Option Investor
Newsletter

Daily Newsletter, Saturday, 5/25/2019

Table of Contents

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

Market Wrap

Five Consecutive Weeks

by Jim Brown

Click here to email Jim Brown

The Dow posted its fifth consecutive weekly loss and the worst run since 2011.

Weekly Statistics

Friday Statistics

Obviously, you can do a lot of things with statistics. While the Dow has had its longest string of consecutive weekly losses since 2011, it is only down 4% from the recent highs. In the December crash it was down -18.8% in only three weeks. I know which one I would rather see happen.


The Russell 2000 had an almost identical rebound to the 50% level but immediately crashed back to a four-month low. Unfortunately, the small caps lead, and they are leading down. If the index breaks and closes below the 1,500 level it would trigger a lot of technical selling and the overall market could begin a new leg lower.



There was only one economic report on Friday, and it was ugly. Durable goods orders for April declined -2.1% after a 1.7% rise in March. The March number was revised lower from 2.8%. A sharp drop in aircraft orders was blamed for the decline. With Boeing having problems with the 737 Max, the overall sales for aircraft declined. Boeing posted almost zero orders in April, down from 44 in March. They did report 4 bookkeeping adjustments that technically kept them above zero. Nondefense capital goods orders fell -5.0% but ex-aircraft that improved to -0.9%.

Defense capital orders rose sharply with a 4.8% gain. On a year over year basis they are up 28.9%. Tariffs on steel and aluminum weighed on the orders as buyers held off hoping for a resolution. This is the second time in 2019 that durable goods orders declined with a -2.6% decline in February.

This was not a good week for economics. The Chicago Fed National Activity Index fell from -0.15 to -0.45. Existing home sales fell from 5.21 million to 5.19 million and missed estimates for 5.36 million. New home sales declined from 692,000 to 673,000. The Kansas Fed Manufacturing Survey declined from 5 to 4 and its second consecutive decline from 10 in March.

On the positive side weekly jobless claims declined to 211,000 and mortgage applications rose 2.4%. E-Commerce sales for Q1 rose from $132.8 billion to $137.7 billion.

The weakness prompted multiple stories about an impending recession. JP Morgan cut their GDP estimates from 2.25% to 1.0% growth. That may be slightly premature because the Atlanta Fed real time GDPNow forecast is 1.3% for Q2 even after the negative economics. JPM said "Net, net, business investment is sputtering at the start of the second quarter as uncertainty and geopolitical risks are a heavy anchor that appears to be a big drag on company's willingness to order up new equipment." "Business confidence is clearly lacking in the manufacturing sector."


What the low numbers did was reset the expectations for a rate cut before January. According to the CME Fed funds futures, there is only a 16.2% chance of rates remaining level through January. That means there is an 83.8% chance of a rate cut. There is a 47% chance of two cuts. While that is highly unlikely, that is what the futures are saying.


The economic calendar is lackluster until Friday. The manufacturing surveys rarely move the market and the GDP release is a revision and not expected to move materially. The personal income and spending numbers on Friday are important for the Fed with the PCE Deflator a critical data point. However, schools are out, and summer has begun and economics will be ignored due to a lack of market interest by retail investors.


There are some decent earnings this week with Palo Alto Networks, Costco, Dell and Uber heading the list. Palo Alto will have news on 5G and guidance will be important given the Huawei sanctions. Costco and Dell are not far from recent highs and guidance will be important. The retail sales trends have been choppy, but Costco is expected to show continued gains. Dell should be profiting from the decline in chip prices, but surveys claim PC sales declined in Q1.

Uber reports its first ever earnings as a public company and everyone expects another big loss. This will be a critical report since shares are barely holding their ground after their IPO. There will be a giant dose of volatility regardless of what they report. There will be a big move.

For the current cycle 483 S&P companies have reported earnings with 75.2% beating estimates and the current forecast is for a 1.5% growth rate. Revenue growth is now forecast to be 5.6% for Q1. Only 57.1% have beaten revenue estimates. There have been 60 earnings warnings for Q2 and 20 earnings upgrades. Nine S&P companies report this week.


Foot Locker (FL) shares were crushed after reporting earnings of $1.53 that missed estimates for $1.61. Revenue of $2.08 billion also missed estimates for $2.11 billion. Same store sales rose 4.6% but missed estimates for 5.6%. The company also cut guidance from double digit earnings growth to high single digits. They warned that "the proposed tariff of 25% on footwear would be catastrophic for consumers, companies and the American economy as a whole." The Footwear Distributors and Retailers of America (FDRA), a trade association, said the tariff would add $7 billion in additional costs for footwear customers every year.

The CEO said Q2 would not be very exciting because of changes to merchandise and the normal course of inventory turnover. Shares fell to a 52-week low and 16% decline.


Hibbett Sports (HIBB) shares were going in the other direction after reporting earnings of $1.61 that blew past estimates for $1.32. Revenue of $343.3 million also beat estimates for $327.0 million. Same store sales rose a whopping 5.1% compared to estimates for a 0.7% decline. They raised guidance from $1.80-$2.00 to $2.00-$2.15. Analysts were expecting $1.90. They raised same store sales estimates from a -1% to +1% range to +0.5%-2.0% range. They said improved web traffic and their buy online pick up in stores program was improving store traffic. Shares rallied 21% on the news.


Autodesk (ADSK) shares were slammed after reporting adjusted earnings of 45 cents that rose 700% from 6 cents but missed estimates for 47 cents. Revenue of $735 million rose 31% but missed estimates for $741 million. Billings rose 40% to $798 million. They guided for Q2 for revenue of $787 million at the midpoint and analysts were expecting $791 million. They also guided for 61 cents in earnings and analysts were expecting 63 cents.

They generated free cash flow of $207 million, $550 million over the last 12 months and they are on target to generate $1.35 billion through fiscal 2020. Shares were hammered for a 5% loss.


The Hewlett Packard twins (HPE and HPQ) both reported earnings on Thursday after the close. HPQ reported a 2.9% rise in earnings to 53 cents that beat estimates for 51 cents. Revenue of $14 billion was in line with estimates. HPE reported earnings that rose 14.4% to 42 cents and beat estimates for 37 cents. Revenue of $7.2 billion missed estimates for $7.4 billion. Both companies had positive and negatives in their metrics. HPQ was seen as the better results and shares rose 4%. HPE gave back early gains to trade flat.



Reuters reported late Thursday that "three sources" claimed Boeing would be allowed to fly the 737 MAX planes on domestic routes as soon as late June. The comments were made in a meeting between the FAA and the International Civil Aviation Organization (ICAO) in Montreal. Reuters said there was no precise timetable but the FAA was leaning towards a removal of the restrictions after the software upgrade.

Unfortunately, on Friday the Wall Street Journal reported the FAA could be expanding their safety review to include older models of the 737. The WSJ claimed this extended review and a new pilot training program could add months to the grounding.

Boeing has completed the software modifications, but they have not yet submitted it to the FAA for certification. Reportedly, Boeing is being forced to come up with new procedures for human pilots when the automatic pilot software goes haywire. The FAA administrator said once Boeing submits their software update for certification is should take the FAA 3-4 weeks to complete certification. After certification, Boeing would install the new software and pilots would have to complete a new training course on how to use it and how to recover from a software error. That suggests late August as a potential date for ungrounding the planes.

American Airlines (AAL), Southwest Airlines (LUV) and United Airlines (UAL) have all cancelled additional flight schedules well into August. The FAA administrator said reporters should not try to apply comments and project dates. "It takes as long as it takes" to get it right.

I would not get too excited about buying the dip because Boeing has a lot of costs ahead. Passenger compensation is expected to exceed $1.4 billion. Airlines with grounded planes are going to demand compensation for lost revenue and that could be billions more. However, Boeing is cash rich and they could write a check for $5 billion and barely feel the impact. It is the negative headlines that will produce the most pain.


Tesla is having a very bad month. Cars are crashing, shares are plunging, competition is rising and price targets are falling. Shares have fallen to two-year lows after Elon Musk said earlier in the week that Tesla was running out of money and need to cut costs dramatically. Shares tried to rally at the open on Friday after Musk sent another email to employees promising record-braking sales. He said Tesla has received 50,000 net new orders in this quarter. He said Tesla could break a prior delivery record if everyone would work together to hit production targets.

"Based on current trends, we have a good chance of exceeding the record 90,700 deliveries from Q4 last year and making this the highest delivery/sales quarter in Tesla history." The company missed production estimates in Q1 and Q4 despite Q4 deliveries setting a record.

Analysts pointed out that the EV tax credit for Tesla cars will decline another 50% to $1,875 at the end of June. Other newer competitors still qualify for the $7,500 tax credit. With 18 EV models set to be released by the end of 2020 and 40 by the end of 2022, prices are going to get cheaper and competition will be fierce.

Multiple analysts posted bearish targets from $10 to $50 and Citigroup reiterated a sell rating. Bank of America, CFRA and Evercore also have sell ratings. The $200 level was a downside target for multiple brokers and with shares now at $190 they are reevaluating their analysis.

The National Transportation Safety Board said a Tesla that crashed on March 1st was operating on Autopilot at the time of the crash. This is the third fatal crash of cars on Autopilot. This trend will continue because Autopilot is not expected to be fully capable until 2021 but drivers are lulled into a false sense of security by the current system.

Shares are on autopilot towards lower levels as negative headlines outpace positive headlines.

Rumors are starting to reappear about Apple buying Tesla. They once offered $230 a share for the company but Musk turned them down. Since Musk has found out how hard it is to run a car company and a dozen other businesses at the same time, he may be more interested the next time he is approached with a lifeline offer.


I seriously doubt Apple will be making an offer for Tesla since they are also in trouble. Shares have lost more than $100 billion in market cap since May 1st. With Chinese manufacturers offering phones in China for $200-$300 and the government trying to talk citizens out of buying anything from an American company, the outlook for Apple is rough. They receive 17% of their revenue from China and sales in China have been declining even before this latest hit from nationalism. The tariffs are also a factor and are reducing profits per phone by an average of $160. This is going to be a rough quarter for smartphone sales.


Morgan Stanley downgraded Constellation Brands (STZ) after a 36% rebound from the January 9th low. The analyst also warned that beer sales are slowing and Constellation will have some tough comps from 2018. They still like the company but worry that the weak forecast for beer sales in general will drag shares lower. They are not factoring in the impact from the Canopy Growth investment because nobody knows what sales of THC infused beverages will bring. They are expected to be available for sale in Q4. Constellation is also preparing CBD infused beverages. I personally believe shares will be a lot higher by the end of 2021 as all these products become hot sellers.


Qualcomm (QCOM) shares were punished again when US District Court Judge Lucy Koh ruled erroneously that Qualcomm was monopolistic and unfair in their patent strategies. Shares collapsed. It was the end of the world for Qualcomm, except that it wasn't. Only those who did not have an understanding of the problem were predicting gloom and doom.

First, the ruling was very shallow and no evidence was presented that any consumers were harmed. There was no weighing of potential harm against potential benefits, like having a phone at all since Qualcomm's patents make the phones possible. There was no economic analysis at all. Lawyers claim those two points make the ruling very likely to be voided on appeal.

Lastly, this only involved the Standard Essential Patents (SEPs) and does not apply to the non-standard essential patents or NSEPs. These are the vast majority of Qualcomm's patents. The SEPs only account for about $7.50-$13.00 on a smart phone. Even if the verdict stood the financial impact to Qualcomm would be minimal since they will still be able to collect a reduced price on the SEPs after renegotiation.

Last month Apple testified that this technology was needed, Qualcomm had the best technology in these areas and that the SEP licensing was mutually beneficial and the licensing model was entirely legal.

Qualcomm is going to request a stay to halt the process from moving forward while they request an expedited appeal, which they will most likely win. Under the most favorable circumstances the appeal is not likely to be decided within 18 months. Since Qualcomm's 5G technology is going to be even more in demand with the ousting of Huawei, we could even see the White House get involved to limit any negative consequences for Qualcomm.

This dip should be buyable since there is no financial impact for at least two years, and it could all be erased. Wait for a base to form and then begin building a position.


Piper Jaffray said based on "conservative growth and valuation assumptions" Amazon (AMZN) could be worth $3,000 a share in 24-36 months. This would be a $1.5 trillion market cap. The analyst said their confidence in the projection was 65% or higher. Using a sum of the parts analysis and factoring in decelerating growth from every major category of Amazon's business we have a "high degree of confidence that shares can reach this level without any major acquisition or significant changes to the business model. They said a potential spinoff of AWS would highlight the undervaluation of all other Amazon businesses. They also pointed out that AWS and advertising revenues were growing well above the rates for the sector in general. Their 12-month price target is $2,225.


Novartis (NVS) received FDA approval for Zolgensma, a one-time gene therapy treatment for spinal muscular atrophy. This is the leading genetic cause of infant mortality and affects 1 in every 11,000 births.

Here is the catch. The drug costs $2.1 million for the one-time dosing. Don't have $2.1 million or your insurance is balking on payment, no problem. Novartis will let you make payments at $425,000 a year for five years. The company rationalized this price by saying this is only 50% of the 10-year cost of the current chronic management of this disease. This makes this the most expensive drug ever.

Biogen has a similar treatment for the same disease that costs $750,000 for the first year and $375,000 annually thereafter. Be very thankful your children did not have this disease.

Shares rose $3 on the news they were in talks with 15 insurance companies on payment options.


Gasoline prices rose 67 cents between New Year's day and the peak on May 4th. This was the second biggest seasonal rise on record. Typically the peak occurs around Memorial Day but the recent volatility in crude prices allowed gasoline prices to decline about 20 cents from the peak. The average is still about $2.80 with California drivers paying more than $4. Despite the rise in prices more than 43 million Americans are expected to travel this weekend. Nearly 75% of Americans are planning a road trip this summer according to GasBuddy.com.

Oil prices did not rise that high this year and the spike in gasoline prices came from an unusually large number of refinery outages. Now that those refiners are coming back online, the price of fuel is falling.



Crude prices crashed for the week on the increasing fears that the trade war will weaken demand. China was also threatening to buy less oil and LNG from the US and that impacted prices.

There is currently 3.3 million bpd of production outages around the world, but Saudi Arabia has promised to keep the market well supplied. Even with the Iranian military threat and the bombing of four tankers in the Persian Gulf, prices declined on the Saudi promise and demand concerns.

Active rigs declined by -4 as oil prices weakened. The energy sector as evidenced by the Energy Select SPDR (XLE) is in a bear market with a 22% decline from its October highs. There is too much oil sloshing around in the global system despite the current outages. If demand does decline, we could see some surprisingly low prices for crude. The summer driving season begins this weekend, but oil prices are not reacting.

Crude inventories are actually rising in the US and this is unheard of for this time of year.






Markets

The Dow posted its fifth consecutive week of losses and the longest streak since 2011. That is the headline on the financial news this weekend and it is not likely to stimulate investors to come back into the market. The five weeks of declines as we entered the "sell in May and go away" period more than likely convinced investors this was a good year to follow the trend and move to cash ahead of summer vacations. The second half of that saying is "come back again after Labor Day." Very few investors want to be at risk in the market while they are on a cruise or at the beach with their family. It is much safer to park your cash in a fund or long-term stock positions where you can withstand a little volatility. Trading comes to a screeching halt over the summer months. Volume on Friday was barely over 5 billion shares.

The market is beginning to understand that this is no longer just a trade war with China. It is a new cold war. China's stated goal is to dominate the world in technology, trade and military might over the next two decades. President Trump understands this threat and is trying to slow them down under the guise of a trade war. If it was just trade, he could have easily convinced China to buy billions more in energy and agricultural products and this fight would have been over months ago. Along with that goal, Trump also wanted to end theft of intellectual property and forced technology transfers. Instead of stealing technology from the US and others, they would have to create it themselves.

This is not new. When the Space Shuttle was flying China stole the blueprints and began to construct their own shuttle. The US discovered the plan to copy the US shuttle and they created fake blueprints and allowed them to also be hacked. Those fake plans had subtle design flaws that would prevent the shuttle from working. China did not discover the flaws until they had constructed their first prototype after ten years of work. When it was discovered they were too far down the path and the US was already abandoning the shuttle program so China killed their program as well.

China has working prototypes of the F-22 Raptor and the F-35 fighter developed from blueprints stolen in cyber attacks against American contractors. Do we have the plans for their new hypersonic carrier killer missiles? I doubt it. Those same US defense contractors report thousands of attempted hacks every day from the massive teams of Chinese hackers. It has been reported that China employs more than 20,000 hackers in buildings where there are thousands employed around the clock seven days per week. If we continue to let China steal our intellectual property by any means it will only fuel their rise to be the dominant global power.

When China realized Trump was not going to back down no matter what, they stiffened their resolve because their way of life was at stake. This is not a trade war. This is a new cold war and it is likely to become significantly worse before it gets better. You will not hear it in the mainstream press, but other countries are expressing support for the president's efforts because China is stealing from them as well.

China plays the long game. They do not fret over what happens over a couple months or even a couple years. They have thousands of years of history and are approaching 100 years of communist rule. They do not have to worry about political opinions and with severe controls on social media and search engines, their people do not know there is a better life. President Xi can continue to stonewall the trade war until a new president replaces Trump even if it is six years from now and Xi can start the process all over in hopes of a better outcome. Timing is relative only to the US.

As investors slowly become aware of the deepening crisis, they will lose even more interest in the market. The S&P has already produced an almost perfect rebound from the initial dip and then a failure of that rebound. If the support at the 2,800 level is broken it would likely trigger an entirely new leg lower with 2,632 as the potential target. I know that is a scary thought, but the market does not care what we believe. A break below 2,800 would produce strong technical selling. Another break below the 200-day at 2,776 could enter free fall until 2,632. I would caution being overly long until the S&P moves back over 2,900 and erases the initial rebound failure.


The Dow is holding over the 100-day average but only barely. This could be just coincidence since the Dow rarely pays attention to averages given its thin 30 stock composition and price weighted swings. The 200-day at 25,433 is also in play but it is almost never respected. The Dow has tested the 25,200-support level multiple times and a breakdown there could target 24,000. Boeing was a big contributor on Friday, but it could just as easily erase 30 points on any given day. Friday was a short squeeze day ahead of a holiday weekend. Shares gapped up at the open and moved sideways the rest of the day on low volume. Friday's action should be ignored.



Both Nasdaq indexes closed right on critical support and right on the edge of a material decline. This pattern is bearish where a 50% rebound failed and the index quickly returns to support. Typically, support fails under those conditions. The Nasdaq Composite posted a minor 8-point gain but the big cap Nasdaq 100 Index posted a 7-point loss. The Nasdaq A/D line was 2:1 positive but the big cap stocks were mostly negative. Apple and Google have been major drags on the Nasdaq. Tesla has also been a negative drag along with the chip sector.




The small cap Russell 2000 is also at critical support and that was after a 12-point gain on Friday. This could be the calm before the storm. Small caps normally lead the market and they are right on the edge of a cliff. Would you buy this chart?


I would love to tell you that good times are just ahead. Unfortunately, I have nothing to justify a statement like that. There is a far better chance that the market will continue to move lower. I am not predicting a crash but just a continuation of the current trend. We are always just one tweet away from a monster rally or a major decline. With all the negativity coming out of China, it is highly unlikely there will be a quick resolution. The president may try to tweet his way to a solution in order to prop up the market, but I don't see the US making any major concessions to bring China back to the bargaining table. That coupled with the new Iranian tensions and rapidly slowing economics, suggests a further market decline.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Be miserable. Or motivate yourself. Whatever has to be done, it is always your choice.."

Wayne Dyer


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


Index Wrap

Complications Increasing

by Jim Brown

Click here to email Jim Brown
Initially it was all about trade and something that could be corrected. Now it is a cold war. The number of factors complicating the conflict with China seem to be increasing by the day. China has stiffened their posture towards the US and are making demands that will not be met. They have gone offensive with their nationalism push and recommending citizens not buy American products. They are preempting regular TV with documentary specials about China fighting the US in the Korean war. They are talking about halting imports of US oil and LNG worth billions every year.

The bluster is increasing on both sides and it is highly likely there will be another round of tariffs against the remaining $300 billion in Chinese imported goods. That will be followed by another round of retaliation from China.

The trade war has turned into a cold war and that war is heating up. Both presidents must maintain a strong posture to avoid looking weak to their constituents. That is more so in the case of Trump because Chinese citizens are prevented from knowing about the trade war by the country's strong censorship.

Meanwhile the equity market continues to erode. The Dow's five week losing streak is notable, but the 4% decline is not. This is a normal bull market correction process and until the decline surpasses 5%, institutional investors will not panic.

There are multiple critical levels this weekend. The Russell 2000 must hold 1,495-1,500 or sentiment will turn more bearish. The Nasdaq Composite needs to hold Friday's closing level and not decline any further. The intraday dip on Thursday to 7,525 was a potential disaster but the market recovered at the close. Initial support is 7,600-7,635 and that is being tested currently. The Nasdaq 100 has a similar level at 7,300 that must hold. The level on the S&P is 2,800 and that was tested on the 13th and again on Thursday.

Note the indicators on the bottom. All are fully in bearish mode. This suggests the market direction will remain bearish.




The A/D line on the S&P has flatlined for the last month. That means buyers and sellers are equally matched but that normally works in favor of the bears. The buyers get tired of buying dips that fail to rebound into a breakout, but the bears are perfectly happy to continue shorting resistance.


The small cap A/D is collapsing. Fund managers have given up on small caps for the summer and without the sudden appearance of a trade agreement with China, the small caps are likely to continue losing buyers.


The Nasdaq A/D is similar to the small caps. The chip wreck and big declines in several big cap techs has poisoned sentiment for the tech sector. The increase in tariffs is negative for tech stocks.


The FANG stocks plus Apple are really weighing on the Nasdaq and tech sentiment. Google continues to lead the decline and now the other three FANG stocks are following Google lower. Apple has lost more than $100 billion in market cap in May.


This is the same chart with Apple in place of Amazon. Note the sharp decline in black to match Google's drop.


This is a very telling chart with the Semiconductor Index plunging from extreme outperformance to under performance and leading the Nasdaq lower. The $SOX has lost 39% since late April.


The triple top formation on the Dow has held and a break of current support at 25,200 targets 24,000 to 23,500.


The day to day headline volatility is supporting the VIX at 15-16 but it is very possible we will see 20 again soon. The next negative headline that tops the prior headlines could be a game changer.


I continue to recommend a cautious position. Buying the dips only works for very short-term trades and there is nothing on the horizon that supports a new bull market. As the say, "the path of least resistance is down." Cash is a position and you cannot lose money while you are in cash. We need a new event to change the trend. That could happen at any minute if the right tweet appears but for now the presidents are both trying to out "stubborn" the other. That is not a recipe for rising equities.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Sell Off Overdone

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Chinese chip-wreck is overdone, and it is time to take a stand. Skyworks will retain its market share regardless of what happens to Huawei. Starbucks may not be so lucky as Chinese nationalism grows along with increased competition.



NEW DIRECTIONAL CALL PLAYS

SWKS - Skyworks - Company Profile

Skyworks Solutions, Inc., together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, antenna tuners, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase locked loops, phase shifters, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators. The company provides its products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets. It sells its products through direct sales force, electronic component distributors, and independent sales representatives. Skyworks Solutions, Inc. has a collaboration agreement with MediaTek Incorporated to deliver standards-based 5G solution. The company was founded in 1962 and is headquartered in Woburn, Massachusetts. Company description from FinViz.com.

Skyworks shares have been crushed in the tariff war and the resulting chip-wreck. Many of the companies that buy from Skyworks have been hit by tariffs that depress their sales. However, this could be n ideal buying opportunity.

Other than Qualcomm, Skyworks probably has the most to gain from the 5G revolution. They said the amount of Skyworks chips in 5G phones will be 40% more than in a 4G phone. Skyworks recently provided a graphic showing all the components they will be supplying for most 5G phones. Their revenue per phone will increase from $18 to $25 per phone.

5G is also going to revolutionize the Internet of Things (IoT) devices because the greater speed will allow them to perform more functions an be in more places. Skyworks will be selling those chipsets as well. Literally billions of 5G IoT devices will be sold over the next several years.

They do have risk. Huawei is on the verge of being blacklisted by the USA and the EU. They will have a hard time selling phones outside of China. Huawei is currently a large customer of Skyworks. However, just because Huawei will not be able to sell phones in the US or EU it does not mean people in those areas will not be buying phones. They will simply be buying different phones from other manufacturers and they will still contain Skyworks chips.

Skyworks rallied 36% off the December lows to close at $93.56 in April. They gave back 29% in the chip-wreck since May 1st to trade at support at $68. This is a monster drop to support and should be a buying opportunity. While we cannot foresee the future headlines, the drop back to support should prevent them from a continued decline unless the headlines are severe.

Earnings August 1st.

Buy July $75 call, currently $2.10, stop loss $65.85.


NEW DIRECTIONAL PUT PLAYS

SBUX - Starbucks - Company Profile

Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. Its stores offer coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink beverages, iced tea, and food and snacks; and various food products, such as pastries, breakfast sandwiches, and lunch items. The company also licenses its trademarks through licensed stores, and grocery and foodservice accounts. It offers its products under the Starbucks, Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange, Ethos, Frappuccino, Starbucks Reserve, Princi, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks VIA brand names. As of April 25, 2019, the company operated approximately 30,000 stores. Starbucks Corporation was founded in 1971 and is based in Seattle, Washington. Company description from FinViz.com.

Starbucks has been the king of coffee for decades. However, lately their market share has been under attack by McDonalds McCafe, Dunkin Donuts and Panera in the US. They were still king in China. Over the last decade they have opened 3,000 stores in China and continue to open one per day. Unfortunately, they have a new challenger in China that has opened nearly 3,000 stores in just the last year.

Starbucks expects to have 5,000 stores in China by 2025. Lukin Coffee plans to have 5,000 stores by the end of 2019. Where Starbucks is opening one store per day, Lukin is opening 7 stores per day.

The Starbucks theory has always been Chinese people will drink coffee once they are exposed to it. China is a tea culture. Starbucks stores appear, they get people to try coffee and some become converts and customers.

Luckin's plan is to offer a broad range of teas and coffee. That way the consumer does not have to change their taste patterns and can continue to be tea drinkers. Those that have been exposed to coffee at Starbucks can now get their coffee elsewhere.

The challenge for Starbucks is that Luckin is very price conscious. They do not accept cash. All purchases are made and paid through their app. Just signing up will get you a reward of 14 coupons on average. Some allow you to purchase a latte for as little as 69 cents where Starbucks charges $4. Once you have downloaded their app you receive a continuous stream of promotions based on what you have ordered in the past.

Starbucks is the lumbering giant in the China coffee market and Luckin is the super smart entrepreneurial kid that is running circles around the giant.

Coupled with the market share challenges in the US, Starbucks has a hard road ahead. It is very possible they will succeed but over the next several months investors are likely to be wary since China has been the growth sector for Starbucks. If their earnings begin to show weakness and loss of market share, the 2019 rally could quickly evaporate.

Earnings July 25th.

Buy July $75 put, currently $1.75, stop loss $79.85.



In Play Updates and Reviews

Weak Week

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P did not close at the lows for the week, but sentiment remains bearish. The low for the week was 2,805 with support at 2,800. The Friday rebound was lackluster and on extremely weak volume. We cannot determine any change in the trend from last week's trading. The trend is down until proven otherwise.



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


LYFT - Lyft
The short position was stopped at $57.25.

CNC - Centene
The long position was entered at the open on Monday.

UBER - Uber Technology
The short position was entered at the open on Monday.


BULLISH Play Updates

CNC - Centene Corp - Company Profile

Comments:

Big drop on Thursday with the market. Rebounded on Friday with news Dan Loeb's Third Point hedge fund was accumulating a position so they could lobby for putting itself up for sale before committing to the $17.3 billion acquisition of WellCare.

Original Trade Description: April 19th

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. The company's Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which covers dually eligible individuals, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray, home-based primary care, transportation assistance, vision care, dental care, telehealth, immunization, specialty pharmacy, therapy, social work, nurse advisory, and care coordination services, as well as prescriptions, limited over-the-counter drugs, medical equipment, and behavioral health and abuse services. This segment also offers various individual, small group, and large group commercial healthcare products to employers and directly to members in the Managed Care segment. Its Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; and vision and dental, and management services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri. Company description from FinViz.com.

Centene has had a rocky six months and shares were recovering in early April until the sector was caught in the Medicare for All downdraft. Since then they reported strong earnings and guidance and are moving up again.

The company reported earnings for $1.39 that beat estimates for $1.35. Revenue rose 40% to $18.44 billion and easily beat estimates for $17.46 billion. Medicare revenue rose 19% to $1.38 billion and commercial policy revenue rose 19% to $3.65 billion.

They raised full year guidance from $4.11-$4.31 to $4.24-$4.44. Revenue guidance rose from $70.3-$71.1 billion to $72.8-$73.6 billion.

Given the decline from the mid $70s in November, our risk should be minimal on an earnings beat and guidance raise. They should outperform the sector.

Earnings July 23rd.

Since Centene has nothing to do with imports or exports the China trade issues should not be a factor.

Shares are facing resistance at $57-$58 but should be clear sailing after that.

Position 5/20:
Long July $60 call @ $2.15, see portfolio graphic for stop loss.


TDOC - Teledoc Health - Company Profile

Comments:

No specific news. No material decline despite the weak market.

Original Trade Description: May 4th

Teladoc Health, Inc. provides telehealth services. It offers a portfolio of services and solutions covering 450 medical subspecialties, such as flu and upper respiratory infections, cancer, and congestive heart failure. The company provides its services through mobile devices, the Internet, video, and phone. It serves employers, health plans, health systems, and other entities in approximately 100 countries worldwide. Teladoc Health, Inc. has a collaboration with Cincinnati Children's Hospital Medical Center to develop a consumer pediatric telehealth platform. The company was formerly known as Teladoc, Inc. and changed its name to Teladoc Health, Inc. in August 2018. Teladoc Health, Inc. was founded in 2002 and is headquartered in Purchase, New York. Company description from FinViz.com.

Teladoc is a subscription medical service where you can access a live doctor almost at will for $49 a month. Business is booming.

Q1 revenue rose 43% from $89.6 million to $128.6 million. They still posted an earnings loss because they are in customer acquisition mode. Long-term the subscription model will be a money maker. US paid memberships rose 28% to 26.7 million.

Subscription revenue in the US grew 33% to $81 million. International revenue more than doubled to $30 million. Gross margins were 65.3%. The cash on hand at the end of the quarter was $480 million.

Some insurance companies cover the Teledoc fees. An individual pays $49 a month for a suite of services that includes unlimited doctor consultations. US visit-fee-only access, which are users not covered by insurance, rose 7% to 10.2 million. Total global visits rose 75% to 1.06 million.

When you consider all the hassle of making an appointment with your regular doctor, driving to the appointment and back and waiting an hour in the office to see the doctor for 5 minutes, this seems like a bargain. A patient can pick up their phone and be talking to a doctor in minutes. If they have a video camera on their phone or computer, they can talk face to face, which is handy if you have some external affliction.

What does a normal doctor visit consist of other than blood pressure, pulse, sometimes temperature and a lot of waiting for the doctor to walk in for 5 minutes and write a prescription and leave.

The company affirmed full year guidance of $535-$545 million, a 29% boost in revenue. Adjusted EBITDA of $25-$35 million.

Position 5/6:
Long July $65 Call @ $3.30, see portfolio graphic for stop loss.
Optional: Short July $75 Call @ $1.40, see portfolio graphic for stop loss.
Net debit $1.90.


USO - US Oil Fund - ETF Profile

Comments:

The China trade war decimated the energy sector on worries the war would significantly decrease global demand. In addition Saudi Arabia assured the world there was enough oil to overcome the current 3.3 million bpd in global outages. I am recommending we close this position.

Original Trade Description: May 4th

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

The USO rallied to nearly $14 in mid-April as WTI prices moved to $65. Oil prices tend to peak around Memorial Day and hold that level or slightly higher into the July 4th weekend.

We found out this weekend that one million bpd of Russian oil will be offline for the next couple weeks and that will squeeze global supply. We are also only two weeks past the elimination of waivers on Iranian oil and that removed another million barrels from the market. Turkey and China are the only two countries to defy the sanctions and continue purchases.

The stage is set for a potential oil rally back over $65. That would put the USO back near $14 or higher depending on what kind of ramp we get into Memorial Day and the beginning of the driving season.

I am recommending we buy an inexpensive July call option and target a 100% return over the next couple weeks.

Position 5/6:
Long July $13.50 call @ 39 cents, no initial stop loss. Target 85-cents to exit.


BEARISH Play Updates

LYFT - Lyft Inc - Company Profile

Comments:

Lyft shares continued to rebound on Uber's lack of decline and moved over prior resistance to stop us out.

Original Trade Description: May 11th

Lyft, Inc. operates a peer-to-peer marketplace for on-demand ridesharing in the United States and Canada. It provides Ridesharing Marketplace, which facilitates lead generation, billing and settlement, support, and related activities to enable drivers to provide their transportation services to riders. The company also offers a network of shared bikes and scooters in various cities to address the needs of riders for shorter routes; Express Drive program, a flexible car rentals program which connects drivers who need access to a car with third-party rental car companies; and concierge for organizations to manage the transportation needs of their customers and employees. In addition, it integrates third-party public transit data into the Lyft app to offer various enterprise programs, including monthly ride credits for daily commutes, supplementing public transit by providing rides for the first and last leg of commute trips, late-night rides home, and shuttle replacement rides. The company was formerly known as Zimride, Inc. and changed its name to Lyft, Inc. in 2013. Lyft, Inc. was incorporated in 2007 and is headquartered in San Francisco, California. Company description from FinViz.com.

We were stopped out of our Lyft put position a week ago and I am reinstating it. The monster earnings loss of $1.138 billon in Q1 is just a preview of things to come.

Lyft reported an adjusted loss of $9.02 per share. That is a small improvement from the loss of $11.40 in the year ago quarter, but it is a huge amount of money. Revenue was $776 million compared to the loss of $1.138 billion. They guided for revenue of $800-$810 million for Q2 and $3.275-$3.3 billion for the full year. Active users rose to 20.5 million, up from 14 million. Average revenue per rider rose from $28.27 to $37.86.

The big question now that Lyft is public is how long can it continue to lose $1 billion per quarter with total revenue at $800 million? With Uber and Lyft both losing tons of cash, cheap rides are going to end. If ride prices double to an average of $75 as needed to breakeven, riders will disappear.

Earnings August 6th.

Position 5/13:
Closed 5/22: Long July $45 put @ $3.50, exit .95, -2.55 loss.


TSLA - Tesla Inc - Company Profile

Comments:

Despite our horrible fill, we are deep in the money on both puts. At some point we are going to have to close both sides. We have a $15 spread and our gain today is only $6.55. We need for more of the short premium to fade as it becomes deeper into the money. I would recommend placing an order to close for a $10 gain. If we get it, we can launch a new position. $180 is support. If we reach that level, I would simply close the position.

Original Trade Description: May 11th

Tesla, Inc. designs, develops, manufactures, and sells electric vehicles, and energy generation and storage systems in the United States, China, Netherlands, Norway, and internationally. The company operates in two segments, Automotive, and Energy Generation and Storage. The Automotive segment offers sedans and sport utility vehicles. It also provides electric vehicle powertrain components and systems to other manufacturers; and services for electric vehicles through its company-owned service centers, Service Plus locations, and Tesla mobile technicians. This segment sells its products through a network of company-owned stores and galleries. The Energy Generation and Storage segment offers energy storage products, such as rechargeable lithium-ion battery systems for use in homes, commercial facilities, and utility grids; designs, manufactures, installs, maintains, leases, and sells solar energy systems to residential and commercial customers; and sell renewable energy to residential and commercial customers. The company was formerly known as Tesla Motors, Inc. and changed its name to Tesla, Inc. in February 2017. Tesla, Inc. was founded in 2003 and is headquartered in Palo Alto, California. Company description from FinViz.com.

Tesla has so many headwinds you could not list them all. They are short on cash. They have multiple gigafactory construction projects underway at the same time. They have multiple models from sedans to semi trucks in pre production planning. Each one could consume $1 billion or more in manufacturing start up costs. The gigafactory in China is multiple billions to construct and populate with equipment and inventory. Sales of the Model S and Model 3 are slowing. Competition is heating up with Mercedes, Volkswagen, Jaguar and BMW starting to deliver new models of electric cars and in large quantities. GM is prepping to deliver multiple models of reasonably priced cars.

Even worse, there is suddenly a large number of used Teslas for sale. For instance TrueCar has more than 940 used Teslas for sale. The electric car fad is now over and they are becoming common place. Instead of only one car maker to choose from now there are six or more with all price ranges. I have seen the Jaguar and I would much rather have that than a Tesla. The Tesla brand is over priced and over hyped.

The constant headlines of Elon Musk in trouble with the law, the SEC, the courts, individual suits, etc, is tarnishing the brand. Musk used to be the wonder kid that could do anything. As his recent promises become even more unbelievable and undeliverable, he is being written off as a spoiled rich kid and the Tesla brand is losing its luster. He has a coming trial date on his comments calling a British cave rescue diver a pedophile and a child rapist. The diver sued him for defamation.

Goldman has a price target of $210. RBC $210 and Cowen $200. Bank of America just resumed coverage with an underperform rating (sell). Evercore has an underperform.

Shares are slowly slipping away after breaking strong support at $249.

Unfortunately, options are expensive and this will have to be a spread.

Update 5/18: Elon Musk sent a memo to employees saying the company only had 10 months of cash at the Q1 burn rate and he was going on a "hard core" cost cutting program. Tesla just raised $920 million in a bond sale in March to bring their cash balance up to $2.2 billion. That is a lot of money unless your cash burn rate is $3 billion a year.

Position 5/13:
Long July $225 put @ $17.61, see portfolio graphic for stop loss.
Short July $205 put @ $10.40, see portfolio graphic for stop loss.
Net debit $7.21.


UBER - Uber - Company Profile

Comments:

Bad fill! The ask that was showing last weekend was $2.95 and a reasonable premium for this stock. Unfortunately, UBER shares gapped down from $42 to $39 at the open on Monday and that ask shot up to $6.20. For years we have had a rule that a gap of more than $1 negated the recommendation. However, I have not emphasized that recently, so I am continuing the play with the bad fill. I did put a tight stop on it to take us out on any further rise.

UBER has earnings on Thursday. I am recommending we hold this position over earnings just in case the market reacts badly to the UBER report. HOWEVER, there is no harm in exiting the position and removing the risk in advance. There is a lot of risk. A $10 spike in the wrong direction could erase more than half the premium in an instant.

Original Trade Description: May 18th

Uber Technologies, Inc. develops and supports proprietary technology applications that enable independent providers of ridesharing, and meal preparation and delivery services to transact with riders and eaters worldwide. The company operates in two segments, Core Platform and Other Bets. Its driver partners provide ridesharing services through a range of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis, as well as based on the number of riders under the UberBLACK, UberX, UberPOOL, Express POOL, and Uber Bus names; and restaurant and delivery partners provide meal preparation and delivery services under the Uber Eats name. The company also offers Uber Central, a tool that enables companies to request, manage, and pay for rides for their employees, customers, or partners; and Uber Health, which allows healthcare professionals to arrange rides for patients going to and from the care destinations. In addition, it provides freight transportation services to shippers in the freight industry under the Uber Freight name; leases vehicles to third-parties that use the vehicles to provide ridesharing or eats services through the platforms; and provides access to rides through personal mobility products, including dockless e-bikes and e-scooters under the JUMP name. The company was formerly known as Ubercab, Inc. and changed its name to Uber Technologies, Inc. in February 2011. Uber Technologies, Inc. was founded in 2009 and is headquartered in San Francisco, California. Company description from FinViz.com.

Now that Uber is public and the initial volatility is over, investors should begin to focus on fundamentals. Losing $1 billion or more a quarter is not a big selling point. While Uber has a lot of other businesses in development the majority of their revenue comes from ride hailing. They have stated they are going to raise prices and pay their drivers less and that is going to be a disaster. Drivers are already protesting about the low wages and no benefits. If their commissions are cut again, many will quit. Response times will rise. If Uber raises prices they will be in a price war with Lyft. The service with the lowest prices will win. Analysts believe ride prices would have to double for Uber to break even. That would be the kiss of death to market share.

Uber has received so much bad press since the IPO that plenty of frustrated investors have exited. Others, not wanting to take a big loss probably waited for the rebound and will be exiting soon.

Position 5/20:
Long July $45 put @ $5.80, no initial stop loss.