Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/15/2016

Table of Contents

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

Market Wrap

No Surprise, No Change From the Fed

by Keene Little

Click here to email Keene Little
The stock market got a little extra bounce this morning following yesterday afternoon's late-day bounce, and then went flat into the FOMC announcement. The reaction was barely noticeable to the announcement until the final 30 minutes of the day when the market sold off. Now the question is whether the next day will be a reversal of that move, which is typical.

Today's Market Stats

The day was mostly positive until the last few minutes of the day after the market sold off in the final 30 minutes. But the pop up in the morning followed by a rally added to the bounce off Tuesday's low and then the market flattened out while waiting for the FOMC announcement and Janet Yellen's conference. There was virtually no reaction to either but then some traders got nervous into the close and decided to sell.

The selling into today's close might have been a head-fake move, not that we've ever seen that happen before. This is opex and we haven't had a good opex rally yet so pulling the market back into today's close might have been a setup to spark some short covering tomorrow. The days following the FOMC announcements often see reversals of the post-FOMC moves so that's another reason to be suspicious of today's late-day selling. But obviously we'll have to let price lead the way and then determine what it means for the bigger price pattern.

Other than the usual Brexit/Bristay polling there's not much for the market to pay attention to and today's FOMC announcement leaves the market guessing what the Fed will do, what Britain will do and what the ECB will do in response to what Britain does. Add in a little opex and we're getting the expected volatility this week. That may or may not calm down before the Brexit vote next week so it's important to be careful with your trading through next week.

The Fed acknowledged the slowing job growth and worries over the Brexit vote. While they would like two more rate hikes this year they hinted that they might only be able to do one. My guess remains none and that they'll drop rates again before they raise them. Six of the ten members now believes there will only be one more hike this year, which is a significant change from just one member in April. They also ratcheted down their expectations for 2017 so they're recognizing that the slowing economy is likely to last into next year.

The Fed made note of an improving housing market but as I'll show later, the home builders are not supporting that view. Interestingly, banks are starting to ramp up their subprime mortgage loans and lowering down payment requirements to just 3%. Borrowers have to be below certain income thresholds in order to qualify. So if you make too much, making you a better risk, you can't get the special financing deals. But if you're credit score is not so good and you don't make enough money to qualify for a regular mortgage you'll be able to get one of these special mortgages. The banks then sell these loans to Fannie Mae and guess who owns Fannie Mae? We the taxpayer through our government. Does this remind you of another time silly things like this were done and the banks and Fannie Mae were bailed out? It's all part of the Fed forcing banks to get rid of their cash and lend it out. What could possibly go wrong with this scenario?

The stock market is getting a little nervous and the selloff following last Wednesday's high is reflecting it. Some would say it's mostly fear of the Brexit vote (the market hates uncertainty) but there's also more evidence of the economy slowing, which the Fed acknowledged today. As I'll show on the charts, the price pattern still supports the idea that the current pullback, even if it becomes a little larger, could lead to a brand new rally. I think that's becoming less and less likely but we'll have to let price lead the way. For now we have to keep things short-term oriented while waiting for the larger pattern to better identify itself. I'll start tonight's review with the Dow Industrials.


Dow Industrials, INDU, Weekly chart

It's been a choppy price pattern for the Dow since its April high and that makes it look like it could be consolidating before pressing higher. It could press higher from here or it could drop lower to give us a larger a-b-c pullback from April. But neither of those options are an assured thing and that's what's making it difficult to figure out what the larger price pattern is likely to be. There's a large consolidation pattern off the May 2015 high that suggests we'll see one more drop down to the bottom of the shallow up-channel off the August 2015 low, currently near 15550 (the February low was near 15500). If you're a longer-term bear, confirmation of bear market won't come until the Dow drops below its August 2015 low near price-level support at 15340. For bulls, proof we're still in the longer-term rally would be a climb above 18400, which would negate a potential bearish correction pattern and it would exceed the May 2015 high at 18351. We've been in a chop zone and that could continue, which is a reason for short-term trading.


Dow Industrials, INDU, Daily chart

The Dow broke important support near 17750 yesterday when it dropped below its 50-dma, near 17785, its 20-dma, near 17755, and its uptrend line from February-May, near 17760. It looks like an impulsive decline from last week and that would make the bounce off yesterday's low just a correction to the decline. The broken uptrend line from February crosses its 50-dma near 17790, while the uptrend line will be near 17830 on Thursday. A 50%-62% retracement of the decline is at 17806-17855 so we have a target zone for the bounce correction, if that's all it's going to be, at roughly 17790-17855 so watch that area, if reached, for a setup to get short. Above 17860 could be bullish and in any case I'd be careful about more whipsaws until we can get through this week and the Brexit vote.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,400


S&P 500, SPX, Daily chart

SPX broke support yesterday near 2085 and then 2075, which was followed by a bounce back up to 2075 for the close. This morning it bounced a little higher and back-tested 2085 S/R, which is price-level S/R and its broken uptrend line from February-May. Its broken 20-dma is only slightly higher, near 2087. There's certainly higher bounce potential, including to a new high, but at the moment the pattern supports lower prices before thinking about the potential for another rally leg. If we've started an impulsive (5-wave) move down from last week and the decline so far is only the 1st wave then we could see a 5-wave move down to the 1982-1992 area by the end of the month. The big question of course is whether or not the Fed/government will do something to prevent any kind of selloff.

Key Levels for SPX:
- bullish above 2121
- bearish below 2064


S&P 500, SPX, 60-min chart

Today's rally attempt was stopped twice by the broken uptrend line from February-May, this morning and then this afternoon. The spike down at the end of the day has it looking like a bearish kiss goodbye following the back-test and a drop below Tuesday's low near 2064 would be more bearish. But be careful about a head-fake pullback here, including the possibility for a minor new low, that's followed by another rally leg into Friday to save some of opex week. Last week closed near 2096 and it's possible we'll see this week close near the same level. If we do get another leg up to create a larger a-b-c bounce off Tuesday's low, two equal legs up points to 2091 and a 50% retracement of the decline into Tuesday's low is near 2092, both of which would have SPX doing another back-test of its broken uptrend line from February. That would make a good setup to review carefully for a shorting opportunity.


Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq found support yesterday at its 200-dma after finding resistance at its 50-dma. Today, before the FOMC announcement, it bounced a little higher than its 50-dma, near 4856 (with a high at 4865), and then went sideways. Its broken 20-dma, near 4890, is now slightly above its downtrend line from December 2015 - April 2016, now near 4882. I show an expected bounce up to price-level S/R at 4920 but it might not make it that high or it could make it higher to close last Friday's gap down, at 4958.62, before reversing back down. This of course assumes we'll get another leg down but we'll have to see how the rest of this week plays out. The stronger the Brexit vote becomes the more worried our market will be. One note on MACD though -- it's starting curl (histogram lines getting less negative) and doing so at the zero line. A cross back up by MACD would be bullish so keep an eye on it (my (8,12,5) settings are faster than default settings on most charting programs).

Key Levels for COMPQ:
- bullish above 4980
- bearish below 4811


Russell-2000, RUT, Daily chart

The RUT remains relatively stronger than the other indexes as it holds above its 20-dma, now near 1150. It was broken intraday yesterday but closed on it and today it closed above it. But it has price-level resistance just overhead near 1160 and if it can get above that level it would then have a little room to run up to its broken uptrend line from February through the May 6th low, currently near 1176. Its pattern is the same as the others -- bullish above its June 8th high at 1190 but bearish below it. We could see a higher bounce before heading lower but at a minimum I think we'll see at least two legs down for a larger a-b-c pullback from last week. If a more significant high is in place then a drop below price-level support near 1193 is likely.

Key Levels for RUT:
- bullish above 1190
- bearish below 1125


10-year Yield, TNX, Daily chart

Last week TNX broke down from its sideways triangle that followed the February low and March high. This week it has dropped below price-level support at 1.65%. This price level comes from lows in May 2013 and January-February 2015. Other than a 1-day decline below this level in February 2016 is has managed to hold above support but now this week's break is significant. I see the potential for a bounce back up to the underside of the sideways triangle, near 1.73% by the end of the month, but that would likely set it up for a stronger decline to follow (bond rally in July). TNX stays bearish below 1.64 and then neutral up to 1.73.


KBW Bank index, BKX, Weekly chart

This week's decline for BKX had it dropping out of its up-channel off its February low. This follows the rally up to its downtrend line from July 2015, where it topped out at the end of May. The rejection at the downtrend line and now dropping out of its parallel up-channel clearly looks more bearish than bullish, especially if the weekly close is below price-level S/R near 66.50 (today's close was 66.03). The bearish pattern suggests we should look at bounces as shorting opportunities.


DJ U.S. Home Construction index, DJUSHB, Weekly chart

It's been a while since I've shown the home builders index so I wanted to point out its topping pattern. The bounce off the February low has now created a double top between April and last week's high, with bearish divergence in June. It looks like it will again be rejected by its broken uptrend line from October 2011 - October 2014 and another weekly close below price-level S/R at 553 (today's close is 556) would likely point to a larger decline from here. This index is at the same level that it was at the May 2013 high near 553 -- 3 years and it's gone nowhere. As with the broader averages, I think there's a good chance the home builders will drop below the November 2008 low at 130.


U.S. Dollar contract, DX, Weekly chart

There's not much of a change in the US$'s weekly chart even though it's been a little volatile in the past two weeks. Its June 1st high was at the top of its down-channel from December 2015 and that was followed by a steep drop back down into last week's low. The rally from June 8th has now brought the dollar back up near the top of the down-channel, near 95.32 (today's high was 95.15) and we'll soon find out if the dollar can break out, which would be confirmed with a high above its June 1st high at 95.90.


Gold continuous contract, GC, Weekly chart

Gold has made it back up near its May 2nd high at 1306 (with today's high at 1300) and I see the potential for it to reach its 200-wma near 1313. But rather than a bullish breakout I'm expecting the rally off the May 31st low to be just a test of its previous high (or slightly higher) but with bearish divergence. I think we'll see at least another leg down (probably a sharp decline) to create a larger correction off the May 31st high before potentially setting up the next large rally. That's the bullish pattern but there's also still a good chance gold will return to its December low (1045).


Oil continuous contract, CL, Daily chart

As expected, oil dropped out of its rising wedge last Friday and if the wedge is the correct interpretation of the pattern we should see a relatively quick retracement of it (so back to the April 5th low at 35.24, perhaps in a month's time). It now looks like a completed A-B-C bounce off the January low and while the larger pattern is a little unclear, there is the potential for oil to drop below the January low near 26. Assuming it will continue to drop from here we'll be able to see if the decline becomes impulsive (bearish) or gets choppy (potentially bullish).


Economic reports

Tomorrow morning we'll get the CPI numbers, which are not expected to change much, and the Philly Fed for June, which is expected to show improvement to +1.0 following May's -1.8. We'll also get the unemployment numbers. More than likely our market will be reacting more to what's happening overseas.


Conclusion

The market was a little nervous heading into today's FOMC announcement but in reality the market pretty much has the Fed figured out and knows it's trapped between a rock and a hard place. Still, you never know what the Ph.D. numbskulls will dream up next. The real worry is the Brexit vote next week and that means another week of pins and needles while watching the polls, which at the moment has the Brexit vote outnumbering the Bristay vote. It's the uncertainty that's keeping traders awake at night. BTW, if you're one of those who can't sleep because you're worried about your positions then may I suggest trimming your positions. Your health is far more important than trading, especially since you could make a million and then die before you get to play with it. Play now and live longer.

One thing to think about into next week, especially if the market heads a little lower but looks like just a 3-wave pullback, is that we could see a sell-the-rumor, buy-the-news following the Brexit vote, no matter which way the vote goes. And if the market remains depressed but the Brexit vote results in a Bristay I can only imagine the rally that would follow that vote. We'll have next Wednesday to see if a decent trading opportunity is setting up on the long side but for now I'd stay cautious since I think we're looking for at least a larger pullback, if not something a lot more bearish, before thinking of buying the dip. If we get a bounce back up tomorrow, look it over carefully for a shorting opportunity and remember to keep your trades short-term (days at the most) since volatility could quickly make a big move against (or with) you. Stay safe.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Too Many Seats

by Jim Brown

Click here to email Jim Brown
Editor's Note

Airlines went crazy with low fuel prices last year and added capacity like there was no tomorrow. Unfortunately, tomorrow came and so did rising fuel prices with expectations for even higher prices in Q4.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

JBLU - JetBlue - Company Profile

JetBlue Airways Corporation, a passenger carrier company, provides air transportation services. As of December 31, 2014, the company operated a fleet of 25 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 Embraer E190 aircrafts. It also served 93 destinations in 28 states in the United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 19 countries in the Caribbean and Latin America.

Business was good until all the airlines began adding capacity at the same time. The discount airlines were particularly aggressive. In order to fill that extra capacity they increased the number of discount seats and overall pricing went down. Now they have plenty of passengers but their revenue per mile has declined. They are still making money but with rising fuel prices they are going to have to raise ticket prices and that will dampen demand.

Last week JetBlue said May traffic measured in revenue passenger miles of (RPMs) rose +10.7% from 3.47 billion to 3.84 billion. Over the prior 12 months available seat miles (ASMs) rose 12.1% to 4.54 billion. The load factor or the percentage of seats filled by passengers declined from 85.7% to 84.6% because the rapid expansion of capacity outweighed the traffic growth generated by the discount tickets. That means the revenue per available seat mile (RASM) declined -7%.

The airline lowered guidance for RASM to decline 7.5% to 8.5% for Q2 compared to prior guidance for a 7% decline. They also lowered ASM growth from 8.5%-10.5% to 8.0% to 9.5%. They do not need to add additional capacity if they cannot fill the seats they already have.

Factor in the strong dollar, rising fuel prices and the increased terrorist activity and the outlook for profits is declining. Since the Belgium airport attack airline traffic has slowed. People do not want to be blown up while waiting in a security line. Add in the Zika virus that has disrupted traffic to Latin America and the Caribbean and that is another reason seats are empty. On the positive side JetBlue was accepted by the DOT to operate scheduled flights to Cuba. However, compared to their total capacity those few weekly flights will not move the needle.

Earnings July 26th.

JBLU shares have already declined significantly. They fell sharply in early May when they reported April traffic numbers. When the numbers did not improve in May they declined again starting on June 10th. JBLU was a rocket ship when it rallied from $5 to $24 in 2015 but we are headed for a round trip with shares back at $16.66 today. It has been a series of disappointing events one after another. I think we will see single digits again soon because of all the events impacting traffic and earnings I discussed above.

With a JBLU trade at $16.50

Short JBLU shares, currently $16.66, stop loss $17.65

Optional

Buy September $16 put, currently $1.05, no initial stop loss.




In Play Updates and Reviews

Fed Going on Vacation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The post Fed bounce barely lasted until Yellen finished speaking. When she folded her press conference notebook and walked out the door the market started moving lower. The selling accelerated at 3:30 with the S&P falling more than 10 points and the Dow -100 points in the last 30 minutes of trading.

The Fed indicated there could still be 2 hikes this year but more than likely only 1 hike and probably late in the year. Many analysts are now saying no hikes in 2016. The Fed appears to be worried about a decline in the U.S. economy, weakness in the global economy and they were concerned about the Brexit vote. The announcement and economic outlook suggests the Fed is going on a rate hike vacation until December.

Pushing rate hikes months into Q4 or even beyond weakened the financials and there was heavy market on close selling.

This is going to be a very heavy option expiration cycle with more than $1 billion in S&P options expiring This is going to make Thursday and Friday very volatile with very high volume.




Current Portfolio





Current Position Changes


NVAX - Novovax

The long position was entered at the open with a trade at $6.65.


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


CSII - Cardiovascular Systems -
Company Profile

Comments:

No specific news. Down slightly in a weak market.

Original Trade Description: June 13th.

Cardiovascular Systems, a medical technology company, develops, manufactures, and markets devices to treat vascular diseases in the United States. It offers peripheral arterial disease products, including Stealth 360° Peripheral Orbital Atherectomy System (OAS), Diamondback 360 Peripheral OAS, Diamondback 360 60cm Peripheral OAS access device, and the 4 Diamondback 360 French 1.25 Peripheral OAS access device products for treating a range of plaque types, such as calcified plaque, in leg arteries both above and below the knee and address many of the limitations associated with existing surgical, catheter, and pharmacological treatment alternatives, as well as Diamondback 360 Coronary OAS, a catheter-based platform to facilitate stent delivery in patients with coronary artery disease.

In the last quarter revenues rose 7%, gross margin rose from 77.8% to 80.4% and operating expenses decline -5%. They expect to reduce expenses by another 7% in the current quarter. Coronary revenues rose +31%.

With more than 18 million Americans suffering from Peripheral Artery Disease (PAD), which is the accumulation of plaque in the peripheral arteries, their market is booming. Coronary Artery Disease is a leading cause of death in the USA. With more than 40% of the population already diagnosed and probably another 20% undiagnosed the market for their products is also growing rapidly. With the baby boomers retiring and these health problems becoming more life threatening as they age the number of "interventions" as my cardiologist calls them is growing rapidly. Stenting any patient with any symptoms of heart disease is becoming more common than tonsillectomies for children. More than 600,000 Americans die from heart disease annually. That is equivalent to 6 jumbo jet crashes every day.

In Q1, Broadfin Capital added a 1.46 million share stake in CSII or 4.47%. Point72 Asset Management added 102,000 shares. Shares have broken out of resistance at $16 and continue to creep higher.

Earnings are August 3rd.

There was only a minor decline today in a very weak market.

Position 6/14/16:

Long CSII shares @ $18.16, see portfolio graphic for stop loss.

No option recommended because of wide spreads.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Goldman downgraded Cisco on rising strength in HP Enterprise, which owns Aruba. "We believe HPE has a much more rounded networking portfolio with the Aruba asset, as well as a much stronger focus on enterprise IT infrastructure. HPE shares rose on the news.

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.



NVAX - Novavax - Company Profile

Comments:

No specific news. Shares up big at the open but faded with the market.

Original Trade Description: June 14th.

Novavax, Inc., a clinical-stage vaccine company, focuses on discovering, developing, and commercializing recombinant nanoparticle vaccines and adjuvants. The company produces its vaccines using its proprietary recombinant nanoparticle vaccine technology. Its product pipeline includes respiratory syncytial virus (RSV) vaccine candidates for elderly and maternal immunization that are in Phase III clinical trials, as well as pediatric RSV candidate, which is in Phase I clinical trial; seasonal quadrivalent influenza and pandemic H7N9 vaccines, which are in Phase II clinical trials; vaccine candidate against Ebola Virus that is Phase I clinical trial, as well as combination respiratory vaccine candidate and seasonal influenza vaccine candidate that is in pre-clinical trial; and rabies G protein vaccine candidate, which is in Phase I/II clinical trial. The company also has pre-clinical stage programs for various infectious diseases, including the Middle East respiratory syndrome coronavirus; and develops technology for the production of immune stimulating saponin-based adjuvants.

Novavax is using a new proprietary model for vaccines that does not require the long incubation time and the annual reformulation. They are far along in their trials compared to other companies and these vaccines can be given to children.

The top line State III data for the RSV F vaccine is due out in Q3 and they already have a fast track designation from the FDA. The drug could be commercially available by mid-2017. This drug could generate $1 billion in sales. While there is always the potential for a trial to fail, this initial drug has already progressed through all the early and mid stage trials. Novovax also has $434 million in cash so plenty of liquidity to continue the process.

Earnings August 9th.

Analysts are predicting a 100% gain for NVAX over the next year and that is attracting new investors today. With their advanced pipeline they could be an acquisition target. Shares only pulled back about 50 cents in the market weakness over the last three days and they posted a gain in today's weak market.

Position 6/15/16:

Long NVAX shares @ $6.65, see portfolio graphic for stop loss.

No options recommended because of price.



UIS - Unisys Corp - Company Profile

Comments:

No specific news.

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

GOGO - Gogo Inc - Company Profile

Comments:

No specific news. New historic low at the close.

Original Trade Description: June 11th.

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.

Position 6/13/16:

Short GOGO shares @ $8.99, see portfolio graphic for stop loss.

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



LE - Land's End - Company Profile

Comments:

No specific news. Shares rebounded with a sector bounce. Some stocks up more than 6%. Missed out stop loss by 5 cents.

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, see portfolio graphic for stop loss.





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