Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/7/2017

Table of Contents

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

Market Wrap

Small Cap Implosion

by Jim Brown

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The small cap indexes failed to rebound at the close and this could be trouble.

Market Statistics

The small caps typically lead the market both higher and lower but the big cap tech stocks filled that role over the last two weeks. The implosion in the small caps today could be bad for the overall market if this is an indication they are taking back control.

Over the last several weeks, the small cap indexes have been moving roughly sideways with a minor negative bias. As long as they were holding their major gains since August, investors were ok with the sideways trend. That changed on Tuesday and any further decline could poison the entire market.



Something spoiled sentiment this morning and it could have been the earnings from Priceline and TripAdvisor. Priceline (PCLN) shares fell -$257 to an 8-month low and the largest decline since they went public in 1999. The company reported earnings of $35.22 compared to estimates for $34.26. Revenue of $4.43 billion beat estimates for $4.34 billion. The company guided for Q4 earnings of $13.40-$14.00 and analysts were expecting $15.57. Priceline typically provides low guidance and normally they get away with it. They have guided lower for four consecutive quarters and 13 of the last 15 quarters. This time was different and 13 of 31 analysts downgraded the stock and cut their price targets. The average target fell from $2,116.50 to $2,021.07.

Here is the problem. Since they have a history of guiding lower, nothing they did this time was any different. What changed was the willingness by nervous investors to just shrug it off. This is a symptom of an overbought market. Investors are nervous and looking for any excuse to sell.


TripAdvisor (TRIP) is in the same sector and they reported earnings of 36 cents compared to estimates for 35 cents. Revenue of $439 million missed estimates for $451 million. They did not provide specific guidance but said competition was causing a reallocation of advertising capital and click-based and transaction revenue was expected to decline further in Q4. What declined immediately was their stock price with a 23% drop of $9.18. Investors are showing no patience in dealing with minor earnings misses as we near the end of the earnings cycle.


Red Robin (RRGB) was also hammered after disappointing results. The company reported earnings of 21 cents that missed estimates for 29 cents and were significantly below the 38 cents in the year ago quarter. Revenue of $304.2 million missed estimates for $309.3 million. Same store sales fell -0.1%. Rising labor costs and slowing customer traffic across the entire restaurant industry took its toll. They guided for the full year for earnings of $2.16-$2.31, down sharply from the $2.80-$3.10 in prior guidance. Shares fell -29% on the news.


Avis Budget Group (CAR) reported earnings of $3.10 that beat estimates for $3.04. Revenue of $2.75 billion missed estimates for $2.77 billion. The company guided for full year earnings of $2.45-$2.65 and revenue in the $8.8-$8.9 billion range. Avis said the hurricanes cost them money because of damaged cars and the expenses of moving cars from other parts of the country into the hurricane areas after the storms had passed. Investors had expected increased profits as a result of the storms. Shares were knocked for 15% decline.


Competitor Hertz Global (HTZ) reports earnings on Thursday but their shares were knocked for a 17% decline on the Avis Budget news.


Valeant Pharmaceuticals (VRX) reported earnings of $1.04 compared to estimates for 90 cents. Revenue of $2.22 billion beat estimates for $2.17 billion. They guided for the full year for revenue of $8.65-$8.8 billion. Valeant said it had given up on its $1 billion bet on "female Viagra." Valeant bought Sprout Pharmaceuticals in 2015 for $1 billion and their only drug was Addyl, supposedly the equivalent of Viagra for women. I would imagine those were some interesting drug trials. After two years of trials and sluggish sales, they sold the drug rights for a 6% future royalty and had to loan the buyer $25 million. The buyer was an investor in Sprout when Valeant acquired the company. Reportedly, the drug is expensive and cannot be used in conjunction with a lot of other drugs including alcohol. Shares of Valeant rose 17% on the earnings.


Mallinckrodt (MNK) reported earnings of $1.97 that beat estimates for $1.80. Revenue of $793.9 million fell -10.9% and missed estimates for $806.7 million. Sales of specialty generics fell -21.1% to $189.1 million. Sales of Acthar Gel fell -5.6% and the company said the decline would continue in the current quarter. The company said articles in Barron's about the questionable effectiveness of the drug and articles dealing with their also questionable marketing practices had weighed on sales. Shares fell 35% on the earnings.


TrueCar (TRUE) reported earnings of 2 cents that matched analyst estimates. Revenue of $82.4 million missed estimates for $86.7 million. Cars sold rose 15% but revenue per car fell from $319 to $306. Average revenue per dealer fell 5% to $5,319. They said marketing issues were causing a decline in sales and the situation with their major partner may not recover. Shares collapsed 35%.


After the bell, Zillow Group (ZG) reported earnings of 19 cents on revenue of $281.8 million. Analysts were expecting 17 cents and $277 million. They guided for the current quarter for revenue of $274-$279 million and full year revenue of $1.07 billion. Shares spiked to $44 in afterhours but fell back to close at $40.80 and only a 60-cent gain.


Snap Inc reported revenue of $208.9 million and missed estimates for $235.5 million. Daily average users at 178 million were below estimates for 180.5 million. This compares to more than 300 million for Facebook's copycat product. The company posted a loss of 14 cents that beat estimates for 15 cents. The company said their app was hard to use and advertisers were frustrated and the price per ad fell 60% because of a transition to an auction based bidding system. Shares fell sharply in afterhours.


Lending Club (LC) reported earnings of 3 cents that matched estimates. Revenue of $154 million missed estimates for $157 million. They guided for revenue of $158-$163 million in Q4 with a loss of $3-$7 million. Analysts were expecting $173 million. Shares fell sharply in afterhours.


Fossil (FOSL) reported an expected a full year loss of $7.75-$8.30 per share compared to estimates for $5.11. They expect revenue to decline -10.5% to $2.72-$2.78 billion. Analysts were expecting $2.78 billion. For Q3 they lost 11 cents compared to estimates for a loss of 24 cents. Revenue declined from $738 million to $688.7 million and analysts were expecting $649 million. Shares fell 15% in afterhours.


The next earnings highlight will be Nvidia on Thursday after the close. This had better be a blowout after the constant gains and another new high close at $212 today or there will be a lot of pain.


On the economic front, the Core Logic Home Price index rose 7.0% for September after a 6.9% showing in August. Yes, home prices are still going up. There is nothing to see here, move along.

Consumer credit for September rose from $13.1 billion to $20.8 billion and well over expectations for $16.5 billion. That is the highest level since November 2016. Credit card spending after the hurricanes was credited with part of the gains.

The Job Openings and Labor Turnover Survey (JOLTS) showed the openings rate was unchanged at 4.0% for September. There are 6.093 million current job openings. Hires of 5.273 million rose 3.6%. Separations of 5.240 million also rose 3.6%. Quits of 3.182 million rose 2.2%. Layoffs of 1.703 million rose 1.2%. These numbers show the job market remains strong. Workers are not afraid to quit and move to new jobs because of a better opportunity.


After the bell the API inventory numbers showed a decline of 1.562 million barrels of oil, compared to expectations for a drop of -2.7 million barrels. Gasoline inventories rose 520,000 barrels compared to expectations for a decline of -2.25 million. Distillate inventories fell -3.133 million barrels compared to estimates for -1.85 million. Crude prices fell back to $57 on the news.

Crude traded at a 2-year high of $57.69 intraday on the Game of Thrones being played out in Saudi Arabia by the Crown Prince Mohammed Bin Salman, otherwise known as MBS. The prince rounded up everyone that could be a competitor to his eventual control when the king abdicates late this year or early 2018. A dozen princes are being held captive in the Four Seasons hotel while dozens of ministers, officials and even ex ministers are being held in undisclosed locations. The prince said this was a corruption sweep but everyone knows he is clearing the playing field of anyone that could question his authority. The uncertainty in Saudi Arabia and the return of the Niger Delta Avengers in Nigeria is supporting oil prices after a major short squeeze.



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Markets

The big cap indexes recovered from their intraday losses and returned to neutral territory. The S&P managed to fight back from a 7-point decline to close only fractionally negative. The big cap dip buyers are alive and well and primarily in the big cap tech stocks.

The S&P continues to move farther above uptrend support and horizontal support at 2,565. The S&P has now gone 493 days without a 5% decline when we normally average at least two per year. As long as the index continues to post minor gains rather than a dozen points at a time, the rally can continue. That slow process is a meltup with opportunities for orderly exits and entries without a lot of drama.

Any portfolio manager that is still holding cash going into yearend is in a panic. They are being forced to hold their nose and buy something in order to maintain their position in the manager rankings and insure a yearend bonus. They are terrified the market could suddenly correct but even more afraid of being left behind.

We are setting up for a monster decline in January. If the market makes it through the end of December without any material decline, there will be significant end of year window dressing and beginning of year window undressing.

This means minor dips should continue to be bought but this week and next is the normal post earnings depression period so there could be some volatility ahead.


The Dow recovered from a 66-point intraday drop to gain a minimal 9 points after a 9-point gain on Monday and 22-point gain on Friday. The Dow is positively creeping higher as opposed to the surge we saw at the end of October. The Dow is already experiencing the post earnings depression phase because 25 components have already reported and there is nothing to provide lift. The Dow needs a catalyst to push it higher and I do not know what that would be. There are far more chances of a negative catalyst over the next couple of weeks.



The Nasdaq was handicapped by the 250 point decline in Priceline. Despite the big decline the stock only erased 11 points from the Nasdaq 100 and the index actually closed positive. Apple, Google and Qualcomm nearly erased the Priceline drop with their addition of 10 points of gains.

The Nasdaq has been the market leader over the last two weeks with nearly a 250 point gain. That could be changing. If you noticed the trend in the earnings reports today, the majority were massive declines. The earnings lift is rapidly fading.





The breakdown in the small cap stocks could be a problem. That would indicate portfolio managers have finally decided to take some profit off the table. If the declines continue, they could rapidly worsen because there is a major air pocket under recent support.


Personally, I would welcome a dip to buy but I would not rush into the first big drop. The dip buyers are still alive and well but the selling volume has been miniscule. If a real sales trend develops, the volume could quickly overwhelm the dippers.

Maintain some cash in your account in case a real opportunity appears.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Back to Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

This monster drug company has found support after a post earnings plunge. Gilead is expected to see revenue of $25 billion for all of 2017 despite a decline in its Hep-C drugs.



NEW DIRECTIONAL CALL PLAYS

GILD - Gilead Sciences - Company Profile

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Buy Feb $75 Call, currently $3.30, initial stop loss $68.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Minor Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes traded a lot lower intraday but the Dow and S&P recovered to close neutral. The Dow gained 9 points for the third day of minimal gains. The S&P recovered from a 7-point loss to close only fractionally negative. The Nasdaq 100 actually recovered to post a gain of 7 points. The market had a chance to decline on profit taking and failed to do so. Dip buyers are alive and well.



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


STX - Seagate Technology
The long call position was entered at the open.



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BULLISH Play Updates

AABA - Altaba - Company Profile

Comments:

Oppenheimer raised the price target on Altaba to $99.

Alibaba's new Global Shopping Festival is coming on November 11th and that will produce a lot of headlines in the days ahead of the event. In 2016, they sold $17.7 billion on that day, up 32% from the prior year. With 549 million active customers, they could do well over $20 billion this year.

Original Trade Description: October 18th.

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

Update 11/2: Alibaba reported an outstanding quarter with a 61% rise in revenue. They raised guidance for 2018 for a 49-53% rise in revenue, up from prior guidance of 45-49%. Their cloud computing business revenue rose 99%. Earnings of $1.29 bear estimates for $1.04. Revenue of $8.29 billion beat estimates for $7.86 billion. Monthly actuve users rose 3.8% to 549 million. The current quarter is going to show explosive growth given the expanded Single Day promotion.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Position 10/19/17:

Long Jan $70 call @ $3.10, see portfolio graphic for stop loss.


ADI - Analog Devices - Company Profile

Comments:

No specific news. Only a minor decline from the record high close.

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.


AXP - American Express - Company Profile

Comments:

No specific news. Fighting resistance at $96.50.

Original Trade Description: November 4th

American Express Company, together with its subsidiaries, provides charge and credit payment card products and travel-related services to consumers and businesses worldwide. It operates through four segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services. The company's products and services include charge and credit card products, as well as other payment and financing products; network services; expense management products and services; travel-related services; and stored value/prepaid products. Its products and services also comprise merchant acquisition and processing, servicing and settlement, merchant financing, point-of-sale marketing, and information products and services for merchants; and fraud prevention services, as well as the design and operation of customer loyalty programs. The company sells its products and services to consumers, small businesses, mid-sized companies, and large corporations through online applications, direct mail, in-house teams, third-party vendors, and direct response advertising. American Express Company was founded in 1850 and is headquartered in New York, New York. Company description from FinViz.com.

The company was founded in 1850. Did you really think a temporary blip from the change at Costco was going to impact them long term? Of course not although analysts were pretty negative for several months. Since that fiasco shares have recovered nicely and closed at a record high on Friday.

They posted Q3 earnings of $1.50 that beat estimates for $1.47. Revenue of $8.44 billion beat estimates for $8.32 billion. Revenues rose 9% and earnings rose 19%. They guided for full year earnings of $5.80-$5.90, up from prior guidance of $5.60-$5.80.

Earnings January 17th.

The CEO said "we are completing a two year turnaround ahead of plan with strong revenue and earnings growth across all our business segments. We added products and benefits, shown continued strength in acquiring new customers and expanded our merchant network. Loan growth continued to be strong and credit metrics were again in line with our expectations. We contained operating costs and reallocated a significant part of those savings to fund many of the initiatives that are driving growth across the business."

Shares have been moving mostly sideways with a slight upward bias the last 7 days but I believe they are about to break out for a new leg higher.

Position 11/6/17:

Long Jan $100 call @ $1.67, see portfolio graphic for stop loss.


COST - Costco - Company Profile

Comments:

No specific news. Recovered Monday's loss.

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.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Update 10/20: Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member.

Update 11/2: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.

Position 10/16/17:

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


PYPL - PayPal - Company Profile

Comments:

No specific news.

Original Trade Description: October 25th.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss


STX - Seagate Technology - Company Profile

Comments:

No specific news. Minor decline.

Original Trade Description: November 6th

Seagate Technology plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company manufactures and distributes hard disk drives, solid state drives and their related controllers, solid state hybrid drives, and storage subsystems. Its products are used in enterprise servers and storage systems applications; client compute applications, primarily for desktop and mobile computing; and client non-compute applications, including various end user devices, such as portable external storage systems, surveillance systems, network-attached storage, digital video recorders, and gaming consoles. The company offers external backup storage solutions under the Backup Plus and Expansion product lines, as well as under the Maxtor and LaCie brand names available in capacities up to 120 terabytes. It sells its products primarily to original equipment manufacturers, distributors, and retailers. Company description from FinViz.com.

Earnings January 22nd.

Seagate posted earnings of 96 cents that beat estimates for 86 cents. Revenue of $2.63 billion beat estimates for $2.53 billion despite a 6% decline. The declared a quarterly dividend of 63 cents payable January 3rd to holders on Dec 20th. During the quarter they returned $350 million to shareholders through dividends and stock repurchases. Cash on hand was $2.3 billion.

The company said demand was increasing as the move to cloud storage was creating the need for massive amounts of data bandwidth, storage, manipulation and retrieval. The average storage per drive shipped was 1.7 terabytes with the average selling price $64 per drive. Hard drive storage is a commodity business where existing technology is competing on a byte per dollar basis and new technology is the only way to expand ASPs. Seagate is progressing in that battle with larger and larger drives that operate at faster speeds and last longer between failures. With many businesses moving to SSD storage, Western Digital has the lead there because of its partnership with Toshiba. However, Seagate just signed on to the consortium that is buying the other half of the Toshiba memory business that WDC does not own. This will enable Seagate to acquire memory for the lowest prices possible and compete with WDC in the SSD arena.

Seagate shares spiked from $35 to $40 on the earnings. They declined back to $36 where they found support and it appears a rebound has begun. Shares were already trending higher before the earnings and this could be an extension of that trend.

Position 11/7/17:

Long Jan $39 call @ $1.14, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

Today was a really strange market. The indexes were down intraday but the VIX barely moved.

If we ever hit that exit target at 16 it means we are probably going to lose other long positions. This is insurance against that potential decline.

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 493 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.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

The Dow continues to be weak despite the 8-point gain today. The option is only worth 34 cents today. With the Dow momentum slowing, I think we should hold it until it expires.

Original Trade Description: October 21st.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is extremely overbought. It is due for a rest. There are 12 Dow components reporting earnings this week. Volatility will occur but we do not know in which direction. Since all the Dow gainers are already up strongly over the last several weeks, there is a good chance we could see some declines.

This is highly speculative. I am using November options because they are cheap but they will require a substantial move in the next ten days or they will decay quickly. This will be a quick trade.

Buy Nov $232 put, currently $1.86, no initial stop loss.


OMC - Omnicom Group - Company Profile

Comments:

No specific news. New 2-yr low close.

Original Trade Description: Nov 1st.

Omnicom Group Inc., together with its subsidiaries, provides advertising, marketing, and corporate communications services. The company offers a range of services in the areas of advertising, customer relationship management, or CRM, public relations, and specialty communications. Its services comprise advertising, brand consultancy, content marketing, corporate social responsibility consulting, crisis communication, custom publishing, data analytics, database management, environmental design, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare communications, and instore design services. The company's services also include direct, entertainment, experiential, and field, interactive, mobile, multi-cultural, non-profit, promotional, retail, search engine, social media, and sports and event marketing services; and investor relations, marketing research, media planning and buying, organizational communications, package design, product placement, public affairs, public relations, and reputation consulting services. It operates in North America, Latin America, Europe, the Middle East, Africa, Australia, China, India, Japan, Korea, New Zealand, Singapore, and other Asian countries. Omnicom Group Inc. was founded in 1944 and is based in New York, New York. Company description from FinViz.com.

Omnicom reported Q3 earnings of $1.13 that beat estimates for $1.10. Revenue of $3.72 billion declined -1.9% and narrowly beat estimates for $3.71 billion.

Expected earnings Jan 16th.

Omnicom was the only advertising agency that posted decent earnings. Interpublic Group (IPG) and WPP Group (WPPGY) both lowered guidance as their biggest clients like McDonalds, Procter & Gamble, J&J, etc, all began to shrink advertising budgets. Amazon has turned into a seller of everything and companies like PG and JNJ are suffering from product price declines and less buying from normal wholesale customers.

McDonalds said this week they were going to review their $2 billion advertising budget and see how much they needed to divert to social sites like Instagram and Facebook. The advertising being served on Facebook does not need a multibillion dollar ad agency to place it. Everything is online and companies have instant access to more than 3 billion consumers between Facebook, YouTube and the Google Chrome browser. The historical advertising business is undergoing a revolution.

Shares of OMC have declined to a two-year low and with the other companies lowering guidance and Facebook posting blowout advertising numbers tonight, we could see lower lows on OMC.

Position 11//2/17:

Long $65 put @ $1.70, see portfolio graphic for stop loss.


PG - Procter & Gamble - Company Profile

Comments:

PG rebounded nearly $1 despite news from the "Paradise Papers" that they received a special tax break of $169 million from Dutch lawmakers. The "special" deal was found to have only been signed by one person and the law requires two signatures by Dutch officials. The odds are good they will have to pay some of that windfall. I do not understand why the stock rallied in the face of an unexpected expense.

Original Trade Description: October 28th.

The Procter & Gamble Company provides branded consumer packaged goods to consumers in the United States, Canada, Puerto Rico, Europe, the Asia Pacific, Greater China, Latin America, India, the Middle East, and Africa. The company's Beauty segment offers hair care products, including conditioners, shampoos, styling aids, and treatments; and skin and personal care products, such as antiperspirant and deodorant, personal cleansing, and skin care products. It markets its products under Head & Shoulders, Pantene, Rejoice, Olay, Old Spice, Safeguard, and SK-II brands. The company's Grooming segment provides shave care products comprising female and male blades and razors, pre- and post-shave products, and other shave care products; and appliances that include electric razors and epilators under the Braun, Fusion, Gillette, Mach3, Prestobarba, and Venus brands. Its Health Care segment offers toothbrushes, toothpastes, and other oral care products; and gastrointestinal, rapid diagnostics, respiratory, vitamin/mineral/supplement, and other personal health care products under the Crest, Oral-B, Prilosec, and Vicks brands. The company's Fabric & Home Care segment provides fabric enhancers, laundry additives, and laundry detergents; and air care, dish care, P&G professional, and surface care products under the Ariel, Downy, Gain, Tide, Cascade, Dawn, Febreze, Mr. Clean, and Swiffer brands. Its Baby, Feminine & Family Care segment offers baby wipes, diapers, and pants; adult incontinence and feminine care products; and paper towels, tissues, and toilet paper under the Luvs, Pampers, Always, Tampax, Bounty, and Charmin brands. The company sells its products through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores, and pharmacies. The Procter & Gamble Company was founded in 1837 and is based in Cincinnati, Ohio. Company description from FinViz.com.

P&G survived a proxy fight from activist investor Nelson Peltz but that does not mean their problems are over. Peltz said, "I believe that there is a direct correlation between how poorly a company is doing and how big of a fight they put up." Peltz estimated the company spent $100 million in their fight to keep him off the board. He said that is a lot of money for a company to spend to keep a knowledgeable investor from seeing the real numbers inside the company. Peltz has not conceded and an official recount of the votes is being conducted.

PG reported adjusted earnings of $1.09 that beat estimates by a penny. Revenue of $16.65 billion rose only 1% and missed estimates for $16.69 billion. Revenue from their grooming business has declined for three consecutive quarters. Peltz believes the entire company is in decline and they are massaging the numbers to put some lipstick on the pig. That only works for a short time.

Earnings January 19th.

Shares have declined $5 since the Oct 18th earnings and they are on the verge of breaking below 52-week support at $86. If the market is going to weaken on post earnings depression after this week, PG could be a leader to the downside given the negative analyst views.

Position 10/31/17:

Long Jan $85 Put @ $1.88, see portfolio graphic for stop loss.




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