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Newsletter

Daily Newsletter, Saturday, 7/22/2017

Table of Contents

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

Market Wrap

Streak Broken

by Jim Brown

Click here to email Jim Brown

The streak of positive gains on the Nasdaq Composite ended at 10 days.

Weekly Statistics

Friday Statistics

The Nasdaq consecutive 10-day winning streak was the longest since July 2013. The index was due for a negative day. Despite the 2-point decline, the index is still bullish and poised to move higher next week with a flood of tech earnings. The following 2 weeks could be a different story.


Friday was not bothered by a bunch of economic reports. The Industry GDP for Q1, a lagging indicator at best, came in at 1.06% growth. Mining and energy contributed 0.32%, manufacturing 0.54%, construction 0.23%, wholesale trade 0.21%. Retail trade subtracted -0.21%, utilities -0.10%, entertainment, food service and lodging -0.04%. The report was ignored.

Personal bankruptcy filings for Q2 rose +0.8% and the first year over year rise since 2010. The average decline over the last two years was about -6.0% per quarter. Business filings remain near the 2006 lows. Banks have noted the change in personal finances and have begun to pullback sharply on auto loans. The report was ignored.

The calendar for next week is highlighted by the OPEC production meeting on Monday and the Fed's post meeting policy announcement on Wednesday. Saudi Arabia has been talking about cutting another one million barrels of production to hasten the decline in global inventories but nobody believes them. The post meeting headlines could move oil prices.

The Fed is not expected to make any changes to rates. There is only a 3.1% chance of a rate hike. They could begin to implement the end of QE with their first taper statement but analysts do not expect that until September. With the dollar crashing, the Fed is pretty much on hold.


The first look at the Q2 GDP is on Friday. The current estimate is for 2.5% growth, which is what I have been saying for months. The Atlanta Fed real time GDPNow has fallen to projections for 2.5%.


The home sales reports are not expected to change materially. This is for the June period and sales should have remained brisk since that is one of the best months of the year for consumers to move. They can buy/sell and get moved and settled before the kids go back to school.


The most important calendar for next week is the earnings calendar. With Alphabet/Google, Facebook, Amazon and PayPal leading the charge on tech stocks we could see a volatile Nasdaq depending on the reports. There are also 9 Dow components with the big day on Tuesday. All 5 companies will report before the open so there will be volatility.

In addition, there are 190 S&P companies reporting this week. When this week is over, we will know within a few percentage points how the quarter's results will end.

The current earnings forecast for Q2 has risen to 9.6%. Of the 97 S&P companies that have reported, 74.2% have beaten estimates, which is above the 64% average of the last four quarters. Of those companies, 72.2% have beaten on revenue, which is above the average of 59% over the last four quarters.


General Electric (GE) was drag on the Dow Friday morning after reporting earnings of 28 cents that beat estimates for 25 cents. Revenue of $29.56 billion beat estimates for $29.12 billion. Shares fell -5.4% at the open but recovered to lose only -2.9%. GE's small stock price of $26 meant that decline did not materially impact the Dow with only a 5-point drag on the index. Shares are down 18% year to date and closed at the lowest level since September 2015.

CEO Jeffrey Immelt ended his 64th quarter as CEO with the largest post earnings decline in four years. The drop in the stock came on weaker guidance to the bottom of the $1.60-$1.70 range for earnings in 2017. During his reign as CEO, GE has lost $170 billion in market cap.

The new incoming CEO is doing a "deep dive" into all the GE businesses and hopes to present a new forecast with the Q3 earnings.


Honeywell (HON) reported earnings of $1.80 that beat estimates for $1.78. Revenue of $10.078 billion beat estimates for $9.835 billion. They raised their earnings guidance from $6.90-$7.00 to $7.00-$7.10 with revenue up from $38.6-$39.5 billion to $39.3-$40.0 billion. Operating cash flow rose 25% and free cash flow rose 39%. Shares rose $1.40 for the day.

Honeywell is a slow grower but it is dependable growth. This is not a rocket stock but one you can look back on a year later and say, dang, I wish I had bought that last year.


The Swedish maker of auto safety systems, Autoliv (ALV) reported earnings of $1.44 compared to estimates for $1.48. Revenue of $2.54 billion missed estimates for $2.57 billion. Organic sales rose only 0.2% and well below the prior guidance for 2.0%. Guidance for Q3 was light and reflected slow production volume in North America and China. Shares fell 8% on the news.


The actual earnings on Friday were few and the stock reactions to earnings after the bell on Thursday were the bigger news.

Microsoft beat earnings on Thursday and shares rocketed $4 in afterhours to $77.24 but declined sharply before Friday's open. The stock lost 43 cents in regular trading to close at $73.75.


Visa (V) beat on earnings on Thursday and shares gained $1.49 to a new high in trading on Friday. The company reported 86 cents and analysts expected 81 cents. This was up from 17 cents in the year ago quarter. Payment volumes rose 12.1% to $840 billion. They forecast net revenue to grow 20% for the quarter ending on Sept 20th, up from prior guidance of 16-18%.


Capital One (COF) shares rose 8.5% after reporting earnings of $1.96 compared to estimates for $1.90. Revenue of $6.7 billion beat estimates for $6.67 billion. Shares were up strongly because the bank did not have to write down a large percentage of its loans. Analysts were worried the $582 million they have in Taxi Medallion loans would take a huge hit. In New York taxi medallions, the permit needed to operate a taxi, have sold for as much as $1.3 million. Since the advent of Uber and Lyft, those have fallen to $240,000. However, these loans represent only 0.24% of COF's outstanding loans. We also do not know how much they actually loaned on average on those medallions so we could be looking at pennies on the dollar and the loans are still viable.

There are currently 13,587 taxis in NYC and more than 50,000 Uber/Lyft cars. The average hourly earnings for a taxi driver in NYC is $30.41 not counting tips.


E-Trade Financial (ETFC) reported earnings of 52 cents on revenue of $577 million. Analysts were expecting 48 cents on $554.3 million. The company also said they authorized a $1 billion stock buyback program. They added 41,000 accounts during the quarter. Shares spiked 5% on the news.


Intuitive Surgical (ISRG) reported earnings of $5.95 per share on revenue of $756 million, a 13% increase in sales. Analysts were expecting $5.79 and $722 million. They shipped 166 da Vinci Surgical Systems in Q2 compared to 130 in the year ago quarter. Globally da Vinci procedures rose 16%. They announced a new model called the da Vinci X, which allows some of the most advanced procedures at a lower price point. Shares fell 5% or -$44.


In other news, Amazon (AMZN) was hit by a probe by the FTC after a complaint from the group Consumer Watchdog. The complaint said they looked at 1,000 items on the Amazon site and the reference price from which the discounts were calculated was not correct. The group said 61% of the items had sold for less than the reference price over the prior 90 days. Personally, I do not think it matters. If a Crock Pot has a manufactures list price of $29.95 and that is what Amazon is using as the reference price to calculate their discount, that should not be a problem. Even if they sold it on the website for $27.95 six weeks ago, so what? Everyone knows that nobody sells anything for the suggested retail price.

The real worry comes from the FTC probe in general. The current administration has dumped on Amazon in speeches multiple times. If the FTC is directed to "find something" then the probe could grow and grow and grow.

Secondly, with lawmakers urging a deeper review of the Whole Foods acquisition by regulators, this could cause even bigger problems getting that approved.

Everyone realizes that Amazon is the main driver behind the lack of retail price inflation in the U.S. and we are all thankful for it. If you are not an Amazon shopper, you may feel otherwise but you are still benefitting.

Amazon Web Services is also under attack but from another tech giant not the government. Microsoft cloud services rose 56% in Q2 and beat estimates by about $2 billion. KeyBanc said, "The sheer size and accelerating pace of cloud growth increases our confidence in the bull-case scenario that Microsoft Cloud can quickly scale north of a $50 billion segment by 2021." This could eventually allow Microsoft to bypass Amazon as king of the cloud. Microsoft cloud revenue is now 20% of their total revenue compared to 5% three years ago.

Whole Foods set August 23rd as the date of the shareholder meeting to vote on the Amazon acquisition. Given the 27% premium to the prior share price, this should be easily approved.

Amazon has begun offering meal kits similar to Blue Apron and Plated and the Amazon price is cheaper. With Amazon, you can order a single meal at any time without restrictions as a Prime customer. With Blue Apron and others, you have to commit to a monthly subscription of $60 or more and order a week in advance. The Amazon cost for a 2 serving meal was between $16-$20 plus a $10 delivery charge. For orders over $40, there is no delivery charge. Order 2-3 meals at once and you are set for several days. One analyst said he did not see the benefit in ordering "work in a box" when you could stop by a restaurant on the way home or order delivery.

Amazon earnings are next Thursday after the close.


Plug Power (PLUG) signed a new deal with Wal-Mart (WMT) where the company will install up to 30 more of its hydrogen fueling station and fuel cell energy solutions at Wal-Mart stores in North America. They have already installed 22 of these systems at Wal-Mart stores in the first deal with 5,500 Plug Power fuel cells at Wal-Mart distribution centers. As part of the deal Wal-Mart will buy up to 55,286,696 PLUG shares. Wal-Mart currently operates the largest fleet of fuel cell powered vehicles in the world. PLUG shares spiked 15%.


In a rare occurrence, two different brokers downgraded a Dow stock to a sell rating on the same day. Atlantic Equities and BTIG both downgraded Johnson & Johnson (JNJ) to a sell rating. BTIG put on a price target of $110 and the stock closed at $135. JNJ trades at a PE of 23 and set a new high on Thursday. It will be really interesting to see what happens to the stock over the next several weeks.


Netflix (NFLX) is not slowing down. The stock added another $5 on Friday in a weak market. With multiple upgrades after their earnings with several analysts targeting $200 and RBC targeting $210, the stock looks determined to hit those levels next week.


Alphabet (Google) reports earnings after the bell on Monday. The company is expected to report $8.25 per share. However, the company will have to report a $2.74 billion charge against earnings for the EU fine on prioritizing Google products above those being offered by non-Google sellers. It is not tax deductible so it will directly impact earnings. MKM Partners believe it will be a charge of $3.89 per share. Revenue is expected to be $20.9 billion, up from $17.5 billion. Paid clicks rose 44% last quarter so that will be the metric for comparison this quarter. Canaccord believes Google is facing a problem with ad load, meaning they have run out of places to put new ads and ad growth may be unsustainable. With Google reformatting ad placement in Europe as a result of the fine, they may have even less ad space available and Europe has been 30% of Google's revenue in past quarters.


The Volatility Index ($VIX) closed at 9.36 on Friday and a 24-year low. That is only 5 cents away from the 9.31 prior low in December 1993. The VIX has closed under 10 for the last seven days. To say this is abnormally low is an understatement. Some people claim the VIX is broken because of the switch to passive investing. Year to date more than $250 billion has flowed into ETFs according to Bank of America and that is a record. Others claim it is a factor of trading by computers. They do not have emotions that cause individual traders to think, "This market is getting overbought, I need to buy some puts."

Fundstrat Global Advisors just completed some research on the VIX and the question of low volatility. Fundstrat's Sam Doctor said after the research we believe the correlations are still there and "the divergence will be resolved in the coming months and could lead to a 10% decline in the S&P-500." They found since 1991 there have been 12 major volatility spikes and the correlation spreads collapsed. "According to our model, we see a 50% chance of a 10% correction in the S&P over the next several months, accompanied by a sharp spike in volatility." They recommend being overweight defensive large-cap growth stocks such as healthcare, telecom and staples. What could go wrong with this scenario? They said "The correlation spread divergence has persisted for over 7 months so far, and it could persist longer than we expect before resolving itself. In 2000, it persisted for 9 months before normalizing." Source


The dollar has imploded and the rate of decline is accelerating. The dollar index closed at a new 12-month low on Friday at 93.85. The Dollar Index has declined -6.4% this year. Against the euro, the dollar has fallen more than 10% and more than 15% against the peso. This is going to be a boon to companies that do business internationally and should boost earnings over the next few quarters.



August has not been kind to the market. Over the last 20 years the average August decline is -1.2%. That may not seem like much but there have been some dramatic declines that were offset by a few good years.

August 1990 - Kuwait invasion
August 1997 - Asian debt crisis
August 1998 - Russian debt default
August 2011 - U.S. debt ceiling, loss of AAA credit rating
August 2015 - China devaluation concerns

Those events caused declines of 5% to 15%. However, even in normal years, August is not kind. There are multiple reasons given by various analysts. The most common is that summer is fading, parents are getting kids ready to go back to school and they are trying to cram some late summer vacations in before that school bell rings. Volume is low as is interest in trading. Since Aug/Sep are the worst months of the year for the market, Sep/Oct are seen as the best months of the year to buy the dip.

October is known as the "bear killer" month because so many bear markets end with a low in early October and the dips are bought ahead of the best six months of the year strategy. November-1st to May-1st are the best six months of the year so everyone wants to be long when November arrives.

I explained these points to emphasize that traders should not be overly long once we enter August. We need to enjoy any continued gains but be ready to exit if the music suddenly stops.

Oil Prices crashed again on Friday despite a decline in active rigs. OPEC is meeting on Monday to discuss the progress of the production cuts but nothing is expected to change. There are cracks appearing in the fragile coalition between OPEC and non-OPEC producers and it will be a challenge just to retain the current level of cuts. Russia and Kazakhstan have both said they would not be part of any future cuts. Ecuador has pulled out of the agreement and is raising production and Iraq wants to increase production by 500,000 bpd. Saudi Arabia has talked about an additional cut of one million barrels on its own. This is highly doubtful since they are already carrying most of the load for the January cuts.

Nigerian production is up to 1.75 mmbpd, up about one million bpd since January. Libya's production jumped 500,000 bpd last month according to RBC Capital. Those two countries almost completely erased the 1.8 mmbpd the coalition agreed to cut starting January 1st. Fortunately, Nigeria is close to full production and cannot increase much further. Libya has room to grow but the easy gains are over.

Francisco Blanch, an analyst at Bank of America, said OPEC is boxed in. "They cannot get out of this problem very easily. It is either a fast death, slow death or death by a thousand cuts." If they kill the deal and increase production, it is a fast death. If they keep the deal, it is a slow death because production is still rising. If they cut production further they give away market share to U.S. shale producers and it becomes a long term death by a thousand cuts.

U.S. production rose 32,000 bpd last week to 9.429 million bpd and a post crash high.

Schlumberger (SLB) reported earnings last week. They said U.S. land revenue rose 42% from Q1 and almost twice the 23% rise in the rig counts. Revenue from fracking rose 68%. They said completion activity was accelerating and demand was "robust." They said U.S. activity has been leading the gains but they are suddenly seeing a burst in international activity among OPEC nations and other producers both onshore and offshore.

It appears to me we are not going to be seeing any material gains in energy prices in the near future. They will more than likely be volatile but with rising production at every turn, there is going to be a surplus of oil for the foreseeable future.

The U.S. onshore rig count declined by 2 last week. That was 1 oil rig and 1 gas rig. However, the offshore rig count rose by 2 to 23. There are several big projects in the Gulf that have been on hold but recent investment decisions have been made to proceed rather than lose the money already invested.




Markets

Friday's market movement was meaningless. It was expiration Friday in the summer earnings cycle. There were $550 billion in S&P options expiring. I wrote last weekend that the large number of call options in the 2450-2480 range could lead to hedging that would keep the markets flat within that range for the week. The S&P gained half a percent or only 13 points for the week despite all the indexes setting new highs on Wednesday. The market action over the last two days was expiration related plus a few earnings disappointments.

The S&P continues to climb slowly higher but Wednesday was the only real gain for the week. The S&P gained 14 points on Wednesday and 13 points for the week. That shows you the positive gain for the week was really only one day. Now that July expirations are over, we could see a little more movement next week. I would not expect it on Monday because that is expiration settlement day, which is rarely directional. Tuesday will be the turning point based on the 5 Dow components that report before the open.

The new target on the S&P is 2,500. This is the big round number that will draw traders like a flies to a picnic. It may also be the summer peak. Big numbers once hit tend to create a softness in the market because traders don't know what to do next. If we were to hit that level as we move into August, it could produce a sell the news event.

Support is now 2,450 and the index closed at 2,469. That gives us plenty of room to roam in both directions without causing any immediate change in sentiment.


The Dow rebounded from a low of -108 to end with a minor loss of 31 points. The intraday low was a higher low from Tuesday. However, the new resistance at roughly 21,650 has held on multiple attempts. The Dow chart is still bullish as long as we keep seeing those higher lows. Initial support is about 21,470. That gives the Dow about a 180-point range to traverse without triggering a breakout or a breakdown.

Tuesday will be the critical day with 5 Dow components reporting before the open. Monday is settlement day after expiration and is not normally directional but recent norms have not been following the historical patterns.



The Nasdaq Composite only gave back 2 points after ten days of gains. That is very good relative strength and with additional big tech earnings this week, we could see further gains. Alphabet is after the close on Monday so that will be the first hurdle to cross. Facebook is Wednesday and Amazon on Thursday.

Current initial support is 6,365 followed by 6,308. Resistance is 6,395. That 6,400 round number resistance will also be a factor but not as strong as the 6,500 target for the current move.




The small cap Russell 2000 had a good week with a record high close on Wed/Thr and a record intraday high on Friday. The index gave back only 6 points after a monster gain on Wednesday. As long as the Russell continues creeping higher, the big caps will eventually follow.


There are signs the markets should be positive this week but nothing is guaranteed. It is the two weeks after that concerns me because of the historical trend. I would still maintain a bullish bias for this week but starting next week I would tighten my stop losses. We may only get random volatility and that would be fine compared to the potential for a steeper decline.

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Random Thoughts


There was a big jump to the bullish camp last week. With all the major indexes closing at new highs on Wednesday, the same day the survey ends, the bullish sentiment saw a whopping 7-point jump. They came from the undecided and from the bearish contingents. This is almost a contrarian indicator that so many investors switched sides on the breakout or what could be near a top.



Google is in the mosquito raising business. The Verily business unit deals with health care issues and one of their recent accomplishments is mosquito breeding. Why do we want to breed millions of mosquitoes a week? In order to wipe out the population. The mosquitoes Google breeds are then infected with the Wolbachia bacteria. This prevents any reproduction activity from being successful. The males go from female to female performing their function but the resulting eggs do not hatch.

The idea is to keep mosquitoes from transmitting Zika, Yellow Fever, Malaria and other diseases. More people are killed every year by mosquitoes than any other animal or insect.

Google has perfected a way for robots to raise millions of mosquitoes a week and sort them by male and female. Only the female of the species actually bite. The males are harmless to humans and are the only mosquitoes released. They are sorted by computer with a picture taken of each mosquito to determine its sex. The project is called MosquitoMate and Debug Fresno.

Intrexon (XON) has been working on a similar program for several years but it involves introducing a genetically modified mosquito into the wild and there could be unforeseen consequences in the future. Google's mosquitoes are not modified. They just carry the Wolbachia bacteria that kills the eggs. Therefore, there is no risk to future generations. Once the males die, the bacteria disappears as well.

Google is aiming on reducing the mosquito population by 90%. People ask why not 100%? Because we do not know if the mosquitoes have a yet undiscovered positive impact on humans, animals, etc. Who knew Google was a mosquito breeder?


Hawaii is preparing to be nuked by North Korea. Missile attack drills will begin in November and citizens will be told to "get inside, stay inside and stay tuned." Students will begin practicing evacuation drills similar to "active shooter" drills. North Korean missiles cannot yet reach Hawaii but the regime has promised that they will be able to reach any part of the U.S. very soon.

If satellites detected a missile launch from Korea, Hawaiians would have about 8-12 minutes to react after the time it would take to recognize a launch and plot the course to a probable target. The total flight time would be about 20 minutes.

Hawaiian officials want to be careful and keep the preparations low key to avoid scaring away tourists.


JP Morgan raised its yearend forecast for the S&P by 150 points to 2,550. They said tax reform and the weaker dollar would produce a meaningful earnings surprise later this year.

If you subtract those 150 points from the target, you get 2,400 and their old target. Actually, the median S&P yearend target from 16 major analysts is, drum roll please, 2,450 which was surpassed last week. That is why that level was so critical. Currently Morgan Stanley is projecting 2,700, they just upped it last week to the highest on the Street. The lowest target is Fundstrat at 2,275 with Wells Fargo second lowest at 2,280.

Having the median target at 2,450 should concern us. If only a couple analysts were projecting that level it would not be material. When the majority are averaging 2,450, it suggests the Aug/Sep period could be rocky because professional portfolio managers are going to be cautious over that level.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"We are winning, they are losing."

Sec of Defense James Mattis when asked how the ISIS fight was progressing.


 


New Plays

Sector Depression

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes events occur that tank a sector and there is nothing companies can do about it. That is the case with the firearms sector in 2017.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

AOBC - American Outdoor Brands - Company Profile

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Sell short AOBC shares, currently $20.81, initial stop loss $21.85.
Alternate position: Buy Sept $20 put, currently 80 cents. Initial stop loss $22.50.


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

No Harm, No Foul

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's market performance was typical of an expiration during an earnings cycle. The markets opened lower and rose slowly throughout the day but try as they might they were unable to return to positive territory. The Dow was hampered by falling oil prices, disappointing earnings and a downgrade to sell on J&J.

The Nasdaq Composite only lost 2 points for the day and the Nasdaq 100 gained 0.30 points. The Dow only lost 31 and the S&P -0.91. This was typical for a summer expiration. There was not excitement in the market and all the headlines revolved around Washington politics. Next week is the heaviest week of the earnings cycle with nearly 180 S&P companies reporting. The market bias is positive until we get to August.





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


No Changes



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BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Holding over $19.50.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Long BOX shares @ $19.21, see portfolio graphic for stop loss.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Only a minor decline.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.



NTNX - Nutanix - Company Profile

Comments:

No specific news. Shares declined slightly after four consecutive gains.

Original Trade Description: July 19th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Position 7/20/17:

Long NTNX shares @ $24.48, see portfolio graphic for stop loss.
Alternate position: Long Oct $30 call @ $1.50, see portfolio graphic for stop loss.




BEARISH Play Updates

FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Shares spiked to $19.10 at the open to stop out the short stock position but the long put position is still open and will move to the lottery play section next week.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Closed 7/21/17: Short FRGI shares @ $18.75, exit $18.85, -.20 loss.
Alternate position:
Still open: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

New closing low. Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

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.

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.




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.


ECA - Encana Corporation - Company Profile

Comments:

Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

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 compared 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 will be 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 July 27th.

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.

Update 5/5/17: 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.

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

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.



NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

No specific news. Shares rebounded slightly. The earnings date is August 3rd. We are going to hold over the event because the news may not be good.

Original Trade Description: June 24th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of June 6, 2017, it operated 138 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

The company reported earnings of 13 cents that missed estimates for 16 cents. Revenue of $192.2 million missed estimates for $197.3 million. Same store sales declined -1.7%. They narrowed their full year guidance to earnings of 50-54 cents. They said they were cutting back on the number of new stores previously announced. That is a sure sign they are seeing competitive pressures on the business. The CEO warned that "the food retailing environment remains challenging."

The Amazon announcement just made their retailing environment significantly more challenging. NGVC has a very nice produce section of organic produce and a small grocery department roughly one fourth the size of a Whole Foods Market. Another 25% of their space is dedicated to vitamins. I visit one about once a week for a couple items. I have long ago switched my vitamin buying to Amazon because of the significantly reduced cost. I ran out of something a couple weeks ago and thought I will just swing by NGVC and get a bottle. The price was so high compared to Amazon, the sticker shock had me leaving the store empty handed. I had it from Amazon two days later.

I am afraid that is what many people are learning. It is hard to beat Amazon prices and the selection is much larger. NGVC was a niche store 10 years ago and did well. Now that Safeway, Walmart and Kroger carry so much organic food, NGVC is having trouble competing.

Expected earnings August 3rd.

NGVC shares are in free fall after their earnings. The Amazon announcement just greased the slide a little more.

Update 6/29/17: NGVC won the "Good Egg Award" at the Good Farm Animal Awards Ceremony in London. Shares spiked to $8.60 at the open to stop us out of the stock position at $8.45. The option position remains open.

Position 6/26/17:

Long August $7.50 put @ 28 cents, see portfolio graphic for stop loss.

Previously closed 6/29/17: Short NGVC shares @ $8.06, exit $8.45, -39 cent loss.



SYNT - Syntel Inc - Company Profile

Comments:

SYNT reported earnings of 44 cents that beat estimates for 40 cents. Revenue was $226.8 million compared to estimates for $220.5 million. Shares spiked $2.50 to $19.50 to take the stock out of range for our August $15 put. I am recommending we drop this position. It has no value currently but lightning can strike at any time. Just hold it until expiration.

Original Trade Description: June 7th.

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel has been around for a long time but there is far more competition today than just a decade ago. Cloud sourcing has overtaken outsourcing. Companies do not need to maintain their own server farms and services like SalesForce.com and Automatic Data can handle all the service issues of running a business.

Syntel reported earnings of 46 cents and analysts were expecting 44 cents. Those estimates had dropped from 51 cents over the prior four weeks. Revenue of $225.9 million beat estimates for $225.1 million.

The company guided for the full year for earnings of $1.57 to $1.77. Analysts were expecting $2.32 but had revised their estimates lower over the prior 4 weeks to $1.90. Syntel still missed the lowered targets.

Estimated earnings July 20th.

Shares are sinking fast and are very close to a new 7-year low at $16.35. There is very little buying activity.

Position 6/8/17:

Drop: Long August $15 put @ .43, currently zero, -.43 loss.

Previously closed 6/23/17: Short SYNT shares @ $16.65, exit $16.60, +0.05 gain.



YRCW - YRC Worldwide - Company Profile

Comments:

YRCW closed at another 4-month high on Friday and looks like it could be ready to move higher. However, all the other trucking companies have been struggling with earnings. YRCW reports on Aug 3rd and we will exit before the event.

Original Trade Description: June 13th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

For the 4th time in 7 years, Walmart selected YRC Freight as the National LTL Carrier of the Year. YRCW delivers to Walmart stores, Sams Club facilities and distribution centers all across North America. Walmart said the extensive YRCW network offers significant coverage to Walmart and their suppliers.

The company reported a loss of 70 cents for Q1 compared to estimates for 27 cents. Revenue of $1.17 billion did beat estimates for $1.14 billion. Shares imploded on the earnings miss and fell from $10.69 to $7.36.

Next estimates earnings August 3rd.

The company announced a restructuring plan to reduce management headcount and "de-layer" operational overhead. They announced several initiatives to reduce costs.

Last week they released metrics for the last two months. In April, freight tonnage per day rose 6.2% with May tonnage rising 3.3% over year ago levels. Regional tonnage increased 1.4% in April and 5.5% in May.

The business is growing and a reduction in costs will be positive. Investors seem to like the news with a rebound to pre-earnings levels. Resistance is $11.25 and a breakout there could easily run to $14.00 if the story and the market remains positive.

Position 6/14/17:

Long July $11 call @ 55 cents, see portfolio graphic for stop loss.

Previously closed 6/21/17: Long YRCW shares @ 10.70, exit $9.95, -.75 loss.





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