Option Investor
Newsletter

Daily Newsletter, Saturday, 11/12/2016

Table of Contents

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

Market Wrap

Best Week in Five Years

by Jim Brown

Click here to email Jim Brown

The major indexes posted monster gains on the back of the Trump victory as the investing thesis for the last eight years was reversed.

Weekly Statistics

Friday Statistics

Last weekend we had the "longest losing streak since 1980" for the S&P. In only five short days that turned from a four month closing low on Friday to a record high this Friday. It is amazing how fast the market can turn when the information changes the outlook for portfolio managers.

Analysts believe the period of "monetary stimulus and stagnation" has ended and we are entering a period of "fiscal stimulus and growth." While this has not happened yet, it is likely to begin in 2017.

The last time republicans controlled all three branches of government was from 2003-2007 during the Bush presidency. The first 2 years they only had a 1 vote majority in the senate and the country was still reeling from the 9/11 attack and the war in Iraq. Still, the S&P rose from the March 2003 low of 789 to the 2007 high of 1,576 or almost 100%. Bush did not have a fiscal stimulus mandate. He was fighting a war and that caused a lot of division and distraction.

The market is in rally mode because of what managers believe will be a stimulus economy. Trump has promised to rebuild roads, bridges, airports and communities. Promises are easy to make. Living up to those promises is a lot more difficult. Temporarily, the markets are in panic mode.

Investors have been invested in dividend stocks, big cap tech stocks, staple stocks and consumer discretionary stocks. Those were the "safe" areas in an economy growing at just over 1% GDP.

Since Tuesday's victory, materials, industrials, banks, defense, aerospace, transportation, mining and energy stocks have been winners. Safe stocks like KO, PG and MO along with big cap tech stocks like AMZN, FB, GOOGL and NFLX have been sold to raise money to invest in the sectors expected to thrive under a Trump presidency.

This has been an excellent example of sector rotation. Sectors that were expected to suffer with further regulation under a Clinton presidency have prospered over the last several days.



Portfolio managers have also been dumping bonds and treasuries to raise money for equities. Under the current assumptions about a Trump presidency, the Fed will be free to hike rates and the government will be selling another trillion in new debt over the next four years to finance the rebuilding of American infrastructure. Both of those are a recipe for higher rates. This caused a major spike in treasury yields as investors ran for the exits.



The dollar rallied to a ten-month high on expectations for a return to growth and a rise in interest rates. This crushed commodities with gold falling from the $1,338 high hit at midnight Tuesday night when the election outcome became apparent, to $1,220 on Friday afternoon. That is a 9% decline in three days.



Early Friday morning somebody sold 85,000 contracts of gold futures worth more than $10 billion and the price fell about $25 dollars. I am surprised it did not drop $100 an ounce. That is a strong testament to the liquidity in our futures markets.

The CME said combined financial and commodity futures set a one-day record on Wednesday with 44,516,949 contracts traded. That beat the prior record of 39,567,064 from October 15th, 2014.


The biggest indication portfolio managers had suddenly turned bullish was the spike in the small caps. The Russell 2000 rebounded +125 points since last Thursdays close at 1,157 to close at 1,282 on Friday. That is a gain of 11% in only six days. The index closed only 13 points below its 2015 historic high at 1,295.80. The Russell had refused to even move close to the high over the summer when the other indexes were in rally mode. This was a pure risk on rally.


The sector that took the biggest hit was the firearms sector. Since Trump is solidly pro gun with several initiatives that would reduce firearms regulation, the gun stocks were crushed. Clinton would have put anti-gun judges on the Supreme Court and had said she would regulate guns by executive order and allow manufacturers to be sued by victims. Sturm Ruger (RGR) fell from $64 to $47 in the three days since the election. The idea is that citizens will not be storming gun stores to load up now that regulations will soften.


The economics on Friday were limited to the Consumer Sentiment Survey for November. Sentiment reversed from the -4 point drop to 87.2 in October with a +4.4 point rebound to 91.6 and the highest level since June. The present conditions component rose from 103.2 to 105.9 but it was the laggard of the two components. The expectations component spiked from 76.8 to 82.5 for nearly a +6 point jump. The October reading was the lowest level since September 2014.

The number of respondents expecting economic conditions to improve surged from 35% in October to 44% in November and the highest level since May.

It will be very interesting to see what the next survey says about the second half of November.


The calendar for next week has 13 speeches by Fed members and you can bet they will be setting the stage for a December rate hike. The election is over, the market is exploding higher, earnings were better than expected and the GDP posted an unexpected rise in Q3. At this point, this is a free rate hike for the Fed. There is no downside risk for them and they may start changing their forecasts for 2017.

The CME FedWatch Tool is showing an 81.1% chance of a rate hike in December. That is pretty close to a sure thing in Fed terms.



It is a good thing the market was already in rally mode because there was very little stock news to generate interest on a Friday.

JC Penny (JCP) reported an adjusted loss of 21 cents that matched estimates. It was their 11th consecutive quarterly loss. Revenue of $2.86 billion missed estimates for $2.95 billion. Same store sales fell -0.8% and missed the +2.2% increase analysts expected. The company revised its full year sales forecast to 1-2% from 3-4%. They said same store sales in the current quarter could rise by 2-5%. The CEO said a warmer than normal September and disruptions caused by the roll out of appliance showrooms in 500 stores, hurt sales.


On Thursday after the close Nvidia (NVDA) reported earnings of 94 cents that beat estimates for 69 cents. Revenue was $2.0 billion and analysts were expecting $1.69 billion. Gross margins rose to 59.2%. Revenue in the video game segment rose by 63% to $1.244 billion. Revenue from the datacenter segment almost tripled to $240 million and should rise sharply in the coming quarters as well. The company announced a 22% hike in the dividend to 14 cents and said it would return $1.25 billion to shareholders in fiscal 2018 in dividends and buybacks. Nvidia guided for revenue in the current quarter of $2.1 billion and analysts were expecting $1.69 billion. Nvidia shares spiked 30% on the news.


Disney (DIS) reported earnings of $1.10 compared to estimates for $1.15. Revenue of $13.14 billion missed estimates for $13.47 billion. Shares dipped from $95 to $91 in the afterhour's session but CEO Bob Iger rescued the stock from a loss on Friday. He said the decline in ESPN subscribers had bottomed. He said ESPN grew in 2016 and was expected to continue growing long term. Iger said Disney was rebuilding the subscriber base through "skinny bundles" designed to be delivered over the Internet through Hulu, Sling, DirecTV and others. He said the various providers are very interested in providing ESPN because that programming is a big selling point for their services. Iger also discussed the next wave of box office blockbusters that would be out in 2017. He also said Shanghai Disney had seen more than 4 million visitors and would break even in 2017. His comments lifted the stock off that $91 low to close at $97.68 with a $2.75 gain.


There are three Dow components reporting next week. Those are Home Depot, Cisco Systems and Walmart. The number of earnings reporters has slowed significantly but there are still some recognizable names. Other than the Dow components, Salesforce.com is probably the most watched event.


Alibaba (BABA) said it sold $17.7 billion in goods during its Singles Day promotion on Thursday. That was 32% higher than the 2015 event but did not compare well to the 60% increase in 2015. When Alibaba first held the event in 2009 there were 63 vendors that took part in discounting their prices. This year there were more than 40,000 vendors, with 30,000 international brands. The impact of the event on Alibaba's bottom line is shrinking. Because of the steep discounts, consumers are now waiting weeks or even months before making their purchases on Singles Day in order to save money. That means the one-day volume is rising but only at the cost of shrinking sales in the month leading up to the day. The profits are less from each item sold because of the steep discounts.

In addition, the SEC and Chinese regulators are investigating how Alibaba accounts and reports Singles Day sales and the Chinese regulator warned the company earlier in the week to avoid fabricating sales figures and misleading advertising.


Valeant Pharmaceutical (VRX) may try to clean up its image by changing its name, according to Bill Ackman. The company was previously called Biovail but changed its name to Valeant after it acquired that Canadian company in 2010 and moved its corporate office to Canada. Ackman said several new names had been discussed but no decision had been made.


Crude prices dipped to $43.03 on Friday after OPEC reported it produced a record 33.64 million bpd in October. That was an increase of 240,000 bpd. It would have been worse but Angola's Dalia field is offline for maintenance and their production declined -165,000 bpd. The largest increases came from Libya, Nigeria, Iraq and Iran. In October, Iran increased production by 210,000 bpd, Iraq 88,300 bpd, Libya 167,500 bpd and Nigeria 170,000 bpd. Those are the same nations that have asked to be exempt from any production agreement. You may remember, OPEC said it was initially going to freeze production. Then they said they would cut production to 32.5 mbpd. Now they claim they are trying to get an agreement to cut production to 32.5 to 33.0 mbpd. Notice, the target is rising and the upper limit is near the current production levels so the cut is reverting to a freeze but the four countries with the biggest production increases want to be exempt.

The odds of getting a meaningful production agreement are very low and the odds of having everyone honor the agreement are zero.

OPEC said demand for OPEC crude would average 32.69 mbpd in 2017. That means the 800,000 bpd surplus in September will rise to 950,000 if production remained level and we know that is not going to happen.

The IEA said demand grew by 1.8 mbpd in 2015, 1.2 mbpd in 2016 and is expected to grow by 1.2 mbpd in 2017.

U.S. production rose from 8.522 mbpd to 8.692 mbpd for the week ended on 11/4. That is the highest production since the week of June 10th but still down from the 9.185 mbpd in the same week in 2015.


Active oil rigs rose by +2 to 452 and gas rigs declined -2 to 115. One miscellaneous rig was deactivated for a net loss of -1 rig for the week.

With the price of oil at $43 and falling, the pace of rig activations is going to slow. There are only a few places in the U.S. where drilling is profitable at $40 oil.


 


 

Markets

The Dow futures fell about 1,000 points in two days after the Brexit vote surprised everyone with a win that contradicted the polls. In the presidential election the dip was -976 points from the 8:PM high to the 10:30 low at 17,418. That is now being called the "Trexit" dip.

In my Tuesday night commentary the closing sentence said, "Sit back and relax and be prepared to buy any dip." By the time the market opened on Wednesday the majority of the drop had already been erased with the Dow only down about 75 points and the S&P down -14 at the open. If you bought that dip, you should be a happy camper.


The Dow closed at a four-month low the prior Friday at 17,890. This Friday it closed at a new high at 18,847. That was a 959-point rally or 5.36% in just one week. In any view of this chart, this would be an extremely overbought condition. In normal circumstances traders would mortgaging the farm to short this chart. However, these are not normal conditions.

The investing outlook has changed significantly. Sector rotation is rampant and portfolio managers are scrambling to match their investments to the new reality.

Fortunately, that reality is a long way off and there will be some profit taking as soon as the price chasing ends. The market was heavily shorted going into the election as evidenced by the 9 consecutive days of declines. In theory, most of those shorts should have covered by now but there was still some activity on Friday.

The Dow did waffle Friday morning and spent most of the day in negative territory. By the close, the shorts were covering again. Next week should be a different market. The long-term bias should remain bullish but I expect the volatility to continue as the sector rotation continues.

The Dow chart is broken. The sudden sprint should have left the index winded and I would look for support in the 18,600 range. Until we actually see some decent weakness and watch for support to form, any projection is just a guess.



The Nasdaq Composite struggled to touch 5,300 and managed to make another lower high before dropping back to 5,179 on Friday. The damage was almost entirely in the big cap tech stocks as investors rotated out of those names and into the sectors expected to do well over the next four years. This tech weakness should not last but given the current market environment, it is tough to predict a big cap tech rebound. The composite index closed 100 points below its prior highs.

The Nasdaq 100 big cap index fell significantly to below 4,700 on Thursday. There was a flush of the big cap techs that appeared to be a monster sell program at the open on Thursday. The NDX fell from 4,855 to 4,685, a decline of -170 points in less than two hours. That was a real shock to holders of those stocks. The 4,850 level is now resistance with 4,650 as support.




The S&P spiked to 2,182 at the open on Thursday and then faded because the big cap tech stocks are components of the S&P-500. The decline found support just above 2,150 and the 100-day average at 2,148. This should be a decent support level unless the market decides the rally was in error and really tanks.

If you notice the Brexit rebound back in June. After the three days of gains there were four days of indecision and consolidation before the S&P shot up another 75 points. This is what I am expecting for the coming week. I expect some indecision and consolidation and then another leg higher.

The investing outlook has changed as I explained at the beginning of this commentary. Portfolio managers will continue rotating vast amounts of money into the sectors expected to gain over the next four years.


Anyone looking at the Dow chart above should be worried about adding new longs in this market and I do not blame you. That chart is scary. It is however, just 30 stocks. The broader market as evidenced by the S&P is far less bullish and the last two days have already seen consolidation. I would definitely be a dip buyer and a cautious buyer of stocks that have not rallied significantly over the last week.

 

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Random Thoughts


Wow! Bullish sentiment soared 15.3% for the week that ended on Wednesday. This only included one trading day after the election. The majority came from the neutral camp, which shrunk -10.3% but some of the hard-core bears also converted. This was an amazing reversal showing the election uncertainty is over.



JP Morgan said bond investors lost more than $1.2 trillion last week as a result of the election. The dollar value of the universe of tradable bonds fell from $54.2 trillion to $53.0 trillion. At the same time, the dollar value of global equities rose from $51.5 trillion to $52.3 trillion. On Friday, Deutsche Bank warned the spike in yields and the rise in the dollar will likely unleash the next leg lower for stocks. Somebody is always wrong.

JPM said the reasons behind the Brexit win and the Trump win were the same. Voters were fed up with growing overregulation, taxes and political correctness. They also said market participants had been "de-risking" for the two weeks ahead of the election and suddenly found themselves under invested with the market racing higher. This prompted price chasing in an attempt to catch up and get reinvested again. More than $22 billion flowed into U.S. equity ETFs over the last three days. That was three times more than flowed out in the prior week and the strongest three day streak since January.


Monday November 14th will be the largest super moon since 1948. This will not happen again until the year 2034. The moon will be significantly closer to earth and the light from the moon will be 30% brighter than a normal full moon. The moon will be closest to earth at 6:22 AM ET on Monday morning. However, viewing it Sunday or Monday night will not be appreciably different. Either stay up late on Sunday or set your alarm clocks for Monday morning.


Buy a piece of history that never happened. Newsweek printed and shipped 125,000 magazines celebrating Hillary Clinton's historic presidency. They were so confident that she was going to win they printed the edition and shipped it. There was an immediate recall on Wednesday morning but some had already been sold. If you missed it at the local magazine stand, you can buy one on Ebay for about $225. Newsweek apologized and said they will have a new Trump edition out next week.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices."

James Grant


 



Index Wrap

Risk On

by Jim Brown

Click here to email Jim Brown
The end of election uncertainty turned into a wild and crazy, risk on market.

Investors had been de-risking for the prior two weeks on worries over the election uncertainty. The conventional wisdom called for a Clinton victory, a gridlocked government, and a market rally. As Trump rose in the polls there was worry about a potential Trump win that would cause even more uncertainty over protectionism and extreme trade law changes.

Apparently investors were in shock when it appeared he was going to win and the Dow futures declined over 800 points. When portfolio managers actually thought about the possibility of significantly lower taxes, repatriation of more than $2 trillion dollars and another $1 trillion infrastructure program, they rushed to buy the dip. The Dow went positive shortly after the open and the rest is history with the Dow closing at a new high for the last two sessions.

Analysts believe portfolio managers were under invested because of the uncertainty. Once the market began to move higher they were forced to chase prices as they tried to put cash back to work. Some feel this could continue for weeks because of the sector rotation required to move from dividend paying safety stocks to industrial growth stocks.

The sectors benefitting from the influx of cash include energy, banks, aerospace, defense, materials and mining. Sectors benefitting from the lack of a Clinton presidency include healthcare, drugs, biotechs and again banks. This rebound in these areas powered the markets on huge volume.

The volume on the four days before the election averaged about 7.1 billion shares a day. On the two days after the election, the average was 12.2 billion shares each. Friday calmed slightly with "only" 9.6 billion shares. Those were the highest volume days this year and probably last year as well with the exception of the 15.1 billion share market crash the day after Brexit where the markets lost -3.14%.

The biggest gains were in the small cap stocks. The Russell 2000 gained 10.2% for the week and the S&P-600 gained 10.5%. Banks rose 12.7%, biotechs 17%, and the brokers gained +14.7%.

The Russell has yet to make a new high but it is very close. However, it may be difficult because many small cap stocks rallied even more than the index with 15% to 30% individual gains. Those will have to be consolidated before the index can move significantly higher.


The Biotech Index has significant resistance at 3,475 and after the 17% gain last week that resistance is likely to hold when tested. The sector dodged a bullet with the Trump victory but that does not make them bullet proof.


One of the charts I have tracked here in the past has been the relationship between the High Yield ETF and the S&P-500. The S&P typically follows the HYG and that ETF declined almost 5% over the last two weeks. Obviously, strong buying in the big cap industrials can offset that correlation temporarily but the HYG decline will eventually weigh on the S&P.



The big cap tech stocks were crushed on Thursday in a monster sell program that may have been launched to raise cash for the sector rotation move. The FANG stocks were all weak but some of the techs did rally on Friday. The semiconductor sector rebounded +4% from Thursday's crash and the $SOX is close to a new high. A new high by the $SOX would drag the Nasdaq higher. The $SOX is the head of the Nasdaq snake. Wherever the $SOX goes the Nasdaq will follow. That assumes the biotech sector is not moving in the opposite direction. In recent years the biotechs have assumed a larger roll on the Nasdaq because of their proliferation.


The market rebound lifted many stocks back over their 50-day averages. The percentage of S&P stocks over their average rose from 27% to $53.8% in only three days.


The commodity sector was the only real loser last week as the dollar soared to a ten-month high. If there really is going to be a major infrastructure rebuild program that will help commodities but we are a couple years or more away from seeing that process begin.


I am not going to spend a lot of time in this section this weekend because I covered a lot of charts in the Option Investor commentary. The main point remains, Trump was elected and the market exploded higher. The gains may not be over because of the sector rotation concept as well as the selloff in the bond market. The "great rotation" may have finally begun and bonds/treasuries could continue to decline for the foreseeable future with that money flowing back into equities.

I said last Sunday, "This means Wednesday is more than likely going to be a massively directional day... If Trump wins, we could see the equivalent of a Brexit dip but I believe it would be bought just like we saw in June. That makes a Trump victory a sell the news event but managers will be quick to buy that dip once the smoke clears." I never expected the dip buying to begin at 1:AM Wednesday morning but I am definitely not complaining.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Increasing Bullish Exposure

by Jim Brown

Click here to email Jim Brown

Editors Note:

Picking stocks over the next couple weeks could be a challenge since many are already up 7% to 10% or more while others were crushed in the sector rotation. Determining when that rotation will end is going to be a daily guessing game.

Starting this week I am going to begin shrinking the play descriptions. We are seldom in a position more than 2-3 weeks and most are based on a combination of chart patterns and short-term fundamentals. The long play descriptions are not necessarily required. If we were planning on holding 3-6 months then a deeper understanding of the play would be necessary to provide a basis for holding over any volatility events. If this is not acceptable, please email me and I will adjust based on the number of responses I get.



NEW DIRECTIONAL CALL PLAYS

FB - Facebook - Company Profile

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Buy Jan $125 call, currently $2.91, initial stop loss $114.85.


SMG - Scotts Miracle Grow - Company Profile

We were blown out of this position last week when the stock fell -$8 on no news. This was the same day the big cap techs were crushed. There was significant profit built up in SMG and I suspect this was just sector rotation. The drop to $83 has provided us with a better entry point.

Original Trade Description: November 9th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Buy March $90 call currently $2.75, initial stop loss $83.35.


WDC - Western Digital - Company Profile

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Buy Jan $62.50 call, currently $2.54, initial stop loss $53.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Still Going and Going

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is doing its imitation of the Energizer Bunny. Despite some mixed indexes early in the day, the Dow and Nasdaq recovered at the close to post another gain. The S&P gave back 3 points but we are not going to complain.

The constantly positive market knocked off another one of our put positions but given the monster gains in the call positions we would be happy to repeat that every day next week.



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


SRG - Seritage Growth

The long put position was stopped at $46.15.

YHOO - Yahoo

The long put position was reentered at the open.



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


HON - Honeywell - Company Profile

Comments:

No specific news. New five-week high. Gains are starting to slow.

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.


IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell just keeps going and going and going. The IWM closed within 50 cents of a new high and we are obscenely profitable here. I am going to keep edging the stop loss a little higher until the eventually profit taking appears occurs to stop us out.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, see portfolio graphic for stop loss.


TREE - Lending Tree - Company Profile

Comments:

No specific news. TREE did not even blink with it powered through the resistance at $91.50 for a 5% gain. Outstanding!

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:

Another small gain but I do not think we can expect it to go much higher without some profit taking. I hope I am wrong. The XBI is up +24% since last Thursday.

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.

Position 11/8/16 with a XBI trade at $58

Long Jan $60 call @ $2.37, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

SRG - Seritage Growth Properties - Company Profile

Comments:

No specific news. The market rebound is just too strong and it is lifting all stocks. We were stopped out on the 3% gain.

Original Trade Description: November 7th.

Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. The Company's portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Company description from Reuters.com.

When Seritage was spun off from Sears it held about 230 properties with either a Sears store or a Kmart as the anchor tenant. Almost immediately, Sears began serving notice of intent to terminate leases. In September, Sears notified Seritage it was terminating 17 more properties. These properties are normally older malls with Sears of Kmart as the anchor tenant. Once Sears or Kmart leaves, the malls have a good chance of dying.

Seritage is rapidly remodeling and trying to release these malls and strip centers. However, in their recent earnings they disclosed the average rent before Sears/Kmart terminated was $19.25 per square foot. The average rent they are receiving after those anchor stores leave is now $13.75 per square foot.

There are two big challenges. The first is the death of the mall. Average rents are going to deteriorate until the mall finally closes. Numerous malls have already been shutdown and bulldozed to make way for office buildings of some type. That is not bad for Seritage since each center they own averages about 10 acres. However, they cannot just terminate all the leases just because Sears terminates. They will try to replace the anchor tenant and continue to operate as a mall as long as possible but income will continue to decline.

The second challenge is the current weakness in the Sears/Kmart business. There is a constant stream of rumors that Kmart will file bankruptcy after the holidays. Some distributors are no longer shipping them product for fear of not being paid.

Since the majority of Seritage properties are occupied by Sears/Kmart they are at extreme risk for further declines in those retail businesses.

Earnings Feb 2nd.

Update 11/7/16: Boenning & Scattergood reiterated an underperform rating saying SRG was seriously over valued and would have to raise significantly more capital in order to remodel the 1.7 million square feet of space Sears is terminating in January. They believe SRG is currently valued at 27% over net asset value and that will be worse when they announce a secondary offering.

Monday's market rally lifted Seritage from a 7-month low but shares only managed to gain 26 cents. If the prior decline continues it should return to the lows and test $40 in the weeks ahead. I am recommending an April option to get us past any January closing announcements by Sears.

Position 11//8/16:

Closed 11/11/16: Long April $40 put @ $2.37, exit $1.35, -.85 loss.


VXX - VIX Futures ETF - Company Profile

Comments:

Only a minor decline because of the mixed market.

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:

The Yahoo put position was reloaded at the open. No specific news.

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.

Update 11/10/16: In a filing with the SEC the company admitted it waited 18 months after the hack was initially discovered before researching it so see what was really stolen and the actual number of account records hacked. The filing also said the FBI is researching data supplied from a hacker that includes a significant amount of account information that was not initially thought to be taken in the account. The hacker said he obtained the information on the web and turned it over to the FBI.

The new SEC disclosure contains this clause in the risk section.

"risks that Verizon may assert, or threaten to assert, rights or claims with respect to the Stock Purchase Agreement as a result of facts relating to the Security Incident and may seek to terminate the Stock Purchase Agreement or renegotiate the terms of the Sale transaction on that basis."

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 11/11/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

Previously closed 11/10/16: Long Jan $40 put @ $1.90. Exit 1.96, +.06 gain


YUM - YUM Brands - Company Profile

Comments:

No specific news. It appears the weakness is returning. Down the last two days in a positive market.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.




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