Option Investor
Newsletter

Daily Newsletter, Saturday, 9/10/2016

Table of Contents

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

Market Wrap

The Last Straw

by Jim Brown

Click here to email Jim Brown

The last straw is the event that finally breaks the markets back. Eric Rosengren was the last straw.

Weekly Statistics

Friday Statistics

The markets have ignored data point after data point for the last couple months with economic news weakening at every turn. The market has also ignored multiple Fed speakers offering multiple points of view that keep the Fed Funds Futures highly volatile. The market ignored the fifth consecutive quarter of negative earnings and a Q2 GDP revision at only 1% growth. After all, the Fed keeps telling us they are "data dependent" and when rate hikes eventually arrive, they will be gradual. The market ignored the hawkish comments from Mario Draghi when he failed to announce an extension to QE last week. The market ignored the BoJ Governor, Haruhiko Kuroda, when he appeared to have run out of options to save his sagging economy.

On Thursday the Fed funds futures were only showing a 15% chance of a rate hike in September. On Friday, Eric Rosengren was the last straw when he spoke about the need to hike rates sooner rather than later and implied the Fed would move in September. The Fed futures spiked to a 24% chance of a rate hike and the equity markets declined the steepest since the Brexit vote on June 27th.


There were complications. With a quadruple option expiration next Friday, portfolio managers and traders normally clean up their option positions on the Friday before that quadruple witching. That helped to increase the volatility. Also, over the prior two days I have seen sharp unexplained declines on no news on multiple stocks. They were mostly prior winners and I wrote in the Thursday newsletter it appeared fund managers were locking in profits and raising cash ahead of the Fed meeting on the 20th. There was likely some caution as well about the 15th anniversary of 9/11 on Sunday. Al Qaeda is fond of anniversaries and there is always the potential for a new attack in the USA.

When the combination of Draghi, Kuroda and the Fed all appearing to be near the end of their stimulus cycles, the next move would be rate hikes. Draghi's comments and lack of action were thought to have been the result of a call from the Fed suggesting a rate hike at the next meeting. In order to prevent further damage to the Euro, he elected to pass on further stimulus. When Rosengren, a former dove, came out strong on the need to hike rates, it was the last straw for the market. The weight of all those prior straws suddenly caused a high volume crash and the two-month consolidation pattern was broken.

Adding to the confusion was a sudden announcement that the Fed's most dovish governor, Lael Brainard, would speak on Monday at 1:PM on the last day before the quiet period begins ahead of the Fed meeting. If she has a hawkish tone, it will be a sure sign the Fed is planning on hiking in September.

I wrote last week after the several negative economic reports, if the FOMC was planning on hiking rates in September they would have to produce multiple speakers before the meeting to warn the market a hike was coming. Since the Fed claims it is "data dependent" the data was suggesting no hike. Since I wrote that, there has been a steady stream of hawkish comments and squeezing in Brainard at the last minute could be the final warning. However, if she maintains her dovish tone maybe she was recruited at the last minute to throw cold water on the hawkish comments from others. Hers will be the last speech before the Fed meeting.

I have written many times warning that when the 4th tightest range since 1928 finally broke it was going to do it explosively. Friday was explosive. Volume was 8.44 billion and 7.69 billion was down volume. Decliners were 10:1 over advancers. New highs fell from 736 on Wednesday to 94 on Friday.

In theory, 10:1 down volume is considered a capitulation day. That means everyone rushed to the exits at once and the weak holders were eliminated. While I would like to think that was the case, I seriously doubt it. Too many support levels were broken in one day and the market closed on the lows. I would expect Monday to be down as well as traders race to cover their margin calls.

Now that the range has broken, it is entirely conceivable that we could decline another 1-2% to prior support in the 2,100 range for the S&P and 17,925 on the Dow. Any declines below those levels would face the potential for a real washout to 17,000 and 2,050.

For the last two months we have seen dip buyers appear on every dip. They never appeared in volume but it was enough to keep the indexes in the consolidation pattern. Those dip buyers were obliterated on Friday.

The only economic report on Friday was the Wholesale Trade for July. Wholesale inventories remained flat after posting solid gains in the prior four months. Durable goods inventories rose +0.3% and nondurables declined -0.3%. Sales fell -0.4% with nondurable goods sales falling -1.0%.

The economic calendar for next week is heavily loaded for Thursday. The Philly Fed Manufacturing Survey is the most important but retail sales will be a close second. There is a strong possibility sales will be negative even though the consensus estimate is for a minor +0.1% gain.


This is a quadruple option expiration week and volatility could remain elevated. However, it would take a continued crash to push it higher than Friday's +39.9% spike to 17.50 on the VIX.


The Fedspeak on Friday caused treasury yields to spike to a two-month high with the ten-year yield rising to 1.672% compared to 1.52% on Wednesday after Tuesday's weak ISM and the lackluster Beige Book. Anyone who bought treasuries over the last two months has already lost in principal more than they will earn in interest over the term of the investment. If the Fed is truly about to embark on a rate hike cycle it is going to be very painful for holders of treasuries.

With $13 trillion in global bonds now offering a negative yield, there could be a race to the exits if it appears rates are going to rise. Switzerland and Germany are selling new 10-50 year debt with negative yields. That means the buyers will get back less money than they paid. This suggests those investors expect economic growth to remain stagnant for years.


Apple (AAPL) shares have collapses since their iPhone 7 announcement. Apple shares closed at $107.70 on Tuesday. I wrote in the Tuesday commentary, "Typically, Apple shares decline on the announcement. Active traders may want to pick up some puts on Wednesday morning. The September $107 puts with 10 days until expiration were $1.19 at the close. Apple shares could easily drop to $105 or so without any unexpectedly good news in the announcement." After Apple said it would no longer report initial sales numbers the stock fell harder than normal to close at $103 on Friday and was a major drag on the Dow and Nasdaq. That $107 put was worth $4.05 at the close on Friday.

Apple did not make any friends with the announcement and the realization the missing headphone jack rumors were true. In order to blunt criticism, Apple is including this cheesy dongle that will allow you to use your existing headphones on a new model 7 phone. However, Apple fans were quick to point out that it would be impossible to charge your phone and listen to music at the same time. Since battery life issues are a common complaint with Apple phones, it means you cannot listen to music when your phone needs to be recharged.

On the positive side, dropping the headphone jack allowed for 14% larger battery and upping the size to 1955mAh. Apple claims that will add 2 hours of battery life to a normal phone.


Apple fans were also excited about the new glossy "piano black" or glossy black color option. The phone looks really nice BUT Apple put a warning on their website that says the phones are prone to "micro abrasions" or scratching. Apparently, even with as little as one day of use, even when being especially careful, the scratches become easily visible and several weeks of use can trash the glossy aesthetics of the phone. Buyer beware, the new phone may look old relatively quickly.

Apple also said it was refocusing its efforts on self-driving cars. Apple closed several parts of the self-driving car project and laid off dozens of employees. The project code named "Titan" has struggled to make any progress. Sources said Apple was going to move away from actually building cars and concentrate on building self-driving technology that could be licensed to auto manufacturers.

Credit Suisse added Apple to their "Focus List" with a price target of $150. That analyst must have been smoking something funny when he issued that note.


Chipotle Mexican Grill (CMG) settled cases with more than 100 customers that became ill after eating at Chipotle stores. Terms of the settlement were confidential. Shares declined $10 with the market but they are still up $25 since Monday when Bill Ackman announced a 9.9% stake in the company.


Deutsche Bank (DB) is close to a settlement with U.S. regulators over past problems with subprime loans. The bank is expected to agree to a fine of $2.4 billion. Some analysts had expected a fine of up to $3.4 billion. The bank is also under fire for manipulation of foreign exchange rates, gold and silver pricing, and rigging of the borrowing benchmarks of Libor and Euribor. DB agreed to pay another $1.9 billion in 2013 on $14.2 billion in subprime loans where the loans were misrepresented.

Deutsche Bank also announced on Friday it was redeeming eight bond futures ETNs. The prospectus allows the bank to redeem them at any time at its sole discretion. The ETNs they are redeeming are LBND, SBND, BUNT, BUNL, JGBT, JGBL, JGBD and JGBS. Five of those are 3x leveraged ETNs. All of the ETNS had very low volume with some less than 1,000 shares a day.


JP Morgan (JPM) is no longer getting the respect it did in prior years. On Friday Macquarie cut its rating from outperform to neutral on valuation. The analyst price target is $70 with JPM at $67. That broker is not the only one turning negative on JPM. The last six ratings changes have been negative.

Macquarie - Outperform to Neutral
Bernstein - Outperform to Market Perform (Neutral)
Citigroup - Buy to Neutral
Berenberg - Initiated at Sell
Portales Partners - Sector Perform to Underperform
Nomura - Buy to Neutral

The analyst said JPM could find it difficult to "meaningfully improve" its return on equity in the future due to "higher-than-peer required capital buffers."


Mattress Firm (MFRM) posted revenue that rose 48.2% to $980 million but missed estimates for $1.0 billion. The company increased sales nearly 50% but was berated for missing estimates. Earnings of 57 cents also missed estimates for 65 cents. They opened 59 new stores and closed 49 stores bringing the total company operated stores to 3,482. They are being acquired by Steinhoff International for $64 or $3.8 billion including assumption of debt. That is the only reason the shares did not decline.


Crude prices have been very volatile the last several weeks. They have been buffeted by OPEC headlines claiming a production freeze was a possibility for several days and then no chance of a freeze for several days and then repeat. Prices have also been pushed around by the volatility in the dollar. A strong dollar means less dollars are needed to buy oil and a weak dollar sends oil prices higher.


The latest news on a potential freeze came from Russia and Saudi Arabia forming a joint venture to find a way to stabilize oil prices. In theory that means freezing or reducing production but in reality it was just one more headline that helped to support oil prices in September, a month that typically sees declines. The initial meeting of the two countries will be in October. If they were actually serious about stabilizing prices, they would meet immediately and announce a plan. This is just more headline spam to support prices in a weak period.


Active oil rigs rose +7 to 414 and gas rigs rose +4 to 92. Offshore rigs rebounded from the -10 the prior week with a +8 gain. This was related to the hurricane in the Gulf that shutdown 10-15% of the platforms along with those ten rigs.

The Gulf produces 20% of the U.S. crude and shutting down the platforms for several days was the reason oil inventories fell -14.5 million barrels last week. There was no monster surge in demand. It was simply a halt in production until the storm moved away. Anyone buying oil on that inventory headline has no clue how the sector works.


 


 

Markets

The consolidation pattern was broken by an abundance of events with the Rosengren speech getting the most blame. We will never know what actually triggered the strong selling but we were very overdue for a decline regardless of the reason. We sometimes forget that the market does not need a reason for a crash. Sometimes all the factors just line up at once and traders are caught off guard.

The strongest sectors over the last couple of weeks were the small and mid cap stocks. The biggest losses on Friday came from the small and mid cap stocks. No real surprise there. The Russell 2000 lost -3.1% while the Dow lost only -2.1%.

This was a good example of portfolio managers locking in profits ahead of 9/11 and the Fed meeting. I reported earlier, I saw some preliminary unexpected selling on Wed/Thr in stocks that had been strong gainers in past weeks. Suddenly they were down 2-3% on no news. This was the advance warning. That profit taking accelerated on Friday as the Fed fears escalated. Stops were hit and the selling became a cascade.

That means there was no material pause points. Every sharp intraday dip triggered new stop losses and new selling. The S&P closed at the low for the day.


The S&P crashed out of its recent congestion range and closed just below light support at 2,130. I do not expect it to rebound from that level. While the market crash could have been a one-day wonder, there should be more selling as a result of margin calls on Monday. There are three Fed speakers on Monday and Brainard speaks at 1:PM. I would not expect any material rebound until after her speech and then only if she remains dovish.

A continued decline would most likely stop in the 2100-2105 range. If that level breaks, we could be looking at 2,050 to 2,000. Given the strong volume on Friday and the 10:1 negative internals, there is a good chance the worst is over. That does not mean an immediate rebound but I would not expect any further "crashes" unless the Fed commentary turns even more hawkish.


All 30 Dow components were negative and 24 of them lost more than $1. Boeing and 3M were the biggest losers followed by HD, IBM, GS and UTX. There was no specific news on any of those stocks that would have caused them to decline -3% or more. This was simply more of the big cap weakness we have seen over the last several weeks. When the market decline accelerated the big caps were the first to be sold because they are the most liquid and the easiest place to raise a lot of cash quick. In times of market stress, sometimes you have to sell what you can instead of what you want to sell. For retail traders, selling the big caps raised cash to cover margin calls on stocks they wanted to keep.

The Dow has risk to 17,925-18,000 and we could easily see those levels on Monday if there is any follow through selling.



The Nasdaq was a wasteland on Friday. After setting a new high on Wednesday there was a minor drop on Thursday but the bottom fell out on Friday. The Nasdaq lost -133 points or 2.5%. The support at 5,200 was broken at the open and the continued decline was dramatic.

The 5,100 level is light support but there is a good chance we retest 5,000 on any multiday weakness. Any rebound will have a tough climb as traders exit along the way, thankful for the opportunity to recover some losses.

Note that almost all of the 30 biggest losers lost more than the top stock gained on the winners list. Only 12 Nasdaq stocks gained more than $1 and the 30th biggest gainer only added 29 cents.



The Russell 2000 fell right to the bottom of the uptrend channel and stopped exactly where we would have expected it to stop. Any further decline breaks the channel support again but the 1200-1205 level should be a pause point. A break below 1,200 turns a minor bout of profit taking into a rout and the 1,095 level comes back into focus.


Do not fight the Fed. If the Fed has decided they are going to hike rates in September regardless of the data, then get out of the way, because the market is going lower. I know it is irrational and a quarter point increase is nothing more than a mosquito bite in the long term scenario. It comes from decades of fearing a recession brought on by Fed rate hikes. The Fed has a gun with only 1 bullet. We are going to see a recession at some point in the next 18-24 months and the Fed is desperate to reload by adding some rate hikes to their arsenal. The higher the interest rate when we reach the next recession the more times they will be able to cut to slow those recessionary forces. They only have one bullet today and it is scaring them because they see the long-term outlook.

This economic expansion is now 7 years old and the third longest in history. The law of averages is working against the Fed and it is only a matter of time before trouble strikes. The sharp declines in the economic reports have awakened the Fed from its stimulus induced coma.

Monday's market will be driven by margin calls and Fed speeches. Brainard is the key to the Fed outlook. As the most dovish member of the group, if she changes her tone, look out below.

For the last couple of weeks, I have been warning to refrain from being overly long, keep some cash in reserve and make a shopping list of stocks you would like to buy on a dip. If you followed my recommendations, Friday was painful but not the end of the world. Now you have more cash to spend. Pull out that shopping list again, look at the charts and pick entry points that would be a best-case scenario. You never know when you will get that once in a year opportunity again.

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


This will be an interesting week. The graphic below is for the survey week that ended on Wednesday. The Nasdaq and the small and mid caps were making new highs. Bearish sentiment was declining with the losses evenly split between the neutral and bullish groups.

The survey that ends next Wednesday is sure to be dramatically different depending on the next two days of trading and the Fedspeak on Monday.



Fifteen years ago today (9/10) my son and I had just completed a presentation in Washington and were scheduled to fly back to Denver the next morning. I had plenty of time we were bored so we went to the airport and flew standby back to Colorado that night. I woke up the next morning to planes where we might have been passengers, crashing into the World Trade Center. It was a sobering experience about how quickly and unexpectedly your life can be over. Never take any day for granted.


In July 2001, a writer for Option Investor had just written a commentary projecting seasonal market movements for the rest of the year. The next day he received a cryptic email from a reader warning "In early September every market in the world will crash. You can bet on it." The actual email was a little longer but that is all I can remember today. We discussed it at the time trying to decipher what could cause the worldwide markets to crash. We could not reach a consensus that made sense and forgot about the email as some crackpot conspiracy theorist. A couple weeks after 9/11 somebody remembered the email. It had been deleted and there was no way to trace it backwards. We get thousands of emails a day and back then, we did not archive them.

I have often thought about that email and wondered why a terrorist, knowing he was going to die in a couple months, would be reading an option investing newsletter. It came to me one day that it was probably not anybody on a plane but somebody farther up the supply chain that actually had investments. Somebody, supposedly Bin Laden, funded the $500,000 spent by the hijackers for room, board, transportation and training. We have readers all over the world and quite a few in the Middle East. Who knows, that person may still be reading the newsletter today.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A teacher is never a giver of truth; he is a guide, a pointer to the truth that each student must find for himself."

Bruce Lee



New Plays

Hurricane

by Jim Brown

Click here to email Jim Brown
Editor's Note

Friday's market drop was a sudden change in direction that leaves unanswered questions. Was it the start of a bigger market decline or just a one-day wonder to be followed by an equally ferocious rebound? Unfortunately, we do not have the answer this weekend. There is a strong potential for margin call selling on Monday and with three Fed speakers early in the day, they could accelerate the crash or they could reverse it.

With the margin call selling there should be weakness at the open and then depending on Lael Brainard's speech at 1:PM there would be another rush of selling at 2:PM. Those are the two periods where margin call selling occurs. If by chance Brainard contradicts Rosengren and continues her dovish tone, we could see some dip buying.

However, this is the third week in the six most volatile weeks of the year and it is a quadruple witching option expiration week. Anything is possible. I recommend we pass on new plays for Monday's open and reevaluate on Monday evening. Jumping into new positions at the open on Tuesday is a suicide play. It is simply a coin toss for direction and we are better off waiting for a better read on market direction.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Direction Changed

by Jim Brown

Click here to email Jim Brown

Editors Note:

How quickly the market can reverse direction when given the proper motivation. I wrote in the prior newsletter that worries over the coming Fed meeting could cause portfolio managers to lock in profits and raise some cash. I did not realize it was going to come so quickly. The Rosengren comments were just the last straw for an already conflicted market. The trend changed on Thursday with the rise in volume and all the indexes lower but it accelerated on Friday on multiple Fed comments.

I also wrote, "We are starting to see some sharp and unexplained drops in individual stocks. This is probably portfolio managers locking in profits on winners and raising cash for a potential late September dip. Now is the time for us to be cautious in adding new positions." That is even truer this weekend. If Friday's drop was not a one-day wonder then we could see some serious follow on selling ahead of the Fed meeting.




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 Ticket Plays


Current Position Changes


FDC - First Data
The long position was stopped with a trade at $13.75.


NTCT - NetScout
The long position was stopped with a trade at $28.85.


FOXA - 21st Centurey Fox
The long put position was closed at the open.


CDNS - Cadence Design
The long call position was stopped with a trade at $25.35.



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

CC - Chemours Co - Company Profile

Comments:

No specific news. Big 6% decline to initial support at $12.75.

Original Trade Description: September 3rd.

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

Position 9/6/16 with a CC trade at $13.75

Long CC shares @ $13.75, see portfolio graphic for stop loss.



FDC - First Data - Company Profile

Comments:

No specific news. Major decline in a weak market. Coverage was initiated by Wedbush at neutral with a $15 price target. We were stopped out of the long on the shares with the 4.5% decline on Friday. The October $14 call is still open and will move to the Lottery Play section of the newsletter and be updated on the weekend.

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

Closed 9/9/16: Long FDC shares @ $13.50, exit $13.75, +.25 gain.

Still open: Long Oct $14 call @ .50, no stop loss.



NTCT - NetScout - Company Profile

Comments:

A -3% decline in a weak market on no news. We were stopped out for a breakeven and shares came to a dead stop at support at $28.

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

Closed 9/9/16: Long NTCT shares @ $28.85, exit $28.85, no loss.



RDN - Radian Group - Company Profile

Comments:

No specific news. New 8-month high close on Thursday and 3% decline today. Shares are at resistance at $14 and we could see some continued weakness over the next several days.

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.



UNT - Unit Corp - Company Profile

Comments:

No specific news. I said yesterday I did not think the big gain would stick and today shares fell -6% to drop back below resistance at $18.65. This was just market related and the -$1.91 drop in crude prices.

Original Trade Description: September 7th.

Unit Corporation, operates as an oil and natural gas contract drilling company primarily in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, and Wyoming. As of December 31, 2015, this segment had approximately 65 gross proved undeveloped wells. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies primarily in Oklahoma, Texas, Wyoming, and North Dakota, as well as in Louisiana and Kansas. As of December 31, 2015, this segment had 26 operating rigs. The Mid-Stream segment buys, sells, gathers, transports, processes, and treats natural gas for third parties and for its own account. This segment operates 3 natural gas treatment plants, 13 processing plants, and 25 gathering systems, as well as approximately 1,464 miles of pipeline. Unit Corporation was founded in 1963. Company description from FinViz.com.

For Q2 the company reported an adjusted loss of 15 cents compared to estimates for a loss of 22 cents. Revenue was $138.3 million. They recorded record production of 97 million cubic feet per day from the Wilcox play, a 25% increase year over year and a 9% increase from Q1. Seven of eight of their highly features BOSS rigs were currently operating under contract to other producers compared to six in Q1. The Midstream segment volumes rose 15%.

Earnings Nov 3rd.

Since oil and gas prices have declined they have reduced drilling of new wells and used their rigs to recomplete existing wells to boost production. An example of the production increase came from four Wilcox wells that were producing 700 Mcfe per day before the recompletion and 17,000 Mcfe after the work over. They anticipate putting additional rigs to work on new wells in early 2017.

Unit has been using the weakness in oil prices to reduce costs and streamline operations rather than try to continue drilling new wells during glut conditions. They are poised to increase production on demand because they own their own fleet of rigs and are not paying high lease fees for drilling equipment.

Oil prices are in rally mode this week because of a unique agreement announced on Monday where Russia and Saudi Arabia will form a joint venture to stabilize oil prices among OPEC and non-OPEC producers. It remains to be seen if it will ever happen but prices are rising on the expectations.

Unit has been relatively calm during the ups and downs in oil prices in 2016 and are poised to break out to a new high for the year.

Position 9/8/16:

Long UNT shares @ $18.38, see portfolio graphic for stop loss.

No options recommended because of price.




BEARISH Play Updates

ACAT - Arctic Cat - Company Profile

Comments:

No specific news. Still chopping around the $14 level with the trend still negative. I would have thought ACAT would have declined more in today's market crash. This is not a good sign. We need a breakdown under $14 to trigger some stop losses and create more selling.

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.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.



FOXA - 21st Century Fox - Company Profile

Comments:

We closed the long put at the open and FOXA fell the most in two months with the market. We were one day early on the close but the prior two days had a positive bias.

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.

Update 9/2/16: New headlines show that Roger Ailes had sexual harassment problems in two jobs before the FOX job. He harassed women into having sex, secretly filmed the events and then warned them later he would release the videos if they ever went public with the harassment. Nineteen women have come forward from prior jobs in addition to the 23 women from Fox.

Update 9/6/16: Fox announced it had settled with anchor Gretchen Carlson over the sexual harassment suit against Roger Ailes. The reported amount was $20 million. News over the weekend reported Carlson had taped conversations with Ailes in his office where he continually propositioned her and said it would be good for her career. Fox is still negotiating with 23 other women that had complained about unwanted advances by Ailes.

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:

Closed 9/8/16: Short FOXA shares @ $24.72, exit $24.65, -.07 loss.

Optional:

Closed 9/9/16: Long Oct $24 put @ .60, exit .45, -.15 loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Major increase in volatility only a couple days after we entered the position. Unless there is going to be several days in a row like Friday this spike will fade in a hurry. There will be ups and downs. Just hang in there and the long-term trend will always be down.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.




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:

That was depressing. Our September $25 call was up to more than $1 on Wednesday and the Thr/Fri crash cut it in half. We were stopped out at $25.35 on Friday.

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

Closed 9/9/16: Long Sept $25 call @ 35 cents, exit .50, +.15 gain.

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



HOV - Hovnanian Enterprises - Company Profile

Comments:

HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Shares fell -13% on the earnings and also because the homebuilders crashed -4% on Friday on the prospect of rising rates.

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.



HUN - Huntsman Corp - Company Profile

Comments:

No specific news and the big decline that started on Thursday, continued on Friday.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call that will be tracked in this section.

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.

Position 8/30/16 with a HUN trade at $17.65

Long Nov $19 call @ 54 cents. No stop loss.

Previously Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.



NAVI - Navient - Company Profile

Comments:

No specific news. Shares fell back below resistance at $14.50 on Friday. This is another favorite stock of Leon Cooperman.

Shares are still stuck at resistance at $14.50 but eventually a breakout will appear and it could be strong.

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 moving lower but they will have to pickup speed to do us any good. The Sept $22 put will expire next Friday and I doubt SKX will decline to that level in time.

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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