Option Investor

Daily Newsletter, Saturday, 7/16/2016

Table of Contents

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

Market Wrap

Impressive Stamina

by Jim Brown

Click here to email Jim Brown

Investors resisted the urge to close positions ahead of the weekend event risk and the Dow even made a new high.

Weekly Statistics

Friday Statistics

I was impressed with the relative strength of the markets on Friday. They should have declined into the close because of option expiration pressures and weekend event risk. I am sure some investors were rethinking their actions when news broke of the potential coup in Turkey. The S&P futures dove -10 points after the close but that should be erased before the open on Monday. Turkey has seen military coups in 1960, 1971, 1980 and 1997. Whenever the "elected" government, and I use that term loosely, strays too far from a secular democracy the military uses force to evict that government and start over again. This coup failed and a lot of people got hurt. At least 161 died, 1,440 were injured and 2,839 military officers have been arrested. Analysts believe this will push Turkey farther into a dictatorship.

Friday saw a very calm market. The Asian markets were slightly positive and the European markets were slightly negative. Nobody was trading ahead of the summer weekend.

China released their Q2 GDP at 6.7% that narrowly beat estimates of 6.6% growth. Another round of government and monetary stimulus kept the economy from sliding lower. Very few people believe the Chinese economic numbers and that was one reason there was not a large market move after the release.

IHS Global Insight said the number will fuel further doubts over the quality of Chinese numbers. "The first misgiving reflects concerns that the government is squeezing as much growth as plausible from relatively opaque sectors via accounting techniques." This was the first release since China said it was changing the way it calculated GDP.

In the USA, the Retail sales for June came in at a healthy +0.6% compared to estimates for +0.1%. However, May's +0.5% number was revised lower to +0.2%. Building materials was the standout with a +3.9% gain followed by gas stations at +1.2%, sporting goods +0.8% and nonstore retailers at +1.1%. Laggards were clothing with a -1.0% drop, electronics and appliances flat at zero, furniture +0.5%, food +0.5% and general merchandise +0.4%. Restaurants and bars declined -0.3%.

Overall sales were up +2.7% compared to June 2015 and +2.2% for May after the downward revision.

The NY Empire Manufacturing Survey for July came in at 0.6 compared to 6.0 in June. New orders fell from 10.9 to -1.8 and backorders fell from -10.2 to -12.1. Employment declined from zero to -4.4. Analysts blamed the headline weakness on Brexit and the uncertainty over orders from the UK. Manufacturers do not know if their overseas business will remain the same or decline as the new Brexit rules are determined.

The Consumer Price Index for June was 0.2% compared to 0.2% in May. Analyst estimates were for a 0.3% gain. Internally food prices declined -0.1% while energy prices rose +1.3% ahead of the July 4th driving weekend. The core CPI, excluding food and energy, rose +0.2% for the third consecutive month. Goods prices declined -0.2% while services prices rose +0.3% for the third consecutive month suggesting rising wages were pushing prices higher for services.

On a trailing 12 month basis the headline CPI is up +1.1% and core CPI is up +2.2%. Medical care costs rose +1.1% while prescription drugs rose +1.3%. Used vehicle prices fell -1.1%. Airfares rose +1.6% after falling -1.5% the prior month. Analysts expect prices to rise +1.6% for all of 2016 and less than the Fed's target of 2%.

June Industrial Production rose +0.6% compared to estimates for +0.2% and a -0.4% reading in May. The majority of the gain came from motor vehicles and parts rising +5.9% after a -4.3% decline the prior month. The second biggest factor was a 2.4% surge in utility production as warm weather caused people to turn on the air conditioning. High tech equipment fell -0.3% and nondurable goods fell -0.1%. Business equipment rose +0.7% and mining (energy) rose +0.2% for the second monthly gain suggesting the oil patch is slowly going back to work.

Business Inventories rose +0.16% in May and slightly better than the +0.14% in April. This is the third consecutive month of gains. Retail inventories rose 0.29% and wholesale inventories +0.13%. The inventory to sales ratio was flat with April at 1.40.

July Consumer Sentiment fell sharply from 93.5 to 89.5 and a three-month low. The present conditions component fell from 110.8 to 108.7. The expectations component declined from 82.4 to 77.1 and the lowest level since September 2014. This is the widest gap between current conditions and expectations since 2006. This is likely related to election expectations. Voters from both parties are severely depressed about the current candidates. Those respondents expecting economic conditions to worsen over the next 12 months increased from 36% to 46%. That is a huge increase and survey respondents are your normal working class person and not specifically interested in economics. With those expecting conditions to worsen nearing 50% they could actually cause weaker conditions because they will be conserving money for the proverbial rainy day rather than spending it and supporting the economy.

We have a small list of events for next week. The most important is the Philly Fed Manufacturing Survey on Thursday. That could set the tone for the ISM and the rest of the regional reports for the coming month. The home construction and sales reports will also be important but they are expected to be flat to weaker than the prior month.

The recent economic reports have actually been improving. It is not an economic surge but they are improving. This suggests there may be some green shoots forming but they are still fragile and not ready for direct sunlight. There are a still a lot of other economics that will weigh on the USA. China may not be reporting economic declines but the country if still weak. Europe is going to be weak for the next year but there are signs there will be additional stimulus in the months ahead. Japan is still circling the drain but they are determined to create enough buoyancy with monetary stimulus even if they have to hire Ben Bernanke to run the printing presses.

Investors appear to believe the current situation is improving. The yield on the ten-year treasury rose from 1.33% the prior week to 1.59% at Friday's close. Those .26 basis points were a huge move.

Gold sold off hard and is down sharply from the $1,377 high to $1,337 on Friday. The flight to safety trade has faded thanks to a rebound in the British pound.

The dollar has slowed its ascent and appears to be struggling to move over the 96.50 range on the Dollar Index. If the dollar would firm at this level until the Brexit fears subside, U.S. companies could hedge against the risk and the earnings outlook may not be that bad.

The British pound was up sharply on the new Prime Minister Theresa May. The relief rally lifted the pound from 126 to 130.50 but it was a shaky rebound. There are still sellers on every uptick but most of the gains are holding.

The earnings cycle is just getting started with 7% of the S&P-500 already reported. The blended earnings decline stands at -5.5% and 66% have beaten on earnings and 51% have beaten on revenue. Revenue has declined -0.6%. Currency issues were mentioned in 21 of the 30 companies that held a conference call. Concerns over Brexit were mentioned in 10 of the calls. According to FactSet no companies have mentioned an impact from Zika or terrorism during their calls.

With the S&P at a historic high at 2,163 the trailing 12-month PE is at 19.4 with earnings estimates at $111.36 and the highest point since February 2010 when the S&P was 1,075 and earnings were $48.11.

In the coming week, 140 S&P companies and 11 Dow components are scheduled to report earnings.

Netflix and IBM will be the headliners on Monday followed by Goldman Sachs, Microsoft and Johnson & Johnson on Tuesday.

The banks have reported decent earnings considering the low interest rate environment and the amount of regulation they have to endure. However, Wells Fargo (WFC) was a disappointment. The bank reported earnings of $1.01 that matched analyst estimates but was lower than the $1.03 reported in the year ago quarter. Revenue of $22.2 billion was also in line with estimates. Net income of $5.56 billion was slightly less than the $5.72 billion in the same quarter last year. The CFO said they had reported more than $5 billion in earnings for 14 consecutive quarters. That is a decent record in this low rate environment. Total loans rose +8% to $957.2 billion.

The bank's net interest income rose 4% to $11.73 billion but the net interest margin fell to 2.86%. Mortgage loan originations rose +43% from the prior quarter and +2% from Q2-2015.

Wells said their loan charge-off rate rose from 0.16% to 0.29% primarily because of oil and gas loans. Shares declined -2.5% on the earnings news.

Citigroup (C) reported only a 14% decline in earnings compared to the 25% predicted by the CEO in early June. They credited the surge in trading for currencies and bonds in the wake of Brexit for the better performance. The bank reported earnings of $1.24 that beat estimates for $1.10 but it was well below the $1.45 earned in the comparison quarter. Their net interest margin declined from 2.95% to 2.86% and they predicted a return to 2.9% later in the year. Shares were flat after rising for the last week in advance of earnings.

US Bank (USB) reported earnings of 83 cents that beat estimates for 81 cents. That also beat the comparison quarter of 80 cents. Net revenue rose 8.1% to $5.4 billion and beat estimates for $5.2 billion. Net interest income rose 4.5% to $2.9 billion. Net interest margin of 3.02% beat the other banks and only declined -0.01% from the prior year. Noninterest income spiked 12.3% to $2.6 billion. That is a lot of overdraft and NSF charges. Total loans increased 8.1% to $266.6 billion thanks to a rise in commercial loans. Deposits rose 7.6% to $307.4 billion. USB shares actually rose on the earnings.

Herbalife (HLF) dealt Bill Ackman an expensive blow on Friday when it announced a settlement with the FTC for $200 million. The billionaire hedge fund manager has a $1 billion short on Herbalife and intraday spike to $70 and a two-year high was very painful. However, Ackman may eventually be right. The FTC said HLF had to operate "legitimately" from now on and that suggests they were not doing so in the past. Herbalife said it disagreed with many of the FTC allegations but decided to settle so they could put the problem behind them. They also agreed to pay $3 million to settle an investigation by the Illinois attorney general's office. Herbalife has now resolved all active investigations.

The problem for Herbalife is the agreement to restructure the compensation plan so that at least two-thirds of compensation for distributors is paid on the actual sale of the products, not recruiting. Also, the company must prove that 80% of future sales are to legitimate end-users or compensation must be reduced. The change in compensation will be a major change for Herbalife. The plan will change completely to a sales based plan rather than a recruitment plan.

The settlement only applies to the U.S. but other countries are not stupid. They will likely review compensation structures in their country and demand changes as well to protect their citizens from overzealous recruiters.

Without the recruiting bonuses, current distributors are likely to dry up and drop out. This is where Ackman could still be right. Earnings are likely to plunge over the next year and the stock should follow. I looked at buying a LEAP put on HLF but the prices are enormous. Maybe in a few weeks the volatility will subside.

On a side note, Carl Icahn owns about 18.3% of Herbalife stock and he was just granted an exemption to raise that stake to 34.9%. Icahn took the position after Ackman went public with his big short and some said he did it just to get back at Ackman for a prior conflict. There is some discussion that HLF might go private but I think that is smoke. With the uncertainty over future earnings, it would be tough to convince any PE firm to put up the money until there is actually a track record. I seriously doubt Icahn will increase his stake for that very reason. The next thing we hear from Icahn is that he liquidated his position for a tidy profit since he got involved in the $30s and $40s and the stock is $65 today.

Shares spiked to $72 at the open and faded to close at $65 for a $6 gain. I would not be surprised to see it back under $60 very quickly. Volume on Friday was 35.3 million with only 93 million shares outstanding. Average daily volume is only 1.3 million shares. That was 27 times normal volume. A lot of shorts following Ackman were crushed in the spike.

AMC Networks (AMCX) was downgraded by UBS to sell on worries the ratings on it most popular shows are falling. The hit series The Walking Dead is seeing ratings decline sharply after 6 years. You can only kill so many zombies and kill off so many regular cast members before viewers start looking for other shows to watch. The new spinoff called Fear The Walking Dead is already being called a flop and viewers have been declining steadily since 10 million watched the premier in August 2015. The Better Call Saul series has been seeing double-digit ratings declines. UBS said they do not see any near term catalysts to resolve these concerns. They are also worried AMC will be shut out of the new online pay TV service offered by Hulu next year. UBS also cut CBS and Discovery Communications to sell as well.

Yahoo (YHOO) will report earnings on Monday but that will be just a prelude to the real show. Reportedly, Monday is the deadline for the final bids on buying the company and its various assets. Estimates range from $3 billion to $6 billion depending on which assets the buyer is willing to take. The deal will be very complicated and actually getting a deal accepted and closed will be very difficult.

Earnings are expected to be 10 cents compared to 16 cents in the year ago quarter. The whisper numbers are in the 8-9 cent range. As part of their sale process, they have been forced to disclose agreements that were not previously public. For instance, Yahoo has a contract with Mozilla (Firefox) that costs Yahoo $375 million a year for five years. It expires at the end of 2019. For that fee, Firefox defaults to Yahoo search in that browser. That means any buyer is on the hook for more than $1.2 billion in fees to Mozilla the day the deal closes. The bad news is that Firefox users and usage shares have been in a steep decline. Google's Chrome browser and Microsoft's new Edge browser are stealing users from Firefox and Opera at a rapid rate. Since the deal was signed in 2014, Firefox share of the browser market has fallen 21%.

Last week Yahoo further complicated its revenue prospects when they implemented a new finance.yahoo.com site. That has been the number one stock news research site for the last 15 years. Now it is practically unusable with bloatware and more ads than news. The investor community is very upset. Yahoo was getting so many complaints they had to deactivate their message boards and complaint links.

I am really tempted to buy a 35/40 August strangle, currently $1.33, on Yahoo on Monday before earnings.

Oil prices rebounded slightly on Friday but glut fears are growing. SocGen, BNP Paribas, UBS and JBC Energy all warned of the risk of another decline in prices. They believe $40 is the floor that will trigger buying again. The IEA warned "the road ahead is far from smooth." Inventory storage is at maximum capacity and production is still flowing. There are more tankers at sea with floating storage than any time since 2009. There were significant supply disruptions early in the summer and most of those have been resolved. With production back in a surplus over demand we are running out of places to store the oil.

Gasoline inventories are at "epic" levels according to Energy Aspects Ltd, an energy consultancy. At least five tankers hauling gasoline to New York were turned away over the last several weeks due to lack of storage. The IEA said stockpiles are at all time seasonal highs. Refiners running out of room to store oil refined it into gasoline they could ship anywhere in the world. Unfortunately, some of those tankers are now anchored because there is nowhere to store it.

China added to the problem after extreme weather damaged roads and pipelines in the country and killed domestic consumption of fuel. Instead of shutting down their refineries, they tried to export all their surplus production. Normally Chinese gasoline exports begin to fall in March. This year they were still rising through May. In May, exports were more than double the five-year average.

This means oil prices are likely to fall and gasoline prices are already falling. The national average was $2.22 on Thursday after a 7% decline over the last month.

Active oil rigs rose +6 last week bringing the total gain to 27 over the last three weeks. Offshore rigs rose 3 to 22 for the first gain in more than two months. Gas rigs rose +1 to 89 but they have been in the 85-90 range for months. There is no growth in active gas rigs.


The S&P surged +32 points last week and narrowly missed setting a new closing high for all five days of the week. That has not happened since 1998. The S&P closed down -2 points on Friday to prevent that from happening.

The S&P is now more than 30 points above its prior high from May 2015 at 2,130. The weekly chart is highly bullish and the lack of a material decline on Friday ahead of the weekend event risk suggests buyers are not going to slack off next week.

The MACD and RSI are bullish and there is no immediate resistance to slow the advance as long as the headlines are favorable. The earnings cycle kicks into high gear and I am not sure even weak earnings and guidance could be a significant drag.

When there is no alternative to equities for a return of more than 2%, we may be seeing the start of the great rotation out of treasuries and bonds. Treasury yields spiked all week indicating selling and equities rallied all week.

Technicians claim 2,061 and 2,071 are the current resistance levels and the S&P stopped on 2,061 on Friday.

The Volatility Index is back in the mid 12 range and showing complete complacency. Nobody expects this rally to fail or at least they are not buying puts for insurance against a potential decline.

When rallies appear when they are least expected they have a tendency to continue longer than normal. Traders in denial will continue to short any weakness and portfolio managers will continue to chase prices to avoid being left behind in an extremely competitive industry.

The Turkey coup attempt should not weigh on the market but it could cause some volatility at the open on Monday.

The Dow chart is a duplicate of the S&P with the index stopping just over tentative resistance at 18,500. The MACD and RSI are strongly positive and could run for another week before hitting the top of their normal ranges.

If we were to get a couple days of serious profit taking I would expect prior resistance at 18,000-18,100 to be support and a second rebound could be equally as strong as the first because everyone would back up the truck on a dip.

There are 11 Dow components reporting earnings next week and it is possible they could spoil the party but the earnings and guidance would have to be really bad and I do not see that happening. Multinational companies are going to warn on currency issues but that is already baked into the market cake. After the first few warnings next week, that excuse will be ignored for the rest of the earnings cycle. "Brexit ate my earnings" is going to be a familiar refrain.

The Nasdaq Composite is the index laggard. The Composite only gained 1.47% and the Nasdaq 100 gained 1.36% to post the smallest gains of the major indexes. The Nasdaq did punch through the resistance at 4925-4950 to close at 5,029 but the next 200 points could be difficult. There is significant resistance between 5100-5225 that the index has to cross before it can make a new high.

With the biotech sector posting alternating gains and losses and portions of the chip sector weak on worries over Apple's production cuts, the Nasdaq is not keeping pace with the rest of the market.

There are some heavyweight techs reporting next week and the volatility could be huge. IBM, NFLX, MSFT, FFIV, EBAY, INTC, QCOM, PYPL and BIIB are just a few. If most of those names were to beat on earnings and give decent guidance it would be an entirely different market by next weekend. Conversely, if they really stink up the place it could kill the current rally.

The Russell 2000 gained +2.37% last week to lead the winners list of the major indexes. This is very positive since a surge in small cap buying suggests portfolio managers are not afraid of future volatility and that is good for market sentiment. However, the Russell did stop right on strong resistance at 1,205 and nearly 100 points from a new high at 1,295.79. That would be a very nice run if it happened. If the Russell were to make a new high, the broader market would be sprinting towards 2,250 or higher.

Remember, traders are always fixated on new highs. Once they are hit the market normally loses traction while a new target is discussed and profits are taken and then the market moves higher. So far, this has not happened in this rally. New highs tend to beget new highs. If Friday's fractional losses on the indexes are all we are going to get, then buckle your seatbelts.

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Random Thoughts

Bullish sentiment surged 5.8% to 36.9% in the AAII Sentiment Survey that ended on Wednesday. That is the highest level since March 9th at 37.4%. Neutral sentiment declined -3.6% to 38.7% and the 24th consecutive week over its historical average of 31%. Bearish sentiment fell -2.2% to 24.4% and the lowest level since April 20th at 23.9%.

Bullish sentiment hit a low of 22.0% on June 22nd and has rebounded 14.9% but remains under the historical average at 38.5%. Investor comments were generally bullish and Brexit has been forgotten.

Bank of America Merrill Lynch said investors poured more money into the market through equity funds than any week in the last nine months. More than $10.8 billion flowed into funds in the week ended on July 13th. That ended the streak of 17 consecutive weeks of outflows. Next week could be even stronger now that the market is making new highs. European equity funds saw outflows of $5.8 billion and the 23rd consecutive week of outflows.

Bond funds also saw inflows. A record $2.1 billion flowed into high-yield bond funds on Monday. That was a historic record and led to a total of $4.4 billion for the week. Investment grade funds saw inflows of $1.8 billion and the 19th consecutive week of inflows.

BAML said investors were "stampeding" into equity funds on fears of missing out on a continued rally. BAML called it "Bear Capitulation."

The same bank that reported those fund flows above also believes the markets could decline up to 15% this summer. Savita Subramanian, head of U.S. equity and quantitative strategy for BAML Global Research, said on Wednesday the S&P could test its lows near 1,800. That would have been more than 16% below Friday's close. She cited valuation, seasonal weakness and uncertainties surrounding the election and Brexit negotiations in Europe. Also, another leg down in oil prices could drive the market lower.

Subramanian reiterated her yearend target of 2,000 for the S&P. She lowered that target from 2,200 on February 12th. She recommended owning volatility during election years. She said the VIX normally spikes to 24 in the month before the election. She said the uncertain impact of a Trump presidency could create a more hawkish Fed and put a cap on PE multiples for the S&P.

Another BAML strategist, Stephen Suttmeier, Chief Equity Technical Strategist, said it took more than 300 days for the S&P to make a new high. That is a relatively rare occurrence that historically tends to send the index significantly higher as buyers overcompensate on the breakout. There were 414 days between the May 2015 high and the recent new high. Since 1929 there have been 24 instances when the market went more than 300 days. Historically, 250 days from the breakout the average return is about 15.6% according to Suttmeier. The median return is 14.8% and the market rose 91% of the time. He also noted that market breadth was increasing rapidly along with new 52-week highs.

Friday's volume was only 6.02 billion shares are slightly stronger than a normal summer Friday. Advancers and decliners were almost dead even. Since Friday was technically a down day the low volume is a plus. We have been seeing higher volume on the days when the market is advancing. That is a definite change in trend.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Champions are not made in gyms. Champions are made from something they have deep inside them, a desire, a dream, a vision. They have to have the skill, and the will. But the will must be stronger than the skill."

Muhammad Ali

New Plays

Key to IoT

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Internet of Things (IoT) depends on network infrastructure for its lifeblood. Without the growing wireless infrastructure of the Internet there would be no IoT. The vast majority of that network is built on fiber optic network cables.


AAOI - Applied Optoelectronics - Company Profile

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.

This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.

Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.

Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.

With an AAOI trade at $12.00

Buy AAOI shares, initial stop loss $10.85.

No options recommended because of short duration trade.


No New Bearish Plays

In Play Updates and Reviews

Minor Gain

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow posted only a minor gain of 10 points with the S&P losing 2 points. I was impressed with the relative strength on both indexes. However, the Dow has not seen any real gains since the gap open on Thursday. The 18,550 level has been rock solid. This could be because the bears decided to mount a defense there of we just ran out of buyers ahead of the weekend.

Assuming the coup attempt in Turkey fails and there are no other negative headlines I could see the markets making a new leg higher next week.

Current Portfolio

Current Position Changes

TRN - Trinity Industries
The long position in TRN was closed at the open on Friday.

FDC - First Data
The long put position in FDC expired on Friday.

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

DDD - 3D Systems - Company Profile


No specific news. Still holding at 2-month highs.

Original Trade Description: July 9th.

3D Systems Corporation, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, metal, nylon, rubber, wax, and composite materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, colorjet printing, and plasticjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications.

The 3D printing sector crashed and burned in 2014 when the expectations for the technology got way ahead of reality. Shares of DDD peaked at $97.28 before starting the long slide to $6 in January 2016. Shares recovered from that low as the sector began to actually provide some amazing technology. Shares rebounded to $19.50 in April before another round of weakness pushed them back to $12. After chopping around in the $12-$14 range they appear ready to breakout.

The new CFO was given a compensation package of $2.1 million a year. He must be really good. If the stock rises to $30 and maintains that level for 90 consecutive days he can exercise options to buy shares at $12.92, which will give him $10.4 million if sold. If the stock prices rises to $40 for 90 days he has another bonus that would give him shares he could sell for a $8.9 million profit. Another bonus awards him $9.4 million if shares reach $30 in year one of his contract and $40 in year two and holds it for 90 days. He has an extreme incentive to get that stock price moving higher.

Hardly a week goes by that 3D does not announce some new process or software enhancement that comes closer to achieving the original expectations for the 3D printing technology. The ability to print parts out of metal has revolutionized the manufacturing environment. Many large corporations are buying printers by the dozens to print parts that previously had to be ordered from the source with long lead times.

Earnings August 3rd.

Shares closed at $14.12 on Friday and that is a two-month high and slightly over resistance. The next resistance level is the April highs at $18.25. If DDD is about to breakout like it did in Feb/Mar then we want to go along for the ride.

Position 7/11/16 with a DDD trade at $14.25

Long DDD shares @ $14.25, see portfolio graphic for stop loss.

No options recommended. Aug $15 call is 74 cents.

EXAS - Exact Sciences - Company Profile


No specific news. A minor gain after 2 days of minor declines. The uptrend may have slowed but it is not yet dead.

Original Trade Description: June 25th.

Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.

Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.

On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.

Earnings July 26th.

Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.

Position 6/27/16:

Long EXAS shares @ $11.50, stop loss $9.45.

No options recommended.

HPE - Hewlett Packard Enterprise - Company Profile


HPE cannot seem to hold over the $20 level but at least it is not declining.

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 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.

Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain

SCTY - Solar City - Company Profile


No specific news. Up on gains in Tesla shares.

Original Trade Description: June 27th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. The leftover long July call position was closed at the open.

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:

Closed 7/15/16: Long July $20 call @ $1.50, exit .85, -.65 loss.

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

TWTR - Twitter - Company Profile


Twitter access was halted along with Facebook and YouTube during the coup attempt on Friday.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.

Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64

BEARISH Play Updates

JKS - Jinko Solar - Company Profile


No specific news. Shares broke below $19 as I expected when the play was initiated.

Original Trade Description: July 13th.

JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.

For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.

Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.

Earnings August 18th.

In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.

Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.

Position 7/14/16 with a JKS trade at $19.35

Short JKS shares @ $19.35, see portfolio graphic for stop loss.

Long August $21 call @ 70 cents, no stop loss.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 11.68 and a new historic low.

We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product, it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.


6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop 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. Our time ran out on the July $10 put and it expired on Friday.

We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remained open.

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:

Closed 7/15/16: Long July $10 put @ $.60, expired, -.60 loss.

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

VNET - 21Vianet Group - Company Profile


VNET rolled over immediately after we were stopped out on the short on the shares. The $9 August put remains open.

Original Trade Description: July 2nd.

21Vianet Group, Inc. provides carrier-neutral Internet data center services to Internet companies, government entities, blue-chip enterprises, and small-to mid-sized enterprises in the Peoples Republic of China. It offers hosting and related services to house servers and networking equipment in its data centers, and connects them through a data transmission network; and other hosting related value-added services.

In June 2015 the Chairman of the board, Kingsoft Corporation and Tsinghua Unigroup International proposed a deal to take the company private. Shares were trading around $20 at the time. On Thursday the same group rescinded their "non-binding" go private offer. The group said "after careful consideration, the group had determined not to proceed with the proposal under the current circumstances." Those circumstances were not described.

After keeping the stock price around $20 for the last year based on this offer the group decided to pass on the deal. While it may have had something to do with the earnings, I suspect it had more to do with the current problems with taking companies private in China. Qihoo (QIHU) and YY (YY) are also struggling. The China Securities Regulatory Commission is considering limits on the numbers of reverse mergers from previously foreign listed companies. There are worries they could impose an outright ban.

In an attempt to counter the drop in the stock the company announced a $200 million share repurchase plan. However, in the first sentence reads, "The Board has authorized, but not obligated, to repurchase up to $200 million in outstanding shares within the next we months." The key words there are "not obligated" which means they do not have to buy the shares if they change their minds. This is a Chinese company and the generally accepted rules are rarely followed. This is just another ploy to try and support the stock price.

Earnings August 24th.

Position 7/5/16:

Long August $9 put @ 85 cents. No initial stop loss.

Previously Closed 7/11/16: Short VNET shares @ $9.57, exit 9.88, -.31 cent loss.

WIN - Windstream Holdings - Company Profile


Nice move on WIN over our $9 call strike. The company announced it had completed network upgrades across 15 states to bring 100 Mbps speeds to residential and small business customers in more than 1,000 markets.

We have an August $9 call and it is in the money with a lot of time left. This is a lottery play that WIN will be well above $9 by August expiration.

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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