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Daily Newsletter, Saturday, 10/29/2016

Table of Contents

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

Market Wrap

Kryptonite

by Jim Brown

Click here to email Jim Brown

The disclosure by the FBI that they had discovered a laptop owned by Huma Abedin containing tens of thousands of State Dept emails was Kryptonite for the market and the indexes declined sharply.

Weekly Statistics

Friday Statistics

At 1:PM on Friday FBI Director Comey took the unusual step of notifying Congress that he was "supplementing" his testimony regarding Hillary Clinton's classified emails. Later reports said in an unrelated investigation they had discovered a device that contained emails from Clinton and the FBI would be investigating their potentially classified status. He did NOT say there were any classified emails on the device. However, given the timing of the letter to Congress, the impact on the political campaigns and the attention any further testimony would attract, it is probably safe to say these emails are not discussing yoga routines or Chelsea's wedding. Comey would not drop this bomb this late in the political campaign unless they already knew the details would be damaging. There is speculation that this laptop contained a backup of the 33,000 emails Clinton deleted.

The market was trading sideways on very thin volume when the headline appeared. There was an immediate decline that pushed all the indexes into negative territory.


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On the economic side the first reading on the Q3 GDP came in at +2.9% growth and much stronger than expected. The Atlanta Fed was predicting 2.1% and the analyst consensus was 2.5%. While the reporters are talking up the stronger than expected GDP, the facts tend to get in the way.

Inventories added 0.61% and exports 1.17% or more than half the headline number. Personal consumption, which normally accounts for more than 70% of the GDP fell to only half of the Q2 level. Consumers quit spending in Q3. Fixed investments otherwise known as capital spending, subtracted from growth for the fourth consecutive quarter. That has never been seen before outside a recession.

The real kicker is the export number which rose from $7 billion in Q2 to $49 billion in Q3. This was the highest level in more than two years. The number one export was soybeans, which normally are exported in Q4 but a poor harvest in South America pulled those exports into Q3. The Q4 export is such a regular event that the government adjusts Q4 numbers with a seasonal adjustment to "smooth" the Q4 GDP. Since the exports were pulled forward into Q3 by the weak harvest there will be a hole in Q4. The current seasonal adjustments for Q3 meant that food and beverage exports increased by +121% in Q3 and obviously not a repeatable number.

Using the Bureau of Economic Analysis numbers the $38 billion in one-time soybean exports was one third of the total $119 billion increase in Q3 GDP. That represents 0.9% of the 2.9% headline number. Capital Economics said if you remove the one time soybean exports, the inventory build, which will be negative in future quarters and the impact of Obamacare, which added 10% to Q3 GDP, the U.S. actually grew by only +0.9% in Q3.

We can expect to hear the politicians and the news sources bragging about 2.9% growth and the highest in more than two years BUT it is a bogus number that will be corrected over the next two quarters with abnormally low GDP reports. You cannot take one third of the GDP increase from one quarter and pull it forward without leaving a hole in the quarter to follow.


The Atlanta Fed GDP forecast remains the gold standard for predictions. Removing the 0.9% for the soybean exports gives a headline number of +2.0% and the GDPNow forecast was 2.1%. The average over the last four quarters is now +1.5% growth and far too low for the Fed to get excited about a series of rate hikes.



Consumer Sentiment for October fell to 87.2 and tied the lowest level since the 86.9 in October 2014. September 2015 saw the same 87.2 reading. That is a -4 point decline since last month and the largest one-month decline in more than a year. The present conditions component declined from 104.2 to 103.2 and the expectations component fell -5.9 points from 82.7 to 76.8. That should tell you something about how excited consumers are about the two presidential candidates. Respondents said the country's direction and outlook for business were the two main factors weighing on their sentiment. More than 30% of respondents said their financial conditions had worsened. More than 71% of those surveyed said business conditions would stagnate or worsen over the next year.


We have a big week ahead economically. The ISM Manufacturing Index on Tuesday is not expected to improve and there are whisper numbers for a decline. The ADP Employment report on Wednesday is expecting only a minor increase from the 154,000 new jobs in September.

The FOMC announcement on Wednesday is not going to feature a rate hike but the Fed is expected to begin warning about a hike in December. The election will be over and the Fed can hike another quarter point and then go to sleep for another six months. The December hike would be to save face since they have threatened a rate hike all year. For November, there is only a 9.3% chance according to the Fed Funds Futures. There is now a 74.2% chance for a hike in December and that is likely to rise after Wednesday.

However, Yellen has been making noises about letting the economy run hotter for longer before raising rates so the Fed guidance is going to be interesting. The economy is far from hot so longer could be a long time if she meant what she said. This is the same person that recently said the Fed could buy equities if their current QE actions were not enough to juice the economy. I would bet that comment did not go over well in the boardroom.



The last nugget next week will be the Nonfarm Payrolls on Friday. They are expected to increase from 156,000 to 170,000 but there are worries that we could see a decline instead. The regional economic numbers over the last six weeks have seen some employment declines. Whether that will carry over into the bigger market is unknown. The Fed should have these numbers before their Wednesday announcement and it could impact their decision.


Earnings remained the biggest news story of the morning and McKesson (MCK) was the disaster of the day. The drug distribution company reported earnings of $2.94 and missed estimates for $3.05. However, the big hit came from lowered guidance. The company lowered guidance for 2017 from $13.43-$13.93 to $12.35-$12.85. The CEO said we are starting to see competitive activity that is broader and more aggressive than previously thought.

There are more companies marketing competing biosimilar drugs and there is growing price pressures from the pharmacy companies. This will only get worse regardless of who wins the election. Clinton has vowed to lower drug prices and allow importation of similar drugs at a cheaper price. Trump has said he would change the laws to allow Medicare/Medicaid to negotiate prices. As the biggest purchasers of drugs that could lower prices significantly.

A lot of companies have drugs going off patent. An example is Amgen's Enbrel, a drug that accounted for 80% of the company's income growth. Unless companies have new blockbuster drugs in the pipeline, the loss of exclusivity on their top drugs is a serious problem.

McKesson shares were down over 25% at one point to $115 but rebounded slightly to close at $124 with a $36 loss. Competitors Cardinal Health (CAH) fell -10% and AmerisourceBergen (ABC) fell -13%. Amgen (AMGN) fell -10%. Cardinal Health reports earnings on Monday.




Novo Nordisk (NVO) reported earnings of 58 cents compared to estimates for 56 cents. Revenue was $4.13 billion. So far so good. Unfortunately, the company said the U.S. market has become "significantly more challenging" and it "no longer deems it achievable" to reach the operating profit growth target of 10% and they lowered it to 5%. They recently announced plans to lay off 1,000 workers to reduce costs in the U.S. market. Shares collapsed 13% on the lowered guidance.


The Healthcare sector is in crash and burn mode with a -2.2% decline on Friday alone to a 7-month low. I looked at buying the dip but we may be a week too early. I am recommending a play this weekend on the biotech sector.


Hershey (HSY) redeemed itself from the post buyout decline when they reported earnings of $1.29 that beat estimates for $1.18. Revenue of $2.0 billion barely beat estimates for $1.99 billion. They raised guidance for full year earnings from $4.24-$4.28 to $4.28-$4.32. Shares rallied 7% on the news.


Anheuser-Busch InBev (BUD) reported earnings that missed estimates for the sixth consecutive quarter. The company said beer sales in Brazil had fallen by 6.8% and there were cracks appearing in the U.S. craft beer boom. BUD is trying to buy up all the competition and spent $103 billion buying SABMiller Plc. The company slashed guidance saying it no longer expects to see volume growth outpace inflation. Q3 earnings rose 2% and analysts were expecting 4.5%.


Amazon (AMZN) reported earnings Thursday after the bell and missed estimates. The company reported 52 cents and well below the 78 cents analysts expected. Sales increased 29% to $32.7 billion and beat estimates slightly. To put this report in perspective they reported 17 cents and $25.36 billion in the year ago quarter. Amazon guided for Q4 for revenue in the $42.0-$45.5 billion range and earnings in the $0 to $1.25 billion range. That is the widest range I have ever seen for earnings guidance. Analysts are expecting earnings of $2.14 and revenue of $44.58 billion. Amazon will hire 120,000 temporary employees for the holiday season. The company ended the quarter with $12.52 billion in cash.

Amazon said Alexa, the voice of the Echo device, has received more than 250,000 marriage proposals to date. The company said they have some surprises in store for this year that will be a major improvement.

Amazon ended the quarter with 65 million Prime accounts based on analyst estimates. A Prime customer spends an average of $1,200 a year and more than twice the spending by a non-Prime customer. Having a lot of Prime customers is a double-edged sword. Amazon said shipping expenses rose 43% in Q3 to $3.9 billion and was responsible for part of the earnings miss.


Virtus Investment Partners (VRTS) reported earnings of $1.64 on revenue of $82.3 million. That beat estimates for $1.50. Shares spiked $20% on the news.


Chevron (CVX) reported earnings of 68 cents that beat estimates for 39 cents. However, Chevron does not adjust earnings for onetime events like asset sales so that is not really and apple to apples comparison. Revenue of $30.14 billion did beat estimates for $30.06 billion. Production averaged 2.51 million bpd, down from 2.54 million. They guided for Q4 production of 2.65-2.70 million boepd. Chevron raised its quarterly dividend by a penny to $1.08 per share. This is the 29th consecutive year they have raised the dividend. They reduced capex spending by $10 billion due to deliberate cut costs. Expectations were low for Chevron so shares rallied 4%.


Exxon (XOM) reported earnings of 63 cents of $2.65 billion, down from $1.01 and $4.24 billion in the year ago quarter. Revenue was $58.7 billion. Analysts were expecting 58 cents and $60.4 billion. Exxon cut capex spending by 45% to $4.2 billion. Production fell -3% to 3.8 million boepd.


Next week is the busiest week of the Q3 earnings cycle but the number of companies that can move the market is limited. Facebook, Alibaba and Starbucks are probably the top three investors will be watching. Now that we are past the blue chip reporting phase, the quality of earnings will decline along with the lack of big name companies.


GE and Baker Hughes (BHI) are talking merger. No, GE is not likely to buy BHI but there is a good chance they will do a joint venture or GE will sell its oil servicing assets to BHI. The energy division was a big drag on GE earnings last quarter and GE is interested to doing something about that. Reportedly, GE approached BHI and a spokesman said we are talking about several options but "none of these options include an outright purchase" of BHI.

If GE sold its energy servicing business to BHI it would lift the company to the number two in the sector behind Schlumberger's $28 billion in revenue. It would catapult BHI from $11 billion in revenue to $22 billion. GE has decided the energy business is too cyclical and they would rather focus on manufacturing equipment rather than maintaining it. Since GE has recently added to its energy services division, ($3.4 billion purchase of Lufkin in 2013) they are probably not going to get a cash bid from BHI that would make them whole. If BHI gave them stock, GE would have a longer-term potential to make a profit once energy prices recovered.


The Volatility Index ($VIX) rose all week but still spiked 3.5 points intraday after the FBI news broke. Apparently, that encouraged a lot of traders to start buying protection.

There are currently 7 times more call options on the VIX than put options. That is the highest since August 2015 just before China devalued the yuan. Clearly, there are a lot of investors either betting on a crash or hedging against a crash.


Seven fund managers reported a total of $50 billion in net outflows in Q3. The biggest losers were Franklin Resources at $22.1 billion, AllianceBernstein with $15.3 billion and Waddell & Reed Financial at $4.9 billion. Others with outflows included T Rowe Price, Ameriprise Financial, Janus Capital and Legg Mason. In Q2, the same 7 funds saw outflows of $34 billion. The reason for the constant stream of outflows from actively managed funds is the shift to passive funds and ETFs. Actively managed funds have had a poor track record over the last couple of years and investors are leaving in droves. Waddell & Reed marked the 9th quarter of outflows. Fewer than 15% of actively managed funds have beaten the S&P-500 over the last 10 years according to S&P Global.

In the 12 months ended September 30th, actively managed funds had outflows of $295 billion. Passive funds had inflows of $454 billion. BlackRock saw inflows of $55 billion in Q3 with 90% going into ETFs. Vanguard Group saw inflows of $78 billion into index funds and ETFs. There were 8,044 ETFs at the end of 2015 with $2.5 trillion invested.

Oil prices are sliding lower as the outlook fades for an OPEC production cut. The delegates to a two-day meeting in Vienna said on Friday they had not reached a consensus on quotas after the first day. Iran, Iraq, Libya and Nigera have claimed they should be exempt from any output cuts. None of the countries attending specified how much they would be willing to cut to stabilize prices. Non OPEC producers Russia and Brazil joined the talks on Saturday. Russia's energy minister was quoted as saying, why do it, "any output freeze could be offset by a quick recovery in US shale output."

After the informal agreement in Algeria, OPEC said it was going to shoot for a reduction in production from 33.4 mbpd in September to 32.5 to 33.0 mbpd when they met at the end of November. The tricky part was deciding how much each country would have to cut production to meet that goal. One delegate said, "It is getting complicated...every day there is a new issue coming up."

The joke making the rounds is that OPEC now means "Organization of Producers Exempt from Cuts." Even if they do claim to have an agreement when they meet in late November, the odds are close to 100% that nobody will honor it. OPEC countries have never honored any prior agreements so why start now. It is all a show for the rest of the world as they try to talk up prices.

Crude prices declined more than 2% on Friday as the news trickled out of Vienna. While very few professional market watchers ever believed OPEC could pull off a production cut, now it appears they may not even be able to enforce a production freeze. Getting everyone to agree is nearly impossible. Getting them to comply is impossible.


The U.S. added 4 active rigs last week but that is not the real story. There were 6 new gas rigs while oil rigs declined by two. The recent spike in gas prices has motivated gas producers and they have added 20 rigs since early September. At the same time, 36 oil rigs have been reactivated. We still have only 25% of the rigs that were active at the peak in 2015.


The dollar index gave back 50 cents on Friday with the majority of that on the dip caused by the FBI headlines. The strength in the dollar has made it very hard for commodities to rise and kept the pressure on crude prices. Meanwhile gold prices rallied after the headline to close at $1,276 and a four-week high.



 


 

Markets

The normal historical trend for a rebound in the last two weeks of October has failed. The election uncertainty has smothered any positive sentiment that actually existed. The Dow is trapped in a tight range but the S&P, Russell 2000 and S&P-600 are all weak.

The FBI announcement at 1:PM on Friday killed what little bullish sentiment still existed. The major indexes fell to the lows of the day and the Dow is the only one that tried to recover.

The S&P has support at 2,120 and the intraday dip knocked it down to 2,119.36 before a minor rebound. The 2,120 support level is critical. We had been fighting the 2,145 resistance for most of the week with minimally lower highs every day. The close on Friday under 2,130 was seen by some as a bearish event because it was the second close under that level since September 14th. The 2,126.14 close was exactly the same close as October 17th and that is a six-week closing low. If the S&P weakens to close under 2,120 we could be in a world of trouble.


The Dow suffered under the earnings curse last week with some companies beating estimates and spiking and others missing and falling. After all the smoke cleared, the Dow actually gained 15 points for the week. However, it remains locked in the 18,100 to 18,250 range and this week there are no Dow stocks reporting earnings. The index will be left to find its own direction and with 26 Dow stocks already reported, all of them will be experiencing post earnings depression.

The Dow will be driven by the external headline from the political campaign, Fed meeting and the payroll reports. None of those events are expected to give a material boost to sentiment. The biggest risk is a decline under that 18,100 support to trigger sell stops and fall into that empty void on the chart with 17,135 at the bottom.

On the positive side, the Dow has not sold off. It has had multiple chances over the last couple of weeks and has always honored that support at 18,100 by the close.



The Nasdaq Composite closed 10 points under critical support at 5,200 but still close enough for it to be in play. Any further decline targets 5,100 and the lows from September.

The Nasdaq 100 ($NDX) made a new high on Monday and fell all the way back to support at 4,800 on Friday. I said multiple times I thought fund managers would buy big cap tech stocks to window dress for the end of October but it did not happen. They were off to a good start on Monday but the negativity and the election uncertainty apparently kept them in cash. A break below 4,800 targets 4700-4650.




The bad news for the week came from the small cap indexes. The Russell 2000 closed at nearly a 4-month low on Friday and well under the last material support at 1,200. There is nothing under Friday's close until the 1,100 range.


The S&P-600 small cap index is almost identical to the Russell with a nearly 4-month low and totally unsupported at this level.

The breakdown in the small caps suggests the broader market is likely to decline. The small caps normally lead in both directions and with the big cap buying fading as we enter November, the outlook on a technical basis is negative.


We could wake up Monday to a completely new spin on the election and the FBI headlines. I have read dozens of articles this weekend with a couple claiming the FBI is not even in possession of the emails because they did not have a warrant to seize that data since their warrant only covered the sexting case. Whether that is true or not remains to be seen. It is entirely possible those emails could disappear by Monday and all the momentum shift back to Clinton. I think that would cause a significant amount of frustration for at least half the population but this is a crazy year.

Given the polarization between the political parties and the short time left in the race, we could still see several other bombshells between now and Election Day. The outcome is far from decided and that uncertainty could cause significant market volatility. Once we are in November, the fund managers no longer have to be fully invested and they can dump positions in volume ahead of the election with plans to reinvest once they see who wins and which sectors will benefit. That could increase any volatility in a thin market.

I would continue to caution against being overly long and I would suggest you update your shopping list of stocks you would like to buy on a dip. Your prior selections may have changed.


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Random Thoughts


There is still a tug of war in progress between the bulls and bears and several ended up in the neutral camp this week. This survey ends on Wednesday so the events of Thr/Fri are not yet included.



When Alphabet (GOOGL) reported earnings, they also announced a $7,019,340,976.83 stock buyback. Alphabet is famous for announcing deals with some hidden meaning in the number and they do not tell us the meaning. You may remember their first buyback program was for $5,099,019,513.59 in 2015. After a few hours, some enterprising math researchers came up with the answer. There are 26 letters in the alphabet and that is the square root of 26.

The puzzle this year was quickly deciphered by a retired math teacher named John Owens. 7019.34097683 = 26^e. "e" is a constant in math and physics. That is far above my pay grade.



Professor Jeremy Siegel has been one of the biggest bulls on Wall Street with a 2,300 price target on the S&P. On Friday, he backed off on that prediction but only by a little bit. Now he believes the S&P will close between 2,250 and 2,300. He is blaming the election uncertainty, the possibility of a Fed rate hike and weak earnings guidance for the minimal reduction in his target.

He said we would need "bang up earnings and super guidance" to get over the hump of a rising 10-year treasury yield. He said even though everyone now expects the Fed to hike in December, the real worry is how often the Fed will hike in 2017. The 10-year treasury yield was up over 5% for the week.



Walmart is upgrading the customer experience this holiday season. They are doubling the number of product demonstrations to 150,000. They are hiring a dedicated pickup manager for each store for people that order online and want to pick up at the store. The manager will have a very high profile counter painted bright orange to make it easier to find and to advertise the pickup option. The store has increased the number of items available online from 8 million to 20 million.

Santa Claus will live in each store with "selfie booths" where customers can take their own pictures with Santa. Walmart will offer 400 toys that are not available anywhere else. One example is the $398 Disney Princess Carriage that is already sold out online, but they have ordered more.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Those who would give up essential liberty, to purchase a little temporary safety, deserve neither liberty nor safety."

Benjamin Franklin


 

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New Plays

Under Armour Odor

by Jim Brown

Click here to email Jim Brown
Editor's Note

Under Armour said revenue growth was only going to rise 20% in 2017 and 2018 compared to groth rates in the high 20s an low 30s over the last several years. They gave some optimistic revenue targets for 2018 at $7.5 billion but warned that profits would miss by $800 million. This caused a ripple in the retail shoe industry.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

FINL - Finish Line - Company Profile

The Finish Line, Inc., operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

The Under Armour warning of slowing sales growth and weaker profits may not hamper Finish Line directly but it is a warning for the industry in general. The ever rising price of shoes and the rising cast of star endorsements means more shoe models and more buyer confusion. The high dollar shoe market may be about to tank.

Finish Line has fallen from $24 to $20 over the last month and the UA warning only added to the stock's decline. Earnings are not until December 23rd so the stock has a long time before it can prove the naysayers wrong. Support is $17.

With a FINL trade at $19.50

Sell short FINL shares, initial stop loss $20.65, target = $17.




In Play Updates and Reviews

Small Caps Leading Lower

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 and S&P-600 both set lower lows and are completely unsupported. In a perfect world the breakdown in the small cap indexes to their current levels would suggest a market collapse next week. However, there are many factors in play and while that collapse may come, the timing is always unknown.

The headlines and the calendar will be in play but the impending election uncertainty is likely to be the biggest weight. With a Clinton win now in doubt the market will have to adjust for the possibility of a Trump presidency. In theory that could mean uncertainty about our economic future. While there is no way of telling what will transpire over the next couple of weeks, the market is more than likely going to remain unstable because of that uncertainty.





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.





Current Position Changes


CSIQ - Canadian Solar
The long stock recommendation has been cancelled.



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BULLISH Play Updates

CC - Chemours - Company Profile

Comments:

No specific news. Shares bucked the weak market to gain 61 cents to a new high.

A reader sent me this info this weekend. Thanks DS!

Further to your post on CC. R-134 freon an HFC which is most widely used on vehicles / equipment from 1994 to present cost about $5-7 per pound average vehicle requires 2-3 pounds.

The new Freon R1234 costs about $110 – $120 per pound. The R1234 is an HFO base and breaks down in the atmosphere in about 12 hours, R-134 breaks down in about 1 Year.

R-1234 has been used in Europe for the past 4 years, and introduced in North America in 2015 in some models, more models in 2016 and mandatory in all 2018 vehicles and equipment.

CC has no where to go but up.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.



CSIQ - Canadian Solar - Company Profile

Comments:

No specific news. With a Clinton win now in doubt, investors are fleeing the solar stocks. I am cancelling this recommendation.

Original Trade Description: October 20th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as they continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Recommendation cancelled.



HLX - Helix Energy Solutions - Company Profile

Comments:

Oil prices crashed to a multi-week low as the proposed OPEC production freeze begins to melt with four countries backing out of the process.

Original Trade Description: October 24th.

Helix Energy Solutions Group, Inc., provides specialty services to the offshore energy industry primarily in the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. It operates through three segments: Well Intervention, Robotics, and Production Facilities. The company engineers, manages, and conducts well construction, intervention, and abandonment operations in water depths ranging from 200 to 10,000 feet; and operates remotely operated vehicles (ROVs), trenchers, and ROVDrills for offshore construction, maintenance, and well intervention services. It also offers well intervention; intervention engineering; production enhancement; inspection, repair, and maintenance of production structures, trees, jumpers, risers, pipelines, and subsea equipment; and life of field support. In addition, the company provides reclamation and remediation services; well plugging and abandonment services; pipeline abandonment services; and site inspections. Further, it engages in the installation of subsea pipelines, flowlines, control umbilicals, manifold assemblies, and risers; burial of pipelines; installation and tie-in of riser and manifold assembly; commissioning, testing, and inspection activities; and provision of cable and umbilical lay, and connection services. Additionally, the company offers oil and natural gas processing services to oil and natural gas companies; and fast response system services. It serves independent oil and gas producers and suppliers, pipeline transmission companies, alternative energy companies, and offshore engineering and construction firms. Company description from FinViz.com.

Last week Helix reported earnings of 10 cents compared to estimates for 4 cents. Revenue of $161.2 million beat estimates for $156.4 million. The company said they had "seen a significant improvement in their financial results but industry conditions remain challenging."

An increase in the price of oil would do wonders for Helix and all the other offshore service businesses. Fortunately, for Helix they operate around the world and there is a strong surge in offshore natural gas drilling and pipeline construction around Africa and Australia. They are also very active in the North Sea. The natural gas activity has kept them afloat where other offshore service companies have failed.

They sold $100 million in stock in Aug/Sep and they had $499 million in cash at the end of the quarter. They prepaid $8 million in debt in Q3 and capex spending was $99 million.

The company is in good shape financially and the offshore drilling activity is increasing. If OPEC is successful in claiming a production cut/halt at the end of November this will raise the price of oil and benefit everyone.

Earnings January 18th.

Position 10/25/16:

Long HLX shares @ $10.18, see portfolio graphic for stop loss.

No options recommended.



MENT - Mentor Graphics - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.

Optional:

Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.




BEARISH Play Updates

SHLD - Sears Holdings - Company Profile

Comments:

No specific news but shares gained 18 cents.

Original Trade Description: October 26th.

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 in mid September 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 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.

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.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Position 10/27/16:

Short SHLD shares @ $10.92, see portfolio graphic for stop loss.



SSYS - Stratasys Ltd - Company Profile

Comments:

No specific news but the sector is sinking.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.



VXX - Volatility Index Futures - ETF Description

Comments:

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.


HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery.

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

Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.

Optional:

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



HUN - Huntsman Corp - Company Profile

Comments:

Huntsman reported earnings of 38 cents that beat estimates for 35 cents. Revenue of $2.36 billion missed estimates for $2.49 billion. Free cash flow was $300 million after an early repayment of $100 million in debt. The announced the filing of a Form 10 registration statement for a spinoff og the Pigments, Additives and Textile Effects businesses expected to occur in the first half of 2017.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call.

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.





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