Option Investor

Daily Newsletter, Tuesday, 8/30/2016

Table of Contents

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

Market Wrap

Closed for Labor Day

by Jim Brown

Click here to email Jim Brown

Traders have already left for the weekend and volume is the lowest of the year.

Market Statistics

They would save everyone a lot of brain damage by just closing the markets for the rest of the week. With volume yesterday at 4.9 billion shares and only 5.6 billion today the indexes are just running in place while we wait for Friday's employment report and the start of the September madness next week.

There were no economic reports of importance to energize the market and gap lower at the open lasted most of the day with only a minor short covering bounce into the close.

The Consumer Confidence for August rose from 96.7 to 101.1 and the highest level since September. It was only the fifth reading above 100 in the past eight years. Analysts were expecting a reading of 97. The present conditions component spiked from 118.8 to 123.0 and the expectations component rose sharply from 82.0 to 86.4. Those planning on buying a car declined slightly from 11.1% to 11.0%. Those planning on buying a home rose from 5.1% to 6.4%, a big jump, and appliances up from 49.3% to 50.3%. Consumers planning on going on a vacation over the next six months rose from 43.4% to 50.7% an unusually large gain.

It would appear those consumers responding to the survey in August were a different mindset than those responding to the sentiment survey last week. Those who felt jobs were plentiful rose from 23.0% to 26.0% and those saying jobs were hard to get rose from 22.1% to 23.4%. Consumers expecting a raise rose from 17.2% to 18.8%.

If these confidence numbers continue to rise the outlook for the economy should improve also.

The S&P Case-Shiller Home Price Index showed prices rose 5.1% in June compared to the prior reading of 5.2%. The report was ignored.

The Texas Service Sector Outlook Survey rose from -1.3 to +6.5 for August. The internal components showed revenue fell from 10.3 to 6.5 but employment rose from 3.8 to 5.8. Costs rose significantly. Employment costs rose from 10.4 to 14.2 and input prices rose from 17.9 to 22.0. Selling prices declined from 3.8 to 2.4. Since it appears all the major components were moving in the wrong direction, I am surprised the headline number showed a gain.

Tomorrow we will get the first payroll report with the ADP private sector employment report. The expectations have risen from 165,000 to 171,000 since last Friday. The Nonfarm Payrolls on Friday have seen expectations rise from 160,000 to 180,000.

The Nonfarm Payrolls will be the key event for the week and the volume on Friday is going to be very anemic. This will be the focus report for the Fed and trigger decisions for the FOMC meeting two weeks later. Any reading materially over 180,000 would almost guarantee a rate hike.

  The ISM forecast has not changed with 52.2 representing a minor decline.

The big news of the day was a wakeup call for Apple (AAPL). This was not the kind of call you want to wake you up. The EU demanded a $14.5 billion tax payment plus interest from Apple because of their business in Ireland. They employ 6,000 workers in Ireland. The EU concluded that Ireland had granted Apple undue tax benefits, which is illegal under EU rules. This allowed Apple to pay an effective corporate tax rate of 1% on its EU profits in 2003 and declining to 0.005% in 2014. Apple and Ireland agreed to a "tax arrangement" in 1991. Apple first relocated employees to Ireland in 1980 but increased their presence after 1991.

The EU official said they were sending a message to any taxpayer in Europe and they were currently investigating Amazon and McDonalds for similar tax liabilities.

The ruling is being protested by both Ireland and Apple. The Irish finance minister said Apple did not owe the money and was paying taxes according to the Irish tax rules in place. He said this was a power grab by the EU in trying to generate extra income by investigating large corporations with money in EU banks. According to the minister, each country in the EU is responsible for charging and collecting their own taxes as they see fit. The EU claim is unjustified and it is being made under an unfair competition clause rather than under a tax rules clause.

Everyone commenting on the situation said it was not about how much Apple pays in taxes but which government collects the money. An Apple spokesman said, "If the ruling is not overturned it would have a significantly negative effect on investment and job creation in Europe." I would not be surprised to see other EU countries begin talks about leaving the EU if this kind of regulatory oversight continues.

A UK official immediately welcomed Apple to move to the UK where they would be free from the onerous EU regulations. This is an example of the regulatory oversight the UK was trying to escape from with the Brexit vote. Unelected regulators in Brussels can pass any law or ruling they desire and the EU countries have to live with it.

Apple shares declined to $106 on the news.

The bottom finally fell out of the Hershey (HSY), Mondelez (MDLZ) acquisition talks. We tried to use a put on the Hershey spike back in June in anticipation of this event but we ran out of time. There was no way an acquisition was ever going to be completed. The Hershey trust owns 80% of the voting rights of the Hershey Company and the trust was created to fund a children's school and living conditions for people in Hershey Pennsylvania. The trust is so intertwined with the people in Hershey PA, that the Attorney General of PA also has veto power over any deal. The trust board is being reconstituted this year and next after the AG forced them to put term limits on the board members.

After two months of talks on how the companies would be structured and how the merger would work, they finally got around to price last week. Mondelez had offered $107 with Hershey at $96. When they finally began to talk price the Hershey CEO said it was not enough. After some soul searching by the Mondelez board they suggested the deal would be earnings neutral at $115 a share. When they passed that number to Hershey the board said no way they would even consider a number under $125. Mondelez immediately canceled the discussions saying there was no "actionable path" to continue the process.

Hershey shares fell -$12 on the news to $99.65 and only $3 above the price where it started in June.

United Airlines (UAL) soared 9% after they hired the president of American Airlines, Scott Kirby. On Friday, he was president of American and on Monday, he was president of United, a position they created just for him, but he will not actually start work until next week. This puts him in the line of succession for ailing CEO Oscar Munoz, who just returned to work after getting a heart transplant. Kirby's base compensation will be $875,000 plus an annual bonus, restricted shares and performance based stock awards. He also received a signing bonus of $5 million in stock options that will vest after UAL stock rises 25%. I hope for his sake the grant date was last week. He left AAL with $3.85 million in severance, plus an accelerated vesting of 259,000 AAL shares worth $9.34 million. He must be a smart guy because he graduated from the U.S. Air Force Academy with degrees in computer science and operations research and then received a masters in computer science from George Washington University.

The spike in United shares helped power the Dow Transports to a 50 point gain in an otherwise weak market.

Abercrombie & Fitch (ANF) reported a loss of 25 cents that was larger than the 20-cent loss analysts expected. Revenue of $783.2 million narrowly beat estimates for $782.7 million. Same store sales declined -4% in the quarter. Weak traffic forced higher discounts and reduced profit margins. The company warned that "traffic headwinds" would continue to weigh on sales for the rest of 2016. This was the 14th quarter of declining sales.

Fashion retailer G-III Apparel (GIII) reported earnings of 1 cent compared to estimates for 18 cents. Revenue of $442 million missed estimates for $485 million. The CEO said "We believe the risk of continued softness in the retail outlet environment has somewhat abated, as we have now liquidated inventory from the 2015 holiday season." The CEO also said expected cool weather trends would benefit retailers compared to the unseasonably warm weather in 2015. The company lowered full year guidance from $2.56 billion and $2.60 in earnings to $2.48 billion and $2.21 in earnings. Shares were crushed for a -21% loss.

DSW Inc (DSW) shares fell -10% after reporting earnings of 35 cents compared to estimates for 30 cents. Revenue of $659 million barely beat estimates for $658.7 million. However, same store sales declined -1.4%. The company reaffirmed full year estimates for $1.32 to $1.42. The severity of the selling was probably related to the ANF and GIII disasters. DSW was guilty by association.

After the bell, Palo Alto Networks (PANW) reported earnings of 50 cents that rose 79% compared to estimates of 49 cents. Revenue rose 41% to $440.8 million and easily beat estimates for $389.9 million. The company guided for the current quarter for earnings to rise 49% to 51-53 cents on a 34% increase in revenue to $396-$402 million. Analysts were expecting 56 cents and $402.9 million. Shares initially rise to $150 but then declined to close at $139, down -$4.

H&R Block (HRB) reported a loss of 55 cents compared to estimates for a loss of 53 cents. Revenue of $125 million missed estimates for $132.6 million. Block's business is highly seasonal and you cannot judge the entire year by a summer quarter. However, investors sold the stock and shares were down about 10% in afterhours.

There are limited earnings the rest of the week with a random collection of companies. However, the retailers will continue to hog the headlines. After today's retail disasters, those late week reporters are probably wishing they could delay their earnings until next week.

Boeing (BA) said it was not going to raise prices on planes in 2016 because they had a record order backlog. Previously they held prices flat in 2001 and 2009. Boeing has sold 336 planes in 2016 compared to 760 for all of 2015. Production is so backlogged that an order placed today would not receive delivery until 2022-2023. Nobody pays list prices for planes so refraining from an annual price hike is not that meaningful. It just means you are a little firmer on the negotiations. However, the flat list prices are an inducement for some buyers to put down millions of dollars in orders for planes they may not get until 2023. That is some long term planning.

Penske Automotive (PAG) is on a vertical ramp because the Chairman and CEO, Roger Penske, is pouring money into stock purchases. He purchased another 478,000 shares on Monday for $21 million. That is in addition to the roughly 1.3 million shares he has purchased previously in August. He has spent roughly $80 million buying shares in August alone. He now owns approximately 32 million shares with only 85 million outstanding. Every 2-3 days he announces another purchase. It appears he is trying to take the company private one share block at a time.

Crude prices are falling despite the harsh weather in the Gulf of Mexico. Oil production in the Gulf has been reduced by about 10% as platform operators begin to shut in production and evacuate the rigs. There has not been a hurricane in the Gulf in more than three years and that is almost a record. There are 781 production platforms in the Gulf and only six have been evacuated so far. Tropical Depression Nine is expected to make a hard right turn to the east and miss all but a few of the rigs on the far east of the oil patch. Winds are only about 35 mph but it is expected to strengthen as it reaches the warmer shallow water. The Gulf produces about 20% of the U.S. oil.

Crude prices are also falling because the OPEC headline spam about a potential production freeze agreement at the late September meeting in Algeria, is fading. There have been multiple comments from various OPEC countries about not participating in a freeze. It appears the effort is going to fail even before the meeting occurs. Crude oil has fallen to $46 as we near the end of the driving season.


Turn off the computer, play a round of golf and get a head start on the holiday planning. The market does not appear to be headed anywhere this week. The divergence between the small caps and the big caps is just enough to keep both categories from moving too far from their current levels.

The Russell 2000 and S&P-600 small cap index both posted fractional gains today while the big cap indexes posted minor losses. Art Cashin pointed out that market lore suggests the indexes are up 60-70% of the time in the three days before Labor Day. While that is not a hard and fast rule there does not appear to be any urgency to move in either direction.

The ADP Employment report on Wednesday could trigger some volatility if it comes in significantly different than the 171,000 estimate. If it comes in much hotter, it will scare traders into expecting a large number on the Nonfarm report and a higher chance for a rate hike. That could cause some selling. If the report comes in lighter than expected, we could see traders project the same thing for the Nonfarm and that would push the hike farther into the future. That could trigger some buying.

Having the payroll report the day before a three-day weekend is always a traumatic event but this time around, it is even more worrisome because Fed heads have already said a hot report would push them towards a rate hike. That means traders will adjust their positions after the ADP report or remove them entirely.

The S&P closed right above initial support at 2,175 and tight in the middle of the recent range. That is about as neutral as you can get and there is no indication of direction. The 2,150 level is still critical support.

The converging resistance on the Dow remains intact and support at 18,350 is also unbroken. The Dow closed in the middle of its recent range although it has made a series of lower highs. The last week has seen a slight downward bias but the emphasis is on slight.

The biotech sell off has slowed and that has helped the Nasdaq keep its losses to a minimum. The sector is still declining but at a much slower pace. The tech earnings for the week come on Wed/Thr and that could provide some limited volatility. It is hard to generate a big market move when there is nobody in the market.

The Nasdaq came close to testing support at 5,200 again today with a dip to 5,205. That is the critical support level that keeps the Nasdaq in a tight range similar to the Dow and S&P. If 5,200 breaks it could trigger a volatility event.

The Russell 2000 is still climbing slowly higher and has not broken out of its recent trend. The microscopically slow climb of three steps forward and two steps backward is like watching paint dry but we cannot knock the trend. The Russell gains are helping to keep the big cap indexes from collapsing.

The S&P has not had a 1% move in the last 37 sessions. In the month of August, there have only been back to back S&P gains TWICE. Think about that. The consolidation pattern has been so tight that we have been alternating gains and losses since July 15th.

This tight pattern has got to break soon and when it does we could easily see a 50 point move on the S&P and possibly more. While the bears are seeing this recent pattern as a top in the market, there is growing evidence there could be a breakout to the upside after Labor Day. Of course, now that I have stated that fact I have jinxed the market. The key here is the fund manager race to their fiscal year end on October 31st. Some 77% of fund managers are performing below their benchmarks. The job of a portfolio manager is survival of the fittest. Those that perform survive; those that do not are replaced.

Once the opening bell rings on Tuesday morning, they will be surveying the landscape, talking to their teams and deciding what to dump and what to buy to cram some performance into the last 60 days of their fiscal year. That means our consolidation pattern is about to end. We just do not know which way it will break first. However, before they can add new positions they will need to liquidate old positions. That is why September is normally volatile. I did catch a sentence from Jeffery Hirsch from the Stock Trader's Almanac, saying Septembers in election years were up 7 out of the last 12. That is hardly a robust showing but the last 12 non-election Septembers have been negative.

All this goes to prove that nobody knows where the market is going next week. We do know that volatility will eventually rise and our consolidation pattern will end.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Where Are You Eating

by Jim Brown

Click here to email Jim Brown

Editors Note:

Qdoba is becoming the Mexican fast food of choice and continues to benefit from the problems at Chipotle.


JACK - Jack in the Box - Company Profile

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 August 10, 2016, it operated and franchised approximately 2,250 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. The company was founded in 1951.

Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.

They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.

Earnings Nov 21st.

Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level and closed at a historic high on Monday. Today's decline was minimal given the weak market. The next time the market strings together several days of gains I expect JACK shares to break over $100 and start a new leg higher.

Because the market appears "toppy" and we are due for a dip, I am putting an entry trigger on the position. I am using the December options so there is some expectation premium when we exit before earnings.

With a JACK trade at $100.25

Buy DEC $105 Call, currently $4.00, initial stop loss $95.85


Sell short DEC $115 call, currently $1.10, initial stop loss $95.85
Net debit $2.90


No New Bearish Plays

In Play Updates and Reviews

Divergence Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow lost 48 points while the Russell 2000 gained slightly for the day. The small caps continue to move slowly higher while the big caps remain locked in a range with a minor negative bias. Eventually one of these groups will reverse and the market will make a major move.

The big caps have been locked in a very tight range for 8-weeks and it is killing our trades. The stocks are not moving because the market is not moving. Option premiums are evaporating due to lack of movement. As long as the market eventually breaks to the upside we will be ok but I am starting to worry the break could be negative. The Dow is typically up 60% to 70% of the time in the three days before Labor Day so I really hope the seasonal trends come through this time.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

CAVM - Cavium

The long call position was opened with a trade at $56.40.

GRUB - GrubHub

The long call position was entered at the open at $40.00.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AKAM - Akamai Technologies - Company Profile


No specific news. Very minor decline.

Original Trade Description: August 13th.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.

If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.

Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world, distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.

In the Q2 report Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.

The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.

The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.

With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.

Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on Thursday. I believe they will recover their pre earnings level of $58, which just happened to be an eight month high.

Earnings are October 25th.

Position 8/15/16:

Long Nov $55 Call @ $2.46, see portfolio graphic for stop loss.

CAVM - Cavium Inc - Company Profile


Cavium shares were up strongly on Credit Suisse comment that CAVM could be an acquisition target by Broadcom. This caused shares to spike and the position was opened at $56.40.

Original Trade Description: August 27th.

Cavium, Inc. designs, develops, and markets semiconductor processors for intelligent and secure networks. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video, and connected home and office applications. The company's products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection, and deep packet inspection. In addition, it provides commercial grade embedded Linux operating systems, development tools, application software stacks, and support and services.

On August 17th, Cavium completes the $1.36 billion acquisition of QLogic. The acquired company has been around a long time and is a leading name in the Ethernet market. As of 2015, QLogic had a double digit market share lead over its peers. Pacific Crest believes Cavium will be able to reduce QLogic's manufacturing costs by 50% and this would help capture further market share gains on cost while expanding into congerged NIC and onboard LAN markets. That could produce another $1 billion in revenue.

Analysts raised estimates for Cavium revenue from $526 million to $957 million and earnings rose from $1.87 to $2.60.

Earnings Oct 26th.

Shares have been moving up since late June when the acquisition was announced. They plateaued at $55 over the last week but could be poised to move higher with resistance at $64.

Position 8/30/16 with a CAVM trade at $56.40

Long Nov $60 call @ $3.70. See portfolio graphic for stop loss.

Short Nov $70 call @ 85 cents. See portfolio graphic for stop loss.

Net debit $2.85

ETN - Eaton Corporation - Company Profile


No specific news. Shares still stuck in a range.

Original Trade Description: August 22nd.

Eaton Corporation operates as a power management company worldwide. The Electrical Sector is a global leader in power distribution, power quality, industrial automation and power control products and services. Products include circuit breakers, switchgear, UPS systems, power distribution units, panelboards, loadcenters, motor controls, meters, sensors, relays and inverters. The principal markets for the Electrical Americas and Electrical Rest of World segments are industrial, institutional, government, utility, commercial, residential, information technology and original equipment manufacturer customers. In California's aerospace industry, the Eaton Corporation manufactures and markets a line of systems and components for hydraulic, fuel, motion control, pneumatic systems and engine solutions. Eaton is a manufacturer of systems and components for use in mobile and industrial applications. Markets include agriculture, construction, mining, forestry, utility, material handling, machine tools, molding, power generation, primary metals, and oil and gas. The Hydraulics group also includes Eaton's Filtration, Golf Grip and Airflex industrial clutch and brake businesses. The Vehicle Group comprises the company's truck and automotive segments. The truck segment is involved in the design, manufacture and marketing of powertrain systems and other components for commercial vehicle markets. Key products include manual and automated transmissions, clutches and hybrid power. Eaton’s automotive segment produces products such as superchargers, engine valves, valve train components, cylinder heads, locking and limited-slip differentials, fuel, emissions, and safety controls, transmission and engine controls, spoilers, exterior moldings, plastic components, and fluid connectors. The company was founded in 1916.

For Q2 the company reported earnings of $1.07 that beat estimates for $1.05. Revenues of $4.08 billion beat estimates for $4.05 billion. Revenues were down -5.4% due to lower sales to the automotive sector and a decline in sales to the oil and gas sector. Currency issues also removed -1% from revenue. The company narrowed its full year guidance from $4.15-$4.45 to $4.20-$4.40 per share. They still expect revenues to decline 2% to 4% for the full year because of the drop in oil and gas sales and the weak global economy and a currency impact of $225 million.

Next earnings Nov 1st.

Argus said the company was doing well in a tough environment and they expect the oil and gas sector to rebound in 2017. They said Eaton was selling at a discount to its peers and raised their rating from hold to buy. Eaton has been restructuring since 2013 and Argus expects that to bear fruit in the year ahead with earnings rising appropriately.

Eaton shares rallied for two weeks after the August 2nd earnings and then went sideways with the market over the last week. Shares closed on Monday at a 52-week high at $67.72. Resistance is $73.50.

If the market rallies as expected after Labor Day, I would expect Eaton to move higher to test that resistance. This is a quality company with low volatility and they pay a $2.28 dividend for a 3.37% yield.

Position 8/23/16 with a ETN trade at $68.05

Long Oct $70 call @ $.99, no initial stop loss.

GRUB - GrubHub - Company Profile


No specific news. The position was entered at the open. Only a minor decline after a new 52-week high on Monday.

Original Trade Description: August 29th.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

In Q2 net revenue rose +37% to $120.2 million topping estimates for $114 million. Earnings rose 35% to 23 cents and also beating estimates for 19 cents. They guided for the current quarter for revenue in the range of $116-$119 million and analysts expected $113 million. At the midpoint that would be another 37% rise.

GrubHub active diners rose 24% to more than 7.35 million. They added 382,000 in Q2. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly, they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings Oct 27th.

Shares spiked to $39 on the earnings and then spent a month in post earnings depression, dropping back below $36 in mid August. The rebound has begun and Monday's close was a new 14-month high. Initial resistance is $41 and our best-case target is $47.

I am using the December option so there will be some expectation value when we close the position ahead of earnings.

Position 8/30/16:

Long Dec $42.50 call @ $2.71, see portfolio graphic for stop loss.

ITW - Illinois Tool Works - Company Profile


No specific news. Shares closed at a new high on Monday. Minor decline today.

Original Trade Description: August 17th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912.

In late July, ITW reported earnings of $1.46 that rose 12.3% and beat estimates for $1.40. Revenue of $3.43 billion beat estimates for $3.40 billion. ITW guided for Q3 earnings of $1.42-$1.52 compared to analyst estimates for $1.46. The company raised full year guidance for earnings by 10 cents to the $5.50-$5.70 range. Analysts were expecting $5.51 per share.

The stock jumped from $111 to $115 on the news and then traded sideways for two weeks on post earnings consolidation. In early August the shares started a slow climb to hit $119 and a new high. Every day I thought about recommending ITW but I kept waiting for a pullback. We saw a minor decline on Tuesday to $118 and a positive gain on Wednesday. This may be our chance to buy a dip, even as small as it was.

Earnings Oct 19th.

Position 8/19/16 with an ITW trade at $119.25

Long Dec $125 call @ $2.05. No initial stop loss.

MKC - McCormick & Co - Company Profile


No specific news. Still stuck in a range along with the market.

Original Trade Description: August 20th.

McCormick & Company manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari brands, as well as Vahine brand in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; McCormick and Aeroplane brands in Australia; and Kohinoor brand in India, as well as through regional and ethnic brands, such as Zatarain's, Thai Kitchen, and Simply Asia. This also supplies its products under the private labels. This segment serves retailers, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound and other flavors to multinational food manufacturers and foodservice customers.

They reported Q2 earnings of 75 cents that beat by a penny. Revenue rose 3.8% to $1.06 billion and matched estimates. Consumer sales rose 7% to $641.8 million while industrial sales declined -0.7% to $421.5 million. For the full year they guided for earnings on a constant currency basis of $3.68 to $3.75 and analysts were expecting $3.74. Revenues are expected to be $4.34 to $4.43 billion but that was on the low side of estimates for $4.41 billion. They expect sales growth of 5% and EPS growth of 10%. They said they had more confidence they would come in at the high end of their revenue and sales guidance. However, that only matched expectations on earnings and was still light on revenue.

Earnings Sept 29th.

They have several challenges. The quit selling a low cost economy product in India and that reduced revenue. Indians have a very low standard of living and try to find the lowest cost products. The company also warned on currency issues. Total sales growth in Q2 was 3.8% but adjusted for constant currency that would rise to 6%.

They also had an issue with private label customers lowering prices for their products. That means a $2 box of private label pepper is competing with a $2.50 box of McCormick pepper. The company is actually fine with that and encourages private label distributors to adjust prices to whatever price point generates the most sales. Apparently, McCormick is perfectly happy growing market share at a reduced revenue rate. They are still making money on private label products and those products are capturing market share.

Shares sold off from $107 to $100 in the month following the earnings report. After putting in a double bottom at $100 the stock is moving higher and a break over $102 could see the gains accelerate. This is a good stable company paying a $1.72 annual dividend without a lot of drama along the way. I expect it to return to the highs, market willing.

position 8/22/16 with a MKC trade at $102.15

Long Dec $105 call @ $2.40. See portfolio graphic for stop loss.

OC - Owens Corning - Company Profile


No specific news. No material movement.

Original Trade Description: August 24th.

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

For Q2 they reported earnings of $1.29 that beat estimates for 85 cents. Revenue of $1.55 billion also beat estimates for $1.47 billion. They repurchased one million shares in the quarter with 2.8 million left on the current authorization. They projected second half shipments of roofing to be flat after a 20% surge in the first six months of 2016. This is a seasonal business. Hail storms that cause roof replacements are heaviest in April-July.

Earnings Oct 26th.

Shares were very volatile after the earnings with a range of $50.88 to $58.69. After the volatility passed the stock found support at $53 and moved sideways for four weeks. This week shares have started to climb out of the consolidation and the stock closed at $54.81 on Wednesday and actually posted a gain in a weak market. That was a four-week high.

This is a low volatility stock and could be a safe location to wait out any market volatility over the next six weeks.

Position 8/25/16

Long Nov $55 call @ $2.35, see portfolio graphic for stop loss.

PAG - Penske Automotive Group - Company Profile


Another 10-month high close after Roger Penske bought another 478,000 shares for $21,132,400. I am tempted to remove the exit target at $47. It appears Penske is trying to take the company private, one chunk of stock at a time. We have a November position so plenty of time for shares to return to the $50-$55 range where they topped out last time.

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.

Update: On August 10th CEO Roger Penske bought another 151,412 shares for $6 million. Roger Penske acquired another 50,000 shares on August 11th at an average price of $41.40. He is on a buying binge with new positions every 2-3 days. Just in August he has purchased nearly one million shares for roughly $40 million. That brings his total ownership to 31,066,574 shares. There are only 85 million outstanding. It looks like he may be taking the company private, one bite at a time.

Update: On August 22nd, Roger Penske bought another 300,000 shares at $42.55 for $12.8 million. No other news and the stock spiked 4%. That raises his holdings to roughly 31.5 million shares and there are only 85 million outstanding. His ownership is now over 37%. He has purchased more than 1.5 million shares in the last month.

Update: On August 29th, Roger Penske bought another 478,000 shares for $21,132,400. That lifts his ownership to roughly 32 million shares.

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.

SWKS - Skyworks Solutions - Company Profile


No specific news. Waiting on Broadcom to report earnings. That could lift the entire sector.

Original Trade Description: August 18th.

Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.

In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.

They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.

Earnings Nov 3rd.

CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.

Shares were up strongly on Thursday despite the weak market. They are poised to break over resistance at $72 and retest the $79 level. Because of the gain the option premiums are inflated so I am recommending a call spread. The October strikes will not be available until next week so we have to go with November.

Position 8/19/16 with a SWKS trade at $72.05

Long Nov $75 call @ $3.70, no initial stop loss.
Short Nov $82.50 call @ $1.66, no initial stop loss.
Net debit $2.30.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


Two steps forward, one step pack. The DIA is actually in a minor downtrend if you look closely. The six weeks after August option expiration are the most volatile of the entire year.

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

IBM - IBM Corporation - Company Profile


Resistance at $160 held. No specific news. IBM is moving in lock step with the Dow and both are stock in a trading range with a minor bias to the downside.

Original Trade Description: Aug 23rd.

International Business Machines Corporation provides information technology (IT) products and services worldwide. The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company's Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources. The business was started in 1924.

This is not a bearish recommendation on IBM's business. This is a trading recommendation based on its chart pattern and the impact on the Dow. IBM has posted revenue declines for 17 consecutive quarters. The business format is changing and IBM is adapting. However, turning IBM around is like turning a VLCC tanker around. They carry 2 million barrels of oil and it takes miles to slow and turn because of their momentum.

IBM is making the turn and their cloud business is growing rapidly but it could take years before the restructuring is complete.

The problem for the market is that IBM is an expensive Dow component. At $160 per share it carries a lot of weight. After they reported earnings showing a big jump in cloud revenue and a major investment from Warren Buffett, the stock rallied to $163 where it stalled for the last two months. At Tuesday's close it was resting on support at $160 and as the Dow dropped to close at the low for the day.

The problem as I see it is this. There is no reason to buy IBM shares. They will post another revenue decline this quarter. That makes it a sell candidate for portfolio managers trying to raise cash for their end of year buys. It is also a high dollar stock so they get a lot of cash back when they sell it compared to selling a GE or a Pfizer. When you need to raise cash you sell the biggest stock with the least promising outlook.

The Dow is the weakest of the major indexes. If the market ever decides to correct over the next six weeks, you can bet the Dow will be the leader to the downside. That means IBM will likely be the leader inside the Dow because there is no real reason to own it when there are so many better stocks in rally mode.

I am recommending we buy the Oct $155 put with an IBM trade at $159. That will be below the support at $160 and potentially the start of a decline that could dip to $150 depending on the market.

Position 8/24/16 with an IBM trade at $159

Long Oct $155 put @ $3.25, see portfolio graphic for stop loss.

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