Option Investor
Newsletter

Daily Newsletter, Sunday, 1/8/2017

Table of Contents

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

Leaps Trader Commentary

This Could be the Week

by Jim Brown

Click here to email Jim Brown
The Dow is poised to break over 20,000 this week but will it hold?

The Dow has spent three weeks consolidating four weeks of gains. There has been no significant decline and every couple of days resistance is tested and it moves up by 10-15 points on every test. This is a perfect example of consolidation in place rather than a 3% to 5% drop over 5-7 days. They both accomplish the same thing and given the lack of damage this would always be the preferred method. Unfortunately, we never get to choose.

With nearly everyone expecting the other form of consolidation and a decent dip in early January, the lack of that dip has caused some anxiety for those who want to be long the market but did not get a buying opportunity. We are in that group. I wanted to see a decent dip to reduce premiums and erase the overbought excesses from the post election rally. Santa did not bring me the correction I wanted.

The Dow traded at 19,999.63 on Friday to miss that psychological 20K level by 0.37 of a point. If any Dow component had gained 6 cents while the Dow was at its peak, it would have been enough to ring the bell.

Previously there was some serious concern that a touch of 20K could produce a sell the news event. Because of the three weeks of consolidation and distribution at that level, I no longer believe that will happen. We need the Dow to push through 20K and then close well above that level in order to trigger the short covering and bring in the rest of the naysayers from the sidelines.

While there is always the possibility of a sudden decline, the dip buyers are alive and well. Analysts are now arguing the potential for a pre inauguration and/or post inauguration selloff. I worry about the potential for a terror attack when there are 2-3 million people congregating in one general location for parades and the swearing in ceremony. With five presidents in one place, only Bush the elder will be absent, this is a target rich environment. Add in the one million people on the mall and it would be hard for a hard-core terrorist to pass up the opportunity. That means I am worried about a pre ceremony selloff. After the event passes it should be the equivalent of an all clear signal for the markets.

We will be nearly two weeks into the Q4 earnings cycle and hopefully that will not cause any further market stress. We have had quite a few earnings warnings but the market seems to be ignoring them.


The S&P has not been as bullish as the Nasdaq but it did close at a new high on Friday thanks to the big cap tech stocks. The FANG + Apple rally was enormous and powered the Nasdaq Composite and the Nasdaq 100 to new highs. However, we all know that a rally powered by ten stocks cannot last. Other stocks have to join the party or the rocket will run out of fuel.



The small cap Russell 2000 is stuck in a rut and declined from resistance for the last two days. As the sentiment indicator for the broader market this is not a good sign. As long as it holds over 1,350 there is no damage but a break of that support could spread like a virus in a second grade classroom.


The economic calendar is light for next week with the Producer Price Index on Friday the most import report but it will not move the market. There are eight Fed speeches including Yellen on Thursday evening. The market is closed next Monday so volume will be light late in the week.


The futures are positive on Sunday evening at +2.75 but that could easily change by 10 points in either direction before morning. I expect another run at Dow 20,000 at the open assuming there are no overseas headlines to tank the futures overnight. Once that level is hit, the fuse will be lit. We could rocket sharply higher or it could turn into a dud. It is not the intraday levels that count. It is the close that counts and the direction into the close.

Don't Miss Out in 2016!

Recent reader comment:

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Portfolio

Positive Market

by Jim Brown

Click here to email Jim Brown
The market shook off the end of December weakness and posted some decent gains.


Current Position Changes


HLF - Herbalife

The put position was stopped at $50.05.

SPY - S&P-500 ETF

The long call position remains unopened until a trade at $220.


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

Bad News Priced In

by Jim Brown

Click here to email Jim Brown
Apple Inc is recovering from a year of bad news but it is recovering thanks to the outlook for 2017. Shares are poised to break over $120 ahead of earnings.



AAPL - Apple Inc - Company Description

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

I am not going to spend a lot of time and space explaining this play because everyone should be aware of their recent problems. iPhone sales slowed and earnings dropped. The company took a hit when they removed the earphone jack from the iPhone 7 and then could not ship the AirPods because of technical problems. The new MacBook Pro was not well received and Consumer Reports failed to give it their seal of approval. That was a first for Apple.

Sales fell -4% to $215.6 billion, well below their target of $223.6 billion. Operating income declined -0.5%. Net sales were down -7.7% and earnings were down -15.7% from 2015 levels.

Recently, Nikkei reported Apple suppliers had been told to reduce production of components for the iPhone 7 by another 10% in Q1. The stock barely wavered on the news. I believe this is due to the rising excitement over the 10th anniversary iPhone due out this fall.

There have been numerous product leaks suggesting they will have three sizes and the largest size will have an OLED screen. The internal feature leaks have been very few but CEO Tim Cook said they were going to introduce some features that you will wonder how you got along without them. Time will tell.

There are also numerous rumors about major upgrades to other devices and some analysts are talking about record revenues in the coming year.

Since this is the tenth anniversary of the iPhone, there is a very good chance it will be chock full of new features.

Apple is also rumored to be building a manufacturing facility in India to be run by one of their prior suppliers. Phone production could begin as soon as April. That would give them a big opportunity to sell new phones into India and that is a huge market opportunity similar to China in 2010.

Because of the calendar, anything we add over the next couple weeks is going to be earnings challenged. Apple has earnings on Jan 24th. Expectations are low but Apple activated more devices during the holiday week than any other vendor so I am not expecting a big miss. It is still a risk but based on the chart, nobody else seems to be worried.

The $120 level is going to be resistance but a breakthrough could trigger significant short covering and price chasing. The last update to price targets was Piper Jaffray to $155 with an overweight weighting.

Buy Jan 2018 $125 call, currently $7.85. No initial stop loss until after any earnings volatility.




Play Updates

Decent Week

by Jim Brown

Click here to email Jim Brown
Editors Note:

The Dow tried hard to break 20K and failed but closed well within range for a new try on Monday. The Nasdaq and S&P did make new highs but the Russell 2000 is heading in the opposite direction. Facebook was the big winner and for that we are grateful. Nvidia did not decline any further and from the news from CES they will rule the world in a couple years.

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:

No specific news. OPEC headlines faded and energy stocks wilted. If oil prices hold over $50 we should see a rebound.

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:

BMY and Five Prime announced the extension of a research term for immuno-oncology therapies. The 12-month extension until March 2018 covers funding for three previously identified immune checkpoint pathways. The company said the joint venture had made significant progress in the effort to produce an antibody candidate. Shares are testing resistance at $60.

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 gained $8 for the week to close at a two-month high. There was a lot of news but nothing worth reporting. Facebook and the other FANG stocks all rallied as fund managers threw money at the market when it did not crash on Jan 3rd. Big cap techs were one way to do that in a hurry.

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. GE Capital Aviation Services (GECAS) did place an $8.3 billion order for (75) Boeing 737 MAX 8 jets. That is the list price and volume buyers normally receive significant discounts. That is Boeings fastest selling jet ever. GECAS owns 1,950 aircraft. Boeing has orders for 3,419 737 MAX planes. The engines are made by GE and SAFRAN Aircraft Engines in a joint venture.

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.

Update 12/18/16: GE is expected to reports earnings of $1.69 in 2017 and $2 in 2018. The CEO said the company was going to divest its $3 billion industrial solutions business and $1 billion water business by mid 2017. The company expects net proceeds of $4 billion. They are also planning to up their production of 3D printed parts to more than 500 parts in 2017, up from the last guidance of 15 parts, and cut manufacturing costs by $3 billion. The company is expecting to return $20 billion to investors in 2017.

Position 11/28

Long Jan 2018 $32 call @ $1.81, see portfolio graphic for stop loss.



HLF - Herbalife - Company Profile

Comments:

Dr. Zhen-Yu Chen, an expert in food and nutritional sciences was appointed to the Herbalife board. This caused the stock to rise and short covering kicked in immediately. We were stopped out at $50.05 and turned our winning position into a minor loss.

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.

Update 12/11/16: Bill Ackman released an update on Herbalife on Friday saying they were fraudulently misrepresenting the settlement with the government. He also pointed out that growth in China has regularly grown 20% to 30% per quarter but has slowed to 1% in the recent quarters. Without that growth engine, earnings are going to collapse. He also pointed out that the company is excluding from earnings significant expenses that Herbalife is trying to categorize as temporary or onetime items including a 46 cents "non-cash interest expense."

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:

Closed 1/4/17: Long Feb $47.50 put @ $2.60, exit $1.66, -.94 loss



HON - Honeywell - Company Profile

Comments:

No specific news. Shares rebounded to close at a five-month high.

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:

Intel announced a new 5G mobile phone modem code named Gold Ridge that could be in phones in 2018. That is the same timeframe Qualcomm has said their new 5G modem would be available. This is a step up for Intel since they have typically been behind the curve on phone technologies.

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.

Update 12/11/16: Intel announced two deals with Amazon to expand the Alexa service. Intel is integrating the Alexa voice controls in to a smart speaker product and the company is expanding the Alexa voice controls into the Smart Home Hub. This means Intel will allow other developers to use its technology to build other Alexa powered devices. GE announced an Alexa lamp last week that replaces the Echo device.

Position 10/10/16:

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

Position 11/7/16:

Closed 12/16/16: Long Dec $32 insurance put @ .33, expired, -.33 loss.



NVDA - Nvidia - Company Profile

Comments:

No material decline for the week. Shares continue to hold just over $100 as a year's worth of gains are consolidated. Nvidia was the hit company at CES with the CEO giving the keynote address and announcing several new futuristic products that are available this year. They are growing so fast and in so many directions, I do not see how Intel or any other chip maker can keep up.

I am leaving the order to close the $90 call open because we never know when the market is going to suddenly crash. With all the events in January, it could happen at any time.

Previously: Our Nvidia strategy has not worked 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. If we hold until expiration we are guaranteed a $20 profit on the position.

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.

With NVDA trade at $90.50, CLOSE Jan $90 short call.



SMH - Semiconductor ETF - ETF Profile

Comments:

Chip stocks faded the prior week and moved sideways last week while the FAANG stocks (FANG + Apple) cornered the market on buyers. Semiconductors are driving the current AI, machine learning and cloud revolution so the sector should not decline too far in a January correction.

Original Trade Description: December 4th.

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.

Position 12/5/16:

Long Jan 2018 $75 LEAP Call @ $3.44, see portfolio graphic for stop loss.



SPY - S&P-500 ETF - ETF Profile

Comments:

The January dip has failed to appear and the S&P closed at a minor new high on Friday along with the Nasdaq. The Dow has yet to breakout and the Russell 2000 is falling. The potential for a decline still exists but odds are decreasing.

I considered putting a stop loss on the position at $229 but there is considerable market risk ahead of the inauguration. Despite the bullish improvement in the market, we could see a sharp decline at any time. The premium would decrease to $1 by the time a stop would be hit and I am willing to risk that dollar that we could still see a material decline.

Original Trade Description: December 11th.

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The market is nearing a top. When and where, nobody knows for sure. However, there are calendar and headline events in our near future that could trigger a significant decline.

The market has posted a remarkable string of gains with the Dow making a new high close on 14 of the last 22 sessions. The S&P has rallied 171 points in 22 days or roughly +8.2%. The Russell 2000 has rallied 20.1% over the same period. Those would be good annual gains but to do it in 22 days has moved the market into very overextended status. And, it may become even more overextended before the bubble pops.

The market typically rises in the two weeks before Christmas and has a mixed record for the days after Christmas. The direction in the post holiday sessions normally depend on the market in the weeks before the holidays. If the market is up strongly, then traders begin to short the market in anticipation of a January decline. If the market was only slightly bullish then window dressing tends to lift the indexes in the post holiday sessions. Those trends are not what we are worried about today.

There are three basic problems. The first is Dow 20,000. The odds are good we will hit that milestone over the next ten days and that could be a very obvious sell the news event. Large round numbers tend to be psychological targets and they do not get much larger and rounder than 20,000. When the target is hit, quite a few traders may decide to take profits and shut down for the rest of the year. Dow 20K could be a bump in the road but probably not the biggest obstacle.

The second problem is the monster market gains in the post election honeymoon phase. Fund managers are putting every penny they can raise into the market in order to leverage as many gains as possible before the end of the year. They are competing with their peers and to keep their jobs and collect their bonuses. This suggests the rally could continue in some fashion until after Christmas. The problem for the next two weeks is the lack of cash. Analysts claim most funds have run out of cash because of their efforts to leverage the gains for the rest of December. That means the withdrawal cycle in January could result in a lot of selling in positions that have exploded higher over the last month.

While there is a lot of end of year retirement money hitting the funds they are investing every penny. Once January arrives and we are in a new tax year, there is no longer any reason to hold grossly overextended positions. Traders and portfolio managers will want to capture the gains and then invest the money for the next year before being forced to pay taxes. That makes January potentially rocky after a big year-end gain.

Dow - January 2016

Lastly, there is the January 20th inauguration and the associated event risk. With more than one million people attending and hundreds of thousands more lining the parade route, the potential for a terrorist attack is very high. I am sure quite a few investors will want to lock in profits and raise cash before that event risk.

So, there are multiple reasons why the market could decline over the next five weeks and very few reasons why it should continue making new highs.

I am recommending we protect ourselves from potential loss by hedging with some puts on the SPY. The ETF closed at $226.50 on Friday and futures are up strong on Sunday evening. We could see a continued rally this week but this rubber band is just about stretched to its limit.

This is not a LEAPS position. This is insurance. I am using the February puts. I am going to start with an entry trigger at $224.50 and then move the trigger and strike up if the market continues higher. The SPY has initial risk to $219-$220 and secondary risk to $216.

The put position on the SPY was triggered on the 28th when the ETF traded at $224.50. The initial support is $219 and we could see a retest of $215.

Position 12/18/16 with a SPY trade at $224.50

Long Feb $221 put @ $2.70, see portfolio graphic for stop loss.



SPY - S&P-500 ETF - ETF Profile

Comments:

I am leaving the potential long position on the SPY in case we do get that dip later in January. I am changing the entry trigger to $220 from $216 and the strike from $220 to $225.

Original Trade Description: January 2nd.

The S&P ETF mimics the S&P-500 index on a 1:10 ratio.

Most analysts believe the market sill finish significantly higher in 2017. Some analysts expect the Dow to reach 24,000 or even 25,000 by the end of 2017. A 10% move would be 22,000 and 15% 23,000. Those targets are possible but 25,000 would be a real stretch.

Analysts are rapidly updating their 2017 S&P forecasts in light of the recent rally. These are the highest estimates on the street today.

2,275 Fundstrat, Tom Lee
2,300 Bank of America, Savita Subramanian
2,300 Credit Suisse, Lori Calvasina
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,425 Citigroup, Tobias Levkovich
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub

If any of those targets come true, buying some January 2018 SPY calls on a dip could be a profitable trade. Unfortunately, they are expensive.

I am going to target a drop to $216 and buy the $220 LEAP calls. I am guessing the premium will be about $9 at that time. If we get filled we will hold them all year and sell a short call against them late in the year to recover some of that premium.

With a SPY trade at $220

Buy Jan 2018 $225 call, estimated premium $8, no initial stop loss.




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by Jim Brown

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Editors Note:

I am still expecting that buying opportunity in January. The market was positive last week but the Russell 2000 was negative. Anything is possible this week but it looks positive. Analysts are still predicting either a decline before or decline after the inauguration. I suggest we continue waiting until that event passes.


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