Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/14/2017

Table of Contents

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

Market Wrap

Back from the Brink

by Jim Brown

Click here to email Jim Brown

We saw another decent intraday rebound after the Dow lost -168 points by 10:00.

Market Statistics

Tuesday was the fourth consecutive day where the Dow gapped lower at the open and then rebounded off the lows. Support at the 23,300 level is being tested every day and this morning's dip hit 23,271. A close at that level would have been a three week low and very negative for market sentiment. The Russell 2000 also clawed its way back from a morning drop to 1,465 and 10 points under prior support at 1,475. However, the small caps posted another lower high and lower close.

The strong intraday rebounds give the appearance that the market is doing ok when the closing numbers show only a single digit gain or loss. Everyone's nerves are calmed and the overall trend is not damaged. However, every one of these big dips chips away at market sentiment. As we move farther into the post earnings depression period there is less conviction to power the next rebound.


The damage would have been a lot worse except for the support of HD, UTX, CAT and MMM. Those four stocks added about 50 Dow points while GS, AAPL, DIS and DWDP subtracted about 65 points. The A/D line on the Dow was dead even at 15/15. For quick reference in the future, the small hash market on the right side of the graphic represents the middle of the Dow list.


The damage would also have been a lot worse without the news headline at 10:35 that Mohamed El-Erian was being considered as Fed Vice Chairman. El-Erian is very well respected on Wall Street and would be a good balance for Jay Powell as Fed Chairman. The Dow rebounded about 130 points on the news but traded in a very narrow 50-point range the rest of the day.


On the economic front the Producer Price Index for October rose +0.4% compared to estimates for a +0.1% gain and a +0.4% gain in September. Goods prices rose +0.3%, services +0.5% and core goods, excluding food and energy, +0.3%. These numbers lifted the 12 months trailing inflation at the producer level to 2.7% and a cycle high. Energy prices were still blamed for the rise in the headline number with oil prices up and fuel prices still high from the hurricane impact.

Despite the rise in producer prices, there are a growing number of analysts that believe the December rate hike is no longer guaranteed. However, the Fed Funds Futures are still rating the chance of a hike at 100%.


The NFIB Small Business Optimism Index for October rose from 103.0 to 103.8 and continues to project solid optimism for the sector. The percentage of businesses that expect higher sales over the next six months rose from 15% to 21%. The percentage with current job openings rose from 30% to 35%. Those thinking now was a good time to expand rose from 17% to 23%. Some 35% said they had at least one job opening they could not fill because of a lack of qualified candidates.

This was a solid report. The NFIB was initially against the tax reform package but have switched to supporting it with the current modifications.

The calendar for the rest of the week is busy but none of these reports are expected to move the market.


The earnings calendar continues to shrink with a decline in quantity and quality of earnings reports. Dow component Cisco Systems reports after the bell on Wednesday and Wal-Mart reports before the bell on Thursday. That means we could see some Dow volatility because of earnings on Thursday but expectations are light.


Home Depot (HD) was the big earnings report this morning. The company reported earnings of $1.84 that beat the street by 3 cents. That was up from the $1.60 it earned in the year ago quarter. Revenue rose from $23.15 billion to $25.03 billion and beat estimates for $24.52 billion. Same store sales rose 7.9% system wide and 7.7% in the USA. Big ticket transactions over $900 rose 12.1%. That represents 22% of the company's sales. Home Depot said about $282 million in revenue was a direct result of the hurricanes but they also lost $51 million from store damage and costs of additional merchandise movement to different locations. They guided for the full year for earnings of $7.36 and that was 3 cents above analyst estimates. Revenue is expected to rise 6.3% with same store sales up 6.5%. It was a very good quarter.


Advanced Auto Parts (AAP) rallied 16% after reporting earnings of $1.43 compared to estimates for $1.20. Revenue of $2.18 billion missed estimates for $2.21 billion but apparently, investors did not care. Shares were down 51% year to date so expectations were minimal. They announced a dividend of 6 cents payable Jan 5th to holders on Dec 22nd.


Dick's Sporting Goods (DKS) reported earnings of 30 cents that beat estimates for 26 cents. Revenue rose 7.4% to $1.94 billion and beating estimates slightly. They guided for the current quarter for earnings of $1.12-$1.24 compared to analyst estimates for $1.10. They guided for the full year for earnings of $2.92-$3.04, up from prior guidance of $2.85-$3.05. However, they warned that earnings could fall as much as 20% in 2018 as they boost online spending in an effort to improve their E-commerce sales. Shares declined slightly on the news.


TJX Cos (TJX) reported earnings of $1 that matched estimates. Revenue of $8.76 billion missed estimates for $8.86 billion. Same store sales were flat and missed estimates for 2.4% growth. The company said the hurricanes and warm weather had impacted results. The hurricanes reduced earnings by 3 cents according to the CEO. They guided for Q4 for earnings of $1.25-$1.27 and analysts were expecting $1.27. Same store sales are expected to be 1-2% and estimates were for 2.7% growth. Shares fell -4% on the news.


Beazer Homes (BZH) reported earnings of $1.03 on revenue of $665.5 million. Estimates were 53 cents and $647.85 million. I am not sure if the $1.03 and 53-cents are apples to apples comparisons. That seems like an enormous beat but it was not reported that way. Adjusted EDITDA rose 14.4% to $178.8 million. Homebuilding revenue of $665.5 million rose 6.2%. Home deliveries of 1,904 homes rose 2.6%. The average selling price rose 4.6% to $349,500. Homebuilding gross margins rose 17.0%. New orders declined -2.3% to 1,315 (hurricanes). Cash at the end of the quarter was $292.1 million. Total backlog of 1,855 homes rose 2.0% to $665.8 million. Shares rallied to a new 3-year closing high.


After the bell, IBM shares dipped to $146.37 after news broke that Warren Buffett had cut his stake in the company by 32% from 54.1 million shares to 37 million. This was at the end of the September quarter and disclosed in the recent SEC filing. That reduced his stake from 81 million shares at the end of 2016. Shares rebounded from the headline drop to close at $147.91. This is new news but the trades happened in Q3.

Buffett added to his stake in Apple with the purchase of 3.9 million shares to bring his total to 134 million. He also bought 679 million shares in Bank of America.


Apple shares declined slightly in afterhours on a new rumor about production delays with the 3D sensors. This has been a persistent rumor since production began many months ago. Adding to this was news that Foxconn, the company that assembles the phones for Apple, posted a 39% decline in profits due to later than expected shipments because of a component shortage. Rumors are already flowing about features on the September 2018 iPhone updates. Reportedly, there will be a 6.46 inch display option for the iPhone X compared to the current 5.8 inch screen. There are reportedly going to be two "high end" iPhones that will be a successor to the model X. All new phones will have the TruDepth camera systems.


Buffalo Wild Wings (BWLD) shares soared after PE firm Roark Capital made an unsolicited acquisition offer of $150 per share or $2.3 billion. Chicken demand has been hot recently and chicken prices have been rising steadily. This has been squeezing margins for places like BWLD and Wingstop (WING). Roark already has multiple restaurant chains in their portfolio including Arby's Auntie Anne's, Cinnabon, Carl's Jr, Hardee's, Corner Bakery, Jimmy John's and many others.


Wal-Mart (WMT) said it was teaming up with Lord & Taylor and will create a Lord & Taylor store on Walmart.com. The company said many of their customers were looking for higher end merchandise and they were going to create a "higher end destination" for L&T. How this will work is still unknown but I would bet that other retailers also approach Wal-Mart about this same "store within a store" online concept. They will not be selling L&T merchandise in their retail locations.


The API inventory report showed a build of 6.513 million barrels and analysts were expecting a decline of -1.4 million. Gasoline inventories rose 2.399 million barrels compared to estimates for a -1.1 million barrel decline. Distillate inventories fell -2.527 million barrels and analysts expected a decline of 500,000 barrels. This coupled with the IEA cutting global demand forecasts for 2018 caused a huge -3% decline in crude prices. This also weighed on the market as energy equities declines sharply.



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Several years ago, we offered a free silver dollar with an EOY subscription. It was our most successful promotion since the Financial Crisis. We are going to repeat that again in 2017 with a specific coin this time. Each EOY subscriber will receive a genuine Morgan Dollar, which is thought to be one of the best looking silver coins ever minted. These make great Christmas presents!

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If you already know you want to renew your subscription at the cheapest price of the year then click the link below. As in past years, we are offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. The Early Bird Discount Offer expires after November 14th and the price will revert to normal.

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Markets

Some analysts believe the "corruption sweep" in Saudi Arabia could be partially responsible for the weakness in the market. There have been short periods of significant selling in multiple world markets including the USA as we saw this morning. On Friday, there were four million ounces of gold sold in about a 10-minute period. They theorize the asset freeze in Saudi Arabia has caused cash flow problems and some Saudi investors are scrambling to raise cash. There was some talk that other Middle East sovereign wealth funds may be raising cash on worries that a war could breakout between Saudi Arabia, Iran and others. With the blockade of Qatar, the Iran proxy war in Yemen, saber rattling over Lebanon, the bombing of the pipeline to Bahrain and heated words flying all around the region, there could be some reasons to reduce global investments and raise cash. We will never know if this is true but sometimes rumors are just as good a reason to sell as headlines.

Asian markets are declining overnight and the S&P futures have been down as much as 10 points in recent trading. They have stabilized around -7.50 but there is a lot of darkness before morning. There are multiple reasons why the markets could be down but I do not have time today to cover them all.

The Saudi Arabia factor could be one that is depressing the Asian markets. Also, Chinese economic data was weak this morning and that could be another reason. Since most of the overseas markets have had huge gains over the last several months, this could be simple profit taking.

In the US, the tax debate is running 24/7 and it seems like every day we get some new interpretation of the current rough draft of the proposals. The senate is currently marking up their bill and we learned today there are 355 amendments that have been presented. This is going to be a hotly contested mishmash of everyone's idea of trade offs and methods of payment. The eventual concoction will be a witch's brew of hundreds of ideas both positive and negative.

The head of the house finance committee said today they were committed to getting the house and senate bills passed, moved through the conference committee and to the floor for an actual vote before the holidays. Unfortunately, there are only about 14 days when Congress will be in session between now and the holidays. Getting a major tax reform package passed by December 15th is going to be next to impossible. There is also the budget battle and debt ceiling deadline on December 8th. Ryan said they would probably punt that into 2018 with a continuing resolution to keep from cluttering up the potential for the tax vote.


The challenge for the market is the daily talking points out of both houses of congress. Every reporter is jumping at every chance to take a 5-sentence sound bite directly to the airwaves with their own interpretation of what it means.

This is going to be the Washing version of the game telephone where everyone tells the next person in line something and then they pass it to the next person and by the time it gets to the end it is nothing like the original content.

The market is going to have to live with extreme political uncertainty for the next four weeks. That in addition to the post earnings depression cycle, suggests the markets could remain volatile.

In the last two weeks of November in 2016, the S&P lost 69 points on post earnings depression and tax loss selling. I am hoping we do not get a repeat.

It has been 500 days since the S&P has seen a 5% decline. Today that would be 129 points. We typically average two 5% declines a year.

Investors have been pricing in a drop in the corporate tax rate to 20%. That is believed to add $15 to S&P earnings and 270 S&P points if it occurs. Most analysts believe some of those gains have been pulled into 2017 and would be immediately erased if the tax bill fails. Wells Fargo said on Monday they expect a 120-150 point decline at any time now and should the headlines on taxes turn negative it could be immediate. The senate version of the bill postpones those tax cuts until 2019 and that news is what crashed the market last Thursday.

The S&P retested support at 2,565 and rebounded to only lose 6 points for the day. The index is only 16 points away from its high and so far, this is just a normal consolidation pattern.


The Dow is consolidating in a sideways pattern until support at 23,300 fails. The index is only slightly below its high close of 23,563. That is just over a 1% decline and definitely nothing to be worried about. However, if that support fails, there is a huge air pocket down to 22,275. The dip buyers are alive and well and as long as the intraday rebounds continue, the market will be fine. If we break support and start closing on the lows of the day, that is when we should be worried.


The big cap tech stocks were evenly mixed today but the Nasdaq declined 19 points. The index is respecting uptrend support and we could lose another 150 points and maintain the current positive trend. It would be painful but it would only reinforce the trend over the last year of the triple digit dips every 4 weeks.



The biggest problem remains the small caps. The Russell 2000 made a lower close and I would not buy this chart. This chart is suggesting a continued decline and there is a lot of air below the current level and real support.

The Russell typically leads the market both higher and lower and this weakness is definitely a negative indicator for market sentiment.


With the global markets experiencing volatility, our small caps leading to the downside and the tax battle underway in Washington, there is likely to be a catalyst in our future. Unfortunately, that catalyst may be negative. I would not be a buyer of this dip at this time. Maybe in a day or so we will see a reversal and the internals will improve. There is always another trading day if you have capital in your account. Be patient, good things come to those who wait.

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

I sincerely apologize for the lateness of the newsletter tonight. We had some technical issues with a server this evening. Never a dull moment!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


TODAY IS THE LAST DAY TO SAVE $50 on your EOY Subscription
!!! This Offer Expires Today !!!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 20 years this Thanksgiving.

Several years ago, we offered a free silver dollar with an EOY subscription. It was our most successful promotion since the Financial Crisis. We are going to repeat that again in 2017 with a specific coin this time. Each EOY subscriber will receive a genuine Morgan Dollar, which is thought to be one of the best looking silver coins ever minted. These make great Christmas presents!

Morgan Dollar

If you already know you want to renew your subscription at the cheapest price of the year then click the link below. As in past years, we are offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. The Early Bird Discount Offer expires after November 14th and the price will revert to normal.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL



New Option Plays

China Falling

by Jim Brown

Click here to email Jim Brown

Editors Note:

Asian markets are in the tank tonight with the Nikkei down -1%. The Shanghai is down 0.7% and the Hong Kong -.7%. The S&P futures have been down -10 and are currently -8. Global market volatility is increasing and that typically carries over into the US markets. There is no reason to add risk into an implied gap down open.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Another Support Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P retested support and closed at lower highs. The Dow punched through support at 23,300 intraday but rebounded 138 points to close with only a minor loss. The S&P retested support at 2,565 and also rebounded for a minor loss. The markets are growing progressively weaker even though the closing numbers are showing minimal gains and losses. This is a market waiting for a catalyst and that catalyst could be negative.

I am leaving most of the stop losses wider than normal in hopes we will not be stopped if the market really does take a dive.



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


FB - Facebook
The long call position was entered at the open.

OMC - Omnicom Group
The long put position was stopped at the open.

VIX - Volatility Index
The long call position is expiring.



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

AABA - Altaba - Company Profile

Comments:

The sell the news trade after Singles Day should be over. Alibaba shares declined back to support at $181.50 and held. A further decline will stop us out.

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.

Update 11/13: Alibaba shares rose slightly after the new record of $25.3 billion in Singles Day sales. Then investors sold the news. A key point that is not getting any press is that Alibaba is extending many of the promotions for the 24 days starting with Singles Day. That means Q4 earnings are going to have 23 extra days of sales hype.

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

Position 11/10/17:

Long Jan $72.50 call @ $3.48, see portfolio graphic for stop loss.

Position 10/19/17:
Previously Closed 11/9: Long Jan $70 call @ $3.10, exit $3.72, +.62 gain.


COST - Costco - Company Profile

Comments:

No specific news. Monster decline of 2 cents from the 5-month high. Shares are holding their gains.

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.


FB - Facebook - Company Profile

Comments:

No specific news. Shares are still consolidating from their earnings bounce.

Original Trade Description: November 13th

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. As of December 31, 2016, it had approximately 1.23 billion daily active users. Facebook, Inc. was founded in 2004 and is headquartered in Menlo Park, California. Company description from FinViz.com.

Everyone should know this story. There is no need to go into lengthy detail on this tech giant. They posted blow out earnings and spiked from $170 to $183. Shares have traded sideways to down for the last two weeks but they have quit declining with three consecutive days at $178.

Analysts are targeting well over $200 because Facebook is printing money. Their growth is outstanding and they still have numerous web properties they have not yet monetized. They are launching Facebook TV, original content, the list of new opportunities is endless.

RBC Capital raised their price target from $190 to $230 to match Mizuho. Monnes Crespi Hardt is $210, Aegis Capital $215, Needham $215, etc. There is plenty of upside from here. Facebook is the largest earnings grower in the space.

They have eradicated Snapchat. Apple reported that Snapchat is no longer in the top 10 downloads from the Apple store.

I believe FB is about to break out of its post earnings depression phase and begin a new move higher. The option premiums are very high so I am recommending a February spread to capture inflated option premiums ahead of earnings.

Position 11/14/17:

Long Feb $185 call @ $6.33, see portfolio graphic for stop loss.
Short Feb $200 call @ $2.30, see portfolio graphic for stop loss.
Net debit $4.03.


GILD - Gilead Sciences - Company Profile

Comments:

No specific news. Shares broke below initial support and dropped to $70. There was a decent intraday rebound but this is troubling.

Original Trade Description: November 7th

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.

Update 11/8/17: Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.


MDCO - Medicines Co - Company Profile

Comments:

No specific news.

Original Trade Description: November 8th

The Medicines Company, a biopharmaceutical company, provides medicines for patients in acute and intensive care hospitals worldwide. The company markets Angiomax, an intravenous direct thrombin inhibitor used as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, and for patients undergoing percutaneous coronary intervention; Ionsys, a fentanyl iontophoretic transdermal system for the short term management of acute postoperative pain for adults requiring opioid analgesia in the hospital. It also markets Minocin IV, an intravenous formulation of a tetracycline-class antibiotic used for the treatment of infections due to susceptible strains of designated gram-negative bacteria; and Orbactiv, an intravenous antibiotic used for the treatment of adult patients with acute bacterial skin and skin structure infections, or caused or suspected to be caused by susceptible isolates of designated gram-positive microorganisms. The company's approved products include Adenosine, Amiodarone, Esmolol, and Milrinone for acute cardiovascular; Azithromycin and Clindamycin for serious infectious disease; and Haloperidol, Midazolam, Ondansetron, and Rocuronium for surgery and perioperative treatment. Its research and development stage products comprise Carbavance, an antibiotic agent that has completed Phase III development stage for the treatment of hospitalized patients with serious gram-negative bacterial infections; Inclisiran, a synthesis inhibitor for the potential treatment of hypercholesterolemia; and MDCO-700, an intravenous anesthetic agent developed for moderate or deep sedation and general anesthesia in patients undergoing diagnostic or therapeutic procedures. The Medicines Company has a collaboration agreement with Alnylam Pharmaceuticals, Inc.; SciClone Pharmaceuticals; and Symbio Pharmaceuticals Limited. Company description from FinViz.com.

Earnings January 25th.

MDCO reported a loss of $1.19 that beat estimates for a loss of $1.23. However, revenue of $16.9 million missed estimates for $22.9 million.

The company announced the layoff of 85% of its workforce from 410 workers to only 60. As part of the restructuring the company is divesting its infectious disease business by the end of 2017. The revenue from the divestiture should allow the company to "aggressively" move its drug candidate through late stage clinical development. The drug, inclisiran is part of a new class of cholesterol lowering therapies called PCSK9 inhibitors. The phase three trial started the first week of November. MDCO is partnering with Alnylam (ALNY) on the trial. There are 1,500 in the trial at 100 clinical sites in eight countries. This is only one of four concurrent trials covering nearly 3,500 patients. The initial trials were very positive.

The stock declined to $28 on the dramatic layoffs and traded sideways for two weeks. A rebound has begun and options are cheap.

Update 11/9: Cardiologist Milton Packer is already pounding the table on MDCO's PCSK9 drug and it is still a couple years away from sales. He said it has the potential to be better than Amgen's Repatha and only needs to be dosed twice a year rather than twice monthly. He said it will also be significantly cheaper than the $14,000 a year for Repatha.

Position 11/9/17:

Long Jan $32 call @ $2.00, see portfolio graphic for stop loss.


MU - Micron Technology - Company Profile

Comments:

No specific news. Closed at a new high.

Original Trade Description: November 11th

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. Some 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 Q3, 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, they guided for earnings of $2.09-$2.23 on revenue of $6.10-$6.50 billion. Analysts were expecting $2.14 in earnings.

Despite the strong earnings and forecasts, the company trades at a PE of 9.5 when the S&P is trading at 18.2. 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. On Oct 31st, they spiked again to $45 after Toshiba said DRAM and NAND memory would remain in high demand and tight supply through 2018.

On October 10th, they announced a $1 billion secondary offering and shares dipped for several days while the offering was priced and completed. This added 25 million shares to the float with 1.14 billion shares outstanding.

This was a great deal. They are using the proceeds to help fund the retirement of $2.25 billion in debt priced at 7.5% and 5.5% interest. This will reduce their costs and eliminate those debt service payments. They raised about $1.2 billion after the offering was upsized and the rest of the funds for debt retirement will come out of cash on hand.

Summit Redstone said buy because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Credit Suisse reiterated an outperform rating and $50 target. Susquehanna has a $50 target and Evercore ISI has a $50 target. 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. Stifel has a $60 target. Needham's, Rajvinda Gill has a price target of $76.

UBS analyst Stephen Chin says he expects Micron's profits to rise 50% in 2018 to $7.50 per share. If you put any kind of market multiple on those earnings, the stock should double.

Shares drifted lower from the Halloween spike but rebounded on Friday back to the highs. There are no sellers in Micron.

Update 11/13: Micron announced a new 32gb NVDIMM memory that is twice as large as current chips on the market. This is non volatile DIMM that retains data in memory next to the processor to speed up processing of large datasets. Shares closed at a new high.

Position 11/13:

Long Jan $46 call @ $2.95, see portfolio graphic for stop loss.


PYPL - PayPal - Company Profile

Comments:

No specific news. Minor gain in a weak market.

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.

PayPal just launched domestic payment services in India with 1.324 billion people.

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.

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 just announced AI powered hard drives for video monitoring.

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:

The VIX position expires on Wednesday. Short of a nuclear blast somewhere, this position is dead. I am dropping it from the portfolio today as a loss. 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 500 days since a 5% decline.

This was a portfolio insurance position and we paid our premium and were fortunate we did not have a crash that cost us several times the premium amount in stops in other positions.

An analyst today compared the several months of very low volatility this year to the summer of 1929 before the market crashed. Earnings were good, the economy was good and the market was hitting new highs. In the space of only a few days, the bottom fell out.

While I do not see a 1929 or 1987 event in our future, I do expect a decent correction in January. We will revisit the VIX as insurance in late December.

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:

Expiring: Long Nov $15 call @ $1.85, expiring, -1.85 loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

The morning drop in the Dow hit 232.91 in the DIA and only 66 cents away from our exit target. We could still get lucky with 3 days to go and the market showing cracks around the edges. The option is only worth 27 cents today. With the Dow cracking, I think we should hold it until it expires on Friday.

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. Shares pushed through resistance at $68 intraday to stop us out.

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:

Closed 11/14: Long $65 put @ $1.70, exit $1.25, -.45 loss.




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