition of the Donna Karan brand from LVMH for $650 million in a combination of cash, stock and notes. Several analysts immediately downgraded the stock saying they paid too much and it would be dilutive to earnings in 2017. The stock crashed from $50 to $38. The Cowen analyst said the price was too high compared to the brand's potential and return on capital from the acquisition.

Donna Karan has a large international presence and G-III is focused on growing its business in the USA. Analysts thought this was the wrong brand at this time. However, G-III believes they can expand the brand globally and especially in the US. G-III Press release I happen to be familiar with it because it was my wife's favorite brand in the 1980s but she had trouble finding it in the US.

I believe G-III will be successful with the brand but we are talking a couple years. We are not going to hold the stock that long. In the short term the stock is oversold and we are going to enter a position to capture a bounce. G-III has a good reputation and they were in a two-month uptrend when the announcement was made. I beleive that trend will return. If the market rolls over investors are going to be looking for stocks that have already been beaten up as potential safe havens. If the market goes higher, eventually investors are going to be looking for stocks that are not over extended. G-III fits the bill on both counts.

Earnings August 31st.

Position 8/4/16

Long Sept $45 call @ 90 cents. See portfolio graphic for stop loss.

Previously closed 8/3/16: Long Sept $45 call @ $1.15, exit .60, -.55 loss.


LCI - Lannet Company - Company Profile

Comments:

No specific news. Shares declined to $31.46 to stop us out. The stop was tight because the option was ITM.

Original Trade Description: August 4th.

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of branded pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, thyroid deficiency, dryness of the mouth, gout, bronchospasms, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Lioresal, Fioricet, Fiorinal, Fiorinal w/ Codeine #3, Lanoxin, Levoxyl/Synthroid, Salagen, Benemid, Brethine, Dyazide, and Actigall brands.

The company recently received FDA approval to market Paroxetine extended release tablets in various strengths. Sales of the branded drug in the U.S. last year were over $122 million. There is only one competitor in the market for this drug.

The big news came from the receipt of a FDA Acceptable Filing Letter for Fentanyl patches. The letter allows them to file for approval of the 12mcg/hour, 25mcg, 50mcg, 75mcg and 100mcg patches. This is the generic equivalent of Ortho McNeil's chronic pain treatment Duragesic. According to Lannet sales of the transdermal patches in the U.S. in 2015 were more than $650 million. Lannet partnered with Sparsha Pharma, a specialist in tramsdermal systems, to produce the patches.

Lannet is rapidly increasing its portfolio of generic drugs and sales are booming. This will be a short-term play because earnings are August 23rd. I am looking for a ramp into earnings and we will close the position ahead of that event.

The Sept $35 option is too far out of the money for a short-term position. I am recommending the slightly in the money $30 call. With LCI at $31.78 it is already $1.78 in the money.

Position 8/5/16:

Closed 8/11/16: Long Sept $30 call @ $3.40, exit $2.85, -.55 loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. Rallied back to resistance at $16.25. Now we need a breakout!

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally returns.

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.


MCD - McDonalds - Company Profile

Comments:

No specific news. Shake Shack joined Wendy's in warning on the conference call that Brexit, terrorism abroad and global economic strains could cause sales declines. With 23 stores exactly how is Brexit and European terrorism going to cause a decline in US hamburger sales?

Original Trade Description: August 6th.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 2015, it operated 36,525 restaurants, including 30,081 franchised restaurants and 6,444 company-operated restaurants. McDonalds was founded in 1940 and is based in Oak Brook, Illinois.

McDonalds has been on a roll recently and set a new high in May at $132. Analysts could not say enough about the turnaround the company was making. Since they went to all-day breakfast items in October the customer traffic has exploded. Unfortunately, all those Egg McMuffins had a negative impact on sales.

The company was selling more items but at cheaper prices. Breakfast items are cheaper than Big Macs and other lunch/supper items. The company reported revenue of $6.26 billion and earnings of $1.45. They beat the $1.38 earnings estimate but missed slightly on the $6.27 revenue estimate. Also, same store sales rose only 1.8% in the U.S. compared to expectations for a 3.2% increase.

Analysts credited part of the revenue shortfall with the industry wide slowdown in the fast food sector. YUM Brands and Starbucks also posted sales declines. Others pointed out that McDonalds sales spiked at the same time Chipotle sales plunged because of their food problems.

Analysts were also quick to point out that international same store sales rose 7.7% in the 100 "foundational markets" covering 100 countries.

McDonalds announced it was farther along in eliminating antibiotics from their chicken, previously targeted for March 2017, had removed the preservatives from the Chicken McNuggets and was removing high fructose corn syrup from its hamburger buns in August. The company is moving in the right direction for long-term improvement.

Analysts believe McDonalds will get control of its all day breakfast menu pricing and will benefit from the longer term menu changes.

Deutsche Bank, Credit Suisse, UBS, RBC Capital and Argus all reiterated their buy ratings with price targets averaging $138.

Earnings Oct 21st.

Shares appear to be rebounding from the post earnings crash. I am recommending the October call just in case we need more time for the post earnings depression to wear off. McDonalds is a Dow component so it will be reactive to the gains and losses in the Dow. With August historically the weakest month for the Dow we could see some volatility in MCD and need the extra time.

Position 8/8/16:

Long Oct $120 call @ $2.71, no initial stop loss.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news. Shares hit $41 shortly after the open to trigger the position. The motivating factor was news that CEO Roger Penske bought another 151,412 shares for $6 million on Wednesday.

Original Trade Description: August 10th.

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other. It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products. The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. At the end of 2015 they operated 355 automotive retail franchises with 181 in the USA, and 174 outside the US, primarily in the UK.

For Q2 they reported earnings of $1.11 and beat estimates for $1.08. Revenue rose 6.8% to $5.3 billion and also beating estimates for $5.1 billion. On a constant currency basis revenue rose 9.2%. They sold 115,106 vehicles in Q2. Gross profits rose 5.5% to $771.3 million. Cash on hand rose from $62 million to $97 million.

On July 27th Penske Automotive acquired an additional 14.4% interest in Penske Truck Leasing from GE Capital for $498.7 million. That raised their ownership to 23.4%. They expect this to add 25 cents to earnings on annual basis. In April a Penske subsidiary, Premier Truck Group acquired Harper Truck Centers, a commercial truck dealership in Ontario Canada. The acquisition will add $130 million in annual revenue.

On August 2nd Chairman and CEO, Roger Penske, acquired 710,121 shares for an averge price of $39.10 for a total value of $27,765,730. Since 2010 Roger had sold 501,326 shares in three transactions. That makes his recent buy even more important because if marks a change in sentiment.

Earnings Oct 27th.

PAG shares are about to break over long-term resistance at $40. Shares closed at $40.20 and that complicates the trade. If we buy the $45 call, which is only $1, the stock has to move $5 to really make a difference in the option price. If we buy the ITM call at $40, which is $2.95 we are paying an ATM premium that will decline as it moves farther into the money. However, for every $1 the stock raises the option will appreciate significantly. Currently the $35 call is $6.30. That is what we could expect the $40 call to be worth if the stock rises to $45. At the same time, the $45 call would rise from the current $1 to $2.95. Do we invest $3 to make $3 or do we invest $1 to make $2? I am going to recommend the $45 call because of the lower cost, lower risk and higher percentage return if PAG rises to $45. The risk is that it stalls somewhere between $40 and $45 and we never reach the ITM premium level before the Oct earnings. I believe this chart is worth the risk. I am going to put a $41 trigger on it to make sure it breaks through that resistance.

Position 8/11/16 with a PAG trade at $41.00

Long Nov $45 call @ $1.35, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The Wednesday weakness was erased with a +117 point gain to push the Dow to a new high by 18 points. The ETF gained more than the index. This is an October position and second half market lows normally occur in Sept/Oct.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25


IWM - Russell 2000 ETF - ETF Description

Comments:

Turn out the lights, this party is over. I am removing this position as a total loss. It was always a hedge against our long positions and with expiration next week it would take a Flash Crash to put it back into the money. I am removing it from the portfolio but I would not close it since there is no value. Surprises do happen.

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

Removed 8/11/16: Long August $112 puts @ $2.62. Expiring, -$2.62 loss.


SIX - Six Flags - Company Profile

Comments:

No specific news. Minor gain in a strong market. Downtrend still intact.

Original Trade Description: July 2nd.

Six Flags Entertainment Corporation owns and operates regional theme and water parks under the Six Flags brand name. The company's parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets, as well as family-oriented entertainment. It owns and operates 18 parks, including 16 parks in the United States; 1 park in Mexico City, Mexico; and 1 park in Montreal, Canada.

In their Q2 report they only generated earnings of 64 cents that missed estimates for 70 cents. Revenue of $407 million was only slightly above estimates for $406.4 million. The company said it sold $300 million in notes in a private placement and would implement a stock repurchase plan.

The problem for Six Flags is that even with low gasoline prices the 2016 attendance only rose 2% in Q2 despite promotions and discounts. People are not rushing out to theme parks this year like they were in the past. Tickets to similar attractions have become so expensive that consumers would rather spend the money on a new cellphone, video game or clothes. Six Flags is currently discounting tickets from $72.99 to $47.99 in an effort to squeeze a few more customers in before Labor Day. Young adult families are faced with spending $400 for 2 adults and 2 kids for a one-day visit including parking and food. Parking is $23.00 and obviously another way to squeeze you for extra money at the gate. $400 is a lot of money in this economy.

Consumers are also staying away from high traffic locations in fear of a terrorist attack and this is not going to change in the near future. In America, we have been fortunate but our time is running out and quite a few consumers are avoiding malls, theaters, concerts and theme parks.

Shares fell $3 on the report and bounced for only one day. A new downtrend has developed and Monday's close was a four month low. Shares have risk to $50 or even $45 depending on the overall market.

Position 8/9/16:

Long December $50 put @ $1.94. See portfolio graphic for stop loss.




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