Option Investor
Newsletter

Daily Newsletter, Sunday, 12/4/2016

Table of Contents

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

Leaps Trader Commentary

Brexit ReDux

by Jim Brown

Click here to email Jim Brown
Italian voters soundly rejected the sweeping constitutional changes on Sunday and the S&P futures fell -12 points.

Fortunately, they have improved significantly to only -7 but the market is still going to open lower on Monday if the futures hold. Analysts posting comments on Sunday evening suggest buying bonds and selling equities because of the growing political instability in Europe. I think that is a little reactionary and the negativity could blow over or at lease moderate by morning.

Prime Minister Renzi has confirmed he will resign and that will through the Italian political system in to turmoil until elections can be held next spring. Italian banks will be the hardest hit because it will be difficult to raise additional capital in an unstable situation.

There are worries that populism could pick up speed with the potential for the Five Star Movement (M5S), a populist, anti establishment party to gain control. The M5S has said they will call for an election to leave the euro. Euroskepticism is definitely on the rise in Italy and the Brexit has fired up movements in multiple countries.

Monday's front page on the Guardian.


Also complicating the overseas political picture, New Zealand's Prime Minister John Key unexpectedly announced his resignation. On the positive side, Alexander Van der Bellen, won the presidential election in Austria. He said his victory sent a "red and white signal of hope to all the capitals of the European Union." Bellen defeated the far right candidate Norbert Hofer.

With the U.S. futures down and Friday's market action less than convincing, there is a good chance the market could open down and possibly lead to further profit taking that was not completed last week.

I was hoping we could avoid a Nasdaq test of support at 5,200 and 4,700 on the Nasdaq 100. The S&P has tested support at 2,190 twice in recent days and the -7 point decline in the futures would see the index open at about 2,185. While that is not far enough away from that support to make a major difference, a close at or below 2,185 would be a minor sell signal. The 2,175 level is the next support to watch.


The Dow rallied on the strength of moves in Goldman Sachs (+16) and UnitedHealth (+10). Together than added roughly 200 points to the Dow for the week. I would seriously doubt that we see similar gains from any two Dow stocks next week. The Dow closed at a new high on Thursday and only lost 21 points on Friday. There is no visible weakness but those kinds of individual stock gain will definitely end.

The Dow has resistance at 19,250 and support at 19,000.


The Nasdaq indexes are the real problem. The Nasdaq Composite declined to 5,255 at the close with only a 4-point gain on Friday. Critical support is 5,200 and that could be tested at any time since we had two days last week where the index lost more than 50 points.


The Nasdaq 100 ($NDX) never made a new high and has nearly erased all the post election gains with a drop back to 4,700 and critical support. The big cap techs have been weak as institutions are rotating out of techs and into industrials, banks, defense and aerospace. There are no signs that trend has changed.


The small caps finally ended their string of gains at 15 days and promptly ran up a four-day streak of losses as limited profit taking appeared. The index was fractionally positive on Friday and I would expect support at 1,300 to be tested next week if the profit taking continues.


The economic calendar for next week is light with no market moving reports. The Fed rate hike the following week will be the focus. Even though everyone expects a hike, it will still be the topic of conversation all week.


I am relatively bullish on the market. Once the current bout of volatility passes, I do expect the market to set new highs before the end of December. Once into January, I fear we could have a recurrence of last January where funds began unloading right at the start of the New Year. That could be lessened if the excitement over the new administration continues to grow. I know that is a long shot but it is a possibility. With the market still near its highs, it would suggest we are going to see some continued window dressing into the end of December. However, multiple analysts have reported that funds are almost 100% invested and there is little cash left to orchestrate that final boost. That is where retail investors will help. They always buy in at market highs and as we saw last week dips on everything but tech stocks were bought.

I would be a buyer of index ETFs on any material dip on Monday that is related to Italy. I believe it will pass and that will just be one more excuse for the weak holders to leave the market.

Jim Brown

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Portfolio

String Broken

by Jim Brown

Click here to email Jim Brown
The string of post election gain has broken and the overbought conditions have eased.

We did see several stops last week as the Nasdaq crash took its toll. They were painful but unavoidable. Profit taking does appear regularly.


Current Position Changes


GE - General Electric

The long call position was opened on Monday.

NBIX - Neurocrine Bio

The long call position was stopped at $46.85.

SWKS - Skyworks Solutions

The long call position was stopped at $71.85.

UA - Under Armour

The long call position was stopped at $29.85.

XOM - Exxon Mobil

Close the position at the open on Monday.


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. Any lines in gray were previously closed.



Current Portfolio





New Plays

Another Dip Buy

by Jim Brown

Click here to email Jim Brown


SMH - Semiconductor ETF -
ETF Profile

The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors US Listed Semiconductor 25 Index (the "Semiconductor Index"). The fund normally invests at least 80% of its total assets in securities that comprise the fund's benchmark index. The Semiconductor Index is comprised of common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor sector. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange. Company description from FinViz.com.

The semiconductor sector has been in rally mode since July. The SMH hit a high post election at $71.83 but was crushed back to $67.50 last week in the Nasdaq crash. If the economy is actually going to accelerate as analysts believe, the chip sector will be a leader. Everything we do today has some kind of chip component from smartphones to refrigerators to automobiles. Everything we touch has a chip if it is even remotely electronic.

Chips were soft from the middle of 2015 until July 2016 as the economic struggled along at a roughly 1.25% growth rate. I believe they are poised to rally higher over the next year. The growth of the cloud with millions of servers added every year is just one area that is seeing new chip technology.

Because of the crash last week the LEAP prices have declined to reasonable levels unlike most individual stocks.

Buy Jan 2018 $75 LEAP Call, currently $3.30, no stop loss.




Play Updates

Nasdaq Pain

by Jim Brown

Click here to email Jim Brown
Editors Note:

The sharp decline in the Nasdaq on Wed/Thr was painful but we knew there would be profit taking eventually. The sharp drop in the chip and biotech sectors accelerated the decline in Nasdaq stocks and knocked us out of the NBIX and SWKS positions plus we saw sharp declined in NVDA, INTC and FB. We cannot avoid these routine bouts of profit taking without leaving the stop losses so wide that they are ineffective. I did that on NBIX and it came back to bite me.

In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.



Original Play Recommendations (Alpha by Symbol)


APA - Apache Corp - Company Profile

Comments:

Nice bounce on the OPEC news. Apache said it sold its 30.3% share in the Scottish Area gas Evacuation system along with its 60.6% interest in the Beryl pipeline. The value of the deal was not disclosed but was through to be in the hundreds of millions of dollars. This is part of the plan to sell noncore assets to raise money to develop its new discoveries. In Q3 more than 100 institutional investors opened new positions in Apache with 336 institutions adding to their positions.

Original Trade Description: October 2nd

Apache Corporation, an independent energy company, explores, develops, and produces natural gas, crude oil, and natural gas liquids. It operates onshore and offshore assets primarily in the Permian Basin, the Anadarko basin in western Oklahoma, the Texas Panhandle, and Gulf Coast areas of the United States, as well as in Western Canada and Gulf of Mexico. The company also operates assets in Egypt and the United Kingdom in the North Sea. As of December 31, 2015, it had total estimated proved reserves of 794 million barrels of crude oil, 198 million barrels of natural gas liquids, and 3.4 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.

While that company description was valid six months ago the picture has changed for Apache. In early September Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. The "Alpine High" as they are calling it, "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The Alpine High play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage, they drilled 19 wells to prove out the reserves. Previously oil industry experts thought the area to be unfit for fracking because of an abundance of clay. Therefore, nobody was interested in this remote corner of the Delaware Basin inside the Permian. Apache said the amount of clay was significantly less than previously thought.

Compare the size of the discovery with the proved reserves in the company description. This one discovery is several times the size of the entire company six months ago.

Apache said it was raising capex by $200 million to $2 billion to reflect their anticipated activity in this area. They are going to allocate 25% of their capex budget to this discovery. Well costs are $4-$6 million for 4,100 foot laterals. They are going to start development with a 3-5 rig program and they have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone. The only drawback to the position is the lack of infrastructure, which Apache will have to build out along with its wells. The company will not be able to sell production until the second half of 2017 when they anticipate the first level if infrastructure will be completed. Volume production will not begin until 2018.

The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.

Apache is going to be getting a lot of attention over the next several months as portfolio managers reevaluate them as a potential investment. By more than tripling the company's reserves in one discovery the company has a lot of profitable work ahead for the next decade.

They were very smart to keep the discovery quiet until they had locked nearly every single acre in the entire discovery for very low prices.

Earnings Feb 2nd.

I have been waiting for the initial stock surge on the news of the discovery to fade to give us a better entry point. However, it never came and now with the OPEC production cut headlines we may never see the stock back below $60. I would rather buy a stock that is rising than wait forever for a dip that never comes.

I am not going to spread this LEAP because shares could run to $100 if the OPEC production cut actually occurs. We can spread out to exit the play on the backend.

Position 10/3/16:

Long 2018 $70 call @ $7.70, no initial stop loss.

You could sell a put to offset the call premium because I seriously doubt this stock is going significantly lower unless oil prices implode.



BMY - Bristol-Myers Squib - Company Profile

Comments:

No specific news. Still holding over support at $55.

Original Trade Description: August 8th.

Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers chemically-synthesized drugs or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that targets and blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung cancer, renal cell cancer, and melanoma; Sprycel, a multi-targeted tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for the treatment of patients with metastatic melanoma; Abilify, an antipsychotic agent for adult patients with schizophrenia, bipolar mania disorder, and major depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation, and the prevention and treatment of venous thromboembolic disorders. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor that is in regulatory review for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer.

BMY is NOT a one-drug company. On August 5th, the stock fell from $75 to $62 on news a clinical trial on Opdivo for lung cancer without chemotherapy had ended without the desired results. More than $20 billion in market cap was erased from the stock because of one trial on a drug that is already successful in lung cancer with chemotherapy and in treating renal cell cancer.

This was not a case where all the patients in the trial died. It was simply a trial that did not work. Specifically this particular trial was hoping to prove the drug would be successful in patients with more than 5% of the PD-L1 protein in the tumors and had not received chemotherapy. This is a very broad trial. They hoped to be able to avoid the expensive chemotherapy process and the very painful side effects. It did not work in that application BUT it has already been approved for use with chemotherapy. The competitor drug from Merck, Keytruda, was tested in a smaller subset of patients with more than 50% of the PD-L1 protein. If BMY had copied that trial for Opdivo, the drug may have worked.

Bristol-Myers has a very strong portfolio of cancer drugs, HIV drugs, etc. Revenue is NOT going to change because the drug had never been prescribed for this specific patient demographic. Nothing changed financially for BMY. They had hoped a successful test would have added billions to annual revenue several years into the future but that was just wishful thinking.

There is an existing Phase 3 trial with Opdivo in conjunction with the drug Yervoy for PF-L1 positive patients. If that trial is successful, the Checkmate-026 trial will be immediately forgotten.

Update 10/30/16: BMY reported earnings of 77 cents compared to estimates for 65 cents. Revenue of $4.92 billion beat estimates for $4.75 billion. They guided for full year earnings of $2.80-$2.90, up from the prior forecast of $2.55-$2.65. For 2017 they guided for $2.85-$3.05 per share. The CEO was very upbeat about the BMY portfolio and pipeline and shares spiked $4 on the news. This should have finally killed the Opdivo headlines. BMY is a good company. There is no material reason for a $20 billion market cap haircut. I have change the recommendation to buy a dip to strong support at $50. The decline is continuing and any further market weakness could give us a great entry point.

Position 10/10/16 with a BMY trade at $51.00

Long Jan 2018 $55 LEAP Call @ $4.00. see portfolio graphic for stop loss.



FB - Facebook - Company Profile

Comments:

Facebook is reportedly developing a curated news feed where the input sources have to be approved in advance. Rather than show news from everyone submitting articles, they will only show news from reputable sites that have been pre approved.

FB shares fell $7 on Wed/Thr with the Nasdaq crash. Support at $114 must hold or risk a bigger decline.

Original Trade Description: November 13th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. They have barely begun to monetize Instagram and WhatsApp. Facebook bought Instagram for $1 billion four years ago and Forbes said it was worth $25 to $50 billion today. Instagram has added 100 million users in the first nine months of 2016 to reach 400 million. They are targeting one billion. Instagram revenue is expected to triple in 2016 to $1.5 billion and then triple again to $5 billion by 2018 according to eMarketer.

Instagram only has 350 employees compared to the 14,500 Facebook employees. Instagram users average 21 minutes a day and upload more than 95 million photos and videos. There is gold in those posts and Facebook is working on finding more ways to monetize the app.

Facebook may expect revenue "growth" to slow but that is different from "decline." It is still a great business and there will be another explosion of growth as Instagram and WhatsApp hit their prime.

Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings Fed 1st.

The drop in price after earnings plus the decline in the Nasdaq big caps last week helped to reduce the premiums but they are still expensive and require a spread position to receive maximum benefit at the lowest cost.

Position 11/14/16:

Long Jan 2018 $125 call @ $13.10, no initial stop loss.
Short Jan 2018 $150 call @ $5.00, no initial stop loss.
Net debit $8.10



GE - General Electric - Company Profile

Comments:

No specific news. Shares are holding right at resistance at $31.50 while waiting for the next market bounce.

Original Trade Description: November 27th.

General Electric Company (GE) operates as an infrastructure and financial services company worldwide. The company's Power segment offers gas and steam power systems; maintenance, service, and upgrade solutions; distributed power gas engines; water treatment, wastewater treatment, and process system solutions; and nuclear reactors, fuels, and support services. Its Renewable Energy segment provides wind turbine platforms, and hardware and software; offshore wind turbines; and solutions, products, and services to hydropower industry. The company's Oil and Gas segment provides turbomachinery solutions; surface and subsea drilling and production systems, and equipment for floating production platforms; measurement and control products; and compressors, pumps, valves, and natural gas solutions. Its Energy Management segment offers industrial and grid solutions; and power conversion systems. The company's Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, electric power, and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment offers diagnostic imaging and clinical systems; products and services for drug discovery, biopharmaceutical manufacturing, and cellular technologies; and healthcare information technology products. The company's Transportation segment provides freight and passenger locomotives, parts, wreck repair, software-enabled solutions, mining equipment and services, marine diesel engines, and stationary power diesel engines and motors, as well as overhaul, repair, and upgrade services. Its Appliances & Lighting segment sells and services home appliances; and manufactures, sources, and sells lighting solutions. The company's Capital segment offers commercial lending and leasing, factoring, energy financial, and aircraft financing and leasing services. Company description from FinViz.com.

GE is a very boring company. They are huge, they move slowly and there is no excitement in their earnings or forecasts. Because they are so boring a straight LEAP call is only $1.85 and the risk from a future bout of profit taking is minimal.

GE is doing all the right things. They are spinning off their energy division to merge with Baker Hughes and create the second largest services company in the oilfield. They sold off their financial services divisions to escape the government's control as a systemically important financial institution (SIFI).

In their recent earnings, they had some delivery problems with some giant wind turbines that shifted revenue into Q4. They continued to suffer from the depleted energy sector and that prompted the spinoff of that division.

They pay a 3% dividend and the company is always growing. Boring.

In this market, with the potential for profit taking over the next couple of months we need some more boring companies in the portfolio. Just don't expect to see a lot of news on GE in the weekly updates.

Buy Jan 2018 $32 call, currently $1.85, no initial stop loss.



HLF - Herbalife - Company Profile

Comments:

No specific news. Shares traded at a 9-month low on Friday. Disappointing guidance and news the CEO was leaving has knocked 19% off the stock in November.

Original Trade Description: November 20th.

Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The weight management product portfolio includes meal replacement, protein shakes, drink mixes, weight loss enhancers, and healthy snacks. The targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients. The energy, sports, and fitness portfolio consists of products that support a healthy active lifestyle. The outer nutrition products include facial skin, body, and hair care products. The company also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. It offers its products through retail stores, sales representatives, sales officers, and independent service providers. Company description from FinViz.com.

Herbalife has been the target of a $1 billion short position by Bill Ackman for several years now. He has done everything possible to kill interest in the company and drive it out of business. John Fichthorn, co-founder of Dialectic Capital Management and follower of Ackman's crusade, funded a movie called "Betting on Zero" that was previewed at the Tribeca Film Festival back in April. At the time Herbalife was under investigation by government regulators for being a pyramid scheme. Since then, the company settled with the government for a $200 million fine and the promise to change its business practices.

The change in practices is going to kill the company. Instead of being a multilevel as the company has been for the last 35 years, they are now required to pay their associates based on the amount of product sold at retail rather than the sales to members in their downline. This will change the commission structure significantly and associates are going to be fleeing in droves. It removes the incentive to sign up new distributors.

When the film was screened at Tribeca a firm hired by Herbalife bought half the tickets in an effort to reduce the number of people viewing the film.

Last week the HBO show "Last Week Tonight with John Oliver" was a diatribe against multi level marketing companies and the film received some additional publicity after being mentioned on the show.

Billionaire investor Carl Icahn has done everything in his power to drive Ackman out of the Herbalife short. He bought the shares when they were down significantly and has accumulated 35% ownership in the company. He claims he has asked the company for permission to own 50%. He has called for the company to go private. All of his headlines are calculated to lift the stock price. However, since the FTC decision and the mandate to change the business compensation structure, that Ichan headline spam has been a losing proposition. News of the distribution deal for the movie and news that sales in China are slowing, have pushed Herbalife shares to a 9-month low.

I believe Ackman will win this war. Herbalife cannot succeed as a retail company rather than a multilevel company. Earnings are going to collapse and distributors are going to quit.

The company beat earnings on Nov 2nd but they announced the CEO was leaving and that caused the stock to collapse and that decline is continuing. With the captain leaving a sinking ship the outlook is not good.

Earnings Jan 31st.

I am recommending a February put that will have expectation value in the premium when the company reports earnings at the end of January. We will decide at the time if we are going to hold over the report.

Position 11/21/16:

Long Feb $47.50 put @ $2.60, see portfolio graphic for stop loss.



HON - Honeywell - Company Profile

Comments:

No specific news. Back to support at $112 in the weak market.

Original Trade Description: October 23rd.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. It also offers fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate fertilizers, phenol, specialty films, waxes, additives, fibers, research chemicals and intermediates, and electronic materials and chemicals. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

On Oct 21st, Honeywell (HON) reported earnings of $1.67 compared to estimates for $1.60. Revenue of $9.80 billion beat estimates for $9.78 billion. The company said it was well positioned for double-digit earnings growth in Q4 and that would push them to 8-9% earnings growth for the full year. For Q4 they guided for $1.74-$1.78 in earnings and analysts were expecting $1.80. They guided for the full year to earnings of $6.60-$6.64 and revenue of $39.4 to $39.6 billion. Analysts were expecting $6.68 and $39.63 billion.

Shares rallied despite the lowered guidance because Honeywell had already warned two weeks earlier and shares were crushed. The company focused on being upbeat about 2017 saying they expect double-digit earnings because of the restructuring they accomplished in 2016. The company laid off 3,017 positions in Q3 as they separated the automation and control solutions business into two new reporting segments. They took a charge of $202 million on the restructuring and layoffs. Because of the big drop in early October, the risk should be reduced for Honeywell shares.

In this market, any company that can produce double-digit earnings in Q4 and give strong guidance for 2017 should find some buyers. I believe the worst is over for the shares and we should see a rebound back to the highs, possibly before year-end.

Position 10/24/16

Long Jan 2018 $115 call @ $6.25, see portfolio graphic for stop loss.

After HON rises some we can turn it into a spread and reduce the premium.



INTC - Intel - Company Profile

Comments:

The chip sector was crushed in the Nasdaq sell off last week. There was no specific reason. It was rotation out of techs into industrials and financials. Intel signed a deal with Delphi and Mobileye to provide a system on a chip (SOC) for the partnership that expects to have an autonomous vehicle on the road by 2019.

Original Trade Description: October 9th.

Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Software and Services, and All Other segments. The company's platforms are used in various computing applications comprising notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices, and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use, and other market segments. It offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip products that integrate its central processing units with other system components onto a single chip. The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers, and power management integrated circuits; and tablet, phone, and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions, and interoperability tests, as well as home gateway and set-top box components. In addition, it offers security solutions for computers, mobile devices, and networks, as well as software and services for technology integration; NAND flash memory products, which are used in solid-state drives; and custom foundry services, including custom silicon, packaging, and manufacturing test services. Company description from FinViz.com.

Yes, Intel. The father of modern computers, servers and everything chip related. They have a lot of competition today but Intel is still a chip behemoth. They rule the PC and server processor space with new developments faster than other chip makers can even conceive of them, with the exception of Nvidia, which is giving Intel a tough battle. There is enough market share for everyone so nobody is going to be squeezed out of the market.

I am not going to go into a lot of detail on Intel because everyone knows who they are and what they do. I believe this is the right time to play Intel because more than one company, including Intel, has said they underestimated PC demand over the last quarter.

The main reason behind the PC surge is Windows 10. The Window's Vista and Window's 8 problems have been forgotten because Microsoft went back to what worked and what customers wanted. Now that Windows 10 has been accepted by the mainstream consumer, the long awaited upgrade cycle is underway. That means tens of millions of PCs are being replaced with new models. Add in the millions of new tablets and servers and Intel should be doing well.

Their earnings are October 18th. I rarely suggest adding a new position only a week before earnings but the options are cheap and I expect Intel to beat the estimates and guide higher. I could be wrong but we have 14 months to be right.

Intel shares closed at a new 15-year high on Friday and just over $38. Intel is breaking out and shares could easily run to $50 over the next year. As a big cap tech with relatively little volatility, fund managers should be throwing money at the stock over the next three weeks.

Update 11/13/16: Intel announced a new chip technology and is releasing proof of concept chips while it scales up to produce them in mass 2-3 years from now. They figured out how to put a FPGA on the same chip as a Xeon processor. This eliminates the requirement to had separate chips on a single motherboard and eliminates all the bandwidth headaches of moving high-speed data between those two chips. Data transfer rates between the two processors on the same chip could start in the 50-100 gigabits per second range and increase to 2 terabits early next decade. This is going to be a game changer when it goes into production 2-3 years from now.

Update: 11/20/16: Intel held an analyst meeting and described a new chip that they will be testing in early 2017 and releasing to some test customers at the end of 2017 that is supposed to be very advanced. They claim their top of the line server chip can process a specific image recognition task in about 2,000 hours. The same task on a Nvidia GPU takes 33 hours. The new Nervana is said to be capable of performing the task in a fraction of that time. It will be more than a year before the refined chip will be available to the public. It is supposedly so fast that Intel was thinking about running it as a cloud service application. That is pretty strong talk for a chip that has not even been tested yet.

Position 10/10/16:

Long Jan 2018 $40 LEAP Call @ $2.79, see portfolio graphic for stop loss.

Position 11/7/16: Long Dec $32 put @ .33, no stop loss



IWM - Russell 2000 ETF ETF Profile

Comments:

The IWM and Russell 2000 finally took profits for four days and the IWM pulled back to uptrend support.

With our average cost on the long puts at $4.22, a $1.65 gain on the short Jan $85 put and our premium received on the sale of the Jan $115 puts at $3.95, we will end up with a gain if the IWM closes above our strikes. The best expiration close would be $114.75 in January but that is not going to happen.

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, see portfolio graphic for stop loss.
4/27 - With IWM trade at $115, Long Jan $100 put @ $3.50, see portfolio graphic for stop loss.

Position 9/12/16:
Short Jan $115 put, entry $3.95, see portfolio graphic for stop loss.

Optional

Closed 9/12/16: Short Jan $85 put @ $2.00, exit .35, +1.65 gain.



LL - Lumber Liquidators - Company Profile

Comments:

No specific news. Shares faded slightly.

This is a 2018 position. We have plenty of time.

Original Trade Description: June 19th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

The shares were up $2.50 on Friday and I would not normally recommend an entry on a gain like that. However, as the news becomes common knowledge the shares should continue higher. We may see a small retracement or maybe not. I am sure the Friday move was short covering. The actual investing buyers will not appear for days or weeks.

Update 10/25/16: They changed the earnings date to Oct 31st. The lawyers announced a settlement in the class action suit with shareholders. Plaintiffs, anyone that held stock when it crashed, will receive 67 cents and 0.03 shares of stock for every share they owned when it crashed on the China flooring news. This was a win for LL and the settlement amount is simply pocket change.

Update 11/6/16: LL shares crashed again after reporting a loss of 68 cents compared to estimates for a loss of 18 cents. Revenue rose 3.4% to $244.1 million and beat estimates for $231.8 million. Same store sales rose 1% compared to estimates for a -3.9% decline. The larger than expected loss was due to legal expenses left over from the flooring scandal in March 2015. There is still one class action suit in progress but the others have been resolved for pennies on the dollar because it was eventually determined the flooring was not hazardous.

Position 8/29/16:
Long Jan 2018 $20 call, entry $2.50, see portfolio graphic for stop loss.



NBIX - Neurocrine Biosciences - Company Profile

Comments:

No specific news. NBIX crashed with the drop in the biotech sector and stopped us out. It was not stock specific but sector specific. Shares fell $8 in four days.

Original Trade Description: September 18th.

Neurocrine Biosciences, Inc. discovers and develops pharmaceuticals for the treatment of neurological and endocrine-related diseases and disorders in the United States. The company's products in clinical development stage include elagolix, which is in Phase III study for endometriosis and uterine fibroids; Vesicular Monoamine Transporter 2 Inhibitor (VMAT2) that is in Phase III study for tardive dyskinesia, as well as in Phase II study for tourette syndrome; and NBI-640756, which is in Phase I study for essential tremor. Its research programs comprise Corticotropin-Releasing Factor Receptor1 Antagonist for congenital adrenal hyperplasia; VMAT2 Inhibitors for movement disorders, bipolar disorders, and schizophrenia; and G Protein-Coupled Receptors and Ion Channels for epilepsy, essential tremor, pain, and other Indications. It has collaborations with AbbVie Inc. to develop and commercialize elagolix and GnRH antagonists for women's and men's health; Mitsubishi Tanabe Pharma Corporation to develop and commercialize valbenazine for movement disorders in Japan and other Asian markets; The Mount Sinai School of Medicine of the City University of New York to develop and commercialize licensed products worldwide; and Dainippon Sumitomo Pharma Co. Ltd. Company description from FinViz.com.

This is another potential takeover target for Gilead Sciences. NBIX has a large portfolio of potential drugs in the pipeline and several are very close to approval. They are developing a drug with AbbVie (ABBV) for endometriosis and uterine fibroids. The drug is called Elagolix and it is expected to be a multibillion dollar blockbuster. Endometriosis can also be associated with chronic non-menstrual pelvic pain and about 50% of infertility in women. Some 6% to 10% of women worldwide, about 176 million, suffer from this condition with monthly pain associated with their monthly cycles.

The company just submitted a New Drug Application last week for valbenazine in treating tardive dyskinesia. This is an orphan drug and there is currently no known treatment for the disease. This is a once daily dosing that relieves the symptoms of involuntary, repetitive movements of the face: lip smacking, grimacing, tongue protrusion, facial movements or blinking, puckering and pursing of the lips, or the extremities.

Earnings Nov 2nd.

NBIX does not have LEAPS. I am recommending the February call. If there is going to be an acquisition offer it should happen before year-end. NBIX broke above recent resistance on Friday and could be headed to new highs on the strong drug pipeline.

Position 9/19/16

Closed 11/30/16: Long February $60 call @ $4.10, exit .10, -4.00 loss.



NVDA - Nvidia - Company Profile

Comments:

No specific news. Shares fell $9 in the chip/Nasdaq rout on Wed/Thr. Support is $83. I do not expect the decline to continue but we never know.

Previously: Our Nvidia strategy did not work out too well. We had a $20 call spread using the 2018 $70/$90 calls. The idea was to allow the premium received from the $90 call reduce the cost in the $70 call. Nvidia reported blowout earnings that surprised everyone and the stock spiked $20 to $88 and caused the deep out of the money $90 call to explode in price. Obviously, a $15 premium for an ATM call will decline over time. Nvidia shares are likely to experience some post earnings depression and the premium imbalances will eventually fade. Temporarily, the accounting looks terrible but it will eventually correct.

Original Trade Description: September 18th

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

Update 10/3/16: Nvidia announced a new chip code-named Xavier that is specifically designed for self driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.

Q2 earnings were a blowout and shares rocketed to a new high. We closed the prior position at $63.11 and I am putting a $56 entry trigger of this Watch List recommendation. We may never get triggered but it we do it should be a winning position.

Breakout entry point.
Position 9/19/16 with a NVDA trade at $63.50

Long Jan 2018 $70 LEAP Call @ $9.40, see portfolio graphic for stop loss.
Short Jan 2018 $90 LEAP Call @ $3.73, see portfolio graphic for stop loss.
Net debit $5.67.



SWKS - Skyworks Solutions - Company Profile

Comments:

Shares fell with the Nasdaq and on news Apple cut orders for iPhone components once again. We were stopped out at $71.85.

Original Trade Description: Aug 28th.

Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.

In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.

They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.

CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.

Shares broke over resistance at $72 and a break over the $79 level would target the old highs. There is a congestion zone from $80-$90 but a positive year-end market could easily overcome that resistance. The double bottom at $58 provided a launch point and shares are rebounding despite the drag from Apple.

Update 11/6/16: The company reported earnings of $1.47 compared to estimates for $1.43. Revenue rose 11% to $835.4 million and beat estimates for $831.3 million. It was a good report that suggested the company had turned the corner but the stock sold off temporarily but rebounded to close at $75.

Position 8/29/16:

Closed 12/1/16: Long Jan 2018 $80 LEAP Call @ $10.10, exit $8.20, -1.90 loss.
Closed 12/1/16: Short Jan 2018 $100 LEAP Call @ $3.60, exit $3.70, -.10 loss.
Net loss $2.00.



UA - Under Armour - Company Profile

Comments:

Under Armour changed its share structure and the UA shares fell below support to stop us out.

UA announced their class C shares last March and they trade under the symbol UA.C. The class C shares have no voting rights and they were trading at a significant discount to the UA shares. Since the company wants to use the class C shares for stock based compensation and acquisitions, they needed the share values to be equal. UA shares were trading at a 20% premium to UA.C shares. They came up with a plan to rename the class A shares from UA to UAA and to then rename the UA.C shares to just UA. That way when "normal" people bought and sold Under Armour shares they would unknowingly buy the UA shares.

Original Trade Description: October 30th.

Under Armour, Inc. develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, the Asia-Pacific, and Latin America. The company offers its apparel in compression, fitted, and loose types to be worn in hot, cold, and in between the extremes. It provides various footwear products, including football, baseball, lacrosse, softball and soccer cleats, slides, performance training, running, basketball, and outdoor footwear. The company also offers accessories, which include headwear, bags, and gloves; and digital fitness platform licenses and subscriptions, as well as digital advertising, as well as licenses its brands. It primarily provides its products under the UA Logo, UNDER ARMOUR, UA, ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR, PROTECT THIS HOUSE, and I WILL, as well as ARMOURBITE, ARMOURSTORM, ARMOUR FLEECE, and ARMOUR BRA trademarks. The company sells its products through wholesale channels, including national and regional sporting goods chains, independent and specialty retailers, department store chains, institutional athletic departments, and leagues and teams, as well as independent distributors; and directly to consumers through a network of brand and factory house stores, and Website. Company description from FinViz.com.

Under Armour was crushed last week when they reported earnings. Shares fell from $38 to $31 and still falling. The company reported earnings of 29 cents compared to estimates for 25 cents. That was a 26.1% increase over the year ago quarter Revenue rose 22.2% to $1.471 billion and beating estimates for $1.453 billion. UA reported revenue growth of more than 20% for the 26th consecutive quarter. They guided for the full year for a 24% increase in revenue to $4.925 billion. Earnings are expected to rise 8% to 9%.

The company warned that earnings growth would slow because they are going to be investing heavily in expanding their retail footprint. They also cautioned that apparel sales growth will be slower than prior guidance. The company still expects sales growth to $7.5 billion in fiscal 2018 but margins are going to contract because of the increased capex spending and marketing.

CEO Kevin Plank blamed the bankruptcy of Sports Authority for removing several hundred retail locations from their marketing effort. He said the increased spending to expand the retail footprint both in the U.S. and overseas is required to become a $10 billion company.

Citigroup reiterated a buy rating saying the long term guidance for mid-teens earnings over 3 years is very good for a growth company and the pullback represents a buying opportunity.

Several other brokers downgraded the shares from buy to hold. Those were Telsey Advisory Group, Mizuho and Deutsche Bank.

Earnings Jan 24th.

Update 11/20/16: Everything was going so well until Foot Locker said sales of the Steph Curry 3.0 shoe had been weak. The shoe became available on Oct 27th and the FL CEO said it had not sold as well as the 2.0 and 2.5 versions but it was still early. Shares of UA fell -4% on the news. I expect this weakness to be temporary.

Position 11/14/16:

Closed 12/2/16: Long Jan 2018 $35 LEAP Call @ $3.30, exit $2.47, -.83 loss.



XOM - Exxon Mobil Corp - Company Profile

Comments:

The Exxon CEO Rex Tillerson is now rumored to be talking to Trump about the Secretary of State position because of his dealings with more than 50 world leaders. Exxon shares did not rally with the OPEC decision and they are still at risk for downsizing their reserves at the end of December if oil prices do not rise sharply. I am recommending we close this position while it is still near a breakeven.

CLOSE THE POSITION

Original Trade Description: August 14th.

Exxon Mobil Corporation explores for and produces crude oil and natural gas in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products; and transports and sells crude oil, natural gas, and petroleum products. As of December 31, 2015, the company had approximately 35,909 gross and 30,114 net operated wells. Exxon Mobil Corporation was founded in 1870.

Exxon is the largest public oil and gas exploration and development company in the world. Their earnings are never in doubt and their production dwarfs the other energy majors. However, Q2 was an uncharacteristically bad quarter. Oil prices remained at low levels and prices received for oil and gas worldwide were the lowest in years. Even the downstream refining division lost money because of low fuel prices.

Earnings fell 60% from the year ago quarter to 41 cents. That missed consensus estimates by 16%. Revenue fell -22% to $57.7 billion and 5% below estimates. The E&P segment produced a 16-cent decline per share and refining removed another 4 cents. The chemical segment was the only profit center adding 2 cents per share. Operating cash flow of $4.5 billion was well below estimates for $6.5 billion due to the low prices received.

On the positive side they reduced their development costs per barrel to $8, which is very low compared to the other producers. Exxon has 10 major projects coming online in 2016 of which only two have begun production. This will rapidly boost production and add to cash flow since the developmental dollars have already been spent. Now they are just cleaning up loose ends required to begin production.

Exxon is far from destitute. They have paid dividends for more than 100 years and have increased their dividend for 34 consecutive years, including a 2.7% increase in 2016. They have far more assets and liquidity than any other energy company and the stock is on sale.

The sudden chatter about OPEC implementing a production freeze at the end of September has caught fire and oil prices are rebounding strongly. If we see a couple more comments out of OPEC members in the week ahead we could see +$50 oil very quickly. If the chatter fades, we could see sub $40 oil in Sep/Oct but I suspect OPEC members realize this and will do what they can to keep the headlines coming even if there is no hope of an actual agreement.

Earnings Oct 28th.

Update 10/30/16: Exxon (XOM) reported earnings of 63 cents of $2.65 billion, down from $1.01 and $4.24 billion in the year ago quarter. Revenue was $58.7 billion. Analysts were expecting 58 cents and $60.4 billion. Exxon cut capex spending by 45% to $4.2 billion. Production fell -3% to 3.8 million boepd. Shares fell -2.5% on the report.

The deep in the money puts are still expensive and we have the opportunity to sell a $70 put to reduce our net cost to $2.70. Exxon has only traded under $70 for 1 day since 2011. This would be a very safe put to sell. This would make us 100% profitable at $93 with 18 months until expiration.

Position 8/14/16:

Long Jan 2018 $90 call @ $6.53, see portfolio graphic for stop loss.

Optional:

Short Jan $2018 $70 put @ $3.60, see portfolio graphic for stop loss.
Net debit $2.93.




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Watch

Close But No Cigar

by Jim Brown

Click here to email Jim Brown
Editors Note:

We finally got a week of profit taking and Monday is heading for an opening loss on the Italian election results. I raised the potential entry point on WDC and maybe we can get filled this week.


New Watch List Entry:


      No New Watch List Entries


Stocks Dropped from Watch List:


      No Watch List Drops


Active Watch List Play Descriptions:


WDC - Western Digital - Company Profile

Comments:

WDC dipped to $61.50 but avoided our prior entry point target at $59. I am raising that target to $60 given the recent relative strength. With the futures down hard on Sunday evening, we might get lucky on Monday.


Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

WDC recently announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Shares have been choppy in recent trading with short-term support at $59. If we get any market weakness we could see that support tested again.

With a WDC trade at $60

Buy Jan 2018 $65 call, currently $8.50, no initial stop loss.
Sell short Jan 2018 $85 call, currently $3.00, no initial stop loss.
Net debit $5.50 but should be cheaper if triggered.