Option Investor
Newsletter

Daily Newsletter, Monday, 6/5/2017

Table of Contents

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

Market Wrap

Cautious Market Holds Steady

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Today's session was bogged down by geopolitical concern but the indices were able to hold their highs. The latest round of terror attacks in England have the world on edge and, surprisingly enough, a bloc of Arab nations have banded together in protest of Qatar, a country known to harbor terrorists. Along with this are mounting political concerns in the EU and ongoing issues faced by the Trump administration. Elections in both the UK and Italy are drawing near and causing jitters among investors, add to this an ECB meeting on Thursday and there is cause enough for cautious, quiet trading and I've not even mentioned former FBI director Comey's testimony to congress.

International indices were mostly down following the London attacks. Asian markets fell -0.25% to -0.5% in quiet trading. European indices were more firmly lower with losses in a range roughly double that of Asia. Weaker than expected PMI helped push indices and the euro lower as ECB expectations began to cool off. The ECB meets Wednesday/Thursday and is expected to to say or do something along the lines of increased tapering.

Market Statistics

Futures trading was flat all morning. Today's economic data was positive but rear-looking or showed slowing growth so not the catalyst it could have been. The open was quiet, the S&P shed 4 points in the first minutes and then regained them to trade near the flat-line for the remainder of the day. Not even Trump's speech on infrastructure and privatizing air-traffic control was able to move the market.

Economic Calendar

The Economy

There was a fair amount of data for a Monday including revisions to Productivity and Factory Orders. Productivity was revised up for the first quarter from the previously released -0.6% to UNCH and is up 1.6% over the same period last year. This led to a downward revision in Labor Cost which are now up only 2.2% from the previous quarter and 1.1% on a TTM basis.


Factory Orders fell -0.2% in April after rising the previous 4 months and a full percent the month of March. Shipments was unchanged, unfilled orders rose by 0.2% and inventories rose 0.1%.


The ISM Services index fell -0.6% to 56.9%. This shows growth but slower growth than last month and is the 89th month the index has been positive. Activity fell -0.7% to 60.7 and remains high. New Orders is also firmly positive at 57.7 but down -5.5% in the last month. Employment increased adding 6.4% to hit 57.8% and is the strongest level in over 6 months.


Moody's Survey of Business Confidence gained 0.6% to hit 36.2. This is the highest level in nearly 20 months. Mr. Zandi says that confidence is remarkably strong and stable, supported by buoyant global financial markets. He notes that there are no blemishes on survey results, that recently soft outlook for present-conditions has firmed and forward outlook remains positive. Looking at the chart it is easy to see that confidence has been building since late summer last year. Now that it has broken out above 35 it could easily continue up to test the highs set in 2015.


The 1st quarter earnings cycle is just about played out. Just over 99% of the S&P 500 has reported for the quarter with the final 2 or 3 scheduled this week and next. The final rate of growth for the index is 14% and much better than expected. A total of 9 sectors outperformed expectations in part to low estimates but also in part to improvements to business


Looking forward growth remains in the forecast. Assuming that estimates do not fall further and that the final rate for each quarter will improve an average of 4% by the end of the respective reporting season we could easily see double digit growth all year. The 2nd quarter estimate has stabilized at 6.6% over the past few weeks, add in the average amount of increase seen in the final rate over the past 2 years and that could easily grow to 10% by the time the next cycle is over. Looking forward 3rd quarter growth is estimated at 7.5% and 4th quarter at 12.5% which equate to 11.5% and 16.5% in my scenario. If I'm even half right this means the full year 2017 estimate of 9.9% earnings growth is off by nearly 2%.


The Dollar Index

The Dollar Index moved up in today's trade but only about 0.1% and not enough to regain support levels broken on Friday. The weak jobs numbers have further weakened FOMC outlook and the dollar which caused Friday's dip to new lows, today's move was sparked by weak EU data that have put a damper on ECB expectations. The index is now trading below the $97 level and possibly at a bearish extreme. This low is driven on central bank expectations that are likely to be left 1) unfulfilled 2) not as fulfilled as expected or 3) only as fulfilled as expected and, to varying degrees of strength, sell-the-news types of events. This week we have the ECB and expectation they will at least talk about more tapering, next week the FOMC and a 96% of a 25 bps interest rate increase so expect some volatility no matter what happens. A continuation of the down trend has a target near $95, a reversal may go to $100 before hitting significant resistance.


The Gold Index

Spot gold crept higher on last week's NFP and renewed safe-haven demand. The metal is now trading just shy of $1,290, near the April highs and below resistance. The near-term trend is up and is supported by geo-political events along with a weakening dollar but there are risks to the rally. For one, geopolitical fear could evaporate at the drop of a Tweet. For another, the ECB or FOMC meetings could result in a stronger dollar and weaker gold. A break above $1,290 for gold would face next resistance at $1,300, a drop from this level may find first support near $1,260.

The Gold Miners ETF GDX continues to trade within its ever narrowing range, focused on the FOMC meeting next week. Today the ETF fell about -0.5% in near sideways trading after opening near resistance at the 150 day moving average and the down-sloping upper range boundary. The indicators remain neutral and consistent with range-bound trading. A break to either side of this range, below $21 or above $23, could produce a fairly strong near-term movement.


The Oil Index

Oil prices got a shake up this morning as Saudi Arabia, Egypt, the United Arab Emirates and Bahrain joined forces in cutting ties to Qatar in response to growing global terrorism. What the move means for spreading violence is unclear, as is its impact on oil prices. The first reaction was to drive prices higher on fear of supply disruption, the second reaction was to drive prices lower on fears the OPEC production cap extension would be broken and flood the market with more oil. WTI trade in a +2% range today and closed near $47.30 with a loss of -0.5%.

The Oil Index continues to struggle along with oil prices. It created a green bodied candle in today's action but closed with a gains less than 0.2% and below my support line at $1,120. The indicators persist in throwing mixed signals indicating near-term bearishness but divergent in the short-term, suggestive of support. Support may still be at the current level, my line may be off by a hair, but if downward pressure continues a move to the low end of last years trading range near $1,075 becomes a possibility. I am still bullish for the long-term due to forward earnings outlook, I think there's a bottom around here somewhere.


In The News, Story Stocks and Earnings

Apple is holding their developers conference and was all over the news today. The biggest headline came out this morning and was a downgrade by Pacific Crest. The advisory firm says iPhone sales will not live up to expectations. The firm reduced the stock from overweight to sector weight and caused a -1.0% decline in share value. On the flipside, Apple is holding their developers conference and unveiled a powerful new Mac OS, peer-to-peer payments and a host of other new updates. Shares of the stock are trading just off the latest set high and look poised to continue the upward trend. Price action is forming a bullish triangle confirmed by stochastic but not yet by MACD.


The VIX trade more or less sideways from yesterday's candle and within near-term ranges but tried to set a new low. The fear index shed a little more than -1% to move below $9.70 but did not hold the move, closing above $10. Regardless, the index is showing historic low prices for options and bull market conditions suggestive of continued rally. The indicators remains bearish and are pointing lower at this time with no indication of bottoming or reversal that I can see.


The Indices

The indices moved lower today, but not by very much. Today's leader is the Dow Jones Transportation Average with a loss of -0.26%. The transports created a small red bodied spinning top candle at the 9,300 resistance line. The indicators persist in bullishness and continue to rise so a move up from here looks very likely. Next resistance is the current all-time high near 9,650.


The NASDAQ Composite shed -0.16% in a move creating a small red candle falling from the current all-time high. The index is in up-trend and supported by the indicators which have begun to show a little bit of strength. Stochastic is moving above the upper signal line, consistent with a sustained upward movement within an up-trend, and suggestive of higher prices. Upside targets are 6,400 and 6,600.


The S&P 500 made the third largest decline today, -0.12%. The broad market created a small, spinning top doji candle falling from the current all-time high. Today's move is a natural pause in the near-term up-trend and not unexpected, a deeper move lower may prove otherwise. The indicators are both bullish and pointing higher in support of higher prices so it looks like the move will continue. Upside target is 2,480 in the near-term.


The Dow Jones Industrial Average is the today's winner with a loss of only -0.10%. The blue chips created a small spinning top doji just below the all-time high set Friday and looks like it will continue to drift higher. The indicators are both bullish and confirm the break to new highs, stochastic showing a bit of strength with a move above the upper signal line. Upside target is 21,500.


There is a bullish tide rolling into the market, how high it will go and when is the question as always. The charts are looking good for a continuation of near-term trends despite a growing wall of worries. These worries may eventually weigh the market down enough to cause correction but there is no sign of it now that I can see. Until there is I have to follow the signals as they come and the signals I see are bullish. I am still cautious for the near-term because we've two major central bank meetings at hand, but looking to see the indices set more new all-time highs over the summer.

Until then, remember the trend!

Thomas Hughes


New Plays

Trend Change

by Jim Brown

Click here to email Jim Brown
Editor's Note

Regardless of how long a trend has been in place, it can always change significantly. Hertz and Avis ruled the rental car business for decades but that dominance is coming to an end.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

CAR - Avis Budget Group - Company Profile

Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary services to businesses and consumers worldwide. The company operates through two segments, Americas and International. It operates the Avis brand car rental system with approximately 5,550 locations that supply rental cars to the premium commercial and leisure segments of the travel industry; the Budget brand vehicle rental system with approximately 4,050 car rental locations, which serve the value-conscious segments of the industry; and the Zipcar brand, a membership-based car sharing network that provides vehicles to approximately 1 million members. The company also operates the Payless brand, which comprises approximately 240 vehicle rental locations; the Apex brand primarily in the deep-value segment of the car rental industry with approximately 25 rental locations in New Zealand and Australia; and the Maggiore brand that provides vehicle rental services in the commercial, leisure, and insurance replacement/leasing segments with approximately 130 rental locations in Italy, as well as the France Cars brand, which offers light commercial vehicle fleets with approximately 60 rental locations in France. In addition, it is involved in the local and one-way truck rental businesses with a fleet of approximately 22,000 vehicles, which are rented through a network of approximately 1,000 dealers and 480 company-operated locations that serve the consumer and light commercial sectors in the continental United States. Further, it offers optional insurance products and coverages, such as supplemental liability, personal accident, personal effects protection, emergency sickness protection, automobile towing protection, and cargo insurance products. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946. Company description from FinViz.com.

Avis has been in existence for more than 70 years. Who would have thought 70 years ago that you could someday pull a phone out of your pocket and have a Uber or Lyft at your location within minutes?

The rental car business is changing and within another 5 years, there may not be a driver in that car that picks you up. The business model for car rental companies is dying.

Adding to their woes are the falling prices for used cars and the changing mix of vehicles in the rental fleets. Hertz, Avis, Budget and Payless have been moving towards smaller and cheaper cars with better gas mileage but customers are demanding more SUVs to pack in all their family and luggage. This is also related to the Uber trend. Single travelers are more than likely to hail an Uber but families are more likely to rent a car. Because of this the mix of models in the fleets are suddenly all wrong. The companies do not want to invest in an SUV fleet since those models can cost more than twice as much as the smaller passenger cars. When you are buying cars by the thousands, this price difference is material.

In their recent earnings Avis reported a loss of 94 cents compared to estimates for a loss of 51 cents and a loss of only 28 cents in the year ago quarter. Revenues of $1.839 billion missed estimates for $1.854 billion and declined due to higher fleet costs and pricing pressures.

Earnings August 2nd.

Hertz reported a similar earnings disaster.

The sector is in decline and it is not likely to recover soon.

Shares closed at a multiyear low on Monday.

Sell short CAR shares, currently $21.44, initial stop loss $23.40.

Alternate position: Buy July $20 put, currently $1.20. Initial stop loss $23.40.


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.



In Play Updates and Reviews

Consolidation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes paused on Monday to reconsider their path ahead of some important events. The Russell was the biggest percentage loser as it fell back below 1,400 by a few cents. There was no material selling on any index as traders try to decide what to do ahead of Thursday's events.

We have the UK election, Comey testimony and ECB rate decision. The one with the potentially biggest impact is the Comey testimony. We are not likely to move up significantly ahead of this event.





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


FLEX - Flex Ltd
The long position was entered at the open.



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

Short term Calls and Puts on equities = Option Investor Newsletter

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Iron Condors = Couch Potato Trader



BULLISH Play Updates

BBRY - Blackberry - Company Profile

Comments:

Blackberry downplayed the shift by Toyota away from the company's QNX software in favor of an open source Linux version for driving the console functions in the 2018 Camry sedans. Blackberry said it was focusing more on the faster growing market for autonomous driving technology.

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

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

Update 5/22/17: BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.

Update 5/24/17: BlackBerry currently has more than 60 million QNX operating systems installed in late model cars and expects to license another 36 million in 2017. With U.S. auto rates around 18 million a year, that shows how BlackBerry has infiltrated the overseas markets as well. Shares were down slightly after an article in Forbes suggested Microsoft and Apple could compete for this marketplace in the years ahead.

Update 5/27/17: Blackberry and Qualcomm reached a final agreement on the arbitration award on overpaid royalties. The final award will be $940 million and wil be paid to Blackberry on May 31st. Qualcomm will deduct some royalties due from 2016 and Q1-2017 but Blackberry will receive most of the money. That includes $125 million in interest and attorney's fees. Qualcomm had originally agreed to cap certain royalties under their original licensing deal years ago but then demanded Blackberry pay anyway. In this case Blackberry prevailed.

Update 6/1/17: Short seller Citron Research issued a buy recommendation on Blackberry saying their automotive software is a game changer for the company. With an installed base of 60 million, QNX already has four times the number of cars as Mobileye when Intel bought them for $15 billion. Citron thinks BlackBerry shares could double and they could be an acquisition target now that their focus has changed to software. Shares rallied 8% to a new 52-week high.

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.



FLEX - Flex Ltd - Company Profile

Comments:

No specific news. Shares retreated slightly in a weak market.

Original Trade Description: June 3rd.

Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It offers innovation services, such as innovations labs for supporting customer design and product development services from early concept stages; collective innovation platform, an ecosystem of technology solutions; Lab IX, a startup accelerator program; centers of excellence solutions in critical areas; interconnect technology center for printed circuits; and CloudLabs that enables customers to accelerate a spectrum of cloud, converged infrastructure, and datacenter strategies. The company also provides design and engineering services, including contract design and joint development manufacturing services, which cover various technical competencies, such as system architecture, user interface and industrial design, mechanical engineering, technology, enclosure systems, thermal and tooling design, electronic system design, reliability and failure analysis, and component level development engineering; and systems assembly and manufacturing services. In addition, it provides component product solutions, including rigid and flexible printed circuit board fabrication, and power supplies; after-market supply chain logistics services; and reverse logistics and repair services, such as returns management, exchange programs, complex repair, asset recovery, recycling and e-waste management for consumer and midrange products, printers, smart phones, consumer medical devices, notebooks, PC's, set-top boxes, game consoles, and infrastructure products. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.

FLEX surprised me. I have traded it numerous times over the last 20 years but it was named Flextronics. They were a manufacturer of circuit boards. If you look at their company description above they are doing far more than that today.

FLEX reported earnings of 29 cents that beat estimates for 28 cents. They posted revenue of $5.86 billion that beat estimates for $5.67 billion. They guided for the current quarter for revenue of $5.7 to $6.1 billion and earnings of 24 to 28 cents. Full year free cash flow was $660 million and cash flow from operations of $1.15 billion. They have expanded margins for 14 consecutive quarters. They repurchased $350 million in shares for the year ended in March. The company said it remained committed to return 50% of free cash flow to shareholders on an ongoing basis. They ended the quarter with $1.8 billion in cash and debt of $3.0 billion.

Earnings July 27th.

Their guidance for earnings was a little lighter than expected because they announced a capex spending project that would weigh on the quarter's earnings. The spending is to improve a process to further expand margins.

Shares are in a steady uptrend and making new highs almost daily.

Position 6/5/17:

Long FLEX shares @ $17.53, see portfolio graphic for stop loss.

Alternate position: Long July $18 call @ 49 cents, see portfolio graphic for stop loss.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. I recommended in the weekend newsletter to close the position this morning.

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.

Update 5/5/17: 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.

Position 4/25/17:

Closed 6/5/17: Long June $25 call @ $1.20, exit $2.15, +.95 gain.

Previously closed 5/17/17: Long FNSR shares @ $23.10, exit $23.95, +.85 gain.



FRAC - Keane Group - Company Profile

Comments:

No specific news. Oil prices fell again and the sector declined with them.

Original Trade Description: May 31st.

Keane Group, Inc. provides full-service completions that include hydraulic fracturing, wireline, coiled tubing, and nitrogen units. It also offers drilling and well construction services that include top hole air rig packages and cementing. The company was founded in 1973 and is based in Houston, Texas. Company description from FinViz.com.

Investors are fleeing energy stocks and analysts are talking about $40 oil. This is ridiculous. All the major players, EIA, IEA, OPEC, Wood MacKenzie, etc all believe global inventory levels are declining by 700,000 bpd thanks to the OPEC production cuts. There are challenges where production is increasing. Libya is ramping up production after years of dormancy because of the civil war. The U.S. is ramping up production we well. These facts are constantly quoted by the bears. What they do not tell you is that global demand is expected to increase between 1.2 and 1.4 million bpd in 2017. With the summer driving season now underway, that demand will begin to surge. Inventory levels in the U.S. have declined -19 million barrels over the last 7 weeks. Now that driving season is here they will begin to decline at a faster rate.

In order for U.S. production to increase there needs to be an increase in fracking capacity. Much of that capacity was cold stacked in 2016 after the oil crash. Today there is not enough capacity and prices are surging.

Keane Group is an oil field service company that just came public in January. The dual oil crashes in March and May, crushed the stock back from $23 to $12. When they reported earnings in early May they were reactivating fracking capacity at a frantic pace. They went from 15 operating fleets to 19 fleets over the last quarter and are still in the progress of reactivating the rest.

In late May they announced the acquisition of RockPile Energy, another oilfield service company and fracking operator. The acquisition will increase Keane's fleet of frackers by 26% and it will be one of the largest and most modern pressure pumping fleets in North America. They will have about 1.2 million hydraulic fracturing horsepower available.

The evolution of hydraulic fracturing in the U.S. over the last three years has been remarkable. The horizontal laterals on the wells are longer with most now in the range of 10,000 feet. The amount of sand and chemicals forced into the wells have increase by a factor of four or more, which means more horsepower, bigger sand capability and better technology. The frackers are going to be in high demand for years to come because producers have figured out how to produce oil and be profitable under $50.

Keane's shares have declined from the IPO price but over the last month they have been rising while all the other energy stocks have been declining. This is proof that frackers are in high demand and investors are understanding the production curve.

Expected earnings August 1st.

Weekly inventories are due out on Thursday morning. If there is another big decline the oil price meltdown could end as quickly as it began.

Because this is a new stock, the option spreads are wide and dangerous. If FRAC performs as expected, we will be ok. If not there could be a substantial penalty in stopping out of an option position. For that reason the alternative option position will not have a stop loss.

Position 6/1/17:

Long FRAC shares @ $15.34, see portfolio graphic for stop loss.
Alternate position: Long July $17.50 call @ 45 cents. No stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news.

Original Trade Description: May 6th.

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.

Position 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.



WTW - Weight Watchers - Company Profile

Comments:

No specific news.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

ERA - Era Group - Company Profile

Comments:

No specific news. Intraday bounce was sold. Missed our stop loss again by 4 cents. Support is $7.25.

Original Trade Description: May 8th.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FOSL - Fossil Group - Company Profile

Comments:

No specific news. Decent rebound but faded at the close.

Original Trade Description: May 25th.

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.

Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.

Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.

Earnings August 8th.

Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.

Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.

Position 5/26/17:

Short FOSL shares @ $11.78, see portfolio graphic for stop loss.

Alternate position:
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.



SNCR - Synchronos Technologies - Company Profile

Comments:

No specific news. Moving back towards the lows.

Original Trade Description: June 1st.

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.

The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.

On May 8th the company announced it was rescheduling the earnings date for May 15th.

On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.

This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.

On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.

Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.

If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.

This has to be a stock only play because the options are too expensive.

Position 6/2/17:

Short SNCR shares @ $12.64, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Minor rebound due to the weak market.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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.





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