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Newsletter

Daily Newsletter, Saturday, 4/1/2017

Table of Contents

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

Market Wrap

Window Dressing Over

by Jim Brown

Click here to email Jim Brown

The first quarter is in the books and window dressing on Wed/Thr is behind us.

Weekly Statistics

Friday Statistics

I think there were still some shenanigans underway on Friday to try and keep certain stocks pinned to their recent highs but managers lost control ahead of the close. The Dow and S&P plunged sharply in the last 20 minutes as traders tried to get in front of potential window undressing next week.

The S&P recovered from an opening drop to 2,362 to trade positive intraday but a burst of selling at 1:30 and another surge at 3:30 knocked 6 points off the index each time. The fund managers were not able to hold the S&P at its highs for the end of the quarter.

The Russell 2000 and the S&P-600 were the strongest indexes for the day but they also saw a sharp sell off at the close.



For the first quarter of 2017 the Dow gained 4.5%, Nasdaq Composite +9.8%, Nasdaq 100 +11.8%, S&P-500 +5.5% and Russell 2000 +2.3%. It was definitely a big cap tech quarter with more than twice the gains of the Dow and S&P. It was the best quarter for the market since Q4-2015.

The Semiconductor sector gained 11.6%, biotechs +16%, housing sector +12% but the banks just barely broke even at +0.3%. Oil declined -5.8% and the energy sector -6.8%.

Volume for the last week of the quarter declined with Wed/Thr at 5.8 billion shares each and the average for the week at only about 6.1 billion shares. The indexes all posted a gain for the week but it was minimal and there was no conviction. After setting a new closing high on March 1st, the Dow actually lost -149 points for the month of March and the first monthly loss since October.

The economic reports on Friday were just as lackluster as the market. The Consumer Sentiment for March came in a 96.9 and slightly below the prior reading at 97.6. The present conditions component rose from 111.5 to 113.2 and the expectations component was flat at 86.5, down from the high of 90.3 in January. This report was a long way from the blowout in Consumer Confidence earlier in the week.


Personal income for February rose +0.4% compared to the +0.5% gain in January. Income growth has been relatively steady over the last eight months averaging about 0.4%. Higher minimum wages that took effect in 19 states has helped lift the national average.

Personal spending declined -0.1% after a -0.2% decline in January. This was the largest two-month decline since the recession. The personal savings rate rose from 5.4% to 5.6%.

The drop in personal spending caused a sharp drop in the Atlanta Fed real time GDPNow forecast for Q1 from 1.3% to 0.9% growth. The forecast had spiked from 0.9% to 1.3% since March 22nd on positive economic reports but that came to a screeching halt on Friday when those gains were erased. For reference, the forecast was for 3.4% Q1 growth back on February 1st.


We have a busy calendar for next week with a lot of reports and headlined by the payroll numbers. The ADP forecast is for a decline from 298,000 to 190,000 jobs for March. The Nonfarm Payrolls are expected to decline from 235,000 to 190,000. About the only thing guaranteed is that the prior nonfarm number will see a stiff revision. Everything else is just a coin toss. We saw that last month when analysts missed the ADP estimate by roughly 100,000 jobs.

The FOMC minutes will also be a key event since the Fed raised rates, analysts will want to see how close they were to a half point hike or how likely the odds are for a June hike.

The national ISM Manufacturing Index is expected to show a slight decline from 57.7 to 57.3.

On Friday, the Senate is expected to vote to confirm Neil Gorsuch for the Supreme Court. That vote was delayed until this week and there is no telling if/when it will actually occur. It has to be this week because the Senate is going on Easter recess until April 21st. The democrats are still vowing to block the nomination and there is going to be a battle. Voting for Gorsuch specifically is not an economic issue. It is the battle between the parties that will cause trouble. With the fight over government funding and the debt ceiling the week after their recess, any lingering hostility from the Gorsuch vote will make the debt ceiling vote even tougher.


In stock news, Blackberry (BBRY) reported adjusted earnings of 4 cents that beat estimates for a loss of 1 cent. Revenue of $286 million easily beat estimates for $186 million. Software revenue rose to $193 million and that line item alone beat estimates for the entire company. Blackberry is trying to become a software and services company rather than a hardware supplier. For the full year, they produced $640 million in software revenue. Blackberry has outsourced all phone production to other companies to further reduce costs. They ended the quarter with $1.7 billion in cash.

The company said it expects to be profitable for all of FY 2018, which began in March. Gross margins were around 60% and they expect those to rise to 70%. They are heavily involved in developing software for self-driving cars and have a partnership with Ford involving in car connectivity. They also have a suite of security-focused software products and are developing operating systems for guided missiles. The CEO said we could see Blackberry branded medical devices showing up soon.


Toshiba won shareholder approval to sell its flash memory unit and there is a feeding frenzy ahead of the bid closing scheduled for next week. Broadcom (AVGO) and PE firm Silverlake Partners have offered $17.9 billion. However, there are nine other bidders including Western Digital (WDC), Micron (MU) and Hynix. The winner gets to enter the very competitive Nand flash memory market. Currently there is a shortage of memory and Micron reported prices rose around 20% last quarter. Hewlett Packard warned earnings would suffer for all of 2017 because of the shortage and the higher prices they were being forced to pay. Some analysts caution we could be nearing a top in the Nand business because shortages always cause manufacturers to add extra capacity and that could produce a surplus in 2018. Others claim the surge in Internet of Things devices and cloud server farms will continue to cause rising demand.

With WDC bidding as well, you can bet that Toshiba will get the best price for their business. WDC is riding the wave of rising memory prices and shares are at a 52-week high.



Johnson & Johnson (JNJ) said their $30 billion tender for Swiss biotech firm Actelion was a success after shareholders tendered 73.25% of the outstanding shares. JNJ said they expect the deal to close in the second quarter because the transaction has already been cleared by the U.S. and was on track in the EU. They plan on spinning out Actelion's research and development segment into a separate business called Idorsia Ltd. The main business will be added to JNJ's Swiss company Janssen, to expand the range of medicines it produces. Actelion has 15 promising treatments in its pipeline.

JNJ is well off its 2017 highs and has been a drag on the Dow for the last two weeks.


Apple (AAPL) won a confusing case in Australia regarding an attempt by banks to use Apple's iPhone payment technology without using Apple Pay. Four large Australian banks had sued to gain access to Apple's near-field communication technology (NFC) so they could add their own tap and pay apps. The court ruled in favor of Apple in what could have global implications. The Australian tap and go market is worth about $85 billion a year.

Competitor Android allows companies to use its NFC technology but Apple does not want to open that door on the iPhone. Obviously, they would like every iPhone user to have Apple Pay as their only option.

Canaccord Genuity upgraded their price target on Apple shares from $154 to $165 saying the excitement was building for the upcoming iPhone 8. The analyst said the age of existing iPhones plus the number of new features expected should provide a very strong upgrade cycle that will last long into 2018. Canaccord said they believe the iPhone installed base of more than 570 million users will provide a strong upgrade cycle for those loyal to Apple and holding an older generation phone. The analyst said the Samsung Galaxy S8 would not cause loyal Apple users to switch to an Android product this close to the iPhone 8 launch but it would cause an upgrade cycle among current Android users.


McDonalds (MCD) shares are holding at new highs after they announced they were going to use fresh beef in their Quarter Pounder burger in order to better compete with chains like Shake Shack and others. McDonalds has been using a frozen compressed burger patty since 1973. The new burgers will be cooked to order and not precooked and kept warm like the existing burgers. It will be a slow process to roll this out to all their U.S. stores but they expect to be completed by mid-2018. This will only apply to the Quarter Pounder. All the other burgers will remain frozen.

They recently said they were moving to cage free eggs with stricter antibiotic policies and they eliminated high-fructose corn syrup from "some" of their buns along with removing artificial preservatives from the chicken McNugget. They are fighting a multiyear decline in traffic because of the rise of the premium hamburger chains. The company said it had lost 500 million customers since 2012 and same store sales fell -2.9% in Q4. The menu overhaul is going to cost them $1.7 billion. They are also testing mobile ordering in California with plans to launch another pilot in Spokane Washington.


TRC Company Inc (TRR) shares spiked 46% on news it had entered into an agreement with New Mountain Capital to sell itself for $17.55 per share, a 47% premium to Thursday's close. The company is an engineering, environmental consulting and construction management firm that employs 4,100 with 120 offices.


FMC Corp (FMC) shares spiked 13% after the company said it was acquiring a significant portion of DuPont's Crop Protection business. DuPont is required to divest the business by an EU ruling in order to merge with Dow Chemical. DuPont will acquire FMC Health and Nutrition and FMC will pay DuPont $1.2 billion. FMC said the transactions will be immediately accretive upon closing. After closing FMC Agricultural Solutions will become the fifth largest crop protection chemical company in the world with revenue of $3.8 billion.


Amazon (AMZN) shares exploded higher last week after Loop Capital released a bullish research note and a $1,100 price target. That is the third highest of the 46 analysts that cover the stock. The analyst said Amazon will continue to dominate the retail market and Amazon Web Services will eventually be spun off for a potential value of more than $200 billion. Barclay's initiated coverage on Wednesday with a $1,120 price target. Stifel has $1,025, Goldman $1,050 and Credit Suisse $1,050.


Forward Pharma (FWP) fell sharply on Friday after Biogen (BIIB) won a patent victory over the active ingredient in their competing multiple sclerosis treatments. Forward had won several patent fights against Biogen and demanded royalties from that company on Tecfidera. Biogen tried to buy the patent for $1.25 billion in January but Forward refused to accept it. Biogen's win could free them to market Tecfidera without any restrictions. Since Forward's market cap is only $1 billion maybe they should have accepted the January offer. Forward plans to appeal the verdict.


In another patent case, a district court invalidated four patents on a multiple sclerosis drug named Ampyra marketed by Acorda Therapeutics (ACOR). The patents were related to the drug delivery mechanism. One patent for an extended release version was upheld. The invalidated patents mean generic competition can begin almost immediately. Teva Pharmaceuticals (TEVA) and Roxane Labratories are two of ten companies already building generic versions. Ampyra was responsible for 90% of Acorda revenue in 2016 at $519 million. Acorda expects to appeal the decision.


Crude prices helped lift the market late in the week after there was a smaller than expected build in inventories, Libyan production was interrupted and OPEC continued to talk about the potential for extending the current production cuts. WTI bounced exactly from the longer-term uptrend support ahead of the refinery restart period.

Last week refinery utilization jumped 2% to 89.3% for the second 2% weekly gain in a row. That is a multi-month high and shows the refiners are starting production on summer fuel blends. Crude inventories rose only 900,000 barrels and should begin to decline over the next two weeks and that decline trend will last until July.

U.S. production rose 20,000 bpd to 9.15 million bpd but the big news was the jump in gasoline demand from the late winter lows to 9.52 million bpd and we are not even really into spring yet. Unfortunately, with crude prices rising back towards $55, the price of gasoline is also going to be rising sharply.



Rig activations continue to surge with 15 rigs added last week. With the latest gains, active rigs have now doubled the level from last May.


Markets

One week a quarter, window dressing definitely impacts the markets and that was last week. Typically, there is some undressing the following week but this quarter could be different. Factset is forecasting the earnings growth rate for Q1 at 9.1% and that would be the highest growth since Q4-2011 at 11.6%. This anticipated rate is down from the forecast of 12.5% on December 31st, but still an outstanding number.

For Q1, 79 S&P companies have issued negative earnings guidance and 32 have issued positive guidance. Seventeen companies have already reported Q1 earnings and 13 beat earnings estimates and 9 beat revenue estimates.

The worst sector for negative guidance has been consumer discretionary with 20 companies warning and only 2 companies providing positive guidance. The second most came from technology with 18 warnings but this sector also had the most companies giving positive guidance at 19.

Since the start of Q1 the earnings forecast has declined -3.6% from $30.59 to $29.49. This is actually a smaller decline than the average of -4.5% for the last four quarters. With earnings estimates declining and the S&P rising the PE ratio has risen to 17.6.

The S&P managed to squeeze back over resistance at 2,360 but only slightly. On Friday, the index dipped 6 points to close at 2,362 and technically over that level, which could once again be recognized as support.

The March 1st closing high was 2,396 and those 34 points between Friday's close and a new high are going to be very tough to achieve. There is now resistance at 2370, 2388 and 2396. With many traders still expecting a decline, there will be an active group shorting every minor blip higher. In some ways that is good because it causes repeated short covering if the market does not roll over.


The Dow has equivalent resistance at 20,750, 20,800, 21,000 and 21,115 which was the March 1st closing high. The Dow shook off some strong declines in several components to rebound from the converging uptrend support at 20,500 on Monday. The opening drop on Monday gave the bears every opportunity to create a real decline but they were unsuccessful. Whether the rebound came from a surge of dip buying or this was the beginning of the window dressing move, we may never know. If the market craters early next week, we could surmise the prior Monday rebound was window dressing.

The Dow remains the weakest index and it needs to push through resistance at the 20,800 level to rebuild some confidence in the large cap stocks.



The Nasdaq Composite closed at a new high at 5,914 on Thursday and gave back only 2.6 points on Friday. I suspect this was definitely window dressing because the large cap techs have been so strong recently, many portfolio managers wanted to keep them pinned at their highs for quarter end. Next week will be a real test for the big caps. Some portfolio managers may not want to wait around for the next four weeks in hopes of a big pre earnings rally since April has such a strong record of market volatility. Portfolio managers have massive profits at risk in the big cap tech stocks and the road ahead could be filled with potholes.




The small cap indexes rallied all week and the Russell 2000 closed just below strong resistance at 1,388. The seven consecutive days of gains came after a triple test of support at 1,340. This appeared to be rotation out of big caps into small caps and strongly suggests it was related to end of quarter window dressing. Portfolio managers not only want to show they are in the big cap winners but have a broad portfolio of small cap hopefuls as well. The performance of the Russell next week will be key in determining if this was real buying for the future or simply cosmetic surgery ahead of quarter end.


If the coming week is positive for the market then I would expect the following week to be positive as well. Once lawmakers return from the Easter recess, there is real danger of a Washington disaster. Also, the week after April 15th is typically rocky.

The government funding runs out on April 28th and lawmakers have to deal not only with the funding but also the debt ceiling limitations. The republican conservative caucus is going to be another sticking point and democrats will be looking to block anything republicans put forth. This makes the last week of April very risky for the market. It would also suggest investors may not want to be placing big bets ahead of April 15th.



Random Thoughts


The prior week's 4.1% bounce in bullish sentiment did not last long. Those same switchers appear to have bounced back to the bearish camp to raise that level to 37.4%. That means 69.8% of investors do not expect the market to move higher this week. On a contrarian basis that means an unexpected rally could be fueled by those investors running back into the market.

Last week results


Consumer spending has declined for the last two months. Retailers reported an ugly holiday shopping season. The health of the sector is not improving. Nine retailers have filed bankruptcy in 2017. That is the same number that filed bankruptcy in all of 2016. That is half the number that filed in 2009 at the depths of the recession.

The number of brick and mortar stores is dwindling but there is still an extreme surplus. Consumers are not going to the malls or the strip malls. They are shopping online for the majority of their goods.

The number of retailers in trouble but have not yet filed bankruptcy is also at the highest level since the recession. Payless is rumored to be closing 500 stores ahead of a bankruptcy filing. Bebe Stores is also rumored to be preparing to file. Sports Authority closed 460 stores and went out of business. Aeropostale closed 600 stores. Macy's, JC Penny's, Sears, Kmart, GameStop and Abercrombie & Fitch are also closing stores.

Moody's said the following stores are in distress and could end up liquidating or restructuring. The analyst said there is a whopping $3.7 billion in debt on these companies that matures over the next five years.

99 Cent Only, Bon-Ton, Charming Charlie, J Crew, Claire's Stores, David's Bridal, Savers, Gymboree, Totes, Nine West, NYDJ Apparel, Rue21, Sears, Toms Shoes, Tops and True Religion.

So far in 2017, these retailers have filed bankruptcy.

Limited Stores
Gordmans Stores
Gander Mountain
Radioshack
Wet Seal
Eastern Outfitters
BCBG Max
HHGregg

Sears is not expected to make it through 2017 despite recent stock purchases by the CEO and the largest stockholder, Bruce Berkowitz.

Target and JC Penny are expected to gain market share from the bankruptcies and store closings of their competitors. However, the one retailer gaining market share on everyone is still Amazon with revenue rising by 20% a year. Home Depot and Costco are the only stores thought to be Amazon proof but Amazon is still squeezing them on any item that can be shipped by UPS. Best Buy has toughened up after nearly going out of business a couple years ago and they are surviving after a tough restructuring process.

Remember the first retailer Amazon targeted? Barnes and Noble books (BKS) is still alive and operating retail bookstores. Now Amazon is experimenting with its own retail locations as well as retail grocery stores. Retail is cyclical and what is hot today may not be hot tomorrow. One of the biggest losers of the current retail recession is the malls. They are closing up by the hundreds as anchor tenants leave and the specialty stores disappear. Nobody likes to shop in a mall with a lot of vacancies. It depresses shoppers and depressed shoppers spend less and shop less at those locations. That forces retail prices lower, reduces profit margins and drives more companies out of business leading to more vacancies.

Shopping center REITS like Seritage Growth Properties are in trouble. Long term there will be more vacancies than they can handle and the properties will eventually be bulldozed and turned into office buildings or condos. That is a tough journey of ever decreasing returns until that final decision is made.

In January the giant 1.1 million square foot Galleria Mall in Pittsburgh, was sold out of foreclosure for $100 million. Wells Fargo held the mortgage and was the only bidder. The mall was built in 2005 but was recently appraised for only $11 million. It was only 55% occupied in December. REITS like Seritage own more than 100 of these types of properties but since Sears or Kmart was the anchor tenant in the Seritage malls, they are not as new and in far worse areas. I would not want to be a retailer or a mall owner in this environment.



There is a new 50-Cent making headlines. I am not talking about rapper Curtis James Jackson III, known professionally as 50 Cent. There is a new, unknown trader spending a fortune in VIX calls at 50 cents each. While that sounds like a miniscule amount of money, he or she has spent $90 million buying VIX calls at that level. Traders are now calling the unnamed trader 50 Cent.

Basically, every day the trader comes in and buys VIX calls that are priced at 50 cents. The strike does not appear material just as long as the premium is 50 cents. He recently purchased 50,000 of the May 21 calls at 49 cents or $2.5 million in premium. Unless the VIX spikes to a five-month high of 21, those calls will expire worthless at expiration. Obviously, a sharp spike that did not hit 21 could also inflate the premium if he was prepared to jump out at the right time. On the same day, 15,000 May 20 calls were purchased at 51 cents and 10,000 additional May $21 calls at 47 cents.

Option trackers claim he has spent about $90 million in premium and options costing $55 million have already expired worthless. Analysts claim total open interest in VIX calls has risen to an all time high and the massive call buying could actually be dampening volatility. Since it is hard to answer strategy questions simply by looking at one set of trades we do not really know if 50 Cent is losing money or simply hedging a massive portfolio. He could also be selling VXX futures and using the VIX options as a hedge against the short futures trade. We may never know who is pulling the trigger on these trades but he does have deep pockets. Eventually a volatility event could occur and we will be wishing we had followed his trades.



Speed of Change

In 1998, Kodak had 170,000 employees and sold 85% of all photo paper worldwide. Within just a few years, their business model disappeared and they went bankrupt. What happened to Kodak will happen in a lot of industries in the next 10 year - and most people do not see it coming.

Did you think in 1998 that 3 years later you would never take pictures on paper film again? Yet digital cameras were invented in 1975.

The first ones only had 10,000 pixels, but followed Moore's law. Today's average cameras have 24 million pixels. The iPhone 7 can take a panoramic picture with 63 million pixels. Entire movies have been shot with smartphone cameras. One hour photo processing locations have disappeared.

So as with all exponential technologies, it was a disappointment for a long time, before it became far superior and then became mainstream in only a few short years.

It will now happen with Artificial Intelligence, health, autonomous and electric cars, education, 3D printing, agriculture and jobs.

Welcome to the 4th Industrial Revolution. Welcome to the Exponential Age.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A government big enough to give you everything you want, is strong enough to take everything you have."

Thomas Jefferson


 

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Index Wrap

Volatility Ahead

by Jim Brown

Click here to email Jim Brown
April trading is typically interrupted by bouts of volatility but no material declines. This year may be different.

There are multiple forces that manipulate trading in April. The quarter end window dressing can be withdrawn in the first week if earnings are not expected to be good. That should not be a problem this year since Q1 earnings will show close to 10% growth. Portfolio managers should be interested in holding positions ahead of earnings on expectations of a continued climb.

In normal years, there is a bout of volatility immediately before and after April 15th as money is extracted to pay taxes. This year could be a little stronger than normal because of the big gains in Q4. This tax payment dip is normally short in duration and provides a buying opportunity.

This year there is an additional complication. The last week of April, when the biggest flow of earnings reporting begins, is also the week that lawmakers will be fighting over funding the government and raising the debt ceiling. With the current hostility in Washington, anything and everything, including government shutdown is possible. While I would like to think calmer minds will prevail, that would probably be an over optimistic view.

Last week was powered by window dressing or at least that is what the charts are suggesting. Assuming everyone does not run for the exits on Monday, the next two weeks should be relatively calm. There are some economic reports that could be ignored and a relatively light calendar of Fedspeak.

The next two weeks should be highlighted by pre-earnings announcements. We have not had any major warnings and the individual news has been positive for the most part. This could fuel any ramp into the actual earnings report cycle, which kicks off on the 13th with Citi, JP Morgan and Wells Fargo. If there was going to be a selling event, I would target Friday the 14th.

Obviously, all those comments above are just speculation based on years of events. No two years are ever alike so it is up to us to plan for the worst and hope for the best.

The S&P has plenty of resistance to fight if the market attempts to move higher. The rebound from last week just barely moved over prior support at 2,360 and the close was 34 points below the March 1st high. With the S&P closing almost exactly in the middle of its recent range, it could head in either direction. Technically the chart is still negative until the downtrend resistance has been broken. If last week was just a window dressing week then we should know by the close on Tuesday.


The Dow remains the weakest index with two clear lines of resistance. The horizontal resistance is 20,750 and it has been tested multiple times. Multiple Dow stocks that posted significant gains after the election are finally seeing traders take profits. This could continue until April 15th as winners are sold to raise cash.


The Nasdaq Composite squeezed out a new high on Thursday at 5,914 to best the March 1st high by 10 points. Friday's minor decline was encouraging but it could have been due to a final push for window dressing to pin the large caps and the index at the highs for the quarter as the quarter ended. That does happen a lot.

The MACD is about to turn positive again but we need one more good day of gains to break free of that new high resistance. Even though we closed over it, the 5,904 resistance is still exerting its magnetic pull.


If there was ever a chart that screamed window dressing it is the Russell 2000. The Russell set 4-month lows the prior week then moved progressively higher without any volatility right into Friday afternoon when it hit 1,390. There was a dip at the close on all the indexes as traders tried to jump in front of any undressing that may appear next week. However, the apparent rotation out of large caps and into a broad number of small caps is textbook window dressing. Portfolio managers wanted to show they were diversified at the end of the quarter.

The resistance at 1,388 has been tested multiple times over the last four months and a breakout there would be dramatic and could actually boost market sentiment significantly.


The Biotech Index dipped back to support at 3,475 several times the prior week and never broke through. The rebound may have also been a touch of window dressing and the index stopped in the middle of its recent range. The Nasdaq and the Russell will need the biotech sector to continue to rebound in order for the larger indexes to push higher. I am not seeing any indications of that at this point.


The Semiconductor Index is at a new high and that is always positive for the Nasdaq. The $SOX leads the Nasdaq and they were in lock step last week.


Over the last year, I have shown this chart multiple times. The numbers have not changed from the initial calculation in early 2016. The tight range in 2015/2016 projected a breakout or breakdown of 324 points from that range. The upper target of that breakout zone is 2,450. When I first labeled that over a year ago with the S&P at 2,125, it seemed a long way off. After the post election rally it is suddenly looking a lot closer and I would not be surprised if we hit that level in 2017.


If we can make it through April without a disaster, the sell in May cycle could be interesting. If April earnings are as good as expected, we could see more investors remain in the market over the summer. Yes, summer rallies do sometimes occur. However, if the April earnings guidance is choppy or negative or the situation in Washington begins to melt down without any progress on taxes, healthcare or infrastructure, the sell in May cycle could be significantly worse.

Investors are overly optimistic at present but they also appear to be getting nervous. Uncertainty is market negative and we will need to see some progress on the Trump policies by the end of April or it could be a rough second quarter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Selling Your Soul

by Jim Brown

Click here to email Jim Brown

Editors Note:

Perrigo sold the rights to the royalty stream for one of its best drugs and investors hated the decision.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

PRGO - Perrigo Plc - Company Profile

Perrigo Company plc, together with its subsidiaries, develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. The company operates through Consumer Healthcare (CHC), Branded Consumer Healthcare (BCH), Prescription Pharmaceuticals (Rx), Specialty Sciences, and Other segments. The CHC segment offers OTC products in various categories, including analgesics, cough/cold/allergy/sinus, gastrointestinal, infant nutritional, smoking cessation, animal health, feminine hygiene, diabetes and dermatological care, diagnostic, scar management, and other healthcare products, as well as vitamins, minerals, and dietary supplements (VMS); and contract manufacturing services. It serves retail drug, supermarket, mass merchandise chains, and wholesalers through sales force and industry brokers. The BCH segment provides branded OTC products in the natural health and VMS; cough, cold, flu, and allergy; personal care and derma-therapeutics; lifestyle; pain relief, nasal decongestants, and cold sore management; and anti-parasite areas, as well as offers generic pharmaceutical products. It serves pharmacies, drug, and grocery stores through pharmacy sales force, as well as a network of pharmacists. The Rx segment offers generic and specialty pharmaceutical prescription drugs in various dosage forms, such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, powders, controlled substances, injectables, hormones, women's health products, oral solid dosage forms, and oral liquid formulations; and ORx products. It serves wholesalers; retail drug, supermarket, and mass merchandise chains; hospitals; and pharmacies. The Specialty Sciences segment offers Tysabri to treat multiple sclerosis. The Other segment offers active pharmaceutical ingredients used by generic and branded pharmaceutical companies. Company description from FinViz.com.

Perrigo was already in trouble with investors for not filing its 10K and the Nasdaq had issued a default notice and posted them for delisting. The company said it was "investigating" revenue recognition practices for royalties derived from the drug Tysabri. Strike one for the stock.

In the middle of this revenue recognition problem they announced they had sold their royalty stream to RPI Finance Trust for $2.2 billion and some incentive bonuses to be paid later on December 31st 2018 and December 31st 2020. Investors did not like that either. Strike two for the stock.

There are valid reasons for selling a royalty stream. Companies spending a lot of money on research and marketing can sell royalties to fund that research. However, nobody buys anything unless they feel like they are going to make money on the deal and that means the seller is offering a large discount. When you are talking as much as $2.8 billion over the next three years, that discount had to be large in order to get a finance company to cough up the cash. Investors thought Perrigo was giving up too much to raise cash quickly. They also did not explain what they were going to do with the cash. That always makes investors nervous.

At the same time they announced the sale of the royalties, they said the CFO had resigned, effective immediately. That is never good.

The combination of no financials and the rush job to sell the royalties while they are in the middle of an investigation on those same royalties, smells bad. Shares closed at a 6-year low on Friday after they announced they closed the sale on Thursday.

They did not report earnings as scheduled on February 27th and there is no current schedule. That is strike three for the stock.

You may remember they were offered $195 per share by Mylan in 2015 and turned it down.

Buy May $65 put, currently $2.95, Initial stop loss $70.25.



In Play Updates and Reviews

Elevator Down

by Jim Brown

Click here to email Jim Brown

Editors Note:

Stocks took the stairs up on Friday morning but the express elevator down at the close. The S&P fell -7 points from 2,370 to close at 2,363 in just over 20 minutes before the close. The Dow was the laggard and never traded in positive territory and fell -60 points in the closing minutes of trading

Window dressing is over for the week. Monday starts a new quarter and we could see some window undressing if fund managers are worried about the debt ceiling battle at the end of April. They could also hold on to their positions for the first couple weeks of Q1 earnings in hopes of squeezing out a few extra bucks before the beginning of the sell in May cycle.



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


JACK - Jack in the Box
The June long call position was entered 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

ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Shares posted another decent gain and closed at a new high.

Original Trade Description: March 23rd.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Everybody knows Adobe or at least they did 20 years ago. Photoshop and Illustrator were the key pieces of software everyone needed to create content for magazines and print media. What would Sports Illustrated have done without Photoshop for their Swimsuit Edition?

Fast forward to 2017 and Adobe has so many different pieces and partners that you cannot even describe them all. With annual revenue at $7 billion and growing they are rapidly outpacing everyone's earnings expectations.

Adobe is hosting its annual Digital Marketing Summit. At that event they announced several new partnerships and the integration of multiple "cloud" entities into one platform.

This description is from a Real Money article.

Headlining these moves is the creation of a common platform, known as the Experience Cloud for all of the products that to date had been grouped within Adobe's "Marketing Cloud." Going forward, Marketing Cloud will comprise one of three parts of Experience Cloud, and feature products such as Experience Manager (used to create and manage marketing content across platforms), Target (lets marketers personalize user experiences) and Social (used to run social media marketing campaigns).

Another part of Experience Cloud, known as Advertising Cloud, lets companies run and optimize search, display and video ad campaigns. It pairs Adobe's Media Optimizer search and display ad-buying tools with recently-acquired TubeMogul's video ad-buying platform. The third part, known as Analytics Cloud, combines the popular Adobe Analytics tool for uncovering insights from customer data with Audience Manager, a platform for creating customer/audience profiles.

Advertising Cloud has gotten a lot of attention, since it more firmly makes Adobe a player in an ad tech space where Alphabet/Google (GOOGL) and Facebook (FB) loom large, and where independent players such as The Trade Desk (TTD) and The Rubicon Project (RUBI) are also present. Adobe is pitching itself as an independent alternative to Google and Facebook, which of course are also giant sellers of ad inventory, while arguing that integrations between the three parts of Experience Cloud set it apart from both independent ad tech players and marketing software rivals such as Salesforce.com (CRM) and Oracle (ORCL).

In their earnings last week, they reported a 21.6% rise in revenue to $1.68 billion and the 12th consecutive increase in revenue from the Creative Cloud graphics software. Earnings were 94 cents and analysts had been expecting 87 cents and $1.645 billion in revenue. Adobe said annualized recurring revenue rose by $265 million to $4.25 billion. That is based on continuing subscription growth.

Earnings June 15th.

Shares spiked after earnings from $122 to $130 and then faded back to $125 over the next week. They have started to rebound again because finding 20% revenue growth in the market is hard to do.

Position 3/24/17 with an ADBE trade at $127.50
Long May $130 call @ $2.61, see portfolio graphic for stop loss.


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Support at $102 held at least temporarily.

The option has declined to only 10 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain almost nothing by exiting now.

Original Trade Description: March 17th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported earnings of 87 cents that rose 57% and beat estimates for 81 cents. Revenue of $2.99 billion rose 6.4% but missed estimates for $3.01 billion. They surprised analysts with revenue growth guidance for 2017 at 6%, down from prior forecasts of 7% to 8%. They blamed the revenue miss and lowered guidance on uncertainty over the elections and the impact of the Trump election. They also see a 1% revenue hit from the sale of their CHSA and COBRA businesses in 2016. They guided for earnings growth of 15% to 17% for the full year. They currently serve 637,000 clients in 125 nations. The number of employees serviced rose 2.3%. PEO Services employees rose 12% to 452,000. These are "co-owned" employees managed by ADP for clients.

They repurchased 4.6 million shares at a cost of $422 million. They expect to repurchase $1.2-$1.4 billion in shares in 2017.

Earnings May 3rd.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

ADP rallied nearly $1 on Friday in a weak market and closed at $105.12 and a new high. It was also just over the $105 strike. I am recommending we reach out to the $110 strike since it appears ADP is about to move higher after three weeks of consolidation. This option price is very cheap and there will be no initial stop loss.

Position 3/20/17:

Long May $110 call @ 75 cents, see portfolio graphic for stop loss.


AZN - AstraZenaca - Company Profile

Comments:

No specific news. Minor 3 cent decline in a weak biotech sector.

Original Trade Description: March 2nd

AstraZeneca PLC engages in the discovery, development, and commercialization of prescription medicines for the treatment of respiratory, inflammation, autoimmune, cardiovascular, metabolic, oncology, infection, neuroscience, and gastrointestinal diseases worldwide. Its marketed products comprise Accolate, Bricanyl Respules, Bricanyl Turbuhaler, Daliresp, Duaklir Genuair, Eklira Genuair/Tudorza/Bretaris, Oxis Turbuhaler, Pulmicort Turbuhaler/Pulmicort Flexhaler, Pulmicort Respules, Rhinocort, Symbicort pMDI, and Symbicort Turbuhaler for respiratory, inflammation, and autoimmunity diseases; Atacand1/Atacand HCT/Atacand Plus, Brilinta/Brilique, Crestor2, Plendil, Seloken/Toprol-XL, Tenormin3, and Zestril4 for cardiovascular disease; and Bydureon, Byetta, Farxiga/Forxiga, Kombiglyze XR, Komboglyze, Onglyza, Symlin, Xigduo, and Xigduo XR for metabolic disease. The company's marketed products also include Arimidex, Faslodex, Iressa, Lynparza, Nolvadex, Tagrisso, and Zoladex, as well as Casodex, Cosudex for oncology disease; Fluenz/FluMist, Fluenz Tetra/FluMist Quadrivalent1, Merrem/Meronem2, Synagis3, and Zinforo4 for infection disease; Diprivan, EMLA, Movantik/Moventig, Naropin, Seroquel IR, Seroquel XR, Vimovo1, Xylocaine, and Zomig for neuroscience disease; and Losec/Prilosec and Nexium for gastrointestinal disease. It serves primary care and specialty care physicians through distributors and local representative offices. The company's pipeline includes 146 projects, of which 125 are in the clinical phase of development. It has collaboration agreements with Celgene Corporation; Immunocore Limited; Heptares Ltd.; Foundation Medicine, Inc., French National Institute of Health and Medical Research (Inserm); and FibroGen and Astellas, as well as a research agreement with Eli Lilly. Company description from FinViz.com.

In their recent earnings AZN reported $1.21 compared to estimates for $1.14. Revenue of $5.585 billion was in line with estimates.

Shares fell after the CEO warned that generic sales of Crestor were crushing sales of the original drug. Sales of Crestor were down 53% in the quarter. The company said because of the Crestor decline there would be low to mid single-digit declines in revenue in 2017 and low to mid-teens percentage decline in core EPS.

However, the company has a lot of drugs coming to market and several are "life changing" for cancer, respiratory and metabolic diseases. He said AZN was at an inflection point for the anticipated return to long-term growth built on a solid pipeline.

Earnings May 4th.

AZN just received approval from the FDA on a type-2 diabetes drug called Qtern, a once daily tablet for a disease that affects 29 million Americans. They also said Lynparza, a breast cancer treatment, proved to be more effective than chemotherapy in treating metastic breast cancer.

Investors are buying AZN for the pipeline and ignoring the decline in Crestor. They have had years for that decline to appear and now it is old news.

AZN is a slow mover and the options are cheap. If the market rolls over we will not have much at risk. If the market rebounds we should be in the money in a couple days.

Update 3/3/17: AZN entered into a deal with Sanofi to market MEDI8897 for the prevention of resipiratory synctial virus (RSV) in newborns and infants. AZN will get 120 million euros up front and 495 million upon the achievement of sales related milestones. All costs will be shared equally.

Update 3/13/17: Good article in the WSJ about AZN helped to power the stock through resistance. Read it here.

Update 3/14/17: AZN released results of a study where the ovarian cancer drug Lynparza sharply slowed disease progression. Women with the disease lived an average of 19.1 months on the drug compared to 5.5 months for those on a placebo. Another report by the Society of Gynecologic Oncology said the number was 30.2 months. This is a new class of PARP drug that blocks enzymes involved in repairing damaged DNA and thereby helping to kill cancer cells. This is the first drug of its class to be approved by the FDA and reach the market.

Update 3/17/17: AZN received its second rejection letter from the FDA on the ZS-9 drug intended to treat high potassium levels in the blood. The letter does not require any new trials. The first rejection was due to some manufacturing issues. There are no details on the second letter but analysts believe it is still related to manufacturing controls since there is no requirement for new drugs trials or data. AZN will resubmit a new application when the issues are corrected. Shares still posted a gain even with the rejection.

Update 3/20/17: AZN released the results of a study for type 2 diabetes showing that treatment with SGLT-2 inhibitors reduced the rate of hospitalization for heart problems by 39% and death by any cause by 51%. This was a study with a population of 300,000 across six countries. This could mean that AZN could apply to sell the drug under more than one diagnosis for different types of treatment.

Update 3/29/17: AZN said the FDA had accepted their NDA for Lynparza for ovarian cancer. The drug was also granted priority review status with a PDUFA date of Q3-2017.

Position 3/3/17:

Long May $30 Call @ $1.10, see portfolio graphic for stop loss.


DIS - Walt Disney - Company Profile

Comments:

Beauty & the Beast ticket sales have crossed $751 million worldwide in 14 days. The show cost $160 million to produce. Sales this weekend are expected to be $50 million. Shares actually posted a gain for two consecutive days.

Original Trade Description: March 13th.

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company's Media Networks segment operates cable programming services, including the ESPN, Disney channels, and Freeform networks; broadcast businesses, which include the ABC TV Network and eight owned television stations; radio businesses consisting of the ESPN Radio Network; and the Radio Disney network. It also produces and sells original live-action and animated television programming to first-run syndication and other television markets, as well as subscription video on demand services and in home entertainment formats, such as DVD, Blu-Ray, and iTunes. Its Parks and Resorts segment owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. This segment also operates Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and manages Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. The company's Studio Entertainment segment produces and acquires live-action and animated motion pictures for distribution in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. This segment also produces stage plays and musical recordings; licenses and produces live entertainment events; and provides visual and audio effects, and other post-production services. Its Consumer Products & Interactive Media segment licenses its trade names, characters, and visual and literary properties; develops and publishes games for mobile platforms; and sells its products through The Disney Store, DisneyStore.com, and MarvelStore.com, as well as directly to retailers. Company description from FinViz.com

Disney reported earnings of $1.55 on revenue of $14.78 billion. Analysts were expecting $1.49 and $15.26 billion. The comparisons to the year ago quarter were tough because of Frozen and Star Wars, The Force Awakens in that period. Star Wars was the first billion dollar film for the current fiscal year. The studio segment generated $2.52 billion in revenue. In January, after the December quarter ended, the company said it had more than $7.6 billion in global box office gross thanks to Star Wars: Rogue One, Captain America: Civil War and Finding Dory. CEO Bob Iger downplayed the concerns over ESPN saying they were very overblown because ESPN was still in demand by consumers, networks and advertisers.

Shares have recovered from the post earnings depression and are poised to continue making new highs, market permitting.

Update 3/15/17: Disney has upped its ownership to 85.7% and said it was going to buy out the rest of the investors and offered them a premium to the current value of their shares. Some investors are complaining. Euro Disney has significant debt and Disney said it would recapitalize 1.5 billion euros once it had full control. The actual park management loves the plan because it would put Disney back into control and provide it solid financial backing. This is just a temporary hiccup in the stock.

Update 3/20/17: Beauty & the Beast took in $170 million in ticket sales on its opening weekend. That was a record high for a family film. Disney has 11 other animated classics that it is planning to remake with human actors. The success of Beauty & the Beast will make theses 11 films a reality.

Mulan, Aladdin, Lion King, 101 Dalmatians, Little Mermaid, Pinocchio, Sword in the Stone, Peter Pan, Snow White and the Seven Dwarfs, Dumbo and a sequel to Marry Poppins.

Update 3/23/17: CEO Bob Iger agreed to a one-year contract extension until July 2019. He was previously going to retire in July 2018.

Update 3/24/17: Rumors and suggestions are starting to circulate suggesting Apple could buy Disney instead of Netflix in order to acquire a content generating machine and level out the earnings/cash flow. Currently Apple has very big fluctuations in revenue because of their cyclical production nature. If they owned a company like Disney they would have steady and predictable earnings. Disney has a market cap of $177 billion and Apple has $230 billion in cash. Liberty Media Chairman John Malone suggested if Disney spun off ESPN, Apple would buy Disney. That suggests an outright Apple purchase would also resort in an ESPN spinoff.

Update 3/30/17: Disney is relaunching Club Penguin, a game with hundreds of millions of users into Club Penguin Island. The original game had to be shutdown when browser technology began to limit what developers wanted to do inside the game. Now they are restarting in an app for Android and IOS. The basic game will be free but there is a $4.99 per month subscription fee it you want the advanced features. If only 100 million of the prior users signed up for the advanced package that would be $500 million a month in additional revenue. What kid cannot get dad to pay $4.99 per month for hours of peace and quiet?

Earnings May 9th.

Position 3/14/17:

Long May $115 call @ $1.83, see portfolio graphic for stop loss.


FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Shares fell sharply once again to support at $27.00 before rebounding slightly. This is our line in the sand with our current stop at $26.45.

Original Trade Description: March 20th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

Finisar reported earnings of 59 cents that rose 136% but missed estimates for 62 cents. Revenue rose 23% to $380.6 million but also missed estimates for $389.5 million. They guided for Q1 earnings of 53 cents and revenue of $370 million. Analysts were expecting 58 cents and $393 million.

Despite the enormous improvement in sales and earnings the stock was crushed for a 25% decline from $35 to $26. The damage was worse because competitor Ciena (CIEN) had also reported a weaker quarter the day before. Panic gripped traders that optical networking was somehow slowing down. The pace of sales "growth" in China slowed slightly and that sent investors running for cover. China is building out its 100 gigabit network technology in metropolitan areas and they are consuming enormous amounts of networking equipment.

Earnings June 9th.

Good article in Barrons very positive on Finisar. Read it here.

Finisar is not a one trick pony. They are also pushing into the smartphone market and will be competing on the 3D sensor components in the next version of smartphones. They are also building out massive networks in the cloud computing datacenters that require miles of fiber and very fast connections.

After the drop, multiple analysts reiterated buys and outperforms on FNSR saying this was just a hiccup and there are far greater earnings in the future. Raymond James upgraded them from outperform to strong buy. Jefferies upgraded from hold to buy. MKM reiterated a buy rating and $41 price target. Needham reiterated a strong buy and $44 target. Stifel, Raymond James and William Blair all reiterated a buy rating.

Shares have rebounded $2 off the lows from last week and should begin to accelerate higher in the days ahead.

Position 3/21/17:

Long June $30 call @ $1.50, see portfolio graphic for stop loss.


HLF - Herbalife - Company Profile

Comments:

No specific news. Minor dip from the new 4-week closing high on Thursday.

Original Trade Description: March 15th.

Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The company's weight management product portfolio includes meal replacement products, protein shakes, drink mixes, weight loss enhancers, and healthy snacks; targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients; and outer nutrition products consist of facial skin, body, and hair care products. It also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. The company offers its products through retail stores, sales representatives, sales officers, and independent service providers. It operates in North America, Mexico, South and Central America, Europe, the Middle East, Africa, the Asia Pacific, and China. Company description from FinViz.com.

It is well known that Bill Ackman has a $1.5 billion short on Herbalife. He has had it for a couple years. It is also well known that Carl Icahn does not like Ackman.

Ackman took a major hit in Valeant when he announced on Monday he had closed his 27.2 million share position for a loss of more than a $3 billion. Ackman is hurting because several of his recent high profile positions have gone against him and investors are pulling out their money or at least sending him hate mail suggesting he get his act together. He is also holding a massive long position in Chipotle and the stock is moving lower.

On Monday, Ackman announced he closed the Valeant position. Immediately, Carl Icahn announced he was buying 372,000 more Herbalife shares and had asked the SEC for permission to acquire up to 50% of the company. He already owns 24.6%. This is killing the short position held by Ackman. Shares are rising on the Icahn news.

While this seems like the perfect long position where Icahn is going to force Ackman to cover, there is one big problem. On March 17th a movie called "Betting on Zero" which profiles Ackman's short thesis, will open in a national release. Remember, everyone has known about this movie for a year. It played in a few single venues and the stock did not decline. When it was picked up for national release about 6 months ago, everyone thought this would be the end of the company. However, in late 2016 the company settled with the FTC for $200 million on a probe into their marketing practices. They dodged another large bullet since the probe was also based on Ackman's short thesis.

Shares collapsed in late February on a guidance miss and bottomed last Friday. They have been rebounding since Icahn made his recent announcement.

I am recommending a short term strangle. The odds are good that the stock is going to be directional after the film begins showing on the 17th. Everyone will either say OMG and dump the stock or they will say, "so what is the big deal" and buy the stock. Since Icahn has $1.5 billion invested, you know he is going to be very vocal about it and will probably publicize any further purchases if the stock declines. We do not care which way the stock moves. We just need it to move significantly.

Position 3/16/17:

Long April $57.50 call @ $1.11, no stop loss.
Long April $52.50 put @ $1.36, no stop loss.


JACK - Jack in the Box - Company Profile

Comments:

JACK said it signed a deal with DoorDash Inc for delivery in over 200 cities. Jack's CMO said they were seeing larger orders as a result of the delivery service.

Original Trade Description: March 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of October 02, 2016, it operated and franchised approximately 2,255 Jack in the Box restaurants in 21 states and Guam; and approximately 699 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951 and is based in San Diego, California. Company description from FinViz.com.

JACK reported earnings of $1.18 but that missed estimates for $1.24. Revenue of $487.9 million rose 3.6% but missed estimates for $500.1 million. The earnings include a $2 million restructuring charge for facility closing costs and employee severance pay. Same store sales rose 3.1% for the quarter. This compared to the retail tracking group NPD SalesTrack which showed similar chains averaged 1.6% for the quarter. The average check also rose 4.9%.

JACK guided for Q1 same store sales to be flat to down -2% at Jack in the Box stores and down 1% to 3% at Qdoba stores. For the full year they guided for sames store sales growth of 2% at Jack stores and flat at Qdoba stores. They guided for earnings of $4.25-$4.45 and well below estimates for $4.71. Shares were crushed for a 10% loss.

Earnings May 24th.

However, in case you did not know there is a restaurant recession in progress. All the restaurant chains reported negative sales comps citing excessive competition and strong discounting. At JACK operating earnings rose 27% for the quarter and very few of the other chains were even close.

Like everyone else they blamed the delayed tax refunds for a sharp slowdown in sales in February. They also suffered from the record rainfall and flooding in California where the chain has a large presence.

They plan to open 20 to 25 new Jack in the Box stores in 2017 and 50-60 new Qdoba stores.

There is nothing wrong with this company that justified a 10% drop in the stock. Now that shares are rebounding, it should attract a lot of buyers expecting a return to the pre earnings levels.

Position 3/31/17:

Long June $110 calls @ $1.85. See portfolio graphic for stop loss.


LITE - Lumentum - Company Profile

Comments:

No specific news. Fighting temporary resistance at $55.

Original Trade Description: March 22nd.

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

For Q4, Lumentum posted earnings of 57 cents that beat estimates for 51 cents and the 49 cents in the year ago quarter. Revenue rose 21% to $265 million to miss analyst estimates by $700,000.

The company said it was seeing "strong growth in new product revenue, particularly the 100Gb Datacom, which was up 124% sequentially and more than 500% over the year ago quarter.

They guided for Q1 for earnings of 46-54 cents and revenue of $250 million compared to 32 cents in the year ago quarter. Analysts were expecting 47 cents and $263.8 million. That was a guide beat on earnings but miss on revenue. Shares rallied $12 over the next two weeks but they gave most of that back in late February.

Earnings May 19th.

Good article in Barrons very positive on Lumentum Read it here.

On March 16th, Goldman upgraded the stock saying there was a "wide range" of possible upside if it wins Apple as a customer. Goldman said Lumentum could benefit from the inclusion of 3D sensing in the new crop of smartphones, that could add $273 million to annual revenue starting in July. Goldman's base case was $65 million in additional revenue. Then Jefferies hiked the price target citing a possible design win in the iPhone 8 as well. Lumentum, formerly part of JDS Uniphase, developed the 3D sensing technology back in 2010 so it is a core technology.

They announced some new products on Tuesday at the OFC Conference and shares soared at the open to nearly $52. The Nasdaq selloff knocked it back down to $48. The Nasdaq rally on Wednesday saw it rebound back to $51.50. There was no holding it back. Shares should continue to rise on the new products now that the post earnings depression is over.

Shares are threatening to break out to a new high. When I started writing the play in early afternoon the option was $2.55.

Position 3/23/17:

Long May $55 call @ $3.30, see portfolio graphic for stop loss.


SLCA - U.S. Silica Holdings - Company Profile

Comments:

No specific news. Minor decline. Still over resistance.

Original Trade Description: March 9th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.

Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.

Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.

Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.

U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.

They were crushed again this week when oil prices fell 7% in just two days to the lows for the year.

Oil prices are down on record inventory levels. Inventories rose by 8.2 million barrels to 528.4 million barrels on Wednesday. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.

If I could, I would buy a longer dated call and hold on to this position until fall. However, this newsletter is not a buy and hold strategy. I am going to recommend the June calls and we will exit before the May earnings.

Earnings May 24th.

The decline over the last two days knocked the stock back to the 200-day and support from November.

Position 3/10/17:

Long June $50 call @ $3.20, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

No specific news. Another failure at resistance but eventually there will be a breakout.

Original Trade Description: March 16th

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Security and Enterprise Security. The Consumer Security segment offers Norton-branded services that provide multi-layer security and identity protection on desktop and mobile operating systems to defend against online threats to individuals, families, and small businesses. Its Norton Security products help customers protect against complex threats and address the need for identity protection, while also managing mobile and digital data, such as personal financial records, photos, music, and videos. The Enterprise Security segment provides threat protection products, information protection products, cyber security services, and Website security offerings. Its products protect customer data from threats, such as advanced protection threats, malicious spam and phishing attacks, malware, drive-by Website infections, hackers, and cyber criminals; prevent the loss of confidential data by insiders; and help customers achieve and maintain compliance with laws and regulations. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, e-commerce platforms, distributors, direct marketers, Internet-based resellers, system builders, Internet service providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com.

You cannot even turn on your phone or PC without being subjected to dozens if not hundreds of potential attackers. Worse than stealing your ID and maybe being able to cause you grief down the road, the biggest attacks today are the ransom ware attacks. If you click on an email link or leave your PC unguarded by a security program, the hacker encrypts all your files and charges you a fee to get them back. All of your documents, pictures, bank account info, Quickbooks, etc, all disappear in a heartbeat. Even if you pay the blackmail, you still may not get them back.

Symantec is the leading cybersecurity vendor for personal computers and small business servers. Enterprise class operations will normally go with higher fee organizations like Fire Eye, Palo Alto Networks, etc. Symantec has the entire personal computer space to themselves. There are some competitors like PC Magic and McAfee but they are distant competitors. Since Intel partnered with McAfee an TPG in September, they are improving but Symantec has a big head start.

Because of the daily headlines on cyberattacks, more and more consumers are reaching out and deploying more sophisticated antivirus programs. It is not just for the closet geeks anymore. Everyone needs a real security program.

Strangely, the biggest risk is still the individual. In a recent study of 19,000 individuals by Intel Security they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.

Update 3/23/17: Morgan Stanley raised their price target from $33 to $37 saying Symantec's recent wave of acquisitions, including Blue Coat Systems and LifeLock, have improved Symantec's position with their rivals. In June, they bought Blue Coat for $4.65 billion to beef up their enterprise offerings. In February, they paid $2.3 billion for LifeLock to enhance their consumer security business. Morgan Stanley expects Symantec to make more acquisitions after their recent $1 billion debt offering.

Symantec should continue to emerge as the big winner in personal computer security.

Earnings May 3rd.

Position 3/17/17:

Long July $32 call @ $1.29, see portfolio graphic for stop loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. No movement but still only a few cents away from a new 5-month high.

Original Trade Description: February 18th

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Varian reported lower than expected earnings on January 26th and shares fell -$6 to $87. Two days later, they spun off Varex and shares fell to $77 as a result of the separation. Since that split the stock has been moving higher and the rate of climb has accelerated over the last two weeks as they signed multiple new deals around the world.

Varian guided for earnings of $2.94-$3.06 for Q2 through Q4. For Q2 earnings are expected to be 84-90 cents on a 4% to 5% increase in revenues. The split at the end of January complicates apples to apples comparisons for Q1.

Earnings April 26th.

On February 13th the company announced competitive bid wins for six Shanghai hospitals. Varian is the leading manufacturer of medical devices and software for treating cancer and will provide its state of the art advanced radiotherapy technology to those hospitals. On February 14th, Varian's Eclipse treatment planning software was named the 2017 category leader for oncology treatment planning by KLAS. KLAS is an independent research firm specializing in monitoring and reporting on healthcare vendors.

Varian announced the sale of its advanced linear accelerators to Hungary's National Institute of Oncology.

Varian is on track to return to its pre-split price of $90 if the current rally continues. Because of its decline in February, I believe it offers some protection against a potential market decline.

Position 2/21/17:

Long May $85 call @ $2.75, see portfolio graphic for stop loss.


$VIX - Volatility Index - Index Description

Comments:

The VIX gained over 7% even with the market positive most of the day. There could be some worry over a selling event next week now that the end of quarter window dressing is over.

With Congress going on nearly a two-week recess starting on the 10th, we will have a much less chance of a politically stimulated event. However, when they get back on the 21st, they only have 7 days to get a funding bill passed and raise the debt ceiling. The political sparing has already started.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 2/22/17:

Long Apr $13 call @ $2.30, no stop loss, profit target $17.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Shares gave back Thursday's gains as the market rolled over.

Original Trade Description: March 29th.

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.

Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.

They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.

Update 3/30/17: Shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future.

Earnings April 26th.

After two months of post earnings depression, shares closed back at $81.39 and a new high on Wednesday. I believe a breakout is imminent. Earnings are four-weeks away and we could see a pre-earnings ramp on strong expectations.

Position 3/30/17:

Long May $85 call @ $3.25, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

AN - Autonation - Company Profile

Comments:

Resistance at $44 held and a 3% decline appeared. The company announced a revised date for their earnings of April 25th.

Original Trade Description: March 27th.

AutoNation, Inc., through its subsidiaries, operates as an automotive retailer in the United States. The company operates in three segments: Domestic, Import, and Premium Luxury. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance services, and wholesale parts and collision services. The company also provides automotive finance and insurance products comprising vehicle services and other protection products, and arrangement of finance for vehicle purchases through third-party finance sources. As of December 31, 2016, it owned and operated 371 new vehicle franchises from 260 stores located primarily in metropolitan markets in the Sunbelt region of the United States. Company description from FinViz.com.

Autonation reported earnings of 95 cents that missed estimates by a penny. Revenue of $5.48 billion also missed estimates for $5.6 billion.

The company said demand for cars was falling while truck/SUV demand remained strong but under pressure. Gross profit margins on new vehicles fell from 5.6% to 5.2%. Used vehicle profits fell from 7.3% to 6.3%. The slowing demand for cars meant discounting was rising, which reduced another $100 per car from gains in the quarter. They see that pressure continuing in 2017.

Earnings May 5th.

Despite the positive economy, consumers are defaulting on the most car loans since the great recession. When interest rates were really low, banks and finance companies were giving auto loans to anyone with a pulse in order to write the higher interest loans. Now that the cars are 2-3 years old and people are tired of those cars, they are no longer making the payments. This puts more repossessed cars into the wholesale market and depresses prices.

Since more people are defaulting the credit criteria for a car loan has risen dramatically. Banks realized the error of their ways and they are making it harder to get approved. That reduces the number of people that can qualify for a loan and the number of people that can buy a car.

Auto prices have been on a permanent path higher but suddenly, very few people are willing to pay the outlandish prices for a car they will be underwater on the loan for the next five years.

This is causing strain on retailer profits. Shares of car dealers are in decline. Karmax (KMX) is widely expected to miss estimates when they report earnings on April 6th. By utilizing a put position on Autonation we can benefit from any disappointment by Karmax. Even if the dealers are not an apples and apples comparison, Autonation will be painted by the same broad brush that punishes Karmax.

Position 3/28/17:

Long May $41 put @ $1.40, see portfolio graphic for stop loss.


SPY - S&P-500 SPDR ETF - ETF Profile

Comments:

The S&P lost 5 points after rolling over from an early morning gain. Monday could be window undressing day.

Original Trade Description: March 25th.

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.

The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.

I believe if the market goes lower next week it could be the beginning of a major decline.

Position 3/27/17:

Long May $230 put @ $3.49, see portfolio graphic for stop loss.




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