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Newsletter

Daily Newsletter, Saturday, 3/9/2019

Table of Contents

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

Market Wrap

Back from the Brink

by Jim Brown

Click here to email Jim Brown

The major indexes posted a significant rebound in the closing minutes to prevent an even worse performance for the week.

Weekly Statistics

Friday Statistics

The Dow declined -216 at the lows and was down as much as -189 at 1:PM. The afternoon rally began at 2:PM with the index down -163. At the high, just before the close, the Dow was down only 2 points. Despite the recovery the indexes posted their worst week in 2019.

The Dow lost -2.2%, Nasdaq -2.5%, S&P -2.2% and Russell -4.5%. The Nasdaq broke its 10-week streak of gains.


The Dow Transports have declined for 11 consecutive days and the longest streak ever. However, that is only a 4.8% decline after a 19.1% post-Christmas rally. Yes, it is painful, but it is hardly as bad as the talking heads were claiming. This is profit taking in a highly volatile sector.


The Dow futures were down -254 points just before the open as a result of the Nonfarm Payrolls. Given the headline shock from the payroll number I am surprised the Dow recovered to the flat line at the close.

The headline number was a gain of only 20,000 jobs and well below the forecast for 180,000. I suspect the market rebounded because most investors understood this was a bogus report. The prior two months were revised higher from 304,000 to 311,000 for January and 222,000 to 227,000 for December. There is no way other than a catastrophe that job growth would suddenly fall off the cliff to that extent. Confirmation this number was bogus was the gain of 183,000 jobs in the ADP report two days earlier. There is a problem in the number, and it will likely be revised higher in the months to come. The survey response rate was only 76.1% and the lowest since 2011.

Analysts blamed the drop on the Polar Vortex in February that kept employers from hiring for outside jobs. The construction sector lost 31,000 jobs after adding 53,000 in January. Business & professional services added 42,000 indoor jobs.

The separate Household Survey showed a drop in unemployed workers of 300,000 and the unemployment rate fell to 3.8%. This was aided by the end of the government shutdown. The labor force participation rate was steady at 63.2%. Average hourly wages rose 11 cents and are now 3.4% higher than the same period in 2018. Rising wages are pulling workers off the couch and back into the workforce.


New residential construction starts for January rose by 18.6% to 1.230 million, annualized. Single family starts rose from 740,000 to 926,000 and multifamily rose from 297,000 to 304,000. Permits rose from 1.326 million to 1.345 million. Total completions rose from 975,000 to 1.244 million and a 27.6% spike. These numbers will likely decline for February due to the Polar Vortex and severely cold weather.

Economics outside the US also had a detrimental impact on Friday's market. Late Thursday evening China reported a 20.7% decline in February exports compared to expectations for a 4.8% drop. Imports fell -5.2% compared to forecasts for a -1.4% decline. The trade surplus for the month was $4.8 billion and far below the expected $26.38 billion. For comparison the January number was $39.16 billion. Trade has fallen off the proverbial cliff. These are horrendous numbers. This is going to weigh on the trade talks, probably in favor of the U.S. but it will be a cloud over the global economy and the global markets.

The Asian markets imploded on Friday. The Shanghai Composite fell -4.4%, Hang Seng -1.9%, Nikkei -2.0%, ASX -1% and KOSPI -1.3%. This weighed on the US futures and then the payroll shocker was another hit to the premarket levels.


The economic elephant in room is of course the Chinese trade talks. Investors appear to be losing patience with the lack of visible progress. The longer they continue the more likely there will be negative consequences. However, while some analysts believed the lengthening process was China dragging their feet in order to force Trump into concessions before the elections, inside officials say that is not so.

When President Trump walked out of the meeting with Kim Jong-un, the stakes for China went up dramatically. President Xi cannot afford to schedule a high-profile meeting at Mar a Lago and have Trump walk out on him as threatened if the deal falls apart. The delay in scheduling this meeting is so negotiators on both sides can go over the agreement point by point in great detail and agree to each individual point. Once everyone is in complete agreement, the joint meeting will be scheduled. For this reason, we know once a meeting is announced, the trade deal has been completed, even though the photo op may not be for a couple of weeks.

I was turning negative on the negotiations as they drag on until I heard this explanation. Now, after seeing the Chinese trade numbers for February, I realize Xi cannot afford to have the negotiations fall apart. China's economy is collapsing and they must get rid of the tariffs to remove the roadblocks to trade.

Given the market decline on worries over deal complications, we could actually have a buy the news event when the meeting is announced. The 10-weeks of gains have been blunted and the overbought pressures have faded. The pendulum has swung back into the favor of a rally on the news.

At one point on Thursday the Dollar Index was trading at a two year high at 97.71. This was due mostly to the drop in the yuan but the euro is also weak ahead of the upcoming Brexit vote. This is going to pressure earnings for US companies in Q1 so expect some misses and guidance warnings.


The yield on the ten-year fell to 2.625% and a two-month low as treasuries became a safe haven once again. With China and Europe adding stimulus again, the US is standing out like a beacon on a hill in the global economy. More than $7 trillion in global debt is still trading at negative yields and that is likely to rise in the months ahead as Draghi tries to overcome the negative impact of a hard Brexit. This makes our treasuries very desirable.


We have a busy week ahead with a variety of economic reports. The price indexes are important but there are not likely to be any signs of inflation. We are importing deflation with the lowered price of goods given the increased global competition. Analysts are expecting both price indexes to show a gain of +0.2% but I would be surprised if that happened.

Retail sales and new home sales will be important because of the subset of analysts that still believe we could be headed for a recession. The vast majority do not believe that but there are some lone voices crying in the wilderness.

The FOMC meets the following week but there is no chance of a rate hike. With other central banks adding stimulus there is a growing number of analysts who believe the Fed's next move will be a cut. The fed funds futures are showing an 8% chance of a cut at the June meeting and zero chance of a hike. The chance of a cut rises to 27% by the January 2020 meeting.


The earnings calendar next week is lumped together all in one day. On Thursday we have Adobe, Broadcom, Dollar General, Oracle and Ulta Beauty. The rest of the week is a motley collection of small caps, many with market caps under $100 million and volume of less than 100,000 shares per day.

With 493 S&P companies already reported the earnings growth for Q4 is 16.7% with 69.2% of companies beating estimates. Revenue growth is 5.1% with 60.2% of companies beating estimates. There are six S&P companies reporting this week. There have been 77 guidance warnings and 30 guidance upgrades. Earnings growth estimates for Q1 are now expected to decline -1.3%. This is still not critical, but it is far from positive.


In stock news Costco (COST) exploded higher after their earnings beat on Thursday after the close. Revenue rose $2 billion to $35.4 billion and earnings of $2.01 rose 42% and blew away estimates of $1.69. Revenue was a fraction light, but nobody seemed to care given the 6.7% rise in same store sales and 25.5% rise in online sales.

In addition to their quarterly earnings the company said revenue for February rose 5% to $10.72 billion with same store sales up 4.7%. For the 26-week period ending March 3rd, revenue rose 8.6% from $68.51 billion to $74.42 billion. This is yet one more confirmation that Amazon is not a problem for Costco. They might as well be in different sectors.


Big Lots (BIG) reported earnings of $2.68 that blew by estimates for $2.30. The company had guided for $2.20-$2.40 so this was a big beat. Same store sales rose 3.1% but overall sales were down -2.5%. Earnings rose 9%. The company has been closing nonperforming stores and apparently, they closed the right ones.

However, the CEO said the sales acceleration in December and January is not expected to continue. They guided for Q1 for earnings to decline -26%. For the full year they are predicting $3.55-$3.75 and down from the $4.04 in 2018. Analysts were expecting 92 cents for Q1 and $3.66 for the full year. Given the lackluster guidance it might be beneficial to exit any positions in this stock after Friday's gain.


American Outdoor Brands, formerly Smith & Wesson, reported earnings of 16 cents that beat estimates for 12 cents, but the stock was crushed on guidance. Revenue of $162 million narrowly beat estimates for $161 million. They left full year guidance unchanged at 69-73 cents and $625-$635 million. The company is not expecting a material recovery in demand since President Trump is pro-gun and has vowed to veto any new gun control laws. President Obama's constant attack on gun owners made him the best gun salesmen in years. AOBC shares rose from $2.50 in 2011 to $30 by the end of 2016.


Eventbrite Inc (EB) reported a loss of 17 cents that missed estimates for a loss of 13 cents. Revenue of $75.9 million beat estimates for $73.2 million. However, they guided for Q1 revenue of $80-$84 million. Analysts were expecting earnings of 2 cents on revenue of $91.3 million. Shares were crushed for a 25% loss. Multiple analysts cut target prices to the low to mid $20s.


Navistar (NAV) reported earnings of 11 cents that missed estimates for 15 cents but that was considerably better than the 74-cent loss in the year ago quarter. Revenue of $2.4 billion rose a whopping 28% and beat estimates for $2.2 billion. The company blamed the earnings miss on one-time pension expenses. Orders rose 26% year over year in Q4 compared to a 35% decline for the rest of the industry. They currently have orders for 53,700 trucks and busses. They produced 71,400 in 2018. That is a lot of big rigs! They raised revenue guidance for 2019 to $11 billion with $875 million in Ebitda. They expect to have a 19% market share. I would be a buyer of Navistar once it finds a bottom.


El Pollo Loco (LOCO) reported pro forma earnings of 16 cents that beat estimates of 14 cents. Revenue of $106.3 million beat estimates for $104.4 million. Same store sales rose 4.4%. The company lowered guidance for 2019 to 70-75 cents and below estimates for 80 cents. They guided for revenue of $62-$65 million compared to estimates for $63.8 million. Same store sales guidance was 2-4%. They blamed the poor start to 2019 on the weather. Parts of California is experiencing near record rainfall and they operate about 80% of their restaurants in California. The CEO said this was the coldest February in 60 years.


National Beverage (FIZZ) reported earnings of 53 cents that missed estimates for 76 cents. Revenue of $220.9 million declined from $227.5 million. This was not the cause of the large decline. The CEO said the earnings miss was due to "injustice" with no immediate explanation. He later blamed other brands for cheapening their price or giving away products and said that was not right. This caused sales to decline on the better LaCroix product. Shares had already fallen 50% over the last six months. Was that unjust too?


Tesla (TSLA) said it signed an agreement with lenders in China for a 12-month credit facility worth $521 million to be used for the gigafactory in Shanghai. Ground was broken for the factory in January and it is expected to be completed in May. That would be a two-year project in the USA. The total cost is expected to be around $2 billion.

Tesla also said it had increased its current lending agreement with a syndicate of banks by $500 million to $2.425 billion and extended the maturity date by three years. The security is Tesla's accounts receivable, inventory and equipment. Tesla borrowed $431 million under this agreement in 2018.

Noted short seller Citron Research, a prior Tesla short, switched sides several months ago and went long. Andrew Neft, posted a picture of a "new Model S" saying I will be the first one in line when they go on sale. Tesla quickly said the picture was not a new Model S. Citron now expects Tesla shares to return to $320.

Citron tweeted, "Since Monday, Elon Musk has: Negotiated a $500 million loan for the first wholly owned auto plant in China, got support from the City of Las Vegas to build an underground tunnel, and launched the first vessel capable of carrying US astronauts in a decade. What have you done this week?" SpaceX did return that capsule to earth after delivering cargo and a dummy named Ripley to the space station.


After the close on Friday, S&P said XPO Logistics (XPO) and Colfax Corp (CFX) would replace Diamond Offshore (DO) and Big Lots (BIG) in the S&P Midcap 400. DO and BIG would replace Maiden Holding (MHLD) and Quorum Health (QHC) in the S&P Smallcap 600.

Netflix (NFLX) was cut from buy to neutral by Buckingham Research citing the company's sensitivity to market pullbacks and investor angst over the coming competition from multiple companies including Disney and Apple. The analyst said Netflix was 40% more reactive to market volatility than the overall S&P index. This suggests investors are uncertain about the future. Shares fell $10 on the news but rebounded to recover $7 before the close.


Crude prices continued to move sideways for the second week as inventories became volatile. After five weeks of gains, there was an 8.6 million barrel drop the prior week then 7.1 million gain last week. This volatility is keeping investors from picking a direction.

Active rigs declined by 11 last week after a 13 rig drop over the prior two weeks. Producers do not seem to be expecting prices to rise or they would be putting new rigs to work.

Natural gas prices are also flat at $2.85 for the last two weeks while inventory levels are plunging. With only 8 weeks of inventory left, traders are betting that weather will warm up and demand will decline. Inventories are at the bottom of the five-year average and already at the lows we saw in 2018. With 1,390 Bcf in inventory and averaging declines of 150 Bcf a week, we will be cutting it close if spring does not arrive soon.

On Saturday the Saudi Arabian oil minister said China and the US would lead global demand for oil in 2019 with an increase of 1.5 mmbpd in demand. He said looking at Venezuela alone would cause a price panic because of the drop in supply but looking at the US alone you would think the world was awash in oil. "You have to look at the market as a whole. We think 2019 demand is actually quite healthy." Chinese demand is breaking records and will hit 11.0 mmbpd in 2019.

Venezuelan exports have fallen by 40% to 920,000 bpd over the last month. The IEA recently predicted demand growth in 2019 at 1.4 mmbpd. The minister said Saudi output would be 9.8 mmbpd in April.

OPEC meets in Vienna on April 17-18th and again on June 25-26th. The minister said it was unlikely there would be a policy change in April and adjustments would be made in June. OPEC's problem is that the current 1.2 mmbpd of production cuts that was supposed to happen on January 1st, has suffered from noncompliance. Russia, Algeria, Iraq and Iran are several of the countries that have not complied. Saudi has cut more than 1.0 mmbpd by themselves in an effort to lower inventory levels. At $65 Brent, there is a strong desire by many OPEC countries to produce at 100% and raise the cash. If it was $45, they would be complying with the cuts to raise prices. Besides, uncle Saudi is cutting production for them. Eventually Saudi Arabia is going to force compliance and when they do it becomes very painful because prices plunge until everyone agrees.






Markets

Ten years ago, Friday March 6th, 2009, the S&P dipped to 666.79 intraday. On Monday March 9th, the closing low was 676.53. Those were the bear market lows and we have come a long way since then.

The S&P is up over 311% since that March 9th low. That is an outstanding return for buying the dip during maximum fear.

The Dow has rebounded from 6,547 to 25,451 or almost 300%. I went back and looked up the March 9th close of the Dow components at that time. This is how much they have improved and how many Dow points they added over the last ten years. Remember this table if you suddenly find yourself transported into the past.

Note that GE only gained $2.46 over the last ten years, despite being up and down multiple times. Exxon also proved to be a terrible investment over the years with the exception of their dividend. If this graphic convinces you of nothing else, it is that we should buy when others are fearful. The more fearful the better. Unfortunately, the decline lasted from November 2007 to March 2009. I am sure everyone remembers buying the dip multiple times over that period, but the bottom only came once. That is the challenge in trying to catch a falling knife.



Fast forward back to 2019 and we have a textbook resistance failure on the major indexes. The S&P failed at 2,815 and has broken support at 2,750. The next material levels to be tested are round number support at 2,700 and the convergence of the 50/100 day averages at 2,675.

There is a difference of opinion on whether the Friday rebound was simply short covering ahead of the weekend or the end of a normal 3% dip on profit taking. The prevailing commentary on Friday was the "China wants all the I's dotted and T's crossed before committing to a meeting with Trump." I understand that and I think that would lead to a positive market if that narrative continues to be pushed. That is a positive development after months of hostility.

If Monday arrives and there are rumors of a breakdown in negotiations, then all bets are off.


Friday was a mixed bag for the Dow with no specific trend on which sectors/stocks were up or down. The index did rebound 200 points from the lows and that is always positive but is also closed at a lower low. The rebound could have set the stage for a continued move higher on Monday, but it will depend on the Asian headlines on Sunday evening.

The Dow failed almost exactly on 26,191 and has not yet reached round number support at 25,000.



The big cap tech stocks had a rough week. There was some volatility in the middle with a different set of stocks up and down every day. The FANG stocks rebounded on Friday and that helped keep the index from posting a major loss. The -13 loss on Friday was neutral after the 90 point drop at the open. With some tech heavy earnings on Thursday there could be some positive midweek sentiment.



The Russell also had a textbook failure at the 200-day average and the round number resistance at 1,600. The Russell was down -5% from the 1,590 high on the 25th and the Friday rebound was lackluster. The 1,500 level is the next support test on any further decline.


I am neutral this week. I want to buy the dip as normal profit taking but the weakness in the Russell is causing me to question that strategy. The closing surge in the big caps could have been short covering or it could have been a cleverly executed buy program. We have seen many times over the years where some large fund triggers a buy program into a Friday close in hopes of forcing some short covering that carries over into Monday and creates a market rally. I have no evidence that was the case on Friday, but it was suspicious. I would watch the 2,750 level and buy a breakout over that level with a tight stop loss. Intraday support on Friday was 2,725 so a breakdown there would be an exit signal.

I think the pendulum has swung from a "sell the news" event on a trade deal and back to a "buy the news" event when a scheduled meeting is announced.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Life is 10% what happens to you and 90% how you react to it."

Charles Swindoll


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Index Wrap

Average Decline

by Jim Brown

Click here to email Jim Brown
The big cap indexes declined about 3% at their lows in what could be an average bout of profit taking. After a strong rally of multiple weeks, it is not unusual for the markets to pull back an average of 3% before continuing higher. There may or may not be any headlines that trigger the event. Normally any headlines are blamed whether they had any material impact or not.

In our case last week, the China trade talks were blamed but it was more than likely just exhaustion after ten weeks of gains.

We have had a nice run in 2019 with roughly a 19% rebound from the December lows. A 19% gain is outstanding since we don't gain that much in most years. We were due for some profit taking. Having the Chinese trade talks drag out with no date for a meeting of the presidents, simply gave investors an excuse to take profits.

Technically, the major indexes failed exactly where they should have at strong resistance. There was simply not enough in the way of positive headlines to overcome those levels.

The selling was not heavy although volume was moderate at 7.5 billion shares and 2:1 advancers to decliners. However, selling was broad based rather than localized to a couple sectors.

The broad-based selling was evident in the sharp decline on the A/D line for the S&P. This was the biggest decline since early December. The A/D line was 3:2 negative on Friday, thanks to the afternoon recovery but it was 4:1 negative on both Wednesday and Thursday. There were 395 decliners to 95 advancers both days. That was the worst breadth since January 22nd when the S&P fell 60 points intraday.


The Russell was the biggest loser last week and the A/D line shows. The small caps rolled over the prior week but accelerated lower the first week of March.


The percentage of S&P stocks over their 50-day average rose to 92.4% the prior week and fell back to 75.8% last week. That is a material change. The percentage over their 200-day average declined back to 54%.



The chip sector was a major drag on the Nasdaq. The $SOX traded at 1,391 on the 25th and fell back to 1,292 on Friday for a 7% decline. The index came to a stop right on the horizontal support from last summer and the 200-day at 1,300.



All the FANG stocks also declined an average of 4% for the week. It would be next to impossible for the Nasdaq to mount a credible move higher without the support of the FANG stocks. The four FANG stocks have a total market cap of roughly $2.1 trillion and if you add Apple that rises to $3 trillion. That is a major portion of the weighting in the Nasdaq indexes.


The Russell is leading the market lower. The index lost 4.5% last week and is showing no sign of a recovery. I scanned the charts of more than 300 small cap stocks this weekend and I doubt there were 20 that were positive. I would be very surprised to see the small caps rebound in the coming week.


The Russell posted a textbook resistance failure at the 200-day and appears headed for a retest of 1,500 and possible 1,465. All the oscillators are negative and declining rapidly. There is no reason to buy these stocks today.


I would urge caution until the market rises on solid volume and the S&P trades convincingly above 2,750. The overbought pressures should have faded after last week but there is still no reason to buy. Q1 earnings are weak, the economy is weakening, China's economy is imploding, and Britain is racing toward a hard Brexit that could crash the economy in the eurozone. Be patient, wait until the market confirms a new uptrend.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Once More with Feeling

by Jim Brown

Click here to email Jim Brown

Editors Note:

We are going to keep running this play until we get it right. Caterpillar is still the main beneficiary of a trade deal with China. After last week's decline they are also priced right.

 

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


NEW DIRECTIONAL CALL PLAYS

CAT - Caterpillar - Company Profile

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Its Construction Industries segment offers asphalt pavers, compactors, cold planers, feller bunchers, harvesters, motorgraders, pipelayers, road reclaimers, skidders, telehandlers, and utility vehicles; backhoe, knuckleboom, compact track, multi-terrain, skid steer, and track-type loaders; forestry and wheel excavators; and site prep and track-type tractors. The company's Resource Industries segment provides electric rope and hydraulic shovels, draglines, rotary drills, hard rock vehicles, track-type tractors, mining trucks, longwall miners, wheel loaders, off-highway and articulated trucks, wheel tractor scrapers, wheel dozers, landfill and soil compactors, machinery components, electronics and control systems, select work tools, and hard rock continuous mining systems. Its Energy & Transportation segment offers reciprocating engine powered generator sets; reciprocating engines and integrated systems for the power generation, marine, oil, and gas industries; turbines, centrifugal gas compressors, and related services; remanufactured reciprocating engines and components; and diesel-electric locomotives and components, and other rail-related products. The company's Financial Products segment provides operating and finance leases, installment sale contracts, working capital loans, and wholesale financing; and insurance and risk management products. Its All Other operating segment manufactures filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, and rubber sealing and connecting components; parts distribution; integrated logistics solutions and distribution services; and digital investments services. 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.

Caterpillar has had a rough five months. Shares were testing $160 when the China tariff problem began, and they have languished as low as $112 in the aftermath. Every time it looks like the China talks are progressing, shares run up to about $140. Every time it looks like talks are breaking down, they pullback to $130 or lower. If we ever get an actual agreement, they should blast higher to the $150-$160 level once again.

Shares fell from $142 to $130 over the last two weeks on the latest headlines about negotiations. With the president continually saying there will be a meeting with President Xi in March, that gives us a short-term window for success. CAT also has reasonably priced options.

Earnings April 29th.

Buy May $140 Call, currently $3.25, initial stop loss $122.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Deck is Clear

by Jim Brown

Click here to email Jim Brown

Editors Note:

The worst week for the markets in 2019 has cleared the portfolio of all but one stock. Our biggest winner, PAYX, finally collapsed at the open to stop us out. The afternoon rebound could be a signal of a pending market recovery but we will need confirmation before backing up the truck.



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


ASHR - Chinese A-Shares ETF
The long position was stopped at the open at $26.85.

PAYX - Paychex
The long position was stopped at $75.50.


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


BULLISH Play Updates

ASHR - CSI China 300 ETF - ETF Profile

Comments:

The A-shares play was in trouble from the start. We got a terrible fill at $2.62 and nearly $1 above the price an hour later. Then headlines began breaking about the trade deal crumbling followed by horrible economics from China. The 4% drop in the Chinese market and stop out on Friday was a mercy killing.

Original Trade Description: March 2nd

The investment seeks investment results that correspond generally to the performance, before fees and expenses, of the CSI 300 Index. The fund will normally invest at least 80% of its total assets in securities of issuers that comprise the underlying index. The underlying index is designed to reflect the price fluctuation and performance of the China A-Share market and is composed of the 300 largest and most liquid stocks in the China A-Share market. The underlying index includes small-cap, mid-cap, and large-cap stocks. Company description from FinViz.com.

The Chinese equity markets have been rising on anticipation of a completed trade deal. Chinese focused ETFs have been rising sharply.

However, a move by MCSI last week is going to lift them even higher. MCSI, the global index provider, announced they were raising the weighting of the Chinese mainland A-Shares from the current 5% weighting to 20% for a number of their global indexes. The weighting will rise to 10% in May, 15% in August and 20% in November.

In 2018 MCSI added 236 China listed large cap stocks to its emerging market index. Most importantly, Chinese A-shares were included in the Emerging Markets Index for the first time.

The increase in weighting will trigger more than $80 billion into Chinese equities. JP Morgan believes it could draw $85 billion and Goldman Sachs expects more than $70 billion in inflows to A-shares.

In addition FTSE Russell and S&P Dow Jones are going to begin adding yuan-denominated Chinese shares to their global benchmark indexes.

The ASHRs ETF holds a basket of 303 large cap Chinese stocks that will benefit from the index additions mentioned above. At the beginning of 2018, before all the trade issues erupted, the ASHR was trading at $35 and rising. Since the dispute shares fell to $24. With multiple index companies adding the large cap Chinese stocks to their indexes for the first time, there should be a solid ramp back to $35 or even higher. A successful Chinese trade deal will give it even more momentum.

The ETF is jerky because it is based on the overnight activity in China's market. It will normally gap open as trade begins in the US.

Position 3/4/19:
Closed 3/8: Long July $29.71 call @ $1.46, exit .85, -1.77 loss.


INTC - Intel - Company Profile

Comments:

No specific news. The Semiconductor Index has fallen 7% from the Feb 25th high but Intel is hanging on to much of its recent gains.

Original Trade Description: Feb 16th

Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

In November Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago, Intel had 6.5 billion shares outstanding. If they complete this buyback program, they will have just over 4 billion shares outstanding.

Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.

Intel reported Q4 earnings of $1.28 that beat estimates for $1.22. However, revenue of $18.66 billion missed estimates for $19.02. Their biggest problem was guidance for Q1 of 87 cents on $16 billion in revenue. Analysts were expecting $1 on $17.29 billion.

Intel is poised to benefit from a trade agreement with China. They currently get 24% of their revenue from China. With the advent of 5G, Intel is poised to be a leading player. They bill themselves as an "end to end" provider. The 5G revolution is not only going to replace nearly every piece of networking gear on the planet, every cellphone owner will be upgrading to a new 5G phone, many with an Intel modem. Remember the old commercials from the 2000's, "Intel Inside?" With Intel's new push into the internet of things (IoT), smartphone communications and self-driving vehicles, they really will be inside most electronic products.

Intel is expected to grow revenue by 5% in 2019. That is better than the sector forecast for 2% growth.

Earnings April 25th.

We have to reach out to the June option cycle to get a strike that comes after earnings and will keep the premiums inflated. We can buy time, but we do not have to use it.

Position 2/19:
Long June $55 call @ $1.53, see portfolio graphic for stop loss.


PAYX - Paychex Inc - Company Profile

Comments:

No specific news. Shares finally succumbed to profit taking in the broader market and fell to stop us out.

Original Trade Description: Feb 3rd

Paychex, Inc. provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Europe. The company offers payroll processing services; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. It also provides HR outsourcing services, including Paychex HR solutions comprising payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative; and retirement services administration, including plan implementation, ongoing compliance with government regulations, employee and employer reporting, participant and employer online access, electronic funds transfer, and other administrative services. In addition, the company offers insurance services for property and casualty coverage, such as workers' compensation, business-owner policies, and commercial auto, as well as health and benefits coverage, including health, dental, vision, and life; cloud-based HR administration software products for employee benefits management and administration, time and attendance, recruiting, and onboarding solutions; and other HR services and products, such as employee handbooks, management manuals, and personnel and required regulatory forms. Further, it provides various accounting and financial services to small to medium-sized businesses comprising payroll funding and outsourcing services, which include payroll processing, invoicing, and tax preparation; and various services, such as payment processing services, financial fitness programs, and a small-business loan resource center. The company markets its products and services through direct sales force. Paychex, Inc. was founded in 1979 and is headquartered in Rochester, New York. Company description from FinViz.com.

The company reported earnings of 65 cents that rose 20.4% and beat estimates for 63 cents. Revenue of $858.9 million rose 7% and beat estimates for $855 million. Free cash flow from operations was $223.5 million. They paid $201.3 million in dividends in the quarter. The annual dividend is $2.24 or a 3.12% yield.

For 2019 the company guided for 18% to 20% revenue growth in PEO and insurance services and 4% growth in management solutions. Interest on funds held for clients is expected to rise by 20-25%. Earnings are expected to rise 11-12%.

During the quarter they announced a deal to acquire Florida based Oasis Outsourcing for $1.2 billion in cash. That is expected to bolster the company's PEO strategy an expand PEO sales and the client base. PEO stands for professional employer organization. This is where they provide all types of HR solutions to small businesses.

Earnings March 20th.

Shares have moved up steadily from the December low and broke above December 3rd resistance high on Friday. The next target is $75 and the October high. With strong earnings, guidance and dividend, shares should continue to be in favor.

The March options cycle expires 5 days before earnings, so we have to reach out to June to prevent premium erosion ahead of earnings.

Position 2/4/19:
Closed 3/8: Long June $75 call @ $1.90, exit $2.95, +1.05 gain.


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