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Daily Newsletter, Saturday, 8/27/2016

Table of Contents

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

Market Wrap

Good Dove, Bad Hawk

by Jim Brown

Click here to email Jim Brown

Janet Yellen and Stanley Fischer played good cop, bad cop on Friday but it translated into good dove and bad hawk.

Weekly Statistics

Friday Statistics

Janet Yellen caved in to the pressure and spoke about the chance for a rate hike in 2016 but there were so many qualifiers that nobody believed her. The market rallied on the seemingly dovish comments. The most hawkish comment Yellen made was "In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months." That is hardly a warning to prepare for a September to remember. Stocks rallied after she qualified that with several more sentences about data dependent conditions would have to be met. The lack of specificity on a timetable suggested a hike would happen later rather than sooner.

Two hours later Vice Chairman Stanley Fischer warned that September was not only a live meeting but potentially the first of two hikes over the next four months. When Fischer was asked in a live interview if the market should prepare for a rate hike in September and maybe again in December, he replied "Yes, if the data cooperates." He warned that the country was at full employment and a strong jobs report next Friday would have to be taken into account at the September meeting. He also tried to correct the lack of focus in Yellen's comments saying, "Her comments were consistent with a September hike and possibly two hikes this year, but the Fed will not know the course of policy until it sees the data." He warned that inflation was nearing the Fed's 2% target and the Fed should be preemptive rather than reactive meaning it should hike in advance rather than waiting for all conditions to be fulfilled before acting.

Fischer's demeanor was compared to somebody that wanted to make sure there was at least one hike in 2016 so he was trying to ratchet up expectations for two just to guarantee at least one hike. If you constantly prepare everyone for two hikes then only one hike becomes the middle ground where everyone can agree.

The Dow spiked +122 points to 18,572 on Yellen's comments, fell -237 to 18,335 on Fischer's comments and then rebounded +63 points into the close. Volatility returned for several hours on Friday.


St Louis Fed President James Bullard said Friday he favors raising rates in September and then doing nothing for the next two years. Bullard recently converted to a dovish stance and is now the most dovish of all the voting members. He believes the economy is strong enough to move rates away from nearly zero but is not expected to be strong enough for further hikes for a long time. He pointed to the anemic GDP growth projected to be only 2% through 2018 as a reason the Fed should not move aggressively. He believes bad rate guidance has hurt the Fed's credibility.

Atlanta Fed President Dennis Lockhart said "I can see two rate hikes as possible with three more Fed meetings in 2016."

The chance of a September rate hike rose to 36% from the 18% chance I posted last weekend. The odds of a December hike jumped from 53% to 64% over the last week. Rate hikes are coming and the market is now pricing in at least one before the end of 2016.



The first revision of the Q2 GDP edged down slightly from 1.2% to 1.1% growth. That compares to 0.83% in Q1 and 0.87% in Q4. Needless to say the growth is very anemic and Yellen could easily wait until 2017 to hike rates because of the slow growth economy.

Consumption added 2.94% to the GDP while fixed investments removed -0.42%, inventories -1.26% and government -0.27%. Exports were the only other positive component with a 0.10% gain. Corporate profits declined -1.19%.

There are worries the current economic cycle is coming to an end. The current economic expansion has lasted 7 years and is the third longest ever. However, the Q3 outlook is still positive at 3.4% according to the latest Atlanta Fed real time GDPNow forecast. Using Stanley Fischer's preemptive model, September would be the right month to hike but what if the forecast was wrong? That is why Yellen's "wait for the data" stance is probably the one that will win.



The final revision in Consumer Sentiment for August declined minutely from 90.4 to 89.8. That is the lowest level since the 89.0 in April and the second lowest since the 87.2 last September. Sentiment is still fading from the 11-year high in January 2015 at 98.1 and the outlook is bearish. The present conditions component fell from 109 to 107 and the expectations component rose slightly from 77.8 to 78.7.

The next several months in an election year typically see a decline in consumer sentiment. In the period from July-Jan in 2012, the average was 75.3 with a low of 72.3 suggesting we have farther to fall. Politicians are telling consumers how bad things are and how they are going to fix it. Unfortunately, the promises never come true and consumers are left with the low outlook until the next spring.

On the positive side, the low mortgage rates and falling gasoline prices are helping to support sentiment.


We have a full calendar next week with the employment reports and the national ISM Manufacturing Index. Any of those events can move the market but the big one to watch is the Nonfarm Payrolls on Friday. The expectations are for a reading of 160,000 but there are whisper numbers at 180,000. Any number over 200,000 is almost a guarantee of a rate hike at the meeting on September 20th. That means the market will be very cautious on the lead up to Friday if the ADP report on Wednesday is strong. Currently the forecast is for a gain of +165,000 jobs.

The ISM Manufacturing Index is struggling to hold over 50 after a reading of 52.6 for July. The manufacturing sector has shown spotty results in the various regional reports with the Philly Fed Manufacturing survey barely posting a gain with +2.0 last week. The Richmond Fed Manufacturing Survey fell from +10 to -11 last Tuesday. Factory orders have been in negative territory for several months. This makes the ISM important for the Fed's rate hike outlook.


The Herbalife (HLF) war heated up again on Friday. Bill Ackman, who has a $1 billion short on HLF in his Pershing Square hedge fund, said he was contacted by Jefferies to see if he was interested in buying Carl Icahn's 17 million share stake. They contacted him in case he was interested in buying some shares to cover his existing short. The story made headlines all day with Ackman hyping the sale attempt saying Icahn was selling the shares because "Herbalife is toast" under the new marketing plan demanded by the government. Icahn was contacted during the day but had no comment. The story started with an article in the Wall Street Journal.

After the bell, Icahn announced he bought another 2.3 million shares. After being down as much as $4 intraday to $57, the stock rallied to trade over $64 in after hours. Icahn has permission from Herbalife to acquire up to 35% of the company. After Friday's acquisition, his stake has risen to 20.8%.

As the smoke cleared late in the day, Icahn said he never gave Jefferies permission to shop his position, worth more than $1 billion. Jefferies then said it never received a sell order from Icahn or anyone at his firm. Both of those claims could be "technically" correct but factually untrue. Icahn and Jefferies could have been testing the water after shares have declined for three weeks. If a willing buyer was found, Jefferies could have communicated the price back to Icahn and then a decision could have been made. Unloading $1 billion in stock in a questionable company would be a challenge. Icahn could not wake up one morning and just put in a sell order and have it executed. There are 93 million shares outstanding and Icahn now owns roughly 20 million. Average daily volume is 1.9 million. It would decimate the price to have 20% of the stock suddenly available for sale. Until Friday's purchase, Icahn's average price was in the $32 range. He may have a huge paper profit but until those shares are sold, there is no actual profit.

Several times over the last three weeks I tried to come up with a long-term put option trade that would work but the premiums were sky high and the bid/ask spreads too wide. Nearly everyone believes the long-term outlook under the new government mandated marketing plan, is going to mean a lot smaller profit and a very small sales force. The new plan says the majority of commissions must come from selling the product to retail customers rather than signing up new distributors. That is going to dramatically slow sales because the distributor workforce is going to evaporate.


Tesla (TSLA) won antitrust approval from the FTC to acquire SolarCity (SCTY). While nobody expected any objection, the early approval from the FTC means the waiting period has expired. Elon Musk will still have to receive approval from SolarCity shareholders. Those investors holding SCTY shares would receive 0.11 shares of Tesla per share of SCTY. Today that is worth $24.20 and Musk initially offered $26.50-$28.50 per share. Shares were trading over $27 when the final agreement was announced. Since Musk and his cousins are majority shareholders in SCTY and they have agreed not to vote their shares it will be interesting to see of the remaining shareholders actually vote for the take-under.



Shares of Pure Storage (PSTG) erased a 13% gain to close negative after reporting earnings. The company had a Q2 loss of 16 cents that was better than the 23-cent loss analysts expected. Revenue surged 93% to $163.2 million and beat estimates for $155.2 million. They guided for Q3 revenue in the range of $187-$195 million and analysts were expecting $191 million. Volume was 8 times normal and shares spiked to $13.50 at the open after a prior close at $11.82. Almost immediately, sellers appeared and shares fell back to $11 intraday and closed at $11.38. JMP Securities blamed it on the weakness in the storage sector. Nimble (NMBL) Storage did the same thing early in the week. This is related to the warnings from Seagate that demand from cloud companies is slowing.


I think the key here is the rapidly growing size of disk capacity. With 8 terabyte drives now common and 10 terabyte drives coming, it takes a lot fewer drives to hold the rapidly growing cloud data. Three years ago, a 2 terabyte drive was the new hot commodity.

Three years ago, a "high capacity" server had the capacity to hold 16 drives. SuperMicro (SMCI) recently announced a 90-drive server. The amount of data that one server can now hold is off the scale of human comprehension, at least for this human. A terabyte is 1,000 gigabytes or in round numbers 1 trillion bytes. Using the new 10 terabyte drives and the 90-drive server there would be more than 900 terabytes of data on one server. You lose some in the formatting process and some in your RAID configuration, but that is still a lot of data.

To put it into perspective, the Library of Congress claims to have about 600 terabytes of data in its files. Ancestry.com has 600 terabytes of data that contain all the census data on every individual from 1790 to 1930. Yahoo has about 100 terabytes in its historical website files since inception. Pictures are big but the Hubble Telescope has only collected 45 terabytes of pictures in its 20-year history. To backup one terabyte of data requires more than 220 DVDs.

The bottom line is that it takes far fewer drives today to hold much more data and storage companies have discovered the law of diminishing returns.

SuperMicro Servers

Ulta Salon (ULTA) finally stumbled. The company reported earnings of $1.43 compared to estimates for $1.39. Revenue was $1.07 billion compared to estimates for $1.06 billion. Same store sales rose 14.4% compared to 12.9% analysts expected. However, the retailer said it expected earnings of $1.25-$1.30 for Q3 and analysts were expecting $1.30. That one sentence caused the spectacular gains for the last six months to come to an end. This is definitely a buy the dip stock but wait until a rebound begins.


Autodesk (ADSK) reported a loss of 5 cents compared to estimates for 13 cents. Revenue of $550.7 million declined -10% but still beat estimates for $512 million. Autodesk is moving from a purchase model to a cloud subscription model and that always decreases revenue in the short term but increases it in the long term. Total subscriptions rose by 109,000 to 2.82 million.


This is the final week for stragglers reporting Q2 earnings. Palo Alto networks, Salesforce.com, Broadcom, Ciena, and Ambarella are the highlights for the week. There are still some retailers reporting with HAIN, ANF, DSW, FRED, GIII, ISLE, NCTY, CHS, FIVE, SCVL, BEBE, LE and LULU closing out the sector earnings.


More than 98% of the companies in the S&P already reported earnings for Q2 and the final results are available. Some 71% have beaten on earnings and 53% beat on revenue. Earnings declined -3.2% for the quarter making it the fifth consecutive quarterly decline. Revenue declined -0.2% and the sixth consecutive quarterly decline. For Q3, 77 companies have issued negative guidance and 33 have issued positive guidance.

Q3 earnings are expected to decline -2.2% and Q4 should see a +5.5% rebound in earnings growth. Revenue is expected to rise 2.2% in Q3 and 4.9% in Q4.

Apple CEO Tim Cook vested in his five-year anniversary bonus and it was a whopper. On Friday, Cook converted 1.26 million restricted stock units to common shares worth $135 million. He sold 990,117 shares to net $35.8 million after taxes. Cook now owns 1.3 million Apple shares and 3.5 million unvested stock units. Shares declined slightly on Friday but it was likely market related rather than Cook's share sale.


Amazon (AMZN) said it was going to build three new brick and mortar book stores in Chicago, San Diego and Portland. The company already has a large store in Seattle that it used to prove the concept. Amazon has many square miles of merchandise in inventory and they view these stores as a showroom for their hot items we well as books. Devices including the Kindles, Fire TV and Echo sell well when people can touch them and learn about their features. Amazon can also use the stores as test centers to see how customers react to new devices or new features.

Amazon's electronic devices are the top sellers on their website but they are just scratching the surface in the consumer market. Multiple analysts were saying Amazon should have bought Best Buy a couple years ago to get a jump start on showrooming their own products nationwide.

Amazon also announced Amazon Vehicles, an online platform for users to research cars, auto parts and accessories. The platform will include specifications, images and reviews for a large number of car models. Users will be able to compare prices and features. Analysts believe this is a prelude to selling cars on Amazon at some point in the future.


Amazon claimed another victim on Friday. Rackspace (RAX) said it was going to be acquired by Apollo Global for $32 a share or $4.3 billion. Amazon and Rackspace were fierce competitors in the cloud space but in the end, you cannot compete and win against Amazon. Rackspace pioneered a cloud operating system called OpenStack. A company could install its own datacenter and then choose OpenStack cloud services to move files, apps and services around to multiple cloud locations. That means the company would never be locked into one location and maintained complete flexibility. The product was very successful but Amazon Web Services (AWS) continued to take customers away from Rackspace. Eventually Rackspace partnered with Microsoft to sell and support the Azure cloud. RAX even tried to partner with AWS and sell a higher priced version of AWS that included a strong customer service component. Amazon has a bad reputation for customer service for AWS. You are pretty much on your own once you contract for cloud space.

Rackspace finally raised the white flag and gave up competing with the 800-lb gorilla. It will be interesting to see what Apollo will do with the company since RAX has tried multiple product offerings and been crowded out by Amazon at every turn. Analysts believe Amazon will eventually push even Google to the sidelines. AWS has already won the market share war and now they are just picking up the stragglers as they increase that share.


Oil prices faded late in the week after the Saudi oil minister Al-Falih said an oil output freeze would be "positive" if it happened but ruled out a production cut. "We will be willing to listen to our colleagues, what they have to offer in that area. I do not believe an intervention of significance is required." These comments were seen as evidence Saudi Arabia may not be totally on board with the concept.

"There is the freeze that is official, and there is the freeze that is practical," Al-Falih said. "Today, when you think about it practically, many countries today are at their capacity. Their room for an increase are limited, certainly for the short or medium term."

I wrote about this last week. With most OPEC countries already at maximum production, announcing a freeze would just be putting a new name on maximum production. However, Libya is slowly coming back online as well as Nigeria and neither of those countries are going to agree to a production freeze at their current output levels. Iran and Iraq are also increasing production so their participation is questionable.

The rebound in prices stalled at $48.50 and once past Labor Day we should see inventories build faster and prices decline.


Active onshore rigs declined -2 to 489 but oil rigs were flat at 406. Gas rigs fell -2 and offshore rigs declined -1. It will be interesting to see if that 8 week rebound in rigs can be sustained, decline or increase further. I suspect it would take $50 oil or higher to really get a lot of rigs off the sidelines.


 


 

Markets

The markets continue to tease investors with the potential for a move in either direction. Bulls see the repeated tests of the recent highs as evidence the market wants to go higher. Bears see the repeated failure at those highs as evidence the market wants to go lower. In this market, there is something for everyone but neither side is having any luck finding winning trades.

The S&P has moved sideways in a 40-point range since July 14th. That is the longest stretch of low volatility since before the financial crisis. Eventually this compressed market will break out of the consolidation trend and it could be explosive and it could move in either direction. The S&P has not made a 1% move in 35 sessions.

What happens over the next five weeks will likely set the stage for a longer-term move. With earnings expected to rise 5.5% in Q4 the most likely direction is higher once the volatility have passed. We are now one week into the six weeks of the year with the highest volatility with five to go. I seriously doubt we will continue sideways for five more weeks.

The S&P traded in a 27-point range on Friday and the widest range since this new high consolidation began in mid July. Despite the 27-point range, the index only lost -3 points to close at 2,169. The intraday low at 2,160 was a three week low. This could be the start of the volatility but it was also due to the conflicting comments from the Fed heads. There is still five days before the holiday weekend and volume should continue to be very low. After Labor Day is when the market should go directional. However, given the increased outlook for a September rate hike there could be a cloud over the market next week as well.

Support at 2150-2160 is the critical level to watch as well as the 2,193 double top intraday highs from the last two weeks. A break below 2,150 should retest 2,100.


The converging resistance on the Dow at 18,625 is still intact and the index lost -157 points for the week to test initial support at 18,350. The next test could be 18,250 and then 18,000. The Dow stocks are all in the post earnings depression phase and there are no catalysts to push the Dow higher.

The banks spiked slightly higher on Friday then faded into the close. The energy stocks are fading along with the price of oil. The drug stocks were weak on the drug pricing scandal surrounding Mylan. Retailers were slipping on poor sector performance and outlook. Every sector seemed to have some new headline that was weighing on prices.

On the positive side, there were no big losers. There were plenty of chances for Dow stocks to crater but the declines were only minimal. This suggests there are still plenty of dip buyers for the big caps.

If the 18,250 level breaks we could be in for a larger than normal decline ahead of the equity fund portfolio restructuring in September. Conversely, if a rally suddenly breaks out from here that takes the index well over 18,625 it could trigger significant short covering and price chasing by funds afraid the market is running away from them.



The Nasdaq managed to buck the trend on Friday thanks to a 1% gain in the biotech sector. The 62-point trading range ended with only a 6-point gain, but still a gain to lift the index a little farther above that critical support.

The biotechs have been the curse of the Nasdaq over the last several weeks. The biotech sector has seen big gains and losses and they are dragging the Nasdaq higher and lower depending on the day. The BTK closed at a five week low and slightly below support at 3,300. The sector could go either way next week but the Mylan price hikes are now old news. If I had to bet on a direction, it would be higher. That would benefit the Nasdaq and help prevent a meltdown under 5,200.




The Russell 2000 small caps are still in a positive trend. This is the most bullish index but it does have risk to the bottom of the channel at 1,225. As long as fund managers are nibbling at the small caps, the market is not in danger. When that changes, it could spell a change in direction for the big cap indexes first.


I am neutral on direction for next week. The Russell 2000 seems to be saying we will go higher but the Dow and S&P are at three-week lows. The big caps led us to new highs but have lost traction. The small caps were laggards on the early rally but are now the strongest section of the market.

This will be week two of the six most volatile weeks of the year and volume will be extremely light. That may be the saving grace because most institutional traders will be out of the office. It is the week after Labor Day that could set the tone for September.

I would continue to caution not to be overly long this week. Keep some cash available and a shopping list of stocks you would like to buy on a dip. We are long overdue for at least a minor bout of profit taking and it could appear at any time.

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.

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Random Thoughts


Bullish sentiment reversed sharply with a -6.1% drop to 29.4%. Considering this survey ends on Wednesday that was before the anguish over the Yellen speech. Neutral sentiment rose +2.9% and bearish sentiment +3.3%. Bullish sentiment is about 10% under the normal average and neutral sentiment is 10% above average. Bearish sentiment is almost exactly at the 30.5% long-term average. Something scared the bulls early last week and that could carry over into next week.



Yellen warned because average job gains of 190,000 over the last three months and expectations for inflation to rise to 2% over the next "several" years and expected growth in the GDP, we should expect the Fed to raise interest rates gradually over time. That was about as neutral as you can get. Yes, we are going to raise rates but it will be data dependent and could take years to return to normal. It was hardly a hawkish speech but Fischer handled the bad news for her.

In Yellen's speech, she laid out several scenarios for dealing with the next recession. After seven years of expansion, the next recession cannot be that far away but that distance is measured in years not weeks. The most common forecast is for a recession to appear around 12-18 months from now.

The common question for the Fed is what to do when a new recession appears if interest rates are too low for the Fed to react with rate cuts. She theorized that rates in the 3% range would be sufficient for a future rate cut cycle along with $2 trillion of QE in order to stabilize the economy, unless the recession was unusually long or severe. If a dramatic recession were to appear, she suggested the Fed might delve into other asset classes for QE to be effective. Those would be stocks, ETFs and corporate bonds. Japan is already in this mode and now that the door has been cracked open, the Fed would like to have that ability as well.

She kept referring to "future policy makers" suggesting she does not plan on being around a long time. Given that the Fed has never unwound a stimulus program without causing a market crash and recession and the current stimulus program is the largest on record, she may be planning an exit before that unwinding occurs so she does not have to face the political heat.

Full Yellen Speech


The University of Chicago broke with a current trend when it sent a letter to new students telling them what to expect when they begin their intellectual journey.

Once here you will discover that one of the University of Chicago's defining characteristics is our commitment to freedom of inquiry and expression. Members of our community are encouraged to speak, write, listen, challenge, and learn, without fear of censorship.

Civility and mutual respect are vital to all of us, and freedom of expression does not mean the freedom to harass or threaten others. You will find that we expect members of our community to be engaged in rigorous debate, discussion, and even disagreement. At times this may challenge you and even cause discomfort.

Our commitment to academic freedom means that we do not support so-called "trigger warnings," we do not cancel invited speakers because their topics might prove controversial, and we do not condone the creation of intellectual "safe spaces" where individuals can retreat from ideas and perspectives at odds with their own.

Fostering the free exchange of ideas reinforces a related University priority - building a campus that welcomes people of all backgrounds. Diversity of opinion and background is a fundamental strength of our community. The members of our community must have the freedom to espouse and explore a wide range of ideas.

While I applaud their stance, many others did not. There was an immediate Twitter war between those that want to coddle students and treat them like grade schoolers and those who were cheering the university's stance. Some donors polled their pledges saying they were not going to support the uncaring stance, saying individual feelings should be protected rather than be exposed to harsh opinions of others.

I believe the university made the right choice. They are the first college to challenge "safe spaces" in an acceptance letter. There are no safe spaces and trigger warnings in life. The sooner these pampered children understand that the better off they will be in the world. Just my two cents.


Burning Man celebrates its 30th anniversary this year. The event starts on Sunday and runs through September 5th. If you do not already have tickets, it is too late to consider going. The general admission tickets at $340 plus an $80 parking ticket, sold out long ago and the ticket resale sites have been getting 2-3 times the face value but those have now evaporated. The event has changed from a bonfire on the beach outside San Francisco to a weeklong event with 70,000 attendees participating in sex, drugs and rock and roll. It is called a combination of Woodstock, Circus du Soleil and Alice in Wonderland all taking place on the planet Tatooine. The event is capped by the ritual burning of the wooden man, which is more than 100 feet tall.

Everything is free with nothing for sale except coffee and ice. Costumes are worn all the time along with those wearing nothing at all. The event attracts all kinds of celebrities including Katy Perry, Jim Belushi, John Stamos, Susan Sarandon, Will Smith and dozens of other actors just blending into the crowd. Mark Zuckerberg helicoptered in last year and handed out hundreds of grilled cheese sandwiches before getting lost in the crowd. Celebrities assume new names for the week so they can fit in with the regular crowd. Elon Musk and his cousin Lyndon Rive came up with the idea of starting SolarCity while they were camped out at the event. Put it on your bucket list if you are a free spirit under 40. Burning Man


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"If you don't read the newspaper you are uninformed. If you do read the newspaper you are misinformed."

Mark Twain



New Plays

Continuing to Improve

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies continue to improve and reinvent themselves. Avis Technology is one of those companies. Shares are way below the $68 price back in 2005 but the product continues to improve.



NEW BULLISH Plays

AVID - Avid Technology - Company Profile

Avid Technology, Inc. develops, markets, sells, and supports software and hardware for digital media content production, management, and distribution worldwide. The company offers professional video creative tools, such as Media Composer product line that is used to edit video content; NewsCutter option and iNews systems for news production; Avid Symphony option, which is used during post-production; Media Composer Cloud solution that enables broadcast news professionals to acquire, access, edit, and finish stories; and Avid Artist DNxIO, a hardware interface for video production. It also offers media management solutions comprising Avid MediaCentral UX Web and mobile-based apps that provide real-time access to media assets for media professional; and Avid Interplay asset management solutions that offer network, storage, and database solutions to enable users to simultaneously share and manage media assets across a project or organization. In addition, the company provides Avid ISIS shared storage systems.

The constant stream of real time content you see on TV is not really real time. The reporter may be live but the constant background videos, the cutaways to apparently live videos and the canned footage of people, places and things, are all put together by video technicians in the production room using various software programs including the Avid products. They can mix, match, edit, cut and produce a stream of video from multiple sources in a matter of minutes thanks to the production software.

Avid has been around a long time. I can remember it being used back in the early 2000s as a cutting edge editing tool. Competition arrived from Adobe, Canopus, Grass Valley and others and it was a fight for market share. Avid never wavered from its quality commitment.

Today their award-winning control software is used by leading sound companies, music studios and post production houses. They have migrated primarily into sound recording and mixing and the products are in high demand. The "Avid Everywhere" platform is the industry's most open, innovative and comprehensive platform for content creation and collaboration.

Quote from Avid. "Media organizations and creative professionals use Avid solutions to create the most listened to, most watched and most loved media in the world, from the most prestigious and award-winning feature films, to the most popular television shows, news programs and televised sporting events, as well as a majority of today’s most celebrated music recordings and live concerts."

In their Q2 earnings report, they said platform licenses for Avid Everywhere were up 47% and cloud-enabled subscriptions were up 390%. More than 38,000 enterprise users were on the platform. There were more than 40,000 paying individual, cloud enabled subscribers, up 62% from Q1 and 390% from Q2-2015. Total bookings rose 32%.

Earnings Nov 3rd.

Shares rose from $7 to $9 on the earnings and traded sideways for the last two weeks. With a positive market, we could see a breakout over $10 and a 52-week high.

With an AVID trade at $9.85

Buy AVID shares, initial stop loss $8.85.

No options recommended because of wide spreads.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Big Volatility, Small Loss

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 lost only 2 points after a 19-point intraday range. Volatility definitely returned with the markets up big in the morning and down big in the afternoon but at the close the damage was minimal. The S&P lost only 3 points after trading in a 27 point range.

The dip buyers are alive and well but the sellers came out in force on the Stanley Fischer comments about the potential for two rate hikes over the next four months. The bulls rescued the indexes at the close but it was a volatile session.

I did not add plays on Thursday night for exactly this reason. We knew there would be volatility but did not know the direction. On Friday, we saw it in both directions so watching from the sidelines was the right call.




Current Portfolio


Stop Loss Updates

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


Profit Targets

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




Lottery Plays


Current Position Changes


ACAT - Arctic Cat
The short position remains unopened until $14.15. Low today was $14.67.


HUN - Huntsman
The long position remains unopened until a trade at $17.65. High today was $17.44.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

FDC - First Data - Company Profile

Comments:

No specific news. Shares continue to hold in a very tight range. The next headline could produce a strong move.

Original Trade Description: August 10th.

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. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

Optional: Buy Oct $14 call, currently .55, no stop loss.



HUN - Huntsman Corp - Company Profile

Comments:

No specific news.

Position remains unopened until a trade at $17.65.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Since the S&P futures are negative tonight I am going to put an upside entry trigger on the recommendation.

With a HUN trade at $17.65

Buy HUN shares, initial stop loss $16.15

Optional: Buy Nov $19 call, currently 60 cents. No initial stop loss.



MRO - Marathon Oil - Company Profile

Comments:

No specific news. Tied to oil price fluctuations.

Original Trade Description: August 17th.

Marathon Oil Corporation operates as an energy company. It operates through three segments: North America E&P, International E&P, and Oil Sands Mining. The North America E&P segment develops, explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in North America. The International Exploration and Production segment explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya, and the United Kingdom; and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea. The Oil Sands Mining segment mines, extracts and produces oil from Alberta and Canada.

Marathon reported a Q2 loss of 23 cents beating estimates by a penny. Revenue of $1.3 billion beat estimates for $1.19 billion. Q2 production averaged 384,000 Boepd and in line with guidance. U.S. production averaged 189,000 Boepd. They said they were adding extra rigs in Q3 thanks to new inventory of leases in the STACK play Oklahoma. Raymond James upgraded them from outperform to strong buy and Bank of America upgraded them from neutral to buy.

Earnings November 2nd.

Shares are poised to break over resistance at $15.75 as OPEC chats up the headlines about a possible production freeze in late September. The next material resistance is $20.

Position 8/18/16 with a MRO trade at $16.05

Long MRO shares @ $16.50, see portfolio graphic for stop loss.

Optional:

Long Oct $17 call @ 70 cents. No initial stop loss.



NTCT - NetScout - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July, NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.



RDN - Radian Group - Company Profile

Comments:

No specific news. No move today. Holding at 8-month high.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter, they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss, the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.

Optional:

Long Sept $14 call @ .15, no stop loss.




BEARISH Play Updates

ACAT - Arctic Cat - Company Profile

Comments:

No specific news. Minor loss in a weak market. Somebody is still providing support at $14.75.

This position remains unopened until a trade at $14.15.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

With a ACAT trade at $14.15

Sell short ACAT shares, currently $14.81. Initial stop loss $16.00.

There are some bad ticks recently and I would like to avoid being stopped out on a bad upside tick. Once in the position I will reset the stop loss.


 


FOXA - 21st Century Fox - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: August 23rd.

Twenty-First Century Fox operates as a diversified media and entertainment company in the United States, the United Kingdom, Continental Europe, Asia, Latin America, and internationally. It operates through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. It also broadcasts network programming; and operates 28 broadcast television stations, including 11 duopolies in the United States.

Lately Fox News has been in the headlines after, Gretchen Carlson, a female news anchor, sued Fox and President Roger Ailes for sexual harassment. Within two weeks of the suit being filed, Ailes resigned from the network. In an internal investigation, more than 25 former and current Fox News employees reported incidents. The investigation revealed that a former Fox News staffer, Laurie Luhn, had been given a $3.15 million severance package after she complained about harassment by Ailes who forced her into a sexual relationship through threats and intimidation. Luhn implicated others in the support staff, several of which have moved into management positions with the Ailes departure.

This week Andrea Tantaros, former co-host of The Five and The Outnumbered, filed suit against Ailes and the network claiming the division "operates like a sex-fueled, Playboy Mansion-like cult, steeped in intimidation, indecency and misogyny." She claims other executives under Ailes aided in the cover-up and named names in the suit. She said Ailes actions were "condoned by his most senior lieutenants, who engaged in a concerted effort to silence Tantaros by humiliation and retaliation.

The law firm handling the original Ailes harassment investigation said they anticipate Fox being forced to settle with the women who have filed claims and the numbers of women are in "double digits."

This kind of news is not something Fox wants to report. While the settlements are likely to be in the millions, it is the damage to the brand that is the most important. Fox has been recognized as a pro-family conservative organization and these kinds of continuing headlines will tarnish that image.

Shares have fallen to a 7-month low and are likely to continue falling until after the settlements and the headlines have passed.

Position 8/25/16:

Short FOXA shares @ $24.72, see portfolio graphic for stop loss.

Optional:

Long Oct $24 put @ .60, no stop loss.



RUBI - Rubicon Project - Company Profile

Comments:

No specific news. Holding at the lows.

Original Trade Description: August 22nd.

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings, RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

Position 8/24/16 with a RUBI trade at $8.90

Short RUBI shares @ $8.90, see portfolio graphic for stop loss.




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. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


CDNS - Cadence Design System - Company Profile

Comments:

Nice move on CDNS. We are now in the money on our September $25 call. Somebody bought 2,000 January $28 calls on Wednesday so the outlook is still bullish.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long Sept $25 call @ 35 cents, no stop loss.

Previously closed 8/15/16: Long CDNS shares @ $24.35, exit $24.45, +.10 gain



CIEN - Ciena Corporation - Company Profile

Comments:

No specific news. They report earnings on Thursday morning so we will have to decide on Tuesday evening whether to stay in the position or take profits on Wednesday.

We were stopped out on CIEN on July 28th after INFN posted ugly earnings and warned that demand was falling across the sector. This was mostly company specific to INFN but it did knock CIEN, JNPR and CSCO lower. There was no stop loss on the optional October call so we have retained it as a lottery play that CIEN moves back to the June highs by October expiration.

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

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

Previously closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.



HOV - Hovnanian Enterprises - Company Profile

Comments:

The trend is still positive but moving really slow until it moves over $2.

This is a long-term position on expectations HOV will return to profitability in Q3/Q4 as outlined by the CEO in the Q2 earnings.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.

Optional:

Long February $2 call @ 20 cents. No stop loss.



NAVI - Navient - Company Profile

Comments:

No specific news. Shares rebounded back above resistance but they could not hold the gains and fell back in the market decline on Friday. This is an October call and I think we will do ok once the breakout sticks.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long Oct $15 call @ 50 cents. No initial stop loss.

Previously closed 8/12/16: Long NAVI shares @ 14.57, exit $13.35, -1.22 loss



SKX - Skechers - Company Profile

Comments:

No specific news. Shares are holding at $25 but not moving higher. With the Olympics over the footwear stocks could begin to fade.

The September $22 put option is well out of the money but at the current price of 5 cents, we do not have much to lose. That is why it is called a lottery ticket.

Original Trade Description: August 1st.

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

Position 8/2/16:

Long Sept $22 put @ .55, see portfolio graphic for stop loss.

Previously closed 8/11/16: Short SKX shares @ $23.75, exit $24.25, -.50 loss.





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