Option Investor

Daily Newsletter, Saturday, 2/4/2017

Table of Contents

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

Market Wrap

Forget Last Week

by Jim Brown

Click here to email Jim Brown

Just pretend last week never happened because the markets closed almost exactly the same place as the prior Friday.

Weekly Statistics

Friday Statistics

Everything you need to know about the market can be seen in the first graphic above. Note the changes for the week for each index in the weekly graphic above. If that were your only picture into the market, it would appear nothing had changed. Of course, if you were paying attention all week you would have seen the -27 point decline in the S&P at Tuesday's low and the -307 point decline in the Dow. Those are some big numbers but they were completely erased by the short squeeze on Friday.

Despite the rebound, the indexes are still at lower highs with the exception of the Nasdaq, which closed at a new high. The Dow gapped up to 20,071 on Friday and then traded sideways the rest of the day to close at 20,071. Yes, that overhead resistance from the prior week is still intact.

Friday's short squeeze was powered by the resumption of the Trump rally and strong economic numbers. The financials exploded higher after comments from the Trump team they were about to reverse some of the regulations in the massive Dodd-Frank bill that is crippling the banking system. The strongly hated Fiduciary Rule in Dodd-Frank that limits investments in retirement accounts was first on the chopping block. The rule required financial professionals to advise investors toward the lowest commission, least risk products and away from products that had higher commissions and potentially higher returns. It sounds like a good idea in theory but it was crushing the business and causing significant rotation of client funds in order to comply with the rules. The industry said it actually added costs to low dollar accounts and would ultimately make small accounts unprofitable.

The four financial stocks in the Dow were the biggest gainers and those four stocks alone added 125 points to the Dow.

The economic news came from the Nonfarm Payrolls for January. The headline number of 227,000 new jobs was well above expectations for 167,500 but not quite as strong as the ADP Employment report from Wednesday. The ADP number was a blowout at 246,000 new jobs compared to estimates for 165,000 and the 153,000 reported in December.

Big gains came from construction with 36,000 new jobs and leisure/hospitality adding 34,000. Retail saw a gain of 46,000, which is surprising given the onslaught of bad news out of the sector over the last month. Even more surprising the retail number from December was revised higher from 6,000 to 34,000. Analysts theorize the January number was stronger because the normal holiday hiring was weak. That meant fewer layoffs in January, which caused the normal seasonal adjustments to show a higher total.

Manufacturing and Mining (energy) added 9,000 jobs. Financials added an unusual 32,000 jobs in January when some of the big banks were actually cutting back on costs.

The only negative news in the jobs report was a minor +0.1% gain in average hourly earnings. Since the higher minimum wage took effect in multiple states in January, there was an expectation for wages to be a little bit stronger.

The labor force saw a gain of 76,000 workers and the participation rate rose 2 tenths to 62.9%. The unemployment rate rose one tenth to 4.8% because of the rise in the workforce.

January is the annual benchmark revisions to the prior year data. This year there were very small revisions and the first three months of the year were so small I did not include them in the table below.

The top line is the most current numbers plus the revised numbers from the past months. The second line was the prior revision, third line the prior and fourth line the original release. The payroll numbers are normally revised in each of the two months following the first release. Then they are revised again in the benchmark revisions in January. The benchmark revision for all of 2016 accounted for a net of only 88,000 additional jobs. That unbelievably low compared to prior benchmark revisions in years past. The Nov/Dec revisions are the normal month-to-month changes and they accounted for a decline of 41,000 jobs from the previously reported numbers.

Market analysts were mixed on whether the strong jobs would encourage the Fed to move forward its rate hike plans and begin in March but most felt the Fed will pass. Evercore said there "was little need for the Fed to pull forward the next rate hike into March." BNY said analysts would be moving their expectations from March to June. Goldman Sachs said it reduced the chance of a March hike from 35% to 15% and now expects 3 hikes in June, September and December. Societe Generale said there was now no pressure on the Fed to accelerate rate hikes into March. Bank of America said the chance of a hike in March is now fairly low and they only expect one hike in September, with the potential for a second. However, Prestige Economics said "A March rate hike is now a lock" after the strong jobs support. ING said the jobs confirmed their expectations for a March hike.

The CME FedWatch tool is now showing only an 8.9% chance of a hike in March, down from 24% a week ago.

The Atlanta Fed GDPNow for Q1 was just released and they are projecting a whopping 3.4% GDP growth compared to the 2.2% average growth projection by 20 top forecasters and their own 2.3% forecast on January 30th. The sharp revision was due to the strong ISM Manufacturing report and Construction Spending report.

The chart looks strange because they do not start adding their own forecasts until the prior quarter GDP is released by the Bureau of Economic Analysis. That happened on January 27th with a 1.9% growth rate for Q4.

The GDPNow will undergo dozens of revisions over the next three months and most analysts seriously doubt the 3.4% forecast.

The ISM Nonmanufacturing Index for January declined slightly from December's previously reported 57.2 to 56.5 but still well into expansion territory. However, December was revised down to 56.6 so it was basically unchanged. New orders rose from 54.2 to 59.9 but backorders fell from 50.0 to 47.5. The employment component improved slightly from 49.7 to 52.7. The services sector has been doing ok with no contraction readings since December 2009. The nonmanufacturing segment of the economy accounts for 88% of nominal GDP.

December factory orders for manufactured goods rose +1.3% and considerably better than the -2.3% decline the prior month. Analysts were expecting a 1.0% rise. Factory shipments rose 2.2% compared to 0.3% in November. The headline number was impacted by a -33.5% decline in defense orders. This was a good report but it was ignored.

The calendar for next week is devoid of any market moving reports. There are only four Fed speakers. This will be a quiet week for economic events.

Earnings are also starting to slow down but there are two Dow components, Disney and Coca Cola. On the S&P, 84 companies will report. Tesla is probably going to be the most watched report since they now have a full quarter of SolarCity results. They officially changed their name last week from Tesla Motors to Tesla Inc.

YUM Brands and YUM China report so it will be interesting to compare the results again. Twitter will report on Thursday but they are only an afterthought these days. If it were not for Trump keeping the activity alive with the tweets and re-tweets of his comments, the news volume would be a lot lower. Analysts believe there is a known buyer in the wings that is waiting for Twitter to reduce expenses significantly and post multiple quarters of results from the Twitter Live product, before they surface with a new public offer. Unfortunately, analysts believe it could be in the $15 range.

More than 55% of S&P companies have reported earnings and 65% have beaten on earnings while 52% have beaten on revenue. The current blended earnings growth rate for Q4 is 4.6% and well above the 3.1% estimate on December 31st. The revenue growth rate is +4.6% and that is lower than the +4.9% forecast at the beginning of the quarter. Of those reported, 44 companies have issued negative guidance and 21 issued positive guidance. Since the Q4 earnings cycle began, analysts have only cut Q1 estimates by -1.5% and that is less than the historical -2.5% average at this time. This suggests analysts are positive about the guidance they have been seeing. Upgrades to estimates for the energy and financial sectors are responsible for the better than average revisions.

The percentage of companies beating on earnings at 65% is lower than the 71% average. The percentage of companies beating on revenue at 52% is only lower than the 53% average. The average earning surprise of 2.5% is below the 4.4% average. There are fewer companies beating by a smaller amount but the difference is still minimal at this point.

There were very few major companies reporting earnings on Friday. Clorox (CLX) reported earnings of $1.25 compared to estimates for $1.22. Revenue was $1.41 billion and that matched analyst estimates. They guided for the full year for earnings of $5.23 to $5.38 per share, down from the prior forecast for $5.23 to $5.45. Volume rose 8% and international sales offset domestic declines in the cleaning and lifestyle segments. Shares rallied $5 on the news.

AutoNation (AN) reported earnings of 95 cents that missed estimates for 98 cents. Revenue of $5.48 billion also missed estimates for $5.62 billion. The company has now missed revenue estimates for seven consecutive quarters and only met earnings targets in one of those quarters. Competitive pressure cut more than $100 from the profit of every car sold and the company said those pressures will remain in 2017.

Hershey (HSY) reported adjusted earnings of $1.17 that beat estimates for $1.08. Revenue of $1.97 billion missed estimates for $1.99 billion. They guided for 2017 for earnings of $4.72 to $4.81 and analysts were expecting $4.64. The company said a -16.6% drop in sales in China weighed on the results. Hershey said they have not yet discovered the nuances of chocolate flavors desired by Chinese consumers.

The company announced a dividend of 61.8 cents for the common stock and 56.2 cents on the Class B stock. The dividends are payable March 15th to holders on February 24th. This is the 349th consecutive regular dividend on the common stock and 130th on the Class B stock.

There were a lot of extreme reactions to earnings posted after the bell on Thursday. These were some of the major moves.

Hanes Brands (HBI) reported earnings of 53 cents and missed estimates for 58 cents. Revenue of $1.58 billion missed estimates for $1.69 billion. Shares crashed 16% on the news.

GoPro (GPRO) reported earnings of 29 cents that beat estimates for 21 cents. However, revenue of $540.6 million missed estimates for $576 million. The company guided for revenue of $190 to $210 million for Q1 and analysts were expecting $267.6 million. Shares fell 13% on the news.

Amazon (AMZN) reported earnings of $1.54 that beat estimates for $1.40. Revenue of $43.71 billion missed estimates for $44.87 billion. Revenue rose 22% but still missed estimates suggesting the estimates were too high. The company guided for Q1 revenue of $33.25 to $35.75 billion and analysts were expecting $35.83 billion. Amazon bragged that their Prime members could now choose from over 50 million items with free two-day shipping. The company is spending more than expected in developing its air cargo project with 40 Boeing 767 cargo jets. They plan to spend $1.5 billion to build a new cargo center at the Cincinnati/Northern Kentucky Airport in Hebron Kentucky. The center will employ more than 2,000 workers. That is just part of the 100,000 workers Amazon plans to hire over the next 18 months. Amazon currently has more than 4,000 trucks and adding more every day. Shares declined $30 on the earnings news.

Amgen (AMGN) reported earnings of $2.89 that beat estimates for $2.79. Revenue rose 8% to $6.0 billion that beat estimates for $5.74 billion. For 2017, they guided for earnings of $11.80 to $12.60 and analysts were expecting $12.46. They guided for full year revenue of $22.3 to $23.1 billion compared to estimates for $23.3 billion. They announced positive data on cholesterol drug Repatha that has shown to reduce heart attacks and strokes for people with high LDL or "bad" cholesterol. Recent sales were only $30 million because 75% of the prescriptions were rejected by insurance companies while they awaited further proof of results. This should boost sales in 2017. The drug is injectable twice a month and costs $1,148 a month at discount pharmacies for just two doses. Shares rallied $8.

FireEye (FEYE) reported an adjusted loss of 3 cents that beat estimates for -16 cents. Revenue of $184.7 million missed estimates for $191.1 million. They guided for the current quarter for revenue of $160-$166 million and analysts were expecting $177.5 million. Shares crashed 16% on the news.

Chipotle Mexican Grill (CMG) reported earnings of 55 cents that missed estimates by 2 cents. Revenue of $1.03 billion missed estimates for $1.04 billion. Same store sales declined -4.8% for the quarter but rose 25% for January. The chain is trying to bring customers back in with constant offers of free food but winning them back after multiple food borne problems has been difficult. Shares fell $19.

Visa (V) was the big winner on earnings. They reported 86 cents compared to estimates for 78 cents. Revenue of $4.5 billion rose 25% and beat estimates for $4.278 billion. Q1 payment volume rose a whopping 47% to $1.9 trillion. Visa guided for 16% to 18% revenue growth for 2017. Shares rallied $4 to help lift the Dow.

Tableau Software (DATA) reported earnings of 26 cents on revenue of $250.7 million that beat estimates for 13 cents and $230.3 million. License revenue rose 14% to $152.2 million. They added more than 4,000 customer accounts and closed 589 transactions greater than $100,000. That was a 42% increase from the year ago period. Shares spiked 15%.

Macy's (M) is reportedly in acquisition talks with Hudson Bay Co (HBC.TO). Discussions are in the early stages and they could reach a deal that does not include an outright purchase of the struggling Macy's chain. Macy's has been selling off real estate in small quantities to appease activist investor Starboard Value LP, which has been pressing the company to consider other strategic alternatives. Hudson Bay owns the Saks Fifth Avenue and Lord & Taylor brands as well. Macy's currently has about 730 stores but only half are in the best malls. They announced plans to cut 6,200 jobs in January and close 100 stores. Macy's $10 billion market cap is about 7 times larger than Hudson Bay. Shares spiked 6% on the news.

According to a Bloomberg survey OPEC produced 32.3 million Bpd in January after they cut 840,000 bpd from their output. The 10 OPEC countries that agreed to cut production were only 83% successful. Production increased in Iran, Libya and Nigeria in accordance to the agreement. Combined they produced an extra 270,000 bpd. Libya increased production to 690,000 bpd and the highest level in more than two years. They are trying to get back to the 1.6 mbpd before the civil war began. That means OPEC is still 550,000 bpd above their production cut target. Bloomberg produced this graphic showing who met their targets and who did not. Those that exceeded the target cut an extra 270,000 bpd but the rest of the pack failed to keep up.

If you remove the three countries that cut more than required, the remaining countries are only about 65% in compliance and that is historically about where OPEC has seen compliance peak in the past.

Russia said it cut production by 117,000 bpd and would try to reduce supply by the agreed 300,000 bpd by the end of June when the agreement expires. I am not holding my breath.

Oil prices have been trading in a narrow $3.50 range for the last month while everyone waited to see if OPEC was going to pull off a miracle. With roughly 65% compliance and three other countries adding 270,000 bpd, the odds of reaching full compliance are nearly zero.

The U.S. active rig count surged another 17 rigs last week to a 16-month high of 729. All the land rigs added were oil rigs. Seventy rigs have been reactivated over just the last three weeks. This is going to result in a sudden surge of oil about six months from now and the same time the OPEC production cuts expire.

Institutional investors are holding record net longs in the WTI futures contracts. This may not end well.




You have heard of the Midas touch that turned everything to gold. On Friday, the markets were touched by Goldman and everything turned green. Goldman's $10.50 rally added more than 71 points to the Dow and that opening spike kicked the financial sector and the short covering into high gear.

Goldman traded below initial support at $230 on Tuesday and Thursday but came roaring back on the news Dodd-Frank and the fiduciary rule were going to be tamed.

Add in Visa, JP Morgan and American Express and that accounted for nearly 70% of the Dow's gain. The opening spike forced ETF shorts to cover and we were off to the races.

However, the Dow never reached the finish line. The index came to a dead stop at 20,070 with only a slight flirtation with 20,080 at the close. I am going to reprint the chart I showed at the beginning of this commentary because it shows the market movement so perfectly. It was a short squeeze with a dead stop at resistance. There is no other way to describe it. Everyone continues to hope that we will get a decent pullback as a buying opportunity. The four-day market dip in the chart below is about all we are going to get given the current state of market sentiment.

We could move higher next week but it will need to be powered by some new stimulus and I don't know what that will be. We know from the prior week that resistance is strong and with only two Dow components reporting late in the week, there could be a lack of motivation. We are also approaching that point in February where the post earnings depression phase normally appears. All the big names have reported and there is a lack of targets for traders to buy ahead of the remaining earnings. Those stocks already reported, suffer from investor flight as traders take profits and move on to some other strategy.

I would like to predict the Dow will blast through that resistance but without some new headline, it could be really tough. We have not had a market moving presidential tweet in several days so there is always that possibility over the weekend. Who know which world leader will cause the next tweet storm? I am hoping the president will realize that tweets can have negative consequences and tone down the rhetoric somewhat. Remember the immigration ban from last week that caused the market to decline on Monday.

On the S&P the 2,299 level was strong resistance for three days last week. I wrote that the 2,300 level on the S&P was the new Dow 20,000 because that is where the all the attention will now be focused. The S&P gapped open to 2,298 and closed at 2,297 after being unable to gain any additional ground the rest of the day.

We did form two new support levels last week at 2,275 and 2,268. If we do take another trip down memory lane next week, those levels should provide at least a brief pause.

I am shocked that Amazon's $31 decline did not hold the Nasdaq back. The index did post a rather sedate gain of 30 points but that was enough to close it at 5,666.77 and a new record high. The prior high was 5,660. The Nasdaq has been the market leader for weeks and it was helped by the transportation, biotech and financials on Friday. Yes, there are financials in the Nasdaq that make up 9% of the index. It is thought of as a technology index and that is 42% of the weighting. Support is now 5,625 and 5,580.

Biotech stocks had a good week with the Biotech Index ($BTK) gaining 3.7%. It was the only index to rise triple digits. The week started with the president meeting with pharma CEOs at the White House and promising to cut regulations and taxes and get drugs approved faster. That was the start of a good week and major support for the Nasdaq.

The Russell 2000 was also buoyed by the short squeeze in the financials and the index posted a 1.5% gain to close just over prior resistance at 1,375. The index has not been able to retest the 1,388 level in four weeks. The Russell has been the weakest index and we need it to take the lead again.

It seems like every weekend recently we have been at a critical point in the markets. This weekend is no different. The Dow and S&P are at resistance highs. The Nasdaq did close at a new high by 6 points but that might as well be a resistance high. The Russell is lagging and the Dow Transports were imploding until the Friday short squeeze.

Last Friday the S&P closed at 2,294 and this Friday at 2,297. The market tried hard to sell off throughout the week and was unable to break support. It looks like we are going to test resistance next week. A breakout at these levels could cause significant short covering because there is very little confidence in a continued rally. I know that sounds strange since we have been unable to produce a meaningful decline but a lot of investors are still not convinced. I get emails every week from readers still short and asking why the market is not going down. I tell them because there are more people looking for a dip to buy than a spike to sell but they are convinced we are going lower. Eventually they will get their correction but it may be from a lot higher level.

Random Thoughts

The markets were down early in the week and this survey closes on Wednesday. After weeks of sentiment imbalances, all three positions have moved to where they are almost equal. That is a clear sign there is no conviction in either direction. The bears probably have the edge this week because the market was down on Monday and Tuesday.

Last week results

Sucking up to Trump. I had to read this more than once it is so unbelievable. Japan is preparing a package to submit to President Trump next week, to create 700,000 U.S. jobs. The concept is that Japan will use its foreign exchange reserves to invest in infrastructure projects in the U.S. to avoid being labeled a currency manipulator. Prime Minister Shinzo Abe will meet with the president on February 10th in Washington to present the package. This is truly stranger than fiction. Source

A little over a month ago, Barron's published an article headlined Get Ready for Dow 20,000. Since the Dow was about 19,900 at the time it was not that big of a deal but the cover got the normal ridicule. They say you can tell when the market has topped when newspapers and magazines begin to run giant headlines about the new highs.

The market did not crash and did close over 20,000. For an encore, Barron's has an article this weekend on "Next Stop Dow 30,000." No, they are not predicting 30,000 over the next several weeks or even in 2017. They are predicting this by 2025. That is eight years from now and an eternity in market time.

The key point here is that while that sounds crazy, that is only a 5.5% annual average gain. I think they could be right. There will be some years with smaller gains but there should also be some years with larger gains if we get the expected tax cuts and don't end up with a trade war or a real war.

The current pro business administration could actually produce several strong years in the market if they stick to the programs they have outlined and not get sidelined in the minutia. They should take President Obama's favorite saying to heart. "Don't do stupid stuff." If they stuck to that motto, we might even get there before 2025.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Reality is merely an illusion, albeit a very persistent one."

Albert Einstein


Index Wrap

Please Squeeze Me Again

by Jim Brown

Click here to email Jim Brown
The Dow rallied back over 20,000 on Friday but it was one more monster short squeeze powered by the financial sector.

Actually, it was powered by four financial stocks on the Dow that contributed 125 points of the 186-point gain. The rest of the financial sector contributed and helped to push the Nasdaq and Russell 2000 higher as well.

If it seems like the financial stocks have either been strongly up or strongly down for weeks, it is because that is correct. They have been leading the market up or leading it down and many times on alternating days.

The chart of the Financial Sector SPDR ETF (XLF) looks a lot like the Dow chart for a reason. Since the election, the two charts have been in lock step. The only material difference is the breakout over 20K for the Dow the prior week when several Dow components reported earnings and another short squeeze pushed the index through that 20K level for a couple days.

Since the XLF has a lot more stocks than the Dow, the sharp gain in only 4-5 stocks cannot cause that short squeeze movement through resistance. Other than those two short squeeze spikes the charts are nearly identical.

We have been hearing a lot about fake news lately. You could almost call Friday's breakout a fake move. When only 4 stocks add 125 points to the Dow, it is not a broad market move. However, once the indexes gapped higher at the open it causes a lot of nervous shorts to cover whatever they are holding. A violent open causes a "cover first, ask questions later" move by anyone holding short position on anything.

While the Dow and S&P stopped right at resistance, there is no guarantee they will immediately retrace their steps next week. Sometimes short squeezes actually trigger additional buying and in some cases, significant rallies are born.

We are in a unique period for the markets. The pro business administration is fueling hopes for a real economic boom. Whether that actually happens or not is immaterial. It is the perception of reality at this point in time that is powering the market. The lack of any material selling over the last two months after a major sprint higher, suggests investors are looking at the future through rose colored glasses. They are buying any dip regardless of how small.

Earnings have been ok but not outstanding and the outlook for the rest of 2017 is strong. Expectations for a corporate tax cut in some form are causing increased buying interest because corporations will almost immediately increase earnings by 10% to 15% if that cut comes to pass. That is a strong lure for eager investors.

These expectations have produced a rising pattern on the S&P as each dip was shallower than the prior dip. Investors are eager to buy despite no material profit taking.

The S&P chart suggests the breakout will continue. I wrote earlier in the week before the breakout occurred, that the S&P was wedging up suggesting a breakout was imminent.

The S&P 2,300 level is the new Dow 20,000. This is strong resistance and all eyes are focused on that level. A break out here could cause significant short covering and price chasing by fund managers that do not want to be left behind.

The Nasdaq has been the strongest index and despite Amazon losing -30 points on Friday, it still managed to close at a new high but 3 points below the intraday high. If the Nasdaq can continue its gains past 5,700 we could see some explosive moves in the weeks ahead.

The Russell 2000 is the weakest index. The heavy impact of its financial components helped lift the index +1.5% on Friday but it is still well below resistance. The chart does show a short-term double bottom over the last three weeks that could provide a launch point for further gains but the resistance is still strong. If the big cap indexes succeed in moving higher, the small cap stocks could catch the bovine sentiment virus as well.

The biggest threat to the potential for a continued rally is post earnings depression. Three of the last four Februarys have seen declines as earnings begin to fade. Investors close positions in stocks they held for an earnings ramp and move on to other strategies. Other investors begin to extract money from the market to pay their taxes. There are multiple reasons why market excitement fades around option expiration week, but maybe this time it is different. It is entirely possible that the Trump honeymoon will extend through his first 100 days. It has already outlived most normal presidential transition periods.

There are many things that can move a market and with earnings, economics, taxes and stimulus all working in the market's favor this year, there may be further gains ahead.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Phoenix Rising

by Jim Brown

Click here to email Jim Brown

Editors Note:

Some companies never die, they just keep reinventing themselves. That is the case with Dell. Michael Dell re-launched Dell as a public company in August and the stock is now moving higher.


DVMT - Dell Technologies - Company Profile

Dell Technologies Inc. provides a range of technology solutions worldwide. It offers client computing devices, including desktop personal computers, notebooks, and tablets; rack, blade, tower, and hyperscale servers for enterprise customers; value tower servers for small organizations, networks, and remote offices; networking solutions; and storage solutions, including storage area networks, network-attached and direct-attached storage, and backup systems. It also sells peripherals, including monitors, printers, projectors, and other client and enterprise peripherals, as well as third-party software products. In addition, the company offers support and extended warranty, enterprise installation, and configuration services; and infrastructure and security managed, cloud computing and infrastructure consulting, and security consulting and threat intelligence services. Further, it provides application services, such as application development, maintenance, migration, management, and consulting, as well as package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions; business process services comprising back office administration, call center management, and other technical and administration services; and system and information management, and security software services. Additionally, the company offers financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of its products. It serves corporate businesses; educational institutions, government, healthcare, and law enforcement agencies; small and medium-sized businesses; and consumers directly, as well as through retailers, third-party solution providers, system integrators, and third-party resellers. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

The company came public without a lot of fanfare back in August and moved sideways for two months. Since the election, the stock has been unstoppable. There was a spike last week when Michael Dell was seen in one of the presidents CEO meetings and identified as the CEO of Dell Technologies. I don't think the average investor has picked up on the fact that Dell is public again.

You may recall that Dell recently bought EMC and VMWare and they are leveraging that technology internationally. Dell has been on a mission to divest as many non-core entities as possible. On October 31st, they sold the Dell Software Group for $2.4 billion. In November, they sold the Dell Services group for $3 billion. In September, they announced a deal to sell the EMC Enterprise Content division for $1.6 billion.

In Q3, they reported revenue of $16.8 billion. Not bad for a company many investors have forgotten about.

The original Dell Company created thousands of millionaires as the stock doubled and tripled, split and repeat multiple times. I know the chart is ridiculous with a $10 gain over the last month but it has very low volatility and the option is cheap. I have put off recommending it several times thinking I would wait for a dip, only it never dips.

Earnings March 9th.

Buy March $65 call, currently $1.95, stop loss $61.50.


No New Bearish Plays

In Play Updates and Reviews

Gap Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gapped open to 20,071 and traded sideways all day to end at 20,071. This was another short squeeze brought to you by the financial sector. Goldman, JP Morgan, Visa and American Express were the largest gainers on the Dow. The opening gap lost traction by 11:am and we traded sideways the rest of the day. There was an uptick just before the close that reached 20,081, only 10 points higher than the open, but it was quickly sold.

The S&P tried very hard to hit that 2,300 resistance level but failed with a high 2,298.31. Only the Nasdaq managed to close at a new high. The rest of the indexes are still trapped under that resistance from the prior week.

Current Portfolio

Stop Loss Updates

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

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

There is a problem with my quote feed vendor this weekend and all the "change today" values reset to zero. I apologize for inconvenience. The daily change numbers are available on the individual charts.

Current Position Changes

VIX - Volatility Index

The long call position remains unopened until a trade at $10.50.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile


No specific news. Shares exploded higher for a $5 gain in a bullish market. That is a two month high.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 28th.

Because of the price of the options, I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85

RHT - Red Hat Inc - Company Profile


No specific news. The breakout continued with next resistance at $80.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.

SLCA - U.S. Silica - Company Profile


No specific news. Minor gain but still holding near the high from Wednesday.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Update 1/31/17: Halliburton selected U.S. Silica as its preferred provider of containerized sand for last mile logistics to drilling locations. They signed a long-term contract with SandBox, a U.S. Silica subsidiary. Shares rebounded to within a few cents of a new high.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.

SPY - S&P-500 ETF - ETF Profile


Nice move on the short squeeze. The S&P returned to just below major resistance at 2,300 and could be poised to break out on Monday. However, that is major resistance.

Original Trade Description: Jan 12th

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 SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.

$VIX - Volatility Index - Index Description


We were stopped out of our original long position on Wednesday with a bad tick. We are attempting to reload this position with a VIX trade at $10.50. The low today was $10.72.

RELOAD: Buy Mar 12 call with a VIX trade at 10.50

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

With a VIX trade at 10.50:

Buy March $12 call, estimated premium $2, no stop loss

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.

WDC - Western Digital - Company Profile


No specific news. No material movement.

Original Trade Description: Jan 31st

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

WDC is kicking butt and taking no prisoners in the disk drive sector. Since the acquisition of flash/NAND memory manufacturer SanDisk, they have upgraded and expanded their product line with additional new products announced almost weekly. SanDisk was the right acquisition at the right time. Today flash memory supply is tight and prices are rising.

The company reported earnings of $2.30 compared to estimates for $2.06. Revenue of $4.89 billion also beat estimates for $4.78 billion. They shipped 44.8 million hard drives in the quarter. The guided for Q1 earnings of $2.00-$2.10, which was above analyst expectations for $1.79. Of the 21 analysts that follow the company, 18 have it as a buy or strong buy. Only 3 rate WDC as a hold. The consensus price target is just under $95 per share with the stock trading at $79.

Earnings April 26th.

Shares traded up on Tuesday in a weak market.

Position 2/1/17:

Long April $85 call @ $2.65, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


The Dow spike on Friday effectively killed our February put position. With the index threatening the lows on Thursday, there was still a chance for a meaningful decline. The Dow is back testing new high resistance and is not likely to decline meaningfully over the next five days. Never say never. With the option premiums at 25 cents, I am not closing the position but it would take a 500 point decline by Friday to do us any good.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.

FINL - Finish Line - Company Profile


No specific news. There has not been any material downward movement over the last two weeks. Foot Locker (FL) was upgraded this week and it appears Finish Line is basing and may eventually rebound off the positive Foot Locker news. I am recommending we close the position.


Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Update 1/26/17: Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. The company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.

GIII - G-III Apparel Group - Company Profile


No specific news. Shares closed under support at $25 and made a new 3-year low.

Original Trade Description: January 28th

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Position 1/30/17:

Long March $25 put @ $1.60, see portfolio graphic for stop loss.

HA - Hawaiian Holdings - Company Profile


No specific news. Shares rebounded slightly from support after a 3-month closing low on Thursday. A real break of that support at $50 should target $45.

Original Trade Description: February 1st

Hawaiian Holdings, Inc., through its subsidiary, Hawaiian Airlines, Inc., engages in the scheduled air transportation of passengers and cargo. It offers daily services on North America routes between the state of Hawai'i and Los Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; and Seattle, Washington. The company also provides daily services on its Neighbor Island routes among the six major islands of the State of Hawai'i; daily services on its international routes between the state of Hawai'i and Sydney, Australia; and Tokyo and Osaka, Japan. In addition, it offers scheduled services between the state of Hawai'i, and New York City, New York; scheduled services between the State of Hawai'i and Pago Pago, American Samoa; Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan; Seoul, South Korea; and Beijing, China, as well as other ad hoc charter services. Hawaiian Holdings, Inc. markets its tickets through various distribution channels, including its Website, www.hawaiianairlines.com primarily for North America and Neighbor Island route customers, as well as through travel agencies and wholesale distributors primarily for its international route customers. As of December 31, 2015, the company's fleet consisted of 18 Boeing 717-200 aircraft for the Neighbor Island routes; 8 Boeing 767-300 aircraft; and 22 Airbus A330-200 aircraft for the North America, international, and charter routes, as well as 3 ATR42 turboprop aircraft. Company description from FinViz.com.

In late January HA reported earnings of $1.28 that missed earnings for $1.30. However, revenue of $633 million did beat estimates for $627.6 million. With fuel costs rising and much of HA routes considered long hauls, their costs are going to rise. Non0fuel costs are expected to rise 3% to 6% in Q1. They are currently negotiating a new contract with pilots and that will cause a rise in labor costs. Costs were already rising in Q4 and investors tanked the stock after earnings.

Earnings April 25th.

Shares have fallen $5 since the January 24th earnings and are hugging support at $50. If that level breaks, the next material support is $45.

Position 2/2/17:

Long March $50 put @ $2.10, see portfolio graphic for stop loss.

QCOM - Qualcomm - Company Profile


No specific news. Shares rebounded only slightly from the new 7-month low on Thursday.

Original Trade Description: January 30th

QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.

Qualcomm it under attack from every direction. A while back China's regulator assessed a $975 million fine for improper licensing and made them lower royalties. The South Korean FTC imposed a fine of $853 million because it found the company's licensing practices to be monopolistic. The KFTC found that Qualcomm's market share had risen from 34% in 2010 to 69% in 2015 while many competitors were forced out of the market.

In early January, the US FTC attacked the company for anticompetitive practices that prevented competitors from supplying chips to handset makers. This is another billion dollar problem.

Three days later Apple sued Qualcomm for $1 billion claiming Qualcomm charged five times as much for licensing than all other cellular patent licensors combined. Apple also claimed the company withheld $1 billion in rebates because Apple had cooperated with KFTC when that investigation was active.

There is blood in the water and there will probably be other suits from companies that suffered under the Qualcomm licensing scheme as well. The odds are also good that Qualcomm will have to change their licensing scheme, which will probably result in lower fees.

With roughly $4 billion in fines and suits over the last few weeks, the investor appetite for QCOM shares has evaporated. Brokers are slashing their ratings from buy to hold or even sell.

Last week the company reported earnings of $1.19 that matched estimates but missed on revenue. They guided for $1.15-$1.25 for Q1 and analysts were expecting $1.17. Other than that the guidance was lackluster with a lot of excuses and questions deflected.

Update 1/31/17: Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Update 2/1/17: Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Earnings April 26th.

Shares have collapsed on the news of the suits and fines and are threatening a steeper decline. Initial support is $50.

Position 1.31.17:

Long March $52.50 put @ $1.68, see portfolio graphic for stop loss.

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