Option Investor

Daily Newsletter, Tuesday, 10/17/2017

Table of Contents

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

Market Wrap

Another Milestone Hit

by Jim Brown

Click here to email Jim Brown

The Dow touched 23,000 today just over two months after hitting 22,000.

Market Statistics

The time it takes from one milestone to the next is shrinking because a 1% gain on the Dow is now 230 points. That means we are only 4% from 24,000 and roughly 8% from 25,000. With some of the Dow components surging higher, those gains are coming even faster. The Dow hit 22,000 on August 2nd. The table below shows the points gained by each Dow component from the close on the 2nd until today's close and the Dow points those stocks provided. The total is not exactly 1,000 points because of the close-to-close methodology but you get the idea. The top five stocks contributed to 508 points of the 1,000-point gain.

Today the Dow was pushed to that 23,000 level thanks to a post earnings bounce from UnitedHealth that added 73 points and Johnson & Johnson added 23 points. Goldman Sachs erased 43 points.

On the economic front the NAHB Housing Market Index rose from 64 in September to 68 in October. This was encouraging because it suggests the impact from the hurricanes has passed. The index declined from 67 in August to 64 in September because of that impact. The component for single-family sales rose from 70 to 75 and the six-month projection rose from 73 to 78. Buyer traffic inched up slightly from 47 to 48. The factor hindering further growth is the limited supply of new homes and the rising prices. Existing homeowners are finding it hard to sell because replacing their home will cost them more money with bigger payments.

Import & export prices for September rose 0.7% and slightly over consensus for 0.6%. This comes after a 0.6% gain in August and a decline of -0.4% over the prior five months. April was the only month to post a gain in that five-month period at +0.2% while the rest of the months declined.

The lifting force came from oil and gasoline. Without oil and products the gain would have only been +0.3%. Oil prices rose 4.5% for the month. If you exclude autos, prices actually fell -0.1%. The report was ignored because of the storm impact.

Industrial production for September rose +0.3% after a -0.7% decline in August. Durable goods rose 1.0% and nondurable goods declined -0.9%. Boring! The report was ignored.

The calendar for the rest of the week is led by further home sales data and the Philly Fed Manufacturing Survey. The Fed Beige Book on Wednesday is important but it is not expected to show any material changes with the exception of Texas and Florida, which of course will be ignored.

Wednesday is the expected date for another North Korean provocation. They have multiple missiles on launchers moving around the country and they threatened this morning that nuclear war could break out at any moment. They warned other countries not to participate in the joint military exercises being conducted this week by the US and South Korea or risk being nuked along with those participants.

The US has two carrier battle groups either offshore South Korea or on their way there as in the case of the USS Theodore Roosevelt with a complement of 7,500 Marines. The US also parked the guided missile submarine USS Michigan offshore with 154 cruise missiles. If Kim Jong-Un does something stupid, there is more than enough firepower to make him regret it. Unfortunately, the market would react negatively to any conflict.

Thursday is the anniversary of Black Monday, Oct 19th, 1987 when the Dow fell 23% in one day. On the Friday before the crash the market was down -4% and it was down -10% for the week. The outlook was already grim but people were putting their life savings into equities thinking this was a great buying opportunity. Even famed investor Stanley Druckenmiller loaded up on equities on Friday. Over the weekend he decided he was wrong and bailed at the open on Monday. He based his exit decision on Treasury Secretary James Baker telling Germany over the weekend to either inflate the mark or the US would deflate the dollar. Druckenmiller said that was the deciding factor and he knew the market was going to crash. Adding to the confusion was a conflict with Iran in the Persian Gulf over some oil platforms. There was no internet or smartphones so all the trades had to be called in and getting somebody to answer the phones was a problem. In the end, some firms made money for the week because they bought dip or were long puts from the market decline the week before.

We have circuit breakers today so it would take a major meltdown somewhere to repeat the declines from 1987.

UnitedHealth (UNH) reported earnings of $2.66 that beat estimates for $2.57. Revenue of $50.3 billion increased 8.7% and missed expectations for $50.37 billion. Medical enrollments rose to 49 million, up from 48.1 million. They guided for adjusted 2017 earnings of $10.00 per share, up from $9.75-$9.90 in prior guidance. Shares exploded higher with nearly an $11 gain.

Johnson & Johnson (JNJ) reported earnings of $1.90 that beat estimates for $1.80. Revenue of $19.65 billion beat estimates for $19.28 billion. They guided for full year earnings of $7.25-$7.30 on revenue of $76.1-$76.5 billion. Analysts were expecting $7.18 on revenue of $75.83 billion. The company said its plants in Puerto Rico were up and running but they could not guarantee there would not be drug shortages. JNJ said it had 9 potential blockbuster drugs in the pipeline that would launch between 2017-2021.

Morgan Stanley (MS) reported earnings of 88 cents that beat estimates for 81 cents. Revenue rose 3% to $9.20 billion and beat estimates for $9.01 billion. Investment banking revenue rose 18.2% to $1.38 billion. Revenue from their wealth management business rose 8.7% to $4.22 billion. Sales and trading revenue declined -9.4% to $2.9 billion. Shares rose only fractionally.

Goldman Sachs (GS) reported blowout earnings of $5.02 compared to estimates for $4.17. Revenue rose 2% to $8.33 billion and beat estimates for $7.54 billion. Investing and lending revenue rose 34.7% to $1.88 billion and investment banking revenue rose 16.9% to $1.8 billion. Bond trading revenue declined -26% to $1.45 billion. Shares were up in the pre market but crashed in regular trading.

Harley Davidson (HOG) reported earnings of 40 cents that beat estimates by a penny. Revenue of $962.1 million beat estimates for $952 million. Motorcycle sales were down -8.1% but the overall industry was down -9.2% suggesting they did slightly better than their competitors. They guided for FY 2017 shipments of 241,000 to 256,000 motorcycles, down 6% to 8% from year ago levels. They expect to ship 46,700 to 51,700 in Q4, compared to 42,414 last Q4. Shares rose slightly on the news from 52-week low levels.

After the bell, IBM reported earnings of $3.30 compared to estimates for $3.28. Revenue of $19.15 billion also beat estimates for $18.67 billion. They guided for full year earnings of $13.80. This was the company's 22nd consecutive quarter of declining revenue. However, they guided for Q4 revenue of $22.0-$22.1 billion, up slightly from the year ago quarter. Analysts were expecting $21.8 billion. The company said they had a new mainframe computer that will provide the boost. When IBM sells a mainframe, they typically sell a lot of software and services along with it. Analysts would rather have seen the gains come from their cloud business but dollars are dollars. Shares exploded higher by $6 in afterhours.

Cree Inc (CREE) reported earnings of 4 cents that beat estimates for 3 cents. Revenue of $360.4 million missed estimates for $361.3 million. They guided for Q4 for a loss of 1 cent to earnings of 4 cents on revenue of $340-$360 million. The CEO promised to do better in the future after a thorough review of all their business lines. Shares fell $1 in afterhours.

Only one Dow component reports on Wednesday and that is American Express. Ebay is the biggest tech reporter but it has lost its excitement among tech investors. PayPal is the next tech highlight on Wednesday along with Dow components Travelers and Verizon.


The Dow hit 23,000 but it was only briefly. The index hit that level three times over a 15 min period in the morning and each time it was immediately sold. The first two did not see a material decline. The third touch saw it knocked back to 22,967. The index traded sideways for the next three hours before starting to creep up again just before the close. At 5 min before the bell, the index hit 23,000.51 but sellers were waiting and it closed slightly lower at 22,997. The Dow futures are up +26 because of the gain in IBM in afterhours. The S&P futures are up only a quarter of a point. There is no excitement and definitely a lack of momentum.

Only two stocks added 105 Dow points and the index only posted a 40-point gain. The Dow is very overextended and the 23,000 level would be a perfect spot for some profit taking to break out. Support is well back at 22,745 and I am sure any dip would be bought.

The S&P only managed to gain just under 2 points but did extend its move over prior resistance at 2,555. The S&P has consolidated over the last 8 days with only minimal gains like today. It has the potential to move higher but the lack of momentum is troubling. If the Dow were to pull back slightly I doubt the S&P would dip much but they would move in tandem.

The S&P needs a catalyst to power a decent move. I do not see it in the earnings calendar for this week but I could be mistaken. There is always the chance the markets are simply holding their gains while they wait to see what North Korea does this week.

Support on the S&P is around 2,545 or less than a 1% retracement from here.

The Nasdaq traded negative most of the day and almost returned to positive territory at the close. The big cap techs were evenly mixed with half up and half down. Netflix fell -$3.20 for the day after being down more than that at noon. This decline after strong earnings poisoned the rest of the big cap tech stocks. The ones that were positive were only barely positive.

The Nasdaq has support at 6,565 and resistance at 6,700.

The Russell 2000 broke below support at 1,500 and could be trouble if this decline is not immediately reversed. This is a critical level and a declining Russell is bad for market sentiment. The Russell futures are up 1.50 tonight and that is a good sign even though it can change in an instant.

The Russell has not tested the upper resistance at 1,515 since the initial spike. We need a retest to rekindle interest in the small cap sector. The A/D ratio on the small caps was 2:1 in favor of decliners.

There is nothing on the horizon that should tank the market other than the potential for North Korea to do something stupid this week. The earnings should keep investors interested but next week is when the flood appears. This is option expiration week and that can produce some volatility but it normally happens early in the week so this could be a tame expiration.

Remember, the market does not need a reason to decline. It can happen at any time. The events we expect are not nearly as dangerous as the events we are not expecting. That suggests a benign event from North Korea could actually be a buying opportunity because they did not go for the big provocation. At this point, anything short of launching a missile at the US ships or launching an H-bomb into the Pacific as they have also threatened, could actually produce a relief rally.

Keep some cash in your account in case we do get a buying opportunity.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Lack of Excitement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The lack of market excitement and Dow 23,000 could be a challenge. There is no reason to expect a market decline but the Dow is very over extended and the touch of 23,000 could be a trigger for some profit taking. Without any forward momentum in the market there is no reason to put additional money at risk. If we were lucky enough to see a minor decline, it would be a buying opportunity.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Thank UnitedHealth

by Jim Brown

Click here to email Jim Brown

Editors Note:

The earnings spike from UnitedHealth added 73 points to the Dow. Add a 32 point contribution from JNJ and that is 105 Dow points from only 2 stocks. Unfortunately, Goldman and Boeing erased 50 Dow points. Decliners outpaced advancers but the Dow hit 23,000 and held at that level at the close.

The Nasdaq finished fractionally negative, the S&P gained less than 2 points and the Russell lost 5 points to close well under the 1,500 support level. It was not a bullish day despite the Dow record.

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

CCL - Carnival Corp
The long call position was entered at the open.

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

ADI - Analog Devices - Company Profile


No specific news. No material movement.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.

CAT - Caterpillar - Company Profile


No specific news. With the major indexes acting strangely today and Dow 23,000 hit, I am recommending we close the CAT position. I considered recommending a weekly call for the Friday after earnings at $1.27 for the $134 strike just in case they report blowout earnings. However, if the market waffles between now and next Tuesday, that option premium could disappear in a heartbeat. That potential trade is there if you want to take it.

Original Trade Description: Aug 29th.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. It's "All Other" operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%.
In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%.
In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%.
In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.

Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.

Update 9/21/17: CAT reported a global increase in machine sales of 11% for August, down 1% from July. Total sales in Asia and the Pacific surged 44%, down 1% from July. Despite the minor declines, the business is very strong.

Update 10/11/17: CAT announced a quarterly cash dividend of 78 cents, payable Nov 20th to holders on Oct 23rd. This was the same rate as last quarter. They have paid higher annual dividends for the last 24 years and have paid a dividend every year since they were founded in 1933.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.

CCL - Carnival Corporation - Company Profile


No specific news, no material move.

Original Trade Description: October 16th.

Carnival Corporation operates as a leisure travel and cruise company. It offers cruises under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn brands in North America; and Costa, AIDA, P&O Cruises (UK), Cunard, and P&O Cruises (Australia) brands in Europe, Australia, and Asia. The company operates approximately 100 cruise ships. It also owns Holland America Princess Alaska Tours, a tour company in Alaska and the Canadian Yukon, which owns and operates hotels, lodges, glass-domed railcars, and motor coaches. In addition, the company is involved in the leasing of cruise ships. It sells its cruises primarily through travel agents and tour operators. Company description from FinViz.com.

Earnings December 26th.

Carnival shares had been on a steady path higher since last October but were derailed by the hurricanes. Many of the cruise destinations, including Puerto Rico, saw significant damage. Carnival had to cancel a couple cruises but continued running a full schedule almost without interruption. Shares have recovered from their decline and are moving towards pre hurricane levels.

More than 40 islands visited by cruise ships are open, fully operational and welcoming cruise ships on a daily basis. The majority of the 48 cruise ports in the Caribbean were not impacted at all by the storms. In places such as Jamaica, Belize and Cozumel in the Western Caribbean, and Aruba, Bonaire and Curacao in the Southern Caribbean, and Antigua and St. Kitts in the Eastern Caribbean, it's business as usual. Ports in the Bahamas, including Nassau and the popular private islands of Half Moon Cay and Princess Cays, are also open for business.

The only ports out of the normal 48 that are not yet operational are St. Thomas, St. Maarten, Grand Turk, Dominica, Puerto Rico and St. Croix.

The beauty of the cruise ship industry is that they can change itineraries very quickly if a normal destination is out of service.

Carnival reported Q3 earnings of $2.29 beating estimates for $2.20. Revenue of $5.52 billion beat estimates of $5.39 billion. The temporary port closures are expected to cause a 10-12 cent reduction in Q4 earnings. They guided for a range of 44-50 cents and analysts had been expecting 63 cents before the storms hit.

Based on the rebound it appears investors are not worried about the storm impact.

Position 10/17/17:

Long Jan $70 call @ $1.90, see portfolio graphic for stop loss.

COST - Costco - Company Profile


No specific news. Shares gave back some more of Friday's big gain.

Original Trade Description: October 14th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.

FMC - FMC Corp - Company Profile


No specific news. Minor decline from the new closing high.

Original Trade Description: October 11th.

FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Nov 6th, unconfirmed.

FMC is riding the lithium wave. The once ignored mineral is now becoming a very important part of FMC's future. In the first half of 2017, lithium accounted for 11% of total revenue and 20% of earnings. The rush to find more lithium so companies like Tesla can produce 500,000 battery operated cars a year, has turned the mining of this material into a race to the future. FMC is in the process of tripling capacity from 2016-2019 and that may not be enough to satisfy battery demand by 2020. Because of the fast growth in this segment, FMC is planning on spinning off FMC Lithium at some point in the future.

Also, around November 1st, FMC is expected to get approvals to buy the crop protection assets from DuPont. Dow and DuPont were forced to sell some of those agricultural assets as terms for their merger approvals. Once the sale to FMC is approved, FMC will become the fifth largest crop=protection chemical company in the world. With global food demand skyrocketing, the demand for fertilizer and weed/pest killer is also ramping higher.

The business being bought from DuPont generates $1.4 billion in annual revenue and the segment will jump to $3.8 billion after the acquisition. Also a part of the deal, DuPont will acquire FMC's Health & Nutrition business.

Shares have rebounded from the late September dip and should breakout to a new high in the days ahead.

Position 10/12/17:

Long Nov $95.00 call @ $2.25, see portfolio graphic for stop loss.

HRS - Harris Communications - Company Profile


No specific news. Still holding above short-term support.

Original Trade Description: Oct 2nd.

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges in the United States and internationally. The company operates in three segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, exploration, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, surveillance and reconnaissance, command, control, communications, computers and intelligence, and undersea systems and solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management; engineering support and sustainment for ground-based systems; and information technology and engineering managed services to government and commercial customers. The company was founded in 1895. Company description from FinViz.com.

Harris is a very strong defense company. As the description above states, they are very active in defense communications. This is a rapidly growing sector because of eavesdropping, jamming, spoofing or hacking into military communications as a clandestine attack in preparations for times of war. With the advent of drones this is becoming an even bigger area of trouble because a hacked drone can be stolen or even worse, used against friendly forces or population centers. Harris has 17,000 employees and nearly 8,000 engineers and scientists.

Harris shares exploded higher starting on the 14th and topped at $131 on the 20th. The stock is Dow reactive. When the Dow began to dip last week, Harris moved sideways. Shares broke out of consolidation on Monday to close at a new high. With North Korea stirring the pot, defense stocks are being bid higher.

Earnings Oct 31st.

I would not normally recommend a stock with this kind of short-term gain but the new high breakout could be the start of a new leg higher.

Update 10/3/17: Harris was awarded a $765 million contract to provide radios to the Navy for the next 5 years. Two months ago, they won a contract for $255 million to build radios for the US special operations forces. Last year they won part of a $12.7 billion 10-year contract to build radios for the Army.

Position 10/3/17:

Long Nov $135 call @ $2.40, see portfolio graphic for stop loss.

HTZ - Hertz Global - Company Profile


No specific news. Still holding over prior resistance.

Original Trade Description: Oct 7th.

Hertz Global Holdings, Inc., an airport general use vehicle rental company, engages in the vehicle rental business in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand. The company operates in three segments: U.S. RAC, International RAC, and All Other Operations. It offers vehicle rental services approximately from 1,600 airport rental locations and 2,600 off airport locations in the United States; and 1,400 airport rental locations and 4,100 off airport rental locations internationally to business and leisure customers. The company operates the Hertz, Dollar, and Thrifty vehicle rental brands in approximately 9,700 corporate and franchisee locations; and sells ancillary products and services. It also owns the vehicle leasing and fleet management business that operates the Firefly and Hertz 24/7 car sharing rental business in international markets; and sells vehicles through its Hertz Car Sales. As of December 31, 2016, the company operated a rental fleet of approximately 515,900 vehicles in the United States and 196,600 vehicles in international operations. Company description from FinViz.com.

Not only are used cars in short supply but the rental car business is hot in Texas and Florida because of all the insurance agents and construction crews that were imported from all over the country. Carpenters, electricians, home repair people of all types have migrated to the disaster areas. Consumers waiting on insurance proceeds need a way to get around town. Rental cars are scarce.

Not everyone is feeling the love for Hertz. Morgan Stanley recently downgraded the stock to underweight, which was good for a $4 drop but the rebound was quick and the stock closed at a ten-month high on Friday. The investing public sees the demand and they are picking up shares in expectations of good earnings.

Earnings Nov 7th.

I have to reach out to January to get the right option strike. There is no $27.50 for November. Just because we buy time, does not mean we have to use it.

Position 10/9/17:

Long Jan $27.50 call @ $2.90, see portfolio graphic for stop loss.

MU - Micron Technology - Company Profile


The semiconductor sector was down today and that impacted Micron.

Original Trade Description: October 9th.

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.

Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.

I am using January options to capture the earnings expectations in December.

Update 10/10/17: Shares of Micron rallied more than $1 in the regular session bur fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.

Update 10/11/17: Shares rebounded from the $2 selloff in afterhours to close down only 37 cents. Summit Redstone said buy the dip because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Instinet reiterated a buy rating and $45 target. Wells Fargo reiterated a buy rating and $45 target. Credit Suisse reiterated an outperform rating and $50 target.

Update 10/12/17: Micron priced its $1.2 billion, upsized secondary, at $41 after the close on Wednesday. Shares had closed at $41.61 and dipped today to close at $40.50. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Needham, Rajvinda Gill has a price target of $76. Let's hope he is right.

Position 10/10/17:

Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


Volatility actually rose again despite the positive Dow. Trouble ahead?

We still have plenty of time. The president is expected to cancel the Iranian nuclear deal this week and call for more sanctions. North Korea is expected to do something stupid again by the 18th.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time. It has been 468 days since a 5% decline.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss, see portfolio graphic for stop loss.

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