Option Investor

Daily Newsletter, Tuesday, 8/9/2016

Table of Contents

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

Market Wrap

Dull Market

by Jim Brown

Click here to email Jim Brown

If you are never supposed to short a dull market, what should we do with this one?

Market Statistics

Most of the major indexes spiked to new intraday highs except for the Dow. The Dow's high was 18,585 and missed the closing high of 18,595 before giving back all the gains and trading in negative territory just before the close. Short covering or buy the dippers helped lift it back into positive territory with a +3 point gain. That is hardly a rousing story of a bullish market trading at new highs.

The Nasdaq did close 4 points into new high territory at 5,225 thanks to a 6 point boost by Charter Communications (CHTR) and their +19 point gain for the day. The S&P squeezed out a 1-point gain but missed closing at a new high by one point.

There was very little excitement in the market and investors appeared unsure how to read the negative economic reports.

The Productivity report for Q2 came in at -0.5% and the third consecutive quarter in decline. According to UBS, there has never been three quarters of declines outside of a recession. The last time this happened was in 1974 and 1979 when interest rates were in the 15% range.

Output rose +1.2% while hours worked rose +1.8%. Hourly compensation rose +1.5% contributing to a 2% rise in labor costs. On a trailing 12-month basis, output per hour has fallen -0.4%.

Manufacturing output fell -0.2% as compensation rose +2.9% and labor costs rose +3.0%. The price deflator rose 2.4% and the strongest quarterly increase since 2011. A drop in productivity means workers are getting paid more but accomplishing less. That is not a good sign for the economy.

Morgan Stanley said the negative expectations for the quarter were exceeded with an even worse result.

Economy.com chart

Wholesale inventories for June rose +0.3% compared to consensus for zero and +0.1% rise in May. However, durable goods inventories fell -0.3% while nondurable goods rose +1.1%. Sales were strong with a +1.9% gain and that drove the inventory to sales ratio down from 1.35 to 1.33%. That is the number of months required to deplete inventories at the current rate of sales.

The NFIB Small Business Survey rose only +0.1 to 94.6 for July. That was the smallest movement in months. The expectations components rose slightly. Plans to increase employment rose from 11 to 12, inventory increases from -3 to zero and expectations for economic improvement rose from -9 to -5. The rest of the components were either flat or slightly lower. When we are excited about a report because the components are simply becoming "less negative" we have a long way to go.

There is a serious lack of any material reports for the rest of the week. The retail sales on Friday would be the most important and analysts expect only a minor gain. We have a bunch of dull reports to accompany our dull market.

The biggest news for the morning was a major earnings miss by Wayfair (W). The company posted a loss of 43 cents compared to estimates for a loss of 41 cents. The company has not reported a profit in the last 18 quarters and this was their biggest loss over that period. Revenue of $786.9 million rose +60% and did beat estimates for $782.4 million.

Wayfair ended the quarter with 6.7 million active buyers, a 65% increase. They processed 2.9 million orders in Q2, a 50% increase. Overall, this appeared to be a good quarter with all the sales metrics soaring. However, they have to eventually make a profit and investors did not like the report. Shares fell 19% on the news and weighed on all the consumer companies except Amazon.

Valeant Pharmaceuticals (VRX) reported adjusted earnings of $1.40 compared to estimates for $1.47. Revenue declined -11% to $2.42 billion compared to estimates for $2.46 billion. The company reaffirmed its full year guidance of $9.9-$10.1 billion and adjusted earnings of $6.60-$7.00 per share.

The CEO said they were exploring the sale of $8 billion in noncore assets with annual revenue of roughly $2 billion. They have sold the North American rights to the hereditary angioedema drug, Ruconest, to Pharming Group in the Netherlands for $181 million and potential future royalties of up to $329 million. Papa said they had received numerous unsolicited bids for various assets. He also said they were negotiating new terms with lenders to allow them some breathing room as they focused on rebuilding the company. Papa also said the company will be reorganized into three parts including Branded Rx, Bausch & Lomb and U.S. Diversified products.

Shares rallied 25% or $5.71 on the earnings. There were 29 million shares short and 106 million shares traded. Average volume is 27 million. The guidance and the debt sales were the big movers.

Endo International (ENDP), sometimes called a baby Valeant, reported earnings after the close on Monday of 86 cents that easily beat estimates for 75 cents. Revenue of $920.9 million also beat estimates for $878.3 million. The company guided for the full year for earnings of $4.50-$4.80 with revenue in the range of $3.87-$4.03 billion. Analysts were expecting $4.55 and $3.93 billion. Endo has been on an acquisition binge where it acquired drugs then raised the prices, exactly like Valeant. Endo shares rallied 22% on more than five times normal volume.

After the bell Dow component Disney (DIS) reported adjusted earnings of $1.62 compared to estimates for $1.61. Revenue rose 9% to $14.277 billion compared to estimates for $14.15 billion. Parks revenue rose 6% to $4.38 billion. Studio revenue rose +40% to $2.85 billion. Consumer entertainment fell -1% to $1.15 billion. They are exiting their game console business. Media revenue rose 2% to $5.91 billion. They announced they were acquiring a 33% stake in BAMTech for $1 billion paid in two installments from Major League Baseball and had the option to acquire a majority stake. BAMTech is separating from MLB Advanced Media in conjunction with the Disney investment. The stake will allow Disney to develop a new streaming media delivery platform that will deliver content for ABC, ESPN and other digital initiatives inside the Disney conglomerate. They also announced DirecTV will include Disney's top 7 subscription channels in its over the top service. Shares declined $1.50 on the news.

Yelp (YELP) reported earnings of 1 cent compared to estimates for a 7-cent loss. Revenue of $173 million beat estimates for $170 million. Shares rallied 13% in afterhours. The company saw a gain of 32% in total advertising accounts to 128,400. The mobile app was accessed by more than 23 million unique devices in Q2. That was a 27% gain. They guided for Q3 for revenue of $180-$184 million and beating estimates for $179.6 million.

Fossil (FOSL) reported earnings of 12 cents that beat estimates for 9 cents. Revenue of $685.4 million beat estimates for $674.1 million. They guided for full year earnings of $1.80-$2.65 per share compared to analyst estimates for $2.03. They also guided for revenue to decline between 1.5% to 5.0% in fiscal 2016. Comparable sales in the Americas fell -11% in the quarter. Overall comps fell -3% compared to estimates for a +0.7% gain. The company has announced its next generation smart watches that will go on sale in stores and online on August 29th. They start at $295 and the same price as an entry level Apple watch. They use the AndroidWear operating system. The Fossil Q lineup now offers more than 20 products that compete with Fitbit (FIT) and Apple.

IDC reported that Apple watch sales fell -55% to 1.6 million units in Q2 compared to 3.6 million in Q2-2015. Samsung shipped 600,000 watches in Q2.

SolarCity (SCTY) reported a loss of $2.32 compared to estimates for a loss of $2.44. Revenue of $186 million easily beat estimates for $146 million. However, they guided for a loss of $2.55 to $2.65 in Q3 and revenue of $155-$168 million compared to estimates for $2.26 and $175 million. They warned that as a result of the Tesla acquisition offer it had taken them longer than normal to finalize new project financing agreements. While this negatively impacted Q2, it will have a positive impact on Q3 according to the company.

Last week the company agreed to a take under with Tesla for $25.73 based on Tesla's share price at the time. Shares had been trading over $27 in anticipation of a higher offer. As part of the acceptance, the board cited the easier access to financing once Tesla was in control.

The Q2 earnings cycle is really slowing and the calendar for Wednesday is lackluster at best. On Thursday, there is Alibaba and Nvidia and both could produce fireworks. Nvidia has been setting a new high almost every day and they are either going to have blowout earnings or a major disappointment that tanks the stock. With their almost weekly new product announcements and immediate sell out of anything announced, I am betting on an earnings beat.

The primary volatility ETFs (VXX/VXZ) did a 1:4 reverse split after the close on Monday. The VXX went from a historic low at $9.30 to $36.57 at the close. The Daily 2x VIX Short Term ETN (TVIX) enacted a 1:25 reverse split that was also effective at the open this morning. Shares were trading for 92 cents before the split and $22.26 at the close.

The API reported a 2.1 million barrel build in crude oil inventories late Tuesday. Analysts were expecting a one million barrel drop. Crude declined to $42.74 on the news. More than 16,500 lots of WTI put options with a $40 strike price were traded before the news was released.

The IEA revised its forecast for production declines in the U.S. in 2016 from 820,000 to 700,000 citing an increase in drilling activity.

Morgan Stanley reiterated their outlook for crude saying "the bottom of our trading range remains $35. Despite the recent bounce we see the prospect for lower prices over the next 1-3 months and a deeper contango." They see that $35 level as a soft floor but still a critical level. The primary catalyst that could prevent a return to $35 is the potential for OPEC to try and talk prices up again with talk about a potential production freeze at the next OPEC meeting. Venezuela's President Maduro has already started making headlines calling for a new unity agreement to freeze production. He almost made it happen last time but Saudi Arabia backed out and the deal fell apart. With oil still hovering in the $40 range there is ample incentive for a new deal.

Marc Faber, the publisher of the Gloom, Boom and Doom Report, is even more bearish if that is even possible. He said on Monday that stocks are likely to drop 50% to 1,100 on the S&P. The S&P hit 2,185 about the time he made that call. He warned the market has not gone up because business is good but because of a couple trillion dollars in stock buybacks. Companies have been borrowing money at record low interest and using the money for buybacks. With stocks trading near a record PE levels, Faber says it is not the market that is pushing higher but a relatively few stocks driving the indexes. He warned that the excess liquidity generated by all the central bank easing and QE programs will eventually come back to haunt the market.

Faber has been wrong far more often than he has been right. However, on the "stopped clock is right twice a day" theory, as long as he keeps calling for a bear market he will eventually be right. He will have given up or lost millions in the years prior to the bear's appearance but he will eventually get to say "I told you so."

I have warned many times that the Fed has never successfully unwound a stimulus program without causing a market crash and this is the largest stimulus program they have ever created. What are the odds this will be the one they can unwind safely? I think I have a better chance with the PowerBall lottery.

I do NOT agree with Faber in this call. Even if the market did begin to correct there are far too many factors to hold it up rather than knock it down. Remember, "There is No Alternative" or TINA. This means with interest rates at record lows and $13 trillion in negative territory, investors and institutions have to buy stocks. That could change when the Fed actually begins to raise rates but that should not happen until 2017 at any sustained pace.


The S&P did not close at a record high but it only missed by 1 point. However, the market continues to be very over extended and could decline at any time. They say never short a dull market and this market is going on four weeks of dull with only one material short squeeze along the way. We could always move higher but eventually gravity will take hold. This is the weakest two months of the year for the markets and the second half lows normally occur in Sept/Oct. This is what the bears are betting on but the market refuses to die.

The three weeks of sideways consolidation on the S&P suggests investors believe we are not going lower. Every minor dip was bought and they are still buying the dips. When that trend changes it will be time to exit. The S&P has support at 2,160 and again at 2,150. If those levels break, I would move to the sidelines or get short. Until then, I would keep my stops tight because the market can continue moving higher if fund managers continue their defensive buying. They cannot afford to let other managers get ahead of them in the fund performance competition.

The Dow will not get any help from the Disney earnings tonight. Disney shares are down and they are likely to continue lower on Wednesday. The Dow tried to push higher at the open but was immediately stopped at 18,575 and then pushed lower into the close. Support at 18,400 and 18,250 was tested last week. The short squeeze lifted the index away from those levels but the Dow has only been able to hold those gains and not add to them. The top of the short squeeze on Friday morning was 18,520. The Dow closed at 18,532 today, 2.5 days later.

The Dow stocks are going through their post earnings depression phase and that means traders are taking profits and moving on to other candidates. Since the short squeeze, the Dow has had initial support at 18,500. A breakdown under that level would be the first warning the trend may be coming to an end. Similarly, a breakout over 18,600 would be a signal there could be another leg higher in progress.

There are no additional Dow stocks reporting earnings this week.

The Nasdaq is still making new highs but very slowly. On Friday, the gain was 3 points over the prior high. On Monday, the index gave back 8 points. Today the index made a new high by 4 points. These are not exactly rip-roaring gains that have investors racing to place their bets on tech stocks. The semiconductor sector was the support for the Nasdaq gains today as the $SOX closed at a new high.

The Nasdaq has initial support at 5,200 and then 5,115. A break under 5,100 would be very negative. There are no high profile Nasdaq stocks reporting earnings other than Ctrip.com, Alibaba and Nvidia. Those are not normally market movers. The biotech sector has been down for the last two days on profit taking from the recent run. We need the biotechs to catch fire again and provide some additional lift for the Nasdaq.

The Russell 2000 had a nice rebound from the 1200-1205 support and has streaked for 31 points in the Friday short squeeze and the 2 prior days. Since the squeeze stopped on Friday morning the index has stalled completely at that 1,231 level. Resistance is now 1,234 and support 1,228. That is a very narrow range. If that breaks to the downside, I would be looking at 1,200 once again.

I am neutral on the market. The lack of selling suggests everyone expects the market to move higher but expectations do not always come true. The volatility is nonexistent with the VIX closing at 11.66 after hitting a new 52-week low at 11.02 at the open. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The caveat there is that the VIX can stay low for some time but when it reverses, the moves can be dramatic. The biggest market losses come from events that are unexpected. Also, the market does not need a reason to correct. Sometimes it just happens for no obvious reason other than the rally has run its course.

I recommend keeping your stop losses tight, try not to be overly long and don't buy the first dip. Keep building your shopping list and the prices you would be willing to pay for each stock on that list. Sometimes Christmas does come in August/September.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Adding Risk

by Jim Brown

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Editor's Note

I believe it is time to pay attention to the dull market. With every day that passes we are that much closer to a major move and several attempt at moving higher have ended in failure. To be fair we have seen the same thing when the bears try to push the market lower. Unfortunately the bulls have a handicap. It is harder to maintain a rally than a decline. For nearly four weeks the buyers have been unable to move it higher. As we move deeper into the two weakest months of the year for the market, there is no reason to continue adding to our existing portfolio. We need to make the dull choice and ignore the dull market while we wait for a vertical trend to appear. Futures are down -2.50 and falling.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Pressure Building

by Jim Brown

Click here to email Jim Brown

Editors Note:

The lack of a material move for three weeks now is building the pressure for a strong breakout/breakdown. The big short squeeze on Friday has failed to produce any follow through to the upside but there is no selling as well. The longer the market remains in this tight range the more likely we will see a big move when the trend finally breaks.

Earnings have been better than expected and economic chatter is positive despite negative reports today.

Current Portfolio

Current Position Changes

VSI - Vitamin Shoppe
The short position was entered with a trade at $27.

INFY - Infosys Ltd
The short position remains unopened until $15.75. Low today was $16.25

CUDA - Barracuda Networks
The long position remains unopened until $22.50. High today was $22.25

RDN - Radian Group
The long position remains unopened until $13.15. High today was $13.10

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

CDNS - Cadence Design System - Company Profile


No specific news. Minor decline.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long CDNS shares @ $24.35, see portfolio graphic for stop loss.

Optional: Long Sept $25 call @ 35 cents, no stop loss.

CUDA - Barracuda Networks - Company Profile


No specific news. Shares are holding over prior resistance at $21.25 but cannot seem to make a higher move.

This position remains unopened until CUDA trades at $22.50. The high today was $22.06.

Original Trade Description: July 21st., August 3rd

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.

We were stopped out of long position on 8/3 because I had the stop loss too tight. I believe CUDA will move higher after a period of consolidation at the current level. I am putting an entry point just over the current consolidation range.

With a CUDA trade at $22.50

Buy CUDA shares, initial stop loss $21.00.

NAVI - Navient - Company Profile


Navient gave back some more of Friday's gain on no specific news. Just a pause in a mixed market.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long NAVI shares @ 14.57, see portfolio graphic for stop loss.


Long Oct $15 call @ 50 cents. No initial stop loss.

RDN - Radian Group - Company Profile


No specific news. Still stuck under $13.

Position remains unopened until a trade above resistance at $13.15. High today was $13.03.

Original Trade Description: July 30th.

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.

TWTR - Twitter - Company Profile


No specific news. Shares surged another 2.6% to $18.68 to close at a 5-month high.

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 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

BEARISH Play Updates

INFY - Infosys - Company Profile


No specific news. Minor gain but downtrend is still intact. Support at $16 is still a factor. It could take several days for this position to be triggered, if at all. However, if we are triggered at $15.75 the stock could continue to single digits.

Original Trade Description: August 4th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. The company offers business information technology (IT) services comprising application development and maintenance, independent validation services, infrastructure management, business process management, and engineering services consisting of product engineering and life cycle solutions; and consulting and systems integration services, including consulting, enterprise solutions, systems integration, and advanced technologies.

Infosys is an Indian company that does business all over the world but it does have a heavy presence in Europe and the UK. Just before the company released disappointing earnings in July they issued a press release saying, "We do not know how Brexit will play out" but we are cutting our guidance anyway. At the same time, they warned they would miss prior estimates for Q2 "even though there was no Brexit impact so far." This would appear to be a case of using a convenient headline as an excuse for poor performance.

The company cut full year revenue growth guidance from 11.5% to 13.5% to 10.5% to $12.0%. They blamed a lack of visibility by banks as a potential reason they may see growth decline. When they reported earnings of 22 cents they missed estimates for 23 cents. Revenue of $2.5 billion also missed estimates for $2.55 billion. Remember, they said there had been no impact from Brexit so far so this was just a miss and they were setting up analysts for a future miss with the guidance cut.

Earnings Oct 14th.

Analysts were quick to downgrade the stock with Nomura cutting it from buy to neutral and Credit Suisse cutting from outperform to neutral.

Shares fell from $18.50 to $16.50 on the announcement and then traded sideways for two weeks. This week they have begun to decline and are only slightly above a new 52-week low. If they punch through the support at $16 they could go to single digits.

With a INFY trade at $15.75

Sell short INFY shares, initial stop loss $16.65

No options recommended because of wide spreads.

SKX - Skechers - Company Profile


No specific news. Zacks reiterated a strong sell.

Original Trade Description: August 1st.

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

Position 8/2/16:

Short SKX shares @ $23.75, see portfolio graphic for stop loss.

Optional: Long Sept $22 put @ .55, see portfolio graphic for stop loss.

VSI - Vitamin Shoppe - Company Profile


No specific news. Shares dipped to $26.96 to trigger the entry into the position.

Original Trade Description: August 8th.

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

Position 8/9/16 with a VSI trade at $27

Short VSI shares @ $27.00, see portfolio graphic for stop loss.

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