Option Investor
Newsletter

Daily Newsletter, Thursday, 10/19/2017

Table of Contents

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

Market Wrap

Buying The Dip

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Indices shed a half percent on news of weak iPhone 8 sales and the dip was bought. Today's action comes on the anniversary of the worst decline in US stock market history but bears little in common with that event. Today's volatility may persist into tomorrow as it is OPEX. Regardless, economic and earnings trends remain positive and today's data does nothing to change that.

International markets felt some pressure today as well. Asian indices closed mixed after the release of Chinese data; the Nikkei led with a gain of 0.40% while the Heng Send shed nearly -2%. The first read on third quarter GDP came in at 6.8%, as expected but down a tenth from last year while retail sales and industrial production for September were both above estimates. European indices were lower across the board on weak data from the UK, tepid earnings and political unease in Spain. The DAX led with a loss of -0.41% followed closely by the CAC's -0.29%.

Market Statistics

Futures trading was negative right from the start, indicating a decline of roughly -0.50% at the open. This held steady throughout the morning and was unaffected by positive reads on jobless claims and the Philly Fed's MBOS. The open was as expected, the indices posted large declines and extended those gains to the days lows by 10:15AM. This turned out to be intraday bottom, the market quickly began to reverse and spent the rest of the day moving to the upside. By 1:45PM the SPX had recovered nearly all of its losses and looked like it would continue moving higher. By late afternoon the index was brushing up against the all time high and by the close it had been exceeded, if barely

Economic Calendar

The Economy

Today's jobless claims is good and reveals no lingering or long term impact from last month's hurricanes. The initial claims fell 22,000 to 222,000 and a new low dating back to March 3,1973. The four week moving average of claims fell -9,500 and is fast approaching a new low. On a not adjusted basis claims -10.7% versus an expected -1.8% and are down more than -12% YOY. I have speculated over the past few months that the downtrend in claims may be been over, this data shows that it clearly isn't.


Continuing claims fell -16,000 to 1.888 million and a new low dating back to December 29th, 1973. The four week moving average of continuing claims fell -22,750 to hit a new low dating back to 1974.

The total number of jobless claims fell -40,371 to hit another new seasonal and long term low. This decline is as expected and brings the total figure within striking distance of my 1.5000 million target. On a year over year basis total claims are down -7.5%. We can expect to see this figure hit bottom soon though, with an expected uptick lasting into the end of the year.


The Philadelphia Federal Reserve Bank Manufacturing Business Outlook Survey rose in the last month and came in better than expected. The headline index gained 4 points to 27.9 and a 5 month high; the index is also trending above the post financial crisis average. The gains were made on broad improvement in the manufacturing sector although there was some slowing of growth. Both new orders and shipments remained positive but fell from last month's levels. Unfilled orders and delivery times both increased and have been positive for the past 12 months showing a prolonged period of expansionary pressures. Both the current employment indices rose, the employment index moving up to 30.6 and an all time high. Prices paid also increased, showing inflationary pressure, but subsided a bit from last month's spike. Looking forward the 6 month outlook dimmed a bit but remains high relative to the long term average.


The Index of Leading Indicators put a slight damper on things, breaking its 13 month positive trend. The index came in at -0.2%, a tenth worse than expected, and the lowest reading since last fall. The good news is that Conference Board economists say the decline is mostly due to hurricane impact with weakness seen primarily in labor and construction. If this is true and there is no reason to suspect it isn't, today's declines in unemployment claims could help the Index of Leading Indicators snap back in the next month. The report goes on to say that other areas of the economy continue contribute positively and that the economy should continue to expand into the end of the year. The Coincident Index gained 0.1% while the Lagging Index fell -0.1%.


The Dollar Index

The Dollar Index fell despite today's round of data. Although positive for the economy it still leaves a shadow of doubt in terms of FOMC rate hike expectations. Today's move saw the index shed about a quarter percent in a move the confirmed both resistance and support. This is consistent with action over the past few quarters as we approach each round of central bank meetings, the next starting with the ECB next week and then the FOMC and BOE the next. The ECB is not expected to change rates but it is expected to do something along the lines of tapering bond purchases which will likely move the Euro. For now, DXY resistance is just below $93.50 with a chance of moving lower. The index is still testing resistance along the down trend line with indicators showing divergence and suggestive of decline. Today's support is at the short term moving average, a break below that would be bearish and trend following with downside target near $91.


The Gold Index

Gold prices got a boost on today's weaker dollar but the gains were muted in light of central bank uncertainty. The spot price moved up about a half percent intraday and settled off the high. Gold is now trading near $1288 and near the middle of the 12 month trading range. There is potential for support and resistance within $20 of today's close and chance for price to jump in either direction. Support target is near $1,260 and resistance just above $1,300 with a break above either unlikely in the near term. There is little in the way of market moving data until the ECB meeting and even then no guarantee fundamentals will change enough to warrant a significant move in the price.

The Gold Miners ETF GDX held very steady and near the middle of its long term trading range. The ETF has been winding up on central bank expectations alongside of gold and likely to continue into the near term. The ETF is currently wedged tightly between the support at the long term moving average and resistance at the short term moving average with little sign it will break in either direction. Momentum is very weak and trending near zero at this time, consistent with listless markets and range bound trading, while stochastic shows some sign support will be tested but no real indication of strengt. A move lower may pierce the long term moving average and even touch to support at $22.50 but I wouldn't expect to much out of the move before the ECB at least, and maybe not until the FOMC in two weeks. A move up is likely to hit resistance at $24, about $0.50 above today's close.


The Oil Index

Oil prices fell -1.4% on profit taking as a wait-and-see attitude begins to creep into the market. There have been some sign of market rebalancing and expectation for an OPEC production cap extension to support prices until now. Now the market wants to see some proof. This week's data shows declines in output from many of the largest producing regions, the question is how long they will last. In the US production curbed due to the hurricanes is already coming back online while supply disruption in other areas may be equally short lived, or not. Today's action left WTI trading near $51.25 with a chance to move down to test $50. A move higher may find resistance at $52.50, if not my next target is near $53.50.

The Oil Index fell about -0.25% but remains within its near term consolidation range. The index has been in consolidation for about 3 week's now, following a massive run up from support, and will likely continue to do so into the near term. The indicators are bearish and show a fairly strong sell signal with the caveat that it is appearing within an uptrend. This means a sell-off is possible but not likely provided support remains firm. Support target is near 1,205 and so far buyers have stepped in above that level. A break below here could be bearish but likely a short term move unless oil prices crash. Longer term I remain bullish on oil due to robust earnings growth outlook.


In The News, Story Stocks and Earnings

Verizon surprised the market this morning with earnings that beat on the top and bottom line. Adjusted EPS of $0.98 is slightly below last year at this time but comes on substantial post-paid user growth. Net post-paid growth came in at 603,000 with churn rates on existing customers falling to 0.75%. Along with the beat news on the AOL/Yahoo integration was positive and provided investors with reason to hope results would continue to satisfy into the next year. Shares of the stock jumped more than 2% in the premarket, opened with a gap and moved higher from there only to unleash pent up resistance at the $50 level.


Apple was one of today's worst performers and a primary cause of today's sell-off. Shares of the stock fell -2.5% to below the short term moving average on reports demand for the iPhone 8 are not as expected. A report in the Taiwan Economic Times suggests orders for the phone could be cut by as much as 50% due to lingering use of iPhone 7's and the upcoming release of the iPhone X. Pre-orders for the X begin later this month with expected shipment of the first phones in early November.


United Airlines was another contributor to today's sell off. The airline reported better than expected earnings yesterday after the bell but today's conference call soured investor appetite. The company is suffering from increased competition by low cost carriers that it has not been able to keep up with. The Company CEO may have sparked the sell-off when he said the words "dug ourselves into a hole". Shares of the stock fell more than -12%.


After hours action was pretty active as well. Earnings reports from a number of companies including Sketchers and Paypal sparked big moves in share prices. Sketchers reported better than expected top and bottom line. Revenue of $1.1 billion rose 16.7% from last year and beat estimates by $0.030 billion and EPS was even better. Earnings of $0.59 beat by $0.15 or 25% and helped drive share prices up more than 7%. Paypal also beat with impressive numbers. Revenue is up 21.3% YOY, coming in ahead by $60 million, with earnings of $0.46 beating by $0.03. Shares of this stock rose more than 2.5% in the aftermarket.

The Indices

Today began on a sour note but ended with near term trends intact. The indices fell hard in the early hours, opened with not insubstantial losses but were able to recover most if not all of the declines. The NASDAQ Composite was hit the hardest, closing with a loss of -0.28%. The tech heavy index set a two week low with today's move but price action created a green candle and is within what I consider to be a near consolidation range so not overly bearish. Support set in without closing the gap formed on 10/5 but may be tested again. The indicators are both rolling over into bearish signals consistent with such a test. Support is at 5,550, a break below there could take the index down to 6,400. A bounce would be trend following and bullish.


The Dow Jones Transportation Average fell -0.13% in a move confirming support at the short term 30 day moving average. Today's candle formed a small green body with long lower shadow indicative of buyers, confirming support at the 9,000 level for the 2nd time in 2 days. The indicators remain bearish but MACD has begun to roll over suggestive of support at this level. A break below 9,000 would be bearish with target at 9,600 and 9,400, a bounce would be bullish and trend following with target at the current all time high.


The Dow Jones Industrial Average closed with a gain of 0.02% creating a small bodied green candle to the side of yesterday's candle and setting a new all time high. There is a small amount of lower shadow suggestive of support but not enough to close the gap formed yesterday. The indicators are bullish and on the rise, confirming the current uptrend and suggestive of higher prices. A fall from this level could be bearish but not necessarily, a move higher would be bullish and trend following. Support on a drop may be found just below today's low near 23,000, a move higher may go to 24,000 in the near to short term.


The S&P 500 closed with the largest gain, 0.03%, and set a new all time closing high. The index created a medium sized green bodied candle with visible lower shadow indicative of support and upward momentum. The indicators are consistent with this move although they are showing some near term weakening. This weakness is consistent with consolidation within an uptrend until support is broken. Support is at 2,550 and if broken next target is the short term moving average near 2,525. A move up from here/bounce from support would be bullish and trend following with upside target at 2,580 in the near term.


Today's action was a little alarming and some of the signals are still mixed but it looks like the market is consolidating within the near term up trend. The indices all fell to test support and in all cases support stepped in. Losses, for the most part, were isolated to specific sectors and stocks and highly reminiscent of rotation. The economic and earnings trends remain intact, forward outlook remains positive so I remain bullish.

Until then, remember the trend!

Thomas Hughes


New Option Plays

China Impact

by Jim Brown

Click here to email Jim Brown

Editors Note:

A minor comment out of a Chinese official tanked the markets. People's Bank of China Governor Zhou Xiaochuan warned Thursday against excessive optimism that could spur a sudden collapse in asset prices. He cited a concept known as a "Minsky Moment" meaning a plunge in asset prices following unsustainable market gains or the exhaustion of credit growth. It was named for Hyman Minsky, an economist who argued that long bull markets can lead to major collapses. Since this current bull market is 8.5 years old and will be nine in March, there are always a number of analysts looking for the end.

With his comments coming on the 30th anniversary of the October 1987 market crash, traders were especially reactive. Today's market hiccup could lead to further profit taking but the rebound back to positive territory suggests the dip buyers are alive and well. The 1987 market crash came after a 40% rally in the prior 8 months and with a strong economy. The markets never "need" an excuse to crash. With the potential for additional negative headlines over the next three days, I see no reason to add positions ahead of weekend event risk.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Nice Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow fell triple digits at the open and the Nasdaq lost -66 but both recovered significantly. The Dow managed to make it back to positive territory and a 5-point gain but that was a new record high close. The Nasdaq rebounded 47 points but still lost 19. The S&P rebounded 14 points to close fractionally higher and back at the record highs.

The Russell was down hard intraday at 1,491 but recovered to close back over prior support at 1,500. This started out of a down day from the highs after comments from China but the bulls bought the dip.



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


AABA - Altaba
The long call position was entered at the open.



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

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BULLISH Play Updates

AABA - Altaba - Company Profile

Comments:

No specific news. We received a gift at the open with the gap down to $66.65. The option price dropped nearly 50 cents to give us a better entry point.

Original Trade Description: October 18th.

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Position 10/19/17:

Long Jan $70 call @ $3.10, see portfolio graphic for stop loss.


ADI - Analog Devices - Company Profile

Comments:

Shares dropped with the market at the open. Jefferies raised their target from $100 to $105.

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.


CCL - Carnival Corporation - Company Profile

Comments:

Crazy day for CCL. The company announced a dividend increase of 12% to 45 cents and the stock was hammered for a $1.67 loss. This was the second increase this year with a 14% increase last quarter. The entire sector was down sharply for the second day.

Original Trade Description: October 16th.

Carnival Corporation operates as a leisure travel and cruise company. It offers cruises under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn brands in North America; and Costa, AIDA, P&O Cruises (UK), Cunard, and P&O Cruises (Australia) brands in Europe, Australia, and Asia. The company operates approximately 100 cruise ships. It also owns Holland America Princess Alaska Tours, a tour company in Alaska and the Canadian Yukon, which owns and operates hotels, lodges, glass-domed railcars, and motor coaches. In addition, the company is involved in the leasing of cruise ships. It sells its cruises primarily through travel agents and tour operators. Company description from FinViz.com.

Earnings December 26th.

Carnival shares had been on a steady path higher since last October but were derailed by the hurricanes. Many of the cruise destinations, including Puerto Rico, saw significant damage. Carnival had to cancel a couple cruises but continued running a full schedule almost without interruption. Shares have recovered from their decline and are moving towards pre hurricane levels.

More than 40 islands visited by cruise ships are open, fully operational and welcoming cruise ships on a daily basis. The majority of the 48 cruise ports in the Caribbean were not impacted at all by the storms. In places such as Jamaica, Belize and Cozumel in the Western Caribbean, and Aruba, Bonaire and Curacao in the Southern Caribbean, and Antigua and St. Kitts in the Eastern Caribbean, it's business as usual. Ports in the Bahamas, including Nassau and the popular private islands of Half Moon Cay and Princess Cays, are also open for business.

The only ports out of the normal 48 that are not yet operational are St. Thomas, St. Maarten, Grand Turk, Dominica, Puerto Rico and St. Croix.

The beauty of the cruise ship industry is that they can change itineraries very quickly if a normal destination is out of service.

Carnival reported Q3 earnings of $2.29 beating estimates for $2.20. Revenue of $5.52 billion beat estimates of $5.39 billion. The temporary port closures are expected to cause a 10-12 cent reduction in Q4 earnings. They guided for a range of 44-50 cents and analysts had been expecting 63 cents before the storms hit.

Based on the rebound it appears investors are not worried about the storm impact.

Position 10/17/17:

Long Jan $70 call @ $1.90, see portfolio graphic for stop loss.


COST - Costco - Company Profile

Comments:

No specific news. Shares posted a decent rebound in a weak market.

Original Trade Description: October 14th.

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.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.


FMC - FMC Corp - Company Profile

Comments:

No specific news. Shares recovered from the market drop at the open.

Original Trade Description: October 11th.

FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Nov 6th, unconfirmed.

FMC is riding the lithium wave. The once ignored mineral is now becoming a very important part of FMC's future. In the first half of 2017, lithium accounted for 11% of total revenue and 20% of earnings. The rush to find more lithium so companies like Tesla can produce 500,000 battery operated cars a year, has turned the mining of this material into a race to the future. FMC is in the process of tripling capacity from 2016-2019 and that may not be enough to satisfy battery demand by 2020. Because of the fast growth in this segment, FMC is planning on spinning off FMC Lithium at some point in the future.

Also, around November 1st, FMC is expected to get approvals to buy the crop protection assets from DuPont. Dow and DuPont were forced to sell some of those agricultural assets as terms for their merger approvals. Once the sale to FMC is approved, FMC will become the fifth largest crop=protection chemical company in the world. With global food demand skyrocketing, the demand for fertilizer and weed/pest killer is also ramping higher.

The business being bought from DuPont generates $1.4 billion in annual revenue and the segment will jump to $3.8 billion after the acquisition. Also a part of the deal, DuPont will acquire FMC's Health & Nutrition business.

Shares have rebounded from the late September dip and should breakout to a new high in the days ahead.

Position 10/12/17:

Long Nov $95.00 call @ $2.25, see portfolio graphic for stop loss.


MU - Micron Technology - Company Profile

Comments:

No specific news. Micron dropped with the market at the open and rebounded $1.50 to post only a minor loss.

Original Trade Description: October 9th.

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.

Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.

I am using January options to capture the earnings expectations in December.

Update 10/10/17: Shares of Micron rallied more than $1 in the regular session bur fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.

Update 10/11/17: Shares rebounded from the $2 selloff in afterhours to close down only 37 cents. Summit Redstone said buy the dip because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Instinet reiterated a buy rating and $45 target. Wells Fargo reiterated a buy rating and $45 target. Credit Suisse reiterated an outperform rating and $50 target.

Update 10/12/17: Micron priced its $1.2 billion, upsized secondary, at $41 after the close on Wednesday. Shares had closed at $41.61 and dipped today to close at $40.50. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Needham, Rajvinda Gill has a price target of $76. Let's hope he is right.

Update 10/18/17: Micron said it was retiring $2.25 billion in debt that carried interest rates of 7.5% and 5.25%. The secondary offering last week will provide most of the funds with the rest paid out of cash on hand. Shares posted a nice gain on the news and have almost recovered the $42 highs before the secondary was announced.

Position 10/10/17:

Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

Big spike to nearly 12 at the open but ended the day negative after the Dow returned to positive territory.

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. It has been 474 days since a 5% decline.

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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