Option Investor
Newsletter

Daily Newsletter, Saturday, 1/5/2019

Table of Contents

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

Market Wrap

Whiplash!

by Jim Brown

Click here to email Jim Brown

The massive reversal from the -660 drop on Thursday to a +747 spike on Friday should have the bears complaining of whiplash.

Weekly Statistics

Friday Statistics

The Apple disaster proved to be a one-day wonder and more than likely company specific rather than an overall symptom of a global economic decline. The rising bullishness since the post-Christmas dip was impacted severely by the knee jerk reaction from the Apple warning. When other companies that deal heavily in China said they were not seeing any weakness, the Apple impact on tech stocks began to fade.

Fed Chairman Powell poured fuel on an already hot market when he said in a speech that the Fed would be patient and flexible with future rate hikes and the unwinding of QE positions was NOT on autopilot and could be changed at any time if it appeared an adjustment was needed.

With Friday's speech Powell has cemented his reputation as a flip flopper. On October 3rd, the high in the market, a hawkish Powell said we are "a long way from neutral on rates." In November he was more dovish as the market was crashing. In December he was hawkish with the autopilot comment and tanked the market once again. Hopefully Friday's significantly dovish comments will last longer than a month before he morphs back into hawk mode.

In plain English, it appears the Fed and Powell has heard the message from the market and decided they do not want to be blamed for a bear market. It is easier to react calmly from a position of patience than be blamed for the next decade for killing the longest bull market on record.




At the end of this commentary is a VERY IMPORTANT MESSAGE: Please read.


Friday started with a blowout jobs report for December. Analysts were worried when November dipped to 155,000 new jobs from the 200K+ in prior months. They did not need to worry. December created 312,000 jobs and well over the 180,000 expected. This was the biggest monthly gain since February at 324,000 and it will probably be revised higher. November was revised higher from 155,000 to 176,000 and October was revised up from 237,000 to 274,000. That was a gain of 58,000 in the revisions of the prior two months. That lifted the average for the last eight months to +226,000 and very strong. For just Q4 the average was 254,000 per month.

The labor force participation rate rose 2 tenths from 62.9% to 63.1% because of the large number of people rejoining the workforce. The labor force rose by 419,000 for the month and the second largest gain since June. The unemployment rate rose from 3.7% to 3.9% because of the larger number of people looking for work. The strong jobs environment is raising wages, and this is drawing people off the couch and back into the job market. The average hourly earnings rose 0.4% and the largest gain in four months. Hourly earnings increased 11 cents for a YoY rise of 3.15% and a high for this economic cycle.

The manufacturing sector created 74,000 jobs and the service sector added 238,000 jobs. Government added 11,000 jobs. Education/Healthcare added 82,000 jobs, leisure/hospitality added 55,000.

More than 2.64 million jobs were created in 2018, up from 2.19 million in 2017. Monthly average job gains are expected to be 200,000 in 2019.

Normally a blowout payroll report would put fear of the Fed into the market. Given the recent market decline on worries about a slowing economy, this report was just what the doctor ordered to end those worries. Powell's comments later in the morning erased any lingering Fed fears.


Vehicle sales for December came in at 17.6 million annualized and that was slightly better than the 17.3 million analysts expected. It was also the highest rate since December 2017. Autos totaled 5.3 million and light trucks/SUVs 12.2 million. This is the fourth consecutive year over 17 million and the first time ever. Interest rates for new loans declined slightly to 5.9% in December.

Starting in 2019 GM and Ford will begin reporting data quarterly instead of monthly and there is little doubt that others will follow suit.

This was really a banner year because a significant number of sales were pulled forward into late 2017 by hurricanes Harvey and Irma. That made early year sales weak, but buyers came roaring back. Auto credit also retreated in early 2018 as banks began to have more delinquencies. That reversed later in the year and sales surged again. The tax cuts put more money in consumer pockets and they spent it. They bought trucks and SUVs because passenger cars as a percent of the total fell to 30% and a record low.

Moody's Vehicle Sales Chart

The weekly EIA oil inventory report was delayed until Friday by the holidays. Crude inventories were unchanged at 441.4 million barrels. Distillate inventories of jet fuel, heating oil and diesel rose 9.5 million barrels. We now know what refiners were producing in late December as they tried to deplete oil levels ahead of the property tax deadline on December 31st. Gasoline inventories also rose by 6.9 million barrels.

Prices rebounded to $48.31 after dipping to $42.36 the prior week. This was helped by news that Saudi Arabia planned a shocking drop in production to hasten the rebound to higher prices. OPEC production declined -460,000 bpd in December and the production cuts were not supposed to be effective until January. Saudi Arabia alone cut production by 400,000 bpd and is said to be cutting another 500,000 bpd in January. In keeping with a previously reported pledge to cut oil shipments to the US, we only imported 1.63 million bpd of OPEC oil in December. That is a 5-year low. The idea by OPEC is to force US inventory levels lower causing an increase in WTI prices.

Libya's Sharara field is struggling to restart after inspection teams reported the theft of key equipment including transformers and cables from numerous wells. Even after the field restarts this will cut production by up to 10,000 bpd until the equipment can be replaced. The 300,000-bpd field has been shut for a month due to militia attacks and threats.

The payroll report and the resumption of US/China trade talks next week also helped to lift prices on hopes demand will increase if the economy continues to be strong and a trade deal is completed with China. Having an extra 312,000 new jobs means every one of those workers will be using more oil in some form. That could be driving to work or increasing the demand on bus/train/subway transportation.

A recent survey of 24 oil analysts by Bloomberg found they believe Brent crude will average $70 for 2019. That puts WTI in the $61.50 range.

The drop in crude prices along with the holidays combined to cause a drop of 8 active rigs in the US. Oil rigs fell 8 to 877 and gas rigs were unchanged at 198.



Note how the refinery utilization rose in the last week in December as refiners tried to reduce oil inventories before the property tax deadline on December 31st.


The EIA Natural Gas inventory report showed a decline of only 20 Bcf for the week ended on 12/28. The weather is simply too mild for this time of year and gas prices are collapsing despite inventories being 18% below year ago levels and 19% below the 5-year average. In theory gas prices should be significantly higher given the low inventories. However, I live in the mountains in Colorado and we are approaching mid-January and we have not had to shovel snow even once this winter. Normally we would be doing it 1-2 times a week after Thanksgiving.



Tech stocks rebounded the most on Friday and I would bet CES 2019 had something to do with it. CES 2019 is the largest electronics show in the world and it starts next week. Nvidia will kick it off with a giant two-hour press conference on Sunday evening. It will be live streamed HERE This is always an interesting presentation and the equivalent of looking 10-years into the future of technology.

IBM has the keynote speech on Tuesday at 10:30 and they will update on the Red Hat purchase and the future for their improved cloud.

The AMD CEO will also present a keynote speech at 11:00 on Wednesday. Dr Lisa Su has completely restructured AMD and they are well ahead of Intel on their technology. This could be a market moving speech for AMD.

The Philly Fed Manufacturing Survey on Thursday is the most important economic report for the week. This is especially true given the decline in the Manufacturing ISM to two-year lows last week.

The FOMC minutes of the last meeting will be on Wednesday and it will be interesting to see if the minutes reflect the new dovish comments from Powell on Friday or did he go through a sudden conversion over the last couple of weeks of market declines. Having everyone in the US mad at you could be a heavy load to carry. His baptism by fire with the market crash on his watch could have led him to a conversion experience.

The consumer price index on Friday has a lot less importance since Powell's comments on Friday. Otherwise investors would have been in panic mode for every tenth of a percent increase.


There are very few earnings next week, but the dam is about to burst. The following week more than 250 companies will report. For Q4, 17 S&P companies have reported. Earnings growth has averaged 15.5% with revenue growth up 6.2%. These are mostly smaller companies and the numbers should rise sharply over the next two weeks. Earnings growth estimates normally rise about 4% to 6% from the start of the cycle as positive earnings surprises appear.

There have been 42 announcements of positive guidance and 71 guidance warnings for Q4.


The big news last week was not political. It was the Apple guidance warning. Shares crashed 10% on Thursday and the trickle-down effect into their suppliers decimated the chip sector. The worry over China's economic weakness translated into declines of every international stock with companies like Boeing and Caterpillar taking big hits.

Apple shares closed at the low for the day and knocked 108 points off the Dow. It was an ugly day because Apple gave the impression that China's consumer was imploding and that hit the market hard.


Fast forward 24 hours and those that bought the dip at that $142 support were well rewarded, at least for one day. Needham reiterated a buy rating but cut their price target from $200 to $180. Moness Crespi & Hardt reiterated a buy rating but cut their price target from $300 to $200. Macquarie, Loop Capital and Jefferies cut their ratings from buy to hold. Half of the 41 analysts surveyed by FactSet cut their price targets, some by as much as $100. The average target fell from $215.91 to $187.03.

I was surprised Apple shares rebounded so strongly because the outlook is still grim by Apple standards. They cut their own guidance to $84 billion in revenue, down from $89-$93 billion. Analysts were expecting $91.5 billion.

They blamed their revenue decline on China where they get 18% of their revenue. They said the decline in sales was unprecedented and tried to suggest the Chinese consumer was dying. I guess it sounded good when Tim Cook put the excuse on paper, but later revelations suggest it is an Apple only problem and not a Chinese consumer problem.

Apple has hit peak iPhone or at least peak prices. With so many competing phones with nearly as many features or even more and prices 50% less in some cases, the iPhone has lost its sex appeal. There are still some hard-core Apple fanatics that will continue to buy the latest and greatest regardless of the price. However, that contingent is shrinking. At the same time the upgrade term is expanding. Instead of a new phone every 18 months multiple surveys have found that cycle to be expanding to more than three years or even as much as five years in some price categories. The more expensive the phone the longer people are keeping them. This hurts Apple because their annual product cycle depends on customers upgrading at least every two years and that trend has suddenly faded.

Apple continues to brag about its growth in services. Unfortunately, that service growth depends on continued sales of iPhones to new customers, not to repeat customers. Of the roughly 20 people in my family, everyone has moved away from Apple and into other brands. Only 1 person still has an iPhone. I am sure that is not the case worldwide, but I am also sure there is some erosion to the customer base. Unless they come out with some new must have feature, the base will continue to erode. Smartphones are now a commodity and with most having the same features, price is now a major factor in the purchase and that puts Apple at a disadvantage.

Apple is still a great company with a single digit PE, oceans of cash, billions in buybacks and dividends, but a fading business model. Regardless of claiming to be a services company, more than 80% of their revenue comes from phone sales. Their global market share has been dwindling and in Q3 was roughly 13% compared to 23% back in 2012. The decline has slowed at that level but will probably decline further in 2019 unless they come up with that must have feature.

Apple is suffering from maturity. They exploded into the smartphone market from 2007 to 2012 and then plateaued into a mature company when their creativity began to fade as the smartphone market went from fad to commodity. Margins are going to be squeezed as Apple tries to compete on price with producers like Samsung with dozens of models and brands of ultra-cheap Chinese phones that appeal to the masses for $250 or less.

I suspect we will see a rebound in Apple shares into earnings, but guidance will be more critical than ever and it will not be believed. Fool me once, shame on you, fool me twice shame on me.



Skyworks Solutions (SWKS) was crushed on Thursday with a nearly 10% decline to a two year low after the Apple warning. The $60 level is strong support and shares did rebound on Friday to regain half of the Thursday losses. Skyworks is an Apple supplier and joined Qorvo (QRVO), Broadcom (AVGO) and Cirrus Logic (CRUS) in the pain locker on Thursday. All of those stocks rebounded from the oversold conditions at Thursday's close.

Skyworks gained 5% on Friday despite a late to the party downgrade by Nomura from buy to neutral. With support at $60 this might be an entry point.


Netflix (NFLX) was added to the Goldman Sachs Conviction Buy List saying the 36% decline from July was a buying opportunity. They have a $400 price target. Goldman said, "We continue to believe Netflix's investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally."

They expect another debt offering to finance a $3 billion cash burn in 2019 but they are laying the groundwork now for positive cash returns in 2022. Goldman cited data from Sensor Tower claiming Netflix app downloads in North America in December rose 12% YoY to record levels despite the fact that 50% of broadband households in the US already have Netflix. In Europe downloads of the app rose 49% while the rest of the world rose 71%. The company is on track to produce 90 movies in 2019 with budgets of as much as $200 million. Shares exploded higher on the news.


Intel (INTC) was upgraded from neutral to buy at Bank of America. The analyst said Intel was a "compelling large-cap investment." The price target was raised from $52 to $60 and shares closed at $47.22. The analyst said, "notwithstanding concerns about macroeconomics, competition and 10nm product delays, Intel is relatively stable due to its expanding opportunity set, incumbency, scale and US manufacturing base." Despite the upgrade the analyst only expects 2.9% revenue growth in 2019 compared to 13% in 2018. They believe 5G will be a major growth area for Intel once the standards are locked down. BofA is expecting 2019 earnings of $4.80 and 2020 at $5.25. Consensus is $4.55 and $4.69 respectively. Shares rallied $2.73 on the news.


Advisors for Sears Holding (SHLDQ) claim the $4.4 billion bid by Eddie Lampert is too low to keep the company from being liquidated. The bid will not cover legal fees from the bankruptcy and payments owed to vendors making it "administratively insolvent." Lampert is using $1.8 billion in Sears debt that he holds as part of his bid making it a "credit bid" rather than a $4.4 billion cash offer. There are also shareholder suits claiming Lampert profited personally when he organized the spinoff of Land's End and Seritage Growth Properties. Seritage is a REIT that profits from Sears dumping real estate into the trust at significantly less than market value. Lampert is pushing the bankruptcy court to not rule on the bid until January 14th when the other bids for liquidation are revealed. It would not make sense to kick Lampert's $4.4 billion bid to the curb and then find out the largest liquidation bid is $2.0 billion. Sears has not posted a profit since 2010. Shares rallied more than 100% briefly last week jumping from 15 cents to 50 cents before falling back to 30 cents.


Remember back in the fall when everyone was worried about the yield on the ten-year breaking out above 3.25% and the terror that would cause in the equity market? Analysts were on CNBC or Bloomberg nearly every day warning of the dire consequences. Obviously, their forecasts did not come to pass. Yields fell to 2.554% at the close on Thursday.

Jim Grant of Grants Interest Rate Observer and one of the smartest men I know, pointed out that there is still $8.1 trillion of global securities that have a negative yield. Without the equivalent of a nuclear event, global rates are not going to rise significantly. There is simply too much money looking for a safe home with an actual yield and currently that means US treasuries. If the global economy is slowing and the US economy is still ticking along at a 3+% rate there will always be an influx of cash into treasuries even at the ridiculous rate of issuance from our debt funded government. Eventually that will change but not in the near future.


2018 was a tough year for funds. 174 hedge funds, speculative funds and ETFs closed in Q3. Another 140 closed in Q4. The shift to passive investing and away from fee-based managed funds has been cussed and discussed all year. Many analysts said this was a driving force into the December decline because these funds were being forced to liquidate by year end and there were no material rallies to sell into. One analyst said it was equivalent to selling into a vacuum because there were no bids. With individual investors running for the sidelines, rampant tax selling in managed funds and these liquidations, all the volume was on the sell side.

Now that the tax selling is over and China trade talks are resuming on Monday, the market should continue higher into the earnings cycle. It could take some time for the volatility to fade but it should fade. 2019 will produce another year of record S&P earnings, just not at the pace of 2018.

The government shutdown has been pushed out of the headlines and a deal will eventually be reached. That could cause a momentary rebound but it is not really relative to the market. This is old news.

With a divided government nothing consequential is going to make it through both houses and be signed by the president. Enter the world of real gridlock. This means the economy should not be threatened by government for the next two years.

Investors should begin to cherry pick some of the most beaten down stocks and those that will benefit from a Chinese trade deal. Be prepared for some additional volatility but the 600-900 point swings are more than likely over.

However, the biggest market gains typically come in bear markets for obvious reasons. Sentiment gets so bad and traders are so short that some unexpected good news can power some powerful short-term moves. Be prepared for this volatility.


Markets

With Apple not dragging the indexes down, we had a good rally on Friday. Powell's dovish comments along with the blowout jobs report were what investors needed to hear.

The rally came in three stages. The overnight futures were positive and then the payroll numbers added to those gains. The S&P gapped open and then traded sideways around 2,520 for a couple hours. When Powell spoke the next leg higher began but stalled at 1:PM. The S&P traded sideways at 2,530 the rest of the day. The lack of a closing selloff was positive given the potential for weekend event risk. With the Dow up over 600 points there was a definite reluctance to continue buying in the afternoon.



Boeing was the big Dow leader and added as many Dow points on Friday as Apple removed on Thursday. The news of the resumption of Chinese trade talks on Monday this coming week, was a strong motive power.

Rising oil prices and a strong rebound in big cap tech stocks also lifted the index.

Prior support at 23,531 became resistance and that is the next level to conquer. The 24,000/24,145 level should also be a hurdle.



The big cap tech stocks were on fire on Friday after being decimated by the Apple warning on Thursday. All sectors, all varieties were seeing hand over fist buying. Alibaba was crushed on Thursday by Apple's comments of a consumer slowdown in China. After numerous companies said they were not seeing the same slowdown, Alibaba exploded higher with a $9 gain.

FANG stocks were soaring with Facebook the laggard with "only" a $6 gain. Any big cap tech stock was a winner on Friday.

The Nasdaq Composite is still 560 points below the 10% correction level and major resistance at 7,300 and above.



The Russell posted a major win with a 50-point gain and closed over the first Fib resistance level. The next hurdle is 1,409. Small cap investors should be celebrating with the relaxation of the Fed rate hike program. Higher interest rates have been a drag on the small caps since the "long way to neutral" comment on October 3rd and the top in the broader market.


While I expect the market to move higher, I am not expecting many days like Friday and there will be some profit taking along the way. I would recommend hesitation on adding new plays on Monday. Whenever there is a monster spike in short covering, there is normally a pause where shorts try to reload and those already long decide to take the easy gains. This is an extremely short-term market where holding periods are a week or maybe two weeks if you are lucky. We should see a more positive bias but don't let your excitement overload your common sense.

I apologize for the delay in email delivery. We had a problem with the email server on Saturday and the programmer was out of town.

VERY IMPORTANT MESSAGE: Please read

For 21 years I have published the Option Investor family of newsletters. I have endeavored to produce the best market commentary available. I have developed a loyal readership and hundreds of people I would call true friends. Unfortunately, all good things must come to an end.

I recently turned 71. I have 6 grandkids, two of which I have never met. By sitting in front of my monitor 10-12 hours a day, including weekends, for 21 years, I have missed countless baseball, soccer and volleyball games, plays, music recitals and family gatherings. I am tired. My health is failing. I always joked that someday somebody would enter my office and find me slouched over my keyboard dead. My recent hospital visit reminded me of my mortality and the likelihood of that actually coming true. I would like to spend my few remaining years not chained to the keyboard seven days a week.

I have been negotiating with several parties about taking over the newsletter. Unfortunately, I have not yet found anyone that I would feel confident in continuing to produce a quality product. Some want to change the product and while change is sometimes good it is also painful.

I do not want to just pull the plug and have Option Investor disappear into digital space. Unfortunately, that may be my only option if I cannot locate a successor by the end of January.

We have dozens of hedge fund managers, portfolio managers, analysts, etc, that have subscribed to this newsletter for years. We have subscribers that have been with us for 20 years. I am always amazed by their continued support.

With this letter I am reaching out to those of you who might be interested in continuing Option Investor for another 20 years. If you have interest in continuing Option Investor, please email me at the link below and I will contact you to discuss the opportunity.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

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Index Wrap

Ready to Rumble?

by Jim Brown

Click here to email Jim Brown
After a volatile week the markets could be poised for further gains. As always, the market picture we see as of Friday's close is rarely the market we get at Monday's open. This time we could be poised to continue the gains from last week. If it were not for the Apple warning and the -644 point drop on Thursday we could have been a lot higher today. That drop was erased but it still damaged sentiment. Everyone was starting to add to their bullish positions only to have the market hit their stop losses only a few hours later.

Because the AAII sentiment survey ends on Wednesday, the impact from the Apple announcement is not yet factored into the puzzle. After the first couple days of 2019 bearish sentiment was already plunging. If we can squeeze out even a minor gain on Monday after the 747-point Dow gain on Friday, we should see a big change in sentiment next week.


This is going to be a short Index Wrap this week because all the charts look the same. There is a rally in progress and everything is in rebound mode but still uneasy. The increased volatility, even if it is positive, is still a major uncertainty factor.

The VIX has fallen 15 points since the December 26th high at 36.20. That is a major decline and it fell -4 points on Friday thanks to the big market rally. Even though it is falling, it is still a factor for investors.


The Nasdaq was the biggest gainer on Friday at a whopping 4.26% but it remains more than 500 points in correction territory. The A/D line improved significantly but there is a long way to go here as well. The MACD has turned positive but we need a week of uninterrupted gains to really heal the market.


The S&P AD has also rebounded sharply but the Apple impact from Thursday was clearly visible. This is a good start to a rebound, but we have a long way to go.


As an indication of just how far we have to go, the percentage of S&P stocks over their 50-day average rose only slightly to 11.8%. That is still very oversold when we have averaged 60% or more for most of the summer. The percentage over their 200-day is only slightly better at 21.6%.



The Nasdaq got help from the FANG stocks with all rebounding strongly. Facebook was the laggard, but it still managed a $6 gain on Friday. The FANG trade may not be dead, but we need a replacement for Facebook.


The chip sector was remarkably in tune with the Nasdaq over the last two weeks. They have been in lock step. I would expect the chip stocks to lead the Nasdaq higher this week. With the Apple scare over, the oversold chip sector should find some buyers.


The Nasdaq is the key index for next week. It has decent resistance at 6,800 and again at 7,300. The 50-day at 7,000 could also be a problem. The Nasdaq was the most oversold index and "should" rebound the strongest. We need to see 7,400 or higher before we really start celebrating.

Tech earnings should be good and assuming the first few reports are positive, we could see another surge. Investors like tech stocks in any rally and the Nasdaq could lead us out of the December disaster.


The biotech sector rebounded sharply thanks to the Celgene acquisition news. The index has rebounded back to resistance at 4415 and this could be a challenge in the weeks ahead. The sector is not likely to be a positive factor for the Nasdaq next week.


I would recommend buying the dips. Option premiums have inflated despite the decline in the VIX. Look for small bouts of profit taking and try to add some oversold stocks with a good outlook. There will still be volatility, but very oversold stocks should be mostly immune. Their damage is behind them. Stocks that have rebounded sharply from the December bottom could struggle to move higher.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Constant Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company is constantly winning drug approvals from the FDA. Hardly a week goes by that Merck is not announcing some new drug approval from the FDA or overseas counterpart.

 

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


NEW DIRECTIONAL CALL PLAYS

MRK - Merck - Company Profile

Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey. Company description from FinViz.com

Keytruda is expanding its base and is now approved for eight different cancer types. The drug has been approved in China, which has a serious melanoma problem. Sales of Keytruda are expected to reach $22 billion a year by 2022.

The FDA granted MRK a priority review on using Keytruda on a rare form of skin cancer. In a study with 14 patients 64% responded well to the treatment and all 14 saw tumor shrinkage.

Hardly a week goes by that Merck does not receive a new approval on some drugs. They have a very strong pipeline.

Merck shares declined in October after the company reported earnings of $1.19 that beat estimates for $1.14. Revenue of $10.79 billion rose 4.5% but missed estimates for $10.88 billion. They raised guidance for the full year from $4.22-$4.30 to $4.30-$4.36. Revenue guidance was narrowed but stayed in the same range. Shares fell $4 on the earnings but recovered almost immediately to set new highs in early December.

The company raised full year earnings guidance from $4.16-$4.28 to $4.22-$4.30. Revenue is expected to range between $42.0-$42.8 billion, up slightly from the prior $41.8-$43.0 billion guidance.

The company raised its dividend 15% to 55 cents. They also announced another $10 billion share buyback.

The company successfully avoided the October/November market decline but rolled over in early December after they announced the $2.3 billion acquisition of Antelliq, which will join their animal health division.

Shares have started to recover and market willing should be making new highs in the near future.

Merck has earnings on January 24th. I am recommending we buy a cheap February call and hold over the earnings report.

Buy Feb $80 call, currently 86 cents, no stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Instant Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

Traders should be getting dizzy from the recent moves. Fortunately, this one might stick. The three-week high close is a very good sign, sellers are losing their conviction. The big drop on Thursday was easily erased with the 750-point Dow gain. We had a good day but we need several good days without a drop to inflate the QQQ position.



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


No Changes


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

CAT - Caterpillar - Company Profile

Comments:

No specific news. However, the White House said a team was going to China next week for a trade meeting and that spiked the stock by $6.64.

Original Trade Description: Dec 22nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois. Company description from FinViz.com.

CAT has failed to decline with the market until the last couple of days. Earnings were good and forecasts were good. CAT has been hobbled by the trade war with China. Investors are worried that tariffs could disrupt its rapidly growing business. CAT said it has raised prices three times to cover the majority of the increased costs and the net impact has only been around $150 million. When a trade deal is reached, you can bet those price increases will not be completely erased. They will make up their losses.

Earnings are January 22nd.

Position 12/24:
Long Feb $135 call @ $2.43, see portfolio graphic for stop loss.


CRM - SalesForce.com - Company Profile

Comments:

FBN analyst Shebly Seyrafi reiterated an outperform rating and $180 price target. He said revenue should grow 21% in fiscal 2020 and produce revenue of $23 billion by 2022. Shares rallied $7.56.

Original Trade Description: Dec 22nd

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Earnings February 26th.

Salesforce will be a fast mover if the market turns positive. This is a crowd favorite and has only declined because of the market.

Position 12/24:
Long Feb $135 Call @ $4.04, see portfolio graphic for stop loss.



QCOM - Qualcomm - Company Profile

Comments:

Qualcomm acted to enforce the ban on iPhones in Germany and Apple was forced to pull the specific models from stores. Germany's biggest retailer, Gravis, said it still had all Apple products on sale but that is likely to end quickly. Qualcomm posted a bond of 1.34 billion euros in order to put the enforcement into effect. According to the court order, Apple has to stop the sale, offer for sale and importation for sale of all infringing iPhones in Germany. The court also ordered Apple to recall the affected iPhones from third-party resellers in Germany.

The 10-day non-jury trial with the FTC over patent procedures began on Friday.

Original Trade Description: Dec 31st

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.

The last 12 months have been turbulent for Qualcomm. First they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.

Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.

Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.

While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.

The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.

The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.

This suit is expected to be settled soon. Qualcomm has been successful in getting some models of iPhones blocked from sale and with each court action they are making it more likely there will be a settlement soon. The CEO said he thought it would be in Q4 but it has not happened yet.

With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.

Qualcomm reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $5.80 billion also beat estimates for $5.52 billion. However, the company guided for Q4 revenue of $4.5-$5.3 billion and earnings of $1.05-$1.15. Analysts were expecting $5.57 billion and 95 cents. The decline was due to a lack of Apple sales. Apple normally buys 35-50 million chips in Q4 but they have dropped Qualcomm as a supplier until the royalty fight is concluded in court. Shares lost $7 post earnings.

Cowen recently reiterated a buy rating and $73 target. Canaccord Genuity reiterated a buy and $75 target. Bank of America reiterates a neutral and $67 target.

Earnings Feb 6th.

Apple is trying to push out a software update to force phones to remove patent liabilities in China. Qualcomm is pressing the court to force an immediate halt to sales. Apple said late in the day that the China sales ban would force them to settle the patent suit with Qualcomm. Obviously that is exactly what Qualcomm has been trying to accomplish. Apple said being forced to settle with Qualcomm would force all other manufacturers to pay higher royalties as well. Everyone has been hoping Apple would be victorious and they would benefit from the same lower royalties if Apple won. Apple is trying to claim that Qualcomm's royalty agreements, which they signed and paid royalties on for years, is no longer valid because the price of the phone has risen so high. The agreement calls for a set percentage of the sales price as the royalty amount. When phones sold for $400 it was a smaller amount but now with $1,000-$1,500 phones that same percentage is a lot bigger number.

Apple is also playing politics in their court filings warning that China will lose millions of dollars in taxes and revenue if the ban is enforced. Of course, they could just pay Qualcomm what they owe and there would be no ban.

Qualcomm also won an injunction in Germany to force Apple to halt sales of iPhones.

Starting on January 4th, Qualcomm will participate in a 10-day non-jury trial against the FTC. This trial is the key to the settlement of Apple's suits around the world. Qualcomm will argue for its current patent and licensing model and fee schedules. The outcome of the trial will either boost Qualcomm's $5.2 billion a year royalty stream or crash it to a fraction of that amount. LINK

Nobody disagrees that Qualcomm's engineering and designs are the best in the business. They are simply whining that Qualcomm charges too much to license those technologies.

The outcome of this trial could move the stock $10 or more in either direction. I am proposing we buy a call and a put and hang on for the ride. One of them could been deep in the money and the other will expire worthless.

Position 12/31/18:
Long Mar $60 Call @ $2.06, see portfolio graphic for stop loss.
Long Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

We should know from the trial watchers if Qualcomm proved their case by the middle of January. I only recommended the Feb put because any downside move should be nearly immediate while any upside move could be lasting.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

Excellent $6 gain but we need a big week without any major declines to put us back into profitable territory.

Original Trade Description: Dec 7th

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq looks like it wants to decline further. I am profiling a dip buy at $158.15 on the hope that the Nasdaq/ETF will not decline below 6,800/155.00.

Position 12/17 with a QQQ trade at $156.85:
Long Jan $168 Call @ $1.12, see portfolio graphic for stop loss.

Position 12/24:
Long five Jan $168 Calls @ .12 each.
Adjusted cost for 6 = $.29 each.


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

Comments:

Big $8 gain to break above resistance at $250.

Original Trade Description: Dec 22nd

The SPY is the SPDR ETF for the S&P-500. It was the first exchange traded fund listed in the USA starting in 1993.

If the market is going to rebound the SPY would be our vehicle of choice. This avoids single stock risk and capitalizes on the most oversold big cap index.

This is a bet on an end to tax loss selling and a post-Christmas market rebound. There is no guarantee there will be a rebound and there is the risk of some early January volatility.

There are hundreds of billions in cash on the sidelines waiting for the selling to end. Investors want to establish positions for 2019 and at the current lows there are plenty of bargains.

Position 12/24:
Long Feb $255 Call @ $3.25, see portfolio graphic for stop loss.


BEARISH Play Updates

No Current Puts