Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/3/2017

Table of Contents

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

Market Wrap

Russell Weakness Ahead?

by Jim Brown

Click here to email Jim Brown

The Russell 2000 traded negative most of the day but squeezed out a gain at the close.

Market Statistics

The end of quarter retirement cash flows should be nearly over. The rotation into small caps may be nearly over as well. The Russell traded positive at the open and again at the close but was in negative territory most of the day. The large cap indexes were positive all day with a steady upward trend. That suggests at least some investors may be starting to take some small cap profits as they rotate back into large caps for the Q3 earnings cycle.

The Russell 2000 has gained 162 points since the August 21st lows. That is roughly 12.2% and it is time for a rest.


There were no market moving economics today. The CoreLogic Home Price index for August rose from 6.7% to 6.9%. Single-family homes, excluding distressed properties, rose +0.8% in price and were up 6.1% over the same period in 2016. The index has finally surpassed its prior peak from April 2006 after 58 months of consecutive growth. Demand is continuing to rise and there are only 4.2 months of inventory available for sale.

The New York ISM report for September declined from 56.6 to 49.7. That was the second consecutive decline from the peak at 62.8 in July. This was the second weakest month in 2017. The six-month outlook component remains positive at 58.4 but declined from 60.5. However, the employment component declined from 56.4 into contraction territory at 48.3. The quantity of purchase component did the same thing with a drop from 51.6 to 48.1.

Vehicle Sales for September hit 18.6 million, annualized. That was up from 16.1 million in August and way over consensus estimates for 17.1 million. The surge came from demand for replacement vehicles after Harvey and Irma. Current insurance estimates suggest there were 800,000 cars flooded by Harvey. Irma and Maria were not as deadly for cars but there will continue to be additional buying for the next 2-3 months as the insurance claims are paid. Harvey will go down in history as the most expensive storm ever in terms of vehicle damage.

Auto sales rose from 6.0 million to 6.8 million. Truck sales exploded from 10.1 million to 11.8 million on an annualized basis. Domestic vehicles rose from 12.6 to 14.6 million. At 65% of the total sales, that was a historic high. New vehicle prices rose to an average of $31,058 and also a record high. Auto manufacturers had a surplus of 500,000 to 600,000 vehicles in inventory as a result of slowing sales throughout the year. The storms rescued them from massive markdowns but the average sales incentive was still a record $4,050 per vehicle.

Wednesday's ADP Employment and ISM Nonmanufacturing are the main reports. The ADP estimates have been reduced from 172,000 to 140,000 over just the last three days. It appears everyone is afraid the hurricanes have really impacted the job market. The Nonfarm estimates have been reduced from 140,000 to 100,000 over the same period with Moody's projecting only 75,000. The actual numbers will not matter because everyone understands the storm impact is temporary.

The hurdle for Wednesday is the Janet Yellen speech. In the speech last Wednesday, she was alternating between dovish, hawkish and confused. She will probably try to clarify her presentation if she gets the chance.


After the bell, the API inventory report showed a decline of 4.079 million barrels of oil compared to estimates for a 750,000 barrel decline. Pushing prices lower in the evening session was a build of 4.19 million barrels of gasoline, four times larger than expectations. Prices declined to $50 on the news. Distillate inventories declined 584,000 barrels. Oil inventories at Cushing rose 2.084 million barrels. We also learned that OPEC increased production by 120,000 bpd in September according to a Bloomberg survey.


In stock news, Lennar (LEN) reported earnings of $1.06 that rose 5.6% and beat estimates for $1.01. Revenue of $3.26 billion rose 15.1% and beat estimates for $3.24 billion. They sold 7,598 homes in the quarter, up from 6,779 in the same period in 2016. The average selling price rose 3.6% to $375,000. They raised their guidance for the full year from $370,000-$375,000 to $380,000-$385,000. They warned that deliveries of about 950 homes would be pushed into the next quarter because of the hurricanes. Orders rose 8.4% to 7,610. The builder warned they saw higher costs ahead as hurricane rebuilding efforts consumed large amounts of lumber, sheetrock, carpet and paint.


Paychex (PAYX) reported earnings of 62 cents that rose 11% and beat estimates for 60 cents. Revenue of $816.8 million rose 4% and barely beat estimates for $816.0 million. They ended the quarter with $368.2 million in cash and no long-term debt. During the quarter, they paid $179.1 million in dividends and repurchased $94 million in shares. The company guided for 6% revenue growth, up from 5% and revenues of $3.34 billion, slightly ahead of analyst estimates for $3.31 billion. Shares rose 3.6% on the news. The PAYX chart scares me. There is constant volatility and I would not be a buyer.


Stifel upgraded the restaurant sector with Dominos (DPZ), Darden (DRI), Wendy's (WEN) and Yum Brands (YUM) getting a buy rating. The analyst said these chains have healthy sales momentum, significant expansion plans and a desire to return cash to shareholders. He was negative on Brinker (EAT) and Buffalo Wild Wings (BWLD) because of declining traffic.



Deutsche Bank downgraded Urban Outfitters (URBN) to sell from hold. The analyst said peers L Brands (LB), Buckle (BKE) and Zumiez (ZUMZ) will report same store sales soon and we expect the multiple for these retailers to contract. URBN shares have rebounded nearly 45% from their August 15th low of $16.82 and they are expected to retrace some of those gains. DB put a $19 price target on the stock.


Wal-Mart (WMT) bought delivery startup Parcel. The company specializes in last mile delivery. Parcel is a 24/7 operation that delivers packages the same-day, overnight and in scheduled 2 hour windows. The acquisition price was not disclosed. Wal-Mart said they plan to leverage Parcel to deliver general merchandize as well as fresh and frozen groceries the same day they are ordered. Parcel will deliver for Wal-Mart and Jet.com, the online retailer Wal-Mart bought for $3 billion last year. These acquisitions are weapons to use against Amazon and Whole Foods.


Tesla (TSLA) reported production for Q3 and it was not pretty. They had previously expected to build 1,500 of the Model 3 and only produced 260. The company said there were no issues with the car, just growing pains as unexpected production bottlenecks appeared. They believe those have been resolved and Q4 production will be higher. They are still forecasting 5,000 a month in December and 10,000 a week by the end of 2018. Overall they delivered 26,150 vehicles. Elon Musk had previously warned the company was entering into "production hell" with the start of the Model 3 and apparently, he was correct.

Goldman Sachs rates Tesla a sell with a $210 price target. Morgan Stanley is neutral with a $317 target. Guggenheim said they see supply chasing demand for the next 2-3 years and have a $430 target. After the close today, Nomura initiated coverage with a buy rating and street high price target of $500. They see revenue increasing from $8 billion in 2016 to $58 billion in 2021. The average target for the street is $304.


Susquehanna downgraded MGM to neutral from positive after the disaster in Las Vegas. MGM owns Mandalay Bay. The analyst said business will rebound over the long term but in the short term, there is the possibility of earnings revisions due to lost revenue. I saw a long line of people checking in on Tuesday afternoon. I seriously doubt what happened will deter many people from completing their trips. Consumers will view the disaster as a lightning strike, a onetime event that is not likely to be repeated. They will probably refrain from large outdoor crowds but Vegas tourists are likely to be immune to almost anything. More than likely, they may turn into gawkers and go out of their way to view the scene.


Deutsche Bank cut F5 Networks (FFIV) to a sell with a $90 price target, warning that increased competition could detract from earnings growth. The analyst warned the stock could decline another 25% with revenue growth falling from 4% to 1%. Shares fell 5% on the news.


After the bell, Office Depot (ODP) said it was going to buy CompuCom for $1 billion and lowered its guidance. CompuCom is an IT company and ODP views it as the first step away from being simply an office supply company into an IT services company as well. Office Depot will issue new shares for the acquisition and pay down CompuCom debt with cash. ODP said operating income for the full year is now expected to be $400-$425 million, down from the prior guidance of $500 million. They blamed the hurricanes and lower back to school traffic. Shares fell 9% in afterhours. They cannot drop much lower.


Ford (F) announced plans to slash $14 billion in costs over the next five years and move away from autos and internal combustion engines to develop more trucks and electric and hybrid cars. The savings are not expected to show up in earnings until 2019 and 2020. They will maintain their production of trucks and SUVs in North America. The company is open to more partnerships to reduce cost and risk in the restructuring. The CEO said shifting to only all-electric vehicles would be like walking off a ledge where we destroy the earnings power of the company. They still plan on one-third of their vehicles to be internal combustion in 2030. He said electric vehicles could have an assembly area half the size, require half the capital investment and 30% fewer labor hours per car. Maybe CEO Farley should check on how that production is working out for Tesla.




Markets

All in? After the rally over the last week, have investors gone all in on the stock market for Q4? While there has been a lot of price chasing and capitulation buying, I suspect there are still a lot of investors holding off on buying a market top. Everyone would like to buy a dip but unfortunately, there have not been any recent dips. The ones we have had were minor and not enough to really draw in the retail investor.

Hedgeye had a new cartoon out yesterday titled, "Gandalf's Wise Words."


With the end of quarter retirement cash flows nearly over, I could easily see the Russell retracing some of its gains. With the first two weeks of October normally volatile, we could see some window undressing and one last surge of portfolio restructuring before the Q3 earnings cycle begins. While I am not betting on a dip, we should always be ready. I do expect a positive market through the earnings cycle.

The S&P closed at a new high with a minor 5-point gain. There were 259 advancers and 196 decliners on the S&P for Tuesday but A/D volume was 2:1 in favor of advancers. The pace of gains slowed slightly but that does not mean they are over.

The S&P is well above prior resistance and in blue-sky territory.


The Dow shook off the 8-days of lethargy while investors were rotating into small caps, and surged with large back-to-back gains. That powered the Dow over uptrend resistance and round number resistance at 22,500. The sudden surge in gains was powered by end of quarter cash flows and a move back into the big cap stocks. On Monday, only 5 Dow components posted losses. Today, only 6 posted losses. This shows very good market breadth.

There is no specific reason for the Dow to retrace at this point but the market never needs a specific reason to take profits.



The Nasdaq has struggled with the big cap tech stocks being weak but the index has now posted five consecutive days of gains. The last two have been decent but rather anemic compared to the 40-60 point days we would like to see. The big caps were mostly positive for a change with the individual losses minimal.

The Nasdaq is well below potential resistance around 6,650 and the relatively minor advance is far from being overbought. If investors begin to buy the big caps ahead of earnings, we could see the Nasdaq move over the 6,600 level.




The Russell 2000 has gained 162 points nearly nonstop and it is due for a rest. With the cash flows fading and the rotation having run its course, I would be very surprised if we did not see a decent dip in the index. The A/D line in the small caps was 3:2 positive today but A/D volume was almost dead even. When I was doing my scans for potential Premier Investor plays today, there were a lot of small cap stocks with almost no movement. They were either up 10 cents or down 10 cents but overall the momentum had evaporated.


We have not had a seasonal trend this year where the market did what was expected. With the first two weeks of October normally volatile, the contrarian view would suggest a directional market. I am not going to bet on either direction. We need to trade what the market gives us this week rather than what we expect.

Yellen's speech could be a pothole or it could be ignored, depending on what she says.

The Russell "should" fade but it would be a buying opportunity if it happens. Be prepared.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Construction

by Jim Brown

Click here to email Jim Brown

Editors Note:

There will be a lot of construction, rebuilding and remodeling over the next 6 months. Materials sellers will profit from this wave.



NEW DIRECTIONAL CALL PLAYS

LOW - Lowes Companies - Company Profile

Lowe's Companies, Inc. operates as a home improvement company in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal living, lawn and garden, paint, millwork, flooring, kitchens, outdoor power equipment, and home fashions. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers; and retail customers comprising individual homeowners and renters. As of March 24, 2017, it operated 2,365 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Company description from FinViz.com.

Earnings Nov 22nd.

Home Depot (HD) is setting new highs every day and it is too late to take a position in that stock. We already have one in the LEAPS newsletter. Lowes is in the same business and is on the verge of clearing resistance to make a four-month high. They will benefit as much as Home Depot in the post hurricane rebuilding boom.

Lowes reported earnings that missed expectations because of some unusual events and they provided weak sales guidance. This was the week before Hurricane Harvey. Shares fell 6% on the news. Credit Suisse said despite the earnings miss there were bright spots and the miss was also due to a calendar quirk that reduced sale days in the quarter. Earnings still rose 14%.

Credit Suisse reiterated an outperform rating and $95 price target. Again, this was before the hurricanes. Sales should be significantly higher for Q3.

Shares have rebounded to resistance at $81.50 and should continue to move higher as investors begin to look for underperforming stocks after the big market move higher. Rather than buy stocks at new highs after the big gains they will look for promising stocks with room to run.

Buy Jan $85 call, currently $1.85, initial stop loss $77.00.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Key Day Wednesday

by Jim Brown

Click here to email Jim Brown

Editors Note:

The end of quarter retirement cash flows should have peaked today. Wednesday should be a key day in the market to see if this rally has any staying power. With the cash flows fading there could be a serious bout of window undressing. We did see a lot more stocks with only minor gains on Tuesday and quite a few with minor losses. It appears the momentum was fading.



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


HRS - Harris Communications
The long call position was entered at the open.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Apple shares rose slightly after a RBC Capital Markets survey found that 28% of respondents were interested in buying the iPhone X. Only 17% were thinking about an iPhone 8 and 20% were interested in an iPhone 8+. Also, 57% of the people thinking about buying the X were planning on getting the more expensive 256 Gb model. Apparently, Apple faithful really want the X.

Original Trade Description: Sept 23rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. Company description from FinViz.com.

Earnings October 31st.

Apple shares have fallen $13 since the September 1st high and $12 since the product announcement on September 12th. The shares have fallen into a cluster of converging support levels and the post announcement decline should be "about" over. Nobody will know for sure until the rebound begins.

After the product announcement Apple reaffirmed its guidance saying we planned for the recent event surrounding the production and release of the new products when giving the prior guidance. Apple rarely misses guidance. Knowing they were having production problems and staggered release they probably low-balled the number.

They are expected to sell 85 million phones in Q4. More than 66% of iPhone users have phones older than 2 years. They will have five active models for sale in Q4. They have the 7, 7+, 8, 8+ and the X plus they still have some of the older, cheaper models they are selling overseas in places like India. The new Watch could be the model that actually turns the Watch into its own revenue category instead of being lumped into the "other" category.

I have been negative on Apple for the last three weeks and the decline is going as expected. I believe the stock has reached a level where buyers will appear. There could still be several dollars of decline but the rebound could be just as quick once it appears to have bottomed.

I am recommending a November spread to reduce our risk and depending on the stock price before earnings, we might hold over the event. That is where they will give sales numbers and Q4 guidance and they could be strong.

Update 9/26/17: Raymond James raised their price target to $180 and increased expectations for gross margins and average selling price. The analyst does not expect this to boost earnings until Q2-2018. The analyst said the decline was a buying opportunity.

Position 9/25/17:

Long Nov $155 call @ $3.65, see portfolio graphic for stop loss.
Short Nov $165 call @ $1.27, see portfolio graphic for stop loss.
Net debit $2.38.


ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Shares rose slightly with the Nasdaq.

Original Trade Description: Sept 27th.

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.

Adobe reported earnings of $1.10, up 47%, on record revenue growth of $1.84 billion, up 26%. Analysts were expecting $1.01 and $1.82 billion. The company said they added a record number of new subscribers for Creative Cloud during the quarter. Deferred revenue rose to a record $2.2 billion.

The stock was up 52% for the year prior to earnings. Shares were crushed because they had the audacity to guide for the current quarter for revenue of $1.95 billion which matched analyst estimates.

Keybanc reiterated their buy rating and $174 price target. Canaccord Genuity reiterated a buy rating and raised the price target to $170.

Expected earnings Dec 19th.

Shares have begun to rebound from the $144 post earnings low. They were $156 before earnings. The risk here should be minimal.

Position 9/28/17:

Long Nov $150 call @ $2.89, see portfolio graphic for stop loss.


ADI - Analog Devices - Company Profile

Comments:

No specific news. Semiconductor sector was flat.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: Aug 29th.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.

Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.

Update 9/21/17: CAT reported a global increase in machine sales of 11% for August, down 1% from July. Total sales in Asia and the Pacific surged 44%, down 1% from July. Despite the minor declines, the business is very strong.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

Facebook said it was going to hire 1,000 workers to screen ads and prevent a recurrence of the Russian advertising scandal.

Original Trade Description: Sept 26th.

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 fell hard on Monday with a nearly $8 drop. That knocked the stock back to $161.56 or a -6.88% decline from its highs. On Tuesday Facebook announced they had signed a long-term deal with the NFL to broadcast 10 min recaps of all 256 MFL games this season. The broadcast will be on Facebook's Watch channel and will be a major draw to that site. A lot of people follow multiple teams but they probably only get highlights on their local team on local TV. In this format they can get a comprehensive recap of every game every week.

Earnings are expected Nov 1st.

Facebook has been posting strong earnings beats and growing demographics. I expect that again in the Q3 report.

I am recommending the December options because in a spread format they are actually cheaper. The close to the money November options are expensive but options slightly out of the money are very cheap. The OTM December options have significant value that makes the spread work.

A $170 Nov call is $4.50. The Dec $170-$185 spread is $4.16 and we have an extra month of time if we decide to use it. The longer dated options will rise faster and retain their value better than the short term November strikes.

Because of the market weakness I am recommending an entry trigger at $165.50.

Update 9/27/17: Facebook gapped open to $165.90 and above our entry trigger at $165.50. Citigroup said Q3 ad revenue will rise 47%. Citi said one agency that manages $1 billion in spending on social platforms said combined spending on Facebook and Instagram rose 88% in July and 73% in August. Another agency said Facebook spending continued to rise because of higher prices and more dynamic ad units. In addition the percentage of video ads continues to increase.

Update 9/30/17: Deutsche Bank reiterated a buy rating and raised their price target from $215 to $220. The analyst said Facebook is the new IBM from decades ago when IBM was dominant in the computer sector. Facebook has the best in class ad systems including targeting, creative and attribution and a massive audience of more than 2 billion consumers. The analyst said conversations with advertising agency executives showed that not only are advertisers sticking with Facebook, they are planning on increasing spending in the future.

Update 10/2/17: Facebook turned over the 3,000 Russian ads to congress and Zuckerberg asked for forgiveness in letting Facebook increase the divisiveness in the country. He said he will try to make Facebook more neutral in the future.

Position 9/27/17:
Long Dec $170 call @ $6.17, see portfolio graphic for stop loss.
Short Dec $185 call @ $1.79, see portfolio graphic for stop loss.
Net debit $4.38.


HRS - Harris Communications - Company Profile

Comments:

Harris was awarded a $765 million contract to provide radios to the Navy for the next 5 years. Two months ago, they won a contract for $255 million to build radios for the US special operations forces. Last year they won part of a $12.7 billion 10-year contract to build radios for the Army.

Original Trade Description: Oct 2nd.

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges in the United States and internationally. The company operates in three segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, exploration, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, surveillance and reconnaissance, command, control, communications, computers and intelligence, and undersea systems and solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management; engineering support and sustainment for ground-based systems; and information technology and engineering managed services to government and commercial customers. The company was founded in 1895. Company description from FinViz.com.

Harris is a very strong defense company. As the description above states, they are very active in defense communications. This is a rapidly growing sector because of eavesdropping, jamming, spoofing or hacking into military communications as a clandestine attack in preparations for times of war. With the advent of drones this is becoming an even bigger area of trouble because a hacked drone can be stolen or even worse, used against friendly forces or population centers. Harris has 17,000 employees and nearly 8,000 engineers and scientists.

Harris shares exploded higher starting on the 14th and topped at $131 on the 20th. The stock is Dow reactive. When the Dow began to dip last week, Harris moved sideways. Shares broke out of consolidation on Monday to close at a new high. With North Korea stirring the pot, defense stocks are being bid higher.

Earnings Oct 31st.

I would not normally recommend a stock with this kind of short-term gain but the new high breakout could be the start of a new leg higher.

Position 10/3/17:

Long Nov $135 call @ $2.40, see portfolio graphic for stop loss.


IIVI - II-VI Inc - Company Profile

Comments:

No specific news. New high close on Monday.

Original Trade Description: Sept 28th.

II-VI Incorporated develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. The company's II-VI Laser Solutions segment provides optical and electro-optical components and materials for use in high-power CO2 lasers, and fiber-delivered beam delivery systems and processing tools, as well as offers direct diode lasers for industrial lasers under the II-VI HIGHYAG and II-VI Laser Enterprise brands; compound semiconductor epitaxial wafers for optical components, wireless devices, and high-speed communication systems applications; and 6-inch gallium arsenide wafers for use in production of high performance lasers and integrated circuits under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brands. Its II-VI Photonics segment provides crystal materials, optics, microchip lasers, and optoelectronic modules for use in optical communication networks, and other various consumer and commercial applications. This segment also offers pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for terrestrial and submarine applications. The company's II-VI Performance Products segment provides infrared optical components and high-precision optical assemblies for military, medical, and commercial laser imaging applications; and engineered materials for thermoelectric and silicon carbide applications. It serves OEMs, laser end-users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, consumers, U.S. government prime contractors, various U.S. Government agencies, and thermoelectric integrators. Company description from FinViz.com.

Expected earnings Nov 6th.

In their recent earnings II-VI reported 50 cents that more than doubled and beat estimates for 35 cents. Revenue rose 13% to $273.7 million and beat estimates for $250 million. More importantly, order backlogs rose to more than $1 billion for the first time. Bookings rose more than 50%. The company guidance was also higher.

Lasers are being used for more applications every day from etching chips in the manufacturing process, producing faster communications in data centers, 3D sensing for autonomous driving and of course Star Wars like directed energy weapons.

Shares closed at a new high on Thursday after a double top in Feb/Jul. With the strong earnings, this breakout to new highs should continue.

Position 9/29:

Long Nov $45 call @ $1.25, see portfolio graphic for stop loss.


TER - Teradyne - Company Profile

Comments:

No specific news. Shares posted a new closing high on Monday.

Original Trade Description: Aug 30th.

Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.

For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.

In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.

Earnings October 26th.

Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.

Position 8/31/17:

Long Oct $37 call @ .90, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

The VIX did not decline today despite the strong market. Worries over end of quarter cash flows fading?

If we do not get any volatility by Oct 6th, I am going to close the position. This week and the next two weeks are typically the most volatile of the year.

We still have plenty of time. North Korea, Iran and Venezuela are still a factor and could erupt at any time.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss, see portfolio graphic for stop loss.



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