Option Investor
Newsletter

Daily Newsletter, Thursday, 10/20/2016

Table of Contents

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

Market Wrap

ECB Stands Pat, No Taper

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The ECB held rates steady and gave no indication QE would be increased, decrease or ended; the market didn't seem to care. The statement and press conference was a dud; Draghi revealed no new information, gave no hints to the banks direction and confirmed ongoing slow, sluggish economic recovery. In light of earnings season, today's economic data, the upcoming FOMC meeting and the election it is no surprise the market reacted the way it did. Add in the fact that tomorrow is OP-EX and there was plenty of reason for traders to sit back and wait.

Asian indices were mixed but largely positive in the overnight session, driven by positive US earnings. Japan led with a gain near 1.4% while indices in Hong Kong and China were more flat than not. European indices finished the day in positive territory after a choppy session. Anticipation for the ECB kept the indices near flat-lined for most of the day, until the release of the statement that is, at which time a quick dip to test for support was followed by a short rally which left them with gains in the range of 0.3% to 0.5%.

The ECB held rates unchanged and made no adjustment to their QE policies. At the press conference Draghi seemed to indicate both an end and no end to easing, saying first that "(current fiscal) policy can't stay in place forever" and then hedging that with comments to the effect that no discussion of ending QE or tapering QE has taken place, that is very unlikely there will be an abrupt halt to QE and that the bank stands ready to take whatever action is necessary to support the economy. In terms of outlook, he says inflation is still expected to rise at a gradual pace.

Market Statistics

Futures trading indicated a flat to positive open during the earliest hours of the electronic session but that changed following the ECB announcement and today's early data dump. By 8:45AM the indices were indicated to open with small losses in the range of -0.15%. Downside pressure persisted into the open of today's session, and into the session itself, driving the indices down by -0.3% in the first 15 minutes of trading. The next saw a bit of volatility, the bulls pushed the indices up and into positive territory shortly after 10AM but were not able to hold their ground. The market sold off again and fell to a new intraday low near -0.45% around 11AM. Those lows held, the market rebound from there and then hovered near break even the remainder of the day.

Economic Calendar

The Economy

There was a fair amount of economic data released today. First off, weekly jobless claims. Initial claims rose a little more than expected, +13,000, to hit 260,000. Last weeks figures were revised higher as well, up 1,000. The four week moving average of claims gained 2,250 to hit 251,750. On a not adjusted basis claims fell -2.3% versus an expected drop of -7.2% and are now up 1.3% versus this same time last year. More than likely not adjusted claims will fall back below last years levels as it has each this year it has risen above them. Regardless, this weeks data remains consistent with long term trends and ongoing labor market health.


Continuing claims rose by 7,000 to hit 2.057 million. Last weeks number was revised higher by 4,000. The four week moving average of continuing claims fell nearly -13,000 to 2.058 million, a new low dating back to July, 2000. All in all these number remain healthy, just off the long term 43 year low, and consistent with improving labor market health.

The total number of Americans on unemployment benefits continues to fall. This week the total fell -34,022 to hit 1.747 million, a new low. Based on historical and seasonal trends we can expect this number to fall for another week or two before hitting bottom. Later this fall expect to see the total number begin to creep higher as staffing levels get adjusted going into the end of the year. The data should peak out in late December/early January with a total near 2.6 million.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was released at 8:30AM as well, indicating growth continues but at a slower pace from the previous month. The headline reading of 9.7 is the third month of expansionbut down from last month's 12.8. Within the report New Orders and Shipments both made sunstantial comeback's from the previous month, up 14.9 and 24 respectively. New Orders came in this month at 16.3, shipments at 15.3 although Deliveries, Unfilled Orders and Inventories all remain in contraction. Employment improved slightly but remains negative at -4.0. The 6 month outlook remains positive but fell -4.9 to 32.6.


Existing Home Sales and Leading Indicators were both released at 10AM, neither did much to bring support into today's market despite their bullish tone. Existing home sales rose more than expected, by 3.2% month to month and 0.6% year over year, although data within the report is less rosy. Average home prices rose once again, due to low inventory and high demand, while inventories fell. Economists at the National Association of Realtors are becoming more and more concerned about inventory levels describing them as poor and not improving. The worry at this time is that without an increase in new home construction home prices will continue to rise, inventories will continue to shrink and the existing homes market will crumble.

The Index of Leading Indicators gained 0.2% in September, reversing the -0.2% decline in August. On a trailing 12 month basis the Index is up 1.4% on balance. Economists at the Conference Board say the index is pointing to modest economic growth through the early part of 2017 at least. This months reading was largely influenced by employment and housing permit data. The Index of Coincident Indicators rose by 0.2% as did the Index of Lagging Indicator.


The Dollar Index

The Dollar Index gained some more ground today as the ECB confirms that, at least for now, it remains on a different path than the FOMC. The ECB is at the least maintaining QE while the FOMC is clearly through with it and on the verge of tightening policy for the 2nd time. The index gained close to a half percent in today's session and appears to have broken out of the flag pattern I highlighted yesterday. First upside target is just above $98.50 although targets derived from the flag pattern and flag pole put a target of $100.50 on this move. The indicators are bullish and consistent with rally, the one red flag I see at this time is that momentum is waning. Looking out over the next couple of weeks this move could easily continue so long as economic data does not completely derail rate hike expectations.


The Oil Index

Oil prices fell more than -2.25% today, reversing yesterday's gains and more. Nothing in the way of news came out today, the move driven on low expectation OPEC's deal will support oil prices longer term and profit taking. WTI fell nearly -$1.20 to hit $50.31. Prices may remain volatile going into November as there is some expectations OPEC will up the ante on it's production cap with an actual cut.

The Oil Index fell early in the day but managed to regain it by the close and post a small gain. The index gained 0.06% in a move up from the short term moving average and capped by the upper limit of the 7+ month trading range. The index is up at the top of the range on higher oil prices but capped by a lack of confidence in the long term bullish prospects; supply and production still outweigh demand. A break above the top of the range could be bullish but would require oil prices to remain at or near current levels at the least, if not rise. A simple move above 1,180 without strength or confirmation bears a high likelihood of being another whipsaw. The indicators remain consistent with an asset trading at the top of a range.


The Gold Index

Gold prices held relatively steady in today's trade, if a bit volatile. Spot prices were up in the early part of the session, about 0.25%, only to fall following the ECB decision on dollar strength. At end of session gold settled near $1267, down about -0.25%, and is likely headed lower under pressure from the rising dollar. Critical support at this time is near $1,250, a break of which could take gold down to $1,220 or lower.

The gold miners traded in similar fashion today, relatively steady if a bit volatile within the range. The miners ETF GDX created a very small spinning top doji just beneath resistance levels at the bottom of the October gap. The ETF may be setting up for another small move higher but resistance must be broken first. More likely it is consolidating below this resistance level, waiting to see which way the wind blows FOMC sentiment, the dollar, and gold prices. The indicators are bullish in the near term but also show an overbought ETF within a near term down trend. A fall from this level could take it down to retest support in the $25 range, a move higher would find next resistance at the top of the gap near $25.75.


In The News, Story Stocks and Earnings

Today was the biggest day for earnings so far this season, just shy of 100 reports were released and there were many top names on the list. Verizon reported before the bell, beating expectations but failing to impress investors. The company reported non-GAAP earnings of $1.01, 2 cents above consensus, and reaffirmed full year guidance above consensus, but investors were disappointed over declining year to year revenue and poor post-paid subscription growth. Shares of the stock fell more than -1% in the pre-opening session and extended that decline throughout the day.


The Walgreens Boots Alliance reported before the bell as well, delivering growth in both revenue and earnings but missing analysts expectations for both. Along with the miss the company gave full year fiscal 2017 guidance in a very wide range around the consensus estimate. Investors were cheered by the results nonetheless as future prospects for growth remain strong. Shares of the stock made a small gap higher at the open and then extended that gain to nearly 5% by the close of trading.


Dunkin Donuts also reported before the bell and delivered a mix bag of results. The company beat EPS expectations by a penny, missed on the revenue end, lowered full year revenue guidance, maintained full year EPS guidance, reported a 2% increase in US comp store sales, the opening of 115 new stores and a near -2% decrease in year over year revenues. Shares of the stock fell more than -5% in the pre-market session to open near $47.50 which has been confirmed as support.


After hours action was filled with market moving reports so expect to see some action tomorrow before the opening bell.

Paypal – Matched EPS expectations, revenue beat, customer counts up 11%, a credit card is on the way, guidance was positive but light. Shares fell -5%.

Microsoft - Beat EPS and revenue estimates driven by strength in the Azure segment which posted a 116% revenue increase. Guidance is favorable and the stock jumped 5.5% to hit a new all time high.

Boston Beer - Missed revenue and earnings estimates on accelerated slow down in the craft beer industry (I promise I'm doing my part to support it). Revenues fell shy by -14% on an 11% decline in barrels sold. Shares fell -3%. Sketchers - Missed revenue and earnings estimates despite 16% growth in global sales and 18% growth in global wholesales. The company is also predicting weak Q4 sales. Shares fell -15%.

Schlumberger - Beat EPS but missed on revenue. Shares held steady in after hours trading.

The Indices

The indices, they are still churning. Today's action was yet another day of listless, directionless sidewinding whose focus is fixed on events yet to happen. For the most part the market closed with little to no change, except for the Dow Jones Transportation Index which fell about -0.35%. The transports created a small black bodied candle wedged tightly between the top of the trading range and the short term moving average. The moving average may continue to support the index in tomorrow's session but the indicators are not strong so a break above the range does not look likely. The indicators remain consistent with range bound trading and are not showing signs of strength or direction. Resistance is near 8,150, support 8,000.


The Dow Jones Industrial Average fell -0.23% in a move that created a small spinning top doji within a narrow congestion band. The index is trapped between 18,000 and resistance in the range of 18,300 and is giving no sign of breaking out. The indicators are consistent with range bound trading and a market in balance with little to no momentum. This action could continue on into the near term while we wait to see what happens over the next few weeks.


The S&P 500 closed with a loss of -0.14%. The broad market created a medium sized doji candle, more spinning top than anything else, just below the mid-point of the September/October trading range. The index is also below the short term moving average which may act as resistance in tomorrow's session. The indicators are rolling over into a bullish signal but remain weak and consistent with range bound trading. Should the index move up above the moving average resistance would be at the top of the range, near 2,175. Support is near the bottom of the range along the 2,120 support line.


The NASDAQ Composite closed with a loss of -0.09%. The tech heavy index created a very small doji type spinning top candle sandwiched between the previous all time high and the short term moving average. The moving average has begun to move lower and may act as resistance tomorrow. The indicators are bearish and consistent with a weakening market, a break below support could take it down to 5,170 and last week's low. A break below that level would be more bearish and could take the index down as low as 5,000.


The Draghi/ECB catalyst has come and gone, delivering a dud, and is one more to check off the list as we await the upcoming election. Earnings, earnings outlook, economic data, the FOMC and rate hikes are all moot at this point. The election has shaped up to be a defining moment in US and global history, the results shaping our world for the next several DECADES if not longer. We've less than 3 weeks to go, and then the rest of our lives to live with the results. The market is scared, yet hopeful, not ready to commit to rally but not afraid enough to sell off. I remain cautious, hopeful, anticipating the next great secular signal.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Hurricane Survivor

by Jim Brown

Click here to email Jim Brown

Editors Note:

We hear lots of tragic stories about damage and destruction from hurricanes but there are ways to profit from it. A destructive hurricane is a windfall for Home Depot. They supply the wood, lumber, sheetrock, paint, etc to rebuild after a disaster.



NEW DIRECTIONAL CALL PLAYS

HD - Home Depot - Company Profile

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores. Company description from FinViz.com

Home Depot is insulated from the Amazon competition. You cannot buy 2x4 boards, carpet or a 5-gallon bucket of stain on Amazon. With the housing recovery in full swing, Home Depot has been fueling a massive remodeling binge. Customers trying to spruce up their homes so they can sell, go to Home Depot for the supplies. Customers that have just bought a home shop at Home Depot for items to remodel to fit their tastes. Customers just remodeling their own home to bring it up to date shop there as well. Home Depot now has online ordering with shipping to you on the smaller items or in store pickup for larger items. About 42% of online orders are now picked up in local stores. That also provides an opportunity to sell the customer something else as he wanders around the store. I am living proof that you cannot go into a Home Depot without buying something.

Same store sales have risen 4% or more in 15 of the last 16 quarters. In an interview with the CFO she said property managers were 3% of their customers but 40% of sales. That is an amazing statistic because once those professional managers are locked into a supplier like Home Depot they rarely change. The only other comparable big box is Lowes and they are always more expensive.

The CFO said the addressable market for their products in the U.S. is $550 billon and Home Depot only has 20% of that market. There is plenty of opportunity for additional growth. More than 50% of U.S. homes are over 40 years old. The company is targeting $100 billion in annual revenue in 2018.

Home Depot has bought back $2.6 billion in stock in 2016 with $2.4 billion to go. Their capital spending plans called for $5 billion for stock purchases. The company will also pay $3.4 billion in dividends. They have not added a new store in the U.S. in more than three years. They are using the expansion money to remodel one-third of each store every year. These "resets" are critical to keeping the stores fresh and implementing new marketing strategies.

Since Hurricane Matthew hugged the coast and caused damage in multiple states, Home Depot is going to have a very strong Q4. They actually have a hurricane response team that loads up trucks with building materials like plywood ahead of the storm and generators for businesses to continue to operate after the storm. They load the trucks and send them to the potential impact areas before the storm actually hits. Once the storm does hit they immediately send more trucks loaded with the supplies normally in demand after a storm. Before the winds actually quit blowing they have trucks pulling into the local stores with the needed inventory.

Home Depot has turned storm watching into a profit center and they do a very good job. This will have only a minimal impact on Q3 earnings but the guidance for Q4 should be strong.

Earnings Nov 15th.

Earnings are the week of the November option expiration so I am using the December strikes to preserve speculation premium. Shares are hovering just above support at $126 and normally rally into earnings and decline afterwards. Because of the expectations for strong guidance I am not planning on exiting before the earnings. We will exit afterwards and probably reload with a February option to capitalize on the January earnings for Q4.

Shares have declined since the early September period and have found support at the $125 level for the last six weeks. HD normally has a pre earnings run and it could start any time now, market permitting.

Because of the market instability I am putting an entry trigger on the position.

With a HD trade at $127.50

Buy Dec $130 call, currently $1.91, initial stop loss $123.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

October Rebound Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The normal end of October rebound got off to a choppy start on Tue/Wed and now the internals are starting to fade. The Dow ended -90 points off its highs with a loss of -40 points. The S&P gave back -4 and the Nasdaq -5. This was another low volume day and the major event hurdles are now behind us with the ECB and the debate now history. This was not an encouraging development.

This is an expiration week and therefore has some heightened cross currents but they should be negated by the earnings parade. So 79% of reporters have beaten on earnings and that is well above the long-term average. However, the market is fading with 70% of the S&P-500 stocks now trading below their short-term 50-day average.



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


NVDA - Nvidia

The long call position was opened at $67.25.



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


COST - Costco - Company Profile

Comments:

No specific news.

Original Trade Description: October 4th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.

Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.

For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.

The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.

The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.

Position 10/5/16:

Long Dec $155 call @ $2.76, no stop loss.


DISH - Dish Networks - Company Profile

Comments:

Houston, we have ignition. We are go for launch. Nice 3% breakout to a new 10-month high. No specific news.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.


HON - Honeywell - Company Profile

Comments:

Honeywell signed a $250 million contract with Entergy Services to improve electric reliability.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Position 10/17/16:

Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.


IDCC - Interdigital - Company Profile

Comments:

No specific news. Shares testing resistance at $80.

Original Trade Description: September 7th.

InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.

IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.

For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.

Update 9/8/16: The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.

Update 9/28/16: In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.

Earnings Oct 27th.

IDCC is a member of the S&P-400 MidCap index.

Position 9/27/16 with an IDCC trade at $78.65

Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.


NVDA - Nvidia - Company Profile

Comments:

Tesla announced the decision to equip all new cars with complete self driving hardware and technological components. Nvidia is the chosen partner to provide the Drive PX chipsets, which retail for $250-$300 each. If Tesla goes with the super high performance Titan GPU at $1,200 each that would equate to $1 billion a year in revenue for Tesla. Shares rose $1.26 on the news.

Original Trade Description: October 19th.

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

Q2 earnings rose 800% to 40 cents and beat estimates for 37 cents. Revenue of $1.43 billion beat their own guidance of $1.35 billion they gave in Q1. Earnings in the year ago quarter were 5 cents and $1.15 billion. They hiked full year revenue guidance as well as the current quarter. They guided for Q3 revenue of $1.68 billion and analysts were only expecting $1.45 billion. During the first six months of 2016, they bought back $509 million in shares and paid $124 million in dividends. The company had $4.88 billion in cash at the end of Q2.

Earnings Nov 10th.

They recently released several new graphics cards that are twice as fast and 40% cheaper than the cards they are replacing.

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

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

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

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

On September 28th, Nvidia announced a new AI supercomputer chip called Xavier, which is designed for self-driving cars. The system-on-a-chip (SoC) integrates a new Graphics Processing Unit or GPU called Volta and a custom 8 core CPU along with a new computer vision accelerator. The processor will deliver 20 trillion operations per second while consuming only 20 watts of power. Nvidia already provides chips to Audi, BMW, Honda, Mercedes, Tesla and Volvo. On August 31st Nvidia and Baidu (BIDU) announced a partnership to make an autonomous car platform. Also today, the company announced a partnership with TomTom to develop artificial intelligence to create a cloud to car mapping system for self-driving cars.

Update 9/30/16: Bloomberg had a blurb earlier in the week saying Nvidia was hiring Apple engineers to work on new graphics for the Apple product line. Apple has always relied on imbedded Intel graphics chips but with the new demand of video editing and VR, that is no longer an option. They are going to have to upgrade to a more powerful video interface. That would be a big win for Nvidia and they would not be hiring Apple engineers unless there was some announcement coming.

On October 3rd, Amazon announced a new P2 instance for the Amazon Elastic Compute Cloud (Amazon EC2). The VM machines are powered by 16 Nvidia Tesla K80 GPUs. They also include up to 64 vCPUs with up to 732 Gb of host memory. These instances offer up to 60 times the processing power of prior P2 instances.

Nvidia is the Intel of the future.

Nvidia shares have been stair-stepping higher since January. They peaked at $69.70 on October 4th. When the stock rolled over on the 6th we were stopped out of a prior position. Nvidia has a habit of surging $5-$7 then resting for a couple weeks. The decline from the October 4th peak touched $63.70 on the 13th and shares have been moving sideways with a slight upward bias. I think they could be getting ready for another move higher as we head into earnings.

I am a firm believer that Nvidia will beat on earnings. I am going to recommend that we hold over the event but I will give everyone fair warning a couple days before so you can make your own decision.

Position 10/20/16:

Long Dec $70 call @ $2.90, see portfolio graphic for stop loss.


QQQ - Powershares QQQ ETF - ETF Profile

Comments:

No material movement with the $NDX down -4 points. The big cap techs are not providing the lift I expected. The entire market is not behaving as analysts expected for this point on the calendar.

Original Trade Description: October 17th.

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.

The QQQ dipped to support at $116 on Thursday. Shares rebounded in the Friday short squeeze but closed at the lows for the day. On Monday the ETF faded with the market ahead of earnings from IBM and Netflix. After the Netflix earnings, the QQQ traded up slightly in afterhours.

Of all the companies reporting over the next couple weeks the tech sector has the best chance of posting positive earnings. That should make the Nasdaq/QQQ a little stronger than the broader market.

While there is no guarantee the market will follow traditional seasonal trends, Monday was the first day of the six best weeks of Q4 in normal years. End of fiscal year window dressing by funds occurs between now and the year end on October 31st. There is a possibility the election could damage this normal seasonal cycle if portfolio managers are too confused to know how to invest depending on which candidate wins Wednesday's debate.

If that is the case, the most likely action will be for managers to throw all their excess cash into big cap tech stocks as a way to be fully invested but also have limited risk. They can exit those positions quickly once we are in November.

This is a play on the expected relative strength of big cap tech stocks over the next six weeks.

Position 10/18/16 with a QQQ trade at $117.50

Long Dec $119 call @ $2.54. See portfolio graphic for stop loss.


SWHC - Smith & Wesson - Company Profile

Comments:

No specific news. Still inching higher.

Original Trade Description: October 18th.

Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility. It serves gun enthusiasts; collectors; hunters; sportsmen; competitive shooters; individuals desiring home and personal protection; law enforcement and security agencies and officers; and military agencies. The company markets products through independent dealers, large retailers, in-store retail channels, and range operations utilizing consumer-focused product marketing and promotional campaigns; social and electronic media; and in-store retail merchandising systems and strategies. It also operates Websites; and online retail stores that sells hunting and shooting accessories, branded products, apparel, and related shooting supplies. Company description from FinViz.com.

I have written about Clintons potential attacks on firearms and gun owners multiple times. She has pledged to issue an executive order implementing various types of gun control in her first 100 days in office. She has also vowed to nominate antigun judges to the Supreme Court in an effort to rewrite firearms laws as cases are presented to the court. She wants to restrict purchases, eliminate concealed carry, close gun shows, eliminate quantity purchases of ammo and ban modern sporting rifles, etc.

Since Clinton surged in the polls on Trump's Access Hollywood comments, gun manufacturers shares have found a bottom and begun to rise again. The closer we get to the election the more the firearms issues will be in the press. If she is elected there will be a flood of purchasers rushing to acquire guns before she can issue her executive order.

Earnings December 1st.

  Gun stores are starting to advertise their "Pre Hillary" sales. Link

I am going out to January on this option and if she is elected, we will hold over the December earnings because guidance should be off the chart.

Position 10/19/16

Long Jan $28 call @ $1.35, no initial stop because of low price.


WOR - Worthington Industries - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: October 12th.

Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.

Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.

As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.

In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.

Earnings Dec 28th.

Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.

Position 10/13/16:

Long Dec $50 call @ $2.05, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile

Comments:

Barclays said Mobileye could be a good long position paired with a short on the severely overhyped Tesla. Shares spiked $1 on the news to stop us out for a 50% gain.

Original Trade Description: September 27th.

Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.

Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance, a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.

Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.

Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.

Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.

Earnings Nov 3rd.

Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.

Update 10/13/16: Deutsche Bank questioned the technology used by Mobileye and others after recent announcements on falling costs. DB suggested the sharp drop in cost for technology offered by other vendors could weigh on future Mobileye sales.

Position 9/28/16:

Closed 10/20/16: Long Nov $40 put @ $2.08, exit $3.10, +1.02 gain.


NKE - Nike Inc - Company Profile

Comments:

I just found out that Apple and Nike are going to unveil a new co-branded fitness watch next Friday. This is likely to give Nike shares a boost. Source

Nike shares are no longer falling and I am recommending we close this position.

CLOSE THIS POSITION

Original Trade Description: October 10th.

NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.

Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.

Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.

When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.

I expect Nike shares to continue declining until sales begin to grow again.

Earnings December 27th.

Position 10/11/16:

Long Dec $50 put @ $1.05, no initial stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

New historic closing low.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.


YHOO - Yahoo - Company Profile

Comments:

Verizon lawyers have begun holding talks with Yahoo about the impact of the cyber attack and the potential for a massive settlement. Verizon said it was up to Yahoo to prove the lack of future impact because Verizon believes it is a condition that could cancel the deal. If the deal dies, Yahoo owes Verizon a $145 million breakup fee.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 10/17/16:

Long Jan $40 put @ $1.90. No stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now