Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/1/2016

Table of Contents

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

Market Wrap

Trick or Treat

by Jim Brown

Click here to email Jim Brown

Investors may be looking at the election next Tuesday as an adult version of Trick or Treat.

Market Statistics

As the election polls tighten and the rhetoric increases to a fever pitch, the market is reacting more forcefully to the trend over the last couple weeks. The trend has been lower as the polls tightened but this morning an ABC national poll showed Trump in the lead by 1 point. While that could change at any moment, he was down -12 points just two weeks ago. The momentum is definitely in his favor and the market reacted negatively.

The market had priced in a Clinton win and the republicans maintaining control of the House effectively insuring gridlock and the status quo for another two years. Suddenly, that scenario has run off the rails with the steady drip, drip of the WikiLeaks documents and the return of the email scandal in a big way.

Now that fund managers are in a new fiscal year they are free to dump stocks and raise cash so they have some dry powder to use after the election. Certain sectors will do either better or worse depending on who wins. Managers are now free to raise cash to make those bets once the winner is declared.

The market performance today was entirely different that what the futures were showing last night. The S&P futures were up +8.75 late Monday night. The reason for the overnight bounce was Asian economics. China's government PMI index for October jumped to 51.2 compared to estimates for 50.4, which had been the actual reading the prior two months. Meanwhile the Caixin manufacturing PMI also rose to 51.2 in October and the fastest pace of improvement since March 2011. A rebound in new orders and stronger demand were the main drivers. The Caixin report focuses on mid-sized companies not in the government survey.

China's services PMI for October rose from 53.7 to 54.0 and the second monthly gain. The combination of the three reports suggests China's economy is starting to improve. The GDP held steady at 6.7% for Q2 and Q3. Also, September producer prices rose for the first time in almost five years.

The Bank of Japan kept policy unchanged and rates at -0.1%. Bond purchases will remain at the same rate at an annual pace of 80 trillion yen. Several economic reports weakened but the overall outlook remained positive so the BoJ did not feel the need to change policy.

The combination of those Asian economic reports above lifted the U.S. futures and it looked like we were in for a strong open in the USA. By the time morning rolled around the indexes were in decline mode and the Dow hit -201 at the lows of the day. If you do not like the market action just go to coffee. When you get back, it will have changed.


SAVE $50 on your EOY Subscription - ONE WEEK ONLY!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 19 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to normal.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL


The U.S. economics were mixed and did not give the Fed any support for a potential rate hike in the near future. Construction Spending for September fell -0.4% after a -0.7% decline in August. Consensus estimates were for a +0.5% gain. Public construction fell -0.9%. Private construction fell -0.2%. Nonresidential construction fell -0.9%. Overall spending is now down -0.2% from the same period in 2015.

The ISM Manufacturing Index for October rose slightly from 51.5 to 51.9. The internal components were mixed and suggested weakness ahead. New orders declined from 55.1 to 52.1 and order backlogs fell from 49.5 to 45.5. The inventory component fell from 49.5 to 47.5 making it the 15th consecutive month in contraction. The highlight was the employment component with a rise from 49.7 to 52.9 and the first time over 50 since June and the highest reading since June 2015. The rising dollar is causing a problem for the manufacturing sector and it is not likely to end soon.


Vehicle sales rose from 17.76 million to 18.29 million on an annualized basis in October. This was the second month the actual numbers beat expectations, which were 17.4 million for October. This pace of manufacturing is not sustainable. Once the pent up demand has been satisfied we could see a significant reduction. However, the average age of a vehicle in the U.S. today is 11 years. That means a lot of cars are going to need replacement in the near future.

Auto sales rose from 7.24 million to 7.27 million. Light truck and SUV sales rose sharply from 10.51 million to 11.02 million. You can thank the low gasoline prices for that surge. Imported vehicle sales rose from 3.61 million to 3.72 million for 20.3% of total vehicle sales. The average incentive per vehicle declined from September's record $3,921 to $3,726.

Moody's Chart

The outlook survey for the Texas Service Sector declined from 13.0 to 9.9 with the survey components weakening. Revenue fell from 13.0 to 9.9, employment from 4.4 to 2.7, hours worked down from 3.1 to -1.4, wages and benefits down from 15.4 to 12.8 and selling prices down from 3.9 to 3.7. The retail sales component fell from 2.0 to -6.6 and a major drag on the headline number. The Texas service sector is starting to benefit from the rebound in the energy sector but the uptick will be slow compared to the activity level in early 2015. The number of active rigs in Texas remains near a 20-year low.

Tomorrow's calendar has the ADP Employment and the estimate has risen from 160,000 to 165,000 since last week. The Nonfarm Payroll consensus has also risen by 5,000 to 175,000.

The FOMC announcement will likely be ignored because there is almost no chance of a rate hike ahead of the election in a weak economy. They will however, point to December as a potential rate event.


Valeant Pharmaceuticals (VRX) hogged the news headlines in the morning and the evening. This morning shares were down -12% after news broke that former CEO Michael Pearson and CFO Howard Schiller are the subject of a U.S. criminal probe in the Philador scam. This is where Valeant sold large volumes of drugs to Philador and to other phony pharmacy companies Philador had set up. This enabled Valeant to maintain its revenue levels according to the current theory. At one point Valeant had an option in place to buy 100% of Philador as this scam was in progress. It is unknown if the company is also likely to be charged.

Late in the day, news broke that Valeant was close to a deal to sell its Salix component for $10 billion to Takeda. Shares immediately spiked more than 30% as all the morning's shorts were crushed. The deal is expected to produce $8.5 billion in cash plus future royalty payments. After the bell, Valeant said it was an open bid process for multiple divestitures and there were additional interested parties.

Valeant has a market cap of only $8 billion after losing -$70 billion in capitalization when the stock crashed. They have $32 billion in long-term debt plus another $8 billion in committed payments for royalties, options, pensions, etc. They need to generate a lot of cash quickly and $10 billion is a good start.


Pfizer (PFE) reported earnings that fell -38% to 21 cents. Adjusted earnings of 61 cents missed estimates by a penny. Revenue rose 8% to $13.045 billion and missed estimates for $13.055 billion. They guided for full year revenue of $52.0-$53.0 billion, up from $51-$53 billion. They guided for earnings of $2.38-$2.45, which was less than the prior $2.38-$2.48. Analysts were looking for $2.46 and $53.1 billion. Shares declined slightly on the news.


Yum Brands (YUM) closed Monday at $86.28 and opened this morning at $62.21. It was not an earnings drop. The spinoff of Yum China (YUMC) occurred and the YUMC shares began trading post spin at $24.50. The Yum China company is going to be the growth company while Yum Brands will be a slow growth high cash flow entity focused on the U.S. market. I am betting Yum US is also going to see its stock decline.


Anadarko Petroleum (APC) reported a loss of 89 cents that was bigger than the analyst estimates for a loss of 57 cents. Revenue rose 12.1% to $1.89 billion and missed estimates for $2.19 billion. The company raised its monetization target again from $3.5 billion to $4.0 billion in 2016. Shares rose on the earnings news despite another drop in oil prices.


Johnson Controls (JCI) was added to the Goldman Sachs Conviction Buy list now that the spin-off of its Adient unit is complete. Adient produces automobile seating components. JCI began trading post spin on Monday at $39.


Tenet Healthcare (THC) reported earnings of 16 cents that missed estimates for 19 cents. The worst news was the guidance. The company guided for Q4 earnings of 17-22 cents and analysts were expecting 54 cents. Shares fell only -3%, which I thought was very surprising. I would have expected -30%.


After the bell, Square (SQ) reported a loss of 9 cents and analysts were expecting a loss of 11 cents. Revenues of $439 million beat estimates for $431 million. The company raised its full year revenue guidance from $1.63-$1.67 billion to $1.695-$1.70 billion. Analysts were expecting $1.68 billion. The company said the total value of payments processed rose 39% to $13.2 billion. Analysts were expecting $12.47 billion. Shares gained 50 cents in afterhours.


Gilead Sciences (GILD) reported earnings of $2.75 compared to estimates for $2.86 per share. Revenues of $7.50 billion did beat estimates for $7.45 billion. Hep-C drug sales of $3.33 billion missed estimates for $3.7 billion. Harvoni had revenues of $1.9 billion that were lighter than expected because of falling demand now that there are multiple Hep-C drugs on the market. Expectations for Q4 are only $1.1 billion in the U.S. and $776 million overseas. Gilead shares were volatile after the close, trading between $71 and $75 but ending down only -90 cents at $73.22. Analysts have been expecting Gilead to announce some big acquisition with their huge cash hoard of $30 billion but nothing was announced. They did announce a dividend of 47 cents payable December 29th to holders on December 15th.


Electronic Arts (EA) reported earnings of 56 cents compared to expectations for 43 cents. Revenue of $1.1 billion beat estimates for $1.09 billion. They guided for the current quarter to revenue of $1.13 billion and that was well below estimates for $2.07 billion. Full year earnings guidance was $2.69 on revenue of $4.78 billion. Shares spiked $5 to $82.40 on the news.


Tableau Software (DATA) reported earnings of 16 cents that easily beat estimates for 7 cents. Revenue of $206.1 million missed estimates for $213.4 million. License revenue rose 7% to $116.7 million and they added 3,600 new customer accounts. Shares collapsed from $49.51 to $40 on the news but battled back to close at $45 in afterhours.


There was not a lot of earnings excitement today but on Wednesday, we will get Facebook, Alibaba and Qualcomm. That could provide a boost to the tech sector but Alibaba is the only one of the three reporting before the open. Facebook and Qualcomm are after the close.

The earnings excitement is fading fast as investors develop a defensive posture ahead of the election.


Apple (AAPL) shares declined to nearly $110 intraday on rumors iPhone sales in China were slowing. Strategy Analytics said Apple only managed to grab 6% of market share in China in Q3 compared to the 10% share it had in Q3-2015. The overall market rose in the number of units sold but Apple's share declined. To put it another way the difference was a 40% drop in market share. The problem Apple has in Asia is the one model per year program. With a dozen vendors each putting out 2-3 models a year, the market is swamped with Apple competitors and continuous offerings of new models.

There was another rumor making the rounds that the Apple Macbook was also losing market share to Windows Surface. The new Surface product has gotten a lot of good reviews and it is cheaper.

Apple Air Buds are also rumored to be delayed until Q1-2017.

The Apple decline was a drag on both the Dow and the Nasdaq indexes.


Brocade (BRCD) continued to rally on expectations for an acquisition by Broadcom (AVGO). Reportedly, Brocade is in advanced talks to sell itself with multiple potential buyers in the discussions but Broadcom is said to be leading.


Crude prices continue to decline after a $2 drop on Monday. The much-hyped OPEC production cut is disappearing faster than M&Ms in a kindergarten class snack break. Nobody wants to cut and now it appears nobody will even agree to a freeze. The next meeting is Nov 30th and prices could decline further if the agreement evaporates.


Markets

The S&P has posted losses for the last six consecutive days. That is the longest streak in 2016. All the major indexes lost ground in October and this week is not looking good. The Russell 2000 is now down -7% from its 1,263 high in September and it has broken below critical support at 1,200. The small caps normally lead the market in both directions and they are leading us down at a high rate of speed. The Russell is unsupported at its current level and portfolio managers are likely moving out of the low liquidity small caps just in case there is a big market drop in the near future. When in doubt, follow the small caps.


The S&P lost -14 points and traded not only below critical support at 2,120 but also under 2,100 intraday. This is a major support break and everyone pointing at critical levels like 2,145, 2,130, 2,119 and 2,114 as critical technical support on the way down, have now run out of levels on which to place their hopes.

Jeffrey Gundlach said this afternoon that he believes the S&P could fall another 5% to 10% over the coming weeks. He is a big dog in the market and while his opinion is just another opinion, his seems to count. His key level was 2,130. He said two closes under 2,130 was the technical kiss of death.


The Dow traded well below 18,000 intraday but recovered to close just above that critical support level. I have no hope that it will continue to recover. I believe the lack of any Dow earnings this week and the post earnings depression cycle from the 26 companies that have already reported will continue to drag the Dow lower.

Add in the weakness in Apple and the election uncertainty and we could easily see significantly lower levels. However, the Dow has been resilient and while trading sideways it has refused to move lower. We may be reaching that point where the next headline will be the one that forces a breakdown below support.

The Dow traded in a very narrow 60-point range on Monday. That was a draw between the buyers and sellers and remarkable considering the volume was nearly 7 billion shares and 1 billion more than any day the prior week. This was a textbook pattern of distribution.



The Nasdaq Composite finally broke below support at 5,200 and nearly touched 5,100. Apple was a big drag but the index got some help from the biotech sector. Strangely, the biotech index was up more than 1% despite a tweet storm by Bernie Sanders attacking Lilly, Sanofi and Novo Ordisk for drug pricing. The biotech sector has been so depressed it must have looked like a safe port in the storm.

Now that 5,200 has broken, I expect the Nasdaq to continue lower and produce a test of 5,100 and a break there will not be pretty.




The VIX spiked through 20 intraday but declined -2 points into the close. However, I believe we will see higher highs, possible in the 25 range by next week. There are a lot of traders that have not converted to the possibility of an unexpected winner in the election.


I believe our election uncertainty will continue to rise and with 6 days left, that is a lifetime in the election cycle. That is six days where the lead could reverse literally every day. This could create some serious market volatility ahead of the election and possibly more volatility after the event.

I would continue to be cautious about being overly long and I would refresh your shopping list for stocks to buy on a dip.


SAVE $50 on your EOY Subscription - ONE WEEK ONLY!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 19 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to normal.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL


Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary 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

 


New Option Plays

Election Uncertainty

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tightening poll numbers sent the markets on a wild ride on Tuesday. Unfortunately, it looks like we are headed for another dip on Wednesday with the S&P futures down -7 points as I type this. There is no reason for us to jump into the high volatility just so we can be stopped out a day later. I recommend we remain on the sidelines until the volatility eases.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Right on Schedule

by Jim Brown

Click here to email Jim Brown

Editors Note:

I warned over the last couple weeks we could be looking at a market dip ahead of the elections once the fund year-end expired on Monday. The election uncertainty is growing and with it the urge for funds to go to cash. Now that their October 31st fiscal year end is over and Tuesday is a new year, they are free to lighten up on positions and raise cash for post election investing. Once they know who wins they can put that cash to work where it will be best utilized.

The S&P broke through critical support at 2,120 and even 2,100 intraday but the dip buyers provided a little relief at the close. The Russell 2000 lost another -1.1% or -13 points to close at 1,177. That index is completely unsupported at this level.

Five more trading days until the election is over.



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


LB - L Brands

The long call position was stopped out at the open.

NVDA - Nvidia

The long call position was stopped out at $70.25.

XBI - Biotech ETF

The long call recommendation remains unopened until $58.



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


DISH - Dish Networks - Company Profile

Comments:

No specific news. Gave back yesterday's gains in a weak 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:

The company announced the redemption of $1.6 billion in notes. No other news.

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:

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 were 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:

Closed 11/1/16: Long Dec $75 call @ $1.65, exit .30, -1.35 loss.


NVDA - Nvidia - Company Profile

Comments:

No specific news. Major 3% drop in a weak market. Earnings are next week and we will look at a new position once past earnings.

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:

Closed 11/1/16: Long Dec $70 call @ $2.90, exit $4.58, +1.68 gain.


TREE - Lending Tree - Company Profile

Comments:

No specific news. Shares spiked at the open to give us a bad fill on the call option but I think we will do ok. Shares posted a gain for the day and one of the few stocks to accomplish that.

Original Trade Description: October 31st.

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.

Position 11/1/16:

Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.


XBI - Biotech ETF ETF Profile

Comments:

Surprise, surprise! Despite a tweet from Bernie Sanders attacking Lilly (LLY) and Novo Ordisk (NVO) the biotech sector actually posted a gain. Support at $56 held.

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. Down with the market. The retail ETF lost -2% for the day.

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:

A 3% gain but dead stop at resistance at $36 and well off the highs.

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. Secondary support broke intraday.

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.




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