Option Investor

Daily Newsletter, Saturday, 6/4/2016

Table of Contents

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

Market Wrap

Going Nowhere Fast

by Jim Brown

Click here to email Jim Brown

The last four days saw triple digit moves on the Dow but we finished only 66 points from where we started the week.

Market Statistics

Friday Statistics

The last four days the Dow has fallen triple digits intraday and yet ended back almost where it started. On Monday, the Dow traded in only a 50-point range and one of the narrowest in years. That was a consolidation day while we waited for traders to come back from the holiday weekend. The rest of the week was somewhat bullish with big afternoon rebounds and Thursday's close looked like a setup for a bullish breakout. Unfortunately, the Nonfarm Payroll report killed that breakout and produced another triple digit intraday decline.

The Nonfarm Payrolls shocked the street with a drop to only 38,000 new jobs in May and the lowest number since September 2010. That was down from the previously reported 160,000 in April and initial estimates for 170,000 jobs. However, April was revised down -37,000 to a gain of 123,000 and March was revised down from 208,000 to 186,000. The separate household survey showed a gain of only 26,000 jobs. This was a major hiccup in job creation and suggests the weakness in the economy is accelerating.

Technology jobs declined -34,000, temporary services fell -21,000, construction -15,000, manufacturing -10,000 and energy/mining -10,000. Private companies added only 25,000 jobs. Since September 2014 the energy/mining sector has lost -207,000 jobs.

The headline number would have been worse but the seasonal "adjustment" added 224,000 phantom jobs into the May calculation and that gave us the +38,000 job gain. Without the adjustment, the number would have been significantly negative. There were 231,000 phantom jobs added in April as well. Since 2007, the workforce has grown by 21 million workers but the number of jobs has only risen 5 million. Only 2 million of those were full time jobs.

The unemployment rate plunged from 5.0% to 4.7% because 458,000 workers dropped out of the workforce. This dropped the labor participation rate from 62.8% to 62.6% and close to a 40-year low. The low in 2015 was 62.4% in September. The number of people not in the workforce rose to a record 94.7 million.

The Verizon strike subtracted 34,000 jobs and those jobs will be back in June. Still, adding those back in only lifts the number to 72,000 and still a big miss since the three-month average would only be 127,000 compared to 181,000 last month.

The BLS used the excuse that the response rate to the survey was unusually low at 74% compared to an average of 82% over the last three years. That suggests there could be significant revisions in the coming months. However, note that the revisions this month were negative.

Offsetting the decline in the Nonfarm Payrolls was the ADP Employment on Thursday that showed a gain of +173,000 private sector jobs. However, the separate Household survey on Friday showed a gain of only 26,000 jobs and confirmed the decline in the Nonfarm Payrolls. One of these surveys is wrong. Either the ADP numbers were grossly overstated or the two BLS numbers were vastly understated.

In a separate Pew Research survey, they found that the number of 18-34 year old individuals living with their parents was the highest since the Great Depression at 32.1%. Young adults are having trouble finding good jobs that will support them living on their own or allow them to get married and start a family.

So far, in 2016, there has been a decline of 6,000 full time jobs but an increase of 572,000 low paying part-time jobs. The percentage of men not working between the prime working ages of 25-54 is at an all time high at 4.6% while the 25-34 age group is at 5.7% unemployed.

The ISM Nonmanufacturing Index declined from 55.7 to 52.9 and the lowest level since February 2014. This was the fifth decline in the last six months. The new orders component fell from 59.9 to 54.2 and employment fell from 53.0 to 49.7. Order backlogs fell from 51.5 to 50.0 and exports fell from 56.5 to 49.0. With multiple components falling into contraction territory and the services sector the strongest section of the economy the outlook is not good. This was a May survey so we cannot blame the weak GDP in Q1 for the decline in the sector in May.

Factory Orders for April rose +1.9% compared to +1.5% in March. The gain was in line with consensus estimates. Durable orders rose +3.4% with nondurables gaining only .4%. Capital goods declined -0.6%. The report was ignored because April was a long time ago in market time.

Despite the weak economic reports over the last couple weeks and the weak employment, the Atlanta Fed forecast for Q2 is still showing 2.5% growth. That is up significantly from the +0.8% growth in Q1 but there is still another month left in the quarter. We could easily be well under 2.0% by the end of June.

There is nothing material on the economic calendar for next week except for the Janet Yellen economic policy speech on Monday. You can bet Janet will spend the weekend rewriting her prepared comments after the employment report blew a hole in the carefully crafted "data dependent" rate hike we were expecting in July.

Actually, Janet is probably breathing a sigh of relief that the data turned sour after a rising number of Fed heads began calling for a hike in June. Now she can point to the data and say we are data dependent and it will be appropriate to raise rates when the data improves.

The FOMC meets the following week and nothing is going to change for the better before the meeting. The Brexit vote is the following week and the jobs data allows the Fed to pass on the rate hike without appearing to be politically motivated because of the Brexit event.

JP Morgan (JPM) said the probability of a recession over the next 12 months has risen from 30% to 36%. This is a new high for this economic expansion. Note that since 1969 whenever that probability has reached this level there was always a recession. Secondly, only ONCE since the Depression has a recession appeared that was not triggered by the Fed raising interest rates. Economic expansions do not die of old age but by Fed action.

We are already in a 7-year economic expansion and the average expansion cycle since 1945 has been 59 months or just short of 5 years. The clock is ticking on this current expansion and the bearish impact on the market.

The payroll numbers caused massive buying in treasuries with the yield on the ten-year falling -5.9% in one day to 1.70%. This is nearing a four-year low at 1.65%. There was definitely a flight to quality underway in treasuries on worries the employment numbers were a warning of an impending recession. The JP Morgan recession warning also spurred buying.

Twenty-three countries now have negative interest rates with more than $10 trillion in investments. The German 10-yr Bund closed at a record low yield of 7 basis points. The 2-yr has a negative yield of -0.54% and the 5-yr at -0.41%.

The dollar crashed immediately upon the release of the payroll numbers. If the Fed is not going to hike rates until September or December then the dollar could remain weak and move lower if the economic reports continue to weaken. Gold prices spiked significantly on the drop in the dollar. Crude prices remained weak but would have been significantly weaker were it not for the dollar drop. The Dollar Index declined -1.76% or -1.69.

The CME FedWatch Tool is now showing only a 3.8% chance of a rate hike at the June meeting. Last week there was a 28.1% chance. The July FOMC meeting still has a 31.3% chance of a rate hike, down from 60.7% last weekend. The September meeting is only showing a 43.7% chance today compared to 66.8% last week. The Fed may want to raise rates but the market is betting against it.

In stock news, the gun manufacturers crashed after the FBI reported background checks rose only 2.6% in May compared to 14.4% in April. May background checks totaled 942,970 compared to 918,710 in the prior May. There was little help from politicians in early May with gun control out of the headlines. However, over the last week it has been front and center so I would expect June sales to rise. President Obama went on a rant in filming for a Sunday news show so that should also help. He admitted his presidency had caused more gun buying than any other point in history. Smith & Wesson (SWHC) fell -7% and Sturm Ruger (RGR) fell -4.8%.

Broadcom (AVGO) reported adjusted earnings of $2.53 compared to estimates for $2.28. Revenue rose +119% to $3.541 billion but still missed estimates for $3.550 billion. The revenue was boosted by strong product cycles from broadband and switching systems but was offset by a drop in the demand for disk drives and "premium smartphones." That is code for iPhones but they are prohibited against mentioning them by name. Wireless communications revenue rose +38% because of high demand for the chips. Wired infrastructure revenue rose sharply on demand for routers and switches to 58% of total revenue. Enterprise storage revenues declined -12% to $525 million. The company had $2.041 billion in cash at the end of the quarter and paid a dividend of 49 cents. The Q3 dividend has been raised to 50 cents. They guided for Q3 revenue of $10.75 billion with gross margin around 60%. Shares rallied 5% on the news.

Chipmaker Ambarella (AMBA) reported earnings of 34 cents that beat estimates for 28 cents. Revenue of $57.2 million also beat estimates slightly. They announced a $75 million share buyback effective immediately, which is 5.4% of their market cap. They guided to Q2 revenue of $60-$66 million and the street was expecting $69 million.

The challenge is the residual problems from the Japanese earthquake that shutdown manufacturing for Sony (SNE). The plant reopened on May 21st but the chip fabrication is not expected to resume until the end of August. Sony image sensors are used in mainstream and high-end video cameras that also use Ambarella chips. Analysts expect a strong second half for Ambarella once Sony production resumes. GoPro is also expected to launch the Hero 5 action camera in September and that uses Ambarella chips. Shares rallied 9.4% on the news but they have a long way to go to regain past glory. Friday was simply a short squeeze but several analysts did raise their ratings.

Earnings for next week are scarce but there are several big names still reporting. Valeant is scheduled to report on Tuesday before the open and this is sure to be the topic on trading desks all day. The consensus estimate is $1.42.

On Wednesday Ctrip.com, Lululemon and Restoration Hardware will report. Thursday has Kroger, Oracle and Rite Aid.

The AAII Sentiment Survey spiked significantly from last week. Bullish sentiment rose +12.4% to 30.2% and a six-week high. Neutral sentiment fell -12.1% to 40.8%. Bearish sentiment barely moved with only a -0.3% decline to 29.1%. It is amazing what several days of a bullish market can do to sentiment. Note that all the increase to bullish sentiment came from those previously neutral. The bears barely flinched with only a fractional decline.

Buy the rumor, sell the news. The Biotech Index ($BTK) is up 470 points or 16% since the May 12th bottom. It has been strong support for the Nasdaq and the Russell 2000. On Friday, the ASCO cancer conference opened for a five day run with 35,000 attendees. Also on Friday many of the big biotech gainers leading up to the conference were crushed as traders took profits rather than have some negative conference headline over the weekend cause a massive sell off next week. The BTK fell -2% on Friday when most of the indexes were only marginally negative. The Nasdaq suffered the worst with stocks including REGN -7, EGRX -5, UTHR -5, FPRX -4, AGIO -4, RARE -4, ALNY -4, etc. The Nasdaq losers list this weekend looks like a biotech who's who. The odds are very good this selling will continue next week and that will be an anchor for the Nasdaq.

Traders were sitting on pins and needles all week worried about the outcome of the OPEC meeting on Thursday. As expected, nothing happened. Oil ministers all said they were happy with oil prices and the current upward correction. Since they are getting twice as much for their oil now than they did in February it would make sense the pressure has been relieved.

However, oil prices began to fade after the meeting because those same higher prices are causing some of the OPEC countries to produce more oil. The various outages are being corrected and the temporary balance of production and demand will quickly turn into a glut once again.

August is the highest demand month of the year with about two million more barrels consumed per day than in May, which is the lowest demand month. Saudi Arabia alone burns an extra one million barrels per day to generate electricity for cooling.

Analysts believe oil will be trapped in a $45-$55 range for the rest of the year with the risks to the downside rather than the upside. There are still some analysts that expect $65 and others expect $40 but they are in the minority.

The rising price of oil caused a spike in the rig count and that is not what Saudi Arabia wanted to hear. Active rigs rose +4 to 408. Active oil rigs rose +9 to 325 and the first gain in 11 weeks and only the second gain this year. Active gas rigs declined -5 to 82. Offshore rigs declined -3 to 21 and a new cycle low. Active rigs are down -1,523 from the peak in early 2015.


The prior week rally in the S&P stalled at 2,100 but there is no evidence of a pending decline. Four days last week the S&P declined to 2085-2088 intraday but recovered to close at the highs of the day. Three times the index closed at 2,099 and once at 2,105. That close over 2,100 had the appearance of a setup to push higher and retest the highs but the employment report killed that effort.

However, the constant rebound from those intraday lows and the return to 2,100 still looks like investors are expecting a breakout. Remember, much of those gains over the last two weeks were on the back of the 16% rally in the biotech sector with help from financials and semiconductor stocks. The biotech stocks are likely to decline next week. The chip stocks appear to have run their course after the Applied Materials earnings bounce and the higher production estimates for iPhones.

The financial sector was crushed on Friday as expectations for a rate hike evaporated. Goldman Sachs (GS) was the biggest loser on the Dow at -$3.61 with JP Morgan in second place at -$1.17. There is no reason for the financial sector to rally next week unless Yellen pulls a rate hike out of her purse in the speech on Monday.

The energy sector is also likely to fade as prices move away from $50. The offset there is a falling dollar that will support crude to some extent but concentrated selling in the futures could overcome the dollar impact. Basically, crude prices are going dormant without some new headline and that means energy stocks could also fade.

If we subtract biotechs, financials, chips and energy stocks from the S&P support base there is not much left. Those are major S&P sectors.

The index has significant resistance from 2100-2132 and it has failed at these levels on every test since last May. Eventually those levels will be broken but heading into the summer doldrums does not give me much hope for the coming month. A rally is possible because of the massive dip buying we saw last week but there has also been sellers waiting at 2,100 on every rebound.

The Dow remains under strong resistance at 17,925 and the index has tested lows at 17,700 for the last four days. The Dow has been the weakest index because it did not have a lot of biotech stocks for support. Weak financials and energy next week could be the anchor that pulls it lower. However, we have seen serious dip buying the last three days but the volume was light. They bought the dips but they could not push the index higher. Conviction stopped around 17,800.

The Nasdaq could have tough week ahead if the biotechs roll over as I expect. That sector has been major support and could now be a major drag. The Thursday gains stopped almost exactly at 4,968, which was resistance from April. This could be an ideal spot for a failure.

Without a lot of earnings or events next week, the Nasdaq will be left to find its own way. That direction may not be positive.

The Russell 2000 small caps surprised everyone with the close over major resistance at 1,165 on Thursday. Of course, that was due to the 2.5% gain in the biotechs that day. The Russell dipped back below that resistance on the -2% decline in biotechs on Friday. The Russell will follow the biotechs next week because there is no other sector that can counter the biotech pull. Financial stocks should be weak and energy should be weak and those three sectors should drag the index lower.

Fundstrat's Tom Lee believes we are in for a June Swoon now that the Fed rate hike has been pushed farther into the future. He said a confluence of events were setting up for a perfect storm. He warned the market's three months of gains, weakening financial stocks, high-yield spreads getting ready to widen, the U.S. dollar reversing lower and disappointing economic data is pointing to a less liquid environment for equities. He said a lot of the firm's clients that made money in May are booking profits. Lee is not a bear. His yearend target for the S&P is 2,325.

I would add in the FOMC Meeting on June 16th, Brexit on June 23rd and the apprehension over the political conventions in July.

There is no rule that says the markets have to go down in June but historically, even without all the various events above, the S&P is flat in early June, peaks around option expiration on the 17th and then closes the month at the lows.

However, since 1950 June has been up 33 years and down 33 years with an average return of -0.10%. July has been up 36 years and down 30 with an average return of 0.84%. August has been up 37 years and down 29 with an average return of -0.27%. September is the big change in trend with 29 up years compared to 37 down years and an average return of -0.68%. October flips back to positive despite some very strong declines early in the month. It has been up 41 years and down 25 with an average return of +0.8%. Source

I am neutral for next week with the exception of a potential decline in the biotech sector that weighs on the Nasdaq and Russell. Yellen's speech on Monday could move the market in either direction. Whether the move will be lasting is a coin toss.

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Random Thoughts

Walmart (WMT) said it was partnering with Uber and Lyft to deliver products to your door on the same day you order them. There will be a $7 to $10 charge for the service. The pilot program will be tested in Denver Colorado and Phoenix Arizona. Sam's Club will also have a pilot in Miami Florida in March.

The deliveries will handle both groceries and general merchandise. Walmart already has a grocery home delivery service in San Jose and Denver. They are planning on adding 14 cities in June. To place an order for home delivery you have to go online and specify a delivery window so the driver does not have to leave the items on your doorstep. Store personnel will pick and pack the order and then call a delivery driver. Walmart stressed there is no payment to the driver on delivery so I am assuming no tips.

Walmart has to do something to combat Amazon. Online sales growth has slowed in 7 of the last 8 quarters. Online sales account for only 5% of total sales. They also said they were experimenting with moving merchandise directly from the delivery truck to store shelves and not keep inventory in the back room. They also said they were "investing in prices" which means they are lowering prices in select areas to compete better with other retail stores.

Are you living in a video game? Elon Musk says it is possible but not likely. He explained to a crowd at the Code Conference that our existence could be a simulation being run by a highly advanced civilization. Seriously, this is from the guy that brought you PayPal, Spacex, Tesla, SolarCity and the Hyperloop.

He said, "The strongest argument for us being in a simulation is the following: 40 years ago, we had Pong. Two rectangles and a dot. Now, 40 years later, we have photorealistic 3D with millions playing simultaneously. If you assume any rate of improvement at all, then the games will become indistinguishable from reality, even if that rate of advancement drops by 1000 from what it is now. It is a given that we are clearly on a trajectory that we are going to have games that are indistinguishable from reality. It would seem to follow that the odds that we are in base reality is 1 in millions." In some circles he would be called crazy.

Musk plans to launch a rocket to Mars in 2018 and then follow it with some supply ships every 24 months until he sends people by 2025. Musk said he did not recommend transporting a human to Mars in SpaceX's Dragon II spacecraft because, for one, the interior space is akin to that of an SUV, which does not make for comfortable space travel. But, perhaps more importantly, the Dragon II does not have the ability to return to Earth. We would have to put that in really small print on the contract. "I mean if you are going to choose where to die, then Mars is not a bad choice," Musk said in response to whether he wanted to end up there. "But it's not some sort of a 'Martian' death wish."

Musk said Google would not be a potential competitor to Tesla in autonomous cars. He said Google has done a great job in showing the potential but they are not a car company. "I would not say they are a competitor." When asked about Apple he said, "They will be more direct." Musk has inside knowledge of Apple's plans because they have hired some Apple engineers and Apple has hired some of his engineers. Musk said Apple will not be in production before 2020. He previously dubbed Apple a "Tesla graveyard" in response to the defection of Tesla employees to Apple.

Facebook has entered the required zone. Tenants in a Salt Lake City apartment complex are "required" to "like" the apartment on Facebook as a condition of their lease. The City Park Apartments posted notices on some resident's doors reminding of their contractual obligation to post a like on the Facebook page and "friend" the apartment complex. The lease also allows the apartment to use pictures of the tenants and their visitors on the apartment's page.

If the tenants do not friend/like the apartment's Facebook page they can be found in breach of the rental agreement and forced to leave.

Over $100 trillion has disappeared from corporate assets. According to John Mauldin and the CIA Fact Book there are 1,656 trillion barrels of oil reserves worldwide. Oil in the ground is a corporate asset or country asset in the case of countries with state owned oil companies. These reserves can be sold to raise cash or they can be used as collateral for loans.

In mid-2014 oil was more than $100 a barrel. In February, it was selling for less than $30 a barrel. That means the asset value to corporations had declined more than 70%. If you multiply the 1.656 trillion barrels of reserves by the $70 drop in prices, more than $115 trillion in asset value evaporated in about 18 months.

The human mind has trouble with very large numbers. It would be hard to quantify in terms everyone could understand on how much money that really is. This is why crude prices are so important to the global economy. Entire countries are struggling today because of the low oil prices. In America alone more than 207,000 workers lost their jobs and more than 100 companies filed for bankruptcy. The "wealth effect" in those countries that depend on oil for their revenue is a real reason why the global economy is so weak. Countries cannot spend money at $40 oil as they could at $100 oil. If your salary were cut by 70% tomorrow, what would your life be like?

North Dakota had a $2 billion rainy day fund two years ago. Today they have a $1 billion deficit because their budget was built on $100 oil and the massive income from all the drilling in the Bakken. That drilling has vanished. As of Friday, there are only 22 active rigs in North Dakota. The tens of thousands of workers have vanished leaving only empty man camps and desolate subdivisions.

Harry Brown, Libertarian presidential candidate in 2000 and no relation to me, listed the top ten ways to preserve your wealth. Never assume your income stream will not stop. Never assume just because you created a lot of wealth in one endeavor that you can recreate it if that wealth was lost. If we could impart that concept to every high school graduate, it would help them immensely. How many times have you seen an article where some famous actor, athlete or past Lotto winner was filing for bankruptcy? Money and fame are fleeting. Plan to keep what you have rather than expect to make it again. How many oil companies are making plans to grow more slowly and save more money when oil prices return? The answer is "all of them."


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Float like a butterfly, sting like a bee. His hands can't hit what his eyes can't see. Now you see me, now you don't. George thinks he will, but I know he won't.

He who is not courageous enough to take risks will accomplish nothing in life.

The man who views the world at 50 the same as he did at 20 has wasted 30 years of his life.

Service to others is the rent you pay for your room here on earth.

I know where I'm going and I know the truth, and I don't have to be what you want me to be. I'm free to be what I want.

The man who has no imagination has no wings.

It isn't the mountains ahead to climb that wear you out; it's the pebble in your shoe.

Silence is golden when you can't think of a good answer.

It is just a job. Grass grows, birds fly, waves pound the sand. I beat people up.

Don't count the days. Make the days count.

It is great to be humble but humble people don't make much history.

I hated every minute of training, but I said, 'Don't quit. Suffer now and live the rest of your life as a champion'.

Hating people because of their color is wrong. And it does not matter which color does the hating. It is just plain wrong.

Live everyday as if it were your last because someday you are going to be right.

It does not matter if you are a Muslim, Christian or a Jew. When you believe in God you should believe that all people are part of our family. If you love God you cannot love only some of his children.

I am the greatest, I said that even before I knew I was.

Muhammad Ali

New Plays

Back to the Drawing Board

by Jim Brown

Click here to email Jim Brown
Editor's Note

Newlink Genetics failed in its last attempt at a pancreatic cancer drug but they promised to look harder in other areas. Shares have resisted the ASCO rebound and could fall to a new low if there was nothing new to report at ASCO.


No New Bullish Plays


NLNK - Newlink Genetics - Company Profile

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products to enhance treatment options for patients with cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway.

The company's lead product candidate, algenpantucel-L, an investigational immunotherapy, was being studied in Phase III clinical trials for patients with pancreatic cancer. They announced on May 10th the drug did not meet the goals of the study and may have actually made the patient sicker in the process. The company said a late-stage clinical trial for its algenpantucel-L treatment did not statistically improve survival rates in patients with resected pancreatic cancer. "In light of these negative results, our scientific and clinical teams will focus on other promising opportunities in our pipeline," said CEO Charles Link. Patients treated with the drug lived an average of 27.3 months compared to 30.4 months on existing treatment programs.

Shares collapsed from $17 to $9 and that was already down from $60 late in 2015. The problem is that Newlink had invested a lot of time and effort in that drug and it had already progressed into stage III trials. That cost them a lot of momentum and investors lost interest. Analysts now say that Newlink's cancer vaccine platform is now empty. They will have to rely more heavily on its IDO inhibitors, another form of cancer immunotherapy, which is only in early stage development. This field is very crowded and Newlink is fading to the back of the pack.

Earnings July 28th AM.

Shares of Newlink rose slowly from $10 to just under $13 on the ramp into ASCO. Investors were definitely not excited about the companies potential for a market moving presentation. Shares fell -8% on Friday as traders sold the ASCO news before the weekend. Nobody wanted to end up holding a company on Monday that was sinking on a negative headline. If some other company announces some new treatment than everyone else in the space will decline.

The conference runs until Tuesday afternoon so I am putting an entry trigger on the position just to make sure it is going lower before we jump in.

With a NLNK trade at $10.25

Short NLNK shares, currently $10.51. Initial stop loss $12.65.

No options recommended because of wide spreads.

In Play Updates and Reviews

Sell the News

by Jim Brown

Click here to email Jim Brown

Editors Note:

Several biotech stocks that rallied ahead of the ASCO conference took a dive on Friday as traders took profits rather than risk a negative headline over the weekend. Unfortunately, two of those stocks were in our portfolio. Each declined -6% on no news. Those were CLVS and OMED.

The Dow sold off -149 points at the open but rebounded to nearly turn positive just before the close. This was the fourth day of opening declines and the third consecutive day of afternoon rebounds. The Dow closed just barely over 17,800 and right in the middle of the range for the week. The Dow remains the weaker index overall but it is still within striking distance of a new high if the bulls found enough conviction to press the case.

The S&P has dipped to 2085-2088 for four consecutive days and then rebounded to close at 2,099 on three of those days. The fourth day it closed at 2,105 and looked like it was ready to retest the highs at 2,132 but the weak payroll numbers killed that idea at least for Friday.

Current Portfolio

Current Position Changes

HPE - Hewlett Packard Enterprise

The long recommendation was opened with a trade at $18.40.

SWIR - Sierra Wireless

The long position remains unopened until a trade at $20.30.

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

CLVS - Clovis Oncology -
Company Profile


No specific news. A -6% decline. This could be the first example of biotech stocks fading on a sell the ASCO conference headline. There was a big gain ahead of the conference and some traders are probably going to take profits rather than wait for a potentially negative headline from the conference.

Original Trade Description: May 29th.

Clovis Oncology is a biopharmaceutical company that focuses on acquiring, developing and commercializing anti cancer agents worldwide. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers.

Clovis announced it would make three presentations at ASCO and one discusses the potential for using Rucaparib for treatment of a different cancer other than the drugs original intent. That presentation is on pancreatic cancer and the other two are on ovarian cancer.

These are promising drugs and any positive data that Clovis releases could give the stock a significant boost.

In their recent earnings, they reported a loss of $1.98 compared to estimates for -$2.15. Because it is an experimental drug company, the earnings are not that material. Shares did decline about $1.50 after the report but have risen $4.50 in the last two weeks.

Earnings August 4th.

Resistance is $20.30 and shares closed at $16.70 on Friday. I would gladly take a $2 gain out of the middle over the next week and they tighten the stop loss as the multi-day conference begins next Friday.

Position 5/31/16:

Long CLVS shares @ $16.80, initial stop loss $15.35

No options recommendation because of wide spreads.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. HPE held the recent gains and is holding right at a historic high.

Original Trade Description: June 2nd.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.

Position 6/3/16:

Long HPE shares @ $18.40, initial stop loss $16.85.


Long August $20 call @ 40 cents. No stop loss.

OMED - OncoMed Pharmaceuticals - Company Profile


No specific news. Fell 6% as the ASCO conference began. I believe this is another case of buy the rumor, sell the news.

Original Trade Description: May 21st.

OncoMed Pharmaceuticals is a clinical-stage company focused on discovering and developing novel anti-cancer stem cell and immuno-oncology therapeutics. OncoMed has seven anti-cancer therapeutic candidates in clinical development, where each target key cancer stem cell signaling pathways including Notch, Wnt and R-spondin LGR. OncoMed is advancing its wholly owned GITRL-Fc candidate and an undisclosed immuno-oncology candidate (IO#2) toward clinical trials in the 2016-2017 timeframe. OncoMed has formed strategic alliances with Celgene Corporation, Bayer Pharma AG and GlaxoSmithKline (GSK).

OncoMed is making six presentations at ASCO related to six oncology drug candidates, including robust preclinical anti-tumor activity data for its wholly owned GITRL-Fc candidate and from clinical trials of vantictumab, ipafricept, demcizumab and tarextumab.

All of that is Greek to me but this is a cancer conference and OncoMed is an up and coming cancer drug company. They should be right at home and the notes I have read suggest several of their drugs are very promising. They have milestone payments coming from GSK, Bayer and Celgene coming in 2016-2017 of more than $270 million.

Shares have risen steadily since the earnings miss on May 5th. As a preclinical company they do not have retail revenues and depend on funding from their partners. They will have operating losses until their drugs are in the marketplace.

Shares spiked on the 28th after AbbVie said they were buying cancer drug company Stemcentrx for $10.2 billion. That company is in the same stem cell research sector as OMED.

Earnings August 4th.

With the ASCO meeting still 10 days away we could benefit from some of the building excitement and hopefully the company's presentations at the meeting will increase the interest in the stock.

Position 5/23/16:

Long OMED shares @ $12.80, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

P - Pandora Media - Company Profile


No specific news. Board membr, Timothy Lelweke, bought 10,000 shares on Wednesday at about $11.63 each. He now owns 43,768 shares so that was almost a 30% increase in his holdings. Something is definitely going on behind the scenes to generate all this insider buying.

Pandora's chief product officer will present at the Stifel Technology Conference on June 7th.

Original Trade Description: June 1st.

Pandora provides internet music streaming services in North America. Listeners can create personalized stations to access free music and comedy catalogs as well as personalized play lists. They offer Pandora One, a paid subscription based service for listeners. They sell audio, video and display advertising for delivery on connected platforms. They also offer a ticketing platform for promoters and advertising to promote their events.

In Q1 active listeners rose to 79.4 million and hours streamed rose 4% to 5.52 billion. They reported a loss of 20 cents but that was 19 cents better than the 39 cent estimate.

Pandora's chairman Jim Hill bought 250,000 shares at $10.97 per share and then another 250,000 shares at $11.33 each. That is close to $6 million in purchases. CFO Mike Herring bought 225,000 shares a couple weeks earlier. Last week somebody bought 12,000 contracts of the September $12 call options. Today somebody bought 1,000 contracts of the July $13 calls and there was another trade for 2,500 of the September $10 calls.

So what is powering this sudden interest in Pandora? In May the hedge fund Corvex Management announced it had acquired a 9.9% stake and demanded the company be sold to the highest bidder. Keith Meister runs the fund and he believes there should be an auction and Facebook should buy the company. Since Pandora has only a $3 billion market cap that should be attractive to Facebook because it would get those 79 million listeners to further spread its advertising reach across the internet.

Apple, Google and Amazon already have some type of streaming app and that leaves Facebook as the likely candidate. Barron's suggested Verizon or Liberty Media could buy them. Sirius XM was also mentioned as a possible buyer.

With plenty of potential acquirers and insiders buying huge amounts of stock there may be some discussions in progress.

Shares have been on a steady upward path for the last month and it is accelerating.

Position 6/2/16

Long Pandora shares @ $12.08. Initial stop loss $10.25.

No option recommended but the July $13 is only 62 cents.

SWIR - Sierra Wireless - Company Profile


No specific news, minor gain. Shares are still holding at resistance at $20. Eventually there will be a high volume breakout or break down.

The position remains unopened until a trade at $20.30. High today was $19.92.

Original Trade Description: May 26th.

Sierra Wireless engages in building the Internet of Things with intelligent wireless solutions. They operate in three segments, Original Equipment Manafacturer, Enterprise Solutions, and Cloud Connectivity Services. They offer cellular embedded modules, software and tools to integrate wireless connectivity into various products and solutions.

In their recent earnings they reported an adjusted profit of 8 cents. Revenue declined -5.1% because of previously reported softness in orders from several existing automotive customers. For Q2 they expect earnings in the range of 9-17 cents on revenue of $150-$160 million. For the full year they guided to earnings of 60-90 cents on revenue of $630-$670 million. They bought back 549,583 shares in the quarter.

The revenue in the OEM solutions segment declined -9.1% due to softness in auto production in Q1. Enterprise solutions revenue rose 9% and cloud and connectivity systems revenue rose 92%. They began upgrading their global LTE core network to provide additional connectivity for wholesale operators.

In their guidance, they said business should improve significantly because of more than 40 new customer programs moving into production on new IoT products. They manufacture to customer specifications when the customer adds a new product.

Earnings Aug 4th.

To go from an 8 cent profit in Q1 to 60-90 cents for the full year is a major gain in profitability. Shares have been rising since the earnings report and showing no weakness when the market was down.

With a SWIR trade at $20.30

Buy SWIR shares, currently $19.90, initial stop loss $18.45.
No options recommended due to wide spreads.

BEARISH Play Updates

ENDP - Endo Intl Plc - Company Description


No specific news. Minor gain. No ASCO drop here where we need it. We still have a long put option open. At 5 cents, it was not worth a stop loss. We have two weeks before that expires and anything is possible after ASCO.

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:

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

Previously closed 6/1/16: Short ENDP shares @ $13.81, exit $16.45, -2.64 loss.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.

These positions are only updated on the weekend.

FDC - First Data - Company Profile


No specific news. The rebound has stalled and we could see a decline begin at any time.

We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remains open. At the current 5-cent price that is a lottery ticket that the headlines will fade and the original direction will return. This is a July option so plenty of time for a disaster to appear.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Long July $10 put @ $.60, no stop loss.

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.

SQ - Square - Company Profile


No specific news. The June call option has two weeks left and at 2 cents we have almost no risk to continue holding the position. Lightning can strike at any time and for $10 today, this is a June lottery ticket.

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 Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.

TRN - Trinity Industries - Company Profile


Trinity announced they won a $940 million wind tower order. They will be delivered over a three year period starting in 2017. This will push out the order backlog on wind towers through 2019. The current backlog was $263.4 million so this order is a big deal. Unfortunately, the stock barely moved since the news came in a negative market the prior week.

We have a July call option that is worth 19 cents today. I would bet $19 that it will recover by July.

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


WIN is moving up again after they announced new fiber connectivity in Nashville and Richmond. The new fiber networks will connect ultra high speed fiber backbones between data centers in those cities to the national backbone.

We have an August $9 call and it could end up in the money because that is well into the future. With the option worth only 31 cents today, there is no value in closing it. This is a lottery play that WIN will be above $9 by August.

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.

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