Option Investor
Newsletter

Daily Newsletter, Saturday, 5/6/2017

Table of Contents

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

Market Wrap

Risk Evaporated

by Jim Brown

Click here to email Jim Brown

Late Friday polls on the French election showed a nearly impossible to overcome lead by Macron and weekend event risk evaporated.

Weekly Statistics

Friday Statistics

With a the Fed meeting and jobs report in the rear view mirror and the pro EU candidate well ahead in France, there was suddenly no reason not to hold longs over the weekend. In the polls, Macron had 63% and Le Pen 37%. With French and German markets at their highs and expected to surge Monday on a Macron victory, big caps stocks were suddenly in demand for the last 30 minutes of trading.

Apple (AAPL) rescued the Dow from the IBM disaster and kept the index close to zero or slightly positive most of the day. IBM fell $4 after Warren Buffett said he sold 30% of his shares. Berkshire was the largest shareholder in IBM at 9% and 81 million shares. He said when the stock hit $180 in Q1 he sold about 25 million shares. His comments suggested he would have sold the rest if the price had not dropped so sharply in early March. Buffett began buying IBM in 2011 in the $160-$170 range. Over the last 6 years, he collected more than $20 per share in dividends. When asked if he made a bad decision buying IBM he said he could have made a lot more money just buying the S&P. Shares fell from the $216 high in 2013 to $117 in early 2016. You can see why he wanted to bail when shares returned to $180 and a minor profit in Q1. IBM shares subtracted 27 points from the Dow on Friday.


Buffett was also saying positive things about Apple. He said the weak iPhone sales in Q1 did not matter. "I don't own Apple because of what I think the earnings are going to be in the next three months or six months." He said he understood why sales are soft and used a car analogy. "If you knew a new car was coming out tomorrow and you had to pay roughly the same, for the year older model, you are probably going to wait." Berkshire owns 2.5% of Apple's stock. Apple just added $35 billion to their stock buyback program and raised the dividend.

Apple was also rising on a note from Citigroup giving a 40% chance they would buy Netflix. Analyst Jim Suva assigned percentages to several other companies as well saying a repatriation tax cut could give Apple a window of opportunity to make a big purchase. Suva said Disney was a 25% chance, Tesla, Activision Blizzard, Electronic Arts and Take-Two Interactive were at 10% or less. On Tuesday, CEO Tim Cook said he wants Apple to be a major player in online video. Buying Netflix would be a way to spring to the front of the pack. With Apple's cash, they could accelerate the production of original content.

There was also a new article suggesting Apple and Amazon were getting together in an Apple TV deal where the Amazon Prime Video app would run on Apple TV by Q3. Apple is also increasing funding for its own original content that will be on the Apple Music service.

With all the various headlines on Apple, the stock shot up $2.43 to add roughly 17 points to the Dow and offset IBM's drag.


The Nonfarm Payrolls for April showed a gain of 211,000 jobs after a sharp drop to 79,000 jobs in March. February showed a revised gain of 232,000 jobs. The unemployment rate fell from 4.5% to 4.4% and the lowest level since 2006. The unemployment rate fell because the percentage of population not in the labor force rose by 162,000. The participation rate slipped slightly from 63.0% to 62.9%. Average hourly earnings rose +0.3%.

Goods producing jobs rose by 21,000 and service jobs gained 190,000. Analysts were expecting a gain of 180,000 after the ADP report on Wednesday showed a gain of 177,000. Mining and energy jobs rose 10,000 as oil well workers go back to work. Manufacturing added 6,000, motor vehicles and parts added 9,000. Retail employment rose 6,000, professional and business +39,000, temporary help +6,000, leisure and hospitality (waiters and waitresses) +55,000. Government employment rose 17,000 despite a decline of 6,000 in the federal government.

The separate household survey showed a gain of 156,000 jobs but significantly less than the 472,000 in March. The broader U6 unemployment rate fell from 8.9% to 8.6% and a post crisis low. The drop was due to a 281,000 person decline in those working part time for economic reasons.

Eventually there will be a hit to job growth once Obamacare is replaced and the 30-hour mandate for healthcare is eliminated. Millions of people currently prevented from working 40 hours on their primary job are working a second job to make ends meet. Once they are able to go back to 40 hours on their primary, they will drop the second job. Employers will also lower the number of jobs. For example, employers with 40 people working 30 hours a week (1,200 hours) will move back to 30 people working 40 hours a week (1,200 hours) but that means 10 people will be laid off. There are always unintended consequences to every government intervention. Obamacare increased part time employment and reduced full time employment. "If" it is replaced, that situation will reverse.


The strong jobs number suggests the Fed is free to hike rates in June and again in September. Analysts believe there will be 2 hikes this year and 3 hikes in 2018. Some are starting to move towards 4 hikes in 2018 but that is still the minority opinion.

There is currently a 78.5% chance of a rate hike in June according to the Fed Fund Futures.


The economic calendar for next week is lackluster with the Producer and Consumer Price Indexes and Retail Sales for April, the most important reports. You can tell the Fed quiet period surrounding the meeting is over because they are out in force hitting the speaking circuit. There is nothing on the economic calendar to move the market unless there is a dramatic disappointment in a specific number.


The earnings calendar is headlined by Nvidia, Priceline, TripAdvisor and Valeant on Tuesday. The retailers close the week with Nordstrom, Kohl's, Macy's and JC Penny.


The current earnings cycle is getting better every week. Of the 412 S&P-500 companies that have reported, earnings growth has risen to 14.7%. More than 75% of companies have beaten on earnings and 63.4% have beaten on revenue. The averages over the last four quarters are 71% and 53% respectively. There have been 50 earnings warnings for Q2 and 27 guidance raises. For next week, 42 S&P companies and one Dow company (DIS) will report. The current PE for the S&P-500 is 17.7. S&P earnings for 2017 are now expected to total $131.44 and grow to $147.40 in 2018 and $161.22 in 2019. If the PE remained constant that would mean the S&P would rise to 2,853 by the end of 2019. Obviously, that is the equivalent of a thousand years in market time.

Companies expected to beat earnings are PCLN, NVDA, EOG, KSS.

Companies expected to miss estimates are VMC, DISCA, TRIP.

Friday's earnings were sparse. Cigna (CI) reported earnings of $2.77 and analysts were expecting $2.44. Revenue of $10.3 billion beat estimates for $9.94 billion. Cigna guided for 2017 to earnings of $9.25-$9.75. Anthem asked the Supreme Court to review last week's decision by an appeals court to block the $48 billion takeover bid for Cigna. The appeals court said the merger would further reduce competition in an already concentrated insurance market. Cigna has sued Anthem seeking billions in damages for not completing the deal on schedule. The original bid was in 2015 and it lingered until the courts finally blocked it. They also blocked the $34 billion acquisition of Humana by Aetna. Shares rallied $3.50 to a new 52-week high.


Ruth's Hospitality Group (RUTH) reported earnings of 35 cents that beat estimates for 33 cents. The restaurant chain posted revenue of $105.5 million that just missed estimates for $105.9 million. They opened two Ruth Chris Steak House restaurants in the quarter plus another store in a partnership. They had 70 company owned steak houses open at the end of the quarter and 81 franchised stores. Same store sales rose 0.7% and the average check rose 2.4%. The calendar shift of Easter into Q2 impacted Q1 results by 70 basis points. The shift of Valentine's Day from Sunday to Tuesday cost them 50 basis points. Apparently, fewer people want to go out for a big meal on Tuesday after work.


Restoration Hardware (RH) announced a buyback program for $700 million. The company said it completed the prior $300 million program in Q1 for 7.85 million shares. This is a material announcement since the market cap for RH is only $1.7 billion. They are proposing to buy back 40% of their shares. The catch is that there is no expiration date on the program. They could take 5 years to complete it and there is no guarantee they will ever complete it. Companies announce buyback programs all the time and then buyback only a fraction of the announced total. Shares rose $5 to $57.


Facebook (FB) said it was launching about two-dozen TV shows in June. The content will be in two forms. Some will be 5-10 min in length and others will be traditional TV format shows. Facebook said it was planning on creating an "ecosystem" of professionally produced video content to augment user-generated videos that currently run on Facebook pages. The idea is to attract viewers so they can sell more ads. Facebook is now interviewing for new positions for film producers, creative producers, film engineers and several other producer type roles. Some will be deeply involved with producing original content and some will "oversee" content generation by others, as in Facebook users, companies and aspiring writers/producers. Facebook is well behind Amazon, YouTube and others in this endeavor but they have plenty of cash and they are not afraid to spend it.


Exact Sciences Corp (EXAS) rocketed another 10% higher on Friday to gain $10 for the week. EXAS makes the new colon cancer screening test Cologuard. This is a simple do it at home and mail it in test that costs $435 per copy. It just became accepted by insurance companies in the last several quarters. Cowen & Co surveyed 50 primary care providers and based on the survey those providers expect to use it on 55% of their patients. With roughly 80 million potential patients of screening age this translates into a $5 to $6 billion a year opportunity.

In Q1 EXAS said 10,000 providers ordered initial Cologuard tests, bringing the number of prescribers to 70,000. Since its launch two years ago, the company has completed 450,000 tests. More than 100,000 were in Q1. That shows you how fast the acceptance is ramping. Revenue rose 226% over the year ago quarter. The company said it hopes to have 2% of the market by the end of the year but said it could be processing 8 million tests annually within a couple years. This is a monster market and the Cologuard is much cheaper, safer, less time consuming and far less trouble than a colonoscopy. Shares have exploded since their earnings and guidance on the 27th.


On Thursday after the close Zillow (Z) reported earnings of 11 cents compared to estimates for 5 cents. Revenue of $245.8 million also beat estimates for $236.2 million. They guided for Q1 revenue in the range of $257 to $262 million and full year revenue of $1.05 to $1.07 billion. RBC Capital raised the price target from $40 to $48. Canaccord raised from $42 to $46, Cowen from $37 to $40. Shares exploded higher on the news to close at $44. We exited our long position at the open on Thursday to avoid a potential post earnings drop. Can I have a do over on that please?


The energy sector had a bad week. Oil prices dipped to $43.76 Thursday night to cap a decline that started around $54 about three weeks ago. Inventory declines have been slow to appear with only a 900,000 barrel decline for the last week. Refiners have been slow to restart production from their spring maintenance season. These events will eventually occur. Consumers drive like crazy over the summer and gasoline consumption soars starting around Memorial Day.

Recent comments from random analysts read like the end of the world for oil prices. With current U.S. production at 9.29 million bpd, one analyst was forecasting 10 million bpd by the end of August. The prior peak in 2015 was 9.61 million bpd. If that increase were to occur it would negate half of the OPEC production cuts and that is just until the end of August. If production continued to increase at that rate the U.S. would add another 1.0 million bpd by next April and inventories would be bursting at the seams.

This has little or no chance of happening. Even if we did increase at the recent average rate of 18,000 bpd per week, that is only about 80,000 bpd per month. There is also the law of decreasing returns. Production is surging today because of all the previously drilled but uncompleted (DUC) wells now being completed. That is far easier than drilling from scratch. Once all those DUC wells are completed the pace of new production will slow significantly.

Meanwhile, oil prices tanked on no news while we wait for the summer driving season to begin and inventories to drop. I went to buy gas yesterday in Colorado and it was $2.36 a gallon. They are already hiking the prices for the summer driving season. Based on $45 oil it should be closer to $2 a gallon. I checked GasBuddy.com and it was $3.09 in NYC, $2.75 in San Francisco and $2.04 in Houston.


There was a slowdown in rig activations last week, which was probably related to the decline in oil prices. Oil at $45 is not going to support as many rigs as $55 for obvious reasons. Only 7 new rigs were added.


Markets

With the late surge on Friday afternoon and the new closing high on the S&P with the Dow slightly over 21,000 it would appear we are poised for a breakout move on Monday assuming Le Pen does not win in the French election.

For two weeks, the markets moved sideways and refused to decline. We had all kinds of potentially negative events but no real selling. Despite going nowhere, volume was high on Tue/Wed/Thr. Thursday was the highest volume since March 21st and all the indexes ended in single digit gains except the Dow, which had a single digit loss. The market action has had all the earmarks of a distribution cycle but it looks like the buyers are about to win the battle.

Volume was moderate at 6.5 billion shares on Friday with advancers 5:2 over decliners. That is the first day in the last four that advancers beat decliners. This is a really crazy market but after two weeks we may be about to pick a direction.

The S&P closed 3 points over the prior closing high from March 1st of 2,395.96 and only fractionally below round number resistance at 2,400. At this point, ANY further gains could trigger significant short covering and price chasing. Everyone not in the market will be racing to buy something before it runs away from them.


The Dow closed at 21,006 and ever so slightly over critical resistance at 21,000. Like the S&P, ANY further gains could lead to significant price chasing. Numerous Dow components closed at new highs and they are overshadowing those laggards still in a slump. If the Dow breaks out, the laggards could find buyers as well on the theory they are not overbought like many Dow stocks seem to be.

The historic closing high is 21,115 on March 1st. That will be the last line of resistance for the bears but they seem to have lost their conviction.



The Nasdaq Composite closed fractionally over resistance at 6,100 and appears ready to move higher. The prior two days of post high selling were minimal despite the sector being very overbought. Nobody wants to sell techs and the FAANG stocks continue to make new highs.

Current support is just over 6,050 and then again at 6,025. There are no sellers and like the other indexes, ANY additional move over 6,100 could cause significant price chasing.




The small cap indexes are lagging big caps again. The Russell was leading the market for the prior two weeks when big caps were stumbling. It appeared to be a rotation from big to small, which would have been bullish for market sentiment. Now that rotation has reversed again and while the market may move higher, a big cap rally has less staying power. Portfolio managers buy big caps because they are liquid and they can get some short-term gains in a positive market. They buy small caps for the long term when they feel the market is going to remain bullish for a longer period.


As of late Saturday, the polls still have Macron ahead of Le Pen 60% to 40% despite Macron's emails being hacked and posted online on Friday. France has a 44-hour blackout of electioneering before the runoff to allow voters to reflect on their choices. While a 20% margin seems unbeatable, it would only take a 10.1% swing to put Le Pen in the lead. She is very strong in the country and Macron is strong in the more liberal cities like Paris. While it would appear Macron will win and the markets are prepared to run if he does, there is no guarantee. Populism is growing in Europe and Le Pen still has a remote chance of pulling off a victory.

The U.S. markets would like to see Macron win because he represents the least amount of change. We will know Sunday evening what Monday will look like once the S&P futures open for trading.

We have had a great earnings cycle with very strong earnings but that cycle is fading. After this week, there will only be about 46 S&P stocks left to report. We will also be heading towards the Memorial Day weekend that kicks off the summer doldrums.

I recommended last week for readers to be cautious with long positions until the Dow moved over 21,000 and the S&P over 2,400. Monday could be the day that happens and the odds are good it will be a repeat of the short squeeze on Monday after the French primary election. That means if you were not long at the close on Friday, you should consider passing on new entries where the stocks gap up significantly on Monday.



Random Thoughts


The bulls held on to their lead at 38.1% and a few more bears joined the fence sitters in the neutral camp. This survey ended on Wednesday so Friday's new highs are not yet in the calculation. If we have another giant short squeeze on Monday, it will be interesting to see the sentiment shift for next week.

Last week results


Major U.S. companies are paying summer interns a fortune in salaries. For example, Facebook is paying $8,000 a month with perks including free food, housing and free weekend events. Others include Microsoft at $7,100 a month in a rotational program that focuses on software engineering. Exxon pays $6,500 a month and teaches engineering, economics and management. Salesforce.com pays $6,450 and provides job shadowing, mentoring and classes. Amazon pays $6,450 and interns are encouraged to have ideas, innovate and try new things. Apple pays $6,400 and the program is run like a series of small start-ups instead of a global company. Others include Bank of America $4,750, Bloomberg $6,400, Yelp $6,400, Yahoo $6,080, VMware $6,080, Google $6,000, Nvidia $5,770, Intuit $5,440, Juniper $5,440. All the numbers come from Glassdoor.com. Top 25 Internships


You paid how much? This quaint 80-year old 908 square foot house with hardwood floors, wood burning fireplace and exposed beam vaulted ceiling in Palo Alto California recently sold for $2,555,000 and $623,000 over list price after a bidding war developed. The house will be bulldozed. Developers wanted only the 7,500 square foot lot. That is $341 a square foot just for the land. Sky High Prices

There have been stories recently about Silicon Valley employees making $160,000 a year and just barely scraping by. Facebook engineers making up to $700,000 a year asked Zuckerberg to subsidize their housing because of the absurdly high prices. This housing mania on the West Coast is eventually going to end very badly.



I was going to use the phrase "light this candle" in a section of commentary but that paragraph did not make the final edit. For those investors who have been in the market a long time here is a flashback to the award winning Ameritrade commercial with Stewart telling Mr B "Let's light this candle." Has the market changed since then? Classic Commercial



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A habit cannot be tossed out the window; it must be coaxed down the stairs a step at a time."

Mark Twain


 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Plays

Back from the Dead

by Jim Brown

Click here to email Jim Brown
Editor's Note

After six years of declining revenue, the results have improved significantly. STM is surging to new highs after posting 12.9% revenue growth for Q1.



NEW BULLISH Plays

STM - STMicroelectronics - Company Profile

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Buy STM shares, currently $16.70, initial stop loss $15.85.

Optional: Buy July $17.50 call, currently 70 cents, no initial stop loss.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Sleeper Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets traded barely positive all day until 1:30 when buyers began appearing in Apple and some other big caps. All the major indexes finished in the green with decent gains but those gains came in the last few minutes of trading. Apparently, traders saw the late afternoon polls suggesting Macron was going to easily beat Le Pen in the French runoff and the weekend event risk evaporated.

The S&P and Nasdaq closed at new highs and the Dow closed just slightly over resistance at 21,000. The Russell 2000 closed back over resistance at 1,388 and only 3 points below 1,400. The S&P-600 was not as bullish and failed to move back over resistance at 850 but still posted a 4-point gain.

For some reason the chart program I use for the portfolio graphic, reset the daily change early on Friday. All the change numbers are showing to be zero, which is obviously not the case. You can see the daily change numbers on the individual charts.





Current Portfolio


Stop Loss Updates

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


Profit Targets

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




Lottery Ticket Plays - Updated only on Weekends


Current Position Changes


PTCT - PTC Therapeutics
The long stock position was closed at the open ahead of earnings.



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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

BBRY - Blackberry - Company Profile

Comments:

No specific news. Nice gain to a new 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.



FNSR - Finisar Corp - Company Profile

Comments:

Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.

Optional:

Long June $25 call @ $1.20, see portfolio graphic for stop loss.



PTCT - PTC Therapeutics - Company Profile

Comments:

No specific news. We closed the position at the open on Friday to avoid holding over the earnings before the market opens on Monday. Of course the shares ticked down at the open but we still escaped with a minor gain.

Original Trade Description: April 19th.

PTC Therapeutics, Inc., a biopharmaceutical company, focuses on the discovery, development, and commercialization of orally administered, small molecule drugs that target post-transcriptional control processes. The company's lead product is Translarna (ataluren), for the treatment of nonsense mutation Duchenne muscular dystrophy in ambulatory patients; and which is in phase III clinical trials to treat cystic fibrosis caused by nonsense mutations. It also develops Translarna, which is in Phase II clinical trials for the treatment of mucopolysaccharidosis type I caused by nonsense mutation, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5; and RG7916 that is in Phase I clinical trials to treat spinal muscular atrophy. In addition, the company's product candidate in cancer stem cell program include PTC596, an orally bioavailable and potent small molecule, which has completed phase I clinical trials that targets tumor stem cell populations by reducing the activity and amount of a protein called BMI1. PTC Therapeutics, Inc. has collaborations with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., and the Spinal Muscular Atrophy Foundation to develop and commercialize compounds identified under its spinal muscular atrophy sponsored research program; and research collaboration with Massachusetts General Hospital for the treatment of rare genetic disorders resulting from pre-mRNA. Company description from FinViz.com.

PTC suffered two hits in March. The first was a failed drug trial on a Cystic Fibrosis drug. That drop knocked shares down from $13 to $10. Drug trials fail all the time and that is just the risk of owning a drug company.

On March 15th, the company announced it was buying a Duchenne Muscular Dystrophy (DMD) drug named Emflaza from Marathon for cash and stock. Companies buy rare drugs from other companies all the time. This particular drug had just created a hornet's nest of controversy after Marathon priced it at $89,000 per year. There had been a monster uproar over the pricing and even Bernie Sanders got into the act saying it should be $1,000 a year. For PTC to jump into the hornet's nest with a $140 million upfront purchase before the drug even succeeds in the market caused investors to flee the stock.

Here is the key point. The drug is in a class called corticosteroids that are anti inflamatories used all around the world to treat DMD as well as other diseases. The drug can be cross marketed and sold for multiple applications besides DMD.

The drug is new and was just approved by the FDA in February. When Marathon priced it at $89,000 right in the middle of the drug price happenings in Washington, they were forced to pause the launch to re-evaluate the price. PTC arrived on the scene and solved their problem.

Now PTC is evaluating the "correct" pricing for the drug and shares are rebounding from their headline induced crash.

Update 4/20/17: The company announced they had completed the acquisition of Emflaza earlier than expected.

Earnings June 15th.

PTC shares broke through resistance on Wednesday to close at a two month high at $11.39. Resistance is now $14 to give us a potential $2 window.

Position 4/20/17:

Closed 5/5/17: Long PTCT shares @ $11.43, exit $11.96, +.53 gain.

No options due to prices and wide spreads.



USO - US Oil Fund ETF - ETF Profile

Comments:

No specific news. Minor rebound but only a drop in the proverbial bucket compared to the losses.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin next week and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.



WLL - Whiting Petroleum - Company Profile

Comments:

No specific news. Minor rebound in oil turned the energy sector positive.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

Minor gain on weekend event risk. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.



WLB - Westmoreland Coal - Company Profile

Comments:

In the never a dull moment category of earnings date revisions, WLB announced their new earnings date would be May 15th before the open. That is Monday a week from now. That shortened the timeframe on this position. We need to be out by next Friday.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th. (revised to May 15th)

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Short WLB shares @ $10.16, see portfolio graphic for stop loss.

I am not recommending the put options because of wide spreads but the June $10 put is 90 cents, $9 put is 50 cents.




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.


CX - Cemex - Company Profile

Comments:

No specific news. Shares still trapped in the consolidation pattern.

We have a July call so we have plenty of time.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Update 2/10/17: CX said sales rose 4% in Q4 to $3.2 billion. EBITDA rose 10% to $654 million and +15% for the full year to $2.7 billion. Free cash flow rose 91% to $1.7billion in 2016. Debt declined by $2.3billion. Asset sales reached $2 billion of which $1 billion will close in 2017. .

Update 3/17/17: Cemex did not bid on the border wall. The company said they felt it would be bad faith and they could face repercussions from their home company of Mexico even though they have multiple concrete plants on both side of the border. However, they did say if a contractor asked for prices for cement they would be obliged to provide those prices and supply the cement.

Cemex is reducing debt by as much as $4 billion through price hikes and asset sales. They expect revenue from the U.S. to rise by $550 million in 2017 without any impact from the wall. In their analyst meeting last week the tone was positive and they expect overall revenue to rise 4% to 6%. That would rise if any infrastructure spending programs were enacted.

Update 3/25/17: Mexico warned Mexican companies it would not be in their best interest to participate in building the border wall between the two countries. The government said it was not going to pass a sanctions law but consumers would know and they would likely boycott any company that participated.

Cemex has said they would not participate but did say they would provide raw materials if asked by the eventual bid winners. Competitor Grupo Cemantos has said they would participate in the project.

The U.S. government said they had received expressions of interest from 720 companies to build the wall or supply components and services.

Update 4/28/17: The company reported a ten-fold increase in quarterly profits aided by asset sales. Cemex earned $336 million in Q1 compared to the $35 million in the year ago quarter. They made $152 million on selling a concrete tube business in the U.S. and $98 million on selling part of a unit in the GCC. They have another $320 million in announced asset sales set to close. Revenue rose 6% on a constant currency basis and debt fell -3.7% to $12.16 billion. Shares are trying to push through resistance at $9.25.

Earnings May 2nd.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Long July $11 call @ 52 cents. No initial stop loss.

Previously closed 2/6/17: Long CX shares @ $9.42, exit $9.05, -.37 loss.



ECA - Encana Corporation - Company Profile

Comments:

Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Position 3/14/17:

Long October $11 call @ $1.40, no stop loss.

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.



ETSY - ETSY Inc - Company Profile

Comments:

Etsy reported a breakeven quarter for earnings that matched estimates. Revenue of $97 million missed estimates for $98.4 million. They also announced a new CEO to replace Chad Dickerson who will be leaving at the end of May. They announced layoffs for 8% of their workforce. Shares plunged on the earnings to a low of $9.90 but rallied on Thr/Fri back to $11.67 and a 10% move on Friday alone to close at a 2-month high.

Original Trade Description: March 15th

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Update 4/22/17: On Friday the Australian Tax Office warned overseas sellers their websites would be blocked if they did not comply with the GST LVG tax laws in Australia. Ebay, Alibaba, Amazon, Etsy and others have complained they are not sellers. They merely match buyers and sellers for a commission. Ebay and Etsy do not collect the money so they cannot pay the tax. The tax only applies to vendors that sell $75,000 a year and therefore any forced collection could not be implemented until a vendor reached that level. It would be impossible to then go back and collect the tax from the vendor for the first $75,000 sold.

Shares were trading at an 8-week high on Thursday. Major sell off on Friday's news. The company said it would report earnings on May 2nd.

Earnings May 2nd.

Position 3/16/17:

Long June $12.50 call @ 36 cents, no stop loss.

Previously Closed 3/27/17: Long ETSY shares @ $10.25, exit $9.75, -.50 loss.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now