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Whipsaw Wednesday – Our Stock of the Year (IBM) Leads the Recovery

Good morning! 

Our Stock of the Year (IBM) is off to a good start – especially as our 2-year target is only $140!  That was part of the reason we chose IBM, the spread was so compelling because IBM was collapsing on news they bought RHAT, which I thought was a clever idea and everyone else seemed to think meant IBM was going bankrupt or something.

Monday Market Madness – IBM’s $33Bn Shopping Spree Gives Tech Investors Hope

It's a powerful thing.  IBM (IBM) announced over the weekend that they will be buying Red Hat Softwars (RHT) for $33Bn which is more than 50% over Friday's $20 close at $116.  I noted in our chat room this morning that $33Bn may have seemed less ridiculous as IBM began negotiating with RHT, probably over the summer as RHT had just been at that valuation – though the people who valued them there were IDIOTS, of course.  

RHT has $3Bn in earnings and $250M in profit.  If it were an IBM division it would have been shut down years ago as not worth keeping but IBM sees RHT as leverage as their customers are the customers of Amazon (AMZN), Microsoft (MSFT) and pretty much all the other cloud providers and that gives the mighty IBM sales force a foot in the door to leverage the 10s of Billions of Dollars they spend on cloud services and THAT is why this deal makes sense for IBM. 

It's also a brave and confident move by IBM CEO Ginny Rometty and it's the kind of thing woman CEOs do that men almost certainly would not, which is make a move that carries a lot of personal risk for them, has no immediate payback but paves the way for the company to be much healthier in the distant future.  It's a nurturing move and the question now is whether she will be tarred and feathered for making it but predominantly male investors and analysts.  

We're in a fairly painful IBM position in our Long-Term Portfolio as we sold 5 2020 $145 puts in January for $12.50 to net in at $132.50 but this morning IBM will open around $120 so we're down about $6,250 (100%) on those.  We also bought 15 2020 $120/150 bull call spreads for $14 ($21,000) back in July and yes, we still have all of next year but now net $9 is down $6,000 on that end too – ouch!   

I think a lot of short-term investors may pull the plug but I have long-term faith so, most likely, we'll rescue $13 from the 15 2020 $120 calls ($19,500) and pick up 25 of the 2021 $110 ($20)/$140 ($7) bull call spreads ($32,500) so we'll spend $13,000 more but now we have 25 spreads that are $10 in the money so $25,000 and pays up to $75,000 against our net $34,000 total investment if all goes well and, of course, we'll make some short call sales along the way – but not when they are below $140.

As to the short puts, we'll leave them for now as $145 in a year is not a crazy target and we'll roll them along to 2021 or 2022 if we have to because, as I said, this is a long-term play in our Long-Term Portfolio.  IBM's Watson has been quietly taking on more and more tasks (nice list here) and you can even use Watson to help coach your fantasy football team now.   IBM has a very long-term strategy to put Watson in everyone's hands and get people used to using it – at home and at work.  

Image result for ai market growthArtificial Intelligence is barely a $1Bn market in 2018 but is projected to be almost $12Bn in 6 years and $36Bn by 2025 so yes, the time is now for IBM to make their moves to dominate the AI and Cloud Spaces – and that's what this Red Hat deal is all about.  Rometty is banking on being able to show some progress next year as AI doubles – even as cloud growth begins to slow (who isn't in the cloud now?) and, after making less than $6Bn in 2017, IBM has made $6.7Bn in the first 3 quarters of 2018 yet you can buy the whold company for $112Bn, just 12.4 times likely $9Bn in current earnings.

That's the kind of company we like to have in our Long-Term Portfolio – the kind that MAKES MONEY!  Last time IBM tested $120 was early 2016, when they began their turnaround program and I was banging the table hard for them at the time.  They since popped back to $180 but now $120 again and again I am banging the table for an IBM investment as they are clearly being sold off by short-term traders – to the great advantage of long-term investors.  

It's a classic LTP play, we sold some puts, the stock went lower which made us like them even more, so we set up a bull call spread -  In this case we had a higher 2020 spread and rolled our longs to 2021, sold more short calls in 2021 and left the earlier short calls to decay (and we bought them back yesterday, in our Live Member Chat Room, with an 80% profit in anticipation of good earnings).  Now, when IBM gets back in near the top of our range ($140), we'll sell more puts and draw an income, while we wait to realize the full $75,000 from this net $34,000 (including our previous losses but not future short-call income) spread.

Jeff Bezos said a good CEO gets paid to make a few very important positions – that's very true and the same goes for a good stock analyst or hedge fund manager.  We're here every day so I talk about stuff every day but it's those BIG moves that really matter in the end, when we call big tops or big bottoms and put our money where our mouths are (and, of course, our hedge fund grabbed the IBM too!).

Still it goes back to ALWAYS managing your portfolio in such a way that you are Ready, Willing AND Able to take advantage of these opportunities when they present themselves – or what's the point? 

As we ramp up Trade Exchange for a rollout this year, I'm going to test the waters for the demand for a service with only a few really good trades since the whole point of Trade Exchange is that we send out an actionable text Alert when something happens – so people who live their whole lives on vacation (Savi!) will easily be able to keep up with our market picks.

October 29th, 2018 at 2:36 pm | (Unlocked) | Permalink

IBM/Pstas – The April $120 ($8)/$130 ($4) bull call spread is tempting at $4.

October 29th, 2018 at 9:16 pm | Permalink

IBM CEO on Red Hat: ‘There’s a $1 trillion dollar market in front of us’

Yet the stock still went down to $113 the next day!  

Also a good review the next day (10/30) of where we were at the 10% line and why I thought we had further to go at the time but now 

10% Tuesday Correction – Have We Fallen Far Enough?

Now we need to watch all the 10% lines to see if they fail and those and we're not goingt to get bullish again until we are back over our strong bounce lines – which would be 6% off the top, recapturing 40% of the drop.  Failing those 10% lines is a strong sign that we are on our way to a 20% correction – another 10% lower than we are now.  Those 10% lines to watch are:

  • Dow 24,300 with a weak bounce at 24,800 and a strong bounce at 25,300
  • S&P 2,640 with a weak bounce at 2,710 and a strong bounce at 2,780
  • Nasdaq 6,870 with a weak bounce at 7,080 and a strong bounce at 7,230
  • Russell 1,485 with a weak bounce at 1,530 and a strong bounce at 1,575
  • NYSE 11,880 with a weak bounce at 12,150 and a strong bounce at 12,400

This morning we're at 24,5662,6466,6921,466 and 12,000 so we're back at the 10% lines and /ES is the inflection point that gives us 3 positive or 3 negative but what's really great is how the 5% Rule is holding up 3 months later!  That means we can be pretty aggressive with our bounce predictions and that means we're going to back in the Futures business (after I've been reluctant to make too many calls in the -20-10% zone as the lines didn't have time to prove out).  

Meanwhile, getting back to IBM, it was the Wednesday before Thankgiving (11/21) that we officially made IBM our Trade of the Year for 2019 and that's another oldie but goodie that's well worth re-reading so you can get a handle as to how we think about the market at these junctures.  While the market had bounced, I had spent the week going over all the things that were wrong in the World and decided they still were not priced in, so we added the following hedge:

Back in October, we looked at the "30 Risks to Markets in 2018" and that is why we expected the correction and those risks are still out there for the most part but now many of them are REALIZED by investors – so they are less likely to cause panic selling when they bubble up in the news cycle and that means we MIGHT stablize here – down 10%, but I'd still feel a lot better about buying if we weak bounce here and continue on to a full 20% correction.

From 7,700 on the Nasdaq, that would be 6,160 – another 500 points down from here.  From Dow 27,000, we're looking at 21,600 – down 3,000 points ($15,000 per contract in the Futures!).  From S&P 2,950, a 20% correction would be 2,360 and that's off 300 points – also $15,000 per contract to be made shorting /ES and the Russell (/RTY) topped out at 1,740 so we're looking at 1,392 and that would be only and 80-point drop – hardly worth playing. 

We had already predicted the Russell would fall the most thanks to more complex calculations using our 5% Rule™ and now we are predicting that, if we break for another leg down, it's the Nasdaq that's most likely to fall hard and the new hedge we'll be using (IF the weak bounces fail) was just sent out as a Top Trade Alert to our Members yesterday using the Nasdaq Ultra-Short ETF (SQQQ):

As a hedge, however, we're more worried about a correction between now and Jan earnings so something higher than here would be appropriate so, as a new hedge, I'd go with:

  • Sell 5 AAPL 2021 $170 puts for $22 ($11,000) 
  • Buy 80 SQQQ March $15 calls at $3.40 ($27,200) 
  • Sell 80 SQQQ March $22 calls for $1.60 ($12,800) 

That's net $3,400 on the $56,000 spread that's $12,000 in the money to start so you can't lose you're $3,400 unless the Nasdaq improves and, if it does improve, it's not likely AAPL will be much lower.  If, on the other hand, AAPL is below $170, it's not likely SQQQ isn't paying you most of that $56,000 back and you are only obligated to own $85,000 worth of AAPL stock so, as a stand-alone – the worst likely case is owning 500 shares of AAPL for net $29,000 ($58/share) but more likely you have some very good downside protection.

You don't have to pick Apple (AAPL) as your offset, any stock you REALLY want to buy at the net price is fine but we REALLY want to buy AAPL for $170 or less – REALLY!!!  That makes using it for spreads like this a no-brainer. It's hard to say if the Apple-bashing has run its course yet but this happens to the stock once in a while as the Banksters know they can manipulate the entire stock market by taking AAPL down (or talking it up) and right now, the Banksters want you to sell all your shares so they can step in and buy them before they tell you how oversold the market is getting.

We cashed the long SQQQ calls as we spiked up towards our $22 goal for around $7.50 (just under the max for the spread at $60,000) and we left the short calls to die on the vine.  The 80 short March $22 calls are now 0.40 ($3,200) and we bought them back when we added more hedges on Friday and now we're "stuck" with 5 short AAPL 2021 $170 puts that are now $30.50 ($15,250) so the net of the spread is now $41,550, up $26,150 (1,222%) so far, with another $15,250 (448%) to gain if AAPL gets back over $170 in two years.  THAT'S A NICE HEDGE!  

Worst case is we end up owning 500 shares of AAPL very cheaply as those $170 puts still have a lot of premium that WILL burn off, leaving us with all the CASH!!! ($60,000 – $3,200 = $56,800) to put towards the purchase of AAPL shares or, as we actually did in the LTP – to put towards a deep in the money spread that's just as good – better even…

Anyway, the point is that this is the PROCESS we follow at PSW.  When the market goes low, we buy value stocks, usually starting a spread by selling long-term puts that either give us an even cheaper entry or, if the stock goes up, drops more CASH!!! in our portfolio – which is what happens more often than not.  When the less often happens and one of our "value" stocks gets an even deeper discount, we then (assuming the Fundamentals haven't changed) begin to establish our long position, as we did with IBM.  If our stocks are cheap because the whole market is down – we have our hedges to put more cash towards the trades and when our stocks recover (as they did last week) we take some of those profits and use them to buy more hedges to lock in our gains.  It's really not that complicated...

Getting back to our 11/21 official Stock of the Year pick, IBM dipped back down and I took advantage of the opportunity to give our readers a similar trade to the one we had made a month earlier in our Member Chat Room, saying:

IBM, for example, came back down to our buy zone ($115) yesterday and our Top Trade Alert from Oct 31st was:

  • Sell 5 2021 $120 puts for $20 ($10,000) 
  • Buy 15 2021 $120 calls for $11.30 ($16,950) 
  • Sell 15 2021 $145 calls for $5 ($7,500) 

That's a net $550 credit on the $37,500 spread so $38,050 upside potential (6,918%) if IBM is over $145 in Jan 2021.  

We got a quick $10 pop but now it's fading back but we love IBM, who have made $6.7Bn in the first 3 quarters of the year yet you can buy the whole company for $105Bn at $117, which is about 10x current earnings.  That's for a company that made over $12Bn a year all decade except last year, when they took restructuring charges and reorganized the company to accomodate future growth.  Nonetheless, "investors" panicked out of the stock and continue to do so, despite almost being back to normal $10Bn+ earnings already.  Idiots – did I mention that the average investor is an idiot?  Keep it in mind…

IBM's CEO, Ginni Rometty just bought $1M worth of stock at $117 and another $2M for her retirement fund along with a couple of Directors who bought $250,000 each recently.  Now, when Elon Musk buys $1M worth of TSLA stock, I'm quick to point out it's just a stunt as he's worth $22Bn and most of that money is tied up in TSLA stock so all he's doing is pumping up his own bank account by creating a stir.  Ginni is no slouch but worth "just" $45M so, when she puts $3M into her company's stock – it's making much more of a statement, isn't it?  

As you can see, they've also been busy buying back their own stock, at a pace of about 8% per year, which means that $10Bn+ in earnings will be divided by a lot less shares going forward than it was in 2016.  IBM did overpay for Red Hat (RHT) at $34Bn but it's money that was burning a hole in their pockets anyway and they had strategic reasons for doing so and no, there won't be a bidding war because RHT will owe IBM $975M if they don't complete the deal – the opposite of a ususal buyout condition.  

Image result for red hat market shareRHT only makes $250M a year on $3Bn in sales so, on the surface, it seems insane for IBM to buy them but Red Hat has 33% of the Global Server Market (and it's the fastest-growing) and, though Linux is basically free, those same companies buy hundreds of Billions of Dollars in Services, which Microsoft (MSFT) is able to parlay into $60Bn worth of sales and $10Bn in profits.  NOW does buying RHT make sense for IBM?

Red Hat is IBM's foot in the door to customers who do buy all those services that IBM sells – just not from IBM.  Now the first interacton they will have is with IBM sales people, coming to the office to deliver their free version of Linux while discussing all the ways IBM can help them install, host and service that software – it's brilliant actually…

That's why IBM, who were our runner-up for Stock of the Year in Nov 2015 at $140, are now our official stock of the year at $117 and that makes the above trade our PSW Trade of the Year and usually we promise to give people who buy an Annual Subscription between now and Dec 31st a full year bonus if our Trade of the Year doesn't make 100% before the renewal next year (you don't have to make the trade but you do have to subscribe), but this one is so cheap we'll simply guarantee that, by November next year, this trade makes at least $5,000 – or your renewal is FREE!  

We'll talk more about it at today's Live Trading Webinar (1pm, EST) and we'll be watching those bounce lines to see if we're going to buy more longs like IBM, which has the potential to return 6,918% on cash (actually a credit), or whether we're going to add our SQQQ hedge – maybe with an IBM offset?

I'm very sorry to report though, that those who bought an Annual Subscription hoping for a freebie are already disappointed because IBM will open around $130 this morning.  Even yesterday, at $122, the 2021 $120 puts were $16.81 ($8,405) and the 15 $120 ($14.10)/145 ($6.00) bulll call spread was net $8.10 ($12,150) for net net $3,745, which is up 780% including the original $550 credt (from $550) so already miles past 100% gains in just two months and, as of this morning, should be double that at least - up over our $5,000 promise a full year ahead of schedule! 

Congratulations to all who paid and please don't forget to use that quick $7,000 gain to buy a PSW Membership, so we can give you trade ideas like this all year long!  


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  1. Good Morning!

  2. Morning, All!

    Join us at 1pm for our weekly webinar!

  3. Nice work Phil!  :)

  4. For those holding a play on COF time to sell a 70 March put. I have set it for 1.00!

  5. For those holding a short term cherry call on IBM, today is not the day to panic, just sit back and wait, I think as usual blind man buying will push the stock up today, once the exitment cools down check your position.!!!

  6. Julian Assange launches legal challenge against Trump administration

  7. 4 places Donald Trump could deliver his State of the Union

  8. Good morning! 

    Wow, IBM $135 – very nice!  Congrats to all who played along.  

    Now I'm REALLY happy we bought back those short calls…

    Big Chart – All is well as long as we hold those 50 dmas for the week.  

    API is pushed to tonight, EIA tomorrow at 11.  /RB still $1.3971 so still long over $1.39.

    /SI with a nice dip back to $15.25 but no real support until $15.20, where I don't mind taking a poke.

    Wow, sorry, I thought I posted this but I never did!

  9. I was reading my news and things turned sour suddenly.  Seems to be the Richmond Fed, which wasn't actually that bad:

    Things would be worse if the Dollar wasn't doing a nose-dive:

    Finally PZZA making a move.  Just needed an excuse:

    Papa John's hires its first chief people officer

    • Papa John's International (PZZA +5.1%) announces the hiring of its first chief people officer.
    • Marvin Boakye will serve as a member of the Papa John’s executive leadership team and report to CEO Steve Ritchie
    • The company says he will play a critical leadership role in implementing the company's talent management strategy, which includes overseeing people operations; compensation and benefits; and learning and development.
    • Boakye has more than 20 years of human resources experience, including serving as vice president of human resources at petroleum company Andeavor.
    • Papa John's International (PZZA +5.6%) breaks higher after a speculative report from DealReporter suggests that Restaurants Brands International QSR could be interested in making a bid.
    • DealReporter thinks ex-CEO John Schnatter and 3G Capital could partner up with Restaurant Brands on the buyout.
    • Papa John's has traded as high as $44.50 this morning. Shares of PZZA were over $80 before Schnatter's damaging NFL comments.
    • Source: Press Release
    • The Bank of Japan stood pat on interest rates, as expected, and cut its inflation forecasts as an exit of a loose monetary policy now looks much further off.
    • The bank voted 7-2 in favor of keeping short-term rates at -0.1%, with long-term rates around zero.
    • It says Japan's economy will continue to expand at a "moderate" pace, but fallout from a trade war between Japan's two biggest partners — China and the U.S. — is raising concerns.
    • The bank has cut its forecast for core consumer inflation in the coming fiscal year to 0.9% from 1.4% amid falling crude prices.
    • That central banking news followed data showing weak trade growth, with Japan's exports falling by 3.8%, its biggest drop in two years. The result disappointed those expecting just a 1.8% decline. Imports also fell short, with a 1.9% Y/Y gain vs. consensus 3.7%


    • Seritage Properties Group (NYSE:SRGreports 878,000 square feet of new leasing at average rent of about $21.00 per square foot on retail leases in Q4.
    • In 2018, SRG signed new leases totaling 3.1M square feet, a 17% increase over 2017 leasing activity; annual base rent of $17.30 PSF.
    • Seritage +0.2% in premarket trading.
    • As of Dec. 31, 2018, Seritage had 96 leases with Sears Holdings (OTCPK:SHLDQ), representing 54% of total leased GLA and annual rent of $56.5M, or 28% of total annual rent.
    • In-place diversified non-Sears leases accounted for 234 leases, or 24% of total leased GLA and annual rent of $65.8M, or 32% of total annual rent.
    • SNO diversified, non-Sears leases accounted for 167 leases, or 22% of total leased GLA and annual rent of $81.3M, or 40% of total annual rent.
    • Previously: Seritage Growth -1.4% after Q3 miss (Nov. 1, 2018)


    • Qatar is preparing to issue a tender for energy companies seeking a stake in its gas expansion project, drawing interest from long-standing partners as well as newcomers Chevron (NYSE:CVX), Equinor (NYSE:EQNR) and Eni (NYSE:E), Reuters reports.
    • Officials from CVX have held talks in Doha in recent weeks and are considering bidding for a stake in the expansion, according to the report.
    • The four companies that hold stakes in Qatar’s existing LNG facilities – Exxon Mobil (NYSE:XOM), Royal Dutch Shell (RDS.ARDS.B), Total (NYSE:TOT) and ConocoPhillips (NYSE:COP) – are widely expected to bid.
    • Competition is expected to be fierce for the stake in the expansion of Qatar’s liquefied natural gas facilities – already the world’s largest – by more than a third in the next five years.


    Image result for i want my flying car
    • Boeing (BA +0.7%) says it completed the first test flight of its autonomous air taxi, bringing it a step closer to making its flying taxis for Uber a reality.
    • "In one year we have progressed from a conceptual design to a flying prototype," says Boeing Chief Technology Officer Greg Hyslop, but the flight only lifted off and hovered for a short time before making a controlled landing; the full flight lasted less than a minute.
    • The company's passenger air vehicle prototype is battery powered and designed to have a range of 50 miles.
    • Boeing and Textron's Bell helicopter unit are partnering with Uber as it maps out plans for an Uber Air taxi service; Airbus and German start-up Volocopter are developing their own air taxi prototypes.
    • United Technologies (NYSE:UTX+3.9% pre-market after easily beating Wall Street expectations for Q4 earnings and revenues, benefiting from strong demand for aircraft parts.
    • This is UTX's first earnings release since completing its $30B acquisition of Rockwell Collins in November and announcing its intent to separate into three independent companies.
    • UTX says Q4 commercial aftermarket sales rose 11% Y/Y at Pratt & Whitney and gained 8% organically at Collins Aerospace Systems; Otis new equipment orders were flat organically, and equipment orders at Carrier increased 3% organically.
    • For FY 2019, UTX sees EPS of $7.70-$8.00, excluding non-recurring items, vs. $7.80 analyst consensus estimate on revenues of $75.5B-$77B vs. $77.1B consensus.
    • Looking to 2019, our segment profit is expected to grow faster than sales, and free cash flow, excluding separation costs, is expected to grow faster than earnings," the company says.
    • RBC Capital downgrades Tesla (NASDAQ:TSLA) to an Underperform rating from Sector Perform on deep concerns over the EV automaker's valuation amid the shift into becoming a volume player.
    • "The current valuation already considers overly lofty expectations. For instance, let's assume 1mm [Model 3] units @$55k ASP, 12 percent EBIT margins, no interest/equity raise all by 2025," notes analyst Joseph Spak. "This is undoubtedly solid earnings, but at a more 'mature' 15x P/E, the discounted back value is ~$195, meaning even in an optimistic case at least 1/3rd of today's price is an Elon premium," he adds.
    • Spak and team give Tesla credit for reeling in expectations. "Whether its cutting the price of their lineup by $2k/unit, admission the federal tax credit expiring will hurt, acknowledgment that Tesla can't sell at $35k Model 3 profitably and costs need to come down, or language around full-self driving – we'd classify recent commentary and actions by the company as more realistic," reads the RBC note.
    • The firm chops its price target to $245 from $290 to rep 18% downside potential.
    • Shares of Tesla are down 1.39% in premarket trading to $294.75.



    • Procter & Gamble (PG +5.3%) CFO Jon Moeller says the company isn't seeing a slowdown in China and remains "fairly confident" on growth in the second half of the year in the region.
    • P&G's solid organic sales growth in Q4 was boosted by a +30% gain in organic e-commerce sales.
    • Segments showing strength in Q4 off new innovation include beauty and skin/personal care.
    • The company expects to pay over $7B in dividends and repurchase up to $5B worth of shares.
    • Procter & Gamble earnings call webcast
    • Previously: Organic sales solid at Procter & Gamble (Jan. 23)


    • Shares of Walmart (NYSE:WMT) perk up after Morgan Stanley upgrades the retail giant to an Overweight rating from Equal-weight.
    • The firm expects Walmart to increase its market share in the U.S. without bleeding margins and sees significant gains for the brand in the apparel, grocery and home furnishing categories.
    • MS assigns a price target of $110 to Walmart.
    • Walmart's FQ4 earnings aren't due out until February 19. As always, the holiday quarter report and look ahead at the full year will be highly anticipated for WMT investors and the retail sector as a whole.
    • WMT +1.22% premarket to $98.68 vs. a 52-week trading range of $81.78 to $109.98.


    • "Short activist" fund Kerrisdale Capital is out with a new short report on Qualcomm (NASDAQ:QCOMsaying that the company's "imminent loss in its ongoing trial against the Federal Trade Commission is more serious" than the Street thinks since it would end its "extortion-level royalties."
    • Read the report here.


    • Comcast (NASDAQ:CMCSAgains 4.3% premarket on Q4 beats with 26% Y/Y revenue growth.
    • Cable revenue breakdown: Total, $14.13B (consensus: $13.99B); Video, $5.58B (consensus: $5.56B); High-Speed Internet (or HSI), $4.4B (consensus: $4.4B); Voice, $978M (consensus: $974.6M); Business Services, $1.84B (consensus: $1.86B); Advertising, $863M (consensus: $801.1M); Other, $467M (consensus: $409.2M).
    • NBC Universal's total revenue was $9.4B compared to the $9.25B consensus.
    • Net adds: Video was down 29K compared to the 62K drop predicted by analysts. HSI grew 351K (consensus: 356K) and Voice added 2K beating the 34K consensus loss.
    • Earnings call is scheduled for 8:30 AM ET with a webcast available here.
    • Press release.
    • Previously: Comcast beats by $0.02, beats on revenue (Jan. 23)
    • Previously: Comcast declares $0.21 dividend (Jan. 23)

  10. Boeing’s Flying Car Has Taken Off

  11. Phil – I have been watching SIG and am wondering about your thoughts on it now. The options premium are pretty attractive for a Jan 2020 28 covered call play at $4 with a $20 put at $3.60. Thank you.

  12. SIG/Wilsons – We played them about a year ago when they were down about here so I'm not adverse to playing them again:

    March 15th, 2018 at 10:53 am | (Unlocked) | Permalink

    SIG/Ilene – Looks very good to me.  Made $4.28 per $39 share with big growth in ECommerce.  Margins were down a bit and they are reducing store count and inventory by about 7%, which incurs some costs and is driving down guidance.  

    The key takeaway

    Signet's fiscal Q4 numbers were decent, but its outlook indicates that it will face some tough headwinds throughout the year. E-commerce only generates a small slice of its revenues, and Signet could struggle against higher-end retailers and bigger e-commerce marketplaces as it attempts to grow them.

    I think they are worth a put sale for the LTP since we can sell the 2020 $30 puts for $5 and that's net $25 or $14 off the current $39 (35%) so yes, we can sell 10 of those for $5,000 and promise to buy SIG for a 35% discount!  


    We cashed them out on the run-up and here they are again at the lows – what a strange stock – especially as they are financially pretty consistent:

    Year End 03rd Feb 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 3,983 4,209 5,736 6,550 6,408 6,253 6,386 6,255 6,140 +9.4%
    Operating Profit $m 560.5 570.5 576.6 703.7 763.2 579.9 -357.6     +0.7%
    Net Profit $m 359.9 368 381.3 467.9 543.2 519.3 -198.2 206.2 183.1 +7.6%
    EPS Reported $ 4.35 4.56 4.75 5.87 6.93 5.73 -6.83     +5.7%
    EPS Normalised $ 4.35 4.56 4.75 5.87 7.21 7.00 -1.52 3.74 3.38 +10.0%
    EPS Growth % +16.2 +4.9 +4.3 +23.5 +22.8 -2.9   -46.6 -9.63  
    PE Ratio x           3.42 n/a 6.41 7.09  
    PEG x           n/a n/a n/a 1.53

    Why are they projected to make so much less next year – that's the question?  It looks to me that this is a guidance issue based on weak holiday sales AND higher credit costs and they seem to be guiding around $3.60 for 2019, which doesn't suck for a $24.28 stock but you can see why they are not $70 anymore.  

    SIG Guidance

    The guide-down is about 20% since last Q so $50 becomes $40 in the very least but then $40 might become $32 and $32 might become $24 and here we are.  I was just saying to my Mom that artificial diamonds were going to wreck this industry (TIF took a nose-dive too) but my Mom crinkled her nose and said if someone gave her an artificial diamond she'd be insulted – so they still have the over 70 base that will remain loyal but my kids can't see the point in buying a diamond over cubit-zirconia, let alone a "real" diamond with flaws over a perfect artificial one that's 1/3 the price.  

    So I don't see this as a big growth industry but I would pay 10x a 20% discount to earnings so call it $2.80 at worst and then $28 would be fair so my play would be:

    • Sell 5 SIG 2021 $20 puts for $5.50 ($2,250)
    • Buy 10 SIG 2021 $20 calls for $8 ($8,000) 
    • Sell 10 SIG 2021 $28 calls for $5.50 ($5,500) 

    That nets you into the $8,000 trade for $250 so there's $7,750 (3,100% upside) if they get back to $28 in two years – nothing wrong with that.  For now, let's sell 5 of the puts in the OOP and 10 of the puts in the LTP and see how it goes before jumping into the bull spread.

  13. Yikes, stocks really off now.  

    • Volatility strikes again as worries over global growth overtake optimism over some better-than-expected earnings.
    • Major U.S. stock lose most of their early gains, with the Nasdaq and S&P each up 0.1% and the Dow up 0.5%.
    • At the open, the Dow rose 1.2%, Nasdaq +0.8%, S&P +0.7%.
    • By sector, materials (-0.7%) and energy (-0.4%) are weighing on indexes, while consumer staples (+0.6%), information technology (+0.4%), and utilities (+0.3%) are leading the gains.
    • Oil edges down 0.1% to $52.95/barrel.
    • Meanwhile, 10-year Treasury falls, pushing yield up 1 basis point to 2.755%.
    • Dollar Index falls 0.2% to 96.13.
    • Previously: Strong earnings for Dow trio help lift broader market (Jan. 23)
    • Investors in industrial stocks need to be wary of "a flock of black swans" in 2019, including tariffs, the Chinese economy and the U.S. economy, says William Blair analyst Nicholas Heymann.
    • The tariff issue became more tangible yesterday when Stanley Black & Decker (NYSE:SWK) shares plunged 15% after warning of trade-related headwinds hitting margins.
    • Heymann suggests focusing on companies that can drive growth through internal improvement, preferring Curtiss-Wright (NYSE:CW) and Wabtec (NYSE:WAB) following respective acquisitions of Dresser-Rand's government business and GE Transportation.
    • Heymann is also a General Electric (NYSE:GE) bull, believing GE has the ability to deleverage and de-risk faster than investors think, but others recommend staying far away given the stock’s 21% rise over the past month.
    • Cowen analyst Cai von Rumohr thinks GE's stock is "ahead of itself given excessive optimism around probable exits of the profitable GECAS/Healthcare units, which would pare liabilities but not obviously raise long-term equity value given the hollowing out of GE’s Remainco."
    • Separately, GE Hitachi Nuclear Energy says it completed the segmentation of reactor internalsat Oskarshamn Nuclear Power Plant Unit 2 in Sweden

    Chevron CEO says energy sales show no sign global economy hitting a wall

    • The global economy may be slowing down but sales of energy and industrial products do not indicate that growth will come to a halt, Chevron (CVX -1.2%) CEO Michael Wirth tells the World Economic Forum in Switzerland.
    • "We’re not seeing signs that we’re hitting any kind of a wall," Wirth says, adding that the company sells products such as lubricants and lubricant additives into industrial sectors such as construction, mining and transportation that historically have been reliable indicators of economic activity.
    • Wirth foresees a more stable crude oil market: "Commodity markets, when they’re volatile, they make it hard for investors to invest… so you really need a price that encourages investment and draws in enough new investment. We’re probably not far from that kind of a price right now."

    FedEx and UPS stumble after WSJ report on Amazon pricing

    • FedEx (FDX -1.7%) and UPS (UPS -2.4%) trade lower after The Wall Street Journal may cut down on the extra fees charged to shippers as part of its new seven-day delivery service.
    • An Amazon e-mail sent to prospective customers indicated that end-to-end deliveries sent to homes during the peak season or on holiday weekends won't be tagged with extra charges. The WSJ notes that residential surcharge fees at FedEx average about $3.80 per parcel, while UPS is even higher at $3.95 per parcel. Amazon could also lighten up on fuel surcharge fees in a bid to poach customers.

    IBM at three-month high after beat, with analysts cautious

    • IBM is up 7.9% and hit its highest point since mid-October after yesterday's Q4 earnings topperthat featured some upside guidance for the coming fiscal year.
    • The move today is IBM's biggest earnings-related gain since Q3 of 2017.
    • That's despite revenues that slipped 3.5% and are still expected to decline this year (by another 2%), developments that have most analyst in "show me" mode, though they were mostly positive on the quarter.
    • For one, BMO's Keith Bachman raised his price target, to $147 from $145, and praised revenue growth in the areas that it did grow (not Systems or Global Financing) even with foreign exchange challenges. He's positive on management strategy and focus but unsure whether the Services business can grow.
    • That $147 target implies just over 11% upside.
    • On the other hand, Wells Fargo has lowered its target to $140 from $155 and sticking to a Market Perform outlook. Analyst Ed Caso says he expects a two-year pause to buybacks as free cash flow is used in the Red Hat acquisition, but also looks to steady progress with help from an increasing dividend rate and relatively high dividend yield and free cash flow yield.
    • Since the beginning of October, shares are down more than 14%, and they're down 24.5% over the past 12 months.
    • Earnings call slides
    • Earnings call transcript

    Hulu raises live TV pricing, lowers ad-supported product price

    • Fresh off of Netflix price hikes, Hulu is raising the price of its live television offering while giving a break to its ad-supported on-demand product.
    • The streamer has raised the live TV bundle by $5 a month, to $44.99/month. Meanwhile, the ad-supported VOD service will see a $2 price cut, to $5.99/month from $7.99/month.
    • The ad-free tier of video on demand will remain unchanged at $11.99/month.
    • The moves are effective as of Feb. 26.
    • Hulu doesn't disclose exactly how its 25M subscribers break down, though it confirmed to Variety that the "majority" of customers are on the ad-supported on-demand plan, which is the one seeing the price cut.
    • Hulu — for now — is owned by Comcast (CMCSA +4.2%), Disney (NYSE:DIS), Fox (FOXFOXA+0.2%) and WarnerMedia (T +0.7%).
    • YouTube TV (GOOG -0.4%GOOGL -0.4%) is expanding to almost the entire country today, adding 95 markets and reaching 98% of U.S. households.
    • It says the remaining households will follow shortly.
    • That brings it in line with other streaming live-TV rivals like DirecTV Now (T +0.8%) and Sling TV (DISH -2.6%).
    • More than 90% of the markets will have local affiliate coverage from the Big Four TV broadcasters.
    • YouTube TV is priced at $40/month and features more than 60 live channels, cloud DVR and support for up to six accounts. A short bit ago, Hulu announced it would raise the price of its live TV bundle to $44.99/month.

  14. FDX; UPS; AMZN- reading the above article reminded me of my days way back when I  was a Marketing guru and we used to talk about "stupid competitors" – defined as anyone buying market share with lower margins/price cutting. Such actions tend to hurt all the players including the perpetrator. However, in AMZN's case, Bezos has been pulling this scam off for years (a wonder he had the time given his taste for bimbo chasing :) )

  15. Another chance to go long /RTY at 1,450 – worked yesterday…

    Stupid/Pstas – That's because he has exogenous sources of revenue to fund these money-losing ventures until the competition runs out of capital and he takes over.  Whole Foods had cool sales for about a month but that's already over and I saved $1.27 by being a Prime Member this week.  Also, Prime has become a joke as now they only ship certain items and they are constantly trying to trick you into paying more for shipping regardless.  That whole 2-day thing seems to be out the window as well on I'd say about 1/3 of the items.

    Still, FDX for sure and UPS a bit have gotten very greedy and charge about 20% more (Gross profit) than it really costs them to ship, and that includes things like paying the CEO $35M (plus all the jets he can fly).  They are also tossing out $500M in dividends and have bought back over 1/3 of their stock since 2013 for about $20Bn as it's a company that's being run for Wall Street these days, not for the customers.  Not saying Bezos will be any better – but these guys were ripe for a take-down – that's why we only sold 5 of the 2021 $180 puts for $22.22 (net $157.78) as we didn't want to over-commit on the 12/14 drop.  

    Submitted on 2018/12/12 at 10:59 am

    FDX/Sun – I think a bigger threat to them than AMZN is a reclassification of their drivers, who are being treated as independent contractors.  That can get messy for them down the road.  Still, AMZN fears are WAY overblown since AMZN sells $200Bn out of $5,000Bn in retail sales and doesn't use FDX anyway so why would FDX really care?  

    Amazon Air was previously known as Amazon Prime Air but that's the drones now so they changed the name but the service isn't new, AMZN bought 20% of Air Transport's stock in 2016 and, in 2017 they began building a hub in Cincinnati which is a $1.5Bn project they are working on and about 2 decades and 12 more air hubs and 25 ground hubs away from matching FDX's capacity (not to mention 300,000 employees and over 1M "contractors" that need to be hired).

    So, assuming AMZN can't match that in 2 years, selling the FDX 2021 $180 puts for $22 is the way I'd go as it's net $158 with FDX at $190, which is $50Bn with about $3Bn in ordinary profits (last year they paid no tax on $4.5Bn in income).

    Let's sell 5 of those for the LTP.

  16. Webinar time!

  17. Hi all!

    Phil had to reboot during the webinar. If you got booted or something, you should be able to log in again.

  18. All sorted – did I miss anything?

    What a silly market.  Pelosi is stopping Trump from giving his State of the Union and he is pissed!  

    Pelosi writes Trump that House won’t consider a resolution authorizing the annual address in its chamber while the government is still shut down

    Mrs. Pelosi told Mr. Trump in a letter that the House wouldn’t consider a resolution authorizing the annual address in its chamber while the government is still partially shut down.

    “I look forward to seeing you on the evening [of] January 29th in the Chamber of the House of Representatives,” he wrote. “It would be so very sad for our Country if the State of the Union were not delivered on time, on schedule, and very importantly, on location!”
    Mr. Trump’s letter to Mrs. Pelosi is the latest chapter in the running feud between the two. After Mrs. Pelosi recommended Mr. Trump delay his address, the president denied her the use of military aircraft for a planned trip to Afghanistan to visit U.S. troops. The White House said the move wasn’t retaliatory but that the president wanted Mrs. Pelosi to remain in Washington to negotiate a way to reopen the government. Mrs. Pelosi said she hadn’t been invited to the White House since the previous week, when the president walked out of a meeting he called with congressional leaders.

    On Tuesday, the White House sent an email to the House sergeant at arms requesting to schedule a security walk-through for the address in the House chamber. The White House has also been researching other venues for the address, in the event Mr. Trump can’t deliver it before Congress.

    Typically, the State of the Union speech is delivered before a joint session of Congress, fulfilling a constitutional requirement that the president give an update on the country “from time to time.” But that requires each chamber to pass a resolution inviting the president to appear. Neither chamber has done so.

    Wow, if this were a TV show we'd think it's over the top!  

  19. SWK- covered call play for conservative traders- bought stock and sold March 115 call for net 110.54 less dividend (late Feb) = 4% in approx. 7 weeks. 

  20. Phil -Is QCOM getting down to an interesting level to sell some puts ?

  21. SPX- another trade with a bit more risk but still fairly conservative- index short strangle on SPX. Sold March 2900/2000 call/put for 4.05. That's approx. 8% return on margin (PM) through March expiration. 

  22. QCOM/Albo – We sold 2020 $50 puts for $6.70 back on 4/16, now $5.35, so not as good as our entry but getting back near there.  Our longs are a $50/70 spread that has seen better days…

    With the lawsuits, I saw QCOM as a bit of a hedge against AAPL but they are just killing each other at the moment.

    /RTY failed right where we were worried it would (1,455)

    Remember, that was a weaker than last bounce by 50%, a sign that the downtrend is intact:

  23. anybody notice QSR

  24. Pstas SWK

    After Stanley Black & Decker shares plunge, some traders bet on more pain!!!

    Your trade looks a bit like a armchair trade, but besides some traders buy the Feb 115/105 vertical,

    the stock offers only a 2.2% yield. For me not a good fit.

  25. SWK the stock trades for 118.55  less the Mar 115 caller 7.30 gives 111.25. So you have spent 11,125.00 dollar. By selling the March 15 115 put at 3.65 you receive 365.00 with a PM margin of 1,125.00, just 1 tenth of your cash outlay and no cash spent. The 66.00 div you will be called for if by any case the stock goes higher.
    In principle a smart move by Pstas, but still 2.2% yield is too little for me.

  26. ‘Fat Finger’ Blamed as Centuries-Old Conglomerate Loses $41 Billion

  27. Ending showdown with Pelosi, Trump postpones State of Union