Option Investor

Daily Newsletter, Saturday, 9/3/2016

Table of Contents

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

Market Wrap

Bad News is Good News

by Jim Brown

Click here to email Jim Brown

We are back to the point in the market where bad economic news is good news for the indexes.

Weekly Statistics

Friday Statistics

It is hard to understand why the market is so afraid of a quarter-point rate hike. The payroll report came in weaker than expected and the market spiked on the idea rate hike expectations had been pushed out to the December meeting. This is not rational since the Fed is committed to a gradual rate cycle. A quarter-point hike would not have any material impact to the economy or the market but the expectations for that hike are market negative. Old habits die hard and after decades of doing the rate hike rotation, some traders are simply stuck in a rut.

The Nonfarm Payrolls posted a gain of only 151,000 jobs for August compared to expectations for 180,000. The headline number was at the bottom of the neutral range from 150,000-190,000 and borderline negative. Like Goldilocks' porridge, it was not too hot but bordered on being almost too cold.

The June headline number was revised down from 292,000 to 271,000 but the July number was revised up from 255,000 to 275,000 making the revisions a net loss of 1,000 jobs.

August is the month where most misses occur and it is the month with the largest revisions averaging an eventual gain of 61,000 jobs. If the average revision occurred, it would raise the headline number to 212,000 jobs but take two months for those revisions to be released.

The number most analysts expected to push the Fed into hiking rates was anything over 180,000. Anything over 200,000 was considered almost a sure bet for a rate hike.

As usual, there were a lot of warts on the report. Manufacturing jobs declined -14,000. Service jobs rose +175,000. The average hourly earnings rose only +0.1% and the average workweek declined from 34.4 to 34.3 hours. That decline was the equivalent of losing -225,000 full time workers. That tenth of an hour adds up when you have 151.6 million workers.

The U3 unemployment rate was unchanged for the third consecutive month at 4.9%. The broader U6 unemployment rate was also flat at 9.7%. The labor force expanded by 176,000 workers, a somewhat slower pace than the 400,000+ worker additions over the prior two months. The labor force participation rate was also unchanged at 62.8%.

The number of people employed part time because full time jobs were not available was flat at 6.1 million. Another 1.7 million workers were marginally attached to the labor force. These workers are unemployed and would work if jobs were available but had not looked for a job in the prior four weeks. Another 576,000 workers were classified as discouraged and have given up looking for work. More than 1.1 million had not looked for work because of family responsibilities or other conflicts.

Food service employment (low paying, part time jobs) rose +34,000. Social workers rose +22,000, professional and technical +20,000, financial +15,000, health care +14,000, hospitals +11,000. Mining and energy lost -11,000 jobs bringing the total since September 2014 to -223,000. Manufacturing lost -14,000.

Since 2014, the U.S. has added 523,000 food service jobs and lost -13,000 manufacturing jobs. In 2016 alone food service jobs have risen +314,000. Food service jobs (waiters and bartenders) have risen in 77 of the last 78 months. It takes 2 or 3 part time jobs to replace the income lost from one full time job so those unable to find a new full time job have to work more than one part time job to keep food on the table and gas in the tank. Employers are also reducing hours to less than 30 so they do not have to provide insurance. That forces people to get a second job.

The ISM NY crashed back into contraction, falling from 60.7 in July to 47.5 in August. This followed the national ISM Manufacturing falling from 52.6 and back into contraction at 49.4 for August.

This was the third time in four months the ISM-NY has been in contraction following seven consecutive months in expansion territory. The quantity of purchases component fell from 48.3 to 44.6 indicating slowing orders. However, the employment component rose from 45.3 to 54.9 and the six-month outlook rose from 56.8 to 65.5.

Factory orders rebounded from the -1.5% decline in June to a +1.9% rise in July. However, the year over year unfilled order rate is still negative as it has been since early 2015. Even with the gain for July, unfilled orders are still down over the same period in 2015. This is the longest period of decline since 1956 and has always indicated the economy was in recession. Unfilled orders to all manufacturers fell -0.1% to $1.13 trillion, the lowest since June 2014.

Bloomberg Chart

The calendar for next week is very skinny with only the ISM Services and Fed Beige Book as the reports important to the market. The Beige Book is the critical report but unless activity in the various Fed regions has fallen off a cliff, it will probably be ignored.

The July report was filled with words like modest, moderate, generally, etc. Consumer spending was net positive but showed signs of softening. More districts noted slowing auto sales, which we have seen in the recent reports. Commentators said the report showed the economy was moving in the right direction but at a very modest pace. If the August report is more of the same, or worse, it could weigh on the market after the sharp declines in the ISM Manufacturing and ISM - NY.

The weaker than expected jobs numbers caused a temporary short squeeze at Friday's open after many traders had positioned for a positive report that would have pushed the Fed to hike rates in September. When the expectations suddenly changed, they were forced to cover those shorts and a low volume short squeeze was born.

The expectations for September changed dramatically. Last weekend the CME FedWatch Tool showed a 36% chance of a September rate hike. That fell to only 21% at Friday's close. Last week the odds of a December hike were roughly 64% and that decreased to 54% on Friday. So, overall the odds of a rate hike in 2016 declined on the various economic reports.

The various talking heads were tying themselves in knots trying to explain why they still expected a September hike or thought the hikes were completely off the table for 2016. The comments from Stanley Fischer last week about two hikes in 2016 were constantly rehashed. However, several analysts pointed out that Yellen has been long term dovish and while talking about the need for hikes has always said "data dependent" and "gradual." She was probably looking for a reason to remain on hold and the week's reports gave her all the reason she needed.

Another analyst pointed out that most of the FOMC voting members were making dovish comments while the majority of the hawkish comments were coming from Fed presidents that are not currently voting members. You have to wonder if they trade emails with Yellen where she suggests they talk up rates to keep the market from going into hibernation mode.

Yellen can always count on some major analyst to hype the situation and keep the uncertainty in place. Goldman's Jan Hatzius said the jobs numbers were strong enough to justify a September hike. He said the possibility of a hike rose from 40% to 55%. To offset his September bullishness he believes the odds for December fell from 40% to 25% because the economics only justify one hike. Even so, he said the Fed would likely change the post meeting statement to a dovish bias and revise the dot-plot to reflect a lower for longer rate hike cycle.

One key point came out of all the headline chatter. With the odds of a September hike falling dramatically, if the Fed is planning on hiking three weeks from now they will have to ramp up their guidance. There will have to be some pretty specific comments from multiple Fed speakers to effectively warn the market a hike is coming.

What this means for us little people is a continued period of uncertainty until the September 21st post-meeting announcement. At that point, all will be made clear for at least a couple hours. Then traders can start placing bets for the December meeting. The November meeting is not a quarterly meeting with a press conference and while they can still hike, the market does not believe they will do that at this stage in the cycle.

You may remember when the Fed hiked rates last December, their guidance suggested four additional rate hikes in 2016. Obviously the outlook changed and it could just as easily change to no hikes for 2016.

In stock news, Lululemon (LULU) posted earnings of 38 cents that rose 11.8% and matched estimates. Revenue increased 14% to $514.5 million from $453 million. However, same store sales rose 4% compared to 6% in the year ago quarter and 5.9% expectations. The company guided for Q3 to revenue of $535-$545 million and earnings of 42-44 cents. Analysts were expecting 44 cents. Shares were knocked for an 11% decline. Numerous analysts began pounding the table on LULU saying it was a buying opportunity after its 43% YTD rise.

Smith & Wesson (SWHC) posted earnings of 62 cents that nearly doubled and beat estimates for 43 cents. Revenue rose 40.1% to $207 million and beat already heightened estimates for $198.16 million. During the quarter, they completed the acquisition of Crimson Trace, a laser sight manufacturer and Taylor Brands, a knife and toolmaker. The company guided for full year earnings of $2.38-$2.48 on revenue of $900-$920 million. Analysts were expecting $1.92 and $776 million. S&W's prior forecast was $1.83-$1.93 and $750 million so business must be booming.

FBI background checks rose 6% in August to 1,853,815 and a record for August when sales are normally slow. That was down sharply from the 2,197,169 checks in July, which was a 27% increase over July 2015. June had posted a similar spike in checks to 2,131,485. Since the FBI began performing and accounting for firearms background checks in 1998 they have processed 243,558,967. In 2015 alone, there were 23,141,970. It is amazing to me that any presidential candidate runs on an antigun platform with the number of firearms in America.

The sharp drop in checks in August caused the firearms stocks to decline. SWHC, RGR and TASR all collapsed for the week.

Ambarella (AMBA) reported earnings of 54 cents that easily beat estimates for 37 cents. Revenue of $65.1 million beat estimates for $63.9 million. The company guided for Q3 revenue of $95-$99 million. The stock lost -7% because full year guidance was flat to -5% on revenue. The disaster at GoPro reduced chip sales to that company for the last year. GoPro is thought to be 25% of Ambarella's total business. The CEO was positive saying "solid product development and customer support continued to result in new design win momentum in all our markets, led by new projects in drone, home monitoring, virtual reality and wearable applications."

Gap (GPS) shares fell -2.6% after the company reported same store sales fell -5% after a -8% decline in August 2015. Banana Republic sales fell -10% after an 11% decline a year ago. Old Navy sales rose 1% but less than the comparable sales of +5% a year ago. Gap is also suffering from a fire that destroyed a 990,000 square foot distribution center in Fishkill NY on Monday. A gap executive said "basically anything you buy" under the Gap umbrella online comes from the Fishkill facility.

Hewlett Packard Enterprise (HPE) will report earnings on Wednesday. On Friday, news broke they were looking for a buyer for their software division in a deal that could be worth $10 billion. Reportedly, HPE is in talks with buyout firm Thoma Bravo LLC to sell the division. The division includes the big data analytics platform Vertica and cyber-security firm ArcSight. Thoma Bravo said HPE had received offers up to $7.5 billion and Goldman Sachs was managing the bidding process. Other firms making offers include Vista Equity partners, Carlyle Group and TPG Capital. HPE generated $3.6 billion in revenue from the division in 2015.

Carl Icahn announced after the close he had purchased another 306,846 shares of Herbalife valued at $18.5 million. He is determined to grind Bill Ackman into dust on Herbalife. Shares only moved up slightly in afterhours because the news broke after everyone had left for the holiday weekend.

Shares of Mylan (MYL) fell another 5% after two senators sent a letter to the Dept of Health and Human Services suggesting Mylan had incorrectly labeled the EpiPen product as generic in the documents submitted to Medicaid. That would have meant they had to refund less in rebates to Medicaid than they would for a non generic drug. Manufacturers have to rebate 23% to Medicaid on branded drugs and 13% on generics. The State of Minnesota estimated it had cost them $4 million YTD in 2016 because of the documentation error. The categorization error began in 1997. If this is proven to be true, Mylan could be responsible for millions in refunds, fines and legal expenses. The drug was classified correctly as a brand name drug by the FDA and Medicare.

Mylan said in a statement that it had complied with all laws and regulations regarding the Medicaid rebate classification and the drug had been classified that way long before Mylan purchased the rights to the drug.

Candidate Clinton continued the firestorm from last week calling on the Senate to create a drug price review panel where changes in prices would have to be approved based on production costs and patient benefits. This would be sudden death to many high priced drugs.

The combination of these two headlines kept the biotech sector negative on Friday. The sector is likely to remain under pressure until the election.

JP Morgan upgraded online retailer MercadoLibre (MELI) from neutral to buy and raised the price target from $133 to $200. Before you jump to the chart, the stock was already priced at $173 before the upgrade. Clearly, JPM was behind the curve on this upgrade. MercadoLibre.com is a Latin American competitor to Ebay and Amazon.

They see revenue rising 46% next year with profits rising 42%. Shares have already risen 60% in 2016. Brazil is their largest market and they only have 4% penetration. Revenue in Brazil rose 61% in 2015 so they have a long way to go as their market share increases.

Everyone is not wearing the same rose-colored glasses as JPM. Goldman recently initiated coverage at neutral with a $170 price target.

Crude prices had a lot of impact on the market last week with the big decline from $47 to $44 weighing on the Dow late in the week. The OPEC headline spam about a production freeze had faded. On Friday a plug by Vladimir Putin saying the "Oil production freeze is the right decision" was only able to cause minimal short covering. Since Russia is not in OPEC, he is hoping he can urge them along so oil prices will rise. Since Russia would be hard pressed to produce any more than they are currently doing, the best option would be to join OPEC in a freeze at the current level of maximum production.

He said the standoff with Iran over participation in the freeze could be resolved and he was confident that all parties could reach a compromise. "We believe that this is the right decision for world energy." Since Putin never does anything that does not benefit Russia, you know the cash crunch is moving into crisis mode. However, Russian energy minister Alexander Novak, downplayed the talks and the potential for a freeze. Say goodbye Alex, your next stop will be a post in Siberia.

Also surprising on Friday was a comments from Saudi Prince Turki Al-Faisal. He said Saudi Arabia could still agree to a deal to freeze production as long as "all" other oil-producing nations to the same. "All oil producers should have a role in whatever decision it taken. Everybody should play their part. Saudi Arabia is seeking a holistic approach to the issue of oil production and prices, not just within OPEC." Good luck with that approach since most non-OPEC producers are scratching for every dollar they can raise with additional production.

Active oil rigs only rose by 1 to 407 but active gas rigs spiked 7 to 88. Active offshore rigs plunged -7 to only 10 as a result of hurricane Hermine in the Gulf. That will correct next week now that Hermine is already well up the East Coast.




It is a small cap market. The S&P-600 Small Cap Index broke out to a new high well over resistance at 750 with a gain of almost 9 points. There was no hesitation for those stocks. The index is up +31% from a low of 581 in January while the S&P-500 is up +20% from that same low but up only 6.6% for the year.

The S&P-400 Midcap Index also rallied to a new high at 1,578, up +30% from the 1,215 low in January. There has been a strong rally in progress all year if we just knew where to look.

The S&P-500 has stalled since reaching the current range back on July 14th. The big caps have all the problems with Europe, China, currencies, etc, that the small caps do not have. The big caps have stagnated despite the breakouts on the small cap indexes. That will not continue forever. If the small cap stocks continue to run, the big caps will eventually follow. Conversely, if the S&P rolls over, no amount of small cap strength will rescue the market from the decline.

The 2,175 level is the current price magnet and 2,150 is critical support. The 2,193 level has been the intraday high twice over the last month. That is the line in the sand the bulls have to cross.

The Dow is 30 of the largest big cap stocks and that is why it is the weakest index. The support at 18,350 was tested three times over the last week and one intraday dip actually made it below 18,300 before the dip buyers could muster enough volume to lift it back to positive territory.

That one thing is saving this market. Buyers are willing to enter on the dips but they are avoiding the highs. Once the afternoon rebound begins to gather momentum it suddenly loses traction. They will buy the dips but not the highs.

The Dow was up 72 points on Friday but only two stocks gained more than $1. Apple was up on the Samsung battery problems and Boeing was up +$1.26 on a potential $7 billion sale of fighters to Qatar and Kuwait. The sale would include 36 F-15 fighter jets and 28 F-18 Super Hornets plus the option to buy 12 more.

More than half the Dow 30 components gained less than 50 cents. That is hardly strong conviction in the rally. Most of the Dow gains came at the open in a +125 point short squeeze but the index faded back to only +22 at 1:30. Some late day short covering or bargain hunting lifted it back to +72. There was $500 million in buy on close orders on the NYSE. Maybe there were some funds trying to get a head start on next week.

The action on the Nasdaq was similar. The index spiked +37 points at the open but fell back to only +5 at 1:30 before rebounding to close with a 22 point gain. It was purely an opening short squeeze and then some positioning at the close.

The Biotech Index and the Semiconductor Index both closed fractionally negative and were no support for the Nasdaq. The constant headlines about drug price controls and a guidance disappointment from Broadcom combined to keep both of those sectors negative.

The Nasdaq Composite has tested support at 5,200 so often it has eroded some of that level with intraday lows hitting 5,190 on three days last week. The close at 5,249 gives the Nasdaq a cushion for next week but it is still below the high close at 5,262.

We have to wonder what will be the headlines that will provide direction for the tech sector. There are no material earnings until Hewlett Packard on Wednesday and that could just as easily be a drag instead of a bullish force.

Watch the 5,200 level and prepare to bail out if it is broken significantly.

The Russell 2000 made a new 52-week high at 1,251 but it has failed to rally to the 1,295 level it needs for a historic high. The Russell 2000 components are chosen solely on the basis of market cap while the S&P-600 and S&P-400 are by invitation only from S&P. They screen out the lower quality stocks.

The Russell uptrend is still intact but the momentum has slowed. It is stuck in the middle of the uptrend channel as it approaches major resistance at 1,275.

In theory, portfolio managers will come back from vacation and begin liquidating the stocks they no longer want and begin furiously adding stocks they do want to have in their portfolio when their fiscal year ends on October 31st. One analyst said 77% of fund managers are not beating their benchmarks this year, normally the S&P-500. Another analyst said only 14% of managers are beating the benchmark. I guess both could be correct with the other 9% actually performing at the benchmark level.

Nonperformance causes managers to be replaced. That is a strong incentive to go for the gold over the next two months. They need to dump the laggards and add some movers and do it quickly. Typically the buying begins when the markets make the lows for the second half of the year in late September and early October.

However, there is nothing typical or seasonal about 2016. Market theory has failed in 2016. The market has confounded all the experts and that is why 77% are performing below their benchmarks. That suggests the next two months will not perform normally, which is usually punctuated by declines and high volatility.

The rally in the S&P-400/600 suggests there could be a continued rally in our future. It just depends on how many positions managers need to dump and will the selling in the big caps drag down the buying in the smaller cap stocks.

The next four sessions should tell us a lot about the rest of the month. We will have the constant analysis of every word that comes out of a Fed head's mouth. Fortunately, there are only three on the calendar this week and then they go into the quiet period ahead of the FOMC meeting on the 20th.

The trend is our friend until it ends. I would continue to caution not to be overly long this week. Keep some cash available and a shopping list of stocks you would like to buy on a dip. We are long overdue for at least a minor bout of profit taking and it could appear at any time.

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

Bearish sentiment continued to rise last week but only slightly. The bullish sentiment at 28.6% is 10 points below the historical average of 38.5%. The most hated bull market in history still cannot find any respect. Neutral sentiment is about 8 points over the 31% historical average and bearish sentiment is just about even with the average. The majority of investors are on the fence and waiting for a direction to appear.

Holiday shopping could be a challenge. South Korea's Hanjing Shipping, a container shipper with 8% of the Trans Pacific trade and one of the world's largest shippers, filed bankruptcy. Ports are no longer allowing those container ships to dock and tugboats are refusing to service the freighters. Both are afraid they will not be paid for their services. This has essentially frozen hundreds of thousands of containers at sea with nowhere to land. To make matters worse, major shippers use whatever ship is available when they have an excess of cargo. That means other shippers have containers frozen on those ships and they cannot get them off. Several Hanjing ships have been seized by creditors.

Those frozen containers, regardless of what shipper they belong to, have a large portion of holiday merchandise on its way to U.S. retailers. Hanjing is pleading with South Korea for an immediate bailout so they can make arrangements to offload those containers. The president of the Retail Industry Leaders Association in the U.S. wrote letters to the Dept of Commerce and the Federal Maritime Commission saying the bankruptcy presents an "enormous challenge to the U.S. and could have a substantial impact on consumers and the economy at large."

The trade group is urging the U.S. government to work with ports, cargo handlers and the South Korean government to resolve the widespread disruption in freight deliveries. The WSJ said as many as 540,000 containers are experiencing delays that could range from weeks to months. In this critical pre holiday shipping season that is a disaster. The retailers most likely to be impacted are Walmart, Target, JC Penny and clothing retailers. The $25 billion U.S. toy retailing industry could also be hit hard.

The U.S. "just in time" supply chain is not prepared for events that can keep hundreds of thousands of containers of holiday goods held hostage at sea for months. This could cause a monumental disaster for retailers this holiday season. I would not be surprised to see Amazon buy up some container ships so they can be in control of their own fate in future years.

This is another warning against holding paper gold. That is some certificate that says you own gold and can take delivery at any time. A client of Xetra-Gold, a German Exchange Traded Commodity fund, has been trying for some time to take delivery of their gold. Xetra-Gold claims the gold has to be provided by the bank where the customer's account is held, even though the prospectus claims Xetra is responsible for delivery. The ETF is traded on the Deutsche Boerse. The bank responsible is Deutsche Bank. The bank responded that the gold is delivered by the bank branch where the client has his securities account and only if that branch offers this service.

Deutsche Bank responded to Xetra Gold that "the bank would attempt to review the individual cases and an individual solution will be found that works for the client." Basically, they admitted they had failed to produce the physical gold and based on the "economic efficiency of physical delivery" they would try to work something out with the client. A lot of people are reading that as "we will give them their money back rather than actual physical gold."

The problem of paper gold has been floating around for years ever since the U.S. Fed refused to produce gold supposedly held in custody for overseas banks. If you have the gold why refuse to deliver it. In one case, they agreed to deliver the gold in periodic shipments over the next two years. What? It really causes the conspiracy theorists to wonder where the gold really went?

There are currently 3,267 active stocks according to Jefferies and the University of Chicago. That is the lowest number of listed stocks since 1984. The stock market is shrinking. When you add in the number of buybacks, acquisitions, mergers and leveraged buyouts the rate of shrinkage is increasing.

IPOs have slowed significantly. Analysts attribute that to the market activity over the last two years and Sarbanes-Oxley. Many companies are deciding not to go public because of the additional regulatory costs.

Over the last several years the market is up more than 200% but the market liquidity has evaporated. Central banks are buying S&P futures and holding them rather than trading them. Companies are struggling to increase profits so they are spending all their excess cash, plus borrowing at ultra low rates, to buy back shares in lieu of spending the money on business expansion.

In theory, the continued shrinking of the outstanding shares means the share price should continue to rise. As stocks prices rise as the float shrinks it creates move volatility in times of crisis. We know there is another crisis in our future and without liquidity, the volatility could be extreme. Think "Flash Crash" on steroids.

As an extension of that prior comment, there was a Reuters article saying the ECB may be forced to buy stocks because there are not enough bonds. JP Morgan has previously warned there was a shortage of bonds for the ECB to continue buying at its stated pace. It has reached a point where the ECB is actually forced to buy bonds from itself in a roundabout fashion.

How does this work? The ECB implements its QE through several national central banks. Those banks buy bonds for the ECB based on the rules for quality set by the ECB. This reduces the amount of available securities in the marketplace. The banks are limited on how much debt they can buy from any one country and they cannot buy bonds with steeply negative yields. These same banks also sell securities as they manage their total reserves. Those bonds are then back on the open market and are bought by some other central bank as part of the QE program. Basically, these banks are swapping debt with each other on behalf of the ECB.

Since the Bank of Japan recently expanded into buying stock ETFs and then eventually doubled the amount of ETFs it could buy because there was not enough bonds available for their QE, the ECB may be approaching this threshold.

According to Reuters, the ECB may be forced to follow Japan's example and buy equities as part of their $1.7 trillion QE stimulus program.

The BoJ's Kuroda, recently admitted ETFs were an easy way to directly monetize and nationalize the stock market. "ETFs allow an investor to trade a range of assets, from a basket of stocks to government debt. ETFs, which offer a convenient way to purchase a broad basket of securities in a single transaction from an exchange, have risen in popularity with investors due to their simplicity and lower fees."

The U.S. Fed is not going to be left out either. At the recent policy conference in Jackson Hole, there were papers presented suggesting that negative interest rates and equity purchases were also in the Fed's toolbox. The subtle hints that were dropped were a way to nudge the door open slightly so they can refer back to it as an option in a time of crisis.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"To steal ideas from one person is plagiarism; to steal from many is research."

Ralph Foss

New Plays

Relative Newcomer

by Jim Brown

Click here to email Jim Brown
Editor's Note

Chemours has shaken off its post IPO depression and is moving up on a strong earnings beat. The high on the June IPO was $22.25 and the low in January was $3. That had to be very depressing for shareholders.


CC - Chemours Co - Company Profile

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

With a CC trade at $13.75

Buy CC shares, currently $13.62, initial stop loss $12.00.

No options recommended because of price. The Oct $15 is 65 cents but time is short. The next available series is January and very expensive.


No New Bearish Plays

In Play Updates and Reviews

Small Caps Win

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes were the outperformers on Friday with new highs. The S&P-600 and S&P-400 both closed at new highs and the Russell 2000 closed at a 52-week high. It was a good day for the smaller stocks as late day buying added to the opening short squeeze gains.

Unlike the small caps the Dow and S&P-500 saw all their gains in the opening short squeeze and then faded as the day progressed. This would seem to suggest the small caps are resuming their leadership position and next week could be positive.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Lottery Ticket Plays

Current Position Changes

AVID - Avid Technology
The long position remains unopened until a trade at $9.85. High today was $9.15.

SQ - Square Inc
The long position remains unopened until a trade at $12.25. High today was $12.07.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AVID - Avid Technology - Company Profile


No specific news. Avid said it would release new products at the IBC 2016 conference on Sept 9th.

This position remains unopened until a trade at $9.85.

Original Trade Description: August 27th.

Avid Technology, Inc. develops, markets, sells, and supports software and hardware for digital media content production, management, and distribution worldwide. The company offers professional video creative tools, such as Media Composer product line that is used to edit video content; NewsCutter option and iNews systems for news production; Avid Symphony option, which is used during post-production; Media Composer Cloud solution that enables broadcast news professionals to acquire, access, edit, and finish stories; and Avid Artist DNxIO, a hardware interface for video production. It also offers media management solutions comprising Avid MediaCentral UX Web and mobile-based apps that provide real-time access to media assets for media professional; and Avid Interplay asset management solutions that offer network, storage, and database solutions to enable users to simultaneously share and manage media assets across a project or organization. In addition, the company provides Avid ISIS shared storage systems.

The constant stream of real time content you see on TV is not really real time. The reporter may be live but the constant background videos, the cutaways to apparently live videos and the canned footage of people, places and things, are all put together by video technicians in the production room using various software programs including the Avid products. They can mix, match, edit, cut and produce a stream of video from multiple sources in a matter of minutes thanks to the production software.

Avid has been around a long time. I can remember it being used back in the early 2000s as a cutting edge editing tool. Competition arrived from Adobe, Canopus, Grass Valley and others and it was a fight for market share. Avid never wavered from its quality commitment.

Today their award-winning control software is used by leading sound companies, music studios and post production houses. They have migrated primarily into sound recording and mixing and the products are in high demand. The "Avid Everywhere" platform is the industry's most open, innovative and comprehensive platform for content creation and collaboration.

Quote from Avid. "Media organizations and creative professionals use Avid solutions to create the most listened to, most watched and most loved media in the world, from the most prestigious and award-winning feature films, to the most popular television shows, news programs and televised sporting events, as well as a majority of today’s most celebrated music recordings and live concerts."

In their Q2 earnings report, they said platform licenses for Avid Everywhere were up 47% and cloud-enabled subscriptions were up 390%. More than 38,000 enterprise users were on the platform. There were more than 40,000 paying individual, cloud enabled subscribers, up 62% from Q1 and 390% from Q2-2015. Total bookings rose 32%.

Earnings Nov 3rd.

Shares rose from $7 to $9 on the earnings and traded sideways for the last two weeks. With a positive market, we could see a breakout over $10 and a 52-week high.

With an AVID trade at $9.85

Buy AVID shares, initial stop loss $8.85.

No options recommended because of wide spreads.

FDC - First Data - Company Profile


No specific news Friday.

Leon Cooperman with Omega Advisors mentioned FDC as a core position on CNBC Wednesday morning and shares rocketed higher. They are continuing to rise on that news. Jefferies initiated coverage with a buy rating and $16.50 price target.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

Optional: Long Oct $14 call @ .50, no stop loss.

HUN - Huntsman Corp - Company Profile


Huntsman moved up again as it tries to beat that 52-week high close on Tuesday.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Since the S&P futures are negative tonight I am going to put an upside entry trigger on the recommendation.

With a HUN trade at $17.65

Buy HUN shares, initial stop loss $16.15

Optional: Buy Nov $19 call, currently 60 cents. No initial stop loss.

NTCT - NetScout - Company Profile


No specific news. NetScout will participate in an investor conference on Thursday with a presentation at 9:40 ET.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July, NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.

RDN - Radian Group - Company Profile


No specific news. New 8-month high close. Shares have now reached resistance at $14 and we could see some weakness over the next several days. A positive market would help us get across that level.

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.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.


Long Sept $14 call @ .15, no stop loss.

SQ - Square Inc - Company Profile


No specific news. Minor gain in a positive market.

This position remains unopened until a trade at $12.25.

Original Trade Description: August 31st.

Square is a mobile payment provider for small businesses, including individuals. Anyone can process a credit card transaction through their Square account using their mobile phone, tablet or laptop computer.

There are at lease 6-8 competitors to Square today. Paypal (PYPL) has offered a card reader for your mobile device for a longtime but they do not advertise it that much. This week Square announced alliances that would let restaurants and retailers to use the point of sale hardware from TouchBistro and Vend. The customers from those two providers will now have access to Squares growing portfolio of services including invoicing, analytics, quick deposits and lending services.

Apparently, Dorsey has discovered that partnering with his competition is the best way to corner the market on his services business.

The company recently announced a similar partnership with Upserve, another startup offering its own point of sale service and software for restaurants. Squares services division saw revenue rise 25% sequentially and +130% over the year ago quarter. Square's lending division is one of the fastest business drivers. They extended 34,000 business loans accounting for $189 million in Q2. That was a 23% increase sequentially and +123% from the year ago quarter.

Q2 revenue of $439 million beat estimates for $406 million. Gross payment value rose 42%. The company reported a loss of 8 cents compared to estimates for a loss of 11 cents. They guided for full year revenue of $1.63-$1.67 billion.

Shares spiked on the earnings news to $11.90 an then faded in a bout of post earnings depression. Recent analyst upgrades provided another boost to $12.50. On Tuesday, Stifel Nicholas upgraded the stock from hold to buy.

The last three days Square shares have been rock solid at $12 despite the market weakness. Once we get past Labor Day, if the market turns positive again, I believe Square will retest its highs at $16.

With a SQ trade at $12.25

Buy SQ shares, initial stop loss $11.65.

Optional: Buy Dec $14 call, currently 45 cents. No stop loss.

TWTR - Twitter - Company Profile


Apple opened a new Twitter account (@Apple) and the rumor is they will stream their product announcement live next Wednesday. That should help Twitter as other brands look to gain additional exposure in the same way.

Original Trade Description: August 29th.

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 implementing the concept with new deals with the NFL, NBA, MLB and NHL. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. 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 rose from the $14 low on June 10th to $21 on August 15th when rumors of a possible acquisition were making headlines. We exited a long play for a nice profit when the shares began to weaken.

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 shares appear to have found support at $18.50 as we move into the football season. With Twitter streaming the Thursday night games they will be attracting a lot of attention. I believe the selling is over and we could see a new move higher on improving fundamentals rather than takeover chatter.

Update 8/31/16: Twitter shares spiked on Wednesday after co-founder and board member Ev Williams said the company had to look at all options including a sale. When asked if Twitter can remain an independent company he said, "We are in a strong position right now but as a board member we have to consider the right options." The way he answered the question suggested they were listening to potential offers. He did not say we are not pursuing a sale or nobody has made an offer, or Twitter will continue to be a public company. He left the door open to a future announcement. By phrasing the answer the way he did, he actually invited other companies to make a bid saying we must consider all options.

Position 8/30/16

Long TWTR shares @ $18.59, see portfolio graphic for stop loss.

No options recommended because of price.

BEARISH Play Updates

ACAT - Arctic Cat - Company Profile


No specific news. We saw a little bit of short covering in a positive market ahead of the long weekend.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.

FOXA - 21st Century Fox - Company Profile


New headlines show that Roger Ailes had sexual harassment problems in two jobs before the FOX job. He harassed women into having sex, secretly filmed the events and then warned them later he would release the videos if they ever went public with the harassment. Nineteen women have come forward from prior jobs in addition to the 23 women from Fox.

Original Trade Description: August 23rd.

Twenty-First Century Fox operates as a diversified media and entertainment company in the United States, the United Kingdom, Continental Europe, Asia, Latin America, and internationally. It operates through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. It also broadcasts network programming; and operates 28 broadcast television stations, including 11 duopolies in the United States.

Lately Fox News has been in the headlines after, Gretchen Carlson, a female news anchor, sued Fox and President Roger Ailes for sexual harassment. Within two weeks of the suit being filed, Ailes resigned from the network. In an internal investigation, more than 25 former and current Fox News employees reported incidents. The investigation revealed that a former Fox News staffer, Laurie Luhn, had been given a $3.15 million severance package after she complained about harassment by Ailes who forced her into a sexual relationship through threats and intimidation. Luhn implicated others in the support staff, several of which have moved into management positions with the Ailes departure.

This week Andrea Tantaros, former co-host of The Five and The Outnumbered, filed suit against Ailes and the network claiming the division "operates like a sex-fueled, Playboy Mansion-like cult, steeped in intimidation, indecency and misogyny." She claims other executives under Ailes aided in the cover-up and named names in the suit. She said Ailes actions were "condoned by his most senior lieutenants, who engaged in a concerted effort to silence Tantaros by humiliation and retaliation.

The law firm handling the original Ailes harassment investigation said they anticipate Fox being forced to settle with the women who have filed claims and the numbers of women are in "double digits."

This kind of news is not something Fox wants to report. While the settlements are likely to be in the millions, it is the damage to the brand that is the most important. Fox has been recognized as a pro-family conservative organization and these kinds of continuing headlines will tarnish that image.

Shares have fallen to a 7-month low and are likely to continue falling until after the settlements and the headlines have passed.

Position 8/25/16:

Short FOXA shares @ $24.72, see portfolio graphic for stop loss.


Long Oct $24 put @ .60, no stop loss.

RUBI - Rubicon Project - Company Profile


No specific news. Only a minor gain in a positive market.

Original Trade Description: August 22nd.

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings, RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

Position 8/24/16 with a RUBI trade at $8.90

Short RUBI shares @ $8.90, see portfolio graphic for 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. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

CDNS - Cadence Design System - Company Profile


CDNS continues to move higher. We are now in the money on our September $25 call.

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

Previously closed 8/15/16: Long CDNS shares @ $24.35, exit $24.45, +.10 gain

HOV - Hovnanian Enterprises - Company Profile


They announced the date for earnings to be next Friday morning. Hopefully the guidance will be good and this stock will begin to move faster.

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.

NAVI - Navient - Company Profile


NAVI said it was redeeming all the the outstanding loans from the 2004-4 and 2004-7 SLM Student Loan Trust. This totals $175 million. In the last 20 months NAVI has redeemed more than $1.2 billion in the bonds representing student loans. They also extended the maturity dates on $6.8 billion in similar bonds. This is another favorite stock of Leon Cooperman.

Shares are still stuck at resistance at $14.50 but eventually a breakout will appear and it could be strong.

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

Previously closed 8/12/16: Long NAVI shares @ 14.57, exit $13.35, -1.22 loss

SKX - Skechers - Company Profile


No specific news. Shares are fading from resistance at $25. With the Olympics over the footwear stocks could begin to fade.

The September $22 put option is well out of the money but at the current price of 5 cents, we do not have much to lose. That is why it is called a lottery ticket.

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:

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

Previously closed 8/11/16: Short SKX shares @ $23.75, exit $24.25, -.50 loss.

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