Option Investor
Newsletter

Daily Newsletter, Saturday, 6/11/2016

Table of Contents

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

Market Wrap

Brexit Beating

by Jim Brown

Click here to email Jim Brown

A new survey showed major gains by the "leave" the EU faction and with the vote just over a week away, investors bailed on equities.

Market Statistics

Friday Statistics

The new UK survey showed 55% of prospective voters favored leaving the EU while only 45% wanted to stay. This is the biggest percentage spread in favor of leaving and the tide is turning in their favor. The vote on June 23rd is a flashing warning signal on investor calendars but I suspect most really do not have any idea what will happen after the vote.

The vote itself is nonbinding. However, it will express the will of the people and the lawmakers will begin the process to leave the EU if that is how the vote plays out. The UK will have to file an "Article 50" request to exit the EU. That starts a two-year countdown clock that will give officials both in the UK and the other EU countries time to begin making plans for how they will handle business with the UK after their exit.

They will have to decide on passage requirements. Will EU citizens be able to travel into the UK without a visa as they do now? Will British citizens be able to travel to EU countries without a lot of passport problems? How will trade be handled after a UK exit? Currently they have a free trade system within the EU. Will they implement something to continue free trade or will they begin to put up tariff barriers? How will financial companies like banks be able to operate? Will they be restricted to the UK or will they be able to offer services within the EU countries and vice versa. Will companies stop investing and moving into the UK until after the exit in order to have all these problems resolved ahead of time?

The UK leaving the EU is not the biggest problem. The problem will be other countries also planning their exits. France and Italy have already expressed a desire to go back to an independent status. Italy is suffering from the EU rules and wants to go back to its own currency (Lira) and abandon the Euro. Wage and cost inequality between all the Eurozone countries makes it difficult for some countries to compete while others have become trade powerhouses.

Because of the potential follow on effect after a UK exit, the EU ministers are likely to exact a stiff price from the UK in terms of restrictions on travel, trade and financial access. They have to make it so painful that other countries will think long and hard before starting their own exit plans.

The EU experiment is failing for multiple reasons. The common currency prevents countries from issuing new money to combat economic conditions, budget limitations, etc. For a healthy country like Germany, that is not a problem. For countries like France, Italy and Spain, it is a serious problem. Also, the national pride inside each country is slipping because their individuality is becoming blurred. The immigration problem is a challenge where some countries want to halt the hordes at their borders but the EU Ministers want equal opportunity for everyone with open immigration. There are many problems with this failed experiment and most analysts believe it will eventually crumble. The UK exit is the first of several.

For the U.S. markets, I think the immediate impact of the Brexit vote is being over exaggerated. There will be no economic impact to the EU for at least two years. The only impact will be sentiment and how that sentiment impacts the European markets over the next several weeks. Then business will return to normal until the actual exit.

A lot of analysts are expecting the Fed to hold off on a rate hike in June because of the pending vote. I am not sure that is a real excuse. The Fed could use it as an excuse but there are no immediate impacts. I would not be surprised to see a decline ahead of the vote and then a rally afterwards when the world does not come to an end.

In the economic news, the Consumer Sentiment for June dropped slightly from 94.7 to 94.3. The present conditions component rose from 109.9 to 111.7 and a multi-year high. The expectations component declined from 84.9 to 83.2. Presidential elections tend to depress the expectations component with candidates telling everyone how bad things are now and how bad they will be if their opponent is elected. Consumers are not expecting the economy to improve over the next 12 months. The drop in the Nonfarm Payrolls soured some expectations about job availability and salary expectations.


The calendar for next week is very busy with a lot of important reports but the big event will be the FOMC announcement and Yellen press conference on Wednesday afternoon. If they do not hike in June, which nobody expects today, they most certainly will hike in July and Yellen will set the stage for that in her press conference. The data dependent qualifier will be ever present but few actually believe they are watching the data. They want to get several additional hikes completed before the next recession appears. With the IMF lowering global GDP forecasts for 2016 from 2.9% to 2.4% that should be a worry for the Fed.

The challenge is the choppy data and the mixed messages from the regional Fed heads. Hike, don't hike, hike, repeat. Even Yellen cannot seem to make up her mind. Hedgeye had a couple of great cartoons last week.



The Retail Sales for May could be a pothole as well as the Philly Fed Manufacturing Survey on Thursday. Both could be weaker than expected.

This is a quadruple witching expiration so expect early week volatility and high volume on Thr/Fri.


The European markets crashed on the Brexit news and German DAX lost more than 2.5% with the French CAC 40 dropping -2.24%. This carried over into the U.S. markets at the open. With the Dow struggling to break through the 18,000 level for most of the week the weight of the European markets was the news that ended that new high attempt.

The German 10-year bund hit a record low yield of 0.011%. With 23 countries and more than $10 trillion in securities currently holding negative yields it appears the German bund is about to join them. If the bund goes negative, that will create an entirely new round of craziness. This makes the yield on the U.S. ten-year treasury look fantastic. This was also the week that the ECB began buying corporate bonds in volume so there was a serious lack of available paper with any yield.



The yield on the ten-year treasury closed at 1.639% and the lowest close since May of 2013. The flight to safety was very strong on Friday. That is a signal that equities may continue lower in the week ahead.


The dollar soared on the new Brexit survey and the British pound imploded. The stronger dollar was negative for commodities except for gold. The yellow metal participated in the flight to quality trade and closed the day back over $1275. That was a significant improvement from the $1210 from last week before the payroll report.




The chances for a rate hike in June are very low because of the employment report and the Brexit vote. The Fed cannot take a chance that the June employment also crashed and waiting until July is a safe play since they get to see an extra month of economic reports and the uncertainty over Brexit will have passed. The major economists are still mixed over when the Fed will hike with only a few focused on July. Most are looking farther out in the year or even into 2016. The table below shows the economists and their expectations for the Fed's next rate hike.


The CME FedWatch Tool shows that June is only showing a 1.9% chance of a rate hike. It would be a real surprise for the market if a hike appeared and the response could be ugly.


In an interview on Friday Bill Gross warned the $10 trillion in securities with a negative yield was a "supernova" ready to explode. He believes the global move toward negative yields in order to force money into economic investments, will have dire consequences. Gross said "global yields are the lowest in 500 years of recorded history." How that explosion will impact financial instruments is unknown and the subject of numerous scholarly efforts. With central banks buying debt in all forms like there is no tomorrow there will be a climax to this event. Eventually that debt has to be sold back into the market. Even central banks have limits to how much debt they can buy and we may be approaching that point. Japan's central bank is even buying equities and ETFs to push prices higher in hopes of creating a wealth effect in the population in order to stimulate the economy.

The Fed has $4 trillion in treasuries on their balance sheet. This is the largest stimulus program ever and the Fed has never successfully unwound a stimulus program in the past without a major impact to the market. We should not expect them to suddenly be miracle workers and magically make that $4 trillion go away without making ripples. The Fed has said they can let the securities mature rather than put them back into the market. However, the Fed is still taking the proceeds from matured securities and buying more to replace those than mature. Is our economy so weak that we cannot stop those replacements?

If the Fed was so concerned about interest rates, they could stop buying treasuries and real rates would rise. Oh, but they can't because the economy is still limping along at only 0.8% growth in Q1 and only 2.1% average annual growth since the recession. So why are they so fired up about hiking rates? Because they are afraid of a coming recession and they currently only have one bullet (rate hike) they can roll back to stimulate the economy again. Riddle me this: If rates at or near zero are so good for the economy, why has the GDP declined for the last four quarters? You can go crazy trying to unravel all these economic questions and even if you did have the answers you could not convince the Fed you were right. Rant off.

In stock news, Amazon (AMZN) is said to be preparing a standalone music service that could launch later this year for $9.99 a month. This would be separate from the Prime subscription. The Prime subscription already has an extensive catalog of music for those subscribers. The new service could also work with the Echo device to stream music to the home. "Alexa, play Bon Jovi, You Give Love a Bad Name." How much easier could it get? Amazon is reportedly in discussions with the major record labels about access to their songs.

In a separate report, Goldman said Amazon was poised to dominate the apparel market by the end of 2017. According to Goldman Amazon's sales represent 20% of the online market at $10 billion. That is nearly twice what Macy's sells online at $5.2 billion. The report said online sales are expected to continue to grow at the 20% rate but sales at brick and mortar stores are expected to drop off a cliff. Goldman said 35% of millennials purchase their clothing online. "An additional $50 billion in sales will migrate online over the next four years." That is the equivalent of total sales for Macy's, Nordstrom and Kohl's combined.

Separately, William Blair initiated coverage with an outperform.


Tesla shares fell 5% after a bogus report of multiple suspension failures in the Model S vehicle. The report said the National Highway Traffic Safety Administration (NHTSA) had received multiple reports of problems with the Model S suspension. Tesla immediately denied it and by the end of the day, NHTSA had also denied it. The agency said "NHTSA confirmed today that they found no safety concerns with the Model S suspensions and have no need of further data from Tesla."

Apparently, some 40 reports were filed with NHTSA but at least 37 of them were bogus with false identification numbers and locations. The man operating the blog where the initial claim was posted, Edward Niedermeyer, previously ran a blog called "Tesla Death Watch" so his motives certainly seem questionable.

The blog also said Tesla demanded customers sign a Non Disclosure Agreement (NDA) that prohibited them from discussing or reporting the problems to NHTSA. Musk exploded and called that idea "preposterous" and said the "Goodwill Agreement" was only used in rare occasions when Tesla performed out of warranty work for free or at a discount. The form basically says if we fix your car for free you will not turnaround and sue the company or malign the company in the press because of the repair. Musk said he "did not want to do a good deed for a customer and then have that used against us in court for further gain." Musk was openly hostile that someone would file 37 fraudulent reports in order to create a false impression there was a safety issue when none existed. They were obviously attempting to tarnish the brand by making bogus reports and then going public with the claims.

Tesla said it had revised its Goodwill Agreements to make it clear that customers were free to report safety concerns to NHTSA.

The one car that may have stimulated the incident had 70,000 miles and the owner reportedly lived at the end of a long and rocky dirt road. Tesla said the car had seen "heavy use" and it took two wreckers to extract the car from the dirt road. Tesla said that particular car had abnormal rust on the ball joint, likely from the extreme punishment, and something the company had never seen before. However, the customer denied the dirt road claim but admitted it took two wreckers to retrieve the car.


H&R Block (HRB) reported earnings of $3.16 compared to estimates for $3.15. Revenue of $2.3 billion missed estimates for $2.6 billion. They also announced a 2-cent increase in the dividend to 22 cents. They hiked the dividend despite declining revenues and a decline of -4.1% in clients. The CEO said the results were not acceptable and they were committed to improving relationships and rebuilding their client base. Shares rose after they committed to further share buybacks. They bought back 20.5% of their outstanding shares in 2015.


Urban Outfitters (URBN) warned that same store sales are declining by the mid single digits in the current quarter that runs through July. That is not a good sign. The retailer blamed an unseasonably cool spring for the decline. That is interesting since most retailers were blaming warmer than normal temperatures for their sales losses. Whatever you blame it on it is clear that retailers are having a tough time and it does not appear to be improving.


Applied Materials (AMAT) announced a new $2 billion share repurchase program after completing the prior $3 billion program. The company also announced a 10-cent quarterly dividend payable September 15th to holders on August 25th. Shares declined only slightly in the weak market. Adding the two programs together means AMAT will have bought back 20% of the outstanding shares when this program is completed.


Twitter (TWTR) fell below Instagram in advertising interest. A new report from STRATA found 63% of survey respondents plan to advertise on Instagram compared to 56% considering Twitter. That is the first time Instagram has out polled Twitter. The survey said Instagram's agency attention has increased 86% from last year while Twitter's has declined -4%. Facebook is in the top spot with 96% of advertising agencies planning on spending money there.

Twitter also warned users to change their passwords after 33 million were posted as the result of a cyberattack. The hacker, Tessa88, was asking 10 bitcoins for the data or about $6,000. Twitter said they were confident the data advertised was not due to a breach in its systems. If it was not a breach then how did Tessa88 get the information? Did she have an inside agent? Why were they not encrypted? Tesla says the data is probably not valid BUT they are contacting everyone the list and forcing a password change.

Is it just my imagination or is Tom Dorsey going to be awarded the prize for being the first CEO to run two listed companies (TWTR and SQ) into single digits at the same time? Somebody PLEASE buy these companies and turn them around.



Wendy's (WEN) said it found a second case of malware at payment terminals at their restaurants. The malicious software allowed hackers to access the terminals remotely and capture cardholder data as purchases were paid. Originally the company had said only 300 stores were affected. Now they are saying the number affected could be "significantly higher" than 300. Wendy's launched an investigation after numerous complaints of fraudulent charges on customer cards after they ate at Wendy's. Oops!


Eagle Pharmaceuticals (EGRX) rocketed 11% after a patent court validated the patents on Treanda. Teva had already agreed to pay $30 million up front and $90 million in milestone payments, plus royalties on sales of Bendeka. That is a rapid-acting reformulation of Treanda. Treanda had revenues of $741 million in 2015 and Eagle Pharma only had revenues of $14.1 million. That means Eagle should get a windfall out of the patent approval. Eagle only has a PE of 9. As luck would have it, I was stopped out of a call on that dip five days ago.


Walgreens Boots Alliance (WBA) rose +4% and Rite Aid (RAD) gained 3% on news there are signs the FTC will approve the $17 billion acquisition of Rite Aid. The report was in the New York Post and cited "unnamed sources" so I would not count on it happening just yet. Helping the case was the top Pharmacy Benefit Manager (PBM), the CEO at Express Scripts (ESRX), saying he supported the deal. That should reduce concerns about competition being reduced. The CEO said there will still be plenty of competition in the retail sector.


Crude prices rose through Wednesday on more violence in Nigeria and a decline in U.S. inventories of -3.2 million barrels. However, other production is beginning to come back online and U.S. production rose for the first time in 13 weeks. Active rigs also rose for the last two weeks and the first gain since August.

The rebound in the dollar also penalized oil since it would take fewer dollars to buy a barrel of oil. Crude is highly reactive to the dollar because roughly 93 million barrels are produced daily. That is approximately $4.65 billion in oil every day. It is the world's most heavily traded commodity.

Conoco, Shell, Suncor and Imperial Oil have resumed operations after the Canadian wildfire. Cenovus and Canadian Natural Resources still have production offline because of a new fire on June 7th.

Some analysts believe there is a big decline ahead once China completes the filling of its strategic reserves. They imported nearly 800,000 bpd of extra oil in the first quarter as they fill the reserve. So far, they have added 135 million barrels to inventory and they only have storage for 155 million. If they hit capacity in the next 20-30 days there will be an extra 800,000 bpd of oil on the market just as production from some of the other production outages comes back online. With Saudi Arabia, Iraq and Iran all boosting production and U.S. production starting to rise again, we could see prices fall back to the lower $40s by September.

Not everyone is in the same camp. Continental Resources (CLR) CEO Harold Hamm said he expects oil to end the year between $69-$72 per barrel. Way to box yourself in Harold. That is not a lot of wiggle room. He believes global supply and demand have already rebalanced and by Q4 we could see a one million barrel per day shortfall. In 2017, he believes that shortfall will rise to two million barrels per day. I sure hope he is right. Harold, I do not know what you are drinking but please send me some.


Active rigs rose +6 to 414 with oil rigs rising +3 to 328 and gas rigs +3 to 85. That is the second weekly gain for oil rigs and last week was the first gain since August 21st. Offshore rigs were unchanged at 21.




Markets

According to the charts, it would appear the S&P failed again at resistance and we can expect a further decline. However, I would caution against using that logic until we see confirmation of a further decline. Headline sell offs like we had on Friday are just like short squeezes. Investors panic, stop losses are hit and that creates a new round of selling and more stops are hit. It becomes a self-fulfilling event. That does not mean it will continue on Monday just like those short squeezes we had in late May completely reversed the following day. I would not be surprised to see the market up on Mon/Tue ahead of the Fed meeting. That is the historical pattern.

Investors will have had time to digest the new Brexit survey and decide they may have been too hasty about their exits. Even if we do go lower, there is decent support at the 2,085 level and that could produce a trading bounce ahead of the Fed. After the Fed and before month end I would bet on a failure of that support.


The S&P broke through the heaviest portion of resistance from 2075-2116 and then stalled. It was though sellers were jumping in ahead of the next level at 2128 in order to get a seat on the downhill express. The high was 2120 and the high close was 2119.


The Dow was a much easier technical story. It failed at 18,000. Period. There were one close slightly above that level at 18,005 but it was immediately erased at the open on Thursday. Friday's decline hit -172 points intraday but recovered to close with a -119 loss at 17,875 and back under resistance at 17,925. If this is a one-day wonder then we will be back fighting that 18,000 level again next week. Otherwise, we could be revisiting the support at 17,700.

The financial stocks, specifically Goldman Sachs, were the biggest weight on the index but the international stocks and commodity stocks were also weak.




The Nasdaq fall from grace was dramatic with a monster gap down open and continued selling all day. The resistance at 4,968 held and support at 4,900 did not. This was a biotech crash. The Biotech Index fell -2.5% on Thursday and -2.4% on Friday. I wrote last week that once the ASCO meeting was over the biotech sector was going to be an anchor for the Nasdaq.

The intraday support at 4,885 was the support from May 25th/26th and it was reasonably solid on Friday. That will be the level to watch on Monday. A decline under 4,885 targets 4,700.




The Russell 2000 fell -1.5% on Friday, also a casualty of the biotech decline. The Russell was also hit by the drop in energy and the financials. Prior resistance at 1,155 could be support. The prior resistance at 1,165 was broken at the close but could still be in play if there is any rebound on Monday. A move under 1,155 targets 1,110.


Historically the market tends to rise on the Tuesday before a Fed decision. Depending on what happens on Monday it will be interesting to see if that trend continues.

The Fed is not likely to raise rates. That means the dollar will weaken and commodity prices should rise and possibly lift the market. That obviously depends on the wording of the Fed statement. "We are not hiking because the economy is weaker than expected and the global uncertainty is lingering. However, it will be appropriate to raise rates in the near term." That is about what I expect them to say. That will immediately make July even more of a live meeting and potentially put a cloud over an already lackluster market heading into the summer doldrums.

Historically the S&P is flat to slightly positive in early June, peaks around option expiration on the 17th and then closes the month at the lows.

I am neutral for next week until we see how the Fed phrases their statement and how the headlines are shaping up for the Brexit vote on the 23rd. If the European markets continue to decline that will weigh on the U.S. markets.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


It is best not to pick a fight with a billionaire. The gossip media company Gawker.com is known for the Jezebel and Deadspin blogs and a constant spewing of news that is questionable at best. Several years ago, they outed billionaire Peter Thiel as gay. Thiel quietly joined forces with other targets of Gawker articles and sued the publication. The highest profile suit was the Hulk Hogan sex tape of him having sex with the wife of a friend. Theil paid the legal bills for Hogan and the court awarded Hogan $115 million plus another $25 million in punitive damages.

On Friday, Gawker filed bankruptcy in order to remain a going concern while they appeal that judgment and "a coordinated barrage of lawsuits intended to put the company out of business and deter its writers from offering critical coverage."

Later the announced they had a "stalking horse" bid of $100 million for the business from Ziff Davis publishing. A stalking horse bid is basically an opening bid to establish a bottom price. Later there was some confusion that the Ziff Davis bid was actually less than the reported $100 million. In testimony last year the Gawker founder, Nick Denton, claimed the business was worth $250-$300 million. Hogan's attorneys have already said they plan to press their judgment against whoever ends up owning the carcass of Gawker. The bankruptcy court could reduce the judgment but since it was so high profile and recently litigated, any reduction may be minimal.

The moral to this story is to not make a billionaire mad at you when he can make it his life's goal to put you out of business.


When the S&P closed at 2,119 on Wednesday the volume was a below average 6.4 billion shares. Thursday's weak market that closed slightly lower than Wednesday saw volume of 6.1 billion shares. Friday's market crash only saw volume rise to 6.8 billion shares and about average for a normal day without a market move.

The key here is the lack of conviction in either direction. However, on Friday, the decliners were 4:1 over advancers and there were a lot of stocks with major opening gaps lower that sealed their fate for the entire day. There was no race to the exits. It was only a headline move caused by the new Brexit survey. That could continue on Monday depending on the European markets or it could be instantly erased with another short squeeze.


Despite the market gains early in the week the bullish sentiment declined -2.3%. It is possible the dead stop by the Dow at 18,000 was seen as a problem that eroded sentiment. The survey ends on Wednesdays and that was when the S&P closed at the 2,119 high. Note that bearishness shrank slightly and neutral rose slightly. The weak economic reports could have also been a factor.



The earnings cycle has slowed to a crawl. Ctrip.com, Kroger, Oracle and Smith & Wesson are the only reports that warrant a mention.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"An economy hampered by restrictive tax rates will never produce enough jobs or enough profits."

John F Kennedy


 


New Plays

Flying High for a While

by Jim Brown

Click here to email Jim Brown
Editor's Note

Gogo Inc received an order from an unspecified airline and shares spiked. A week later the real details came out and shares closed at a new low.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

GOGO - Gogo Inc - Company Profile

Gogo provided communication services to the commercial and business aviation markets in the U.S. and internationally. They provide in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers to and from North America.

Gogo has had a rough few months as airlines complained about the service and some removed the Gogo service and replaced it with a competitor.

On May 23rd Gogo announced the pricing of $525 million in senior secured notes. On May 26th the stock spiked 20% after the company filed a notice with the SEC saying an unspecified airline had requested a proposal for service to cover its large domestic fleet. Under the proposal Gogo would provide Wi-Fi to a "meaningful" portion of the domestic fleet that is is currently serving. Gogo cancels the $525 million debt sale.

On June 3rd shares plunge as the unspecified airline turns out to be American Airlines and the proposal is far less than expected. American picked ViaSat (VSAT) to provide internet access on 100 new Boeing jets. Gogo updates its SEC filing to say it would provide service on 140 American planes and continue service on 400 others. However, American retained the option to remove Gogo equipment on any American planes at any time. Gogo said it now expects American to remove its equipment on the "mainline" planes over the next several years. American said it was planning on upgrading the service on its planes but had not picked a successor. That means the 100 ViaSat planes will be a live test and will likely replace Gogo. ViaSat provides 12 mbps of bandwidth to each seat while Gogo provides 70 mbps for the entire plane and that bandwidth has to be shared by all passengers. There is a significant difference.

On June 9th Gogo reinstates the $525 million debt offering and priced it at 12.5% after Moody's rated it a B3-PD (Probability of Default) credit.

Earnings Aug 4th.

The future is not bright for Gogo. They are trying to produce a faster service through satellite connections rather than ground based systems but the testing and roll out is not going smoothly. Several years of hostility between passengers and carrier over the slow bandwidth has poisoned the relationships and ViaSat appears poised to take over the market.

Shares closed at a historic low on Friday at $8.97 and the downward trend is likely to continue.

Short GOGO shares, currently $8.97, initial stop loss $10.05.

I am not recommending an option but the August $8 put is $75 cents.




In Play Updates and Reviews

Don't Get Excited Yet

by Jim Brown

Click here to email Jim Brown

Editors Note:

The minor decline on Friday was simply a move to get out of positions before the weekend. The Brexit survey was an added incentive. The new survey found "leave" voters had risen to 55% and "remain" voters fell to 45%. This was the highest percentage difference in all the recent surveys.

Traders are afraid of that that will do to European markets on Monday and after four days of knocking on the door at 18,000 without any breakthrough, they decided to take profits ahead of the weekend.

Add in the bearish comments by Bill Gross, Carl Icahn and George Soros and traders had plenty of incentive to move to the sidelines.




Current Portfolio





Current Position Changes


LE - Lands End

The Short position was entered at the open with a trade at $15.80


HTZ - Hertz Global

The long position remains unopened until a trade at $11.75


ENDP - Endo Pharma

The long recommendation was cancelled.


SWIR - Sierra Wireless

The long recommendation was cancelled.


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


ENDP - Endo Pharmaceuticals -
Company Profile

Comments:

No specific news. Shares down -$1.52 or -8%. With the biotech sector imploding, I am cancelling this recommendation until the sector recovers. The Biotech Index fell -2.5% on Thursday and -2.4% on Friday.

Original Trade Description: June 8th.

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 in mid May. 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 was also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector. However, now that the Valeant disaster has turned into old news, analysts are starting to talk about price targets on Endo in the $40-$50 range.

Full year earnings are expected to be in the $4.50 range and that means their current PE is around 4.5. That is ridiculously cheap. That guidance was reduced from $5.85-$6.20 because of some generics going off patent, specifically Voltarena Gel and Percocet. Investor Wally Weitz believes there is significant upside in Endo and they probably reduced guidance conservatively so they would makes sure to hit future earnings.

Earnings are August 4th.

The shares have rebounded from the May lows at $12.50 and refused to decline after the ASCO conference ended. I am putting an entry trigger on this position to make sure we buy on a breakout rather than a breakdown.

Recommendation cancelled.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. Down on profit taking in a weak market.

Original Trade Description: June 2nd.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.

Position 6/3/16:

Long HPE shares @ $18.40, see portfolio graphic for stop loss.

Optional:

Long August $20 call @ 40 cents. No stop loss.



HTZ - Hertz Global Holdings - Company Profile

Comments:

No specific news. Down -4% in a weak market.

This position remains unopened until a trade at $11.75.

Original Trade Description: June 8th.

Hertz engages in the rental and lease of cars and trucks worldwide. It operates through four segments: U.S. Car Rental, International Car Rental, Worldwide Equipment Rental, and All Other Operations. The company rents various makes and models of cars, crossovers, and light trucks under the Hertz, Dollar, Thrifty, and Firefly car rental brands on hourly, daily, weekend, weekly, monthly, or multi-month basis through a network of company-owned rental airport and off-airport locations, as well as franchise locations. They operate 9,980 corporate and franchise locations. They also rent industrial equipment like earthmovers, air compressors, power generators, etc.

Last week Hertz shareholders formally agreed to the proposed split of hertz into two companies. Hertz Global will remain a car rental company. Herc Holdings will be the equipment rental company and trade under the symbol HRI.

The HRI stock will be spun off on June 30th to shareholders on June 22nd as a dividend distribution and therefore taxed at a lower rate when sold.

Shareholders will receive one HRI share for every five HTZ shares they own. Further complicating the process the HRI shares will have a reverse split of 15:1 on July 1st. The HRI portion of Hertz is significantly smaller and the reverse split is to boost the initial share price.

Activist investor Carl Icahn filed a notice with the SEC last week that he had increased his stake in Hertz to 15.24%. The Herc Holdings company will add three Icahn affiliate directors when the spinoff occurs.

With Icahn remaining on board the company should continue to be shareholder friendly. Icahn was instrumental in forcing the company split.

Also, the Hertz CEO was instrumental in producing a boost in the stock earlier in the week when he said the tide had turned for pricing in the rental car market. The fleet sizes had been reduced, everyone was running very tight and rental prices were rising. That fueled the sector on hopes of better earnings.

I am recommending we add the stock now and then decide on June 21st if we want to hold over the spinoff. Shares are right at resistance from March at $11.50. I would like to see them move over that level before we jump in.

With HTZ trade at $11.75

Buy HTZ shares @ $11.75, initial stop loss $10.45.

No options recommended because of the spinoff.



P - Pandora Media - Company Profile

Comments:

We were stopped out at 10:30 at $11.75 before the news broke that Amazon was starting a $9.99 a month streaming music service. That news pushed Pandora shares to close at the low for the day.

Original Trade Description: June 1st.

Pandora provides internet music streaming services in North America. Listeners can create personalized stations to access free music and comedy catalogs as well as personalized play lists. They offer Pandora One, a paid subscription based service for listeners. They sell audio, video and display advertising for delivery on connected platforms. They also offer a ticketing platform for promoters and advertising to promote their events.

In Q1 active listeners rose to 79.4 million and hours streamed rose 4% to 5.52 billion. They reported a loss of 20 cents but that was 19 cents better than the 39 cent estimate.

Pandora's chairman Jim Hill bought 250,000 shares at $10.97 per share and then another 250,000 shares at $11.33 each. That is close to $6 million in purchases. CFO Mike Herring bought 225,000 shares a couple weeks earlier. Last week somebody bought 12,000 contracts of the September $12 call options. Today somebody bought 1,000 contracts of the July $13 calls and there was another trade for 2,500 of the September $10 calls.

So what is powering this sudden interest in Pandora? In May the hedge fund Corvex Management announced it had acquired a 9.9% stake and demanded the company be sold to the highest bidder. Keith Meister runs the fund and he believes there should be an auction and Facebook should buy the company. Since Pandora has only a $3 billion market cap that should be attractive to Facebook because it would get those 79 million listeners to further spread its advertising reach across the internet.

Apple, Google and Amazon already have some type of streaming app and that leaves Facebook as the likely candidate. Barron's suggested Verizon or Liberty Media could buy them. Sirius XM was also mentioned as a possible buyer.

With plenty of potential acquirers and insiders buying huge amounts of stock there may be some discussions in progress.

Update 6/3/16: Board member, Timothy Lelweke, bought 10,000 shares on Wednesday at about $11.63 each. He now owns 43,768 shares so that was almost a 30% increase in his holdings. Something is definitely going on behind the scenes to generate all this insider buying. Position 6/2/16

Closed 6/10/16: Long Pandora shares @ $12.08. Exit $11.75, -.33 loss.



SWIR - Sierra Wireless - Company Profile

Comments:

No specific news. Shares crashed in a weak market as profit taking from the two month run finally hit. I am cancelling this recommendation until the stock recovers.

Original Trade Description: May 26th.

Sierra Wireless engages in building the Internet of Things with intelligent wireless solutions. They operate in three segments, Original Equipment Manafacturer, Enterprise Solutions, and Cloud Connectivity Services. They offer cellular embedded modules, software and tools to integrate wireless connectivity into various products and solutions.

In their recent earnings they reported an adjusted profit of 8 cents. Revenue declined -5.1% because of previously reported softness in orders from several existing automotive customers. For Q2 they expect earnings in the range of 9-17 cents on revenue of $150-$160 million. For the full year they guided to earnings of 60-90 cents on revenue of $630-$670 million. They bought back 549,583 shares in the quarter.

The revenue in the OEM solutions segment declined -9.1% due to softness in auto production in Q1. Enterprise solutions revenue rose 9% and cloud and connectivity systems revenue rose 92%. They began upgrading their global LTE core network to provide additional connectivity for wholesale operators.

In their guidance, they said business should improve significantly because of more than 40 new customer programs moving into production on new IoT products. They manufacture to customer specifications when the customer adds a new product.

Earnings Aug 4th.

To go from an 8 cent profit in Q1 to 60-90 cents for the full year is a major gain in profitability. Shares have been rising since the earnings report and showing no weakness when the market was down.

Recommendation cancelled.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. Good relative strength with only a 16 cent decline.

Original Trade Description: June 6th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.

Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.

Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.

Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.

Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.

Earnings July 28th.

Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.

If the current rebound continues the next material resistance is $12.

Position 6/7/16:

Long UIS shares @ $8.47, no initial stop loss.

Optional:

Long October $9 call @ 80 cents. No stop loss.




BEARISH Play Updates

LE - Land's End - Company Profile

Comments:

No specific news. Shares declined slightly but closed at a new low.

Original Trade Description: June 9th.

Land's End operates as a multi-channel retailer. The company operates through two segments, Direct and Retail. It offers casual clothing, accessories, footwear, and home products. The company sells its products through its e-commerce Websites, direct mail catalogs, dedicated LandsÂ’ End Shops at Sears, stand-alone LandsÂ’ End Inlet stores, and international shop-in-shops. As of January 29, 2016, it operated 227 LandsÂ’ End Shops at Sears; and 14 LandsÂ’ End Inlet stores in the United States, as well as 5 United Kingdom based shop-in-shops.

Land's End operated in the world of Amazon and they are getting crushed. They use the term multi-channel because they retail a lot online. Unfortunately, in an Amazon dominated environment they are finding it hard to sell sheets, blankets, towels, shoes and apparel and still make a profit.

In their recent report they lost 18 cents compared to analyst estimates for 2 cents. Revenue of $273.4 million that was below the $299.4 million in the comparison quarter. Retail segment revenue declined -10.4% with same store sales falling -7.1%. Even worse, inventory rose 8.9% to $309.9 million up from $284.6 million. Cash balanced declined -$50 million. Stale inventory is rising, they are burning cash and sales are falling. That is not a recipe for earnings growth.

The retailer was forced to remove Gloria Steinem from their online website and from their catalog after the feminist made some comments on abortion rights. Customers, including numerous religions groups, promised a large scale boycott if Steinem was not removed from all advertising.

The summer months are not likely to be kind to Land's End. They will be forced to further discount products to move them out of inventory in a period where customers are vacationing rather than shopping.

Earnings Sept 1st.

When the market finally rolls over, we could see selling in LE accelerate due to a lack of interest in holding for a Q4 rebound. The historic closing low is $15.81.

Position 6/10.16:

Short LE shares @ $15.80, initial stop loss $17.25.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.

These positions are only updated on the weekend.


FDC - First Data - Company Profile

Comments:

No specific news. Major 4% decline but it was market related not stock specific. We still have a lot of time.

We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remains open. At the current 5-cent price that is a lottery ticket that the headlines will fade and the original direction will return. This is a July option so plenty of time for a disaster to appear.

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:

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

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.



SQ - Square - Company Profile

Comments:

No specific news. The June call option has one week left and at 2 cents we have almost no risk to continue holding the position. Lightning can strike at any time and for $9 today, this is a June lottery ticket.

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:

Long Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.



TRN - Trinity Industries - Company Profile

Comments:

Trinity was bullish early in the week and rose to a six week high. The market weaknes took back some of the gains but I am encouraged.

We have a July call option that is worth 40 cents today. I would bet $40 that it will recover by late July.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.



WIN - Windstream Holdings - Company Profile

Comments:

WIN closed at a four-week high on Thursday but gave back some of the gains in Friday's weak market. They announced they were moving into a "mega data center" operated by QTS Realty Trust in Chicago where they will be a major fiber supplier.

We have an August $9 call and it could end up in the money because that is well into the future. With the option worth only 21 cents today, there is no value in closing it. This is a lottery play that WIN will be above $9 by August.

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.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now