Option Investor
Newsletter

Daily Newsletter, Sunday, 5/1/2016

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Weathervane

by Jim Brown

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The weathervane for the market was spinning in circles all last week as competing headlines pushed the market around. Traders will need a marketvane next week to determine direction in a listless market.


The economic calendar is headlined by the two employment reports. While both are expected to be slightly weaker than in March, the declines of about 5,000 jobs are minimal. However, they will be closely watch for a bigger change and should that happen they could move the market.

The ISM Manufacturing on Monday is expected to decline but remain barely in expansion territory at 51.5. Should the ISM fall below 50 that could also be a market mover. The rest of the reports are simply economic filler and should not be market movers.


The real market moving headlines next week will come from the earnings reports but there is a shortage of high profile companies. The majority of the blue chips and big tech names have already reported and the market reacted to each. The banks beat their lowered estimates and rallied. The majority of tech companies did much worse with tech earnings declining -10.9% so far in Q1. Tech companies struggled to post gains and the Nasdaq declined. Big earnings beats by Amazon, Linkedin, Expedia and others after the close on Thursday failed to lift the markets on Friday despite big gains in the individual stocks.

Starting this week the earnings quality will decline. Smaller companies typically struggle more in a difficult environment and their earnings reflect this challenge. Offsetting that is less impact from the strong dollar. However, this is the week where investors tend to tire of chasing the next earnings beat and the market begins to weaken.


The Dow retreated from the prior week high at 18,167 to trade at 17,651 at the low on Friday. That is a -516 point drop from the prior week's high. The lure of making a new high was not enough to overcome the various headlines that moved the market last week. The BOJ failed to add any stimulus despite expectations. The Fed said the economy had weakened since the March meeting. The mixed earnings provided conflicting signals as to the health of U.S. corporations. Carl Icahn warned of a "day of reckoning" ahead and that prompted the sell in May strategy traders to get an early start as April came to an end.

The Dow has support at 17,500 and again at 17,400. Resistance remains 17,925, 18,110 and 18,165.


The S&P never made it to the upper resistance band and closed well under 2,100 at 2,065 on Friday. The 2,100 level appears to be strong resistance and we saw a lower high at that level last week. Support is now 2,040 and then 2,020.


The Nasdaq 100 closed under support at 4,350 and a six-week low. Remember, this close came on the day Amazon gained 58 points, Priceline +26, Monster +16, Veritas +10, Expedia +9 and Baidu +8 to name a few. Despite those big name games the broader tech sector was weak. Falling PC sales, declining enterprise activity and even lower sales in the cyber security sector were weighing on techs and especially chip stocks. This is not a good sign for the weeks ahead.


The Russell 2000 also declined sharply after two weeks of gains. This may be only profit taking from those gains but it may also be a sign that the small cap rally has run its course. The Russell never made it to resistance at 1,165 and the early failure may be related more to the calendar than to fund manager sentiment.


Crude prices continued to rally thanks to the falling dollar. The dollar index declined to 16 month lows and propelled crude to six-month highs. Multiple OPEC nations said they were increasing production but fundamentals apparently do not matter in a falling dollar environment. We ar also reaching the point on the calendar where U.S. inventories will begin to decline as gasoline production increases ahead of the summer driving season. Prices typically rise when that happens so the speculators are out in force.


I did not add any new stocks to the watch list again this week. I would rather wait for a buying opportunity than continually buy the "top" of this rally. If we got a 100 point decline on the S&P there would be a lot of opportunities.

Jim Brown

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Portfolio

Portfolio Update

by Jim Brown

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Current Position Changes


CAT - Caterpillar

The position remains unopened but he entry trigger was lowered to $79.35.


NFLX - Netflix

A new call position has been recommended for Netflix.


Stop Loss Updates

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



Current Portfolio




New Plays

Buying the Dip

by Jim Brown

Click here to email Jim Brown
We tried this position a couple weeks ago but bailed on the play after Apple cut component production by 30% for Q2. That was the right decision since Apple shares imploded on the earnings and guidance. After the drop from $112 to $92, I think it is time to go back into this position.

What investor in the market today has not heard about the decline in iPhone sales and the Q2 cut in component production? All of Apple's ills are now common knowledge and anyone that wanted to sell the stock, probably has already sold it.

The long term uptrend support is about $85 and the short term support is $92.50. In theory it would take a lot more volume to push it significantly lower.

Apple currently trades at a PE of 10. They announced a 10% increase in the dividend and a $50 billion increase in stock buybacks to $250 billion. If they are going to buy back stock and support the stock price this is the logical place at a two-year low and at support.

AAPL - Apple Inc Company Profile

Apple designs, manufactures and markets smartphones, tablets, digital music players, personal computers and smart watches internationally. If you do not know what Apple does, you have been living in a cave somewhere for the last 20 years.

Apple's problem started about a year ago as analysts began to worry about competition from Android devices and saturation of the market for Apple devices. Hypothetically, if the smartphone market is 500 million phones a year and Android's market share is growing, then Apple's saturation point is fast approaching or at least that was the theory.

Apple has continually surprised analysts with their sales growth. As the premium phone on the market there seems to always be new customers that want to trade up to an iPhone. Offsetting the total smartphone market limitation they are pushing into India, Africa and 3rd world countries that are seeing a rise in the number of consumers that can afford a $700 phone.

Apple released the 4-inch model SE with a price point of $399 to try and combat their market share losses in poorer environments. Not everyone wants a giant Model 6+ to carry around all day. In Asia, smaller phones are the most popular.

Analysts predicted sales in Q1 would decline for the first time in years. Apple also guided lower and shares crashed. When they actually reported earnings that missed estimates, shares crashed again. iPhone sales declined to 51.2 million, down -16% from the year ago quarter. It was the first year over year decline in iPhone sales ever. Apple guided to sales of $41-$43 billion for the current quarter and analysts were expecting $47 billion.

Apple is having a couple bad quarters because the iPhone 6 was such a success and the iPhone 6s did not have any must have features that made people rush out to upgrade again so soon. The iPhone 7 to be announced this September is rumored to be feature rich so people are simply waiting for the next model to make their upgrade decision.

Apple shares normally rally in Q3/Q4 on those product announcements. This year should be no different except we are starting out from a much lower base.

I believe Apple will shake off this period of slow sales thanks in part to the release of the SE and the expected release of the Model 7 versions in September. Apple shares typically rise into the announcement period.

I am recommending the January $100 call, currently $5.50. If you want to offset some of that premium you could sell the $75 put, currently $2.54. The odds of Apple shares being under $75 by January are very slim. Conservative investors could just buy the call and hang on for the ride.

I do not plan on holding this position until January. Typically, Apple shares peak on the release date of the new phone. They announce the phones in September and begin delivery in November. We will exit a couple days ahead of the delivery date.

Buy Jan $100 LEAP Call, currently $5.50, no initial stop loss

Optional

Sell short Jan $75 put, currently $2.54, no initial stop loss
Net debit $2.96.




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Play Updates

Market Pulls Stocks Lower

by Jim Brown

Click here to email Jim Brown
The positive earnings from the prior week failed to continue and the major indexes spent the last several days in decline.

Editors Note:

The trend of beating the "less bad" earnings estimates and seeing shares rise came to an end late in the week. Even some major beats by companies like Amazon, Expedia and Linkedin could not lift the tech sector on Friday.

The broader markets pulled back from the recent highs as resistance finally asserted its dominance over the indexes. With the reporting from most of the high profile companies behind us it will be difficult to generate an earnings bounce in the coming weeks. The deeper we get into the earnings cycle the lower the quality of earnings as company sizes shrink.

In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. I am not that confident we are going to get through the summer without a material market drop so once the earnings bounce is upon us we will try and reduce some positions by taking profits. If historical trends return, we could see declines by the end of May.



Original Play Recommendations (Alpha by Symbol)


BA - Boeing Company Profile

Comments:

Boeing reported earnings of $1.74 that missed estimates for $1.81. Revenue of $22.63 billion easily beat estimates for $21.24 billion. The order backlog at the end of the quarter was $480 billion for 5,700 commercial planes. The earnings miss was due to some changes in the Air Force tanker program and will be made up in future quarters. The company reaffirmed its full year guidance for $8.15-$8.35 per share on revenue of $93-$95 billion.

The KC-46 tanker program change caused a $156 million after tax charge of 24 cents per share. The program has been delayed by changes in the specifications. All four test aircraft are now flying and have refueled a variety of military aircraft. Once tests are completed and certified the tanker will move into full production. Boeing said the tanker had completed 80% of flight testing before meeting milestone C, which must be reached before production can begin. That is expected to happen by the end of Q2. Boeing expects to deliver the first set of 18 tankers by August 2017. Without the charge, Boeing's earnings would have been $1.98 and a huge beat.

Despite the earnings miss, this was a very strong earnings report and Boeing reported numerous sales after the quarter ended. One of them was $4 billion to China Eastern Airlines for (15) 787-9 Dreamliners.

Original Trade Description: March 13th.

Boeing designs, develops, manufacturers, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems worldwide. If it flies on earth or in space Boeing probably has their hand in its design and manufacture.

Boeing has had a relative dry spell in orders in 2016. For the prior four weeks they signed no new orders for commercial aircraft but they made up for it last week when they booked the biggest order of the year. They sold one 767 to FedEx, four 777s to United Airlines and 25 new 737s to United. However, at the same time United cancelled four 787 orders. That represents a net new order total of about $2.5 billion. Earlier in the year United also committed to buy (40) 737-200 aircraft at a list price of $80.6 million each.

So far in 2016, counting the orders from last week, Boeing has new orders for:

1 Boeing 767
1 Boeing 787
88 Boeing 737s
10 Boeing 777s

Boeing also has orders from the Air Force for 179 KC-46 tankers built out of 767 airframes. That contract is worth $43 billion and they have to be delivered by August 2017. The first 18 are already in production with Boeing working on some outside their buildings in Everett Washington. They do not have enough room inside the manufacturing facility because they are backed up on 787 deliveries. Last July FedEx bought 50 of the 767s in a freighter configuration. Boeing expects to sell more than 1,000 model 737 freighters with most going to China and Asia. Boeing sees $550 billion in aircraft demand from Southeast Asia in the years ahead.

While orders may be slow so far in 2016 the backlog of business is very healthy. Boeing delivered 750 jets in 2015 and expects to easily beat that number in 2016. As of the end of January Boeing had an order backlog of (4,392) 737 planes, (20) 747, (80) 767, (524) 777 and (779) 787s. The biggest order block is the 737s and that is one of Boeing's most profitable planes. The total backlog is something like 7 years of orders. Historically the backlog has run 2-3 years of production so it is more than double that today.

Add in the satellite and missile businesses and that is one busy company. As oil prices rise in late 2016 and 2017 the demand for more energy efficient planes will boost their orders even more. Some airlines are making do today with older less efficient planes because fuel is so cheap. Once prices rise again so will the orders. China's demand for planes is rising with double-digit growth in passenger traffic. One out of every four planes built goes to China.

Boeing expects to begin delivering the 777X models in 2019. The big jets are very expensive. The 777X-8 will cost $371 million and seat 350-375 passengers. The 777X-9 will list at $400 million and seat 400-425 passengers. They will have carbon fiber wings, burn 12% less fuel and be 10% cheaper to operate than competing aircraft.

Shares of Boeing declined in January after news of an SEC probe into the company's "program accounting" that shifts R&D expenses and production costs. They are the only major company to use that method but the technique is recognized under GAAP. Basically they are allowed to calculate profits over the life of the program and assign average costs to each airplane. That allows them to recognize profits earlier in the life cycle of each model but it reduces the profits on the back end. Nothing is expected to come from the SEC probe. Boeing is a very large company and they would not do anything that would jeopardize their future.

The analyst consensus for the stock is a target of $165 with a close of $124 on Friday. Earnings are April 20th.

Update 4/11/16: Boeing had a good month in March. The company booked orders for 69 new planes. A 767-300F, (4) 747-8F, (4) 777-300ER and (60) 737s. In just the first week of April then landed 17 new orders. So far in 2016 they have sold 122 model 737s, 11 model 777s, four 747s, one 767 and one 787. They sold 140 year to date but had 18 cancellations of prior orders for a net gain of 122. The total order backlog today is 5,740 planes.

Position 3/14/16 with a BA trade at $125.50

Long Jan $130 LEAP Call @ $7.85, see portfolio graphic for stop loss.

Optional

Short Jan $100 LEAP Put @ $4.44, see portfolio graphic for stop loss.

Net debit $3.45.



CAT - Caterpillar Inc Company Profile

Comments:

CAT tumbled with the market last week on no news. As a Dow component, it is susceptible to movements in the Dow. I am lowering the entry point to $79.35 and just over the Thursday highs.

Original Trade Description: April 24th

Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. All of their equipment is painted a distinctive yellow and is known the world over.

CAT reported earnings last week of 67 cents and missed estimates by a penny. Earnings fell -68% and revenue fell -25.5% to $9.46 billion. They guided for full year for $3.70 per share, down from $4.00 in prior guidance.

The key point to the earnings report was the guidance. The CEO said for the first time in years they are seeing an increase in demand from China. He said we do not expect a "hockey stick" rebound but the bottom is either in or currently being formed.

Caterpillar is seen as the canary in the coal mine for the global economy. I guess that is appropriate since all their equipment is yellow. Any material development in the construction or mining industries requires Caterpillar equipment. If China is starting a bunch of additional infrastructure projects, Caterpillar will supply the equipment. For CAT to say demand is rising in China suggests the stimulus is working and the long decline in the Chinese economy may be over. Commodity prices are rising and that means an eventual rebound in mining.

Cat shares had already risen 28% in Q1 and was the best performer in the Dow. They pay a 77 cent per quarter dividend, which equates to a yield of 3.83%.

Shares hit a high of $116 in 2011 and 2012 before slumping with the global economy. I believe investors will continue to buy CAT if there is any glimmer of an economic rebound. However, I do not want to blindly buy the Friday dip. We have plenty of time and a market that could be near is highs.

I am recommending we buy a January call with a CAT trade at $80.75, over Wednesday's close at $80.40, and under initial resistance at $90. The 2014 high was $106. With CAT's nearly 4% dividend and guidance that China is improving, I think any post earnings depression could be limited. If it is not then we will look at a better entry point as the stock declines.

With a CAT trade at $79.35 *** New Trigger ***

Buy Jan $85 call, currently $3.15, no initial stop loss until we see what happens after we enter the position.



CSC - Computer Sciences Corp - Company Profile

Comments:

CSC still cannot free itself from resistance at $33. It has been stuck there for a month. No specific news.

Original Trade Description: February 21st:

CSC is an information technology and professional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia. They reported earnings last week of 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion and missed estimates for $1.859 billion. The stock was crushed for a nearly -20% loss from $31 to $24 on the news. Shares recovered to trade just over $27 for the last week.

During the quarter, they spun off their public sector business and merged it with SRA International and the merged company began trading on the NYSE under the symbol CSRA. This was responsible for a portion of the revenue decline.

However, the Global Business Service (GBS) segment saw revenues decline -8.2% due to a decline in consulting revenues. Overall the segment produced $1.6 billion in revenues for the quarter, which were up +35%.

Global Infrastructure Services (GIS) revenues declined -12.2% to $854 million. This was due to a continued decline in their legacy business, which is being replaced by their new cloud offerings. New business awards rose +4% to $1 billion.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

CSC ended the quarter with $1.83 billion in cash and long-term debt at $2.67 billion.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

The big drop in the stock last week came from lowered guidance. The company guided for earnings in the range of $2.40-$2.60 because of their acquisition expenses, reduced revenue after the spinoff and delays in the government order renewal process and constricted federal spending.

They have plenty of business as evidenced by the $2.7 billion in new bookings and 16% earnings growth.

I believe the selloff it overdone and long-term the value will return to CSC shares. The options are cheap and the stock does not have to rebound far to put us into the money. This is purely a value play on an oversold stock that should move higher in a positive market.

I do not want to enter the position until that rebound appears so I am putting a $28.50 entry trigger on the position.

Position 2/26/16 with a CSC trade at $28.50

Long Jan $30 LEAP call @ $2.50, see portfolio graphic for stop loss.



CVX - Chevron Corp - Company Profile

Comments:

Chevron reported a loss of 39 cents that was larger than estimates for 18 cents. Revenues of $23.553 billion were slightly above estimates for $23.547 billion. Production was 2.666 mbpd and basically unchanged from the year ago quarter. The E&P division lost -$1.423 billion because of the low oil prices. Overall, given the condition of the sector, it was still a decent report.

Original Trade Description: February 21st:

Chevron Corp explores, produces and refines oil and gas on a global scale. The upstream division explores and produces oil and gas. The downstream division refines the oil, produces petrochemicals and liquefies and distributes LNG around the world. Chevron is the real deal with operations in every facet of oil and gas production and distribution.

Despite the low oil prices Chevron continues to announce the completion of multiple projects to significantly enhance ongoing production. Currently Chevron produces about 2.54 million Boepd globally. They have a global refining capacity of 1.9 mbpd where profits offset the decline in crude prices. In Q3 Chevron had net income of about $2 billion. They generated cash from operations of $5.4 billion and paid out $2 billion in dividends.

The company has announced a decrease in capital expenditures from $42 billion in 2013 to $25 billion in 2016 and as low as $20 billion in 2017 depending on the market. This was helped by most of the work being completed on their two LNG facilities in Australia at a cost of nearly $60 billion. These facilities are preparing for first LNG and will be a source of a huge production increase for Chevron over the next three years.

On January 27th Chevron announced a $1.07 dividend for Q1 and they are confident cash flow will cover dividends through 2017. The CEO said maintaining the dividend will be their top priority in a period of low oil prices. Their current yield is about 5.1%.

The company announced on January 26th, first gas at the Chuandongbei Project in Southwest China. The project covers more than 800 square kilometers and is thought to contain more than 3 trillion cubic feet of gas. The LNG project consists of three trains that can process 258 million cubic feet of gas per day. The first train is now in operation and the other two trains are under construction and nearing completion. Chevron owns 49% of the project and China National Petroleum owns 51%.

In December they announced first oil from the Moho Bilondo development offshore the Republic of Congo. The project is 50 miles offshore in 4,000 feet of water. The initial project has 11 wells that are expected to produce 40,000 bpd. In November they announced first oil from the Lianzi Development Project also offshore the Republic of Congo. This project is 65 miles offshore in 3,000 feet of water and is also expected to produce 40,000 bpd.

Chevron has such strong financials that along with Exxon they were the only two companies not included in the recent Moody's warning of ratings downgrades. The rating agency said they were going to downgrade 120 oil and gas companies and 55 mining companies. Chevron and Exxon were exempted.

In the last earnings cycle for Q3 Chevron beat estimates by 37.9% and has posted an average beat of 15.11% for the last four quarters. Their refining and chemicals businesses have offset the losses from the lower oil prices. Chevron is set to announce earnings on Friday. I would not normally recommend a long position ahead of earnings but Chevron has a lot to brag about and production increased significantly in Q4. Conservative investors may want to wait until next week to enter the position.

Chevron shares have shown relative strength to the market because of their balance sheet, high production, new projects coming online and the dividend. That means we should be somewhat insulated from a price crash. Once oil prices do begin to rise for whatever reason we should see Chevron shares outpace the sector because of their relative strength.

Chevron probably has more new production in the pipeline than any other U.S. company. Most of that production is gas with two monster projects in Australia. The Gorgon project is a multibillion dollar LNG facility with the export capability of 15.6 million tons per annum (MTPA)(2.184 Bcf/d) of LNG to Asian markets. Demand for gas to Asia is expected to double by 2025. The fields feeding this LNG plant have more than 40 Tcf of gas with new discoveries every month. The first train of the three-train project is under construction and should be operational in 2015.

The $29 billion Wheatstone project will consist of two LNG trains with a combined capacity of 8.9 MTPA (1.25 Bcf/d) with the option to expand to 25 MTPA (3.5 Bcf/d). The first LNG output will be in 2016. More than 80% of the gas supplied to Wheatstone will come from Chevron fields. Another 20% will come from an Apache find in the same region. Chevron has made 21 major discoveries of gas in the region since 2009. The initial discovery was 9 Tcf of gas but more is being added every month.

There have been some worries recently about a surplus of LNG with numerous projects getting close to commencing operations. Chevron was one of the first to sanction the major projects in Australia and they presold the vast majority of their production for the next 20 years. If LNG prices do decline, Chevron will be protected. The Australian projects are close to Asia so shipping is less of an expense making their gas more desirable. With the projected startup later this year and full production by the end of 2016 this will be a monster boost to Chevron's global production.

Gorgon is the world's largest LNG project since 2010 and Australia's largest LNG project. Chevron owns 47% and Exxon and Shell own 25% each. Chevron spent $4.5 billion in 2014 and is expected to spend $3 billion in 2015 on Gorgon. Just beginning operations turns this project from a money pit into a moneymaker with revenue net to Chevron of $2.1-$2.9 billion a year.

These are just two of the dozens of projects Chevron has in progress. In the last ten years, Chevron has added 10.2 billion barrels of oil equivalent to its reserves.

The biggest factor in Chevron's favor is the pending start of the Australian LNG operations. This will significantly increase global production, reduce capex and increase cash flow. The earnings reports in 2016 will show significant improvements.

I am recommending an optional short put to offset some of the premium for the expensive LEAP calls.

Position 2/22/16:

Long 2017 $90 LEAP Call @ $8.05, see portfolio graphic for stop loss.

Optional:

Short Jan $70 LEAP Put @ $3.94, see portfolio graphic for stop loss.

Net debit $4.11.



DIS - Disney - Company Profile

Comments:

Jungle Book continues to pack in viewers and Captain America: Civil War starts this week. The movie has already taken in more than $200 million overseas and millions in advance ticket sales in the USA. This will be a very profitable movie with $1.1 to $1.3 billion in global gross.

Shares declined slightly with the Dow. As a Dow component they will always have a high correlation to the Dow's movements.

Original Trade Description: February 1st:

Disney has been pummeled since its $120 high in November. The problem for Disney was comments that ESPN subscribers are declining. This was attributed to cord cutting from the cable companies as consumers move to sites like Netflix and Amazon for streaming downloads. This is not the case although I am sure there are some losses for that reason.

However, Disney said there was a lack of a large number of major sporting events in 2015 that would keep ESPN subscribers happy. Disney said the 2016 Olympics would help bring those subscribers back. ESPN is only one of dozens of Disney networks and the rest are doing just fine.

In case you missed it Star Wars: The Force Awakens has earned over $2 billion worldwide and still going strong. This compares to only $572 million for Episode VI the Return of the Jedi that was the most popular movie in the prior seven movies. Merchandise sales are approaching $1 billion. This is a cash printing machine and it is only going to get better from here.

Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule

Jan 29th, 2016 - "The Finest Hours"
Mar 4th, 2016 - "Zootopia"
April 15th, 2016 - "The Jungle Book"
May 6th, 2016 - "Captain America: Civil War"
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

We should not overlook their theme parks, which are also doing great. Disney said they are considering a tiered pricing for tickets with high volume attenfance dates costing more. The three levels for the season pass holders would be gold, silver and bronze. Gold passes could be used any day at any time and would obviously be the most expensive. Silver would only be good for off peak days and not valid for holidays. Bronze would be the cheapest and would only be valid on certain off peak periods. Currently discounted tickets for those customers spending multiple days and with children under the age of ten begin around $100.

Shanghai Disney will open on June 16th and they expect 40-60 million people in the first year. At $100 or more per ticket the revenue is astromonical. The park is located within 4 hours drive time of 330 million people.

Don't forget their theme cruises. Disney is not having any problems filling up their cruise ships and prices have remained strong.

The only real challenge to Disney today would be a slowdown in consumer spending. The company said they are not seeing any decline despite the drop in retail sales numbers over the last several months. Consumers are just spending their money on diffrent things like cable movies, theme parks and iPhones.

Disney has earnings on February 9th. Normally I would not recommend a stock ahead of earnings but this could be a blowout given the unbelievable cash flow from Star Wars. Even if they disappoint there is decent support at $90 and profits are only going to rise in subsequent quarters from the items mentioned above.

Shares have found support in the $92-$93 range despite the recent market volatility. I expect shares to rise as we approach earnings. I am putting an entry trigger just slightly above $96 just to make sure we have upward movement after Friday's big gain. If shares decline again I would be thrilled to enter the position at $92.

Update 2/21/16: Disney reported strong earnings but was punished again as shares fell to $86 despite the record earnings. Earnings of $1.73 compared to estimates for $1.45 and revenue of $15.2 billion compared to $14.75 billion. Earnings rose +36% and revenue +14%. They reaffirmed strong guidance and the stock was still knocked for a -5% loss. Once the smoke cleared and calmer heads prevailed the stop rallied back to pre announcement levels at $96.

There is nothing wrong with Disney. The CEO said they even saw a rise in ESPN subscriptions in January and they were expecting big gains as they offered their sports package in various other bundles. The worry over Disney's revenue growth has become so pervasive that everyone is afraid to buy the stock.

However, this is only going to be a temporary situation. Disney released a teaser for Star Wars episode VIII last week so the hype is already beginning. Episode VIII The current Star Wars movie has grossed over $2 billion and still going strong.

Position 3/1/16 with a DIS trade at $97.50

Long 2017 $105 LEAP Call, entry $5.20, see portfolio graphic for stop loss.



FFIV - F5 Networks - Company Description

Comments:

No specific news and still fighting resistance at $105. Nice rebound from the mid April crash.

Original Trade Description: March 13th.

F5 Networks develops, markets and sells application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.

With the vast amount of Internet traffic now being served over mobile devices utilizing 4G speeds and now advancing towards significantly faster 5G speeds it is imperative for companies to improve the speed and security of their networks.

Just to catch everyone up on how much faster 5G (5th generation) is than 4G here is a comparison.

3.5G = 42 Mbps (megabytes per second)
4G/LTE = 100 Mbps
4G/LTE.Cat 4 = 150 Mbps
4G/LTE Adv = 1,000 Mbps
5G = 5,000 Mbps to 10,000 Mbps (estimates)

The 5G standards have not been officially defined but multiple vendors are touting speeds with existing equipment up to 7,500 Mbps. Qualcomm is currently producing Snapdragon processors for smartphones with Cat.10 modems that are capable of 450 Mbps.

To put all of this in perspective for F5 Networks. At advanced 4G/LTE speeds you could download an entire standard definition movie in under 5 seconds. A theoretical 5G speed could download an entire HD BlueRay movie in under a second.

Obviously that means the servers and networks delivering this content securely must also have this capability, otherwise those superfast mobile devices will be suffering significant lag times.

Since most datacenters and networks are still delivering content at the 3G rate there is a vast amount of untapped opportunity for those companies like F5 that are bridging the technology gap.

You hear about the Internet of Things (IoT) and how much network capacity will have to increase to add tens of billions of additional devices like lights, thermostats, refrigerators, every TV now being produced and nearly every car now being produced as an Internet hot spot.

As cloud systems garner additional customers the vast amount of storage required plus the amount of network connectivity required to access that storage is growing exponentially. This week I added a new cloud account with Amazon to use as a backup and I have been uploading 150 Gb of data continuously for the last 4 days and the job is only half done and Amazon has fast servers.

Securing all that data and network traffic and delivering it instantly is what F5 does. They provide multiple highly concurrent platforms and specifically position service providers for next generation networks.

As an illustration they offer a blade server (VIPRION B445) that can handle 1.2 billion concurrent connections and more than 20 million connections per second using only an 8 blade chassis and 100 Gbe hardware. I would explain how fast that is but it would require far more space than I have here. To say it is mind boggling would be an understatement.

In their Q4 earnings they reported earnings of $1.32 that beat estimates for $1.27. Revenue rose +5.8% to $489.5 million, which also beat estimates. Service revenues rose +14.9%. The company guided for earnings in Q2 of $1.61 to $1.64 and analysts were expecting $1.32.

Shares rallied on the earnings beat to plateau at $100 over the last week. I believe that $100 level is going to break and we will see shares retest the recent highs at $120 in the months ahead.

Position 3/18/16 with a FFIV trade at $101.50

Long Jan $105 LEAP Call @ $9.75, see portfolio graphic for stop loss.

Optional

Short Jan $85 put @ $4.85, see portfolio graphic for stop loss.

Net debit $4.90



GE - General Electric - Company Info

Comments:

GE moving sideways after earnings as we wait for the next headline on losing their SIFI classification. Shares have been hampered by the decline in the Dow. Analysts are speculating GE is going to announce a major energy acquisition in the near future. National Oilwell Varco (NOV) has been a rumored target. NOV has declined -35% in the oil crash and represents a strong value proposition today. The energy sector will rebound and NOV is a prime player. NOV shares were up 20% last week on speculation.

Original Trade Description: December 20, 2015:

GE has been slowly drifting higher since the 2009 market lows. Most of 2014 and 2015 the stock was stuck churning sideways. The situation changed in early October this year after a big activist investor got more involved. It's making a difference. The S&P 500 is down -2.6% year to date. Yet GE is up +20% in 2015 and should continue to outperform in 2016.

GE is in the industrial goods sector. According to the company, "GE is the world's Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the 'GE Store,' through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. www.ge.com"

One of the biggest changes at GE has been the company's long-term transformation to get rid of its financial assets that have been an albatross around its neck for so long. Management is focusing on the company's roots, which is industrial products and innovation.

The company recently held their annual meeting with analysts. The year ahead brings a lot of challenges. The global market is still struggling. The U.S. economy is limping along at +2% growth. Plus the strong dollar hurts sales outside the U.S. In spite of these headwinds GE's CEO Jeffery Immelt is bullish on 2016.

Management is forecasting 2016 earnings to rise +15% on revenue growth of +2% to +4%. That is impressive for such a massive company like GE who does so much business overseas. They also foresee paying investors $8 billion in dividends and spending $18 billion on stock buybacks in 2016. GE provided a long-term 2018 earnings forecast of more than $2.00 per share compared to $1.30-1.20 a share in 2015. They expect to return $55 billion to shareholders in dividends and buybacks between now and 2018. That sort of investor-friendly action could help GE weather any market volatility in 2016.

The stock has been showing relative strength the last few months. The stock held up pretty last week too during the market's volatile moves. GE tagged multi-year highs on Wednesday. The point & figure chart is bearish and forecasting a long-term target at $53.00.

The action in GE's stock over the last few weeks is either a new top or it is a new base. We are betting it is the latter.

Position 2/22/16

Long 2018 $30 LEAP call @ $2.60, see portfolio graphic for stop loss.



HCN - Welltower Company Profile

Comments:

HCN declared a quarterly dividend of 86 cents payable May 20th to holders on May 10th. No other news. Earnings May 3rd AM.

Original Trade Description: March 6th

Welltower is an independent equity real estate investment trust. They acquire, plan, develop, manage and monetize real estate assets. The company primarily invests in senior living and health care properties, including medical office buildings, inpatient and outpatient medical centers, senior living communities and life science facilities.

With the boomer generation rapidly entering into old age and facing all the health problems associated with getting older, Welltower has positioned itself to capitalize on this trend. Welltower operated in markets with relatively high real estate values where the barriers to entry are higher than average. Entering a high priced market and building new properties would take a large amount of cash and a long time to be profitable. Welltower got an early start and is already well positioned. Welltower believes they have the best healthcare real estate portfolio in the industry.

Welltower does not hold its properties forever. Once they have peaked in terms of revenue and life cycle they liquidate and use the funds to acquire new properties in desired locations to further enhance the portfolio. They sold off their life sciences portfolio in 2015 for a tidy profit.

The company has increased scale in the most attractive real estate markets in the country including Southern California, Northeastern U.S. and in London. Real estate prices are only going higher in those locations along with rents and the cost of medical services. Welltower is not buying facilities in places like Cheyenne Wyoming where the population cannot afford healthcare and senior living communities are all supported by Medicaid payments. They are building/buying in the high-income areas where rising rents can be supported by the population. Welltower's average senior living property is 12 yrs old and located in an area with a $78,387 median income. For their competitors the average is 18 yrs old and median income is $53,996. Over the past five years, Welltower has invested approximately $1.2 billion a quarter into real estate.

Welltower has about 2.5% of the more than $1 trillion U.S. healthcare real estate market and they own some of the top properties. Over the next 45 years the U.S. population over 65 is projected to double and the number of seniors over age 85 is expected to triple. Welltower expects the healthcare real estate market to double or triple over the next 20 years. Over the period 2014 to 2014 the amount spent on healthcare is expected to rise 76% to more than $5.4 trillion or nearly 20% of GDP.

Since its IPO in 1971, the company has generated an average total return of 15.6% per year for shareholders.

In Q4 HCN reported earnings of $1.13 that beat estimates for $1.12. Revenue of $1.03 billion also beat estimates for $979.4 million. The company is projecting full year earnings of $4.50-$4.60 per share.

In early February HCP Inc, another REIT posted a major earnings miss and impairment charge related to some property sales. The entire REIT sector was crushed. HCP fell from $35 to $25 and that disaster knocked Welltower from $63 to $53 in a guilty by association sector dump.

Welltower has already rebounded back above the $63 level from that drop thanks to communication from the company saying we are not HCP and we are better positioned.

Earnings are May 3rd.

Welltower closed at $66 and has resistance at $70. The 2015 high was $85. I am recommending we buy the $70 call, currently $3.70. If readers would like to reduce that premium outlay, you can sell short the Jan $50 put at $1.65 to give you a net debit of $2.05.

Position 3/6/16:

Long Jan 2017 $70 call @ $3.70, see portfolio graphic for stop loss.

Optional:

Short Jan 2017 $50 put @ $1.88, see portfolio graphic for stop loss.
Net debit $1.82.



IWM - Russell 2000 ETF ETF Profile

Comments:

The Russell spiked to $115 to trigger the second tranche of puts before falling back to $112. I am recommending we add to our put position again with a trade at $120. The market is rapidly running out of time with numerous headwinds as we move into summer.

Add to position with IWM trade at $120.

Original Trade Description: March 27th

I am picking the Russell 2000 ETF for multiple reasons. The first is that the Russell has rebounded the least of the major indexes. The high on the Russell 2000 was 1,296 in June of last year. The Russell declined to 943 at the low in February for a -27% drop. The rebound from that February low to Thursday's close at 1,079 has been 14%. However, the index has gone sideways for the last three weeks while the large cap indexes moved higher. The Russell failed to reach critical resistance at 1,120 and a 50% retracement of 10-month decline. There is significant resistance at 1,120 and again at the 61.8% retracement at 1,162.

The Russell is weak for multiple reasons. Financials make up the largest sector in the index with health care and energy also major components. Those sectors have been under extreme pressure so far in 2016. There is a rising call on the political front to break up the big banks and introduce price controls on drugs that will severely damage health care and biotech stocks. The energy sector has actually provided some lift in the last two months but the price spike to $41 in WTI is not likely to last.

I believe the rebound to 1,100 in March could be another lower high and the setup for a lower low in the months ahead. In an election year, the market is typically pressured by candidates on the campaign trail. They throw out dozens if not hundreds of things wrong with the economy and what they are going to do to fix it. Of the two major candidates, analysts believe Clinton would be less damaging to the market than a loose cannon like Trump. They have no political history for Trump and some of the things he says he will do, like tariffs on China and Mexico would cause an instant recession.

As we move out of the primary cycle in June and the leaders begin mudslinging towards each other the tone of the debate is going to become increasingly ugly. Normally that weighs on consumers and on the equity markets. There is always the potential for riots surrounding the conventions and that is market negative. If we head into October with a candidate unfavorable to the market in the lead, we could see significant declines.

Add in the potential for further ISIS attacks in Europe and the USA and that is another problem for the market to digest. Economically the economy is worsening. The Q4 GDP was revised up to 1.39%, which is barely growth at all, and the Q1 GDP is now forecast at 1.4% and declining. The Fed, despite Janet Yellen's calming words, appears desperate to hike rates in April. No less than four Fed heads made those claims last week. If the market believes the Fed is going to accelerate its rate hike cycle the market will decline. Earnings are now forecast to decline -8.7% in Q1.

There are lots of potentially negative factors to consider and very few if any positive factors. All the future market catalysts are negative. That could change at any time but that is the outlook today.

I am recommending we buy the January $100 LEAP put, currently $5.92. I would recommend launching this position at $110 and adding to it at $115 on the IWM. This will lower our overall cost in the position. Also, you could sell short a January $85 put, currently $2.31 to reduce the initial net debit in the total position.

The S&P futures are up slightly on Sunday night. I am expecting the market to rally on Mon/Tue as fund managers window dress their portfolios.

Position 3/29/16 with an IWM trade at $110

3/29 - With IWM trade at $110, Long Jan $100 put @ $4.93, no initial stop loss.
4/27 - With IWM trade at $115, Long Jan $100 put @ $3.50, no initial stop loss.
Buy Jan $100 put with IWM trade at $120, no initial stop loss.

Optional

Short Jan $85 put @ $2.00, no initial stop loss.
Net initial debit $2.93.



JCI - Johnson Controls - Company Profile

Comments:

JCI continued to gain through Wednesday but faded with the market late in the week. They reaffirmed that the JCI/TYCO merger is still on track and is set to close on Oct 1st. They also filed the initial Form 10 Registration Statement with the SEC for the Adient spinoff to shareholders after the Tyco merger is completed in October. JCI shareholders will receive 1 share of Adient for every ten shares of JCI they own. Adient will have 230 locations in 33 countries with 75,000 employees and $20 billion in revenue.

Original Trade Description: February 8th

JCI is a diversified technology and industrial company worldwide. They design, produce and market building efficiency systems including heating, air conditioning, security, controls and mechanical equipment. They also have a division that manufacturers interior products, control systems, instrument panels, seating and passenger systems for cars and trucks. Their Power Solutions division makes batteries for normal cars and trucks as well as hybrid and all electric vehicles.

What makes JCI important to us today is their recently announced merger with Tyco (TYC). Tyco manufacturers fire and security systems and is headquartered in Ireland. After the merger JCI shareholders will own 56% of the combined entity to be called Johnson Controls Plc. Once the merger is completed the company will spin off the automotive segment to be called Adient leaving Johnson controls with a pure play on the HVAC, controls, fire, security products marketplace plus the Power Solutions division that will produce batteries for electric vehicles. Current JCI shareholders will own 56% of Adient.

The Johnson Controls company will have about $32 billion in revenue and Adient around $17 billion in revenue. The synergies to the merger include $150 million in tax savings because of the Ireland domicile. Another $500 million will come from eliminating corporate redundancies and from operational synergies. There will also be additional revenue synergies which has not been quantified. Both Tyco and JCI existing customers will immediately have a new range of products available to them. This should result in a significant sales boost in the first three years.

Normally when a merger is announced one of the companies sees their stock decline. That did not happen in this case. Tyco shares spiked 10% and are continuing to move higher while JCI shares moved sideways for the last two weeks but made a four-week high on Thursday. Friday's market crash knocked some of the wind out of JCI shares but they only declined -66 cents.

The actual merger has a long way to go since it was just announced on January 25th. With Tyco shares rising and JCI shares having put in a solid base at $34 I expect JCI shares to return to growth mode in the coming weeks.

This is a good deal for both companies. It will not only create a powerhouse in the building systems market but throw off the automotive business into another entity where it can be acquired by one of the larger players.

Earnings are April 28th.

Position 2/16/16 with a JCI trade at $36.75

Long Jan $40 LEAP Call @ $2.45, see portfolio graphic for stop loss.



NFLX - Netflix - Company Info

Comments:

Time to buy a Netflix call. Netflix has declined from $112 to $90 post earnings and we could be nearing a bottom. Netflix shares declined on lower guidance for international subscriber growth. Analysts were too excited about the 130 countries they opened for Netflix service in early January. Netflix said early distribution issues and marketing slowed adoption but they did expect that to increase as they completed the rollout. Consider the details involved in opening up 130 countries at the same time. That would be a huge task. However, now that all are open and signing up customers the rest is easy.

Netflix took in $7.1 billion in revenue over the last 12 months. That was a 23% increase. First Call expects that to grow to $8.77 billion in 2016 and $11 billion in 2017. That is 29% and 26% growth respectively. Yes, despite the stock decline, revenue growth is accelerating.

The company said it was planning on spending another $6 billion on content in 2017, up from $5 billion in 2015. CEO Hastings is using the Amazon growth model. If you build it, they will come and it will be harder for competitors to catch you.

17 million subscribers are about to see their $7.99 monthly fee rise to $9.99 and that would add about $450 million a year in revenue. The company expects to add 2.5 million new subscribers in Q2 and 9-11 million in the second half of the year as the international platforms gain speed. With a debt to equity ratio of only 5% they are planning on issuing some more debt late in 2016 and/or early 2017 to cover the content acquisition process. Their last debt issuance is selling at a premium in the aftermarket at $1.08 per $1 in value. This is highly sought after and the company believes it can get a highly desirable rate on its next issuance.

We still have $9.45 in net premium received from selling the original short put after subtracting the $5.59 loss in the original call.

I am recommending we buy a Jan $100 call with a NFLX trade at $93.25. That is $3 above Friday's close. If Netflix continues lower we can change the recommendation to match the chart. If it rebounds and begins to move higher then we will be in the trade.

With NFLX trade at $93.25
Buy Jan $100 call, currently $9.35, no initial stop loss.

Original Trade Description: January 24th.

Netflix has a plan for total domination of streaming video. On December 31st they were active in 60 countries. In early January, they announced they had expanded into 130 additional countries a full year ahead of schedule. The original plan was to complete the expansion by the end of 2016. This gives them a huge additional base of prospective users of more than 450 million broadband accounts. Everyone around the world knows of Netflix. Many have been waiting for them to open in their country. Netflix could gain more than 25 million new users in 2016 alone. They currently have just under 75 million. The 190 countries does not include China. They are working on getting into China but the government has put numerous censorship roadblocks in their path that need to be overcome. They expect to be in China in 2017. They added 4.04 million international subscribers in Q4 and that was just from the existing 60 countries.

Netflix said it was targeting young, outward-looking, affluent consumers with international credit cards and would spread out from that base.

Last year Netflix raised prices for new subscribers by $1 to $10 a month for unlimited high definition streaming. Existing subscribers were left at the $8 level. Now the company is saying those grandfathered under the $8 plan will see their exemption expire in May. They can continue paying $8 a month for standard definition but the rate will rise to $10 for HD shows and movies. Premium subscribers getting 4K UHD videos will be paying $12 a month. With 75 million subscribers this represents a cash windfall with the $8 rate rising 50% to the $12 level if you want UHD. Netflix said they were already seeing very fast adoption of the $12 plan by existing users. Plus, premium subscribers can stream to 4 devices simultaneously rather than just 2.

Netflix plans to stream more than 600 hours of original content in 2016 compared to 450 hours in 2015. There will be 31 new and returning original series, up from 16 in 2015. There will be two dozen original feature films and documentaries, 30 children's series and a variety of comedy specials.

Analysts believe Netflix earnings are going to soar in 2017 as the adoption of streaming in those 130 new countries begins to accelerate. That is good news because Netflix shares are highly overvalued according to normal metrics. Revenues have been rising 25% annually and streaming content obligations rose by 15% in 2015. They are paying a lot for content but they are essentially taking it off the market to prevent anyone else from competing. They can now use that content in 190 countries so they are leveraging their assets to expand future revenue. Their current PE of 346 is less than half of Amazon's 851 PE. They are operating on the same business model as Amazon. If you build it subscribers will come. When they finish their expansion phase, which is limiting earnings today, they will be highly profitable with more than 200 million subscribers by 2020. That equates to $2 billion a month in revenue. That is a month, not a year.

Buying Netflix requires a leap of faith that investors will return to it as a momentum growth stock. After the earnings report shares have been weak as traders looking for an earnings bounce move on to other stocks in hopes of repeating the process. Shares closed at $100 on Friday after a low of $97 during Wednesday's market crash.

I am suggesting we target that $97 level for a long entry. However, the LEAPS are so expensive we have to use a combination play to make it work.

One option would be to buy the stock and sell a January $110 LEAP covered call, currently $17.50. If we buy the stock at the $97 target we are protected against a decline to $80 by the premium we receive. If Netflix does not drop significantly and rebounds to more than $110 then we make roughly 20% or $20 over the next year. We cannot complain about a 20% gain in this market. If Netflix shares did decline significantly so $90 or so, the option premiums will shrink significantly and we could buy back the $110 LEAP for a profit and then buy a LEAP at a lower level for less money.

Another option would be to use a combination position where we buy the LEAP and then sell a put spread or a naked put to offset the cost of the LEAP call. One example would be to buy the $110 call for $17 and sell the $90 put for $14.25 giving you a net debit of $2.95 to be long Netflix for the next year. If shares declined under $90 you "may" be obligated to buy the stock at $90 "if" it was put to you. With the volume of puts on Netflix that potential is minimal but it does exist. If you were put I would sell a covered LEAP call to cover any losses and you still have your $110 long call for when the stock rebounds.

The option I am recommending is the combination play. If Netflix trades at $97.25 we enter the following trade. I am using the even dollar strikes in case there is another stock split in 2016.

Position 1/26/16 when NFLX traded at $97.25

Still short January 2017 $90 LEAP put @ $14.95, no stop loss.
Net debit 5 cents. If we are put the stock our cost will be $74.95 and a bargain.

Closed 2/3/16: Long January 2017 $110 LEAP call @ $15.00, exit $9.41, -5.59 loss
The call position will be replaced once the market volatility eases.



NKE - Nike - Company Info

Comments:

Nike rebound faded with the market but support at $58 is holding. Nike surprised everyone by signing endorsement deals with 15 members of the new NFL rookies class. Under Armour only signed one player. The contracts are for 3-4 years each and represent a bet that at least a few of this crop of rookies will turn into stars.

They are still expected to see earnings rise 15% in 2016 and revenue 20%. It would be hard to find a company with better growth.

Original Trade Description: January 24th

Nike split 2:1 on December 23rd at $132 and the stock went straight down from there. When a stock is a major fund holding and it splits, there is a rush to the exits by some funds. They can sell the new shares nearly tax-free when it is classed as a stock dividend and they still have the same number of shares in the original position. Some funds have restrictions on the number of shares they can hold in any single position. A stock split doubles the number of shares and sometimes puts them over the limit and they sell the extras. These factors cause what is called "post split depression." Nike shares have now experienced that depression.

Shares declined from the $66 level the day of the split to $56 last week on fears the holiday retail selling may have been weak. Given Nike's predominant position in athletic leisure apparel they will always be the dominant seller compared to Under Armour and LuluLemon.

The reported earnings in late December of 90 cents, that rose +22% and beat estimates for 85 cents. Revenue rose +4% to $7.686 billion but missed estimates for $7.808 billion because of the strong dollar. Excluding the dollar impact revenues rose +12% and well over $8 billion.

The company guided for earnings growth in the "mid teens percentages" and said there was no weakness in China. They announced a $12 billion stock buyback program in November and raised their dividend by +14%.

Nike is targeting $50 billion in annual revenue by 2020 with online direct ecommerce sales of $7 billion, up from $1 billion in 2015. Online sales rose +51% in 2015.

Competitor Under Armour is targeting total sales of $8 billion by 2018 to put that aggressive Nike target into perspective.

Nike plans to begin selling in Mexico, Chile and Turkey in 2016. Nike began e-commerce sales to Canada, Switzerland and Norway in the last quarter.Sales in China rose +28% despite the economic downturn. North American sales rose +10% with futures orders up +14%.

Earnings are March 22nd.

I am recommending we buy the $65 LEAP with a Nike trade at $62.25 to confirm the rebound from the lows last week.

Position 2/22/16

Long January 2017 $65 LEAP @ $4.08, see portfolio graphic for stop loss.



SWHC - Smith & Wesson HoldingsCompany Profile

Comments:

There was no bad news for the week and sellers appear to have vanished. Support at $22 is holding. President Obama started a new anti gun push on Friday and it is sure to produce another wave of gun buyers.

I recommended last week that we add to our existing position. This lowered our cost in the January LEAP to $2.05.

Sturm Ruger (RGR) reports earnings on Monday.

Original Trade Description: March 27th

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year, they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week. Last week a New York public advocate gave us a buying opportunity.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possible loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents? Thank you Letitia for the entry point.

I am also recommending this in the Option Investor newsletter on a shorter time horizon.

Earnings are June 16th.

I am using an entry trigger just in case the stock continues lower on the NYC advocate hatchet job.

Update 4/17/16: Sturm Ruger (RGR) and Smith & Wesson (SWHC) got some bad news on Friday. A judge in Connecticut ruled that a 2005 law that shields gun manufacturers from lawsuits brought by victim's families does not prevent victim's families from arguing that the semi-automatic rifle used in the Sandy Hook school shooting should not have been sold to civilians.

The case has no chance in court. The gun was made by Bushmaster Firearms, a subsidiary of Remington Arms, and no relation to either Ruger or S&W. However, the bad ruling by this judge means the families will sue Remington and there will be plenty of bad press before it is settled.

The gun belonged to Adam Lanza's mother and was stolen from a locked closet by her son and used to kill her and the victims at the school. The AR-15 style rifle is the most popular sporting rifle in America with millions sold every year by dozens of different companies.

Remington should not incur any liability by the son's illegal use of the firearm any more than GM is liable for the thousands of people killed every year by drunk drivers using GM cars. If a person decides to purposefully drive his car into a crowd of people, nobody is going to sue GM.

Since our LEAP had already declined to 90 cents on the first set of bad news in early April I am not going to close the position. We will tough it out and wait for the next set of NCIS numbers. Position 3/28/16 with a SWHC trade at $27.15

Long 2017 $30 LEAP Call @ $3.08, see portfolio graphic for stop loss.

Position 4/25/16: Added Jan $30 call @ $1.05
Adjusted cost on current position now $2.05.



TOL - Toll Brothers - Company Profile

Comments:

Toll shares and the entire builder community declined sharply after the New Homes Sales for March declined abruptly for the third consecutive month. This was not a Toll problem but a sector decline. I did add a stop loss in case it continues.

Original Trade Description: February 28th.

Toll Brothers is a builder of high dollar semicustom homes. They also develop golf courses and country clubs around which they construct master planned communities and sell lots to other builders in addition their own home construction.

Toll shares have been crushed since December but have rebounded since they reported earnings last week. The company reported earnings of 40 cents that matched estimates. Revenue rose 8% to $928 million that beat estimates for $916 million. Orders in Q4 rose +17.6% to 1,250 homes. Buyer traffic rose +13% in the first three weeks of February.

While the earnings were not a big beat of Wall Street estimates the guidance was strong. The company expects to sell 5,700 to 6,400 homes in 2016. The average low end pricing was raised to $810,000-$850,000 and the high end homes sell for as much as $2 million. The average selling price in Q4 was $873,500.

The CEO said business activity was strong and there was no signs of a recession. The CEO said, "The stock market seems to be pricing in a steep decline in the economy, and along with it, our sector. We on the other hand, are seeing signs that reflects strength and positive momentum in our business."

I believe Toll shares will rebound to the mid $30s as the homebuilder numbers from the spring selling season begin to appear. I am recommending a LEAP position but my exit target will be in the $37 range and we could be out of this position in the summer.

There is resistance at $28.35 so I am putting an entry target of $28.50 on the position.

Position 3/1/16 when TOL traded at $28.50

Long 2017 $30 LEAP call, entry $3.00. see portfolio graphic for stop loss.



TRN - Trinity Industries - Company Profile

Comments:

Trinity shares tested resistance at $20 all week and should eventually breakout to test the next higher level at $22.50. No specific news.

Original Trade Description: February 21st:

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed last week after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

They are also divesting their galvanizing business, think galvanized highway guardrails, and are slowing production in the highway products division and aggregate business.

The key here is that Trinity is now trading at a PE of 3. Yes 3.47 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock is extremely oversold and should recover as the shock of the post earnings drop wears off and oil prices begin to rise. Note on the chart that the stock price began to decline at the same time the price of oil began to crash in August 2014. I view this as a remarkable opportunity for long-term investors.

I am recommending the $23 2018 LEAP to get us well past the recovery in oil prices and any further weakness in the sector. Remember, Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

I understand that buying a 2018 LEAP is a stretch of the imagination for some investors. However, at $2 you will not have much at risk and it becomes a buy and forget investment. If Trinity returns to the 2015 highs at $35 that LEAP would be worth $12 and a 500% return. With a PE of 3.47 there is very little risk.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

I am still going to put an entry trigger on this position. Since the post earnings drop is only one day old we do not know if it will continue. I would love to buy this stock as cheap as possible but I also do not want it to run away from us. If it continues lower, I will change the strike price and entry to keep pace.

Position 3/7/16 with a TRN trade at $17.75

Long 2018 $23 LEAP Call @ $2.65, see portfolio graphic for stop loss.



UTX - United Technology - Company Description

Comments:

UTX reported earnings of $1.47 that beat estimates by 7 cents. The company said it was seeing an uptick in orders from China and U.S. orders have been very strong. The Otis elevator division saw orders rise 33% in the USA. The CEO was bullish about expectations for the second half, especially in the climate control division and the security division. Sales in aftermarket airplane parts and repair services rose +19%. The company said airlines are flying existing planes longer rather than buying expensive new equipment and that means more upgrades and more spare parts. Shares faded with the Dow late in the week.

Original Trade Description: March 6th.

United Technology is an $80 billion company that provides technology products and services to building systems and aerospace industries worldwide. They build elevators, refrigeration units, electronic security products, electric power generation and management, etc. The aerospace segment supplies flight sensing and management, engine controls, intelligence, reconnaissance, maintenance, engine components, landing systems, etc. I could go on for several paragraphs but the key here is that they do everything and do it well.

A couple weeks ago Honeywell and United Technology acknowledged they had held talks about a merger/acquisition. Honeywell reportedly offered $108 billion or $108 per share for the company. United said the offer undervalued the company and would not succeed in getting regulatory approval. Honeywell "strongly" disagreed with that assessment.

Honeywell and United have been talking on and off for 15 years about some sort of merger because their business lines would fit together very well. Reportedly there were serious discussions in may 2011 when UTX approached HON about a merger. Those talks failed and the companies began talking again in April 2015. Those talks also failed to reach an agreement.

Honeywell approached the chairman and the CEO of UTX again in February and initial talks were highly positive. However, they fell apart again a week later when UTX said the price was too low and they could never get regulatory approval.

On March 1st, Honeywell said it had dropped all plans to pursue an acquisition of UTX because the company appeared unwilling to negotiate.

A UBS analyst recommended buying UTX because the "company is still in play" whether from Honeywell or somebody else. With shares at $97 and the last "undervalued" Honeywell offer at $108 that leaves plenty of room for upside. Even if no acquisition comes to pass, the shares were trading at $125 last March. With acquisition interest I believe UTX shares could head back to those highs over the next few months, market permitting.

Earnings are April 19th.

I am recommending two entry points for this position. If shares move higher, we will enter the play at $98.25. If shares move lower in a weak market we will enter the position at $94.25. ONLY ENTER ONE POSITION using the first entry point that is hit.

Position 3/17/16: With a UTX trade at $98.25

Long Jan $105 LEAP Call @ $3.50, see portfolio graphic for stop loss.



VRX - Valeant Pharmaceuticals Company Profile

Comments:

Valeant filed its 10K on Friday to remove all the technical default risk. After an opening spike, investors sold the news. The 10K divulged numerous suits, probes and investigations by regulatory authorities.

The company did hire Joe Papa to take over as CEO and that is a strong plus. Now that the 10K issues have been solved the company can move on to fixing the various problems. Nearly the entire board is being replaced with most existing directors not standing for reelection. With Ackman driving the board and Papa driving the company we should see some positive headlines in the weeks ahead. Papa will make $100 million if he can lift the stock price back to $150. While that will be a formidable task, I would not bet against him. He has 4 years to accomplish that task and win the $100 million. I would expect some asset sales to be announced in the weeks ahead to show they are making progress on righting the company.

Original Trade Description: April 10th.

The Yahoo profile for Valeant says, "Valeant develops, manufacturers and markets pharmaceuticals, over-the-counter products and medical devices worldwide." They have dozens of name brand products and earn billions of dollars a year.

They were a serial acquirer and went on a buying spree that astonished the sector. CEO Michael Pearson was credited with making dozens of timely decisions that turned into a basket of golden eggs for the company.

Last year they ran into trouble when they were found to have likely acted improperly with a specialty mail-order pharmacy company named Philidor. Papers show that Valeant was the only customer for Philidor and they had purchased an option to acquire Philidor and consolidated Philidor's results into Valeant's own financial results. The entire thing appeared to be suspect to short seller Citron Research. They blasted out a short sell paper asking a lot of uneasy questions and making a lot of unsubstantiated claims as they always do when they attack a company.

Also suspect was a practice of sending out millions of dollars of product to specialty pharmacies and then claiming the profits from those drugs before they are actually sold. They also claimed the unsold inventories at those pharmacies as still on Valeant inventory lists. One specialty pharmacy was R&O, which was 100% owned by Philidor, which was secretly owned by Valeant. Citron believes this was a scam to deceive the auditors and claim sales of drugs that were not really sold. Citron dug up links to other "captive" pharmacies owned by Philidor, including West Wilshire Pharma, SaferX Pharma, Rando Pharmacy and Orbit Pharmacy. All were supposedly online drug stores and all their domain names were registered on the same day by the same person.

Since the Citron report went public Valeant ended its relationship with Philidor and the stock declined from $263 to $25. Some are trying to say that Valeant did not know about the captive pharmacies and Philidor was trying to scam Valeant. This would be hard to believe given the hundreds of millions of dollars in drugs flowing to Philidor.

Fast forward to the present. Bill Ackman and several other activist fund people have been named to the board. CEO Michael Pearson has been fired and will leave the company as soon as a replacement is named. Ackman appears to be running the board. His firm has lost more than $1 billion in Valeant stock so he is a man on a mission.

Last week Valeant received a reprieve from lenders and eliminated the pending threat of default for failure to file key SEC reports. Pearson was out on medical leave for two months, reportedly with pneumonia. It was more than likely a nervous breakdown from the Citron research publication. They used his absence as the reason for the report delay.

Creditors extended the deadline for filing the annual report from April 29th to May 31st. They allowed a delay for the Q1 earnings from June 14th to July 31st.

Much of the delay came from an investigation by the board into the Philidor disaster. The board launched an investigation into the Philidor relationship and the company had to restate earnings of $58 million from 2014 and move them into 2015. Last week the investigative committee said it had discovered no additional accounting errors and was closing the probe.

Valeant is a solvent company. They said last week they were "comfortable with its current liquidity position and cash flow generation for the rest of the year and remains well positioned to meet obligations."

Pearson was subpoenaed to appear before the Senate on drug pricing issues last week and did not appear. His lawyer said the Senate committee was unfair in that they wanted to question him on a variety of issues but would not identify which issues in advance so that he could prepare.

Ackman said he could restore value to Valeant relatively quickly. The first step will be to file updated financials later this month and that would take all the pressure off the stock. Investors do not know today what Valeant is worth because of the accounting probe and worry that some information may have been incorrect. Valeant is restating financials because of "improper conduct" of past executives including CFO Howard Schiller.

Secondly, Ackman said they were going to install a new management team within a "matter of weeks, not months" and that would reassure investors as well. Ackman said he was confident he would recover all his money in the Valeant investment. He bought VRX shares at $161 and again somewhat lower than that.

Ackman said Valeant was willing to sell off noncore assets to raise cash and pay down debt to improve the financial picture. Valeant only has a market cap of $11 billion today compared to nearly $100 billion back in August of 2015. This drop is entirely due to the confusion over Philidor and possibly impropriety. The board now claims there was no additional problems other than the $58 million restatement of earnings.

The last time Valeant issued guidance they were projecting $12.6 billion in revenues for 2016. Adjusted EPS of $13.50 a share. Double digit sales growth and $2.25 billion in debt reduction. A company that can produce $13.50 in earnings at a relatively mild PE of 10 would be worth $135 per share.

They have plenty of assets they can sell to raise cash if needed. Their Bausch & Lomb division is worth as much as $20 billion by itself or twice the current market cap of the entire company.

I believe Ackman will get the ship righted again. His reputation depends on it plus the $1 billion he has lost. The potential for Valeant shares to decline significantly has been greatly reduced with the resolution of the accounting probe and termination of Pearson and Schiller. I am sure the company made some mistakes. However, the sum of the parts is worth more than $118 a share according to a BMO analyst.

The stock has been crushed. The odds of an additional decline from here have been significantly reduced. The odds of a dramatic rebound have greatly increased.

In the LEAPS portfolio, we want stocks with the potential for significant appreciation. Once positive announcements become commonplace with Valeant the shares should rebound appreciably. Just filing the updated financials later this month will be a major step forward.

I am recommending we buy the Jan $40 call and sell a $25 put to offset the cost of the call. Premiums are expensive on Valeant because of the potential for a huge rebound. The stock was $263 a year ago and I do not expect that again but we could easily see the current price double or triple given the strong earnings potential.

Position 4/11/16

Long Jan $40 LEAP Call @ $8.25, see portfolio graphic for stop loss.

Optional

Short Jan $25 LEAP Put @ $6.00, see portfolio graphic for stop loss.

Net debit $2.25.



WDC - Western Digital Company Profile

Comments:

WDC reported earnings of $1.21 that missed estimates by 7 cents. Revenue of $2.82 billion declined -20.5% and missed estimates by about $40 million. The company cited weak PC sales and enterprise activity moving to the cloud. This resulted in declining drive prices and weak margins. The company guided for the weakness to continue in the current quarter. They predicted revenue of $2.6-$2.7 billion and below estimates for $2.92 billion. Earnings of $1.00-$1.10 will be well below estimates for $1.34.

The company touted its acquisition of SanDisk and said "Our strategy is to become a broad-based provider of media-agnostic storage solutions to anticipate these and other trends," speaking of low PC sales and higher cloud usage. I continue to believe that the SanDisk acquisition is a major milestone for WDC but it will take time for those products to be merged and produce results. Shares declined sharply on the earnings news.

Original Trade Description: March 20th.

Western Digital develops, manufactures and sells data storage devices that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content worldwide. They produce hard drives for consumer PCs and enterprise servers. They produce solid-state drives (SSDs) that contain flash memory and operate at many times the speed of a conventional mechanical disk drive. They produce direct attach storage solutions for private and public clouds with storage per device of up to 24 TB.

Several months ago Western Digital agreed to buy flash memory maker SanDisk for roughly $80 per share or $16 billion. SanDisk has a revolutionary new memory technology that is due to hit the market soon and is considerable faster than existing flash memory. Western will be able to incorporate this super fast flash into its products and move well ahead of competitor Seagate Technology (STX). Seagate purchased competitor Samsung and Western Digital purchased Hitachi over the last several years. That leaves Seagate and Western Digital as the only major disk storage manufacturers in the world.

The shareholders of WDC (90%) and SNDK (98%) recently approved the merger and the U.S. and EU regulatory agencies have given approval. China is the only major country still working on their approval process. The merger is expected to complete in Q2. However, China could elect to drag out the approval process in order to extract concessions from the combined companies. They have done this before as in the Hitachi acquisition. Western is expected to derive $500 million in synergies from the SanDisk acquisition in the first two years and another $500 million by 2020. Institutional Shareholder Services, a company that advises investment firms, believes there will be up to $1.1 billion in cost synergies. That is a huge plus for WDC.

When Western Digital bought Hitachi in 2012, China approved the transaction but required WDC to maintain manufacturing and sales separate from WDC manufacturing and sales for 2 years. At the end of that period China tried to impose new restrictions and after a long battle they finally relented in December. Western will finally be able to fully integrate the Hitachi acquisition into Western's manufacturing process. That is expected to provide them with another $500 million in synergies over the next two years.

As a result of the SanDisk merger, Western Digital will have an opening to spread out in the flash storage market. SanDisk will be able to leverage Western's decades of market share in the hard drive market to expand on its flash storage into laptops, notebooks, tablets, PCs, etc. This is a win-win for both companies.

Western Digital shares have bounced around between $40-$50 for the last two months as the acquisition headlines played out in the market. Western's partner, China's Unisplendor, pulled out of the deal. They had planned on investing $3.78 billion in Western Digital and western was going to use that money to help finance the $19 billion SanDisk acquisition. When Unisplendor pulled out, Western negotiated a new deal for $15.8 billion with SanDisk and the deal went forward. That period saw shares drop to $40. Western announced debt deals last week to raise $17 billion in the market and the merger is looking very good. Now that all the hysteria is over the shares should begin to move higher as we get closer to completion. Shares gained $3 on Friday as the debt sale and shareholder approvals were announced.

Analysts are upgrading their ratings with Needham upgrading to strong buy and Citigroup to a buy. Needham has a price target of $90.

I am recommending we take a position ahead of the completion with the understanding that China could drag out the approval date. I gave serious consideration to using a 2018 LEAP but decided to go with 2017 instead. We can always roll forward late in 2016.

Earnings are April 28th and we will hold over the announcement.

Position 3/20/16 with WDC at $49.15

Long Jan 2017 $55 LEAP Call @ $4.90, see portfolio graphic for stop loss.

Optional:

Short Jan 2017 $35 LEAP Put @ $2.70, see portfolio graphic for stop loss.
Net debit $2.20.



XOP - Oil Exploration ETF - ETF Description

Comments:

Crude prices continued to rise thanks to the falling dollar. News of increasing production ain various OPEC countries failed to blunt the rally. Unless the dollar continues to fall to new lows this rally will eventually fail in the short term but long term we should see $50 oil by the end of December.

Original Trade Description: February 28th.

The XOP is an ETF focusing on oil and gas exploration and production companies in the USA. There are 65 companies held by the ETF. More than 82% are oil and gas producers and 18% are refining and marketing companies. Only three companies comprise more than 3% of the weighting and that is due to price declines in other positions. The average weighting is about 2.4% for the majors and 1.5% for the minors.

In recent weeks we have seen oil prices trade as low as $26 and as high as $35. The two times it declined to the $26 range are more than likely the bottom for prices. The rebound to $34 last week came on daily headlines from the Middle East on Russia and OPEC countries getting together to agree on a production cap to limit future production and hopefully allow the glut to shrink.

Unfortunately, OPEC produced at a record high of 32.6 mbpd in January and freezing production at that level only guarantees continued excess production. Crude prices are rising because speculators believe that any agreement between OPEC and non-OPEC producers could eventually lead to a production cut when OPEC meets on June 5th.

The problem is that very few OPEC members have ever lived up to prior agreements. They all claim to produce to their quota but most overproduce and that is why we are in this mess today. Saudi Arabia got tired of always being the swing producer that had to cut even more production because everyone else was overproducing. They said if everyone cannot honor the quota then we will open the pipelines and the prices will show you the error of your ways.

Saudi Arabia did this in 1998 for the same reason and oil prices fell under $10. The rest of the OPEC nations finally caved in and promised to honor the quotas and Saudi relented and slowed production and prices rebounded. Some producers failed to learn the lesson last time and are having to suffer through it again.

Russia has agreed to limit/cut production three times in the past and never honored their agreement.

This is the problem today. Nobody wants to be the only one to honor a freeze only to have everyone else gain market share at their expense. If the group can agree to a freeze and audit the results and finds that the agreement worked then that would provide a basis for cooperation on a production cut at the June 5th meeting.

The entire oil crash problem is ridiculous. If OPEC would agree to cut production 2.0 mbpd the price would be back at $65 or more within a few months and eventually move even higher. The lack of trust and cooperation is costing them billions of dollars every day and they are too stubborn to fix it.

The reason for adding this ETF position now is that everyone is talking and that could lead to an eventual production cut. Also, U.S. production has declined more than 500,000 bpd since the peak last April at 9.61 mbpd. U.S. production has declined -135,000 bpd in just the last five weeks. The active rig count is crashing with total rigs falling to 502 last week, down -1,429 from their high of 1,931 at the peak in 2015.

Oil prices at $30 are finally having a material impact on U.S. production and the IEA expects production to decline another -500,000 bpd in 2016 and -200,000 bpd in 2017.

Also, the spring refinery maintenance season will be over at the end of March. At the peak of the maintenance season more than 2.0 mbpd of capacity is offline. When all those refineries go back to work the current inventory build cycle will end and four months of inventory declines will begin. This always raises the price of crude oil in the summer.

Lastly, pipeline outages in Iraq and Nigeria have removed 800,000 bpd of crude from the market and that should continue for at least two more weeks. An increase in violence in Libya is preventing a resumption of production and slowing exports.

Because of the low gasoline prices gasoline U.S. demand rose to a three month high at 9.576 mbpd last week and is expected to continue rising as we move into the summer driving season.

The XOP appears to have bottomed at $23 at least for the time being. If any of the factors described above cause a decline in excess production and increase in global demand then oil prices will rise and exploration companies will breathe a sigh of relief as their stock prices rise as well.

Oil prices will return to significantly higher levels in the next two years. There have been 8 boom/bust cycles since the early 1980s. Prices always return to levels where a significant number of producers throw in the towel and then rebound to new highs because of a lack of production. Demand rises about 1.2 mbpd per year. This oil crash is crushing future production with more than $200 billion in new projects canceled. It is just a cycle and the cycle will repeat.

When oil prices were $50 back in early October the XOP was over $40. I would really like to buy the 2018 LEAPS instead of the 2017 LEAPS but the prices are almost double. We will be better off to own the 2017 strikes and then roll into the 2018 strikes as the 2017 positions near expiration.

I am putting an entry trigger on the position just in case oil prices do take another dive lower. If that happens, I will lower the entry and the strike price.

Position 3/2/16 when XOP traded at $25.75

Long 2017 $28 LEAP Call, entry $3.10, see portfolio graphic for stop loss.




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Watch

Internals Softening

by Jim Brown

Click here to email Jim Brown
Editors Note:

The major indexes all declined for the week despite some major earnings beats on Thursday after the close. Big beats by Amazon, Expedia and Linkedin failed to rescue the Nasdaq from a lower opening and -30 point decline. We are starting to see more companies actually miss their lowered estimates and going into the summer doldrums that is not encouraging. The economic picture continues to weaken with the GDP falling to only +0.5% growth for Q1.

With markets starting to decline there is no rush to add a bunch of new positions. There could be a bigger dip in our future.

I prefer to view a decline as a potential buying opportunity rather than a losing proposition.

No new watch list entries today.


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