Option Investor
Newsletter

Daily Newsletter, Monday, 10/31/2016

Table of Contents

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

Market Wrap

Data, Earnings, FOMC and Emails

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

As if the we did not have enough to worry about with the weeks schedule of earnings, economic data and the FOMC meeting, Hillary's emails have reemerged to disrupt the market. The latest; as many as 650,000 new emails have been discovered, possibly the 33,000 deleted emails, and the FBI has gotten the warrant to investigate them. They belong to Hillary's advisor, Huma Abedin, and were found hidden on her husband's computer. What they contain is yet to be revealed but the rumors are flying.

In other news more closely related to the market; this will be the biggest week of the earnings season, we've a raft of major macro-economic data on tap and the FOMC meeting/policy statement on Wednesday. Today's action was understandably muted in light of all that is going on; data, earnings and the FOMC all have the power to change the underlying fundamental outlook of the market while we wait for the another email-bomb to drop.

International market were just as stunned as we at the revelation the FBI had discovered new emails. Asian and European indices both lost ground in choppy trading but losses were minimal.

Market Statistics

Futures trading indicated a flat to positive open all morning and this was strengthened somewhat following the release of Personal Income & Spending data. The open was quiet, not much action to speak of, the SPX opened with a gain of about 3 points and held that level for the first hour of trading. Around 11:30AM the index pulled back to test break-even for support and made a small bounce, up to about +6.5 points, before falling back to retest for support. The rest of the day saw the indices trade between early lows and mid day highs, closing near the lows of the day.

Economic Calendar

The Economy

Personal Income & Spending data was released at 8:30AM, the data is for September, and shows a continued and steady increase in both income, spending and consumer level inflation. Personal Income rose by 0.3% to the highest level in 3 months. This is slightly off the 0.4% predicted by analysts but is made up for by an upward revision to the previous month. Personal Spending rose by a more robust 0.5%, slightly ahead of expectations, but is offset by a downward revision of -0.1% to the previous month. Disposable Personal Income rose by 0.3%, Real DPI rose by a more modest 0.1%. Headline PCE, a Fed favored indicator of inflation, rose by 0.5% while Real PCE rose by a more robust 1.2%. Ex-food PCE was up 0.1%, ex-food and energy up 1.7%.

Chicago PMI was released at 10AM. This gauge of manufacturing fell by -3.6 to 50.6, the lowest level in more than 6 months, indicating a slowdown in expansion. The 3 month average of CPMI is 52.1 which is consistent with a moderately growing manufacturing sector. The decline was led by drops in production and new orders but not limited to them. Employment and inventory levels fell as well.

Moody's Survey Of Business Confidence jumped 1.1 points to 30.4, the highest level since early May. The index has made a notable increase over the last few weeks but I suspect with the weekend's email news that could change next week. Mr. Zandi says that US business sentiment is consistent with an expanding economy, the rest of the world less so but still positive, and that sentiment in South America may be bottoming.


So far 58% of the S&P 500 has reported earnings and the scorecard looks just like it has the past few quarters. Of those that have reported so far 74% have beaten EPS estimates, above average, while only 58% have beaten revenue estimates, below average. The good news is that the blended rate of earnings growth has turned positive which means we have emerged from the earning recession; this week's blended rate is up nearly +2% to 1.6%, snapping a 5 quarter losing streak. So far all 11 sectors have delivered better than expected results, led by the real estate sector. Looking forward, the Forward Looking 12 month EPS outlook has finally broken out of its range and hit a new high.


Looking to the next quarter, the full year and next year earnings outlook remains positive but estimates continue to shift. Fourth quarter 2016 is now expected to see growth in the range of 4.6%, down -0.9% from last week, while full year estimates have risen to 0.2%, up 0.1%. If the trends hold up and next quarter is as much better than expected as the average tell us earnings growth for the quarter could be as high as 9% or 10%, full year growth in the 1% to 2% range. Next year, full year 2017 estimates fell by -0.4% but remain strong at 12%.


The Dollar Index

The Dollar Index firmed a bit in today's action and remains in near term uptrend. The index gained about 0.25% on steady growth in wages and spending but gains were capped by the 78.6% retracement level. This level has been the point of consolidation over the past two weeks and the likely starting point of the next move. The indicators are bearish and pointing lower at this time,suggesting near term support could be tested, but consistent with consolidation within an uptrend so I wouldn't read to much into them just yet. A move higher has a target near the $100.50 level and last years high, a move lower could go as low as $97.20 before hitting the next strong support level. If I had to put my finger on a day these moves might start it would have to be Wednesday afternoon with the release of the FOMC statement. The Fed Watch Tool shows a 6% chance of November rate hike and a 78% chance of December hike. We likely won't get a hike this week but we could get hawkish statements.


The Oil Index

Oil prices tanked today, falling more than -3%, as the OPEC and hope driven rally evaporates. There is growing concern that OPEC and non-OPEC members alike will not comply or cooperate with proposed production capping. This, along with rampant production, high supply levels and tepid demand add up to one thing, a continuation of the already years long supply glut. WTI fell just over $1.50 to hit a four week low. If they continue to fall first target for support is in the $45 to $46 range.

The Oil Index came under pressure today as oil prices fell and 2017 earnings outlook comes into question. Next year the oil sector is expected to see earnings growth in the range of 300%, but all based on $50+ oil. If oil prices remain low outlook will fall, the silver lining is that there will be growth, just not 300%. Today the Oil Index fell a little more than -0.90% to close below the short term moving average. The index remains range bound and now looks like it could move down to the bottom of the range. The indicators are consistent with range bound trading and showing a bearish crossover, consistent with lower prices. Target for support is the bottom of the range, near 1,120.


The Gold Index

Gold prices held steady in today's action, falling about $3 or -0.25%, to trade just above $1270. Spot prices have been edging higher over the past two weeks but remain near the recent low and below potential resistance areas near $1285 and $1,300. Prices may continue to tread water near this level for the next day or two, up to and until the FOMC meeting. At that time it will depend on them and what they do to the dollar. A move down may find support near $1,250, a move higher may find resistance near $1,300.

The gold miners remain in limbo while we await the Fed's next move but today's move was to the upside. The miners ETF GDX rose in today's session, counter to the underlying commodity but remains below resistance. Resistance is the short term moving average, near $22.25. The indicators are a bit mixed, bullish but in decline and generally consistent with the one month trading range. A move up above resistance could go as high as $27.23, a move down to next support could go as low as $22.50.


In The News, Story Stocks and Earnings

Even with all the earnings on tap for the week the number one story today was M&A related. GE and Baker Hughes announced the merger of their oil & gas operations in a deal that will make a company to compete with the likes of Schlumberger. Combined revenues are expected to be in the range of $32 to $33 billion annually. GE will put up all of its oil and gas resources along with a special $7.4 billion cash dividend for owners of BHI and end up owning 62.5% of the new company. GE opened the day higher but sold off to close near break even, BHI also opened the day higher and sold off but closed with a much greater loss, near 7.25%.


Cardinal Health reported earnings before the bell. The maker/provider of medical products and services reported earnings and revenue ahead of expectations. GAAP EPS of $0.96 is down 10% from last year, adjusted EPS of $1.24 beat by a nickel. Revenue grew 14% year over year but was not enough to overcome rising costs. The company went on to lower full year guidance to a range matching consensus. Shares of the stock gained a little more than 2% on the news but the move barely recovers losses experienced at the end of last week.


Williams Companies Incs reported before the bell. Williams Companies Inc is an integrated energy company delivering a range of services and products from the "wellhead to the burner tip" including but not limited to oil, natural gas and electricity. The company delivered relatively strong results but just not enough to move the market higher. The good news is that cash flow from operations increased by 2%, net income turned positive, adjusted ebidta rose 8% and there is plenty of cash available for dividends. The bad news is that full year GAAP earnings are still negative and outlook is tepid. Shares of the stock tried to rally but failed, capped at the short term moving average, and confirmed resistance at the short term moving average.


The Indices

The indices did a whole of nothing again today. A little up, a little down, a lot sideways and all on below average volume. The only index to move more than a very marginal amount was the Dow Jones Transportation Index which gained a little more than 0.50%. The transports, despite the gains, remain trapped within their long term range and do not appear like it will break out in tomorrow's session. The indicators are rolling into a bullish signal but it's not a strong one and are, overall, still consistent with range bound trading. There may be a test of resistance at the 8,150 level, a break above that will be suspect unless driven by positive catalyst and/or a high volume market day.


The other indicators all closed with moves of less than a tenth of a percent, the Dow Jones Industrial Average in negative territory. The blue chips lost -0.10% in today's session, creating a very small spinning top doji candle. This is the 38th day the index has traded within the current, very narrow, trading range. The indicators remain consistent with this range if biased toward the downside and suggestive a test of support may come.


The S&P 500 closed with a loss of 0.01% and created a very small doji like candle, near the bottom of its trading range. The index remains range bound with indicators consistent with this assessment. The current indication is down so there may be a test of support, near 2,120, with a possible move down to 2,100 but not much further, at least for tomorrow.


The NASDAQ Composite posted a loss of -0.02% at the close. The tech heavy index created a small black bodied candle, spinning top-ish, near the bottom of the 6 week consolidation range. Today's action appears to be confirming a drop below support targets at the previous all time high and the indicators support it but a move below the bottom of the range, near 5,150, does not seem likely at this time, at least not for tomorrow. If so it would be bearish and could take the index down as low as 5,025.


The only thing for certain in the market right now is uncertainty. Earnings outlook is good but uncertain due to the FOMC, the election and the economy. The FOMC meeting brings uncertainty because of rate hikes and their affect on the market, the dollar and the economy. The election, and the email scandal, bring uncertainty of such enormous proportion it is hard to quantify. Needless to say I am very cautious this week. I still the signs a prolonged rally is on the way, we just have to get past the next 9 days and see what happens. Don't forget; we've got the FOMC on Wednesday, the NFP/Unemployment on Friday, the Election next Tuesday and the emails hanging over it all.

Until then, remember the trend!

Thomas Hughes


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New Option Plays

Buy the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

If earnings and revenue are at record levels and growing by double digits every quarter is a minor guidance miss really worth a big sell off?



NEW DIRECTIONAL CALL PLAYS

TREE - Lending Tree - Company Profile

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Buy Dec $85 call, currently $3.10, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Tuesday is Critical

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets traded sideways but bled points going into the close as funds ended their fiscal year. Tuesday starts a new fiscal year and anything is possible. Portfolio managers worried about election uncertainty could dump stocks starting tomorrow. Many analysts are saying we could see a 10-15% decline depending on the winner. While I do not expect that type of correction, it is always possible.

The S&P futures closed right at the 100-EMA again and the S&P-500 closed at six week low. The CBOE put/call ratio is at 0.78 and a level not seen since June. Put volume is nearly twice that of calls and close to the most since April.



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


COST - Costco

The long call position was stopped out at $148.35.

XBI - Biotech ETF

The long call position remains unopened until a trade at $58.



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BULLISH Play Updates


COST - Costco - Company Profile

Comments:

No specific news. In fact, no news at all. Shares gapped down more than 2% at the open to stop us out at $148.35.

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:

Closed 10/31/16: Long Dec $155 call @ $2.76, exit $1.39, -1.37 loss.


DISH - Dish Networks - Company Profile

Comments:

No specific news. Nice $1.25 gain in a mixed market.

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:

No specific stock news but plenty of new product announcements. Shares only declined about 10 cents.

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.

Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

Position 10/17/16:

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


LB - L Brands - Company Profile

Comments:

Apparently, somebody leaked the news that LB was going to warn after the close. The stock was down -1.50 in regular trading to $72. After the close the company warned on earnings saying they were reducing Q3 earnings guidance to "about 40 cents" and down from the 40-45 cents they had previously expected. Analysts were looking for 46 cents. They also warned that same store sales would only be up +1% instrad of the 1.7% analysts expected. Victoria Secret is expecting a 2% decline while Bath & Body Works is rising 6%. Shares fell another $4 in afterhours to $68 and we will be stopped out at the open on Tuesday.

Original Trade Description: October 24th.

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

In early October LB said same store sales for the five weeks ended on Oct 1st, rose 3% and beat expectations. Total net sales for September rose $971.4 million. Same store sales were flat at Victoria Secret but rose 9% at Bath& Body Works.

The company said they are emphasizing pink active bras and the sports collection for October. They guided for comps to increase in the low-single digits for October.

With analysts expecting a decent earnings report on November 16th and shares rising, we could see a decent gain over the next three weeks. Resistance is $73.50 and again at $75.

This is a short-term play and we will try to get in and out quickly. I am using the December strike so there will be some earnings expectation premium left when we exit.

Somebody recently bought 2,300 November $75 calls for as much as $1.80. That is a pretty expensive bet that shares will rise.

Position 10/25/16:

Long Dec $75 call @ $1.65, see portfolio graphic for stop loss.


NVDA - Nvidia - Company Profile

Comments:

No specific news. Minor gain in a weak market but still a gain.

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.

Update 10/20/16: 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.

Update 10/27/16: Nvidia said they would be providing the complete Drive PX 2 chipsets so revenue per car could be in the $800-$1000 range.

  Microsoft announced a new Windows 10 Surface Studio that includes a desktop PC and 28 inch ultra-high resolution monitor powered by Nvidia graphics chips.

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.


XBI - Biotech ETF ETF Profile

Comments:

Shares declined 69 cents to support at $56 and now we can wait a couple days and see if it will hold. The next target level would be $50.

This position remains unopened until a trade at $58. We will reset the entry point if the ETF continues lower.

Original Trade Description: October 29th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

With a XBI trade at $58

Buy Dec $60 call, currently $2.07, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

BIG - Big Lots - Company Profile

Comments:

No specific news. Minor rebound.

Original Trade Description: October 26th.

Big Lots, Inc., operates as a non-traditional, discount retailer in the United States. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments; soft home category that consists of home decor, frames, fashion bedding, utility bedding, bath, window, decorative textile, and area rugs departments; hard home category, including small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments; and furniture category consisting of upholstery, mattress, ready-to-assemble, and case goods departments. It also provides merchandise under the seasonal category that includes lawn and garden, summer, Christmas, toys, and other holiday departments; and electronics and accessories category, including electronics, jewelry, hosiery, and infant accessories departments. The company operates 1,449 stores in 47 states. Company description from FinViz.com.

For Q2, the company reported earnings of 52 cents compared to estimates for 45 cents. Revenue of $1.2 billion missed estimates for $1.22 billion. For the current quarter they guided for a profit of 1 cent to a loss of 4 cents. That is not exactly a stellar performance.

Revenue growth in Q2 slowed from the 3% in Q1 quarter to a -0.5% decline in Q2. Same store sales only rose +0.3%. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth. The admitted online sales were only about 4% of the total and there was limited inventory online. That is not what investors wanted to hear.

Earnings Dec 2nd.

Shares collapsed to plateau about $47 in September. In October that plateau declined to $44.50 and this week that level has now broken. With the market weakening there is less tolerance for companies that are not performing. Shares are near a 9-month low.

Position 10/27/16:

Long December $42.50 put @ $2.10, see portfolio graphic for stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

The VXX rose 2% on worries over a market decline before the election. This is temporary.

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:

No specific news. Initial support has broken. Heading to test critical support at $41.25.

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.

Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.

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. See portfolio graphic for stop loss.




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