Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/9/2019

Table of Contents

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

Market Wrap

Dovish Fed Lifts Stocks

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The FOMC minutes reveal the committee is less hawkish than the policy statement led us to believe. The minutes include some relatively minor changes in wording that carry a lot of weight regarding the pace of future interest rate increases. Most notably, the FOMC now sees that 'some' further gradual rate hikes will be needed and qualified the change with a note. The committee wanted the market to know that 'some' is meant to convey the idea of a relatively limited number of future rate hikes and the market like what it heard. Indices that had been cautiously higher moved to the highs of the day on this news.


The committee also says the economy is still strong despite geopolitical headwinds and that labor markets remain strong. Regarding the pace of hikes; the committee says it is still data dependent although it has become more difficult to judge the need for hikes and that the number and pace of those hikes is uncertain. Basically, the FOMC has altered its stance and now expects to see only one (1) rate hike in 2019.

Today's slate of events included speeches from three FOMC members who agree the committee is patient. The need for rate hikes may still be present but it has lessened to the point a pause in hikes is the most likely scenario. The CME's FedWatch Tool shows only a 16.5% chance of one hike next year and a slim chance rates will be cut.


Regarding the balance sheet rundown, the committee will continue to allow their balance to wind down and cautions the market that it may spark volatility in other key rates. At the current pace of run-off, $50 billion monthly, it will be years before the Fed's balance sheet is back to pre-crisis levels.

Market Statistics

The trade talks ended today and there are signs of positive progress. Under Secretary of Agriculture for Trade and Foreign Agricultural Affairs, Ted McKinney said the talks went just fine and that it was good for us. Now the trade reps will have to report back to Trump to make the next step. Now that the talks have begun in earnest there is a chance they could progress quickly although no substantive change in Chinese domestic affairs is expected very soon. At best China will open up its markets, import more agricultural and energy products, and make promises we'll have to trust them to keep. Regardless, this is good news and will be a boost to 2019 global GDP.

Economic Calendar

The Economy

Only one macro-economic release today and that was the minutes. The minutes were a nice confirmation of the FOMC's new stance and a sign they will allow the economy to catch up with current interest rates. The weekly mortgage applications saw a 23.5% surge in the last week as pent-up holiday demand and lower rates spur activity. As a leading indicator, this is a good sign of increased real estate activity but won't likely show in that data for another month or two at least.

The Dollar Index

The Dollar Index began to fall well before the FOMC minutes were released. The decline was driven by an expectation for Fed dovishness that was reinforced by statements from Raphael Bostic, Charles Evans, and Eric Rosengren. While some of the committee members still see a need for rate hikes all have toned down their outlook and indicate future hikes are not on autopilot and are data dependent. Today's move in the dollar trimmed 0.75% from the index and broke below a key support level.

The index may move lower in tomorrows session, the indicators are in support of such a move, but the ECB meeting is on tap and that may reverse the index fall. If the ECB backs off of their policy stance as the FOMC has done I would expect to see the dollar index resume its sideways meandering rather than fall to new lows.


The Gold Index

Gold prices moved up on today's dollar weakness and look like they could go much higher. The metal is in an uptrend and forming a flat pattern that could add $45 to its price in the very near term. This move is set up by the softening expectation for future FOMC rate hikes and could be sent out of the park by the ECB if they maintain their own outlook. The ECB has indicated that they will begin tightening policy in the second half of this year, anything to that effect will be bearish for the dollar and bullish for gold. Resistance is currently at $1,300, a move above there would be bullish and could take gold up to the $1,345 to $1,365 range.


The Gold Miners ETF GDX moved up more than 1.0% in today's session and may move higher, is likely to move higher, if gold is able to move higher as well. Today's candle extends yesterday's bounce from support but was halted before the recent highs. The indicators are mixed and suggest and range bound trading or correction so there is a reason to be cautious. A move above resistance would be bullish and could take the ETF up to $22, $23, and $24 in the near to short-term. If resistance at the $21.50 holds or is confirmed by whipsaw action I would expect the ETF to trend sideways at current levels or pull back to retest support at or below $20.50.


The Oil Index

Oil prices surged more than 5.0% in today's session on two catalysts that are light on substance. The first is the Saudi Oil Ministers reaffirmation that Saudi Arabian oil production would fall in the coming months. The second, a positive conclusion to this week's round of trade talks. Both news bites are positive but I say light on substance because the Saudi's are manipulating oil prices with talk and tight control of supply, and the trade talks are far from conclusive. WTI is now trading just above $52 where there is a high potential for strong resistance. A move up from this level could be bullish, a fall from this level would confirm resistance and the near-term downtrend in prices.


The Oil Index advanced more than 2.0% in today's session and has extended its climb above the short-term moving average. The index is rising on oil prices and may move higher if it can surpass resistance at 1,260. The indicators are bullish and suggest prices will continue to climb in the near-term. A move above 1,260 would be bullish but face another resistance target at 1,300.


In The News, Story Stocks and Earnings

Constellation Brands reported earnings before the bell and beat on the top and bottom lines. The company says revenue and adjusted EPS both grew in the last year but the outlook for future growth is not good. The company says softness is being felt in spirits, beer, and wine that I think may be linked to the budding marijuana boom that is sweeping the globe. Legalization of medicinal and recreational cannabis is accelerating and likely to lead to a Federal regulation at some point in the not-too-distant future. Shares of the stock fell nearly -12.0% in pre-market action.


Pricesmart reported December sales before the open and fiscal Q1 2019 after the close of the session. The December sales figures are positive and somewhat strong at 0.9% for the month and that was negatively affected by currency fluctuation. Comp-store sales rose 0.4% for the month and round out a solid year for the warehouse shopping club.

Earnings in the first fiscal quarter were good but revenue was only as expected which left shares flat in after-hours trading. Adding to investor malaise were mixed metrics on merchandise sales, up 0.3% in the quarter but down more than -2.0% on a comp-store basis. The mixed results were due in part to the opening of a new store that helped increase total sales while sales per store unit fell.


Shares of home builders were up on today's mortgage data and expectations for earnings scheduled to be released after the bell. Shares of KB Homes and Toll Brothers were both up more than 4.0% at the end of the session and KB Homes at least surged another 4% in the after-hours session. The builder reports revenue and earnings above expectations and provided a positive outlook for future operations. The company has a substantial amount of free cash flow and has been allocating towards reducing debt and preparing for growth this year and next.


The Indices

Today's index action wasn't very strong but it was bullish and set new multi-week highs for a broad swath of the market. What I really like is that the Dow Jones Transportation Average led the charge and it broke above its short-term moving average.

The candle is not large but opens at the close of yesterday's doji session and move up to close near the high of the day. The move shows that potential resistance at the 9,500 level is not present leaving the path forward open to advance. The indicators are bullish and suggest that upward momentum will carry prices higher in the near-term at least. Now that prices are edging above the 30-day moving average momentum may begin to build but we're not out of the woods yet. There are several targets for resistance just above today's close that may cap gains in the near-term.


The NASDAQ Composite posted the second largest advance at 0.70%. The tech-heavy index extended its move above the short-term moving average and poked its head above an important uptrend line. Today's move is cautious but bullish, let's hope there aren't bears waiting to play whack-a-mole with prices now that they are on the rise again. The indicators are bullish and suggest rising prices are at hand, my target for the next resistance is now 7,290.


The S&P 500 gained about 0.40% in the session and created a small spinning top doji. The candle is above the short-term moving average and at a new near-term high so bullish and possibly the precursor to higher prices yet to come. The indicators are both on the rise and support the idea of higher prices provided the 2,600 can be overcome. The 2,600 level is consistent with the November and December lows, a target for possible resistance. A move above 2,600 would be bullish and may take the index up to 2,700 in the near term.


The Dow Jones Industrial Average gained about 0.38% in today's action and may move higher. The caveat is that today's candle is small and shows resistance at the 24,000 level. The index is above the short-term moving average and the indicators are bullish so upward pressure is present. If it is enough to break above resistance prices will likely move up to 24,800 in the near-term.


The market used to be scared of trade wars, the FOMC, and slowing growth. Now the causes of those fears are gone or leaving, the FOMC has decreased the trajectory of interest rate hikes and trade talks are underway, both of which will help alleviate the third concern of slowing global growth. It's still early in the rebound, there is still cause for caution, but the price action looks bullish and so am I.

The next hurdle for the market is earnings. The Q4 2018 cycle is about to go into high gear and that could add fuel to the rally. Next week the season kicks off with reports from the big banks and some important industrial and transportation names like Alcoa and CSX. The expectations are high, not compared to last quarter, and the estimates have been falling so I think there is a good chance most S&P 500 companies will beat their consensus estimates. I am firmly bullish for the long-term and ever so cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Buy the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

This Dow stock should dip at the open on Thursday. Home Depot is close to breaking above prior resistance and any dip at the open on Thursday could be a buying opportunity.

 

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


NEW DIRECTIONAL CALL PLAYS

HD - Home Depot - Company Profile

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares declined after six consecutive months of declining home sales. The rising mortgage rates were also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that will continue into this summer that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Earnings February 12th.

The company reported Q3 earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75.

Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.

HD will rally with the Dow for the rest of January as long as the Q4 earnings guidance from other companies does not turn negative.

The market is poised to open lower on Thursday so we should be able to buy a dip at the open. With the February option expiring on the 15th and earnings on the 12th, the premium should have decent support.

Buy Feb $185 call, currently $3.25, stop loss $171.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Warnings Increase

by Jim Brown

Click here to email Jim Brown

Editors Note:

One week ahead of the Q3 earnings cycle and the number of warnings are increasing. Warnings from unrelated sectors are starting to appear and Thursday could be a good day for some profit taking. Constellation Brands, Samsung, Lennar Homes, etc have warned about an earnings slowdown. This is what the market was worried about in Q4 along with the rate hikes.



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. Shares moved up slightly on Wednesday to close over prior resistance.

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:

Atlantic Equities initiated coverage with an overweight rating and $179 price target.

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.



MRK - Merck - Company Profile

Comments:

No specific news. Shares waiting for the next drug sector surge.

Original Trade Description: Jan 5th

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.

Position 1/7/19:
Long Feb $80 call @ 85 cents, see portfolio graphic for stop loss.


QCOM - Qualcomm - Company Profile

Comments:

The trial with the FTC is continuing but news has been minimal. The Apple CEO and Qualcomm CEO got into a headline war with each saying the other was misrepresenting the discussions over a settlement. Meanwhile Qualcomm unveiled an entire rage of chips at CES that covered everything from self-driving cars to 5G communications.

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.

Update 1/5: 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. 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 rally 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:

Excellent continued gains. The next resistance is 2,632 on the S&P.

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