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Thrilling Thursday – A Brexit Deal (sort of) Brings Us back to 3,000 (again)

Image result for schrodinger's brexitIsn't this fun?  

IBM had a big miss, Netflix had a big beat, the indexes and futures are all over the place and Boris Johnson has Schrodinger's Brexit but he dares not look in the box because – as long as he doesn't, he has a deal that is dead and alive at the same time – which is quite the sweet spot for a politician – very much like Trump's secret China deal we are still waiting for the details of.  

Nonetheless the US Futures are back to yesterday's highs but that was based on the "Deal" that was touted at the EU open (3am, EST) but has already fallen apart as details are painting a less enthuiastic picture than we had overnight.  That doesn't stop our beloved S&P from testing 3,000 though – so it makes a great short below that line (/ES Futures) with tight stops above.  

We get the Philly Fed Report at 8:30, which is likely to be trending down from last monh's 12 and Industrial Production is likely to slip into contraction while Capacity Utilization was already a miserable 77.9% so 22.1% of our capacity is already idle – not a good thing at all…   There's also some housing data but that's it until tomorrow's Leading Economic Indicators (probably flat) along with China's GDP and we have 6 Fed Speeches tomorrow, so we'll probably finish the week at the 3,000 line – somehow – so quick profit-taking on the /ES shorts. 

On Tuesday at 11am, we put out a Top Trade Alert to our Members for the Marijuana ETF (MJ) at $18.40, which we added to our Short-Term Portfolio with the following spread:

  • Sell 10 MJ 2022 $20 puts for $5.40 ($5,400)
  • Buy 30 MJ 2022 $15 calls for $7 ($21,000) 
  • Sell 30 MJ 2022 $30 calls for $2.20 ($6,600)
  • Sell 5 MJ Jan $20 calls for $1.65 ($825) 

That's net $8,175 on the $45,000 spread so there's $36,825 (450%) of upside potential at $30 but, even if we don't get to $30, we have  829 days to sell and we just sold 94 days for about 10% of our cost on just a 1/6th cover.  That's what I always liked about this ETF but we were too enthusiastic and failed to sell short-term calls, which is what really hurt us last cycle.

I happen to be in California raising capital for our new Cannabis Fund and I liked what I was hearing about the industry settling down after the recent shakeout and we didn't want to miss a pop in the ETF on positive earnings reports from its holdings.  Turned out we got a nice pop the next day and another one should be coming this morning as Cronos (CRON) has jumped 22% on their earnings and we'll see if it sticks.  CRON is the 4th largest holding for MJ, making up 7.4% of the portfolio so we should see at least a 3.5% gain plus whatever pop the rest of the sector gets this morning.  Congratulations to all who followed our Top Trade Alert! 

With a possible Brexit deal on the table, the Euro is popping and the Dollar is dropping and that too is lifting the markets and commodities into the open.  The Dollar is down almost a full 1% since Tuesday morning and the S&P is back from 2,970 to 3,000 again.  See – Magic!

So color us less than impressed and still mostly on the sidelines but that doesn't mean we can't find fun things to trade.  We played Netflix (NFLX) to stay below $300 and, so far, it barely is and we are hoping for IBM (IBM) to go lower so we can have aother run at last year's Stock of the Year (we cashed out our first play), hopefully back around $125 as they actually beat on Earnings but missed on Revenues by a tiny bit – not bad for a transition year where they are absorbing Red Hat.


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  1. Everything is awesome again…. 

  2. Who needs NFLX when you can stream "Drama at 1600 Pennsylvania Ave."

  3. As I have been saying for a while, someone seems to be profiting from advance knowledge of decisions:

    In the last 10 minutes of trading on 8/23 as markets were roiling in the face of more bad trade news, someone bought 386,000 Sep e-minis. Three days later,Trump lied about getting a call from China to restart the trade talks – S&P shot up nearly 80 points. The potential profit +$1.5bn.

  4. Yikes, where's 1020? Good morning, everyone.

  5. Teva Pharmaceutical Industries (NYSE:TEVA) upgraded to Buy at Gabelli citing valuation and the potential for a global opioid settlement.

  6. TEVA / Albo – Hopefully some relief in that dog in my portfolio!

  7. Good Morning!

  8. Good Morning Snow :)

  9. Looks like IBM has a bit of a hick up, yesterday some member was worried about his 150 Oct caller. I even mentioned my 145 caller and was not too worried. Time to sell some more put soon. Stock of the year!!!!

  10. Good morning!

    Drama/StJ – You said it, it's like the last act of King Lear over there!

    Profits/StJ – Quid pro quo indeed!

    TEVA – Still a bit early but I guess they'll survive and they are priced not to.

    You can sell 5 TEVA 2022 $7 puts for $2.60 ($1,300) and buy 20 of the 2022 $5 ($4)/12 ($1.85) bull call spreads at $2.15 ($4,300) for net $1,700 on the $14,000 spread so $12,300 (723%) of upside potential if TEVA can get back to $12 and you are starting out $4,000 in the money.  Worst case is you end up owning 1,000 shares of TEVA for $7,000 + the lost $1,700 so net $8.70 ($8,700) so it makes a pretty efficient play – even if it's for an IRA.

    That's the kind of play we build a portfolio with because, if it goes well, we make 12.3% of a $100,000 portfolio on the one trade and, realistically, we don't expect we're risking much more than $4,000 before we'd give up so it's well worth an allocation block (and we don't mind owning TEVA for the very long-term) and very little cash or margin commitment means we have more firepower to allocate to other trades.

    IBM/Yodi – Such a silly sell-off.   Costing the Dow 70 points so it's stronger than it looks.  

    Wedbush maintains a Neutral rating on IBM (NYSE:IBM) and cuts the target by $10 to $155 after yesterday's earnings report.

    The firm lists positives as the strength in cloud and the upside Red Hat performance, but saw negatives in the margin miss and IT services results.

    Stifel maintains a Buy rating and $169 target but says the stabilization of the GTS and legacy Cognitive businesses are key catalysts that Q3 showed will now be 2020 events.

    More target cuts: BMO (Market Perform), $157 to $152; Nomura (Buy), $175 to $170; Wells Fargo (Market Perform), $147 to $140.

    IBM shares are down 5.8% to $133.85. The company has a Hold average Sell Side rating.

    You can already sell IBM 2022 $120 puts for $14 and buy the $120 ($21)/$145 ($10.50) bull call spread for $10.50 so a net $3.50 credit puts you into IBM at, worst case, $116.50 and best case is a $28.50 gain, which is 24.4% of your entry risk and just $6,555 in ordinary margin to sell 5 puts against 500 x $28.50 ($14,250) in potential gains so another good one but only for a bigger portfolio that fits 500 shares of IBM at $116.50 ($58,250), which would be a full allocation block in a $500,000 LTP. 

    IBM is, of course, the kind of stock I wouldn't mind allocating a block to but just $14,250 potential gain means it's not exciting enough to commit to since 20 trades like that would "only" make us $280,000 in two years – just over 50% and there's little chance that IBM will pop so high that we'll cash in early – so we keep fishing.

  11. NFLX back to $290, pretty much exactly the action we predicted:

    Submitted on 2019/10/10 at 3:22 pm

    NFLX into earnings:


    We have a big fund bet they stay flat (+/- 10%).  My thinking is that a lot of bad news is already priced in and, since they are subscription-revenues, there won't be any major variation all of a sudden but good news will be tempered with worries about Disney and AAPL services taking share next year.  

    You can: 

    • Sell 5 NFLX Nov $300 calls for $10 ($5,000) 
    • Sell 5 NFLX Nov $250 puts for $7 ($3,500) 

    That's $8,500 in pocket so you have $17 of wriggle room above or below the strikes before you lose any money (or roll, of course).  If we hit the middle, that's $8,500 in 36 days!  Profit range is $233-$317.

    If you feel like you dodged a bullet on the short $300 calls, they are back to $7.75 and the $250 puts are down to $1.40 so giving back $4,575 of the $8,500 collected is a very quick $3,925 (46%) profit though I'd be happy to roll the short calls along rather than buy them back for $7.75 so it's really a question of margin – if you need it for other earnings plays – better off cashing out and having the firepower ready to go but, if not, time (and premium decay) is on your side!

  12. Phil – Thanks for the TEVA trade idea.  The reason that I didn't close out the trade earlier is because there is what I would call "Smart Money" involved.  The American Funds Group ( a pretty conservative bunch) owns 14% of the outstanding shares.  And best I can tell Buffett still holds a position.

    StJ  -Perhaps we'll get some relief if there is an opioid settlement !

  13. TEVA / Phil, Albo – As I said before, I have doubts that Israel would let them fail.

  14. Industrial production falls below consensus

    • September Industrial Production: -0.4% M/M to 109.5 vs. -0.2% consensus, +0.8% prior (revised).
    • Capacity Utilization 77.5% vs. 77.8% consensus, 77.9% prior.

    Philly Fed outlook missed expectations

    September housing starts trail consensus

    • September Housing Starts-9.4% M/M to 1.256M vs. 1.300M expected, 1.386M prior (revised from 1.364M).
    • Building permits 1.387M vs 1.335M expected and 1.425M prior (revised from 1.419M).
    • The September starts weaken from a 12-year high as activity in the multi-family category slips.
    • Single-family housing starts in September, though, increased to a rate of 918K, up 0.3% from August's 915K and single-family permits at 882K, rose 0.8% M/M.

    Pound falls as Northern Ireland's DUP won't back Johnson's deal

    • The British pound sinks 0.3% against the U.S. dollar after Northern Ireland's Democratic Unionist Party said it could not support the Brexit deal proposed by Prime Minister Boris Johnson and the EU.
    • Invesco CurrencyShares British Pound Sterling Trust ETF (NYSEARCA:FXB), though, is up 0.4% in premarket trading.
    • Previously: Brexit deal done… if it passes (Oct. 17)

    Momentum will lead to a more complete U.S.-China trade deal, Kudlow says

    • In an interview on CNBC, White House economic adviser Larry Kudlow said he sees the tentative trade agreement with China leading to a more complete pact between the world's two largest economies.
    • To the skeptics, he says, "There's a lot of momentum and there's agreement on both sides."
    • U.S. companies will get access to new opportunities, he contends, on the expectation that China will lower non-tariff barriers on agriculture.
    • Since Friday, when President Trump announced the "phase one" deal, some analysts have expressed skepticism on how much was actually achieved through the agreement, which hasn't yet been put on paper.

    Mortgage rates rise, housing market on upswing

    • 30-year fixed-rate mortgage averages 3.69% for the week ending Oct. 17, 2019, up from 3.57% in the previous week and 4.85% at this time a year ago, according to the Freddie Mac Primary Mortgage Market Survey.
    • “Despite this week’s uptick in mortgage rates, the housing market remains on the upswing with improvement in construction and home sales,” said Freddie Chief Economist Sam Khater.
    • 15-year FRM averages 3.15%, up from 3.05% in the prior week and 4.26% at this time a year ago.
    • 5-year Treasury-indexed hybrid adjustable rate mortgage averages 3.35%, unchanged from the previous week and down from 4.10% at this time a year ago.
    • Earlier today, September housing starts slipped from a 12-year high due to weakness in the multi-family segment but still stayed at a solid rate.
    • iShares Home Construction ETF (BATS:ITB) gains 1.3%, iShares Mortgage Real Estate Capped ETF (BATS:REMrises 0.4%.
    • Homebuilder names on the rise include KB Home (KBH +1.8%), Toll Brothers (TOL +1.2%), PulteGroup (PHM +1%), William Lyon Homes (WLH +3%), and D.R. Horton (DHI +0.9%).

    Natural gas inventory build slightly less than consensus

    Barrick Gold sees slight drop in Q3 gold production

    • Barrick Gold (NYSE:GOLD) says it expects Q3 gold production will come in below Q2 levels, saying its North Mara mine in Tanzania was affected by operational restrictions that were in place for most of Q3 but were lifted by quarter-end.
    • Preliminary totals show Q3 gold production hit 1.31M oz., slightly lower than Q2's 1.35M oz., while copper output climbed 14.4% to 111M lbs.; average market price for gold in the quarter was $1,472/oz., while the average for copper was $2.63/lb.
    • Barrick says full-year production continues to trend towards the upper end of its 5.1M-5.6M oz. guidance range while costs likely will come in at the lower end of the forecast.
    • GOLD -0.6% pre-market.

    Textron posts Q3 earnings beat but cuts cash flow guidance

    • Textron (TXT -3.5%) tumbles after reporting better than expected Q3 earnings and a slight revenue increase from the prior-year period but reducing its full-year cash flow guidance.
    • TXT narrows its full-year EPS outlook to $3.70-$3.80 from $3.65-$3.85 previously, but it now sees manufacturing cash flow before pension contributions of $600M-$700M, down from previous guidance of $700M-$800M; expected pension contributions remain at ~$50M.
    • Q3 manufacturing cash flow before pension contributions fell 30% Y/Y to $181M from $259M in the prior-year quarter.
    • Q3 Textron Aviation revenues rose 6% Y/Y to $1.2B, primarily due to higher jet and aftermarket volume partially offset by lower defense volume, and Bell revenues edged 1% higher to $783M on higher commercial revenues partially offset by lower military volume.

    Ford charges ahead with EV plans

    • Ford (NYSE:F) announces a new public charging network in North America that includes more than 12K places for drivers to charge, including fast charging, and more than 35K charge plugs total.
    • The automaker says the large network addresses a big concern for those switching to all-electric cars.
    • Ford's all-electric vehicles, including the Mustang-inspired SUV arriving next year, will come standard with a Ford Mobile Charger that can charge regardless of outlet power (120- and 240-volt outlets). Drivers with longer commutes or who want greater peace of mind, a Ford Connected Charge Station can fully power a vehicle overnight while they sleep with the Ford Connected Charge Station. Also, drivers can charge their battery from 10% to 80% in 45 minutes through an Electrify America DC fast charger.
    • Ford is collaborating with Amazon in the U.S. for installation services – from 240V outlets to the Ford Connected Charge Station.
    • Shares of Ford are up +0.66% premarket to $9.10.
    • Source: Press Release

    A new vibe from Toyota

    • The partnerships for Toyota (TM -0.5%) keep piling up as the Japanese automaker looks to position itself strategically with all the changes going on in the industry.
    • "They have changed from ultra-conservative to ultra-aggressive," says auto analyst Michael Dunne on the new Toyota partner strategy.
    • Toyota has deals in place with Suzuki, Mazda, BMW and a new stake in Subaru. The arrangements are seen keeping Toyota nimble to react to technology and market demand changes.

    Southwest pulls Boeing 737 MAX until February

    • Southwest Airlines (NYSE:LUV) says it has removed the Boeing (NYSE:BA) 737 MAX out of its schedules until Feb. 8, later than any U.S. airline, although Air Canada yesterday yanked the plane from its schedules until Feb. 14.
    • LUV's delay to a month past the carrier's previous expectation comes a few days after its pilots said they do not anticipate the MAX to return until February at the earliest.
    • American and United said last week that they do not expect to fly the planes until January, about a month later than they had previously forecast.

    Tyson looks to boost exports to China

    • Tyson Foods (TSN -1.4%) is making a change with its supply practices in the hopes to win more business in China.
    • The food giant is banning the use of feed additive ractopamine in hogs it purchases in accordance with Chinese regulations.
    • The policy change isn't related to the U.S.-China trade war directly, but is a result of the decimating African swine fever outbreak.
    • Tyson will start the new policy in February of next year. JBS Foods (JBS) is reportedly also making the change to boost imports to China.
    • Shares of Tyson are still up 51% YTD, although they have fallen back quite a bit from the September high of $94.07.

    Cheesecake Factory -2% after Raymond James cut

    • Shares of Cheesecake Factory (NASDAQ:CAKE) slip in early trading after Raymond James drops the restaurant stock to a Market Perform rating from Outperform.
    • The cut by RJ places the firm in the same position as a majority of the sell-side CAKE watchers (5 Buy-equivalent ratings, 17 Hold-equivalent ratings, 1 Sell-equivalent rating).
    • CAKE -2.34% premarket to $37.50 vs. the 52-week trading range of $35.83 to $52.91

    Skechers over Nike in court again

    • Skechers (NYSE:SKX) says it won a victory over Nike (NYSE:NKE) in a case related to claims of Chuck Taylor trademark infringement.
    • Specifically, the Chief Administrative Law Judge of the International Trade Commission found no violation of Converse's Chuck Taylor midsole trademark by Skechers' Twinkle Toes and BOBS from Skechers product lines or by any of the other Skechers product lines accused in the case.
    • Judge Bullock further ruled that the midsole trademark is not valid as to Skechers because the trademark had not acquired secondary meaning at the time that Skechers began using its designs back in 2001.
    • Skechers points out that it has won a victory against Nike in the case three times in a row now.
    • Source: Press Release

    Airbnb's Q1 op. losses more than double – report

    • Airbnb's (AIRB) Q1 operating loss spiked to $306M, according to The Information.
    • The steeper loss was partially due to higher investment in sales and marketing, which rose 58% Y/Y to $367M. Product development expenses rose 51%.
    • Airbnb plans to go public next year, potentially through a direct listing.

  15. any thoughts on oil report phil

  16. Saudi Arabia plans bumper Aramco IPO, relying on easy loans and rich locals

  17. So much for being up 100 points.

    Oil/Tommy – It's hard to tell until we get the full report around 1pm but it wasn't that big of a net draw – about 3Mb – just a rounding error and expectations were already low so not much effect.

    Crude inventories build sharply

    • EIA Petroleum Inventories: Crude +9.3M barrels vs. +2.9M consensus, +2.9M last week.
    • Gasoline -2.6M barrels vs. -1.4M consensus, -1.2M last week.
    • Distillates -3.8M barrels vs. -2.4M consensus, -3.9M last week.
    • Futures -0.41% to $53.14.

    They are scooping up options that would pay out if interest rates fell below zero. The number of bullish contracts outstanding on Eurodollar futures that pay out if interest rates hit zero or fall below has increased to about 1.2 million, according to CME Group data through September.42

  18. PHIL / NFLX – what would you roll the long callers to?

  19. Hi Phil,  Do you have any comment on MFGP?  The company's strategy is to buy legacy software assets and reduce costs.  There is concern that the company is having difficulties integrating the HPE software assets it bought in 2017.  The stock has a PE of 3.5 and dividend yield of 8.39% per Yahoo Finance, and a PE of 6.3 and dividend yield of 7.87% per Think or Swim.  The stock has been as high as $32.93 and as low as $12.50 in the last year.  One could sell April 20 12.5 Puts for $1.05 to establish an entry.  The yield here is attractive but I wonder if this is a value trap.  Here is a link to their last Earnings Call slide show:  Thank you for your thoughts.

  20. Phil or Pharm:

    Know anything about EXAS? This company Exact Sciences created cologuard - genetic testing of stool for colon cancer and cancer precursors (adenoma and high grade dysplasia). Can replace colonoscopy in SOME people. Is public on NASDAQ and has options. Although they are still losing money, the infrastructure is in place. All people over 45 potential patients every 3 years and very easy for MD offices. The company obtains the referral and does the shipping of the collection bucket, testing and record keeping. Now working on lung cancer detection with sputum

  21. Putin Is the New King of Syria

  22. JMD/ EXAS   They also bought Genomic Health for expansion in cancer testing, also a growing business.  I sold a few puts to keep an eye on them. 

  23. NFLX/Batman – Nothing until they are closer to expiration – unless NFLX is over $300 and they have lost most of their premium.  The Jan $340s are $7 so it's an even roll to go up $40 in two months – very hard to get in real trouble when you can roll like that.

    MFGP/John – I don't generally pay attention to them but they are pretty steady and reasonably priced at $5Bn ($14.65) with $3Bn in sales and $750M in profits.  I don't see any growth now that the current spurt is over so $7.5Bn would be about the most I'd pay but that's still 50% up from here – so room to run.

    Year End 31st Oct 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 412.2 433.1 834.5 1,245 1,077 4,754 3,203 3,378 3,201 +63.1%
    Operating Profit $m 159.4 155.7 144.9 294.9 227.4 376.8 124.5     +18.8%
    Net Profit $m 121.8 122.1 101.8 162.9 157.9 784 1,455 765.6 750.6 +45.1%
    EPS Reported $ 1.14 1.15 0.74 0.93 0.63 0.041 -2.20     -48.7%
    EPS Normalised $ 1.14 1.15 1.27 1.05 1.19 2.00 -2.76 2.01 2.17 +11.8%
    EPS Growth % +5.0 +1.0 +10.0 -17.1 +12.7 +68.4   +0.50 +8.07  
    PE Ratio x           7.26 n/a 7.22 6.69  
    PEG x           14.5 n/a 0.90 n/a

    The short time frame and low interest on their options is why we don't play them. I think there are easier ways to make $1 but, if I were going to play, I'd have a spine and sell 10  April $15 puts for $2.35 ($2,350) and pair that with 20 $12.50 ($3)/15 ($1.50) bull call spreads at $1.50 ($3,000) so net $650 on the $10,000 spread can make $9,350 (1,438%) by April if the stock is up 0.35 from where it is now.  If you don't have the faith to play that – why are you even looking at the stock?  

    EXAS/JMD – SOUNDS great but so do a lot of these biotechs, so I defer to Pharm.

    Pence says Turkey has agreed to a cease-fire in Syria and will get back to ISIS fighting.  

    That's the right way to play it, Stock…

  24. Later all, have to go do some PSWI Business!

  25. Hi Phil,  Thanks for the thoughts on MFGP.  In answer to your question regarding why I am looking at the stock, I've been looking at it for the dividends, and as a vehicle to sell calls against.  The market is very high and fraught with peril at these levels, and I have been looking for low PE stocks with what I hope are limited downside to enter, sell calls against, and collect dividends.  In contrast to stocks like NLY, which I like very much but which is hard to sell calls against because there is almost no premium to be had, one can sell the April 15 calls for MFGP for $1.50 or the $17.50 calls for .70 with the stock at $14.64 today.  The reason I wanted to sell the $12.5 puts (now showing at $1.10) was to establish a low entry.  My concern has been whether or not MFGP is a value trap whose stock will melt away in a bad market.  Anyway, is there anything to be said for buying the stock for the dividends and call selling potential or do you really think puts and a BCS are the way to go at this time in this market?  Thanks.