Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/26/2016

Table of Contents

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

Market Wrap

Dip Buyer Rally

by Jim Brown

Click here to email Jim Brown

A sell program knocked the Dow to a -105 point loss in the morning but dip buyers were ready and waiting.

Market Statistics

The sell program was brief and could have been timed to coincide with the normal pre-FOMC bounce. Historically the day before a Fed-meeting announcement the market is positive. Launching a sell program into that positive market would be one way to unload some stocks without crashing a low volume market. Whatever the reason for the drop the dip buyers were waiting and the rebound was immediate. The Russell 2000 was a big gainer with a close at a new 52-week high. That is strongly bullish for the broader market.

The economic news was also good and helped to power the market higher. The New Home sales for June rose from 551,000 to 592,000 for a 3.5% rise. Analysts were only expecting a rise to 560,000. The Midwest saw sales rise 10.4% and West +10.9%. However, the Northeast saw sales decline -5.6% and the South declined -0.3%. The months of supply on the market shrank to 4.9 from 5.1 and a high of 5.5 months in the Jan-Mar period. The median home price rose sharply from $288,500 to $309,900 for a 7% increase.

Record low interest rates are helping this sales boom. Let us hope the Fed does not do anything to upset this trend when they release their meeting announcement on Wednesday.


The Richmond Fed Manufacturing Survey rebounded back into positive territory with a July headline number of 10, up from -9.6 in June. All of the internal components were positive for the first time in more than a year. New orders spiked from -17.3 to +15.0 and order backlogs rose from -12.1 to 1.0.

In the separate Services Survey, the headline number rose from zero to 8.0 for July.



Consumer Confidence for July declined slightly from 97.4 to 97.3. However, that June number was revised down from 98.0. The present conditions component rose from 116.6 to 118.3 and the expectations component rose declined from 84.6 to 83.3. Those respondents planning on buying a car declined from 12.7% to 10.8%. Homebuyers rose slightly from 4.8% to 4.9% and appliance shoppers rose slightly from 48.1% to 48.3%.


The big event on the calendar for Wednesday is the FOMC announcement and the potential for them to turn hawkish in their statement and increase expectations for a rate hike in September. Currently the market is not expecting a rate hike until early 2017 so any hawkish tone would be market negative.

Friday is the next hurdle day with the Bank of Japan stimulus announcement, the stress test results for the EU banks and the first look at the Q2 GDP. Since the core S&P earnings peak on Thursday for this cycle, the market could be fragile and react to those headline events.


It was all earnings, all the time on Tuesday. Even though Apple (AAPL) was the last to report I will discuss them first. They reported earnings of $1.42 compared to estimates for $1.38. Revenue of $40.4 billion narrowly beat estimates for $40.1 billion. They sold 40.4 million iPhones and slightly more than the 40.1 million expected. All of those estimates had been lowered dramatically over the last quarter. IPhone sales were down 17% but still beat those lowered estimates. For comparison, in the year ago quarter Apple had earnings of $1.85 and revenue of $49.61 billion.

iPad sales hit 10 million and the first gain in 10 quarters. Estimates were for 9.14 million. Mac sales were 4.3 million compared to estimates for 4.39 million. Services revenue rose 19% to $6 billion. Tim Cook said services revenue would be the size of a Fortune 100 company in 2017. Since Northwestern Mutual is the smallest company on the Fortune 100 with revenue of $28.1 billion I think Cook meant to say the Fortune 500. The 400th company on the Fortune 500 is Symantec with revenue of $6.5 billion.

Tim Cook said new customers switching from other carriers accounted for the largest percentage of quarterly iPhone sales Apple has ever measured. Apple is closing in on the sale of its billionth iPhone.

For the current quarter, they guided to revenue of $45.5 to $47.5 billion and analysts were expecting $45.94 billion. Sales in China fell -33% to $8.8 billion. Cook still bragged about the China business but it is becoming very competitive and having the highest priced phone is going to be a volume loser in the end.

Shares spiked $5 in the afterhours session to close at $101.88.


Twitter (TWTR) reported adjusted earnings of 13 cents compared to estimates for 12 cents. Revenue of $602 million missed estimates for $605.5 million. For the current quarter, the company guided to revenue in the range of $590-$610 million and analysts were expecting $682.8 million. While that guidance sounds bad, they basically guided for the same revenue as they just posted in Q2. Twitter has a lot of things in the pipeline that will not really get off the ground until Q4. They plan on live streaming one NBA and one NHL game per week along with a nightly sports highlight show covering 120 sports. They also contracted to live stream 10 NFL Thursday night games. There are dozens of other events they have lined up but most do not start until very late Q3 and early Q4.

Twitter is moving in the right direction and advertiser demand is very strong for their new services. However, they cannot book the sales until the events arrive. Average monthly users rose slightly from 310 to 313 million to break the decline streak over the last several quarters. The CFO said they were seeing sequential growth in monthly active and daily active users because of their change in format.

Shares fell $2 in afterhours trading.


Panera Bread (PNRA) reported earnings of $1.78 compared to estimates for $1.75. Revenue of $698.9 million barely beat estimates for $698.3 million. They guided for full year earnings in the range of $6.60-$6.70 per share. Analysts were expecting $6.68 per share. The CEO said, "At a time when other restaurants are feeling the impact of a slowing consumer environment, we are maintaining our momentum." Same store sales were up 4.2% to barely beat estimates for 4.1%. For the full year, the company is guiding for 4-5% sales growth. Shares rallied $7.89 in afterhours after being down -9.38 in the regular session.


The morning session was very busy for earnings with McDonalds the biggest loser and the biggest impact on the Dow with a loss of -$5.69. The company reported earnings of $1.25 that missed estimates of $1.38 by nearly 10%. Revenue of $6.265 billion also missed estimates for $6.281 billion. McDonalds blamed the strong dollar and weak international currencies for the miss.

Revenues at company own stores declined -8% to $3.917 billion but revenue at franchised locations rose 5% to $2.348 billion. Global comps rose +3.1% but that was less than the 6.2% rise last quarter. U.S. comps rose only 1.8% and was much lower than the 5.4% last quarter. The breakfast all day bounce is wearing off. McDonalds is trying to wean customers off the former $1 menu that hurt sales and profits. They are stressing the McPick 2 for $5 menu and some customers are converting.

The nearly $6 drop in MCD shares knocked around 40 points off the Dow. Were it not for a strong showing by Caterpillar with +$4 gain the damage would have been a lot worse.


Dow component Caterpillar (CAT) reported adjusted earnings of $1.09 compared t estimates for 96 cents. That was down from a revised $1.40 in the year ago quarter. Revenue was $10.3 billion, down from $12.3 billion. Management is cutting costs like crazy to offset the global decline in sales. The cut estimates for full year revenue to $40.0-$40.5 billion, down from $40-$42 billion. They cut earnings guidance from $3.70 to $3.55. The company said despite the guidance cuts and falling sales they were still optimistic about the global outlook although it was a tough economy and currency issues were a challenge.


Dow component United Technology (UTX) posted earnings of $1.82 that easily beat estimates for $1.68. Revenue of $14.87 billion also beat estimates for $14.7 billion. The company said backorders were growing rapidly. They now have more than 8,200 orders for Geared Turbofan aircraft engines. The company raised earnings guidance on the low end by 15 cents to $6.45-$6.60 per share. Revenue is expected to be $57-$58 billion compared to prior guidance for $56-$58 billion. They are working on cutting another $1.5 billion in costs, which will add $900 million in annual savings. Shares rallied $3.24 on the news.


Dow component 3M (MMM) reported earnings of $2.08 compared to estimates for $2.07. Revenue of $7.66 billion missed estimates for $7.71 billion. They lowered full year guidance from $8.10-$8.45 to $8.15-$8.30. Analysts were expecting $8.23. Shares were at a 52-week high and sold off on the lowered guidance.


Under Armour (UA) reported earnings of 1 cent that included a 3 cent charge for the Sports Authority bankruptcy. That matched analyst estimates. Revenue of $1.0 billion rose 28% and were in line with estimates. The company reiterated its guidance for full year revenue for $4.925 billion and a 24% increase. Earnings are expected to rise 8-9% to $440-$445 million. In an effort to replace Sports Authority they have entered into an agreement with Kohl's (KSS) to sell apparel, accessories and footwear at more than 1,100 stores all across the U.S starting on March 1st. Currently UA is sold in 11,000 stores in the U.S. compared to 24,000 for Nike. Kohl's said more than 400,000 customers searched the Kohl's website last year looking for the Under Armour brand. This could be a good deal for UA revenue but it may cheapen the brand since Kohl's is a low price discount retailer.


Gilead Sciences (GILD) reported earnings of $3.03 that beat estimates for $3.02 but were lower than the $3.10 in the comparison quarter. Revenue of $7.78 billion missed estimates for $7.85 billion and was down -5.7% from a year ago.

The company cut full year revenue guidance by $500 million to $29.5-$30.5 billion citing challenges in the Hep-C market including fewer patients and shorter treatment duration. This combined to produce lower revenue per patient. Shares suffered multiple downgrades.

The company is trying to increase sales of its HIV drugs as the Hep-C drugs decline in cost and usage. Sales of Hep-C drugs were down -32% in Europe but up 13% in the USA. Harvoni sales declined -28.9% but the replacement drug Sovaldi rose 5.2%. The newest Hep-C drug, Epclusa was only approved in late June but should see a sharp rise in sales in the coming quarter because of its lower side effects and single pill dosage.


Facebook and Boeing are the high profile stocks to watch on Wednesday as the earnings cycle rolls on. Thursday is the big day with Amazon and Google and the peak of the Q2 earnings cycle.


Analog Devices (ADI) said it was buying Linear Technology (LLTC) for $14.8 billion in cash and stock worth about $60 per share. That is a 24% premium to Monday's closing price on LLTC. The combined companies will be worth about $30 billion. The announcement hit the wires about 30 min before the close and shares of LLTC immediately jumped from $49 to $62 as shorts were forced to cover. That has got to be painful.


Crude prices continue to tumble on oversupply of refined products and the return to glut status for crude production. The API inventory report after the bell showed a 1.4 million barrel build in crude at Cushing Oklahoma along with a 2.3 million barrel decline overall. Crude prices declined to $42.65 on their way to $40. Some analysts now believe they could return to $35 but the general consensus is in the $38-$40 range. This will continue to weigh on energy equities. If the Fed turns hawkish and the dollar strengthens again it would be bearish for crude prices.

Morgan Stanley (MS) made a big splash in the oil market this morning when they said crude prices could spiral down as low as $30 this fall. They correctly repeated that the spike in prices was due to outages in Canada, Libya, Nigeria and elsewhere and those have mostly been resolved and the outages will not last forever. MS pointed out that the pace of production declines in the U.S. had slowed significantly and rigs were rushing back to work over the last four weeks.


Markets

The S&P rebounded from the 10-point decline this morning to close fractionally positive at 2,169. The current historic high is 2,175 from Friday. The S&P has traded in a narrow range from 2,155 to 2,175 over the last nine trading sessions. That is extremely narrow and the lack of volume suggests it is a controlled consolidation rather than a distribution phase. The difference is that a consolidation suggests there will be an upside breakout while a distribution phase suggests there will be a downside breakout. A distribution phase is generally accompanied by higher volume with advancing/declining volume roughly even. We are still averaging only about 5.85 billion shares a day and that is very light. Everyone is waiting for something to happen so they can trade in the direction of the trend.

The Fed decision at 2:PM on Wednesday could be a make or break event. If they maintain their lukewarm bias from the prior meeting, the market could move higher. If they turn more hawkish because of the stronger jobs and manufacturing reports, the market could turn lower. While nobody expects a rate hike in 2016 a hawkish tone could put the September meeting back into focus.

Hedgeye captured it perfectly in this cartoon. The rally is not over until Yellen turns hawkish.


Despite the fractional close on the S&P today the indicators are signaling weakness. They have not completely turned negative yet but they are suggesting the rally's strength is ebbing. A slip back to 2,115 or even 2,100 could be positive because it would allow some profit taking and the opportunity for new buyers to jump in.

However, the strength of today's rebound showed the dip buyers were ready and waiting so assuming the Fed does not spoil the party the market path may still be higher at least until the peak in the Q2 earnings cycle on Thursday.


Over the prior 8 days, the Dow had only traded in a 151-point range. That is very narrow for an index in the 18,500 range. On Tuesday that expanded after the -105 point drop after the morning sell program but the rebound put it right back into that prior range.

The number of Dow components reporting caused the early volatility and that is now behind us. There are still some components left but they are not the high profile variety.

The Dow established a new support level today at 18,400. That is the critical level to watch on future declines. A second break of that level may not be bought so quickly. Resistance is now 18,600 and support at 18,400. That is still a narrow range so any breakout could be significant after two weeks of dormancy.



The Nasdaq is still fighting the initial resistance band starting at 5,100 and has only managed to gain 10 points into that band. The large number of high profile tech earnings starting with Apple tonight and ending with Amazon and Google on Thursday should produce some extra volatility depending on how they report. The Apple earnings boosted the Nasdaq futures to a +29 point gain tonight but the S&P futures are holding at about +3 so not quite as bullish.



The Russell 2000 closed at a 52-week high with the breakout well above the 1205-1210 resistance level. This is a sentiment indicator for the broader market. If the Russell can add to its gains, the rest of the indexes should power higher as well.


I would not be adding new positions ahead of the Fed. There is too much risk they can say something that will cause significant volatility and possibly a market decline. I would be looking to buy a Fed generated dip once it appears to have run its course but not before Thursday. The post Fed markets have a tendency to swing in both directions before picking one on the day following the event.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Volatility Event

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Fed announcement at 2:PM on Wednesday is a opportunity for volatility. With economic data turning positive, the Fed is in position to spoil the party. With the Jobs report turning hot at +287,000 for June, the regional activity reports turning positive and Friday's GDP expected to jump to +2.4% there is a real danger the Fed could revert back to a rate hike posture. If this were to occur at 2:PM on Wednesday the market could react negatively. We risk nothing by waiting until Wednesday night to add new plays.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Dip Buyer Panic

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 moved from a lackluster decline on Monday to panic buying on Tuesday. The Russell closed at a 52-week high with a gain of 7 points to 1,217. The ten-day range bound trade under 1,210 was busted at the open but fell back on the morning sell program only to bust higher again as soon as the program ended.

The high close on the Russell suggests the broader market is heading for higher levels.




Current Portfolio





Current Position Changes


QURE - Uniqure
The short position in QURE shares was opened at $7.00.


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

AAOI - Applied Optoelectronics - Company Profile

Comments:

No specific news. 3-month high close on a 3% gain.

Original Trade Description: July 16th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.

This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.

Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.

Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.

Position 7/18/16 with an AAOI trade at $12.00

Long AAOI shares @ $12, initial stop loss $10.85.

No options recommended because of short duration trade.



ANF - Abercrombie & Fitch - Company Profile

Comments:

No specific news. 3% gain.

Original Trade Description: July 20th.

Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel. The company sells knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brand names. As of March 2, 2016, it operated through 754 stores in the United States; and 178 stores in Canada, Europe, Asia, and the Middle East. The company sells its products through its stores and direct-to-consumer sales.

Abercrombie has been pounded from the highs at $33 back in March after some disappointing earnings and weak outlook for the retail sector. Since then they have cleaned up their inventory levels and dumped a ton of bad product choices. Now they are heading into their heavy selling season and ready to go head to head with other stores.

The company has been in a restructuring period for over a year where they remodeled stores, dumped inventory and closed unprofitable locations. The drop from $33 to $16 took all the fluff out of the stock price and shares are moving higher today. They closed at a 2-month high on Wednesday.

If the market begins to roll over, these previously oversold stocks will look like a safe haven for investors looking for a bargain. This is Abercrombie's biggest selling season so sentiment should remain positive through Labor Day. The National Retail Federation said back-to-school spending will rise by 11.4% to $75.8 billion this year of which $9.54 billion will be on clothes. Apparel retailers like ANF get about 15% of their annual sales in the back-to-school season.

Earnings August 25th.

Position 7/21/16 with a ANF trade at $20.10

Long ANF shares @ $20.10, see portfolio graphic for stop loss.

No options recommended.



CIEN - Ciena Corporation - Company Profile

Comments:

No specific news. Nice gain to 8-week high.

Original Trade Description: July 23ed.

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.

On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.

After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.

Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.

Earnings are Sept 1st.

I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.

Position 7/25/16 with a CIEN trade at $20.35

Long CIEN shares, see portfolio graphic for stop loss.

Optional

Long Oct $23 call @ 70 cents. No stop loss.



CUDA - Barracuda Networks - Company Profile

Comments:

No specific news. Minor gain but a 10-month high close.

Original Trade Description: July 21st.

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher. Thursday's close was a 9-month high with a 1.7% gain in a weak market.

Shares are about to move over resistance at $21.25 from last November with the next major resistance at $30.

With a CUDA trade at $21.45

Buy CUDA shares, initial stop loss $19.25.

No options recommended due to wide spreads.



FLXN - Flexion Therapeutics - Company Profile

Comments:

No specific news. Very minor decline after Friday's 8-week high close.

Original Trade Description: July 18th.

Flexion Therapeutics, Inc. is a specialty pharmaceutical company that focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain.

In clinical trials the drug Zilretta reduced knee pain by 50% from the baseline from week 1 through week 12. The FDA said the results were enough to support a filing for U.S. approval. The current treatment is a corticosteriod injection that wears off quickly so Zilretta has a good chance of becoming the treatment of choice for current sufferers. Those over the counter drug patients would also be candidates.

Flexion said they can price the drug at $2,000 a year and that is well within normal insurance guidelines so getting insurance payments should not be a problem. Once Zilretta is in the market place and advertising has begun they expect it to produce more than $1 billion in annual revenue very quickly.

Last week they hired three new executives to prepare marketing plans and advertising so Flexion will be ready to go when the drug is approved. While there is no guarantee the drug will be approved, the FDA rarely suggests the clinical results are sufficient to apply for approval if it is not going to happen.

Recently hedge funds Millennium Management and Renaissance Technologies both bought 125,000 share positions.

Earnings are August 4th.

Shares spiked on May 26th to $17.35 on the news the FDA said they could submit the drug for approval. That excitement faded in June to $13 but shares have returned to a positive trend. If we only saw the shares return to $17.35 that would be a 10% gain but I believe they will pass that level on the potential for the approval of a billion dollar drug.

Position 7/19/16:

Long FLXN shares @ $15.89, see portfolio graphic for stop loss.

No options recommended because spreads are too wide.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. New historic high close.

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

Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.

Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain



SCTY - Solar City - Company Profile

Comments:

No specific news. Shares declined only 7 cents.

Musk said he had spoken with the largest investors in SolarCity and he expects a "super majority" to support the acquisition.

Shares are already nearing the $28 level and I expect Tesla will have to pay more than the $26-$28 it has offered to buy the company. I am still expecting a counter offer in the $30-$32 range.

Original Trade Description: June 27th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Update 7/18/16: SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available for customers. Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.



TWTR - Twitter - Company Profile

Comments:

Twitter reported adjusted earnings of 13 cents compared to estimates for 12 cents. Revenue of $602 million missed estimates for $605.5 million. For the current quarter, the company guided to revenue in the range of $590-$610 million and analysts were expecting $682.8 million.

Shares crashed to $16.50 in afterhours on the disappointing guidance. We added a $17 put on Monday so we should be able to capture some of the downside. The long position in the shares is to capitalize on the benefits of their new live stream efforts in Q3 and the potential for somebody to make an offer to acquire them. It will be interesting to see where the decline stops.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

Optional

7/25/16: Long Aug $17 put @ 62 cents, no stop loss.




BEARISH Play Updates

QURE - UniQure - Company Profile

Comments:

No specific news. QURE hit our entry trigger at $7 and the play is active.

Original Trade Description: July 19th.

UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.

In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.

Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.

Earnings August 25th.

Shares have been declining for the last week and are very close to a new low. We played this back in June when it was making that low and were stopped out for a gain when it rebounded. I think it will set a new low this time and probably sink to $5.

They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause.

Position 7/26/16 with a QURE trade at $7.00

Short QURE shares @ $7.00, initial stop loss $8.00.

No options recommended.



VXX - Ipath VIX Short Term Futues ETN - ETN Profile

Comments:

The VXX closed at 11.00 and a new historic low.

We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product, it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.

Position:

6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.





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