Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/17/2016

Table of Contents

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

Market Wrap

It's Alive!

by Jim Brown

Click here to email Jim Brown

Positive economics suddenly resurrected the fear of a Fed rate hike at the June meeting.

Market Statistics

The June meeting is a live meeting. Investors have tried to ignore it in hopes it would go away but the sudden rise in inflation has made that impossible. Add to the economics the comments from San Francisco Fed president John Williams that the Fed will rise 2-3 times in 2016 and comments from Robert Kaplan that the Fed will move quickly to normalize rates. Richmond Fed president Jeffrey Lacker said June rate hike should be on the table, "The case for raising rates looks pretty strong in June." Suddenly the June meeting is not just alive but it is expanding in importance.

The report causing trouble this morning was the Consumer Price Index for April. The headline number rose 0.4% and the largest gain since February 2013. The core rate excluding food and energy rose +0.2%. On a trailing 12 month basis the headline CPI is up +1.1% and the core CPI is up +2.1%.

The headline number was lifted by a +1.9% increase in fuel oil and +8.0% rise in gasoline prices. Food prices rose +0.2%.

In theory, the Fed is smart enough to realize that the current inflation is caused by rising oil prices rather than normal inflationary forces. Hiking rates in June will not do anything about the rising inflation caused by higher gasoline prices. If they hike for the wrong reasons, it will be a market disaster. Higher rates will hurt oil producers already suffering from low prices. Rising rates would raise their debt payments and make it harder for them to recover from the oil crash.


Industrial Production for April rose +0.7% and well over estimates for +0.3%. This was the first rise in three months. The March reading was revised down from -0.6% to -0.9%. That was the weakest reading since August 2012.

The April headline number is misleading because utility production rose +5.8% and mining/energy declined -2.3%. Business equipment production rose +2.4%. Those numbers skewed the headline significantly. Production has been handicapped by the strong dollar and weak global economy. This report looks good on the surface but many of the internal components were still weak. I would disregard the April reading since the chart clearly shows a strong decline going into April. Utility production is not really an economic plus.


New residential construction starts rose +6.6% in April from 1.089 million to 1.172 million. That was more than the 1.125 million analysts were expecting but still well under the February rate of 1.213 million. Single family starts rose +3.3% and multifamily starts rose +13.9%. Permits rose +1.5% and multifamily permits rose +8.0%. Completions fell from 1.048 million to 933,000 or an -11% decline.

In the chart, you can see that housing starts have plateaued at 1.2 million and appear to be tapering off. With mortgage rates at near record lows, this is troubling for the sector. Home buying appears to be tapering off and housing is a very large portion of the economy.


Internet E-Commerce sales for Q1 rose from $89.1 billion to $92.8 billion in Q4. Compared to the $80.6 billion in Q1-2015 and $70.1 billion in Q1-2014 this is proof the retail economy is moving to the web. To put that into context Amazon's sales in Q1 were $29.1 billion. That was a $7 billion increase over Q1-2015. Out of the $12 billion increase in all E-Commerce revenue over 2015 levels, $7 billion or 58% of the increase was sold by Amazon. To look at it a different way Amazon's $29.1 billion in Q1 revenue was 42% of all the E-Commerce revenue from all sources. Also, Amazon's revenue for the quarter rose 28.2%. They will be 50% of all E-Commerce revenue soon.


The economic calendar for the rest of the week is headlined by the FOMC minutes and the Philly Fed Manufacturing Survey. The Philly survey is expected to show a strong increase so anything in the opposite direction would be a big disappointment.

The NY Empire State Manufacturing Survey on Monday was expected to show a +6.5 and posted a very disappointing -9.0 instead. If the Philly survey, which is much more important, showed a similar decline, it would be a disaster.

Some analysts believe the FOMC minutes on Wednesday could contain language suggesting a June rate hike even though the official post-meeting announcement gave no indications. Worry over the minutes were part of the market's problem today.

I believe raising rates in June would send the wrong signal that the Fed was in a hurry to hike rates because they are behind the curve. I believe they would be better off to use the June meeting to signal their intention to raise rates at the July meeting. That would show they were being deliberate rather than urgent and it would give the market time to decipher the Fedspeak and adjust accordingly. It will also give oil prices time to level out and reduce their impact on the inflation figures.


After the bell, Japan's GDP for Q1 came in at +0.4% growth compared to expectations for +0.1%. This was a significant improvement from the -0.4% decline in Q4. Analysts were worried that Q1 could come in negative and fit the definition of a technical recession with two consecutive quarters of negative growth. While domestic demand for things like televisions and food rose +0.2% there were still problems. In a separate report capex spending declined -1.5% in Q1 and the fastest pace of decline in a year. S&P futures spiked higher on the GDP and then turned negative on the capex spending.

On the earnings front, Dow component Home Depot (HD) reported earnings of $1.44 that easily beat estimates for $1.33. Earnings rose 24% for the quarter. Revenue rose +9% to $22.76 billion, up from $20.89 billion and higher than the $22.32 billion analysts expected. Same store sales rose 6.5% globally and +7.4% in the USA. The company cited warmer than normal weather and a rebound in the housing sector. April temperatures set record highs and was the 7th consecutive month of record highs.

HD said it expected full year earnings of about $6.27 per share with revenue rising 6.3% and same store sales up 4.9%. They had previously forecasted earnings of $6.12-$6.18 and sales growth of 5.1-6.0%. Despite the big earnings beat and higher guidance, shares dropped -$3.50. Analysts believe investors were expecting an even bigger beat and that is why shares dropped. I believe investors are just afraid of the market and they wanted to take profits quickly before they evaporated.


Red Robin Gourmet Burgers (RRGB) reported earnings of $1.03 that missed estimates for $1.11. Revenue of $402 million rose +1.8% but missed estimates for $415 million. Same store sales declined -2.6%. The company said the number of guests declined -4.1%. Shares fell -19% on the news.


TJ Max (TJX) reported earnings of 75 cents that beat estimates for 70 cents. Earnings rose +7.14%. Revenue rose +10% to $7.5 billion. Same store sales rose +7% and more than the +5% in the comparison quarter. During the quarter, the company spent $375 million to buyback five million shares. TJX even increased its dividend by 24% in Q1 for the 20th consecutive year of dividend increases. They guided for Q2 for earnings in the range of 77-79 cents with same store sales rising 2-3%. Full year guidance rose from $3.29-$3.38 to $3.35 to $3.42. Shares spiked at the open to $78.38 but declined with the market to trade flat again.


Children's Place (PLCE) reported earnings of $1.32 that easily beat estimates for $1.03. Revenue of $419 million also bet forecasts for $413 million. They guided for the current quarter to a loss of 22-30 cents. Full year earnings are expected to be $4.17 to $4.27 per share. The current quarter is typically a weak quarter for the children's retailer. Shares spiked to $74.40 on the news but faded with the market to $71.


Wednesday and Thursday are the last big days for the Q1 earnings cycle. Walmart, Target, Gap, Foot Locker and L Brands finish out the retail earnings. Cisco Systems and Salesforce.com are the biggest tech stocks left to report.


Intel (INTC) was initiated with an underperform rating by CLSA saying the declining growth in the semiconductor industry is going to require more specific focus by companies in the space. The analyst said it raised the rating on Qualcomm (QCOM) with a price target of $65 compared to a close at $52. Broadcom/Avago (AVGO) was started with a buy rating and a $165 price target compared to the prior close at $142.65. The consensus target on AVGO is higher at $178.52. NXP Semiconductor (NXPI) was started with a buy rating and $105 target after a close at $85. Microchip (MCHP) was started as a buy with a $58 target after a close at $48.

Of all those mentioned above I like Qualcomm but the stock has been stuck in a $3 range for three months. That is dead money until it breaks out. Broadcom is threatening to break support at $140 because of the decline in orders from Apple. No excitement there either.



Clorox (CLX) announced a quarterly dividend of 80 cents, up from 77 cents, payable on August 12th to holders on July 27th. That is roughly a 2% yield. Clorox has increased annual dividends every year since 1977. Shares fell 2% on the news.


David scored a direct hit on Goliath today. Coherus (CHRS) reported the U.S. Patent Trial and Appeal Board (PTAB) had agreed to hear a case against AbbVie's (ABBV) $14 billion drug Humira. That one drug represents 60% of AbbVie's revenue. AbbVie has a market cap of $97 billion and Coherus has a market cap of $738 million. Coherus is developing a biosimilar drug to compete with Humira. A successful patent challenge could help get that drug to market sooner. The patent review will take up to a year and could cause AbbVie a significant problem if the specific patent under review is invalidated.

Amgen (AMGN) has already tried to petition the PTAB twice on Humira and were declined on both. This is the first appeal the board has agreed to review on Humira. AbbVie claims Humira is safe and will produce $18 billion a year in sales through 2020. They have 70 patents on the drug that do not begin expiring until 2022. Coherus has requested reviews on two other Humira patents and the PTAB has to decide on reviewing them by June 15th. Obviously, it could take a long time before this appeal has any actual impact on AbbVie, even if the PTAB finds in Coherus favor. The decline in ABBV shares is not warranted today. The bounce in CHRS could last until the June 15th deadline on the other two appeal requests.



Many stocks with recent gains imploded on Tuesday. One example would be Kraft Heinz (KHC) with a -4.3% drop on absolutely no news. This is a sign investors are finally throwing in the towel and heading to the sidelines. Profits are being taken even on the strong stocks.


Twitter (TWTR) may be ending the 140-character limit for tweets. Originally, the 140-character limit was because of the limit on text messaging. With 140 characters, the tweet would fit into a single text message. Since almost nobody uses plain text messaging anymore, it is time for Twitter to upgrade. Twitter users already send more than 140 characters by being creative and sending pictures of text rather than the actual text. That way there is a much larger practical limit. However, the text pictures cannot be searched and indexed. They are just pictures. Dorsey recently described the 140-character limit as a "beautiful constraint" that inspires creativity, brevity and a "sense of speed" and Twitter does not want to lose that feeling.

Bloomberg reported on Monday that Twitter was going to quit counting the characters in links and photos in the 140 character limit. Twitter declined to comment on the report but Bloomberg said they had a good source that said the change could come over the next couple of weeks. Shares were up a nickel on the news.


Dell Inc sold $20 billion in secured bonds on Tuesday and the offering was 300% oversubscribed. They had offers for $85 billion. The investment grade notes were spread across six tranches with maturities ranging from 3 years to 30 years. A $4.5 billion 10-year bond was priced with a yield of 4.25% above comparable treasuries or roughly 6%. They still need to sell $4.0 billion in junk rated, unsecured bonds, to raise enough cash to complete the $63 billion acquisition of EMC. They are still waiting on approval from Chinese regulators and EMC shareholders. When the acquisition is completed, Dell will have $50 billion in debt and has committed to pay that down by $5 billion a year from operating cash.

That $20 billion is the 4th largest bond sale on record. The largest was Verizon in 2013 for $49 billion, Anheuser-Busch InBev in 2016 for $46 billion and Allergan in 2015 for $21 billion. Last week companies including AbbVie and Chevron sold $47 billion in investment grade bonds to bring the year to date total to a record $506 billion.

After the bell, the American Petroleum Institute (API) reported a -1.1 billion decline in U.S. crude inventories. Cushing inventories rose 508,000 to a new record. Gasoline declined -1.9 million barrels and distillates declined -2.0 million barrels. The API inventories rarely agree with the EIA inventories due out Wednesday morning. Crude rose slightly on the API numbers but the real move will come after the EIA reports at 10:30 on Wednesday.

In regular trading crude rose to $48.43 and a new six-month high. With record open interest in long futures contracts and with futures expiring on Friday there is sure to be some volatility the rest of the week. The $50 level is the next target and I would expect a serious sell the news event when that level it reached.


Markets

The three-peat is complete. For three consecutive weeks, the Dow has surged triple digits in a monster short squeeze only to roll over and decline triple digits the next day and completely erase the gains. The Dow closed at a new 8-week low after trading under key support at 17,500 intraday. The S&P came within one point of touching critical support at 2,040.

The market is now poised to break those critical support levels and slide until the end of May. Whatever happens we know it will not be straight down. The last three weeks have proven that much. However, we have seen seemingly bulletproof short squeezes erased in just one day. The sellers are definitely waiting for the rips rather than chasing prices lower but I think the market sentiment is changing. If those support levels break, they may throw caution out the window and hit the sell trigger anyway.

If the 2,040 level breaks on the S&P the next logical resting place is the 1990-2000 level followed by 1,975 and then 1,950. Resistance is now 2,070 and the highs from Thursday and Monday.


The Dow traded down to 17,469 intraday and well under the critical support at 17,500. However, the rebound at the close pulled it back from a -240 loss to only -180 and a close at 17,529. That does not mean that 17,500 support is still intact. The intraday dip damaged it and the next decline will more than likely stick.

The next support level is 17,400 followed by 17,135 and then 16,500.



The Nasdaq lost -60 points for the day and closed just over key support at 4,700. A break there targets 4,600 and then 4400-4200. The Nasdaq traded in correction territory intraday but pulled out to only a 9.9% decline at the close. The odds of a breakdown in this index are nearly 100%. The Nasdaq was supported again by the biotech sector, which declined only 0.6% and the least of all the major indexes. The relative strength in the sector was amazing since it has been up for the prior two days. This is rare. The biotechs have been doing the two-steps down, one-step back for weeks. After two major gains, today should have been a major decline. One analyst pointed to the coming ASCO Oncology conference on June 3-7th as the reason biotechs are rising.




The small cap Russell 2000 was the biggest decliner today with a -1.7% drop. The S&P-600 small cap index matched its move with a -1.67% decline. The Russell closed under key support at 1,100 with a close at 1,097. The 1,090 level is the next support target. The Russell declined -18 points today in what could be considered a rout. If that were to happen again tomorrow, the market sentiment would turn seriously negative and we would move into plunge mode.


The hero for the day was the Dow Transports with a +45 point gain. I know, it is shocking to see the transports up the same time oil is up and the broader market is tanking. It only took multiple upgrades to the airline sector and the railroads but they did rally even if they closed well off their highs.

The 7,500 support level was tested on Friday and followed by two days of gains. The Transport index finished -123 points off its intraday high and probably would have turned negative if time had not expired.


Follow the volume. I have mentioned several times recently the market move with the heaviest volume is the move we should trust. Monday's short squeeze came on 6.4 billion shares and the lowest volume since April 26th. Today's volume was 7.6 billion shares and the highest volume since May 3rd. This suggests the market direction is down even if there are a couple up days in our future. If those critical support levels of 17500, 4700, 2040 break we could see an acceleration of selling. Be prepared.

Enter passively, exit aggressively!

Jim Brown

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New Plays

No Added Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market appears to be performing as expected but triple digit moves in alternating directions can cause motion sickness. The Dow has traded in opposite directions for the last 8 days. In theory, that suggests it will trade higher on Wednesday BUT the market appears to be headed south as May comes to a close. We are positioned heavily bearish in the current portfolio with 2 long positions and 6 short positions. I believe we are correctly positioned and after today's decline, none of my watch list stocks offered what I considered a killer entry point. I am recommending we stand aside on Wednesday and hold what we have. The FOMC minutes are probably going to produce some market volatility at 2:PM and it could be in either direction.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Teetering on the Cliff Edge

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped to 2,041 just before the close and came very close to a major breakdown. That support at 2,040 is critical and a breakdown there should target 2,000 or even 1,950. With just under two weeks left in May there is plenty of time for the market to move significantly lower even if the moves were sluggish.

The S&P closed at 2,043.94 on December 31st. That makes the 2,044 (rounded) level also critical support. Breaking both those levels would be very negative.

Problems for the market include the FOMC minutes on Wednesday, which could include a bombshell that would suggest a rate hike was possible at the June meeting.

This is option expiration week and volatility is to be expected.




Current Portfolio





Current Position Changes


GPRO - GoPro

The short position remains unopened until a trade at $8.75


FDC - First Data

The short position was opened at $10.69.


SQ - Square

The long put position was closed at $9.35.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


BLMN - Bloomin Brands -
Company Profile

Comments:

No specific news. Only a minor dip of 14 cents. Buyers are nibbling on the dips.

Original Trade Description: May 9th.

Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.

They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%. Shares surged 9% despite the miss.

Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.

Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.

Position 5/10/16:

Long BLMN shares @ $19.71, initial stop loss $18.25.

No option recommendation due to wide spreads.



WIN - Windstream Holdings - Company Profile

Comments:

No specific news. Shares crashed on no news in a very weak market. The CEO will speak at the JPM Global Technology Conference on May 25th.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Position 3/11/16

Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.




BEARISH Play Updates


AMAG - AMAG Pharmaceuticals - Company Profile

Comments:

No specific news. Shares were up because if relative strength in the biotech sector.

Original Trade Description: May 14th.

AMAG Pharmaceuticals, Inc., a specialty pharmaceutical company, provides products and services with a focus on maternal health, anemia management, and cancer supportive care in the United States. They also own Cord Blood Registry. This company collects, processes and stores umbilical cord blood and cord tissue for use in fighting chronic diseases in later childhood.

In their recent earnings they reported 94 cents that beat estimates for 89 cents. However, revenue of $109.3 million missed estimates for $123 million. Service revenues at Cord Blood were $19.5 million. However, R&D expenses rose +103.6% to $14.2 million and SG&A expenses rose 96.7% to $63.2 million.

With revenue well under estimates and expenses rising dramatically, the outlook for earnings weakened. While the company reiterated guidance for full year revenue in the $520-$570 million range that would require a significant rise in drug sales from the $109 million in Q1. Shares were downgraded to hold by Raymond James.

Earnings August 2nd.

Shares are at a 52-week low and they did not rally on Friday when the entire biotech sector was up more than 1%. They also failed to rally on the 9th when the biotech sector was up +3%. Apparently investors are not convinced they are going to be able to meet their revenue targets and earnings are going to suffer.

Position 5/16/16:

Short AMAG shares @ $18.33, initial stop loss $20.25.

Optional

Long August $17 put @ $1.08, initial stop loss $20.25.



DB - Deutsche Bank - Company Profile

Comments:

No specific news.

Original Trade Description: May 14th.

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Position 5/16/16:

Short DB shares @ $16.37, initial stop loss, $17.75.

Optional

Long July $16 put @ $1.10, initial stop loss $17.75.



ENDP - Endo Intl Plc - Company Description

Comments:

No specific news. Biotech index was only down -19 points as the sector outperformed all the losers for the day.

Original Trade Description: May 11th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.

Optional

Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.



FDC - First Data - Company Profile

Comments:

No specific news. Position was entered at the open this morning. The stock closed at a 3-month low.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Short FDC shares @ $10.69, initial stop loss $11.85

Optional

Long July $10 put @ $.60, no initial stop loss.



GPRO - GoPro - Company Profile

Comments:

GoPro only gained a 6-cents and the stock is extremely oversold. There was no short covering in these shares.

SHORT GPRO SHARES with a trade at $8.75, a new low. Stop loss $9.45

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

Short GPRO with a trade at $8.75

Previously Closed 5/13/16: Short GPRO shares @ $9.65. Exit $9.35, +.30 gain.



SQ - Square - Company Profile

Comments:

Shares dipped to a new low at the open as the lockup expired. Shares then rebounded to stop us out of the put position and left us with the long June $11 call. We now want the stock to shrug off the lockup negativity and begin rising again.

Original Trade Description: May 7th.

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.

Position 5/9/16:

Closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.
Long Jun $11 call @ 55 cents. See portfolio graphic for stop loss.



XLF - Financial ETF - ETF Profile

Comments:

No material movement. The May option will expire on the 20th.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.





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