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Daily Newsletter, Saturday, 4/22/2017

Table of Contents

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

Market Wrap

Quiet Expiration

by Jim Brown

Click here to email Jim Brown

After Friday's morning dip the market never strayed very far from the flat line except for a short sell program at 1:PM. It was a very quiet option expiration.

Weekly Statistics

Friday Statistics

The market open was calm for an expiration Friday and the earnings were mostly positive. The constant chatter was more about the French elections than the saber rattling around North Korea. President Trump and Steve Mnuchin made separate comments about releasing their new healthcare proposal and the tax reform proposal next week. Those comments lifted the Dow off its morning lows but the ever-present weekend event risk kept investors on the sideline. The most volatility came from a sell program about 1:PM. It could have been a headline reaction instead but I could not find anything at that time. The Dow fell nearly 70 points in just over 5 minutes.


The only economic report that mattered was the Existing Home Sales for March. The headline number rose from 5.47 million to 5.71 million homes at an annualized rate. This was the fastest rate of sales since the 5.75 million pace in July 2008. That was a 4.4% increase from February and 5.9% increase from the year ago period.

The median single-family home price fell -0.5% to $245,300 and the price for a condo declined -0.4% to $231,690. Those prices are still up +6.8% from year ago levels. The supply of homes on the market was flat at 3.8 months. Sales in the Northeast rose 10.1%, Midwest 9.2%, South 3.4% and sales fell in the West by -1.6%. Listings for single-family homes rose slightly to 1.61 million thanks to the arrival of spring. Average days on the market for a home have fallen to record lows due to a shortage of inventory and more than half the homes coming to market are sold in less than 30 days.


We have a very busy calendar for next week with four regional Fed reports. There are two home sales reports and the first GDP release for Q1. The GDP report is not expected to be good. The official forecast is for +0.8% growth but the Atlanta Fed real time GDPNow is currently forecasting only 0.5% growth. This is the lowest forecast since the Fed began tracking it back in early February.

If the actual GDP is close to the GDPNow, the market may suddenly decide it is too optimistic for the current conditions. The Q1 GDP is the result of the prior administration because Trump policies and directives have either not yet been enacted or it is too soon for any impact. It will be Q1-2018 before there is any meaningful policy impact.

With the PE of the S&P-500 at 18.0, you really have to be optimistic with a 0.5% GDP. There could be a reality check if the actual number is low.


The Fed meets again the following week to consider rates. Currently there is only a 4.3% chance of a rate hike at that meeting. However, they could reveal more of their plans for reducing their QE balance sheet and that could have more of a market impact than another rate hike.


The French elections on Sunday should be good for a 10% move in the European markets. The direction depends on who wins. This is a four-person race and the top two finishers will compete head to head in another election in June. The most current polls have Le Pen at 22% and Macron at 23% with Fillon and Melenchon at less than 20% each. There is one other candidate at 8% but Hamon has no chance of winning.

The terrorist attack in Paris last week should give an edge to Le Pen because of her anti immigration, anti terrorist platform.

Citigroup believes Le Pen and Macron will be the top two in this election. In the runoff in June, they expect Macron to win with 65% of the vote and Le Pen 35%. If Sunday's election plays out like Citigroup expects, they believe the European markets will rise 5% to 10% over the coming months on the expectation for Macron to be the runoff winner. However, should Le Pen post a much stronger showing on Sunday it could be enough to cause chaos in the market since she wants to exit the euro and go back to the franc.

The ideal scenario for the U.S. markets would be a strong showing by Macron that suggests he will win the runoff. The chart below is before the terrorist attack.

FiveThirtyEight Chart

Lastly, the government funding battle is starting to heat up with democrats talking about poison pills in the resolution that will be deal killers. The stage is set for a confrontation but there is talk of implementing a short-term continuing resolution for a week or two to give lawmakers time to work out a solution. That is the right attitude. Stay away from the potential government shutdown as long as possible but eventually there will be a showdown. The farther away from the current earnings cycle the better.


The earnings cycle heats up next week with 194 S&P companies reporting. There are 12 Dow components reporting. The current forecast for Q1 is for earnings growth of 11.2%. Of the 95 S&P companies that have already reported, 75.8% have beaten estimates for earnings. That is higher than the average of 71% over the prior four quarters. Only 62.1% of the companies have beaten on revenue but that is still above the recent average of 53%. So far, in Q1, there have been 83 earnings warnings and 33 companies have issued positive guidance. Over the next two weeks, 325 S&P companies will report. When you add the 95 already reported a whopping 420 S&P companies will have reported in only three weeks. According to StarMine, companies expected to beat earnings estimates next week include NOC, FTI, AMZN, AMT, AAL, AJG, EQIX, CNC, XL, PEP and NEM.

Thursday is especially jam packed with tech stocks with INTC, MSFT, AMZN, GOOGL, SBUX, UPS and WDC.


On Friday, Dow component GE got the ball rolling with earnings of 21 cents that beat estimates for 17 cents. Revenue declined -1% to $27.66 billion but still beat estimates for $26.37 billion. The energy division continued to drag on results and they said they were on track to merge that division with Baker Hughes (BHI) on schedule around the middle of 2017. The company guided for full year earnings of $1.60-$1.70 per share. Analysts expected $1.63.

GE said they closed the acquisition of LM Wind Power for $1.65 billion. The company makes rotor blades for wind turbines.

CEO Jeffrey Immelt said global growth was accelerating while the U.S. continued to improve. During his trips overseas, he said China, Southeast Asia, Latin America and Africa were all stronger than in 2016. Shares fell -2.4% on the report.


Honeywell (HON) reported earnings of $1.66 compared to estimates for $1.62. Revenue declined slightly to $9.492 billion but beat estimates for $9.328 billion. The company guided for the full year for earnings of $6.90-$7.10 per share, a 5-cent increase on the low side. They said the "commercial aftermarket within aerospace and the global distribution business within home and building technologies remained strong." The demand for performance materials and technologies were boosted by "low-global warming products." Shares rebounded $3 to a dead stop at resistance at $127.


Stanley Black & Decker (SWK) reported earnings of $1.29 that beat estimates for $1.19. Revenue rose 5% to $2.806 billion and topped estimates for 2.75 billion. That was even more impressive since they took a 1% hit from currency translation and 2% from divestitures. They paid dividends of $86.7 million and repurchased $17.3 million in shares. They guided for the full year to earnings of $7.08-$7.28, up from prior guidance of $6.98-$7.18. Shares spiked $5 on the news.


SunTrust Banks (STI) reported earnings of 87 cents compared to estimates of 84 cents. Adjusted revenue of $2.21 billion rose 7% but barely beat estimates for $2.20 billion. Deposits averaged $158.9 billion with the average loan balance $143.7 billion. Provision for credit losses rose 18% to $119 million. Shares declined slightly on the news.


McDonalds (MCD) coverage was initiated at BMO Capital with an outperform rating and a $153 price target. The analyst said "McDonalds was a premium brand in the early stages of mounting a comeback with a favorable risk/reward profile." Shifting to fresh, never frozen, beef for their Quarter Pounder was a major step and the first of many changes ahead. The analyst also initiated coverage on Wendy's with an outperform rating saying the company had a "defensible" premium position following structural enhancements.


Domino's Pizza (DPZ) rebounded from its recent funk after Guggenheim rated the stock a buy, saying the company has scale, disciplined decision making and an excellent franchise network. The pizza company has had a rough few weeks after a report by M Science warned the company's domestic sales growth would be "well below consensus for Q1." M Science would not respond to analyst questions on why they are projecting a miss. Shares of DPZ fell -$13 on the news in early April.


Wal-Mart (WMT) has declared war on the grocery sector. The retailer is slashing prices in its grocery dept with a goal of being 15% cheaper than everyone else at least 80% of the time. Barclay's checked prices on identical items at competing chains and found Wal-Mart was 4% cheaper than Kroger because the smaller chain is trying to compete with Wal-Mart's cuts to retain market share. Wal-Mart was cheaper on 74% of the items checked. Wal-Mart was 5.6% cheaper on nonperishable and frozen items. Kroger's "fresh products," currently not on sale, were 15% more expensive than Wal-Mart. Kroger runs constant sales on some fresh items as loss leaders to convince shoppers their prices are cheaper overall. Barclays said Kroger was a better operator but Wal-Mart's scale made them almost unbeatable. This grocery price war is great for consumers and Kroger shares are suffering while Wal-Mart shares are rising.

This is another reason why analysts believe Kroger should buy Whole Foods Market with 460 stores. It would give Kroger access to millions of shoppers who are not specifically price conscious. Kroger already owns a dozen chains with different brands and adding Whole Foods would be simple. Currently Whole Foods is suffering from lower grocery prices in general rather than a price war with Wal-Mart on the lowest level products. A can of beans may cost 65 cents at Wal-Mart, 75 cents at Kroger and 85 cents at Whole Foods. Whole Foods profits would benefit from the greater scale of Kroger's operation.

Whole Foods shares are rising on the almost daily commentary about somebody making an offer. A couple weeks ago, it was revealed that Amazon had considered buying the company to jump-start their entry into the grocery business. Just knowing that Amazon was thinking about it should scare Kroger into action to keep Amazon from acquiring that foothold.




Bebe Stores (BEBE) announced on Friday it would liquidate all merchandise and close all of its stores by the end of May. They are selling the merchandise, furnishings, fixtures and equipment. They will take a $20 million charge from deferred rents on the closed stores and employee terminations. The company had 180 stores on Decc-31st. Previously they had said they planned to close only 25 stores. There have been more than 3,000 announced retail store closings in 2017.

BEBE did a 1 for 10 reverse split in December to avoid being delisted.


Oil prices imploded and fell more than 6% for the week. The $2 decline on Wednesday was probably due more to futures expiration on Thursday. Everyone hoping for a big jump in prices from the EIA inventory report on Wednesday morning, were forced to bail out when that spike did not come. There was almost no movement in the futures on Thursday but volume rose again on Friday with more than 665,000 contracts trading compared to a daily average of 525,000 contracts.

The CFTC showed speculative long positions as of April 18th rose to 355,077 contracts and the highest level in more than a month.

Another factor in the price decline was news from Clipperdata that there was more waterborne imports arriving from the Middle East than in recent months. There is more waterborne crude today than there was before the OPEC production cuts were enacted in January. OPEC can say it has cut production but the tanker shipments tell the tale. A country like Saudi Arabia with tens of millions of barrels in storage, can brag they cut production but continue exporting more oil with the extra coming out of storage.

There are multiple views today on whether OPEC and Russia will extend the cuts for another six months. Russia has refused to answer the question more than once on whether they would honor any extension. Nordic Bank believes OPEC will end the cuts because a spike in prices over $55 would benefit the U.S. shale drillers and cause another production spike.


Producers added another 10 rigs last week to raise the total to 857. This was the 14th consecutive week of activations with 367 rigs activated since October 1st. U.S. production has increased 220,000 bpd in just the last eight weeks. Analysts expect that rate to grow significantly over the next six months as the roughly 5,000 drilled by uncompleted wells in inventory on January 1st are put on production. Completing those wells is the fastest way for producers to generate additional production and income.


Markets

The markets traded sideways for the week on low volume with a minor increase in volatility. The Dow closed at a two-month low on Wednesday before a major short squeeze lifted it back into consolidation territory on Thursday. Despite the rebound the Dow remains under resistance at 20,600 and the chart remains bearish.

The reasons for the bearish breakdown was a combination of earnings from several high profile Dow components and a new round of event risk from North Korea, France and impending budget battle in Washington. There is always a reason for a decline or at least commentators will blame something. They forget the market does not need a reason to take profits.

I wrote over the prior two weeks that the market normally declines immediately after April 15th as funds are extracted to pay the tax bills. That deadline was extended to April 18th and the market declined for two days. Coincidence?

The markets appear to be poised for a big move. North Korea is a paper tiger and I do not apply any credence to their warning for a "super-mighty preemptive nuclear strike." Some people may be concerned over the headlines but Little Kim has suddenly found himself in a lot of trouble. China quit accepting his coal shipments and suddenly his gas stations are out of gas thanks to a lack of imports. China has gotten his attention and they can continue squeezing the noose tighter since they supply 90% of the country's oil imports.

The risk for Monday is a stronger than expected showing in the French election by Marion Le Pen. Saturday headlines are reporting a sudden surge in the polls after the Paris attack. She is very strong on restricting immigration and the attack has given voters another reason to pick her. Forbes said on Saturday if Le Pen captures 30% or more of the vote, she could go on to win the runoff in June. Goldman Sachs said Le Pen was in the "pole position" and they were short French bond futures as a precaution. As of Saturday morning, more than 30% of French voters had not yet decided on their candidate. The election carries a 5% to 10% downside risk for the European markets, which would carry over into the U.S. markets.

The local event risk is the budget battle. Democrats are making headlines this weekend saying they will shut down the government if the republicans add funding for several items or fail to add funding for the democrat's desires. This could be a rocky week if the two parties cannot pass a temporary continuing resolution to avoid a shutdown.

An ideal outcome for the U.S. markets could be for Macron to emerge the vote leader in France and for lawmakers to pass a CR first thing on Monday to remove all the drama from the process. Unfortunately, I am not expecting either event to occur.

The Dow has minor support at 20,400 where it bounced on Thursday. The index closed under resistance at 20,600 with 20,750 the next level higher. I am using a line chart this week to better show the Dow direction. I believe investors get distracted by the triple digit moves in both directions and forget the overall direction is still down.



The S&P rebounded from 2,330 on Monday and moved slowly higher in choppy trading the rest of the week. The index gained 19 points but had to fight for every point. Thursday's close was over critical resistance at 2,350 but the index slipped fractionally below that again at Friday's close.

This has been a big cap rally. The top ten companies in the S&P have accounted for more than 20% of the index gains. Roughly, 130 companies are trading below their 200-day average and more than 70 are within a few percentage points from their lows.

The big caps in the Dow were mostly responsible for the rough week in the S&P with the multiple earnings disappointments dragging the rest of the S&P lower. This coming week will see 194 S&P companies report. The majority are expected to meet or beat estimates. This should help provide support in an otherwise rocky environment.

Despite the rebound, the chart is still bearish. That rebound could be a good start for a move higher but until that happens and the index closes over 2,370, the chart will still be bearish.


The Nasdaq big caps are still controlling the broader market. The Nasdaq Composite closed at a new high on Thursday and gave back only 6 points on Friday. Thursday will be tech earnings day with multiple major companies reporting. That expectation for good earnings could hold the Nasdaq at the highs. Obviously, a general market meltdown as the result of those headlines listed above would negate those expectations.




The Russell 2000 was strong on Friday despite the weakness of the big caps. The Russell declined -15 points intraday then rebounded strongly to regain 10 of those points to close with just a minor loss. The Russell was very strong on Thursday with a 17-point gain to put the index very close to strong resistance at 1,388. If the Russell were to break through that level it would be a major boost to market sentiment.


I have already beaten this event risk horse to death so I will not repeat it. The Russell rebound suggests investors are not as worried as it would appear from the Dow and S&P weakness. The Russell and the Nasdaq are strong and ANY positive news over the next several days could send us significantly higher.

If there were a Brexit like dip as a result of the French election, it would be a buying opportunity. As long as President Trump and Steve Mnuchin continue to hype the "massive" tax reform program coming, the market will have a bullish bias. If they announce the details and the democrats and conservative republicans denounce it, like they did the health care reform, then we could see the beginning of the "sell in May and go away" cycle for 2017. Mnuchin said getting tax reform passed before the August recess was not realistic and others have said they expect it in the first half of 2018. Once investors see this reality, we could see market optimism fade quickly.



Random Thoughts


Individual investors are playing a sort of musical chairs in their sentiment position. The details have not changed much over the last three weeks with the bulls gaining a little the prior week and the bears lost a little. Those gains/losses reversed this week but the changes were not material. We still have 74.3% that believe the market is not going higher.

Last week results


Google, one of the largest internet advertisers on the planet has decided to include an ad blocker in its Chrome browser. I know what you are thinking. They will probably allow you to block all the ads except for the ones they provide. This is not true because they would be opening themselves up to the largest class action suit ever.

Google has talked with the Coalition for Better Ads, a group representing the online advertising industry. The group includes Facebook, News corp, Unilever, Procter & Gamble, etc. The current plan would be to adhere to industry standards, which are still being determined, and would be friendly to both advertisers and consumers. With standards including size of the ad, speed to load, content restrictions, etc, Google is trying to improve the browsing experience rather than eliminate ads.

I view thousands of web pages a week tracking news articles on potential stocks. Some websites are nearly unusable without an ad blocker. I have found that Adblock Plus, (Google for the free download) is by far the best. It will not block all the ads but it gets most of them. For instance, the page containing the story on Google had 14 ads blocked by Adblock. Now all I need is a reliable SPAM blocker for my Thunderbird email client.


Researchers have made some progress in locating Malaysian flight MH370 in the Indian Ocean. Some months ago, a wing part appeared on La Reunion island along with two other misc pieces. Researchers plotted the ocean currents and put an identical wing part in the ocean near Hobart, Tasmania. They tracked this wing part to the same destination. Being able to accurately track and plot the path and backdate the original finding suggests the plane is farther north than the old search zone that covered 46,000 square miles. The new target area is about 10,000 square miles and somewhat north of the original search zone.

The original search for the plane was the most expensive ever and led by the Australian Navy with help from dozens of other volunteer ships.


On four days last week Russian Tu-95 Bear, nuclear capable bombers and/or Ilyushin IL-38 spy planes flew into the U.S. ADIZ around Alaska. Three times the planes were met by Air Force F-22 fighters and CF-18 Hornets. Once, an E-3 Sentry AWACS plane was launched to make sure there were no other Russian planes trying to sneak in at lower altitudes while the air controllers were distracted with the bigger targets.

Earlier in the week, a Russian news report claimed the armed forces had an electronic warfare weapon that could render U.S. planes, ships and satellites completely ineffective. I reported a couple years ago that a Russian SU-24 had disabled the electronic systems on the USS Donald Cook in the Black Sea in April 2014. Reportedly, the Russian system codenamed "Khibiny" disabled the state of the art Aegis warfare system on the destroyer and allowed the unarmed SU-24 to make 12 simulated missile attack runs against the destroyer before leaving the scene with another SU-24 that was watching the event from a distance.

They also claimed they have an electronic dome they can erect instantly over bases and forces to make them invisible from radar and protect them from attack.

We have to remember that the Russian media is controlled by the state and this could be a total propaganda effort to give enemies (U.S.) a reason to rethink any conflict.


A G2 class geomagnetic storm is scheduled to hit the earth on Mon/Tue after a major crack (coronal hole) opened on the sun and caused a large solar flare. The fissure on the sun is currently pointed in our direction and there could be more storms to follow. Officials are warning of potential temporary blackouts, magnetic interference in radio and TV and disruptions of satellites. This is expected to be a moderate storm. The ratings scale goes from G1 to G5. The ones we need to worry about are the X class CME events. Those happen on average 4 times every 11 years and fortunately they are seldom pointed at the earth.

The black spot is the massive crack in the Sun as of Saturday.



 

Enter passively and exit aggressively!

Jim Brown

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Index Wrap

Big Cap Techs Lead

by Jim Brown

Click here to email Jim Brown
The big cap tech stocks continue to lead the market but we are starting to see some significant divergence.

The Dow closed at a two-month low on Wednesday because of earnings disappointments in several big cap stocks. The rebound on Thursday was a massive short squeeze after positive tax reform comments out of the new administration. Unfortunately, talk is cheap and it will not hold up the market long term.

The strength of a few big cap stocks is disguising the broader market weakness. The top ten big cap stocks in the S&P are responsible for more than 20% of the recent market gains.

The health of the broader market can be seen in the declining number of stocks trading over their 50-day average. That percentage has declined from 82% at the beginning of the year to 51.8% today. That is a significant difference and the decline began in early March and sank to 49% in early April. The minor bounce last week is not relative. The trend is negative unless we see a significant rebound in the broader market.


The S&P-500 itself fell below the 50-day average on April 11th and has yet to recover. The S&P dipped to 2,330 the prior Friday and rebounded immediately on Monday but the week was choppy and the index gained only 18 points for the week to end at 2,348. The 50-day average is currently 2,357. The index is still in decline despite the rebound for the week. However, as long as it can avoid a close under 2,330 there is hope for the bulls.


However, even the Nasdaq big caps have started to weaken. The percentage of stock in the Nasdaq Composite over their 50-day has fallen to 50.18%. The percentage in the Nasdaq 100 has fallen to 57%. For the Nasdaq 100 that means 43 of the big cap stocks have declined below their 50-day.

Think about that in context with the Nasdaq 100 Index, which closed only 1 point below its record high on Thursday. The index is at a record high but 43 of the stocks are below their 50-day average. A very few stocks are leading the charge higher.

Both Nasdaq indexes made new highs on Thursday and both only pulled back a very minor amount on Friday despite the weekend event risk. This suggests any event volatility on Monday should be bought even with nearly half the index components under their 50-day average.

Nasdaq Composite

Nasdaq 100

Note the strengthening of the RSI/MACD on both of the Nasdaq charts.



The Dow remains the weakest index with a new two-month low on Wednesday and trading well below its 50-day average. The indicators are still negative with very little uptick from last week. The Dow is hostage to its 30 stock price weighted composition. Any single stock can cause the index to have a bad day. This coming week there are 12 Dow components reporting earnings. Some will beat, some will disappoint. However, the ones with the biggest share prices like MMM, BA, UTX and MCD will have more impact than INTC, MSFT and KO. As a rule of thumb, you can figure a $1 price move in a stock equates to a 7-point move in the Dow.

Here is the killer point. Only 15 of the Dow 30 stocks are over their 50-day average. Several others are right on the line and could fall below at any time. On the positive side, 12 of the Dow stocks are at or just below their recent highs. Half the index is weak and the other half is strong. Unfortunately, in recent weeks it was the weak half dragging the index lower.



The small caps have been relatively flat for two months. Note the 50-day average has flatlined. However, over the last week the small caps have seen some increased buying interest. If the Russell could move over that solid resistance at 1,388 it would be very bullish for the broader market since the Russell represents 2,000 stocks.


The charts are not likely to determine our fate for next week. The market reaction to the French elections and the government funding battle in Washington will likely provide direction. However, with 194 S&P stocks reporting earnings along with several hundred not S&P stocks there will be plenty of headlines to distract from the political events.

If there is a volatility event and the market declines sharply, I believe it will be a buying opportunity. Remember the Brexit rebound. Remember the Trump election rebound after the Dow futures were down nearly 1,000 points. Knee jerk reactions are dangerous if you have stop losses on your positions. If you have available cash, I would be ready to put it to work on a dramatic drop.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Unfairly Abused

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes good companies are punished for performing too well. This was the case for MSC Industrial Direct and their Q4 earnings.



NEW DIRECTIONAL CALL PLAYS

MSM - MSC Industrial Direct - Company Profile

MSC Industrial Direct Co., Inc., together with its subsidiaries, markets and distributes various ranges of metalworking and maintenance, repair, and operations (MRO) products primarily in the United States, Canada, and the United Kingdom. The company's MRO products comprise cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components, and electrical supplies. It offers approximately 1,000,000 stock-keeping units through its master catalogs; weekly, monthly, and quarterly specialty and promotional catalogs; brochures; and the Internet, such as its Websites comprising mscdirect.com and use-enco.com. The company serves primarily through its distribution network of 85 branch offices and 12 customer fulfillment centers. In addition, it distributes fasteners and other consumables for customers in manufacturing, government, the Department of Defense, transportation, and natural resources end-markets. The company was founded in 1941 and is headquartered in Melville, New York. Company description from FinViz.com.

MSC reported earnings of 93 cents compared to estimates for 90 cents. Revenue of $703.8 million beat estimates for $696.8 million. They guided for the current quarter to revenue of $734-$748 million and analysts were expecting $735 million. They declared a quarterly dividend of 45 cents. Shares fell $18 on the news.

The earnings were great and guidance was good. Why did the stock crater? Shares had vastly outperformed the market with a $35 post election gain. The earnings turned into a sell the news event as investors captured all that built up profit.

Shares bottomed at $86 last week and began to move slightly higher. Having just released earnings they to not report again until July 6th. We have plenty of time.

Just to be sure the rebound has begun I am going to put an entry trigger on the position.

With a MSM trade at $90.50

Buy June $95 call, currently $1.40, no initial stop loss because of wide spreads.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Its Back!

by Jim Brown

Click here to email Jim Brown

Editors Note:

Weekend event risk weighed on the market and kept the major indexes slightly in the red. The market would have been considerably more negative except that President Trump and Mnuchin both touted in different appearances that a tax reform plan could be released on Wednesday and the new health care plan could be released at any time. The president also signed multiple executive orders dealing with de-regulation.

The various sound bites provided some market lift and the Dow actually traded positive for a few minutes in the afternoon. Unfortunately, worries over the French election, military saber rattling and talks of poison pills for the funding battle next week, kept investors on the sidelines.



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


HLF - Herbalife
The long call position was closed at the open on Friday.



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. Minor gain but 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. Minor decline from the new 3-week high close on Thursday.

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. Still fighting that resistance at $64.

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.

Update 4/11/17: We were stopped out on the knee jerk move in Apple suppliers after Dialog Semi was cut when news broke Apple was going to make some of their own chips for their phones. This was simply a reaction to a headline. Even if Apple did decide to make their own chips it would take until 2019 for it to have any impact and Cirrus Logic would not be affected because of the type of chips they supply. We reloaded the position at the open on 4/12.

Update 4/12/17: After the close today, Pacific Crest said Cirrus, Broadcom, Qorvo and Skyworks would be exempt from Apple's in-sourcing of its own chips. The chips these companies make are highly sophisticated and protected intellectual property.

Position 4/11/17:

Long May $65 call @ $2.93, see portfolio graphic for stop loss.

Previously Closed 4/11/17: Long May $65 call @ $3.30, exit $2.65, -.65 loss.


CVX - Chevron - Company Profile

Comments:

Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Update 4/19/17: Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.


DIS - Walt Disney - Company Profile

Comments:

No specific news. Minor decline from Thursday's new high.

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?

Update 4/11/17: Goldman Sachs put Disney on their conviction buy list with a $138 price target. The company cited their best upcoming calendar of movies ever. In FY 2018 they have 4 Marvel films, 2 Star Wars films and 3 animated films. Goldman expects record profits from the studio in 2017 and 2018. The analyst said Disney was seeing accelerating profit growth at ESPN and record profits from the theme parks. Avatar Land, Toy Story Land and Star Wars Land all making debuts over the next couple years, the parks are going to be flooding the company with cash.

Earnings May 9th.

Position 3/14/17:

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


FIVE - Five Below - Company Profile

Comments:

The company opened 9 new stores in the Los Angeles area this week. New 7-month high.

Original Trade Description: April 10th.

Five Below, Inc. operates as a specialty value retailer in the United States. It offers accessories, including novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, and T-shirts, as well as beauty products comprising nail polish, lip gloss, fragrance, and branded cosmetics; and items used to complete and personalize living space, including glitter lamps, posters, frames, fleece blankets, pillows, candles, incense, and related items, as well as provides storage options for the customer's room and locker. The company also provides sport balls; team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls; games, including name brand board games, puzzles, toys, and plush items; and pool, beach and outdoor toys, games, and accessories. In addition, it offers accessories, such as cases, chargers, headphones, and other related items for PCs, cell phones, and tablet computers; books, video games, and DVDs; craft activity kits; arts and crafts supplies that consist of crayons, markers, and stickers; and trend-right items for school comprising backpacks, fashion notebooks and journals, novelty pens and pencils, and everyday name brand items. Further, the company provides party goods, gag gifts, decorations, and greeting cards, as well as every day and special occasion merchandise products; assortment of classic and novelty candy bars, movie-size box candy, and gum and snack food; chilled drinks through coolers; and seasonally-specific items used to celebrate and decorate for events, such as Christmas, Easter, Halloween, and St. Patrick's Day. It primarily serves teen and pre-teen customers. As of January 28, 2017, it operated approximately 522 stores in 31 states. Company description from FinViz.com.

Five Below is an expensive Dollar Store. Everything in Five Below is $5 or less. That gives they a wider range of products and still keeps them somewhat Amazon proof because buying it online requires shipping.

Five Below is a bargain hunter impulse store. Customers rarely walk in with a specific product in mind but looking for a bargain instead. This is a kid magnet because they stock a lot of stuff that appeals to adolescents.

They reported earnings of 90 cents that beat estimates for 89 cents. Revenue was $388.1 million and that narrowly beat estimates for $387 million.

They guided for Q1 for earnings of 12-14 cents and analysts were expecting 13 cents. For the full year, they guided for $1.55-$1.61 per share and analysts expected $1.58. Revenue guidance was $1.21 to $1.23 billion.

They currently operate about 550 stores and plan to open 100 in 2017. They expect to increase that to 2,000 stores over time. They were primarily in Texas Florida and the North East but they have begun to expand into California and the feedback has been outstanding. Nothing costs under $5 in California so their stores are hot locations.

Earnings June 21st.

Shares closed at a 7-month high on Monday and just over resistance at $44.50. If the current rally holds the next resistance test would be $52.

Update 4/12/17: Five will open the first nine stores in California next week with stores at Aliso Viejo, Anaheim, Compton, Hawthorne, Montebello, Fontana, Rancho Cucamonga, South Gate and Redlands.

Position 4/11/17:

Long May $45 call @ $1.90, see portfolio graphic for stop loss.


HLF - Herbalife - Company Profile

Comments:

No specific news. We got lucky on closing the long call at the open. Shares of HLF spiked at the open and the option price opened at $2.76. That gave us a minor gain of 23 cents for the combination play. That is far less than we hoped but at least it closed with a gain. Herbalife declined after we entered the plan then traded sideways for another week in April. The trend was in the right direction but there was no momentum.

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:

Closed 4/21/17: Long April $57.50 call @ $1.11, exit $2.76, +1.59 gain
Closed 4/21/17: Long April $52.50 put @ $1.36, exit zero, -1.36 loss.
Net gain 23 cents.


LB - L Brands - Company Profile

Comments:

No specific news. The next resistance level will be $51.25.

Original Trade Description: April 17th.

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.

Two weeks ago, 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.

On April 6th, 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. 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. Investors bought the excuses and the stock did not decline.

Earnings May 24th.

Oppenheimer came out swinging on the LB buying opportunity with a $62 price target. The analyst said patient investors will be well rewarded because the low March numbers were predicted in advance and the recent sell off was overdone. Changes in inventory levels and content after a slow January, made an immediate difference in traffic and revenue.

In April, the stores are transitioning into a Mother's Day theme featuring new and seasonal products in body care, home fragrance, soaps and sanitizers.

Shares rebounded to $47.50 on the better than expected same store sales when accounting for discontinued swimwear. They have held at that level for seven days and are showing no signs of a decline. The next move appears to be higher. If we make an entry now before that move begins, we can get a lower option premium.

There are no June options.

Position 4/18/17:

Long August $50 call @ $2.70, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

No specific news. Still trapped in the consolidation pattern.

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 10th.

Position 3/17/17:

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


$VIX - Volatility Index - Index Description

Comments:

The VIX gained half a point in the weak market. Weekend event risk helped lift the index. 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 3/30/117
Long July $14 call @ $2.55, no stop loss.

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.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.


WDC - Western Digital - Company Profile

Comments:

A new report claims KKR & Co and Innovation Network of Japan are planning on submitting their own bid for Toshiba. There was no mention of WDC being a party to the bid. There was also talks about forming a public-private consortium from dozens of Japanese companies to raise money for a bid. Shares fell $1.30 on the news.

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. Update 4/11/17: JP Morgan upgraded WDC from neutral to overweight and raised the price target from $80 to $116. The analyst said NAND memory prices are going higher and that was great for WDC. He also said the PC market was stabilizing and driving disk demand higher.

Update 4/12/17: WDC may have a trump card in the sale of the Toshiba memory business. WDC has invested more than $13 billion into a partnership with Toshiba in developing the NAND memory business. The company said the sale to a third party would be a serious violation of their joint venture agreement. WDC is bidding with Silver Lake Partners but currently has the lowest bid out of the four remaining bidders. Broadcom is the highest at $23 billion. Two Chinese companies are still in the bidding but would probably be declined because of national security concerns. That leaves Broadcom and WDC and WDC is already a part owner.

Update 4/14/17: Rumors broke early Thursday saying Toshiba had shut down all meetings and actions relating to the sale of its memory business. Shares of Toshiba fell 9%. Later in the afternoon Toshiba said it had not take that action and the report was incorrect. Toshiba's problem is that half the assets it is trying to sell already belong to WDC. Western has a "right to approve" clause in its joint venture contract with Toshiba and they can halt any sale. Reportedly, there are only three bidders left. Those are Broadcom at $23 billion and Taiwan's Hon Hai Precision Industry at $27 billion. WDC is reportedly offering between $15-$18 billion but they have the hammer and the right to block any transaction. The Hon Hai bid would likely be rejected for national security reasons.

Update 4/20/17: Bloomberg said WDC was negotiating with the state-backed Innovation Network of Japan and Development bank of Japan as well as the government over the acquisition of Toshiba's memory 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.


WFM - Whole Foods Market - Company Profile

Comments:

A new article in Barron's suggested Kroger should get their act in gear and make a bid for Whole Foods before somebody else steals it from them. Shares rose to another new high.

Original Trade Description: April 19th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, and household goods. As of March 8, 2017, the company operated approximately 460 stores in the United States, Canada, and the United Kingdom. Whole Foods Market, Inc. was founded in 1978 and is headquartered in Austin, Texas. Company description from FinViz.com.

This is not a play based on Whole Foods fundamentals or earnings. This is a defensive play covering the next four weeks when the market could be volatile.

Shares of WFM spiked last week when news broke that Amazon had considered acquiring the chain to jumpstart its grocery business. Before that news we found out that Jana Partners had taken a huge stake and had given the firm until September to make some radical changes of they would launch a proxy fight.

A couple weeks before that Kroger (KR) was reportedly mulling over making a run at Whole Foods. Jana already had Kroger, Albertsons and Amazon on their list of possible acquirers they were suggesting to WFM management.

Normally shares spike up on a big set of news headlines like these and then roll over a few days later when nothing happens. WFM shares are continuing to rise. That suggests there may be continuing conversations that have not made it to the headlines.

Earnings are May 10th and I am recommending we buy the May $35 call because it is cheap, there is a reasonable chance of something happening in the acquisition area and if the market or stock tanks, we have very little at risk.

Update 4/20/17: Credit Suisse analyst Edward Kelly put out a note saying Kroger (KR) should write a check for WFM because they were the perfect partner and it would accelerate Kroger's market share. The analyst said accretion could be 40 cents per share before any reinvestment.

Position 4/20/17:

Long May $35 call @ $1.30, see portfolio graphic for stop loss.


Z - Zillow Group - Company Profile

Comments:

No specific news. Shares closed at a new five-week high.

Original Trade Description: April 8th.

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.

Update 4/19/17: Bridge Interactive, a subsidiary of Zillow, announced it had added 10 new multiple listing services to its platform. This added 180,000 agents to its 400,000 existing members.

Earnings May 9th.

Position 4/10/17:

Long May $35 call @ $1.45, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

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

Comments:

Resistance held on the SPY and we are set up for either a big decline on a potential government shutdown or a big rebound if the French election plays out correctly and U.S. lawmakers pass a short term resolution to avoid a shutdown.

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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