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Daily Newsletter, Tuesday, 5/8/2018

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

Market Wrap

Next Headline?

by Jim Brown

Click here to email Jim Brown

The Iranian announcement came and went and the market yawned.

Market Statistics

It was as though investors were saying "Is that all you have? Next headline please." The markets traded in a very tight range and ended the day flat on low volume. Crude prices were the big mover with the futures trading in nearly a $3 range and on extremely heavy volume. The final settlement for the session was put off nearly an hour because of the extreme volume. Crude traded as high as $70.84 on Monday ahead of the announcement and as low as $67.63 today after a bogus headline claiming the president was NOT going to pull out of the nuclear agreement.


After the bell, the weekly API inventory report showed a decline of 1.85 million barrels after a build of 3.43 million the prior week.

Crude prices could fade the rest of the week because later in the afternoon it was announced there would be a 90-180 "wind down" period before the sanctions returned in full force. That means any previously scheduled oil purchases and shipments could continue as planned. It will also get us past the normally high price period of Memorial Day through July 4th weekend without any material rise in crude prices. Anyone holding short-term futures contracts are likely to exit and reload using positions out in November of later. That is normally a weak period for prices so the immediate impact of any sanctions will be minimal.


Analysts believe the sanctions impact six months from now will be limited to less than 500,000 bpd of Iranian crude. As a unilateral sanction, they will not have as much impact as the prior sanctions because most of our trading partners will not be participating. China, Japan, India and South Korea will continue buying oil from Iran at what should be discounted prices. Iran exports 2.5 mmbpd and analysts believe only 20% or less will be impacted. Any price rise ahead of the sanctions will benefit Iran and they will be trying to produce as much as possible before they take effect.

The real impact will be from companies in the energy sector that have contracted to explore and produce in Iran. Since the U.S. will be leaning on these companies, the development may be restrained. When given the choice of doing business in Iran or the USA, they will likely choose the USA.

Unfortunately, Boeing is likely to lose as much as $20 billion in sales after Iran committed to buy equal amounts from Boeing and Airbus. Iran can shift that $20 allocated to Boeing over to Airbus. While that is a lot of money, it is a drop in the bucket for Boeing.

In economic news, the NFIB Small Business Survey for April rose only one tenth of a point to 104.8. Since the index has risen every April but one since 2006, it was expected to post a gain but that gain turned out to be minimal. The components were mostly flat with the exception of plans to increase employment falling from 20% to 16% and plans for capex spending rose from 26% to 29%.

The headline number declined -3 points in March on tariff fears and that is probably why there was not a material rebound in April. Some 35% of respondents said they had job openings that were proving hard to fill.

The Job Openings and Labor Turnover Survey (JOLTS) spiked for March with a 4.2% rise in job openings, up from a 3.9% rise in February. Job openings rose to 6.550 million, up 16.8% over March of 2017. Only 5.4 million workers were hired during the month and 5.3 million workers left their jobs. This suggests higher wages ahead since workers are steadily changing jobs and openings are not declining. There is a giant game of musical chairs underway with currently employed workers trying to improve their employment by changing companies. This is happening at the rate of 5 million changes per month and everyone is trying to find a better job before the employment music stops.

Tomorrow is the producer price index with prices expected to have risen by 0.3% for April. The consumer price index is on Thursday with the same expectations at the consumer level.


In stock news Comcast (CMCSA) is reportedly seeking $60 billion in new financing in order to make an all cash deal for the media assets of Twenty-First Century Fox (FOXA). This is notable since Fox has already agreed to sell those assets to Disney for $52 billion. The Comcast offer would also hinge on whether the Justice Dept will approve the $85 billion acquisition of Time Warner (TWX) by AT&T (T). Another hang-up is that Fox's Rupert Murdoch would rather be paid in stock than in cash since a stock transaction is not taxable to shareholders. Comcast also has a $30 billion offer outstanding for Sky PLC.



Dean Foods (DF) reported earnings of 14 cents that beat estimates for 12 cents. No revenue was given. The company guided for the full year for earnings of 55-80 cents. Shares spiked 17% on the news so somebody liked the numbers.


Dish Networks (DISH) reported earnings of 70 cents that narrowly beat estimates for 69 cents. Revenue declined from $3.68 billion to $3.46 billion and missed estimates for $3.5 billion. The company lost 94,000 subscribers while adding 91,000 Sling TV subscribers. Those Sling subscribers only generate about $25 a month in revenue while a regular Dish subscriber generated $84.50 on average in Q1. The company said it expected the trend to continue as Sling TV picks up speed and gains acceptance. The company has been acquiring a lot of spectrum in preparation to offering a 5G service in the years ahead. Shares fell 12% on the news.


Valeant Pharmaceutical (VRX) reported earnings of 89 cents compared to estimates for 60 cents. Revenue declined from $2.109 billion to $1.995 billion and beat estimates for $1.949 billion. Branded drug sales and US diversified sales came in above estimates but Bausch & Lomb sales missed estimates. The company guided for 2018 for revenue up from $8.10-$8.30 billion to $8.15-$8.35 billion. They announced a name change to Bausch Health Companies starting in July. Shares rallied 9% on the news.


After the bell, TripAdvisor (TRIP) reported earnings of 30 cents that beat estimates for 16 cents. Revenue of $378 million beat estimates for $361 million. User reviews rose 26% to 630 million covering 7.5 million places to stay, places to eat and things to do. That included 1.2 million hotels, 800,000 rentals, 4.6 million restaurants and 940,000 tourist attractions worldwide. Average monthly users rose 12% to 433 million. Shares rose $8 in afterhours.


Electronic Arts (EA) reported earnings of $1.95 compared to estimates for $1.83. Revenue of $1.58 billion easily beat estimates for $1.24 billion. Sales in digital games rose 18% to $1.10 billion. The company announced a $2.4 billion share buyback program. Shares rose about $3 in afterhours.


Match Group (MTCH) reported earnings of 33 cents that beat estimates for 19 cents. Revenue rose 36% to $407.4 million and beat estimates for $386 million. Tinder was the hot spot which added 368,000 paying subscribers in the quarter. Analysts were expecting 355,000. When asked about the new Facebook dating service the CEO said, "We don’t think Facebook will have any impact on Tinder, which is our growth engine." The company raised the full year revenue outlook to $1.6-$1.7 billion and analysts were expecting $1.6 billion. They guided for the current quarter for $405-$415 million and beat estimates for $391 million.


Wendy's (WEN) shares fell -4% in afterhours when they reported earnings of 11 cents compared to estimates for 10 cents. Revenue rose 5% to $380.6 million and beat estimates for $374 million. Same store sales rose 1.6% compared to estimates for 1.8%. Shares declined on the comp sales miss.


Etsy (ETSY) posted earnings of 10 cents that beat estimates for 5 cents. Revenue of $120.9 million rose 24.8% and beat estimates for $120.19 million. Gross merchandise volume rose 19.8% to $861.1 million. Active sellers rose 9.4% supported by a 16.9% rise in active buyers. Shares declined 43 cents in afterhours.


Dow component Disney (DIS) reported earnings of $1.84 that beat estimates for $1.70. Revenue rose to $14.5 billion and beat estimates for $14.1 billion. The company was helped significantly by Black Panther and its $1.3 billion in ticket sales. Theme park attendance also rose in what is normally a slow quarter. Could it be that people had more money in their pocket as a result of the tax cuts? On the downside, the cable division posted a 4% decline due to continued cord cutting, over the top streaming services and a change in the schedule on the college bowl games. April's blockbuster debut of Avengers: Infinity Wars is going to power Q2 earnings as well. The next big movie is "Solo: A star Wars Story" due out soon. So far in the first half Disney movies have accounted for a third of the domestic box office. Shares fell about 70 cents in afterhours.


Leading the earnings parade on Wednesday will be AmBev, Budweiser and Bookings, the company formerly known as Priceline. The most watched report for the week will be Nvidia after the close on Thursday.


Activist investor ValueAct has acquired a $1.2 billion stake in Citigroup (C). In a statement, the bank said it has been having "constructive conversations" with ValueAct and welcomes them as investors. That accounts for about a 0.07% stake in the bank so it is hardly a serious threat. However, even small stakeholders and make a big fuss in the financial press if they feel their concerns are not being addressed. The company is not calling for a major shakeup but there are areas where they feel the bank could improve profitability.

ValueAct took a similar position in Morgan Stanley a couple years ago and were instrumental in achieving some significant changes. Shares of Citigroup rose $2.50 on the news.



Markets

Today was actually a decent day in the markets. After three days of gains, I am counting the nearly 400-point rebound on Thursday, the markets could have sold off significantly and it did not. The Russell 2000 was actually the best performer and closed above two levels of resistance. Since the small cap index is typically the sentiment indicator for the broader market this suggests there may be further gains ahead. The Russell has strong resistance at 1,600 and above and could actually test that if we could get a couple more days with a positive market.


The flip side to those positive thoughts is the S&P. The index closed flat but it failed at the resistance of the 50-day average once again. This is a hurdle along with the prior resistance at 2,675 that has been strong for the last month or more.

Granted, nobody expected the major indexes to post a positive gain today because of the Iran announcement so it is hard to put too much emphasis on the lack of performance. The S&P is still in a descending bearish triangle and until it moves over the 100-day at 2,705 and the resistance high from mid April, it is still a bearish chart.


The Dow is a clone of the S&P with the downtrend resistance and the 50-day and the 24,500 level all converging to cause problems. We know that the right positive headline could power these indexes over this short-term resistance in a strong short squeeze but we seem to be running short on positive headlines. The Dow really needs to move over 24,500 and 24,700 before it can shake the bearish label.



The Nasdaq chart looks a lot like the Russell chart but from a slightly lower level. The Nasdaq needs to move over 7,300 to turn the chart bullish. The big cap techs were evenly mixed and the index closed flat. Nvidia's earnings are going to be a minor cloud over the tech sector until after they report on Thursday. If the Nasdaq could move over 7,300 and the Russell over 1,600 we could have a real rally on our hands because the Dow and S&P would likely follow. Conversely, if the Dow and S&P crater they will drag the other indexes lower.



I am actually more encouraged today than I have been in a couple of weeks. We could be on the cusp of the market turning positive but there are still challenges. We are in the post earnings depression portion of the earnings cycle and in the sell in May and go away spot on the calendar. I would not back up the truck on new long positions but I would be nibbling on some "trades" if the market remains positive.

Be patient a trend will eventually appear.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Trading Boycott

by Jim Brown

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Editors Note:

The markets were flat on the day due to lack of interest ahead of the Iran announcement. Nobody knew which way the market would move after the event so nobody traded. There was some limited profit taking ahead of the event but a few buyers returned before the close to lift the indexes back to the flat line. This is actually bullish. After three days of gains, we were poised for some increased profit taking and it did not appear.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


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In Play Updates and Reviews

No Movement

by Jim Brown

Click here to email Jim Brown