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Daily Newsletter, Saturday, 4/8/2017

Table of Contents

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

Market Wrap

Geopolitical Risk Returns

by Jim Brown

Click here to email Jim Brown

The surprising news of the missile strike on Syria brought geopolitical risk back to the market.

Weekly Statistics

Friday Statistics

The S&P futures shook off a -15 point overnight decline to 2,336 and rebounded to 2,360 by Friday afternoon. However, weekend event risk suddenly took on an entirely new meaning with the Syrian headlines. Cautious investors moved to the sidelines and the afternoon gains faded back to minimal losses.

The big cap indexes all ended the day with single digit declines while the Russell 2000 was fractionally positive. The only two real gainers were the Biotech Index at +19 and the Semiconductor Index at +5.

Late Friday news broke that the Russian warship Admiral Grigorovich had entered the Eastern Mediterranean and was steaming full speed towards the two U.S. ships that fired the 60 Tomahawk cruise missiles. Russia later said "the ship, armed with the advanced Kalibar missiles would visit the logistics base in Tartus Syria." There were also headlines claiming Syrian aircraft had taken off from the same airbase in the afternoon to continue bombing civilians. Both of those headlines suggested on the surface that there could be further conflict in the future. Obviously, some investors did not want to be long over the weekend.

S&P Futures

On the economic front, there was a major upset. The Nonfarm Payrolls for March had been expected to show a gain of 180,000 jobs. That was revised down from estimates of 190,000 the prior week. The actual headline number was 98,000 and a major miss. The prior two months were revised lower by a total of 38,000 jobs.

The Nonfarm number was a surprise because the ADP Employment report on Wednesday greatly exceeded estimates for 185,000 with an actual number of 263,000 new jobs for March. That put everyone's mind at ease and the market spiked sharply higher on Wednesday.

The Nonfarm report showed that goods producers added only 28,000 jobs compared to the 95,000 in February. Construction also fell sharply to only a 6,000 job gain compared to the 59,000 in the prior month. Mining/energy added 11,000 thanks to the resurgence in the oil sector. Manufacturers showed a gain of 11,000.

Service sector job gains were only 61,000 and less than half the February total. Retailers were hammered for a 30,000 job loss. General merchandisers cut 20,000, department stores 13,000, clothing stores 6,000 and personal care -4,000.

Professional and business services remained strong at +56,000 and leisure and hospitality added +6,000.

The unemployment rate dropped to 4.5% from 4.7%, a 10-year low and the Fed's target for "full employment." The broader U6 unemployment rate fell to 8.9%, down from 9.2% and a post recession low. The labor participation rate remained at 63%.

There were two reasons being blamed for the weak jobs number. The first was the warm weather in February that drew outdoor jobs forward and then the return of winter weather in March that depressed hiring for outside jobs. The late Easter was also blamed for a delay in hiring. If this is the correct reason, the headline number should rebound in April.

The second excuse was the end of the Trump bump. Analysts said business optimism declined in March with the expected failure of the health care bill and the reality that tax restructure and infrastructure stimulus programs would be pushed well back in 2017, if not 2018. That supposedly caused employers to put off hiring until something was actually passed.

Offsetting the low 98,000 headline number on the establishment survey was the strong +472,000 increase in employed from the household survey. Analysts said the spike was due to increases at small businesses, which are captured by the ADP report but not by the Nonfarm payrolls, which only survey large businesses.


The weak payroll numbers did not impact the expectations for the next Fed rate hike. The CME Fed funds futures are predicting a 66.2% chance of a rate hike at the June meeting. There is also a 38.5% chance of a third hike at the September meeting. The various Fed speakers have tended to suggest the Fed could move faster unless they decide to begin selling off their $4.5 trillion in QE purchases, which would be the equivalent of multiple rate hikes. That potential was raised in the FOMC minutes and helped cause the market crash on Wednesday.


The various economic reports including the Nonfarm payrolls, knocked the forecast for the Atlanta Fed real time GDP for Q1 down from 1.2% on Tuesday to only +0.6% growth as of Friday. This is a material change and could impact the Fed's eventual rate hike plans.

The first look at the actual Q1 GDP will be on April 28th.


In other reports, the California Manufacturing Survey for Q1 declined slightly from 59.7 to 58.2.

U.S. Wholesale Trade for February rose from -0.2% to +0.4%. On a 12-month basis, inventories are up +3.2%. These reports were ignored.

We have a very light calendar for next week with Janet Yellen leading off with a speech on Monday. After the reaction to the Fed minutes and the topics discussed, she will probably try to calm the markets with additional "gradual" comments.

The next most important event is the bank earnings on Thursday. With Citi, JP Morgan, Wells Fargo, First Horizon, First Republic and PNC Bank all reporting on the same day there is significant potential for volatility. ALL of them report before the market opens. A trio of strong earnings beats from C, JPM and WFC could power the market higher. However, in the last cycle, earnings beats by those banks did not power them higher. With the sector down the last week, it would appear investors are pricing in some lackluster results OR they just feel the November rally has run its course until some actual deregulation appears.

With Friday a market holiday, the bank earnings on Thursday morning are going to create a flurry of volatility and then volume will drop to near zero for the rest of the day.


The yield on the ten-year treasury dipped to 2.27% and a five-month low after the Syrian attack was announced. When it appeared to be a "one of one" event and not a prelude to active long-term intervention in Syria, the yields began to rise slightly to 2.31% at 12:00. After NY Fed President William Dudley spoke at the Princeton Club, the yields spiked again to close at 2.37%. Dudley said the Fed might pause in its plan to normalize rates if it decided to begin reducing its balance sheet. He also said the U.S. should consider some small adjustments in the Dodd-Frank law which toughened oversight for financial institutions.

The last time the unemployment rate was 4.5% the yield on the ten-year was 4.75% and the Fed funds rate was 5.25%. The Fed claims their new normal target will be 3.0-3.5% for two years from now. If the Trump administration believes that, they should be locking in some long-term treasury debt soon. For every quarter of a point that interest rates rise it adds $50 billion a year in interest to the U.S. debt. A rise to 3.5% would add $500 billion a year in interest to the debt. We never actually pay the interest. The government sells new debt for enough to replace the old debt and cover the interest. That is like getting a cash advance on your credit card in order to make the payment on that card.


The dollar dropped sharply after the attack and the weak payroll report. However, that was a knee jerk reaction and the internals on the jobs report suggested the economy was still on track with the unemployment at a 10 year low. The dollar dip was immediately bought and then comments about a rate hike in June and September and possibly even December, set it soaring to a three-week high.


Credit Suisse said year to date in 2017 there have been 2,880 announced store closings in the retail sector. This is more than double prior years for this point on the calendar. They project as many as 8,700 store closings for the entire year. There have been 10 retail chain bankruptcies and 7 additional chains are expected to file this year. The retail sector is in a death spiral and those not able to adapt to the online model are doomed to fail.

The retail sector has lost 60,600 jobs over the last two months. That was the largest two-month contraction since December 2009 when the industry lost 62,200 jobs. Mall stores accounted for 34,700 job losses in March. Retail workers account for 10.9% of all jobs in the USA. That is down from 11.6% in 2000. Payless Shoes filed bankruptcy last week and is closing 400 stores.

The death of the mall is well documented. The Richmond Town Center outside of Cleveland had three anchor tenants. Sears, Macys and JC Penny's. Two of them have already closed and JC Penny's is closing in June.


Amazon (AMZN) announced it was going to hire 30,000 part time workers over the next year with 5,000 of those to be work from home jobs. The 5,000 workers from home will be its Virtual Customer Service Program and the remaining 25,000 will be hired at the 70 fulfillment centers across the USA. This is in addition to the 100,000 full time employees with benefits the company said it was going to hire back in January. That hiring was going to take place over the next 18 months. Part time workers who work over 20 hours are eligible for benefits that include life insurance, dental, vision and disability insurance and Amazon pays all the premiums. Amazon will also prepay 95% of tuition costs for courses related to in-demand fields even if those courses would not lead to a job at Amazon. Full time workers also get 401K matching programs and paid time off. Amazon added 150,000 employees over the last five years and had 180,000 employees at the end of 2016.


Yum Brands (YUM) said it was cutting the use of antibiotics in chickens bought for use in its KFC restaurants. The company is giving poultry suppliers until the end of 2018 to stop using the antibiotics. Yum is joining McDonalds (MCD) and Chick-Fil-A in ending the practice. KFC sells more than 65 million buckets of chicken every year. Yum normally buys only about one-third of the chickens in a seller's flock because the rest do not meet their quality standards. Chicken farms are shifting to things like putting oregano in the bird's water to kill bacteria and infuse chickens with antioxidants. Farmers are now required to wipe eggs with sanitizing wipes before sending them to a Tyson facility to be hatched. Once they arrive, Tyson puts them in a room of fog made from peracetic acid to keep the bacteria as low as possible before being placed in the incubators.


Twilio (TWLO) was upgraded by JP Morgan from neutral to overweight. They listed 7 reasons why they think Twilio is a buy. After surging to $70 post IPO, the stock fell back to $28 and now trades at only a slight valuation premium to its peers. Their 12 consecutive quarters of 70% revenue growth is impressive. Amazon, which invested in Twilio, is more of a partner than a competitor. They are adding new Twilio features to their AWS offerings almost every month. The 31 million-share lockup expiration in February has already passed. The company has cut its higher-risk variable revenue by 60% so future revenue will be more predictable. Twilio's services are more reliable than its competitors. The company's addressable market of $46 billion is more legitimate than other providers.

JPM said "customers and developers recognize Twilio as a best-in-class toolbox for communications with a multi-year industry lead." Shares rallied 4.6% on the upgrade.


WD-40 (WDFC) reported earnings of 87 cents that missed estimates for 90 cents. Revenue of $96.5 million missed estimates for $99.8 million. They guided for full year earnings of $3.64 to $3.71 and revenue of $390-$395 million. Shares fell -4.7% on the news.


PriceSmart (PSMT) reported earnings of 90 cents on revenue of $772.3 million. Analysts were expecting 92 cents and $794.4 million. Same store sales rose 2.1% in March after being flat in February and declining the prior two quarters.


Diana Shipping (DSX) saw shares rise by 9% after JP Morgan upgraded the company from neutral to overweight. JPM said rates will improve because of a more stable supply trend. The weak global economy has punished shippers but the bank believes conditions are going to improve. That would be beneficial for all shippers not just Diana.


Apple (AAPL) shares declined the last two days on new worries the iPhone 8 will be delayed. According to a news report in the Economic Daily News in China, the phone could be delayed as late as November instead of the normal September launch. The article quoted "technical issues" with components. They said the OLED screens and incorporating the 3D sensing technology into the phone were the reasons for the delay. Apple has reportedly placed an order for 70 million OLED screens from Samsung. Online website 9to5mac said the absence of leaks from Foxconn Technology, the actual maker of the phones, could signify delays. "Either Apple has tightened security to improve secrecy OR the devices are not yet being produced in mass quantities." Foxconn employs more than one million workers and once production begins, there are always a few people that post pictures and details.

Apple will be rushing to get its phones to market ahead of Google's updated Pixel phone also due out in late 2017. This is the second set of rumors suggesting a delay in production. The first came from a fire at a ST Microelectronics (STM) facility that manufactures the 3D sensors. After several weeks of tense headlines, that rumor faded but there was also a different comment last week saying STM would not be ready to ship components until September.

It would appear that Apple shares are priced for perfection and any concrete rumor that deliveries could be delayed a month or more could be catastrophic. Investors are betting on a blowout Q4.


The Syria attack helped to lift crude prices. Syria does not produce much oil but any additional instability in the Middle East is always good for oil prices. Crude actually rose despite the spike in the dollar and that suggests larger trader interest.


U.S. production increased by 52,000 bpd last week to 9.2 million bpd. That is still well below the peak of 9.61 mbpd in 2015. Active oil rigs increased by ten to 672 with most of them going to the Permian. Active gas rigs increased by 5 to 165. Continued gains in oil prices should accelerate rig activations.


Markets

Volume was light at 5.95 billion shares and decliners of 3,638 were slightly ahead of advancers at 3,272. The markets recovered from their early morning dip with the Dow at -56 at the low and returned to positive territory in early afternoon. The fear of weekend event risk saw investors heading for the sidelines just before the close.

However, the selling was light and there was nothing to suggest it will be worse next week. Given the various headline events last week, the market missed out on several opportunities to post a significant decline. That suggests the likely path is higher even though the Dow and S&P charts are still slightly bearish.

The Dow remains stuck under resistance at 20,750 but the declines have been minimal. We have had two days of lower highs and lower lows but the index is refusing to drop below 20,600 and there is even stronger support at 20,500. The bank earnings on Thursday could be a market driver in either direction. Banks have been depressed despite the Fed rate hike. Strongly positive earnings could trigger short covering and mediocre earnings could add to the depression.

The Dow leaders on Friday were an unlikely group with all the normal leaders clustered at the bottom of the list.



The S&P is also stuck in a range between 2,350 and 2,370 that has held for the last eight trading days. The overall chart is slightly bearish but only until that 2,350 support fails and then it will be solidly bearish. A move on decent volume over 2,370 that holds and then pierces the next level at 2,380 would turn the chart slightly bullish. Until the range from the last three weeks has broken, we will not know the market direction. Given the flurry of negative headlines, just holding in place is somewhat bullish from a sentiment perspective.


The resistance on the Nasdaq Composite has moved up to 5,915 after the 5,914 high close the prior Thursday. This level has been penetrated multiple times but each attempt failed at the close. The Nasdaq Composite pulled back only slightly and the bullish trend is still intact.

The Nasdaq 100 has solid resistance at 5,440 and the major big cap stocks have been ticking lower the last couple days. Despite the selling in Facebook, Apple, Amazon, Netflix and Google, the index continues to hold just below that resistance. All it would take would be one good day to set a new high but we need a positive catalyst and I do not see one on the horizon.




The small caps have not declined over the last two days. The fractional loss on the S&P-600 on Friday is not material. However, the index is holding just over support at 825 where the Nasdaq indexes are holding just under resistance. Helping the small caps on Friday were the biotechs and semiconductors.

If this index closes below 825 and last week's lows, it could signal a sentiment shift for the market. It appeared over the last couple days that rotation from big caps to small caps had returned but it is so weak we cannot claim it.


The market is closed on Friday making this a short week. With lawmakers out of town on their Easter recess until the 23rd, there will be little in the form of negative headlines unless there is another unexpected military confrontation. The economic calendar is uninspiring with the bank earnings on Thursday the only bright spot for the week.

I believe the market needs a catalyst to move higher. I have no clue what that could be but without one we could languish in a sideways range for another week.

The fireworks begin when the lawmakers return to work on the 24th with only five days to pass a funding bill and raise the debt ceiling. The fighting was already in progress before they left for the recess but it was muted because they did not want to give the folks back home something else to be mad at them about.

In theory, this week should be neutral but as Yogi Berra reportedly said, "In theory there is no difference between theory and practice. In practice there is." (The quote was actually first spoken by computer scientist Jan van de Snepscheut in the early 1980s. It first appeared in print in the 1986 book on Pascal programming by Walter Savitch and he said he heard it at a computer conference years earlier from Snepscheut. More than a decade passed before it was falsely attributed to Berra.)



Random Thoughts


The bearish crowd continues to grow with bullish investors shrinking for the second week. The shift in sentiment now shows that 71.7% of respondents do not believe the market is going higher. That means there are very few buyers to propel the market forward. On a contrarian basis, it also suggests an unexpected spike could pull a lot of traders off the sidelines or force them to cover bearish positions.

Last week results


The Trump administration warned Russia it was going to strike Syria and gave them time to move their planes and people. They did it over the de-confliction hotline that was in use to prevent inadvertent or deliberate conflicts between U.S. and Russian planes in the skies over Syria.

Late Friday, the U.S. News and World Report said Russia has shutdown the hotline saying it was no longer needed. In addition, Russian Defense Ministry spokesman Maj. Gen. Igor Konashenkov said Russia will quickly "strengthen the Syrian air defense system and increase its efficiency in order to protect Syria's most sensitive infrastructure facilities."

Russia is trying to send a message to Trump that any further attacks on Syria will be met with Russian defenses. If that response included attacking a U.S. ship that launched the missiles, we would be moving into an entirely new chapter on U.S. - Russian relations.

The real message Trump sent was also to North Korea and China. By launching the attack while at dinner with the Chinese president, he showed he was serious about red lines. North Korea has been crossing red lines at will without any negative results. The administration has said multiple times recently that the military option is on the table against North Korea if China does not control its wayward neighbor. China could stop North Korea's nuclear and missile programs very quickly but has refused to interfere. Thursday's strike on Syria probably caused Xi Jinping and Kim Jong Un to rethink their posture on flaunting those UN Security Council sanctions.


Speed of Change

3D Printing:

The price of the cheapest 3D printer came down from $18,000 to $400 within 10 years.

At the same time, it became 100 times faster.

All major shoe companies have started 3D printing of shoes.

Spare airplane parts are already 3D printed at remote airports.

The space station now has a printer that eliminates the need for the large amount of spare parts they used in the past.

At the end of this year, new smartphones will have 3D scanning possibilities.

You can then 3D scan your feet and print your perfect shoe at home.

In China, they have already 3D printed a complete 6-story office building.

By 2027, 10% of everything that's being produced will be 3D printed.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A wise man can learn more from a foolish question than a fool can learn from a wise answer."

Bruce Lee


 

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Index Wrap

Ships Can Sink in a Calm Sea

by Jim Brown

Click here to email Jim Brown
The coming week could be calm but there is nothing preventing a sudden storm.

For the last several weeks, I have written that the first two weeks of April are erratic and interspersed with gains and losses. The week after April 15th is normally down and the fourth week is normally up but this year could be an exception. Nothing has changed. Last week saw some volatility in both directions, which is normal. Next week could be calm with intermittent bursts of directional trading. It is a short week with Friday a market holiday. The only material event on the calendar is the bank earnings on Thursday morning.

With no catalysts on the horizon for this week, it could be a sleeper. Traders could leave early for the holiday and volume for the entire week could be light.

What everyone should be doing is preparing for the final two weeks of April. The last week could be dramatic with Washington going into full warfare on the funding and debt ceiling.

Most traders are aware of the calendar. They understand the risks for the last two weeks of the month and they should be making preparations this week. That could lead to a negative bias.

When determining potential market direction it is best to look at the broadest index and work down. The Russell 3000 has broken uptrend support, which is now resistance. Downtrend support is intact. However, support at 1,390 appears to be rock solid. That will make a great trading signal when/if it breaks. That would be a sell signal with major support down in the 1,335 range. I am not speculating it will go there, only the interim support is weak.

The 1,380 support from three weeks ago would be the first level to watch.

I am not predicting a breakdown in the R3K but the chart is negative. Given our place on the calendar, it will be a directional indicator.


The small cap S&P-600 is barely holding over the 820-825 level and a breakdown could be ugly given all the white space on the chart between 700 and 820.


If you needed any confirmation the rally in 2017 was powered by the big caps you only need to look to the S&P-100. That is the largest 100 stocks in the market. The sprint to the highs after January is unlike any other index.

The indicators are telling us the big cap rally may be fading. Both the MACD and RSI are falling and a break below support at 1,040 could easily drop 40 points in a very short period.


Last but not least, the Dow remains the weakest big cap index. It is stuck below resistance at 20,750 and decent support at 20,500. We could see a lot of volatility and not break out of that range. If a real correction did appear, the 19,750 level would be the target. I am not predicting it but the chart is showing us the target, if a decline appeared.


I am not going to leave the Nasdaq out of the discussion. However, the Nasdaq 100 continues to prove the big cap rally claim. The index traded at a new intraday high on Wednesday and could easily do it again at any time. The FAANG stocks were negative the last couple days but the declines were minimal. They would have to really break down to drag the index lower.

Note that the indicators began to decline at the end of February and are still declining. This means buying interest still exists but it has faded since the surge ended in late February.


Assuming Russia or Syria refrains from some form of retaliation for Thursday's attack, the shortened trading week could be calm. However, ships can sink in a quiet sea. Without a positive catalyst, the bears could become restless and the bulls become timid. The weak before Easter is normally blessed with a bullish bias but Easter came late this year and is conflicting with the April 15th tax deadline and the funding battle is not a normal April occurrence.

I would continue to refrain from being overly long and look to add some positions later in the month when volatility is likely to spike.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Selling Season is Here

by Jim Brown

Click here to email Jim Brown

Editors Note:

Spring is in the air and we are quickly moving into the selling season for this sector. This four month period starting in April is the most active period for buying and selling homes.



NEW DIRECTIONAL CALL PLAYS

Z - Zillow Group - Company Profile

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. The company offers a portfolio of brands and products to enable people find information about homes and connect with local professionals. Its brands focus on various stages of the home lifecycle, including renting, buying, selling, and financing. The company's portfolio of consumer brands comprises real estate and rental marketplaces, such as Zillow, Trulia, StreetEasy, HotPads, and Naked Apartments. It also owns and operates various brands comprising Mortech, dotloop, Bridge Interactive, and Retsly, as well as provides advertising services to real estate agents, and rental and mortgage professionals. Company description from FinViz.com.

Zillow reported earnings of 14 cents. This compares to a loss of 1 cent in the year ago quarter. Revenue of $227.6 million rose 34%. The guided for Q1 for revenue of $232-$237 million. Shares declined after the report because the guidance was slightly less than analysts expected.

In Mid March, shares declined again after a story appeared on Inman.com suggesting that Zillow's marketing programs may have violated RESPA rules. The Real Estate Settlement Procedures Act was put in place in 2010 to protect potential homeowners from predatory lenders. Basically, if a lender or real estate agent pays somebody a kickback for a referral, it is illegal after 2010.

Zillow allows mortgage brokers to advertise on the websites. No problem there. Zillow also offers referral services. If you want a mortgage loan you can go to the Zillow site and enter some information like your loan amount and zip code where you are buying the home. Zillow then matches your request with lenders that pay to advertise on the site and you are given a list of referrals. The inman.com article suggested this was a recommendation for pay, which is illegal. However, Zillow contends it is just generic advertising that matches lenders and borrowers by zip code. The key point is that Zillow gets paid for the advertising whether a lender makes a loan or not. They get paid for the click rather than a loan. Several analysts have noted that Google does the same thing if you type in mortgage loan calculator. They show lenders on that page and Google gets paid for that impression even if no loan is ever made.

Shares declined to $33 on that story and have held there for three weeks. On Friday, Zillow closed at a post dip high. With this the active selling season, the expectations for their May earnings should be high and should lift the stock.

Earnings May 9th.

Buy May $35 call, currently $1.55, initial stop loss $32.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Tie Game

by Jim Brown

Click here to email Jim Brown

Editors Note:

The buyers and sellers fought all day in a low volume market and the result was a tie. The major indexes all finished with minor single digit losses after trading both high and lower during the day. At the close the weekend event risk was the determining factor and cautious investors moved to the sidelines.

The gains and losses in individual stocks were miniscule with nobody wanting to add any risk. All of the big cap tech stocks were negative with some of them now down 2-3 days straight. The index charts, with the exception of the Nasdaq's are still bearish.

If nothing happens over the weekend, we could see a move higher next week. I am basing that on the inability to produce any material decline despite numerous negative events.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


LB - L Brands
The long put position was entered with a LB trade at $47.

CRUS - Cirrus Logic
The 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:

Adobe today announced that the company has been recognized as the only leader in "The Forrester Wave: Digital Intelligence Platforms, Q2 2017" report. Adobe received the highest scores possible in nine categories, including cross-channel attribution, social analytics, web analytics, behavioral targeting, online testing, tag management, partner ecosystem, digital intelligence revenue and number of enterprise customers. Of the ten vendors Forrester invited to participate in the report, Adobe was recognized as a leader in an evaluation of 26 criteria, including current offering, strategy and market presence.

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. Finally starting to rebound.

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 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.


CRUS - Cirrus Logic - Company Profile

Comments:

No specific news. Shares closed at a new high to open the position.

Original Trade Description: April 6th.

Cirrus Logic, Inc., a fabless semiconductor company, develops, manufactures, and markets analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets. It offers portable audio products, including analog and mixed-signal audio converters, and digital signal processing products for mobile applications; codecs-chips that integrate analog-to-digital converters and digital-to-analog converters into a single IC; smart codecs, a codec with digital signal processer; amplifiers; and micro-electromechanical systems microphones, as well as standalone digital signal processors. The company offers its products for mobile devices, including smartphones, tablets, digital headsets, wearables, smart accessories, and portable media players. Its products are also used in laptops, audio/video receivers, home theater systems, set-up boxes, portable speakers, digital camcorders, musical instruments, and professional audio products applications; and serve the automotive market, which include satellite radio systems, telematics, and multi-speaker car-audio systems. In addition, the company's products are used in industrial and energy-related applications, including digital utility meters, power supplies, energy control, energy measurement, and energy exploration applications. It markets and sells its products through direct sales force, external sales representatives, and distributors in the United States and internationally. Company description from FinViz.com.

Cirrus is a major component contributor to Apple, Samsung and other smartphone manufacturers. They also supply chips to dozens of other types of products.

In 2014 Apple provided for 80% of Cirrus annual revenue. In 2016 that declined to 65% and continues to shrink. Samsung made up 15% of 2016 revenue.

The strong sales of the iPhone 7 and the expected blowout sales for the iPhone 8 and Samsung 8 this year should produce millions in additional revenue. Sales rose 28% in 2016 and analysts expect 31% revenue growth in 2017. Earnings are expected to rise 82% for 2017

With the iPhone 8 expected to post blowout sales numbers, that means component demand over the next 9 months will also be strong. Suppliers normally begin shipping components in the last week of June but this year there are indications they have been requested a month earlier so that Apple can have more phones on hand when sales begin.

Earnings May 3rd.

With earnings in early May, this will only be a three-week position. We will exit before earnings. On the chart, the spike on February 1st was earnings of $1.87 compared to estimates for $1.63. The immediate decline the next day was on guidance for revenue of $300-$340 million and analysts had been expecting $331.9 million. That dip has been forgotten given all the hype over the iPhone 8 and Samsung 8. A move over that level should trigger additional short covering.

Position 4/7/17:

Long May $65 call @ $3.30, see portfolio graphic for stop loss.


DIS - Walt Disney - Company Profile

Comments:

Beauty and the Beast hit $920 million and well on its way to break $1 billion. UBS did an attendance survey on the Shanghai Disney park and they expect 11.4 million visitors in this first year of operation. They expect that to contribute significantly to Disney earnings.

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.


HLF - Herbalife - Company Profile

Comments:

No specific news. Shares posted a minor gain after fading with the market.

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:

No specific news. Minor gain in a weak market.

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.


SLCA - U.S. Silica Holdings - Company Profile

Comments:

No specific news. Shares holding over prior resistance while we wait for oil prices to rise into the summer.

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.

Update 4/4/17: SLCA rallied $1.24 on news they acquired a division of National Coatings that supplies roofing products with high thermal resistance and emittance. They reduce energy consumption and increase the durability of the roof. SLCA already supplies more than 260 products to industry with frack sand only one of those products.

Position 3/10/17:

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


SYMC - Symantec - Company Profile

Comments:

No specific news. New resistance test likely for next week.

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 material movement but support is holding.

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 posted a 4% gain ahead of weekend event risk. We may not be out of luck just yet.

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. WDC surged another $1 to a new closing high in a weak market.

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.

Update 4/4/17: WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.

Update 4/6/17: WDC announced a new pocket sized SSD drive for portable data so developers and content creators can take their data with them wherever they travel. These are the fastest portable drives with speeds of up to 515 Mbps and come in 256gb, 512gb and 1TB capacities starting at $99. This is an amazing accomplishment and these will be hot products.

WDC also named Phil Bullinger as head of its data center business. Bullinger was formerly a general manager of Dell EMC storage business and before that he was in charge of Oracle's SAN/NAS storage business. 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:

No specific news. Thursday's minor rebound has begun to fade.

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.

Update 4/3/17: Competitor Carmax (KMX) was hit by a story in Barron's saying shares could fall 20% as charge offs increase for risky loans. KMX shares fell -4.3% and AN shares fell -3.2%. Carmax reports earnings on Thursday.

Position 3/28/17:

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


LB - L Brands Inc - Company Profile

Comments:

The long put entry was triggered when LB declined to $47 in early trading. The August $45 put was the most active strike again on Friday.

Original Trade Description: April 5th.

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, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom, and Greater China, which are primarily mall-based; through its Websites comprising VictoriasSecret.com, BathandBodyWorks.com, HenriBendel.com, and LaSenza.com; and through franchises, licenses, and wholesale partners. As of January 28, 2017, the company operated 2,755 retail stores in the United States; 270 retail stores in Canada; 18 retail stores in the United Kingdom; and 31 retail stores in the Greater China area. It also operated 203 La Senza stores in 24 countries; 159 Bath & Body Works stores in 30 countries; 23 Victoria's Secret stores in 12 countries; 391 Victoria's Secret Beauty and Accessories stores in 70 countries; and 5 PINK stores in 3 countries. Company description from FinViz.com.

On Tuesday, Citigroup downgraded LB from buy to neutral saying the retailer is operating in too many failing and underperforming malls. The analyst said their entire year would come down to how they perform in the second half of 2017 after an ugly shopping season in 2016.

The company beat on Q4 with earnings of $2.18 compared to estimates for $1.90. Revenue of $4.5 billion matched estimates. Same store sales fell -3% at Victoria Secret. However, they guided for 2017 earnings of $2.05-$3.35 and analysts were expecting $3.61. They reported mid to high teens percentage same store sales declines in February. They also said the exit from swimwear will cost them another 6% in sales in April.

I do not need to say much about this recommendation. Sales and profits are falling, mall traffic is shrinking and the earnings for Q1 are likely to be horrible.

Earnings May 24th.

There are no June options so we either have to go with May, which expires the week before earnings or reach out to August where there will still be some earnings anticipation in the put when we exit before earnings. Using the August strike costs more but the premium erosion over the next several weeks will be a lot less.

Update 4/6/17: Before the open LB said same store sales in March fell -10%. However, they had an excuse. They blamed 2% to 3% of that drop on the later than normal Easter that would have normally produced some late March sales. They also said sales were lowered by the exit from the swimwear and apparel business had a negative 7% impact. Apparently investors bought the excuses and a monster short squeeze was born.

Victoria Secret sales declined -13%, compared to analyst estimates for a 10.8% decline. Bath and Body Works sales were flat and analysts expected a 2% decline.

Nearly every analyst said the $4.75 (11%) gain was a short squeeze. Fred's (FRED) reported better than expected earnings on Wednesday after the close and that helped lift the retail sector in general. The retail ETF (XRT) spiked 2%.

The volume on the August $45 put today was 5,624 and well over the open interest of 3,618. I am going to change the option strike to the August $45 and put an entry trigger on it of $47, just under the afternoon lows.

Position 4/7/17 with a LB trade at $47

Long Aug $45 put @ $3.31, see portfolio graphic for stop loss.


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

Comments:

Minor decline ahead of weekend event risk. Resistance is still intact.

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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