Option Investor

Daily Newsletter, Tuesday, 9/6/2016

Table of Contents

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

Market Wrap

Takeover Tuesday

by Jim Brown

Click here to email Jim Brown

The markets surged out of the gate this morning on a flurry of acquisitions and mergers.

Market Statistics

The initial opening gains were reversed into temporary losses but by 11:30 the major indexes were back in positive territory. This was a big cap rally day with the smaller cap indexes, S&P-600 and S&P-400 both closing fractionally lower after making new highs on Friday.

The reason the market went negative right after the open was a sharp drop in the ISM Nonmanufacturing report. This is the services sector of the economy and represents 88% of GDP and the headline number fell from 55.5 to 51.4 for August. This mirrored the ISM Manufacturing decline we saw last week. The consensus estimate was for a minor decline to 55.0 and they missed it by a mile.

This was the lowest level since January 2010. This was not a good report despite the fact it remained over 50.0 and slightly in expansion territory.

New orders fell from 60.3 to 51.4 and the biggest drop since 2008, employment from 51.4 to 50.7 and business activity 59.3 to 51.8. Imports fell from 53.0 to 50.5, exports from 55.5 to 46.5, order backlogs from 51.0 to 49.5 and inventories declined from 54.0 to 48.0. None of the components posted even a minor gain.

For the headline number this was the third decline in the last four months. Only nine industries reported growth compared to 15 in July. Thirty-two percent of respondents said their inventories were still too high based on current business conditions.

The decline in the components suggests there will be an even lower headline number for September and this close to 50 it is possible we could see a contraction in September.

The unexpectedly bad ISM report pushed estimates for a September rate hike even lower. On Friday, there was a 21% chance as indicated by the Fed Funds Futures and the CME FedWatch Tool. That declined to 18% today. There is almost no actual chance of a rate hike in September. The December meeting probability declined slightly from 54% to 52% and some analysts were rating the odds even lower than that.

The only positive report was the global Semiconductor Billings for July. Billings rose from +1.1% in June to +2.6% in July to $27.1 billion. This was the largest gain since September 2013. Billings in the U.S. rose 6.7% with China sales up +9.8%. Strangely, the Semiconductor Index was negative for the day. The index did make a new high on Thursday so this was simple profit taking.

The calendar for Wednesday is headlined by the Apple iPhone 7 announcement at 1:00 and the Fed Beige Book at 2:00. Apple's announcement will generate far more headlines and air time than the Beige Book.

Given the drop in the ISM Manufacturing, ISM services and anecdotal reports about the weak retail sector in August, I am not expecting good things from the Beige Book. However, the Fed officials that put it together always try to spin the news positive whenever possible.

Apple is expected to announce the iPhone 7 and possibly some other items as well. The iPhone 7 announcement is expected to be underwhelming. The "space gray" color option will be replaced by "dark black" regular finish and a glossy black finish called "piano black," which is expected to only be available in the high end models. The minimum memory size will be 32Gb and the upgrades will be to 128Gb and 256Gb. The phone will have a dual lens 12 megapixel camera system, one for wide angle and one for telescopic but they will both work together. This is expected to give you the capability of refocusing pictures after they have been taken. The phone will be more water "resistant" but not water "proof."

There will not be a headphone jack and that is sure to anger many people with high-end headphones that will now be almost useless. However, Apple is including an adapter that will plug into the "lightning" jack and allow you to plug your wired headphones into the adapter. That sounds very clunky and I am sure it is just a way to get everyone temporarily over the shock of no jack on the phone.

The new A10 processor is expected to be 2.4 Ghz and a big jump over the current A9 at 1.85 Ghz. It is also expected to be a drag on battery life. The camera's flash will have 4 LEDs, 2 warm and 2 cool for better color rendition.

Most consumers are likely to be unimpressed. If you are tuned into the Apple product family, you probably already know there will be a radically new iPhone released next year for the 10-year anniversary of the product. The people buying an iPhone 7 either do not know there is a big new redesign on the horizon or their current phone is on its last legs and they just have to have a new phone now.

Apple is also going to start overhauling the App Store next week. They are going to review all the existing apps and remove all the outdated apps plus the ones that do not conform to current requirements, have crashes in their history log, etc. In order to get back into the App Store, developers will have to bring apps current and then resubmit the apps to be reviewed again under the current rules. Quite a few of the oldies but goodies are going away.

Apple is also expected to release a new operating system that includes more "core" apps like News, Photos, and Messenger.

Apple shares were fractionally lower ahead of the event. Typically, Apple shares decline on the announcement. Active traders may want to pick up some puts on Wednesday morning. The September $107 puts with 10 days until expiration were $1.19 at the close. Apple shares could easily drop to $105 or so without any unexpectedly good news in the announcement.

Monsanto (MON) is closer to a deal with Bayer (BAYRY) but it is not yet agreed. Bayer raised their offer to $127.50 a share with Monsanto at $106 today. Monsanto confirmed the receipt of the "nonbinding" proposal and said it was in "constructive negotiations" with Bayer. What puzzles me is the lack of any material movement on Monsanto stock. Analysts believe the bid price would still have to be raised but that is even a better reason to own the company.

I looked at call options on Monsanto several times since the discussions have been in progress. Several weeks ago, the prices were high and the bid-ask spreads were $2-$3. Today the October at the money calls are $2.65/$2.93. If they a moving closer to a deal and the price is expected to go higher, then those calls are a bargain. The fly in the soup is the clause "a deal may not be concluded" in all the various press releases. That means the calls go to zero the instant a "no deal" headline crosses the wires. If you are willing to risk $3 on a potential $20 gain, then jump right in.

Danaher Corporation (DHR) said it was acquiring Cepheid (CPHD) for $53 a share in cash or roughly $4 billion including debt. Cepheid is a molecular diagnostics company that develops tests to screen for diseases. This will be a good fit for Danaher because they already have a testing business that produces $5 billion in annual revenue. Shares rallied 52% on the deal.

EOG Resources (EOG) said it was buying privately held Yates Petroleum and some of Yates subsidiaries in a deal valued at $2.5 billion in order to increase its assets in the Permian Basin. EOG will issue 26.06 million shares and pay $37 million in cash. The company will also assume $245 million in Yates debt and $131 million in cash from the Yates acquisition.

Yates has 1.6 million acres under lease. This raises EOG's position in the Permian to 574,000 acres. It doubles their Powder River acreage to 400,000 acres. It gives EOG a foothold in the Emerging Northwest Shelf of 150,000 acres and creates a combined 424,000 acre position in the Delaware Basin. The Yates acreage gives EOG immediate new inventory of 1,740 premium drilling locations. EOG defines "premium location" as a well that will produce a 30% return after taxes assuming a $40 oil price. EOG will add additional rigs to begin drilling these locations in 2017. Yates currently produces 29,600 boepd with 48% crude oil. They have proved reserves of 44 million barrels. EOG currently produces 551,000 Boepd.

EOG shares surges 7% on the news.

Enbridge Inc (ENB) is buying Spectra Energy (SE) for $28 billion in a stock for stock transaction. Spectra has more than 21,000 miles of pipeline in North America. Spectra shareholders will receive 0.984 shares of Enbridge for every share of Spectra they own. The merger will create the largest energy infrastructure company in North America with an enterprise value of $127 billion. The combined company expects to increase the dividend by 15% in 2017. The combined companies have $37 billion in pipeline projects in development. The transaction is expected to close in Q1.

Dave and Busters (PLAY) reported earnings after the bell of 50 cents compared to estimates for 44 cents. Revenue rose 12.4% to $244.3 million and beat estimates for $243.1 million. However, they cut same store sales expectations for the full year from 3.25%-4.25% to 2.25%-3.25%. Shares fell $3 in afterhours.

After the close AMD announced plans to sell $600 million in stock and $450 million in convertible senior notes. The combined proceeds of $1.02 billion will repay current borrowings and outstanding notes. Any remaining proceeds will be used for normal corporate uses. Shares fell back to $7 after the announcement.

Chipotle Mexican Grill (CMG) spiked in after hours when news broke that Bill Ackman's Pershing Square fund had acquired a 9.9% stake in the company. In an SEC filing, Pershing said Chipotle's shares were "undervalued, offered a strong brand, a differentiated offering, enormous growth opportunity and visionary leadership." Ackman needs to buy a winner after his losing positions in Herbalife and Valeant.

Casey's General Store (CASY) reported record earnings of $1.70 but that missed estimates for $1.79. Shares fell $10 on the news.

Twitter (TWTR) shares rose again on multiple stories being floated about a potential acquisition or even being taken private. There is a board meeting on Thursday and that has the trader sphere all in a twitter.


It seemed like a normal trading day despite the lack of any volatility. Once the ISM dip was over the markets slowly drifted higher. Volume was very decent at 6.6 billion shares considering it was the day after a three-day weekend. The normal holiday hangover was minimal.

The Nasdaq Composite closed at a new high thanks to the FANG stocks. Every one of them posted strong gains on no news. It was as if portfolio managers sitting on a lot of cash decided to through a lot of money at the highly liquid stocks as an easy way to get invested quickly now that we are in the countdown period for their fiscal year end on October 1st.

The prior Nasdaq high was 5,262 and the index closed at 5,275.91 for a new record. It was also a new intraday high since the index closed at the high of the day. The biotech sector came roaring back to with a +93 point gain to provide support.

The Nasdaq is poised for a new leg higher but those fund managers will need to keep feeding the rally with their accumulated cash.

The S&P only added 6 points to 2,186 with the prior closing high at 2,190. It is very close but we saw twice in the last two weeks where the S&P spiked to 2,193 intraday only to fall back sharply. The S&P did not get the same lift from the FANG stocks as the Nasdaq but they did help. Support remains 2,175 and 2,150.

The Dow had a mediocre gain with the oil stocks helping after Saudi Arabia and Russia agreeing on Monday to form a joint venture to stabilize oil prices and possibly freeze production. Crude oil was up $1 on Monday and another 44 cents today. That lifted Chevron and Exxon into the top 5 list on the Dow. McDonalds and Boeing were the other two winners.

The Dow remains stuck below multiple levels of converging resistance at 18,625 and today's +46 points was lackluster. If Apple declines after the iPhone announcement, it will be a drag on the Dow on Wednesday afternoon.

Support remains 18,350 and 18,300.

The Russell 2000 only gained 1 point and the S&P-400 and S&P-600 were negative for the day. The small cap stocks were leaders late last week but it was a big cap tech day today. The Russell 2000 is still progressing higher but very slowly. As the market sentiment index, it is not showing any bullish conviction today.

While today's Nasdaq rally was nice, one day does not make a trend. Just because the portfolio managers threw some money at the FANG stocks today and lifted the Nasdaq, it does not mean they are going to do the same thing on Wednesday.

The Apple announcement could turn into a negative for the Dow if Apple shares sink. The Fed Beige Book could be bad news, but that may actually be another buy signal suggesting the Fed is on hold at least until December.

I would continue to refrain from being overly long just in case Tuesday's rally was a head fake. There is plenty of time to make new trades. There is always another trade waiting as long as you have capital to invest.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Long Term Position

by Jim Brown

Click here to email Jim Brown
Editor's Note

We played the VXX several months ago before the 1:4 reverse split and did very well. I wrote at the time we would play this again post split and Friday's support break is the opportunity.


No New Bullish Plays


VXX - Volatility Index Futures - ETF Description

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Short VXX shares, currently $33.88, no initial stop loss.

No options recommended because of price.

In Play Updates and Reviews

Small Caps Lose

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday favored the big caps with the small cap indexes closing fractionally negative. Some days you win and some days you lose. After a couple days of leadership by the small cap indexes the S&P-400 and S&P-600 both closed fractionally negative after setting new highs on Friday. The big cap indexes posted decent gains but there was a lack of conviction except in the Nasdaq.

The FANG stocks, FB, AMZN, NFLX and GOOGL, were screaming higher in what looked like a session where portfolio managers were throwing cash at the market in response to the positive close on Friday and no indications of selling in September.

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.

Current Position Changes

AVID - Avid Technology
The long recommendation has been cancelled.

CC - Chemours
The long position was entered with a trade at $13.75.

RUBI - Rubicon Project
The short position was stopped out with a trade at $9.05.

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. The recommendation has been cancelled.

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.

Recommendation cancelled.

CC - Chemours Co - Company Profile


No specific news. The position was opened with a trade at $13.75.

Original Trade Description: September 3rd.

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.

Position 9/6/16 with a CC trade at $13.75

Long CC shares @ $13.75, see portfolio graphic for stop loss.

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.

FDC - First Data - Company Profile


Friday's breakout saw some profit taking on Tuesday.

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 gave back 18 cents in a weak small cap market. No specific news.

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 on Friday. Shares have now reached resistance at $14 and we could see some weakness over the next several days.

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 decline in a mixed 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


Multiple articles today on a possible sale of Twitter. The board meets on Thursday and investors are running out of patience. They are reportedly worried about a group of activist investors swooping in and making life miserable for the company. One article suggested the board could put up a for sale sign after this week's meeting. Using the Linkedin metrics it would be an $18 billion sale bout nobody expects that big of a deal. Twitter currently has a market cap of $14 billion. There was even an discussion of somebody taking Twitter private until they could grow the company to double or triple its current 300 million users.

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. Friday's short covering bounce was erased.

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


Fox announced it had settled with anchor Gretchen Carlson over the sexual harassment suit against Roger Ailes. The reported amount was $20 million. News over the weekend reported Carlson had taped conversations with Ailes in his office where he continually propositioned her and said it would be good for her career. Fox is still negotiating with 23 other women that had complained about unwanted advances by Ailes.

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.

Update 9/2/16: 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.

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 but a 5% gain in a mixed market. That stopped us out at $9.05 for a minor loss of 15 cents.

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

Closed 9/6/15: Short RUBI shares @ $8.90, exit $9.05, -.15 loss.

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