Option Investor

Daily Newsletter, Saturday, 5/14/2016

Table of Contents

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

Market Wrap

Time for the Real Support Test

by Jim Brown

Click here to email Jim Brown

The Dow closed at an 8-week low and the S&P closed only 6 points above critical support. There will be a test and I expect a failing grade.

Market Statistics

Friday Statistics

There was no apparent reason for the Friday decline other than economics came in better than expected and expectations rose for a Fed rate hike in June. Add in the destruction in the retail sector and investor sentiment took a serious hit. The retail ETF (XRT) has collapsed -11% in just over a week and we still have some major retail earnings next week. Somebody please kick me for not shorting it last week after Macy's warned their earnings would be weak.

On the economic front, we got a big surprise from the April Retail Sales report. April sales rose +1.3% after a -0.3% decline in March and twice what analysts were expecting. At 1.3% that is about 500% more than I was expecting. On a week when every major retailer is reporting sharp declines in same store sales of 2% to 5%, the economic report shows a 1.3% gain. Obviously, there is a catch.

The sales of autos rose 3.2% and gasoline rose 2.2%. Those categories supplied all the lift necessary to post an unexpectedly high number. Back in the real world sporting goods rose +0.2%, food service and bars +0.3%, general merchandising was flat, electronics and appliances +0.5% and home furnishings +0.7%. Building materials declined -1.0% to be the only drop.

I do not think we should be too excited by a 2.2% rise in gasoline sales since that is totally related to the higher prices at the pump. Also, the +3.2% spike in auto sales only offset the -3.2% decline in sales in March. If you average the two months you get zero. If you average the last five months you get -0.06%.

The euphoria over the stronger than expected retail sales was very misplaced especially when analysts were saying it put the Fed back into the picture for a June rate hike.

Also blamed for stimulating Fed worries was the +0.2% increase in producer prices. That was the biggest gain since last June but less than estimates for a +0.3% rise. This was only the second rise this year. The core rate excluding food and energy rose +0.3% and stronger than the +0.1% gain in each of the last four months. Some of the gains could be from the decline in the dollar over the last month. A cheaper dollar means commodity goods cost more.

There is still nothing for the Fed to get excited about. For the trailing 12 months the PPI is only up +0.1%, goods are down -1.9%, core goods +0.5% and services up +1.1%. That is hardly rampant inflation and the pace of the rise is miniscule.

Moody's Chart

The biggest surprise for the day was the nearly 7-point spike in Consumer Sentiment from 89.0 to 95.8 for May. That is the highest level since last June. The present conditions component rose from 106.7 to 108.6 but the expectations component rose from 77.6 to 87.5, a whopping 10 points. This was the first gain in the expectations component since November. Sentiment had been declining for the prior four months and this was a stunning rebound. There is a very good chance that we will see these numbers fade when the final report comes out at the end of June. You have to wonder if Trump becoming the presumptive republican nominee had anything to do with this spike. Blue collar workers taking this survey may have been feeling elated about the event. In an exit poll survey after the Indiana primary only 19% of college educated voters were for Trump but 83% of non-college educated voters did vote for him.

We have a busy calendar for next week and a several important events. The three housing reports will be closely watched for a rebound now that we are in the spring selling season. The Consumer Price Index is expected to show a big spike in inflation and that could aggravate expectations for the June Fed meeting. The Philly Fed Manufacturing Survey is the most important regional survey for the month and analysts are expecting a major improvement from 1.6 to 6.5 and that could also be Fed negative.

The FOMC minutes of the April meeting will be dissected for clues about a possible June rate hike.

This is also an option expiration week and volatility could be increased but I do not know how it could be worse than last week.

The destruction in the retail sector has called into question the health of the economy. The yield on the ten-year treasury declined to 1.7% at the close and very near a three-month low. This pressured the banking sector and Goldman Sachs (GS) was the biggest loser on the Dow.

Despite the apparent weakness in the economy, the expectations for a possible rate hike have pushed the dollar back up to 94.50 on the dollar index. This has weighed on commodities like oil and gold and on equities. The 15-month low the prior week has been erased and the return of a stronger dollar will depress Q2 earnings and raise prices for manufacturers. The celebration over the falling dollar was premature.

Apple (AAPL) broke below support at $92.50 on Thursday but held at $90. On Friday, Apple announced a $1 billion investment in Didi Chuxing which translates in English to Honk Honk, Commute. This is the Uber of China. They operate in 400+ cities, control 99% of taxi hailing in China and 87% of private car hailing. They also offer bus and chauffer booking services. They provide more than 11 million rides a day with 11 million registered drivers. The Didi Hitch service allows you to hail a designated driver that takes you and your car home if you had too much to drink. Uber only operates in 50 cities in China and does about one million rides a day. Didi recently paid $100 million to join the Lyft coalition so riders can use each other's networks when out of their home country.

Didi has a market cap of $20 billion, up from $6 billion a year ago. They have $3 billion in cash. So why is Apple making this investment? This is about appeasing the Chinese government more than investing for a future return. The Chinese government recently closed down the iTunes and iMovie services in China in order to reduce western influences. iPhone sales declined -11% in Q1 in China.

Apple needs to make friends with the government and they can do that by investing in Chinese businesses. Apple can also use its investment to learn how the ride share business works in China and possibly serve as a stepping stone when they eventually produce the iCar. Apple will also learn more about the buying and traveling habits of Chinese consumers.

Freeport McMoRan (FCX) cancelled leases on two drilling rigs owned by Noble Corp (NE) and agreed to pay Noble a $600 million termination fee. The cancelled leases covered the Noble Tom Madden and Noble Sam Croft, both ultra-deepwater rigs in the Gulf of Mexico. They were on 3-year contracts that expired in July and November 2017 and had $800 million in remaining payment obligations.

What is unusual about this cancellation penalty is that Freeport can pay using cash, Noble bonds and Freeport stock. Freeport can use stock up to 9.9% of its outstanding shares of stock. They can also pay with up to $200 million in Noble bonds due no later than December 19th, 2019. Apparently, Freeport believes they can buy Noble debt in the open market at less than face value and then tender it to Noble at face value.

Freeport also agreed to pay up to $75 million in contingent payments, depending on the price of oil over the next 12 months. Freeport cancelled the leases because current oil prices do not support deepwater drilling. If oil suddenly shot up to $75 a barrel then Freeport would owe Noble some additional money.

Freeport is saving about $200 million in cancelling the leases but they only had $224 million in cash at the end of Q1. That suggests they will have to issue stock to complete the payment. Shares fell -6% on news of the deal and Freeport's market cap sank by about $500 million on the drop. Sometimes you just cannot win.

Alibaba (BABA) was suspended from the International AntiCounterfeiting Coalition (IACC) only one month after it joined. This is a global nonprofit organization that fights counterfeit products and piracy. Alibaba has long been a site where just about any form of counterfeit product is available for sale. Alibaba says it has been working to reduce the number of counterfeit products (wink, wink) but other members of the IACC said it was not doing enough. The IACC includes companies like Nike, Apple, Rolex, etc. The IACC board also discovered a conflict of interest where the IACC president, Bob Barchiesi, owned Alibaba stock and had close ties to a company executive that used family members to help run the coalition. The board said they were not told about "certain aspects" of his conflict of interest. IACC had created a special category of membership just so Alibaba could join. That category is now on hold.

On a positive note, Alibaba teamed up with Japan's SoftBank to launch a cloud computing enterprise in Japan. The company will be called SB Cloud.

Herbalife (HLF) told investors in its earnings release that is was close to a settlement with the FTC over its marketing efforts. The company said it could be fined or sued but it expected a positive outcome. On Friday the National Consumers League (NCL) sent a letter to the FTC demanding "meaningful reforms and significant consumer redress" in any Herbalife settlement. The letter asked the FTC to insure that any injunctive relief addressed "persistent structural concerns." The NCL said "the threat of pyramid scheme behavior in the MLM industry is significant and persistent." Shares declined slightly on the news.

Allergan (AGN) was added to Goldman's conviction buy list with a $275 price target only a couple weeks after Pfizer ended their acquisition attempt. Goldman said Allergan had a "best in class" drug pipeline with 70+ unique drugs, an improving business model based on branded-growth pharma and a double digit revenue growth forecast based on volume-driving durable assets. They are going to deleverage their balance sheet when the sale of assets to Teva is completed for $40 billion and they authorized a $10 billion share repurchase.

Activision Blizzard (ATVI) and Electronic Arts (EA) are still gaining after strong earnings from both companies. However, NPD reported that video game hardware sales were down -23% in April and game software was down -21%. However, Activision just announced it had more than 9.7 million players testing its new game Overwatch, which is currently in beta. This is their biggest open beta debut ever. The game goes from beta to sales on May 24th and anyone wishing to continue playing will have to pay.

Activision also announced they were launching a new live-streaming video game platform in conjunction with Facebook. Activision acquired MLG.tv earlier this year. Viewers can watch live streams of other people playing games in real time. Viewers can learn the tricks and tips from watching and that improves their own game experiences. Amazon has a live stream gaming portal in Twitch.com and Google is trying to break into the space with YouTube Gaming.

Activision is going to be the winner in the gaming space with more than 500 million active gamers currently playing its games.

Sanofi (SNY) is planning on nominating 8 people to replace the entire Medivation (MDVN) board. Sanofi has been trying for months to buy MDVN for $52.50 a share but MDVN is not interested. They have held talks with Novartis, Amgen and Pfizer in an effort to find a better partner than Sanofi. Shares have rallied to $62 on expectations that somebody other than Sanofi will end up with a deal. Do not bother looking at the options because the premiums do not make sense.

Warren Buffett emerged as a potential bidder for Yahoo. Berkshire Hathaway is backing a consortium that is bidding the company's internet assets. The founder of Quicken Loans, Dan Gilbert, is part of the consortium. This group has apparently made it into the second round of bidding. Buffett's backing is a surprise since he is definitely not a tech person. It is also rare for Buffett to be bidding on a company where he cannot leave management in place. He is always a fan of companies with great management that can continue to operate without his involvement. Also, he never buys declining businesses. Former Yahoo president Sue Becker is on Buffett's board.

Verizon is still expected to emerge the winner because they have deep pockets and they own AOL. They could easily integrate Yahoo into their Internet portfolio. Other bidders still in the running include private equity firms TPG Capital, KKR and Bain Capital has partnered with Vista Equity Partners. YP Holdings is also a bidder.

The U.S. House of Representatives has blocked access to Yahoo Mail because of an increasing number of ransom ware attacks being spread through spam emails through Yahoo. Two individuals in the House fell victim to the attacks and had their files encrypted and held for ransom.

Reportedly, the bids are in the $4-$8 billion range. Yahoo currently has a $35 billion market cap but that includes $29 billion for its 15% stake in Alibaba and $8 billion for its stake in Yahoo Japan. The core Yahoo business is currently valued at less than zero because of the difficulty in splitting the various assets apart and the tax ramifications. I looked at several option combinations on Yahoo to capitalize on the rise or fall after the bidding process is completed. I passed because the prices do not make sense. In theory, any bid for Yahoo should make the stock rise but there is always the danger of a "take under" where the price is unexpectedly low because of factors unknown in the press. We do not know what skeletons they are hiding. For instance, they just lost a 15-year deal with AT&T that was producing $100 million a year in revenue. Are there more problems like that still being hidden?

In earnings news, JC Penny (JCP) reported a loss of 32 cents that was smaller than the 38 cents analysts expected. Revenue of $2.81 billion missed estimates for $2.92 billion. However, given all the retail results over the last week JCP came in at the top of the class. Penny still expects same store sales to rise 3-4% for the year. Penny reported only a 0.4% same store sales decline in Q1. The company said it was reducing its reliance on sales of apparel and moving more into appliances and other types of products. "We looked at our categories, and we look at what customers are spending." They are spending on entertainment, experiences and home beautification.

Penny got out of appliances some 30 years ago. Now they are putting appliances back into 500 of their stores. The CEO said one-third of our appliance customers are new customers and the average sale is $1,200. The company said they are also expanding its Sephora beauty shops and updating its salons now branded Salon by InStyle.

It is very strange that the company given up for dead over the last two years is now rebounding with an entirely new game plan that is beating companies like Macy's, Nordstrom's and Kohl's.

Nvidia (NVDA) reported earnings of 46 cents that beat estimates for 31 cents. Revenue of $1.31 billion also beat estimates for $1.27 billion. Nvidia is the leader in the high-end graphics processor market and they just keep getting better. I wrote several times last year that Nvidia was going to continue to exceed estimates because their technology is so far ahead of the rest of the pack. I said if you could only buy one chip stock this is it.

I had several readers email me back in January asking if I still liked the stock after it took an $8 drop in January along with the rest of the market. I told them to keep the faith, it will recover. Shares have nearly doubled since that January low.

Revenue from its GeForce graphics cards for PCs rose 17% to $687 million in Q1. Revenue from its datacenter business that includes Tesla processors, rose 62.5% to $143 million. They raised guidance and said they would return $1 billion to shareholders through dividends and buybacks.

Their newest high end gaming graphics card, the GeForce GTX 1080, has 8 GB of GDDR5X memory with 10 Gbps memory speed, 320 Gbps bandwidth, 2,560 CUDA cores, 1,733 Mhz cpu speed and supports monitor resolution of 7680x4320. I have been in computers since the mid 1960s and that much power in one card is beyond my comprehension. Nvidia said current high intensity graphics games will run 3 to 5 times faster with this card with significantly enhanced graphics.

Shares spiked 15% on the earnings and any pullback to $35 would be a definite buying opportunity.

Earnings are really slowing down next week. The large retailers Home Depot, Lowes, Walmart and Target will report. There will still be a few apparel chains reporting including L Brands, Stage Stores, The Gap and Ross Stores. Foot Locker closes the retail week on Friday.

The biggest tech stock to report is Cisco after the close on Wednesday.

After this week, there will only be a trickle of earnings reports until the Q2 cycle starts in July.

Crude oil rose to a six-month high at $47 on Thursday after U.S. inventories declined -3.4 million barrels for the prior week. This was due to the one million barrel production outage from Canada that flows into the U.S. pipeline system. It was also due to higher refinery demand as they ramp up for the summer driving season. Gasoline demand rose to 9.658 million bpd last week. That is the highest level since August 7th, 2015. We should continue to see inventory declines for the rest of the summer.

U.S. oil production declined another 23,000 bpd to 8.802 million bpd. That is down 808,000 bpd from the June 5th peak last year.

Active rigs declined -9 to a new record low at 406. That is down a whopping 1,565 rigs or -80% from the peak of 1,931 in early 2015. Offshore rigs fell -2 to a new multiyear low at 22. Gas rigs rose +1 to 87 and have been relatively stable in the upper 80s for several months now.

I reported last weekend that outflows from equity funds exceeded $16.9 billion the prior week and the most since the market crash last August. Bank of American said the outflows continued this week with $7.4 billion leaving equity funds. That brings the five-week total to $44 billion and the most since August 2011. This is also the 14th consecutive week of outflows and the longest run since February 2008. Money market funds saw inflows of $10.9 billion and the most in 13 weeks. Investment grade bond funds saw inflows of $3.2 billion.


The major indexes are teetering on the brink of a potential collapse. The sell in May cycle coupled with all the other negative headlines has pushed them back from their effort to make new highs on April 20th to making lower lows on Friday May 13th. There were no black cats or broken mirrors but simply a large outflow of cash for too many consecutive weeks.

Friday was more a lack of buyers than an abundance of sellers. Volume has been weak for the last seven sessions and Friday was no exception with 6.6 billion shares. Decliners were exactly 2:1 over advancers.

The earnings cycle is drawing to a close and the summer doldrums are rapidly approaching. Family vacations are being planned and schools begin their summer holidays in two weeks.

With the Fed lurking in the background, the UK Brexit vote in four weeks and weekly downgrades to the global economic outlook there is little reason to buy equities today.

Q2 earnings are not expected to be much better than the -7.1% we saw for Q1 and the rising dollar is going to continue depressing results. We should be buying trough earnings with a 6-9 month time horizon but in an election year, that involves a lot more risk. I think everyone would agree the current set of candidates are producing an abnormal risk environment with every sentence they speak.

Institutional investors are seeing the next several months as a risk off environment until the smoke clears and we have a better idea of what to expect in November and beyond.

While I do not believe the markets are going to go straight down in the months ahead, I do believe the bias will be negative and the market action choppy. The last two weeks have proven that point.

The S&P is poised to break below critical support at 2,040 and where that decline will stop is anybody's guess. Additional support levels are 2020, 1990, 1975 and then back to the August lows at 1867. I am not predicting any specific level but once below 2,040 the market sentiment could change dramatically.

The S&P closed under the 50-day average (2,054) on Friday for the first time since February 26th. The 200-day average at 2,012 could also be support but the S&P has not been reactive to that average since last August.

The Dow closed at an 8-week low at 17,535 and just over critical support at 17,500. A breakdown there would test light support at 17,500 and then decent support at 17,135. The Dow sprinted higher so fast in March there are few support levels that could slow any decline.

The decline on Friday saw nearly half the Dow components lose more than $1 and only three closed positive. Apple was the biggest gainer at +19 cents after dragging the index lower in prior sessions.

I am hoping we avoid a decline like the one we saw in January once support at 17,135 broke. The final resistance failure at 17,750 created two weeks of cascade selling that knocked 2,300 points off the Dow in only 13 sessions. The current resistance failure at 17,925 looks ominous since we have lost about 400 points in just three days. A break below 17,500 could see that selling accelerate.

The Nasdaq was buoyed again by the biotech sector. The $BTK gained +1% on Friday despite a sharp drop in the big cap indexes. The Nasdaq decline was limited to -19 points. Note the majority of the stock on the gainers list are biotechs.

The Nasdaq has been leaving tracks all over support at 4,750 but it does not seem to stick. The Friday close at 4,717 was not yet a lower low like the one we saw on the Dow. We would need to see a break under 4,685 for that to happen. However, that resistance failure at 4,800 was a lower high.

While the Nasdaq lagged in relative performance to the upside over the last couple of months, it is also lagging to the downside. The Dow is now the market leader in this decline.

Support on the Nasdaq is 4,600 then 4,500 and then a long drop to 4,200. Resistance remains 4,800.

The biotech index appears destined to retest that 2,750 support level. This sector is either feast or famine with alternating days of big declines and gains. It should remain under pressure as long as the presidential candidates continue to pick on the drug sector.

The Russell 2000 closed right on support at 1,100 and should easily test 1,090 on the next decline. The Russell was also helped by the biotechs and gave back only 6 points on Friday. Any continued decline should test strong support at 1,065.

I said last week, "In theory, this is a negative week on the market calendar as the sell in May followers accelerate their exits."

It was the third consecutive week of declines and this streak could easily turn into 4 or 5 weeks unless we get another monster short squeeze that is not erased because of a lack of market participants. Traders will be cleaning up their positions ahead of option expiration next Friday and probably not adding too many new positions ahead of the Memorial Day weekend the following week. After Friday's expiration, the volume is going to decline even further as summer begins with the holiday weekend.

Watch S&P 2,040 for market direction.

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Random Thoughts

Donald Trump is declaring war on Jeff Bezos and Amazon. Trump said Amazon had a huge antitrust problem because they control so many markets and are running small entrepreneurs out of business. While Amazon is big and does have its fingers in a lot of pies, the real problem is political.

Jeff Bezos owns the Washington Post personally. Trump called the Post, "Jeff Bezos toy." He said Bezos is using the Post for power over Washington so politicians will not tax Amazon the way it should be taxed and break up the monopoly portions.

While that may sound presidential in some circles, that is still not the problem. The problem is that the Post has put 20 reporters on researching Trump and calling him out on a large number of his past sins and outrageous statements.

Trump is hitting back at Bezos by threatening antitrust actions because of the negative articles written by the Post. Analysts claim Bezos should not take Trump's threats lightly because he has been known to carry grudges for a long time and could actually cause Amazon a lot of trouble if he was actually elected.

The U.S. is moving to activate a ballistic missile defense shield in Europe to defend against missiles from Iran. The former Soviet-era base in Romania is the first point in the shield that will eventually stretch from Greenland to the Azores.

Russia's President Putin came close to declaring war in comments he made after the announcement from the U.S. and NATO. He said Russia will act to neutralize the U.S. missile shield threat. He said the missile defense base activated in Europe was the first step in a new arms race and he vowed to adjust budget spending to neutralize it.

Putin claims the missile system was aimed at blunting Russia's nuclear arsenal. "This is not a defense system. This is part of the U.S. nuclear strategic potential brought onto a periphery. In this case Eastern Europe is such periphery. We are now forced to think how to neutralize emerging threats to the Russian Federation." This is "yet another step to rock international security and start a new arms race."

Of course, it is Russia that violates other countries airspace with fighters and bombers on a weekly basis and runs mock attack drills against American ships in the Black Sea.

Venezuela is moving closer to total collapse. The last beer producer went out of business two weeks ago because they could no longer buy supplies without dollars and the government has run out of money. They have actually run out of money needed to print more money. Last week mobs of more than 5,000 ransacked food stores and warehouses looking for something to eat. Children are dying for lack of medicine and food. Mobs are roaming the streets looking for anything they can steal and trade for food and supplies.

Government food dispensaries were overrun and looted by the mobs while government troops stood by and watch because they were so outnumbered. One reporter said there were 250 rioters for every policeman.

The stores were already empty with people waiting in lines for hours just to get a loaf of bread or a can of food. Now they are really empty with nothing left and no chance of being restocked with the government out of money. In March, food prices rose 582.9% and that was if you could actually find something to buy.

People have resorted to hunting pigeons, cats and dogs for food to feed their families. Livestock like horses, cows, goats, pigs and chickens have long since been stolen from farmers and killed for food. Citizens are now trying to flee to neighboring countries in hopes of finding food and shelter. With millions walking to the borders, this will cause the same type of rioting in neighboring countries when they cannot feed the masses.

There are rumors of an impending coup against President Maduro. The state security personnel have been disarmed to prevent them from turning on the government. The National Guard is said to be waiting for the entire situation to reach a boiling point and the population marches on the government before joining them to overthrow Maduro and his socialist policies.

Goldman Sachs strategist David Kostin warned last week of a coming crash. He said 35 out of 53 tech stocks saw their profit margins decline while valuations were near record highs. "It is time to play defense in a tough market." He currently has a yearend target of 2,100 on the S&P but he said "with 80% of fund managers underperforming their benchmark, the probability of irrational capital allocations increases, and as a result there is a reasonably high probability of a large drop in the S&P-500 this summer."

Also, "unbalanced distribution of upside/downside risks suggests 'sell in May' or buy protection. A shift in investor perception of various risks could easily trigger a sell off."

Officially, Goldman's risks include "elevated valuation, investor positioning, money flow trends, uncertain interest rate policy, weak economic growth, and election year politics. A 5%-10% drawdown in S&P 500 during the next few months implies an index level of 1850 to 1950 and a forward P/E of 15x-16x based on bottom-up consensus EPS." Full article

Dirty bombs? The State of Texas has begun issuing its game wardens radiation detectors. Since game wardens travel in remote areas and encounter many strange situations, they are potentially likely to come into contact with people that are intent on sowing destruction in America. There have been many stories about the potential for ISIS or Al-Qaeda to smuggle in radioactive material over the Mexican border for use in a dirty bomb in some densely populated city.

The devices issued to the game wardens are about the size of a cell phone and will be worn on their duty belts and will emit sounds if the warden approaches something that is radioactive. Multiple thefts of radioactive substances have been reported in Mexico in recent years. Why transport it from overseas if you can steal it in Mexico? We should be worried, very worried.

The Texas Parks & Wildlife division now has its own SWAT teams complete with camo painted assault rifles and night vision goggles.

Wendy's has announced they are going to install self-service kiosks at 6,000 locations because of the hikes in the minimum wage. McDonalds is expected to follow suit but at a slightly slower pace. All 258 Wendy's stores in California, where the wage is rising to $15 an hour will be installing the kiosks. Carls Jr is also installing the self-service kiosks because "the government is making it difficult to afford employees." Does it help to boost workers wages to $15 an hour if it costs them their jobs?

The Eatsa fast food chain now has a zero human interaction ordering process. The customer orders on an iPad and when the food is ready it is placed into a cubicle that looks like a microwave and the customer's name pops up on the screen associated with the order. Customers never see a human employee. It is considered the first fully automated restaurant. Full Story


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The short memories of the American voters is what keeps our politicians in office."

Will Rogers


New Plays

Investors Lack Belief

by Jim Brown

Click here to email Jim Brown
Editor's Note

AMAG is declining even when the sector is positive and that suggests investors do not believe their recent guidance. Expenses are rising rapidly and revenue missed significantly in the recent earnings report. That suggests trouble ahead.


No New Bullish Plays


AMAG - AMAG Pharmaceuticals - Company Profile

AMAG Pharmaceuticals, Inc., a specialty pharmaceutical company, provides products and services with a focus on maternal health, anemia management, and cancer supportive care in the United States. They also own Cord Blood Registry. This company collects, processes and stores umbilical cord blood and cord tissue for use in fighting chronic diseases in later childhood.

In their recent earnings they reported 94 cents that beat estimates for 89 cents. However, revenue of $109.3 million missed estimates for $123 million. Service revenues at Cord Blood were $19.5 million. However, R&D expenses rose +103.6% to $14.2 million and SG&A expenses rose 96.7% to $63.2 million.

With revenue well under estimates and expenses rising dramatically, the outlook for earnings weakened. While the company reiterated guidance for full year revenue in the $520-$570 million range that would require a significant rise in drug sales from the $109 million in Q1. Shares were downgraded to hold by Raymond James.

Earnings August 2nd.

Shares are at a 52-week low and they did not rally on Friday when the entire biotech sector was up more than 1%. They also failed to rally on the 9th when the biotech sector was up +3%. Apparently investors are not convinced they are going to be able to meet their revenue targets and earnings are going to suffer.

Short AMAG shares, currently $18.27, initial stop loss $20.25.


Buy August $17 put, currently $1.40, initial stop loss $20.25.

DB - Deutsche Bank - Company Profile

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Short DB shares, currently $16.39, initial stop loss, $17.75.


Buy long July $16 put, currently $1.15, initial stop loss $17.75.

In Play Updates and Reviews

Eight-Week Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow lost -185 points to close at 17,535 and an eight-week low and the S&P came within 3 points of critical support at 2,040. It is not a good sign when the indexes close on their lows on a Friday. That suggests shorts were not interested in covering their positions ahead of the weekend. Typically, there is an end of day bounce as they cover but that was very limited on Friday.

The declines would have been worse but the biotech sector rallied for more than a 1% gain. Quite a few biotech stocks were up sharply. That cushioned the decline and the Nasdaq only gave back 19 points and the Russell 2000 only lost -6. Next week is a new week and the biotechs have been alternating directions so Monday could be another sector decline.

We were stopped out on INSY because of the biotech rebound. I had moved the stop loss too close just to make sure we exited with a gain if a rebound occurred.

We were also stopped out on GoPro after they started shipping a $15,000 VR camera configuration. Shares popped more than 6% on the news as shorts covered but analysts were quick to point out that it would only appear to professional filmmakers and acceptance would be very limited. It will not provide any material economic boost to their profits.

I am recommending we reload the GoPro short on Monday if the stock trades at $8.75, which would be a new low.

The odds are very good we are going to see a breakdown in support on the major indexes next week with only two weeks left in the Sell in May cycle.

Current Portfolio

Current Position Changes

GPRO - GoPro

The short position was stopped out at $9.35. We are going to reenter.

INSY - Insys Therapeutics

The short position was stopped out at $13.25.

Profit Targets

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

Stop Loss Updates

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

BULLISH Play Updates

BLMN - Bloomin Brands -
Company Profile


No specific news. Minor loss in a weak market.

Original Trade Description: May 9th.

Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.

They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%. Shares surged 9% despite the miss.

Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.

Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.

Position 5/10/16:

Long BLMN shares @ $19.71, initial stop loss $18.25.

No option recommendation due to wide spreads.

TRN - Trinity Industries - Company Profile


No specific news. Trinity fell below support again and closed at a two month low. We have a July option that is worth 30 cents today. I would bet $30 that it will recover by July. However, I am dropping it from the portfolio. There is no reason to continue to report on it every day for the next two months. I will continue to monitor it and report on it from time to time but not daily.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.

WIN - Windstream Holdings - Company Profile


No specific news.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Position 3/11/16

Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

BEARISH Play Updates

ENDP - Endo Intl Plc - Company Description


No specific news. Biotech sector was up more than 1% on Friday as traders bought beaten down stocks.

Original Trade Description: May 11th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.


Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.

GPRO - GoPro - Company Profile


GoPro began shipping its $15,000 VR Odessey camera package and shares spiked 7% at the open on short covering. That stopped us out for a small gain.

HOWEVER, this was just a reaction move and shares collapsed back to the lows. I am recommending we reload the short at the open on Monday.

SHORT GPRO SHARES with a trade at $8.75, a new low. Stop loss $9.45

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

Position 5/10/16 with a GPRO trade at $9.65

Closed 5/13/16: Short GPRO shares @ $9.65. Exit $9.35, +.30 gain.

Reload the position on Monday with a trade at $8.75.

INSY - Insys Therapeutics - Company Profile


No specific news. The biotech sector gained more than 1% on Friday as traders looked for beaten down stocks to buy. We were stopped out on the 6.5% spike in INSY but the stock rolled over to give most of it back.

I am not going to reload this position today. Depending on what the market does on Monday I may reload it on Monday evening.

Original Trade Description: May 4th.

Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.

They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.

The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.

Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.

While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.

Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.

Earnings July 28th.

Position 5/5/16 with an INSY trade at $13.60

Short INSY shares @ $13.60, initial stop loss $14.60

SQ - Square - Company Profile


Square rebounded slightly on news Magic Johnson resigned from the board and Lord Paul Deighton, recent UK commerce secretary treasurer, will replace him. Johnson resigned to devote time to his infrastructure fund JLC Loop Capital Partners. The fund was formed to take advantage of new federal government infrastructure spending promised by President Obama. The first investor they approached put in $1 billion and Johnson said he was going to devote his full time to the project.

Tuesday is lockup expiration and we will be closing the put side of this position in the next several days depending on stock movement.

Original Trade Description: May 7th.

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.

Position 5/9/16:

Long May $10 put @ 60 cents. No stop loss. (Corrected entry)
Long Jun $11 call @ 55 cents. No stop loss.

XLF - Financial ETF - ETF Profile


Major decline but we need another 80 cent drop over the next week. The May option will expire on the 20th.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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