Option Investor

Daily Newsletter, Saturday, 4/15/2017

Table of Contents

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

Market Wrap

Weekend Event Risk

by Jim Brown

Click here to email Jim Brown

Geopolitical worries over what may happen over the long holiday weekend pushed the market to multi-month lows.

Weekly Statistics

Friday Statistics

The Dow and S&P closed at the lows for the day and at two-month lows. The S&P-600 small cap index closed at four-month lows. The Dow Transports closed at almost a five-month low. The Nasdaq indexes were weak but remained over critical support levels.

The only index that closed with a gain was the Biotech Index, which rallied 1.3% led by Alexion (ALXN), Regeneron (REGN), Kite Pharma (KITE), Incyte (INCY), Ionis (IONS) and Ultragenics (RARE). There was a flurry of drug news that stimulated the biotech rally.

The small cap segment of the market had been riding a wave of consecutive daily gains until Wednesday when the sector imploded. Thursday's added decline saw the S&P-600 close well under critical support at 820 and at a four month low.

Helping to push the VIX higher and the market lower was news North Korea was likely to test a nuclear bomb as early as Saturday. The U.S. warned against it and positioned two Tomahawk carrying destroyers 300 miles off the country's coast. The nonverbal warning was clear to everyone and Little Kim said he was not going to be deterred and would test his weapons whenever he decided the time was right. Whether he is stupid enough to act in the face of extreme danger remains to be seen. It did weigh on the market since he has shown no restraint in any past actions including having family members poisoned, killed by being ripped apart by dogs and shot with anti-aircraft weapons. At this point, I think he is running out of family members to kill.

Also on Friday the U.S. said it dropped a thermobaric Massive Ordnance Air Blast (MOAB) bomb in Afghanistan. The 21,000 pound bomb is nicknamed Mother of All Bombs because of its explosive power. The bomb just above ground level. It contains a highly explosive liquid that is ejected from the bomb just above the ground using a small explosion that atomizes the liquid explosive. The atomized liquid explosive mixes with the oxygen in the air and when the secondary explosion occurs it ignites the "fuel air" mixture in its wake to provide a massive thermal explosion that kills everything within 500 yards in every direction. It kills from massive overpressure from the blast rather than shrapnel or bomb fragments. The blast can be heard up to 100 miles away and can blow out windows over a mile away.

The bomb was used to neutralize an ISIS tunnel complex thought to contain as many as 100 fighters. Because it works on overpressure, they can be well underground and immune to normal bombs but they are not immune to the pressure from the blast. It is actually worse in the caves and tunnels because of the compression effects. MOAB Description Not to be outdone, Russia created the Father of all Bombs on the same principal and said it was four times as powerful as the MOAB. The Russian bomb is said to be the equivalent of 44 tons of TNT.

The U.S. does have an even bigger bomb called the GBU-57 Massive Ordnance Penetrator (MOP) that weighs 37,000 pounds and is designed to burrow deep underground through heavily reinforced concrete bunkers. The bomb reportedly can penetrate more than 60 feet of reinforced concrete before detonating. The Air Force only ordered 20 of them and they cost $314 million each. GBU-57 Description

The press was all excited on Thursday and were spewing the "biggest non nuclear weapon ever used in combat" message and trying to create some news from their different spins on the message. That helped push the market over the cliff on Thursday afternoon.

Adding to the tension in the market was several position changes by the Trump administration. The tax reform effort is back on hold until a health care plan can be completed. That could take months and there is growing doubt that tax reform will occur in 2017. President Trump also flipped his position on NATO, the UN, China as a currency manipulator, the strong dollar, Janet Yellen as Fed Chairman and the Export-Import Bank. It was a very eventful week for the president and Washington is spinning with the multiple abrupt changes in posture despite his campaign rhetoric. The Trump Bump in the market appears to be fading rapidly.

There are growing concerns that we are facing a potential government shutdown on April 29th. When lawmakers come back from recess on April 24th, they only have five days to pass a funding bill and raise the debt ceiling. President Trump campaigned on reducing the $20 trillion in debt and he constantly criticized republicans for being too quick to raise the debt ceiling. Now that he is in charge, some analysts believe it will be too tempting for him not to demand some concessions before agreeing to raise the limit. The democrats have pledged to defeat anything that is not a "clean" limit increase. Republicans are also split on hiking the limit so getting anything passed in the five days after the recess, is going to be a major challenge.

Bond investors are betting on a disaster ahead. The yield on the ten-year treasury fell to 2.23% on Friday and a five-month low. This is not a good sign for the stock market since falling yields normally mean investor flight from equities.

The Volatility Index is at five-month highs going into the weekend on the geopolitical worries and the falling equity market. The VIX rarely stays at elevated levels for more than a few days but it could go significantly higher. We have not had that capitulation event yet. So far, the selling has been relatively slow and steady rather than a panic event.

On the economic front the Producer Price Index (PPI) for March declined -0.1% and the first decline in seven months. However, on a trailing 12-month basis producer prices are up +2.3%. Core PPI rose 1.7% over the last 12 months. Impacting the headline number was a -2.9% decline in energy prices with a -8.3% drop in gasoline prices.

Consumer Sentiment for April rose from 96.9 to 98.0 and a three-month high. The 13-year high was 98.5 in January. The present conditions component rose from 113.2 to 115.2 and are at the highest level since 2000. The expectations component rose from 86.5 to 86.9. Spring weather and an abundance of jobs seem to be the main factors in the strong sentiment. More than 89% of respondents expected their financial situation to improve in 2017. More than 78% of respondents believe business conditions are going to improve.

On Friday the Consumer Price Index (CPI) for March declined -0.3% after a +0.1% rise in February and +0.6% rise in January. The core CPI fell -0.1%. The pace of inflation is slowing thanks to the decline in oil prices, but it should be only temporary.

Retail Sales for March declined -0.2% after a -0.3% decline in February. Excluding autos, it would have been flat and excluding autos and gasoline there would have been a minor +0.1% gain. Motor vehicles and parts declined -1.2%, gasoline -1.0%, building materials -1.5% and sporting goods -0.8%. Electronics was the only material gainer at +2.6%.

Business Inventories for February rose +0.3% and the smallest gain in four months. Wholesale inventories rose +0.4% and retailers rose +0.3%.

The calendar for next week is light with the Philly Fed Survey and two home sales updates the most important reports. The Fed Beige Book on Wednesday will be watched but recent revisions have been neutral with a slightly positive bias so unless something changed, it will be ignored.

The most important event will be the French elections on Sunday the 23rd. The far right candidate, Marine Le Pen and the independent centrist candidate, Emmanuel Macron are currently leading the four-person race with 23-24% of the vote each. The far left candidate, Jean-Luc Melenchon, surged 7% last week and could upset the status of the leaders. Melenchon has a radical tax and spend platform with a 100% tax rate on people making more than 33,000 euros a month. He is currently 6% behind the leaders.

The two candidates with the most votes will go head to head in a second election. If Melenchon continues to surge and take votes from Macron, there could be a previously unimaginable prospect of a runoff between the far left and far right candidates in a contest that would split the country right down the middle and cause a massive upheaval in French and European politics. Melenchon has seen his approval rating rise 22 points to 68% and he is now the most popular politician in France. Besides the 100% tax rate for the rich he favors cutting the workweek from 35 to 32 hours, lowering the retirement age to 60, raising the minimum wage and social security benefits. He wants to shutdown the nuclear power plants, from which France gets 75% of its power. He wants to withdraw from NATO and forge a warmer relationship with Russia. Conservatives are calling him the French Hugo Chavez, the socialist dictator that bankrupted Venezuela before his recent death.

Le Pen wants to pull out of the EU, so whichever candidate wins, there could be some big changes for France and the EU. Analysts claim a runoff between the two would be a choice of "economic disaster and economic chaos."

Having Le Pen and Melenchon win the four-person race on Sunday would almost be the equivalent of Brexit. Knowing that one of them would be the eventual president would throw the financial system into a panic, tank the EU markets and roil the global markets.

Thursday was bank earnings day. JP Morgan (JPM) reported earnings of $1.65 compared to estimates for $1.51. That compares to the $1.35 earned in the year ago quarter. Revenue of $25.59 billion was powered by $12.39 billion in interest income and beat estimates for $24.88 billion. That compares to $24.08 billion and $11.67 billion in the year ago quarter. Investment banking revenue rose 34% and trading revenue rose 14%. Credit card balances rose from $127.3 billion to $137.2 billion.

Citigroup (C) reported earnings of $1.35 compared to estimates for $1.24. This compares to the $1.10 in earnings in Q1-2016. Revenue of $18.120 billion beat estimates for $17.758 billion. Loans rose 2% to $629 billion and deposits rose 2% to $950 billion. Net interest margin was 2.74%. The bank reported gains in all areas except for Asia, which declined -3%.

Wells Fargo reported earnings of $1.00 compared to estimates for 97 cents. Revenue of $22.0 billion narrowly missed estimates for $22.1 billion. The bank said business was down as a result of the account opening scandal. They also said expenses were up as they employed numerous firms to help them unwind the mess from the scandal and modify policies and procedures to prevent future issues. Wells is also going to reimburse everyone who had accounts opened in their name during the term of the scandal.

PNC Financial (PNC) reported earnings of $1.96 compared to estimates for $1.84. Revenue of $3.88 billion beat estimates for $3.77 billion. Loans rose by $2 billion to $212.8 billion. Consumer loans declined -$700 million due to lower home equity loans, student loans and credit card balances. Shares declined slightly.

Hanes Brands (HBI) preannounced Q1 results of 28-29 cents and slightly above estimates for 27 cents. Estimated revenue of $1.38 billion missed estimates for $1.39 billion. They guided for the full year for earnings of $1.93-$2.03 and revenue of $6.45-$6.55 billion. Analysts were expecting $1.96 and $6.46 billion. Analysts said the results were decent given the weak retail sector and the Easter shift two weeks later than normal.

The earnings parade begins on Monday with Netflix. There are nine Dow components reporting starting on Tuesday. Goldman and IBM on Tuesday have the biggest chance for moving the Dow.

Analysts said 72% or pre-earnings guidance has mentioned the shift in Easter. In 2016 Easter was in March and this year in mid April. This shifts strong buying patterns from Q1 into Q2. All the earnings misses for Q1 will be blamed on the Easter Bunny.

Tesla shares surged again after the company said it was ready to unveil an electric semi-truck in September. Musk tweeted about the upcoming announcement. He had already said he planned to produce a semi and minibus. After several people responded to his tweet on Twitter he also admitted a pickup truck was in the works in 18-24 months as well as a convertible roadster.

An investor group complained that Tesla board members were too connected to Musk and demanded he appoint two independent outside directors. In reply, he said dissatisfied shareholders should buy Ford (F) stock instead. The Ford family controls Ford using two classes of stock and the family has owned the company since the beginning.

Tesla said they would reveal the final Model 3 in July along with all the features and pricing. Morgan Stanley said it could be the safest car on the road. Musk said the initial production models of the Model 3 would have "horribly negative margins" because of all the startup costs to produce the new version. Shares rallied $7 on the news.

News broke on Friday that Apple might be injecting itself into the Toshiba memory auction process. Toshiba is selling its memory business after its Westinghouse subsidiary filed bankruptcy. They have to raise cash and the Toshiba memory division has lots of value. They started with about ten potential bidders but that list had been shaved to only three on Thursday. Those were Broadcom at $23 billion, Hon Hai Precision (Foxconn) at $27 billion and Western Digital at $15-$18 billion. Hynix is reportedly still in the bidding but would be blocked on national security issues. Western has the power to veto any sale because it is a 50% owner in a joint venture with Toshiba. Western warned Toshiba last week that the sale was in violation of their joint venture agreement and demanded exclusive negotiation rights.

Late Thursday news broke that Apple has offered to buy a stake in the business from Toshiba of more than 20%. That would allow Toshiba to retain partial ownership as well as generate some cash. Since Foxconn is Apple's iPhone manufacturer, a joint Foxconn/Apple bid for only a portion of the business could satisfy regulators concerned about national security issues from selling the business to a Chinese company. Japanese broadcaster NHK said Apple wanted Foxconn to own 30%.

This story is bound to have a lot more chapters before we reach a final sale.

Also on Friday, Apple was awarded a permit to begin testing self-driving cars in California. The permit covers three 2015 Lexus RX 450H Hybrid SUVs and six individual drivers. In California all testing must be done with a driver that can take control in the event of a malfunction. Apple is the 30th company to be awarded a permit in California. Those include Ford, GM, BMW, VW, Tesla and Google. The Google subsidiary Waymo has a fleet of cars that have logged more than 2 million miles.

Nintendo confounded everyone on Thursday when they said they were going to discontinue the NES Classic, which just began delivering in Q4. The company has already sold 1.5 million of the games. The list price is $59.99 but the game has been so popular it has been impossible to actually find them in stores. You can buy them from scalpers on Ebay or Amazon for $325-$350. The console contains 32 of Nintendo's most popular games like Super Mario Brothers, Donkey Kong, Pacman, Tetris, etc.

Nintendo said it was discontinuing the Classic because the Switch console had become so popular. Since the beginning of March the switch has sold 906,000 copies in North America alone along with an equal number of copies of the Legend of Zelda, also a classic game.

It appears Nintendo made a mistake in releasing the Classic. Since the games are included and the price is so cheap, they are not making any money on it. With the Switch, the games are extra.

Crude prices declined slightly on Friday after reaching a 4-week high. Energy stocks were down sharply with the market. During the week, Saudi Arabia was rumored to have asked OPEC to extend the production cuts for six more months.

Active rig growth slowed slightly from prior weeks and it was probably due to the approaching Easter holidays. The rig gain for the current week will probably be light as well. Gas rigs are struggling with a loss of 3 while oil rigs rose +11.


I think it is time to start looking for stocks to buy on the dip. As of late Saturday afternoon, there have not been any military events in North Korea. If we can escape the weekend without an event, the market could rally next week. Unfortunately, it might only be a short-term blip since we still have the problem with the government funding and debt ceiling the following week.

The major indexes closed below critical support levels, which would normally suggest we were going lower. When that kind of close comes on a clear geopolitical headline, there is a good chance of recovery when that headline fades. In this case, it was the MOAB in Afghanistan that the news media blew out of proportion and tried to make it a statement over a possible attack on North Korea. That compounded the April 15th Founders Day risk for North Korea and caused the markets to drop.

If we do rebound next week, I would not be too anxious about jumping into a lot of long positions. A government shutdown has historically caused significant market dips. You would think lawmakers would not want to take that risk but the partisan hostility in Washington is at record levels. If one party thought they could successfully blame a shutdown on the other, they may go for it.

In theory, the S&P close at 2,329 and well under strong support at 2,350 and minimal support at 2,340 should suggest a new target of 2,250. Multiple support levels have broken, there is a clear downtrend in place and the index closed at the low for the day at a two-month low. It does not get much more negative than that.

The Dow closed at 20,453 and well under prior support of 20,600. This was a two-month low and the Dow closed on its lows. On a technical basis, the chart is projecting a target of 19,800. Only two Dow components were positive. The energy stocks were big losers despite a lack of geopolitical headlines that would have impacted prices. Goldman closed on support just above $185 and could be poised for a major fall if earnings disappoint on Tuesday.

The Nasdaq indexes remain the strongest segment of the market but even the strong suffered from the recent weakness. The Nasdaq Composite closed just over critical support at 5,805 and avoided a two-month low close by 16 points. A break below that level would target 5,330.

The Nasdaq 100 has been weak for the last seven days as the big cap tech stocks began to see multiple sessions of light profit taking. The index is still well over support and remains the strongest chart.

The small cap indexes imploded over the last two days after positive gains for the prior three days while the large cap indexes were falling. The combination of headlines was too convicting and investors sold everything, especially small caps where the volatility risk is greater.

I would start looking for stocks you want to buy on a dip. Without a negative weekend headline, we could see a relief rally early in the week. Unfortunately, if the government funding and debt ceiling negotiations do not go well the following week, we could see a very volatile market.

If a potential government shutdown appears likely, we could see lower lows. However, these events pass and once the situation is resolved, we could see a decent market rally.

The wild card in all of this forecasting is the "sell in May" cycle, which could be stronger this year given the collapse in the administration's policy agenda. Once we are past the budget impasse, if the tax reform process looks like it will be put off to Q4 or longer, there will be a larger incentive to take profits and come back after the dog days of summer.

Random Thoughts

The market did not really roll over until Wednesday afternoon and this survey ends on Wednesday. A few bears became less cautious and moved to straddle the fence. The bulls did not really gain any converts and sentiment remained neutral for the week.

Last week results

JC Penny said it was going to postpone the liquidation and closing of 138 stores previously scheduled for April 17th. The company said it was seeing strong sales at the stores listed for closing. This is not uncommon according to JCP. When you announce a closure, local shoppers will appear looking for bargains while others will return to shop because of nostalgia about losing an old friend. They remember shopping there in years past and suddenly want to see what they have been missing. The company said sales had been brisk and it was "prudent to continue selling the spring and summer merchandise at the current promotional levels and begin the actual liquidation a month later than originally planned." The new liquidation will begin on May 22nd and the stores will be closed on July 21st.

This "going out of business" phenomenon has been well known for decades. Back in the 50s and 60s stores would announce going out of business sales at least once a quarter. Once they got you in the store, it was always a particular brand or model year they were closing out. I remember when I lived in Dallas in the 60s they passed a law about how frequently you could "go out of business." I am surprised Sears has not picked up on this and started holding quarterly going out of business sales. Of course, they have been going out of business for so long now, nobody would believe them.

The Canadian government announced on Thursday that it will introduce new legislation to legalize the use of recreational marijuana for adults 18 years and older. The government will introduce a number of bills that will set a "strict framework" around the age, production, distribution and sale. Individual provinces will be able to modify legislation to fit their own localities. Canadians will be able to grow their own but be limited to 4 plants per household. There will be a zero tolerance policy for driving under the influence.

Analysts in the U.S. believe every state could have some kind of permissions by 2021. These are the states that have already passed marijuana access laws.

A student group at Duquesne University in Pennsylvania wants to prohibit a Chick-fil-A from opening on campus because it would cut down on the school's "safe places." Apparently, chicken sold by a company with a Christian founder is discriminatory. I feel sorry for these students when they actually have to make it in the real world where it is survival of the fittest and there are no safe places.


Enter passively and exit aggressively!

Jim Brown

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Index Wrap

Right on Schedule

by Jim Brown

Click here to email Jim Brown
The first two weeks of April were erratic and interspersed with gains and losses.

For the last several weeks, I have written that the first two weeks of April are normally erratic and interspersed with gains and losses. That has definitely been the case only with more losses than gains.

The market decline over the last two days was due to geopolitical concerns ahead of the long holiday weekend. There is nothing worse than being long or short over a weekend and seeing the futures rocket 20 points in the wrong direction on Sunday night after some overseas event. It can be very painful both financially and emotionally.

After investors have suffered through a couple of those events, they are very reluctant to hold over future weekends if there is even a hint of risk. With the Syrian attack only a week old, a carrier battle group racing to take a position off the coast of South Korea and two Tomahawk armed destroyers taking up positions off the coast of North Korea along with a massive bomb being used against ISIS in Afghanistan, the weekend event risk was huge.

There was a genuine risk that North Korea would do something stupid to celebrate the 105th birthday of Little Kim's grandfather and the U.S. could have reacted with another missile barrage. However, in Korea the situation is a lot different than Syria. Seoul Korea sits just over the DMZ from North Korea and 11 million people live in Seoul. The North has more than 20,000 artillery pieces aimed at Seoul as a deterrent. A tit for tat exchange with NK could result in a massive artillery barrage and thousands of people being killed. There is no way for the U.S. to knock out all that artillery in a week, much less in a few hours. With a madman in control, there is extreme risk in making him angry.

Investors understood this risk on Thursday and they fled the market although the holiday volume was light at 6.1 billion shares. The most likely result will be a relief rally on short covering at the open on Monday, assuming there are no headlines over the weekend. Late Saturday South Korea tried to launch a ballistic missile as a show of force but it exploded almost immediately after the launch. That would not be good for Kim's ego and he has had a lot of failed missile launches recently.

A military spokesman said late Saturday the U.S. has no intentions of responding to another UN violation by attacking South Korea, the military was only there for war games with the South Korean military. That sounds like a cover your bases answer and I would not count on it.

The S&P closed at the low for the day and a two-month low after breaking below critical support at 2,350 and the 50-day average. Minimal support at 2,340 was also broken. In theory, this is a critical failure that should lead to lower lows. In reality, it was a headline news event that could be erased at the open on Monday. However, broken support is still broken support. It is never as strong on the next retest. That 2,350 level is now resistance and it would take a couple of strong days to successfully close back over that level. Just getting over 2,350 is only the first step. The 2350-2370 range has been congestion for the last two weeks and that 2,370 level is strong resistance.

The most likely path is for the S&P to rebound and give us a lower high and then roll over later in the week as we approach the budget battle starting on the 24th. The risk of a government shutdown is probably stronger than the risk of launching Tomahawks into North Korea.

The Dow chart is just as ugly as the S&P with the two-month low close and the complete failure of support. The 20,600 and 20,500 levels broke and the new downside target should be 19,750.

The MACD and RSI are in full decline and the chart is very bearish.

The Nasdaq Composite barely escaped a breakdown with a close just above support at 5,800. The 50-day average was broken for the first time since early December. If that 5,800 level were to break next week, it could be a long drop.

This is not a week to be spending a lot of time analyzing charts. The markets were reactionary to geopolitical events rather than earnings, economics and fundamentals. The charts are the equivalent of skid marks on pavement the day after a wreck. You can see how it happened but they give you no clue as to where those cars are today or where they are going. The charts this weekend are very bearish but the headlines rule.

Just getting past the event risk this weekend does not solve the market's problems. With the French election next Sunday and the potential for another Brexit event and the funding battle starting on the 24th, I suspect any early week relief rally could be short lived. We are going to have the same worries next Friday and there could be a new military confrontation by then.

I would recommend maintaining a high ratio of cash until after we get past the funding battle. If they go the government shutdown route again we could see a dramatic selloff and I would view that as a buying opportunity. The coming week could start well but finish badly.

I would continue to refrain from being overly long and look to add some positions late in the month when volatility is likely to spike.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

No Reason for Drop

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market punished everyone equally on Thursday with many stocks plunging on a complete lack of news. Chevron was one of those stocks. Oil prices only fell a few cents and there were no headlines that would be negative to oil prices. Shares of Chevron fell -3% as the entire sector sank.


CVX - Chevron - Company Profile

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Buy June $110 call, currently $1.45. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Bears Win

by Jim Brown

Click here to email Jim Brown

Editors Note:

The weekend event risk sent investors running to the sidelines as the bears came out to play. The Dow and S&P both closed at two-month lows and at the lows for the day after a major breakdown in support. While this is probably related solely to the weekend event risk and there may be a rebound on Monday, there is no denying that support has been badly broken and sentiment has suffered.

The Nasdaq barely held over critical support at 5,800 with a close at 5,805. The Russell 2000 lost another 14 points and closed just barely over critical support at 1,340.

Despite all the gloom and doom, it would have been worse if the biotech sector had not gained 1.3%. That actually supported the Nasdaq and Russell or the declines would have been worse.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

JACK - Jack in the Box
The long call position was stopped at $98.85.

LB - L Brands
Close the long put position at the open on Monday.

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

ADBE - Adobe Systems - Company Profile


No specific news. Guggenheim initiated the stock as a buy with a $155 price target saying there could be 20% upside. Only a minor decline in a very weak market.

Original Trade Description: March 23rd.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Everybody knows Adobe or at least they did 20 years ago. Photoshop and Illustrator were the key pieces of software everyone needed to create content for magazines and print media. What would Sports Illustrated have done without Photoshop for their Swimsuit Edition?

Fast forward to 2017 and Adobe has so many different pieces and partners that you cannot even describe them all. With annual revenue at $7 billion and growing they are rapidly outpacing everyone's earnings expectations.

Adobe is hosting its annual Digital Marketing Summit. At that event they announced several new partnerships and the integration of multiple "cloud" entities into one platform.

This description is from a Real Money article.

Headlining these moves is the creation of a common platform, known as the Experience Cloud for all of the products that to date had been grouped within Adobe's "Marketing Cloud." Going forward, Marketing Cloud will comprise one of three parts of Experience Cloud, and feature products such as Experience Manager (used to create and manage marketing content across platforms), Target (lets marketers personalize user experiences) and Social (used to run social media marketing campaigns).

Another part of Experience Cloud, known as Advertising Cloud, lets companies run and optimize search, display and video ad campaigns. It pairs Adobe's Media Optimizer search and display ad-buying tools with recently-acquired TubeMogul's video ad-buying platform. The third part, known as Analytics Cloud, combines the popular Adobe Analytics tool for uncovering insights from customer data with Audience Manager, a platform for creating customer/audience profiles.

Advertising Cloud has gotten a lot of attention, since it more firmly makes Adobe a player in an ad tech space where Alphabet/Google (GOOGL) and Facebook (FB) loom large, and where independent players such as The Trade Desk (TTD) and The Rubicon Project (RUBI) are also present. Adobe is pitching itself as an independent alternative to Google and Facebook, which of course are also giant sellers of ad inventory, while arguing that integrations between the three parts of Experience Cloud set it apart from both independent ad tech players and marketing software rivals such as Salesforce.com (CRM) and Oracle (ORCL).

In their earnings last week, they reported a 21.6% rise in revenue to $1.68 billion and the 12th consecutive increase in revenue from the Creative Cloud graphics software. Earnings were 94 cents and analysts had been expecting 87 cents and $1.645 billion in revenue. Adobe said annualized recurring revenue rose by $265 million to $4.25 billion. That is based on continuing subscription growth.

Earnings June 15th.

Shares spiked after earnings from $122 to $130 and then faded back to $125 over the next week. They have started to rebound again because finding 20% revenue growth in the market is hard to do.

Position 3/24/17 with an ADBE trade at $127.50
Long May $130 call @ $2.61, see portfolio graphic for stop loss.

ADP - Automatic Data Processing - Company Profile


No specific news.

The option has declined to only 10 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain nothing by exiting now.

Original Trade Description: March 17th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported earnings of 87 cents that rose 57% and beat estimates for 81 cents. Revenue of $2.99 billion rose 6.4% but missed estimates for $3.01 billion. They surprised analysts with revenue growth guidance for 2017 at 6%, down from prior forecasts of 7% to 8%. They blamed the revenue miss and lowered guidance on uncertainty over the elections and the impact of the Trump election. They also see a 1% revenue hit from the sale of their CHSA and COBRA businesses in 2016. They guided for earnings growth of 15% to 17% for the full year. They currently serve 637,000 clients in 125 nations. The number of employees serviced rose 2.3%. PEO Services employees rose 12% to 452,000. These are "co-owned" employees managed by ADP for clients.

They repurchased 4.6 million shares at a cost of $422 million. They expect to repurchase $1.2-$1.4 billion in shares in 2017.

Earnings May 3rd.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

ADP rallied nearly $1 on Friday in a weak market and closed at $105.12 and a new high. It was also just over the $105 strike. I am recommending we reach out to the $110 strike since it appears ADP is about to move higher after three weeks of consolidation. This option price is very cheap and there will be no initial stop loss.

Position 3/20/17:

Long May $110 call @ 75 cents, see portfolio graphic for stop loss.

CRUS - Cirrus Logic - Company Profile


No specific news. Very small decline.

Original Trade Description: April 6th.

Cirrus Logic, Inc., a fabless semiconductor company, develops, manufactures, and markets analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets. It offers portable audio products, including analog and mixed-signal audio converters, and digital signal processing products for mobile applications; codecs-chips that integrate analog-to-digital converters and digital-to-analog converters into a single IC; smart codecs, a codec with digital signal processer; amplifiers; and micro-electromechanical systems microphones, as well as standalone digital signal processors. The company offers its products for mobile devices, including smartphones, tablets, digital headsets, wearables, smart accessories, and portable media players. Its products are also used in laptops, audio/video receivers, home theater systems, set-up boxes, portable speakers, digital camcorders, musical instruments, and professional audio products applications; and serve the automotive market, which include satellite radio systems, telematics, and multi-speaker car-audio systems. In addition, the company's products are used in industrial and energy-related applications, including digital utility meters, power supplies, energy control, energy measurement, and energy exploration applications. It markets and sells its products through direct sales force, external sales representatives, and distributors in the United States and internationally. Company description from FinViz.com.

Cirrus is a major component contributor to Apple, Samsung and other smartphone manufacturers. They also supply chips to dozens of other types of products.

In 2014 Apple provided for 80% of Cirrus annual revenue. In 2016 that declined to 65% and continues to shrink. Samsung made up 15% of 2016 revenue.

The strong sales of the iPhone 7 and the expected blowout sales for the iPhone 8 and Samsung 8 this year should produce millions in additional revenue. Sales rose 28% in 2016 and analysts expect 31% revenue growth in 2017. Earnings are expected to rise 82% for 2017

With the iPhone 8 expected to post blowout sales numbers, that means component demand over the next 9 months will also be strong. Suppliers normally begin shipping components in the last week of June but this year there are indications they have been requested a month earlier so that Apple can have more phones on hand when sales begin.

Earnings May 3rd.

With earnings in early May, this will only be a three-week position. We will exit before earnings. On the chart, the spike on February 1st was earnings of $1.87 compared to estimates for $1.63. The immediate decline the next day was on guidance for revenue of $300-$340 million and analysts had been expecting $331.9 million. That dip has been forgotten given all the hype over the iPhone 8 and Samsung 8. A move over that level should trigger additional short covering.

Update 4/11/17: We were stopped out on the knee jerk move in Apple suppliers after Dialog Semi was cut when news broke Apple was going to make some of their own chips for their phones. This was simply a reaction to a headline. Even if Apple did decide to make their own chips it would take until 2019 for it to have any impact and Cirrus Logic would not be affected because of the type of chips they supply. We reloaded the position at the open on 4/12.

Update 4/12/17: After the close today, Pacific Crest said Cirrus, Broadcom, Qorvo and Skyworks would be exempt from Apple's in-sourcing of its own chips. The chips these companies make are highly sophisticated and protected intellectual property.

Position 4/11/17:

Long May $65 call @ $2.93, see portfolio graphic for stop loss.

Previously Closed 4/11/17: Long May $65 call @ $3.30, exit $2.65, -.65 loss.

DIS - Walt Disney - Company Profile


RBC said Apple should buy Disney to allow Apple to replicate its iTunes music strategy in the content-media space. The analyst said the odds are low for a deal to appear but they are not zero. He said Apple would likely use their $200 billion in overseas cash to acquire somebody if a repatriation opportunity arises. This chatter kept Disney shares positive on Thursday.

If anything, this could push Disney to acquire Netflix in order to avoid being an acquisition target. The combination of Disney and Netflix would be too large at $250 billion market cap for anyone to take over. The two are a perfect match since Disney has a million hours of content it could stream on Netflix and power that streaming business even higher.

Original Trade Description: March 13th.

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company's Media Networks segment operates cable programming services, including the ESPN, Disney channels, and Freeform networks; broadcast businesses, which include the ABC TV Network and eight owned television stations; radio businesses consisting of the ESPN Radio Network; and the Radio Disney network. It also produces and sells original live-action and animated television programming to first-run syndication and other television markets, as well as subscription video on demand services and in home entertainment formats, such as DVD, Blu-Ray, and iTunes. Its Parks and Resorts segment owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. This segment also operates Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and manages Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. The company's Studio Entertainment segment produces and acquires live-action and animated motion pictures for distribution in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. This segment also produces stage plays and musical recordings; licenses and produces live entertainment events; and provides visual and audio effects, and other post-production services. Its Consumer Products & Interactive Media segment licenses its trade names, characters, and visual and literary properties; develops and publishes games for mobile platforms; and sells its products through The Disney Store, DisneyStore.com, and MarvelStore.com, as well as directly to retailers. Company description from FinViz.com

Disney reported earnings of $1.55 on revenue of $14.78 billion. Analysts were expecting $1.49 and $15.26 billion. The comparisons to the year ago quarter were tough because of Frozen and Star Wars, The Force Awakens in that period. Star Wars was the first billion dollar film for the current fiscal year. The studio segment generated $2.52 billion in revenue. In January, after the December quarter ended, the company said it had more than $7.6 billion in global box office gross thanks to Star Wars: Rogue One, Captain America: Civil War and Finding Dory. CEO Bob Iger downplayed the concerns over ESPN saying they were very overblown because ESPN was still in demand by consumers, networks and advertisers.

Shares have recovered from the post earnings depression and are poised to continue making new highs, market permitting.

Update 3/15/17: Disney has upped its ownership to 85.7% and said it was going to buy out the rest of the investors and offered them a premium to the current value of their shares. Some investors are complaining. Euro Disney has significant debt and Disney said it would recapitalize 1.5 billion euros once it had full control. The actual park management loves the plan because it would put Disney back into control and provide it solid financial backing. This is just a temporary hiccup in the stock.

Update 3/20/17: Beauty & the Beast took in $170 million in ticket sales on its opening weekend. That was a record high for a family film. Disney has 11 other animated classics that it is planning to remake with human actors. The success of Beauty & the Beast will make theses 11 films a reality.

Mulan, Aladdin, Lion King, 101 Dalmatians, Little Mermaid, Pinocchio, Sword in the Stone, Peter Pan, Snow White and the Seven Dwarfs, Dumbo and a sequel to Marry Poppins.

Update 3/23/17: CEO Bob Iger agreed to a one-year contract extension until July 2019. He was previously going to retire in July 2018.

Update 3/24/17: Rumors and suggestions are starting to circulate suggesting Apple could buy Disney instead of Netflix in order to acquire a content generating machine and level out the earnings/cash flow. Currently Apple has very big fluctuations in revenue because of their cyclical production nature. If they owned a company like Disney they would have steady and predictable earnings. Disney has a market cap of $177 billion and Apple has $230 billion in cash. Liberty Media Chairman John Malone suggested if Disney spun off ESPN, Apple would buy Disney. That suggests an outright Apple purchase would also resort in an ESPN spinoff.

Update 3/30/17: Disney is relaunching Club Penguin, a game with hundreds of millions of users into Club Penguin Island. The original game had to be shutdown when browser technology began to limit what developers wanted to do inside the game. Now they are restarting in an app for Android and IOS. The basic game will be free but there is a $4.99 per month subscription fee it you want the advanced features. If only 100 million of the prior users signed up for the advanced package that would be $500 million a month in additional revenue. What kid cannot get dad to pay $4.99 per month for hours of peace and quiet?

Update 4/11/17: Goldman Sachs put Disney on their conviction buy list with a $138 price target. The company cited their best upcoming calendar of movies ever. In FY 2018 they have 4 Marvel films, 2 Star Wars films and 3 animated films. Goldman expects record profits from the studio in 2017 and 2018. The analyst said Disney was seeing accelerating profit growth at ESPN and record profits from the theme parks. Avatar Land, Toy Story Land and Star Wars Land all making debuts over the next couple years, the parks are going to be flooding the company with cash.

Earnings May 9th.

Position 3/14/17:

Long May $115 call @ $1.83, see portfolio graphic for stop loss.

FIVE - Five Below - Company Profile


No specific news. Minor gain in a weak market.

Original Trade Description: April 10th.

Five Below, Inc. operates as a specialty value retailer in the United States. It offers accessories, including novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, and T-shirts, as well as beauty products comprising nail polish, lip gloss, fragrance, and branded cosmetics; and items used to complete and personalize living space, including glitter lamps, posters, frames, fleece blankets, pillows, candles, incense, and related items, as well as provides storage options for the customer's room and locker. The company also provides sport balls; team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls; games, including name brand board games, puzzles, toys, and plush items; and pool, beach and outdoor toys, games, and accessories. In addition, it offers accessories, such as cases, chargers, headphones, and other related items for PCs, cell phones, and tablet computers; books, video games, and DVDs; craft activity kits; arts and crafts supplies that consist of crayons, markers, and stickers; and trend-right items for school comprising backpacks, fashion notebooks and journals, novelty pens and pencils, and everyday name brand items. Further, the company provides party goods, gag gifts, decorations, and greeting cards, as well as every day and special occasion merchandise products; assortment of classic and novelty candy bars, movie-size box candy, and gum and snack food; chilled drinks through coolers; and seasonally-specific items used to celebrate and decorate for events, such as Christmas, Easter, Halloween, and St. Patrick's Day. It primarily serves teen and pre-teen customers. As of January 28, 2017, it operated approximately 522 stores in 31 states. Company description from FinViz.com.

Five Below is an expensive Dollar Store. Everything in Five Below is $5 or less. That gives they a wider range of products and still keeps them somewhat Amazon proof because buying it online requires shipping.

Five Below is a bargain hunter impulse store. Customers rarely walk in with a specific product in mind but looking for a bargain instead. This is a kid magnet because they stock a lot of stuff that appeals to adolescents.

They reported earnings of 90 cents that beat estimates for 89 cents. Revenue was $388.1 million and that narrowly beat estimates for $387 million.

They guided for Q1 for earnings of 12-14 cents and analysts were expecting 13 cents. For the full year, they guided for $1.55-$1.61 per share and analysts expected $1.58. Revenue guidance was $1.21 to $1.23 billion.

They currently operate about 550 stores and plan to open 100 in 2017. They expect to increase that to 2,000 stores over time. They were primarily in Texas Florida and the North East but they have begun to expand into California and the feedback has been outstanding. Nothing costs under $5 in California so their stores are hot locations.

Earnings June 21st.

Shares closed at a 7-month high on Monday and just over resistance at $44.50. If the current rally holds the next resistance test would be $52.

Update 4/12/17: Five will open the first nine stores in California next week with stores at Aliso Viejo, Anaheim, Compton, Hawthorne, Montebello, Fontana, Rancho Cucamonga, South Gate and Redlands.

Position 4/11/17:

Long May $45 call @ $1.90, see portfolio graphic for stop loss.

HLF - Herbalife - Company Profile


No specific news. Only a minor decline in a weak market.

Original Trade Description: March 15th.

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 company's weight management product portfolio includes meal replacement products, protein shakes, drink mixes, weight loss enhancers, and healthy snacks; targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients; and outer nutrition products consist of facial skin, body, and hair care products. It also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. The company offers its products through retail stores, sales representatives, sales officers, and independent service providers. It operates in North America, Mexico, South and Central America, Europe, the Middle East, Africa, the Asia Pacific, and China. Company description from FinViz.com.

It is well known that Bill Ackman has a $1.5 billion short on Herbalife. He has had it for a couple years. It is also well known that Carl Icahn does not like Ackman.

Ackman took a major hit in Valeant when he announced on Monday he had closed his 27.2 million share position for a loss of more than a $3 billion. Ackman is hurting because several of his recent high profile positions have gone against him and investors are pulling out their money or at least sending him hate mail suggesting he get his act together. He is also holding a massive long position in Chipotle and the stock is moving lower.

On Monday, Ackman announced he closed the Valeant position. Immediately, Carl Icahn announced he was buying 372,000 more Herbalife shares and had asked the SEC for permission to acquire up to 50% of the company. He already owns 24.6%. This is killing the short position held by Ackman. Shares are rising on the Icahn news.

While this seems like the perfect long position where Icahn is going to force Ackman to cover, there is one big problem. On March 17th a movie called "Betting on Zero" which profiles Ackman's short thesis, will open in a national release. Remember, everyone has known about this movie for a year. It played in a few single venues and the stock did not decline. When it was picked up for national release about 6 months ago, everyone thought this would be the end of the company. However, in late 2016 the company settled with the FTC for $200 million on a probe into their marketing practices. They dodged another large bullet since the probe was also based on Ackman's short thesis.

Shares collapsed in late February on a guidance miss and bottomed last Friday. They have been rebounding since Icahn made his recent announcement.

I am recommending a short term strangle. The odds are good that the stock is going to be directional after the film begins showing on the 17th. Everyone will either say OMG and dump the stock or they will say, "so what is the big deal" and buy the stock. Since Icahn has $1.5 billion invested, you know he is going to be very vocal about it and will probably publicize any further purchases if the stock declines. We do not care which way the stock moves. We just need it to move significantly.

Position 3/16/17:

Long April $57.50 call @ $1.11, no stop loss.
Long April $52.50 put @ $1.36, no stop loss.

JACK - Jack in the Box - Company Profile


No specific news. Shares spiked to $102 at the open and then immediately crashed back to $98.50. I looked everywhere and could not find a reason. Volume was very low at 7,000 shares in the first 5 minutes of trading when all the volatility occurred. We were stopped out.

Original Trade Description: March 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of October 02, 2016, it operated and franchised approximately 2,255 Jack in the Box restaurants in 21 states and Guam; and approximately 699 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951 and is based in San Diego, California. Company description from FinViz.com.

JACK reported earnings of $1.18 but that missed estimates for $1.24. Revenue of $487.9 million rose 3.6% but missed estimates for $500.1 million. The earnings include a $2 million restructuring charge for facility closing costs and employee severance pay. Same store sales rose 3.1% for the quarter. This compared to the retail tracking group NPD SalesTrack which showed similar chains averaged 1.6% for the quarter. The average check also rose 4.9%.

JACK guided for Q1 same store sales to be flat to down -2% at Jack in the Box stores and down 1% to 3% at Qdoba stores. For the full year they guided for sames store sales growth of 2% at Jack stores and flat at Qdoba stores. They guided for earnings of $4.25-$4.45 and well below estimates for $4.71. Shares were crushed for a 10% loss.

Earnings May 24th.

However, in case you did not know there is a restaurant recession in progress. All the restaurant chains reported negative sales comps citing excessive competition and strong discounting. At JACK operating earnings rose 27% for the quarter and very few of the other chains were even close.

Like everyone else they blamed the delayed tax refunds for a sharp slowdown in sales in February. They also suffered from the record rainfall and flooding in California where the chain has a large presence.

They plan to open 20 to 25 new Jack in the Box stores in 2017 and 50-60 new Qdoba stores.

There is nothing wrong with this company that justified a 10% drop in the stock. Now that shares are rebounding, it should attract a lot of buyers expecting a return to the pre earnings levels.

Position 3/31/17:

Closed 4/13/17: Long June $110 calls @ $1.85. exit $1.00, -.85 loss.

SLCA - U.S. Silica Holdings - Company Profile


No specific news. Only a minor decline in crude prices. No specific reason for a $3 drop in the stock.

Original Trade Description: March 9th

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. Company description from FinViz.com.

Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.

Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.

Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.

U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.

They were crushed again this week when oil prices fell 7% in just two days to the lows for the year.

Oil prices are down on record inventory levels. Inventories rose by 8.2 million barrels to 528.4 million barrels on Wednesday. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.

If I could, I would buy a longer dated call and hold on to this position until fall. However, this newsletter is not a buy and hold strategy. I am going to recommend the June calls and we will exit before the May earnings.

Earnings May 24th.

The decline over the last two days knocked the stock back to the 200-day and support from November.

Update 4/4/17: SLCA rallied $1.24 on news they acquired a division of National Coatings that supplies roofing products with high thermal resistance and emittance. They reduce energy consumption and increase the durability of the roof. SLCA already supplies more than 260 products to industry with frack sand only one of those products.

Position 3/10/17:

Long June $50 call @ $3.20, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


No specific news. Support was tested again.

Original Trade Description: March 16th

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Security and Enterprise Security. The Consumer Security segment offers Norton-branded services that provide multi-layer security and identity protection on desktop and mobile operating systems to defend against online threats to individuals, families, and small businesses. Its Norton Security products help customers protect against complex threats and address the need for identity protection, while also managing mobile and digital data, such as personal financial records, photos, music, and videos. The Enterprise Security segment provides threat protection products, information protection products, cyber security services, and Website security offerings. Its products protect customer data from threats, such as advanced protection threats, malicious spam and phishing attacks, malware, drive-by Website infections, hackers, and cyber criminals; prevent the loss of confidential data by insiders; and help customers achieve and maintain compliance with laws and regulations. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, e-commerce platforms, distributors, direct marketers, Internet-based resellers, system builders, Internet service providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com.

You cannot even turn on your phone or PC without being subjected to dozens if not hundreds of potential attackers. Worse than stealing your ID and maybe being able to cause you grief down the road, the biggest attacks today are the ransom ware attacks. If you click on an email link or leave your PC unguarded by a security program, the hacker encrypts all your files and charges you a fee to get them back. All of your documents, pictures, bank account info, Quickbooks, etc, all disappear in a heartbeat. Even if you pay the blackmail, you still may not get them back.

Symantec is the leading cybersecurity vendor for personal computers and small business servers. Enterprise class operations will normally go with higher fee organizations like Fire Eye, Palo Alto Networks, etc. Symantec has the entire personal computer space to themselves. There are some competitors like PC Magic and McAfee but they are distant competitors. Since Intel partnered with McAfee an TPG in September, they are improving but Symantec has a big head start.

Because of the daily headlines on cyberattacks, more and more consumers are reaching out and deploying more sophisticated antivirus programs. It is not just for the closet geeks anymore. Everyone needs a real security program.

Strangely, the biggest risk is still the individual. In a recent study of 19,000 individuals by Intel Security they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.

Update 3/23/17: Morgan Stanley raised their price target from $33 to $37 saying Symantec's recent wave of acquisitions, including Blue Coat Systems and LifeLock, have improved Symantec's position with their rivals. In June, they bought Blue Coat for $4.65 billion to beef up their enterprise offerings. In February, they paid $2.3 billion for LifeLock to enhance their consumer security business. Morgan Stanley expects Symantec to make more acquisitions after their recent $1 billion debt offering.

Symantec should continue to emerge as the big winner in personal computer security.

Earnings May 3rd.

Position 3/17/17:

Long July $32 call @ $1.29, see portfolio graphic for stop loss.

$VIX - Volatility Index - Index Description


The VIX spiked again to just over 16 on geopolitical worries and holiday weekend event risk.

With Congress on a two-week recess, we will have a much less chance of a politically stimulated event. However, when they get back on the 24th, they only have 5 days to get a funding bill passed and raise the debt ceiling. The political sparing has already started.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

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.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.

WDC - Western Digital - Company Profile


Rumors broke early Thursday saying Toshiba had shut down all meetings and actions relating to the sale of its memory business. Shares of Toshiba fell 9%. Later in the afternoon Toshiba said it had not take that action and the report was incorrect. Toshiba's problem is that half the assets it is trying to sell already belong to WDC. Western has a "right to approve" clause in its joint venture contract with Toshiba and they can halt any sale. Reportedly, there are only three bidders left. Those are Broadcom at $23 billion and Taiwan's Hon Hai Precision Industry at $27 billion. WDC is reportedly offering between $15-$18 billion but they have the hammer and the right to block any transaction. The Hon Hai bid would likely be rejected for national security reasons.

Original Trade Description: March 29th.

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.

Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.

Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.

They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.

Update 3/30/17: Shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future.

Update 4/4/17: WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.

Update 4/6/17: WDC announced a new pocket sized SSD drive for portable data so developers and content creators can take their data with them wherever they travel. These are the fastest portable drives with speeds of up to 515 Mbps and come in 256gb, 512gb and 1TB capacities starting at $99. This is an amazing accomplishment and these will be hot products.

WDC also named Phil Bullinger as head of its data center business. Bullinger was formerly a general manager of Dell EMC storage business and before that he was in charge of Oracle's SAN/NAS storage business. Update 4/11/17: JP Morgan upgraded WDC from neutral to overweight and raised the price target from $80 to $116. The analyst said NAND memory prices are going higher and that was great for WDC. He also said the PC market was stabilizing and driving disk demand higher.

Update 4/12/17: WDC may have a trump card in the sale of the Toshiba memory business. WDC has invested more than $13 billion into a partnership with Toshiba in developing the NAND memory business. The company said the sale to a third party would be a serious violation of their joint venture agreement. WDC is bidding with Silver Lake Partners but currently has the lowest bid out of the four remaining bidders. Broadcom is the highest at $23 billion. Two Chinese companies are still in the bidding but would probably be declined because of national security concerns. That leaves Broadcom and WDC and WDC is already a part owner.

Earnings April 26th.

After two months of post earnings depression, shares closed back at $81.39 and a new high on Wednesday. I believe a breakout is imminent. Earnings are four-weeks away and we could see a pre-earnings ramp on strong expectations.

Position 3/30/17:

Long May $85 call @ $3.25, see portfolio graphic for stop loss.

Z - Zillow Group - Company Profile


No Specific news. New 3-week closing high.

Original Trade Description: April 8th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. The company offers a portfolio of brands and products to enable people find information about homes and connect with local professionals. Its brands focus on various stages of the home lifecycle, including renting, buying, selling, and financing. The company's portfolio of consumer brands comprises real estate and rental marketplaces, such as Zillow, Trulia, StreetEasy, HotPads, and Naked Apartments. It also owns and operates various brands comprising Mortech, dotloop, Bridge Interactive, and Retsly, as well as provides advertising services to real estate agents, and rental and mortgage professionals. Company description from FinViz.com.

Zillow reported earnings of 14 cents. This compares to a loss of 1 cent in the year ago quarter. Revenue of $227.6 million rose 34%. The guided for Q1 for revenue of $232-$237 million. Shares declined after the report because the guidance was slightly less than analysts expected.

In Mid March, shares declined again after a story appeared on Inman.com suggesting that Zillow's marketing programs may have violated RESPA rules. The Real Estate Settlement Procedures Act was put in place in 2010 to protect potential homeowners from predatory lenders. Basically, if a lender or real estate agent pays somebody a kickback for a referral, it is illegal after 2010.

Zillow allows mortgage brokers to advertise on the websites. No problem there. Zillow also offers referral services. If you want a mortgage loan you can go to the Zillow site and enter some information like your loan amount and zip code where you are buying the home. Zillow then matches your request with lenders that pay to advertise on the site and you are given a list of referrals. The inman.com article suggested this was a recommendation for pay, which is illegal. However, Zillow contends it is just generic advertising that matches lenders and borrowers by zip code. The key point is that Zillow gets paid for the advertising whether a lender makes a loan or not. They get paid for the click rather than a loan. Several analysts have noted that Google does the same thing if you type in mortgage loan calculator. They show lenders on that page and Google gets paid for that impression even if no loan is ever made.

Shares declined to $33 on that story and have held there for three weeks. On Friday, Zillow closed at a post dip high. With this the active selling season, the expectations for their May earnings should be high and should lift the stock.

Earnings May 9th.

Position 4/10/17:

Long May $35 call @ $1.45, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

LB - L Brands Inc - Company Profile


Very weak market but only a minor decline. I am recommending we close this position.

Original Trade Description: April 5th.

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, PINK, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom, and Greater China, which are primarily mall-based; through its Websites comprising VictoriasSecret.com, BathandBodyWorks.com, HenriBendel.com, and LaSenza.com; and through franchises, licenses, and wholesale partners. As of January 28, 2017, the company operated 2,755 retail stores in the United States; 270 retail stores in Canada; 18 retail stores in the United Kingdom; and 31 retail stores in the Greater China area. It also operated 203 La Senza stores in 24 countries; 159 Bath & Body Works stores in 30 countries; 23 Victoria's Secret stores in 12 countries; 391 Victoria's Secret Beauty and Accessories stores in 70 countries; and 5 PINK stores in 3 countries. Company description from FinViz.com.

On Tuesday, Citigroup downgraded LB from buy to neutral saying the retailer is operating in too many failing and underperforming malls. The analyst said their entire year would come down to how they perform in the second half of 2017 after an ugly shopping season in 2016.

The company beat on Q4 with earnings of $2.18 compared to estimates for $1.90. Revenue of $4.5 billion matched estimates. Same store sales fell -3% at Victoria Secret. However, they guided for 2017 earnings of $2.05-$3.35 and analysts were expecting $3.61. They reported mid to high teens percentage same store sales declines in February. They also said the exit from swimwear will cost them another 6% in sales in April.

I do not need to say much about this recommendation. Sales and profits are falling, mall traffic is shrinking and the earnings for Q1 are likely to be horrible.

Earnings May 24th.

There are no June options so we either have to go with May, which expires the week before earnings or reach out to August where there will still be some earnings anticipation in the put when we exit before earnings. Using the August strike costs more but the premium erosion over the next several weeks will be a lot less.

Update 4/6/17: Before the open LB said same store sales in March fell -10%. However, they had an excuse. They blamed 2% to 3% of that drop on the later than normal Easter that would have normally produced some late March sales. They also said sales were lowered by the exit from the swimwear and apparel business had a negative 7% impact. Apparently investors bought the excuses and a monster short squeeze was born.

Victoria Secret sales declined -13%, compared to analyst estimates for a 10.8% decline. Bath and Body Works sales were flat and analysts expected a 2% decline.

Nearly every analyst said the $4.75 (11%) gain was a short squeeze. Fred's (FRED) reported better than expected earnings on Wednesday after the close and that helped lift the retail sector in general. The retail ETF (XRT) spiked 2%.

The volume on the August $45 put today was 5,624 and well over the open interest of 3,618. I am going to change the option strike to the August $45 and put an entry trigger on it of $47, just under the afternoon lows.

Position 4/7/17 with a LB trade at $47

Long Aug $45 put @ $3.31, see portfolio graphic for stop loss.

SPY - S&P-500 SPDR ETF - ETF Profile


The SPY broke below critical support at 233.50 and one more decline could seal the deal. Thursday's drop was weekend event risk. If nothing happens over the weekend we could see a major rebound on Monday. If that does not occur, I would expect to target the 225 level.

Original Trade Description: March 25th.

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.

The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.

I believe if the market goes lower next week it could be the beginning of a major decline.

Position 3/27/17:

Long May $230 put @ $3.49, see portfolio graphic for stop loss.

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