Option Investor
Newsletter

Daily Newsletter, Saturday, 1/26/2019

Table of Contents

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

Market Wrap

Saved by the Bell

by Jim Brown

Click here to email Jim Brown

Time on the clock expired before the Dow could slide into the loss column for the week.

Weekly Statistics

Friday Statistics

The Dow gapped up to +306 at 10:30 but faded the rest of the day as the various headlines impacted the market. The temporary shutdown at LaGuardia, the arrest of long time Trump friend Roger Stone, the hourly updates on the government shutdown and the impact of earnings all weighed on the index. The Dow finished the week with a 30-point gain but that was a plus given the sharp declines early in the week.

The Dow, Nasdaq and Russell stretched their weekly gains to five weeks, but the S&P ended its streak with a loss of 6 points for the week.


There were no economic reports on Friday. The durable goods orders for December and the new home sales were postponed by the government shutdown.

Late Friday afternoon the president, house and senate agreed on a temporary bill to reopen the government until February 15th to let 800,000 workers return to their jobs, receive their back pay and at least one more paycheck before another potential shutdown on the 16th. As part of the deal a conference committee was formed to work out a solution acceptable to all parties over the next three weeks. The bill was signed by President Trump late Friday to officially reopen the government.

One of the first reports for next week will be the Q4 GDP, with the analyst consensus at 2.9% growth. The Atlanta Fed real time GDPNow forecast is currently 2.7% growth. The tariffs on China are thought to have removed several tenths from Q4 but anything over 2.5% growth is still a respectable number.

The Q1 GDP is going to be impacted by 0.5% to 0.7% from the government shutdown.


The headline event for next week is of course the FOMC decision on Wednesday and the Powell press conference. There was some "messaging" last week about a potential slowdown in QT if the data supported it. This is another change in the posture for the Fed suggesting they got the message from the market. With Mario Draghi warning about a continued slowdown in Europe and the potential for a hard Brexit, there may have been some communication between the central bankers and Powell is being preemptive in his messaging.

This is also payroll week. I do not know if the government shutdown with 800,000 people furloughed will have any impact on the Nonfarm Payroll numbers or not because I don't know how they account for that in their surveys. The ADP number should not be impacted because that does not have any government component. It is corporate payrolls only.

There are a lot of reports because some were postponed by the shutdown and pushed into next week. There may be some I do not have on the schedule because the new dates have not yet been assigned for those previously postponed.

The earnings calendar will be far more important than the economic calendar.


For this reporting cycle 112 S&P companies have reported Q4 earnings with average growth of 14.3% and 5.6% revenue growth. More than 72% of companies have beaten on earnings and 58% have beaten on revenue. More than 125 S&P companies report next week.

The most important part of this cycle is the rapidly declining estimates for Q1. Estimates were over 8% as of December 1st and that has fallen to only 2.0% as of Friday. If the Q1 forecast falls below zero, the market is going to react negatively. Guidance will be especially critical this quarter.

Q2-2019 estimates have fallen from 10.6% back on July 1st to a forecast for 4.5% today. Q3-2019 has declined from 12.1% on October 1st to 3.4% today.

Apple is the first big cap tech stock to report on Tuesday and this will be a "hold your breath" report. The analyst community is evenly split between "all the bad news is priced in" and "they are going to miss even the revised guidance." With hardly a day going by over the last two months without an Apple supplier warning or an analyst downgrading the stock, there is a lot of bad news for sure. I am worried that when faced with weak phone sales they may guide even lower in hopes of beating Q1 estimates rather than be forced to warn again mid quarter. You know the old saying, "under promise and over deliver."

Apple has a monster impact on the tech sector because of all the suppliers. When you have one company consuming $30 billion in parts every quarter, every little cut in production causes big ripples.

Wednesday is stuffed with big names with Facebook, Boeing, McDonalds, Microsoft, PayPal, Tesla and Visa. Facebook will be the most watched to see if they are going to guide lower because of the 10,000 social media screeners they hired to police posts. How much are those costs going to impact earnings? Will there be charges for litigation both existing and expected? Has their advertising revenue taken a hit from all the privacy violations?

Compared to Apple and Facebook, Microsoft will look like an old reliable tortoise as it plods slowly along creating annual investor wealth rather than consistent quarterly gains. Microsoft has a lot of new initiatives underway and their earnings call could be exciting.

Lastly, Amazon reports on Thursday and nobody is expecting any surprises. That makes this dangerous. The biggest surprise normally comes when you are not expecting it. I think most investors will be interested in how Jeff and Mackenzie Bezos are going to split the 16% of the company that Jeff owns. Investors would love to hear that a settlement has been previously agreed and Mackenzie will get X% but Jeff retains the votes.

There are 13 Dow components reporting earnings.


Intel (INTC) was a 20-point drag on the Dow on Friday after missing on revenue estimates and posting weak guidance. Intel posted earnings of $1.28 that beat estimates for $1.22. Revenue was $18.7 billion, and analysts were expecting $19.01 billion. Overall earnings rose 18% while revenue rose 9%. The company guided for Q1 earnings of 87 cents on revenue of $16 billion. Analysts were expecting $1.01 on revenue of $17.37 billion. It was a major guidance miss. They guided for the full year for earnings of $4.60 on revenue of $71.5 billion and analysts were expecting $4.55 and $73.25 billion.

Intel's revenue growth rate in the cloud division declined from 50% to 24% YoY. That is a major challenge. Large cloud providers like Amazon, Google and Microsoft are customizing their own chips and servers and some have begun adding processors from AMD now that they have the newest technology.

JP Morgan reiterated an overweight rating saying despite current weaknesses in cloud and modems, the second half of 2019 would be an inflection point. This is when they will begin to deliver some of their newer chip architecture and could regain some market share.

Shares fell 5.5% and closed $1.25 off the lows with a loss of nearly $3. With decent resistance at $50 it is likely to be a while before it moves over that level.


Starbucks (SBUX) shares posted a decent gain on Friday after the company reported earnings of 68 cents that beat estimates by 3 cents. The big news was the 4% rise in same store sales that beat estimates for a 2.8% rise. The company said the return of holiday drinks had lifted sales. Who knew Peppermint Mochas and Gingerbread Lattes would be so popular? They said afternoon sales were the best in five quarters thanks to new drinks and food options. They now have more than 2,000 stores in China in 30 cities.

Here is the kicker. If holiday drinks spiked same store sales in Q4, what will happen in Q1 when those drinks are no longer popular and leave the menu? Are they setting up for an earnings miss?


Western Digital (WDC) reported earnings of $1.45 per share that missed estimates for $1.49. Revenue fell from $5.34 billion to $4.23 billion and missed estimates for $4.25 billion. Shares fell more than $2.50 in afterhours on Thursday. However, even though they posed weaker guidance on the conference call shares spiked $11 from the afterhours low of $37.50 to the opening high at $47.95. The company guided for current quarter revenue of $3.6-$3.8 billion and earnings of 40-60 cents. Analysts were expecting $3.88 billion and 97 cents.

The company said the weakness came from a slowdown in high end smart phone sales with lots of memory. They expect that trend to fade in 2H 2019 when another model year for dozens of even larger memory phones will debut. They also forecast a resurgence of cloud buying as cloud computing companies return to more normal buying patterns. The company is also targeting $800 million in cost reductions and those cost reductions will outpace price declines in 2H19. They also blamed the weak earnings on a major slowdown in China in a repeat of comments already heard from other tech companies.


United Rentals (URI) reported earnings on Wednesday that beat estimates. Their earnings beat and positive guidance could be a good sign for Caterpillar's earnings on Monday. United saw rental revenue rise 21% to 86% of its total revenue. Overall revenue rose 20% to $2.306 billion.

If the rental business is booming, we should expect to see equipment sales rise as well. This rental equipment is not cheap and rental prices rose 2.2% for the quarter. Caterpillar is expected to show positive gains in North America, but it will be China in focus. With the monster Belt and Road initiative in China covering 60 countries and costing between $4-$8 trillion, there is going to be a huge demand for earth moving equipment for the next 20 years. They are proposing thousands of miles of highways, railroads and electrical infrastructure to support commerce along those routes. I would not buy and hold Caterpillar today just because of this mammoth project but it will be a source of high demand for years to come.



Worries over trade, the government shutdown and the messaging from the Fed on tapering QT all weighed on the dollar on Friday. The Dollar Index fell a whopping 78 cents and that powered gold and silver higher.

Gold prices shot up nearly $23 on the drop in the dollar. Also attracting attention to gold was Venezuelan president Maduro trying to get his hands on $1.2 billion in gold held by the Bank of England. As many countries have now recognized the opposition party leader as the rightful president of Venezuela, Maduro is trying to extract some hard currency with inflation in Venezuela up 80,000% in one year. If he is heading for a remote island paradise getaway now that his socialist gig is up, he will have to get his gold elsewhere. The Bank of England denied his request to remove Venezuelan gold from their vaults.



Crude prices are back over $53, helped by the falling dollar but hurt by rising inventory levels. In the US, inventories rose by 8.0 million barrels last week. Imports rose by 660,000 bpd to the highest level in four months. With President Trump threatening to cut off imports of Venezuelan oil, refiners have been loading up on the heavy sour crude that converts better into diesel and distillates. If sanctions are incurred, they will have to acquire this from the Middle East and Saudi Arabia is pressuring other OPEC nations not to sell to the US in order to keep our overall inventories lower. WTI is priced on our inventory levels. Sanctions on Venezuela will increase our oil prices.

Active rigs rebounded from the loss of 25 the prior week with 9 rigs going back to work last week. With oil prices still relatively low, there is not likely to be any rush to put rigs to work.





Markets

The S&P had rallied for four weeks before stumbling at the 10% correction level of 2,637. After consolidating for a week, Friday was a breath of fresh air and it almost made it to a new 5-week high. There were just enough big cap losers to keep that from happening, but we should be thankful for Friday's gain.

We are heading into big cap tech earnings and there is likely to be volatility with some missing estimates. Resting nearly 30 points above support gives us some room if Apple and/or others stink up the place.

Support is back around 2,615 with some congestion just above that level. This is where we should begin to worry if downside volatility reappears.


The Dow was helped by the tariff sensitive stocks like Boeing, Caterpillar and 3M but Apple was surging ahead once again. While a 5-point gain was remarkable ahead of earnings the stock is still very oversold, and this was probably a combination of short covering and bottom fishing ahead of Tuesday's event. The odds are good we are going to see a major move in Apple, only the direction is unknown.


The Dow overcame its consolidation early in the week and closed right at resistance at 24,750. If it can move over that level the round number resistance at 25,000, which is also the 100 and 200 day averages, will be the next hurdle. There are 13 Dow components reporting earnings this week. There will be volatility.



The Nasdaq closed at a 7-week high and just over resistance at 7135-7157. The Nasdaq is approaching a very active period of congestive resistance between Friday's close and 7,500. This should not be a walk in the park but a tough uphill battle.

The flurry of big cap tech earnings next week will provide volatility in both directions. Support is now around 7,000.



The Russell recovered from the early week decline to close fractionally positive for the week and at a 5-week high. There is a little white space on the chart before there are multiple lines of converging resistance at 1,531.


This is going to be a hectic week. With 13 Dow components, 125 S&P components and most of the Nasdaq big cap tech stocks reporting earnings along with a FOMC decision there will be plenty of headlines. As usual, guidance will be critical in maintaining the rally. Companies will be required to beat on both top and bottom and raise guidance. Anything else will result in declines.

The Tuesday before a FOMC decision is normally positive. With the government shutdown over temporarily and China coming to talk at the end of the week, the political headlines should be positive. Obviously, we all know the market does not need a reason to sell off. However, recently it has been climbing the wall of worry on a regular basis. Let's hope this continues.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

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Index Wrap

Barely Positive

by Jim Brown

Click here to email Jim Brown
The Dow, Nasdaq and Russell ended the week with a gain but they were only fractional.

The Dow gained only 31 points for the week. The Nasdaq gained 7 and the Russell only managed a 0.35-point gain. Fortunately, that kept the streaks alive for five weeks of gains. Unfortunately, the longer the streak the more likely it is about to be broken.

There is a pattern known as a rolling correction. While that refers to larger market events it also applies to smaller consolidations. The market rallies sharply for several weeks and then instead of declining for a week or so it simply moves sideways as some investors take profits while others establish new positions. We had a minor version of that last week.

The S&P traded in a 50-point range but ended flat for the week with only a 6-point loss. The three days of sideways movement and increased volatility gave investors a chance to shuffle positions ahead of the earnings next week. Everyone should now be positioned and waiting for the fireworks to start.


Every week I show the A/D chart for the S&P because it tells us what is going on under the daily gains and losses. Advancers continue to overwhelm decliners except for last Monday. Even though the S&P had a choppy week and remains 9% below its 52-week high, the A/D line is about to breakout to a new high. This is bullish because it means investors are buying the broader market even if a few big caps are struggling.


Note the difference in the Nasdaq A/D chart. There is a lot more indecision under the surface for the tech sector. On the Nasdaq the generals are leading but the troops are unorganized and have not decided if they want to follow. This is the chip sector and banking sector providing the drag. Chips have been weak because of the Apple warning and component manufacturers also warning. Until Apple reports earnings on Tuesday, we will not have a concerted move in any direction on chips.


We did see a surge in chips on Friday after Intel reported. Intel fell sharply but chip stocks surged on Intel's guidance. This is bullish for the Nasdaq if it continues but Apple's earnings is the roadblock ahead. If Apple says they over compensated on their earnings warning and things are not as dire as they expected, then we are off to the races. If they say iPhone sales have not picked up and they give weak guidance for Q1, it is going to be an ugly week for tech stocks.


Note that the A/D for the small cap stocks is actually more bullish than the Nasdaq. This is a positive sign and we could see it continue if the chatter is positive ahead of the Chinese trade meeting this week. While tariffs on Chinese goods would not normally be a large impact on small cap stocks it is a sentiment challenge for the economy and therefore on the main street economy where these stocks operate.

The correlation between the Dow and the Russell is returning to normal and that will be bullish for market sentiment. With the Russell closing at a 5-week high it is actually starting to lead again.



One of the most bullish charts of the week is the percentage of S&P stocks over their 50-day average. This fell to 1.25% at Christmas and it has rebounded to 73.2% and right at the highs from back in Aug/Sep. This is clear evidence of a bullish undercurrent in the market. Of course, the sharp dip in December dragged the 50-day averages lower so the rebound in prices had a lower target.

The slower reacting 200-day had a lot less crossovers. In late December only 10.8% of S&P stocks were over their 200 day and that has improved to 41.4% but still has a long way to go since normal is about 60%.



The broad market is still in rally mode. The Russell 3000moved over 1,538 and then used 1,550 as support. The next major hurdle is in the 1,650 range. The R3K is not reactive to moving averages because it has so many components. The index did honor the 200-day back in early 2018 but that was a rare instance.


I remain bullish on the market and would buy a dip this week. However, with the outlook for Q1 earnings moving lower every week, we could be only a couple weeks away from an earnings recession challenge. If the Q1 forecast turns negative, the market will decline. However, if the Chinese trade meeting ends on a positive note the market should rally. That could delay any earnings drag but in the end, the earnings are the key to any market gain.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Back in the Saddle Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

When an old faithful company disappears for years and then reappears on the scene, investors should return. I am talking about Dell computer. They were taken private by Dell and some private equity companies. Now Dell is back.

 

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


NEW DIRECTIONAL CALL PLAYS

DELL - Dell Technologies - ETF Profile

Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.

Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.

Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.

Since the new Dell shares have only been around a month, they are definitely not over-owned.

Earnings March 14th.

Buy April $47.50 call, currently $2.60, stop loss $42.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Great Friday Move

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets shook off several headlines once again and posted a strong rally ahead of weekend event risk. This is another session that is good news for investors. We had bad news on Wed/Thr and the market did not go down so that suggests next week could be positive as long as tech earnings don't stink up the place.



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 rallied ahead of earnings on Monday. Normally we would close before the earnings event. Expectations are high that CAT will be bullish so we are holding over.

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:

No specific news. Shares holding over support and poised for a new leg higher.

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.



HD - Home Depot - Company Profile

Comments:

No specific news. Shares recovering from the weak guidance from Stanley Black & Decker.

Original Trade Description: Jan 9th

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.

Position 1/10/19:
Long Feb $185 call @ $2.66, see portfolio graphic for stop loss.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

Comments:

No specific news. Short term support held, and we could try a breakout next week. The index is up strongly from December and it has held its gains.

Original Trade Description: Jan 19th

The investment seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents. It is non-diversified. Company description from FinViz.com.

The IBB has 226 stocks and follows the Nasdaq Biotech Index ($NBI). The IBB rebounded strongly from the Christmas bottom and then stalled for over a week in the $108 range as it consolidated its gains. Friday's minor gain set it up to test resistance at $111.50 and a breakout there would target the prior highs at $122.

The first quarter is normally strong for biotechs because of the multiple conferences and calendar of FDA drug approvals. I am recommending we enter a position to benefit from a break over resistance.

Position 1/22/19:
Long March $115 Call @ $1.79, see portfolio graphic for stop loss.


MDT - Medtronic - Company Profile

Comments:

No specific news. Shares declined in a weak market. I am recommending er close this position for lack of positive movement.

Original Trade Description: Jan 9th

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. The Cardiac and Vascular Group segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation product; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software. It also provides aortic valves; percutaneous coronary intervention stents, surgical valve replacement and repair products, endovascular stent grafts, percutaneous angioplasty balloons, and products to treat superficial venous diseases in the lower extremities. The Minimally Invasive Therapies Group segment offers surgical products, including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, and gynecology products; hardware instruments and mesh fixation device; and gastrointestinal, inhalation therapy, and renal care solutions. The Restorative Therapies Group segment offers products for spinal surgeons, neurosurgeons, neurologists, pain management specialists, anesthesiologists, orthopedic surgeons, urologists, colorectal surgeons, urogynecologists, interventional radiologists, and ear, nose, and throat specialists; and systems that incorporate energy surgical instruments. It also provides image-guided surgery and intra-operative imaging systems; and therapies for vasculature in and around the brain. The Diabetes Group segment offers insulin pumps and consumables, continuous glucose monitoring systems, and therapy management software. The company was founded in 1949 and is headquartered in Dublin, Ireland. Company description from FinViz.com.

Medtronic tanked after the JP Morgan Conference after the CEO updated guidance and some analysts took it negatively. The company lowered 2019 guidance slightly due to worries over paclitaxel and higher mortality signals. However, the company feels "very confident" the devices are safe and has the necessary data to back up the claim. An analyst at BTIG said the guidance was "very conservative" after talking to the CEO. He said Medtronic should be able to at the very least match its guidance and more than likely beat it.

BTIG said beyond 2019 the company has a "broad and rich" pipeline for fiscal 2020 that will generate more than a 4% growth in several specific areas. He upgraded MDT shares from neutral to buy with a $100 price target.

On Tuesday Medtronic announced a new mobile app that communicates directly with its portfolio of pacemakers. Patients and doctors can monitor the pacemakers on a smartphone or tablet. That means the pacemaker can transmit vital data to the patients smartphone without intervention and the app can communicate with the doctor for analysis. Patients no longer need to be tied to home based monitoring equipment.

Shares rallied the last two days on the new mobile app news and the analyst upgrade.

Earnings February 19th.

I am recommending a May option because there are no March or April options at this time. We can buy time, but we do not have to use it.

Position 1/17:
Long May $90 call @ $2.82, see portfolio graphic for stop loss.


MRK - Merck - Company Profile

Comments:

No specific news. No reason to close the position for 5 cents. The original play description was to buy "an inexpensive February call and hold over earnings." Those will be out on Feb 1st. The call cost 85 cents.

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 February 1st. 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.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

Decent move with the Nasdaq up 91 points. Next week is tech earnings week.

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 1/14/19:
Long March $170 Call @ $1.77, see portfolio graphic for stop loss.

Previously closed:
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.
Expired 1/18: Adjusted cost for 6 = $.29 each. Expired, -.29 loss.


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

Comments:

Very close to a 6-week high close. The next hurdle is 2,700.

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.


SWK - Stanley Black & Decker - ETF Profile

Comments:

With the $250 million restructuring program nearly complete and price hikes on the way for 2019, investors should be buying this stock.

Original Trade Description: Jan 23rd

Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Company description from FinViz.com.

Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.

Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.

Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.

Now is the time to buy the dip on SWK.

Position 1/24/19:
Long Mar $125 Call @ $2.40, see portfolio graphic for stop loss.


TGT - Target - Company Profile

Comments:

Excellent move on Friday to breakout to a 2-month high.

Original Trade Description: Jan 9th

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings in November. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.

They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales. On Thursday Jan 10th, Target said same store sales for the November-December period rose 5.7% thanks to higher store traffic and a minor increase in ticket size. This compares to 3.4% in the same period in 2017. The company affirmed its Q4 guidance for same store sales of 5.0% and full year earnings of $5.30-$5.50. This came on the same day that Macy's warned on earnings and shares fell sharply all across the retail sector. Shares rebounded sharply by almost 2% in a weak market on Friday.

Earnings February 19th.

Since Target has already affirmed guidance, the odds are good they will beat it. The risk has been removed from the stock and their positive comments suggest the Q4 earnings and 2019 guidance will be good. I am recommending a March option to retain the call premium, but we will exit before the earnings.

Position 1/14/19:
Long March $72.50 call @ $2.08, see portfolio graphic for stop loss.


BEARISH Play Updates

QCOM - Qualcomm - Company Profile

Comments:

No specific news. Minor rebound, probably short covering ahead of the weekend.

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 had 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.

Update 1/23/19: Noted short seller Sahm Adrangi and his Kerrisdale Capital hedge fund took aim at Qualcomm saying a loss to the FTC in the current trial would cut the stock price in half. If the company loses they would be forced to "license core patents to competitors and to renegotiate all of its existing licenses on fair terms." Kerrisdale argued that Judge Lucy Koh, currently presiding over the case, has already ruled against the company on several maters and may be inclined to rule in favor of the FTC.

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

Previously closed: 1/22: Long Mar $60 Call @ $2.06, exit .60, -1.46 loss.




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