TWEAK TO OUR UPDATES SCHEDULE

Last week we shared our rationale for changing the name of this service to Tematica Options+.  In case you missed it, click here for details.

This week we’re letting you know that for the next several weeks we’ll be coming at you with this weekly update on Wednesdays instead of Thursday. Part of this reflects a trip to Singapore that I’ll be taking to keynote INVEST 2017 as well as some other travels. I’ll be sure to share all the details, and I probably won’t skip the grueling details of the flight to and from Singapore. The upside is, it’s thrilling to have been asked address thousands over the power of thematic investing.

Now, onto the work at hand…

As we noted in today’s Tematica Investing, 2Q 2107 earnings are starting to hit the tape and while there have been a few impressive results, we’re seeing more concern than celebration, even when a company reports an upside surprise. In short, we’ve been expecting the next three weeks to see a return of volatility as investors digest earnings and in many cases reset expectations accordingly. It means that while we will be optimistic, we will be treading on cautious ground. We’ve got our inverse ETF positions in play and we’ll be keeping them until the earnings deluge is over, come mid-August.

 

Like Its Shoppers, We’re Buying COST Calls in Bulk, Adding a Third Call to the List

Somewhat surprisingly, all of our call option positions ended flat week over week – I can’t remember a time when I’ve seen that before. Has much changed in our underlying investment rationale for each of these positions? No, and in some cases, they have gotten only stronger. For example, as we poured over the June Retail Sales report that was published late last week, we noticed that Costco (COST) clearly took wallet share during the month before and after accounting for gas and the impact of foreign exchange. For the record, Costco’s June sales grew 6.0 percent year over year (6.5 percent excluding gas and foreign exchange) compared to 1.7 percent growth year over year for the general merchandise store category reported by the U.S. Census Bureau.

While we are down in our Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) thus far, we are certainly not out. While tempting to scale further into this position, we are taking a different course of action – adding the Costco Wholesale (COST) October 2017 155 calls (COST171020C00155000) that closed last night at 3.98 to the Tematica Options+ Select List. With this layered approach, we are taking advantage of the Amazon (AMZN) infused disruption on COST shares to add another leg of exposure. It’s not lost on that COST shares are currently over sold, and having visited Costco over the last few days, we can report not only are the checkout lines long and carts stuffed to the gills, but the location stocked with Back to School related items.  From our perspective, the worst is priced into the underlying COST shares and it will be only a matter of time before the herd realizes that Costco remains well positioned as it grows its warehouse count and member ship fee income.

Given the oversold nature of the shares, we are resisting adding a formal stop loss on the Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) calls as we think our patience with the position will prevail over the medium-term.

• On the back of the confirming context found in the June Retail Sales report, we are adding the Costco Wholesale (COST) October 2017 155 calls (COST171020C00155000) that closed last night at 3.98. We would be buyers up to 4.75, and because this is a new position we are holding off with a stop loss due in part to COST shares being over sold.
• That same oversold status has us holding steady with the Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) as we head into the Back to School shopping season.

 

General Motors – Cutting Production is a Harbinger of What’s to Come

As you know we’ve been bearish on General Motors (GM) shares, and we received yet another reason to keep that stance over the last few days. As we’ve shared General Motors has been plagued by ballooning inventories and has had to use incentives to move what vehicles it could. We warned we could see production cuts even before the company cut its 2017 industry forecast. Well lo and behold, this week General Motors has decided to “extended a shutdown at the Michigan factory that builds the new Chevrolet Volt electric car as part of a broader effort to get control of bulging inventories of unsold vehicles in the United States.”

We’d point out that General Motors has also extended summer vacation shutdowns at three other North American assembly plants. All of this is a recipe for a less than pleasant 2Q 2017 earnings call on July 25 given simply the fact that cutting vehicle production also cuts GM’s revenue and potentially profits.

• We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.

 

Checking in on Our Beat the Heat Utility Play

Last week we added the Utilities SPDR ETF (XLU) September 15, 2017 $52 calls (XLU170915C00052000) to the Tematica Options+ Select List and we are enjoying a nice 30 percent as we hear the whir of air condition units kick on. It’s been hot and prospects for it to continue are what lay ahead as we enter the dog days of summer.

Over the ensuing weeks, we’ll hear from a number of the underlying ETF’s key holdings, including NextEra Energy (NEE), Duke Energy (DUK), Dominion Energy (D) and Southern Co. (SO) as well as Exelon Corp. (EXC). On a combined basis these five positions account for more than 38 percent of the ETF’s assets. Inside these reports, we’ll be paying attention to utility generation levels for 2Q 2017 and what’s expected for the current quarter.

• Given the quick move in the Utilities SPDR ETF (XLU) September 15, 2017 $52 calls (XLU170915C00052000) we would recommend subscribers that missed the initial trade to hold off unless the calls slip back below the 1.05 level.
• Because this is a relatively new position, we are holding off with a protective stop loss at this time; we will look to review that decision as the calls trade higher over the coming weeks.

 

AXT – The Tea Leaves to Watch This Week and Next

While our AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500)were unchanged week over week, we expect that to change in the coming days which will have a smattering of data points for this position. Key customer Skyworks Solutions (SWKS) reports its 2Q 2017 results later this week, as does T-Mobile USA (TMUS). These reports should offer some insight on current smartphone and other connected device trends, and also share expectations regarding 5G deployment timing. The following week we’ll hear from AT&T (T) and Verizon (VZ) as well as AXT, which reports its 2Q 2017 results on July 26.

Our thesis on the underlying shares and therefore the calls as well center on the growing number of connected devices sprouting past smartphones and tablets to the Connected Car, Connected Home, Internet of Things, and other device categories such as connected speakers. That proliferation, as well as continued smartphone upgrades, bode well for incremental RF semiconductor demand, which is a positive for AXT’s substrate business.

• With our AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) up more than 50 percent from our mid-June buy in, we are holding steady with the position, but boosting our stop loss to 0.60 from 0.35.
• At that level, our new stop loss will ensure a modest profit should a more volatile than expected market erupts this earnings season.

 

 

Housekeeping: Stopped Out of DY Calls for Respectable Gain

Last week we were stopped out of the Dycom Industries (DY) September 2017 $90 calls (DY170915C00090000) when the position moved below 6.50, leaving a respectable gain of more than 22 percent in 40 days.