Option Investor
Newsletter

Daily Newsletter, Thursday, 9/21/2017

Table of Contents

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

Market Wrap

Quiet Market Mulls Rate Hikes

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The FOMC has indicated a December hike likely and the market quietly accepted the news. There was some mild intraday volatility but nothing to write home about, the market is treading water near its all time highs and the outlook is good. Today's economic data was positive and in support of expanding growth, reinforcing the idea of a December hike and the possibility GDP could expand above 3%.

International markets were quiet as well. In Asia eyes were on the BOJ which decided to hold rates steady and gave no indication of future policy action. Indices in the region were flat on the day with China closing with small losses and Japan with small gains. European indices were also flat but mostly in the green. Shares were supported by positive economic outlook and the possibility of a weaker euro.

Market Statistics

Futures trading was calm and quiet indicating little to no change at the open. There was a little movement with the release of data but not substantial, the open was however a little more active. Selling hit the market with the opening bell and drove the broad market down by about 8 points or -0.30%. This brought the SPX down to just below 2,500 where it created a neat little double bottom ad bounced back to near break even. It proceed to trend sideways near the high of the day until mid afternoon when prices dipped to test support, confirmed and bounce back to close near the middle of the days range.

Economic Calendar

The Economy

Jobless claims are already showing improvement following the two hurricanes. Initial claims fell -23,000 on top of a downward revision of -2,000 to hit 259,000. This level is still elevated but down substantially from a few weeks ago and well on the way to returning to more normalized levels. The four week moving average gained 6,000 to hit 268,750 and is at a +1 year high. Looking at the numbers I expect the average to begin falling next week. On a not adjusted basis claims rose by 0.006% versus an expected 8.8% and are up 3.2% over last year. Claims will likely remain elevated for another week or two but look like the surge won't last much longer than that, barring another storm of course.


Continuing claims rose by 44,000 and are now showing effect of hurricane related job loss. That being said the impact of 2nd week filers appears to be muted compared to that of initial claim filers indicative of employees getting back to work. The previous week's figure was revised down by -8,000, the four week moving average rose by 6,500 to hit 1.953. All in all this figure is showing an increase but not a very significant one, and one that will likely subside very soon.

The total number of claims has not yet been affected by the storm data, that will come next week. This week's data shows a continuation of near term and long term trends, falling by -114,202 and better than expected. This figure shows further improvement within the labor market, not much more to say about it than that.


The Philly Fed Manufacturing Business Outlook Survey shows a broadening of growth within the sector and region. And also an increase in pricing pressure. The activity index increased by 5 points to 23.8 while the future outlook index gained nearly 13 points to approach the all time high. The activity index has been positive for 14 months showing sustained expansion within the sector. The new orders index rose by 9, the shipments index by 8 and both the delivery and unfilled orders indices remained positive indicative of growing back log. Employment fell slightly but remains positive and expansionary.


The Index of Leading Indicators confirms growth and the possibility of expansion within the economy. The index rose by 0.4% in August and has been positive for 13 months. Economists at the Conference Board say the index is pointing to continued growth that may even have a moderate pick up. Tomorrow's data is Flash PMI for both the manufacturing and services sectors.


The Dollar Index

The Dollar Index gave up some of its gains in today's trade. While the dollar made advancements against the yen, hitting a two month high, it fell against the euro which is also expected to receive support from its central bank. The FOMC statement was bullish for the dollar but not really more than expected with the caveat that expected ECB action will continue to erode strength in the dollar. Looking back to yesterday's statement and press conference I thought it was scary when they said they don't know why inflation is running so low, sounds like they aren't really in control. Considering the data and in particular the indications of growth given by the Leading Indicators I'll not be surprised when we see inflation begin to spike. For now it looks like the DXY may remain within the near term range, near long term lows, between $91 and $92.50.


The Gold Index

The reaction in gold to the FOMC meeting was more decisive. Firming forward rate hike expectations sent the metal crashing to support at $1,300 and through it to trade near $1,290. Now that gold has broken support there is risk it will fall further with possible targets as low as $1,250 with nearer targets at $1,280 and $1,265. That being said there is still support from safe haven seekers and a chance the dollar will not be able to strengthen substantially.

The Gold Miners ETF GDX fell nearly -2% to hit support at the long term moving average. Today's action created a gap lower that was met by buyers and forming a green bodied candle. Support is now at the long term moving average, a break below which would be bearish. The indicators are bearish, pointing lower and gaining strength suggesting that support will at the least be tested further. A break below the moving average would have targets near $22.50, $22 and $21. A bounce from the moving average would confirm support but face resistance at $24 and $25. Longer term it looks like the ETF will remain range bound.


The Oil Index

Oil prices pulled back from yesterday's highs but remains above $50. The price is supported by hopes OPEC will give signs of extending the production cut tomorrow at their Vienna meeting, it is being weighed down by US and global production levels. US production is now reported to have regained pre-Harvey levels and there are no major disruptions in global supply. Without OPEC I see little reason for prices to move higher save a possible pick up in demand as economic expansion continues.

The XOI continues to move higher, supported by rising oil prices and forward earnings outlook. The index gained a half percent today and set a new 5 month high. I think I can safely say now that the sector has fully reversed. I don't know that it's time to add to positions right now, but future dips and tests of support will be buying opportunities. Next target for resistance is near 1,200, first target for support is near 1,160.


In The News, Story Stocks and Earnings

Google announced plans to expand on its smartphone business. The Internet behemoth is purchasing portions of HTC's business including employees and teams working on the Pixel smartphone. The deal is worth $1.1 billion and does not include an equity stake in HTC which will continue with its other operations pending a possible IPO(?). In the statement Google said it was investing for the long run. Shares of Google gained about 0.40% and confirmed support at the short term moving average. The stock is consolidating above long term support with indicators showing bullish crossovers and looks like it will move higher.


Micron reports after the bell tomorrow. The company is expected to post strong earnings driven by double digit growth in DRAM chips that is not expected to abate until 2019. Today the stock traded in a tight range just shy of the 3 year high. Price action is bullish over the short term and supported by the indicators. Nearer term it is in consolidation at recent highs with the possibility of extending the run higher. A beat on earnings with positive outlook could drive the move. Upside target would be near $42.


The VIX shed another half percent to close below 10. The index created a small doji candle testing resistance at the 10 level and confirming for the 2nd day in a row. The indicators are bearish, pointing lower and gaining strength suggesting the index will continue to fall. Downside target is near recent and long term lows in the vicinity of 8.90. This action is consistent with a calm market and bullish conditions if not a rise in the corresponding SPX.


The Indices

Today's action was largely to the downside but only marginally and not indicative of imminent doom. The indices are quietly churning at their highs, calmly processing yesterday's FOMC announcement and preparing for the onset of peak earnings season. The Dow Jones Transportation Average led with a small gain, about 0.15%, and set a new high. This is a new two month high and supported by the indicators so a move up to test the all time high looks likely. A break to new all time highs would be trend following and bullish.


The tech heavy NASDAQ Composite made the largest decline, about -0.50%, in a small test of support at the short term moving average. The indicators are bullish but rolling over, consistent with the near term top and suggestive that support will be tested and/or a consolidation range has been reached. Support is just below the 2,400 level near the the short term moving average, a break below there would be bearish in the near term with target near 6,250. A bounce would be bullish and trend following with upside target in new all time high territory.


The SPX closed with a loss of -0.30%. The broad market created a small red bodied candle just under the all time high and completely within yesterday's candle. The index appears to have crested a near term top and the indicators are in support. Near term support is at 2,500 for now. If it moves lower next support is likely to found at the short term moving average 2476, or -1%. A bounce from either level would be trend following and bullish.


The Dow Jones Industrial Average created a small bodied red candle closing at the low of the day and posting a loss of -0.23%. Today's action created a new all time high at the open that was met by light profit taking. The indicators remain bullish although they do show a little weakening in the near term. Without major resistance it is possible this index could continue to drift higher in the near term. If not, support is near 22,200.


The indices have broken to new highs and are now consolidating at those highs. The FOMC meeting confirmed forward economic outlook, as did today's data, and that outlook has been dimmed a bit in terms of long running inflation expectations. This adds up to economic growth, earnings growth, low inflation and ultimately low interest rates regardless of a hike or two. I am still firmly bullish for the long term. In the near term I am cautiously and selectively bullish, watching the rotation and waiting for earnings season.

Until then, remember the trend!

Thomas Hughes


New Plays

Geopolitical Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

North Korea returned to the headlines on Thursday evening. I am paraphrasing here: The North Korean Foreign Minister warned the country may consider the test of a hydrogen bomb in the Pacific Ocean as one possible "highest-level" actions against the US. Kim Jong-Un said the president's remarks at the UN merit the "highest level of hard-line countermeasure in history" because of the "mentally deranged behavious of the US president." S&P futures were down -8 a few minutes ago but have eased slightly.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Apple Weighs on Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

For the second day, headlines on Apple caused a major decline in the stock. The Nasdaq declined hard and Apple was the biggest loser on the Dow. The S&P gave back 7 points to close at 2,500 once again. All the indexes declined and Friday is not off to a good start with the futures down hard at -8. The Russell was the best performer losing only 1 point but that may not be material to Friday's markets.





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


DVAX - Dynavax Technologies
The long stock position was entered at the open.



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BULLISH Play Updates

DVAX - Dynavax - Company Profile

Comments:

No specific news. Minor decline with the biotech sector down hard.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.



ETSY - Etsy Inc - Company Profile

Comments:

No specific news. Shares still flat after the big decline on Friday.

Original Trade Description: Sept 13th.

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

For Q2, the company reported earnings of 10 cents that rose from a 6-cent loss in the year ago quarter. Revenue rose 19.1% to $101.7 million. Active sellers rose 10.9% to 1.83 million. Gross merchandise volume rose 11.7% to $748 million. Sales on mobile devices rose 47%. International sales rose 31% to 32% of gross sales. The number of employees in the workforce declined 23% thanks to an aggressive push by the CEO to expand profitability.

They guided for gross merchandise sales to rise 12% to 14% for the full year, up from prior guidance of 11.7%. Full year revenue is expected to rise 18% to 20% and in line with the 19.1% in Q2.

The company is growing rapidly, especially internationally and they are reducing costs significantly. Over the last several months, they replaced the CEO, CFO and CTO in their push to grow the company and profits quickly.

Expected earnings Nov 2nd.

On Sept 7th a Davidson's analyst, Tim Forte, went all in on ETSY with a glowing forecast. Shares spiked to $17.50 and then faded for a couple days. They have rebounded over the last three days and closed at a new high on Wednesday.

Position 9/14/17:

Long ETSY shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.



HIMX - Himax - Company Profile

Comments:

No specific news. Support held despite the weak market and weaker Nasdaq.

Original Trade Description: Sept 9nd

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax produces video drivers for 4K TVs and that accounted for 36% of total revenue in Q2. However, the big news comes from the 3D sensing chips. They are expecting a 90% increase in revenue from this technology in Q3. There are rumors that Himax is going to supply the 3D sensing technology for the new iPhones. Since several companies are rumored to have been selected, somebody is riding the rumor wave.

Since Himax guided for a 90% increase in revenue in Q3 from those sensors, it would suggest there is a surprise in store for the chip community.

They also provide chips for vehicle display panels and they recently guided for demand to jump from 135 million units in 2016 to 200 million by 2022.

On August 30th, Qualcomm and Himax jointly announced a new high resolution, low power, active 3D depth sensing camera system to enable conputer vision capabilities such as biometric face authentication, 3D reconstruction and scene perception for mobile, IoT, surveillance, automotive and AR/VR. They specifically said it would enable Android smartphones to have unparalleled 3D experiences. They called it "game changing technology for smartphones." This technology is the culmination of 4 years of research and development by these two firms.

Shares rallied on the announcements but then faded last week. The company issued a press release suggesting an Oppenheimer analyst had become too excited about the prospects and they reaffirmed their recent guidance. The fading excitement erased $1.50 in gains but support appeared at $10 and the overall uptrend should resume.

Expected earnings November 7th.

Position 9/11/17:

Long HIMX shares @ $10.31, see portfolio graphic for stop loss.
Alternate position: Long Dec $11 call @ $1.20, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

Original Trade Description: August 14th.

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 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 department spending.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Update 9/5/17: New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

Update 9/6/17: KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.



MRVL - Marvel Technology - Company Profile

Comments:

No specific news. No decline in a weak market. Support at $18 is holding.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Oct $18 call @ 64 cents, see portfolio graphic for stop loss.



SYMC - Symantec - Company Profile

Comments:

No specific news. Shares down with the Nasdaq.

Original Trade Description: August 26th.

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. Company description from FinViz.com.

Symantec is the largest provider of security products for retail buyers. They have an excellent suite of firewalls and antivirus programs. I have used everyone in the market at one time or another and Symantec has always been the best for me.

Last week they announced something different. They announced a secure router that handles everything in your house. It has special security for smartphones, tablets, PCs, IoT devices, etc. It has a handy user friendly interface and you can set at the router level, individual passwords for everyone in the family with individual settings by password. Say you have a 12 year old boy in the house. You can set different parental exclusions for him than you would for an 8 year old in the same house. You are in charge of everyone's access regardless of what device they are using.

The secure router blocks attacks before they get to your PC and before Windows has to deal with them. The router is not cheap but compared to what it does, it is cheap for the number of functions. How much does it cost to have your PC compromised? The router is $300 and comes with a year of service. After the year is up it goes to $10 a month. That is an entirely new revenue stream for Symantec. Obviously, it will not show up in their earnings for several quarters but the stock is rising on the news.

You can read the full press release HERE.

Expected earnings Nov 1st.

The stock is at the upper end of the range that I recommend in Premier Investor. With the potential for volatility in September, I am not recommending we go long the shares. This will be an option only position so we can try and ride out some of the volatility with minimum risk.

Update 8/28: Symantec said over the weekend they have identified a sustained cyber spying campaign, likely state sponsored, against Indian and Pakistani entities. The espionage effort began in October. India, China and Pakistan have raised military readiness over the last several weeks.

Update 9/6/27: Symantec said the US and EU power grid had been hacked by state actors and they had gained access to core systems that would have allowed them to be shutdown. The hacks were loosely tied to a recently dormant group called Dragonfly with links to Energetic Bear or Kola, widely believed to be sponsored by Russia.

Update 9/11/17: Shares of Symantec continue to soar after Google reported that searches for "LifeLock" had exploded and surged even higher than after the Anthem hack in 2015. Symantec's LifeLock monitors the credit bureaus and notifies you if anyone tries to open an account in your name. It carries a $25,000 reimbursement for stolen funds and retails for $9.95 a month. This is going to be a boost to Q3 earnings.

Update 9/14/17: The halt to US sales of the Kapersky virus suite, made in Russia, is another plus for Symantec.

Position 8/28/17:

Long Oct $31 call @ 48 cents, see portfolio graphic for stop loss.


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BEARISH Play Updates

DF - Dean Foods - Company Profile

Comments:

No specific news. Shares closed at a new 5-year low as the decline accelerates.

Original Trade Description: September 16th.

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The CEO warned, that volume and mix challenges are occurring at a higher-than-planned rate. As such, given the resulting volume shortages, they lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

On August 22nd the CFO resigned unexpectedly, effective Sept 1st. That is never good when a CFO exits with only one-week's notice.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

We shorted this stock on August 10th at $11.37 and shared dipped about 60 cents then rebounded to take us out of the short. The long put ended 6 cents in the money after shares began to roll over again. I believe we are going to see new lows.

Position 9/18/17:

Short DF shares @ $11.02, see portfolio graphic for stop loss.
Alternate position: Long Dec $10 put @ 40 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

No specific news. Since this is a long-term position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.





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