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Daily Newsletter, Wednesday, 6/14/2017

Table of Contents

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

Market Wrap

No Surprise Rate Hike

by Keene Little

Click here to email Keene Little
Most of the market has been in a choppy consolidation this week while waiting to get through this afternoon's FOMC announcement. To no one's surprise the Fed raised rates 0.25% and the initial reaction was sell the news. But a late-day rally saved the indexes from a worse selloff.

Today's Market Stats

This morning started like previous mornings where we saw a small gap up that was then followed by immediate selling. Tuesday's gap up and immediate pullback was followed by another push back up but today's pullback was followed by mostly sideways consolidation. The pre-market economic reports caused some commotion in the dollar and metals, which then reversed themselves after the FOMC announcement. The net result was more chop and a negative day for the indexes, except the Dow as it continued to work its way higher to another new all-time high (it's working on a 4th straight week at new highs).

This morning's economic reports gave the stock index futures a little pop to the upside and that gave us the little gap up to start the day. The retail sales report, which was largely ignored again, showed further slowing. It will matter when it matters. Sales dropped -0.3% in May from +0.4% in April. Retail sales ex-auto was the same -- -0.3% in May vs. +0.4% in April. That's a significant drop and it points out the fact that the consumer is very likely maxed out on their credit cards (consumer debt is now higher than where it was back in 2007 before the crash into 2008).

The other pre-market report was CPI data, which also slowed and we're now facing possible deflation, er I mean, disinflation. CPI dropped -0.1% in May vs. +0.2% in April and it was lower than the expected 0.0%. Core CPI was higher, coming in at +0.1%, the same as April.

In the Fed's statement this afternoon they feel the slowing of inflation is, let's say it together, transitory. While inflation is running well below the Fed's target of 2%, The Fed feels the economy can handle another rate increase of 0.25%, making the Fed's policy rate now 1.00%-1.25%.

As for reducing its balance sheet, the Fed stated the roll-off of some maturing debt will start sometime this year but they were not specific about when it would start. They are of course data dependent on this, stating "The committee currently expects to begin implementing a balance sheet normalization process this year, provided the economy evolves broadly as anticipated."

The information about the roll-off stated there will be an initial cap of $6B for Treasuries and $4B for agency and mortgage debt, meaning only $10B per month will be allowed to expire without replacement. The remainder of expiring debt for the month will be reinvested. This is obviously a puny amount when you're talking about a balance sheet that has more than $4T of debt.

The Fed's current plan is to increase the cap by $6B per quarter for Treasuries and $4B per quarter for agency and mortgage debt until the cap reaches $30B and $20B per month, respectively. Considering the per quarter increase and max cap of $50B per month (which would be a significant drain of liquidity from the market) it would take about 6 years to get their balance sheet down to where it was prior to the huge expansion that started in 2009. This plan will of course change depending on the economy and it assumes no recession and/or financial catastrophe hits us.

No recession and no financial disaster in the next 10 years has about a zero percent chance of happening. I came across the chart below that shows we could be a lot closer to both than most are currently thinking. It's a chart that shows year-over-year changes in bank loans plus nonfinancial commercial paper. Interestingly, notice the deterioration that's been happening for a long time -- the peaks since 1973 have been lower during each recovery. Also, each low since 1981 has been lower.

Typically, each time loans have peaked and the year-over-year change turned down there's been a recession (vertical gray bars) and the last time (2008) led to extreme financial hardship for banks as all the bad debt had to be written off. Today we have a lot of bad debt in auto and student loans, much of which is already in default (and default rates are on the rise). With the recent turn down in bank loans we have to wonder if it will be different this time. I would not bet on that.

Declining Bank Loans, 1967-April 2017

I'll start tonight's chart review with the Dow since it's been the stronger index lately. It seems money might be rotating into the safety of the bluest of the blue chips, which many view as a defensive move. Money that must be invested in stocks (many funds require managers to be fully invested) will often be moved to the large cap stocks because it's much easier to get in and out of them without greatly affecting their prices.

With the significant expansion in the use of ETFs (passive investing), these are also used by fund managers to control their risk (so they think). One of the consequences of using ETFs is that individual stock picking has declined significantly. The large impact of the FAANG stocks is an example of how just a few stocks can greatly impact the index it's a part of. The tech indexes have suffered much worse than the Dow recently because of this. Helping the Dow has been the recent outperformance of the financials and energy (although energy took a hit today).

The RUT has been more volatile than the others because funds use the various small-cap ETFs (inverse, 2x, etc.) as their playground and it causes a lot more volatility than playing around in the larger-cap ETFs. But the overall result in the use of these ETFs is what we're seeing today -- a fractured market between the indexes as traders unselectively trade in and out of a multitude of stocks only because those stocks are a part of the same index as say the FAANG stocks.


Dow Industrials, INDU, Weekly chart

The weekly chart of the Dow is the one that has kept me more bullish than bearish but admittedly I was beginning to think it was in trouble at the end of April and beginning of May. That was when it was making a double top with its March 1st high and showing bearish divergence. But the pullback into the May 18th low looked more like a correction to the rally and not something more bearish and since then we of course have seen the Dow push to new highs.

Unfortunately for the bulls the bearish divergence has not been negated and it suggests the recent push to new highs might not hold. It doesn't prevent a continuation higher but it does suggest caution about the upside. I've been thinking we might see the Dow make it up to its trend line along the highs from May 2011 - December 2015, which is currently near 21590 and about 200 points above today's high.

An important point to keep in mind is that the rally from January 2016 now has the requisite 5-wave move and can be considered complete at any time. Betting on further upside is a risky bet since upside potential is significantly dwarfed by downside risk.


Dow Industrials, INDU, Daily chart

The rally from May 18th has formed a rising wedge pattern (better seen on the 60-min chart further below), which is another warning sign for bulls to pay attention to. The good thing for the bulls right now is the Dow's ability to climb back above its broken uptrend line from November-April, which has acted as support this month. Bulls want to see that trend line, currently near 21270 and rising about 20 points/day, hold as support since a break of it would indicate a top is likely in place.

Key Levels for DOW:
- bullish above 21,169
- bearish below 21,159


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows the rising wedge pattern for the rally from May 18th. Today it made it up to the top of the wedge and achieved the price projection near 21384 with today's high near 21392 (but closed back below 21384). This projection is where the 5th wave is 62% of the 3rd wave, a typical projection for each wave inside a rising (and descending) wedge. Notice the 3rd wave was also 62% of the 1st wave.

This is a good setup for a reversal back down into a strong selloff (wedges tend to get retraced faster than the time it took to build them) but obviously we have no evidence yet of a top in place. It's only a setup and now we wait to see if the market agrees. A continuation higher out of the wedge would be a bullish move (up to at least the 21600 area.


S&P 500, SPX, Daily chart

SPX has a slightly different price pattern than the Dow and it isn't quite as clear where it could head next. I see upside potential to the top of a rising wedge for its rally from March, currently near 2456. A choppy rally into next week could see it as high as 2465 and above that level would be more bullish, in which case I'd look for a rally to the 2500 area where it would achieve some longer-term price projections based on its rally pattern. But as with the other indexes, the daily chart is overbought and showing bearish divergence, as is the weekly chart. The bulls are toast if and when SPX drops below its June 9th low near 2416.

Key Levels for SPX:
- bullish above 2447
- bearish below 2415


Nasdaq-100, NDX, Daily chart

Heading into its high last Friday NDX presented a very nice setup for the bears to take advantage of, which I posted at the time. It was up against two trend lines along the highs, one since the end of March and the other from November 2014 - July 2015. It was also close to achieving a price projection for the 5th wave of the rally from its March 27th low, at 5906 (the high was near 5898).

Following Friday's quick morning high it then tanked and dropped sharply into Monday's low before starting a bounce correction. Note the bounce off support at its uptrend line from December 2016 - April 2017 (green line), which it again tested with this afternoon's low at 5682. We could see a larger bounce correction but with a 50% retracement of its decline and a back-test of its broken 20-dma the pieces are in place for the next leg down.

Key Levels for NDX:
- bullish above 5898
- bearish below 5633


Russell-2000, RUT, Daily chart

Following last Friday's test (again) of its trend line along the highs from June 2007 - June 2015 the RUT pulled back sharply but looked like it was going to try it again with Tuesday's rally. However, today's decline dropped the RUT below its steep uptrend line from May 31st and while there remains upside potential to at least the 2007-2015 trend line, near 1435, it's now vulnerable to a breakdown from here.

Key Levels for RUT:
- bullish above 1440
- bearish below 1386


10-year Yield, TNX, Daily chart

This morning the bond market rallied and yields tanked. TNX dropped to a new low below its June 6th low before starting a small consolidation and then a bounce back up after the FOMC announcement. The morning low at 2.103 was good enough to close its November 14th gap at 2.117. The low was also a test of a short-term trend line along the lows from May 18 - June 6 and since it's possible this trend line is the bottom of a bullish descending wedge we could see at least a higher bounce from here.

TNX remains bearish below its downtrend line from 2007-2013, currently near 2.25, and turns more bearish if it drops out the bottom of the wedge pattern. A continuation lower from here would target the double-top price objective near 2.00.


10-year emini contract, ZN, Weekly chart

Another way to look at the bond market is of course price instead of yield. The weekly chart of ZN, the 10-year emini contract, shows another reason why yields could start at least a bigger bounce, if not a new rally. Off the December 2016 low ZN now has a 3-wave bounce up to strong resistance at its broken 50- and 200-week MAs and a downtrend line from July 2012 - January 2015. All of these lines cross near 127, which was achieved with today's midday high at 127'08 before reversing back down following the FOMC announcement.

If ZN reverses back down from here it would of course drive yields back up, which is supported by the bullish descending wedge shown on the TNX daily chart above. But obviously if ZN powers through resistance it would be bullish and that would drop TNX below the bottom of its descending wedge. So it's decision time for bond prices here.


KBW Bank index, BKX, Daily chart

Financials have been one of the stronger sectors since last week, along with energy (although energy stocks got thumped this morning with oil), and that has helped the blue chips in their relative strength in the past week. BKX shows a strong spike up from June 6th but that might be all there will be to see for its bounce attempt. The spike up fits well as the c-wave of an a-b-c bounce off the April 17th low and it has so far left a bearish kiss goodbye following the back-test of its broken uptrend line from June 2016 - April 2017.

The trend line was tagged twice, on Monday and Tuesday, but the line held as resistance. For the short-term pattern I do see the potential for one more minor new high, for another back-test of the broken uptrend line, before starting back down.


Transportation Index, TRAN, Weekly chart

Since its December high the TRAN has been trading in a sideways choppy trading range. Following the rally from January 2016 the choppy consolidation can certainly be viewed as a bullish continuation pattern. But there are some signs of weakness that suggest any new highs from here might not hold for very long.

The weekly chart below shows the recent rally off the May 18th low has brought the TRAN back up to its broken uptrend line from June-October 2016 for what is likely to be just a back-test before turning back down. One reason for thinking that is because of the extreme bearish divergence seen on the weekly oscillators.

Daily is now overbought and looking ready to turn back down at any time. That would leave essentially a triple top since December with bearish divergence and a huge "SELL ME!" sign hanging over it. IYT is the transportation ETF that can be traded (e.g., buy puts) if you agree with the bearish setup.


U.S. Dollar contract, DX, Weekly chart

Today was a little wild for the US$ as it spiked down in the morning (presumably on the negative inflation number and perhaps a sudden fear the Fed might back off on another rate increase) but then spiked back up following the FOMC announcement of another rate increase. The dollar finished the day lower but the morning low might have been a good test of last week's low and with bullish divergence since the May 23rd low it's looking like the dollar could get at least a decent bounce.

The weekly chart, which I haven't shown in a while, helps keep the big picture in mind. There are a multiple possibilities for where the dollar will trade inside its large megaphone pattern off the March 2015 high. The dollar has been chopping up and down in a widening trading range and that might not change much in the next year or two.


Gold continuous contract, GC, Daily chart

Gold did the opposite of the dollar today -- it spiked up on the 8:30 economic reports but then spiked back down on the FOMC announcement. Today's high could have completed a bounce correction to its June 6-13 decline but so far the back-test of its 50-dma near 1261 is holding and it remains bullish above 1261. However, on the bear's side, this afternoon's spike high was a perfect 62% retracement of the decline and a back-test of its broken uptrend line from May. This follows the June 6th test of its downtrend line from September 2011 - July 2016, which potentially completed the larger bounce correction off the December 2016 low. The larger pattern suggests lower for gold and we should soon find out if the market agrees or not.


Oil continuous contract, CL, Daily chart

Oil has been trading in a choppy sideways trading range since June 2016 and it's decision time for oil traders. This morning oil spiked down and landed on an uptrend line from August 2016 - May 2017. It then traded in a very tight sideways consolidation for the rest of the day, which has it looking like the trend line will break. That would obviously be more bearish and a drop below the May 5th low at 43.76 would confirm another leg down for the decline from January was in progress.

The price pattern for the decline suggests the selling could accelerate and drive the price of oil well below 40 soon. But if oil gets a bigger bounce started we could easily see 50 again before rolling back over. Until I see evidence to the contrary I believe we'll see oil at least test its February 2016 low near 26 before we'll see oil above 55.


Economic reports

Thursday morning will be busy with economic reports, some of which could be market moving. The Philly Fed index is expected to show a drop from 38.8 to 26 but if it's worse than that, especially in light of this morning's numbers showing a further decline in retail sales and the slowing of inflation (disinflation, not the dreaded word deflation), there could be a negative reaction. It will be interesting to see what the Import/Export prices look like since it will either mirror or counter the inflation numbers we got today.

But the Empire Manufacturing index is expected to show a gain from -1.0 to 6.0 so that would balance out fears about the Philly Fed index. And if both jump higher we could get a nice pop up in the morning. Mitigating any difference between the two, the Industrial Production number is expected to drop to 0% from 1.0%.


Conclusion

The market is fractured at the moment with different indexes doing different things. Money appears to be rotating out of the riskier high-beta stocks and into the safety of the blue chips. Even the utility index has been relatively strong, which is another defensive sector.

While the indexes appear to be holding up for opex I think it's vulnerable to topping at any time. The techs look like they've already topped while the blue chips could hold up for a little longer. I don't think the risk:reward ratio supports betting on the long side but bears obviously need to be careful in a market that always seems to turn back up no matter what kind of selling hits. That I think is about to change but that opinion and $3 will buy you a cup of coffee.

The bottom line is that I see price patterns that support the idea that we're close to getting a strong selloff, even if that selloff is only going to be a larger pullback correction before heading higher again later this summer. Depending on your trading/investing timeframe, now's a good time to pull stops up a little tighter and maximize your profits before going to either cash or trying some short positions.

Good luck and I'll be back with you for Saturday's Market Wrap as I fill in for Jim. See below for a good deal on an OIN subscription for the rest of the year. And in the process you'll be supporting starving writers (wink).

Keene H. Little, CMT


 

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New Option Plays

Headline Risk Increasing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets failed to continue their winning ways as economics, violence and political issues weighed on stocks. The weak economics this morning, the Washington shooting and the Fed decision and press conference kept stocks flat for most of the day. After the bell news broke that the special counsel has expanded the probe to investigate President Trump for obstructing justice. S&P futures are down -6 points. We have a full portfolio and I am not going to add to it in an unstable environment.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Conflicting Signals

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets stumbled over some weak economic reports and there was no post Fed rally. The big cap tech stocks weakened again with several posting lower highs and suggesting the rebound might be fading.

The Dow continued to a new high but all the other indexes were negative. The Washington shooting put a cloud over the markets early. I am concerned the market may be starting to roll over and the Nasdaq rebound may have run its course.



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


ATVI - Activision
The long call position remains unopened until $142.50.

SHOP - Shopify
The long call position remains unopened until $90.75.



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

ADP - Automatic Data - Company Profile

Comments:

No specific news.

Original Trade Description: June 1st.

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.

When ADP reported they beat on earnings with $1.29 compared to estimates for $1.23 but revenues of $3.41 billion missed estimates of $3.43 billion. The news that tanked the stock was a 7% decline in new bookings. Every other metric was fine. The company guided for full year revenue growth of 6% and earnings to rise 17-18%.

Who would not want to own a company growing revenue 6% and earnings 17% per year. Those are good solid numbers.

Apparently there were enough knee jerk sellers to crash the stock from $104 to $95. After two weeks in the doghouse shares began to rise again and they are almost back to $104.

The stock has tried to break out three times this year and each time gets just a little higher before failing. This time, I expect a breakout, market permitting.

Earnings August 2nd.

Position 6/2/17:

Long Aug $105 call @ $1.05, see portfolio graphic for stop loss.


ATVI - Activision Blizzard - Company Profile

Comments:

No specific news.

Original Trade Description: May 22nd.

Activision Blizzard, Inc. develops and publishes games for video game consoles, personal computers (PC), mobile devices, and online social platforms. The company operates through three segments: Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content through retail channels or digital downloads; and downloadable content. It also publishes subscription-based massive multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year, they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.

Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.

Activision is a powerhouse with rapidly rising revenue and multiple game titles arriving in the coming months.

Earnings August 3rd.

Shares dropped sharply with the market last Wednesday and have already rebounded to close at a new high today.

Position 5/23/17 with an ATVI trade at $57.75:

Long August $60 calls @ $2.24, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long August $60 calls @ $2.66, exit $2.02, -.64 loss.


BA - Boeing - Company Profile

Comments:

Qatar's Ministry of Defense said they signed an agreement with Boeing to buy 36 F-15QA fighter jets for $12 billion. In November the U.S. approved a sale of up to 72 fighters for $21.1 billion. This was half of that approval.

Original Trade Description: May 25th.

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.

Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part. That problem has already been forgotten.

Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.

Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.

Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.

Boeing will also profit from the $110 billion arms deal with Saudi Arabia and the escalation to $350 billion over the next decade.

All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.

Earnings July 26th.

Shares made a new high on May 9th at $187 before dropping back to $182 on the market decline. That drop has been erased and shares are poised to break out to a new high and probably begin a new leg even higher.

Update 5/27/17: Tom Cruise said he was planning on filming a new Top Gun movie in 2018. Since the F-14 is no longer flown and the F-35 is not yet available for its film debut, Boeing will probably receive a major public relations bonanza with the F/A-18 Super Hornet in the title role. If it stars in the movie it would be a major advertising win because the capabilities will be shown all around the world and that could generate additional orders.

Boeing received a new $58.6 million contract to demonstrate a new generation of technology to intercept and destroy multiple missiles fired at the USA. This is a result of the accelerated missile testing currently in progress in North Korea. The technology is called the Multi-Object Kill Vehicle (MOKV). Basically, it would be one missile that would be launched at an incoming swarm of hostile missiles. As the MOKV nears the intercept point it would itself launch multiple interceptors and each would be directed to a different target by the radar and communication systems on the MOKV. Instead of firing one missile from the ground to target one incoming missile, the MOKV would be like launching a launching pad of missiles to a predetermined location and then having it attack the swarm on its own. This is not going to be cheap technology.

Boeing also said it won a $89 million contract from the Navy to incorporate the Block II Infrared Search Track System in the F/A-18 E/F aircraft.

Update 5/31/17: The Boeing Midcourse Defense anti-missile system performed flawlessly and knocked down a target ICBM fired from the Marshal Islands on Tuesday. This is the equivalent of a bullet hitting a bullet with a closing speed of more than 2,000 mph in space. That is pretty impressive. Boeing is the prime contractor with Northrop Grumman (NOC), Raytheon (RTN) and Orbital ATK (OA) the key subcontractors. Shares closed at a new high.

Update 6/1/17: Boeing shares dipped at the open after the company got into a fight with the Canadian Defense Minister. Boeing complained that Canadian firm Bombardier was selling jets to U.S. customers below cost because of subsidies from the Canadian government. The defense minister became irate and cut off contact with Boeing regarding a potential order for 18 F-18 Super Hornets to replace some of their aging CF-18 fighters. This was just a headline storm. It is not material to Boeing at this time.

Update 6/7/17: Boeing said the current Arab argument with Qatar has not hurt the $21.1 billion order for 72 F-15QA multirole fighters. The State Dept said they still expect the order to be signed soon. Canada said it planned to increase its military spending by 73% over the next ten years and would involve a significant number of new planes. The spokesman said Canada would hold an open competition to buy 88 advanced fighters to replace its fleet of 77 CF-18 planes. Previously, the government had planned to buy 65 fighters. Part of the requirement is that the planes would have to operate seamlessly with planes and communication systems of Canada's allies. That gives Boeing a big edge up plus they are the incumbent having made and maintained the CF-18s.

Update 6/8/17: Boeing said it was going to send some of its aircraft completion work to China and a production plant near Shanghai. The plant will focus on painting and furnishing jets to be used in China. Boeing expects this to help sales to China of 6,800 jets over the next 20 years. The company said this would not impact any jobs in the USA.

Update 6/13/17: Multiple sources claim Ryanair is talks with Boeing over a large order for the new 737-MAX 10 that will debut at the Paris Air Show next week. Ryanair has already ordered 100 of the 737 MAX 200 planes. The MAX 200 seats 189-196 and the MAX 10 seats 230 passengers. The Ryanair CEO said the only thing preventing them from growing faster was the lack of available planes. Indonesia's Lion Air is expected to place an order for 50 of the 737 MAX 10s as early as next week. Business is good for Boeing.

Position 5/26/17:

Long Aug $190 call @ $5.15, see portfolio graphic for stop loss.
Short Aug $200 call @ $1.79, see portfolio graphic for stop loss.
Net debit $3.36.


BABA - Alibaba - Company Profile

Comments:

No specific news. BABA shares continued to move sideways as it consolidates the gains from last week.

The position remains unopened until $142.50.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

With a BABA trade at $142.50

Buy Aug $150 call, currently $3.25, initial stop loss $135.50.
Sell short Aug $160 call, currently $1.30, initial stop loss $135.50.
Net debit $1.95. Prices will rise significantly before our entry is triggered.


COST - Costco - Company Profile

Comments:

No specific news. Nice $1.16 gain.

Original Trade Description: June 1st.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

Costco reported earnings of $1.59 compared to estimates for $1.30. Revenue of $28.22 billion rose 8% but missed estimates for $28.6 billion. Same store sales rose 5% and beat expectations for 4%. Shares spiked $2.50 on the report.

Earnings August 24th.

On May 31st, Costco reported May sales results of $9.86 billion, an increase of 7%. Same store sales rose 4.5% in the U.S. and 6.4% internationally with the company average at 4.5%.

Guggenheim said the May comps reinforce the case for 20% earnings growth in Q4. Costco customers are on track to spend more than $100 billion on their Visa branded credit cards and 70% will be at retailers that are not Costco. The company stands to make $170 million on the commissions from Visa.

People love to shop at Costco and they spend a lot of money. A weekend shopping trip to the local Costco store will expose you to roughly 30 tables of free samples as Costco employees cook up concoctions available for sale in the store. Broiled salmon, cocktail weenies, crab dip, jalapeno biscuits, barbecue, etc, are all available for tasting. Weekend shopping takes on a party atmosphere and the local stores are always full. Amazon cannot crack this code.

Amazon is the largest online seller of Costco products marketed under the Kirkland brand. They have 69.5% of the online market share for Kirkland products. Costco only has 23.2% market share online. Who knew Amazon was such a big supporter of Costco?

We played Costco before the earnings and exited with a nice gain after they announced $7 special dividend for mid May. Now that earnings are over and shares are breaking out to a new high, it is time to play them again.

Position 6/5/17:

Long July $183 Call @ $2.60, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

No specific news. Facebook has built an AI that learned how to lie to get what it wants. Can Skynet be much farther into the future? Facebook fed the AI computer the text messages from 5,808 human conversations where they negotiated for some specific outcome either an item, event or decision. Then they tried to negotiate with the computer over some items each were given. The key was for the computer to end up with a specific item. During the testing they found that the computer had learned to lie to misdirect the opponent from the item the computer actually wanted. This is scary. Extrapolate this into a much larger environment with millions of conversations to learn from and the outcome could be an entirely new level of computer consciousness.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Update 5/19/17: Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Update 5/22/17: Facebook shares were weak after the BROWSER bill was introduced in the House. Websites and browsers must get explicit permission from users in order to collect and use personal data including browser history, search terms, cookies, etc. They also cannot deny you the use of their program if you decline to give them permission to use your data. While the bill has little chance of passing it was a wet blanket on Facebook today.

Update 5/24/17: Reuters reported that Facebook has signed content deals with Vox Media, Buzzfeed, ATTN, Group Nine Media and others to begin creating shows for its upcoming video service. They are going to develop both short and long form content with ad breaks included. The first scripted shows will be up to 30 min which Facebook will own. The second tier will be shorter scripted and unscripted shows with episodes lasting 5-10 minutes.

Position 6/12/17:

Long Aug $150 call @ $4.75, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long Aug $150 call @ $4.90, exit $6.80, +$1.90 gain.


LB - L Brands - Company Profile

Comments:

No specific news.

Original Trade Description: May 30th.

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. The company was formerly known as Limited Brands, Inc. Company description from FinViz.com.

The company reported its seventh consecutive quarter of positive earnings surprises despite a minor revenue miss. Earnings of 33 cents beat estimates for 29 cents. That was well above the company's own guidance for 20-25 cents. Revenue of $2.436 billion was slightly lower than the estimate for $2.456 billion.

The bad news was a 9% decline in same store sales. The majority of that was due to the exit from swimwear and related apparel categories. This has been in progress for about two years. Those two categories created a 6% decline for the lack of swimwear and 9% decline for the related apparel. Excluding those the comp sales were in line with estimates. However, Victoria Secret lingerie sales declined -12% while PINK sales rose in the low single-digits.

They raised their 2017 guidance to earnings of $3.10-$3.40, up from $3.05-$3.35. Q2 earnings guidance was 40-45 cents. Analysts were expecting $3.19 and 45 cents.

Expected earnings Aug 16th.

Update 6/1/17: The company said despite a 10-14% impact from the discontinued swimsuit and swim apparel lines, same store sales for May only declined -7%. That means without that impact sales would have been up 3% or more.

Shares were down ahead of earnings to $47.50. They have rebounded to a two-week high and appear to be on the road to recovery. Resistance is $53.50.

Position 5/31/17:

Long August $52.50 call @ $2.35, see portfolio graphic for stop loss.


NFLX - Netflix - Company Profile

Comments:

No specific news.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Update 5/22/17: Netflix expects to have 102 million subscribers by the end of Q2 with 51.45 million in the U.S. and 50.49 million internationally. Three years ago the company only had 11 million international subscribers. They expect international numbers to exceed U.S. subscribers by the end of the third quarter. With international subscribers growing roughly 3 million per quarter they should reach 100 million in 2020 as acceptance continues to grow. That puts them on track for 200 million total subscribers by 2025.

Update 5/27/17: Piper Jaffray reiterated an overweight rating this morning but raised the price target from $166 to $190. The analyst said Netflix probably low-balled the company's 2020 earnings expectations by as much as half. The analyst said it the international viewers grow as well over the next 10 quarters as the last 10 then expectations could be 100% too low. They believe Netflix could have 180 million international subscribers by 2020. Jaffray said the total addressable market of broadband viewers could be more than 765 million by 2020.

MKM Partners also raised their price target from $175 to $195.

Update 6/2/17: Tom Lee of Fundstrat said "stick with the FANG stocks in 2H-2017 for 20% to 40% additional gains." Netflix added $2 to a new high close.

Update 6/6/17: Cantor Fitzgerald raised their price target from $165 to $190 saying international subscriptions are set to surge. The analyst said Netflix has 50% penetration in the US households with broadband access but only 5.7% internationally. He expects that international number to rise dramatically as advertising and acceptance grows.

Update 6/13/17: Netflix partnered with telecom giant Altice and will begin rolling out pay services in France, Portugal, Israel and the Dominican Republic in the coming months.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 6/12/17:

Long July $160 call @ $4.96, see portfolio graphic for stop loss.
Short July $175 call @ $1.65, see portfolio graphic for stop loss.
Net debit $3.31.

Previously closed 6/9/17:
Long July $160 call @ $6.45, exit $7.50, +1.05 gain.
Short July $175 call @ $2.16, exit $2.41, -.25 loss.
Net gain 80 cents.


RMD - ResMed Inc - Company Profile

Comments:

No specific news. Holding the $2 gain from Tuesday.

Original Trade Description: June 6th.

ResMed Inc. designs, develops, manufactures, and markets medical devices and cloud-based software applications that diagnose, treat, and manage respiratory disorders. Its portfolio of products include devices, such as air flow generators, ventilators, and oxygen concentrators; diagnostic products; mask systems; headgear and other accessories; dental devices; portable oxygen concentrators; and cloud-based software informatics solutions. The company also produces continuous positive airway pressure, variable positive airway pressure, and AutoSet systems for the titration and treatment of sleep disordered breathing (SDB). In addition, it offers data communications and control products, such as EasyCare, ResLink, ResControl, ResControl II, TxControl, ResScan, and ResTraxx modules that facilitate the transfer of data and other information to and from the flow generators. The company markets its products to sleep clinics, home healthcare dealers, patients, hospitals, physicians, and third-party payers through a network of distributors and direct sales force in approximately 100 countries. Company description from FinViz.com.

ResMed reported earnings of 71 cents that rose 2.8% and beat estimates by a penny. Revenue of $514.2 million rose 13.3% but missed estimates for $519 million. Revenue in the America's rose 18% compared to a 9% rise in EMEA and APAC. Gross margin was 58.3%. They ended the quarter with $827.3 million in cash. They announced a quarterly dividend of 33 cents, payable on June 15th.

Expected earnings July 27th.

ResMed's recent claim to fame is the ResMed AirMini, the world's smallest CPAP mask. Their goal is to change 20 million lies by 2020 with products that improve patient outcomes and daily lives. They manufacture and market products for chronic diseases where there is a large patient base.

They currently provide remote monitoring for more than three million patients around the world.

Shares closed at a two year high on Wednesday. Earnings are July 27th and the July options will deflate too quickly. I am recommending the October strikes but we will exit before the earnings. We can always buy time but we do not have to use it.

Position 6/8/17:

Long $75 call @ $2.90, see portfolio graphic for stop loss.


SHOP - Shopify - Company Profile

Comments:

No specific news. We were stopped out on the prior position on Friday and I recommended we reload with a trade at $90.75. Shares dipped again on Wednesday but support held. I again debated lowering the entry point but decided to keep it the same so we can be sure there is a rebound in progress rather than speculate on a bottom.

RELOAD: With a SHOP trade at $90.75, Buy July $95 Call. Sell July $105 call.

Original Trade Description: May 31st.

Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in Canada, the United States, the United Kingdom, Australia, and internationally. Its platform provides merchants with a single view of their business and customers in various sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces; and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting. The company was formerly known as Jaded Pixel Technologies Inc. and changed its name to Shopify Inc. in November 2011. Company description from FinViz.com.

The company reported a Q1 loss of 4 cents compared to estimates for a loss of 11 cents. Revenue rose 75% to $127.4 million and beat estimates for $122.1 million. Merchant solution revenue rose 92% to $65.3 million and subscription revenue rose 60% to $62.1 million. They guided for Q2 to revenues of $142-$144 million and the full year for $615-$630 million. That is above their prior guidance of $580-$600 million.

Expected earnings August 1st.

The company was very positive about the future outlook. On May 18th they announced a secondary offering for $500 million at $91 per share. The stock dropped from $91 to $81 on the news but immediately recovered. Wednesday's close was a two-week high after that announcement.

SHOP has been discussed multiple times as takeover bait for Ebay or Amazon. Neither company will comment but Amazon would be the likely player. They could gobble up Shopify at $7 billion like a late night snack.

I believe shares are going to resume their upward momentum now that the secondary offering has been consumed by the market.

Update 6/5/17: The S&P/TSX index is considering whether to add SHOP to the Canadian index. That would equate to about 5.4 million shares of additional buying from index funds. The rule change that would allow SHOP to benefit is out for comment until June 9th.

I wanted to buy calls that expire after earnings but there are no August strikes yet. The next strike in October is too expensive. Even the short-term strikes are expensive so I am going with a July spread to reduce the risk.

With a SHOP trade at $90.75:

Buy July $95 call, currently $4.00, see portfolio graphic for stop loss.
Sell July $105 call, currently $1.90, see portfolio graphic for stop loss.

Previously closed 6/9/17:
Long July $95 call @ $5.25, exit $5.00, -.25 loss.
Short July $105 call @ $2.35, exit 2.50, -.15 loss.
Net loss 40 cents.


V - Visa Inc - Company Profile

Comments:

No specific news.

Original Trade Description: June 10th.

Visa Inc. operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a processing network that enables authorization, clearing, and settlement of payment transactions; and offers fraud protection for account holders and assured payment for merchants. The company also offers gateway services for merchants to accept, process, and reconcile payments; manage fraud; and safeguard payment security online, as well as processing services for participating issuers of visa debit, prepaid, and ATM payment products. In addition, it provides digital products, including Visa Checkout that offers consumers an expedited and secure payment experience for online transactions; and Visa Direct, a push payment product platform, which facilitates payer-initiated transactions that are sent directly to the Visa account of the recipient, as well as Visa token service that replaces the card account numbers from the transaction with a token. Further the company offers corporate (travel) and purchasing card products, as well as value-added services. It provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands. Company description from FinViz.com.

Visa reported earnings of 86 cents compared to estimates for 79 cents. Revenue of $4.5 billion rose 23.5% and beat estimates for $4.3 billion. They raised full year revenue guidance saying they expect to come in at the high end of the $17.49-$17.79 billion prior forecast. Analysts were expecting $17.75 billion. Shares rallied $10 since the earnings report.

Estimated earnings July 20th. Visa shares declined sharply on Friday even though they are not a tech stock. The sudden need to raise cash because of losses elsewhere may have caused investors to take profits in Visa. This should be a buying opportunity. With the Fed likely to raise rates this week the financial community should continue to post gains.

Position 6/12/17:

Long Aug $95 call @ $2.30, see portfolio graphic for stop loss.


$VIX - Volatility Index - Index Description

Comments:

The position was closed at the open. Now volatility is free to spike to the moon.

The June 2nd close at 9.75 was the lowest close since December 1993. The June 9th intraday low at 9.37 was also a 24-year low.

This is a July call. We have plenty of time and the odds of a market sell off over the next 2 months are close to 100%. The VIX cannot go much lower but it can go a lot higher.

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early this week then the entire event risk scenario comes back into play with a potential come from behind win.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

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:

Shares dropped $2 after Hynix said it was going to partner with six other firms to put together a $20 billion bid for Toshiba's memory business. That could take WDC out of the running.

Original Trade Description: June 10th.

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. Additionally, the company licenses its technologies. The company sells its products under the HGST, SanDisk, and WD brands to original equipment manufacturers (OEMs), distributors, resellers, cloud infrastructure players, and retailers. It serves storage subsystem suppliers, OEMs, Internet and social media infrastructure players, and PC and Mac OEMs. Company description from FinViz.com.

Western Digital is in the sweet spot for hard drives and memory. After acquiring SanDisk last year they have been integrating memory products into their product lines and business is booming. Their hard drives are the state of the art with 10 terabyte drives now the leading edge of capacity. Their SSD drives are growing by leaps and bounds with capacities surging and prices declining.

They are currently bidding on the Toshiba NAND memory business with an $18 billion bid. Toshiba is supposed to announce the winner of the bid on Thursday. If WDC wins that bid they will be unstoppable with yet another source of highly desirable memory components. They already own half of the Toshiba business so whatever happens they will still be a part of the company. There could be a protracted legal fight if WDC is not the winner but they will still benefit.

Estimated earnings July 27th.

Shares crashed from a high of $91.94 on Friday to a low of $82.14 today. The rebound from the opening low was immediate and the stock closed at $86.64. I am looking for a return to the highs and if they win the Toshiba business we could see higher highs.

Update 6/13/17: Western Digital was initiated with a buy rating and a $130 price target at Aegis Capital and saying there was additional "long term appreciation" above that level. At the same time, Japanese media said WDC would raise its bid to $18.2 billion. The bids close on Thursday. Guggenheim reiterated a buy rating and a $125 target saying WDC would be fine regardless of whether or not it buys Toshiba.

Position 6/13/17:

Long Sept $90 call @ $6.50, see portfolio graphic for stop loss.
Short Sept $100 call @ $3.09, see portfolio graphic for stop loss.
Net debit $3.41



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