Option Investor

Daily Newsletter, Saturday, 7/30/2016

Table of Contents

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

Market Wrap

Still Consolidating?

by Jim Brown

Click here to email Jim Brown

Over the last two weeks, the Dow has lost a total of 84 points and remains just over critical support at 18,400.

Weekly Statistics

Friday Statistics

On the surface, the market appears to be bullish. The S&P closed -2 points from its historic high and the Nasdaq closed 2 points over strong resistance at 5,160. However, the Dow, S&P, NYSE Composite and the Dow Transports all lost ground for the week. The declines were not dramatic and overall we still have a positive market but the cracks are starting to show ahead of the normal seasonal weakness in August and September.

The economic reports did not help on Friday. The Q2-GDP at 1.22% came in at less than half the expected rate of 2.6%. Even worse, the Q1 GDP was revised lower from 1.07% to 0.83% and the Q4 GDP was revised down from 1.39% to 0.87%. That means the economy has grown at an average rate of only 0.97% over the last three quarters and only 1.23% over the last year.

Consumption was the main driver of the Q2 release at 2.83% followed by exports at +0.23%. Fixed investment reduced GDP by -0.52%, inventories -1.16% and government -0.16%. The PCE index showed inflation of 1.9% in Q2, up from 0.3% in Q1. With GDP averaging 0.97% over the last three quarters and inflation spiking from 0.3% to 1.9%, that is the textbook definition of "stagflation."

The only positive for the market from this GDP report is that the Fed is not going to be hiking rates in September or December. According to the CME, the chance of a September hike has fallen to 12%, November 12% and December 33% but those numbers are likely to drift lower next week.

The strong dollar has hampered exports and weak oil prices have reduced the purchasing power for more than a dozen normally high spending nations. The weak economy in China is hurting exports to Asia. None of these problems are expected to go away soon and they will continue to be a drag on the U.S. economy.

Consumer sentiment improved only slightly from the initial reading. The headline number rose from 89.5 to 90.0 but that was still down from the 93.5 in June. This was the lowest level since April. The present conditions component declined from 110.8 to 109.0 and the expectations component declined from 82.4 to 77.8.

Next week we get the payroll data but the numbers would have to be as high as last month before the Fed would come back into the picture. Since June's spike to 287,000 was a correction from May's 38,000 print the odds of a repeat performance over 250,000 are very slim. The consensus view is for a drop back to the 180,000 range and a level that is reasonable for the current economic environment.

The ISM Manufacturing Index on Monday could be a pothole but recent regional reports have shown some strength in spots. Whether this is enough to lift the national ISM is unknown. There is still weakness in some areas and the recent uptick in others could have been transient.

The rest of the economic calendar is busy but the reports are not market movers. One other area that could be a challenge is the Bank of England economic outlook on Thursday. The bank is expected to paint a bleak picture because of the Brexit vote. If the outlook is "gather up the food and the kids and run to the cellar" type of bleak it could be a problem for the U.S. markets. If the report is just a "dang, that was disappointing but we will get through it", bleak then the market will ignore it.

The dollar crashed -1.26% on the GDP news and that rescued the commodity sector from closing lower for the week. The GDP revisions paint a much weaker economic picture and the dollar is the reflection of that picture.

The yield on the ten-year treasury collapsed with a -3.5% drop to 1.458% and a multi-week low. The end of the world trade is coming back into focus with rising fears of a U.S. recession in 2017.

Gold prices rallied off their early week low at $1,315 and back to $1,350 on a flight to quality spike. With inflation rising sharply and economic growth slowing, gold suddenly looks a lot better as an inflation hedge.

Friday's earnings were dominated by the energy giants. Exxon (XOM) posted earnings of 41 cents that missed estimates for 64 cents. Revenue of $57.69 billion missed estimates of $59.83 billion by more than $2 billion. Production fell -0.6% to 3.9 million Boepd. Exxon cut its capital budget by 38% to $5.16 billion but the falling oil prices continued to weigh on earnings. The company only generated a profit of $294 million from the E&P segment. Profits in the refining sector fell by 60% but managed to offset some of the pain from the low oil prices. They will not be able to do that in Q3 because of the glut in refined products and the lack of available storage space. Gasoline prices have declined to $2.14 a gallon as of Friday. That is the cheapest gasoline for this time of year since 2004. Exxon said it will "remain resolute in commitment to pay a reliable and growing dividend."

The $1.7 billion in quarterly profits was still more than most of the S&P-500 stocks will earn but it was Exxon's lowest profit since Q3-1999. The earnings miss by Exxon is a wakeup call for the rest of the sector. If Exxon, the largest U.S. oil company, cannot meet its estimates, the rest of the sector reports could be equally as ugly.

Looking at the Exxon chart, it almost looks like the data was leaked. The sharp decline since last Friday's close at $94 is very unlike Exxon. They normally meet their estimates and there is rarely a sell off ahead of their earnings. Did somebody get the news early?

Chevron (CVX) reported adjusted earnings of 35 cents compared to estimates for 32 cents. Revenue fell from $40.4 billion to $29.3 billion and slightly below estimates for $29.9 billion. Production fell -2.6% to 2.528 million Boepd. Production in the U.S. fell -6% to 682,000 Boepd. The E&P division lost $2.462 billion after a non-cash charge of $2.8 billion for writing down reserves to match current oil prices and writing off projects and investments that may never be developed or completed until oil moves back over $100 a barrel. Some leases may expire before that happens.

Chevron had operating cash flow of $4.5 billion. They spent $5.2 billion on capex and $3.1 billion on their dividend. This represents a funding gap of $3.8 billion. They are making up this shortfall by borrowing money and selling assets. Chevron said "Dividend return to shareholders is our first priority."

Shares dipped to support at $100 and rebounded to close at $102.58 on the dividend promise.

UPS (UPS) reported earnings of $1.43 that were in line with estimates. Revenues rose +3.8% to $14.63 billion and narrowly beat estimates for $14.62 billion. Overall package volumes rose 2.5% with a rise of 2.4% in ground shipments and 5.6% gain in Next Day Air services. Thank you Amazon Prime. Export shipments rose 3.9% thanks to growth in Asia and Europe. The company bought back 13.3 million shares for $1.3 billion in the quarter. Shares declined slightly on the lukewarm earnings.

Dow component Merck (MRK) reported earnings of 93 cents that beat estimates by a penny. Revenue rose 1% to $9.84 billion. Prescription drug sales rose 2% to $8.7 billion. Only a couple of drugs rose but quite a few declined in sales. Their new Hep-C drug Zepatier had sales of $112 million compared to billions for Gilead's Harvoni and Sovaldi. The melanoma drug Keytruda had sales of $314 million and three times the year ago quarter but Bristol Myers reported $1.1 billion for their competitor drugs Opdivo and Yervoy. The company is reportedly looking for acquisitions to build up its pipeline of new drugs to offset the number of drugs it has going off patent and will face generic competition. Shares gained only fractionally.

AbbVie (ABBV) reported earnings of $1.26 that rose 16.7% and beat estimates for $1.20. Revenue rose 17.5% to $6.43 billion and beat estimates for $6.24 billion. Humira sales rose 17.4% to $4.1 billion. U.S. sales of the drug rose 26.7% to $2.7 billion. The company is expanding the uses for the drug into rheumatology, dermatology and gastroenterology. Duodopa sales rose 31.2% and Creon +12.9%. Hep-C drug Viekira sales were $414 million and flat with Q1. With Gilead offering 3 Hep-C drugs and Merck also competing, it is tough to get any traction in that market.

AbbVie raised full year earnings guidance from $4.62-$4.82 to $4.73-$4.83. Analysts were expecting $4.76. The company has said it will fight to maintain the Humira patent but several other companies are already preparing biosimilars to compete with that product. Shares rallied to a 52-week high.

Anheuser-Busch InBev (BUD) reported earnings of $1.06 that missed estimates for $1.09 and well below the $1.21 in the year ago quarter. Revenue declined -2.2% to $10.806 billion but beat estimates slightly. Revenues for the three leading brands, Budweiser, Corone and Stella Artois, rose 8.4% for the quarter. That was powered by a 13% rise in Corona and 9% in Stella Artois and 6% in Bud.

The company also said it raised its bid for SABMiller to 45 pounds or $59 in a cash and stock deal. The company had to raise it one pound because of the drop in the British currency after Brexit. The board of SABMiller immediately recommended shareholders approve the offer. The offer upgrade came as China officially approved the merger. The two largest shareholders, Altria (MO) and Columbia's Santo Domingo family, both urged approval of the deal. The merged companies would account for 30% of global beer sales.

Lexmark (LXK) shareholders voted 99% in favor of the acquisition by a consortium of investors. Over 70% of the outstanding shares voted and of those shares voted more than 99% were in favor of the acquisition for $40.50 per share in cash. However, shares fell -2% to $36.67 because the company reported a loss of 56 cents on revenue of $862.6 million for the quarter.

Tyco (TYC) reported earnings of 54 cents that beat estimates by a penny. Revenue of $2.449 billion missed estimates for $2.457 billion. The company said it was on track to complete the merger with Johnson Controls (JCI) by September 2nd. Earnings guidance was withdrawn because of Irish and European rules related to the proposed merger. Shares are holding near historic highs ahead of the merger.

Xerox (XRX) reported earnings of 30 cents that beat estimates for 25 cents. Revenue fell -4.5% to $4.39 billion but matched estimates. The company cut 1,300 jobs in the quarter and reduced costs by 6%. They have reduced staffing by 11,800 since the end of December but still employ 131,800. They are on track to reduce costs by $700 million in 2016. They have announced a split into two companies. One will be the copier business and the other the services business. The company guided for earnings of 26-28 cents in the current quarter and analysts were expecting 28 cents.

The quantity and quality of earnings will decline next week but there are still a few large companies reporting. The only two Dow components for the week will be Pfizer and Procter & Gamble on Tuesday. The most watched earnings will probably be Tesla, Jack in the Box and Priceline. Normally Linkedin would be in that group but since Microsoft is acquiring them their relative importance evaporated.

Factset said the blended S&P earnings for Q2 have improved to a -3.8% decline compared to the expected decline of -5.5% as of June 30th. Blended revenues are actually showing a minor +0.1% increase for the quarter and it would be the first time in six quarters that revenue did not decline.

With 63% of the S&P-500 reporting earnings, 71% have beaten on earnings and 57% on revenue. For Q3, 36 companies have issued negative guidance and 20 companies have issued positive guidance.

During the month of July, analysts reduced earnings estimates for Q3 by -0.7%. That is the smallest reduction since Q2-2014. Over the last four quarters the average decline in estimates has been -2.7%. Over the last 20 quarters the average decline has been -2.3%. So far, Q3 is shaping up to be the smallest earnings decline in 6-quarters at only -0.6% but odds are good the actual earnings will be positive. Earnings typically come in slightly over estimates thanks to big surprises by a few companies.

The trailing 12-month PE is now 19.4 and the forward 12-month PE is 17.0 and the highest since Q4-2014.

Hewlett Packard Enterprise (HPE) spiked 6% intraday on Friday after news broke that a consortium of private equity firms were considering an offer to take the company private. That would have been a $40 billion acquisition. Later in the day, Reuters broke a story that the group only wanted to buy some software assets from HPE and shares declined to only a 3% gain. That is still a record high.

The falling dollar helped rescue oil prices from a possible break under $40. The low for the day was $40.57 right at the start of the regular session. When the dollar imploded on the GDP report, the price of oil rebounded to close at $41.56. That is a temporary reprieve unless the dollar continues to plummet.

The oil glut is continuing and the new glut of refined products led to a rise in crude inventories of 1.7 million barrels in a month when declines should be normal. With a lack of storage space for refined products, the refinery utilization fell from 93.2% to 92.4% for the week and should continue to decline with the summer driving season over in just four short weeks.

The odds are very good prices will dip under $40 before rebounding in October. I would be a buyer of energy stocks when oil dips under $40. That dip could be brief.

Active rigs rose only 1 to 463 but oil rigs rose +3 to 374. Active gas rigs fell -2 to 86 and the lowest level since June 10th. The small number of gas rigs and the slowing production rate has spiked gas prices significantly.

With only 86 active gas rigs in the U.S., gas production in the first five months of 2016 has been 12,000 Bcf. That is a gain of only 194 Bcf over the same period in 2015 at 11,806 Bcf. For reference in 2014 we produced 10,964 Bcf over the same period, which equated to a jump in production of 842 Bcf in 2015 compared to the 194 Bcf this year. Gas injections into storage for winter consumption were only 17 Bcf last week. The average injection for the last six years for the last week of July was 58 Bcf. Shale wells also produce natural gas. With a decline in new wells of almost 5,000 per quarter for the last 6 quarters compared to the 2014 drilling rate, there are more than 30,000 oil wells that were not drilled and therefore are not producing natural gas to offset declining production in older wells. This slowing gas production has lifted prices from a 16-year low in March at $1.61.

The European banking stress test results were released on Friday after the close of the U.S. markets. The results could cause some volatility at the open on Monday.

The stress test results were not as bad as some analysts expected but they were not good. The European Banking Authority (EBA) reported the Common Equity Tier 1 capital (CEIT) ratio for the 51 largest banks in Europe under a severe stress scenario. The CEIT ratio does not have a pass/fail level but anything under 8.0 is considered weak and over that level is considered safe.

The Banca Monte dei Paschi di Siena (BMPS) saw its CEIT ratio fall to -2.23 and a crisis level. However, the bank announced on Friday it had sold 9.2 billion euros ($10.3 billion) in bad loans and received a 5 billion euro investment from a consortium of underwriters. While that did not repair the bank's balance sheet, it was a step in the right direction.

Other results in the "weak" category included:

Austria's Raiffeisen Landesbanken 6.14%
Spain's Banco Popular 7.1%
Italy's Unicredit 7.12%
UK Barclays 7.3%
Ireland's Allied Irish Banks 7.39%
Germany's Commerzbank 7.42%
Bank of Ireland 7.69%
Germany's Deutsche Bank 7.8%
French Societs Generale 8.3%

With more than 1 trillion euros of nonperforming loans across Europe the banking authority is very concerned about the health of the banks if there is a further deterioration in the economy. The loans depress profits and prevent the accumulation of capital to make new loans. If the pace of bad loans increases in an economic decline the problem will only get worse.

Because the majority of the banks were over the 8% CEIT level the market could celebrate on Monday. There were quite a few analysts preaching doom and gloom that did not come to pass.


Friday was the end of the month and the $600 million in buy on close orders on the NYSE could have been month end buying rather than bets that the market is going to continue higher. Monday could also see a positive bias from the month end cycle.

The markets have now traded sideways for the last 12 sessions. Eventually this consolidation will end with a breakout or a breakdown. The longer we remain in these tight ranges the stronger the move when it comes. The Dow and S&P have been the tightest but the Dow broke down over the last couple of sessions with post earnings depression causing prior Dow reporters to fade.

On the flip side, the Russell 2000 has exactly the opposite trend with a positive bias. Meanwhile, the S&P has failed to move out of its range and continues to move sideways. The gains by Amazon and Google on Friday helped push it to the upper end of the range but that may be temporary.

Fortunately, with the super tight range we have a clear decision point on a breakout or breakdown. If the S&P moves under 2,160 it would be a signal to close bullish positions. If it were to break over the historic high close at 2,175 it would be a signal the rally has farther to run. I would want to see an increase in volume in either direction before I jumped on for a ride. The path of least resistance is still down.

The level to watch on the Dow is 18,400. The Dow has traded below that level intraday on 3 of the last 4 days and closed at 18,429 thanks to those buy on close orders. The post earnings depression is starting to weigh on the Dow. Only six Dow components have yet to report and only two report next week. Neither of those two are generally market movers. If the market is looking for leadership, it will have to look elsewhere.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Nasdaq is not showing any weakness. The index closed over 5,160 and just under the December high at 5,165. This is the last major resistance before testing the historic high close from last July 20th at 5,218. If the earnings continue to be more positive than negative the Nasdaq has a chance of retesting that high but we should remember what happened last year.

The Nasdaq hit that high on July 20th and was trading 926 points lower (-18%) only 25 days later on August 24th. We say that August and September are seasonally weak and are the two weakest months of the year. There is a good track record of declines but there are sometimes rallies. I reported several weeks ago that the years with rallies in August tend to have blowout gains because investors are betting on the seasonal weakness.

If the majority of traders bet on the seasonal weakness and the market goes up there is a monster short squeeze that can keep on squeezing as traders try to reload their shorts at every pause. Likewise, if everyone is betting on a drop and that drop occurs it can accelerate rapidly as everyone piles on when the trade works out as they expected.

The big earnings beats by Google and Amazon helped to lift the Nasdaq on Friday. Unfortunately, all the major market moving tech stocks have already reported. There are a few big names next week but they do not have the same power as Amazon and Google and the Nasdaq is VERY overextended. It will take a lot of positive headlines to continue pushing it higher.

The chart indicators are not showing any weakness so the index could continue higher on some earnings follow through but eventually there will be a post earnings depression phase.

The small cap Russell 2000 is struggling higher after breaking through the resistance at 1205-1210. The moves have been small but continuous. It is as though the fund managers are continuing to nibble at the small cap sector but they are afraid to put any real money to work over 1,200. The index is a long way from its highs at 1,295 and I would be very surprised if we tested that level over the next several weeks. The 1,200 level has been tested as support and it held so that is the key level to watch for a breakdown.

Analysts and traders continue to say the market is tired. However, Boston Marathon runners are tired by the time they get to mile 20 but the finishers keep plodding along at a fraction of their starting pace. The market may be tired and we may be entering a seasonally weak period but the market will continue going higher as long as fund managers are buying defensively to prevent other funds from outperforming them in the annual competition.

Unfortunately, there is a new fly in our soup. For the prior two weeks, the market volume has been very low in the 5.4-5.6 billion share range on average. For the last three days the average has been 7.2 billion with a 7.42 billion day on Friday. I have been telling you we were not in "distribution" mode because the volume was so light. With the sharp increase in volume, it now looks like we are undergoing some distribution. That is when large holders slowly sell stock into a rally at market highs. They do not dump their shares but dole them out at a constant rate in order not to impact the price. Retail traders just think the rally has slowed and is consolidating when in fact the smart money is calmly liquidating.

We need to be cautious next week. With the peak in Q2 earnings behind us and the seasonally weak months ahead of us, there is a real possibility we could see some negative volatility.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts

Despite the Nasdaq, Russell and S&P hitting new relative highs the AAII sentiment survey saw bullish sentiment decline again. Bullish sentiment declined -4.2% to 31.3%. Bearish sentiment rose +1.7% to 28.4%. Neutral sentiment rose the most at +2.5% to 40.3%. This survey ends on Wednesday. Investors must be looking at those overextended charts and coming to the same conclusion we are that profit taking cannot be far off.

On the day Facebook reported earnings the IRS served them with a "statutory notice of deficiency" claiming the company owes more taxes for 2010. Earlier in July, the IRS sued Facebook to surrender some documents saying that Facebook accountants had undervalued some assets it transferred to Ireland in 2010. The current notice is only for 2010 but IRS has similar investigations in progress for other years. If the IRS can prove its case, Facebook could be liable for as much as $5 billion in back taxes plus penalties. The company is appealing and said should the IRS win the ruling would have a "material adverse impact" to Facebook finances.

Stupidity has no limits. This weekend, stunt man Luke Aikins is planning on jumping out of a plane at 25,000 feet without a parachute or a wingsuit. He will only be wearing the clothes on his back. He is planning on guiding himself to hit a net. The 42-year old daredevil has been thinking about the stunt for several years. Of his 18,000 jumps, he has had to use his reserve chute 30 times. The net is one-third the size of a football field or 100x100 feet and 20-stories high. They test dropped several 200-pound dummies to test the net and one of them punched right through the net. That means he has to not only hit the net but also hit it flat to spread his weight over a wide area. He will be going 120 mph when he hits the net. Good luck Luke!

Do not plan on taking any trips to Jupiter. Recent tests showed that the upper atmosphere is about 620 degrees Fahrenheit and significantly hotter than it should be that far away from the sun. Jupiter is five times farther from the sun than earth. The great red spot is a storm that has been raging for at least 150 years and the advent of modern telescopes. However, some observers have reported seeing the red spot as far back as the 1600s. The spot is twice the size of the earth and winds are blowing over 400 mph. The NASA Infrared Telescope shows the temperature in the clouds above the red spot is 2,420 degrees and the warmest spot on the planet. They believe there are sound waves in the storm that are heating up the atmosphere but until the new probe is operational, they are just guessing.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Those who expect to reap the blessings of freedom, must, like men, undergo the fatigue of supporting it."

Thomas Paine

New Plays

Financial Going Up

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the banks showing mixed performances, this financial company is going higher. The mortgage market is hot with rates at multiyear lows. This mortgage company hedges risk for lenders.


RDN - Radian Group - Company Profile

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.


Buy Sept $14 call, currently .20, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Earnings Peak

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P rebounded to an intraday high on AMZN, GOOGL but could not hold it. The S&P hit an intraday high of 2,177.09 after a morning rebound from the opening dip to 2,163. The big gains in the tech stocks kept the Nasdaq positive but the Dow declined on weak economics and worries over the EU stress tests on 51 banks. The test results were not as bad as expected on the first read and the S&P futures closed at their high for the day at 2,171.

Thursday was the peak in earnings activity for the Q2 cycle. We are now entering the seasonally weak August/September period and next week could see the indexes begin to slide. However, there was $600 million in buy on close orders on the NYSE on Friday. That could have been month end buying rather than a bet we are going higher next week.

Current Portfolio

Current Position Changes

SCTY - SolarCity
The short-term put position was closed at the open.

QURE - Uniqure
The short position was closed at the open.

AAOI - Applied OptoElectronics
The long position was stopped at $11.95.

TWTR - Twitter
Close the long put. Reload the long position on TWTR shares.

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

AAOI - Applied Optoelectronics - Company Profile


No specific news. Shares continued to decline and stopped us out at $11.95 with a loss of 5 cents.

Original Trade Description: July 16th.

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.

Position 7/18/16 with an AAOI trade at $12.00

Stopped 7/29/16: Long AAOI shares @ $12, exit $11.95, -.05 loss

ANF - Abercrombie & Fitch - Company Profile


No specific news. Minor gain in a mixed market.

Original Trade Description: July 20th.

Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel. The company sells knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brand names. As of March 2, 2016, it operated through 754 stores in the United States; and 178 stores in Canada, Europe, Asia, and the Middle East. The company sells its products through its stores and direct-to-consumer sales.

Abercrombie has been pounded from the highs at $33 back in March after some disappointing earnings and weak outlook for the retail sector. Since then they have cleaned up their inventory levels and dumped a ton of bad product choices. Now they are heading into their heavy selling season and ready to go head to head with other stores.

The company has been in a restructuring period for over a year where they remodeled stores, dumped inventory and closed unprofitable locations. The drop from $33 to $16 took all the fluff out of the stock price and shares are moving higher today. They closed at a 2-month high on Wednesday.

If the market begins to roll over, these previously oversold stocks will look like a safe haven for investors looking for a bargain. This is Abercrombie's biggest selling season so sentiment should remain positive through Labor Day. The National Retail Federation said back-to-school spending will rise by 11.4% to $75.8 billion this year of which $9.54 billion will be on clothes. Apparel retailers like ANF get about 15% of their annual sales in the back-to-school season.

Earnings August 25th.

Position 7/21/16 with a ANF trade at $20.10

Long ANF shares @ $20.10, see portfolio graphic for stop loss.

No options recommended.

CUDA - Barracuda Networks - Company Profile


No specific news. Minor decline from the 10-month high close.

Original Trade Description: July 21st.

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher. Thursday's close was a 9-month high with a 1.7% gain in a weak market.

Shares are about to move over resistance at $21.25 from last November with the next major resistance at $30.

Position 7/22/16 with a CUDA trade at $21.45

Long CUDA shares @ $21.45, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


HPE shares spiked +3.5% and that was actually down from +6% intraday after Bloomberg reported PE firms KKR, Apollo Global Management and the Carlisle Group were considering taking HPE private. That would be an enormous deal worth roughly $40 billion at any reasonable premium. The stock closed on Friday with a market cap of $35 billion and with the stock ar a record high. I seriously doubt this will happen but yo never know. HPE is spinning off its services business into an entity with Computer Sciences (CSC) so the remains of HPE would be smaller but still enormous. A later report by Reuters suggested the PE firms were only looking to buy certain assets of HPE, not the entire company.

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


We were rescued by the market drop this morning that spiked the premium on the long put that was expiring today. We exited that position with only a 15 cent loss. Rather than try to play the same game with the expected earnings next Thursday I am going to recommend we close the SolarCity position before earnings. Somebody is sitting on the stock the last two days with a big position they are selling at $27. I am recommending we close the position and reopen on any post earnings dip. If they announce the approval of the Tesla acquisition with earnings we will simply lose out. We are up $3.30 on the position and we need to protect those gains.


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.

Update 7/18/16: SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available 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.

Position 7/28/16: Long July $27 put @ .45.

TWTR - Twitter - Company Profile


Twitter shares rallied for the second day and I am recommending we close the long put and reload the long on the TWTR shares. I believe all their new live streaming efforts are going to pay off. The post earnings dip appears to have run its course.

BUY TWTR SHARES, currently $16.64

CLOSE AUG $17 long put.

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:

Closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.


Still Open: 7/25/16: Long Aug $17 put @ 62 cents, no stop loss.

BEARISH Play Updates

QURE - UniQure - Company Profile


No specific news. We close this position at the open.

Original Trade Description: July 19th.

UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.

In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.

Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.

Earnings August 25th.

Shares have been declining for the last week and are very close to a new low. We played this back in June when it was making that low and were stopped out for a gain when it rebounded. I think it will set a new low this time and probably sink to $5.

They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause.

Position 7/26/16 with a QURE trade at $7.00

Closed 7/29/16: Short QURE shares @ $7.00, exit 7.26, -.26 loss.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 10.18 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 three 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. When a split is announced we will close the position and reenter after the split.

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.

Position 6/24/15: With a VXX trade at $17

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.

CIEN - Ciena Corporation - Company Profile


We were stopped out on CIEN on July 28th after INFN posted ugly earnings and warned that demand was falling across the sector. This was mostly company specific to INFN but it did knock CIEN, JNPR and CSCO lower. There was no stop loss on the optional October call so we have retained it as a lottery play that CIEN moves back to the June highs by October expiration.

Original Trade Description: July 23ed.

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.

On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.

After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.

Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.

Earnings are Sept 1st.

I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.

Position 7/25/16

Long Oct $23 call @ 70 cents. No stop loss.

Previously closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.

HOV - Hovnanian Enterprises - Company Profile


This is a long term position on expectations HOV will return to profitability in Q3/Q4 as outlined by the CEO in the Q2 earnings.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.


Long February $2 call @ 20 cents. No stop loss.

JKS - Jinko Solar - Company Profile


No specific news. We have a long August $21 call that we added as insurance to the short on JKS shares. Shares appear to have found support at $18.

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

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

Previously Closed 7/20/16: Short JKS shares @ $19.35, exit $19.05, +.30 gain.

SHLD - Sears Holding - Company Profile


No specific news. Shares are creeping higher and closed near the 3-month high.

We were stopped out on the long in SHLD shares on July 14th. The long call was optional and we are tracking it here with no stop loss.

Original Trade Description: July 11th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

Position 7/12/16 with a trade at $14.65

Long Sept $16 call @ .88, no stop loss.

Previously closed 7/14/16: Long SHLD shares @ $14.65, exit $13.75, -.90 loss.

VNET - 21Vianet Group - Company Profile


VNET shares have flat lined at $9.50 as the buyers and sellers jockey for position. It could go either way and we have a $9 put option.

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


No specific news. Shares moved sideways to lower during the week but recovered on Friday. Earnings are next Thursday so we have to decide if we want to take our minor gain or hold over earnings. I will make that decision in the Tuesday newsletter.

We have an August $9 call and it is in the money. 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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