Option Investor

Daily Newsletter, Saturday, 2/18/2017

Table of Contents

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

Market Wrap

Nasdaq Still Leading

by Jim Brown

Click here to email Jim Brown

The major indexes excluding the Nasdaq all posted single digit gains on Friday. The Nasdaq surged to another new high.

Weekly Statistics

Friday Statistics

The Nasdaq Composite dipped back to 5,800 on Thursday but surged on Friday to close at 5,838 and a new high. The Nasdaq 100 ($NDX) dipped to 5,290 on Thursday but rebounded to close at 5,324 on Friday. Both indexes closed over new round numbers of 5,800 and 5,300 and show no signs of weakness despite being severely overbought.

The Nasdaq 100 ($NDX) Relative Strength Index (RSI) reading rose to 83.09 when 70 is considered overbought. Friday was the highest reading since January 3rd, 2000 when it hit 84.15 after 2.5 months of nearly consecutive daily gains. Overbought oscillators can always become even more overbought but this is at a seriously extreme level.

In 2000, the index declined more than 500 points over the next three days but once the overbought conditions were equalized, the index went on to gain 1,400 points over the next two months before the bottom fell out in March. We need a few days of equalization so the rally can continue.

Friday did not have any market moving economic reports. The E-Commerce Sales for Q4 only rose +1.9% from Q3 despite being the holiday shopping season. Sales were $102.7 billion compared to $101.3 billion in Q3. However, compared to the $89.8 billion in Q4-2015, sales rose 14.3% to a new record. Q4 sales in 2015 rose 3.9% from Q3. This is one more piece of evidence that the holiday shopping was lackluster at best. E-Commerce accounted to 8.3% of total sales in Q4.

Moody's Chart

Next week has a limited calendar of events with home sales the top two reports. Winter month home sales reports are seldom exciting but with the warmer than normal winter there may have been more shoppers out and about.

The FOMC minutes will be the midweek hurdle. With Yellen's testimony slightly more hawkish in some areas and dovish in others, the minutes will have a little more importance. The chance of a rate hike in March declined slightly from 25% to 17.7% after her comments.

The Dow struggled on Friday to overcome a big decline in UnitedHealth (UNH) of -$6 that knocked more than 41 points off the index. However, that was the only Dow stock that lost more than $1.

UnitedHealth was sued by the Justice Dept claiming the insurer had overcharged Medicare hundreds of millions of dollars. The period in question was five years ago and the company said they would contest the charges vigorously. Supposedly, the insurer claimed their members were sicker than they actually were and billed for procedures that were more expensive than those actually performed. The original suit was brought by a whistleblower and the Justice Dept joined that suit. The allegations were against Texas-based WellMed, which UnitedHealth acquired in 2011.

Several days after Aetna (AET) cancelled its plans to buy Humana (HUM) for $34 billion, the company announced a $4 billion stock repurchase program and doubled its quarterly dividend to 50 cents a share. Shares spiked $7 to $129 after the Tuesday announcement of the deal cancellation. They gave back $4 on Friday despite the sudden burst of good news for shareholders. Analysts believe the cash dispersal plans suggests Aetna is not going to move forward with another acquisition of a smaller company and that is why the shares fell.

Kraft Heinz (KHC) reported it had made a $143 billion offer for Unilever (UL) in what would be the largest takeover ever in the food and beverage industry. A successful acquisition would create a company valued at $300 billion or more. Unilever said it had rejected the $50 a share proposal. Shares were trading at $43 when the announcement was made. Unilever said the offer dramatically undervalued the company and the company saw no further basis for further discussions. Kraft Heinz said it would seek to gain agreement on the terms of a transaction. Under European laws, KHC now has 30 days to make a firm bid or it would have to walk away for a six month cooling off period.

KHC was formed two years ago when Warren Buffet and 3G Capital teamed up to buy H.J. Heinz. Analysts had speculated the two deep pocket investors would attempt another acquisition to add to KHC. Kellog (K), Mondelez Intl (MELI), Campbell's Soup (CPB) and General Mills (GIS) had been speculative targets.

Everyone knows you do not lead with your best offer despite it being an 18% premium to the pre announcement price. That would equate to 3x sales and a PE of 21. A combined company would have annual sales of $85 billion. 3G Capital is known for aggressive cost cutting and developing synergies to increase value. Unilever shares posted the worst performance in 2016 since the financial crisis.

Analysts believe the real target is the Unilever food business. Kraft is probably looking to acquire the food business and spin off the household and consumer goods company. They may also be able to offer enough to induce Unilever to just sell them the food business outright. It would be worth a fortune to Kraft as a market expansion opportunity.

T-Mobile (TMUS) shares rose after multiple reports that Softbank was preparing to approach T-Mobile about selling them Sprint (S), which is majority owned by Softbank. The company is waiting until the end of the FCC spectrum auction, which restricts carriers from talking to each other. The auction ends in April. Goldman Sachs (GS) believes a deal is unlikely because the FCC wants to keep four major players in the U.S. market to increase competition. We are seeing the result of that competition with Verizon going back on its prior marketing plan and offering a new unlimited data plan. On Friday, AT&T (T) also relented and expanded their unlimited plans. Sprint and T-Mobile both need each other. They are so far down the competitive landscape they have no hope of regaining any significant market share on their own. Together they would be a strong third place and could give the big boys some competition. Now the focus will shift to how a Trump led FCC would react to a potential deal.

Investors are voting on the outcome of the Bass Pro Shops merger with Cabelas (CAB) and they are running for the sidelines. Cabelas reported earnings of $1.05 that missed estimates for $1.22. Revenue of $1.34 billion missed estimates for $1.45 billion. That was not the biggest problem for the stock. The fate of the proposed merger is in serious doubt. Cabelas was supposed to sell its credit card division to Capital One (COF) in order to reduce the amount of cash needed for the acquisition. When COF reported earnings last week they said the deal was all but dead. They expected to either withdraw the application or have the acquisition denied by the Comptroller of the Currency.

Another challenge is that the third largest retailer in the sector, Gander Mountain is preparing to file bankruptcy. That means letting the two largest merge could be a challenge for the FTC. Bass Pro Shops offered $65.50 per share for Cabela's. Shares have fallen from $63 to $45 suggesting investors think there is little chance of a successful conclusion. If a deal did get done in the coming months the price could be dramatically lower than $65. This may be a buying opportunity for Cabelas shares if the deal is called off. The selling is way overdone.

St. Louis based LMI Aerospace (LMIA) agreed to be acquired by Sonaca Group for $14 a share. That was a 52% premium over Thursday's closing price. The company will remain in St Louis but will operate as a member of the Sonaca Group. Sonaca is a global company based in Belgium that manufactures and assembles advanced structures for civil, military and aerospace markets.

GSI Technology (GSIT) announced a breakthrough technology called an Associative Processing Unit (APU) that results in an "orders of magnitude" performance ratio improvement compared to conventional CPU, DRAM methods. In the computers we use now, the data has to be moved from memory to the CPU for processing and then moved back into memory for every operation/calculation. This creates a bottleneck moving data into and out of the CPU for processing. The patented APU no longer needs to move the data and can process it at its current location in memory. This greatly speeds up the computing process and could be a game changer in future computing systems. They are going to present at the ECI Workshop on Feb-23rd. Shares exploded higher on the news.

TrueCar (TRUE) reported a smaller than expected loss of 9 cents compared to 33 cents in the year ago quarter. The adjusted loss was one cent compared to estimates for 5 cents. Revenue of $74.1 million beat estimates for $71.1 million. The number of vehicles purchased rose from 183,157 to 218,807 or +19%. The number of franchise dealers rose from 9,094 to 11,151 or +23%. The company said a recent JD Power survey showed that 60% of the buyers that use the internet to search for a car visit the TrueCar website.

They guided for Q1 for 205,000 to 210,000 vehicles, up from 174,982. Revenue of $71 to $73 million, up from $61.9 million. Adjusted EBITDA between $4 and $5 million, up from $1.1 million. For all of 2017 they guided to 920,000-930,000 vehicles compared to 806,953 in 2016. Revenue of $315-$320 million, up from $277 million. Adjusted EBITDA $20-$24 million, up from $15 million. This was a very strong report.

Broadcom (AVGO) saw a bounce on Friday after JP Morgan said adding wireless charging to the iPhone 10 or iPhone X, which is their term for the iPhone 8, would add $500 to $600 million annually to Broadcom revenues. Working with Apple, Broadcom has developed a chip solution to power the wireless charging functionality on the iPhone.

Skyworks Solutions (SWKS) shares rallied 4% after beating on earnings and raising guidance. The company also announced its SkyOne chip system for the high growth China LTE wireless market. Skyworks reported earnings of $1.60 compared to estimates for $1.58. Revenue of $914 million beat estimates for $903 million. They guided for the current quarter for a 12% rise in earnings to $1.40 and 8% rise in revenue to $840 million. Analysts were expecting $1.39 and $818 million.

The Q4 earnings cycle is coming to a close. The last two Dow components report on Tuesday followed by the Hewlett Packard twins HPE/HPQ. The retail sector also wraps up with GPS, JWN, KSS, LB, WMT, W and JCP. Tesla is the highest profile reporter for the week on Wednesday after the close. Another 50 S&P companies report this week to bring the total reported to 92% of the S&P-500.

More than 82% of the S&P 500 has reported earnings for Q4 and 66% have beaten estimates with 53% beating revenue estimates. The blended earnings growth for Q4 is now 4.6% and the forward PE of 17.6 on the S&P is the highest since June 23rd, 2004. The 10-year average PE is 14.4. The blended revenue growth is now 5.0%. Some 61 companies have given negative guidance and 29 have issued positive guidance.

Expectations for Q1 earnings growth is now 9.6% with revenue growth of 7.4%. Q2 expectations are for 9.0% earnings growth and 5.5% revenue growth.

Crude oil prices remain locked in their recent range between $50.75 and $54.25. The OPEC production cut news has failed to provide any additional gains. However, last week OPEC, led by Saudi Arabia, said they might extend their six-month cuts for another six-months because they are working so well. I do not know what metric they are using to measure that performance since oil has flat lined. We can expect several more months of posturing and "suggesting" there will be an extension in order to keep prices at this level.

Crude prices typically decline in late February and early March as inventories build while refiners are offline for maintenance. In late March, prices typically rise into August as demand season kicks into high gear.

The active rig count has continued to rise with another ten rigs added last week. That brings the total of new rigs to 92 over the last five weeks. This is going to pressure crude prices 3-6 months from now.

Energy equities have been declining since early December. That is when oil topped out at $54 and everyone began taking profits on the post election rally. It will take higher crude prices or a couple quarters of rising earnings to lift equities from here.




The Investment Company Institute (ICI) reported that equity outflows from January through October 2016 were $117 billion and the highest since the financial crisis. Since the election, more than $67 billion has flowed into equity funds. They credit the election results and the Dow crossing over 20,000 for the surge in fund flows.

Morningstar reported funds leaving actively managed equity funds and more than $500 billion flowing into passive equity funds over the last 12 months. In January, $13.8 billion flowed out of actively managed funds with passive equity funds seeing inflows of $20.8 billion. U.S. equity index funds saw inflows of $30.6 billion in January. Currently, actively managed equity funds are holding $3.6 trillion in assets. Passively managed equity funds are holding $3.1 trillion in assets. All classes of actively managed funds have seen outflows of $325.6 billion over the last 12 months while passively managed funds have seen inflows of $563 billion. Vanguard saw inflows into its passive funds of $43.7 billion. Blackrock saw inflows of $14 billion.

Strangely, taxable bond funds saw inflows of $32.2 billion with municipal bonds seeing inflows of $4.3 billion. The "great rotation" has failed to appear and yields on the ten-year are holding at the 2.4% range despite the equity rally. There is no material selling in bonds. There was a surge just after the election but that faded quickly and yields have been in this range since December 1st.

The equity markets continue to move higher although the gains are taking a little more effort each day. The morning dips are being bought and we are still closing at the highs. The S&P has been fighting resistance at 2,350 for the last three days. Support is now well back at that prior resistance at 2,300.

The Dow has pulled to within 375 points of Dow 21,000. The 20,600 level has been resistance for the last three days but the Dow has managed to string together seven consecutive days of gains. The index is very overbought but as long as the majority of the individual components continue posting minor daily gains the index will continue higher. More than 50% of the Dow components are at or near their recent highs.

The drop by UnitedHealth knocked 41 points off the Dow and caused an 86-point drop in the index at the open. Late day buying lifted the index back into positive territory right at the close. You can credit Trump's appearance and speech at the Boeing plant for the 13 Dow point bump. Home Depot also gained ahead of their earnings on Tuesday.

Seeing the Dow rebound to close positive ahead of a three-day weekend is either a very positive signal that buyers believe we will go higher next week or it was shorts covering ahead of the weekend event risk. I believe it was the shorts covering. Very few investors will put new money to work at a market top ahead of three-day weekend event risk. Anything can happen overseas when their markets are open and ours are closed.

The Nasdaq indexes continue to lead the market higher and investors should be looking at these charts and developing a healthy skepticism about their chances to move higher. They are very overbought and "should" be due for a 3-5 day decline to equalize these pressures.

However, markets can remain irrational far longer than we can remain liquid if we are betting against them. Once everyone capitulates and the shorts disappear, the markets will correct.

The small cap Russell 2000 closed at a new high on Wednesday then weakened the next two days. The Russell is struggling to move higher despite being over prior resistance. If the small cap stocks ever catch fire we could have an explosive market. However, should they begin to weaken again it could poison the big cap advance.

The S&P-600 closed at a new high by a few cents on Wednesday but also declined the last two days. It was the only major index in the red on Friday. This is confirmation the Russell weakness is not just related to the Russell.

We are due for a bout of profit taking but as long as the dip buyers persist in snapping up every little intraday decline, the bigger dip is not going to happen. Eventually we are going to get a headline that catches the market off guard and the low volume dip buyers are going to be overrun in the higher volume collapse. Whether that is this week or next month, nobody actually knows.

What we do know is that trees do not grow to the sky and markets do not rally indefinitely. We do have streaks where the markets can continue in a specific direction for a couple months without any material pause but eventually there will be a pause and the longer we go without it the worse it will be.

They say the trend is your friend until it ends. Right now the trend favors anyone willing to hold their nose and buy stocks that have been up for 7-10 days straight. The winners continue to be winners but when that headline appears, it could produce a significant air pocket. Keep your seatbelts fastened and stop losses in place.

Random Thoughts

The markets closed at new highs but nearly 5% of the voters in this week's poll fled back to bearish territory. Previously bullish and neutral responders decided the market was leaning out too far over its skis and retreated to the sidelines to wait for the crash. The survey ends on Wednesday and that was before the late week softness. The markets ended on the highs on Wednesday. Is this too much of a good thing?

Last week results

The headline that matters could be only a few days away. The border adjustment tax is on life support according to Greg Valliere, chief global strategist with Horizon Investment. In theory, the border adjustment tax would tax imports but exports would be untaxed. The concept was to raise a lot of money from the import tax to be able to cut corporate taxes significantly. The expectations for a corporate tax cut is one of the main reasons the market is in rally mode. President Trump was lukewarm on the idea before he was elected. His idea was to tax certain imports as punishment for American companies producing products in other countries and importing them back into the U.S. for sale.

The border adjustment tax concept was seized by the republicans in the House as a way to offset the corporate tax cuts. When Trump met with retailers last week they expressed their extreme displeasure at the idea and his resolve appeared to weaken somewhat. The president indicated his lack of support saying the plan was "too complicated."

Trumps own advisors are mixed on the topic. Steve Bannon is for it and Gary Cohn is against it. Clearly, Cohn would be a far stronger voice on the subject coming out of Goldman Sachs while Bannon came from a news website. Peter Boockvar, chief market analyst with the Lindsey Group, believes the administration is trying to come up with another plan but not having much luck. They have to raise $1 trillion over 10 years to offset the potential losses from a corporate tax cut to 15% or a little less if the cut is to 20%. Short of a miracle solution, the only way to do that is with the border tax. Boockvar said "without a satisfactory Plan B the market will collapse." That suggests the announcement about the new tax plan may delayed for weeks and it may be a lot weaker than previously promised. That realization could easily tank the market, which expects a major tax cut. Since almost every retailer in the country sells imported goods, a border tax could spike the cost of those goods by 15% to 20% and potentially create a recession as purchases screech to a halt.

The democrats have already started their "tax cuts benefit fat cats and big corporations" defense and getting any cut through congress that is not revenue neutral would be nearly impossible. Goldman Sachs said late last week the potential for a border tax is 20% or less. If that is the case, the potential for a meaningful tax cut is 20% or less. The market has not yet come to that realization. Goldman said a tax cut without a border tax would likely be minimal to a lower rate of 25%. Goldman said a border tax could be challenged by other countries in the WTO.

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said the market could decline 3-4% once that realization became apparent.

Trump's "phenomenal tax plan" had better be phenomenal or there will be a major hiccup in the markets.

The Philly Fed Manufacturing Survey on Wednesday shot up from 23.6 to 43.3 and the highest level since the 43.4 reading in March 2011. Some economic sites are claiming it is the highest since 1984 and since we are only talking about one tenth of a point I am not going to argue. This was a very strong report and has been increasing steadily since the 8.7 in November. That was followed by 19.7, 23.6 and now 43.3. The pace of the manufacturing economy is definitely accelerating.

Two other reports out last week included the Producer Price Index at +0.6% and the Consumer Price Index at +0.6%. The PPI was the highest since September 2012 and the CPI the highest since February 2013. Those are inflation indexes and inflation is suddenly rising twice as fast we analysts expected. Consensus estimates for the CPI and PPI were for a +0.3% gain. That is eventually going to wake up the Fed and the results will not be market friendly.


Enter passively and exit aggressively!

Jim Brown

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New Plays

Down in a Bull Market

by Jim Brown

Click here to email Jim Brown
Editor's Note

This is a tech stock that is not rising in a strongly bullish market. Cray spiked on earnings but then began to fade despite the Nasdaq continuing to make new highs.


No New Bullish Plays


CRAY - Cray Inc - Company Profile

Cray Inc., together with its subsidiaries, designs, develops, manufactures, markets, and services high-performance computing systems. The company operates through Supercomputing, Storage and Data Management, Maintenance and Support, and Engineering Services and Other segments. It offers a range of supercomputing systems, including the Cray XC40-LC, XC40-AC, CS400-AC, CS400-LC, and CS-Storm supercomputers. The company also provides analytics products comprising Cray Urika-GD Graph Discovery Appliance, which addresses the interactive data discovery with graphs; and Cray Urika-XA Extreme Analytics Platform used for production-class data analytics workloads. In addition, it offers storage and data management products, such as the Cray Sonexion storage systems that embeds the Lustre parallel file system and other software in an optimal configuration; Cray DataWarp applications I/O accelerator; and Cray Tiered Adaptive Storage, a flexible storage and archiving solution, which allows customers to transparently move data among fast, primary, and archival tiers. Further, the company provides custom engineering solutions; and customer support services comprising hardware and software maintenance, applications support, installation project management, system installation and de-installation, site preparation, and technical training for its systems, as well as ancillary services in application consulting, third-party software support, site engineering, on-site analysts for defined projects, and specialized training. Company description from FinViz.com.

Shares of CRAY were weak in January after the company provided selective guidance that was not specifically positive. They reported earnings on Feb 9th and spiked from $17.50 to $22.50 but never rose any higher.

The earnings of $1.38 were good and beat estimates for $1.24. Revenue of $346.6 million also beat estimates. However, the earnings guidance and commentary was lackluster. "While 2016 was not nearly as strong as we originally targeted we finished the year well." "Due to current market conditions, the company has limited visibility into 2017. While a wide range of results remains possible, the company continues to believe it will be difficult to grow revenue compared to 2016." Revenue is expected to be flat to down. Operating expenses are expected to be higher and gross profits are expected to be slightly lower. It was hardly an exciting outlook.

Earnings May 9th.

Shares began to decline last week and are poised to break below the post earnings support at $21. With a lackluster outlook, any decline in the Nasdaq could be magnified in Cray.

Short CRAY shares, currently $21.25, initial stop loss $22.50

Optional but not recommended: April $20 put, $1.00.

In Play Updates and Reviews

Dip Bought Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors had found a trend they can repeat over and over. The market dipped again at the open on Friday but buyers were waiting. This lower open, higher close trend is eventually going to bite them. The markets moved further into overbought territory but nobody seems to care. This is turning into a "hold your nose and buy it" market.

The small caps continue to lag but the Russell did recover to close with a fractional gain but still under 1,400. The S&P-600 small cap index closed with a minor loss and was the only negative index.

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.

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

ARNC - Arconic
The combination position was entered at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AKS - AK Steel - Company Profile


No specific news. On Thursday they bought the weekly $9 calls for next Friday. More than 28,000 were bought at a whopping 20 cents each. That is still $560,000 worth for a one-week option. I hope there is some good news coming to back up that purchase.

Original Trade Description: February 4th

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.

ARNC - Arconic - Company Profile


Hedge fund Lion Point, a minor shareholder in Arconic, urged the company to "promptly engage" with Elliott Management to increase shareholder value. Elliott is the largest shareholder in Arconic is trying to get the CEO replaced and they have nominated five board members. Lion Point and Elliott both believe "the intrinsic value of Arconic materially exceeds the company's current stop price."

Original Trade Description: February 16th.

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Position 2/17/17:

Long Mar $30 call @ 90 cents. No stop loss.
Long Mar $28 put @ 60 cents, No stop loss.

BOX - Box Inc - Company Profile


No specific news.

Original Trade Description: January 21st.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.

BRKS - Brooks Automation - Company Profile


No specific news.

Original Trade Description: February 13th

Brooks Automation, Inc. provides automation and cryogenic solutions for various applications and markets. It operates through two segments, Brooks Semiconductor Solutions Group and Brooks Life Science Systems. The Brooks Semiconductor Solutions Group segment offers critical automated transport, vacuum, and contamination controls solutions and services. This segment's products include atmospheric and vacuum robots, robotic modules, and tool automation systems that provide precision handling and clean wafer environments; automated cleaning and inspection systems for wafer carriers, as well as reticle pod cleaners and stockers; and vacuum pumping and thermal management solutions for use in critical process vacuum applications. This segment also provides support services, including repair, diagnostic, and installation, as well as spare parts and productivity enhancement upgrades. The Brooks Life Science Systems segment provides automated cold storage systems; consumables, including various formats of racks, tubes, caps, plates and foils; and instruments used for labeling, bar coding, capping, decapping, auditing, sealing, peeling, and piercing tubes and plates. This segment also provides sample management services, such as on-site and off-site sample storage, cold chain logistics, sample relocation, bio-processing solutions, disaster recovery, and business continuity, as well as project management and consulting. In addition, this segment offers sample intelligence software solutions and customer technology integration; and laboratory work flow scheduling for life science tools and instrument work cells, sample inventory and logistics, environmental and temperature monitoring, and clinical trial and consent management, as well as planning, data management, virtualization, and visualization services. The company sells its products and services in approximately 50 countries. Company description from FinViz.com.

Brooks reported earnings of 25 cents that beat estimates for 20 cents. Revenue of $160 million also squeezed by estimates for $159.7 million. For the current quarter they guided to earnings of 24 to 27 cents and revenue from $165 to $170 million.

The company provides automation and cryogenic solutions for various markets. Their expected growth rate for 2017 is 105% compared to the industry rate of 19.5%. Consensus estimates for the current year rose from 82 cents to 96 cents over the last 30 days. Estimates for the current quarter rose from 21 to 24 cents and the company guided for 24 to 27 cents.

Shares spiked from $17.50 to $21.00 on the earnings beat on February 1st. After three days of consolidation and profit taking, shares have started to rise again. They closed at a new high on Monday. I know this chart is over extended but the strong earnings, guidance and expected growth rate suggests they can continue climbing, market permitting.

Earnings May 3rd.

Position 2/14/17:

Long BRKS shares @ $21.58, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

FEYE - FireEye - Company Profile


No specific news. Nice rebound from the CSCO related drop on Thursday.

Original Trade Description: February 11th

FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques. Further, it provides cloud-based subscription services; Security-as-a-Service; and incident response, compromise assessments, and related consulting, as well as training and professional, and customer support and maintenance services. Company description from FinViz.com.

FireEye is transitioning from a firewall appliance vendor to a cloud service and as always happens when companies go this route, the revenue slows temporarily. They reported Q4 results of a loss of 3 cents. Analysts were expecting a loss of 16 cents. This compares to a loss of 55 cents in the year ago quarter. Revenue of $184.7 missed estimates for $191.1 million.

For the current quarter the company guided to earnings of 26 to 28 cents and revenue of $160-$166 million. Analysts were expecting $177.5 million.

The company said several large deals had been expected to close in Q4 and they were pushed into Q1 versus being "lost."

They added 330 net new customers during the quarter. They closed 34 deals for more than $1 million each, including one of their largest SaaS deals ever. They announced a new product called Helix and more than 250 customers have already signed up to get the product as soon as it is released.

Other onetime negatives from the earnings release was news the CFO was leaving to pursue another opportunity and Chairman David Dewalt resigned from the board.

Earnings May 4th.

Cisco (CSCO) recently acquired AppDynamics and that is expected to start a flurry of acquisitions in the cybersecurity space. The space is fragmented today and highly competitive with each player commanding its own niche. The quickest way to expand your product offerings is to acquire somebody else that is a leader in their niche. FireEye is a leader in intrusion detection and tracking. Their recent fall from grace should make them an attractive target with only a $2 billion market cap.

Regardless of whether an acquisition cycle has begun, the stock decline to support is a buying opportunity.

Position 2/13/17:

Long FEYE shares @ $11.75, see portfolio graphic for stop loss.

No options recommended because of price.

UA - Under Armour - Company Profile


No specific news. Still fighting resistance at $20. The Under Armour roll out to more than 800 Kohl's stores is in progress and could make a big difference over the next two quarters.

Original Trade Description: February 15th

Under Armour, Inc. together with its subsidiaries, develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, the Asia-Pacific, and Latin America. The company offers its apparel in compression, fitted, and loose types to be worn in hot, cold, and in between the extremes. It provides various footwear products, including football, baseball, lacrosse, softball and soccer cleats, slides, performance training, running, basketball, and outdoor footwear. The company also offers accessories, which include headwear, bags, and gloves; and digital fitness platform licenses and subscriptions, as well as digital advertising, as well as licenses its brands. It primarily provides its products under the UA Logo, UNDER ARMOUR, UA, ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR, PROTECT THIS HOUSE, and I WILL, as well as ARMOURBITE, ARMOURSTORM, ARMOUR FLEECE, and ARMOUR BRA trademarks. The company sells its products through wholesale channels, including national and regional sporting goods chains, independent and specialty retailers, department store chains, institutional athletic departments, and leagues and teams, as well as independent distributors; and directly to consumers through a network of brand and factory house stores, and Website. Company description from FinViz.com.

UA posted 26 consecutive quarters of +20% revenue growth. For Q4 that fell to 12%. That was a major blow for the stock. They also announced the CFO was leaving immediately for personal reasons. Could it be because he missed so badly on guidance?

They guided for 2017 for revenue growth of 11% to 12%. That is significantly lower than the 20% bar they have been reaching for the last 9 years.

However, Q4 was a really bad quarter for retailers. Traffic was down everywhere and overall sales only rose 1.4%, Under Armour gets 85% of its revenue from the U.S. and 60% of its revenue from retail stores. Under Armour supplied the products but retailers were unable to attract any traffic. It was not a shoe problem but a retailer problem.

To be fair there was a shoe problem as well. The super high dollar famous player shoes were discounted heavily because of the lack of retail customers. Foot Locker was having 50% off sales on their website because shoes were not moving. The lack of buyers was due to a weak retail season rather than a specific drop in UA products.

Earnings May 2nd.

Shares fell from $25 to $18 on the earnings and after two weeks in the dungeon they closed at a two week high on Wednesday.

I am going to recommend a distant option because the stock is $19.86 at the close making the $20 call "at the money" with an inflated premium of $1.20 for April. The $22.50 option is only 40 cents but it is 12% out of the money or $2.64 away from the strike. However, we have 65 days and if UA cannot move $2.64 in 65 days, I picked the wrong play.

Position 2/16/17:

Long UA shares @ $19.94, see portfolio graphic for stop loss.

Optional: Long April $22.50 call @ 35 cents, no stop loss.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


This position expired on Friday. This was a bet on the historical trend for stocks to decline in January. The Trump rally negated that trend and even though the Russell was the weakest index over the last month, it did not decline enough to make a difference.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Closed 2/17/17: Long Feb $134 put @ $3.38, expired, -3.38 loss.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

CX - Cemex - Company Profile


No specific news. Shares are starting to fade from the highs with no recent headlines about the border wall.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Update 2/10/17: CX said sales rose 4% in Q4 to $3.2 billion. EBITDA rose 10% to $654 million and +15% for the full year to $2.7 billion. Free cash flow rose 91% to $1.7billion in 2016. Debt declined by $2.3billion. Asset sales reached $2 billion of which $1 billion will close in 2017. .

Earnings Feb 9th.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Long July $11 call @ 52 cents. No initial stop loss.

Previously closed 2/6/17: Long CX shares @ $9.42, exit $9.05, -.37 loss.

FCX - Freeport McMoran - Company Profile


The Indonesia saga continues. On Friday, Freeport declared force majeure at the Greasburg mine after a five-week export ban. At the same time, the government said it issued a permit allowing for the export of 1.1 million tons for 2017. Freeport has said it will not accept the permit if it is not based on the current contract with the government. There was no word on Friday if the new permit was acceptable. Shares are declining on the battle despite copper prices being at 20 month highs.

Original Trade Description: January 31st

Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, Miami, Chino, Tyrone, Henderson, and Climax in North America; Cerro Verde and El Abra in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo, Africa. The company's oil and gas operations include oil production facilities in the Deepwater Gulf of Mexico; oil production facilities onshore and offshore in California; onshore natural gas resources in the Haynesville shale in Louisiana; natural gas production from the Madden area in central Wyoming; and a position in the Inboard Lower Tertiary/Cretaceous natural gas trend onshore located in South Louisiana. As of December 31, 2015, its consolidated recoverable proven and probable mineral reserves included 99.5 billion pounds of copper, 27.1 million ounces of gold, 3.05 billion pounds of molybdenum, 271.2 million ounces of silver, and 0.87 billion pounds of cobalt; and its estimated proved oil and natural gas reserves totaled 252 million barrels of oil equivalents. Company description from FinViz.com.

Freeport has had its share of problem over the last couple years. They bought back their spinoff oil and gas company in 2014, just as the price of oil began to crater. They bought the dip and added additional reserves in the deepwater gulf but the dip was not over. They tried for a year at the worst of the market to sell the energy business and could find no takers. Finally in Q4 they sold the deepwater assets to Anadarko Petroleum for $2 billion and far less than they were worth but at least they stopped the bleeding.

The decline in the global economy caused prices for copper to fall sharply and they were forced to sell some copper reserves as well as some other mining properties. Copper was selling for less than it cost to mine it so mines shut down and the industry restructured.

After copper bottomed at $1.93 in early 2016 it remains just over $2.00 for nine months until the surplus inventories started to deplete. Copper was $4.50 back in 2011. With copper prices at a 52-week high this week, Freeport shares also made a new 52-week high today.

Freeport has also had a battle with the government of Indonesia. With copper a major export, the government implemented a program a couple years ago that only allowed refined copper to be exported. The idea was to have the multiple mining companies build huge copper smelters and hire a lot of workers at decent wages. The miners battled the government to a standstill several times and production slowed to a crawl. With copper revenue crashing the government relented to some extent. However, Freeport reported with earnings that the pressure was on again and they were going to be forced to shut down production if the government did not allow them to export. A multiweek standoff occurred. On Tuesday, the government said it was going to exempt Freeport from some of the rules and shares rose.

Freeport is actually in good shape right now. The global economy is accelerating and commodity prices are rising. They have reduced debt and refocused their priorities. I expect shares to continue climbing.

Update 2/3/17: Freeport provided an update on the progress of negotiating with the Indonesian government on the new rules for exports the government put in place in January. Freeport warned that an unsuccessful outcome could reduce production by 70 million pounds of copper and 70,000 ounces of gold per month until approvals are received. This a high stakes game of chicken. The government wants to limit production and export of raw material and increase the amount that is smelted in Indonesia. However, there is not enough capacity at the jointly owned smelter and the mining companies do not want to commit millions of dollars to build a new smelter unless they are guaranteed an operating contract longer than five years, which is what the government is offering. The government is offering the option of a five-year extension but it is not guaranteed. Also, at the end of ten years the miners must have sold at least 51% of their business to Indonesian investors. So, spend millions to build a smelter, live under our austerity rules for the next five years and maybe we will let you continue but after 10 years controlling interest in your business belongs to Indonesia. Freeport has been fighting government rules for years and typically the government buckles because they need the export income and the jobs.

Update 2/10/17: Freeport surged 7% at the open on Friday but gave back half of those gains. The Indonesian government said it had issued a new mining permit to Freeport and the company could apply for a new export license at any time now that the permit was in force.

However, Freeport immediately rebutted those claims saying the new mining permit was unacceptable because it increased taxes and required Freeport to divest 51% of its operations in Indonesia. The company said all those terms were in violation of its long term contract with the country. Freeport warned again it would be shutting down production if it did not receive a permit on the same terms and conditions of the prior permits and existing contract.

Earnings April 26th.

Position 2/2/17:

Long April $18 call @ $.99, see portfolio graphic for stop loss.

Previously closed 2/7/17: Long FCX shares @ $16.69, exit $15.45, -1.24 loss.

STM - STMicroelectronics - Company Profile


No specific news. Earnings estimates are moving higher. Shares closed at a new high on Thursday.

Original Trade Description: February 6th

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest chipmaker. The company reported revenue of $1.86 billion, an 11.5% increase. The also raised guidance for Q1 saying they expect 12.5% growth. The CEO said, "Based on market forecasts, a positive booking trend, and a strong performance at our distributors, we see the momentum from the second half of 2016 continuing as we enter 2017."

The chipmaker said improved efficiencies and product mix lifted gross margins from 33.5% to 37.5%. Their smartphone market share helped increase sales in that division by 17.8%. The automotive and industrial products segment saw sales increase 12.5%. STM is a supplier to Apple, Cisco Systems, HP, Seagate and Western Digital. Every one of those companies are reporting stronger sales and new product lines, all of which helps STM. They also make chips for drones, 3D printing and a wide variety of IoT products.

The consensus earnings estimates are for 103.4% growth in 2017.

Earnings April 27th.

Shares have caught fire because of expectations for a large boost in chips for the iPhone 8 or X whatever they end up calling it.

This stock is not cheap with a PE of 75 but the outlook is so strong that volume is exploding and the stock will not go down. We are going to hold our nose and buy it. A safer way to play this would be to buy the call option. That way your total risk is 70 cents a share.

Position 2/7/17:

Long April $15 call @ 65 cents. See portfolio graphic for stop loss.

Previously closed 2/9/17: Long STM shares @ $14.22, exit $13.75, -.47 loss.

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