The IMF dropped a bomb on the markets on Monday with a lowered outlook. The IMF said the global expansion in recent years is slowing. They are now forecasting a 3.5% global GDP for 2019 and 3.6% in 2020. These are down -0.2 and -0.1 percentage points respectively. This is their second forecast cut in three months.

They are blaming the trade war between the US and China, weakness for German auto manufacturers, weakness in global financial markets and a sharper recession in Turkey that would likely be deeper than previously expected.

They also warned of the growing danger of a hard Brexit or "no deal" Brexit where cross border trade is dealt a severe blow in the short term. If that happens the U.K. and the EU would have to drop back to WTO rules to structure trade programs.

This came after China reported over the weekend that their economy grew at 6.6% for 2018. That was the slowest official growth rate since 1990. The 2017 rate was revised down to 6.8%. Q4 GDP was 6.4%, down from 6.5% in Q3.

Asian markets are lower on Monday evening on worries about the global economic outlook. China is the second largest global economy and they are an export driven mode. That means global economic weakness is bad for their export business.

The S&P futures are down -16.75 as I type this. After four weeks of market gains, we are due for a pause and come consolidation.

Some of the reports listed on the calendar may not appear because of the shutdown and the impact on government agencies but I listed them anyway just in case there is a breakthrough in the standoff.

The US and Chinese trade delegations will meet again in two weeks. I do not have the exact date, so I did not put it on the calendar. While they could reach some agreements, nothing will happen until Trump and Xi meet again so both can get their Kodak Moment signing the agreements. March 2nd is the date the US tariffs on China rise from 10% to 25% so expect an agreement before March 2nd.


Earnings intensity increases this week with a bit more diversity in the company's announcing. IBM and Intel will be the biggest tech stocks followed by several chipmakers. Starbucks reports on Thursday. Other Dow components include JNJ, PG, UTX and TRV.

Some 55 S&P companies have reported Q4 earnings with average growth of 14.2%. More than 76% have beaten analyst estimates. Revenue growth has averaged 5.6% with 58.2% of companies beating estimates. The current forward PE is 15.4. There are 60 S&P companies reporting this week.

Historically the actual earnings growth ends the quarter about 4% higher than the estimates at the beginning of the cycle. That would put Q4 earnings growth in the 18% range if the trend continues. We will track this as the cycle progresses.


On Friday the Dow and S&P both closed within only a few points of their 2017 close. The S&P closed at 2,673 on December 29th, 2017 and 2,670 on Friday. The Dow closed 2017 at 24,719 and closed on Friday at 24,706. For both indexes to be so close to their 2017 levels at the same time is remarkable. All the volatility of 2018 is hopefully behind us.


The S&P surged over the 10% correction level at 2,637 and appears to be headed for round number resistance at 2,700 followed by the convergence of multiple resistance lines at 2,750. The ultimate test will be 2,800. Once over 2,700 that higher target will become a magnet for investors and could prompt a sell the news event when reached.


The Dow had a great day on Friday with all the tariff sensitive stocks posting strong gains. Unfortunately, the China news story is going to fade before we get any real data. The next trade meeting is not for two more weeks. Minor details may leak out, but any real deal will not occur until Trump and Xi meet again to sign any deal and get their pictures taken for the consumers at home.

The Dow eased over minor resistance at 24,700 by only 6 points so that level is still in play. The real hurdle will be 25,000 and the convergence of the 100/200 day averages and the horizontal resistance since July. After the big run over the last four weeks, the Dow is very overbought and continued gains could be rocky.



The Nasdaq has yet to regain the 10% correction level at 7,298 and there are multiple types of converging resistance at that level. The downtrend resistance since October and the 100-day average as well as the round number resistance at 7,300 should make that a volatile location. The big cap tech stocks have been mostly positive for the week and the index gained 2.6% so it was a good week. The techs are lagging the big cap indexes because of weakness in the chip sector, thanks to Apple. There are only a handful of tech stocks reporting next week so the following week is where the tech earnings will flow.



The Russell had a good week after a slow start. After three weeks of gains it went through several days of consolidation before surging ahead. The lack of a rate hike threat and the potential for a trade deal helped encourage fund managers it was safe to buy small caps again.


Just how bad was the market crash in Q4? Investors pulled a record $143 billion from actively managed funds in December alone. That brought the total for the year to -$301 billion and just below the record of $320 billion in 2016. Passive funds and ETFs gained $60 billion in December as investors fled to a cheaper, longer term investment. Passive index funds have risen to $6 trillion in assets while ETFs have risen to $3.6 trillion in assets. Investors are losing faith in fund managers since most did not beat the market in 2018.

While I believe the market is going higher, we have had a four-week rally and the Dow is very overbought. We are at risk for a post earnings consolidation period. Since tech earnings are still a week away that should get us through this week without any major decline. Expectations are still in play. Several high-profile earnings misses or warnings could easily kill those expectations but investors have been buying bad news. I would continue buying the dips until we are proven wrong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

TITN - Titan Machinery - Company Profile

Titan Machinery Inc. owns and operates a network of full-service agricultural and construction equipment stores. It operates through three segments: Agriculture, Construction, and International. The company sells new and used equipment, including agricultural and construction equipment manufactured under the CNH family of brands, as well as equipment from various other manufacturers. Its agricultural equipment comprise tractors, combines and attachments, application equipment and sprayers, planting and seeding equipment, tillage equipment, hay and forage equipment, and precision farming technology and related equipment for use in the production of food, fiber, feed grain, and renewable energy; and home and garden applications, as well as maintenance of commercial, residential, and government properties. The company's construction equipment includes compact track loaders, compaction equipment, cranes, crawler dozers, excavators, forklifts, loader/backhoes, loader/tool carriers, motor graders, skid steer loaders, telehandlers, and wheel loaders for commercial and residential construction, road and highway construction machinery, and mining operations equipment. It also sells maintenance and replacement parts. In addition, the company offers repair and maintenance services that include warranty repairs, on-site and off-site repair services, and scheduling off-season maintenance services, as well as notifies customers of periodic service requirements; provides training programs to customers; and sells extended warranty services. Further, it rents equipment; and provides ancillary equipment support services. The company operates in North Dakota, South Dakota, Iowa, Minnesota, Montana, Nebraska, Wyoming, Wisconsin, Colorado, Arizona, and New Mexico, the United States; and Romania, Bulgaria, Serbia, and Ukraine, Europe. Titan Machinery Inc. was founded in 1980 and is headquartered in West Fargo, North Dakota. Company description from FinViz.com

Think of Titan equipment as the poor man's Caterpillar. They are a fraction of the size of Caterpillar but their prices are reasonable compared to the yellow metal giant.

They reported Q3 earnings of 49 cents compared to analyst estimates for 36 cents. Earnings rose 400% over the year ago quarter. Revenue of $363.6 million rose 10% and edged out estimates at $360 million.

They guided for similar sales in Q4 but raised their margin guidance from 8.7%-9.2% to 9.1%-9.4%. They guided for earnings of 65-75 cents. Consensus estimates are well below that level.

Shares have rebounded sharply from the December market crash and are right on the verge of breaking out to an 8-month high. Given their recent gain I would normally not recommend them but with the outlook on China improving and the market in rally mode, I am going to buy the breakout. Options are cheap.

Earnings February 28th.

Buy March $20 call, currently 55 cents, no initial stop loss.




Current Portfolio


Open Positions

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.




Current Position Changes


COST - Costco
The long position was entered at the open on Tuesday.


Original Play Recommendations (Alpha by Symbol)


CAT - Caterpillar - Company Profile

Comments:

No specific news. CAT surged to a new two-month high on the improving news flow about a possible Chinese trade deal.

Original Trade Description: Jan 7th

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. Company description from FinViz.com.

For Q3, they reported a 47% increase in profits but that was not good enough. In Q1 earnings rose 99% and 120% in Q2. Expectations were high. Earnings per share were $2.86, up from $1.95 but just barely over estimates for $2.85. The company affirmed their full year guidance of $11-$12 saying nothing had changed since the last quarter. That should be good news. Any changes would have been expected to be negative. They said the China market remained healthy and produced a 40% rise in excavators in 2018. They previously guided for a $100-$200 million hit from tariffs and said with the year 75% over it looked like the impact would be at the lower end of the range.

In any normal period, a 47% increase in profits would be outstanding. Given the sharply declining market and the dumping of anything related to China and tariffs, CAT shares were crushed.

In late November CAT said the three-month rolling sales growth for the October quarter rose 18%. That was still good but down from the 21% in September. Total industry sales rose 46% after a 47% rise in September and 35% in August. Energy and transportation retail sales were up 7%, with oil and gas up 20%. The report showed some slight moderation, but it was still a good month despite the tariffs.

With the Chinese trade talks accelerating the odds of a deal are improving. The Chinese Vice Premier showed up unexpectedly at Monday's talks signifying China's interest in actually doing a deal.

Earnings are January 24th. ANY positive news on China will cause this stock to rocket. I am proposing a short term call and then decide ahead of earnings if we want to hold over.

Position 1/8/19:
Long Feb $135 Call @ $3.52, see portfolio graphic for stop loss.



COST - Costco - Company Profile

Comments:

No specific news. Big gain on Friday to a 5-week high.

Original Trade Description: Jan 14th

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio products; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel business. In addition, the company provides gold star individual and business membership services. As of September 2, 2018, it operated 762 membership warehouses, including 527 warehouses in the United States, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, 2 in Spain, 1 in Iceland, and 1 in France. Further, the company sells its products through online. The company was formerly known as Costco Companies, Inc. Costco Wholesale Corporation was founded in 1976 and is based in Issaquah, Washington. Company description from FinViz.com

Everyone should know by now that Amazon and Costco are not competitors. They do sell some of the same items, but Amazon is not a threat. Costco is Amazon proof. If anything, they are becoming more of a threat to Amazon because their online business is growing rapidly.

For December, Costco reported sales of $15.42 billion a 7.8% increase over the year ago quarter. For the quarter ended on January 6th sales rose 9.5% to $52.99. Same store sales rose 7.5% in the US and 6.1% globally. Ecommerce sales rose 13.6%. For the quarter US same store sales rose 10.0%, globally 7.9% and Ecommerce 27.9%. These are dynamite numbers and show no weakness when other retailers are floundering.

Earnings are March 6th.

Shares are recovering from a monster crash in December. I am going to recommend an April call because there are no March options at this time. We will exit before their earnings. Having the expiration after earnings will retain premium until after earnings. Decay should be minimal.

Position 1/15/19:
Long April $220 call @ $5.35, see portfolio graphic for stop loss.



CRM - SalesForce.com - Company Profile

Comments:

Salesforce said it was building a new tower in Dublin Ireland and would double its workforce in the country by adding 1,500 jobs. Shares just keep rising and the old high at $160 is the current target.

Original Trade Description: Dec 10th.

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Position 1/8/19:
Long Feb $150 call @ $4.50, see portfolio graphic for stop loss.

Position 12/11/18:
Previously closed 12/20: Long Feb $150 call @ $4.40, exit $1.54, -2.86 loss.



IBM - International Business Machines - Company Profile

Comments:

IBM signed an 8-year deal with Vodaphone to manage their cloud and digital initiatives for the B2B segment. The contract is worth $550 million. They will also work with Vodaphone on 5G implementation and Software Defined Networking (SDN). Earnings on the 22nd.

Original Trade Description: Jan 7th

International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a computing platform that interacts in language, processes big data, and learns from interactions with people and computers. This segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and tailored industry solutions; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. International Business Machines Corporation has a strategic partnership with Samsung Electronics to manufacture microprocessors. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. The company was founded in 1911 and is headquartered in Armonk, New York. Company description from FinViz.com

IBM is buying Red Hat to significantly increase their cloud offerings. This is a major deal and will completely change the focus and add to market share for IBM. Most analysts are just waking up to the fact this is a game changer.

The IBM CEO will present the keynote speech at CES 2019 on Tuesday. This could be a market moving speech. I propose we enter at the open and then hold until earnings on January 22nd and then decide whether to hold over.

Position 1/8/19:
Long Feb $125 call @ $2.00, see portfolio graphic for stop loss.



BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

With the Dow up 336 and the S&P up 37 on Friday your would have thought the VXX would have declined further. It was the potential for weekend evet risk that provided support. Tuesday's after a three-day weekend have a bad reputation for declines.

We just need to be patient and it will be back under 30 soon.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done five 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from history that the VXX always declines.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a new rally into the Q1 earnings cycle we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the VXX spiked $21 in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

We are not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position.

In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better today.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

Position 2/13/18:
Short VXX shares @ $49.16, no initial stop loss.



Prices Quoted in Newsletter

At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

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All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.