Option Investor
Newsletter

Daily Newsletter, Saturday, 9/24/2016

Table of Contents

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

Market Wrap

Apple, Facebook and Oil

by Jim Brown

Click here to email Jim Brown

There were three major drags on Friday's market in addition to a bout of profit taking.

Weekly Statistics

Friday Statistics

Apple (AAPL) was trading sideways early in the day but at 1:30 a report broke that caused shares to drop from $114.70 to $111.55 and cause a serious market drag. The report from German research firm GFK said according to channel checks in 17 countries iPhone 7 sales were down -25% from iPhone 6 rates. The countries checked did not include the USA.

This would be in stark contrast to the comments from Sprint and T-Mobile saying sales were up +375% in the first weekend in the USA. Apple also reported the initial inventory of iPhone 7s had sold out. However, that specific headline could easily be manipulated by shipping a smaller quantity and then bragging when it sold out. That kind of gimmick is common in all forms of retail sales.

Lastly, a Digitimes article on Friday reported Apple chip suppliers had been told that Q1 orders would be 20% lower than Q4, which was already 20% lower. If the iPhone sales were so strong, why are they making 20% fewer? That could also be explained by the expectations for the 10-year anniversary iPhone reportedly due out in September 2017 and Apple is planning on shrinking the supply of iPhone 7s well in advance. The anniversary phone is rumored to have a large number of new, must have features.

Apple shares fell sharply on the news and this story may have legs that last well into the future. Remember, Apple broke with tradition for this cycle and said they would not report the early iPhone sales. They blamed the blackout on "supply issues" that would limit the available phones for sale. Of course that was convenient if you were expecting lower sales and were planning on shipping a smaller quantity of phones in hopes you could announce a "sell out" that would spur future sales.

If that was not enough to weigh on Apple shares, a Reuters report claims Japanese regulators are considering antitrust action against the company for possible violations that might have helped it dominate the smartphone sector in Japan and gain a 50% market share.


Another big cap tech stock was also dragging the market lower. Facebook (FB) admitted to significantly overstating viewer time on video ads by eliminating videos viewed less than 3 seconds from the overall calculation. While that makes sense in one aspect that artificially inflated the metrics to make it appear Facebook advertising videos had a lot longer viewing rate. One advertiser, Publicis Group SA, said Facebook told them the earlier method likely overstated the average time spent watching videos by 60% to 80% for two years. While the calculation did not impact the billing for advertising, it probably impacted the decisions for advertisers to place ads on Facebook if they thought the viewing time was significantly higher. Facebook shares were down more than 2% intraday and impacted the Nasdaq indexes.


On Wednesday, oil prices soared after Saudi Arabia said they would agree to a production freeze if Iran would agree to a freeze. That was the first time a Saudi official has said they would agree to a freeze. Unfortunately, that lasted about 24 hours and then fell apart. On Friday, another Saudi official cautioned not to expect a deal and the meeting in Algeria next week would be more of a chance to consult rather than reach any agreement. Iranian officials were also said to have refused to freeze production although there was no official statement. Iran has increased production since the end of sanctions from 2.3 million bpd to 3.7 million bpd. Crude prices fell nearly 4% on Friday as the potential agreement was seen to be collapsing before any meetings are even held.


Active rigs rose +5 to 511 with oil rigs gaining +2 and gas rigs rising +3. With oil prices more likely to hit $40 than $50 over the next month, the addition of new rigs should slow.


The combination of those three events helped to push the equity markets lower in an already weak environment. Friday was already expected to be a day for profit taking ahead of the weekend event risk and Apple, Facebook and oil prices simply accelerated the decline.

There were no economic events on Friday. However, next week has so many events I had to leave some off the calendar. Now that the Fed meeting is over the quiet period has ended and the Fed speakers are out in force. There are 11 Fed heads speaking in the first four days and in addition, Janet Yellen speaks twice. We can expect to hear multiple conflicting views on the chance for future rate hikes. Eric Rosengren already got his two cents in on Friday saying the economy needs "modest gradual tightening now." He warned the unemployment rate was going to fall to unsustainable levels that would push up inflation. When employers have to raise wages to compete for workers, it creates inflation.

The outlook for the November meeting is only a 12.4% chance of a hike because it is only 4 working days before the election. The outlook for December is now 54% and it will be interesting to see how it changes after a week of heavy Fedspeak.


The presidential debate on Monday is going to be a hurdle. There is almost no outcome that does not produce market volatility. A knockout by either candidate could produce a significant market move as those sectors seen benefitting from their win, will rise sharply. If Clinton wins the debate the biotech sector and energy sectors will crash along with others. Just expect volatility on Tuesday and if none appears, be grateful.

  Since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P. The Monday night debate is going to have about 100 million viewers, or the equivalent of a Super Bowl only with no commercials. This is likely to produce the lowest ratings in a decade for a Monday night NFL game.

The final GDP revision on Thursday will probably be in the range of 1.0% to 1.2% growth and the third consecutive quarter of roughly 1% growth after 0.83% in Q1 and 0.87% in Q4. Any revision under 1% could be market negative.


Another tech stock with a lot of activity on Friday was Twitter. Reportedly, the company has received multiple expressions of interest after Evan Williams said on CNBC two weeks ago the board has to look seriously at any potential offers. I said at the time that sounded like a sales pitch designed to solicit offers. Apparently if you pitch it, they will come. The only two companies named in the news were Google (GOOGL) and SalesForce.com (CRM) but reportedly, there are several others. The stock shot up to a nine-month high at $22.62 on the news. The obvious question is the acquisition price. Since any bid would assume a premium, the obvious target would be $26 and their original IPO valuation at 20 times EBITDA. Twitter may not be worth that on a fundamental basis but they are a unique property and should command at least a minor premium.

In a case of bad timing, RBC Capital downgraded Twitter to sell after the close on Thursday based on a survey of 1,100 advertising professionals. Twitter placed 5th out of 7 in ROI on advertising dollars spent. Some 28% of advertisers planned to cut spending on Twitter and 30% of respondents said they were not allocating any spending on Twitter. RBC cut their price target from $17 to $14. The acquisition news broke right before the open and erased the pre market decline. Twitter traded 194 million shares or 7 times normal volume.



Shares of cybersecurity firm Imperva (IMPV) spiked after news broke that IBM and Cisco Systems may be interested in buying the company. Forcepoint, private company owned by PE firms was also mentioned as interested. Imperva hired Qatalyst Partners to do a strategic review that has apparently paid off. Shares spiked 21%. Final bids are due in two weeks.


Yahoo (YHOO) announced it suffered the second biggest cyber hack in history with records stolen for more than 500 million accounts. We found out on Friday that CEO Marissa Mayer knew of the data breach in July and well before the bidding process for Yahoo ended with Verizon the winner. She did not tell anyone involved in the bidding process about the hack and only told Verizon two days ago. Yahoo claims this was a state sponsored hack but state operators rarely divulge the data or sell it. Currently the data is available for sale on the dark web and that would suggest it was not state sponsored. That excuse is just being used by Yahoo to try and deflect some of the blame. Another option is that there were two separate hacks of Yahoo's servers by two different groups.

The stolen data contained names, email addresses, telephone numbers, date of birth, some passwords, security questions and answers. Credit card numbers, bank account details and payment info was not stolen. If Mayer knew of the attack in July and did not notify anyone, including users, the company could be in breach of SEC rules.

Yahoo has already been sued by a user on behalf of all the other users, accusing the company of gross negligence. They are asking for class action status and this will be one more thorn in Mayer's side.


Finish Line (FINL) reported earnings of 55 cents compared to estimates for 53 cents. Revenue of $509.4 million beat estimates for $493.6 million. Same store sales rose +5.1% compared to estimates for 2.9%. The demise of Sports Authority helped send consumers to Finish Line stores. The company guided to full year earnings of $1.50-$1.56 per share. Analysts were expecting $1.54 per share so that guidance was slightly below estimates. They guided for same store sales between 3% and 5% for the full year.

Shares fell -5% after the CEO warned that September same store sales had risen at a "low single-digit percentage rate." That suggests the uptick in sales in July/Aug has faded.


 


 

Markets

Friday's decline was expected. Apple and Facebook only made it worse along with the drop in oil prices. The post Fed reaction lifted the markets back to resistance and buyers ran out of conviction ahead of the weekend and Monday's debate.

Last week was the fifth week of the sixth most volatile weeks of the year. Next week is the sixth and final week. That does not mean week 7 will suddenly explode higher but typically the last two weeks of October are bullish. The problem with next week is the debate and that is a once every four year event so it is hard to quantify other than the historical details I posted earlier. The worst part about it is that the other two debates are five days apart the following week. We are going to be drinking political news from a fire hose and that is likely to be market negative unless one candidate surges ahead after the Monday debate.

I would like to think portfolio managers are so starved for returns they will jump in anyway after Monday's debate but we have to see the results first.

The S&P closed at 2,177 on Thursday, which was right in the middle of the congestive resistance from the six weeks of consolidation. Friday's decline moved it closer to the bottom but still well above prior support at 2,150.

Gaining the 30 points needed to make a new high could be a tough challenge but not insurmountable if the right events appear.

Three weeks from now, we will begin the Q3 earnings cycle. Earnings are expected to decline -2.3% compared to the forecast for a +0.3% increase as of June 30th at the start of the quarter. This will be the sixth quarter or earnings declines. So far, 70 S&P companies (69% of those issuing guidance) have issued negative guidance and only 35 have given positive guidance. On the positive side, revenue is expected to rise +2.6% and the first quarter of revenue growth since Q4-2014.

The weak earnings for Q3 are already factored into the market but the positive expectations for Q4 are not. The guidance with the earnings will be very important and should they confirm the analyst expectations for Q4 we could see a lasting rally appear.

Unfortunately, there are two weeks of political hurdles in out path and Monday's event should give us a clue of what to expect in the rest. You may remember Romney had a good first debate and the market rallied. His second two debates were failures and the market had to adjust for the Obama recovery.

This debate has the potential to be more like a UFC cage match than a civilized debate. That makes the outcome even more volatile.

That means predicting the path of the S&P next week is next to impossible.


The Dow was down -137 at its low on Friday. That took it right back to the 18,250 level, which was prior resistance and is now support. The biggest stocks in the Dow were also the biggest losers and that could continue next week.

The Dow spiked over initial resistance at 18,350 on Thursday and looked like it had a good chance of holding that level. The breakdown in Apple helped drag the other stocks lower in sympathy.

Support is now 18,250, 18,100 and 18,000. Falling back under 18,200 could poison sentiment and cause a larger decline.



The Nasdaq was the hero for the week with two consecutive closes at new highs. The -33 point decline on Friday is still in new high territory so the relative strength is still there. The index would have to fall back to 5,225 for sentiment to weaken.

The Nasdaq will be penalized by the debate if Clinton is seen to be the winner. The biotech sector will crash and that is a large component of the tech index. Secondly, the news on Friday that Apple chip suppliers are seeing another 20% cut in orders for Q1, suggests the semiconductor sector could also be weak. Losing both chips and biotechs would make it nearly impossible for the Nasdaq to post any material gains.

Support is now 5,200.



The small cap S&P 600 came very close to a new high at 764.64 on Thursday with the prior high at 765.47. The -5 point decline on Friday was not material. The SP600 failed to break below support at 730 on the early September decline and maintained its relative strength. As long as that support does not fail, the broader market should remain in a positive trend.


We are entering the sixth week of the six most volatile weeks of the year and this could be a wild ride. The Fed may be out of the picture on rates but with 11 Fed speeches and two Yellen speeches next week, they will be front and center with their opposing sound bites. In the prior 30 years, there has only been two times where three voting members have dissented on the policy action taken. Last Wednesday was the third time and you can bet those dissenters will be trying to make their case to the market in the weeks ahead. With the December meeting so far away, investors may ignore any screaming hawks and focus on the soothing cooing from the doves.

We are approaching a point where the market "should" rally once all the political headlines are digested. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. You may get that chance.

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


I am shocked the bullish sentiment declined again last week. The survey ends on Wednesday and investors should have been breathing a sigh of relief when the Fed pushed the rate hike into December. Bullish sentiment still declined and bearish sentiment rose. There may be more unrest in the investor population than is visible on the surface.



The largest cyber hack of all time was actually a hack of 420,000 sites of all sizes. A Russian gang amassed more than 1.2 billion unique sets of data by purchasing a small set of credentials and using those credentials to hack progressively larger sites where they stole new credentials that allowed them into even larger sites. They wrote programs that scanned the web using the credentials they already had to see what other websites had users with those same credentials.

The third largest hack was 360 million MySpace accounts. Next was 167 million Linkedin accounts followed by 145 million Ebay accounts. Lastly, 130 million MasterCard and Visa accounts were stolen from Heartland payment systems. Heartland paid $140 million in fines for allowing access to the information.


This item was sent to me by a reader.

Some people believe the stock market can predict the presidential election, based on its performance in the 3 months leading up to the election. When the stock market is down so is the incumbent party but when the stock market is up there is a greater likelihood the people will keep the incumbent party in power. It is another example of how the stock market is an excellent barometer of social mood. Of the past 22 elections, since 1928, the stock market's performance has accurately predicted the election results 19 times (86%). In the game of odds, those are darn good. The S&P closed at 2,180 on August 8th. With Friday's close at 2,164 that would suggest an incumbent loss.

The chart below is courtesy InvesTech Research.



So far, in this election campaign the Secret Service has paid Trump's campaign $1.6 million to cover the costs of flying agents charged with protecting him on his personal plane. That is less than the $2.6 million the service has paid Clinton's campaign. The Clinton amount is larger because she has been chartering private planes and the cost is much higher. The Federal Election Commission (FEC) requires the service to pay its own way or reimburse the candidates.

Clinton's campaign disclosed it paid $36,602.99 to the government for her travel on Air Force One from Washington to Charlotte NC with President Obama on July 5th. Air Force One costs $206,337 per hour to operate. There were some other travel reimbursements in that $36K number but the campaign would not break them out. Analysts say the $30K number is about right for the flight. I am sure it was worth it to Clinton just to get that picture of her and Obama waving from the cabin door at the top of the stairs.



UPS delivered its first package by drone on Thursday. The 2 pound package was a medical inhaler and was flown unattended without a pilot to an island 3 miles offshore Beverly, Massachusetts and landed on a patch of grass at the destination. Flying without a pilot was a simulated urgent medical delivery.

UPS has a partnership with CyPhy Works, a drone maker in which UPS has a stake. It was the first test delivery as UPS experiments in using drones for difficult locations or emergency deliveries.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Every stock is a canoe in the ocean and the Fed is the tide."

Rick Santelli


 


New Plays

Playing the Trend

by Jim Brown

Click here to email Jim Brown
Editor's Note

The M&A activity in the biotech sector is only going to increase. With Allergan snapping up two companies on the same day and one of them included a 800% premium and Gilead Sciences trying to decide where to spend its $29 billion in cash, the smaller biotechs are on fire.



NEW BULLISH Plays

EXEL - Exelixis - Company Profile

Exelixis, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of new medicines with the potential to enhance care and outcomes for people with cancer. It focuses on advancing cabozantinib, an inhibitor of multiple tyrosine kinases, including MET, AXL, and VEGF receptors, which has shown clinical anti-tumor activity in approximately 20 forms of cancer and is the subject of a broad clinical development program. The company has received regulatory approval for two separate formulations of cabozantinib for the treatment of certain forms of kidney and thyroid cancer and marketed as CABOMETYX tablets in the United States and COMETRIQ capsules in the United States and European Union respectively. It also offers COTELLIC (cobimetinib), a selective inhibitor of MEK, in the United States and European Union; and is being evaluated for further potential indications by Roche and Genentech under collaboration with Exelixis. Exelixis, Inc. has collaboration and license agreements with Ipsen Pharma SAS, Genentech, Inc., GlaxoSmithKline, Bristol-Myers Squibb Company, Sanofi, Merck, and Daiichi Sankyo Company Limited for the development and commercialization of various compounds and programs. Company description from FinViz.com

Potential cancer drugs are the main focus of the big cap drug companies. They believe a breakthrough in cancer treatment is just around the corner and the drug that turns into a silver bullet is going to be obscenely valuable. With over 200 types of identified cancers no one drug has been able to affect them all.

Exelixis has multiple drugs in process and cabozantinib has proven effective in 20 different forms of cancer. The company appears well on its way to finding that silver bullet.

The stock is on fire as more investors decide the company will be acquired. If the price is anything like the Alergan (AGN) purchase of Tobira Therapeutics (TBRA) last week any takeout price could be astronomical. TBRA closed at $4.73 and spiked to $40 the next morning.

Earnings Nov 2nd.

I know the stock has been a rocket lately but analysts still believe it is undervalued. With the speculation in the biotech sector the rocket could continue higher. If we can just get a couple days of gains we can tighten up the stop loss and let it ride. Hopefully it will be on somebody's shopping list.

I have wanted to add it for the last couple weeks and kept thinking it would take a rest. It is not happening. Every day I look at it again and it posted another gain.

With an EXEL trade at $15.10

Buy EXEL shares, initial stop loss $13.85.

No options recommended due to cost.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Weekend Worry

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market declined sharply as traders locked in profits ahead of the weekend event risk. We made the right decision on Thursday evening to avoid adding new plays at the open on Friday. The chances for profit taking were too great and now we have the potential for better entry points.

I believe the markets will rally to new highs in October but next week is the sixth week in the worst six weeks of the year. There is a continued potential for volatility until the first week of October.




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


WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.



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

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Minor gain. Still fighting resistance from the 52-week high.

Original Trade Description: September 17th.

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

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



BOX - Box Inc - Company Profile

Comments:

No specific news. Only a minor decline and now using prior resistance at $14.50 as support.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



KS - KapStone Paper & Packaging - Company Profile

Comments:

No specific news. Only a minor gain but still a 9-month high.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.

No options recommended but the Nov $20 call is $1.30.



PTLA - Portola Pharmaceuticals - Company Profile

Comments:

No specific news. Resistance at $24 is holding.

Original Trade Description: September 12th.

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

Position 9/14/16 with a PTLA trade at $22.25

Long PTLA shares @ $22.25, see portfolio graphic for stop loss.

(Wide stop loss because of the market volatility. I will raise it when it makes sense.)




BEARISH Play Updates

SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Minor decline. Time for gravity to return.

Original Trade Description: September 19th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The VXX only gained .24 in a bearish market proving the ETF is flawed and the long term trend is always down. A few more good days in the market and it could be below $30.

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.



WFM - Whole Foods Market - Company Profile

Comments:

No specific news. No material movement.

On Thursday 9/15, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.

This position remains unopened until a trade at 27.75.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.


I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

With a WFM trade at $27.75

Short WFM shares, initial stop loss $28.75

Optional: Buy Nov $25 put, currently .60, no 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.


FDC - First Data - Company Profile

Comments:

No specific news. Leon Cooperman's holdings including FDC declined after the SEC announced he was being investigated for insider trading. Shares are holding at prior support at $13.

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 Oct $14 call @ .50, no stop loss.

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



HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. Support at $1.65 held.

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.

Update 9/9/16: 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.

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:

Shares rebounded after an explosion at a competitor's plant killed 4 workers. The competitor plant produces 8% of the global output of the chemical MDI.

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 dipped briefly below support on the Leon Cooperman news but rebounded back into the prior congestion range.

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





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