Option Investor
Newsletter

Daily Newsletter, Saturday, 12/3/2016

Table of Contents

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

Market Wrap

Holding Pattern

by Jim Brown

Click here to email Jim Brown

After trying to move higher intraday, the markets ended flat ahead of the Italian referendum.

Weekly Statistics

Friday Statistics

The Italian constitutional referendum on Sunday is a major decision for Italy. The vote will significantly modify the 68-year old constitution. Forty-seven of the Constitution's 139 articles will be modified. It would change the composition of Parliament, the ways the laws are passed and the balance of power between the central government and the country's 20 regions. A yes vote would reduce the 315 Senate members to only 95, plus 5 members nominated by the president. The current requirement for the Senate and the lower house of Parliament to both pass an identical version of the same bill before it becomes law, would be removed. The lower house will pass most laws and the Senate would become more of a consultative body.

Prime Minister Matteo Renzi, wants a yes vote in order to concentrate more government authority in a smaller number of hands. If the vote is a no and the constitution remains unchanged, he has vowed to resign. Some opposition members have been promoting a no vote in order to force his resignation and topple the current government. Renzi has lost a lot of popularity in recent months and there may be quite a few people that vote no. If Renzi did resign, President Sergio Mattarella would consult with the various political parties and could decide to form a caretaker government or call for early elections.

However, a yes vote would be the equivalent of the Brexit vote for the Italian markets. The CEO of the Italian stock exchange said there are colossal short positions held by U.S. investors and the market would explode if there was a yes vote.

A no vote would promote political instability and banks, currently under severe pressure and in need of recapitalization, would find it difficult to raise capital under an unstable government. The vote will have repercussions in the rest of Europe where populism is surging after the Trump election and the sharp rise in violence as a result of the Muslim immigration.

U.S. markets could react sharply to the outcome of the referendum but it is difficult to know which way they would move. It will depend on the outcome and the impact to currencies. I would expect some significant volatility at the open but it should fade quickly.

In the U.S. the payroll numbers had little impact on the market. November saw 178,000 jobs added compared to consensus estimates for 175,000. Moody's had predicted 215,000. The October number was revised down from 161,000 to 142,000 and September was revised up from 191,000 to 208,000.

The unemployment rate declined 3 tenths from 4.9% to 4.6% and the low for this cycle. However, it was due to more discouraged workers leaving the workforce and fewer new workers entering the workforce. The labor force participation rate declined one tenth to 62.7% as the labor force declined by -226,000 workers. Those not in the labor force rose by 446,000 to 95,055,000.

Average hourly wages declined -0.1% after rising a total of +0.7% over the prior two months. The average hourly workweek was flat at 34.4 hours for the third consecutive month.

Analysts were surprised by the loss of 8,000 jobs in the retail sector heading into the holiday shopping season. Information technology lost 10,000 jobs and manufacturers lost another 4,000 jobs. Construction contractors were a high point with a gain of 19,000 jobs. Professional/business added 63,000, education/healthcare added 44,000 and leisure/hospitality gained 29,000.

The Nonfarm Payrolls disappointed compared to the blowout in the ADP numbers on Wednesday. ADP reported a gain of 217,000 jobs compared to estimates for 165,000 and the 147,000 created in October.


The ISM - NY current conditions index rebounded from 49.2 to 52.5 for November. That is the first reading in expansion territory over 50 in four months and significantly improved from the 47.5 in August. The employment component rose from 50.6 to 52.3. The six-month outlook rose from 56.9 to 60.8. The prices paid component rose from 55.6 to 69.2 and a five-year high. This is showing the rapidly rising inflation beginning to filter through the system. This report was ignored.

We had a very robust economic calendar last week and that left us with a void for the coming week. The only report of interest is the ISM services on Monday but it rarely moves the market. We have some filler reports on Tuesday with factory orders the most important if they come in as expected with a big 2% bump. After that the calendar is devoid of any material events until the Fed rate hike the following Wednesday.

The only Fed speakers are on Monday with the normal one-week pre FOMC quiet period starting on Tuesday. It does not make any difference that there are no speakers because the Fed will still hike rates. The CME FedWatch Tool is now predicting a 97.2% chance of a rate hike.



Internet music streaming company Pandora (P) saw its shares rise 16% after sources said it was open to selling itself. The report said the company was now willing to talk to SiriusXM, a company that tried to buy them in the past. The official word from the Pandora spokesman was that the company does not "comment on rumors or speculation." Bloomberg was reporting that Sirius XM chairman, Greg Maffei, recently made a fresh approach to Pandora. No prices were discussed. Previously Sirius offered $15 per share. Competition is increasing from sources like Spotify, Apple Music, Google Play Music and Amazon Music Unlimited. When they reported earnings, Pandora said active users had declined. Activist fund Corvex has a 9.9% stake and has been urging a sale.


Starbucks (SBUX) CEO Howard Schultz announced he was stepping down from the position and turning the company over to the current COO, Kevin Johnson, who will serve as president and CEO starting April 3rd. Schultz will become executive chairman and focus on innovation, design and development of the new Starbucks Reserve Roasteries around the world.

The premium Reserve Roasteries and Tasting Room stores are gigantic stores with dozens of comfortable seating areas more like a cozy den with overstuffed leather chairs, coffee tables, fireplaces, etc. Roastery sales rose 24% in 2016 and the average customer spends four times as much per visit than a typical Starbucks store. Schultz is currently focused on opening 30 of those stores in "influential" cities around the world. They are targeting 1,000 of the slightly lower scale Starbucks Reserve stores, which include espresso bars that make coffee in a variety of brewing methods.

Schultz was CEO from 1987 to 2000, when he resigned. He came back to rescue Starbucks from a depressed period in 2008 and has been CEO for the last 8 years. Schultz grew up in the projects in New York and his father was a blue-collar worker that never made more than $20,000 a year in wages. Schultz went to college on a football scholarship and was the first person in his family to go to get a diploma. After working in sales for Xerox and GM for a Swedish house wares company, he joined Starbucks in 1982 in the marketing department. The company only had four stores at the time.

Kevin Johnson is a great guy, aggressive and intelligent and this may be exactly what Starbucks needs, fresh ideas at the top.


Workday (WDAY) reported earnings of 3 cents compared to estimates for a loss of 4 cents. Revenue of $409.6 million beat estimates for $400.5 million. Unfortunately, they guided for Q4 at $428.8 million and analysts were expecting $433.6 million. The company also said some large contracts that had been expected to close in Q3 were delayed citing uncertainty over Brexit and the potential for a Trump administration to modify trade agreements. Workday was cut from hold to sell by Societe Generale. Shares fell $10 on the news.


Smith & Wesson (SWHC) reported blowout earnings of 68 cents compared to estimates for 55 cents. Revenue of $233.5 million rose 63.5% and beat estimates for $228 million. Gross margin was 41.8% compared to 29.3%. They guided for the current quarter for earnings of 52-57 cents and revenues of $230-$240 million. Analysts were expecting 59 cents and $237.74 million.

The CEO said firearm sales had been very volatile under president Obama and that was not expected to continue under a pro-gun Trump administration. They guided for "single-digit to high single-digit" sales growth in a "normalized environment." He did say more women were buying guns both for defense and for sport.

Shares had fallen sharply after the pre-election uncertainty but they fell off a cliff on Friday with a -12% drop of $3. Going from a 63% increase in revenue to high single-digits is a major drop in growth.


Gap Stores (GPS) reported a 1% drop in same store sales for November but that is significantly better than the 8% decline in the year ago quarter. Comps for Gap global fell -3% and Old Navy -2%. Banana Republic posted a 5% increase after a 19% decline in the year ago quarter. The company said the fire in the distribution warehouse in Fishkill NY in August knocked 3% off the overall comp sales in November because of lack of inventory and distribution capability. The company also said foot traffic at mall stores remains challenging. Shares fell -3% on the news.


Ulta Beauty (ULTA) reported earnings of $1.40 that rose 26% compared to estimates for $1.37. Revenue of $1.13 billion rose 24.2% and beat estimates for $1.108 billion. Online sales rose 59.1% and same store sales were up 13.6%. The company guided for Q4 revenues of $1.516-$1.541 billion, earnings of $2.08-$2.13 and same store sales to rise 12% to 14%. This company is growing very fast and profitably. They opened 42 new stores in the quarter. They ended the quarter with 949 stores. Unfortunately, we cannot play them in Option Investor because the options are so expensive. Shares spiked to $274 intraday but faded to close at $253 in the weak market.


G-III Apparel (GIII) confounded the earnings traders with earnings of $1.50 that missed estimates for $1.53. Revenue of $883.5 million missed estimates for $937.5 million. The company guided for the full year for earnings of $1.61-$1.71 and revenue of $2.43 billion. Despite the earnings miss, shares spiked 3% after falling to $24.41 at the open. Short interest of more than 14% apparently fueled the squeeze.


Oil prices rallied to $51.50 on Friday after a week of gains on the bogus OPEC production cut news. OPEC officially said it was cutting 1.16 million bpd starting in January to reach its 32.5 mbpd target. Cue the wild applause from traders long the market and stupid reporters that believed the headline spam.

Whenever OPEC does anything, there is always a catch. This is nothing buy a slight of hand trick to confuse the market. One of the important points left out of most of the reports about the cut is the timing. It starts in January and lasts only six months. The Saudi Arabian oil minister said they could discuss it again at the May 25th OPEC meeting and vote on extending it another six months if everybody agreed.

Secondly, the actual production cut is only about 300,000 bpd. In the graphic below the October numbers are from OPEC and that is what they based their reductions on by country. Note that the total of 32,997,000 bpd is significantly less than the 33.6 mbpd that the IEA claims was actually produced in October. I guess if OPEC fudges the starting number by 600,000 bpd than they can cut less to arrive at their future targets.

Note that Iran actually won approval to increase production by 90,000 bpd. That was quite a trick on their part since Saudi Arabia said they would not agree to any deal unless Iran cut production as well. Don't worry, OPEC members are only lying if their lips are moving.

Also note also that Libya and Nigeria are exempt from the cuts. They are also the nations that will be increasing production the most over the next six months. It is convenient they were left out of the deal. Libya plans to increase production by 349,000 bpd by the end of December. Nigeria plans to add 423,000 bpd by early 2017.

If you just believe the headlines, you probably thought OPEC actually accomplished something. However, in the graphic below there is only about 396,000 bpd less in 2017 than there was in October and remember, the October "quoted" number was 600,000 bpd under the IEA reported number. It is all a combination of misdirection and selective reporting by OPEC.


Lastly, they said non-OPEC producers were going to cut production by 600,000 bpd. Russia was the only major producer to step up and say, we will cut 300,000 bpd. Again, easy to say in front of a gaggle of reporters, easy to ignore in the homeland. Later an official in Russia said, I doubt we will be cutting any production. Another official said Russia would work "towards" cutting production in "2017" but no specific number or dates. They just wanted to make a big splash and once the ripples subside, they expect everyone to forget it because it is not going to happen. It is all politics and bravado. Russia previously announced they were going to increase production in 2017. They could just postpone that 300,000 bpd increase and claim they fulfilled their part of the deal. It is all smoke and mirrors.

I have not even touched on follow through by OPEC. They have never honored production limits and never will. You can say one thing in Vienna in front of the microphone and then go back to your home country and conduct business as usual. Back when they had a 30 million bpd quota, for two years they produced 32 mbpd and continued to claim at every meeting that the production quota was 30 million. "Move along, there is nothing to see here."

I am just amazed that oil traders have fallen for this scam once again. However, it has been so long since the last quota scam, the old army of traders has probably retired and a crop of newbies are running the trading desks.

Oil rose to $51.50 and several analysts are calling for $60 by the end of December. I hope they are right but I am very skeptical after living through multiples of these shell games over the last 25 years.


Active rigs only increased by 4 last week with 3 oil rigs and 1 new gas rig. If oil prices remain over $50, I would expect to see these numbers spike rather briskly over the next couple months. The key words in that sentence were "remain over $50" and that has yet to be proven.


 


 

Markets

We finally got a decent bout of profit taking. The selling was tame unless you were in Nasdaq stocks. The Nasdaq fell -152 points in two days and the selling may not be over.

The Russell 2000 completed a streak of 15 consecutive daily gains and then lost four days in a row. Friday was a fractional win of a half point but it was a gain. The Russell has pulled back to about 1,310 and appears to be resting before the next big move. There is psychological support at 1,300 where there was a little stutter step on the way up. I would look to be a buyer of the IWM ETF at the 1,300 level on the Russell.


The S&P tested support at 2,190 for the last two days but there is no assurance it is not going lower. The index closed 6 points off its intraday high for a gain of less than 1 point. That is hardly induces bullish conviction. The S&P could easily bounce from here or dip further to retest 2,175.

The overbought conditions have eased. Now we are in the testing phase where traders will be taking small positions to see if support is going to stick and sellers will be looking for intraday bounces as an opportunity. This is low volume sparring. However, Wed/Thr traded an average of 9.3 billion shares and Friday was just over 7.0 billion. There is still a lot of activity but no directional movement.


The Dow has been making new highs while the broader market indexes were selling off. The Dow made a new high on Thursday and closed only 21 points below that high on Friday. There have been some amazing one-day gains in a couple Dow components to produce those new highs.

Goldman Sachs (GS) gained 16 points in two days to add roughly 124 Dow points. UnitedHealth (UNH) gained 10 points to add roughly 75 points to the Dow. Since the Dow only gained 18 points total for the week you can easily tell who was carrying the load for the other 28 stocks. Those 28 were either marginally positive or negative for the week. What happens when GS/UNH quit surging? Will somebody else take their place?

Resistance is now 19,250 and support 19,065 and 19,000.



The Nasdaq did not decline on Friday but it was close. The 4-point gain was simply an accident after the index closed -19 points below its intraday high. If I had to bet, I would bet on a retest of support at 5,200. We had a very strong rally and only two days of declines. Those were some very strong declines but the sector rotation may not be over yet.

Resistance is 5,400 and a long way off from here.

The Nasdaq 100 never made a new high and has fallen back to just over critical support at 4,700 and I would not be surprised to see that tested next week.




Friday was a settlement day. The market was up for three weeks, down for one week and the overbought pressures have been relieved. Traders were squaring up positions and trying to decide what to do for next week. The Italian referendum headlines probably did not have a lot to do with retail trading but actively managed funds were likely holding off on establishing new positions until the results are known. They may have a better buying opportunity next week.

I believe the worst is over but I cannot guarantee it. If we get a decent dip on Monday, I would be a buyer of some index ETFs but I would probably avoid buying the big cap tech stocks. There may be more pain ahead for the big guys. That monster two day dip did give us some buying opportunities in select stocks but only if you can stomach the potential for a little additional volatility.

 



 

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Random Thoughts


The rally bloom is fading. Bullish sentiment declined -6.1% with the difference spread equally between the bearish voters and neutral voters. Nothing to see here. This survey ended on Wednesday.

Last week results


Do not install those apps! If you have an Android phone, you are at risk of downloading malware instead of an app. According to Check Point Software, malware designed to look like real Android apps has taken control of more than a million Google accounts since August. The new malware is called Gooligan but the fake apps have names like StopWatch, Perfect Cleaner, WiFi Enhancer, etc.

Gooligan is infecting 13,000 devices every day and can potentially infect about 74% of existing Android phones based on the Android 4 and 5 operating systems. The malware steals information including email addresses, authentication tokens, passwords, photos, documents, Google Drive and G Suite.

Check Point has a free online tool that will tell if your device has been infected. You can go HERE and enter the email address of your device and Check Point will tell you if your phone has been breached and what to do to clean it.


Let's say your company paid $100 million to build a Panamax container ship ten years ago. The Panamax classification was given to the maximum size ships that could pass through the Panama Canal. I hope you made a lot of money over the last ten years because your new container ship is now scrap.

Since the Panama Canal has opened its new expansion in June, it can now accept ships three times larger than the Panamax ships, which were the largest of their period. Bigger ships with three times the cargo capacity, have crushed freight rates. The cost to run both ships is roughly the same but with three times the cargo the shipping cost is significantly lower on the larger ships. The largest ships can carry more than 18,000 containers per trip. There are ships being designed today that will carry 27,000 to 30,000 containers but they will not be going through the canal and will not be completed until 2022-2024. By comparison the Panamax ships could only carry 4,000 containers.

In September, a 7-year-old Panamax container ship was being bid at $5.87 million for scrap. SEVEN years old! The value of Panamax ships fell -62% in 2016 alone. Previously the average age of scrapped container ships was 19 years.

There have been 151 container ships scrapped so far in 2016. That is twice the number scrapped in 2015. New environmental regulations requiring retrofitting are also pressuring the value of younger vessels. Shippers are hoping their retrofit requirements will drive a lot more ships to the scrap yard and lift shipping rates again. Currently, freight rates are at record lows. This is sparking consolidation in the industry with Maersk buying the seventh largest container carrier Hamburg Sud. Hamburg Sud operates 130 container ships. Maersk operates more than 605 container ships that travel more than 50 million nautical miles a year.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"If you dream small dreams, you may succeed in building something small. For many people, that is enough. But if you want to achieve widespread impact and lasting value, be bold."

Starbucks CEO Howard Schultz


 


New Plays

Fad Fading Fast

by Jim Brown

Click here to email Jim Brown
Editor's Note

The smartwatch space is struggling. More and more competitors are vying for market share and none of them are breaking out in profitability.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

FIT - FitBit - Company Profile

Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.

FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?

The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.

When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.

FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.

FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.

Earnings Feb 1st.

Sell short FIT shares, currently $8.14, initial stop loss $9.15.

Optional: Buy Feb $7 put, currently 57 cents.




In Play Updates and Reviews

Flat Into the Weekend

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed flat for the week ahead of the weekend event risk. The indexes rebounded weakly intraday and then faded in the afternoon. The worry over the Italian referendum on Sunday and the impact on the eurozone was one factor along with worry the crude gains will evaporate next week.

The Russell 2000 closed only fractionally positive as did the S&P. The Nasdaq gained 5 points but the lack of a material decline does not mean the selling is over. Friday was a settlement day as traders squared up positions for the week to wait for a new start on Monday.





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


BOJA - Bojangles
The long stock position was opened with a trade at $18.65.



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BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile

Comments:

No specific news. Shares spiked to $18.65 intraday to trigger the new entry then faded with the market.

The company announced the pricing of the secondary offering at $17.25. The offering will close on December 6th.

Original Trade Description: November 30th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

On Wednesday 11/30 shares dropped with the market to stop us out of the initial position. I still believe the company will set a new high once the secondary is priced.

Position 12/2/16 with a BOJA trade at $18.65

Long BOJA shares @ $18.65, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. Shares gained slightly in a weak market but still fighting resistance at $28.25.

Original Trade Description: November 30th.

Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.

Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.

They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.

Earnings Jan 25th.

Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.

Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.

Position 12/1/16 with a TRN trade at $28.25

Long TRN shares @$28.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 60 cents, see portfolio graphic for stop loss.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. Only a minor gain in a weak market.

Original Trade Description: November 26th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

Position 11/30/16 with a UIS trade at $15.25:

Long UIS shares @ $15.25, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



XLF - Financial SPDR ETF - ETF Profile

Comments:

Minor profit taking after the new 8-year high for the XLF.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX posted a weak gain once again despite a mildly positive market. This was likely due to put buying ahead of the weekend event risk.

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 done 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. HOV had another excellent week. Shares have been rising post election and our $2 call is now at the money. Earnings are Thursday so expect volatility.

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

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

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





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