Option Investor
Newsletter

Daily Newsletter, Sunday, 6/9/2019

Table of Contents

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

Market Wrap

Fed to the Rescue

by Jim Brown

Click here to email Jim Brown

The Tuesday short squeeze on Powell comments changed sentiment significantly.

Weekly Statistics

Friday Statistics

After a -1,722 point decline in the prior five weeks the Dow rebounded back with a 1,300 point gain. The market exploded higher on comments that progress was being made in the Mexican tariff talks and comments from Fed members that they would be open to cutting rates to offset the impact of tariffs. The icing on the cake was another headline tease that China would welcome a resumption of the trade talks.

Obviously, none of these headlines developed into concrete developments but they boosted sentiment significantly on expectations of future events. The very oversold market rocketed higher from Mondays tech generated lows. Google (GOOGL) dropped 80 points at the open on Monday and Facebook declined 16 points to severely tank the tech sector. The Nasdaq Composite was down -160 points at the low. This tech washout fueled the giant short squeeze as investors rushed to grab some bargains in a FOMO rebound. The Nasdaq rebounded 475 points from Monday's low to Friday's high for a 6.5% gain.


The challenge is determining how much longer this rebound can run. The Dow is right back in its prior resistance range that has caused trouble since November. It would be foolish to expect the Nasdaq to simply continue higher after a 6% gain in four days. There needs to be a pause for profit taking. Over the same period the Russell 2000 has lagged with only a 3.5% gain. The Russell was leading us lower and will be the key to our future direction.

Fortunately, the standoff with Mexico was resolved and the market is poised to open higher on Monday. That could postpone profit taking for another day or two.



The potential for the Fed to hike rates rose even higher on Friday after the Nonfarm Payrolls missed estimates badly. Jobs for May rose by only 75,000 compared to the estimate for 190,000. In April the same report initially showed a 263,000 increase in jobs.

The April number was revised lower by 39,000 jobs to +224,000 and the March number was revised lower by 36,000 jobs to +153,000.

I believe the tax cut pixie dust has faded and the chart seems to show that jobs peaked in January with the +312,000 reading. The last four months have been significantly weaker with a drop to 56,000 in February.

At the time analysts were saying there was a timing error in survey that pumped up January and by drawing jobs out of February. It is possible that same error exists in the April/May survey but overall the moving average is moving lower. Analysts pointed out that the normal survey week fell later in the month. It was also impacted by the severe flooding in the Midwest. The June numbers should rise because of recent graduates moving into the workforce.

For now, the unemployment rates remained at 3.6% and a 50-year low. The labor participation rate was flat at 62.8%. The broader U6 employment fell to 7.1% and the lowest since the financial crisis. Average hourly earnings increased 0.22% and slightly higher than the recent average gains.

Weighing on the numbers was the closure of the Payless shoe store chain and continued store closures by other retailers. Providing a lift for June will be the hiring for the census. That will be a positive for months to come with more than 500,000 workers hired.


The miss in employment expectations along with the various tariff headlines caused the yield on the ten-year to fall to 2.05% and a two-year low. The low in September 2017 was 2.034% and a decline below that would take us back to November 2016 and the day before the election. Bank of America said inflows to bond funds last week were the highest since February 2015.


All the worries about a global economic slowdown has caused a sharp rally into treasuries and that rally may not be over. Multiple fed heads said last week they are open to cutting rates to offset the problems caused by tariffs. Analysts are now expecting a rate cut in July. The Fed funds futures are indicating only a 1.1% chance of making it to January without a rate cut. That means there is a 98.9% chance of at least one cut.

Currently there is an 81% chance of a cut in July, 66% chance of a second cut in September and a 61% chance of a third cut in December. Clearly, that is the extreme view since each cut will diminish the chance of future cuts but that is what the numbers show today.


The CME pointed out that open interest on Fed funds futures contracts had risen 469% since 2013. Volume has risen 39% since the same period in 2013. CME's global nearly 24-hour network ensures liquidity so investors/traders can enter and exit instantly at any time. Open interest across all rate contracts has surpassed more than 102 million contracts. Those futures have been given a workout over the last several weeks with daily headline driven trade causing extreme volume.


The headline volatility also tanked the dollar. The Dollar Index fell -1.6% over the last week to a two-month low. The tariff troubles are hitting the US economy on all fronts. This will be a plus for S&P companies doing business overseas, but it will not compensate for the tariff hits.


The economic calendar is light for next week and the normally active Fed speakers have entered their quiet period before the FOMC meeting the following week.

The consumer and producer price indexes will be the most important reports for the week. If they were to suddenly show an increase in inflation, it could put the Fed back on hold and the expected rate cuts could disappear. The market could be volatile around these reports.


There are only a couple big name companies reporting earnings next week. The calendar is sparse. Lululemon and Broadcom are the only heavyweights. We have reached the end of the Q1 cycle and it is only a couple weeks before the early reporters begin the Q2 cycle.

Of the 495 S&P companies that have reported, 75.6% beat earnings with an average gain of +1.6% compared to the 16.9% growth rate in Q4. Revenue has risen 5.6% with 56.9% beating estimates. There have been 76 negative guidance warnings with 21 companies issuing positive guidance. Only two S&P companies report this week.


Last week was a slow week for earnings as well. Salesforce.com (CRM) was a highlight with earnings of 93 cents that beat estimates for 61 cents. Revenue of $3.74 billion beat estimates for $3.69 billion. While the earnings were good the best news was raised guidance that erased fears from the prior two quarters of a growth slowdown. The CEO said they were still on path to double their annual revenue to $26-$28 billion over the next four years. For Q2 they guided for earnings of 46-47 cents on revenue of $3.94-$3.95 billion. For the full year they raised guidance to $2.88-$2.90 on revenue of $16.10-$16.25 billion. Analysts were expecting 65 cents on $3.94 billion for Q2 and $2.56 on $16.14 billion for the year. The Q2 earnings guidance miss for Q2 did not impact the stock price and shares rebounded from Tuesday's low of $141.50 to close at $161.27 on Friday.


Beyond Meat (BYND) continued its rocket ride after revenue rose 215% to $40.2 million and beating estimates for $38.9 million. They posted an adjusted loss of 14 cents that was slightly better than the 15 cent loss analysts expected. They raised their full year revenue guidance to $210 million, a 140% increase, and beat estimates for $204.9 million. The company qualified that raised guidance saying it did not include numbers for any deals that have not been signed or deals that are still in trials. Multiple large chain restaurants have been in trials in April and May and those trials should result in nationwide delivery contracts and millions of meals being served. The company also said they could reach breakeven on earnings by the end of 2019. Barclays said the "alternative to meat" market could reach $140 billion in annual sales. Beyond has a big head start in this race to capture market share. The stock gained $39 on Friday. Shorts, thinking the earnings would disappoint, were squeezed once again.


Ciena Corp (CIEN) exploded higher after reporting earnings of 48 cents that beat estimates for 41 cents. Revenue rose 18.5% to $865 million and beat estimates for $819 million. The company saw 17.8% growth in networking platform revenue to $697 million. The company guided for annual revenue growth of 13-14% and well above their prior guidance for 6-8%. The CEO said some customers are shifting business away from smaller companies and Ciena is the market leader, ahead of Huawei and Nokia. With the push to blacklist Huawei, Ciena's prospects are only going to improve. They expect to gain 2-3% or more in market share for the rest of 2019. The CEO said Ciena has "virtually no revenue exposure to China." "We like to compete on the basis of merit and that is not how the market works there."


Another recent IPO, Zoom Video Communications (ZM), surged after reporting earnings of 3 cents that beat estimates for a penny. Revenue rose 103% to $122 million and beating expectations for $111.7 million. They guided for Q2 for revenue of $129-$130 million compared to estimates for $121 million. Zoom is one of the few profitable companies to go public in 2019. This year has been reminiscent of 2000 when companies with no forecast of ever being profitable were going public at astronomical prices. Most of those companies no longer exist.

Bernstein said Zoom's total addressable market could rise to $43 billion in two years giving them plenty of room to grow and take market share.


Gamestop (GME) is the prime example of technological obsolesce. After rising to operate 5,800 stores across 14 countries it is rapidly disintegrating. The company posted earnings of 7 cents that beat estimates for a loss of 3 cents but that was the only highlight. Revenue fell from $1.79 billion to $1.55 billion and analysts were expecting $1.64 billion.

The company guided for full year revenue to decline between 5-10% and halted its dividend. With the stock decline the yield was up around 20% and they had plenty of cash but the business is crumbling. The challenge is the recent move to online games rather than physical games that can be resold. Their business model is going the way of Blockbuster. Netflix and streaming put Blockbuster out of business. The move to online games by Microsoft, Google and others will eventually put Gamestop out of business. The company cannot support 5,800 stores without new physical games to sell. As time passes the gamers will grow tired of replaying all the existing games and reluctantly move on to the online environment. With online games you can play the same game on your smart TV, PC, tablet or even your phone so you can play wherever you are and not just in front of your TV with a game console.


After the bell we learned that Uber's (UBER) chief marketing officer (CMO) Rebecca Messina and COO Barney Harford were both leaving the company. Shares declined sharply on the news. It is bad for sentiment when two C-suite executives flee the ship immediately after the IPO.


After years of saying Amazon is a valuable partner for FedEx, the company finally pulled the plug and cancelled their ground shipping contract with the retail giant. FedEx made the decision not to renew its FedEx Express contract in order to "focus on the broader e-commerce market." This does not currently impact any of the other contracts they have with Amazon, but the path is clear. In 2018 the FedEx Express contract only accounted for 1.3% of FedEx total revenue. FedEx Express is a 3-day ground delivery option. With Amazon now delivering more than 100 million products overnight, the 3-day express option was more than likely declining in use.

The FedEx CEO said daily e-commerce deliveries are set to grow from the current 50 million packages per day to more than 100 million by 2026. I would like to know how he came up with that statistic.

The CEO said FedEx has the network and capacity to serve thousands of retailers in the e-commerce space. What they did not say was that Amazon's constant pressure to reduce costs was causing FedEx to lose money on the service. Amazon is rapidly ramping up its fleet of 737 and 767 freight aircraft, now at 50, and expected to grow. They are building a $1.5 billion air cargo hub in Kentucky to handle their fleet. The company is also adding thousands of delivery partners in cities across the US. Amazon is rapidly duplicating the UPS/FDX portion of their network. It is clear that Amazon is eventually going to be delivering the bulk of their own packages to cut the cost of the last mile and be more in control of their delivery times. Amazon thanked FedEx for being a valued partner but said nothing else.



Over the weekend we learned that United Technologies (UTX) and Raytheon (RTN) have agreed to an all stock merger of equals to create a $74 billion company. Raytheon shareholders will receive 2.3348 shares in the combined company for each Raytheon share they own. The merger is expected to produce $1 billion in cost synergies by the end of the fourth year. United Technologies shareholders will own about 57% of the combined companies. The deal is expected to close in early 2020 after United completes the spinoff of the Carrier air conditioning and Otis elevator businesses. United supplies communications gear for commercial aircraft and Raytheon supplies aviation equipment to government contractors for military aircraft and missiles.



It was a bad week for energy prices. Fears of a global slowdown along with worries about a rebound in supply caused WTI prices to fall to $50.60 on Wednesday. Russia's energy minister said the country would increase production at the end of June. Russian production had declined below agreed levels after the sabotage of more than 20 million barrels of Russian crude with a corrosive chemical. That has been cleaned up and normal production has resumed.

Prices rebounded somewhat after the Saudi Oil minister said OPEC would prevent excess production from pushing prices lower. The Saudi energy minister said OPEC was close to a deal to extend the production cuts at the June meeting. The agreement is keeping 1.2 mmbpd off the market. The OPEC production meeting is on June 25-26th.

US inventories rose unexpectedly by 6.8 million barrels after a 7 million barrel spike in imports for the week. The 7.93 million bpd import rate was the highest in months. US production rose to a new high at 12.4 mmbpd.

The falling oil prices caused an 11-rig drop in active oil rigs and as prices close in on $50 it is only going to get worse. Many companies that are marginally profitable or at least surviving with prices over $50 will begin to struggle under that level. They will not be spending millions on drilling new wells or at least they will only be drilling in their most prolific areas where they already have production infrastructure.

I caught some flack about my comments on rapid shale depletion in the prior newsletter. The following statistics prove my claim. There are currently 446 rigs drilling for oil in the Permian Basin. Each rig completes between 2 and 3 wells per month. Using the low number that means there are roughly 892 wells completed per month. According to the EIA production from the Permian has only risen 56,000 bpd since the same period in May. Completing that many wells should cause a significant increase in production unless the gains are being offset by depletion in the 18,480 horizontal wells that already exist. Those are new wells drilled since 2008.

This is another killer statistic. Some 60% of Permian production comes from wells that are less than 18 months old. Source The other 15,000 wells only contribute 40%. The instant prices decline to the point where it becomes unprofitable to drill in the Permian, production will crash almost immediately.

There is one qualification. Many of the new wells do not have infrastructure to move the oil to market. Once the various pipelines are completed over the next 18 months, many of those wells will become producers. There are 3,964 drilled but uncompleted wells in the Permian and waiting for pipeline access and/or higher oil prices to justify spending millions to complete them.





Markets

On Tuesday Chairman Powell rescued the markets from an ugly slide but it only takes a day or two for investors to price in the headlines. With investors already expecting a cut in July, September and December, the Fed is more than likely going to try and reign in some of these expectations in the statement after the FOMC meeting on the 19th. That will tone down some of the excitement. While the Fed is a powerful force in the market it is the headlines that move the indexes not the long-term expectations. We could be reaching the end of that headline euphoria.

Hedgeye Cartoon

The market is currently climbing a formidable wall of worry. The trade war with China has serious economic implications if President Trump and President Xi do not have a successful meeting at the G20 in Japan at the end of the month. Trump is said to be considering additional tariffs on $300 billion in Chinese goods.

The tariffs are hurting China. According to Wells Fargo, Chinese diesel fuel demand, an indicator of business activity, declined 14% in March and 19% in April. This is a significant drop and suggests a sharp decline in economic activity. This is used to fuel trucks that move goods. Wells Fargo believes this is related to the trade war uncertainty and tariffs. Diesel demand has declined to post 2008 levels. If China continues to slow dramatically the rest of Asia will also slow and we could be facing an Asian recession.


Other factors in the wall of worry include recession worries and slowing growth in the US, falling yields, earnings in low single digits, antitrust worries in mega cap techs and geopolitics in general. They say markets like to climb a wall of worry and we have one today.

Fortunately, the agreement with Mexico took a major roadblock out of our way. Analysts said the proposed tariffs on Mexican goods would have been significantly more damaging than the Chinese tariffs.

The S&P rebounded to resistance from January at 2,872 and should surge over that level on Monday thanks to the Mexican agreement. Futures are up +16 as I type this. The index is back over all the major averages and poised to move back above 2,900.

If the S&P is successful in moving over 2,900 we could see the new high target begin to exert its pull once again. That would be a close over 2,945. Tom Lee said on Friday that investors should quit worrying about this short-term volatility and think long-term. He is maintaining a 3,100 target for the end of 2019.


The Dow never made a new high back in April. The prior high was 26,828 back in October and the April high close was 26,656. The Dow is handicapped by several stocks with exposure to China and falling interest rates. Apple was also a major drag. The Dow needs positive economic sentiment to make a new high and that sentiment is falling in the US as evidenced by the Fed's willingness to consider rate cuts.



The Nasdaq exploded through the 7,645 resistance level on Friday as the big cap techs reversed their early week decline. That should now be support. Multiple analysts were putting out buy recommendations on Facebook and Google saying the worry was overdone and the actual fines would be less than expected. Apple and Facebook powered higher, each with $5 gains.

The next resistance is 7,840 followed by 7,925. The early May high was 8,164 and not likely to be retested soon. The Nasdaq gained 4% for the week but that was after a 2% decline on Monday so a 6% rebound overall. There should be profit taking in our future.



The Russell posted a solid rebound from the 1,463 level but it remains lackluster compared to the other indexes. The small caps have a long way to go to punch through the 1,600 level again and even longer run to the new high levels at 1,740. This could be our Achilles Heel.


It appears we are going to open positive on Monday thanks to the elimination of the Mexican tariffs. However, given the strength of the rebound last week we should be expecting a pause to reset at some point. Just as the markets were oversold, they are now short-term overbought, and those pressures need to equalize. I am neither positive or negative on the market for the week but without some positive economics and movement on the China talks, the longer-term path of least resistance is still down. The wall of worry can still be climbed but we are only one tweet or headline away from a profit taking event. Who would have thought the prior week that a tweet would appear calling for tariffs on Mexico only three days after the USMCA had been fast tracked? I would avoid being overly long until after the June 29th G20 meeting with President Xi.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Do or do not. There is no try."

Yoda


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

Textbook Squeeze

by Jim Brown

Click here to email Jim Brown
Monday's headline generated crash produced an oversold climax to five weeks of declines. Last weekend everything was ugly. The markets were accelerating lower and the headlines were worsening. Everyone was slowly moving to the sidelines and the shorts were doubling up on every new headline. The Nasdaq crashed on Monday on worries about new regulations on Facebook and Google. The worries had been around for weeks but news broke confirming the potential probes. Shares in the mega cap techs all plunged in conjunction with those companies. If you dump tech ETFs because of exposure to a few big caps then all the stocks in those ETFs decline.

The tech dumping produced was not nearly as bad as you would have expected on a 2% decline. There were still some buyers with 56 new highs on the Nasdaq. While it looked bleak on the surface there was some underlying strength. The A/D line was actually positive 1,561 advancers to 1,464 decliners. Yes, you read that right. The Nasdaq was down 2% and advancers still held the lead.

When Chairman Powell said Tuesday morning that the Fed was willing to cut rates, it produced a monster short squeeze in a market that was oversold and already had investors buying the dip. The resulting short squeeze was a textbook example. The market exploded higher and never looked back as additional Fed heads added their voices to the mix.

Last week the A/D line was right at a two-month low and today it is a new high. What a difference a week makes. There was no wobble or deterioration in the trend on Friday. Advancers were 3:1 over decliners and a three-day high. For me, what this means is that the remaining shorts were running scared into the close and were forced to cover before the weekend. Given the resolution to the Mexican tariff problem that was the right decision.


There was a marked contrast between the A/D line on the S&P and the Nasdaq. The tech index posted a 6% rebound from Monday's lows BUT the A/D line barely improved. The difference between the two charts is remarkable. The reason is due to the generals leading and the troops lagging. The A/D on the Nasdaq on Wednesday/Thursday was 3:2 decliners over advancers despite the index making positive gains. The big cap techs were rebounding but the smaller stocks were mostly declining. On Friday that reversed with advancers 2:1 over decliners. It was a rocky week for the tech stocks despite the 6% rebound.


The small cap A/D line was similar to the Nasdaq. The small cap sector was not nearly as positive as the big caps. Decliners out paced advancers on Wed/Thr by the same 3:2 margin but Friday was strong with a 3:1 advancers over decliners. Clearly nobody wanted to go home short.


Google was the biggest drag on the Nasdaq with the 80 point plunge on Monday. Apple was the biggest help with the $20 rebound from Monday's lows. The correlation breakdown since the end of April has been remarkable.


The correlation between the Nasdaq and the Semiconductor Index is back in lock step after deviating significantly in April. The semiconductor crash has ended and the rebound in oversold chip stocks helped to lift the Nasdaq.


Unfortunately, the deviation is expanding between the small caps and big caps. The small caps led the market lower since the beginning of May. Last week the big caps led the small caps higher, but it was a battle. Note the lack of a pause on the blue line and the stutter step on the black line. This is our challenge for next week. If the small caps roll over without a clear catalyst, they could continue to drag the overall market lower.


The Dow triple top formation remains intact and the rebound stalled at what could be called a mini H&S formation. If the index does not continue higher from here it would be a technical breakdown on multiple patterns.


The percentage of Nasdaq stocks above their 200-day average rose slightly to 39.25%. This shows that the techs stocks are not longer-term overbought. This four-day rally was barely a blip on this chart. They are short-term overbought, but that pressure can be relieved in just a couple of days. Longer term most tech stocks are still undervalued on a technical basis. We can't determine a fundamental basis from a chart.


On a relative basis the same chart for the S&P shows a much stronger pattern with 63.5% of stocks trading over the 200-day. Big caps held their strength while the tech troops retreated into the woods.


The VIX faded but held over 16 and that is higher than you would have expected given four days of strong gains. The answer is the lingering expectations for Mexican tariffs on Friday. It should decline sharply on Monday now that the Mexican conflict has been settled.


While we should open higher on Monday, I would not chase the rally. We are short-term overbought and due for a pause. This week is likely to be choppy followed by some gains on Mon/Tue ahead of the FOMC meeting. There is nothing to be gained by trying to navigate this chop until after we see a bout of decent profit taking. Be patient there is always another day to trade.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

New High Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

This retailer is on the edge of a breakout to new highs. Walmart has fought back from a 20% decline and could be on the verge of a new leg higher.

I wanted to add a second call play this weekend but every stock I wanted to play was up so sharply from last week that premiums were out of sight. They all needed some profit taking first. I believe we will get that this week.



NEW DIRECTIONAL CALL PLAYS

WMT - Walmart - Company Profile

Walmart Inc. engages in the retail and wholesale operations in various formats worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, drugstores, and convenience stores; membership-only warehouse clubs; e-commerce Websites, such as walmart.com, jet.com, shoes.com, and samsclub.com; and mobile commerce applications. The company offers grocery products, including meat, produce, natural and organics, deli and bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, floral and dry grocery, as well as consumables, such as health and beauty aids, baby products, household chemicals, paper goods, and pet supplies; and health and wellness products. It also provides electronics, cameras and supplies, photo processing services, wireless, movies, music, video games, and books; stationery, automotive, hardware and paint, sporting goods, and outdoor living and horticulture; apparel for women, girls, men, boys, and infants, as well as shoes, jewelry, and accessories; and home furnishings, housewares and small appliances, bedding, home decor, toys, fabrics, crafts, and seasonal merchandise, as well as brand name merchandise. In addition, the company offers fuel and financial services and related products, including money orders, prepaid cards, wire and money transfers, check cashing, and bill payment. It operates approximately 11,300 stores and various e-commerce Websites under the 58 banners in 27 countries. The company was formerly known as Wal-Mart Stores, Inc. and changed its name to Walmart Inc. in February 2018. Walmart Inc. was founded in 1945 and is based in Bentonville, Arkansas. Company description from FinViz.com.

Walmart has fought its way back to the prior highs after a 20% decline in Nov/Dec. They are hitting on all cylinders and no longer look like Amazon roadkill. They are fleshing out their online ordering, store pickup and next day delivery and showing no signs of losing market share to Amazon.

This is a technical position. The stock has risen to the prior highs and could be positioned to break out for a new leg higher. Options are cheap and the August option expires one day after earnings so it should hold its value. We will exit before earnings.

Earnings August 15th.

Buy August $110 call, currently $1.88, stop loss $101.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Short Squeeeeeeezzzzee

by Jim Brown

Click here to email Jim Brown

Editors Note:

After five weeks of declines, the shorts gave back much of their gains in only four days. It was a great week for the bulls and a bad week for the bears. While a short squeeze can be just an oversold rally in a bear market it can also be the start of a lasting rally. Just look at the bottom left of this chart when the December decline ended with a giant squeeze.

Unfortunately, when these squeezes appear, all the oversold stocks rally and that stopped us out of the three put positions.



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


AJRD - Aerojet Rocketdyne
The long position was entered at the open on Monday.

CNC - Centene
The long position was stopped at $52.50.

SBUX - Starbucks
The short position was stopped at $79.85.

TSLA - Tesla Inc
The short position was closed at $180.00.

UBER - Uber Technology
The short position was stopped at $42.25.


BULLISH Play Updates

AJRD - Aerojet Rocketdyne - Company Profile

Comments:

Aerojet said it was opening a state of the art rocket propulsion facility in Huntsville Alabama. The 136,000 sqft Advanced Manufacturing Facility was opened on Friday/ They will produce high performance rocket motors for things like the Standard Missile-3 and the THAAD missile defense system.

Original Trade Description: May 31st.

Aerojet Rocketdyne Holdings, Inc. designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. The company operates through two segments, Aerospace and Defense, and Real Estate. The Aerospace and Defense segment offers aerospace and defense products and systems for the United States government, including the Department of Defense, the National Aeronautics and Space Administration, and aerospace and defense prime contractors. This segment provides propulsion systems, such as liquid, solid, air-breathing, and electric propulsion systems for space, defense, civil, and commercial applications; and armament systems. The Real Estate segment engages in the re-zoning, entitlement, sale, and leasing of the company's excess real estate assets. It owns 11,451 acres of land adjacent to the United States Highway 50 between Rancho Cordova and Folsom, California east of Sacramento. The company was formerly known as GenCorp Inc. and changed its name to Aerojet Rocketdyne Holdings, Inc. in April 2015. Aerojet Rocketdyne Holdings, Inc. was founded in 1915 and is headquartered in El Segundo, California. Company description from FinViz.com.

Earnings July 30th.

Aerojet reported earnings of 44 cents that beat estimates for 27 cents. Revenue of $491.7 million also beat estimates for $478.2 million. Revenue was flat year over year because of the phase out of the AJ60 solid rocket motor. However, the uptick in Patriot missile components offset that end of life product. Order backlogs were $3.8 billion.

I am sure everyone has noticed the increase in launches by dozens of companies and everyone needs rocket motors. SpaceX, Blue Origin, NASA and other countries all around the world are adding to the 4,091 satellites in orbit. Every satellite requires a rocket. In addition, Aerojet has numerous contracts with the government to supply defense contracts. With the defense sector seeing increased orders from around the globe, the outlook for Aerojet is strong.

Shares rose over prior resistance at $38 on the strength of their earnings. New high resistance is $40 and only $1.50 away.

Position 6/3:
Long August $40 Call @ $2.00, see portfolio graphic for stop loss.


CNC - Centene Corp - Company Profile

Comments:

The takeover bubble burst when Humana said it would not make a bid for Centene. Analysts and shareholders had been hoping that something would happen to breakup the proposed acquisition of WellCare by Centene.

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:
Closed 6/3: Long July $60 call @ $2.15, exit $.60, -1.55 loss.


SWKS - Skyworks - Company Profile

Comments:

Shares closed at a three-week high as the semiconductor crash comes to an end.

Original Trade Description: May 25th

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.

Position 5/28:
Long July $75 call @ $2.00, see portfolio graphic for stop loss.


BEARISH Play Updates

SBUX - Starbucks - Company Profile

Comments:

No specific news. Major short squeeze. Shares sprinted higher with a $6 gain to stop us out.

Original Trade Description: May 26th

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.

Position 5/28:
Closed 6/5: Long July $75 put @ $1.73, exit .83, -.90 loss.


TSLA - Tesla Inc - Company Profile

Comments:

TSLA shares hit exit target at $180 and then rebounded $25. It may be time to launch a new 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.

Update 5/31: The bad news continues to flow, and analysts are slashing prices almost daily. The Fresno Model 3 plant is now running only one shift instead of three as demand for the Model 3 continues to decline.

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 $8.06. 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.

Position 5/13:
Closed 6/3: Long July $225 put @ $17.61, exit $46.75, +$29.14 gain.
Closed 6/3: Short July $205 put @ $10.40, exit $31.05, -20.65 loss.
Net gain $8.49.


UBER - Uber - Company Profile

Comments:

When the major short squeeze began in the market, Uber went along for the ride. Every stock with selling pressure over the last couple weeks posted major gains. We were stopped out early so the loss was minimal.

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.

Update 5/26: Bad fill again. 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.

Update 5/31: UBER reported a loss of $1.01 billion (-$2.26) and slightly better than the $1.0-$1.1 guidance. Revenue rose 20% to $3.1 billion. While the report was still ugly it was "less bad" than some expected. Shares rose slightly after the earnings but floundered intraday before posting a fractional gain at the close. Costs rose 35%. The company failed to provide Q2 guidance and that suggests they could lose even more money. I put a tight stop on the position in case a rebound appears.

Position 5/20:
Closed 6/3: Long July $45 put @ $6.20, exit $5.10, -1.10 loss.