Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/17/2017

Table of Contents

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

Market Wrap

Storm Ahead

by Jim Brown

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Normal storms do not bother the equity market but this storm could cause serious damage.

Market Statistics

The storm the market is afraid of is a Tweet Storm from the president elect. Several times over the last week, the tweets have caused significant fluctuations in equities. Some were good and some were bad. It appears Trump is trying commit suicide by tweet with some of the recent notes attacking his own party. If Trump is to be successful as president he needs to turn his Twitter account over to a rational and political savvy third person who could then change the password on the account to prevent those late night Twitter fights.

With worries growing on which of Trump's policy promises will actually come true the market is losing confidence and he has yet to actually be sworn in as president. Numerous policy divisions have appeared between Trump and his cabinet and now he is attacking the republican tax proposals. Analysts are starting to say the corporate tax cuts to 15% will never pass but maybe 20% or even 25% could be the eventual rate. While 25% is a lot lower than we have today it is far from the 15% rate Trump promised. Stocks with high tax rates that have rallied since the election, are starting to fade as the expected tax windfall shrinks.

The first 100 days could be a series of battles between Trump, congress and the Republican Party. Trump's tweets have been lightning bolts from the blue for many companies as his comments roil expectations. Last week retailers like PVH and Nike crashed after comments about raising import taxes. Today PVH spiked more than 6% and twice the Friday decline on Trump comments that the republican proposal, which would have taxed all imports, was "too complicated." Trump wants to charge a punitive tax on imports from companies that have left the U.S. but ship products back into the country. He tweeted over the weekend he wants to put a 35% tariff on German cars.

Some people claim this is the way Trump negotiates. He throws out an obscene number then negotiates to a lower rate. The problem with this strategy as president is that he is putting it out through tweets that rock the equities in that sector and that moves the markets. A private businessman can use that public strategy but a president needs to be more aware of the market impact and the impact of expectations around the world.

Several analysts have said that Trump's tweets could increase in quantity and severity this week before he is actually sworn into office. They claim he is trying to develop some momentum for his positions so he can hit the ground running next week. If he does not learn the art of subtlety very soon he may be running into a brick wall in the weeks ahead. While I commend his efforts, he could be his own worst enemy and that could produce some rocky markets after the inauguration.

Historically, the market is not kind to a president in the first 30 days after the inauguration. In the table below, which covers the last 11 presidents, the S&P-500 declined an average of -2.59% in the first 30 days of a presidency. This does not take into account any pre inauguration market gains and losses. Given our recent post election gains, it would suggest any decline could be intensified if it appears Trump's promises/policies are not going to be immediately implemented. There is a lot of risk that many of them will be blunted severely and/or face a tough uphill battle. That suggests future tweet storms against anything that stands in his way. Picking a twitter fight with Boeing over Air Force One is a lot different than picking a fight with China's President Xi over islands in the South China Sea, currency manipulation or tariffs on Chinese imports. There could be significant ramifications from Twitter wars with other foreign leaders.

Trump said over the weekend he might leave the inauguration day festivities early so he can get a head start on making changes. We are entering a new and uncharted world in presidential politics and that could be unsettling for the market.

Data from SPGMarketIntel

The only material economic report on Tuesday was the NY Empire State Manufacturing Survey for January. The headline declined from 9.0 to 6.5. However, the 9.0 from December was also revised lower to 7.6 so it was a double dose of bad news. December was still the highest level since April. Unfortunately, new orders declined from 10.4 to 3.1 but all other components improved. The backorder component rose from -10.4 to -1.7 and employment improved from -12.2 to -1.7 as well. Inventories improved from -13.9 to +2.5.

On the negative side the prices paid component rose from 22.6 to 36.1 indicating inflation is accelerating. That component was 15.5 in November. Manufacturers are passing on some of the price hikes with the prices received component rising from 3.5 to 17.6. With inflation accelerating it could limit expansion plans and reduce employment growth expectations.



The calendar for Wednesday has the Fed Beige Book as the most important report followed by the Housing Market Index and Consumer Price Index. If we start to see consumer prices rising as fast as the NY manufacturing report above, it could kick the Fed into high gear on their rate hike plan. That would obviously be market negative.

The Philly Fed Survey on Thursday is the next most important report but it will probably be ignored in the build up to the inauguration on Friday.


The Q4 earnings cycle was the focus of attention this morning as another group of companies confessed and issued guidance. Morgan Stanley (MS) posted earnings of 81 cents that beat estimates for 65 cents. Bond trading revenue more than doubled to $1.47 billion. Equity trading revenue rose 7.3% to $1.95 billion. Forecasts were for $1.0 billion and $1.84 billion respectively. Total revenue rose 17% to $9.02 billion, which also beat estimates for $8.48 billion. Shares fell -4% with the entire financial sector declining 2% on worries Trump's deregulation would not occur in the near future and tax rates would not decline as much as promised.


Dow component UnitedHealth (UNH) reported earnings of $2.11 compared to estimates for $2.07. Revenue of $47.5 billion beat estimates for $46.8 billion. Revenues from the UnitedHealthcare segment rose 15.5% to $38.9 billion. The Optum segment saw revenues rise 1.4% to $22.2 billion with a 23.7% rise for the full year to $83.6 billion. Total members rose from 46.4 million to 48.59 million. The company affirmed its guidance for 2017 for revenue of $197-$199 billion and earnings of $9.30-$9.60 per share on an adjusted basis. Shares gapped down from $162 to $157 at the open but rebounded to close at $160.62.


After the bell, CSX Corp (CSX) reported earnings of 49 cents and analysts expected 50 cents. Revenue rose 9% to $3.04 billion thanks to an extra week in the quarter. Overall volume declined -1% to 1.63 million units and coal volumes rose 3%. Dollar revenue from coal rose 16%. Automobile shipments were strong but commodity shipments continued to be weak. The company said headwinds from low commodity prices were impacting the number of shipments and that would continue. They are also suffering from the strong dollar which is impacting exports and it will take another six months for the impact to be fully felt by CSX. Shares fell $1.50 in afterhours to $36.50.


United Airlines (UAL) reported earnings of $1.78 compared to estimates for $1.73. Revenue of $9.05 billion matched estimates. Revenue per seat mile declined -1.6%. For the full year, United repurchased $2.6 billion in stock and has $1.8 billion left on the current authorization. They forecast Q1 revenues to be flat and analysts were expecting 41 cents and $8.28 billion. Shares declined $1 in afterhours.


Gigamon (GIMO) warned after the close that earnings would be in the 35-37 cent range compared to guidance for 36-38 cents. Revenue of $84.5-$85.0 million would be well below guidance of $91-$93 million. Shares fell -22% in afterhours. They said several major customers had deferred purchase decisions until 2017.


Walmart (WMT) tried to get on the good side of Trump by announcing it was going to add 10,000 new retail jobs as it opens new stores. The new construction would employ 24,000 workers over the next two years. The store plans had been previously announced but the announcement touting the new jobs was clearly an effort to stay out of the future Trump tweet storm. Amazon did the same thing last week when it said it was adding 100,000 workers over the next 18 months. The Walmart announcement did halt a two-week slide in the stock price.


GM announced a planned investment of $1 billion in U.S. factories and the addition of more than 1,000 jobs. GM has been under fire from Trump for manufacturing cars in Mexico. Shares were flat on the day.

Tiffany (TIF) said comparable same store sales declined -4% during the holiday shopping period. They blamed this in part to a 14% decline in sales at the Fifth Avenue store in New York because of traffic disruptions around Trump Tower after the election. The company said they do not anticipate a significant improvement in economic conditions in 2017.


JC Penny's (JCP) agreed to allow Nike (NKE) to open Nike Outlets in 600 of Penny's stores. The store within a store will occupy 500 sqft in the men's department and will feature "pumped up visual elements." They will feature an expanded assortment of performance and "athleisure" apparel and accessories. Nike shares gained slightly on the news.


Disney (DIS) was upgraded from neutral to buy at Goldman Sachs. The bank said the film offerings for 2018 were going to be the best slate ever. They also have a new park on the horizon and they will benefit from a lower tax rate and the ability to repatriate cash from overseas. Shares were flat for the day.

Nordstrom (JWN) was cut from buy to hold by Stifel Nicolaus on expectations for lower holiday sales. Shares actually gained 18 cents.

Reynolds American (RAI) finally agreed to a deal to be acquired by British American Tobacco for $29.44 per share plus half a BAT share. That was $2 billion over an initial offer made in October. Shares gained 3%.


Clayton Williams Energy (CWEI) agreed to be acquired by Noble Energy (NBL) for $3.2 billion. This greatly expands Noble's acreage positions in the Delaware Basin portion of the Permian. This provides Noble with 120,000 net acres and 4,200 drilling locations with more than 2 billion Boe of net unrisked resource according to Noble. The cash and stock deal was valued at $138.97 per CWEI share as of Friday's close. Shares spiked to $145 because Noble shares gained $2.66 on the announcement.


Markets

The major indexes were really mixed today with the Dow and S&P down only 0.29% while the Russell 2000 fell -1.43%. The small cap S&P-600 fell -1.36% and the Russell Microcap index was down -1.8% so the weakness was definitely in the smaller stocks. The big caps continue to be a storehouse of cash for fund managers but they are bailing from the low liquidity positions. The Russell 2000 closed at a five-week low.


Despite the weakness in the small caps, the rest of the market was choppy. The big cap indexes gapped down at the open on events in Europe and Asia but there was no panic. The indexes trades sideways most of the day with another dip at 2:PM to the lows for the day. Dip buyers were ready but the volume was weak as though conviction was fading.

The S&P did not close far from its highs and no harm was done. This was just a consolidation day for the big cap indexes. The S&P is not showing any weakness and without a drop below 2,250 the movements are just noise.


The Dow declined to 19,775 intraday and the bottom of its recent range. The 19,800 level is the psychological bottom but the intraday declines have penetrated that level several times since mid December only to rebound by day's end.

Goldman and JP Morgan were the biggest losers as the financial sector lost -2%. JP Morgan was downgraded by KBW from outperform to market perform. Shares fell -$3 on the downgrade to knock more than 20 points off the Dow.

Goldman's $8.56 loss knocked 56 points off the Dow. Goldman was due for a major bout of profit taking and this could be the start.

Note that the support on Goldman mimics the support on the Dow.




The Nasdaq dip was just a hiccup after a string of gains. The Nasdaq is now up 8 of the last 10 days so it is hard to say the selling was material. The big cap tech stocks were all on the wrong side of the winner/sinner graphic today. The biotech sector was also negative with a -2.31% decline on Trump fears. Despite the big caps and the biotechs declining the Nasdaq barely even stumbled.



The Dow transports have given up some of their gains from November thanks to worries about cross border taxes and the impact of the strong dollar. They are still holding the majority of their gains but the 9,000 level is in danger.


The rest of this week could be rocky but the rebound today suggests the dip buyers are still alive and well. Whether they will continue to buy the dips right up until the start of the inauguration process is unknown. There is event risk but there is almost no sign of that risk in the market. The VIX gained only 0.64 to 11.87 today despite the down market. Given the risk and the market weakness, we should have seen a more significant spike. Investors remain complacent as though Trump was going to touch the bleachers on Capitol Hill and turn them into gold.


When investors are the most complacent is when the biggest declines normally appear. Let's hope this is not one of those times.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Bleacher Seats

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the big event on Friday, the best observation position could be the bleacher seats. We do not know how the market is going to react between now and the close of business on Friday. Anything is possible and the headline flow is only going to accelerate. With the Russell 2000 closing at a five-week low we could be seeing the early signs of a sell the news move.

There is no reason to put money to work in this market ahead of the event. I scanned what few companies there are that do not report earnings over the next three weeks and there were none that just screamed "buy me." There are only three days left in this week and next week could see an entirely different market. Let's wait and see that Friday brings before diving into the market. I will run my scans again on Wednesday and see if anything changed.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Conviction Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The intraday dip was bought but on less conviction and lower volume. Buyer conviction appears to be fading but one day does not make a trend. The Dow was down over 100 points intraday and recovered only slightly to close with a loss of 59 points. The S&P was slightly more bullish with a close nearer the highs for the day but still a 7 point loss.

The Russell 2000 was the canary today with the lowest close in five-weeks and below prior support. This could be the bearish signal that weakens the overall market.



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


GATX - GATX Corp

Long put position was closed at the open.

SPY - S&P-500 ETF

Long call recommendation remains unopened until $223.25.



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BULLISH Play Updates

SPY - S&P-500 ETF - ETF Profile

Comments:

Only a minor decline to start the week. Three days left for a pre inauguration decline.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short term position using February options just in case any potential dip turns into a crash. The estimated option premium should be less than $2.

With a SPY trade at $223.25

Buy Feb $225 call, estimated to be $2.00 or less, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

The Dow was down over 100 points intraday and closed at the bottom of its recent range. The five-week range is still intact but today suggests a breakdown could be imminent.

Original Trade Description: December 7th

The SPDR Dow Jones® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


FINL - Finish Line - Company Profile

Comments:

No specific news. Shares spiked slightly in a negative market. Possibly dip buyers looking for an oversold stock. There was positive news that Nike would open 600 stores inside existing JC Pennys stored but that should actually be negative for FINL.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


GATX - GATX Corporation - Company Profile

Comments:

No specific news. We exited at the open for a minor gain. I believe shares are going to continue lower. We may enter this position again after earnings on Thursday.

Original Trade Description: December 15th

GATX Corporation leases, operates, manages, and remarkets assets in the rail and marine markets in North America and internationally. The company operates in four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. The Rail North America segment primarily leases railcars and locomotive, as well as other ancillary services. This segment also offers repair, maintenance, modification, and regulatory compliance services on the railcar fleet. The Rail International segment leases railcars, as well as offers repair, regulatory compliance, and modernization work for railcars. The ASC segment operates a fleet of vessels that provide waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for steel makers, automobile manufacturing, electricity generation, and non-residential construction markets. The Portfolio Management segment is involved in leasing, asset remarketing, and marine operations, as well as manages portfolios of assets for third parties. As of December 31, 2015, it operated a fleet of 17 vessels; a fleet of approximately 106,100 cars; a fleet of 18,400 boxcars; and a fleet of 611 older four-axle and 26 six-axle locomotives. Company description from FinViz.com.

There has been no news since the company announced a 40-cent dividend on Oct 28th. The dividend is payable on Dec 31st to holders on Dec 15th. That is today. That means nobody else is going to be buying the shares to get the dividend.

Earnings Jan 19th.

GATX has rallied 69% since the election. I can only assume it was because of the rally in the Dow Transports in anticipation of a better economy in 2017. There is no current fundamental reason for a 69% rally and odds are good once the stock begins to roll over with the market it could fall very hard. Apparently other investors believe the same way since the only put strike with any volume is the January 60 puts. There is more volume in that one strike than all the other strikes combined.

Update 1/12/17: GATX was downgraded from hold to sell by Stifel Nicholas with a $49 price target.

Position 12/16/15:

Closed 1/17/17: Long Jan $60 put @ $2.35, exit $3.20, +/85 gain.


LB - L Brands - ETF Profile

Comments:

No specific news. Shares spiked at the open to give us a slightly better entry. I looked at news on the majority of retailers and could find nothing to cause the spike.

Original Trade Description: January 14th

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.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.




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